Avago Technologies, a maker of radio-frequency chips for
mobile devices, is poised to benefit from rollout of 4G wireless
networks in heavily populated markets such as China. It's also
apt to see large-scale cost savings from a recent, transformative
Singapore-basedAvago 's (
) stock is up about 35% this year, recently trading around 72,
and the company gets a highest-possible Composite Rating of 99
Large swaths of Asia, notably including China, are in the
early stages of deploying higher-bandwidth cell-phone standards,
moving from so-called third generation to fourth generation, or
4G. China's massive population creates the possibility for
long-term demand from customers for new mobile devices as this
move unfolds. Avago, by extension, could see demand for its chips
boosted commensurately, analysts say.
Avago "has an important play on the switch to 4G," RBC Capital
Markets analyst Doug Freedman said in an interview.
For its second quarter of fiscal 2014 ended in May, Avago
reported revenue of $701 million, up 25% from a year earlier and
ahead of analyst views for $678 million. Earnings came in at 85
cents per share ex items, up 39% year over year and well ahead of
Wall Street's expectations for 76 cents per share.
Building On Acquisition
Both profit and revenue growth have advanced for four
consecutive quarters, and the company is expected to extend that
streak. For its current quarter, Avago has estimated revenue of
$1.3 billion to $1.4 billion, which would be more than double the
Analysts polled by Thomson Reuters on average predict EPS of
$1.04 for the current quarter, a 41% year-over-year rise. Among
23 analysts who cover Avago, four have a strong buy rating, 14
have a buy rating, and five say hold the stock.
The big bump in sales anticipated in the current quarter would
come as Avago includes for the first time contributions from its
$6.6 billion May buy of LSI Corp., a maker of semiconductors and
software used in storage and networking gear.
Avago CEO Hock Tan, speaking with analysts after reporting
earnings in late May, called the LSI deal a "transformative event
in Avago's history" that created "a substantially larger company
with a much more diversified and balanced mix of end
Avago produces chips for wireless and wired communications as
well as industrial, automotive and consumer electronics. Its top
customers includeApple (
), Samsung,Cisco Systems (
),Hewlett-Packard Co. (
) and Siemens.
Business Mix Changes
Before the LSI takeover, about half of Avago's revenue came
from wireless communications products -- nearly a third from
wired infrastructure customers and the rest from industrial and
other segments. The large wireless customer base is fertile
ground, but it also has been volatile at times, analysts say, as
demand for products such as smartphones ebbs and flows with
advances in technology and rollouts of new devices.
The combined company now has "about 50% of its revenue tied to
stable businesses (storage and industrial) and 50% tied to growth
businesses (wireless and wired infrastructure)," Romit Shah, an
analyst at Nomura Private Equity, wrote in a report.
Avago's stock has been riding high this year, in part because
of the $200 million in annual cost savings that the company
expects from the LSI deal by the end of its fiscal 2015, says
Thomas Diffely, an analyst at D.A. Davidson.
"We're in a market right now where investors really like the
prospect of cutting a bunch of costs," he said in an
Tan said on the May conference call that the integration of
LSI was "still progressing" heading into the summer months, "but
progressing very well." He said Avago was "very much on track" to
achieve the cost savings as planned.
Avago also has begun to divest some LSI assets. At the end of
May, the company said that it would sell LSI's Accelerated
Solutions division and its Flash Components division to
disk-drive makerSeagate Technology (
) for $450 million.
Avago also remains a buyer, looking to deepen its
diversification play. The company announced Monday that it plans
to acquirePLX Technology (PLXT) in an all-cash deal valuing PLX
at about $300 million. The transaction, expected to close in
Avago's fourth quarter, is projected to benefit Avago's adjusted
EPS immediately while broadening its networking and storage
offerings, the company said.
With these deals, Avago is working to build out its
chip-development business in the data-communications and
While many on Wall Street welcomed the effort to diversify and
offset volatility as a positive for the long term, it cuts
Avago's exposure to the wireless business roughly in half at a
time when wireless revenue could swell. That means that the
combined company -- while larger and packed with potential for
greater sales -- may not grow in coming quarters as fast as it
has in the recent past, some analysts say.
The wireless segment accounted for 50% of Avago's total
revenue in the last completed quarter, as wireless sales
ballooned 25% year over year. For the current quarter, wireless
revenue "will be a little over 25%" of total revenue, Tan said on
the May conference call.
The LSI deal, while a big positive on the cost-savings front,
effectively scales back what had been the major driver of core
growth, at least when looking at percentage advances, Diffely
"It dilutes a nice growth story," he said, adding that he
recently downgraded Avago stock from a buy to a hold
recommendation. "We really did like their position before. ... We
still like it; it's just that there's not as much upside for the
stock from here."
Ringing-Up New iPhone 6
Freedman, the RBC Capital Markets analyst, noted anticipation
for an Apple iPhone 6 rollout as soon as the second half of 2014.
That launch will drive wireless business not just in Asia but
also in North America, Europe and elsewhere.
While it certainly stands to benefit Avago, Freedman says, the
benefit will be less now in terms of its share of revenue growth
for the company. Following the LSI deal, Freedman adds, Apple
shrinks from close to 20% of the Avago customer base to about 10%
Given the proven popularity of the iPhone and similar products
from Apple and competitors such as Samsung, Freedman said, a
diluted exposure on that front could concern some investors.
"It's still significant; I would never say Apple is not
significant," he said. "But it is markedly less significant (to
Avago) than it used to be."
That noted, both Freedman and Diffely said that Avago is a
company on sound footing with an eye toward long-term staying
"We still feel very comfortable about the fundamental drivers
of the company," Diffely said.