Maxim Integrated Products, Inc.’s (MXIM) first quarter fiscal 2015 adjusted earnings of 38 cents per share beat the Zacks Consensus Estimate by a penny. However, earnings were within managements guided range, primarily attributable to a higher gross margin, reduced operating expenses and a lower tax rate, offset by lower revenues.

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Revenues

Revenues in the reported quarter were $580.3 million, down 9.7% sequentially and 0.8% year over year. The sequential decrease in revenues was primarily due to lower smartphone volumes at the company’s largest mobility customer. Revenues missed the Zacks Consensus Estimate of $601.0 million.

Revenues by End Market

The revenue mix in terms of major markets in the first quarter of fiscal 2015 was as follows:

The Consumer end market remained the largest revenue contributor, accounting for approximately 30% of revenues, down 22.6% sequentially. The sequential decline was due to weakness in smartphones and tablets, mainly at its biggest customer. Its biggest mobility customer currently represents around 13% of revenue, down considerably from 27% of revenues in fiscal 2013.

Industrial, Maxim’s second largest segment generated 28% of revenues, reflecting a 6.3% sequential decline. This, however, was in line with management’s expectations and was primarily due to normal seasonal trends in the core Industrial end market.

The Communications and data center end market accounted for 26% of revenues, reflecting a 2.1% increase sequentially.. The increase was primarily attributable to the company’s strength in the enterprise server business, offset by weakness in Communications infrastructure, primarily because of the China 4G LTE rollout.

The Automotive end market generated 11% of revenues, reflecting a 0.6% decline sequentially, in line with normal seasonality.

The Computing business contributed 5% of revenues, 9.7% down sequentially.

Margins

Non-GAAP gross margin was 61.6%, up 1122 basis points (bps) sequentially and 91 bps year over year. The sequential increase was attributed to lower inventory reserves and overall cost controls.

Non-GAAP operating expenses of $220.3 million were down 2.9% sequentially but up 6.3% from the year-ago quarter.

Net Income

Pro forma net income was $108.6 million, or 18.7% of sales compared with $123.9 million or 19.3% in the prior quarter and $119.5 million or 20.4% in the year-ago quarter. Our pro forma calculation excludes restructuring, intangibles amortization, asset impairments and other one-time charges on a tax-adjusted basis.

Balance Sheet & Cash Flow

During the quarter, cash flow from operations was $117.0 million or 20% of revenues compared with $234.1 million in the prior quarter. Important usages of cash during the quarter included $31.7 million on capex, $62.7 million on share repurchases and $79.8 million on dividends.

Inventory days were 125, up 22 days from the prior quarter. Half of this increase was due to increased inventory and the other half due to lower COGS.

Total cash, cash equivalents and short-term investments decreased by $53.0 million during the quarter to $1.32 billion.

Guidance

For the second quarter of fiscal 2015, Maxim expects revenues in the range of $540–$580 million based on a quarter-end backlog of $379.0 million. Management’s revenue guidance reflects a cautious outlook towards smartphone and tablet shipments at its largest customer. Moreover, shipments into the mobility market can be delayed.

Management expects industrial market revenues to be down due to seasonally lower core industrial sales.

Automotive is expected to be slightly up as the company continues to deliver on its pipeline of design wins.

Gross margin is expected be in the 55%–59% range on a GAAP basis and 58%–62% on an adjusted basis (excluding special items). Operating expenditure is expected to be flat sequentially.

Earnings per share are expected to be 19 cents to 25 cents on a GAAP basis and 26 cents to 32 cents on an adjusted basis (excluding special items). The tax rate, excluding special items, is expected to be within the range of 20%-22%.

Conclusion

Maxim delivered mixed fiscal first quarter 2015 results with earnings beating the Zacks Consensus Estimate but revenues missing the same.

Looking forward, the company is making a strategic shift to advanced node process technology development through a new collaboration with its foundry partners.

Maxim’s overall strategy of mixed signal and analog integration is bearing fruit and has long-term growth prospects. This is backed by strong year-over-year revenue growth performance of each of the segments outside of Consumer.

The company remains committed to growing its Mobility business by increasing content opportunities, broadening the customer base and targeting new opportunities like wearable devices. At the same time, it is taking down costs related to this segment because these efforts will take time to convert to revenue.

Currently, Maxim’s shares carry a Zacks Rank #4 (Sell). Better-ranked stocks in the technology sector include Autobytel Inc. (ABTL), World Energy Solutions, Inc. (XWES) and zulily, Inc. (ZU).while Autobytel and zulily sport a Zacks Rank #1 (Strong Buy), World Energy Solutions carries a Zacks Rank #2 (Buy).

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