Maxim Integrated Products’ (MXIM) first quarter earnings excluding special items and including stock-based compensation expenses beat the Zacks Consensus by 6 cents. Revenue was also slightly ahead of our expectations, beating by 1.8%.
Revenue
Maxim’s first quarter revenue of $626.1 million was up 10.6% sequentially, 39.4% year over year and toward the high end of management’s guidance range of $600−$630 million, or up 6%−11% sequentially. Revenue growth was fairly broad-based across end markets, with only computing remaining sluggish, as may be expected.
Revenue by End Market
The computing market generated 20% of revenue, up 0.6% sequentially and 11.5% year over year. Maxim stated that the notebook segment was responsible for the relative softness here, with both data storage and server segments seeing steady growth. This is consistent with earnings reports from Intel Corp (INTC), Advanced Micro Devices (AMD) and Microsoft Corp (MSFT), among others. Although the notebook market has been dampened by the advent of tablets, Maxim continues to see design wins at tablet manufacturers, so there could be some improvement going forward. Its power management portfolio in particular continues to do well.
The consumer market generated 33% of revenue, up 10.6% sequentially and 39.4% year over year. The increase was fueled by continued strength in the smartphone market. The inventory accumulation in the LCD TV channels impacted sales in that particular segment.
The industrial market generated 27% of revenue, up 10.6% sequentially and 56.8% year over year. The control & automation, smart meter and automotive segments were responsible for growth in the last quarter. However, Maxim sounded most optimistic about growth opportunities in automotive, particularly in the audio and infotainment areas. The smart meter business benefited from the Teridian acquisition.
Communications brought in the remaining 20%, representing sequential and year-over-year increases of 22.9% and 54.9%, respectively. Management stated that the strength in communications was broad-based across product lines, although fiber optic modules remained particularly strong. Maxim’s Phyworks acquisition is proving to be highly synergistic to its position in the optical transceiver segment. The acquisition enables a broader and deeper portfolio, which should continue to open up opportunities 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 down double-digits in the last quarter, slightly reducing the backlog. The book-to-bill fell below unity for the first time since the March 2009 quarter. Turns sales increased low single-digits in the last quarter, with backlog sales increasing significantly. Additionally, lead times remain quite high at slightly less than 14 weeks, with Maxim’s internal investories flattish. The declining orders and slow growth in turns seem to indicate softer demand and considering the still-long lead times, we believe there is significant uncertainty in demand and/or loss of business to peers.
The pro forma gross margin was 63.4%, up 163 basis points (bps) sequentially and 686 bps year over year. Management attributed the increase to better cost absorption, given the higher level of revenue.
Operating expenses of $199.9 million were up 4.7% sequentially and up 17.7% from the year-ago quarter. However, the operating margin continued to expand, reaching 31.5% in the last quarter. This was a sequential increase of 344 bps and a year-over-year increase of 1,274 bps. The higher gross margin and lower R&D (as a percentage of sales) drove the increase, helped by slightly lower SG&A (as a percentage of sales).
Net Income
Pro forma net income was $129.0 million, or a 20.6% net income margin compared to $102.3 million, or 18.1% in the previous quarter and a net loss of $19.2 million, or 4.3% of sales in the year-ago quarter. Our pro forma calculation excludes acquisition-related inventory write-up restructuring, intangibles amortization and certain other one-time charges 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 a net income of $117.5 million (39 cents per share) compared to $58.5 million (19 cents per share) in the June 2010 quarter and $41.9 million (13 cents per share) in the September quarter of 2009.
Balance Sheet
Inventories were down 0.9% to $204.2 million. Inventory turns were 4.9x, up slightly from 4.2x in the June quarter. Days sales outstanding (DSOs) went down from 55 to around 48. The cash and marketable securities balance was $718..3 million, down $108.2 million or 13.1% during the quarter. The cash generated from operations was $158.5 million, of which the company spent over $38 million on PP&E, $73 million on acquisitons, $62 million on cash dividends and $84 million on share repurchases. Maxim has just $300 million of long term debt (through acquisition) and long-term liabilities are also not too high at $306.4 million.
Guidance
In the fiscal second quarter, Maxim expects revenue of $595−$625 million (flat to down 5% sequentially), as all end markets are expected to be flat to down in December. The consumer market is expected to decline, as LCD inventory continues to be worked down (expected to continue into the March quarter).
The gross margin is expected be in the 59.5%−62.5% 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 are expected to be flat to up slightly from September. All this will yield earnings of 36−41 cents on a GAAP basis and 39−44 cents on an adjusted basis. Capital expenditure is expected to be up slightly sequentially.
Maxim expects revenue to increase 5%−7% in fiscal 2011.
Our Take
Maxim’s results have been impacted by the slowdown in the computing market, as well as LCD inventory accumulation in the consumer market. While both these markets should turn around, with excess inventory being worked down and tablet demand picking up, the margin profile is not clear yet. The gross margin, though expanding, is still well below historical levels, although getting close to Maxim’s long-term target of 64%. It is apparent that the Maxim has been sacrificing margins for growth. Additionally, while management is optimistic about continued growth in industrial (particularly automotive), we note that design wins in this market take some time to convert to revenue. The below-seasonal revenue guidance for the fiscal second quarter is also not encouraging.
Given the above, we are unable to muster much enthusiasm for Maxim shares in the near term. The company carries a Zacks Rank of #3 (short-term Hold recommendation).
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