initiating coverage - xilinx

INITIATING COVERAGE REPORT

William C. Dunkelberg Owl Fund October, 3

rd 2014

Nathan Clark: Lead Analyst [email protected] Ryan Rinaldi: Associate Analyst [email protected]

Sector Outperform Recommendation: BUY

Key Statistics: Price $43.17 52 Week Low $39.12

Return 21.35% 52 Week High $55.59

Shares O/S (mm) 268.5 Yield 2.69%

Market Cap (mm) $11,547 Enterprise Value

$10,624

1 Year Price Graph

Earnings History: Quarters EPS Δ Rev. YoY Δ Price

2Q14 $0.55 10% -3.28% 3Q14 $0.54 15% 2.27% 4Q14 $0.55 16% -9.08% 1Q15 $0.62 6% -14.31% Earnings Projections: Year Q1 Q2 Q3 Q4 Total

2013 $0.47 $0.46 $0.38 $0.47 $1.78

2014 $0.56 $0.58 $0.55 $0.56 $2.23

2015(Q2,3,4E) $0.63 $0.55 $0.59 $0.63 $2.39

2016e $0.64 $0.65 $0.64 $0.67 $2.59

All prices current at end of previous trading sessions from date of report. Data is sourced from local exchanges via CapIQ, Bloomberg and other vendors. The William C. Dunkelberg Owl fund does and seeks to do business with companies covered in its research reports.

COMPANY OVERVIEW Xilinx, Inc. (XLNX) designs and develops programmable devices

and associated technologies of semiconductors. The company

develops associated technologies that include integrated circuits (ICs)

in the form of programmable logic devices (PLDs). Xilinx designs

and engineers these semiconductors so that other companies can

program them to the liking of the consumer. The company also

develops software design tools to program the PLD’s. In addition to

its programmable platforms, the Company provides design services,

customer training, field engineering and technical support. Xilinx’s

has multiple end markets for its products. Its communications and

data center end market makes up 50% of total revenue, industrial,

aerospace and defense make up of 31%, while broadcast, consumer

and automotive account for 16% of revenue. The Company sells its

products and services through domestic and foreign distributors and

through direct sales to original equipment manufacturers and

electronic manufacturing service providers. About 43% of Xilinx’s

revenue comes from the Asia Pacific region, while just over a quarter

(26%) comes from operations in North America. Xilinx has 21% of

its business in European markets and the final 10% of revenue is

from its operations in Japan.

INVESTMENT THESIS XLNX is currently trading at a 4.35% discount to its own 3 year historical P/E average, as well as a 21% discount to the historical spread between XLNX and its main competitor, Altera (ALTR). This discount was created by two sharp price drops of 9% (Q4 FY 2014) and 14% (Q1 FY 2015). The first drop was due to low top line guidance of only 0 – 4% growth, mainly caused by aerospace/defense. This was caused by the inability to close deals in time with governments. The more recent miss was due to slowed orders from the wireless segment. China Mobile decided to slow down the speed at which wireless base stations were being built, hurting XLNX’s growth. The near term slowdown in China wireless and aerospace/defense end markets caused slowed growth and inventory to increase with days inventory outstanding increasing over 15% in FY 2014. Going forward, China Mobile’s transparency regarding its new plans for the 4G LTE build out, the overall PLD market trends, and the partnership with China Mobile for a 5G network, will drive XLNX to our discounted cash flow valuation of $51.21 with an implied P/E multiple of 21.7x yielding a dividend adjusted return of 21.35%.

