Archive: Altera (ALTR)

The Case for the Semiconductor Rally to Continue

My latest column is up at RealMoney. In it, I explain why I think the recent rally in semiconductor stocks should continue.

First, as I have mentioned before, the supply/demand balance remains favorable.

Second, pricing power appears to be improving, based on the most recent PPI report.

I think the names that will perform best are those whose gross margins are currently depressed, as improving margins would result in accelerating earnings power.

Disclosure: At time of publication, William Trent holds shares of SMH and MXIM, as well as put options against the shares of LRCX.

Disclosure: William Trent has a long position in SMH.

Topics: Altera (ALTR), Cypress Semiconductor (CY), Intel (INTC), Marvell Technology (MRVL), Micron Technology (MU), ProShares Ultra Semiconductors (USD), Semiconductor HOLDRS (SMH), Semiconductors | No Comments

TSM: Taiwan Semi Provides Stable Cash Flow in an Uncertain Environment

The following is a reprint of my January 16, 2007 RealMoney column

In a volatile market, investors tend to gravitate toward companies and investments that provide stability. As crazy as this may sound, I think that stability can be found in a semiconductor company – namely, Taiwan Semiconductor (TSM). I think the table below shows just how stable.

Taiwan Semiconductor Cash Flow Generation ($U.S. Billions)





Cash flow from operations





Capital expenditures





Free cash flow





Sources: Taiwan Semiconductor, Yahoo! Finance, William A. Trent estimates

Taiwan Semi operates in an unsexy part of the semiconductor industry known as “foundries.” It sounds as exciting as a blacksmith shop, and that isn’t far from the truth. Foundries don’t design any of the products they manufacture. Instead, they make the chips that other companies design. Their expertise isn’t in technology so much as process and efficiency.

Because they don’t design the chips themselves, Taiwan Semiconductor and other foundries such as United Microelectronics (UMC) typically get lower gross margins. The design profits fall to their customers. TSM’s expertise in manufacturing and economies, however, are much needed by customers who are often too small to absorb the enormous costs of building a chip fabrication plant.

Such customers include many fabless semiconductor companies and systems companies such as Altera (ALTR), Broadcom (BRCM - Annual Report), Marvell (MRVL - Annual Report), nVidia (NVDA), Qualcomm (QCOM) and VIA Technology, as well as integrated device manufacturing companies such as Advanced Micro Devices (AMD - Annual Report), Analog Devices (ADI), Freescale, and Philips (PHG).

Many small customers have given the company a balanced sales base. By end market, 40-45% of sales are communications-related, about 30% are to the computer market, 15-20% go to consumer electronics and the rest serve the memory and industrial markets. In 2006, the largest customer represented 10% of company sales, and the top ten amounted to just over half of sales. The lack of concentrated exposure to any customer or end market is one of the reasons TSM can generate stable cash flows.

The largest customer related risk factor may be that three quarters of sales are to customers in North America, and thus may impact the company if there is a U.S. recession. However, the global end markets for technology suggest that the true end customer is more widely dispersed geographically.

As the cash flow table shows, it seems fairly safe to say TSM will generate about $2.5 billion in cash flow. In some years, such as 2006, the cash flow may be unusually high. But even the industry downturns in 2004 and 2007 did relatively little harm. Given that the current enterprise value for Taiwan Semi is about $42 billion, it is offering a free cash flow yield of just under 6%.

If I had $42 billion that I wanted to invest safely, I might choose between buying TSM outright or investing it all in 5-year U.S. Treasuries. The Treasuries are currently yielding about 3.0%, so I would get $1.25 billion in interest each year from my investment. If that were my choice, I think I would go with the $2.5 billion in cash flow offered by Taiwan Semi.

It’s true that as a small investor owning a portion of TSM I would not be able to access all of the free cash flow. There is some risk to the comparison, since I am hoping the company invests any cash they hold onto wisely. But the company does pay two thirds of the cash flow as a dividend. Unless things change, that is still a 4.0% yield taxed at 15% compared to a 3.0% yield taxed at my marginal income tax rate.

How Bad Can it Get?

As stable as it may appear, I also have to acknowledge that TSM’s cash flow is not guaranteed. However, I think 2007 probably marked a fundamental bottom for the semiconductor industry – or at any rate that things won’t get much worse.

Consider, for example, the pricing environment. The Bureau of Labor Statistics reported that semiconductor prices declined 16.9% in December compared to the year earlier. That number was a modest improvement over November’s decline, which was the worst on record. Even the depths of the Internet bust were better times for semiconductor pricing. The fact that the pricing environment is so extraordinarily bad suggests to me that it probably won’t get too much worse.

