Maxim Reports Robust Results - Analyst Blog

Maxim Integrated Products Inc.’s (MXIM) second quarter earnings beat the Zacks Consensus Estimate by 6 cents. Two of its close competitors, Linear Technology Corp (LLTC) and Intersil Corp (ISIL), also beat the Zacks Consensus by a wide margin. We expect Semtech Corp (SMTC) to report likewise.
 
Revenue
 
Revenue of $473.5 million was up 5.4% sequentially and 15.3% year over year. This was the first year-over-year increase in seven quarters. Revenue was over the high-end of management’s guidance range of $450−$465 million (up 0.2−3.5% sequentially). The results reflected the characteristics of a regular quarter, with consumer down slightly, more than offset by increases in industrial, communications and computing markets.
 
Revenue by End Market
 
The computing market generated 25% of revenue, up 5.4% sequentially and 6.8% year over year. Revenue benefited from sequential strength in the server and storage segments.
 
The consumer market generated 31% of revenue, down 1.0% sequentially and up 32.4% year over year. The cell phone market softened slightly in the last quarter due to inventory rebalancing at some customers. However, this was largely offset by continued strength in the LCD TV market.
 
Industrial generated 25% of revenue, up 9.8% sequentially and 20.1% year over year. Segment strength was very broad-based, although industrial and automation and control as well as automotive were particularly strong.
 
Communications brought in the remaining 19%, a sequential increase of 11.3% and a year-over-year decline of 0.4%. The growth trend in this market is very encouraging, with all segments within communications picking up in the last quarter. However, fiber optic modules were exceptionally strong in the last quarter.
 
Orders
 
Management does not provide any specific information on orders, as shifts in customer vendor managed inventory programs distort quarter-to-quarter comparisons.
 
Our estimates indicate that orders were up double-digits in the last quarter, resulting in a higher backlog. Turns sales also increased. The book-to-bill ratio was well over unity.
 
Both end customers and distributors increased their bookings and inventories at Maxim and at distributors increased slightly, but were still below normal levels. Customer lead times stretched by a week, which could indicate some delayed order fulfilment in the next quarter.
 
Consumer market bookings were up mid-single-digits, driven by very strong demand for LED TVs and softer cell phone demand. Computing market bookings were up modestly, driven by financial terminals, storage, servers and notebooks. Communications bookings grew strongly across all segments, particularly boosted by strength in datacom and base stations. All segments within industrial witnessed strength in the last quarter, although bookings were strongest in control, automatic test equipment (ATE) and automotive.
 
Margins
 
Pro forma gross margin was 62.7%, up 551 basis points (bps) sequentially and 382 bps year over year. Management attributed the increase to higher utilization rates and a stronger mix of higher-margin industrial business.
 
Operating expenses of $158.0 million were up 4.9% from the $150.7 million recorded in the September 2009 quarter. The operating margin was 29.4%, up 568 bps sequentially and down 826 bps year over year. The sequential increase was almost entirely attributable to the higher gross margin, although slightly lower R&D (as a percentage of sales) also contributed, partially offset by slightly higher SG&A (as a percentage of sales).
 
Net Income
 
Pro forma net income was $74.8 million (15.8% margin) compared to $41.4 million (9.2%) in the previous quarter and $99.5 million (24.2%) in the year-ago quarter. Our pro forma calculations exclude restructuring charges, stock based compensation charges, certain one-time litigation charges and tax adjustments in the last quarter.
 
Including these items, on a fully diluted GAAP basis, the company recorded a net income of $58.6 million (19 cents per share) compared to $41.9 million (13 cents per share) in the September 2009 quarter and a net loss of $38.8 million (12 cents per share) in the December quarter of 2008.
 
Balance Sheet
 
Inventories were up 2.0% to $196.0 million. Inventory turns were 3.6X, down slightly from 4.0X in the September quarter. Days sales outstanding (DSOs) went up from 46 to 54 days, mainly due to higher sales in a back-end loaded quarter. The cash and marketable securities balance was $838.6 million, down $99.0 million during the quarter. Cash generated from operations was $31 million, of which the company spent $28 million on PP&E and $61 million on cash dividends in the last quarter. Maxim has no long term debt and long term liabilities totaled $195.9 million at quarter-end.
 
Guidance
 
In the fiscal second quarter, revenue is expected to be in the $500−$520 million range (up 5.6−9.8% sequentially).
 
Industrial segment revenue is expected to increase, both due to positive seasonality and continued recovery across all segments within industrial. Communications is also expected to grow, with broad-based strength across all segments, particularly in optical transceivers and base stations. Strength in computing will be driven by servers, storage and financial terminals, as well as renewed strength in notebooks. A recovery in cell phones and continued strength in LCD TVs will drive growth in the consumer business.
 
The GAAP gross margin is expected to lie in the 60−61% range, which is the usual level for the company. Gross margin will be supported by the high utilization rate and a higher mix of industrial business in the next quarter. Operating expenses are expected to increase to $180−$183 million, driven by increased R&D design activity and restructuring charges. The tax rate, excluding special items for international restructuring is expected to be 36%. The pro forma EPS is expected to be 25−28 cents. Capital expenditure is expected to be at the high end of the targeted range of 5−7% for the year.
 
Estimate Revisions
 
There have been significant estimate revisions since the company reported last week, with 13 of the 24 analysts covering the stock raising estimates for the March quarter and 11 of the analysts raising estimates for the fiscal year ended June 2010. As may be expected, there were no downward revisions.
 
Moreover, the earnings surprise history seems to indicate that analysts have been conservative in their estimations, with the company beating the Zacks Consensus Estimate at double-digit rates in each of the last four quarters. The average surprise over the last four quarters is as high as 44.17%.
 
The Zacks Consensus Estimate for the current quarter is 22 cents, representing an upside potential of 13.64%.
 
The Zacks Rank for the stock is currently #3, representing a short term Neutral rating. However, further revisions would propel it higher.
Read the full analyst report on "MXIM"
Read the full analyst report on "LLTC"
Read the full analyst report on "ISIL"
Read the full analyst report on "SMTC"
Zacks Investment Research