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Xilinx, Inc. Exchange: NasdaqGS Ticker: XLNX Target Price: $51.22

Fall 2014

T h e W i l l i a m C . D u n k e l b e r g O w l F u n d

CATALYSTS/POSITIVES China Wireless – 4G LTE Build Out. Earlier this year, China

Mobile decided it was going to slow down its wireless base station build out for its 4G LTE network. This caused poor earnings numbers and subsequently, an inventory backlog at XLNX. However, on September 17th, the Chairman for China Mobile announced that the company now has plans to build 700,000 base stations by the end of 2014. China Telecom and China Unicom are following suit. China Mobile had completed 400,000 base stations prior to this announcement. This news shows the pause in the build out is over and the Chinese telecommunications companies will be rapidly building out 4G LTE in the next two years. The initial plan was to only build 500,000 base stations for 2014 and now China Mobile is saying they aim to build an extra 200,000 (700,000 in total). It should be noted that not all of these wireless stations involve new hardware. So far in 2014, 60% of the base stations were upgraded to 4G while 40% involved hardware build outs. XLNX gains revenue from both changes but more so on the hardware build out. We see XLNX taking advantage of this trend more than ALTR because of the company’s early release of its 28nm product (approximately 1 year earlier than ALTR). The early release of this product has enabled XLNX to obtain 70% market share which is then followed by high switching costs. Investor Relations is confident that the 28nm product will grab more business than ALTR’s products. The 28nm will drive margins in coming years since older products have higher margin than new products. The market is currently not factoring in XLNX’s market share with its 28nm product and its ability to drive revenue and margins in the China build out.

PLD Market. Analysts are bullish on the PLD market due to the economics of these semiconductors in comparison to ASIC’s. The upfront costs associated with ASIC’s are continuing to increase the amount of semiconductors that must be sold in order to break even. The PLD’s have key advantages in the amount of volume that must be moved, longer product cycles, faster time to market, and high switching costs. Some analysts see the PLD market growing at 8% - 9% in the long run, representing 1.5 to 2 times faster growth than the broader semiconductor industry. With a 51% market share, XLNX will capitalize on this trend.

China Mobile 5G Deal. On September 15th, XLNX signed a deal with China Mobile to begin working on 5G infrastructure. China Mobile realizes that users on a 5G network may face congestion and are looking for XLNX to create semiconductors that help the scalability of these 5G base stations. ALTR also signed a deal with China Mobile to work on network function virtualization (NFV). We believe that deal to be smaller than XLNX’s since ALTR will only be focusing on semiconductors that enable NFV, not the overall wireless base station. This is a long term catalyst since the 4G build out has not yet been completed but we do believe this deal shows China Mobile’s confidence in XLNX and bodes well for obtaining 4G business from China Mobile, the largest carrier in China.

ECONOMIC MOAT

High Switching Costs/Market Share: It is difficult to switch PLD suppliers do to the nature of the product. Since PLD’s need to be programmed by an engineer, it is difficult for an engineer to switch from one PLD supplier to another. This stickiness is the reasoning for the formation of the duopoly between XLNX and ALTR and has prevented any major competitors from stealing market share away from the two leaders. XLNX in particular takes advantage of this switching cost due to its early product launch of the 28nm semiconductor. This product launch led to early market share gains and enabled XLNX to further widen its moat. RISKS

Cyclical Nature of Semiconductors: Xilinx operates in a cyclical semiconductor business. Companies in this segment will face booms and busts in demand for its products. There is a correlation between demand for semiconductors and demand for personal electronics like phones and computers. When demand is high, it is sometimes hard for companies to meet it, conversely when demand is low. The ASIC market is especially susceptible to cyclicality since these semiconductors are used in more consumer electronics. PLD’s tend to be less cyclical since they are not used in many consumer products. China: China has a track record for not trusting American companies when it comes to hardware products. The country is known for being skeptical of American companies after the NSA scandal. XLNX has not had problems in the past when it comes to regulations and hurdles in China but it should be noted that if China becomes uncooperative, there could be problems for XLNX going forward with its wireless business. Dependence on Major Distributor: Xilinx’s largest distributor, Avnet, accounted for 42% of the company’s revenue in FY 2014. This poses a risk as XLNX is heavily dependent on one distributor. That being said, this seems to be common industry wide. Altera, XLNX’s main competitor, has its largest customer accounting for 38% of its revenue. Issues with the financial health of Avnet could cause distribution problems for XLNX going forward.

