Altera's Q1 Earnings & Revs Beat Estimates - Analyst Blog

Altera Corporation ALTR reported earnings of 37 cents per share in the first quarter of 2014, which beat the Zacks Consensus Estimate of 32 cents. Earnings remained relatively flat on a year-over-year basis, primarily due to lower-than-expected operating expenses.

Revenues

Altera's first-quarter revenues not only increased 12.3% on a year-over-year basis to $461.1 million, but also came ahead of the Zacks Consensus Estimate of $439.0 million.

The year-over-year increase was mainly attributable to growth in new product revenues (49.0% of total revenue), which increased 39.0% year over year and offset the 12.0% decline in mainstream revenues.

By verticals, all except the Networking, Computer & Storage (15.0% of total revenue) increased on a year-over-year basis. The Networking, Computer & Storage segment witnessed a decline of 7.0%, primarily due to weaker-than-expected demand for computers and tepid demand from vendors of flash-based storage systems. Telecom & Wireless (45.0% of total revenue) increased 23.0% from the year-ago quarter, primarily due to LTE deployment in China. Industrial Automation and Military & Automotive markets, which comprised of 22% of first quarter revenues, increased 13.0% from the year-ago quarter. Other segments (18% of total revenue) increased in single-digit from the year-ago period.

By geography, Asia Pacific grew 24.0% on a year-over-year basis, whereas revenues from Japan and EMEA increased 18.0% and 11.0%, respectively. However, revenues from Americas declined 13.0%.

Operating Results

Altera reported gross margin of 67.1%, which was down 223 basis points (bps) from the year-ago quarter primarily due to an unfavorable product mix.

Operating margin came in at 29.2%, up from 28.7% in the year-ago quarter. Total operating expenses increased 4.9% year over year, reflecting an 11.3% rise in research and development expenses. As a percentage of revenues, operating expenses contracted 270 bps to 37.9% from the year-ago quarter, which favorably impacted margins.

Reported net income was $116.5 million or 37 cents per share compared with $120.2 million or 37 cents per share in the first quarter of 2013. Including gain on securities and gain from the reclassification, net income was $129.0 million compared with $120.1 in the year-ago quarter.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $2.91 billion compared with $3.01 billion in the previous quarter. The company generated cash flow from operating activities of $130.4 million.

Guidance

Altera expects sales to increase in the range of 2% to 6% sequentially ($470.3 million to $488.8 million) in the second quarter. The Zacks Consensus Estimate is pegged at $463.0 million. Management expects revenues from Telecom & Wireless to be up with wireless revenues increasing sharply, primarily due to China LTE shipments. Industrial Automation, Military & Automotive revenues are expected to be down, sequentially. However, Networking, Computer & Storage revenues are expected to increase quarter over quarter.

Management projects gross margin of roughly 67.0% in the second quarter. Research and development expenses are expected in the range of $104.0 million to $106.0 million, while selling, general and administrative expenses will likely range between $78.0 million and $80.0 million. Tax rate is expected in a range of 12.0% to 13.0%.

Our Take

Altera has delivered better-than-expected first-quarter 2014 results with both earnings and revenues beating the Zacks Consensus Estimate. Although revenues increased year over year, earnings remained relatively flat. The company provided a modest guidance for the upcoming quarter.

Nonetheless, growth in 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.

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 holds a Zacks Rank #3 (Hold).