Year/Year Change in Semiconductor Prices (PPI Data)


Source: Bureau of Labor Statistics

Furthermore, as I have written in other columns, I think the turnaround in semiconductor fundamentals is within sight. Pricing is a function of supply and demand, and since March of 2007 demand (semiconductor revenues as reported by the Semiconductor Industry Association) has been growing at a faster rate than supply (bookings for new semiconductor equipment as reported by Semiconductor Equipment and Materials International).

I think the industry’s recent restraint in adding new capacity will soon become evident in stronger pricing even if there is an economic slowdown. If I am right, what already looks like a solid and stable cash flow level could soon look even better.

Disclosure: William Trent has a long position in SMH.

Topics: Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Broadcom (BRCM), Koninklijke Philips Electronics (PHG), Marvell Technology (MRVL), NVIDIA (NVDA), Qualcomm (QCOM), Semiconductors, Stock Market, Taiwan Semiconductor (TSM), United Microelectronics (UMC) | No Comments

Semiconductor Pricing Near a Bottom?

I warned most of last year that building oversupply would harm pricing for semiconductors, and the latest PPI data bear that out.
PPI for semiconductors

Pricing is the worst it has been since late 2003, which in turn was the worst it has ever been. But I think the fundamental outlook is improving, and my updated supply and demand model shows that late 2003 was actually quite a good time to own semiconductor stocks. You can never be too sure, though, so I decided to review the recent conference calls from a broad range of semiconductor manufacturers to get their sense of market conditions.

Intel (INTC - Annual Report) is seeing a shift in where the pricing pressure is coming.

Now, as far as the pricing environment. It was a more competitive pricing environment than we thought in Q2, and we expect it to continue to be somewhat competitive which is what you’re seeing in our margin outlook for the year. We believe the best defense against the competitive price environment is better product.

If you look at what’s happening with us the last year, you’ve seen better products quarter by quarter by quarter. You’ve seen improved product differentiation, 45 nanometer coming out; the Penryn product family, as Paul talked about. So what you’re seeing is Intel’s commitment and focus to making our products better and better and better which is the best defense we have in a competitive pricing situation.

Glen Yeung – Citigroup

Andy, is the pricing pressure the same now as it has been all year? Is it getting worse or getting better?

Paul Otellini

I would say it is different, Glen. It is much more targeted now at the low end of the desktop and even a little bit of the notebook marketplace, and a year ago it was higher in the stacks in many areas.

(Excerpt from full INTC conference call transcript)

Altera (ALTR) is deciding that in some cases they just won’t take it anymore.

There are pieces of business that we do look at, that we do turn down, because we don’t think that they are profitable today or will ever be profitable pieces of business for us to entertain. As an example in Q1 we looked at two pieces of consumer business, where the pricing expectation and requirement for the customer was not something that we could support. And so, we told the customer, we were not interested in participating in the business going forward.

(Excerpt from full ALTR conference call transcript)

Texas Instruments (TXN - Annual Report) wants to avoid competition where possible.

Jim Covello – Goldman Sachs

Okay. And then maybe my final question. Just on the analog side, you guys are obviously doing a terrific job picking up share. You talked at the Analyst Meeting in very clear terms about the strategy for doing that and a lot of the share gain is kind of coming from that third bucket you described at the Analyst Meeting, the smaller customers where you have the scale and mask to you need to go after customers that maybe your competitors don’t have the same scale and mask to go after. What kind of competitive response are you expecting from the rest of the analog industry, as they try and stop you guys on your continued share gain impact? Thanks a lot.

Kevin March

Jim I guess, I would comment on that, we have already been seeing competitive response but I think the difficulty for our competitors again has to do with scale, that is we have a sales force that is such that we can just simply touch a lot more customers than any of our competitors can touch at a one point in time. We added to that the breath of our total product offering that we have and we can literally solve almost any problem that a customer may have on a particular Board that they’re may be designing, which allows them to really solve their problem fairly quickly with solutions that we have as opposed to having multiple vendors in. Those are probably two elements of the position that we enjoy today and we’ll enjoy in the future that we would expect to be quite difficult for our competitors to really be able to overcome, so we remained confident that our objectives to growing our positions in analog are really pretty solid and within our reach.

(Excerpt from full TXN conference call transcript)

All in all, it seems that management teams are seeing the competitive pressures that are reflected in the PPI, and are responding to them. Their response, I believe, will improve the industry’s fundamental balance and result in better pricing and better stock prices.

