Xilinx Downgraded to Neutral

We recently downgraded our recommendation on Xilinx Inc. (XLNX) to Neutral from Outperform.

We believe Xilinx lost market share to Altera Corporation (ALTR) in 2010. Altera’s lead at the 40 nm technology node can bring about a market loss for Xilinx in the coming years as well.

Capital spending by carriers in China is also expected to slow down in 2011, leading to an inventory correction across the semiconductor space, which should impact Xilinx as communications is the largest end-market the company serves.

Earlier, Xilinx reported lackluster results for the second quarter and provided a disappointing guidance for the third quarter. The outlook for the next quarter was below expectations. Xilinx projects sales to be flat to down 4% sequentially in the third quarter of 2011.

This implies a revenue guidance of $594.9 – $619.7 million. Sales from communications are expected to be approximately flat as increases in wired communication are offset by decreases from wireless communications.

Industrial and other sales are expected to be approximately flat as increases in defense sales are offset by decreases in industrial scientific and medical as well as test and measurement. Consumer and automotive sales are expected to be up, driven by increases in automotive and audio video broadcast. Data processing sales are expected to decrease.

Xilinx forecasts a gross margin of 65%, +/- a percentage point. Operating expenses in the December quarter are estimated to be approximately $190 million, an increase of 3.4% sequentially primarily due to a restructuring charge of $4 million.

While XLNX had the lead at 65nm (Virtex 5), prime competitor Altera has the lead at 40nm. Altera started shipping its 40nm products in late 2008 while Xilinx began shipping its next generation Virtex 6 (40nm) products in 2009 only. Xilinx has lost market share to Altera in 2010.

In addition, Altera seemed to have an edge at the 28nm node. It shipped its first samples in July 2010 while Xilinx will ship its samples in the first quarter of 2011.

Earnings estimates for fiscal 2011 have declined by $0.09 in the last sixty days due to the lackluster second quarter and disappointing guidance. Earnings estimates for fiscal 2012 have plummeted by $0.20 in the last sixty days.

Hence, we downgrade our recommendation to Neutral from Outperform. Xilinx currently has a Zacks #4 Rank , which translates to a short-term rating of Sell, primarily due to near-term pressure on the stock after the disappointing guidance.

XILINX INC (XLNX): Free Stock Analysis Report

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