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WIKI ANALYSIS
Maxim Integrated Products, Inc. (NASDAQ: MXIM) sells integrated circuits, or ICs - miniature electronic circuits made with semiconductor materials to process electronic signals. All electronic signals are either digital or analog, and Maxim focuses on making ICs to process analog signals that are driven by real world phenomenon such as temperature, sound, speed and pushing a button or flipping a switch. Maxim also creates mixed signal chips that combine both digital and analog signals.[1]
Maxim's ICs are used in everyday electronics (cell phones, DVD players, TVs, and MP3 players) and cars (in airbags, cruise control, and steering systems), as well as being used for industrial applications (such as robotics). Maxim's product portfolio spans over 3,000 integrated circuits sold to over 30,000 customers.
Maxim generates 70-75% of its sales from outside the US, with a big portion coming from manufacturing-heavy economies in Asia. China alone accounted for 28% of the company's sales in the fiscal year ending 2005 (the company has not filed annual financial results since then).
In October 2007, Maxim’s stock was delisted from the NASDAQ stock exchange after it missed the deadline to submit regulatory filings to the Securities and Exchange Commission (SEC).[2] In December 2007, Maxim’s former CEO and former CFO were sued by the SEC for improperly backdating stock option grants, which the SEC claims inflated Maxim’s net income by 10% for fiscal years 2003 through 2005. The stock is now listed OTC, meaning it does not trade on a major exchange.[3]
Business Financials
Maxim manufacturers and sells integrated circuits that are used in a broad range of applications, including cars, consumer electronics, telecommunications, medical devices and industrial. The company’s portfolio consists of over 5,000 products, sold to over 30,000 unique customers[4].
From 2005 to 2006, the company selectively exited highly commoditized sectors and introduced an internal system that prioritizes research projects over product launches. In the beginning of 2006, the amount of capital invested in research and development as a percent of net revenue increased by 25% from the previous year.[5]
Furthermore, Maxim has begun to focus on high-volume complex circuits for consumer electronic goods such as portable MP3 players, cell phone handsets and laptops; this sector of the semiconductor industry is one of the fastest growing. By the end of 2005, the company had invested hundreds of millions of dollars in additional production equipment to accommodate the massive increase in product orders[6]. It should be noted that the market for consumer electronic goods ICs tend to be lower margin because of greater competition in the space.
The company’s custom circuit designs have resulted in a higher gross margin (GM) for the company, which has historically spanned the high-60% to mid-70% range. In comparison, companies that offer standard/catalog circuits have GMs that span the mid-40% to mid-60% range.[7].
| Year | Net Revenue (thousands USD) | Operating Income (thousands USD) |
|---|---|---|
| 2001 | $ 1,576,613 | $445,166[8] |
| 2002 | $1,025,104 | $345,352 [9] |
| 2003 | $1,153,219 | $447,036[10] |
| 2004 | $1,439,263 | $606,035[11] |
| 2005 | $ 1,671,713 | $781,372[12] |
International sales have generally accounted for 70%-75% of the company’s total sales. This reflects Maxim’s focus on emerging Asian markets as it enters the high-volume circuits sector. In the first quarter of 2006, the sales breakdown by geographic region was:
| Region | Percent of Net Revenue |
|---|---|
| China | 28%[13] |
| US | 22%[14] |
| Rest of Asia | 20%[15] |
| Europe | 17%[16] |
| Japan | 10%[17] |
| Rest of World | 3%[18] |
Key Trends and Forces
- Semiconductor Cyclicality Creates Volatility in Maxim's Margins: The semiconductor industry, particularly the analog devices sector, has historically moved in cycles. Progress in technology and changes in technological standards determine the demand for both low-volume high-performance analog (HPA) products as well as high-volume electronic consumer products, including battery power devices, audio and video devices, displays and power supplies, circuit switches, advanced clocks and timers, and thermal sensors. Since the two product categories constitute Maxim’s revenue stream, Maxim’s performance is greatly affected by fluctuations in technological standards and related demand for these products. The company’s diverse product portfolio in a broad range of industries serve as a buffer to minor fluctuations, but also make the company susceptible to a variety of industry-specific risks as well as the general condition of the economy.
- China Drives One-Quarter of Sales: China drove 28% of Maxim's sales in 2006, as the company benefited from the rapid rise of technology manufacturing companies in China, many of which incorporate Maxim's circuits for their own products. As such, Maxim's performance is heavily influenced by the business environment and laws in China, and future revenue growth will depend on continued Chinese demand for Maxim's products..
