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Xilinx Inc. (XLNX - Analyst Report) reported adjusted earnings per share (EPS) of 56 cents in the first quarter of fiscal 2014, beating the Zacks Consensus Estimate and the year-ago earnings of 47 cents a share. Shares surged 3.72% in the after-hours.

Revenues

Xilinx generated total revenue of $579.0 million, down 0.7% from the year-ago quarter but up 8.8% sequentially. The quarter’s result was well above the Zacks Consensus Estimate of $550.0 million. The year-over-year decline was due to weaker-than-anticipated sales from Communications & Data Center (specifically with strength in wired communications) and Consumer & Automotive end markets, partially offset by better performance in the Industrial, Aerospace & Defense end market. Sequentially, all the end markets posted solid performances, which led Xilinx to outshine its sequential growth guidance of 1.0% to 5.0%.

Year over year, North America and Asia-Pacific grew 6.0% and 2.0%, respectively. But revenues from Europe and Japan dropped 9.0% and 7.0%, respectively. However, all the regions witnessed good sequential growth. New product sales increased 75.0% year over year, driven by higher sales of Kintex-7 and Virtex-7 FPGAs. The company stated that its 28 nanometer families gained much traction during the quarter. But the company generated soft revenues from Mainstream, Base and support products.

Operating Results

Gross margin accelerated to 69.0% from 66.0% in the year-ago quarter, primarily attributable to continued focus on yield improvement, cost reduction and favorable customer mix. Operating margin increased to 33.3% from 28.2% in the year-ago quarter due to lower expenses. Research and development expenses declined 8.2%, while selling, general and administrative expenses dropped 4.0%.

Balance Sheet & Cash Flow

During the quarter, Xilinx generated $144.2 million of cash from operations and incurred $11.3 million in capital expenditure. Xilinx paid $66.0 million in cash dividends. Xilinx ended the quarter with cash, equivalents and short-term investments of $1.84 billion, up from $1.71 billion in the prior quarter.

Guidance

Xilinx stated that the backlog entering into the second quarter was up sequentially. The company also expects revenues from all end markets and 28-nanometer products to increase sequentially. Consequently, Xilinx expects sales to be flat to up 3% sequentially in the second quarter of fiscal 2014 with support from higher revenues from all geographic regions, barring Europe.

Gross margin is forecast to be roughly 69.0%. Operating expenses are expected to be around $225.0 million, including approximately $2.0 million of amortization of acquisition-related intangibles. Other income and expense is expected to be $9.0 million. Fully diluted share count is expected to be approximately 284 million. Effective tax rate is expected to be approximately 14.0%.

Management expressed optimism about its yet-to-be shipped 20nm products. Xilinx confirmed that it has reached the final stage of the design cycle for the 20nm transition. Xilinx also mentioned that it has extended its business tie with its foundry partner Taiwan Semiconductor Manufacturing Co. Ltd. to plan for a 16nm transition. With this, Xilinx sounded positive about its Programmable Logic Devices (PLD) market position.

Conclusion

Xilinx’s first quarter results were impressive with both the bottom and top lines beating the Zacks Consensus Estimate. Revenues declined year over year while earnings per share improved due to cost optimization. However, the second quarter guidance was encouraging, reflecting recovery in the semiconductor market on the back of expected higher spending especially from telecom customers.

The company’s transition into 28nm nodes, expected shipment of 20nm nodes and recovery in the semiconductor market are catalysts. But stiff competition from Altera Corp. (ALTR - Analyst Report) and dwindling PC (significant consumer for semiconductor chips) market sales keep us concerned for the near term.

Currently, Xilinx has a Zacks Rank #4 (Sell). Investors should consider other semiconductor stocks such as Rambus Inc. (RMBS - Snapshot Report) and Advanced Micro Devices Inc. (AMD - Analyst Report), both with a Zacks Rank #1 (Strong Buy).

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