Disclosure: William Trent holds put options on the shares of Lam Research (LRCX) and has a short position in put options related to the Semiconductor HOLDRs ETF (SMH).

William Trent currently owns put options against the shares of Lam Research (LRCX).

Topics: Altera (ALTR), Economy, Intel (INTC), Maxim Integrated Products (MXIM), Producer Price Index, Semiconductors, Texas Instruments (TXN) | No Comments

The Week Ahead – 21 July 2007

The Economic Calendar is quiet in the early part of this week but there are important reports at the end of the week. On Thursday is the Durable Goods report, for which the consensus estimates a 2.0% increase. On Friday is the Preliminary Estimate of 2Q GDP, which the consensus has pegged at 3.2%. That sounds a little high to me based on the economic data table I’ve been compiling.


Bad and Deteriorating Bad but Improving Good but Deteriorating Good and Improving
Existing Homes (June) Chicago Fed NAI (May) Consumer Confidence (June) Real Disposable Income
Employment (June) Durable Goods (June) Personal Spending (June) ISM Manufacturing (July)
New Home Sales (June) Construction Spending Retail sales (August 2007) ISM Services (June)
ATA Truck Tonnage (June) CPI (July 07) Leading Indicators (June)  
GDP (Q2 Advance) Trade deficit (July 07)    
PPI (July 07) Durable Goods (July)    
Industrial Production (July 07)      
Housing Starts (July 07)      

The Earnings Calendar is as busy as it can get. Some of the names I’ll be watching:



  • CH Robinson (CHRW - Annual Report) – estimates have been rising and now stand at $0.47, but Landstar (LSTR - Annual Report) disappointed.
  • CDW Corporation (CDWC) – stellar monthly sales reports have kept estimates rising. They now stand at $0.97.
  • EMC Corporation (EMC - Annual Report) – The big news is still the VMWare IPO, but it is also a decent look at enterprise tech spend.
  • Laboratory Corporation of America (LH) – The Mid Cap and Large Cap Watch List (Track at Marketocracy) member has been seeing positive earnings revisions and is now expected to earn $1.09 on $1.03 billion in revenue.
  • Lexmark (LXK) preannounced and will probably offer poor guidance.
  • Linear Technology (LLTC) – expected to earn $0.35 on $267 million in sales.
  • Norsk Hydro (NHY) – The Large Cap Watch List (Track at Marketocracy) member has no analyst coverage right now.
  • Plantronics (PLT) – my covered call position is now being cashed out so I’ve no skin in this one. But it is often volatile.
  • United Parcel Services (UPS) is a great read on the health of the economy. Expectations are $1.03 on $12.23 billion in revenue.



Disclosure: William Trent has a long position in SMH.

Topics: Air Courier, Altera (ALTR), Basic Materials, CDW Corp (CDWC), CH Robinson Worldwide (CHRW), Colgate Palmolive (CL), Communications Equipment, Computer Hardware, Computer Peripherals, Computer Storage Devices, Conglomerates, Consumer Non-cyclical, Corning (GLW), Durable Goods, EMC Corp. (EMC), Economy, Electronic Instruments and Controls, Federated Investors (FII), Financials, Freeport McMoRan (FCX), GDP, Graco (GGG), Healthcare, Healthcare Facilities, Hexcel (HXL), Ingram Micro (IM), Investment Services, Iron and Steel, Laboratory Corp. of America (LH), Large Cap Watch List, Lexmark (LXK), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Metals and Mining, Mid Cap Watch List, Miscellaneous Capital Goods, Miscellaneous Transportation, Norsk Hydro (NHY), Personal and Household Products, Plantronics (PLT), Retail (Catalog and Mail Order), Semiconductors, Services, Small Cap Watch List, Steel Dynamics (STLD), Stock Market, Technology, Texas Instruments (TXN), Transportation, United Parcel Service (UPS), Watch List, Xerox (XRX), Xilinx (XLNX) | 3 Comments

Spotting the Next Cisco

Often, a company seeing weakness will cut back on its own purchases. When we previewed earnings for Cisco Systems (CSCO) we said “A major supplier, Altera, (ALTR) looked weak. That makes us nervous.” With Cisco now down nearly 10% in the two days since announcing earnings, we thought it an appropriate opportunity to demonstrate supply chain analysis in action.

We do so by turning to recent comments from management at Cisco as well as some of Cisco’s suppliers.

