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Alan Ibrahim

ADI AT A GLANCE

P/E ► 37.3 AVG EV/EBITDA ► 23.2 AVG ROA ► 7.8% HIGH ROE ► 10% AVG Debt to Equity ► 0.346 AVG Current Ratio ► 6.44 HIGH Interest Coverage Ratio ► 73.7 HIGH

 

 

 

 

 

 

Analog Devices (NYSE: ADI) is a leader in the design and production of high-performance analog, mixed-signal, and digital signal processing integrated circuits (ICs). The company’s products can be classified into two categories: analog products and digital signal processing (DSP) products. Recently, Analog Devices has divested away from certain product lines to focus more on high performance signaling processing solutions, something that the company believes will have benefits in the long run. The company faces fierce competition in the rapidly changing semiconductor industry but also possesses growth opportunities in product niches. Additionally by increasing R&D expenditures, Analog Devices has been able to increase revenue and continue to be a major competitor in the industry.

About the Analog and Digital Signal Processing Business

Electrical signals fall into two categories, digital or analog. Analog signals (sometimes known as linear signals) represent real-world phenomena such as temperature, pressure, speed, sound, and motion. Analog sensors measure and collect information on these happenings by generating continuous voltages or currents. These signals are then processed using analog methods such as amplification, filtering, and shaping. For example, an electric guitar and its amplifier uses analog signal processing. The electric current generated by the guitar is filtered, amplified, and then sent to the speaker. Analog Devices produces high-performance analog signal processing ICs that generally support 10-bits of accuracy and a minimum of 50 MHz of speed ^[1].

These analog signals are sometimes then converted into digital signals, in a process known as digital signal processing. Digital signals differ from analog signals in that they are valued at fixed time intervals and not continuously. Many modern devices use digital signals because they cooperate well with computers; such devices include cell phones, music players, video recorders, and digital cameras. Digital signal processors (DSP) that Analog Devices produce are optimized in high-speed numeric calculations, which are essential in the processing of digital data (analog to digital signal conversion). Analog Devices produces both general-purpose and application-specific DSP ICs.

Business Financials

Products

Analog products represent 90% of the company’s revenue. These analog products are divided into four different categories:

1) Converters: Includes A/D (analog to digital) and D/A (digital to analog) converters. A/D converters, for example, transform unreadable analog signals to readable digital signals that can be processed by digital devices. This technology is used in a variety of applications such as music recording and TV tuners.

2) Amplifiers: Analog Devices offers many amplifiers including audio, video, current sense, instrumentation, isolation, log, and RF/IF amplifiers. Electronic amplifiers for example, covert an audio signal with a low amount of energy into a signal with a high amount of energy. In the case of sound, the output is substantially greater in magnitude.

3) Power Management & Reference: The product line includes battery chargers, fan controllers, LED drivers, and power supply controllers. Many electronic devices are in need of products that provide power management to regulate the amount of energy supplied to different parts of the product at any given time. For example, when a computer goes to sleep, a lower power state, a device is needed to trigger the change.

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4) Other Analog: Which includes advanced IC technology such as micro-electromechanical system (MEMS). MEMS along with signal conditioning allows devices to sense position and acceleration. Currently Analog Devices provides Nintendo (NTDOY) with the MEMS needed in the popular Wii game system controller ^[3].

DSP products represent 10% of the company’s revenue. DSP products are categorized as:

1) General Purpose DSP: Analog Devices offers four different families of DSP ranging from 16 to 32-bit. As discussed earlier, DSP is the process in which analog signals are converted to digital signals. Analog Devices creates products that allow for this processing to be done at different speeds and different amounts of information.

2) Other DSP: This category previously included wireless baseband chipsets.

In the fiscal fourth quarter of 2007, Analog Devices struck a deal with Taiwan based company MediaTek to sell its Othello and SoftFone baseband chipset product lines. The product line had plagued the company for the past couple years as revenue produced by that segment decreased dramatically. By selling the baseband chipset product lines, the company hopes to focus on its profitable product lines such as high performance DSP and product lines that have high growth potential product lines such as MEMS ^[4].