- Foreign Currency Risk Could Affect Maxim's Balance Sheet: Since the majority of Maxim’s total sales are made internationally, the company makes transactions in non-US currencies, such as the Japanese Yen, the British Pound, and the Euro. This exposes the company to fluctuations in currency exchange rates on accounts receivable from sales made in foreign currencies. A sharp decline in the value of the dollar in relation to a foreign currency would decrease the company’s net income, although Maxim had signed currency futures contracts in 2006 to minimize this risk[20].
- Maxim's Increasing Dependence on High-Volume Consumer Electronics Creates Risks: As Maxim is increasingly dependent on the high-volume consumer electronics market, the company becomes more susceptible to cancellations of product orders made by its customers. Maxim’s earnings will be affected by such cancellations, since the product orders in this market are generally much larger by dollar value (but lower margin). Furthermore, there is greater unpredictability in customer order size and delivery schedule in the high-volume market than in the low-volume HPA circuits market, which adds strains to Maxim’s operations.[21]
Competitors
Maxim generates one of the highest margins of large semiconductor companies.[22]. Each of Maxim's competitors has some aspect in its business that differentiates it from its peers.
Linear Technology - Linear Technology has a sales force of mostly engineers. The company claims that this allows its customers to receive high-quality technical service on demand. The company generates the highest gross margin (78%) of among all large competitors.
National Semiconductor - National Semiconductor utilizes energy efficiency in its circuits as the primary differentiator for its product line.[23]
Texas Instruments - Texas Instruments is the biggest company based on annual revenue among its competitors. It holds a strategic advantage in the amount of financial, manufacturing and marketing resources it can invest. However, due to the wide array of products it offers, it faces intense price competition in many fronts.
STMicroelectronics - STMicroelectronics has diversified its sales over the five high-growth sectors (percentage of sales in 2007): Communications (35%), Consumer (17%), Computer (16%), Automotive (16%) and Industrial (16%).[24]
Analog Devices - Analog Devices derives 41% of its revenue from the industrial market, and 29% from communications.[25]
| Company | June 30 2006 TTM Sales (Millions USD) | 2005 Operating Income (Millions USD) | 2005 Revenue (Millions USD) | 2006 Gross Margin |
|---|---|---|---|---|
| Maxim | $1,749 | $781.372 | $1,671.713[26] | 68% (up to Q3)[27] |
| Linear Technology | $1,083 | $56.2 | $1,049.694[28] | 78%[29] |
| National Semiconductor | $1,930 | $399.5 | $1,913.1[30] | 59%[31] |
| Texas Instruments | $13,839 | $2,791 | $13,392[32] | 51%[33] |
| STMicroelectronics | $9,854 | $244 | $8,882[34] | 36%[35] |
| Analog Devices | $2,685 | $515.987 | 2,388.808[36] | 59%[37] |
Notes
- ↑ MXIM 10-K 2005, Item 1, pg. 1
- ↑ MXIM Press Release, October 1 2007
- ↑ MarketWatch, December 7th, 2007, Benjamin Pimentel
- ↑ MXIM website
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 2, pg. 1
- ↑ MXIM 10-K 2005, Item 1, pg. 10
- ↑ MXIM 10-K 2005, Item 1, pg. 20
- ↑ MXIM 10-K 2005, Item 6, pg. 1
- ↑ MXIM 10-K 2005, Item 6, pg. 1
- ↑ MXIM 10-K 2005, Item 6, pg. 1
- ↑ MXIM 10-K 2005, Item 6, pg. 1
- ↑ MXIM 10-K 2005, Item 6, pg. 1
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ MXIM 10-Q 2006 Q1, Part 1 Item 1, Note 7
- ↑ World Semiconductor Trade Statistics, 2005 Forecast
- ↑ MXIM 10-Q 2006 Q1,Part 1 Item 3
- ↑ MXIM 10-K 2005, Item 1, pg. 11
- ↑ Maxim Company Profile
- ↑ National Semiconductor Company Profile
- ↑ National STMicroelectronics Company Profile
- ↑ ADI 10-K 2006, Part I Item I
- ↑ MXIM 10-K 2005, Part II Item 6
- ↑ MXIM 10-Q Q3 2006, Part I Item I
- ↑ LLTC 10-K 2005, Part 2 Item 1
- ↑ LLTC 10-K 2007, Page 8
- ↑ NSM 10-K 2005, Part 2 Item 6
- ↑ NSM 10-K 2006, Page 2
- ↑ TXN 10-K 2005, Page 6
- ↑ TXN 10-K 2006, Page 2
- ↑ STM 10-K 2005, Pages 64,66
- ↑ STM 10-K 2006, Page 9
- ↑ ADI 10-K 2005, Part II Item 6
- ↑ ADI 10-K 2006, Page 31
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