Altera Corporation’s (ALTR) fourth-quarter 2014 earnings of 36 cents per share increased 16.1% from the year-ago quarter and came a penny ahead of the Zacks Consensus Estimate. The year-over-year earnings growth was mainly driven by higher revenue base and lower share count.
However, shares of this semiconductor maker dipped nearly 2% in after-hours trading as the company’s revenues fell short of the Zacks Consensus Estimate. Additionally, a soft revenue outlook for the first quarter of 2015 hurt investor’s sentiments.
Revenues
Altera’s fourth-quarter revenues increased 5.6% on a year-over-year basis to $479.9 million, but missed the Zacks Consensus Estimate of $482 million.
The year-over-year increase was mainly attributable to growth in new product revenues (59% of total revenue), which increased 32% year over year and offset a 20% decline in mainstream revenues and 17% decline in Mature and Other markets. New product revenues were primarily driven by robust performance in its 28-nanometer (nm) process node.
Revenues from FPGA (84% of total revenue) increased 7% on a year-over-year basis. Revenues from CPLD constituted 8% of total revenue, which decreased 3% year over year. Other product revenues inched up 1% and accounted for 8% of total revenue.
By verticals, all except the Networking, Computer & Storage (16% of total revenue) increased on a year-over-year basis. The Networking, Computer & Storage segment declined 11%. Telecom & Wireless (42%) increased 10% from the year-ago quarter. Industrial Automation and Military & Automotive markets revenues (22%) increased 7% year over year. The Other segment revenues (20%) increased 13% from the year-ago period.
By geography, revenues from EMEA and Asia Pacific regions increased 29% and 7%, respectively, on a year-over-year basis, whereas the same from the Americas and Japan regions decreased 13% and 12%, respectively.
Operating Results
Altera reported gross margin of 65%, which was down 330 basis points (bps) from the year-ago quarter, primarily due to an unfavorable product mix and higher cost of sales.
However, the company was successful in managing operating expenses. Total operating expenses were down 1.2% from the year-ago quarter to $190.8 million reflecting a decline of 4.3% in selling, general and administrative expenses. As a percentage of revenues, operating expenses decreased 270 bps to 39.8% from the year-ago quarter’s level of 42.5%.
This, in turn, positively impacted the company’s quarterly operating margin by partially offsetting the contraction in gross margin. Altera’s operating margin came at 25.2%, 60 bps lower than the prior-year period operating margin of 25.8%.
Reported net income was $111.1 million or 36 cents per share compared with $98.9 million or 31 cents per share in the fourth quarter of 2013.
Balance Sheet & Cash Flow
Altera exited 2014 with cash and short-term investments balance of $2.58 billion, lower than the year-ago level of $3 billion. Long-term debt amounted to $1.49 billion, flat with the previous fiscal year. The company generated cash flow from operating activities of $666.2 million in fiscal 2014 compared with $590.2 million in fiscal 2013.
During the quarter, Altera repurchased approximately 4.3 million shares for $151.5 million, Furthermore, concurrent with its earnings release, Altera announced a cash dividend of 18 cents to be paid on Mar 2, 2015 to shareholders of record as on Feb 10.
Guidance
Altera expects first-quarter 2015 sales in the range of flat to down 4%, sequentially. In dollar terms, it translates to a range of $460.7 to $479.9 million (mid-point $470.3 million). The weak guidance was primarily due to expectation of lower-than-expected sales from the telecom, military and industrial segments. However, management expects revenues from Wireless to increase sequentially. The Zacks Consensus Estimate is pegged at $488 million. The company is positive about its 28-nm revenues for the forthcoming quarter.
Management projects gross margin of approximately 65% in the first quarter. Research and development expenses are expected in the range of $112 to $116 million, while selling, general and administrative expenses will likely range between $76 million and $80 million. Tax rate is expected within 13% to 14%.
Our Take
Altera has posted mixed fourth-quarter 2014 results wherein its bottom line beat the Zacks Consensus Estimate but top line missed the same. The company’s earnings and revenues improved year over year, primarily aided by strong growth in its 28-nm process node and higher growth in its FPGA solutions.
However, the company provided tepid first-quarter 2015 revenue guidance due to expectation of lower-than-planned sales from the telecom, military and industrial segments.
Nonetheless, growth in 3G and 4G/LTE deployments in particular will increase the demand for FPGAs, which will be beneficial for Altera. Additionally, the company’s transition to 14-nm FPGAs in association with Intel Corp. (INTC) is likely to be a competitive differentiator.
Altera is currently manufacturing its chips using 28-nm nodes. We believe that the deployment will strengthen its product portfolio and offer more comprehensive and high-value programmable solutions.
Moreover, the continued share buybacks are expected to support the company’s bottom line, going forward.
However, macroeconomic weakness, competition from Xilinx Inc. (XLNX) and Lattice Semiconductor Corporation (LSCC), consolidation in the telecom market, declining margins and volatility in the semiconductor market are the concerns.
Currently, Altera has a Zacks Rank #2 (Buy).
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