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Will Apple’s iPhone 7 Success Boost ADI’s Fiscal 4Q16 Earnings?

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ADI’s fiscal 4Q16 earnings preview

Analog and mixed-signal supplier Analog Devices (ADI), which announced the acquisition of Linear Technology (LLTC) in July 2016, had a strong fiscal 3Q16 driven by orders from Apple (AAPL). This growth is likely to continue in fiscal 4Q16, and ADI is likely to post seasonally strong earnings on November 22, 2016. In this series, we’ll see what factors could drive ADI’s fiscal 4Q16 earnings.

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Revenue estimates

For fiscal 4Q16, ADI expects its revenue to rise 14.6% sequentially to $940 million at the midpoint, which is lower than the analyst estimate of $949.3 million. ADI’s revenue has surpassed analyst estimates in two of the past five quarters by an average of 1.9%. If this trend continues, ADI could report revenue of $967 million in fiscal 4Q16.

What will drive revenue growth in fiscal 4Q16?

Revenue growth is likely to be driven by strong orders from its largest customer, Apple, which reported a 17% sequential growth in iPhone sales in fiscal 4Q16. Another Apple supplier Texas Instruments (TXN) also reported 12.3% sequential revenue growth in the September 2016 quarter.

Meanwhile, rival Maxim Integrated (MXIM) reported less than a 1% sequential revenue fall during the same period, as it was hit by the discontinuation of Samsung Note 7 due to the issue of an explosive battery.

Another factor that could drive ADI’s revenue growth is strong demand in the automotive sector, which drove revenues of peers TXN and MXIM.

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EPS estimates

For fiscal 4Q16, ADI expects its non-GAAP (generally accepted accounting principles) EPS (earnings per share) to rise 16.6% sequentially to $0.89 at the midpoint, which is lower than the analyst estimate of $0.90. If we look at the past five quarters’ EPS, the company beat analyst estimates in all five quarters by an average of 9.2%. If the company maintains this trend, it’s likely to post EPS of $0.99 in fiscal 4Q16.

What will drive EPS growth in fiscal 4Q16? 

ADI’s EPS is likely to grow at a faster rate than revenue as analog chips are produced in old fabrication facilities that have already been paid off. Large orders increase factory utilization and further reduce the cost of production.

Even TXN’s EPS grew ~24% sequentially, while its revenue grew only 12% in the September 2016 quarter. MXIM’s EPS grew 0.5% sequentially even though its revenue fell 0.8% during the same quarter.

Next, we’ll see what profit margins ADI could report in fiscal 4Q16.

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