Analog Devices CFO Says Inventory Correction Over For Company

Analog Devices Inc.'s (ADI) chief financial officer said the inventory correction is behind the semiconductor company and margins should continue improving going forward.

Analog Devices, which specializes in devices that measure information such as temperature or light and converts it into digital data, has posted soaring profits in recent quarters. The company generates most of its revenue from the industrial market and has limited exposure to consumers.

ADI last month reported its fiscal first-quarter profit jumped 84%, and it projected better-than-expected fiscal second-quarter results.

Chief Financial Officer Dave Zinsner said Thursday that the company went through an inventory correction "pretty quickly."

"When we talk to customers for 2011 in total, they seem pretty optimistic about what's going on and what their order flow to us is going to look like," Zinsner said. "It looks like the inventory correction is behind us."

ADI shares, up 39% over the past 12 months, grew 1.7% to $40.43 in recent trading.

Zinsner's statements echo recent comments from other chip makers in the analog market, such as Texas Instruments Inc. (TXN). TI has long said the inventory correction would be short and shallow, and Chairman and Chief Executive Rich Templeton reiterated that belief Wednesday at the Morgan Stanley conference.

"This [slowdown] has been lighter because capacity has been under-invested," Templeton said. "So we never got to excess inventories anywhere near the magnitude we've seen in prior cycles."

Zinsner, meanwhile, said chip makers that "did particularly well in managing lead times," or how long it takes customers to receive products, didn't see much of an inventory correction.

When lead times become longer, customers buy more products on worries they won't be able to get semiconductors when needed. That leads to a build up in inventory and falling demand once lead times start declining. Many companies, such as ADI, have worked to keep lead times steady, lessening the impact of a correction.

In addition, Zinsner said there are still opportunities for the company to grow its gross margins going forward. ADI's margins have been steadily improving in recent quarters, with the gross margin in the fiscal first quarter widening to 66.2% from 61.1% in the year-ago period.

"Where gross margins are today is probably right for the level of sales we have today, but we think we can improve margins as sales go up," he said.

-By Shara Tibken, Dow Jones Newswires; 212-416-2189; [e-mail]