Xilinx Inc, which in late June revised its April guidance higher, still reported double-digit annual declines in revenue and adjusted EPS. Revenue and profitability appear to have bottomed, however, based on guidance for sequential growth in fiscal 2Q21. As the pandemic has swept across the globe, Xilinx has experienced weak demand in markets including automotive, consumer and broadcast. Wired & Wireless demand was also down from what it was the prior year, although this business showed encouraging sequential momentum. Global shelter-at-home restrictions and the rising use of end-point devices such as PCs and smartphones have increased data center traffic, leading to a doubling in Data Center Group revenue during the quarter. Investors expressed concern that rising activity in Data Center and Wired & Wireless might represent aggressive ordering against potential future supply chain disruptions. CEO Victor Peng also attributed some of the overall top-line strength to customers accelerating orders following recent changes in U.S. government restrictions on sales of certain Xilinx products to international customers.
Based on current-quarter guidance, however, the sequential acceleration in Xilinx’s order book appears to represent real demand growth, and not just-in-case stockpiling. The automotive market has begun to pick up, although we expect negative comps in automotive, consumer and broadcast to continue for several more quarters. The ways in which consumers and businesses consume data have been permanently changed by the pandemic, in our view, resulting in a growing reliance on digital solutions and a rising level of data traffic. That should be positive for applications acceleration and other XLNX solutions.
RECENT DEVELOPMENTS
XLNX is up 14% in 2021, in line with its peers. Non-GAAP EPS of $0.65 declined 30% but topped the revised Street estimate of $0.57. CEO Victor Peng noted that the Xilinx supply chain has been operating without disruption. After the uncertainty that caused management to guide cautiously in April, demand was better-than-expected in several end markets as the quarter progressed, the CEO noted. Xilinx also saw some benefit from customers accelerating orders as the U.S. Department of Commerce removed purchasing restrictions on some foreign companies. The company’s original April guidance called for revenue of $660-$720 million, issued at a time when COVID-19 uncertainty was most intense. Compared to this original guidance, Wired & Wireless Group and Data Center Group results were stronger than expected. Better demand in these areas partly offset significant weakness in Automotive, Broadcast & Consumer. Aerospace/Defense, Industrial & TME revenues were lower because of a ‘meaningful’ customer-timing issue that moved revenues out of 1Q21 and into the current 2Q21. In terms of product categories, Advanced Products (68% of revenue) declined 16% year-over-year. This category had grown at sharp double-digit rates for years before slowing in mid-FY20 due to inventory drawdowns by data center customers and a spending pause by network customers. Within Advanced Products, Zync family sales (18% of total company revenue) declined 7%, primarily due the automotive slowdown. Core Product revenue (32% of total) declined 12%. On an end-markets basis, Aerospace-Defense, Industrial, & TME (AIT) represented 45% of revenue and fell 2% annually. This business was helped by industrial customers serving the healthcare industry during the pandemic, as well as by TME applications as technology companies pivoted to serve stay-at-home consumers and businesses. Aerospace-Defense remains a ‘secular driver’ within Xilinx’s core business; Xilinx recently announced the first 20 nm ‘space-grade’ FPGA with high radiation tolerance for satellite and space applications.
Automotive, Broadcast, & Consumer (ABC) represented 12% of revenue and declined 30%. Vehicle sales collapsed and consumers sharply curtailed retail purchases early in the crisis. These categories are coming back, but will take time to recover; management is cautiously optimistic about a second-half recovery in FY21. Xilinx remains well-placed within the modern vehicle in areas including ADAS. The Wired & Wireless Group (WWG), 32% of revenue, declined 34% annually but rebounded 28% sequentially. Even before the pandemic, this business had been subject to volatility in the still-formulating 5G demand environment. Xilinx recently announced a strategic engagement with Samsung for its second-generation radio design that includes beamforming, based on the 7-nm Versal ACAP. Xilinx is also seeing rising demand for its radio frequency system-on-a-chip (RFSoC) and its solutions in support of massive MIMO radio applications. Data Center Group (DCG) represented 12% of revenue and was up 106% annually and 15% sequentially in 1Q21. Global shelter-at-home restrictions have resulted in surging social media traffic, massive amounts of media streaming, and accelerated home-networking and PC demand. These are driving increased data center traffic, which is proving positive for applications acceleration and other XLNX solutions. Xilinx could earn around $0.70 per diluted share in 2Q21, which would be down 25% annually. The automotive market has begun to pick up, although we look for negative comps in automotive, consumer and broadcast to continue for several more quarters. The ways in which consumers and businesses consume data have been permanently changed by the pandemic, in our view, resulting in a growing reliance on digital solutions and a rising level of data traffic. That should be positive for applications acceleration and other XLNX solutions.
EARNINGS & GROWTH ANALYSIS
For the first quarter of the March 2021 fiscal year (calendar 2Q20), Xilinx reported revenue of $726 million, which was down 14% annually and 4% sequentially. Revenue was just below the $727 million midpoint of management’s revised guidance of $720-$734 million issued on June 29, 2020. Revenue exceeded the revised $723 million consensus estimate. 68.9% in 1Q21 from 70.8% in 4Q20, while expanding 28.9% in 4Q20 and from 29. Xilinx provides directional line-item guidance rather than explicit EPS guidance. GAAP earnings of $0.38 per diluted share fell 59% from $0.94 a year earlier, reflecting a big one-time tax hit. Non-GAAP EPS of $0.65 declined 30% but topped the revised Street estimate of $0.57. Given the one-time tax hit and other factors, we are modeling Xilinx on a non-GAAP basis going forward.
Victor Peng succeeded Moshe Gavrielov as CEO and president in January 2018. Brice Hill became CFO in April 2020. Former CFO Lorenzo Flores stepped down in September 2019 to become vice chairman at Toshiba Memory.