Tech Earnings Cheat Sheet: Avago (AVGO) Continues To Benefit From The Smartphone Boom

Earnings: Q3 profits excluding items of $0.61 vs. estimates of $0.53 and $0.18 in Q3 last year.

Revenue: Up 52% YoY to $550 million, in-line with management’s revised guidance and at the high end of the company’s original guidance.

CEO Hock Tan noted that Avago (NASDAQ: AVGO) “reached a historic milestone in the third quarter of fiscal 2010.  In addition to another record net revenue quarter, Avago’s non-GAAP Gross Margins surpassed 50% as [the company] continued to execute well on [its] strategy of expanding gross margins.”

He added that, “business remains robust and our proprietary products continue to gain momentum as we win more programs at major OEMs.”

Comment: Avago designs, develops and supplies a range of analog semiconductor devices with a focus on III-V-based products.  This form of compound semiconductor is desirable for its thermal properties, which allow for higher-efficiency power consumption.  They are used in FBAR filters, power amplifiers, front-end modules and light emitting diodes, primarily in wireless handsets and equipment.

On top of its earnings and revenue beat, AVGO also gave solid guidance for the current Q, forecasting a 3%-6% rise in revenue QoQ to $566.5 million-$583 million vs. estimates of $557 million.  Unadjusted gross margins rose to 47.8% from 38.8%.

Shares shed 1.38% during after-hours trading after dropping 0.78% on the day, last changing hands at $19.96.  An on-again, off-again secondary offering from major shareholder KKR has been weighing on shares for the better part of a month, and seems to still be in AVGO’s way.  Still, despite the potentially dilutive effects of such an offering, AVGO saw its debt rating upped by S&P this past Monday.  S&P cited revenue strength and appropriate debt level as its reason for boosting AVGO’s rating to BB+, or on notch below investment grade.

From a technical standpoint, AVGO was able to hold its 200-day moving average on August 11th, a day in which big negative news concerning the semi space took down the whole sector.  That indicator, which now rests at about $19.50, is just $0.46 below today’s after-hours close, and shares may be ready to test the mark again.  If AVGO can make it through a second test, that should definitely be taken as a cause to give shares a second look.  Given their exposure to smartphones, AVGO is better situated to weather weakness in semis than many of its peers.  As such, putting on a pairs trade vs. a weaker competitor may be the way to go.

Disclosure: No holdings in AVGO.