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Maxim Integrated Products, Inc. (MXIM)

Deutsche Bank 2017 Global Technology Conference

September 12, 2017 2:10 PM ET

Executives

Bruce Kiddoo – Chief Financial Officer

Analysts

Ross Seymore – Deutsche Bank

Presentation

Ross Seymore

Good morning, everyone. Welcome to the next presentation. We're lucky to have Maxim Integrated, CFO, Bruce Kiddoo, up on stage with me, Ross Seymore.

So Bruce, why don't we start off a little bit with the business model update that you guys just gave a week ago today, I believe? Talk about some of the updated metrics that you gave, and then I'll follow up with some questions on the whys and what fors.

Bruce Kiddoo

Sure, thanks Ross, and thanks for everybody here joining us today. So a couple of years ago, we announced the transformation of the company. And really, the goal was to be much more focused on the portfolios that we're investing in and where we are investing our R&D and to become much more profitable through structural changes. And when we sort of kind of looked at how we did, I think on the revenue side, we returned to growth. We did well. We grew 5% in our fiscal year just completed in June, although we didn't grow faster than the market, as we had hoped for.

On the profitability side, we met or exceeded all of our targets. We had said we were going to go from low 60s to mid-60s, gross margin last quarter, we were at 67%. We said we were going to go from sort of almost a mid-20s to the mid-30s operating margin. Last quarter, we were close to 36%. We said we were going to drive free cash flow margin from sort of below kind of in the 25% to 30% to 30% to 35%. We got into that range consistently.

And so we just felt it was time to update that model because, obviously, investors were asking us, What's next? And so in doing that, we said being good engineers and kind of looking at our results. On the revenue side, we should – what we set our new model at, at-market because we're highly confident we could do that. And we just felt, given our history, we hadn't outgrown.

And from a credibility point of view, I'd much rather put something out there that investors can count on and bake into their models. And when you think of the rest of the model, the profitability side, Maxim's the model works very well with at-market growth. On the profitability, we took gross margins from the mid-60s to the high 60s, 67% to 70%. Most of that is driven by structural changes.

It isn't determined or dependent on revenue growth to get there. And we did leave room in that gross margin for the opportunity to continue to grow the top line, right? We left room for kind of to be able to have a range of businesses that are at different margins and different growth rates.

We said we were going to continue to manage OpEx very sensibly, continue to invest in the growth areas, but at the same time, kind of reduce investment in those areas that weren't showing the adequate return, such that we would get operating margins at the 37% to 40% range.

We said free cash flow margin CapEx will remain low at 1% to 3% because of we exited the majority of our fabs. And so free cash flow margin should be 35% or higher. And we returned that to shareholders, kept our commitment to return 80% of free cash flow to shareholders, which we've consistently done over many years.

So we feel good about the model. With think we've been able to execute. We wanted to put out a new model that investors can measure us by. We think our ability to execute on our prior commitments should give confidence that we're able to execute on these commitments as well. And it's an exciting time to be at Maxim.

Ross Seymore

Great. Thanks for that overview. Why don't we start diving in a little bit into the first metric, pretty much the only metric that you lowered, and then we can get to the ones that you raised after that. So the revenue side of things, I agree that you want to be credible on that, and it's even more impressive that you can hit your margin targets without growing at 1.5 times the industry. But if we look a little bit in the rearview mirror, what was the headwind that you didn't foresee that caused the growth to be less than the 1.5 times?

Bruce Kiddoo

I think the primary issue was our consumer business, specifically Samsung. I think we knew, and we wanted to diversify our business there. I think Samsung came down faster than we thought. That was primarily due to dual sourcing. We talked about this back in the March quarter. So if you look at the June quarter right now, Automotive grew in the low teens. Industrial grew, I think, 11%, 12%. These are all year-over-year numbers. The Comm and Data Center was up in just in single digits, and it was Consumer that was down 10% year-over-year.

If you break that down, actually, smartphones were down probably 30% year-over-year. And all of the other businesses, whether it's in tablets, in gaming, in wearables, this whole proliferation of devices, were all up substantially to offset that. And so what's happened is while most people know kind of Samsung is behind us, it's less – it's no longer a 10% customer. It's still impacting the year-over-year calculation. so that until we lap basically in the March – or really the full impact will be the June quarter, until we lap that in June 2018, we'll still see this impact on a year-over-year basis.

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