Why Is Analog Devices (ADI) Down 27.5% Since Last Earnings Report?

A month has gone by since the last earnings report for Analog Devices (NASDAQ:ADI). Shares have lost about 27.5% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Analog Devices due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Analog Devices Q1 Earnings & Revenues Beat Estimates

Analog Devices reported first-quarter fiscal 2020 adjusted earnings of $1.03 per share, beating the Zacks Consensus Estimate by 3%. However, the bottom line decreased 22.6% year over year and 13.4% sequentially.

Revenues of $1.304 billion surpassed the Zacks Consensus Estimate of $1.301 billion. However, the top line declined 15% year over year and 9.6% from the fiscal fourth quarter.

This downside can be attributed to weak performance of the company in all the end-markets served. Moreover, the top line was negatively impacted by macroeconomic headwinds.

Nevertheless, Analog Devices’ deepening focus on efficient capital deployment and executing customer-centric approach remains a positive. Additionally, the company expects stabilization in the end-market demand in second-quarter fiscal 2020.

Revenues by End Markets

Industrial: The company generated revenues of $744.1 million (accounting for 52% of total revenues), which was flat year over year.

Communications: Revenues from this market came in at $260.1 million (18% of revenues), decreasing 19% year over year.

Automotive: Revenues from this market came in at $226.1 million (16% of revenues), down 8% from the year-ago quarter.

Consumer: This market generated revenues of $212.8 million (15% of revenues), reflecting a decline of 7% on a year-over-year basis.

Operating Details

Non-GAAP gross margin contracted 180 basis points (bps) on a year-over-year basis to 68.5%.

As a percentage of revenues, adjusted operating expenses were 31.6%, expanding 250 bps from the year-ago quarter.

Non-GAAP operating margin contracted 430 bps on a year-over-year basis to 36.9% during the reported quarter.

Balance Sheet & Cash Flow

As of Feb 1, 2020, cash and cash equivalents were $654.4 million, up from $648.3 million as of Nov 2, 2019.

Long-term debt was approximately $4.7 billion, down from $5.2 billion in the prior quarter.

Net cash provided by operations was $349.6 million in the fiscal first quarter, down from $658 million in the prior quarter.

The company generated $294.8 million of free cash flow during the fiscal first quarter.

Additionally, Analog Devices returned $300 million to shareholders through dividends and share repurchases in the reported quarter.

Guidance

For second-quarter fiscal 2020, Analog Devices expects revenues to be $1.35 billion (+/- $50 million).

Outbreak of coronavirus remains a concern for the company.

Non-GAAP earnings are expected to be $1.10 (+/- $0.08) per share.

The company anticipates non-GAAP operating margins to be approximately 37.5% (+/- 100 bps).

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month.

VGM Scores

Currently, Analog Devices has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Analog Devices has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.