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How ADI Beat Its Own Earnings Guidance in Fiscal 3Q16

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ADI’s fiscal 3Q16 earnings overview

Analog Devices (ADI) was recently in the news as it announced the acquisition of Linear Technology (LLTC) for $14.8 billion. To put a cherry on top, ADI revised its fiscal 3Q16 earnings guidance upward.

The company released its fiscal 3Q16 (ended July 31, 2016) earnings on August 17, 2016, and the results were better than expected. Despite this, the company’s stock fell by 0.1% on August 18, 2016, as its overall earnings in fiscal 2016 are now lower than in fiscal 2015.

In this series, we’ll look at the various components of ADI’s earnings and the likely impact of internal and external factors on future growth. We’ll start with revenue specifics.

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ADI’s fiscal 3Q16 revenue beats analysts’ estimates

In fiscal 3Q16, ADI’s revenue rose by 0.7% YoY (year-over-year) to $869.6 million, beating the analyst estimate of ~$847.4 million and its own revised guidance of $800 million–$840 million.

Fiscal 3Q16 saw the company’s first YoY revenue growth in fiscal 2016. Strong demand from its Communication Infrastructure, Consumer, and Automotive segments more than offset weak demand in its Industrial segment.

ADI’s revenue growth compared to peers

Rival Texas Instruments (TXN) also reported YoY revenue growth during the same quarter, after four quarters of decline, as strong demand in automotive more than offset weak demand in personal electronics. On the other hand, Maxim Integrated (MXIM) reported a 3% YoY decline in revenue as strong demand in automotive was offset by weak demand in computing and consumer.

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ADI’s sequential revenue growth

While the consumer segment was weak for TXN and MXIM, it was slightly stronger for ADI. On a sequential basis, ADI’s revenue rose by 11.7% in fiscal 3Q16, driven by a 131% sequential growth in its Consumer segment, where Apple (AAPL) is its largest customer. The growth in ADI’s Consumer segment is largely due to a large order from Apple for its next flagship product, iPhone 7, which is due to release in September 2016.

Analog IC (integrated circuit) makers have contrasting revenue growth because of their degree of exposure to various end markets.

ADI’s strategy to boost future revenue growth

ADI is looking to boost its revenue through acquisitions. It recently announced the acquisition of rival Linear Technology, which specializes in power-management chips. The two companies’ complementary product portfolios would almost double the combined entity’s total addressable market to $14 billion.

The two companies’ similar consumer markets would bring in cross-selling opportunities as well. In 2015, ADI acquired Hittite Microwave for ~$2 billion. ADI should realize revenue synergies from both the acquisitions in 2017.

Now let’s look at ADI’s profits in fiscal 3Q16.

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