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Earnings Scorecard: Altera Corp

ALTR XLNX

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Earnings estimates for chipmaker Altera Corporation (ALTR - Analyst Report) have declined significantly after the company provided soft guidance for the fourth quarter of 2012 despite reporting better-than-expected results in the third quarter. 
 
Altera 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.
 
Altera reported sales of $495.0 million in the third quarter of 2012, down 5% year over year but up 6% sequentially. 
 
Guidance in Detail 
 
However, Altera expects sales to be down 6% – 10% sequentially in the fourth quarter of 2012. This implies a revenue guidance of $445.5 million – $465.3 million.
 
The weak guidance prompted the majority of the analysts covering the stock to lower their estimates for 2012 and 2013. 
 
For 2012, as many as 20 out of 21 analysts have reduced their forecast leading to a 5 cent decline in earnings estimates. 
 
For 2013, the decline is steeper as 19 out of the 21 analysts have lowered their projections, leading to a 24 cent decline in the earnings estimates. 
 
For the fourth quarter of 2012, 19 out of the 21 analysts cut their estimates, leading to an 8 cent decline in earnings estimates. 
 
Management attributed the weakness in guidance to lower demand from two prime customers. 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.
 
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 projected a sequential decline of 1% to 5%, driven by the overall weak economic environment impacting all major market segments. Management projects gross margin of 69% – 70% in the fourth quarter, roughly in line with the third quarter. 
 
Our Take 
 
Altera and its prime rival Xilinx, Inc (XLNX - Analyst Report) together hold nearly 87% of the PLD market. However, Xilinx seems to have gained traction and has won back its lost market share over the past few months. This does not bode well for Altera in the coming quarters.
 
Margins have already peaked and it might not be sustainable in the long run. Hence, owing to the macroeconomic weakness, we downgrade our recommendation to Underperform from Neutral. 
 
Our Underperform recommendation is supported by a Zacks #4 Rank, which translates into a short-term rating of Sell. 

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