Chipmaker Altera Corporation (ALTR: 27.59 -0.72 -2.54%) reported sales of $469.3 million in the second quarter of 2010, up 17% sequentially and up 68% year over year.Once again, Altera reported a solid quarter with both the top line and bottom line showing solid growth. The year-earlier quarter was a weak quarter for Altera as most customers were trying to eliminate inventory they had on hand in view of the economic slowdown, which adversely impacted demand in most end-markets.
The results beat management’s revised guidance of $442.5 million – $450.6 million. The sequential growth was broad-based across all geographies and vertical market driven by recovery in the semiconductor industry and new product momentum. Both large and small customer categories depicted growth. New, mainstream, and mature product categories all grew sequentially.
New products include 65-nanometer (nm) and 40-nm field-programmable gate arrays (FPGAs) and HardCopy application-specific integrated circuit (ASIC) and the latest complex programmable logic devices (CPLD) family – all products which are in the design win and production ramp phase of their lifecycle. Mainstream products include 90-nanometer FPGAs and HardCopy ASICs, products which are no longer in the design-in phase and tend to grow or decline with the market.
In terms of product mix, 65-nm FPGA revenue showed solid strength and accounted for 25% of total revenue, up from 22% in the previous quarter. Newer 40-nm products grew even faster as they transition into the production phase and accounted for 10% of the total, an increase from 7% in the prior quarter. The 65-nanometer products contributed 25% of total company revenue and 40-nanometer contributed 10%, up from 22% and 7% respectively in the prior quarter. In addition, Altera continues to ramp up work for the next-generation 28-nm FPGA, which is entering the final stages.
Incoming orders were strong throughout the quarter driving a book-to-bill ratio of more than 1 and leading to a significant increase in ending backlog.
In terms of end-markets, telecom and wireless, the largest market for the company, increased 21% sequentially. The second largest market – industrial, military and automotive, accounting for 23% of the total, registered a 14% growth.
However, management indicated that due to the significant increase in demand, some of the product lead times have extended and at present vary from 0 to 26 weeks compared with normal lead times of 0 to 16 weeks. The semiconductor industry is currently facing supply constraints leading to longer lead times.
Moving onto margins, Altera continues to depict solid improvement in operational activities as well along with growth in top-line. Gross margin improved to 71.7%, up from 71.4% recorded in the previous quarter and 66.5% in the year-earlier quarter. The sequential improvement in gross margin was primarily due to cost reductions and yield improvements, which were partially offset by unfavorable product mix. Operating margin came in at 43.9%, up from 40% in the previous quarter and 24.0% in the year-ago quarter.
Net income was $180.6 million or 58 cents per share compared to a net income of $153.2 million or 50 cents per share in the first quarter of 2010 and a net income of $47.4 million or 16 cents in the year-earlier quarter. The reported figure easily beat the Zacks Consensus Estimate of 53 cents per share.
Going forward, management expects sales to be up 4% to 8% in the third quarter. Once again, the driver of growth will be telecom and wireless markets. Communications should continue to grow as India upgrades to 3G and U.S. and Japan deploy 4G networks. Networking, computer and storage should increase driven by networking.
The guidance implies a revenue guidance of $488.0 – $506.8 million. Given Altera’s track record of upgrading guidance as the quarter progresses, we can expect an increase in the guidance provided with the earnings results. Gross margin is expected to decline a bit and come around 70% – 71% due to an unfavorable product mix.
Altera indicated that this level of margins will not be sustained in the long term. The average gross margin for the company is 65% in the long run. Meanwhile, Altera remains committed to returning cash to its investors through dividends and buybacks. The company announced a 20% increase in its quarterly cash dividend, which now comes to 6 cents per share from the previous level of 5 cents. In addition, Altera still has 14 million shares left in its share repurchase program.
The company is a leader in the Programmable Logic Devices (PLD) market, which is growing faster than the total semiconductor market. Altera’s main rival is Xilinx Inc. (XLNX: 27.94 -0.51 -1.79%). Together, they hold nearly 87% of the programmable logic devices (PLD) market.
The results did not have much of an impact on the stock price. Shares of Altera were down 0.04% and closed at $28.30 in after-hours trading. In regular trading, shares were up 0.07% and closed at $28.31.
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We continue to be positive on Altera. The company has product superiority in the 40-nanometer node, which has generated a significant amount of business. The 40-nanometer will be the growth driver of the industry for the next couple of years. We recently upgraded our recommendation on the stock to Outperform from Neutral.
| Analysts' Targets | |
| UBS Securities | $34 |
| Add | |
| Wednesday, April 21, 2010 | |
| Stifel Nicolaus | $33 |
| Buy | |
| Wednesday, April 21, 2010 | |
| Longbow | $25 |
| Neutral | |
| Friday, January 15, 2010 | |
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