Altera Corporation (ALTR) reported earnings of 41 cents per share in the second-quarter of 2014, which beat the Zacks Consensus Estimate of 37 cents. Earnings also increased 29.1% on a year-over-year basis, primarily due to a higher revenue base and lower share count.

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Revenues

Altera’s second-quarter revenues not only increased 16.5% on a year-over-year basis to $491.5 million, but also came ahead of the Zacks Consensus Estimate of $479.0 million.

The year-over-year increase was mainly attributable to growth in new product revenues (53.0% of total revenue), which increased 53.0% year over year and offset the 11.0% decline in mainstream revenues and a 5.0% decline in Mature and Other markets. New product revenues were primarily driven by robust performance in its 28-nm process node and 40-nm products.

Revenues from FPGA (84.0% of total revenue) increased 18.0% on a year-over-year basis. Revenues from CPLD and other products, which constitute 8.0% of total revenue each, increased 7.0% and 12.0%, respectively.

By verticals, all except the Networking, Computer & Storage (15.0% of total revenue) increased on a year-over-year basis. The Networking, Computer & Storage segment witnessed a decline of 6.0%. Telecom & Wireless (46.0% of total revenue) increased 28.0% from the year-ago quarter, primarily due to LTE deployments in the U.S., Europe, South Korea and Japan, and China Mobile LTE deployment. Industrial Automation and Military & Automotive markets, which comprised 21.0% of second-quarter revenues, increased 14.0% from the year-ago quarter. Other segment (18.0% of total revenue) increased 16.0% from the year-ago period.

By geography, Asia Pacific grew 28.0% on a year-over-year basis, whereas revenues from EMEA and Americas increased 13.0% and 9.0%, respectively. Revenues from Japan increased 3.0% on a year-over-year basis

Operating Results

Altera reported gross margin of 66.9%, which was down 101 basis points (bps) from the year-ago quarter, primarily due to an unfavorable product mix.

Operating margin came in at 29.8%, up from 26.6% in the year-ago quarter. Total operating expenses increased 4.7% year over year, reflecting a 5.9% rise in research and development expenses and a 1.4% increase in selling, general, and administrative expense. As a percentage of revenues, operating expenses contracted 418 bps to 37.1% from the year-ago quarter, which favorably impacted margins.

Reported net income was $127.0 million or 41 cents per share compared with $101.5 million or 31 cents per share in the second quarter of 2013. Including gain on securities and gain from the reclassification, net income was $141.4 million compared with $92.4 million in the year-ago quarter.

Balance Sheet & Cash Flow

Altera exited the quarter with cash and short-term investments balance of $2.81 billion compared with $2.91 billion in the previous quarter. Long-term debt amounted to $1.49 billion. The company generated cash flow from operating activities of $301.4 million.

During the quarter, Altera repurchased approximately 6.0 million shares at a cost of $197.0 million and announced a cash dividend of 18 cents to be paid on Sep 2, 2014.

Guidance

Altera expects sales to increase in the range of (2.0%) to 2.0%, sequentially ($481.7 million to $501.3 million) in the third quarter. The Zacks Consensus Estimate is pegged at $481.0 million. Also, the company is positive about its 28-nanometer revenues in the forthcoming quarter.

Management expects revenues from Telecom & Wireless to be flat, sequentially. Industrial Automation, Military & Automotive revenues are also expected to be flat, sequentially. However, Networking, Computer & Storage revenues are expected to increase quarter over quarter.

Management projects gross margin of roughly 67.0% in the third quarter. Research and development expenses are expected in the range of $114.0 million to $116.0 million, while selling, general and administrative expenses will likely range between $78.0 million and $80.0 million. Tax rate is expected in a range of 11.0% to 12.0%.

Our Take

Altera has delivered better-than-expected second-quarter 2014 results. Both revenues and earnings increased on a year-over-year basis, primarily aided by strong growth in its 28nm process node and constant development from its 40 nm products. Moreover, the company provided an encouraging third-quarter revenue guidance.

Also, growth in 4G/LTE deployments in particular will increase demand for FPGAs, which will be beneficial for Altera. Additionally, Altera’s transition to 14nm FPGAs in association with Intel Corp. (INTC) is likely to be a competitive differentiator.

Altera is currently manufacturing its chips using 28-nanometer nodes. We believe that the deployment will help Altera to strengthen its product portfolio and offer more comprehensive and high-value programmable solutions.

Moreover, the continued share buybacks are expected to support the company’s bottom line, going forward.

However, macroeconomic weakness, competition from Xilinx Inc. (XLNX) and Lattice Semiconductor Corporation (LSCC), consolidation in the telecom market, declining margins and volatility in the semiconductor market are concerns.

Currently, Altera holds a Zacks Rank #2 (Buy).

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