Lackluster Quarter from Xilinx - Analyst Blog

California-based Xilinx, Inc. (XLNX) posted net income of 171 million or 65 cents in the second quarter of 2011 compared to a net income of $159 million or 58 cents per share in the first quarter of fiscal 2011, in line with the Zacks Consensus Estimate. Net income for the quarter more than doubled from $64.0 million or 23 cents in the year-ago quarter.

Xilinx designs and manufactures a broad range of high-performance, high-density programmable logic devices (PLDs) for electronic equipment manufacturers.

Sales of $619.7 million were up 4% sequentially and up 49% year over year, within management's guidance, but missed the Zacks Consensus Estimate of $627 million. This is the fourth consecutive quarter of growth for Xilinx, driven by growth in new product sales, accounting for 44% of total sales, increased 17% sequentially, propelled by strong growth from the Virtex-6 and Spartan-6 families.

Sales from both these families doubled sequentially in the September quarter driven by strong new customer adoption in wide ranging applications such as 3D digital video displays, high performance computing and wireless infrastructure.

Sales from mainstream and base products both declined sequentially. Coming to end-markets, communication sales increased 5% sequentially driven by growth in wireless sales while wireline sales declined. Industrial and other sales were essentially flat as decreases in defense were offset by increases in test and measurement.

Consumer and automotive sales increased 7% sequentially driven by increasesin consumer and audio/video broadcast and data processing. Sales from data processing increased 6% driven by increases in computer and data processing applications.

Geographically, sales from Japan were strongest, increasing 22% sequentially, driven by consumer and wired communications. Asia-Pacific sales increased 7% sequentially primarily due to increases from communications and data processing.

European sales increased 4% sequentially, driven by wireless and industrial and other. North American sales decreased 3% sequentially as declines from defense and communications more than offset the increases in audio/video broadcast and test and measurement.

Margins

Gross margin improved to 65.6% from 65.0% in the previous quarter and 61.9% in the year-ago quarter, in line with management's guidance. The improvement in gross margin was driven by both yield improvement and mix, which was biased towards more profitable products.

Operating expenses decreased 2.9% sequentially and 5.2% year over year. Consequently, operating margin improved to 35.9% from 35.0% in the previous quarter and from 20% in the year- ago quarter.

During the quarter, Xilinx generated $42 million of cash from operations and used $15 million on capital expenditures. Xilinx repurchased 1.3 million shares for $33 million and paid $42 million in cash dividends.

Xilinx ended the quarter with cash, equivalents and short-term investments of $1.4 billion. Inventory days in the September quarter were 89, up from 80 in the prior quarter. Xilinx built inventory during the quarter to ease supply constraints for most devices.

Xilinx expect inventory days to grow in the December quarter as it has built inventory for the ramp of 40-45-nanometer product families. Inventory days are expected to be close to 100 days.

Guidance

The outlook for the next quarter is below expectations. Management expects to see continued strength from the new Virtex-6 and Spartan-6 families. Going forward, Xilinx projects sales to be flat to down 4% sequentially in the third quarter of 2011. This implies a revenue guidance of $594.9 - $619.7 million. This was below the Zacks Consensus Estimate of $622 million.

Gross margin is forecasted at 65%, +/- a percentage point. Operating expenses in the December quarter are estimated to be approximately $190 million, an increase of 3.4% sequentially primarily due to a restructuring charge of $4 million.

Yesterday, rival Altera Corporation (ALTR) reported a solid quarter and beat expectations, driven by growth in both top-line and bottom-line and provided a strong outlook for the fourth quarter. Altera and Xilinx hold nearly 87% of the programmable logic devices (PLD) market.

Although the the top-line has been steadily moving up after bottoming out in June 2009, we believe Altera is well ahead of Xilinx when it comes to new product introduction at smaller geometries. This has probably eroded the market share of Xilinx in recent times. The company plans to deliver more advanced 28 nm products by the first quarter of calendar 2011 while Altera already released its first samples in July 2010.

Investors were not impressed by the quarterly performance as revenues missed expectations and guidance was lackluster. Shares of Xilinx were down 1.58% and closed at $25.60 in after-hours trading. In regular trading, shares were down 1.23% and closed at $26.01.