Analog Devices: Impressive execution

A focus on the high-performance analog space helps Analog Devices perform well despite tough conditions.

by Drew Wilson -- Movers and Shakers, 8/15/2003

JERALD FISHMAN BELIEVES the analog market is one of the best-kept secrets in the world.

Fishman, who has been in the analog business for 30 years and CEO of Analog Devices Inc (ADI) since 1995, can list the reasons why.

Jerald Fishman, CEO, Analog Devices

He points out that the high-performance analog space ADI plays in sees little consolidation and few startups trying to elbow their way in. It sees far lower capital-intensive manufacturing because analog players don't have to chase Moore's Law. And many of ADI's products are proprietary, tending to live long lifecycles, reap high margins, and hold relatively stable pricing.

During a downturn, unit volumes drop, but prices don't retract much, he says. "The thing that kills most semiconductor companies is the multiplicative effect of lower volume and ever lowering prices," he says.

ADI owns 6.4 percent of the total analog market, according to Databeans Inc, making it the third-largest supplier of analog ICs.

Last year ADI saw its analog sales dip slightly to $1.52 billion. Still, Tore Svanberg, senior research analyst at US Bancorp Piper Jaffray, says ADI in the last three years surprised a lot of people by executing well in tough conditions. Even during the downturn, the company has kept gross margins pretty high.

"Gross margins did not come down as much as they did at STMicroelectronics or Texas Instruments," Svanberg says. "Fishman has from time-to-time surprised a lot of the investment community."

Jack Romaine, head of semiconductor research at SG Cowen Securities, adds that until 1998, the company was underperforming the rest of the players in the analog space. Since then, both growth rate and returns have been improving, Romaine says.

Over the last four quarters, ADI's revenue has indeed been rising. Revenue from the quarter ended August 2002 to the quarter ended May 2003 grew sequentially from $445.5 million to $502 million. During the same timeframe, quarterly net income more than doubled, from $31 million to $71 million.

"Given the hand that the whole industry got dealt, I think we're pretty proud of how we responded," Fishman says.

ADI's largest single product group is general-purpose standard linear ICs, which include high-performance data converters and amplifiers. Data converters have been ADI's forte, and the company dominates with more than 40 percent marketshare, according to Susie Inouye, senior industry analyst at Databeans.

ADI has been growing in the power-management market the past few years, particularly in the computing and cellular-handset segments, she adds. .

In a significant strategy shift, ADI has also become a major DSP supplier, providing both general-purpose DSPs and highly integrated application-specific devices that combine analog and digital signal-processing capabilities in a single IC. DSP products accounted for 22 percent of revenues in Q2 this year, up 8 percent from Q1.

ADI more recently started to focus aggressively on the general-purpose DSP market. Romaine says the company's new DSP, the Blackfin, seems to be getting good traction in applications outside of the traditional DSP areas.

"ADI is going after customers that are not currently using DSPs," he says, adding that the general-purpose DSP strategy avoids direct competition with market-leader Texas Instruments in application-specific DSPs.

However, the company will butt heads with TI after an interesting move in June, when ADI entered the wireless infrastructure market with DSPs for wireless basestation applications. Called TigerSHARC, the DSP line includes a high-density embedded DRAM jointly developed with IBM, which will also foundry the product.

In calendar year 2003, Romaine expects Analog to record nearly 20 percent topline growth, to $2.1 billion, with gross margins of roughly 56 percent.

During the downturn, ADI cut manufacturing staff but retained engineers. Fishman says ADI is spending 24 percent of annual revenues on R&D, compared with 15 percent at the last cycle peak.

ADI currently has a worldwide workforce of approximately 8,600 employees, including 3,100 engineers. Constant rejuvenation of that engineering population is a big challenge, Fishman says. Universities don't train a lot of analog engineers, so ADI has to hire early, just as graduates come out of university, and provide years of training.

The company's four fabs, three located in the US and one in Ireland, manufacture ADI's analog products. Manufacturing analog ICs is tricky, Fishman says. "At the high end, the analog manufacturing process is very tailored to the analog products, so it can be difficult to take the product to a foundry," he says.

Digital technology creates growth for analog because the digital ICs need an interface with the real world, Fishman says. He points out that every major new application--digital cameras, mobile handsets, medical instruments, industrial equipment--is enabled by analog technology. "People think cell phones are mainly digital, but well over half the bill of materials for the digital cell phone is analog," he says.

Fishman says ADI's chief competitors are Maxim and Linear Technology. ADI's competitive edge, he adds, derives from a much greater breadth of customer base--nearly 60,000 customers.

ADI's top 10 analog customers account for only 15 percent of total business. The top 150 customers contribute only 40 percent, the top 1000 50 percent, and the rest account for 50 percent.

"That's a very different profile from any other analog player or even any other semiconductor company," Fishman says.