Maxim Integrated Products, Inc.'s (MXIM) second quarter fiscal 2015 adjusted earnings of 33 cents per share beat the Zacks Consensus Estimate by 4 cents. Moreover, earnings surpassed management’s guided range, primarily attributable to lower-than-expected operating expenses and higher-than-expected revenues.
Shares were up over 5% to $34.80 during afterhours trading, primarily due to strong earnings and a positive guidance indicating enhanced growth prospects in all the segments.
Revenues
Revenues in the reported quarter were $566.8 million, down 2.3% sequentially and 8.6% year over year. The sequential decrease in revenues was primarily due to weaker demand for communications infrastructure products. Revenues however came in line with the Zacks Consensus Estimate and within management’s guidance range.
Revenues by End Market
Consumer and automotive were the strong points while other segments softened. The revenue mix in terms of major markets in the second quarter of fiscal 2015 was as follows:
The Consumer end market remained the largest revenue contributor, accounting for approximately 33% of revenues, up 7.4% sequentially. The sequential increase was due to improved performance at the company’s leading mobility customer and an increase in revenue from other mobility customers in both tablets and in shipments for a wearable product.
Also, the company’s diversification efforts and strong demand helped to increase revenues. Its biggest mobility customer currently represents around 15% of revenues, up from 13% in the prior quarter but down from 28% of revenues in fiscal 2013.
Industrial, Maxim’s second largest segment generated 27% of revenues, reflecting a 5.8% sequential decline. This was in line with management’s expectations and was primarily due to normal seasonal trends in the core Industrial end market.
The Communications and Data Center end market accounted for 23% of revenues, reflecting a 13.6% decrease sequentially. The sequential decline was primarily attributable to weakness in the enterprise server business and also the weakness in optical infrastructure equipment.
The Automotive end market generated 12% of revenues, reflecting a 6.6% increase sequentially, in line with management’s expectations. The increase was primarily driven by growth in electronic content in cars as well as a growing base of customers and products.
The Computing business contributed 5% of revenues, down 2.3% sequentially.
Margins
The non-GAAP gross margin was 60.3%, down 133 basis points (bps) sequentially but up 212 bps year over year. The sequential decrease was attributed to lower internal fab utilization, which declined from 71% in the first quarter to 60% in the second quarter.
Non-GAAP operating expenses of $215.7 million were down 2.1% sequentially and 4.7% from the year-ago quarter. The sequential decrease was driven by overall cost controls, which included the initial savings from the company’s restructuring activities.
Net Income
The pro forma net income was $93.7 million, or 16.5% of sales compared with $108.6 million or 18.7% in the prior quarter and $102.5 million or 16.5% 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.
Balance Sheet & Cash Flow
During the quarter, cash flow from operations was $172.9.0 million or 30.5% of revenues compared with $117.0 million in the prior quarter. Important usages of cash during the quarter included $18.6 million on capex, $60.0 million on share repurchases and $79.0 million on dividends.
Inventory days were 124, down 1 day from the prior quarter.
Total cash, cash equivalents and short-term investments increased by $62.0 million during the quarter to $1.38 billion.
Guidance
For the third quarter of fiscal 2015, Maxim expects revenues in the range of $565 million–$605 million based on a quarter-end backlog of $378.0 million. Management’s revenue guidance reflects strong growth in automotive segment and a seasonal increase in industrial. It also signifies the commencement of new product shipments into the mobility market.
Gross margin is expected be in the 52%–56% range on a GAAP basis. It is expected to be in the range of 58%–62% on an adjusted basis (excluding special items), flat with the prior quarter. Operating expenditure is expected to be down sequentially due to a decrease in spending in targeted product lines and continued firm expense controls. The tax rate, excluding special items, is expected to be within the range of 21%-23%.
Earnings per share are expected to be 20 cents – 26 cents on a GAAP basis and 32 cents – 38 cents on an adjusted basis. The Zacks Consensus Estimate for the March quarter is currently 33 cents (at the lower end of the range).
Conclusion
Maxim delivered decent fiscal second quarter 2015 results with earnings beating the Zacks Consensus Estimate and revenues coming in line with the same.
Maxim is shifting to advanced node process technology development through a new collaboration with its foundry partners. New products from this initiative could help it expand margins.
It is also taking steps to restructure operations by the closure of the San Jose fab and discontinuation of investment in its MEMS and touch lines of business. The reduced investment will take out an additional $3-4 million of costs. The company’s steps to streamline costs will help it increase its profitability and therefore drive margins.
Maxim’s diversification strategy is starting to reap fruits in Consumer and its automotive and industrial businesses are also seeing growth. The latest pipeline of automotive technologies in infotainment, safety and driver assistance applications will further enhance the company’s financial position.
The company remains committed to growing its Mobility business by increasing diversifying the business, broadening the customer base and targeting new opportunities like wearable devices. At the same time, it is taking down costs related to its consumer segment because these efforts will take time to convert to revenue.
Currently, Maxim’s shares carry a Zacks Rank #3 (Hold). Better-ranked stocks in the technology sector include CSR plc (CSRE), Microsemi Corp. (MSCC) and Microchip Technology Inc. (MCHP). All the stocks carry a Zacks Rank #2 (Buy).
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