Avago Technologies Ltd (NASDAQ:AVGO), a leading semiconductor device supplier to the wireless, enterprise storage, wired, and industrial end markets, today reported financial results for the third quarter of its fiscal year 2015, ended August 2, 2015, and provided guidance for the fourth quarter of its fiscal year 2015.

Basis of Presentation

Avago’s financial results include results from LSI Corporation’s (“LSI”) continuing operations starting the third fiscal quarter of 2014, from PLX Technology Inc. starting in the fourth fiscal quarter of 2014, and from Emulex Corporation (“Emulex”) starting the third fiscal quarter of 2015, in each case from the date of their acquisition. The financial results from businesses that have been classified as discontinued operations in the Company’s financial statements are not included in the results presented below, unless otherwise stated.

Third Quarter Fiscal Year 2015 GAAP Results

Net revenue was $1,735 million, an increase of 7 percent from $1,614 million in the previous quarter and an increase of 37 percent from$1,269 million in the same quarter last year.

Gross margin was $884 million, or 51 percent of net revenue. This compares with gross margin of $846 million, or 52 percent of net revenue last quarter, and gross margin of $393 million, or 31 percent of net revenue in the same quarter last year.

Operating expenses were $585 million. This compares with $428 million in the prior quarter and $555 million for the same quarter last year.

Operating income was $299 million, or 17 percent of net revenue. This compares with operating income of $418 million, or 26 percent of net revenue, in the prior quarter, and a loss of $162 million, or 13 percent of net revenue, in the same quarter last year.

Net income, which includes the impact of discontinued operations, was $240 million, or $0.84 per diluted share. This compares with net income of $344 million, or $1.21 per diluted share, for the prior quarter, and a net loss of $164 million, or $0.65 per diluted share in the same quarter last year.

The Company’s cash balance at the end of the third fiscal quarter was $1.4 billion, compared to $2.5 billion at the end of the prior quarter.

The Company generated $592 million in cash from operations and spent $148 million on capital expenditures in the third fiscal quarter of 2015.

Within the quarter, the closing of the Company’s acquisition of Emulex resulted in the payment of $582 million in cash to acquire all of Emulex’s outstanding shares. As a result of the acquisition, all of the $175 million aggregate principal amount outstanding of Emulex’s 1.75% Convertible Senior Notes due 2018 (the “Emulex Notes”) became convertible at an increased conversion rate, until June 30, 2015, under the make-whole fundamental change provision of the indenture relating to the Emulex Notes. As a result of the acquisition, upon conversion, holders of Emulex Notes were only entitled to receive a cash payment based on the $8.00 per share acquisition price. All of the outstanding Emulex Notes were converted at this increased conversion rate, resulting in an aggregate cash payout of $178 million in the third quarter.

The Company previously issued $1 billion of its 2% Senior Convertible Notes due 2021 (the “Convertible Notes”) to two investment funds affiliated with Silver Lake Partners. During the third quarter, the noteholders converted all of the Convertible Notes. The settlement of the conversion resulted in an aggregate cash payment of $1 billion, and the issuance of an aggregate of approximately 13.8 million shares of the Company to the noteholders within the quarter.

On June 30, 2015, the Company paid a quarterly cash dividend of $0.40 per ordinary share, totaling $104 million.

Third Quarter Fiscal Year 2015 Non-GAAP Results From Continuing Operations

The differences between the Company’s GAAP and non-GAAP results are described generally under “Non-GAAP Financial Measures” below, and presented in detail in the financial reconciliation tables attached to this release.

Net revenue from continuing operations was $1,750 million, an increase of 6 percent from $1,645 million in the previous quarter, and an increase of 36 percent from $1,287 million, in the same quarter last year.

Gross margin from continuing operations was $1,063 million, or 61 percent of net revenue. This compares with gross margin of $998 million, or 61 percent of net revenue last quarter, and gross margin of $735 million, or 57 percent of net revenue, in the same quarter last year.

Operating income from continuing operations was $733 million, or 42 percent of net revenue. This compares with operating income from continuing operations of $701 million, or 43 percent of net revenue, in the prior quarter, and $428 million, or 33 percent of net revenue, in the same quarter last year.

Net income from continuing operations was $660 million, or $2.24 per diluted share. This compares with net income of $620 million, or $2.13per diluted share last quarter, and net income of $347 million, or $1.26 per diluted share, in the same quarter last year.

