By Ken Nagy, CFA, Zacks Investment Research.
June quarter revenue for Actel Corporation (NASDAQ: ACTL) fell short of consensus expectations, as the company was short of Flash product. However, the EPS was in-line. Although Flash product growth was lower than expected, the product line is expected to remain strong for the next few years. Actel continues to enjoy a high margin in select markets, although the quicker ramp of new products is likely to exert some negative pressure.
The exposure to the consumer market is also increasing, so working capital requirements are likely to increase. The stock looks attractive at these price levels, but we are reiterating our Hold rating in view of the broader market uncertainties.
Actel's expertise, the limited competition, and its embedded customer base have enabled the firm to emerge as the leading supplier of HiRel FPGAs to the military, avionics and space industries. Actel's Flash products are beginning to take off. The company has introduced seven product families to date, with varying success. Flash products generated 24% of revenue in Q2 of 2008. The management also expects significantly lower cost of production within the 1Q09-2Q09 timeframe, as the company proceeds on the learning curve and also ships higher volumes.
However, the low growth profile of the antifuse FPGA business is a long-term concern to many potential investors. While Actel benefits from the higher margins, the limited growth opportunity prompted the company to diversify its product portfolio. The management has deliberately steered the company into the consumer business, which is a mixed blessing. Being a faster-growing market, it will provide the much-needed boost to the topline. However, consumer demand tends to be seasonal, which could lead to significant quarterly fluctuations.
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