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Altera Corporation (ALTR - Analyst Report) reported a net income of $157.5 million or 49 cents per share in the third quarter of 2012, easily beating the Zacks Consensus Estimate of 46 cents per share.
 
However, the reported net income compares unfavorably with $162.7 million or 50 cents per diluted share in the second quarter of 2012 and a net income of $185.4 million or 57 cents per share in the third quarter of 2011. 
Altera reported sales of $495.0 million in the third quarter of 2012, down 5% year over year but up 6% sequentially. 
 
Reported revenues, however, came in toward the higher end of management’s sequential growth guidance of 2% – 6%. 
 
On an end-market basis; automotive, broadcast, military and networking grew double digits on a percentage basis.
 
Altera posted healthy growth in both its new and mainstream product categories, which increased 8% and 13%, respectively. Revenue at the 40-nanometer node increased by 8% and continues to be the single largest revenue node for the second straight quarter.
 
Revenue for the 28-nanometer node more than doubled to $18.1 million but was short of management’s target of $20 million. Altera had over $4 million worth 28-nanometer demand, which could not be shipped due to product mix.   
Book-to-bill remained below one in the third quarter as well. 
 
Gross margin came in at 69.3%, down from 69.6% in the previous quarter and 68.0% in the year-ago quarter and below management’s guidance. This was primarily due to the unfavorable customer mix in the wireless and wireline market. Operating margin came in at 35.8%, up from 34.3% in the previous quarter but down from 39.3% in the year-ago quarter.
 
During the quarter, the company's board declared a quarterly dividend of 10 cents per share, which will be paid on December 3, 2012 to stockholders of record as of November 13, 2012.
 
During the quarter, Altera repurchased 1.6 million shares in the quarter for $50.0 million. Altera ended the quarter with $2.8 billion in cash and investments, down from $3.3 billion at the end of December 2011. 
 
Altera expects sales to be down 6% – 10% sequentially in the fourth quarter of 2012, primarily due to lower demand from two prime customers. This implies a revenue guidance of $445.5 million – $465.3 million.
 
One customer in the mainstream category products converted a high-volume design last year to an ASIC but recently discovered a technical limitation in the device which required the customer to fill the gap with product from Altera in the third quarter.
 
Altera continues to see traction in the 28-nanometer node and expects revenue from this node to exceed $20 million in the third quarter. Revenue from 40-nanometer node is expected to grow again sequentially. 
 
The second customer has converted 2 high-volume designs, one in networking and one in wireless, both mainstream products from Altera to ASICs, amounting to approximately 4% of revenue in the third quarter. 
 
Excluding these conversions, Altera would have expected a sequential decline of 1% to 5%, driven by the overall weak economic environment impacting all major market segments. 
 
Nevertheless, the loss of 2 designs to ASICs at the company’s largest customer has been partially offset by market share gains with other customers. 
 
Management projects gross margin of 69% – 70% in the fourth quarter, roughly in line with the third quarter. 
 
The weak guidance drove a 2.15% decline in share price in after-hours trading to close at $31.92. In regular trading, shares were down 0.91% to close at $32.62.
 
Last week, prime rival, Xilinx, Inc, (XLNX - Analyst Report) also reported better-than-expected results for the second quarter of fiscal 2013 but provided a weak guidance for the December quarter due to continued macroeconomic uncertainty.
 
We continue to maintain a Neutral recommendation on Altera. Our long-term recommendation is supported by a Zacks #3 Rank, which translates into a short-term rating of Hold. 

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