Avago Technologies Holds Steady in the First Quarter

Communication chip makers are coming up with fairly decent results this earnings season. After Skyworks Solutions trumped the Street last month, it was time for Avago Technologies (Nasdaq: AVGO  ) to follow suit.

Let's see what went right for Avago and what didn't.

First, what's wrong
Avago's revenue remained almost flat from the year-ago period, coming in at $563 million in the quarter from $550 million last year. It was Avago's industrial and automotive electronics business, one of its three segments, which played a spoilsport in the quarter, declining 31% from last year. A tentative economy led to controlled spending at original equipment manufacturers, and hurt the company's top line.

While management predicts that the sore point of its industrial business has bottomed out and is now improving, I would see this as being cautiously optimistic. But I am positive about the other two segments.

Making it good
Decline in the industrials business was offset by gains in the other two segments. The company's wireless division, which supplies chips for smartphones and consumer electronics, grew 26% from last year, while its infrastructure business increased 6% despite the effects of inventory correction. Avago more or less held its ground.

I feel good about Avago's growth in the wireless communications business. The jump in this area was quite significant and now contributes almost half of the company's revenue. Also, keeping in mind the rapidly growing demand for wireless data, I believe Avago has significant room to keep up the growth momentum in the coming quarters.

Moreover, the stability in the top line was well complemented by cost reduction measures. Avago had put in a more efficient cost structure to combat the weakness in the market, and the results showed in the quarter. The company managed to trim $6 million of its costs, thereby helping its net income jump 5% to $125 million in the quarter from the year-ago period.

Needs to make it better
While the cost control initiatives are commendable, I think Avago needs a more competitive cost structure to strengthen its gross margin. The company's gross margin fell to 48% from 49.3% last year, and this is certainly worrying when we consider the fact that peer Analog Devices (NYSE: ADI  ) reported a higher number at 63%.

Moreover, Analog's dividend yield of 2.5% is ahead of Avago's 1.4%. This is another reason that  Avago needs to do some catching up and generate more cash to satisfy shareholders. Thus, a little more operational efficiency will surely help Avago become a more attractive option.

The Foolish takeaway
Avago is projecting revenue for the current quarter in the range of $568.6 million to $585.5 million against the $577 million expected by the Street. I believe Avago is going in the right direction, and can beat Mr. Market once again, as its businesses seem to be well-placed. Moreover, once the company sets a few areas right, it can be a good long-term prospect.

Fool contributor Harsh Chauhan owns none of the stocks mentioned in the article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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