Leading analog semiconductor manufacturer Avago Technologies Limited (AVGO - Analyst Report) recorded strong fourth-quarter fiscal 2014 results (ended Nov 2, 2014) with substantial year-over-year improvements in revenue and recurring earnings on the back of accretive LSI Corporation and PLX Technology Inc. acquisitions. This is the first full quarter in which Avago and PLX operated as a combined entity after the $309 million acquisition successfully closed in August this year. Avago completed the acquisition of LSI in May 2014 and this is the second quarter in which its earnings are included in the former’s results.

Net income (GAAP) for the reported quarter was $135 million or 50 cents per share compared with $172 million or 68 cents per share in the year-earlier quarter. The significant year-over-year improvement was primarily attributable to robust top-line growth.

Excluding non-recurring items, Avago recorded a non-GAAP net income (from continuing operations) of $556 million or $1.99 per share compared with $227 million or 89 cents per share in the year-ago quarter. The more than twofold increase in recurring earnings was largely driven by higher revenues in fourth-quarter fiscal 2014. Recurring earnings for the reported quarter comfortably beat the Zacks Consensus Estimate of $1.52.

For fiscal 2014, net income was $263 million or 99 cents per share compared with $552 million or $2.19 per share in the prior fiscal. The sharp year-over-year decline was primarily attributable to discontinued operations.

Excluding non-recurring items, Avago recorded a non-GAAP net income (from continuing operations) of $1,343 million or $4.90 per share compared with $731 million or $2.89 per share in fiscal 2013. The healthy rise in recurring earnings was largely driven by higher revenues in fiscal 2014, which increased 71% year over year to $4,307 million. Recurring earnings for fiscal 2014 well surpassed the Zacks Consensus Estimate of $4.11.

Quarter Details

Non-GAAP net revenue (from continuing operations) for fourth-quarter fiscal 2014 more than doubled to $1,610 million from $738 million in the prior-year quarter. The surge in revenues was primarily due to synergies from LSI and PLX, and strength across all the end markets. Net revenue for the reported quarter beat the Zacks Consensus Estimate of $1,549 million.

By target markets, revenue from Wireless Communications accounted for 39% of the total revenue and increased 83% year over year. Avago achieved high penetration levels with Chinese OEMs on the back of its industry-leading film bulk acoustic resonator (FBAR) technology and healthy demand from a smartphone OEM in North America.

Revenue from Wired Infrastructure represented 22% of the total revenue and improved 43% year over year. Revenue growth was primarily due to strong demand from enterprise networking features and service provider routers. Avago generated 10% of its revenue from the Industrial & Other market. Buoyed by resurgence in demand in Asia, year-over-year sales were up 13% in this target market.

Quarterly revenues from Enterprise Storage, a new end market for Avago dealing with LSI's hard disk drive and service storage connectivity product lines, accounted for 29% of the total revenue.  

Non-GAAP gross margin for the reported quarter improved to 58% of net revenue from 51% in the year-ago quarter. Operating income from continuing operations (non-GAAP) was $636 million in fourth-quarter fiscal 2014, considerably up from $229 million in the same quarter last year.

During the quarter, Avago closed the sale of the Axxia Networking Business of LSI to Intel Corporation (INTC - Analyst Report) for $650 million in cash. The company also completed the divesture of LSI's flash businesses to Seagate Technology Public Limited Company (STX - Analyst Report). The strategic divestments were aimed at augmenting revenues by offloading non-core businesses, as the industry resorts to more consolidation in a challenging macroeconomic environment. Both the transactions are included as discontinued operations in the current quarter results.

Cash Flow & Balance Sheet

Avago generated $381 million in cash from operations in the reported quarter compared with $212 million in the prior-year period. Capital expenditures were relatively high at $189 million, up from $57 million in the year-earlier quarter owing to higher spending on the FBAR capacity ramp-up.

At fiscal end 2014, Avago had $1,604 million in cash and cash equivalents compared with $985 million at fiscal end 2013. Long-term debt (net of current portion) was $5,463 million. During the quarter, the company paid a dividend of 32 cents per share, which represents a sequential and a year-over-year increase of 3 cents and 9 cents, respectively. Avago has continuously increased the quarterly dividend since its inception.

Guidance

Along with the quarterly results, Avago provided guidance for first-quarter fiscal 2015, based on the current market conditions. GAAP revenue is expected to be flat to up 4%, while gross margin is projected at about 48%. Operating expenses are estimated to be approximately $432 million. Capital expenditures are expected to be approximately $200 million.

We are encouraged by the strong quarterly results of this Zacks Rank #3 (Hold) stock and its positive guidance. Advanced Semiconductor Engineering Inc. (ASX - Snapshot Report) is another well-placed stock worth considering in the industry with a Zacks Rank #2 (Buy).