Paul Silverstein – Credit Suisse

John, if I missed you in the prepared remarks, I apologize. But can you give us some more insight in terms of what you are seeing in the US enterprise market? Whether there are any signs of a pick up in that market sector?

John Chambers

Sure, Paul. The market, it stayed pretty flat in terms of mid-single digits for the quarter. And that to me was actually good that it didn’t spillover into commercial. In fact commercial went up. And I am seeing from the customers, most people feel that they are coming in for a soft landing. They are being conservative on their budgets, which is little bit of surprise.

(Excerpt from full CSCO conference call transcript)

How much of a surprise was it? Or, at least, should it have been? Altera reported earnings on April 23, and said:

Tim Luke – Lehman Brothers

Just on the networking side, it sounds like Cisco is moving back towards the lean inventory. I was under the impression that of the program that they started a while ago, and maybe you could give us some sense of how long that you think that will take to work through in terms of having an impact in your orders, and then when you would expect to see that move upwards again, having been worked through?

John P. Daane

Tim, I will start with the networking side. As you probably are familiar with us, we tend, or we really do not want to talk about specific customers, so I am going to stay generic here. We have seen customers move to sort of a lean model over time where they are moving to a VMI program, if you will, vendor management inventory essentially or a program where they are having ultimately the contract manufacturer hold their inventory for them, in which case you are basically removing one of the buffer spots in the chain where there used to be inventory before.

Typically, if you think about it, customers only keep a small amount of inventory, so you would expect at any particular time that there may be an impact of about a quarter, so a month to three months, and then you should see a return to the normal buying pattern.

This is specific to one customer this quarter. That’s a major customer in the networking space. I would note that we have had this effect over the last several years from other large customers, particularly in the communications area, that have also been doing this.

(Excerpt from full ALTR conference call transcript)

So we know for a fact that Cisco was reducing orders – either to trim inventory (the official story) or to reflect slower orders. Yet Cisco’s major competitor Juniper (JNPR) was seeing blowout sales when it reported (also on April 23.)

And now moving to the enterprise business. We continue to make progress in this marketplace with approximately one third of our business coming from enterprises, where we today served over 20,000 enterprise customers worldwide. Our enterprise business in total grew 25% in Q1 as compared to the same period a year ago.

(Excerpt from full JNPR conference call transcript)

Based on Juniper’s results, even keeping shifting toward a leaner inventory presumably would be overwhelmed by such strong growth. The official story starts sounding less plausible.

So how can one figure out which companies are exposed to others as either customers or suppliers if you don’t already know? We went to Edgar full text search and typed in [Cisco NEAR10 "major customer"]. It gave us 32 results, including PMC Sierra (PMCS) and Avanex (AVNX). While PMC Sierra’s transcript wasn’t available, we were able to get one for Avanex, which reported on May 3.

John Harmon – Needham & Company

And congratulation on getting the divestiture done. Just a couple of questions. One just the obvious question. Given what one of your competitors said last night, have you felt the effect of these supply chain shortenings, and secondly the Lucent-Alcatel merger, what effect has that had on your business?

Jo Major

I will help people understand if they didn’t read the other scripts. Both last quarter and this quarter, there has been some discussion of the fact that companies like Nortel and Cisco have publicly announced manufacturing initiatives along the line of lean.

And lean is simply a look at how you can remove inventory from your system. So you look to your suppliers to provide shorter lead times and again that’s a real fundamental attribute of the new amplifiers suite, it’s a really fundamental attribute of the idea of bringing tunable dispersion compensation out to manage inventory.

But the lean initiatives had met in some areas. You’ve seen some pull backs on purchasing, because they would have had 15 weeks of inventory and they want to move that down to 5.

(Excerpt from full AVNX conference call transcript)

From 15 weeks to 5? That sounds preposterous. If Cisco was able to operate on 5 weeks of inventory instead of 15 why didn’t it make the switch years ago? Comments like these are why investors need to think about what is being said rather than take it at face value.

Topics: Altera (ALTR), Avanex (AVNX), Cisco Systems (CSCO), PMC-Sierra (PMCS), Stock Market | 1 Comment

Five Reasons NOT to Buy Semiconductor Stocks Today

Lest you think we were going soft, we hereby balance our earlier enthusiasm for semi stocks with our more customary caution. The five reasons to avoid semiconductor stocks right now include:

  1. The fundamentals will get worse before they get better. While supply indications grew slower than demand in April, the turn followed 16 months of too much capacity being ordered. As that capacity comes on line, the inventory situation will worsen and margins will get hit more. It is not at all certain that estimates reflect this.
  2. It is May. Sure, sell in May and go away is a cliche. Things often become cliches for a reason.
  3. Demand? What demand?
  4. Valuations are too high because investors are hoping for more premium buyouts. They will happen, but not to every name in the sector.
  5. The last bear may no longer be standing.

