Valuation Attractive on Xilinx

Xilinx, Inc. (XLNX - Analyst Report) recently reported Q1:FY08 revenues of $475.7 million, in line with our estimate of $476 million. Gross margin improved to 63.4% from 62.1% in Q1 2007 and 63.3% in Q4:FY07 due to efficiencies in manufacturing and continuous yield improvements in 99-nanometer and 65-nanometer process technologies. Operating margin also improved to 24.6% from 24.3% in the previous quarter and 17.9% in the fourth quarter of fiscal 2007, as targeted by the management.

Virtex 4 and 5 generated an estimated 60% more revenues in the quarter than Altera Corporation's (ALTR - Analyst Report) competing lines. For Q1 of fiscal 2009, management expects revenues to be up 3% to down 1% sequentially. Gross margin is anticipated to come around 63% - 64%. We have adjusted our Q1 and FY2009 estimates accordingly.

Its March-quarter gross margin was the highest in the past 14 consecutive quarters. June-quarter gross margin guidance marks a 15-quarter high. Management expects gross margin to remain at comparable levels over the next few quarters. Internal reorganization should generate cost savings and operating leverage going forward.

Xilinx is trading at 16.8 times our fiscal 2009 earnings estimate. We believe the company’s growth will reaccelerate given the competitive advantages of the company’s 90-nm and 65-nm technologies as well as the end to an inventory correction in the industry. We view communication as a secular growth theme over the next few years, driven by triple-play infrastructure build.

Accordingly, we are maintaining our target price of $31, reflecting our belief that Xilinx is well positioned to start regaining market share this year. This is derived by applying a target P/E multiple of 20.9x to our fiscal year 2009 EPS estimate. We consider our choice of target multiple to be conservative and underscores the attractiveness of the company’s valuation. We continue to rate Xilinx a Buy.

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