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Here's How Analog Devices, Inc. Makes Its Money

Analog Devices (NASDAQ: ADI), according to its most recent form 10-K filing, sells a "broad line of high-performance ICs [integrated circuits] that incorporate analog, mixed-signal, and digital signal processing technologies."

"Our ICs are designed to address a wide range of real-world signal processing applications," the company explains in its 10-K filing. "We sell our ICs to tens of thousands of customers worldwide, many of whom use products spanning our core technologies in a wide range of applications."

Image source: Analog Devices.

Before investing in a company's stock, it's helpful to know from what market segments a company derives its revenue and roughly how much of its overall revenue comes from each segment. That way, investors can watch broader industry trends and have some idea of how those trends will affect a company.

Let's go over the four major end markets Analog Devices services.

Largest market segment

Analog Devices' largest market segment by revenue during its fiscal 2016 was the industrial market, making up 44% of its revenue during that year. In its form 10-K, Analog Devices goes over the major sub-segments within industrial.

The first sub-segment is "industrial and automation," which the company says includes applications such as robotics, weigh scales, oscilloscopes, environmental control systems, and more.

The next one is "defense/aerospace." Analog Devices says that, within this end market, its chips are used in applications such as navigation, radar, security, and even space and satellite communications.

The third is "energy management," which the company says can include chips used in utility meters, wind turbines, and more. 

And, finally, there's healthcare. Within this sub-segment, Analog Devices says it provides chips for things such as CT scanners, X-ray machines, blood analyzers, ultrasounds, and more. 

So it's clear why this segment is Analog Devices' largest: It seems to be the company's broadest.

This segment has grown modestly since 2014, with revenue rising from $1.344 billion that year to $1.502 billion in fiscal 2016. However, in 2014, this segment made up 47% of the company's overall revenue, so it's become a slightly smaller part of the company's revenue over the past few years.

Communications is second

Analog Devices' second-largest business segment, by a small margin, is communications.

"Communications technology involves the processing of signals that are converted from analog to digital and digital to analog form during the process of transmitting and receiving data," Analog Devices explains.

The company then notes that the "need for higher speed and reduced power consumption, coupled with more reliable bandwidth-efficient communications, creates demand for Analog Devices' products. Those products, Analog Devices says, "are used in the full spectrum of signal processing for internet protocol, video streaming, voice communication, and machine-type communications."

The company says its revenue from the communications segment was about $667 million in its fiscal 2014, making up 23% of its revenue at the time. During fiscal 2016, this segment generated a bit more than $690 million in revenue and made up 20% of the company's overall revenue.

So, as is the case with the industrial segment, Analog Devices' revenue here has grown since fiscal year 2014, but it has become a smaller part of the company's overall business.

Consumer is third, but growing like crazy

Analog Devices' third largest business segment is its "consumer" segment. The company doesn't go into a lot of detail about the products it builds here, but it says chips in its consumer segment go into "portable devices (smartphones, tablets and wearable devices) for media and vital signs-monitoring applications," as well as "prosumer audio/video equipment."

During the company's fiscal 2014, the consumer segment generated almost $328 million in revenue, accounting for 11% of the company's business. However, this business popped during Analog Devices' fiscal 2015, with revenue more than doubling to nearly $730 million.

The business was a little down from fiscal 2015 levels in fiscal 2016, generating a bit more than $688 million, though it was still up substantially from fiscal 2014 levels. This surge is believed to have been driven by Analog Devices' supplying a key 3-D Touch component for the iPhone 6s-series smartphones, as well as the subsequent iPhone 7-series smartphones.

Should Analog Devices retain its position in the upcoming iPhone models, its consumer business should easily ascend to become its second-largest business by revenue. 

Automotive is last

The final segment Analog Devices serves is the automotive industry. Although a recent surge in interest in artificial intelligence and self-driving cars has been a boon for some chipmakers that have traditionally had little to no content in cars, Analog Devices' automotive business doesn't seem particularly exciting, probably because it has supplied products into this market for quite some time. 

In fiscal 2014, Analog Devices' automotive business, which the company says involves selling a "broad portfolio of analog, digital, and MEMS" integrated circuits, generated about $525 million in revenue.

In fiscal 2016, the business generated almost $541 million in sales, making up just 16% of the company's total revenue. That was down from 18% in fiscal 2014, but up from 15% in fiscal 2015, which was a flat year for the business.

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Ashraf Eassa has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.