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Maxim Integrated Products, Inc.’s (MXIM - Analyst Report) third quarter fiscal 2013 earnings of 45 cents, excluding special items but including stock-based compensation expenses, beat the Zacks Consensus Estimate by 3 cents or 7.1%.

Revenues

Revenues in the reported quarter were $604.9 million, down 0.1% sequentially but up 5.9% year over year. Revenues were within management’s guidance range of $580–$610 million. 

Revenues by End Market

The Consumer end market remained the largest revenue contributor, accounting for approximately 49% of total revenue, up 6.4% sequentially and 26.6% year over year. Maxim witnessed strong growth due to strength in smartphones, as it started shipping to its largest customer, Samsung for its S4 smartphone model.

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, flat sequentially but down 1.9% year over year. In the last quarter, Maxim benefited from strength in the automotive end market and a slight increase in general purpose industrial categories, which were however offset by weakness in other areas.

Currently, Maxim is focusing on ASSP solutions as it provides highly integrated products in select end market segments such as automotive, smart meters and medical. It is also trying to strengthen its position in the general purpose market by providing high-performance analog building block products. However, this segment is affected by macroeconomic variables.

Revenues from the Communications end market were down 6.7% sequentially and 12.8% year over year to 14.0% of total revenue. The sequential decline was the result of continued softness in the Networking and Datacom segment. Maxim is witnessing strength in sales in cable infrastructure products. It expects that revenues from the Networking and Datacom segment will improve in the coming quarters.

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 network performance going forward.

Revenues from the Computing business fell 14.3% sequentially and 15.3% year over year and contributed 12.0% of revenues. The weakness was due to the decline in notebook sales.

Margins

The GAAP gross margin was 62.2%, up 215 basis points (bps) sequentially and 346 bps year over year. Management stated that the improvement in the gross margin was related to higher factory utilization, lower reserves and lower one-time items.

GAAP operating expenses of $221.8 million were down 9.8% sequentially and 0.8% from the year-ago quarter. Sequentially, lower research and development (R&D) expenses as a percentage of sales as well as lower restructuring and asset impairment charges positively impacted the gross margin, offsetting the rise in selling, general and administrative (SG&A) expenses (as a percentage of sales). As a result, the GAAP operating margin increased 609 bps sequentially and 592 bps from the year-ago quarter to 25.5%.

Net Income

Pro forma net income was $134.6 million or a 22.3% net income margin compared with $124.8 million or 20.6% in the previous quarter and $99.5 million or 17.4% 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 $128.8 million or 43 cents per share compared with $76.6 million or 26 cents per share in the previous quarter and $22.7 million or 8 cents per share in the year-ago quarter.

Balance Sheet

Inventories were up 4.0% to $268.0 million. The cash and marketable securities balance was $1.57 billion, up $542.8 million or 52.7% during the quarter.

Cash generated from operations was $211.7 million, with Maxim spending around $54.9 million on capex, $70.4 million on cash dividends and $66.3 million on share repurchases. Maxim has $503.6 million of long-term debt.

Guidance

For the fourth quarter of fiscal 2013, Maxim expects revenues in a range of $610–$640 million. Backlog is expected to be $386 million.

On a GAAP basis, gross margin is expected be in the 61–64% range.

Earnings are expected to be 45 cents – 49 cents on a GAAP basis.

Conclusion

Maxim’s business is well-diversified. It has increased its focus on the faster-growing 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 commendable, we believe its exposure to the consumer and computing markets increases risks.

Maxim’s shares currently carry a Zacks Rank #2 (Buy).

Investors could also consider 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).

Aol Inc. (AOL - Snapshot Report) with an ESP of +3.03% and Zacks Rank #2 (Buy)

Facebook (FB - Analyst Report) with an ESP of +12.50% and Zacks Rank #2

Applied Materials Inc.(AMAT - Analyst Report) with an ESP of +7.69% and Zacks Rank #2

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