Altera (ALTR) Beats Q2 Earnings and Revenues; Down Y/Y

Altera Corporation ALTR reported decent results for second-quarter 2015 wherein the top line and the bottom line surpassed the respective Zacks Consensus Estimate but declined year over year.

Altera's second-quarter adjusted earnings of 27 cents per share surpassed the Zacks Consensus Estimate by a couple of cents but plunged 34.1% year over year. On a GAAP basis, the reported earnings of 23 cents per share declined from 41 cents posted a year ago mainly due to lower revenue base and higher operating expenses.

Revenues

Altera's second-quarter revenues decreased 15.7% on a year-over-year basis to $414.2 million. The decline was mainly due to weak performance by the telecom and wireless business resulting from capital spending delays across some of the developed and developing countries.

In terms of product category, New Product revenues (53% of second-quarter total revenue) declined 14% year over year, while Mainstream (23%) and Mature and Other markets (24%) revenues went down 11% and 22%, respectively.

On a year-over-year basis, revenues from FPGA (83% of second-quarter total revenue) decreased 17%, revenues from CPLD (11%) increased 11% year over year and the same from. Other product (6%) declined 31%.

By verticals, Telecom & Wireless (31%) decreased 44% from the year-ago quarter.  On the other hand, Industrial Automation and Military & Automotive markets revenues (27%) increased 10% year over year, Networking, Computer & Storage (18%) increased 4%, while Other segment revenues (24%) went up 11% from second-quarter 2014.

By geography, revenues from the Americas region increased 6% on a year-over-year basis, whereas the same from the EMEA, Asia Pacific and Japan regions decreased 18%, 17% and 28%, respectively.

Operating Results

Altera reported gross margin of 69.4%, up 240 basis points (bps) from the year-ago quarter primarily backed by better product mix.

Total operating expenses were up 10.2% from the year-ago quarter to $201.2 million. As a percentage of revenues, operating expenses increased to 48.6% from 37.1% in the year-ago quarter.

This, in turn, negatively impacted Altera's quarterly operating margin, which came in at 20.8%, down 900 bps year over year from 29.8%. Reported net income was $70.3 million compared with $127 million a year ago.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $2.07 billion, lower than the previous-quarter level of $2.38 billion. Long-term debt amounted to $1.49 billion, flat sequentially. During the first six months of 2015, the company generated cash flow from operating activities of $225.9 million compared with $301.4 million in the comparable year-ago period.

Furthermore, concurrent with its earnings release, Altera announced a cash dividend of 18 cents to be paid on Sep 1, 2015 to shareholders of record as on Aug 10.

Our Take

Altera's results for second-quarter 2015 were better than expected but declined year over year. The decline was mainly due to weak performance by the company's telecom and wireless business resulting from capital equipment delays from carriers in developed as well as some developing countries.

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-nanometer (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 should support the 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 #3 (Hold).

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