Xilinx (NASDAQ:XLNX) reported its second quarter results after Thursday's market close. The maker of programmable semiconductors delivered revenue for the quarter that was reasonably in line with expectations, but better-than-expected margins propelled net income to a solid over-performance at $171.5 million. The earnings beat drove Xilinx stock up roughly 5.5% higher in after-hours trading. 

Results breakdown
Xilinx's second quarter revenue came in at $604 million , up 1% over the corresponding period in its last fiscal year. Revenue was down 1% from the preceding quarter, in line with company expectations that a dip between 1% and 4% would occur. Diluted earnings per share came in at $0.62, up 27% from the same period last year.


Average Analyst Estimate           Actual Result        
Revenue $601.7 million  $604.3 million
EPS (non-GAAP) $0.55  $0.62

Revenue beat the consensus estimates by 0.43%, while earnings per share came in roughly 12.7% higher than expected. Compared to the same quarter in fiscal year 2014, Xilinx delivered operating income growth of 22%, and grew net income 21%.

While sales were in line with the company's guidance, its operating margins were better than expected, growing from 27% to 33% year-over-year. The company saw its share of revenue from the communications and data segment fall to 41%, down from 50% in the previous fiscal quarter. The company delivered on its projected rebound in its defense and aeronautics segment, which rose to 41% from 31% in the previous quarter, helping to offset the decline in communications.

Looking ahead
The programmable logic device market is expected to grow significantly over the next five years, a trend that has the potential to benefit Xilinx. A recent report from TechNavio estimates that the sector will see 14.8% CAGR from 2013 to 2018, which could give the chipmaker a cushion even if it starts to lose market share to competitors.

It currently controls roughly 50% of the programmable semiconductor market and should continue to be a driving player in this field, but there are factors that complicate the future of the company and its stock. Altera, Xilinx's chief rival in the PLD space, looks to offer customers technological advantages when new-generation chips achieve commercial prominence. Xilinx currently accounts for roughly 70% of 28-nanometer PLD sales, but Altera has beaten the company to the 14-nm die shrink. This technological advantage could force Xilinx to increase research and development spending.

In addition to challenges presented by established competition, there are also broader threats to the American semiconductor industry to consider. October 9 saw Microchip Technology issue a downward revision on its earnings estimates due to soft demand from China, and the company indicated that a market correction in the semiconductor industry could be under way. Xilinx has since recovered from the price dip that this announcement spurred on, but concerns about the future of the semiconductor remain.

China has also announced that it plans to become a bigger force in the chip industry, and reports suggest that a recently established fund dedicated to this end could reach $19.5 billion in initial investments.

Given that American companies currently have a firm grasp on the PLD market, and the importance of these chips in communications, aeronautics, and defense technologies, devoting resources to being more competitive in this field would seem to be a logical move. Xilinx's most recent quarter saw 37% of its business come from Asia Pacific territories, so increased local competition in this region has the potential to destabilize the company's business. The company's recently announced partnership with China Mobile in the development of virtualized 5G networks may offer some assurance on this front, but the development of the Chinese semiconductor market remains a point of concern.

For its December quarter, the company projects that revenue will remain flat or see an increase of up to 4%, and expects a gross margin of approximately 69%. Sales of its 28-nm chips are expected to rebound. The company expects annual sales from this line to reach approximately $600 million, increasing nearly 60% over the previous fiscal year.

Foolish thoughts
Xilinx's latest quarterly report delivered solid results. The company managed to significantly grow its earnings per share thanks to improved margins, and the rebound of its defense and aeronautics sales gives the appearance of a more balanced business structure. The rollout of 4G LTE networks and the performance of its 28-nm chips will likely be the key points to watch for the remainder of the fiscal year.