Xilinx Is Ready to Make a Comeback

Xilinx (NAS: XLNX) , designer and marketer of programmable chips, came out with fourth-quarter results recently, and while revenue and profits fell compared to the prior-year period, the company was able to top analyst estimates for both. The 5% year-over-year revenue decline was primarily driven by a lack of new orders from its customers in the communications industry.

On the bright side, however, the company did manage to grow its top and bottom lines on a sequential basis, which, understandably, came as good news for investors. Besides that, a better-than-expected sales forecast added to the positive investor sentiment, lifting Xilinx's share prices as much as 8% following earnings, only for them to languish back to pre-earnings levels in subsequent days.

Feeling confused by this mixed reception? Let's take a closer look.

Figuring it out
Xilinx's total revenue declined by about 5% from the previous year, clocking in at $559 million. Net income was also lackluster, down by 16% at $134.1 million.

Sales for the company's data processing division remained weak, falling 12% from the previous year due to weak storage sales. The communications division fared no better, as it recorded a 16% decline in revenue. On the bright side, revenues from the industrial sales division increased 10% from the previous year's quarter, followed by a pedestrian 1% rise in the company's consumer and automotive division.

But Xilinx wasn't the only company putting up a muted top-line show. Chip rival Altera (NAS: ALTR) recently came out with weak numbers that were below Street expectations. The company's first-quarter earnings came in at $115.8 million -- almost half of what it made during the same period last year. Once again, the main reason for this was the lower-than-anticipated demand in the communications industry.

But then again, there seem to be enough reasons to believe that there is still hope for Xilinx.

Looking up
The 5% sequential growth in revenue for Xilinx's communication division, which accounts for more than 40% of the company's total revenue, reveals a positive growth path.

Xilinx's clients, many of which are wireless equipment makers such as Ericsson (NAS: ERIC) , are increasingly demanding more chips as more wireless service providers switch over to newer, better networks to feed the sheer demand for more data arising out of smartphones such as Apple's notorious "data-hogging" iPhone.

Ericsson, which accounted for more than 10% of Xilinx's business in the latest quarter, witnessed higher spending on new-age LTE networks by wireless carriers Verizon (NYS: VZ) and AT&T (NYS: T) and increased spending on 3G networks in India and China.

Chipping into the cloud
And that's not all: Xilinx makes components used in super-fast computing products as well, including flash-memory-based SSDs used for enterprise and cloud computing servers. And with the cloud computing market slated to reach a whopping $55 billion within the next two years, according to research firm IDC, Xilinx stands to benefit from the sales of chips used in servers placed in cloud-based data centers.

The Foolish bottom line
Though the semiconductor industry is passing through turbulent times, it seems to be on the verge of an upswing, and Xilinx definitely stands to gain from the trend. Recently, S&P boosted the company's credit rating by a notch to BBB+ based on an improvement in the company's outlook and strong cash flows. I'd certainly keep a close watch on the company and so should you, by adding Xilinx to your free Watchlist.

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At the time this article was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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