Altera Misses, Stays a Buy

Altera Corp: Q1 EPS Falls Short of Expectation

Shares of Altera Corp. (ALTR - Analyst Report, Buy) are weaker in late-morning trading today following its release of fiscal Q1 results yesterday. EPS of $0.15 came in a penny shy of our estimate, while revenues of $264.6 million were higher than our expectation of $254 million, driven mainly by 3G buildouts in China. The company anticipates China to play a major role as a potentially growing target market, particularly in its 40 nm FPGA sales, although the road ahead could be bumpy.

In terms of end markets, Telecom and Wireless accounted for 46% of the total revenues, up 2% sequentially and up 6% year over year, driven by the previously announced $42 billion spend by China's three communications carriers through 2010. 2G and 3G deployments in Asia continue to drive momentum.

Networking computer and storage decreased 14%. Industrial military and automotive decreased 30% and the Other category was down 33%. In terms of product segment, new products were down 8% sequentially.

Gross margin declined to 64.5% from 65.1% generated in the corresponding quarter of last year, and down from 69.2% in the previous quarter. The company experienced a more pronounced pull-back in its highest margin segments than it had expected. Operating margin came in at 19.5% compared to 27.4% in the previous quarter and 28.1% in the previous quarter. This was also well below the company’s historical range of 22% - 23%. On a GAAP basis, net income came in at $43.9 million or $0.15 per diluted share compared to a net income of $83.0 million or $0.28 per diluted share in the previous quarter.

Going forward, management expects revenues to grow 2% - 7% sequentially in Q2 as most of the markets have stabilized and wireless revenues continue to grow. ALTR entered the first quarter with a book-to-bill ratio above 1. Telecom and wireless should increase on continued 2G and 3G network builds in Asia. Management expects automotive, industrial and military to grow driven by solid growth in military. Computer storage and networking and other are estimated to decline.

During the quarter, the company generated $43.9 million of cash from operating activities and used $4.5 million in capital expenditures. ALTR ended the first quarter with cash and equivalents of $1.23 billion.

We continue our coverage of ALTR with a Buy rating.