Microsemi Corporation’s MSCC first-quarter fiscal 2016 adjusted earnings of 58 cents per share matched the Zacks Consensus Estimate.
Revenues
Microsemi reported revenues of $329.0 million, up 0.1% sequentially and 8.4% year over year. Also, revenues came ahead of the Zacks Consensus Estimate of $327 million, driven by strong growth across all the end markets.
In the reported quarter, the book-to-bill ratio was greater than 1.
Revenues by End Market
Microsemi generates revenues from the Defense & Security, Aerospace, Communications and Industrial markets.
Around 40% ($131 million) of Microsemi’s quarterly revenues came from the largest end market, Communications, which increased 3% sequentially and 18% year over year.
Microsemi’s communication infrastructure, broadband gateway applications and enterprise networking posted strong results. Management expects the Communications market to do well through the remainder of 2016, with some seasonality in the broadband gateway markets in the March quarter.
The Defense & Security market generated 26% ($87 million) of sales, up 2% sequentially and 3% year over year. The improved defense end-market environment led to the year-over-year rise.
Management expects this end market to continue to witness growth backed by improving defense budget and increasing dollar content.
The Aerospace segment generated 14% of first-quarter revenues. The segment increased 19% year over year, supported by strong fundamentals in the commercial aviation markets.
The Industrial market generated 20% of sales, flat sequentially but down 7% year over year to $64 million. The results were hurt by the oil-affected end markets, partially offset by modest results from the medical end markets.
Revenues by Product Line
FPGAs generated 23% of first-quarter sales, growing 8% sequentially and 6% year over year.
The company’s SoC FPGAs are used in multiple end markets — Aerospace, Defense, medical and industrial — and witnessed good traction in each of these. Management stated that it will continue to improve its capabilities in the FPGA business, thereby expanding the revenue base.
Timing products revenues accounted for 17% of sales, up 6% sequentially and 2% year over year, because timing solutions in the communications applications continued to grow, and management expects the trend to continue.
Mixed-signal RF accounted for 34% of the revenues, up 2% sequentially and 29% year over year, supported by solid growth of Ethernet, PoE, voice circuits and ultra low power radios.
Discretes were down 7% sequentially, accounting for 26% of the total first-quarter sales due to seasonality and weakness in the drilling applications for the discrete solutions.
Margins
Pro-forma gross margin was 57.1%, up 57 basis points (bps) sequentially and 92 bps year over year. The increase was driven by higher revenues, a favorable product mix, operational efficiency and consolidations.
Adjusted operating expenses of $118.1 million were up 2.7% sequentially and 10.4% year over year. Operating margin of 21.2% was down 33 bps sequentially but up 29 bps year over year.
Net Income
Microsemi generated GAAP net income of $23.7 million or earnings of 25 cents per share compared with $25.3 million or 26 cents per share in the previous quarter and $19.7 million or 21 cents per share a year ago.
Excluding special items but including stock-based compensation expense, non-GAAP earnings per share were 58 cents as against 60 cents in the prior quarter and 54 cents in first-quarter fiscal 2015.
Balance Sheet
Cash and cash equivalents balance at the end of the quarter was $199.7 million, down from $256.4 million in the fourth quarter. Operating cash flow was $82.9 million compared with $77.9 million in the previous quarter. Capex was $10.5 million as against $9.2 million in the previous quarter.
Inventories were $231.4 million compared with $227.2 million in the previous quarter. Accounts receivable was $176.2 million as against $186.9 million at the end of the prior quarter. Days sales outstanding (DSOs) were down 3 days to 50 days.
Guidance
Microsemi expects second-quarter fiscal 2016 revenues to be $435–$455 million, while the Zacks Consensus Estimate is pegged at $328 million. Earnings per share are likely to be within 62–68 cents, above our estimate of 60 cents.
Our Take
Microsemi reported a decent quarter with the top line exceeding the Zacks Consensus Estimate but the bottom line coming in line with the same.
The company’s focus on improving product mix, operational efficiency, and consolidation, will drive revenues and help it achieve the 60% gross margin target in the second half of calendar 2016.
Last month, Microsemi completed the acquisition of PMC-Sierra and the integration remains well on track. The company expects to save in excess of $100 million annually from this merger, with more than $75 million to be realized in the first full quarter of the combined operations.
Microsemi sports a Zacks Rank #1 (Strong Buy).
Other Stocks to Consider
Other well-performing stocks are MaxLinear, Inc MXL, NXP Semiconductors NV NXPI and eBay Inc. EBAY. All of them have the same Zacks Rank as Microsemi.
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