Xilinx (XLNX), is the market leader in Programmable Logic Device (PLD), a $4.5 billion subset of the $318 billion market for semiconductors. Xilinx holds a 50% market share of the PLD market, followed by Altera with 38% and 11% for all others.
PLDs are one of three primary circuits used in integrated circuits, can be programmed to perform certain logic operations and are a key component to any electronic system. Xilinx makes PLDs that include field programmable gate arrays (FPGAs), complex programmable logic devices (CPLDs) and programmable systems on a chip (also called SoCs), which combine microprocessor PLDs in a single device.
Xilinix’s manages its business through a product maturity portfolio of PLD brands broken down as follows:
- New (43% of 2013 Revenue) –most recent product offerings
- Mainstream (31% of 2013 Revenue) – these products are several years old and designed into customer programs that are shipping in full production
- Base (23% of 2013 Revenues) – products used in customers’ oldest systems but still in production
- Support (3% of 2013 Revenue) – products or services sold in conjunction with the above products
Except for support services, the above portfolios are modified on a periodic basis to better reflect the maturity of the products and advances in technology.
Xilinix sells its products and services through independent domestic and foreign distributor and direct to end markets with 41% of Revenue coming from the Communications & Data Centers; 41% Industrial, Aerospace & Defense; 15% Broadcast, Consumer and Automotive and 3% Other which includes computer peripherals and high-performance computing.
Xilinix Sales are Growing at Slower Pace
Xilinix fiscal year ends March 29th, so for Xilinix third quarter ended December 28, 2013 Xilinix reported a 15% year over year increase in sales to $586.8 million, a 68% increase in operating income to $202.7 and a 61% increase in earnings-per-share (EPS) to $0.61.
For the quarter ending on March 29, 2014, Xilinx reported a year over year sales increase of 16% to $617.8 million, a 29% increase in operating income to $189.5 million and a 13% increase in EPS to $0.53.
For the period ending on June 28, 2014, Xilinix continued its upward trend but at slower pace due to weakness in the defense and wireless end markets with an increase in year over year sales of 6% to $612.6 million, increase in operating income of 7% to $206.5 million and an increase in EPS of 11% to $0.62.
For the quarter ended September 30, 2014, revenue growth fell in line with previous guidance increasing 1% to $604.3 million but operating income increased 22% to $200 million representing a 33% margin, and significant increase from the same period last year’s operating margin of 27%. Increased margin drove EPS higher by 27% to $0.62.
XLMX Stock May be Good Buy For Income Investors
Xilinix stock dropped like a rock in July as results were below Analyst estimates and downgrades. Since then, Xilinix stock has followed the overall chip market lower with a recent bump up when Xilinix reported that it beat expectations for the second fiscal quarter. In the face of declining increases in sales, management has been able to hold down expenses allowing increasing margins.
Xilinix is looking for a recovery in sales from the communications and defense markets in the remaining months of 2014 and in 2015. With a dominant hold on its niche, Xilinix appears capable of growing faster than the overall semiconductor market and with management keenly focused on expense management, I would anticipate margins to remain elevated. Analysts are estimating Xilinix revenue to grow between 4% – 5% next year with earnings growth in line with the overall semiconductor industry. Xilinix has seen multiple analyst downgrades in the last 90 days with a current 12-month consensus price target of $48, nit very much higher than the current trading range.
With a price to earnings ratio of 18.5 compared to an industry average of 20.5 and a price to earnings growth of 1.6, it is hard to argue that Xilinix is cheap but with Xilinix’s lower stock price, the dividend yield is now over 3%. Xilinix has had three consecutive years of dividend increases with a three year annualized dividend growth rate of 14.9% and payout ratio of under 50%.
For income investors Xilinix stock offers significant price risk, but a nice yield with a good record of increasing annual earnings, making the risk of a dividend cut unlikely. If you can stomach the volatility, it would certainly be worth income investor to consider adding to their portfolios.
As of this writing, Kenneth Fick did not hold a position in any of the aforementioned securities. Write him at kfick@piercethefog.com or follow him on his blog at www.piercethefog.com.
