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Maxim Integrated Products, Inc’s (MXIM - Analyst Report) second quarter fiscal 2013 earnings of 42 cents, excluding special items but including stock-based compensation expenses, beat the Zacks Consensus Estimate by a penny.

Revenues

Revenues in the reported quarter were $605.3 million, down 2.9% sequentially but up 2.4% year over year. The revenues were within management’s guidance range of $595–$625 million. 

Revenues by End Market

The Consumer end market remained the largest revenue contributor, accounting for approximately 46% of total revenue, down 4.9% sequentially. The 4.9% sequential decline in revenue was driven by weakness across product lines. However, the main reason was Samsung working down mobile phone-related inventories, a situation that should reverse in the current quarter. Home entertainment and appliances, which are a smaller part of Maxim’s segment revenues also continued to decline in the last quarter.

Maxim is expanding its product portfolio to sensors, motion control and other areas of smartphones, tablets and hybrid devices, which will increase its dollar content per device.

Industrial, the second largest segment, generated 25.0% of revenues, up 1.2% sequentially. In the last quarter, Maxim benefited from strength in medical and smart meter markets that offset the weakness in its general purpose products. Better internal lead times also helped shipments in the last quarter.

The industrial automation & control segment remains weak mainly because of distributors reducing inventories during the quarter. The weakness is likely to continue, given macroeconomic trends.

Revenues from the Communications end market were down 2.9% sequentially to 15.0% of total revenue. The sequential decline was the result of continued softness in the traditional telecom business as offset by strength in the femtocell market. This is an area where existing customers have started increasing orders. Maxim has also secured design wins, so the momentum should continue.

Maxim is focusing on delivering next-generation networks with improved coverage, capacity and reduced power consumption. Further, management expects the introduction of highly integrated solutions across its broad range of technologies to help drive up network performance going forward.

Revenue from the Computing business fell 2.9% sequentially and contributed 14.0% of revenue. The weakness was due to the decline in notebook sales.

Margins

The GAAP gross margin was 60.0%, down 187 basis points (bps) sequentially but up 119 bps year over year. Management stated that the sequential contraction in the gross margin was related to lower utilization rates.

GAAP operating expenses of $245.8 million were up 11.6% sequentially and 5.3% from the year-ago quarter. Higher R&D as a percentage of sales, as well as higher restructuring and asset impairment charges added to the lower gross margin, offsetting the decline in SG&A (as a percentage of sales). As a result, the GAAP operating margin declined 713 bps. although it was still 6 bps up from the year-ago quarter. All expenses declined year over year as a percentage of sales.

Net Income

The pro forma net income was $124.8 million or a 20.6% net income margin compared with $139.1 million or 22.3% in the previous quarter and $100.7 million or 17.0% of sales 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.

Including these items, the company recorded GAAP net income of $76.6 million or $0.26 per share compared with $127.9 million or $0.43 per share in the previous quarter and $88.1 million or $0.29 per share in the year-ago quarter.

Balance Sheet

Inventories were down 0.4% to $257.7 million. The cash and marketable securities balance was $1.03 billion, up $105.2 million or 11.4% during the quarter.

Cash generated from operations was $255.1 million, with Maxim spending around $62.1 million on capex, $70.1 million on cash dividends and $50.4 million on share repurchases. Maxim has $3.9 million of long-term debt.

Guidance

For the third quarter of fiscal 2013, Maxim expects revenues in a range of $580–$610 million. Backlog is expected to be$353 million.

The gross margin is expected be in the 58–61% range on a GAAP basis and 60–63% on an adjusted basis.

Earnings are expected to be 39 cents – 43 cents on a GAAP basis as well as  adjusted basis.

Conclusion

Maxim’s business is well-diversified and it has increased its focus on faster-growth markets in the last few years. The company currently generates a significant percentage of its revenues from the consumer and computing end markets. While consumer is showing signs of strength, there are issues in the computing business that may hurt its results in the near term.

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 countries.

While Maxim’s product line and pipeline of new products remain solid and its end-market diversity is commendable, we believe its exposure to the consumer and computing markets increases risks.

Maxim’s shares currently carry a Zacks Rank #3 (Hold).

Investors should look out for some other stocks that are slated to report this earnings season with positive Zacks Rank and Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

ON SemiconductorCorp (ONNN - Analyst Report) has a Zacks Rank #2 (Buy) with an ESP of +14.3%. Further, investors can consider other semiconductor stocks such as Atmel Corp.(ATML - Analyst Report) and Diodes Inc. (DIOD - Snapshot Report), both of which have a Zacks Rank #1 (Strong Buy).

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