Avago Comfortably Beats Q4 Earnings On Higher Revenues

Leading analog semiconductor manufacturer Avago Technologies Limited AVGO recorded stellar fourth-quarter fiscal 2015 results (ended Nov 1, 2015) with substantial year-over-year improvements in revenues and earnings on the back of accretive LSI Corporation, PLX Technology Inc. and Emulex Corporation acquisitions.

Avago reported fourth-quarter fiscal 2015 adjusted earnings of $2.33 per share, which comfortably exceeded the Zacks Consensus Estimate of $2.19. The better-than-expected adjusted earnings for the reported quarter were primarily attributable to significant top-line growth.

GAAP earnings for fourth-quarter fiscal 2015 more than tripled to $429 million or $1.49 per share compared with $135 million or 50 cents per share in the year-earlier quarter. The rise in year-over-year earnings was led by higher revenues. Non-GAAP earnings from continuing operations for the reported quarter were $737 million or $2.51 per share compared with $556 million or $1.99 per share in the year-ago period.

GAAP net income for fiscal 2015 recorded a five-fold jump to $1,364 million or $4.85 per share from $263 million or 99 cents per share in fiscal 2014 on nearly a 60% rise in revenues. For fiscal 2015, Avago reported non-GAAP net income of $2,613 million or $8.98 per share compared with $1,343 million or $4.90 per share in fiscal 2014.

Quarter Details

Total quarterly GAAP revenue increased 15.7% year over year to $1,840 million and marginally missed the Zacks Consensus Estimate of $1,850 million. The upsurge in year-over-year revenues was led by synergies from LSI and PLX, economies of scale, rich product mix and strength across all the end markets. For fiscal 2015, Avago recorded GAAP revenues of $6,824 million compared with $4,269 million in fiscal 2014.

By segments, GAAP revenue from Wireless Communications accounted for 37% of the total revenue and increased 8.3% year over year to $680 million with customary product ramp at a North American customer. Avago has high long-term expectations for the wireless business and expects RF content per smartphone to increase at over 20% every year. The company also remains on track with its plan to increase film bulk acoustic resonator (FBAR) filter capacity in fiscal 2016 by 50%.

GAAP revenues from Wired Infrastructure represented 20% of the total revenue and improved 7.4% year over year to $378 million. Revenue growth was primarily due to strong demand from enterprise networking features and service provider routers. Avago generated 8% of its GAAP revenue from the Industrial & Other market. With reduced shipments partially offset by resurgence in demand in the Asia Pacific and Europe, year-over-year sales were down 2.7% in this target market to $143 million.

Quarterly GAAP revenues from Enterprise Storage accounted for 35% of the total revenue at $639 million. Revenues from this segment were up 38% year over year with increase in shipments of enterprise and datacenter hard disk drives.  

GAAP gross margin for the reported quarter improved to 54% of net revenue ($997 million) from 50% ($788 million) in the year-ago quarter. Operating income (GAAP) was $514 million in fourth-quarter fiscal 2015, considerably up from $301 million in the same quarter last year.

Cash Flow & Balance Sheet

Avago generated $582 million in cash from operations in the reported quarter compared with $381 million in the prior-year period, bringing the respective fiscal tallies to $2,318 million and $1,175 million. Capital expenditures were $106 million, down from $189 million in the year-earlier quarter.

At fiscal end, Avago had $1,822 million in cash and cash equivalents with long-term debt of $3,903 million compared with the respective tallies of $1,604 million and $4,543 million in fiscal 2014. During fourth-quarter fiscal 2015, the company paid a dividend of 42 cents per share, which represents a sequential increase of 2 cents. Avago has continuously increased the quarterly dividend since its inception.

Guidance

Along with the quarterly results, Avago provided guidance for first-quarter fiscal 2015, based on the current market conditions. GAAP revenue is expected to be in the vicinity of $1,768 million, while gross margin is projected at about 52.75%. GAAP operating expenses are estimated to be approximately $472 million. Capital expenditures are expected to be approximately $140 million.

We are encouraged by the strong quarterly results of this Zacks Rank #3 (Hold) stock. In addition, the acquisition of Broadcom Corp. BRCM is likely to script a new era in the history of the company, redefining the dynamics of the semiconductor industry. A couple of better-ranked companies in the industry include Anadigics, Inc. ANAD and Applied Micro Circuits Corporation AMCC, both carrying a Zacks Rank #2 (Buy).

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