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Maxim (MXIM) Q2 Earnings, Revenues Lag Estimates, Fall Y/Y

Zacks Equity Research

Maxim Integrated Products, Inc. MXIM reported fiscal second-quarter 2019 adjusted earnings of 60 cents per share that lagged the Zacks Consensus Estimate by couple of cents. The figure declined 7.7% from the year-ago quarter and 20% sequentially.

Revenues of $576.9 million decreased 7.3% year over year and 9.6% from the previous quarter. Moreover, the top line missed the Zacks Consensus Estimate of $591 million. The top line declined due to soft demand environment. Weakness in the Asian region also affected revenues.

However, after “normalizing for 14-week quarter and sell-in accounting revenue transition that occurred in the year-ago quarter,” adjusted earnings increased 2% and revenues declined 1% respectively year over year.

The company’s distribution channel constituted 44% of the total revenues.

Maxim Integrated Products, Inc. Price, Consensus and EPS Surprise

Maxim Integrated Products, Inc. Price, Consensus and EPS Surprise | Maxim Integrated Products, Inc. Quote


End-Market in Detail

Industrial: Maxim generated 27% of revenues from this market. Revenues declined 6% from the prior-year quarter, primarily due to slow bookings and resales across most of the company’s product lines.

Automotive: The company generated 24% of revenues from this market and revenues were up 8% on a year-over-year basis. This can primarily be attributed to strong performance of battery management systems for electric vehicles and driver assistance content. Additionally, Maxim is seeing increased opportunities in power management and point-to-point serial link data communication products.

Notably, the company won designs for GMSL-2 products with seven different original equipment manufacturers (OEMs) and expects to launch more products. Moreover, Maxim introduced high-voltage automotive power solutions for Advanced Driver Assistance Systems (ADAS). The company also noted that the scale and reach of its battery management systems increased.

However, Maxim experienced softness in infotainment and auto body electronics business due to sluggish car sales.

Consumer: Maxim generated 28% of revenues from this market and revenues were up 7% year over year, driven by the company’s solid momentum across wearables, tablets and peripheral markets. In the reported quarter, Maxim launched power management products and integrated battery chargers.

Communications and Data Center: Revenues in this market were down 13% from the year-ago quarter. This was due to lower-than-expected demand of 100G optical products and sluggishness in communications infrastructure.

Lower demand for 100G laser products was due to technical issue with one of Maxim’s customer products and reduced spending by cloud customers in the last few months. Notably, the company generated 3% of revenues from this market.

Computing: This market accounted for 3% of the total revenues in the quarter under review.

Operating Details

Non-GAAP gross profit decreased 9.7% year over year to $379.9 million and non-GAAP gross margin contracted 170 basis points (bps) year over year to 65.9%. The decrease can be attributed to higher inventory levels in the reported quarter and one-time credits given in the fiscal first-quarter 2019.

Non-GAAP operating expenses of $188.2 million decreased 6.5% year over year due to efficient cost control. However, as a percentage of revenues, the figure expanded 30 bps year over year to 32.6%.

GAAP research and development expenses declined 4.8% year over year to $110.3 million. Moreover, selling, general and administrative expenses declined 8.8% year over year to $77.9 million. Notably, the company is adjusting its expenses and investments to be in proportion with market demand.

GAAP operating income decreased 9.4% year over year to $182.4 million and operating margin contracted 70 bps year over year to 31.6% due to lower revenues.

Balance Sheet & Cash Flow

As of Dec 29, 2018, cash, cash equivalents and short-term investments were $1.96 billion compared with $2.56 billion as of Sep 29, 2018. The decrease was due to bond payments worth $500 million in the reported quarter and higher share buybacks. Notably, Maxim spent $208 million for repurchasing shares.

During the quarter under review, cash flow from operations was $224.3 million, up from $207.2 million in the last reported quarter. Adjusted trailing twelve-month free cash flow increased 8% year over year to $919 million.

Additionally, Maxim used $13 million for capital expenditure during the fiscal first quarter. Further, the company made $127 million of dividend payment (46 cents per share).

Guidance

For fiscal third-quarter 2019, Maxim expects revenues in the range of $520 million to $560 million. The Zacks Consensus Estimate is pegged at $587.1 million.

Gross margin is expected within 64-66% on an adjusted basis (excluding special items). Earnings per share are expected in the range of 49-55 cents on an adjusted basis. The Zacks Consensus Estimate is pegged at 62 cents.

Management expects to retain its strong momentum in the automotive market in the fiscal third quarter, backed by the company’s well performing battery management systems and ADAS. But this is expected to be offset by lower car sales.

However, management announced that industrial market will be down sequentially, primarily due to weakness in Automatic Test Equipment (ATE). Moreover, Communications and Data Center segment is expected to be significantly down due to lower demand for 100G laser shipments and “broad-based of building block products.”

Further, seasonal fluctuations in the consumer market and softness in smartphones growth may affect Maxim’s top-line growth in fiscal third-quarter 2019.

Zacks Rank and Stocks to Consider

Maxim currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the broader technology sector are Twitter TWTR, Lumentum Holdings LITE and Acacia Communications ACIA. While Twitter sports a Zacks Rank #1 (Strong Buy), Lumentum and Acacia carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Twitter, Lumentum and Acacia Group is 22.1%, 17% and 12.4%, respectively.

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