Maxim Integrated Products, Inc. (MXIM) reported third quarter fiscal 2014 earnings on Apr 24. Earnings excluding special items of 43 cents per share beat the Zacks Consensus Estimate by 4 cents.
Revenues
Revenues in the reported quarter were $605.7 million, down 2.4% sequentially and flat on a year-over year basis. The sequential decline in revenues was primarily due to a decline in consumer and computing revenues. However, revenues were on par with the Zacks Consensus Estimate.
Revenues by End Market
The Consumer end market remained the largest revenue contributor, accounting for approximately 38% of revenues compared with 39% in the prior quarter. The sequential decline was due to normal seasonality, which was partly offset by the ramp of a new smartphone at the company’s main consumer.
Maxim’s expansion into sensors, motion control and other areas of smartphones, tablets and hybrid devices is proving to be beneficial as it secured design wins for its sensor technology. Further, Maxim is also expanding its mobile solutions toward mid-range smartphones as high-end smartphones are witnessing a slowdown globally. It gained new power system on a chip (SoC) wins in the quarter.
Industrial, Maxim’s second largest segment, generated 31.0% of revenues compared with 28.0% in the prior quarter. The sequential rise was attributable to persistent growth in Automotive and signs of strength in the core industrial business. In Automotive, the company experienced broad-based rise in infotainment and LED lighting applications.
The Communications end market accounted for 17.0% of revenues compared with 16.0% in the prior quarter. The sequential increase was driven by strength in base stations due to the release of China 4G LTE and implementation of superior data converter products in cable infrastructure business.
The Computing business contributed 14.0% of revenues compared with 17.0% in the prior quarter. The sequential decline was primarily due to decline in both notebook and server businesses.
Margins
Non-GAAP gross margin was 60.1%, up 190 basis points (bps) sequentially but down 340 bps year over year. The sequential decline was attributed to lower fab employment and higher inventory reserves.
Non-GAAP operating expenses of $222.2 million were down 1.9% sequentially but up 2.8% from the year-ago quarter. The sequential decrease in operating expenses was mainly due to the extra cost synergies from the Volterra factor as well as lower spending due to stringent cost control.
Net Income
Pro forma net income was $123.1 million compared with $102.5 million in the prior quarter and $134.6 million 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 $211.7 million or 35.0% of revenue, down from $234.4 million in the prior quarter. Inventory was 109 days, a slight drop from the previous quarter.
Total cash, cash equivalents and short-term investments increased by $81.3 million in the third quarter to $1.23 billion.
Net capex was $26.0 million compared with $46.0 million in the prior quarter. Maxim has $1.0 billion of long-term debt flat compared with the prior quarter.
Share Repurchase & Dividend
Maxim spent $73.5 million on cash dividends and $51.1 million on share repurchases in the reported quarter.
Guidance
For the fourth quarter of fiscal 2014, Maxim expects revenues in a range of $635–$665 million based on a quarter-end backlog of $413.0 million. Management expects sequential revenue growth in all major end markets.
Gross margin is expected be in the 58%–60% range on a GAAP basis and 61%–63% on an adjusted basis (excluding special items). Operating expenditure is expected to rise roughly 2% to 3%.
Earnings per share are expected to be 38 cents – 42 cents on a GAAP basis. The tax rate, excluding special items, is expected to be within the range of 18%-20% of revenues. Capex is expected to be maintained at 5-7% of revenue.
Conclusion
Maxim reported decent first quarter results with the bottom line beating the Zacks Consensus Estimate and the top line matching the same. Revenues increased year over year while earnings declined.
Maxim’s business has a well-diversified portfolio of products and abilities. It has increased its focus on the faster-growing consumer and computing end markets.
The company aims to integrate simpler device design, higher performance, power and space efficiency in its different businesses including Automotive, Industrial, Communications and Datacenter. This integration will benefit the company with more secular growth in the analog industry.
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 markets.
Of late, Maxim has been attempting to diversify its exposure within the Mobility market in several ways such as expanding its tech offerings for mobile devices, growing revenue and content in the mid-range smartphone market with significant growth in China and so on.
Additionally, Maxim has been on the lookout to expand beyond smartphones with gaming devices, tablets, wearables and e-readers. All these efforts are aimed at extending its foothold in various spheres.
While Maxim’s portfolio and pipeline remain solid and its end-market diversity commendable, we believe its exposure to the consumer and computing markets increases risks. Moreover, its strong business model coupled with strong profitability allows it to return a significant portion of its free cash flow to shareholders.
Currently, Maxim’s shares carry a Zacks Rank #3 (Hold). Better-ranked semiconductor stocks include Montage Technology Group Ltd. (MONT) and ON Semiconductor Corp. (ONNN), both with a Zacks Rank #1 (Strong Buy) and Inphi Corp. (IPHI) with a Zacks Rank #2 (Buy).
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