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Xilinx Inc. (XLNX - Analyst Report) reported adjusted earnings per share of 49 cents in the second quarter of fiscal 2014, which lagged the Zacks Consensus Estimate of 52 cents per share. However, reported earnings increased 6.6% from the year-ago quarter.

Revenues

Xilinx’s revenues of $598.9 million were not only up 10.1% on a year-over-year basis but also came ahead of the Zacks Consensus Estimate of $588.0 million. The year-over-year increase was due to 32% improvement in revenues from Industrial, Aerospace & Defense segment (32% of second-quarter fiscal 2014 revenues) and 17% year-over-year growth in Broadcast, Consumer & Automotive (15% of second-quarter fiscal 2014 revenues) which more than offset the 3% decline in revenues from Communications & Data Center segment (49% of second-quarter fiscal 2014 revenues)..

The company reported strong sales in Xilinx’s 40-nanometer (nm) and 45-nm products — Virtex-6 and Spartan-6.

Geographically, revenues from North America and Asia Pacific increased 22% and 17% year over year, respectively, while revenues from Europe and Japan decreased 7% and 5%, respectively, during the same period of time.

Operating Results

Xilinx reported gross profit of $416.1 million which increased 16.8% from the year-ago quarter and margins increased 399 basis points (bps) to 69.5%. The margin expansion was primarily attributable to higher revenues and favorable customer mix.

Operating expenses for the quarter increased 21.3% from the year-ago quarter due to higher research and development, and selling, general and administrative expenses.

The company reported operating profit of $163.87 million, up 10.6% from the year-ago quarter, while margins expanded 11 bps. Net Income for the quarter came in at $141.5 million or 49 cents compared to $123.4 million or 46 cents reported in the year-ago quarter.

Balance Sheet & Cash Flow

Xilinx ended the quarter with cash, equivalents and short-term investments of $2.26 billion, up from $1.84 billion in the prior quarter.

During the quarter, Xilinx generated $254.9 million of cash from operations and incurred $8.4 million in capital expenditure. Xilinx paid $67.2 million in cash dividends and repurchased stocks worth $69.9 million.

Guidance

Xilinx stated that the backlog, entering into the third quarter, was up sequentially. The company also expects sequential increase in revenues from all end markets and 28-nm products. Consequently, Xilinx expects sales from Base and mainstream products to be down.

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. Share count is expected to be approximately 291 million. Effective tax rate is expected to be approximately 13%.

Management expects revenues from broadcast, consumer and automotive to be down moderately due to consumer decreases which is expected to be offset by revenue increases in the AVB and automotive segment sequentially. Moreover, revenues from industrial, aerospace and defense are also expected to decline sequentially.

Conclusion

Xilinx reported mixed second-quarter results. The third-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 and the expected shipment of 28-nm nodes, and recovery in the semiconductor market are catalysts. However, 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 #1 (Strong Buy). Investors can also consider other stocks, such as Cirrus Logic (CRUS - Snapshot Report) and Plexus Corp (PLXS - Analyst Report), both carrying a Zacks Rank #1.

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