Shares of Altera Corporation (ALTR) went down 3.7% in after-hours trading yesterday after the company provided a tepid fourth-quarter revenue guidance.
The company reported earnings of 38 cents per share in the third-quarter of 2014, which beat the Zacks Consensus Estimate by a penny. Earnings also increased from 37 cents reported in the year-ago quarter, primarily due to a higher revenue base and lower share count.
Revenues
Altera’s third-quarter revenues not only increased 12% on a year-over-year basis to $499.6 million, but also came ahead of the Zacks Consensus Estimate of $491 million.
The year-over-year increase was mainly attributable to growth in new product revenues (56% of total revenue), which increased 45% year over year and offset a 13% decline in mainstream revenues and a 14% decline in Mature and Other markets. New product revenues were primarily driven by robust performance in its 28nm process node.
Revenues from FPGA (85% of total revenue) increased 17% on a year-over-year basis. Revenues from CPLD and other products constituted 8% and 7% of total revenue, which decreased 10% and 7%, respectively.
By verticals, all except the Networking, Computer & Storage (16% of total revenue) increased on a year-over-year basis. The Networking, Computer & Storage segment witnessed a decline of 5%. Telecom & Wireless (45% of total revenue) increased 23% from the year-ago quarter. Industrial Automation and Military & Automotive markets, which comprised 21% of third-quarter revenues, increased 3% from the year-ago quarter. The Other segment (18% of total revenue) increased 18% from the year-ago period.
By geography, Asia Pacific increased 20% on a year-over-year basis, whereas revenues from EMEA and Americas increased 15% and 1%, respectively. However, revenues from Japan decreased 1% on a year-over-year basis.
Operating Results
Altera reported gross margin of 66.8%, which was down 149 basis points (bps) from the year-ago quarter, primarily due to an unfavorable product mix and higher cost of sales.
Operating margin came in at 28.3%, down from 28.8% in the year-ago quarter. Total operating expenses increased 9.2% year over year, reflecting a 17.6% rise in research and development expenses, which in turn impacted quarterly operating margins. As a percentage of revenues, operating expenses contracted 101 bps to 38.5% from the year-ago quarter.
Reported net income was $118 million or 38 cents per share compared with $119.4 million or 37 cents per share in the third quarter of 2013. Including loss on securities and gain from the reclassification, net income was $113 million compared with $121.8 million in the year-ago quarter.
Balance Sheet & Cash Flow
Altera exited the quarter with cash and short-term investments balance of $2.81 billion, flat on a quarterly basis. Long-term debt amounted to $1.49 billion. The company generated cash flow from operating activities of $515.4 million.
During the quarter, Altera repurchased approximately 4.2 million shares at a cost of $144 million and announced a cash dividend of 18 cents to be paid on Dec 1, 2014.
Guidance
Altera expects sales to decrease in the range of 2% to 6%, sequentially amounting to $469.6 million to $489.6 million in the fourth quarter (mid-point $479.6 million). The weak guidance was primarily due to lower-than-expected sales from the telecom and wireless segment. The Zacks Consensus Estimate is pegged at $487 million. However, the company is positive about its 28-nanometer revenues in the forthcoming quarter.
Management expects revenues from Wireless to be flat, sequentially. Better-than-expected China-based FTD-LTE shipments and demand for 3G and 4G will offset the decline in China TD-LTE shipments.
Industrial Automation, Military & Automotive revenues are also expected to be flat, sequentially. Networking, Computer & Storage revenues are expected to decrease quarter over quarter.
Management projects gross margin of approximately 66.5% in the fourth quarter. Research and development expenses are expected in the range of $111 million to $113 million, while selling, general and administrative expenses will likely range between $78 million and $80 million. Tax rate is expected in a range of 12% to 13%.
Our Take
Altera has delivered better-than-expected third-quarter 2014 results. Both revenues and earnings increased on a year-over-year basis, primarily aided by strong growth in its 28nm process node and higher growth in its FPGA solutions. However, the company provided a tepid fourth-quarter revenue guidance.
Nonetheless, growth in 3G and 4G/LTE deployments in particular will increase demand for FPGAs, which will be beneficial for Altera. Additionally, Altera’s transition to 14nm FPGAs in association with Intel Corp. (INTC) is likely to be a competitive differentiator.
Altera is currently manufacturing its chips using 28-nanometer nodes. We believe that the deployment will help Altera to 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 concerns
Currently, Altera has a Zacks Rank #3 (Hold).
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