Xilinx Inc. XLNX delivered first-quarter fiscal 2021 earnings of 65 cents per share, beating the Zacks Consensus Estimate of 63 cents. However, the bottom line comes in 33% lower than the prior-year quarter’s 97 cents.

Revenues of $727 million came in line with the Zacks Consensus Estimate but declined 17% year over year. The impact of the Huawei ban and other trade-related uncertainties, along with the pandemic’s adverse impact on the business, hurt the top line.

The company witnessed improved chip demand across Data Center Group (DCG), Wired and Wireless Group (WWG), and the Industrials markets. However, demand from Automotive and Broadcast businesses remained weak through the quarter.

Quarter in Detail

Product wise, advanced product revenues declined 16% year over year, contributing 68% to total revenues. Revenues from core products (32% of total revenues) also decreased 12% from the year-ago quarter.

During the quarter, the company recorded a 7% decline in Zynq product-based revenues primarily due to lower Zynq sales in the automotive businesses.

On the basis of end markets, A&D, Industrial and TME (AIT) revenues (45% of total revenues) dipped 2% on a year-over-year basis. The decline was mainly due to rescheduling of some customer program in the second quarter.

Automotive, Broadcast and Consumer group (ABC) (12% of total revenues) slipped 29% year over year. The automotive business suffered steep decline in auto sales and witnessed factory shutdowns due to the pandemic.

WWG revenues (33% of total revenues) dropped 33% year over year. The segment’s sales were adversely impacted by trade restrictions on Huawei.

DCG revenues (12% of total) surged 104% from the year-ago period, primarily owing to contributions from compute acceleration, driven by a mix of cloud and high-performance compute customers. Notable contribution from a hyperscaler deployment of its FPGA-based SmartNIC was a tailwind.

Geographically, the company registered a year-over-year decrease of 6% in North America, 9% in the Asia Pacific, 18% in Japan and 39% in Europe.

Margins

Non-GAAP gross margin came in at 69%, up 240 basis points (bps) year over year. It also came within the company’s guided range of 68-70%.

Non-GAAP OpEx was $314 million, slightly above the company’s guidance of $307-$311 million due to increased variable compensation.

The company posted non-GAAP operating income of $186.6 million, down 28.2% year over year. Operating margin contracted 460 bps to 26% as benefit of higher gross margin was offset by elevated operating expenses.

Balance Sheet and Cash Flow

Xilinx exited the fiscal first quarter with cash, cash equivalents and short-term investments of approximately $3 billion compared with the prior quarter’s $2.27 billion sequentially.

The company’s total long-term debt increased to $1.49 billion as of Jun 27, from $747.1 million as of Mar 28. This upswing reflects senior notes issuance of $750 million in May.

Xilinx generated $245 million of cash from operations compared with the previous quarter’s $345 million. The company generated free cash flow of $230 million compared with the $313 million witnessed in the last quarter.

During the fiscal first quarter, the company repurchased 0.7 million shares at an average price of $78 per share and paid out dividends worth $92 million.

Outlook

For the second quarter of fiscal 2021, the company expects revenues between $730 million and $780 million.

In the earnings call, management predicted its WWG revenues to decline sequentially in the fiscal second quarter due to digestion of CIV accelerated orders. Additionally, it projects sales at DCG to remain flat or marginally decline on a sequential basis.

Nonetheless, the company anticipates solid sequential recovery in its AIT segment, led by the TME and A&D businesses. Xilinx also expects recovery across the automotive and broadcast markets.

Gross margin is forecast to be 69.5-72.5%. Operating expenses are projected at $322-$336 million for the fiscal second quarter.

Zacks Rank and Key Picks

Currently, Xilinx carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader technology sector include Dropbox DBX, Zoom Video Communications ZM and Analog Devices ADI. While both Dropbox and Zoom sport a Zacks Rank #1 (Strong Buy), Analog Devices carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Dropbox, Zoom and Analog Devices is currently pegged at 32.5%, 25%, and 13.3%, respectively.

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