Fall 2014


INDUSTRY OVERVIEW

PLD vs ASIC

Programmable Logic Devices (PLD’s) are expected to grow at 1.5 to 2 times the overall semiconductor index. This is

mostly due to the cost benefits that are arising between PLD’s and Application-Specific Integrated Circuit (ASIC’s).

ASIC’s are much more advanced than PLD’s because they are fully programmed and used in consumer products like

smartphones and tablets. The use of ASIC’s also means that the semiconductor must be of relatively small size, further

driving up its cost. PLD’s are essentially blank semiconductor that can easily be programmed to compute logic

functions and are used in wireless base stations, medical devices, aerospace, defense, and automobiles. Therefore,

ASIC’s are only used over PLD’s if the amount of volume needed is going to be substantial and size is critical.

Otherwise, the upfront costs would not be absorbed. The development costs for ASIC’s have been outpacing the

upfront costs for PLD’s. The development cost for a 65

nanometer (nm) semiconductor (new in 2007) was $35 million

while the required revenue from that cost was $175 million.

The latest ASIC semiconductor, the 20nm, however, had

development costs of $156 million and a revenue requirement

of $780 million. This increased development cost has

outpaced the PLD development costs, making the PLD’s more

affordable on an economic standpoint. Analysts and our team

see this as a tailwind for the PLD market with revenue

expected to grow at about 8%, while the rest of the

semiconductor market is only expected to grow at 5%.

Other benefits regarding PLD’s vs ASIC’s include:

Faster time from design and engineering to mass production. Enables fast product releases. See Chart above.

Lower chance of inventory buildup due to the ability to sell a single design across multiple end markets

Lower cyclicality since end market customers are normally large telecommunications companies, governments, industrial, and medical companies instead of the everyday consumer

Longer product cycles

The PLD Market

The PLD market is a duopoly where XLNX has

dominant market share with 51% for the calendar year of

2013. Its biggest competitor in this duopoly is Altera

with 38%. The rest of the market is shared by Lattice

Semiconductor and Microsemi. This duopoly has been

formed due to the high switching costs involved with

retraining engineers and programmers. Another

important factor regarding market share for PLD’s is the

timing of product releases. The company that can release

the newest version of a semiconductor has an advantage

when it comes to obtaining market share. The newer

products gain the most market share but new products

tend to be much lower margin. Therefore, players in the

PLD market look to innovate the fastest, knowing

market share gains are essential, but that these new

products will not yield high margins till years later.

Fall 2014


FINANCIALS

Revenue

Top line grew at 9.9% in FY 2014 YoY, after reporting negative 3.2% growth in 2013 YoY. Sales had a five year (2009 – 2014) CAGR of 5.48%. FY 2013 was a down year for XLNX due to the macroeconomic conditions the company experienced in relation to the wired communications/data center end market losing share on older products. New products latched on during this period but as mentioned earlier, new products are less profitable than older products. Comparing wired communications/data center numbers to previous years is also difficult due to the 3G build out that occurred in China in FY 2011. During FY 2011, XLNX saw revenue grow 29.2%, with most of that business coming from the China build out. This same trend can be seen with ALTR. ALTR had strong revenue growth (at 63.5%) due to the China build out but then suffered in the coming years with -13.6% top line growth in FY 2012. XLNX has now entered another bull run on top line due to the China 4G LTE build out. This is causing top line growth to be reinvigorated with predicted growth at 6.5% in FY 2015 and 8.5% in FY 2016. We are seeing the wired communications/data centers as a major driver of revenue going forward, with incremental revenue growth coming from aerospace/defense end markets. The 28nm semiconductor will gain extra market share on the wireless stations due to its earlier release in comparison to ALTR. The early release of the 28nm allowed XLNX to gain early market share, which is now predicted to be around 70% for that particular semiconductor. The widespread use of this semiconductor in the wireless stations, combined with the high switching costs will allow XLNX to outpace ALTR when it comes to this 4G LTE build out. Other end markets that XLNX serves include Industrial, Aerospace/Defense, Broadcast, Consumer and Automotive. See Chart on the right for breakdown. XLNX also breaks out its products by New, Mainstream, Base, and Support products. New products include semiconductors that have recently been released. These products are lower margin than the other product categories because these semiconductors are in the early stage of the product life cycle and suffer from larger unit costs and lower volumes. Mainstream products tend to be older and run at full production. Base products have the highest margin, as they are older and running on older systems with high volumes. Support products/services help customers design and program the PLD’s. See Appendix for XLNX product portfolio breakdown. Going forward, we see revenue growing at a five year (2014-2019) CAGR of 6.19%, driven by China and the aerospace/defense end market closing orders that were deferred in previous quarters.

