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Altera Corporation (ALTR - Analyst Report) reported earnings of 37 cents per share in the fourth quarter of 2012, which missed the Zacks Consensus Estimate by 2 cents.

The quarter’s miss and a weak guidance resulted in a 6.2% decline in share price in after-hours trading.

Revenues

Altera reported total revenue of $439.4 million in the fourth quarter, down 4.0% year over. The quarter’s revenue came below the Zacks Consensus Estimate of $451.0 million but was better than management’s sequential decline guidance of 6.0% – 10%. Weak sales of mainstream and mature products outweighed strong new product sales.

Geographically, all regions posted year-over-year declines, barring Europe, Middle East & Africa region. The revenue improvement in Europe was mainly due to a major customer win. On an end-market basis; automotive, broadcast, military and networking fell double digits on a percentage basis. Contributions from Telecom and Wireless end market and Computer and Storage end market remained flat year over year.

Operating Results

Gross margin came in at 69.7%, down from 70.1% in the year-ago quarter and slightly below management’s guidance. This was primarily due to unfavorable customer mix in the wireless and wireline markets. Operating margin came in at 31.4%, down from 35.0% in the year-ago quarter. Total operating expenses grew 1.3% year over year, reflecting modest cost reduction initiatives.

Reported net income was $120.8 million or 37 cents per share compared with $146.6 million or 45 cents per share in the fourth quarter of 2011.

Balance Sheet & Cash Flow

Altera exited the quarter with a cash and short-term investment balance of $3.02 billion and operating cash of $126.7 million. Capital expenditure was $7.2 million.

Altera repurchased 1.6 million shares in the quarter for $50.0 million. The company also declared a quarterly dividend of 10 cents per share, which will be paid on Mar 1 to stockholders of record as of Feb 11.

Guidance

Altera expects sales to be down 4% – 8% sequentially in the first quarter of 2013, primarily due to continuous weak performances across end markets and a Vendor Managed Inventory (VMI) arrangement signed with one of the customers. Under this arrangement, Altera could only replenish the customer’s stock after its exhaustion. The procedure, though beneficial for both the parties, will delay revenue recognition.

Altera continues to see traction in the 28-nanometer as well as 40-nanometer nodes.

Management projects gross margin of 69% – 70% in the first quarter, roughly in line with the fourth quarter.

Conclusion

Altera has delivered disappointing fourth quarter 2013 results with EPS and revenue missing the Zacks Consensus Estimates. Broad-based revenue weaknesses were noticed across the end markets and geographical regions. Guidance was disappointing. The only positive was strong sales of new products, which however will be not enough to give the fundamentals a boost in the near term.

Last week, Altera’s archrival Xilinx Inc. (XLNX - Analyst Report) reported modest results for the third quarter of fiscal 2013 and provided a better guidance for the fourth quarter citing higher revenues from all geographic regions and better demand situation for its 28NM node products.

Currently, Altera holds a Zacks Rank #5 (Strong Sell). Not all semiconductor stocks are performing as poorly as Altera. We recommend Atmel Corp. (ATML - Analyst Report) and Diodes Inc. (DIOD - Snapshot Report), which have a Zacks Rank #1 (Strong Buy).

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