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Analog Devices Profits From Spike in Medical Device Demand

May 22, 2020
Analog Devices said business was also buoyed by demand for chips used in wireless networking gear as China restarts its rollout of 5G networks after a prolonged pause in investment and as the United States looks to offer 5G technology to more consumers.

Shares of Analog Devices spiked after it reported second-quarter results that matched estimates from before the coronavirus outbreak, which has upended the supply chain and dented demand for some of its parts. The analog chip giant said on Wednesday that it faced faltering demand for chips used in factory equipment and cars, balanced out by soaring sales in medical devices and wireless networking gear.

"Our diversification across customers, applications and market is mitigating weaker global business activity," said Vincent Roche, chief executive officer at Analog Devices, adding that it "enabled us to deliver second quarter results within our original guidance range." Analog Devices said sales came out to $1.317 billion in the second quarter of the year, falling in line with its pre-pandemic forecast of about $1.3 billion to $1.4 billion.

Lockdowns to limit the spread of the lethal pathogen also pressured the company's profits. Analog Devices reported income of $268 million, or 72 cents per share, in the second quarter of 2020, compared to $368 million or 98 cents a share, in the second quarter of 2019, when its overall sales totaled $1.526 billion. Supply chain challenges also dented its gross margins, which plunged to 64.3% from 67.7% over the last year.

In March, Analog Devices said that it was withdrawing its forecast in the second quarter due to uncertain demand and supply chain delays. Many governments where it operates ordered nonessential businesses to close to curb the outbreak, which shut down some of its testing and packaging plants in Southeast Asia. Analog Devices said that it was granted essential status to reopen and it has since then resumed normal operations. 

Analog Devices said that it anticipates sales in the range of $1.25 billion to $1.40 billion for this quarter. The company said it widened the range of its forecast to underline the uncertainty around Covid-19, the disease caused by the novel coronavirus, which has upended businesses around the world. The forecast also includes $50 million in sales pushed out of the last quarter due to snags in its supply chain and other operations.

"Overall, we're well positioned if this breaks up or should it break down," Prashanth Mahendra Rajah, chief financial officer at Analog Devices, said on a conference call.

Analog Devices said sales of semiconductors used in medical devices drove business over the last quarter as the lethal viral spread around the world and hospitals scrambled to address a spike in severe cases. The company said it pivoted production lines to boost its supply of chips used in ventilators, respirators and other medical devices. It also sees more demand from healthcare customers stocking up in the second half of 2020.

Shares of Analog Devices soared around 8% to $114.90 after it reported its sales forecast for the current quarter on Wednesday. But the shares slipped to $110.45 by Friday.

Analog Devices said sales would be driven by demand for chips used in networking gear as China restarts its rollout of 5G networks after a prolonged investment pause and the United States rolls out more 5G cellular antennas. Analog Devices sells radio frequency, microwave and other analog chips for translating the signals, including millimeter waves, used by 5G networks. "But over the long term, this is a high-growth market," Rajah said.

Analog Devices, which also sells chips slapped on smartphones including Apple’s iPhone, said demand for chips used in consumer electronics dipped by 5% over the last year. The firm is also weathering weakness in its largest business, which sells parts used in factory equipment, test and measurement, and medical devices. The sales slipped 8% to $710 million as demand for medical devices was offset by steep declines in other segments.

Analog Devices said sales of chips used in cars plunged by 12% from the first quarter of the year and 23% from the second quarter of 2019, as most of its customers shut down factories, leading to a global slowdown in production. "We think it will be tough for the remainder of the year in automotive but perhaps we start to recover in the first half of next year," Roche said, adding that demand in every major category of chips declined.

He said that the slowdown in global car sales has not changed its strategy for the sector. It is increasing investment in chips used in the central dashboard of the car, including its automotive audio bus, or A2B technology, for advanced audio signal processing. Analog Device is also hoping to steal more of the market share in chips that act as the brains of battery packs in electric vehicles, boosting the driving range on a single charge.

"We are seeing some green shoots, in terms of early production designs," Roche said. "We are somewhere in the range of 40% to 45% market share in battery management systems, and we believe that share will grow to 50%, given the design pipeline we have and commitments we have from customers around the world. " Analog Devices has footholds in the US and China and is also gaining ground in Japan and Europe, he said.

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