Maxim Beats, Guidance Disappoints - Analyst Blog

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Maxim Integrated Products ' ( MXIM ) second quarter earnings excluding special items and including stock based compensation expenses beat the Zacks Consensus by a penny.

Revenue

Maxim's second quarter revenue of $591.4 million was down 7.0% sequentially, 3.5% year over year and missing management's guidance range of $625-655 million, or down 1.7% to up 3.0% sequentially. Revenue was down across all end-markets. 

Revenue by End Market

The consumer end market was the largest in the last quarter, with a quarterly revenue contribution of around 41%, down 7.0% sequentially and up 23.6% year over year. Sales in the consumer end market suffered on account of year-end inventory rebalancing at customers and Maxim stated that it was in line with normal seasonal patterns.

Growth from the year-ago quarter was due to a growing design wins and opportunities in the smartphone, tablet and other markets. Maxim is now focusing on more integrated solutions, which are expected to gain momentum this year. 

Industrial , the second largest segment, generated 26% of revenue, which was down 7.0% sequentially and 10.4% from the year-ago quarter due to broad-based weakness in the market. While automotive and smart grid segments continue to show signs of strength, other segments within the industrial market remain weak.

Revenue from the Communications end market was down 7.0% sequentially and 21.9% year over year to 17% of total revenue. The GPON business remained strong in the last quarter according to Maxim.

Additionally, growing braodband usage in China continued to boost infrastructure investment, which was a positive for FTTH deployment. Other areas of the business remained weak on account of soft market conditions overall.

Despite the dismal performance in the last quarter, the computing market remains important for Maxim, given its 16% revenue contribution. Revenue from the end market was down 7.0% sequentially and 18.8% from last year. Maxim attributed the decline to the ongoing weakness in the notebook market.

Revenue by Geography

China remained the single largest contributor in the last quarter, with a revenue share of 44% (down 5.8% sequentially and up 14.1% from last year). Korea accounted for 7% (down 36.6% sequentially) and Japan 6% (up 1.1% sequentially and down 17.7% year over year). The rest of Asia brought in another 15% of total quarterly revenue, which was up 10.0% sequentially.

The U.S. and Europe generated around 13% and 12% of revenue, respectively. However, while the U.S. declined just 3.1%, Europe was down 15.1%. The two regions were down 11.7% and 25.0%, respectively from the year-ago quarter. The rest of the world accounted for around 3% of revenue.

Orders

Management does not provide specific information on orders, as shifts in customer vendor managed inventory programs distort quarter-to-quarter comparisons.

We estimate that orders were down mid-single-digits in the last quarter, cutting down the backlog significantly, with the book-to-bill going remaining below unity. Turns sales increased strongly in the last quarter, while backlog sales declined. Supply chain activities improved, with Maxim's delivery lead times dropping to six weeks exiting the quarter. Internal inventories declined.

Margins

The pro forma gross margin was 60.5%, down 315 basis points (bps) sequentially and 304 bps year over year. Management stated that the weaker gross margin was related to lower utilization rates and higher inventory reserves.

Operating expenses of $220.3 million were up 2.2% sequentially and 8.9% from the year-ago quarter. This helped bring the operating margin down 497 bps sequentially and 729 bps from last year. Both R&D and SG&A also increased significantly as a percentage of sales, although not as much as cost of sales.

Net Income

The pro forma net income was $103.3 million, or a 17.5% net income margin compared to $137.2 million, or 21.6% in the previous quarter and $132.4 million, or 21.6% of sales in the year-ago quarter. Our pro forma calculation excludes restructuring, intangibles amortization and other one-time items on a tax-adjusted basis, but includes stock based compensation charges in the last quarter.

Including these items, on a fully diluted GAAP basis, the company recorded a net income of $88.1 million ($0.29 per share) compared to $133.4 million ($0.44 per share) in the September 2011 quarter and $109.6 million ($0.36 per share) in the December quarter of 2010.

Balance Sheet

Inventories were down 7.8% to $233.4 million, with inventory turns up from 3.7X to 4.0X. Days sales outstanding (DSOs) went down from around 47 to around 38. The cash and marketable securities balance was $816.5 million, up $56.2 million or 7.4% during the quarter.

The cash generated from operations was $249.3 million, of which the company spent over $68 million on PP&E, $12 million on acquisitons, $64 million on cash dividends and $72 million on share repurchases. Maxim has just $308.7 million of long term debt and long term liabilities are also not too high at $327.8 million.

Guidance

In the third quarter of fiscal 2012, Maxim expects revenue of $555-585 million (down 1-6% sequentially). The backlog is $365 million, but the guidance calls for high turns sales, which may be within its capacity given recent trends.

The gross margin is expected be in the 55-58% range on a GAAP basis and 57-60% on an adjusted basis. Mix, utilization and inventory reserves will be variables impacting the gross margin. Operating expenses excluding special items are expected to be down 3-4% from December. The tax rate excluding special items is expoected to be 26-28%.

All this will yield GAAP earnings of 22-26 cents on a GAAP basis and 25-29 cents on an adjusted basis. The Zacks Consensus Estimate was 32 cents when the company reported, but has moved down 5 cents after the company reported. Capital expenditure is expected to be be flat to down sequentially. Capital expenditures are expected to be 5-7% of revenue in fiscal 2012.

Conclusion

Maxim is a well-diversified business, although it has increased focus on faster-growth markets in the last few years. Therefore, the company currently generates a significant percentage of its revenue from the consumer and computing end markets. These markets are not doing so well right now due to natural disasters and inventory imbalances.

However, Maxim has done better than the market, because of its superior technology and innovation Therefore, design wins continue, not just in the U.S. but also in emerging countries, such as China.

While Maxim's product line remains solid and its end market diversity is commendable, we think its exposure to the consumer and computing markets will negatively impact results.

Maxim shares therefore have a Zacks Rank of #3, implying a Hold recommendation in the short term (1-3 months). We remain relatively more positive about other analog players, such as Semtech Corp ( SMTC ), which has a Zacks #2 Rank (Buy) and Intersil Corp ( ISIL ), whichh has a Zacks Rank of #1 (Strong Buy).


 
INTERSIL CORP ( ISIL ): Free Stock Analysis Report
 
MAXIM INTG PDTS ( MXIM ): Free Stock Analysis Report
 
SEMTECH CORP ( SMTC ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: ISIL , MXIM , SMTC

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