PEER GROUP IDENTIFICATION

All of these companies are direct competitors in the niche, semiconductor

market that designs and manufactures programmable logic devices

(PLD’s).

Altera Corporation (ALTR) o 38% market share for Calendar Year 2013 o Market Cap of 11,129 Million

Lattice Semiconductor (LSCC) o 7.4% market share for Calendar Year 2013 o Market Cap of 893 Million

Microsemi Corporation (MSCC)

o 4.4% market share for Calendar Year 2013

o Market Cap of 2,392 Million

TARGET PRICE

XLNX is currently trading at a 4.35% discount to its own

historical 3 year P/E multiple. The company is also trading at a

21% discount to its 3 year historical spread to Altera, the other

competitor in the PLD duopoly. Using the long term corporate

goals for margins and % of sales numbers provided by investor

relations, our discounted cash flow valuation gave a target price

of $51.22. We used a modest 0.63% perpetuity growth. This was

derived from an average of the Return on Invested Capital times

the Investment Rate for the 7 year projections.

Growing Perpetuity Discounted Cash Flow

Valuation Price Target= $51.22

Implied Target Multiple: 21.7x

Fall 2014


Margins/Profitability Historically, XLNX has been improving its gross and net income margins. Gross margin was 63.4% in 2010 and has grown to 68.8% for FY 2014, representing an increase of 5.4%. We see gross margin continuing to expand as the 28nm semiconductor (introduced in 2011) ages and becomes a larger portion of revenue through its implementation in the China wireless build out. Going forward, we forecast the gross margin expanding to 69% in 2015 but then settling off to a management projected, long run average of about 66%. Altera has seen margin contraction since FY 2010. For FY 2010, ALTR had a gross margin of 71% but it has since come down to 68.4% for FY 2013. Part of the reasoning behind ALTR’s high margin in FY 2010 was due to the company’s ability to take advantage of the 3G China build out. We also see ALTR’s margins settling off at a long run average of 66% as this company does not have pricing power over XLNX. XLNX has enjoyed higher net income margins than its biggest competitor, ALTR. XLNX has grown its margin to 26.5% from 19.5% in FY 2010. This increased efficiency has been seen by ALTR but not to the same degree. ALTR enjoyed high margins during the 3G build out but since then margins have been compressing. FY 2010 had a margin of 40.1% but FY 2013 had a margin of only 25.4%. XLNX has higher profit margins because less of its current product portfolio is classified as “New” compared to ALTR. See Appendix for ALTR product portfolio breakdown. Newer products have lower margins than older products. Many analysts are predicting margin expansion for ALTR and we believe that is due to the Intel deal the company has signed. After speaking to investor relations at XLNX, we do not view the Intel deal as a catalyst for growth or margin expansion. XLNX turned down the chance to work with Intel because of good relations with Taiwan Semiconductor Manufacturing Company (TSMC), its main manufacturer. We are also skeptical about Intel’s ability to prove itself in the PLD space as its business model focuses more on microprocessors. XLNX does not disclose margins across different end markets. The only guidance the company gives is that older products have higher margin than newer products. Since New products are currently 45% of the product portfolio, overall margin expansion will occur in the coming years as these products age. XLNX has higher profitability metrics than ALTR when it comes to Return on Assets, Return on Equity, and Asset Turnover as well. ROA has increased from 11.92% in FY 2010 to a current level of 13.18%. This has mainly been driven by increasing profit margins. Asset turnover has decreased over the past couple years due to inefficiencies regarding inventory. Altera has experienced the same trend with asset turnover falling to 0.35 after being at 0.65 in FY 2010. However, XLNX’s higher profit margin has enabled the company to have a higher ROA than ALTR’s (current ROA of 8.64). ROE for XLNX has also outpaced ALTR. XLNX has grown ROE to 