Food for thought.

Disclosure: William Trent has a long position in SMH.

Topics: AGR, Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Applied Materials (AMAT), Cadence Design Systems (CDNS), Cree (CREE), Elpida (ELPDF.PK), Freescale (FSL), Hynix Semiconductor (HXSCF.PK), Intel (INTC), Intersil (ISIL), KLA-Tencor (KLAC), LSI Corp. (LSI), Lam Research (LRCX), Lattice Semiconductor (LSCC), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Marvell Technology (MRVL), Maxim Integrated Products (MXIM), MicroSemi (MSCC), Micron Technology (MU), NVIDIA (NVDA), National Semiconductor (NSM), ON Semiconductor (ONNN), PowerWave Technologies (PWAV), Qimonda (QI), STMicroelectronics (STM), Samsung Electronics (SSNLF.PK), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Silicon Laboratories (SLAB), Standard Microsystems (SMSC), Stock Market, Supertex (SUPX), Taiwan Semiconductor (TSM), Texas Instruments (TXN), United Microelectronics (UMC), Winbond Electronics (WBEMF.PK), Xilinx (XLNX) | No Comments

Five Reasons to Buy Semiconductor Stocks Today

A reader complained yesterday that we have been too negative. While we aren’t going to go crazy and have a whole positivity day, we will take the time to outline the bull case for the industry on which we have been most negative: semiconductors.

  1. The bad news is known. When we started harping about oversupply, it was the farthest thing from anyone’s mind. Like Heisenberg’s uncertainty principle, the act of observation can alter the experiment.
  2. The market is ignoring the fundamentals. Related to point 1, the market knows about the bad fundamentals and doesn’t care. Often this means that the bad news is sufficiently well known to be priced in. This is of course the weakest reason, as the market ignored the fundamentals in 2000 as well.
  3. Demand may be ready to pick up. Double-digit growth from a tech distributor for the first time in a long time should not be ignored. The Vista hoopla has passed, now the nuts and bolts work may be beginning.
  4. Supply and demand will soon realign. For the first time since 2005, orders for new equipment grew at a slower rate than semiconductor end demand. The longer this situation continues, the healthier it will be for future industry sales, pricing and profit margins.
  5. The game has changed. Forget private equity buyers. For the first time a semiconductor management team decided it was more important to take capital out of the industry than to add more. This is a sea change in semiconductor management-think, and the strong positive reaction from investors ensures that the wave will continue to build.

There. That wasn’t so hard, was it? Stay tuned for our five reasons NOT to buy semiconductor stocks today.

Disclosure: William Trent has a long position in SMH.

Topics: AGR, Advanced Micro Devices (AMD), Altera (ALTR), Analog Devices (ADI), Applied Materials (AMAT), Cadence Design Systems (CDNS), Cree (CREE), Elpida (ELPDF.PK), Freescale (FSL), Hynix Semiconductor (HXSCF.PK), Intel (INTC), Intersil (ISIL), KLA-Tencor (KLAC), LSI Corp. (LSI), Lam Research (LRCX), Lattice Semiconductor (LSCC), Linear Technology (LLTC), MEMC Electronic Materials (WFR), Marvell Technology (MRVL), Maxim Integrated Products (MXIM), MicroSemi (MSCC), Micron Technology (MU), NVIDIA (NVDA), National Semiconductor (NSM), ON Semiconductor (ONNN), PowerWave Technologies (PWAV), Qimonda (QI), STMicroelectronics (STM), Samsung Electronics (SSNLF.PK), Sandisk (SNDK), Semiconductor HOLDRS (SMH), Semiconductors, Silicon Laboratories (SLAB), Standard Microsystems (SMSC), Stock Market, Supertex (SUPX), Taiwan Semiconductor (TSM), Texas Instruments (TXN), United Microelectronics (UMC), Winbond Electronics (WBEMF.PK), Xilinx (XLNX) | 1 Comment

The Week Ahead (6 May 2007)

The Economic Calendar starts off light but gets busy toward the end of the week.

