Chip Shortages to Persist for ‘Balance of the Year,’ Says Analog Devices CFO

Global semiconductor shortages remained the talk of major chipmakers that reported quarterly results Tuesday and Wednesday. Analog Devices Inc. (ADI) said it’s expanding production capacity to record levels, but doubts it will keep up with demand. Lattice Semiconductor credited proactive inventory-build decisions it made several quarters back for its good supply position relative to the industry. Both companies warned investors not to expect relief from the supply constraints soon.

The “sharper than expected” economic recovery “coupled with the lean inventory backdrop” is fueling “unprecedented demand for semiconductors and putting stress on the global supply chain,” said ADI Chief Financial Officer Prashanth Mahendra-Rajah on a fiscal Q1 investor call Wednesday. “While the industry at large is working to meet this historic demand, it’s more than likely we will be operating in a constrained supply environment for the balance of the year,” he said.

ADI is “working to secure additional capacity” from outside suppliers, said Mahendra-Rajah. It’s also “ramping our internal operations to increase output,” he said. “I’m encouraged by the near-term trends we’re seeing across our end markets. While we’re mindful of the ongoing macroeconomic uncertainties, we are optimistic that a broad-based recovery is underway.”

The chipmaker is “producing and shipping at record levels,” said Mahendra-Rajah. “We have enough capacity to meet to the guide” of a 21% revenue increase to $1.6 billion in fiscal Q2 ending late April, he said. “But significant additional upside versus that guide will depend on what we’re able to procure, both from an external wafer standpoint as well as the capital that we’re in the process of deploying in our internal facilities to support that.”

ADI is able to “alleviate” some shortages because it has been “consistently building inventory since last summer to deplete what was pulled down during the pandemic shutdowns” in China a year ago, said Mahendra-Rajah. Even with the “additional capacity” ADI procures from outside suppliers or ramps internally, “it’s very likely that the strength of demand is going to outpace supply for some period of time,” he said. “I think we will be chasing demand at least for the balance of this year.”

The chipmaker entered its fiscal Q1 in early November with “what we would call normal lead times” in supply, said CEO Vincent Roche. “During the quarter, into the early part of this quarter, we’ve seen lead times extend, which I think is pretty consistent with the industry at large.” Though the global landscape features some “hot spots” of severe shortages, “what we’re really talking about is a few weeks” of extended lead times “in different places,” he said.

Q2 will be an “all-time record for the company” in factory output, said Roche. “Our investments are keeping ahead of these revenue levels. Like most of our peers in the industry, there are supply constraints in parts of the business, so we’re not able to meet all the demand.” The shortage is especially severe in automotive, “which has been very, very well-publicized,” he said.

ADI’s communications business generated 18% of Q1 sales and revenue was down 10% sequentially from Q4 but up 16% year over year, said Mahendra-Rajah. Wireless and wireline revenue grew by double digits from the year-earlier quarter, “despite zero revenue from Huawei this quarter” due to the Commerce Department’s export restrictions on the Chinese telecom giant, he said.

The chipmaker has said consistently “the U.S. deployment of 5G is going to be a second-half event,” said Mahendra-Rajah. “Our view on that has not changed. What we have seen is a bit more of a slowdown in China as they’re digesting the 5G that they have deployed and the channel counts are a bit lower.” ADI doubts it can grow communication revenue year over year, “given the significant headwind from Huawei going to zero,” said Mahendra-Rajah. “That’s a tough ask.”

Lattice Semiconductor doesn't deny that “certainly there’s tightness” in the semiconductor supply chain, but the company itself is in “a pretty good position right now” due to a “couple of things that we did proactively” several quarters back, said CEO Jim Anderson on a fiscal Q4 earnings call Tuesday. Lattice began building inventory “strategically” in Q2 to be sure “we had plenty of supply” to support customers’ “natural demand and then also any upside that they might see,” he said.

The inventory build continued in the third and fourth quarters, concentrating on “high running parts, where there’s significant volume and no risk of obsolescence,” he said. Lattice also began “working really closely” with suppliers in 2018 to be sure “we were giving them long-term multiyear outlooks on our demand expectations and working with them proactively to plan out capacity over a multiyear period,” including the “potential to drive upside capacity,” he said.