Avago Technologies Limited (AVGO, Financial) operates through four segments -- Wireless Communications, Wired Infrastructure, Enterprise Storage, and Industrial & Other segments. The company designs, develops, and supplies semiconductor devices with a focus on analog III-V based products. The RF component chipmaker seems to be riding on the success of smartphone boom and the stock has gained over 22% year-to-date and more than 80% during the last one year.
First quarter fiscal 2015
- First quarter fiscal 2015 revenues came in at $1.66 billion, up 3% year-over-year on the back of better-than-expected performance of the wireless segment. First quarter revenues were higher than management’s own guidance.
- Gross margin was above the top-end of the guided range and clocked 59%. This was on the back of better revenue mix and higher manufacturing yields.
- Net income was $596 million and earnings per diluted share came in at $2.09.
- Since the start of dividend in second-quarter fiscal 2011, the company has been increasing dividend every quarter. For the quarter the company paid a quarterly cash dividend of $0.35 per ordinary share. This was $0.03 higher than prior quarter.
Five Growth Drivers
- Avago Technologies has successfully completed the acquisition of Emulex Corporation just last week. This will complement Avago’s enterprise storage businesses and aligns very well with the company’s business model. This will allow Avago to offer broadest suites of silicon and software storage solutions to the enterprise and data center markets. In addition, this will immediately be accretive to earnings per share on a non-GAAP basis, and contribute approximately $250 million to $300 million in annual net revenue. Hence, this will be a good growth driver in the long run.
- Reducing term-loan by repaying $600 million will reduce the annual interest expenses by about $22 million based on current interest rates. This will drive bottom-line growth going forward.
- The global 4G-LTE market is slated to grow at a CAGR of 79% from 2013 to 2019, breaching the $610 billion mark by 2019. Currently around 50% of smartphones are on 2G and have less than $1 worth of RF content. On an average, 4G devices have RF content of around $4. As 4G smartphones increase globally the demand for RF content will also go up. This will be a significant tailwind for Avago.
- According to a recent report, Avago has landed significant dollar content in Samsung’s Galaxy S6 and this is around $5 versus $2-$3 in the Galaxy S5. Although the sales of Galaxy S6 is pegged to be same as Galaxy S5 in terms of numbers, an increase in dollar content will mean more revenue for Avago.
- Most importantly, Apple's (AAPL) iPhone 6 and iPhone 6 Plus is expected to continue delivering strong sales numbers. Avago has about $6 worth of RF content in the current pair of flagship devices from Apple. Strong sales performance of these phones will help Avago to sustain the momentum.
Second quarter 2015 guidance
- Net revenue is expected to be in the range of negative 3% to up 1% on sequential basis.
- Gross margin is expected to be 58.5%, give or take 1%.
- Operating expenses are expected to be around $294 million.
- The diluted share count is expected to be 289 million shares.
- Reducing term-loan by $600 million will result in quarterly savings of around $4 million. This will add to bottom-line growth.
Demand is huge
The demand for company’s products is huge. Despite increasing the Fort Collins fab capacity significantly over the past few years, the demand has continued to exceed expectations. Avago expects to remain capacity constrained even as it continues to grow its FBAR capacity over the next 12 months.
Wrapping up
Avago is currently trading at a forward P/E of 13.57 versus trailing P/E of 69.95. In addition, the company’s earnings are slated to grow at a CAGR of 26% for the next five years. Also, the company offers a dividend yield of 1.2% and has been increasing dividend every quarter since the second-quarter of 2011.
Hence, given its good performance and huge market potential for 4G LTE devices, this stock still has more upside to warrant a buy.
