Leading analog semiconductor manufacturer Avago Technologies Limited AVGO recorded strong second-quarter fiscal 2015 results (ended May 3, 2015) with substantial year-over-year improvements in revenue and adjusted earnings on the back of accretive LSI Corporation and PLX Technology Inc. acquisitions.
Avago reported second-quarter fiscal 2015 adjusted earnings of $1.96 per share, which comfortably exceeded the Zacks Consensus Estimate of $1.83. The better-than-expected adjusted earnings for the reported quarter were primarily attributable to significant top-line growth.
GAAP earnings for second-quarter fiscal 2015 were $344 million or $1.21 per share compared with $158 million or 61 cents per share in the year-earlier quarter. The over two fold year-over-year increase in earnings was led by higher revenues. Non-GAAP earnings for the reported quarter were $620 million or $2.13 per share compared with $223 million or 85 cents per share in the year-ago period.
Quarter Details
Although total quarterly GAAP revenue increased 130.2% year over year to $1,614 million, it marginally fell short of the Zacks Consensus Estimate of $1,621 million. The upsurge in revenues was led by synergies from LSI and PLX, and strength across all the end markets.
By segments, revenues from Wireless Communications accounted for 36% of the total revenue and increased 66% year over year to $576 million. Avago achieved high penetration levels with Chinese OEMs on the back of its industry-leading film bulk acoustic resonator (FBAR) technology and healthy demand from a smartphone OEM in North America.
Revenues from Wired Infrastructure represented 23% of the total revenue and improved 74% year over year to $382 million. Revenue growth was primarily due to strong demand from enterprise networking features and service provider routers. Avago generated 12% of its revenues from the Industrial & Other market. Buoyed by resurgence in demand in Asia, year-over-year sales were up 41% in this target market to $189 million.
Quarterly revenues from Enterprise Storage, a new end market for Avago dealing with LSI's hard disk drive and service storage connectivity product lines, accounted for 29% of the total revenue at $467 million.
Non-GAAP gross margin for the reported quarter improved to 61% of net revenue ($998 million) from 54% in the year-ago quarter. Operating income from continuing operations (non-GAAP) was $701 million in second-quarter fiscal 2015, considerably up from $233 million in the same quarter last year.
Broadcom Acquisition Announcement
Concurrent with the earnings release, Avago announced the acquisition of rival Broadcom Corp. BRCM for $17 billion in cash and equity valued at approximately $20 billion as of May 27, 2015 for a total consideration of $37 billion. The deal is arguably the largest of its kind in the semiconductor chip industry and would create a behemoth with one of the most diversified communications platforms in the semiconductor industry at combined annual revenues of approximately $15 billion.
Although there is little product overlap between the two companies, Avago’s interest in Broadcom signifies that it is now venturing into a business category. The semiconductor chip industry is also witnessing sluggish growth despite healthy strides in the digital and telecommunications markets. (Read: Avago to Snap Up Broadcom: Grand Merger in the Cards?) Synergistic benefits from the merger are likely to increase profitability through economies of scale and mutual sharing of manufacturing expertise, research and development costs and adjustment of staffing expenses. The transaction will likely result in $750 million of annual cost synergies within the first 18 months of operation and is expected to be immediately accretive to non-GAAP earnings and free cash flow.
Cash Flow & Balance Sheet
Avago generated $663 million in cash from operations in the reported quarter compared with $251 million in the prior-year period. Capital expenditures were relatively high at $177 million, up from $73 million in the year-earlier quarter owing to higher spending on the FBAR capacity ramp up.
At quarter end, Avago had $2,508 million in cash with long-term debt of $3,926 million. During the quarter, the company paid a dividend of 38 cents per share, which represents a sequential and a year-over-year increase of 3 cents and 11 cents, respectively. Avago has continuously increased the quarterly dividend since its inception.
Guidance
Along with the quarterly results, Avago provided guidance for third-quarter fiscal 2015, based on the current market conditions. GAAP revenue is expected to be approximately $1,729 million, while gross margin is projected at about 49.5%. Operating expenses are estimated to be approximately $513 million. Capital expenditures are expected to be approximately $160 million.
The guidance includes contribution from the acquisition of Emulex Corporation completed in early May. Emulex complements Avago's enterprise storage capabilities, and boosts its strategy to support next-generation server and storage architectures.
We are encouraged by the strong quarterly results of this Zacks Rank #2 (Buy) stock. In addition, the acquisition of Broadcom is likely to script a new era in the history of the company, redefining the dynamics of the semiconductor industry. Some other better-ranked companies in the industry include CEVA Inc. CEVA and Cirrus Logic Inc. CRUS, both carrying a Zacks Rank #1 (Strong Buy).
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