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Bellwether fabless semiconductor company Altera Corp. (ALTR - Analyst Report) went a step ahead to focus on an advanced version of FPGA (Field-Programmable Gate Arrays) chips. For this transition into high-end high performance next-generation chips, Altera is collaborating with the chip giant Intel Corp. (INTC - Analyst Report).

So far, the chip maker has used its facilities for its own processors. Signing Altera as its first foundry customer will allow it to grow its foundry chip business and make a successful strategic shift in its business model.

According to the agreement, Intel will be making chips for Altera using its 14 nanometer (nm) trigate transistor technology. Altera is currently manufacturing its chips at the 45nm, 40nm and 28nm nodes. Intel’s technology will help it to make a smooth transition to 14nm FPGA production. Altera remains on track to launch its 20nm FPGA product suites as planned.

Altera believes that the 14nm offerings will be suitable for high-performance systems used in military, wireline communications, cloud networking, and computing and storage applications.

An FPGA is a semiconductor programmable logic device (PLD) that can be programmed by the customers/original equipment manufacturers (OEM) after manufacturing. The flexible nature of the FPGA is preferred by many customers over the low-cost, fixed-function ASICs (application-specific integrated circuits).

Altera earns the largest share of its revenues from FPGA products. It is also evident that the company’s revenue growth is led by its new products. Hence, we are positive on Altera’s decision to shift to Intel-powered 14nm FPGA product suites as this would give its revenue stream a boost, going forward.

With the transition, Altera would be in a favorable position against its archrival Xilinx Inc. (XLNX - Analyst Report). The agreement between Altera and Intel requires Intel to consider Altera as the prime consumer of its 14 nm FPGAs. Hence, it will be difficult for Xilinx to adopt Intel’s technology to match its rival’s offerings.

In a separate development, Altera announced that it will be continuing its long-term relationship with its foundry partner Taiwan Semiconductor Manufacturing Company (TSM - Snapshot Report), which will continue to work on developing advanced FPGA offerings. Currently, TSMC is working on Altera’s yet-to-be announced 20 nm product suites.

Despite prospects in the FPGA space and a favorable position in the PLD market, some basic problems (longer sales cycle, volatility in the semiconductor market, a soft telecom market and declining margins) keep us concerned about Altera. The company delivered disappointing fourth quarter 2012 results with earnings per share (EPS) and revenues missing the Zacks Consensus Estimates. It also provided a soft first quarter 2013 outlook.

The association with Intel is not going to drive its near term results. Hence, Altera currently has a Zacks Rank #5 (Strong Sell).

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