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Maxim (MXIM) Posts In-Line Earnings in Q3, Lags Revenues

Maxim Integrated Products, Inc.’s MXIM third-quarter fiscal 2016 adjusted earnings of 41 cents per share were in line with the Zacks Consensus Estimate.

Revenues

Revenues of $555.0 million were up 8.7% sequentially and down 3.8% year over year. The increase was driven by the strength in the majority of end markets.

However, this was in line with the company’s guidance range of $535 million to $575 million and below the Zacks Consensus Estimate of $557.0 million.

Revenues by End Market

The revenue mix in terms of major markets has been discussed below.

The Consumer end market remained the largest revenue contributor, accounting for approximately 29% of revenues. This segment was up sequentially due to the ramp up of a flagship smartphone and higher-than-expected wearable shipments.

Industrial, Maxim’s second-largest segment, generated 28% of revenues, up sequentially. The improvement was driven by core industrial, with strength across various interface and power products.

The Communications and data center end market accounted for 22% of revenues, up sequentially. A broad-based recovery across communications infrastructure markets led to the sequential increase.

The Automotive end market generated 17% of revenues, up sequentially and year over year. The increase was driven by content growth and continued strong adoption of new products.

The Computing business contributed the remaining 4%.

Margins

The non-GAAP gross margin was 61.4%, up 91 basis points (bps) sequentially and 182 bps year over year. The increase was led by higher utilization rates.

Non-GAAP operating expenses of $191.0 million increased 2.3% sequentially but decreased 4.4% year over year. The decline resulted from overall cost control, including the initial savings from the company’s restructuring activities.

Net Income

GAAP net income was $139.8 million compared with $67.5 million in the last quarter and $79.4 million a year ago.

Pro-forma net income was $117.7 million compared with $92.8 million in the last quarter and $114.2 million a year ago. Our pro-forma calculation excludes restructuring, intangibles amortization, asset impairments and other one-time charges on a tax-adjusted basis.

Balance Sheet & Cash Flow

During the quarter, cash flow from operations was $168.0 million compared with $182.0 million in the prior quarter. Important usages of cash during the quarter included $17.5 million on capex, $83.8 million for share repurchases and $85.7 million paid as dividends.

Total cash, cash equivalents and short-term investments were $1.86 billion in the fiscal third quarter, up from $1.77 billion in the prior quarter.

4Q Guidance

For the fiscal fourth quarter, Maxim expects revenues in the range of $555 million to $55 million based on a quarter-end backlog of $370.0 million. The Zacks Consensus Estimate is pegged at $569.0 million.

Gross margin is expected within 59–61% on a GAAP basis and 62–64% on an adjusted basis (excluding special items).

Earnings per share are expected within 40–46 cents on a GAAP basis and 45–51 cents on an adjusted basis. The Zacks Consensus Estimate stands at 32 cents.

Going Forward

Maxim delivered decent fiscal third-quarter 2016 results with earnings matching the Zacks Consensus Estimate but the top line slightly missing the same.

The company expects improvement in the June quarter. Automotive and Industrial are likely to grow due to seasonality and Consumer market should expand due to diversification. Also, Communications and Data Center are expected to see a modest sequential increase.

Maxim remains financially strong with convincing margin expansion opportunities through its cost-saving initiatives and R&D focus on high-return investments.

The company is transforming the manufacturing footprint to enhance flexibility and profitability, while lowering capital expenditures. Management also plans to optimize the product lines and organization for better returns on R&D investments.

In this regard, Maxim closed the sale of fab in San Antonio to TowerJazz in the fiscal third quarter. Also, the company completed the divestiture of the energy metering business to Silergy. These transactions will likely enable Maxim to improve the future utilization rates, reduce costs and improve gross margin performance to the mid 60% range.

Based on these initiatives, management said that it is on track to achieve $180 million in annual savings over the long term.

Maxim is shifting to advanced node process technology development through a recent collaboration with its foundry partners. Products launched under this initiative should expand margins.

Currently, Maxim carries a Zacks Rank #3 (Hold). Other stocks in the same space that investors may consider are Inphi Corporation IPHI, Microchip Technology Inc. MCHP and Semtech Corporation SMTC, all carrying a Zacks Rank #1 (Strong Buy).

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