Xilinx Beats in 2Q, Guidance Weak (ALTR) (XLNX)

Xilinx Inc. (XLNX) 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.

California-based Xilinx Inc. is engaged in designing and manufacturing a broad range of high-performance, high-density programmable logic devices (PLDs), such as field-programmable gate arrays (FPGAs) and complex-programmable logic devices (CPLDs).

The company reported total sales of $543.9 million, down 2% year over year and 7% sequentially, but in line with management’s guidance. The overall decline was attributable to weaker-than-anticipated sales from industrial and Aerospace and defense and computer and data processing, offset somewhat by better-than-expected sales from wireless communications.

Geographically, the company’s sales were down sequentially across all regions except Japan. New product sales increased 7% sequentially, driven by higher sales of 28 nanometer families, partially offset by flat 40 nanometer sales. Revenues from 28 nanometer surpassed management’s target of $20 million.

Mainstream products increased 3% during the quarter, driven by strength from the Virtex-5 products, attributable to LTE deployment activity. Base products declined by almost 20% sequentially, due to soft industrial, defense and communications segment performance.

Sales from communications in data center increased 3% sequentially, driven by strong wireless sales, which more than offset expected declines in wireline. Broadcast, consumer and automotive sales declined 15% sequentially as sales from all categories were flat to down sequentially.

Margins

Gross margin decreased to 65.5% from 66.0% in the previous quarter but was up from 63.9% in the year-ago quarter, primarily due to continued focus on yield improvement and cost reduction, which offset significant impact from customer and product mix during the quarter. Operating margin decreased to 27.2% from 28.2% in the previous quarter and 27.9% in the year-ago quarter, despite lower expenses.

During the quarter, Xilinx generated $197.4 million of cash from operations and incurred $7.6 million in capital expenditures. Xilinx paid $58 million in cash dividends. Xilinx ended the quarter with cash, equivalents and short-term investments of $1.7 billion, flat with the previous quarter. Days sales outstanding decreased by 3 days to 35 days. Inventory increased by $11 million sequentially to $204.0 million.

Guidance

Xilinx stated that the backlog entering into the December quarter was down sequentially. In addition, management estimates that continued macroeconomic uncertainty may result in unpredictable customer ordering patterns. Sales of base and mainstream products will likely decline. Nevertheless, Xilinx, which competes with Altera Corporation (ALTR), expects continued growth from new products. Consequently, 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.

Gross margin is forecasted around 66%, marginally up from the September quarter, primarily due to improving customer mix. Operating expenses in the December quarter are expected to be approximately $224 million, including approximately $3 million of amortization of acquisition-related intangibles.

Meanwhile, owing to the uncertain business environment, Xilinx is taking steps to reduce headcount and lower discretionary spending. The weak macroeconomic environment affected sales for the September quarter and has also resulted in lower-than-seasonal guidance for the December quarter.

The weak guidance drove a 0.56% decrease in the share price in the aftermarket hours trading to close at $33.77. Earlier, the stock, gained 0.65% to close at $33.96 in regular trading.

We maintain an Underperform recommendation on Xilinx in the long run. However, we have a Zacks #3 Rank on the stock, which translates into a short-term rating of Hold.