Cautious Guidance Hurts Xilinx

Shares fall as a tepid outlook offsets 27% revenue growth.
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Updated from Jan. 19

Xilinx

(XLNX) - Get Report

grew its top line by 27% on strong demand from industrial and defense markets.

But the San Jose, Calif., logic-chip maker's cautious guidance raised questions about whether the momentum would continue into the current quarter.

The company's stock slumped in early Friday trading, off $2.12, or 7.1%, to $27.67.

For its recently completed fiscal third quarter, Xilinx said late Thursday that it earned $81 million in net income, or 23 cents a share, on sales of $450 million. The results included a $25.3 million tax charge stemming from the company's repatriation of $500 million.

Analysts polled by Thomson First Call had forecast $441 million in revenue with a profit including items of 21 cents a share.

Xilinx raised its sales estimates twice during the third quarter, moving its initial projection of 1% to 5% sequential growth up to the 11% to 12% range it delivered at the start of January. The ultimate 13% sequential increase boosted Xilinx's revenue to its highest level since December 2000.

However, Xilinx is much more diversified now than it was in 2000, CEO Wim Roelandts told analysts in a conference call following the announcement. The company is much less dependent on a handful of large customers than it was in 2000. And sales to consumer and industrial markets now account for 41% of sales, vs. about 8% in 2000.

"Unfortunately, this growth rate has been masked by the decline in sales to our traditional areas of communications and servers," said Roelandts.

During the third quarter, the communications market, which accounts for roughly half the company's total revenue, grew 13% year over year. The storage and servers division was down 16%.

Much of the upside in the quarter came from a couple of particularly large orders from the defense sector, Roelandts said. Typical of deals with the defense industry, he said, these were one-time gains that would not occur again in the following quarter.

"It's good business to have," said Roelandts. "But it tends to be a little bit chunky." Xilinx's more realistic underlying growth rate is more in the range of 7% to 8%.

But the company's forecast for the current quarter -- historically one of its strongest of the year -- called for sequential revenue growth of 1% to 5%, essentially bracketing analysts' estimates.

Roelandts acknowledged that the rate was somewhat lower than the typical March quarter, noting that the big defense orders in the third quarter hurt the sequential comparison. And with energy prices climbing back up, Roelandts said he was offering cautious guidance.

Xilinx nudged its gross margin to 63% during the third quarter, up from 61.4% in the second quarter. And the company worked down its inventory to 144 days, from the second quarter's l46-day level.