Maxim's Q4 Earnings Miss Estimates

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Maxim Integrated Products, Inc.’s (MXIM) fourth quarter fiscal 2013 earnings of 44 cents, excluding special items, but including stock-based compensation expenses, missed the Zacks Consensus Estimate by 3 cents or 6.4%.

Revenues

Revenues in the reported quarter were $608.2 million, up 0.5% both sequentially and year over year. Revenues missed management’s guidance range of $610–$640 million. 

Revenues by End Market

The Consumer end market remained the largest revenue contributor, accounting for approximately 44% of total revenue, down 9.7% sequentially but up 2.9% year over year. The sequential decline was due to weakness in smartphones as it was impacted by inventory correction for Samsung’s S III, which is also Maxim’s largest customer.

Maxim is expected to face slowdown due to weakness in demand for Samsung’s latest flagship device Galaxy S4 and inventory correction. However, Maxim is making in-roads into several other Samsung offerings.

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.

Industrial, Maxim’s second largest segment, generated 29% of revenues, up 16.6% sequentially and 12.1% year over year. Maxim benefited from strong order bookings in the automotive, smart meter and medical end market segments, which was offset by weakness in control and automation segment orders.

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.

Revenues from the Communications end market were up 7.7% sequentially but down 5.7% year over year to 15% of total revenue. The sequential increase was the result of improvement in the Networking and Datacom segment, which was offset by decline from base stations. Maxim is witnessing strength in sales in cable infrastructure products. Maxim is also witnessing improvements in its fiber optics business due to improvements in the Chinese markets. It also secured a new design win for PON deployments with a major Chinese vendor.

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 were up 0.5% sequentially but fell 19.6% year over year and contributed 12.0% of revenues. The weakness was due to the decline in notebook sales.

Margins

GAAP gross margin was 61.1%, down 111 basis points (bps) sequentially and 42 bps year over year. The decline in gross margin was related to lower factory utilization and higher inventory reserves.

GAAP operating expenses of $220.3 million were down 0.7% sequentially and 6.6% 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. As a result, GAAP operating margin decreased 67 bps sequentially but rose 236 bps from the year-ago quarter to 24.8%.

Net Income

Pro forma net income was $129.5 million or a 21.3% net income margin compared with $134.6 million or 22.3% in the previous quarter and $134.7 million or 22.3% 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 $119.0 million or 40 cents per share compared with $128.8 million or 43 cents per share in the previous quarter and $110.6 million or 37 cents per share in the year-ago quarter.

Balance Sheet &Cash Flow

Inventories were up 2.8% to $275.6 million. The cash and marketable securities balance was $1.20 billion, down $373.0 million or 23.7% during the quarter.

Cash generated from operations was $214.4 million, with Maxim spending around $48.9 million on capex. Maxim has $503.6 million of long-term debt.

Share Repurchase & Dividend

Maxim authorized a new share repurchase program worth $1 billion and increased cash dividend by 8% to $0.26 per share. Maxim spent $69.5 million on cash dividends and $193.2 million on share repurchases

Guidance

For the first quarter of fiscal 2014, Maxim expects revenues in a range of $570–$600 million. Backlog is expected to be $357 million.

Gross margin is expected be in the 59%–62% range on a GAAP basis and 60%–63% on an adjusted basis.

Earnings are expected to be 34 cents – 38 cents on a GAAP basis and 37 cents – 41 cents on an adjusted 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 markets.

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.

Currently, Maxim’s shares carry a Zacks Rank #4 (Sell). Semiconductor stocks that are worth considering include Linear Technology Corp. (LLTC), Microchip Technology Inc. (MCHP) and Intersil Corp. (ISIL), all carrying a Zacks Rank #2 (Buy).

Read the Full Research Report on MXIM

Read the Full Research Report on MCHP

Read the Full Research Report on LLTC

Read the Full Research Report on ISIL

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