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Altera Corporation (ALTR - Analyst Report) reported earnings of 37 cents per share in the third quarter of 2013, which beat the Zacks Consensus Estimate of 34 cents. However, on a year-over-year basis, reported earnings dropped 24.4% primarily due to lower revenues and higher operating expenses.

Revenues

Altera’s third-quarter revenues not only declined 9.9% on a year-over-year basis to $445.9 million, but also lagged the Zacks Consensus Estimate of $452 million.

The year-over-year decline was due to weakness in mainstream and mature product revenues, which declined 28% and 25%, respectively and more than offset the 27% increase in new product revenue.

All except the Industrial Automation and Military & Automotive markets declined double-digits and these two markets were relatively consistent with the year-ago quarter. On the other hand, the Telecom & Wireless and Networking, and Computer & Storage segments declined 18% and 12%, respectively.

Japan was the only geography posting modest increase, with the Asia/Pacific and Americas remaining particularly weak. Specifically, Japan grew 2%, while the Americas and Asia/Pacific declined 11% and 18%, respectively.

During the quarter, Altera partnered Micron (MU - Analyst Report) to develop interoperability between Altera Stratix V FPGAs and Micron's Hybrid Memory Cube which will enhance the company’s system on chip (SoC) offering and field-programmable gate array (FPGA)

Operating Results

Altera reported gross margins of 68.3% which was down 103 basis points from the year-ago quarter primarily due to lower revenue base. Gross margins tend to move around depending on mix. While the higher mix of industrial was likely a positive for last quarter, the higher mix of new products was likely a negative. 

Operating margin came in at 28.8%, down from 35.8% in the year-ago quarter. Total operating expenses grew 6.2% year over year, reflecting a 6.3% growth in sales and marketing expenses and a 4.3% increase in research and development expenses.

Reported net income was $121.8 million or 37 cents per share compared with $161.2 million or 49 cents per share in the third quarter of 2012. Excluding intangibles amortization, gain on securities and gain from the reclassification of comprehensive income, the net income was $120.2 million compared with $158.2 in the year-ago quarter.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $2.96 billion. The company’s year-to-date cash flow from operating activities was $459.4 million.

Guidance

Altera expects sales in the range of -3% to +1% sequentially in the fourth quarter of 2013. Management expects revenues from Networking, Computer & Storage to be up while Telecom & Wireless and Industrial Automation, Military & Automotive revenues are expected to remain flat, sequentially.

Management projects gross margin of roughly 68.5% in the fourth quarter. Research and development expenses are expected in the range of $110.0 million to $111 million, while selling, general and administrative (SG&A) expenses will range between $82 million and $83 million.

Our Take

Altera has delivered mixed third-quarter 2013 results with earnings beating the Zacks Consensus Estimate but revenues missing the same. Overall year-over-year performances were weak. Guidance for the upcoming quarter was also tepid.

Though, Altera’s association with chip maker Intel Corp. (INTC - Analyst Report) will keep it ahead of its peers, synergies from the partnership are not likely to boost fundamentals in the near term.

However, macroeconomic weakness, competition from Xilinx Inc. (XLNX - Analyst Report) and Lattice Semiconductor Corporation, consolidation in the telecom market, declining margins and volatility in the semiconductor market are concerns.

Currently, Altera holds a Zacks Rank #3 (Hold).

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