Avago Poised For Further Growth?

(RTTNews) - This Singapore-based chip maker is expected to benefit from continued sales of iPhone 6/6+, 4G Long-Term Evolution or LTE gaining momentum in China and India, and growing demand for its Film Bulk Acoustic Resonator or FBAR filters across the world.

The stock in focus -- Avago Technologies Ltd. (AVGO) is a designer, developer and global supplier of a broad range of analog, digital, mixed signal and optoelectronics components and subsystems with a focus in III-V compound semiconductor design and processing.

Diversified Business

Backed by an extensive portfolio of intellectual property, Avago's products serve four primary target markets: wireless communications, wired infrastructure, enterprise storage, and industrial and other. Applications for products in these target markets include cellular phones and base stations, data networking, storage and telecommunications equipment, factory automation, power generation and alternative energy systems, and displays.

Original equipment manufacturers or OEMs, or their contract manufacturers, and distributors typically account for the substantial majority of the company's sales. Avago established strong relationships with leading OEM customers across multiple target markets and has a direct sales force focused on supporting large OEMs.

The company also distributes a substantial portion of its products through broad distribution network, and a significant amount of these sales are to large global electronic components distributors, including Avnet Inc. and Arrow Electronics Inc.

Products and Markets

Avago's product portfolio ranges from discrete devices to complex sub-systems that include multiple device types and incorporate firmware for interfacing between digital systems. The company's products also include mechanical hardware that interfaces with optoelectronic or capacitive sensors.

The wireless communications segment contributed 40% of fiscal 2014 revenues, the wired infrastructure segment 27%, the enterprise storage segment 20%, and the industrial & other segment 13%, respectively. Fiscal 2014 net revenue also includes contributions from LSI and PLX commencing on their respective dates of acquisition; LSI and PLX primarily contributed to the enterprise storage segment.

Customer Concentration

The company has a diversified and well-established base of thousands of end-customers, located throughout the world, which it serves through multi-channel sales and fulfillment system.

Sales to distributors accounted for 25% of Avago's net revenue for fiscal year 2014 and 28% for fiscal 2013. In fiscal year 2014, direct sales to Foxconn Technology Group companies, or Foxconn, a contract manufacturer, accounted for 20% of net revenue. The company's top ten direct customers, which included three distributors, collectively accounted for 57% of net revenue.

During fiscal year 2013, direct sales to Foxconn accounted for 18% of Avago's net revenue and its top 10 customers, which included three distributors, collectively accounted for 64% of its net revenue.

Avago believes that its aggregate sales to Apple Inc., accounted for more than 10% of revenues for both fiscal years 2014 and 2013. Aggregate sales is direct sales to the customer plus sales to the contract manufacturers that the customer utilizes.

Revenue-wise, Avago's main global distributors are Avnet Inc. and Arrow Electronics Inc., complemented by a number of specialty regional distributors with customer relationships based on their respective product ranges.

Multiple Growth Drivers

Avago derives sizable sales from Wireless segment, but the company has a broad product line that is benefiting from the ramp of a new smartphone generation, a large North American smartphone OEM, FBAR related products across the board, and in particular from multiple Chinese LTE smartphone OEMs.

The company's wireless communications segment provides RF amplifiers, filters, FEMs, ambient light and proximity sensors for mobile phones. Wireless communications generated net revenue of $1.69 billion in fiscal 2014, an increase of 39%, compared to $1.22 billion in fiscal 2013. Segment revenue in fiscal 2012 was $1.06 billion.

Avago's wired infrastructure segment provides fiber optic transceivers and SerDes ASICs for high-speed data communications and server applications. Wired infrastructure revenue increased 55% to $1.15 billion in 2014 from $744 million generated in fiscal 2013. Segment revenue in fiscal 2012 was $662 million.

In the enterprise storage segment, the company provides read channel-based SoCs and preamplifiers to the HDD market, custom flash controllers to the SSD market, and SAS and RAID controller and adapter solutions to the server and storage system markets. Revenue from Enterprise storage segment was $867 million in fiscal 2014, thanks to the acquisition of LSI in May 2014.

Industrial & other segment provides fiber optic transceivers for communication networks, LEDs for displays, motion control encoders and subsystems and optocouplers for factory automation and motor controls. Industrial & other segment revenue was $562 million versus $2.52 billion in the previous year. Segment revenue in fiscal 2012 was $638 million.

Recent Happenings

On May 6, 2014, the company acquired LSI, a provider of high-performance storage and networking semiconductors, for about $6.5 billion. In connection with the acquisition, Avago incurred $5.6 billion of new indebtedness.

