Analog Devices Sees Revenue at High-End of Its Quarterly Forecast

(Bloomberg) -- Analog Devices Inc. said revenue in the current period may exceed its previous forecast range, indicating that demand remains strong and downplaying concerns that customers are stockpiling inventory.

Chief Financial Officer Prashanth Mahendra-Rajah said Tuesday that the chipmaker's sales growth is trending toward the higher end of its guidance for the fiscal second quarter and may beat the target of $2.8 billion, plus or minus $100 million.

Longer-term, the company sees revenue growing in the range of 7% to 10%, Mahendra-Rajah said at an event for investors. The company remains confident it will be able to report gross margins, the percentage of sales remaining after deducting costs of production, of more than 70%, he said.

Analog Devices specializes in analog and embedded computing components, a sector led by Texas Instruments Inc. Analog chips convert real-world things like sound and pressure into electronic signals, and the rush to add automation to factory equipment and buildings has stirred new demand. The move toward driverless cars also is fueling the market.

Like many of its peers, the company has posted a surge in sales and earnings over the last 12 months as it rushed to fill orders from automakers and other customers desperate for supply and willing to pay more to get it. Revenue across the industry jumped 32% in February to $52.5 billion, according to the Semiconductor Industry Association. Sales of chips have increased more than 20% for 11 straight months.

That rise has fueled concern that shipments are outrunning end demand for the products that use chips. The Philadelphia Stock Exchange Semiconductor Index has fallen 17% this year -- following three annual advances of more than 40% -- as investors bet that the industry is peaking.

Mahendra-Rajah said that while investors are worried that there's an accumulation of chip inventory -- the usual precursor to a downturn -- Analog Devices isn't seeing it.

“There's a concern by customers that there's no inventory available for them,” he said in an interview. “There's still demand that needs to be met.”

Like other management teams, Analog Devices leadership is arguing that the chip industry is no longer primarily dependent on computer and smartphone demand. Semiconductors are used in many more devices -- ranging from industrial machinery to vehicles -- and that diversification makes companies much less vulnerable to the sudden drops in orders that have characterized its past, Mahendra-Rajah said.

His boss, Chief Executive Officer Vincent Roche, also repeated a forecast being made by several industry CEOs that the semiconductor business, which took about 45 years to reach $500 billion in sales, will double in size to $1 trillion in total revenue over the next decade.

The shares of the Wilmington, Massachusetts-based company fell 2.8% to $159.98 at the close in New York amid a broad market decline. Though the company's stock has dropped 9% this year, it is performing better than shares of many of its chipmaker peers.