Third Quarter Fiscal Year 2015 Non-GAAP Results Change
(Dollars in millions, except EPS) Q3 15 Q2 15 Q3 14 Q/Q Y/Y
Net Revenue $1,750 $1,645 $1,287 +6% +36%
Gross Margin 61% 61% 57% +4ppt
Operating Expenses $330 $297 $307 +$33 +$23
Net Income $660 $620 $347 +$40 +$313
Earnings Per Share – Diluted $2.24 $2.13 $1.26 +$0.11 +$0.98

“In contrast to the recent volatility and uncertainty in equity markets, our market fundamentals have been relatively stable and I am pleased with our third quarter revenue and earnings performance,” said Hock Tan, President and CEO of Avago Technologies Limited. “Led by strong seasonal growth in our wireless segment, and stable performance from our enterprise storage, wired and industrial segments, we expect solid sequential revenue growth to sustain in the fourth quarter.”

Other Quarterly Data
Percentage of Net Revenue* Growth Rates
Net Revenue by Segment Q3 15 Q2 15 Q3 14 Q/Q Y/Y
Wireless Communications 35 35 28 7% 69%
Enterprise Storage 34 28 32 26% 46%
Wired Infrastructure 21 23 27 -3% 7%
Industrial & Other 10 14 13 -21% 2%
* Represents percentages of non-GAAP net revenue
Key Statistics (Dollars in millions) Q3 15 Q2 15 Q3 14
Cash From Operations $592 $663 $314
Depreciation $59 $58 $46
Amortization $197 $172 $211
Capital Expenditures $148 $177 $95
Non-GAAP Days Sales Outstanding 42 42 39
Non-GAAP Inventory Days On Hand 67 69 79

Fourth Quarter Fiscal Year 2015 Business Outlook

Based on current business trends and conditions, the outlook for continuing operations for the fourth quarter of fiscal year 2015, endingNovember 1, 2015, is expected to be as follows:

GAAP Reconciling Items Non-GAAP
Net Revenue $1,838M +/- $25M $12M $1,850M +/- $25M
Gross Margin 52.75% +/- 1% $148M 60.50% +/- 1%
Operating Expenses $485M $149M $336M
Interest and Other $38M $38M
Taxes $29M $13M $42M
Diluted Share Count 289M 7M 296M

Projected reconciling items:

  • Non-GAAP Revenue includes $12 million of LSI intellectual property licensing revenue not included in GAAP revenue as a result of the effects of purchase accounting for the LSI acquisition;
  • Non-GAAP Gross Margin includes the effects of $12 million of LSI intellectual property licensing revenue and excludes the effects of $128 million of amortization of intangible assets, $7 million of share-based compensation expense, and $1 million of restructuring charges;
  • Non-GAAP Operating Expenses exclude $64 million of amortization of intangible assets, $59 million of share-based compensation, $17 million of acquisition-related costs, and $9 million of restructuring charges; and
  • $13 million provision at the Taxes line represents the tax effects of the reconciling items noted above.

Capital expenditures for the fourth fiscal quarter are expected to be approximately $134 million. For the fourth fiscal quarter, depreciation is expected to be $58 million and amortization is expected to be $192 million.

The guidance provided above is only an estimate of what the Company believes is realizable as of the date of this release. The guidance also excludes any impact from any mergers, acquisitions and divestiture activity that may occur during the quarter. Actual results will vary from the guidance and the variations may be material. The Company undertakes no intent or obligation to publicly update or revise any of these projections, whether as a result of new information, future events or otherwise, except as required by law.

Avago will be presenting at the Citi 2015 Global Technology Conference on September 9, 2015 in New York City, meeting investors at the 22nd CLSA Investor’s Forum on September 15 and September 16, 2015 in Hong Kong, and presenting at the Deutsche Bank 23rd AnnualLeveraged Finance Conference on September 29th, 2015 in Phoenix.(Original Source)

Following earnings, shares of Avago Technologies are up 1.90% to $118.52 in after-hours trading. AVGO has a 1-year high of $150.50 and a 1-year low of $68.75. The stock’s 50-day moving average is $125.78 and its 200-day moving average is $127.45.

On the ratings front, Avago Technologies has been the subject of a number of recent research reports. In a report released today, Brean Murray Carret analyst Mike Burton reiterated a Buy rating on AVGO, with a price target of $180, which implies an upside of 59.9% from current levels. Separately, yesterday, CLSA’s Srini Pajjuri upgraded the stock to Buy and has a price target of $150.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Mike Burton and Srini Pajjuri have a total average return of 7.6% and -4.6% respectively. Burton has a success rate of 46.6% and is ranked #614 out of 3730 analysts, while Pajjuri has a success rate of 38.1% and is ranked #3019.

The street is mostly Bullish on AVGO stock. Out of 12 analysts who cover the stock, 11 suggest a Buy rating and one recommends to Hold the stock. The 12-month average price target assigned to the stock is $164.18, which implies an upside of 45.8% from current levels.

Avago Technologies Ltd is engaged in manufacturing semiconductor products such as optoelectronics, radio-frequency and microwave components, and application-specific integrated circuits.