Friday, January 30, 2009

Maxim and Microchip Report Fourth Quarter 2008

Maxim Integrated Products (MXIM) and Microchip (MCHP) both reported on their fourth quarters yesterday. Both are makers of digital and analog semiconductor chips, and to a certain extent are rivals. However, they serve different markets with different styles, so comparing them may give a good view of how the semiconductor market is evolving.

Microchip is known for its microcontrollers, which are microprocessors combined on a single chip with inputs and outputs designed to control external devices. A typical use might be controlling a consumer appliance or coordinating the systems in an automobile. It makes a wide variety of microcontrollers that are usually sold as standard parts. It also makes some analog devices (capable of creating radio wave forms, for instance) and other special parts.

Maxim makes standard parts that can be incorporated into circuit designs, but more of its business is in making special parts for particular products. These parts may or may not include a microcontroller; they often include both digital and analog circuits on the same chip.

Both companies saw demand dry up in Q4 as manufacturers who use their chips cut back on orders, both because of weak demand from their own customers and because they could save cash by depleting inventories.

Both companies cut back on their own production in order to save cash and to cut their own inventories, but both still believe their own inventories are too high if the economy remains down.

Microchip revenues were $192 million, down 29% sequentially from $270 million and down 24% from $253 million year-earlier.

Maxim revenues were $410.7 million, down 18% sequentially from $501.2 million and down 24% from $540.0 million year-earlier.

One reason that Maxim's revenues were not down as much sequentially as Microchip, but were down the same from year-earlier, had to do with notebook computers. Maxim makes parts for notebook computers, and had made a part for a particular Intel standard design. They lost that part in the latest transition. However, they have new design wins that they believe will enable them to regain some traction in notebooks in 2009, if notebook end demand does not crash even futher.

Both companies had a variety of one time charges and benefits in the quarter. Stripping those out, especially if you look only at cash flows, both were positive. Both sit on large accumulations of cash kept from more prosperous times. Both give investors generous dividends and see no need to cut the dividend at the current level of recession. At this moment's prices, Maxim pays a dividend of 6.22% at $12.45, and Microchip pays a 7.37% at 18.98. You can't get that from a Treasury or CD.

What about the future? Neither firm has good visibility, although it is fair for us to assume that when (or if, for pessimists) the economy revives the demand for their chips will also increase. Both plan on even lower revenues in the March quarter. Maxim believes that it will do well in its communications segment (which does not include parts for cell phones, but for infrastructure) because they are supplying parts for base stations in China, which is committed to continuing its 3G rollouts. They think their computer segment will do poorly as there is a lot of notebook inventory in the distribution channels. They believe cell phone inventories have been depleted (their parts are in high-end phones), so unless consumer demand drops off further, they expect their customers to start restocking soon.

Microchip has more customers, typically using smaller numbers of chips for a particular product. This makes it harder to know what their customers' plans are. Their book to bill ratio was a horrendous 0.7 at year's end, but they have seen a slight uptick in January orders over December. They believe they can return to growth even in a downturn by introducing new products, but their best trick is the flexibility of their expense side. They can cut expenses rapidly, already having done so in 2008. They believe they can remain profitable at almost any level of economic activity.

I own Microchip stock, but not Maxim. I also own competitor Marvell (MRVL). Maxim is on my list to buy at some point, but I have a pretty lengthy list of companies to choose from given their valuations and compared to my ability to generate cash to buy them.

For more detailed coverage of their December quarters, see my Microchip analyst conference summary for Q4 2008, and my Maxim analyst conference summary for Q4 2008.

See also their company sites:

Keep diversified!

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