PMC-Sierra Inc. (PMCS) reported adjusted fourth-quarter 2014 earnings of 9 cents per share that came in line with the Zacks Consensus Estimate. The adjusted earnings exclude one-time items but include stock-based compensation expense.
Revenues
PMC-Sierra reported revenues of $136.9 million, up 1% sequentially and 7.9% from the year-ago period. Reported revenues came ahead of the Zacks Consensus Estimate of $136.0 million and were toward the higher end of management’s guidance of $132–$139 million. The increase was driven by broad-based strength in the company’s storage products and optical products, partially offset by weak demand for mobile products.
Revenues by Market Segment
The Storage segment generated 72% of fourth-quarter revenues, same as in the third quarter. Its products include controllers based on Fiber Channel, Serial Attached SCSI and Serial ATA used for developing external and server-attached storage systems.
The segment increased 8% year over year to $98.4 million. The increase was driven by strong demand for 12-gig SAS and Flashtec product lines. In fact, the company witnessed strong demand across all storage end-markets, servers, hyperscale data centers, storage systems and Flash.
Going forward, the company expects the Flash controllers, Adaptec 12-gig SAS/RAID adapters to continue to witness strong interest from large data center customers. Management remains confident that the industry’s continued shift toward 12-gig SAS will increase the company’s market share by at least 10% over the next 18 to 24 months.
The Carrier segment generated 18% of sales, up from 16% in the prior quarter. Segment revenues increased 3% sequentially and 7% year over year to $38.5 million. Optical Transport Network (OTN) revenues were $24 million, up 11% sequentially and 21% year over year. However, mobile revenues decreased due to weak wireless backhaul capex.
Management stated that its third-generation OTN product family called DIGI as additional line cards will boost the OTN revenues, going forward. With the ramp up of the new DIGI-based platforms and some new bids in the North American and European markets, the company expects to increase its market share in the OTN business.
The Mobile segment accounted for 10% of sales, down from 12% in the prior quarter. Though segment revenues were down sequentially, the company’s new Remote Radio Head products continued to show sequential and year-over-year growth.
Operating Results
Reported gross margin was 70.3%, up 10 basis points (bps) sequentially but down 30 bps from the year-ago quarter. The sequential increase was due to higher revenues and a favorable product mix.
PMC-Sierra reported GAAP operating expenses of $80.4 million, down 1.7% from $81.8 million incurred in the year-ago quarter. As a percentage of sales, both research & development and selling, general & administrative expenses decreased from the year-ago quarter. The net result was a GAAP operating margin of 3.5% versus (4.6%) in the year-ago quarter.
Net Income
On a GAAP basis, PMC-Sierra recorded a net income of $2.3 million or earnings of 1 cent per share compared with a net loss of $15.7 million or a loss of 8 cents per share in the year-ago quarter.
On a non-GAAP basis, the company generated adjusted net profit of $17.9 million compared with $16.53 million in the last quarter. Pro-forma earnings per share came in at 9 cents, flat year over year.
Balance Sheet & Cash Flow
PMC-Sierra exited the quarter with cash, cash equivalents and short-term investments of approximately $158.5 million versus $125.4 million in the prior quarter. Trade receivables were $55.4 million, down from $57.0 million in the last quarter.
Cash flow from operations was $29.1 million versus $22.5 million in the previous quarter. Capex was $4.5 million versus $3.6 million in the earlier quarter.
In the reported quarter, the company did not repurchase any stock.
Guidance
For the first quarter of 2015, PMC-Sierra expects total revenue in the range of $129–$137 million, down 2% sequentially at the mid-point due to seasonal weakness in storage revenues, partially offset by 12-gig share gains.
On a non-GAAP basis, the company expects gross margins in the range of 70%, (+/- 50 bps); operating expenses in the $72.0–$74.0 million range; tax provision in the range of $1–$1.5 million and earnings per share of 9 cents, assuming a share count of 202 million. The Zacks Consensus Estimate for earnings per share is pegged at 6 cents.
Our Take
PMC-Sierra is engaged in design, development, marketing and support of semiconductor solutions by integrating mixed-signal, software and systems expertise in North America, Europe and Asia. The company reported a decent quarter with the top line exceeding our expectations while the bottom line matching the same.
Though mobile revenues remained weak, we are encouraged by the improvement in the storage and carrier segments, introduction of several major products and design wins.
Over the long term, PMC-Sierra is well positioned to grow and gain market share in server/storage, wireless infrastructure and optical communications. We expect LTE build-out in China, cloud and data center build-outs and storage demand to increase substantially and act as solid catalysts through 2015.
Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Some stocks in the same space that are performing well include Broadcom Corp. (BRCM), Nitto Denko Corporation (NDEKY) and DSP Group Inc. (DSPG). While Broadcom and Nitto sport a Zacks Rank #1 (Strong Buy), DSP has a Zacks Rank #2 (Buy).
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