Avago Technologies Continues to Deliver

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Avago Technologies Ltd. (NASDAQ:AVGO) is an interesting company. It is engaged in the design, development, and supply of analog semiconductor devices with a focus on III-V based products. Its product portfolio comprises RF power amplifiers, RF filters, RF front end modules, ambient light sensors, low noise amplifiers, proximity sensors, multi-market wave mixers, diodes, fiber optic transceivers, serializer and deserializer ASICs, optical laser and receiver components, motion control encoders and subsystems, optocouplers, LEDs, and industrial fiber optics.

The company’s products are used in cellular phones, consumer appliances, data networking and telecommunications equipment, enterprise storage and servers, data communications, smartphones, base stations, core routing and transport, in-car infotainment, motor controls, factory automation, displays and lighting, power isolation, power conversion, and renewable energy systems applications. It markets its products through a network of distributors and its direct sales force worldwide. The company sells products to original equipment manufacturers of wireless communications, wired infrastructure, industrial and automotive electronics, and consumer and computing peripherals markets. In this competitive sector, Avago has done well, and its shareholders have been rewarded. In fact, the stock is up 118 percent in just one year. This is because the company continues to deliver strong results.

In its most recent quarter, Avago’s net revenue was $701 million, a decrease of 1 percent compared with the previous quarter and an increase of 25 percent from the same quarter last year. Gross margin came in at $357 million, or 51 percent of net revenue. This compares with gross margin of $339 million, or 48 percent of net revenue, last quarter, and gross margin of $272 million, or 48 percent of net revenue, in the same quarter last year. Operating expenses actually declined from last quarter but were up year over year. In the most recent quarter, they were $197 million. This compares with $200 million in the prior quarter and $154 million for the same quarter last year.

Income from operations was $160 million. This compares with $139 million in the prior quarter and with $118 million in the same quarter last year. Overall, net income was $158 million, or 61 cents per diluted share. This compares with net income of $134 million, or 53 cents per diluted share, for the prior quarter, and net income of $113 million, or 45 cents per diluted share, in the same quarter last year. The company’s cash balance improved, as well. At the end of the second quarter was $1.278 billion, compared to $1.112 billion at the end of the prior quarter.

Hock Tan, President and CEO of Avago, said: “In the second fiscal quarter of the year, our wireless business came in significantly above our expectations due to strong product ramps for our FBAR-related products into multiple Asian Smartphone OEMs. We also saw a resurgence in Industrial re-sales through our distributors, especially in Europe and Japan. The third quarter marks a transformative event in Avago’s history as we completed the acquisition of LSI, creating a substantially larger company with a much more diversified and balanced mix of end markets.”

Looking ahead, it seems the company will continue to deliver. For the next quarter, the company expects revenues of $1.3 billion and gross margin to come in around 24 percent. It expects a hefty amount of operating expenses of $691 million to achieve these revenues and gross margin. All in all, the company continues to succeed. While the stock has leveled off recently, I think it has much more room to run. As such, I have a buy rating on the stock and assign an $80 price target.

Disclosure: Christopher F. Davis holds no position in Avago and has no plans to initiate a position in the next 72 hours.

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