Altera Meets Expectations

Altera Corporation (ALTR - Analyst Report) reported sales of $286.6 million, down 20% from a year ago but up 3% sequentially and in line with the management’s revised guidance provided last month. New products grew 7% sequentially. Sales of 40 nm devices tripled sequentially as the company won record results.

Last month Altera upgraded its guidance, driven by broad-based improvement across all market segments except telecom and wireless. Management stated that business conditions improved steadily during the quarter and most markets performed better than expected due to a combination of new program ramps, improved end-market demand and an increase in customer orders due to inventory depletion.

Gross margin came in at 67.3% compared to 67.1% in the year-ago quarter, but improved from 66.4% in the previous quarter driven by a favorable product mix along with improved yields on some of the new products. Operating margin came in at 23.2% compared to 24.0% in the previous quarter and 30.8% in the year-ago quarter.

Net income came in at $56.7 million, up 19.6% sequentially but declined 40.1% year over year. Earnings per share (EPS) came in at 19 cents, in line with the Zacks Consensus Estimate.

Going forward, management guided revenues to grow by 6% - 10% sequentially in the fourth quarter of 2009 as demand improves in most end-markets. Gross margin is expected around 67% - 68%, slightly up from the third quarter as the company realizes a full quarter margin benefit from the recently undertaken cost-cutting activities (primarily workforce reduction).

Demand from telecom and wireless markets is expected to increase, driven by broad geographic deployments which includes China, Japan and North America. Management expects networking, computer and storage to be slightly down due to program timing. Strong growth is expected from automotive, industrial and military markets as well.

Altera is a leading supplier of programmable chips and related products to communications and other industries. The company primarily competes with Xilinx Inc. (XLNX - Analyst Report) in this space.

We think Altera is well positioned to capitalize on the eventual recovery of the markets with its strong design wins. Business sentiment has improved significantly among the semiconductor companies after months of inventory correction. We maintain our Neutral rating on the stock.

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