Maxim Won't Chase Growth

Maxim Doesn’t Chase Growth for Growth’s Sake

Maxim Integrated Products, Inc. (MXIM - Analyst Report) has had one of the most efficient business models in the technology sector, offering 65-70% gross margins in 4 consecutive fiscal years.

A few quarters ago, management decided to revise the corporate strategy, which had been focused on pursuing high-margin business, thus limiting expansion into high-growth markets. The company has now entered several high-volume markets such as the digital camera and display markets. Since these markets allow less attractive gross margins, management has reduced its targeted gross margin to the 63-65% range.

Management has outlined several cost reduction initiatives that are expected to offset some of the negative impact of the lower gross margin. The first is the more strategic use of R&D dollars.

Accordingly, R&D expense is being moved from the low-margin RF transceiver, and the deployment of funds for further development of some of the newly introduced communications products is being delayed until the market acceptance of these products becomes clearer. It is also in the process of moving to a uniform EDA platform and increasing collaboration among business units to cut out duplication of effort.

With each business unit working on individual profitability goals, the expenditure of R&D funds is expected to be optimal. This is expected to net a gain of $15 million annually.

The second initiative is the shutdown of the Dallas fab and further consolidation of operations. The shutdown will be completed in Q4 and bring $18 million in savings after completion. The still-attractive margins, absence of long-term debt and strong cash position are evidence of management’s efficient execution.
    
Management Aligning Capex Spending to Macro Softness

The company is building a new manufacturing facility in the Philippines to bring the production of some modules in-house. The test capacity in Thailand has been doubled.

Maxim is also building a large facility in India, and has plans of building or purchasing another facility in Arizona. However, management plans to bring down the capex for fiscal 2009, with the investment in equipment continuing as may be required.

There are several other positives. Maxim’s business is very diverse, in terms of products, end markets and geographies. This lends stability to the business over the long term.

The company continues to introduce products in the automotive, medical and test areas and has also secured a number of strategic design wins. Maxim has also implemented some profitability initiatives that are expected to offset the essentially lower gross margin consumer business.

While we cannot say with confidence that the margin pressure will not continue per management’s new plan, the impact is likely to be mitigated by these cost reduction initiatives, price negotiations and improving operating performance. The company’s solid debt-free balance sheet and strong liquidity position continue to provide financial flexibility.

Sejuti Banerjea contributed to this report.