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conference date: February 7, 2007 @ 2 PM Pacific Time
for quarter ending: December 23, 2006 (2nd fiscal quarter 2007)
forward looking statements
Overview: Sequentially slightly down revenues and decreased cash while stock-option accounting review continues.
Basic data:
Revenues were $497.5 million, down 1% sequentially but up 11.6% from Q2 fiscal 2006.
Cash ended at $1.3 billion, down $78 million.
Guidance:
Project fiscal Q3 revenues to be down from 3% to 6% sequentially.
Conference Highlights:
Held up well compared to some competitors in this cyclical downturn due to design wins in multiple end markets. Believes gained market share in high-performance and analog mixed-signal markets.
Expects to restate stock-based compensation charges for 2000 through 2006, but will not discuss specifics.
All numbers discussed are estimates only.
Gross turn orders were $222 million, down somewhat sequentially from $233 in Q1.
Like other semiconductor companies, had a softening of orders from certain end markets. Largely offset by gains in high-volume end markets led by gains in computing market. These markets, such as notebook computers, provide lower gross margin, resulting in about a 1.3% decline in gross margin. Further impact of 2% due to inventory reserve actions: write off of leaded inventory. Sales slowdown caused business units to revise forecasts, so that some inventory was no longer projected to sell within 12 months and was also reserved against.
Operating expenses excluding stock-based compensation, below the line spending increased by 2.5% sequentially. Largely due to hiring engineering talent.
Cash decreased because $50 million paid in dividends, $99 million for property, plant and equipment, and $116 million for income tax payments. No stock buy back during quarter.
Accounts receivable decreased $15 million to $277 million. 52 days sales outstanding.
12 month back backlog declined to $403 million (from $415 million prior quarter). 90 day beginning backlog for Q3 is $343 million, vs. $365 beginning of quarter.
Computing, high-end consumer, industrial and communications markets each represent about a quarter of Maxim's business. Computing market has seen increased bookings, specifically in notebook market. High-end consumer bookings were down due to seasonality. Industrial market bookings were flat. Communications bookings were flat.
Near term initiatives: Continued focus on gross margins. Improve on-time delivery performance (manufacturing cycle time). Improve collaboration among business units. Make business unit executives more accountable. Review sales and distribution strategy.
Agreement with Seiko Epson announced today for manufacturing of Maxim mixed signal products and sharing of technology.
Reiterated design wins and new products.
Q&A:
Total gross margins down 3 to 3.5%? Yes. Will stabilize in short term, but in long term target is low 60s for margins.
Growth driving items? High-end consumer market will be a long-term driver. Power management, audio, video will all see a lot of growth.
Distribution inventories? Exactly in line with demand.
March quarter bottom? Difficult to predict, but business units forecast growth in Q4.
Lead times? Expanded slightly, 4 or 5 days, in Q2.
Inventory reserves in Q3? Not determinable in advance. Does not expect them to be as high as in Q2.
What does Seiko Epson deal imply for gross margins? No noticeable effect.
Turnover of employees? Higher than, say, 3 years ago, but not significant.
Complex product percent of business? Does not measure that, but customers are asking for this. Probably higher than 18%, predicted will get to 25% in 2007.
Pricing experiments? Been cautious about raising prices. Most effects are for new design wins.
Expense outlook? Need to control spending, and are taking some measures like cutting travel, but want to continue hiring engineers opportunistically.
Inventory trends? In Q2 inventories were flat after reserve actions. In Q3 will build inventory to prepare for demand rebound.
Model is really about profits and earnings growth, not just gross margins. So plan will be continued as they come out of this downturn.
Intel v. AMD based design wins? Wins on both. AMD reference design contains Maxim products; has been more successful there.
Industrial demand? Seeing Q3 as flat or increasing slightly.
Computer market? In Q1 notebook customers were cautious given the amount of demand they saw. So slow bookings in Q1. In Q2 roared back.
Capital expenditures? Watch it carefully. It is high because needed to fuel growth for next year. Lower going forward, as % of revenue, than in past quarters.
Cash flow use? Will probably increase dividends this year. Would like to buy back stock. Look at acquisitions, but don't like a lot of risk in that area.
Inventory reserves? Needs to use period of slow demand to replenish die banks. If not sufficient inventory in an upturn, they have many unhappy customers. Write-off was largely because of leaded inventory issue [lead has been banned], not because of product mix.
Normalized tax rate going forward? Long term 33% plus or minus.
Seiko-Epson deal? Run Maxim designs only, but Epson will use remainder of fab in short term for their own chips.
Low-margin product elimination? Some we'll improve costs, some trying not to design into next generation. But some will continue to sell, and they do contribute to profits and help get design wins. There will always be products with negative contributions, as old products are removed and some products age into that situation.
High complexit circuits? It has its own disadvanges in terms of design time and expenses, but it is necessary for business growth.
Does not know if notebook surge will continue into 2007.
Will continue to value options for motivating engineers. How heavily they will be used in the future is to be determined.
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Disclaimer: Our analyst summaries may include both our condensations of statements made by company representatives and our own analysis. They are not covered by any warranty. We cannot guarantee anything said by company representatives is true. We try not to make errors, but its possible. Before making or terminating an investment you should always verify any factual basis of your decision.
Copyright 2007 William P. Meyers