23.42% from a level of 17.57% in FY 2010. Meanwhile, ALTR has seen its ROE compress to a 13.51% from a FY 2010 level of 45.93%. The reasoning for XLNX’s higher ROE is a better ROA, driven by profit margins, and a higher degree of leverage. We see XLNX continuing to outpace ALTR in regards to these metrics due to high market share in its 28nm product, further driving revenue and margin expansion over ALTR. See Comparables Table for metrics. Earnings XLNX has missed on EPS 4 of the last 10 quarters. The most recent EPS miss was Q4 2014, with a -2.10% surprise. This was caused by weak numbers coming from China, leading to high inventory. Price dropped 9.08% on this miss. Even with this large miss, XLNX has been able to grow earnings by 72% since FY 2010. Going forward, analysts are predicting EPS to grow another 31.8% by FY 2017. Our model is more conservative with EPS only growing 22.14% by FY 2017. The reason for this slowed growth going forward is due to the 3G build out causing historical numbers to be abnormally high. This time period experienced rapid revenue growth, inflating EPS in the near term. Analysts are predicting the 4G build out will bring more modest growth to XLNX. ALTR has also seen rapid EPS growth with earnings growing 58.14% from FY 2009. Going forward, analysts see ALTR growing earnings by 80.15% in FY 2017. The reasoning behind ALTR’s high earnings predictions is that some analysts are bullish on the Intel deal and believe that will drive ALTR, going out past FY 2015. We believe the market is discounting XLNX because of the Intel deal, leading to slower expected growth from XLNX.

Fall 2014


Cash Flow Depreciation XLNX has had depreciation higher than capital expenditures every year since FY 2008, with the exception of FY 2011. We view this trend as unsustainable and unrealistic going forward. Eventually depreciation will run off and capital expenditures will be higher than depreciation. Since we view this trend as unsustainable, we reversed it in the model. Going forward, we forecast depreciation being smaller than capital expenditures. We believe analysts are doing the same in their models. Smaller depreciation in comparison to capital expenditure numbers will adversely affect FCF and CFFO. CFFO/FCF XLNX reported CFFO for FY 2014 as $804.9M and we are modeling CFFO to be $726.4M in FY 2015, mostly affected by a lower depreciation number and other minor changes on the balance sheet. FCF was $760M in FY 2014, with our model predicting FCF to be $718.4M for FY 2015. Once again, low depreciation numbers are hurting cash flow numbers going forward. Our model has the same trend as Bloomberg estimates. Although low depreciation is hurting near term FCF, we have modeled FCF to have a 5 year (2014 – 2019) CAGR of 1.72%. In the past, FCF grew at a 4 year (2010- 2014) CAGR of 9.63%. These growth rates are difficult to compare because FCF saw a 43.7% increase in FY 2012 due to abnormal net income growth. We are not concerned about FCF growing at a slower rate than in the past because our model predicts depreciation will correct itself. We believe analysts are doing the same, as Bloomberg estimates show the same trends in terms of FCF going forward. In the past, CFFO grew at a 5 year (2009 – 2014) CAGR of 12.71%. We see CFFO being adversely affected by depreciation, leading to a 5 year (2014 – 2019) CAGR of 1.01%. Once again, we are not worried about cash flows going forward as we believe all analysts are modeling out a reverse in the depreciation – capital expenditure trend. ALTR has seen CFFO grow 81.8% since FY 2009 and FCF grow 76% over the same period. ALTR does not have the same depreciation – capital expenditures relationship trend occurring. Therefore, it is easier for analysts to model out the depreciation for this company. This also means that ALTR is predicted to have rising CFFO and FCF because depreciation numbers will not have adverse effects on cash flow. Analysts are also predicting higher long run top line growth for ALTR, which leads to higher net income and FCF. Debt We are confident in Xilinx’s ability to repay its debt, which totals $1.5B. While XLNX has a higher debt/equity to ratio

