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Why Maxim Posted Strong Guidance for Fiscal 3Q16

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Fiscal 3Q16 guidance

In the previous part of this series, we saw that Maxim Integrated (MXIM) reported a decline in revenue in fiscal 2Q16. Most of its consumer sectors faced seasonal demand weakness. As the seasonal effect fades away, the company expects to report stronger results in fiscal 3Q16 than it did in fiscal 2Q16.

Looking at its backlog of $329 million at the start of fiscal 3Q16, we see that the company expects to report revenue in the range of $535 million–$575 million. This range exceeds the $511 million Maxim reported in fiscal 2Q16.

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Profitability

On a non-GAAP[1. generally accepted accounting principle] basis, Maxim expects to post a gross margin between 60% and 63% in fiscal 3Q16. It reported 60.5% in fiscal 2Q16. The company expects to report earnings per share between $0.38 and $0.44 in fiscal 3Q16 versus $0.32 in fiscal 2Q16. But analysts are more optimistic. They expect the company to report earnings per share of $0.46 on revenue of $568.5 million in fiscal 3Q16.

The company expects its non-GAAP operating expenses to remain flat at the fiscal 2Q16 level of $187 million.

Maxim’s guidance is different from the rest of the semiconductor industry’s. Intel (INTC), Advanced Micro Devices (AMD), and Xilinx (XLNX) posted weaker results for the March 2016 quarter due to an uncertain macro environment. Maxim, on the other hand, posted strong guidance.

Fiscal 2016

Maxim is restructuring to reduce costs by $180 million per year. In the long term, the company expects these efforts to increase its gross margin to the mid-60s and operating margin to the mid-30s. Moreover, it expects the manufacturing structure post-restructuring to reduce its capex requirement. For fiscal 2016, it expects to spend 1% to 3% of its revenue on capex.

In fiscal 2Q16, the company achieved several milestones in its restructuring plan.

  • It proposed to sell its San Antonio fabrication facility, or fab, to TowerJazz. It also sold its development fab in San Jose for $39 million. The two sales should improve the company’s gross margin in the March and June 2016 quarters.
  • The company is streamlining its portfolio to improve its return on research and development. So it has proposed to sell its Energy Metering business to Silergy for $105 million, as the market has limited growth potential for Maxim.

The PowerShares QQQ ETF (ETF) has just above 8% exposure to semiconductor stocks, including 0.19% to MXIM and 0.26% to XLNX.

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