Programmable-computer-chip maker Xilinx's (Nasdaq: XLNX) shares rose 8% in late trading after it posted estimate-topping numbers in the third quarter. The company's upbeat outlook was enough to boost investor confidence and send its shares north, despite a drop in revenues and earnings.
I will now put the company through the wringer and see what's working for Xilinx.
Precise inventory management
The challenge for Xilinx in the quarter was to keep its margins intact. And it did just that. It seems that the company's predictions of low sales were bang on target, and it adjusted inventories with precision. This helped Xilinx to keep its gross margin stable at 66%, whereas industry peer Linear Technology (Nasdaq: LLTC), which came out with earnings earlier this week, saw its gross margin drop 4%. Xilinx has managed to keep its basics in place, although a few glitches were unavoidable.
The turnaround begins …
The industry has been in a slowdown mode since last year, resulting in an oversupply of chips. Xilinx is no exception. The company's revenue in the quarter fell 10% to $511 million from the year-ago period due to weak demand in the wireless market, which, in turn, led to a 13% decline in Xilinx's communications business.
However, Xilinx believes that the weakness in the industry is almost over, and is projecting top-line growth in the range of 2% to 6% for the current quarter, ahead of analysts' expectations. It makes sense to depend on Xilinx's forecast, as even Linear Technology looks to beat the Street and projects revenue growth of 4% to 8% for the quarter, propelled by new booking orders.
… and Xilinx has a strong pipeline
Xilinx has a strong pipeline and superior product development initiative to generate higher revenue in future. The company has substantial design wins already in its bag. It is churning out chips which are ahead of time and provide better solutions in terms of speed, as well as being cost-effective.
Xilinx's latest 28-nanometer chips are finding broad acceptance among customers and the company has already seen 350 design wins in this category, totaling above $1 billion. The company is ramping up production of this new family of chips, and expects the effort to start bearing fruit by the end of this year.
The Foolish takeaway
The industry is beginning to revive due to inventory correction. And Xilinx is already in line with some nice development plans that make me feel positive about its prospects. I believe that Xilinx is one stock that you should take a look at if you are contemplating an addition to your portfolio. In case you still harbor some doubts about Xilinx's credentials, you can use our customized Watchlist feature to keep an eye on it by clicking here.