of 55.8% to that of Altera’s 44% (its competitor in the PLD duopoly), XLNX has a higher interest coverage ratio of

14.9x compared to the 13.5x ratio of Altera. Our forecasts show that XLNX will be able to cover all of these debt

payments through CFFO alone. Both XLNX and ALTR hold an “A-” credit rating from S&P. This shows confidence

in the PLD market in that it is not as cyclical as the broader semiconductor market. XLNX’s debt schedule allows the

company to pay off its small amount of debt in increments. This will allow XLNX to combat any macro conditions that

may arise of the next few years. The maturities occur in 2017, 2019, and 2021.

Fall 2014


SHAREHOLDER RETURNS Xilinx has a history of giving back to its shareholders through a combination of a growing dividend and share buybacks.

From 2008 to 2013, Xilinx has repurchased $2.5B of the company’s shares. While the company does not currently have

an active repurchase program, Xilinx bought back $750M of the company’s outstanding shares ending in the September

quarter of 2013. This past quarter (Q1 FY 2015) the company reported another $100M repurchase that was previously

unannounced. Xilinx has historical given back to its shareholders through a solid dividend too. XLNX has a dividend

yield of 2.42%, higher than Altera’s 1.67%. Xilinx has a dividend payout ratio of 44.7%, higher than Altera’s payout ratio

of 36.7%. This shows that XLNX is providing a higher return to shareholders through its dividend in comparison to

ALTR.

VALUATION Xilinx has had two price drops in the previous 12 months. The first was on April 23rd, 2014 after the company reported

revenues of $618M and EPS of $2.19, beating analyst expectations on revenue but slightly missing on EPS by $.02 per

share. The drop was also in response to lowered guidance for the current quarter citing flat expected growth in the

company’s wired communications and industrial & aerospace segments. Comparatively, Xilinx’s main competitor Altera

also fell on struggling numbers in the industrial & aerospace segments. The second price drop occurred on July 22nd,

2014 after the company reported revenue of $612M, missing analyst projections by 3%. Xilinx did report solid EPS

numbers with a 2.77% beat. CEO Moshe Gavrielov noted that the decline in revenue was a result of a very weak quarter

in the defense and wireless businesses. This is an industry trend with Altera, Xilinx’s main competitor, also facing

decreases in these segments. Xilinx lowered guidance on revenue to a range between $588M- $612M due to uncertainty

of its immediate future with Chinese business. Since then, collaboration on work in China has resumed and we expect

the value of Xilinx to appreciate as positive numbers are released from the Chinese business. Defense and aerospace

business is due to return in the coming quarters, with the company citing deals not being closed in time for the previous

quarter. This revenue was simply deferred to later quarters. These price drops have left XLNX undervalued to

themselves, ALTR, and the broader semiconductor index on a P/E and EV/EBITDA basis. See Appendix for graphs.

