While reporting solid fiscal Q4 and 2008 results, Analog Devices said it would take steps to reduce expenses by 10% as it moves into fiscal 2009, suffering some immediate pains but planning for long-term gains.
"The fourth quarter culminated a year of solid performance for ADI," said Jerald Fishman, ADI's president and CEO, regarding the November quarter.
"While we exited the year faced with very difficult global economic conditions, we believe [our] focus on our market-leading core signal processing technologies gives us a competitive advantage that will endure throughout and beyond the current downturn."
Withholding specifics, Fishman said ADI will reduce spending "in areas that offer less opportunity for differentiation and growth." That effort is a continuing one for the Norwood, Mass-based company. The company in its fiscal Q1 2008 sold two businesses, its wireless handset baseband chipset and radio transceiver business and the CPU voltage regulation and PC thermal monitoring business, as it looked to better target resources.
"We will continue to reduce investments in areas where the returns do not meet our business model," Fishman said on the company's call with financial analysts Monday.
"We expect this process to yield better operating margins, gross margins, and lower expenses in future quarters. We are continuing to execute our wafer fab consolidation strategy in Ireland, which began last year. Once complete, we expect this to reduce infrastructure costs and be accretive to gross margins. We expect to be able to begin to realize these savings during the second half of 2009."
Fishman further said ADI is planning to consolidate its two remaining US wafer production sites into its existing Wilmington manufacturing location in Boston. "These actions are expected to permanently reduce ADI's manufacturing costs," he said.
In addition, ADI will extend its customary holiday shutdown in certain manufacturing locations during Q1, Fishman said. He reported that ADI has also delayed all salary increases for professional staff until order rate stabilizes and growth resumes, and is planning to extend the holiday period for salaried employees in Q1 and to reduce all discretionary expenses corporate wide.
Strategic rebalancing
"The combination of this strategic rebalancing, of product divestments, manufacturing consolidations, extended vacation periods and reduction in variable compensation and discretionary costs is expected to reduce operating expenses from Q4 levels by approximately 10% or $25 million per quarter. We anticipate that we'll achieve over half of that savings in the first quarter and the balance in our second quarter," Fishman said.
Q4 stats:
- Revenue for ADI's Q4 was $661 million, up slightly from the immediately prior quarter and an increase of 6% from the same period one year ago.
- Gross margin was $404 million, or 61.1% of revenue, compared to $402 million, or 61% of revenue, in the analogue maker's fiscal Q3, and $374 million, or 60% of revenue, for the same period one year ago.
- Operating income from continuing operations was $161 million, or 24.3% of revenue, compared to $161 million, or 24.5% of revenue, in the immediately prior quarter, and $120 million, or 19.2% of revenue, from the same period one year ago.
- Capital expenditures for the quarter totaled $47 million, or 7% of revenue.
- Inventory at the end of the quarter increased by 2% compared to the immediately prior quarter. Days cost of sales in inventory was 112 days at the end of ADI's Q4, compared to 110 days at the end of the immediately prior quarter.
- Q4 analogue product revenue, which makes up 90% of ADI's total revenue, was approximately flat compared with the immediately prior quarter and grew 6% year-over-year. The company noted weakness in the automotive and consumer electronics sectors, and noted strong revenue growth among basestation and wireless handset customers.
- For the full fiscal year, ADI recorded product revenue of $2.6 billion, an increase of 6% from $2.4 billion in fiscal year 2007.
- Gross margin was $1.6 billion, or 61.1% of revenue, compared to $1.5 billion, or 60.6% of revenue, in fiscal 2007.
- Operating income was $625 million, or 24.2% of revenue, compared to $569 million, or 23.1% of revenue, in fiscal 2007.
- Full-year revenue from analogue products increased 6% in fiscal 2008, and has grown at a five-year CAGR (compound annual growth rate) of 11%, ADI reported.
"The global credit crisis and deteriorating economic conditions have resulted in much more cautious customer spending behaviour and generally lower demand. Order rates slowed in late September, and backlog declined significantly from the prior quarter, which limits our short-term visibility," Fishman said speaking to ADI's fiscal Q1 2009 guidance.
"Forecasting revenue in this environment is very difficult. Our operating plan is for revenues to decline sequentially by approximately 20% in the first quarter of fiscal 2009. We are planning to take steps to avoid a large inventory buildup by significantly reducing manufacturing output.
"We are responding to the current economic environment by taking actions that we expect will reduce expenses in the short term while strengthening our position for the long term," Fishman continued.
"We anticipate that our variable and discretionary cost reductions will modulate with general economic conditions, while the actions related to realigning our product portfolio and streamlining our manufacturing infrastructure will result in short-term savings, as well as a fundamentally lower cost structure. As such, we believe that we have taken steps to mitigate the short term reduction in our earnings while at the same time positioning ADI for significant earnings leverage when growth resumes."
By Suzanne Deffree, Managing Editor, News - Electronic News