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Why Is Xilinx (XLNX) Down 1.2% Since its Last Earnings Report?

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A month has gone by since the last earnings report for Xilinx, Inc. XLNX. Shares have lost about 1.2% in that time frame, outperforming the market.

Will the recent negative trend continue leading up to its next earnings release, or is XLNX due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Xilinx Q3 Earnings & Revenues Top Estimates

Xilinx reported third-quarter fiscal 2018 non-GAAP earnings (excluding one-time items and tax expense due to the enactment of recent Tax Cut and Jobs Act of 2017) of 76 cents per share, beating the Zacks Consensus Estimate of 63 cents. The figure surged 46.2% from the year-ago quarter and 16.9% from the previous quarter.

Revenues for the quarter came in at $631.2 million, which is above the mid-point of its guidance range of $615-$645 million (mid-point $630 million), as well as surpassed the Zacks Consensus Estimate of $630 million.

Advanced Products Drove Top-Line Growth

Management noted that Xilinx’s revenues increased for the ninth consecutive quarter, reflecting product strength. This uptick was primarily driven by robust performance of the company’s 16nm, 20nm and 28nm products.

Product wise, Advanced product revenues jumped a whopping 30% year over year and 10% sequentially. We note that the segment’s contribution to total revenues was 56%, a significant increase from 47% in the year-ago quarter and 52% reported in the previous quarter.

The robust performance of Advanced products was mainly driven by solid demand for its Zynq SoC platform and 20-nm and 16-nm nodes. Revenues from the Zynq SoC platform recorded 40% year-over-year growth, backed by robust demand in all of the company’s end markets, i.e. automotive, industrial, wireless and consumer.

The 20-nm sales soared 70% year over year in the reported quarter, chiefly driven by strength in multiple end markets. However, Xilinx noted that the 16-nm was the top performer in the quarter, registering over four-fold jump in revenues. The company shipped 43 unique products to more than 1,160 discrete customers across all end markets.

Revenues from core products declined 12% from the year-earlier quarter and 7% sequentially.

On basis of the End Market, Communications & Data Center segment revenues (35% of total revenues) dipped 12% year over year and 2% sequentially. The industrial, Aerospace & Defense segment revenues (47% of total revenues) climbed 23% on a year-over-year basis and 7% on a sequential basis. The broadcast, Consumer & Automotive revenues (18% of total revenues) ascended 24% year over year, but declined 3% sequentially.

Geographically, the company registered year-over-year growth in every region. Revenues from North America, Europe, Japan and Asia Pacific were up 12%, 11%, 10% and 3%, respectively. Nevertheless, sequentially, Japan was weak, declining 8%. This was fully offset by robust growth from North America, Asia Pacific and Europe, which advanced 3%, 3% and 2%, respectively.

Product Strength: Key Catalyst

Xilinx’s ongoing transition from a FPGA provider to an all-programmable devices producer has been helping the company gain market share. Its expanding product portfolio, which includes the Zynq RFSoC platform, is assisting it to counter intense competition from the likes of Intel. The company’s Zynq portfolio, which is implemented in both the 28-nm and 16-nm node, delivered sturdy top-line growth in the quarter.

Xilinx noted that it started shipping of the 16-nm RFSoC Silicon In-house family of product in the fiscal second quarter, which offers a superior architectural solution to 5G wireless with integrated RF-class analog technology. The product facilitates reduction of power consumption (50-75%), as well as footprint reduction for future 5G deployments, cable and wireless backhaul applications.

Management is also optimistic over the demand of its Ultrascale+ FPGAs data-center operators for providing FPGA-as-a-Service. Amazon    was the first to use Xilinx chips and started offering FPGA-as-a-Service in May 2017.

Since then, the company has got five contracts for FPGA-as-a-Service deployments, which, however, haven’t come online yet. The list, which includes the likes of Alibaba, is in the process to deploy two generations of FPGA-as-a-Service by using Xilinx’s Ultrascale+ FPGA chips.

Operational Details

Gross margin expanded 150 basis points (bps) year over year to 71.1% and 90 bps sequentially, and came in above the company’s guided range of 69-71%.

Operating expenses flared up 6.1% year over year and 3.9% sequentially to $259.3 million. Nonetheless, the figure came in lower than the company’s guidance of $260 million. As a percentage of revenues, operating expenses amounted to 41.1%, reflecting contraction of 60 bps on a year-over-year basis, but expansion of 80 bps sequentially.

Reduced operating expenses as a percentage of revenues, along with healthy revenue growth and improved gross margin, resulted in year-over-year expansion of 230 bps in operating margin, which came in at 30.1%. On a sequential basis, operating margin improved 20 bps, mainly driven by higher gross margin. Additionally, the company noted that it has achieved its goal of attaining 30% in operating margin one quarter ahead.

In dollars, the company posted operating income of $189.7 million, up 16.4% year over year and 2.4% sequentially.

The company’s net income came in at $11.9 million, significantly lower than $141.8 million reported in the year-ago quarter, and $167.5 million posted in the fiscal second quarter. The decline was mainly due to a one-time tax expense of approximately $183 million resulting from “the recent enactment of Tax Cut and Jobs Act of 2017”.

Excluding this and other one-time items, non-GAAP net income summed $200.6 million, marking year-over-year growth of 40% and 19.8% sequentially.

Balance Sheet, Cash Flow & Shareholders’ Return

Xilinx exited the reported quarter with cash and cash equivalents of approximately $3.54 billion compared with $3.56 billion recorded in the previous quarter. The company has total long-term debt (excluding current portion) of about $1.73 billion, down from $1.74 billion at the end of the prior quarter.

Xilinx generated cash of $184.7 million from operations and incurred $6.8 million as capital expenditure during the third quarter. The company paid $89.5 million in dividends and repurchased approximately 1 million shares for $73.3 million.

In the first three quarters of fiscal 2018, the company generated cash of $577.7 million from operations and incurred $28.9 million as capital expenditure. It paid $263.8 million in dividends and repurchased approximately 4.6 million shares for $310.8 million.

Guidance

For fourth-quarter fiscal 2018, Xilinx projects revenues in the range of $635-$665 million (mid-point $650 million). Management projects growth in the Advanced Products segment. Xilinx anticipates the Broadcast, Consumer & Automotive, Communications and the data-center end market to improve year over year. On the other hand, the Industrial and Aerospace & Defense end markets are estimated to remain flat.

Gross margin is anticipated to be between 69% and 71%. Operating expenses are likely to decrease to $255 million. During the quarter, Xilinx expects to incur a one-time expense of approximately $30 million due to CEO transition. Tax rate is projected between 0% and 5%.

The company remains focused on achieving its fiscal 2018 revenue target of approximately $2.5 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There has been one revision higher for the current quarter compared to three lower.

Xilinx, Inc. Price and Consensus

 

Xilinx, Inc. Price and Consensus | Xilinx, Inc. Quote

VGM Scores

At this time, XLNX has an average Growth Score of C, though it is lagging a lot on the momentum front with an F. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

The company's stock is suitable solely for growth based on our style scores.

Outlook

Estimates have been broadly trending downward for the stock but the magnitude of these revisions has been net zero. Notably, XLNX has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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