Yesterday, after market close, Altera announced its midquarter update; December‐quarter revenue is now expected to be down 8% o 10% sequentially; prior guidance had called for a 6% to 10% decline. Management highlighted a cautious overall demand environment with limited visibility, but the downward revision was not caused by a specific end‐market or customer program. The company also provided initial 2013 guidance excluding revenue, which calls for flat gross margin (in line with consensus) 10.5% operating expense growth (moderately above consensus), and a higher tax rate.
Our Take: Overall, the guidance reflects a continuation of recent trends, with muted (or negative) revenue growth compounded by higher spending on new products and incremental growth opportunities. The acceleration of R&D investments is coming at an inopportune time, given uncertain macro environment and limited visibility on the top line. That said, we believe there are signs of a cyclical bottom and Altera should benefit from the continued ramp‐up of 40 nanometer products throughout 2013. In addition, Altera would be a primary beneficiary of a pickup in capital spending for wireless infrastructure in China.
Altera shares trade at 19 times our revised 2013 EPS estimate, a slight premium to Xilinx (XLNX $34.34; Outperform) and the peer group, which have generally not cut numbers. While we expect increased spending in 2013, Altera is increasing its opportunities to displace ASIC and ASSP solutions to outgrow the broader semiconductor market over the long term, and we believe there are reasons to feel positive about a sales recovery in 2013. We maintain our Outperform rating.
Sales Guidance Reduction
Altera reduced the midpoint of fourth‐quarter revenue guidance by roughly 1%, to $450.5 million; the consensus estimate was $455.6 million. The company has witnessed broad softness, with no segments or programs accounting for a significant portion of the shortfall. The company does not provide annual revenue guidance but did highlight low visibility due to macro uncertainty, which has led to expedited orders by customers trying to avoid building excess inventories.