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Maxim Integrated Products, Inc.’s (MXIM - Analyst Report) second quarter fiscal 2014 earnings (excluding special items but including stock-based compensation expenses) of 36 cents per share beat the Zacks Consensus Estimate by 4 cents.

Revenues

Revenues in the reported quarter were $620.0 million, up 6.0% sequentially and 2.5% on a year-over year basis. The sequential rise in revenues was primarily on account of the acquisition of Volterra. However, revenues missed the Zacks Consensus Estimate of $623.0 million.

Revenues by End Market

The Consumer end market remained the largest revenue contributor, accounting for approximately 39.0% of revenues compared with 43.0% in the prior quarter. The sequential decline was due to weakness in home entertainment.

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 28.0% of revenues compared with 29.0% in the prior quarter. Although Automotive grew for the fourth straight quarter, the Industrial business declined slightly due to seasonal weakness in Smart Meter and Medical businesses.

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

The Computing business contributed 17.0% of revenues compared with 12.0% in the prior quarter. The sequential improvement in the Computing business was mainly on account of the Volterra acquisition.

Margins

Non-GAAP gross margin was 58.2%, down 250 basis points (bps) sequentially and 330 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 $226.4 million were up 9.2% sequentially and 4.9% from the year-ago quarter. The increase in operating expenses was mainly due to the Volterra factor as well as the impact of the annual merit rise and equity grants.

Net Income

Pro forma net income was $102.5 million compared with $119.5 million in the prior quarter and $124.8 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.

Balance Sheet & Cash Flow

During the quarter, cash flow from operations was $234.0 million or 38.0% of revenue, up from $96.0 million in the prior quarter. Inventory was 110 days, flat sequentially.

Total cash, cash equivalents and short-term investments increased by $115 million in the second quarter to $1.15 billion.

Net capex was $46.0 million compared with $33.0 million in the prior quarter. Maxim has $1.0 billion of long-term debt compared with $500.9 million in the prior quarter.

Share Repurchase & Dividend

Maxim spent $73.0 million on cash dividends and $59.0 million on share repurchases in the reported quarter.

Guidance

For the third quarter of fiscal 2014, Maxim expects revenues in a range of $590–$620 million. Backlog is expected to be $366.0 million. Management expects consumer market revenues to be subdued in the third quarter as the March quarter happens to be seasonally soft for mobility products. Communications revenues are projected to increase in the third quarter. Maxim expects Industrial revenues to grow significantly in the third quarter. Computing revenues, however, are projected to go down in the next quarter.

Gross margin is expected be in the 56%–58% range on a GAAP basis and 60%–62% on an adjusted basis (excluding special items).

Earnings are expected to be 37 cents – 41 cents on a GAAP basis. The cap-rate, excluding special items, is expected to be within the long term range of 16.0%-20.0%.

Conclusion

Maxim’s business is well-diversified. It has increased its focus on the faster-growing consumer and computing end markets.

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.

Of late, Maxim has been attempting to diversify its exposure within the Mobility market in several ways such as expanding its tech offerings for mobile devices, growing revenue and content in the mid-range smartphone market with significant growth in China and so on. Additionally, Maxim has been on the lookout to expand beyond smartphones with games in tablets and e-readers. All these efforts are aimed at extending its foothold in various new spheres.

While Maxim’s product line and pipeline remain solid and its end-market diversity commendable, we believe its exposure to the consumer and computing markets increases risks. Moreover, its strong business model coupled with strong profitability allows it to return a significant portion of free cash flow to shareholders.

Currently, Maxim’s shares carry a Zacks Rank #4 (Sell). Better-ranked semiconductor stocks include  Microsemi Corporation (MSCC - Analyst Report) and Supertex Corporation , both with a Zacks Rank # 1 (Strong Buy) and Micron Tech (MU - Analyst Report) with Zacks Rank # 2 (Buy).
 

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