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Thursday, November 16, 2006

Analog Devices Conference Call Review

By William Trent, CFA of Stock Market Beat

Having had a chance to review the Analog Devices (ADI) conference call, we came away with a few observations. We’ll start with the commentary from CEO Jerald Fishman:

I think first and most importantly, for the full year of 2006, our sales to our broad base of industrial customers have increased 15% from 2005. Revenues from industrial customers for the year represented 42% of our sales, and industrial applications remained one of the most fragmented markets in the electronics industry.

Within this overall category that we call industrial products, sales to instrumentation customers was up 20% year over year, motor control was up 23% year over year, medical was up 24% year over year, power metering up 16%, and sales into defense applications increased 17%.

While sales to automotive customers increased only slightly last year, our newest products are designed into many new platforms that will begin to appear in 2007 and 2008 models.

This is in keeping with our take on Rockwell Automation (ROK), as well as today’s Econoday article. However, we are scratching our heads over his next comment:

Our sales to ATE customers increased 11% year to year, but ATE continues to be a very challenging market, as semiconductor capital spending still remains very choppy.

If they describe a market in which orders have been up about 60% from the previous year for the last six months as “choppy” we can’t wait to see how they describe the downturn we believe is looming.

Fishman also listed a number of factors that will impact the current quarter, including the fact that comparisons are affected by an extra week of selling time:

Our first quarter in 2007 will be influenced by a number of factors. Our opening OEM backlog for Q1 is down $11 million from the beginning of Q4 as the result of generally lower bookings during the quarter, primarily as a result of excess inventory in infrastructure, handset and automatic test equipment [inaudible] our customers.

While distribution bookings were also weaker in Q4, end market re-sales remain stable, indicating continuing firm demand from our broad base of industrial customers. Our end customer book-to-bill ratio was approximately 0.98 for the quarter.

Our lead times have decreased again during Q4, which would imply a greater percentage of our revenues will be derived from turns business, which is business that we booked and we shipped in the same quarter. I think this is very typical at this point in the cycle.

Our Q1 will also be a 14-week quarter, which occurs once every seven years to adjust for the fact that 52 weeks is slightly different than 365 days. This should provide a revenue boost which could offset the normal seasonality due to the holiday period that we usually experience.

Also, as mentioned in our press release, during Q1 we will record a $35 million revenue as a result of a recently completed license transaction. This will not be repeated in future quarters and will also be excluded from our non-GAAP measures.

As a result of all these factors, when you add them all up, our revenue plan for Q1 is in the range of $635 million to $670 million, which does not include the one-time $35 million license fee.

The extra week was the subject of a great deal of back-and-forth during the conference call, and likely explains why the market performance today is not as strong as the post-market trading yesterday seemed to indicate.

The author may hold a position in the securities discussed. The author's current holdings are as follows: Long: Intuit (INTU) put options; Nasdaq 100 (QQQQ) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Lion's Gate (LGF); Three Five Systems (TFS); Adobe Systems (ADBE) call options; Ceradyne (CRDN); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Lion's Gate (LGF) call options; Dell (DELL) put options; Ceradyne (CRDN) call options; Plantronics (PLT) put options.

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