When Singapore-based semiconductor company Avago Technologies Ltd (NASDAQ:AVGO) released its first-quarter report last week, it didn’t spring much of a surprise. The company met expectations on revenue and beat on earnings, but this is the least it should have done, since estimates were already quite low after Avago had issued a gloomy outlook the quarter before.
However, Avago Technologies Ltd (NASDAQ:AVGO) guided below Street expectations yet again for next quarter. While analysts were expecting a sequential increase in revenue to $583 million, Avago thought otherwise. It expects its top line to shrink 2% to 5% in the second quarter, as a product ramp up at its Korean customer won’t be enough to offset the annual product transition at its North American customer.
As you would have guessed, these customers are Apple Inc. (NASDAQ:AAPL) and Samsung, to whom Avago supplies wireless chips that prevent interference between various kinds of radio signals. According to CEO Hock Tan, product transition at Apple has arrived a quarter earlier this time, and this knocked out some wind out of Avago’s sails.
Apple Inc. (NASDAQ:AAPL), through Foxconn, accounted for 17% of Avago Technologies Ltd (NASDAQ:AVGO)’s revenue last year. Thus, the weakness of the latest iPhone was bound to have a negative effect of Avago this quarter. According to Jefferies analyst Peter Misek, sales of iPhone 5 have slowed down earlier than expected, leading Apple to issue further order cuts.
However, as Misek pointed out, preparation for the next iPhone is expected to start this month. As the iPhone transition appeared a quarter earlier, one can expect Apple Inc. (NASDAQ:AAPL) to start preparing its next flagship earlier as well, and this should help Avago in the next quarter when orders start flowing in.
The presence of Samsung as a customer was the saving grace for Avago, as it acted as a hedge against Apple’s weakness. Avago had supplied chips to Samsung for the Galaxy S III. With the next iteration of the Korean giant’s flagship on the horizon, Avago Technologies Ltd (NASDAQ:AVGO) saw better orders from Samsung, and this salvaged its outlook to some extent.
A bite of the berry
Another shot in the arm for Avago could be its presence inside Research In Motion Ltd (NASDAQ:BBRY)’s messiah, the Z10. Even though the flagship has yet to be launched in the U.S., it is off to a good start in other countries. For instance, reports suggest that the Z10 appears to be doing well on its home turf in Canada, as well as in the U.K., by taking away share from other platforms.
Moreover, the smartphone has started off well in an important market such as India despite steep pricing, which establishes the fact that consumer loyalty could help Research In Motion Ltd (NASDAQ:BBRY) regain some of its lost market share. This, in turn, should prove beneficial for Avago Technologies Ltd (NASDAQ:AVGO).
Apart from these bigwigs, Avago is also finding traction at other phone makers in regions such as Taiwan, Korea, and China. Growth of 4G LTE devices and increasing FBAR content are expected to help Avago going forward. The company invested $300 million for quadrupling its FBAR capacity, as it expects increasing sales of LTE devices to result in higher demand for its chips.