Supply Constraints Hurt Xilinx: Another Dismal Quarter

Yesterday evening, chipmaker Xilinx Inc. (XLNX) reported first quarter sales of $376.2 million, down 23% year over year and down 5% sequentially (see conference call transcript). The decline in revenues was attributed to supply constraints on certain Virtex-5 devices (programmable chips for high-speed networking applications), which are in great demand.

The primary factor which led to constraints in the supply chain was due to the ramp up of foundries from a very low utilization to a high utilization level resulting in production inefficiencies. The results have come in line with the company’s revised guidance provided earlier.

As expected by the management, revenues were down from all geographies except Asia Pacific and down from all end markets. The gross margin declined to 61.8% from 63.8% in the prior-year period and 62% in the previous quarter, but was within the 61% – 63% range provided by the company. Operating margin declined to 15.1% from 21.9% in the year-ago quarter and 19.8% in the previous quarter.

Net income slumped to $38.0 million or $0.14 per diluted share from a net income $86.3 million or $0.31 per diluted share in the year-ago quarter and $69.6 million or $0.25 per diluted share in the previous quarter. Excluding unusual items of $0.07 per share, EPS came in at $0.21, two cents better than consensus estimate of $0.19.

Management has forecasted second quarter revenues to be up 2% to 6% sequentially. This implies revenue guidance between $384 million and $398 million against consensus estimate of $380 million.

Gross margin is estimated to be 61%, down from 61.8% reported in the first quarter due to strong growth in low margin new products and customer mix skewed towards high-volume, low-margin customers. However, margins are estimated to improve in the December quarter as the company hopes to iron out supply issues by then.

Two days ago, rival chipmaker Altera Corporation (ALTR) reported an in-line quarter but provided a disappointing guidance due to slowdown in communications equipment deployment in China.

It is quite clear that XLNX has more than one problem at hand. This is the fifth consecutive quarter of revenue decline for XLNX while margins remain under pressure.