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Profit Slumps at Analog Devices

The company offers lukewarm guidance.

Updated from 4:32 p.m. EDT

SAN FRANCISCO --

Analog Devices'

(ADI) - Get Analog Devices, Inc. Report

profit slid in its fiscal third quarter, as the company experienced a sharp drop in sales of its wireless chips.

And while the Norwood, Mass.-based chipmaker beat Wall Street's earnings expectations by a penny, ADI served up a lukewarm guidance for the current quarter.

Shares of ADI slipped 1.4%, or 52 cents, to $37.20 in extended trading Tuesday.

ADI earned a net income of $120 million, or 37 cents a share in the three months ended Aug. 4 vs. the average analyst expectation of 36 cents EPS.

At this time last year, ADI earned net income of $144.7 million, or 39 cents a share.

Sales increased 3% to $680 million, above the $672 million expected by analysts polled by Thomson Financial.

"The third quarter was another solid quarter for ADI, turning out largely as we had planned in terms of our revenue growth, product sales mix, and operating expenses" said CEO Jerald Fishman in a statement.

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Chip sales for consumer markets posted the strongest growth, increasing 24% year-over-year, while sales to industrial products -- ADI's biggest chip market -- increased 3% year-over-year.

Sales of wireless chipsets decreased 33% year-over-year, primarily as a result of weak demand for chips used in cell phone handsets.

Fishman said in a post-earnings conference call that this falloff reflects the order patterns of ADI's wireless chip customers, who tend to pause in the third quarter after placing big orders in the preceding quarter.

ADI said its order rates from original equipment manufacturers and distributors remain strong in the current quarter -- with a book-to-bill ratio above 1.0 -- and said it had reduced its own inventory by $10 million sequentially.

But ADI said it would continue to constrain the production levels at its manufacturing facilities in order to further reduce inventories to target levels.

And while ADI said it remains committed to hitting its 60% gross profit margin target, it said the margin in the current quarter will be flat with the 57.1% in the fiscal third quarter.

ADI attributed the flat profit margins to seasonally strong sales of consumer chips, which carry lower product margins than its industrial products.

Fishman also pointed to recent economic and capital market turmoil to explain the uninspiring financial forecast, despite the strong orders the company has already booked.

"Internally, we're seeing good momentum and a lot of reasons to be very enthusiastic about the

business segments," said Fishman. "So I don't think there's anything going on in the segments that is cautionary, it's just the overall environment is uncertain and there are a lot of external factors out there that cause us to be cautious."

ADI said sales in the fourth quarter will range between $680 million to $710 million, with EPS between 36 cents and 40 cents. Analysts were looking for $696 million in sales with EPS of 40 cents.