Image Source: Xilinx Analyst Day presentation
Recent addition to the simulated Dividend Growth Newsletter portfolio Xilinx continues to impress with its robust free cash flow generating capacity, and the company is taking advantage of momentum in key end markets as its top-line growth has been nothing short of impressive.
By Kris Rosemann
Shares of recent addition to the simulated Dividend Growth Newsletter portfolio Xilinx (XLNX) soared after it surpassed market expectations in its fiscal third quarter and provided compelling upside guidance for its final quarter of fiscal 2019. The company continues to be a tremendous example of free cash flow efficiency, and we think it makes up for its relatively small dividend yield with its robust dividend growth potential. Shares are currently changing hands near the upper bound of our fair value range, but we expect a nice bump in our fair value estimate in a coming update to its valuation. We highlighted shares in the November edition of the Dividend Growth Newsletter, released November 1, when shares closed at a price of $86.99. Just a few short months later, the stock price has reached the mid-$100s as of the January 24 trading session.
Xilinx’s fiscal third quarter report, results released January 23, revealed impressive top-line strength as revenue advanced 34% on a year-over-year basis to $800 million. Its ‘Communications’ end market (35% of total revenue in the quarter) turned in 41% year-over-year revenue growth thanks to early production in 5G and pre-5G deployments, particularly in South Korea and China. The ‘Industrial, Aerospace, & Defense’ end market (27% of total revenue in the quarter) reported 17% revenue growth from the year-ago period as a result of strength across multiple defense and stage programs. Core data center revenue, which excludes the contracting cryptocurrency category, nearly doubled from the comparable period of fiscal 2018, and management points to strong momentum with hyperscale data center operators, which will be an increasingly important portion of the data center market moving forward, as reason for confidence moving forward.
Better-than-expected top-line performance helped drive a greater than 60% increase in non-GAAP operating income at Xilinx in its fiscal third quarter. Gross margin of 69% was in line with guidance but fell by roughly one percentage point from the year-ago period, and operating expenses were also in line with management’s expectations, which helped expand non-GAAP operating margin to 32.9% from 27% in the comparable period of fiscal 2018. Non-GAAP diluted earnings per share leapt more than 40% on a year-over-year basis.
Where Xilinx truly shines is on the cash flow statement thanks in part to its minimal capital spending requirements. Through three quarters in fiscal 2019, the company generated $742 million in free cash flow, a ~35% increase over the comparable period of fiscal 2018 despite capital spending more than doubling, and the measure easily eclipsed non-GAAP net income of $650 million for a free cash flow conversion rate of 114%.
Cash dividends paid in the nine-month period came in at $273 million, revealing significant coverage with internally-generated cash flow, even after considering $162 million in share repurchases in the period. As of the end of its fiscal third quarter, Xilinx held nearly $3.5 billion in cash, cash equivalents, and short-term investments compared to a total debt load of $1.7 billion, and this sizable net cash position helps boost its Dividend Cushion ratio to an impressive 3.5 at last check.
Not only did Xilinx surpass expectations in its fiscal third quarter report, but it also issued better-than-expected guidance for the fourth quarter of the fiscal year. We like what we’re seeing from the company in terms of momentum in key end markets, and its free cash flow margin is top-notch. Shares yield just ~1.4% as of this writing, but we continue to believe the payout has a long runway for growth ahead of it, as evidenced by its robust Dividend Cushion ratio. We continue to highlight the company as an idea in the simulated Dividend Growth Newsletter portfolio.
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Kris Rosemann does not own shares in any of the securities mentioned above. Some of the companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.