Discounted Cash Flow Valuation

Assumptions and Drivers of Free Cash Flow

For sales growth, we projected 6% and 8.5% growth for FY 2015 and FY 2016, respectively. This projection is higher

than some analysts but we are taking the position that the sales growth in the China wireless segment will outpace what

analysts are currently modeling out. When it came to operating margin, gross margin, R&D, and SG&A, we used long

term projections provided by investor relations. See Appendix for numbers from investor relations. We increased R&D

expense because early innovation is key to gaining market share and we believe XLNX will continue to invest heavily in

R&D. For the model, we put in some bullish margins and growth for the first 3 years but then brought numbers down

to meet the XLNX long term model provided by IR. We believe our projections are modest, considering we undershot

Operating Margin in relation to the guidance provided by IR. Other important factors relating to Free Cash Flow were

Capital Expenditures, Depreciation, and the Tax Rate. In past years, XLNX had higher depreciation than CAPEX. We

built into the model that this would reverse since that trend is unsustainable. CAPEX for XLNX has historically been

relatively low in comparison to sales with it only equaling 1.9% of sales in FY 2014. XLNX is not in a capital intensive

industry with FY 2014’s expenditures coming from offices being built. We built a gradual tax rate increase into our

model in order to be more conservative. Historically, XLNX has paid a tax rate of 10.9% but we forecasted it to

increase to 15% from 2018 on. We modeled the tax rate this way in order to be modest with our projections. For

irregular items like intangible amortization and accumulated other comprehensive income, we modeled out constant

numbers due to the inability to properly predict these categories.

Fall 2014


Price Targets

Finding an accurate Exit Multiple for a cyclical industry is difficult. Taking an average of the historic multiple is not an

accurate representation of where the multiple will be 7 years out. The multiple on the DCF is the average of XLNX and

ALTR’s EV/EBITDA multiples over the past 10 years. We found that the PLD duopoly traded at a much different

level than the broader semiconductor market. Therefore, using a semiconductor industry Exit Multiple would not

properly capture the PLD market and its trends. This method yielded a dividend adjusted return of 5.3%.

The Growing Perpetuity rate was calculated through ROIC times the Investment Rate. We took an average of this rate

of the 7 years of projections. We believe a growth rate of 0.6% to be modest but accurate as it helps catch the cyclicality

of the business. This method leaves us with a price target of $51.21 and an implied P/E of 21.7x. The Growing

Perpetuity method yields margin expansion of 14.27%, as XLNX currently trades at 19.02x. We find this method to be

much more realistic due to the relatively modest inputs and transparency that investor relations provided with long term

corporate targets.

WACC

The WACC of 8.75% was calculated using 5 year average weights of 92% for equity and 8% for debt. XLNX is

relatively unlevered. For the cost of equity, we used a risk free rate of 2.47%, expected market return of 7.38% and beta

of 1.06. These numbers, along with short term and long term debt rates were taken from Bloomberg estimates. Cost of

equity was 7.67% while cost of debt was 2.26%. We rounded our WACC to 9.00% from 8.75%. The Bloomberg

estimate for WACC is 9.10%.

Peer Group Valuation

The PLD market is a duopoly with XLNX having 51% market share and ALTR having 38% as of 2013. Lattice

Semiconductor (LSCC) and Microsemi (MSCC) also compete in the PLD market but have significantly smaller market

share at around 12% market share combined. It will be difficult for these two competitors to gain market share from

XLNX and ALTR because of the high switching costs involved with teaching engineers how to program the

semiconductors. Valuing XLNX against LSCC and MSCC on a P/E basis proved to be difficult as those two companies

are small and do not have consistent EPS numbers. On an EV/EBITDA basis however, XLNX is trading 8% below

its 3 year historical spread to a custom index of ALTR, LSCC, and MSCC. When comparing to ALTR on a 3 year

historical spread, XLNX is trading at a 21% discount to its average. To the broader semiconductor index, XLNX is

trading at a 27% discount to its 3 year historical average spread. We do not believe this method is an accurate way to

value XLNX though because PLD’s trade higher than the broader semiconductor industry. See Appendix for charts

regarding discounts. As mentioned earlier, XLNX enjoys higher margins and profitability ratios than its all of its direct

competitors. We believe this trend will continue as the 28nm semiconductor will win more business in the China

wireless build out and further drive margins as the product ages.

