Maxim Integrated Products, Inc. MXIM reported third-quarter fiscal 2017 adjusted earnings of 56 cents per share, ahead of the Zacks Consensus Estimate by 4 cents. Also, earnings were up 36.6% from the year-ago quarter.

Following the results, share price was up by 1.93%, driven by strong growth in automotive and industrial markets and greater-than-expected profitability.

However, in the last one year, shares of Maxim underperformed the Zacks categorized Semi- Analog & Mixed industry. While the industry gained 32.1%, the stock returned only 24.5%.

Revenue

Revenues of $581 million were up 5.5% sequentially and 4.7% year over year. The increase was driven by major strength in the automotive and industrial end markets.

The top line was at the higher end of the company’s guidance of $555–$595 million and came above the Zacks Consensus Estimate of $575 million.

Revenues by End Market

The revenue mix in terms of major markets is discussed below.

The Industrial, end market remained the largest revenue contributor, accounting for approximately 28% of revenues. The segment’s revenues were up sequentially and year over year. The increase was driven primarily by factory automation products in the areas of interface and power management.

Consumer, Maxim’s second-largest segment, generated 26% of the revenues, down sequentially due to lower content in smartphones. Notably, the company’s business at Samsung was below 10% of its third quarter revenue.

The Communications and Data Center end market accounted for 21% of revenues, up sequentially but flat from the year-ago quarter. The sequential increase was driven by growth in data center with strong customer adoption of 100G optical products used in high-speed data center applications. The company also witnessed sequential growth in the communications infrastructure as well.

The Automotive end market also generated 21% of revenues, up 13% sequentially and 26% from the year-ago quarter. The increase was driven by growth in infotainment content. The power management products for infotainment applications helped in strengthening customer relationships in automotive and earning new design wins for Serial Link USB and LED lighting products.

The Computing business contributed the remaining 4%.

Margins

The non-GAAP gross margin was 65.2%, up 113 basis points (bps) sequentially and 383 bps year over year. The increase was due to higher revenues and a favorable mix.

Non-GAAP operating expenses of $187.2 million increased 0.8% sequentially but decreased 2% year over year. The year-over-year decline resulted from overall cost control, including initial savings from the company’s restructuring activities.

Proforma operating margin was 33%, up 262 bps sequentially and 602 bps year over year.

Net Income

GAAP net income was $140.2 million compared with $130.5 million in the last quarter and $139.8 million a year ago.

Proforma net income was $159.8 million compared with $132.7 million in the last quarter and $117.7 million a year ago. Our proforma calculation excludes restructuring, intangibles amortization, asset impairments and other one-time charges on a tax-adjusted basis.

Balance Sheet & Cash Flow

During the reported quarter, cash flow from operations was $221 million compared with $193 million in the prior quarter. Important usages of cash in the quarter included $8.3 million on capex, $57 million for share repurchases and $93 million paid as dividends.

Total cash, cash equivalents and short-term investments were $2.16 billion in the fiscal third quarter, up from $2.09 billion in the prior quarter.

4Q Guidance

For the fiscal fourth quarter, Maxim expects revenues in the range of $590–$630 million based on a quarter-end backlog of $382 million. The Zacks Consensus Estimate is pegged at $599.30 million.

Gross margin is expected within 65–67% on an adjusted basis (excluding special items). Earnings per share are expected within 59–65 cents on an adjusted basis. The Zacks Consensus Estimate stands at 58 cents.

Going Forward

Maxim delivered strong fiscal third-quarter 2017 results with both earnings and revenues exceeding the Zacks Consensus Estimate.

For the upcoming fiscal fourth quarter, the company expects the automotive market to be flat sequentially. The industrial market will be up sequentially, driven by strength from factory automation content. Also, the Communications and Data Center market is likely to be up in the upcoming quarter, driven by continued momentum expected in 100G optical products. Consumer revenue is expected to be up in the June quarter. The lower revenue from smartphones is expected to be more than offset by strong growth in wearables, tablets, peripherals and gaming products.

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 expanding its manufacturing footprint to enhance flexibility and profitability, while lowering capital expenditure. Management also plans to optimize product lines and organization for better returns on R&D investments. These efforts are likely to enable Maxim in improving future utilization rates, reducing costs and improving gross margin performance to the mid 60% range.

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.

Maxim Integrated Products, Inc. Price, Consensus and EPS Surprise

Maxim Integrated Products, Inc. Price, Consensus and EPS Surprise | Maxim Integrated Products, Inc. Quote

Currently, Maxim carries a Zacks Rank #3 (Hold). Some other stocks worth considering in the industry are Applied Materials AMAT, KLA-Tencor KLAC and Fortive Corporation FTV each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Applied Materials delivered a positive earnings surprise of 3.92%, on average, in the trailing four quarters.

KLA-Tencor delivered a positive earnings surprise of 14%, on average, in the last four quarters.

Fortive Corporation delivered a positive earnings surprise of 6.11%, on average, in the trailing four quarters.

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