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Coronavirus Threatens Xilinx’s Outlook, but Fundamentals Remain Strong

By Harsh Chauhan - Apr 30, 2020 at 7:14AM

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The chipmaker gave a few positive signals in its latest quarterly report.

Xilinx's (XLNX) fiscal fourth-quarter results turned out to be a mixed bag. The chipmaker beat Wall Street's revenue expectations by a small margin and met earnings estimates, but its guidance played spoilsport.

Xilinx forecast $660 million to $720 million in revenue for the first quarter of fiscal 2021, the mid-point of which is going to fall well short of the consensus estimate of $738.8 million. The company had reported nearly $850 million in revenue during the prior-year period, which means that its top line could crash over 18% annually in the June quarter.

The uncertainty caused by the coronavirus pandemic has also forced Xilinx to refrain from providing full-year guidance. That's because the company expects some of its core markets to witness "evident" disruptions on account of COVID-19. However, a closer look at Xilinx's business indicates that it may be able to weather the near-term headwinds and get back on track once things return to normal. Let's see why.

A representative picture of an integrated circuit.

Image Source: Getty Images

Xilinx's solid balance sheet helps in these difficult times

Xilinx ended the fiscal year with $2.27 billion in cash and $1.25 billion in long-term debt. It generated operating cash flow of $345 million during the quarter as compared to $288 million in the year-ago quarter despite a 9% decline in revenue. The company has also generated $1 billion in free cash flow over the past year.

XLNX Free Cash Flow Chart

XLNX Free Cash Flow data by YCharts

This robust cash position allowed Xilinx to ramp up share buybacks during the March quarter as its stock price took a hit. The company repurchased $470 million worth of stock during the quarter as compared to $261 million worth of repurchases during the December quarter. The reduced share count should have a positive impact on the company's bottom line and help mitigate the COVID-19-related weakness to some extent.

However, Xilinx management has now decided to be more prudent about how it spends the company's cash. It plans to be "more conservative" with buybacks, as focus shifts toward the preservation of capital and maintaining a strong liquidity position. Despite that, the company has decided to raise its quarterly dividend by 3%. Its forward dividend yield now sits at 1.75%.

The company had paid $372 million in dividends last year, and it should be able to afford the small increase thanks to its strong cash position. Meanwhile, Xilinx is also trying to keep a check on its expenses.

The company managed to keep its fourth-quarter non-GAAP operating expenses of $317 million slightly below original expectations by reducing hiring and discretionary expenses. Xilinx anticipates non-GAAP operating expenses between $307 million and $311 million this quarter as compared to $306 million a year ago.

Xilinx management made it clear in the latest earnings conference call that the company won't be resorting to layoffs to reduce costs. It plans to pursue other avenues to keep a handle on its expenses. In all, Xilinx's strong balance sheet should allow it to continue creating shareholder value and also weather the coronavirus-related downturn that its business is facing right now.

Some silver linings...

Xilinx may have delivered terrible quarterly guidance and pulled its full-year forecast. But there were a few positive takeaways from the quarter that could help this tech stock make a comeback in the future.

The company's data center business got a nice shot in the arm during the quarter as revenue jumped 77% year over year. Xilinx credits this impressive jump to an increase in demand from cloud computing and high-performance computer customers. More importantly, Xilinx added that its data center pipeline opportunity is growing in the double digits in these uncertain times.

Xilinx's data center business now accounts for 10% of its overall business. It could play a bigger role for the company in the coming quarters as demand for components could increase if operators need to increase their capabilities in a bid to tackle the surge in data traffic. An uptick in this business should help the company mitigate the weaknesses in other areas to some extent.

Meanwhile, Xilinx's 5G business recently got a shot in the arm thanks to a tie-up with Samsung. The South Korean corporation will use Xilinx's Versal adaptive compute acceleration platform (ACAP) in commercial 5G deployments across the globe. Samsung anticipates that chips using Xilinx technology will be available to customers from the fourth quarter of 2020.

These developments indicate that there may be light at the end of the tunnel for Xilinx once businesses resume normal activity. The company says that it has entered the latest quarter with a "backlog ahead of our historical average."

...But a few dark clouds, too

The stock may test investors' patience as the coronavirus might dent some of its key businesses.

Xilinx's automotive business, for instance, has taken a hit as auto sales in China and other geographies have slumped thanks to COVID-19. Revenue from this business increased just 2% annually last quarter, but it is expected to be "meaningfully down" this time. Along with broadcast and consumer, the automotive business supplies 16% of the company's total revenue.

The industrial business -- which accounts for half of Xilinx's revenue along with the aerospace and defense businesses -- is also expected to be disrupted by the coronavirus. The company has warned that COVID-19 has started impacting demand, so investors can expect things to get worse before they get better.

In all, it is likely that Xilinx stock could lose more ground in the coming months as the true impact of the coronavirus on its business is revealed. But its strong balance sheet, a nice dividend, and a pipeline could help Xilinx get back on track once things are normal.

This is why it may be a good idea for investors to keep a close watch on this tech stock and consider building a long position if it gets cheaper in the coming months.

Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool recommends Xilinx. The Motley Fool has a disclosure policy.

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