Maxim’s (MXIM) fourth quarter earnings excluding special items and including stock based compensation expenses beat the Zacks Consensus by 6 cents.
Revenue
Fourth quarter revenue of $605.0 million was up 5.9% sequentially, down 3.4% year over year and exactly in line with management’s guidance range of $590-620 million, or up 3.3% to 8.5% sequentially. En market performance was mixed in the last quarter.
Revenue by End Market
The consumer end market remained the largest, with a quarterly revenue contribution of around 43%, up 11.1% sequentially and 15.3% year over year. The strong performance in the last quarter was because of the production ramp of Samsung’s Galaxy S3 smartphone, which uses Maxim’s power SoC chipset. Samsung has emerged as the leading smartphone maker in the U.S., surpassing Apple (AAPL). Therefore, Maxim’s relationship with Samsung is a big positive.
Maxim stated that it continued to see strong demand in its consumer business (not just smartphones, but also tablets) on account of the buildup for the holiday season. Overall, opportunities continue to unfold in the smartphone, tablet and other markets. Maxim is now focusing on more integrated solutions, which are expected to gain momentum this year.
Industrial, the second largest segment, generated 26% of revenue, which was up 2.0% sequentially and down 10.3% from the year-ago quarter. The sequential improvement was in the automotive and control & automation segments.
Management sees continued demand for its solutions for the power meter (particularly in China) and automotive segments. Automotive revenue is also expected to increase because of production ramps at some customers (growth in automotive infotainment is the primary driver here). The industrial automation & control segment remains weak mainly because of distributors cutting inventories during the quarter.
Revenue from the communications end market was down 0.3% sequentially and 18.7% year over year to 16% of total revenue. The sequential performance was the result of growth in base stations that was more than offset by softness in the legacy business.
Since base station demand is returning to normal, there will be no spike in the following quarter. Management expects continued growth in the networking segment with core communications remaining soft.
Despite the broad-based weakness in the market, Maxim’s computing business grew 5.9% sequentially, with the revenue contribution remaining stable at 15%. However, revenue was down 14.8% from last year.
Going forward, Maxim continues to see strong demand in the financial terminals segment, which will, however, be offset by weakness in notebooks and peripherals. China remains a strength for Maxim.
Orders
Management does not provide specific information on orders, as shifts in customer vendor managed inventory programs distort quarter-to-quarter comparisons.
We estimate that orders were up low-single-digits in the last quarter, leading to a slight increase in backlog. The book-to-bill remained above unity. Turns sales were up slightly in the last quarter, while backlog sales also increasing. Supply chain activities improved, with Maxim’s delivery lead times continuing to decline. Internal inventories jumped, however, as there were some builds for the upcoming holiday season.
The pro forma gross margin was 63.0%, up 261 basis points (bps) sequentially and down 61 bps year over year. Management stated that the stronger gross margin was related to higher utilization rates.
Operating expenses of $214.0 million were flat sequentially and up 1.4% from the year-ago quarter. This contributed to the 471 bp sequential expansion in the operating margin. However, it was still 229 bps down from the year-ago quarter. All expenses declined from sequentially as a percentage of sales, with cost of sales declining the most, followed by R&D and SG&A coming in almost flat.
Net Income
The pro forma net income was $136.2 million, or a 22.5% net income margin compared to $101.2 million, or 17.7% in the previous quarter and $130.2 million, or 20.8% of sales in the year-ago quarter. Our pro forma calculation excludes restructuring, intangibles amortization, asset impairments and other one-time items on a tax-adjusted basis, but includes stock based compensation charges in the last quarter.
Including these items, on a fully diluted GAAP basis, the company recorded net income of $110.6 million ($0.37 per share) compared to $54.5 million ($0.18 per share) in the march 2012 quarter and $124.7 million ($0.41 per share) in the June quarter of 2011.
Balance Sheet
Inventories were up 10.0% to $242.2 million, with inventory turns down from 4.1X to 3.7X. Days sales outstanding (DSOs) went up from around 47 to around 48. The cash and marketable securities balance was $956.4 million, up $20.4 million or 2.2% during the quarter.
Cash generated from operations was $190.1 million, with maxim spending around $77 million on PP&E, $2 million on acquisitions, $64 million on cash dividends and $56 million on share repurchases. Maxim has just $5.59 million of long term debt, as most of its debt ($303.5 million) will now have to be paid in the near term. Long-term liabilities were $438.7 million at quarter-end.
Guidance
In the first quarter of fiscal 2013, Maxim expects revenue of $605-635 million (up 0-5% sequentially). The backlog is $393 million, but the guidance calls for higher turns sales, which should be within its capacity.
The gross margin is expected be in the 59-62% range on a GAAP basis and 61-64% on an adjusted basis. Mix, utilization and inventory reserves will be variables impacting the gross margin. Operating expenses excluding special items are expected to be up around 3% from June.
The tax rate, excluding special items, is expected to be 20-22%. All this will yield earnings of 38-42 cents on a GAAP basis and 41-45 cents on an adjusted basis. The Zacks Consensus Estimate was 43 cents when the company reported, exactly in line with management’s own expectations.
Capital expenditure is expected to be down sequentially. Maxim’s targeted capital expenditures remain 5-7% of revenue.
Conclusion
Maxim is a well-diversified business, although it has increased focus on faster-growth markets in the last few years. Therefore, the company currently generates a significant percentage of its revenue from the consumer and computing end markets. While consumer is showing signs of strength, there are issues in the computing business that may be expected to hurt its results in the near term.
However, Maxim has done better than the market, because of its superior technology and innovation Therefore, design wins continue, not just in the U.S. but also in emerging countries, such as China.
While Maxim’s product line remains solid and its end-market diversity is commendable, we think its exposure to the consumer and computing markets increases risks.
Maxim shares currently carry a Zacks Rank of #3, implying a Hold rating in the near term.
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