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Maxim Integrated Products, Inc.’s (MXIM - Analyst Report) first quarter fiscal 2014 earnings (excluding special items but including stock-based compensation expenses) of 41 cents per share, beat the Zacks Consensus Estimate by a couple of cents.

Revenues

Revenues in the reported quarter were $585.0 million, down 3.8% sequentially and 6.1% on a year over year basis. Revenues missed the Zacks Consensus Estimate of $590.0 million.

Revenues by End Market

The Consumer end market remained the largest revenue contributor, accounting for approximately 43.0% of revenues compared with 44.0% in the prior quarter. The sequential decline was due to weakness in smartphones. Samsung happens to be Maxim’s largest customer.

Maxim’s expansion into sensors, motion control and other areas of smartphones, tablets and hybrid devices is proving to be beneficial as it secured design wins for its sensor technology. Further, Maxim is also expanding its mobile solutions toward mid-range smartphones as high-end smartphones are witnessing a slowdown globally.

Industrial, Maxim’s second largest segment, generated 29.0% of revenues, thus remaining flattish sequentially. Although Automotive grew for the third straight quarter, Industrial business declined slightly due to seasonal weakness lower revenue growth in Smart Meter and Medical businesses...

Revenues from the Communications end market were 16.0% of revenues compared with 15% in the prior quarter. The sequential increase was driven by robust performance from Networking and Datacom segment.

Revenues from the Computing business contributed 12.0% of revenues, flattish sequentially. Revenue from Volterra in the September quarter was $ 36.0 million.


Margins

Non-GAAP gross margin was 60.7%, down 160 basis points (bps) sequentially and 270 bps year over year. The decline in gross margin was attributed to unfavorable product mix, lower factory utilization and higher inventory reserves.

Non-GAAP operating expenses of $207.3 million were down 3.2% sequentially and 2.7% from the year-ago quarter due to stringent cost control.

Net Income

Pro forma net income was $119.5 million compared with $129.5 million in the prior quarter and $139.1 million in the year-ago quarter. Our pro forma calculation excludes restructuring, intangibles amortization, asset impairments and other one-time charges on a tax-adjusted basis but includes stock based compensation charges in the last quarter.

Including these items, the company recorded GAAP net income of $103.1 million compared with $119.0 million in the previous quarter and $127.9 million in the year-ago quarter.

Balance Sheet & Cash Flow

During the quarter, cash flow from operations was $96.0 million, down from $214.4 million in   the prior quarter due to the payment of the annual employee bonus. Inventory was 110 days, flat sequentially.

The cash and marketable securities balance was $1.03 billion, down $165.5 million or 13.8% during the quarter.

Cash generated from operations was $95.9 million, with the net capex being $33.0 million. Maxim has $500.9 million of long-term debt.

Share Repurchase & Dividend

Maxim spent $74.0 million on cash dividends and $154.0 million on share repurchases in the reported quarter.

Guidance

For the second quarter of fiscal 2014, Maxim expects revenues in a range of $605–$635 million (including $35 million to $37 million from Volterra). Backlog is expected to be $417.0 million. Management expects communication revenues to be flat in the next quarter. It expects its revenues in the computing market to be up sequentially, driven primarily by the Volterra acquisition.

Gross margin is expected be in the 58%–61% range on a GAAP basis and 59%–62% on an adjusted basis.

Earnings are expected to be 34 cents – 38 cents on a GAAP basis and 37 cents – 41 cents on an adjusted basis.

Conclusion

Maxim’s business is well-diversified. It has increased its focus on the faster-growing consumer and computing end markets. While consumer is showing signs of strength, there are issues in the computing business that may hurt its results in the near term.

However, Maxim has outperformed the broader market owing to its superior technology and innovation, which leads to continued design wins not just in the U.S. but also in emerging markets.

While Maxim’s product line and pipeline of new products remain solid and its end-market diversity commendable, we believe its exposure to the consumer and computing markets increases risks.

Currently, Maxim’s shares carry a Zacks Rank #3 (Hold). Semiconductor stocks that are worth considering include Micron Tech (MU - Analyst Report) with Zacks Rank # 3 (Hold), Microchip Technology Inc. (MCHP - Analyst Report) and Intersil Corp. (ISIL - Snapshot Report), both carrying Zacks Rank #2 (Buy).
 

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