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Maxim Integrated Products, Inc. (MXIM)

Q1 2018 Earnings Conference Call

October 19, 2017 05:00 PM ET

Executives

Kathy Ta - Vice President, Investor Relations

Bruce Kiddoo - Chief Financial Officer

Tunc Doluca - President and Chief Executive Officer

Analysts

Harlan Sur - JPMorgan

Ross Seymore - Deutsche Bank

Tore Svanberg - Stifel

Ambrish Srivastava - BMO

Vivek Arya - Bank of America

Toshiya Hari - Goldman Sachs

Mark Lipacis - Jefferies

John Pitzer - Credit Suisse

Blayne Curtis - Barclays

Srini Pajjuri - Macquarie Capital

Craig Hettenbach - Morgan Stanley

Philip Lee - Citi

Chris Caso - Raymond James

C.J. Muse - Evercore ISI

Amit Daryanani - RBC Capital Markets

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Maxim Integrated First Quarter of Fiscal 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded.

I would now like to introduce your host for today's program, Kathy Ta, Vice President, Investor Relations. Please go ahead, Kathy.

Kathy Ta

Thank you, Jonathan. Welcome everyone to Maxim Integrated's fiscal first quarter 2018 earnings conference call. Joining me on the call today are Chief Executive Officer, Tunc Doluca; and Chief Financial Officer, Bruce Kiddoo.

I would like to highlight that we have posted a supplemental financial presentation to our external Investor Relations Website. The information in this presentation accompanies the financial disclosures in our earnings press release and on this conference call.

During today's call, we will be making some forward-looking statements. In light of the Private Securities Litigation Reform Act, I'd like to remind you that these statements must be considered in conjunction with the cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements in this call involve risks and uncertainties, and that future events may differ materially from the statements made. For additional information, please refer to the Company's Securities and Exchange Commission filings which are posted on our website.

Now, I'll turn the call over to Bruce.

Bruce Kiddoo

Thanks Kathy. We continue to successfully execute on our updated business model and grow our top line. Our first quarter earnings per share exceeded the high end of our guidance range. In gross margin, nearly 67% excluding special items was already within range of our new financial targets for the company.

Revenue in the first quarter was up from the same period a year ago and we are guiding the second quarter to grow well above the seasonality.

Let me now discuss our first quarter financial results. Revenue for the first quarter was $576 million, up 3% from the same quarter a year ago. Our revenue mix by major markets in Q1 was approximately 28% from industrial, 28% consumer, 20% communications and data center, 20% automotive and 4% computing.

It is worth highlighting that industrial plus automotive is nearly 50% of total company revenue, up from 37% over three years ago when we began breaking out our automotive revenue as a step-up category.

Let me now turn to the distribution channel. Distribution comprised 46% of Maxim's revenue in the September quarter. Resales in Q1were strongly up from the same quarter last year. We ended Q1 with 68 days of inventory in the distribution channel, up 7 days from the Q4. The increase in days was driven by stocking for a specific product ramps in Japan, shifting contract manufactures from direct-to-distribution in Taiwan and stocking Future Electronics, our newest distribution partner in the U.S.

We expect inventory days to decline in Q2 to the lowest 60s with resales expected to be up strongly again from the same quarter last year and through management of channel inventory.

Turing to the P&L, Maxim's gross margin excluding special items with 66.9%, approximately flat from the prior quarter driven by strong operational execution. Special items in Q1 gross margin included intangible asset amortization from acquisitions.

Operating expenses excluding special items were $182 million, down $7 million from the prior quarter due to tight cost controls and some one-time benefits. Special items in Q1 operating expenses included acquisition related charges and restructuring charges. Q1GAAP operating income excluding special items was $203 million, operating margin at 35.2% of revenue is approximately flat from the prior quarter and up 390 basis points from the same quarter a year ago. The improvement in operating margin was driven by revenue growth, our manufacturing transformation and focused R&D investment strategy.

Q1 GAAP tax rate excluding special items was 14%. GAAP earnings per share excluding special items was $0.60 above our guided range and up 24% from the same quarter a year ago.

Turning to the balance sheet and cash flow. During the quarter, cash flow from operations was $220 million or 38% of revenue. Q1 inventory days ended at a 117, up 3 days from Q4. Inventory dollars were down 1% from the prior quarter.

Gross capital expenditures were 14 million in the quarter, offset by 1 million in proceeds from sale of property. Capital expenditures are well below depreciation of $24 million for quarter. Trailing 12 months free cash flow ending in Q1 using gross capital expenditures was $819 million or 35% of revenue and up 24% over the same quarter last year. Our free cash flow yield is nearly 6% at yesterday's closing stock price.

For capital return, share repurchases totaled $75 million in Q1 as we buyback approximately 17 million shares. Dividend totaled $101 million in the quarter or $0.36 per share. The current dividend yield is approximately 3% on yesterday's closing stock price, reflecting the dividend increase we announced last quarter.

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