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Xilinx (XLNX) Down 2.9% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research

It has been about a month since the last earnings report for Xilinx (XLNX). Shares have lost about 2.9% in that time frame, underperforming the S&P 500.

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

Xilinx Q2 Earnings Top Estimates, Q3 View Disappoints

Xilinx delivered second-quarter fiscal 2020 earnings of 94 cents per share, higher than the Zacks Consensus Estimate of 92 cents as well as the prior-year quarterly figure of 87 cents.

Further, revenues rose 12% year over year to $833 million and topped the Zacks Consensus Estimate of $827 million as well.

Rebound in datacenter business was a key driver. Additionally, better-than-anticipated 5G product demand from other global communications OEMs is a tailwind.

However, the suspension of shipments to Huawei due to the export ban imposed by the U.S. government induced weaker-than-anticipated Wired and Wireless Group (WWG) revenues.

Management mentioned that in the second half of the fiscal business restrictions, soft demand for communications products and macro-related weakness will offset strong overall growth in data center and improvement across the company’s core vertical market.

The impact of Huawei ban and other trade-related uncertainties forced the company to provide a downbeat outlook for third-quarter fiscal 2020.

Nonetheless, the company expects growth revival in the fiscal fourth quarter, backed by a broad customer base that includes TME, aerospace and defense, automotive plus industrial customers. Computational storage and SmartSSD market is likely to remain a key driver.

Quarter in Detail

Product wise, Advanced product revenues declined 29% year over year, contributing 74% to total revenues. However, the same from core products (26% of total) decreased 19% from the year-ago quarter.

Growing demand for the company’s 16-nanometer UltraScale+ family has been the key driver. The company is also benefiting from strong demand for its Zynq platform, boosted by the adoption of MPSoC family in wireless and across core vertical markets. Deployment of RFSoC by multiple wireless customers and in other end markets is a positive.

On the basis of end markets, WWG revenues (38% of total revenues) rose 24% year over year but fell 8% sequentially. Decline in wired business due to shipping restrictions to Huawei and softness of demand from other customers was a dampener.

Automotive, Broadcast and Consumer group (ABC) (16% of total revenues) increased 9% year over year and 6% sequentially, attributable to double-digit growth in automotive business. Deterioration in consumer business was a downside.

A&D, Industrial and TME (AIT) revenues (36% of total revenues) rose 7% on a year-over-year basis, aided by solid growth in A&D. Management mentioned that significant decline in TME was an overhang.

Data Center revenues (10% of total) increased 24% from the year-ago period and 92% on a sequential basis, primarily owing to growth in sales to storage customers. Moreover, additional hyper scale customer demand and limited growth from cryptocurrency customers were an upside. Solarflare contributed $5 million to revenues in the fiscal second quarter.

Geographically, the company registered year-over-year growth of 29% in Asia Pacific and 12% in North America. While Europe and Japan declined 19% and 8%, respectively.

Margins

Gross margin came in at 66.6%, down 300 bps year over year. Product and customer mix in AIT and customer mix in DCG were dampeners.

The company posted non-GAAP operating income of $217 million, down 7.9% year over year. However, operating margin contracted 560 bps to 26%.

Balance Sheet and Cash Flow

Xilinx exited the fiscal second quarter with cash, cash equivalents and short-term investments of approximately $2.52 billion compared with $2.88 billion sequentially.

The company has total long-term debt of about $1.25 billion.

Xilinx generated $224 million of cash from operations compared with $298 million in the earlier reported quarter.

Outlook

On the earnings call, management mentioned that the company forecasts WWG business to be down significantly in the fiscal third quarter due to removal of revenue expectation from Huawei. While wired is expected to recover in the fiscal fourth quarter, wireless is anticipated to remain bleak. Management expects base band ASIC transition and unexpected program delays with some communication customers to be persistent concerns.

Management expects Solarflare buyout to contribute $10 million in the December quarter. However, pause in hyper scale customer orders in the fiscal third quarter is likely to dent DCG revenues. Further, macroeconomic headwinds are likely to affect customer demand in both AIT and ABC markets in the fiscal third quarter.

Xilinx projects revenues in the range of $710-$740 million. Gross margin is forecast to be 67-69%. Operating expenses are projected to be $339 million in the third quarter of fiscal 2020.

For fiscal 2020, the company expects total revenues between $3.21 billion and $3.28 billion. Non-GAAP gross margin is projected in the range of 66.5-68.5%. Non-GAAP operating expenses are estimated to be around $1.3 billion for the full fiscal.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -27.27% due to these changes.

VGM Scores

At this time, Xilinx has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Xilinx has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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