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Altera Corporation (ALTR - Analyst Report) reported earnings of 31 cents per share in the fourth quarter of 2013, which beat the Zacks Consensus Estimate by a penny. However, on a year-over-year basis, earnings dropped 18.1% primarily due to higher operating expenses.

Revenues

Altera’s fourth-quarter revenues not only increased 3.4% on a year-over-year basis to $454.4 million, but also came ahead of the Zacks Consensus Estimate of $442.0 million.

The year-over-year increase was mainly attributable to growth in new product revenues (47.0% of total revenue), which increased 26.0% year over year and offset the 13.0% and 9.0% decline in mainstream and mature product revenues, respectively.

By verticals, all except the Telecom & Wireless segment (40.0% of total revenue) increased on a year-over-year basis. The Telecom & Wireless segment witnessed a decline of 6.0%. Industrial Automation and Military & Automotive markets increased 10.0% from the year-ago quarter. Networking and Computer & Storage segments increased double-digits from the year-ago period and were relatively consistent with the year-ago quarter.

By geography, Japan grew 20.0% on a year-over-year basis, whereas Asia/Pacific and Americas posted modest increase of 8.0% and 1.0%, respectively. On the other hand revenues from EMEA declined 10.0%.

Operating Results

Altera reported gross margin of 68.3%, which was down 135 basis points from the year-ago quarter primarily due to unfavorable product mix.

Operating margin came in at 25.8%, down from 31.4% in the year-ago quarter. Total operating expenses grew 14.9% year over year, reflecting a 14.4% growth in sales and marketing expenses and a 13.5% increase in research and development expenses.

Reported net income was $98.9 million or 31 cents per share compared with $120.8 million or 37 cents per share in the fourth quarter of 2012. Including gain on securities and gain from the reclassification, net income was $72.1 million compared with $121.8 in the year-ago quarter.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $3.01 billion compared with $2.96 billion in the previous quarter. The company’s year-to-date cash flow from operating activities was $590.2 million.

Guidance

Altera expects sales to increase in the range of (2%) to 6% sequentially in the first quarter of 2014. Management expects revenues from Telecom & Wireless to be up with wireless revenues increasing sharply, primarily due to China LTE shipments. This is expected to more than offset the decline in telecom revenues. Industrial Automation, Military & Automotive revenues are expected to remain flat, sequentially.

Management projects gross margin of roughly 68.0% in the first quarter. Research and development expenses are expected in the range of $100.0 million to $102.0 million, while selling, general and administrative expenses will likely range between $75.0 million and $77.0 million. Tax rate is expected in a range of 12.0% to 13.0%.

Our Take

Altera has delivered encouraging fourth-quarter 2013 results with both earnings and revenues beating the Zacks Consensus Estimate. Although revenues increased year over year, earnings dropped sharply.  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.

Moreover, macroeconomic weakness, competition from Xilinx Inc. (XLNX - Analyst Report) and Lattice Semiconductor Corporation (LSCC - Snapshot Report), 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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