Markets

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Industrial: The industrial market is composed of four major areas:

• Industrial Process Automation: includes applications such as factory automation systems, automatic process control systems, and robotics.
• Instrumentation: includes engineering, medical, and scientific equipment.
• Defense/Aerospace: includes navigation systems, flight simulators, radar systems, and security devices.
• Automotive: includes GPS devices, anti-lock brakes, and crash airbag sensor systems.

Communications: Communications technology requires the acquisition of analog signals that are converted from analog to digital and then digital to analog during transmission. Analog Devices provides products that make these transmissions occur at a higher speed and at reduced power. The company’s products are used in audio, data, image, and video communication.

Consumer: Digital entertainment systems and high quality music, movies, and photos require the use of high-performance ICs. Such products include digital cameras, home theater systems, LCD and plasma televisions, and high-definition DVD players.

Computer: Analog Devices produces products in this market under the brand name SoundMAX. These products are used in laptops, desktops, printers, and scanners.

Research and Development

The semiconductor industry can be characterized by rapid technological changes and advancements. Because of this, Analog Devices has to invest a lot of money into research and development in order to stay with competition and create better and new products that customers want to buy. As recent years have shown, the more money the company invests in R&D, the more revenue it is able to generate.

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Key Trends and Forces

• Semiconductor Cyclicality - the semiconductor industry consistently moves in cycles. This highly cyclical industry can be illustrated by rapid changes in technology, quick obsolescence in products, and evolving technological standards. High fluctuations in the industry are directly connected to maturing products, new product introductions, and the general economic conditions at the time. For Analog Devices this means periods of high downturns and high upturns.

• Increasing Product Demand – development and advancement in the technological world, has raised the demand for products that use Analog Devices’ ICs and DSP. These products range from needs, such as anti-lock brakes or air bag sensors, to luxuries such as home theater systems. As we become more dependent on technological devices for safety or leisure, the need for these products will increase.

• Growth in Foreign Countries – Analog Devices is very dependent on international sales to generate revenue. In 2007, international sales represented 74% of total sales compared to the 26% of sales in the United States. As foreign countries continue to develop economically and technologically, the need and want for high-performance products is going to rise. For example, sales in China, the world’s fastest economic growing country, have increased from 9% of Analog Devices’ total sales in 2005 to 11% in 2006 to 13% in 2007 ^[8]. The continued success of China and other foreign countries will have positive effects on the company.

Competitors

Being in the semiconductor industry, Analog Devices faces fierce competition on all fronts. The company is forced to invest a large portion of their money into R&D in order produce new and innovative products to stay ahead of and even with competition. Failure to keep up with the rapidly changing and advancing industry, will have severe negative impacts for the company.

Analog Devices has shown multiple ways it is keeping up with the competitive industry. The company has available general purpose core products that it sells to customers; these general purpose products can be made and distributed quickly. Additionally, if a buyer needs a more specific product from Analog Devices to fit a certain product, the company can devote more time to the development and design of application specific products. The company has also been able to form good relationships with customers in some of their growing product lines such as MEMS (ie. the relationship with Nintendo).

However the company faces many challenges in its DSP product line. Texas Instruments is the world leader in DSP production and controls a large portion of the market share. Due to its size, resources, and brand name popularity, TI has been able to form relationships with many customers who are looking for quality products at low prices. Analog Devices faces the challenge of competing and outperforming an industry giant.

References

1. ↑ ADI 2007 10K, Item 1 pg. 3
2. ↑ ADI 2007 10K, Item 7, pg. 26
3. ↑ Analog Devices Press Release May 9, 2006
4. ↑ Analog Devices Press Release September 10, 2007
5. ↑ ADI 2007 10K, Item 7, pg. 25
6. ↑ ADI 2007 10K, Item 8, pg. 43
7. ↑ ADI 2005 10K, Item 8, pg. 33
8. ↑ ADI 2007 10K, Item 7 pg. 26
9. ↑ ADI 2006 10K, Item 8, pg. 41
10. ↑ TXN 2006 10K, Exhibit 13, pg. 6
11. ↑ BRCM 2006 10K, Item 15, pg. F-3
12. ↑ NSM 2006 10K, Item 6, pg. 26
13. ↑ MXIM 2006 10K, Item 6, pg. 20
14. ↑ LLTC 2006 10K, Item 8, pg. 14
15. ↑ SLAB 2006 10K, Item 15, pg. F-4