Maxim Integrated Products, Inc. (MXIM) shares have declined nearly 10% since the company reported fourth quarter fiscal 2014 earnings and provided a tepid guidance on Jul 24. Earnings excluding special items of 43 cents per share missed the Zacks Consensus Estimate by 5 cents. Moreover, it was down 1.9% from the year-ago quarter. The decline was primarily due to lower revenues at the Consumer, Industrial and Computing end markets and inventory reserves.
Revenues in the reported quarter were $642.5 million, up 6.1% sequentially and 5.6% on a year-over-year basis. The sequential increase in revenues was primarily attributable to growth across all its main businesses and solid strength in its balanced portfolio, despite softness in the mobility business. However, revenues missed the Zacks Consensus Estimate of $650.0 million.
Revenues by End Market
The Consumer end market remained the largest revenue contributor, accounting for approximately 35% of revenues compared with 38% in the prior quarter. The sequential decline was due to weakness in smartphones and tablets, mainly at its biggest customer.
Mobility consumers are rapidly shifting toward the latest generation devices, while demand for prior generation products is falling at an increasing rate. Decline in previous generation smart devices at company’s leading customer adversely affected the business. Older mobility products, specifically tablets, generated lower-than expected revenues.
Maxim’s expansion intopower management sensors, motion control, MEMS, audio amplifier and other areas of smartphones, tablets and hybrid devices is proving to be beneficial as it secured design wins for its sensor technology.
Industrial, Maxim’s second largest segment, generated 27% of revenues compared with 31% in the prior quarter and grew 10% on a year-over-year basis. The year-over-year rise was attributable to persistent growth in the core industrial end market and support from vertical industrial markets. In the core industrial end market, the company has introduced distributed control in the factory by allowing solid and effective designs that are heat efficient in the industrial atmosphere.
The Automotive end market generated 10% of revenues. The company experienced broad-based rise in infotainment as mobility user experience shifted to the Automotive market. Moreover, the segment also witnessed an increase in new design wins across numerous applications and customers.
The Communications and data center end market accounted for 23% of revenues compared with 17% in the prior quarter and up 30% from the year-ago quarter. The sequential increase was driven by continued strength due to the release of China 4G LTE and better demand from a number of OEMs. The year-over-year increase is attributable to organic growth in server applications, driven by positive synergies from the acquisition of Volterra technology. Moreover, its cable infrastructure business continues to witness growth due to the adoption of the company’s highly developed data converter products.
The Computing business contributed 5% of revenues compared with 14% in the prior quarter.
Non-GAAP gross margin was 60.4%, up 31 basis points (bps) sequentially but down 194 bps year over year. The sequential increase was attributed to higher utilization at fabs, partially offset by higher inventory reserves. Inventory charge for the older generation mobility products, especially tablets, negatively impacted margins.
Non-GAAP operating expenses of $226.9 million were up 2.2% sequentially and 6.0% from the year-ago quarter.
Pro forma net income was $123.9 million compared with $123.1 million in the prior quarter and $129.5 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 $234.0 million or 36.4% of revenue, up from $211.7 million in the prior quarter. Inventory was 103 days, a drop of 6 days from the previous quarter.
Total cash, cash equivalents and short-term investments increased $141.0 million in the fourth quarter to $1.37 billion.
Net capex was $22.0 million compared with $26.0 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 $74.0 million on cash dividends and $41.0 million on share repurchase of 1.2 million shares in the reported quarter. The company declared a cash dividend of 28 cents per share to be paid to shareholders, representing an 8% sequential increase in dividend.
For the first quarter of fiscal 2015, Maxim expects revenues in a range of $580–$620 million based on a quarter-end backlog of $377.0 million. Management’s revenue guidance reflects a cautious outlook toward smartphone and tablet shipments at its largest customer. Moreover, shipments into other Mobility opportunities can be delayed.
Management expects industrial market revenues to be down due to seasonally lower core industrial sales. Automotive is expected to be slightly up as the company continues to deliver on its pipeline of design wins. Management has a cautious stance for the consumer segment as it expects consumer to be down significantly due to softness in smartphones at its largest customer, partly offset by a number of new Mobility products. Communications and data center is forecast to be flat from a strong June, with continued support from the fiber optic infrastructure build-out and base station consumption. Lastly, computing is expected to be flat with the June quarter.
Gross margin is expected be in the 56%–59% range on a GAAP basis and 59%–62% on an adjusted basis (excluding special items). Operating expenditure is expected to decline roughly 1% to 2%.
Earnings per share are expected to be 27 cents – 33 cents on a GAAP basis and 34 cents-40 cents on an adjusted basis (excluding special items). The tax rate, excluding special items, is expected to be within the range of 18%-20% of revenues. Capex is expected to be at 3-5% of revenue.
Maxim reported disappointing first quarter results with the top and bottom lines missing the Zacks Consensus Estimate.
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.
Maxim’s long-term fiscal strategy of growth, leverage and return is on the right track. 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.
The consumer market is also moving towards more innovation with new content prospects across new smart devices platforms and the fast growing wearables and portable devices space. All these efforts are aimed at extending its foothold in various spheres. Moreover, diversification of customer base, beyond its existing leading customer, to Chinese producers and other important OEMs indicate healthy growth prospects for the company.
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.
Moreover, its margins are expected to improve with better inventory controls and stringent cost control methods. 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 #5 (Strong Sell). Better-ranked semiconductor stocks include Fairchild Semiconductor International Inc. (FCS) and ON Semiconductor Corp. (ONNN) and Analog Devices (ADI), all carrying a Zacks Rank #2 (Buy).
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