On Jun 13, 2014, we issued an updated research report on Altera Corporation ( ALTR ) following the company's better-than-expected first-quarter fiscal 2014 results.
Revenues improved on a year-over-year basis attributable to growth in new product revenues (49.0% of total revenue), which increased 39.0% from the year-ago quarter and offset the 12.0% decline in mainstream revenues. Altera saw year-over-year growth across both geography and verticals.
Additionally, Altera's transition to 14-nm FPGAs in association with Intel Corp. ( INTC ) is likely to be a competitive differentiator. Intel will be making chips for Altera using its 14-nm trigate transistor technology. Hence, it will be difficult for Xilinx ( XLNX ) to adopt Intel's technology to match its rival's offerings.
Furthermore, Altera is witnessing higher revenues from its FPGA offerings. FPGAs are widely used in third generation (3G) and fourth generation long-term evolution (4G LTE) network connections. A higher percentage of FPGAs per base station allows higher data bandwidth. We believe Altera is well equipped with FPGA product suites (Stratix, Arria and Cyclone) to take share in the growing PLD market.
It is also worth noting that Altera is a fabless company. It does not own or operate foundries for the production of silicon and instead works with independent merchant foundries and chip assemblers for the manufacture of products. This benefits the company with superior manufacturing capability, scalability, as well as flexibility to move wafer manufacture, assembly and test of products to vendors that offer superior technology and services at competitive prices.
Altera is currently manufacturing its chips using 28-nanometer processes. We believe that this will help Altera to strengthen its product portfolio and offer more comprehensive and high-value programmable solutions.
Apart from this, Altera has solid cash generating abilities. Out of its total cash flow, 61.3% has been used for dividends and share buybacks in fiscal 2013. Moreover, during the first three months of fiscal 2014, Altera paid dividends worth $47.6 million and bought shares amounting to $161.8 million. These continued share buybacks are expected to support the company's bottom line going forward.
On the other hand, macroeconomic weakness, competition from Xilinx and Lattice Semiconductor Corporation ( LSCC ), consolidation in the telecom market, declining margins and volatility in the semiconductor market remain concerns.
Currently, Altera has a Zacks Rank #3 (Hold).
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