JoAnne joined the team at ABR Investment Strategy during the summer of 2013 to work collaboratively on technology-oriented equity research. She covers the same semiconductor and equipment universe, but now has the opportunity to develop joint reports combining insights from Asia Tech and Computing and Storage Hardware.
Avago delivered April results ahead of expectations and gave guidance above the Street. Guidance implies roughly $0.70 in EPS (non-GAAP, ex-SBC) for this quarter which is close to our prior of $0.71 and above Street at $0.68. We are reiterating our BUY and $43 price target.
Upgrading on Growth Potential: We see further upside to IDTI’s performance, following discussions on enterprise flash and wireless charging with industry contacts. We are raising our rating to BUY and setting a $10 12-month target price (19x FY14 EPS) as new products are positioned to drive growth in 2H and consensus estimates appear too conservative given our checks.
Operating margin came in at 6% last quarter, but through gross margin expansion (volume, mix) and cost cuts, the company sees its goal of 20% by F4Q14 (March 2014) as “ambitious but achievable” if revenues approach $130M and gross margin climbs to ~60%. Most are not expecting IDTI to reach this goal and appear to be discounting that target by nearly one-quarter. But if management were to achieve this, it would push earnings well ahead of our and consensus expectations and the corresponding improvement in free cash flow would, we believe, further propel valuations.
Key Growth Drivers: We focus here on the new product drivers for growth for IDTI, but fully expect continuing, though gradual, economic recovery to help its core businesses to move up from recent lows.
The deployment of LTE/4G is only the first of many changes in wireless technology that we expect to raise demand for Avago’s FBAR filters in coming years. Already, we are seeing Avago benefit from its success in iPhones and from growing traction at Samsung. Coverage this week of Samsung’s progress in developing 5G technology, while a headline grabber, primarily indicates that 4G/LTE technology will be filling phones for many years to come.
Nvidia reported results near the top of guidance and ahead of expectations ($955M vs. $940M, and $0.13 vs. $0.10 GAAP) even as Tegra revenues dropped more steeply than we had expected ($103M vs. $125M); the company was helped by relative strength in graphics which supported sales and gave gross margin a lift.
Key Drivers, New Estimates, and Recommendations:
Recap: Microchip continued to see strong demand through the March quarter (and into April) and this helped it top consensus estimates (and ours) delivering $0.52 in EPS (vs. $0.47 expected) on $430.1M in sales (vs. $426.9M expected). Bookings have remained strong since the year’s beginning and internal inventories have dropped back to normal even as channel inventories have recovered since the December low. Backlog to begin the June quarter exceed that of March and stretches into the September quarter.
Guidance points to 2-6% sequential revenue growth, and EPS guidance of $0.50-$0.54 meets our prior forecast, but is ahead of consensus. The strength this quarter comes not only from strong demand, but also from a boost in gross margin—ahead of expectations—and additional accretion from SMSC as the company uncovers yet more sources of cost savings.
We continue to recommend the shares and see room for continued outperformance based on further share gains, economic rebound, and further margin expansion (and, of course, that appealing dividend). We also see upside from Microchip’s report for other broad-based semi providers.
Intel names Brian Krzanich, formerly COO, as its new CEO and with that move signals the firm’s commitment to capitalizing on its manufacturing dominance, not only to maintain its PC and server CPU advantages, as would be expected, but also to push harder into mobility and to bring its nascent foundry business to a much larger set of customers. Both of the latter require innovations in manufacturing technology and in production management of the sort that Krzanich has masterminded for the last several years.
We remain NEUTRAL on INTC shares in the face of near-term headwinds, but view the selection of Krzanich as positive step towards a future with stronger growth and sustainably high margins.
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AMD’s results and outlook reveal a company still in the depths of a protracted transition, but financials appear to be stabilizing as new products gain traction in consoles, tablets, and inexpensive laptops and hybrids. Richland and Kabini are both shipping, and this puts low-cost, but powerful, APUs into the hands of OEMs at a time when hardware margins have become razor-thin. Temash, the sub-2W SOC for tablets and embedded applications, is ramping now and we expect shipments this quarter to help boost revenues. Investors remain cautious following last year’s disappointing results; can AMD outperform even conservative expectations in 2013?
Intel came it a bit shy of expectations for 1Q, but that was likely a relief for many, and its 2Q guidance is close enough to expectations and its capex trim is likely to reassure investors that it has no intention to flood the market with CPUs. New CPU releases appear on schedule, gross margin is positioned for recovery in 2H, and data center business is seeing continued strength from cloud and HPC and also a hint of a pickup in enterprise spending. Uneven macro signals leave 2H demand in a fog, and so we think it premature to raise growth estimates, but Intel is taking a cautious approach and this should limit downside risk.