Skip to main content

Reviewing a Tech Holding's Report

We're unfazed by the softer guidance and will add to our position.
  • Author:
  • Publish date:
Comments

-- Buying 100 shares of Xilinx on Thursday morning at a bid/ask of about $44.72/$44.90.

Xilinx (XLNX) reported earnings after the close that were strong, but guidance was softer than expected. Total sales guidance for the upcoming fiscal third quarter is up/down 2%, compared with the 3%-4% growth expected by analysts. We believe this is a timing issue related to its old technology platform runoff with key customers (namely Ericsson), rather than the introduction and momentum in its new product line, especially the China LTE buildout. But at 19x earnings and up 31% year to date, shares are selling off in the aftermarket.

The company needed to beat numbers handily and raise guidance, and without that the stock is selling on the news (although we still don't see the valuation as excessive, considering its historical range of 10x to 27x). It doesn't help that IBM (IBM) and eBay (EBAY) also disappointed. We believe the issues at IBM and eBay are more secular than those at Xilinx, and we continue to like the long-term growth story. We will be buyers tomorrow morning ¿ we'll start with 100 shares at a bid/ask of about $44.72 by $44.90.

Xilinx's fiscal second-quarter sales were $599 million, up 3% quarter over quarter, and came in at the high end of the company's guidance of flat to up 3% quarter over quarter. Sales also rose 10% year over year. Impressively, new products grew 22% sequentially and were up by $40 million -- double on a year-over-year basis -- and this represents 36% of total sales. The newest technology platform, 28 nanometer sales, surpassed $80 million, with sales increases in all five of its product segments.

By end market, communications and data center rose 2% quarter over quarter and were better than the flat guidance, with wireless sales up (as expected) quarter over quarter, led by China LTE demand (earlier than expected -- seen in a September rather than October time frame). This is the future growth driver in the communications segment (management expects an acceleration into December and March), and this segment represents 40% of total sales at the company.

Unfortunately, the strength from the China LTE news was offset by the decline in sales from a key customer (Ericsson) in its older technology in 65 nanometer products. This was the reason the guidance wasn't stronger than expected -- although flat guidance with up/down 2% seems very conservative to us. We see it as a timing issue (with December likely to be the end of the transition), and that is why we will add to our position tomorrow. Management said, importantly, that the transition will not affect any of the demand from the China LTE products.

In the second quarter, industrial, aerospace and defense increased 6% quarter over quarter, which was better than the 4% expectation, and broadcast, consumer and auto rose 5% quarter over quarter, nicely ahead of the flat expectation. Of note, the industrial segment now accounts for 38% of total sales and is clearly benefiting from the industry-wide shift to smarter apps ¿ intelligent imaging and surveillance and machine vision.

By geography, all segments rose sequentially with the exception of Europe: North America sales rose 2% quarter over quarter and 22% year over year, Asia Pacific rose 11% quarter over quarter and 17% year over year, Japan rose 3% quarter over quarter and fell 5% year over year, offset by a 6% decline in Europe quarter over quarter and a 7% drop year over year.

Gross margins were also ahead of plan at 69.5%, compared with the 69% consensus, and guidance is for this level to be maintained at 69%, even as it is ahead of its long-term guidance of 64% to 66%. Operating expenses were in line at $252 million for the second quarter, excluding a one-time $29 million patent charge. Operating cash flow was strong at $255 million, and the company repurchased $70 million worth of stock in the quarter. Total cash and investments total $3.7 billion.

After our trade, we will own 1,300 shares of XLNX, or 2.0% of the portfolio.

Regards,

Jim Cramer, Stephanie Link, and TheStreet Research Team

DISCLOSURE: At the time of publication, Action Alerts PLUSwas long XLNX.