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We recently upgraded our recommendation on programmable logic devices maker Xilinx, Inc. (XLNX) to Neutral from Underperform.

Xilinx is uniquely positioned to capitalize on incremental growth opportunities presented by its leadership in 28nm products and innovative platform-based architectures. The ramp up in 28-nanometer and 40-nanometer products will create a host of new opportunities, and replacement of ASICs will take place in a more aggressive way. 28-nanometer sales showed solid growth in the second quarter of fiscal 2013.

The company reported better-than-expected results for the second quarter of fiscal 2013. Xilinx reported earnings per share of 46 cents in the second quarter of fiscal 2013, easily beating the Zacks Consensus Estimate of 41 cents. However, the quarterly earnings failed to surpass the year-ago earnings as well as the prior quarter earnings of 47 cents a share. Net income declined 5% sequentially and 2% year over year to $123.4 million. 

However, earnings estimates for Xilinx have declined significantly owing to the soft guidance provided by the company. Xilinx stated that the backlog entering into the December quarter was down on a sequential basis.

In addition, management estimates that continued macroeconomic uncertainty may result in unpredictable customer ordering patterns. Sales of base and mainstream products are likely to decline.

Nevertheless, Xilinx, which competes with Altera Corporation (ALTR - Analyst Report), expects continued growth from new products.  However, Xilinx expects sales to be down 1% to 5% sequentially in the third quarter of fiscal 2013 and sales from all geographies are projected to decrease.  

Most analysts covering the stock have reduced their estimates following the results leading to a fall in estimates for fiscal 2013 and fiscal 2014.

Owing to the uncertain business environment, Xilinx is taking steps to reduce headcount and lower discretionary spending. We also expect margins to improve as the company starts executing better with TSMC as its foundry partner. The shift to TSMC should lower operating expenses as well.

We expect the communications market to be the growth driver in the coming quarters, propelled by accelerating LTE deployments across the world. The company has most recently won its first major design win at Huawei. We expect Xilinx to win some of its lost market share from Altera .

Our Neutral recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold.

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