Xilinx Sales Grow Sequentially

Xilinx, Inc. (XLNX - Analyst Report) recently reported sales of $415.0 million for the second quarter of fiscal 2010. The result was down 14% year over year but up 10% sequentially, exceeding management's guidance range of revenue growth between 2% and 6%.

Sales growth in the September quarter was driven by strength in all end markets and geographic regions. New Product sales increased 36% sequentially during the quarter.

In particular, sales of Virtex-5 (one it's new products) recorded outstanding growth and exceeded 20% of the total sales after ironing out supply issues from the previous quarter. The company expects to resolve all supply issues by the December quarter and inventory should return to normal levels.

Europe and Japan posting the strongest growth of 15% and 26% respectively. Strength in Japan was driven by consumer and communications applications, while growth in Europe was related to a broader base of end markets, including communications, industrial, and audio-video broadcast.

Sales from all major end market categories increased sequentially. In particular, sales from consumer automotive and data processing categories grew 27% and 31% respectively.

Gross margin for the quarter was 61.9%, down from 63.3% in the year-ago quarter but almost flat sequentially. It also surpassed management's guidance of 61% due to higher-than-anticipated sales growth, lower costs, and the sale of previously reserved inventory.

Operating margin came in at 20% compared to 26% in the year-ago quarter and 15% in the prior quarter as higher variable spending associated with higher sales was offset by lower mass cost and overall expense reduction efforts.

Net income was down 34% year over year to $64.0 million but up 68% sequentially. Earnings per Share (EPS) of 21 cents were in line with the Zacks Consensus Estimate of 21 cents.

Management was encouraged by the broad-based recovery of the business and stated that backlog remains strong as the company enters the December quarter. Going forward, the company expects sales to grow 6% – 10% sequentially with the strongest growth coming from North America and Europe. Revenues are expected to be up in all end markets. Gross margin is estimated around 62% – 63% as higher sales will be partially offset by strong new product growth, which generates lower margin. Operating expenses are projected to increase due to restructuring charges.

Yesterday, rival Altera Corporation (ALTR - Analyst Report) reported results in line with expectations and stated that business conditions improved steadily during the quarter. Most end markets performed better than expected due to improved demand, while an increase in customer orders was attributed to inventory depletion.

This signals that the semiconductor sector is all set for a strong recovery in the second half of 2009 as demand revives after a drastic downturn and months of inventory correction by most major Original Equipment Manufacturers (OEMs). The mood remains upbeat with signs of reviving demand.

Xilinx also announced an increase of $0.02 in its quarterly cash dividend to $0.16 per share. The dividend will be paid on Nov 24, 2009 to all stockholders of record at the close of business on Nov 4, 2009.

Xilinx was earlier plagued by supply issues that hit the first quarter results, but management seems to be keen to iron out deficiencies in operations by the December quarter. We believe the company's growth will reaccelerate, given the competitive advantages of its 90-nm and 65-nm technologies. We maintain our Neutral rating on the stock.