ADI Adopts ‘Cautious’ Outlook, Cites ‘Modest’ Order Cancellations

The “macro backdrop” of negative business conditions in the tech industry is “dynamic, and it’s clear that we’re at an inflection point,” said Analog Devices CEO Vincent Roche on an earnings call Wednesday for fiscal Q3 ended July 30. “Economic conditions are beginning to impact demand, with orders slowing later in the quarter, and cancellations increasing slightly,” he said.

ADI’s fiscal Q3 “order book remained strong,” and its backlog increased “to a new record, stretching well into mid-2023,” said Chief Financial Officer Prashanth Mahendra-Rajah. “However, orders moderated later in the quarter,” and ADI’s book-to-bill ratio was down from that of the previous quarter, he said. Strength persisted in the quarter in ADI’s industrial and automotive sectors, while its consumer and communications end markets “were a bit softer,” he said.

The “modest increase in cancellations” that ADI incurred was “not specific to any end market or geography,” said Mahendra-Rajah. “Given these dynamics, along with the macro backdrop, we believe it’s prudent to take a more cautious stance” in ADI’s outlook for fiscal Q4 ending late October, "despite bookings, backlog and higher supply that would all suggest stronger growth." he said. It’s forecasting “only slight sequential revenue growth” to $3.15 billion, up from the $3.1 billion in Q3, which had a 24% increase from the year-earlier quarter, he said. The stock closed 5% lower Wednesday at $170.13.

In Q&A, Mahendra-Rajah urged investors not to read too much into the Q3 cancellations, noting ADI only mentioned them at all on the call in the “spirit of transparency.” Cancellations “ticked modestly higher,” he said. “We want to be fully transparent on this call, so we’re calling it out, but I wouldn’t really put too much focus on the cancellation number.”

ADI’s consumer business generated 13% of total Q3 revenue, “and has now grown year over year for seven consecutive quarters,” said Mahendra-Rajah. “The diversity and growing design momentum across portables and prosumer is enabling us to grow, despite the consumer market slowdown,” he said.

CEO Roche spent several minutes on the call singing the praises of ADI’s consumer “franchise” as a business “that plays a pivotal role in our long-term profitable-growth strategy.” Amid the recent “negative data points” surrounding the consumer tech market, “one may wonder why I highlight this market now,” he said.

ADI’s consumer business is “built differently” from the norm, said Roche. “While we’re not immune to macro slowdowns, we’ve aligned this business to the high end of the market, where performance really matters,” he said. ADI draws about 30% of its consumer revenue from “long-lifecycle prosumer applications,” including next-gen conferencing systems professional audio/video and home theater, he said.

The remaining ADI consumer revenue is drawn from portables, including “fast-growing wearables and hearables,” plus premium smartphones, said Roche. ADI in the past five-plus years has “reconfigured our consumer business to increase diversity across customers, products and applications,” reducing its exposure to “volatility,” he said. “No single product” in its consumer business contributes more than “a couple of percentage points to total ADI sales,” he said.