August 12, 2014, Avago acquired PLX Technology Inc., a provider of PCI Express, or PCIe, semiconductor and software connectivity solutions, for about $308 million.

Avago sold LSI's Flash Components Division and Accelerated Solutions Division, or the Flash Business, on September 2, 2014, to Seagate Technology LLC for $450 million. November 18, 2014, the company sold LSI's Axxia Networking Business and related assets, or the Axxia Business, to Intel Corp., or Intel, for $650 million.

Healthy Q4

Avago's adjusted earnings for the fourth quarter rose more than twofold from last year and surpassed Wall Street estimates. Revenue also topped consensus.

But, GAAP profit dropped to $135 million or $0.50 per share from last year's $172 million or $0.68 per share, largely reflecting higher operating costs and restructuring charges as well as income tax expenses.

Excluding one-time items, adjusted earnings from continuing operations for the quarter rose to $556 million to $1.99 per share from $227 million or $0.89 per share a year ago.

The more than twofold increase in adjusted earnings was largely driven by higher revenues in fourth-quarter fiscal 2014.

On average, 21 analysts polled by Thomson Reuters expected earnings of $1.68 per share for the quarter. Analysts' estimates typically exclude certain special items.

Revenues for the fourth quarter rose to $1.59 billion from $738 million a year ago. Analysts had a consensus revenue estimate of $1.55 billion for the quarter.

Gross margins for the quarter improved to 50% from 47% last year. Research and development expenses for the quarter increased to $234 million from $109 million a year ago, while selling, general, and administrative costs rose to $129 million from $60 million.

The company recorded amortization of intangible assets of $91 million for the quarter, while restructuring charges were $33 million. Provisions for income tax were $126 million, up from $8 million last year.

Segment wise, revenue from Wireless Communications accounted for 39% of the total revenue and increased 83% year over year. Within the quarter, growth was largely driven by the ramp of a new smartphone generation and a large North American smartphone OEM. Avago also saw strong double digit sequential revenue growth from its film bulk acoustic resonator or FBAR related products across the board, and in particular from multiple Chinese LTE smartphone OEMs.

Revenue from Wired Infrastructure represented 22% of the total revenue and improved 43% year over year, reflecting significant strength in its ASIC business, and growth in Ethernet switching and routing products.

Avago generated 10% of its revenue from the Industrial & Other market. Re-sales were weaker than expected in all regions, except the Americas as the company saw a cautionary stance from customers in those various other countries. On a sequential basis in fact, re-sales in America were up 2% but declined 9% in Asia Pacific, 6% in Europe and 13% in Japan.

Quarterly revenues from Enterprise Storage, accounted for 29% of the total revenue. The HDD, or hard disk drive end market had a seasonally strong quarter with a large increase in enterprise shipments and HDD revenue grew mid-single digits sequentially on a percentage basis.

Annual Financial Data

Net income for fiscal 2014 was $263 million or $0.99 per share compared to $552 million or $2.19 per share in fiscal 2013, $563 million or $2.25 per share in fiscal 2012, $552 million or $2.19 per share in fiscal 2011, and $415 million or $1.69 per share in 2010.

Net revenue totaled $4.27 billion in fiscal 2014, higher than the $2.52 billion generated in 2013, $2.36 billion in 2012, $2.33 billion in 2011, and $2.09 billion in fiscal 2010.

Cash Position

Avago's cash and cash equivalents increased by $619 million to $1,604 million at November 2, 2014 from $985 million at November 3, 2013, primarily due to $4.6 billion from the Term Loans under the 2014 Credit Agreement, $1.0 billion from the Convertible Notes, $1,175 million in cash provided by operating activities, $450 million from the sale of the Flash Business, and $124 million from the issuance of ordinary shares pursuant to the exercise of options and purchase rights under our employee share purchase plan.

Partially offsetting the increase in cash and cash equivalents was $5,961 million paid for business acquisitions completed during fiscal year 2014, $409 million in cash paid for capital expenditures, $284 million of dividends paid to the company's shareholders and $124 million of debt issuance costs related to the Term Loans under the 2014 Credit Agreement and 2014 Revolving Credit Facility.

Looking Ahead

For the first quarter of fiscal 2015, the company expects revenue to be flat to up 4% on a sequential basis.

Avago expects mid-single growth in enterprise storage, low to mid-single digit growth in industrial for the first quarter. However, low single digit growth in Wired offset by a flat to down Wireless segment.