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Altera Corporation (ALTR - Analyst Report) reported earnings of 41 cents per share in the second-quarter of 2014, which beat the Zacks Consensus Estimate of 37 cents. Earnings also increased 29.1% on a year-over-year basis, primarily due to a higher revenue base and lower share count.

 


Revenues

Altera’s second-quarter revenues not only increased 16.5% on a year-over-year basis to $491.5 million, but also came ahead of the Zacks Consensus Estimate of $479.0 million.

The year-over-year increase was mainly attributable to growth in new product revenues (53.0% of total revenue), which increased 53.0% year over year and offset the 11.0% decline in mainstream revenues and a 5.0% decline in Mature and Other markets. New product revenues were primarily driven by robust performance in its 28-nm process node and 40-nm products.

Revenues from FPGA (84.0% of total revenue) increased 18.0% on a year-over-year basis. Revenues from CPLD and other products, which constitute 8.0% of total revenue each, increased 7.0% and 12.0%, respectively.

By verticals, all except the Networking, Computer & Storage (15.0% of total revenue) increased on a year-over-year basis. The Networking, Computer & Storage segment witnessed a decline of 6.0%. Telecom & Wireless (46.0% of total revenue) increased 28.0% from the year-ago quarter, primarily due to LTE deployments in the U.S., Europe, South Korea and Japan, and China Mobile LTE deployment. Industrial Automation and Military & Automotive markets, which comprised 21.0% of second-quarter revenues, increased 14.0% from the year-ago quarter. Other segment (18.0% of total revenue) increased 16.0% from the year-ago period.

By geography, Asia Pacific grew 28.0% on a year-over-year basis, whereas revenues from EMEA and Americas increased 13.0% and 9.0%, respectively. Revenues from Japan increased 3.0% on a year-over-year basis

Operating Results

Altera reported gross margin of 66.9%, which was down 101 basis points (bps) from the year-ago quarter, primarily due to an unfavorable product mix.

Operating margin came in at 29.8%, up from 26.6% in the year-ago quarter. Total operating expenses increased 4.7% year over year, reflecting a 5.9% rise in research and development expenses and a 1.4% increase in selling, general, and administrative expense. As a percentage of revenues, operating expenses contracted 418 bps to 37.1% from the year-ago quarter, which favorably impacted margins.

Reported net income was $127.0 million or 41 cents per share compared with $101.5 million or 31 cents per share in the second quarter of 2013. Including gain on securities and gain from the reclassification, net income was $141.4 million compared with $92.4 million in the year-ago quarter.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $2.81 billion compared with $2.91 billion in the previous quarter. Long-term debt amounted to $1.49 billion. The company generated cash flow from operating activities of $301.4 million.

During the quarter, Altera repurchased approximately 6.0 million shares at a cost of $197.0 million and announced a cash dividend of 18 cents to be paid on Sep 2, 2014.
 
Guidance

Altera expects sales to increase in the range of (2.0%) to 2.0%, sequentially ($481.7 million to $501.3 million) in the third quarter. The Zacks Consensus Estimate is pegged at $481.0 million. Also, the company is positive about its 28-nanometer revenues in the forthcoming quarter.

Management expects revenues from Telecom & Wireless to be flat, sequentially. Industrial Automation, Military & Automotive revenues are also expected to be flat, sequentially. However, Networking, Computer & Storage revenues are expected to increase quarter over quarter.

Management projects gross margin of roughly 67.0% in the third quarter. Research and development expenses are expected in the range of $114.0 million to $116.0 million, while selling, general and administrative expenses will likely range between $78.0 million and $80.0 million. Tax rate is expected in a range of 11.0% to 12.0%.

Our Take

Altera has delivered better-than-expected second-quarter 2014 results. Both revenues and earnings increased on a year-over-year basis, primarily aided by strong growth in its 28nm process node and constant development from its 40 nm products. Moreover, the company provided an encouraging third-quarter revenue guidance.
 
Also, growth in 4G/LTE deployments in particular will increase demand for FPGAs, which will be beneficial for Altera. Additionally, Altera’s transition to 14nm FPGAs in association with Intel Corp. (INTC - Analyst Report) is likely to be a competitive differentiator.

Altera is currently manufacturing its chips using 28-nanometer nodes. We believe that the deployment will help Altera to strengthen its product portfolio and offer more comprehensive and high-value programmable solutions.

Moreover, the continued share buybacks are expected to support the company’s bottom line, going forward.

However, 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 #2 (Buy).

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