Maxim Integrated Products: Analog explosion

Digital processors are leading to exponential growth in the need for analog parts, and Maxim Integrated Products is on top of the trend.

by Drew Wilson -- Movers and Shakers, 8/15/2003

IN BAD TIMES, SHAREHOLDERS cut their losses and employees are let go. At Maxim Integrated Products, the CEO also takes a whack.

For fiscal 2003, which ended in June, Maxim CEO John Gifford sacrificed his annual salary. Moreover, for the second year in a row he received no bonus.

Not that Maxim is doing badly. For the first nine months of fiscal 2003, the company reported profits of $228 million, up 20 percent from the same period a year earlier. Sales were up 15 percent to $858 million.

But stocks are still recovering from down-cycle levels, and Gifford believes in employees and shareholders collectively sharing gain and taking pain.

Tore Svanberg, senior research analyst at US Bancorp Piper Jaffray, calls Maxim "probably one of the best companies in the industry." He cites reliable company management as a consistent strength.

When Maxim gives guidance, "year in and year out it keeps hitting the targets," Svanberg says.  "That's indicative of a company that manages its business very well."

Maxim, a $1.02 billion company, supplies analog and mixed-signal ICs that include data converters, interface circuits, microprocessor supervisors,  amplifiers, sensors, and wireless and fiber-optic products. "We're in every industry except food and clothing," Gifford says.

Recent design wins include new generation notebook PCs, 802.11 wireless LANs, cellular handsets, portable medical devices, and high-speed data networks.

Gifford says low-cost microcontrollers are driving semiconductors into all areas of life, and every semiconductor requires anywhere from one to a dozen analog circuits to support it.

"Digital microcontrollers are causing exponential growth in mixed-signal analog, radios, data converters, and battery-management circuits," he says. "Those are strategic product areas growing at high rates."

Gifford cites a trend he calls "instrument on a chip." A blood glucose monitor, for example, is very close to a single microchip. It has a microcontroller on it that directs analog information about the blood, and the analog IC processes that and puts it into digital format. The processor is probably 60 to 70 percent digital, but the value is about 95 percent analog.

Maxim, according to US Bancorp's Svanberg, is taking an integration approach to analog, combining as many components and as much circuitry as possible. Maxim is headed in what he believes is the right direction: mixed signal as opposed to pure analog.

"Digital microcontrollers are causing exponential growth in mixed-signal analog, radios, data converters, and battery-management circuits. Those are strategic product areas growing at high rates.” John Gifford, CEO, Maxim, Integrated Products

Maxim's mixed-signal capability includes the ability to develop analog parts and microcontrollers while providing low-cost manufacturing and microminiature packaging.

David Wu, analyst at Wedbush Morgan Securities, says Maxim has a somewhat broader product line than indirect competitor Linear Technology, though he adds that neither company has a sharp advantage over the other.

And like competitor Linear, Maxim also boasts high gross margins. Over the last four quarters, gross margins have increased sequentially to $200 million, or 70 percent of revenue, for the quarter ending March 2003.

"There are more SoCs out there, so the market is bigger, but companies have to pick a spot," Wedbush's Wu says, adding that Maxim's 70 percent gross margins show that it has chosen its targets well. About 85 percent of Maxim's products are proprietary, providing high margins.

In fiscal 2003, Gifford expects to show 15 percent annual growth in revenue and gross margin. He believes his company was the best performing of all analog companies over the last two years. His goal, he adds, is to grow profits 25 to 30 percent annually.

Gifford, who has a reputation for being blunt and outspoken, founded Maxim in 1983 after a falling out with Jack Welch after Welch's GE bought Gifford's Intersil. Maxim has retained its senior management team for more than a decade.

Wedbush's Wu adds that the management teams of Maxim and Linear Technology have both performed exceptionally well, making distinctions between the two companies difficult. "It depends on whether you want Cartier or Saks Fifth Avenue," he says.

Maxim has 84 product lines, competing with nearly every analog company in the business in some area. Gifford says Maxim is Texas Instruments' strongest competitor in battery management for cameras and notebook PCs. TI and Analog Devices are Maxim's broadest competitors, though Maxim has a broader product line than the two, he says.

Maxim invests 24 percent of annual revenue in R&D and the company has about 1000 development engineers. The company develops 600 products annually and produces them at three wafer fabs in the US. "We will not be run out of a market, but we will choose to run other people out of our markets if they choose to get in," Gifford says. "That means you must be a low-cost producer."

In 2001, Maxim acquired Dallas Semiconductor for $2.5 billion, a move that initially raised skepticism. Dallas Semi's expertise in the battery-management function of handheld devices complemented Maxim's analog circuits that also go into cellular phones.

According to Brian Matas, vice president at IC Insights Inc, the acquisition is slowly taking shape and so far shows a nice fit. "Maxim has the Dallas product line and has used it to beef up their own line and expand their product offering," Matas says.

However, Gifford's initial forecast--that within two years Dallas would be adding $600 million to $800 million in revenues--hasn't been realized. Dallas currently has gross margins of 63 percent and makes up 25 percent of Maxim's $1.02 billion revenues.

Gifford, who disparages acquisitions in general, says future growth plans steer clear of any more purchases. "Acquisition strategies work only as a consolidation vehicle when mediocre or bad companies consolidate because they really shouldn't be there," he says. "We've proven historically we're good at this and don't need to be defocused by other things of lesser quality."

Gifford is equally cynical about startups, even though he's successfully launched two companies himself. He says analog suppliers have become so important to the end equipment that a newcomer in the analog space would have a rough time building critical mass, which involves financial integrity, circuit and test development, low-cost manufacturing and package development.

"Customers won't take a risk with a small company," Gifford says.