WACC

•9.00%

EM Method

•EM: 14.4x

•$44.30

GP Method

•GP: 0.6%

•$51.22

Fall 2014


APPENDIX

PRODUCT PORTFOLIO FOR XLNX AND ALTR (XLNX ON LEFT, ALTR ON RIGHT)

Note: High roughly equals New; Mainstream – Mid-range; Low - Base

DCF ASSUMPTION

Xilinx Comparables Analysis

($ in millions except per share)

Stock Equity Enterprise Revenue EBITDA EPS Gross EBITDA Debt/

Price Market Market Growth Growth Growth Margin Margin Equity

Company (TICKER) 9/24/14 Value Value LTM NFY LTM NFY NTM NTM NTM LTM LTM MRQ

Xilinx (XLNX) 43.82$ $11,764 $10,842 19.31 18.37 12.94 12.29 4.8% 5.3% 7.0% 69.2% 34.7% 26.8% 55.8% 14.89 (923) A-

Altera (ALTR) 36.26$ $11,202 $9,888 24.83 23.88 16.79 16.19 11.5% 8.8% 11.6% 67.6% 31.8% 24.9% 44.0% 13.47 (1,310) A-

Lattice Semi (LSCC) 7.56 896 649 22.18 20.71 9.82 13.3% 73.8% 54.8% 17.7% 10.5% 0.0% 0 (247) N/A

Microsemi (MSCC) 25.43 2,426 2,969 95.7 11.96 16.01 13.12 16.5% 57.0% 78.7% 53.7% 17.1% 0.4% 68.1% 0 543 BB

Median 24.8 20.7 16.0 14.7 13.3% 32.9% 73.8% 54.8% 17.7% 10.5% 44.0% - (247) N/A

Mean 47.6 18.9 14.2 14.7 13.8% 32.9% 54.7% 58.7% 22.2% 11.9% 37.4% 4.5 (338) N/A

Source: Bloomberg

Capitalization Valuation Multiples Leverage

Profit

Margin

LTM

Margins

P/E Multiple EBITDAInterest

Coverage

S&P

Credit

Rating

Net

Debt

MRQ

Growth Rates

Fall 2014


MANAGEMENT PROJECTIONS

XLNX P/E MULTIPLE W/AVERAGE LINE OVER THE LAST 3 YEARS

XLNX 3 YEAR HISTORICAL P/E SPREAD VS ALTR

Fall 2014


XLNX 3 YEAR HISTORICAL P/E SPREAD VS S5SSEQX INDEX

Note: The only PLD companies in this index are XLNX and ALTR.

XLNX 3 YEAR HISTORICAL EV/EBITDA SPREAD VS ALTR, LSCC, AND MSCC

Fall 2014


DISCLAIMER

This report is prepared strictly for educational purposes and should not be used as an actual investment guide.

The forward looking statements contained within are simply the author’s opinions. The writer does not own any

Xilinx, Inc. stock.

TUIA STATEMENT

Established in honor of Professor William C. Dunkelberg, former Dean of the Fox School of Business, for his

tireless dedication to educating students in “real-world” principles of economics and business, the William C.

Dunkelberg (WCD) Owl Fund will ensure that future generations of students have exposure to a challenging,

practical learning experience. Managed by Fox School of Business graduate and undergraduate students with

oversight from its Board of Directors, the WCD Owl Fund’s goals are threefold:

Provide students with hands-on investment management experience

Enable students to work in a team-based setting in consultation with investment professionals.

Connect student participants with nationally recognized money managers and financial institutions

Earnings from the fund will be reinvested net of fund expenses, which are primarily trading and auditing costs

and partial scholarships for student participants.

initiating coverage - xilinx

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