  • On Wednesday the Federal Reserve will announce that it has not raised rates and issue a statement indicating that it may or may not either raise or lower them in the future. However, their statement will be less scrutable than the preceding.
  • On Thursday we’ll find out exactly how much more we have been spending on foreign goods than foreigners have been spending on ours. The general consensus is that it will be $60.1 billion more, give or take a few billion.
  • On Friday we’ll get PPI. While the headline figures are estimated to be 0.7% higher for all goods and 0.2% higher excluding food and energy, as usual we’ll focus more on the implications for individual companies and industries.
  • Also on Friday is the retail sales report, with the consensus expecting a 0.4% rise for the month.

Earnings season also winds down this week. Nearly all the reports we track are on Tuesday.

  • Clearwire (CLWR) – expected to lose money for the foreseeable future, earnings are less important than indications it is not the next Vonage.
  • Cisco (CSCO) – A major supplier, Altera, (ALTR) looked weak. That makes us nervous.
  • Nvidia (NVDA) – reports on Thursday, with the consensus expecting $0.39 in EPS both this quarter and next.

We look forward to the opportunity to start catching up on some things we had to put aside during earnings season.

Topics: Altera (ALTR), Cisco Systems (CSCO), Clearwire (CLWR), NVIDIA (NVDA), Stock Market | 1 Comment

XLNX: Xilinx The First Semiconductor Company to Impress Us This Quarter

Xilinx Announces Fourth Quarter and Fiscal Year 2007 Results: Financial News – Yahoo! Finance

Xilinx, Inc. (XLNX) today announced net revenues of $443.5 million in the fourth quarter of fiscal 2007, down 2% sequentially from the prior quarter and down 6% compared to the same quarter a year ago. Fourth quarter net income was $87.6 million, or $0.27 per diluted share, and included stock-based compensation expense of $20.1 million.

Analysts were expecting the company to earn $0.23 on $441 million in sales. In our own preview we called it “Altera (ALTR) with more risk to the earnings target.” It turns out that risk was to the upside. The company also issued the following guidance:

Business Outlook — June Quarter Fiscal 2008
– Revenues expected to be up 1% to 5% sequentially.
– Gross margin expected to be approximately 62%.
– Operating expenses are expected to be down approximately 4% to 5% sequentially.
– Other income including interest expense is expected to be approximately $15 million.
– Tax rate is expected to be approximately 21%.
– Fully diluted share count expected to decrease to approximately 302 million shares.

Let’s see… carry the three… looks to be about $0.29 on $457 million in sales, which compares favorably to the previous consensus guesstimate of $0.25 on $453 million. Xilinx thus becomes the first semiconductor company reporting this quarter (that we’ve noticed) to earn its likely strength in tomorrow’s stock market. With both accounts receivable and inventories down sequentially, we even believe their comments that things are looking up for them.

Disclosure: William Trent has a long position in SMH.

Topics: Altera (ALTR), Semiconductor HOLDRS (SMH), Stock Market, Xilinx (XLNX) | No Comments

ALTR: Market Enthusiasm Over Altera Results Mystifies Us

Our earnings preview for Altera Corporation (ALTR) said “valuation is rich but looks set up to beat on earnings.” The company beat on earnings, and judging from after-hours trading the valuation is getting richer.
Altera Announces First Quarter Results: Financial News – Yahoo! Finance

Altera Corporation (NASDAQ:ALTR – News) today announced first quarter 2007 sales of $304.9 million, down 4 percent from the fourth quarter of 2006 and up 4 percent from the first quarter of 2006.First quarter 2007 net income was $75.1 million, $0.21 per diluted share, compared with net income of $58.7 million, $0.16 per diluted share, in the first quarter of 2006.

Consensus estimates called for $0.20 in EPS on $311 million in sales. Another top-line miss, bottom-line beat. The guidance for a 1%-4% sequential revenue increase implies $308-$317 million in sales next quarter, well below the $324 million consensus. It also looked to us like the EPS guidance for next quarter would be below estimates due to higher spending on research and development.

Looking further down the financial statements, it was very difficult to understand the market’s enthusiasm. Inventories were up 6% sequentially despite a sequential sales decline and the slower expected growth next quarter. Accounts receivable soared nearly 40%, which suggests three possible scenarios:

  1. Sales picked up late in the quarter and will continue to be strong (not supported by guidance)
  2. Sales picked up late in the quarter due to aggressive pricing/channel stuffing
  3. Sales were made to customers who are less able to pay

The positive scenario seems to us least likely of the three due to the incongruity with guidance. While there may be many other plausible scenarios, we don’t like the rising receivables/declining sales combination regardless of the explanation.

Topics: Altera (ALTR), Stock Market | 1 Comment