Maxim Integrated Products Inc.’s (MXIM) first quarter earnings beat consensus estimates by a penny. Revenue was over the high-end of management’s guidance range of $415-445 million, or a sequential increase of 5-13%.

Revenue
Revenue of $449.2 million was up 13.9% sequentially and down 10.4% year over year. The sequential strength in demand was reflective of the rebound in the semiconductor sector and follows stronger results reported by other chip companies, such as Linear Technology (LLTC), Intel Corp. (INTC), Advanced Micro Devices (AMD) and Texas Instruments (TXN).

Revenue by End Market
The computing market generated 25% of revenue, up 13.9% sequentially and down 20% year over year. Revenue benefited from sequential strength in the server, financial terminals and notebook segments.

The consumer market generated 33% of revenue, up 17.4% sequentially and 5.6% year over year. The cell phone and LCD TV markets accounted for the strength in the last quarter. Several new designs ramped into production, providing further impetus to growth.

Industrial generated 24% of revenue, up 9.3% sequentially and down 10.4% year over year. Segment results were driven by broad-based strength in all areas.

Communications brought in the remaining 18%, a sequential increase of 13.9% and a year-over-year decline of 19.3%. The segment saw broad-based growth, although networking and data communications were the strongest.

Orders
Management does not provide specific information on orders, as shifts in customer vendor managed inventory programs distort quarter-to-quarter comparisons.

Our estimates indicate that orders were up 7.0% in the last quarter, resulting in a higher backlog. Turns sales also increased, although at a slower rate than in the last two quarters. The book-to-bill ratio was over 1.

Distributor bookings increased 6% sequentially, with channel inventories increasing 4%. Channel inventories remain lean overall, as they are still down 35% from year-ago levels. Distributor bookings on Maxim increased 90% sequentially, as end demand continued to strengthen. Customer lead times were steady.

Consumer market bookings were driven by very strong demand in LCD TVs and flattish cell phones. Computing market bookings were up low single-digits. There was double-digit bookings growth in financial terminals, storage, servers and peripherals. Communications bookings saw broad-based strength, particularly in networking and datacom. Base station bookings grew, driven by increased demand from China . All segments within industrial witnessed strong bookings growth in the last quarter.

Operating Performance
The pro forma gross margin was 57.2%, up 241 basis points (bps) sequentially and down 558 bps year over year. Management attributed the increase to higher utilization rates, driven by the higher volumes and the Dallas fab shutdown.

Operating expenses of $150.7 million were higher than the $139.9 million recorded in the Jun 2009 quarter. The operating margin was 23.7%, up 433 bps sequentially and down 849 bps year over year. Most of the sequential increae was attributable to the higher gross margin, although lower R&D and flattish SG&A (as a percentage of sales) also contributed.

The pro forma net income was $41.4 million, or a 9.2% net income margin compared to $47.4 million, or 12.0% in the previous quarter and $122.5 million, or a 24.4% net income margin in the prior-year quarter. The fully diluted pro forma earnings per share was $0.13 compared to $0.15 in the previous quarter and $0.38 in the Sep quarter of last year. Our pro forma calculations exclude restructuring charges, stock based compensation charges certain one-time litigation charges and impairment of long-lived assets and tax adjustments in the last quarter. On a fully diluted GAAP basis, the company recorded a net income of $41.9 million ($0.13 per share) compared to $8.1 million ($0.03 per share) in the previous quarter and a net profit of $67.6 million ($0.21 per share) in the prior-year quarter.

Balance Sheet
Inventories were down 11.7% to $192.3 million, yielding inventory turns of 4.0x. Days sales outstanding (DSOs) were around 46 days. The cash and marketable securities balance was $937.6 million, up $24.2 million during the quarter. The company spent $27 million on PP&E, $4 million on acquisitions, $61 million on cash dividends and $18 million on share repurchases in the last quarter. Around $100 million of investments were converted to cash. Maxim has no long term debt and long term liabilities totaled $220.0 million at quarter-end.

Guidance
In the fiscal second quarter, revenue is expected to lie in the $450-465 million range (up 0.2- 3.5% sequentially). The industrial end market is expected to see some strength, as bookings increased 22% in the last quarter. The communications market is expected to be up slightly, driven by continued growth in fiber modules. Computing will have mixed results, with a decline in notebooks offset by increase in servers and financial terminals. The consumer market is expected to decline as some customers engage in year-end inventory rebalancing. However, LCD TVs will continue to grow.

The GAAP gross margin is expected to lie in the 57-59% range, due to higher utilization rates and better mix. Operating expenses are expected to increase to $175-178 million, driven by higher bonuses, higher design activity and higher stock based expenses. The tax rate, excluding $15 million of additional tax provision for international restructuring is expected to be 36%. The pro forma EPS is expected to be $0.16-$0.20.
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