ADI: The SHARCs are circling! Message Board

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Technology Stocks : ADI: The SHARCs are circling!

ADI 313.46

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To: Jim Oravetz who wrote (2859)	8/22/2005 12:59:03 PM
From: Jim Oravetz	Read Replies (1) of 2882

Declining Demand Dampens Analog Devices Analog Devices (ADI: NYSE) By First Global U.S. Research ($36.50, Aug. 19, 2005) WE ARE DOWNGRADING SHARES of Analog Devices to Market Perform from Outperform. In fiscal 2005's third quarter, Analog Devices' net sales came in well below management's initial expectation of up to 3% sequential growth. At $582.4 million, sales were down 3.5% sequentially and 19% year over year. Management attributed the disappointing performance primarily to the sequential decline in sales of digital signal processing-based products to wireless handset customers in Asia. Sales of global-system-for-mobile-communications/general-packet-radio-service base band chipsets to those customers declined sequentially by $23 million. Unlike the situation in the prior quarters, when the inventory correction phase affected sales, this time around it was the increased global competition to Analog Devices' Asian customers that was cited as the cause of the slippage. Analog Devices did manage to meet its initial earnings-per-share expectation for the third quarter (31 cents to 33 cents) due to higher-than-expected gross margins and lower operating costs. The company recorded a diluted EPS of 32 cents for the quarter (below our expectation of 34 cents). The operating cash flow during the quarter was healthy ($180 million or 31% of sales), as it usually is for Analog Devices. But, Analog Devices' overall results for the third quarter let investors down (as evidenced by the 5% decline in the stock price the day after the preannouncement of the sales shortfall on August 2). Going forward, while we expect the company's analog product sales (84% of total revenues in the third quarter) to do just fine, the persistent decline in Analog Devices' digital signal processing sales (four quarters in a row) is a cause for concern. The company has decided to reorient its digital signal processing focus, which bodes well for the medium term. One also has to acknowledge that a digital signal processing turnaround remains a possibility in the fourth quarter (due to seasonal strength in the wireless market). But all considered, we believe a wait-and-watch policy is prudent for the present time.

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