PMC-Sierra Inc. (PMCS) reported adjusted second-quarter 2014 earnings of 6 cents per share, exceeding the Zacks Consensus Estimate by a penny. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
PMC-Sierra reported revenues of $126.8 million in the second quarter, up 0.3% sequentially but down 0.6% from the year-ago period. Reported revenues beat the Zacks Consensus Estimate of $125.0 million. The increase was driven by strong demand for the company’s optical and mobile products, partially offset by weak demand for storage products.
Revenues by Market Segment
The Storage segment generated 65% of second-quarter revenues, down from 69% in the fourth 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 decreased 4.7% sequentially due to the inventory consumption expected at two large customers. Also, revenues from Flash Controllers decreased due to the timing of data center build-outs.
Going forward, the company expects the Flash controllers, Adaptec 12-gig SAS/RAID adapters to witness strong interest from large data center customers. Management stated that the majority of these 12-gig design wins will start to ramp up with Intel's Brantley launch in the second half of 2014, helping the company to continue its market share dominance.
The Carrier segment generated 20% of sales, up from 19% in the prior quarter. Segment revenues were up over 11% sequentially due to strength in the Optical Transport Network (OTN) business. The OTN products continued to witness strength in the last quarter and were up $1.4 million sequentially — the sixth straight quarter of growth — driven by deployments in India, Russia and Korea, partially offset by lower fiber-to-the-home revenues in Japan.
Management stated that its third-generation OTN product family called DIGI as additional line cards will go into production in the third quarter and beyond, boosting the OTN revenues. With the ramp up of new DIGI-based platforms, the company expects to increase its market share in the OTN business.
The Mobile segment accounted for 15% of sales, up from 12% in the prior quarter. Segment revenues were up 20% sequentially. The WinPath business led to the growth due to broad-based strength in mobile backhaul for 3G and 4G deployments.
Operating Results
Reported gross margin for the quarter was 71%, up 70 basis points (bps) sequentially and 50 bps from the year-ago quarter. The increase was due to higher revenues and a favorable product mix.
PMC-Sierra reported GAAP operating expenses of $88.3 million, down 4.8% from $92.7 million incurred in the year-ago quarter. As a percentage of sales, both research & development expenses and selling, general & administrative costs decreased from the year-ago quarter. The net result was a GAAP operating income of $1.3 million versus operating loss of $2.2 million in the year-ago quarter.
Net Income
On a GAAP basis, PMC-Sierra recorded a net loss of $3.5 million or a loss of 2 cents per share compared with a loss of $4.8 million or a loss of 2 cents per share in the year-ago quarter.
On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $12.48 million compared with $9.43 million in the last quarter. Pro-forma earnings per share came in at 6 cents compared with 5 cents in the last quarter.
Balance Sheet & Cash Flow
PMC-Sierra exited the second quarter with cash, cash equivalents and short-term investments of approximately $107.6 million versus $92.5 million in the prior quarter. Trade receivables were $58.4 million, up from $56.6 million in the prior quarter.
Cash flow from operations was $28.4 million versus $10.6 million in the prior quarter. Capex was $4.6 million versus $3.7 million in the prior quarter.
In the reported quarter, the company did not repurchase any stock.
Guidance
For the third quarter of 2014, PMC-Sierra expects total revenue in the range of $130–$138 million, down 6% sequentially at the mid-point. The Zacks Consensus Estimate for revenues for the upcoming quarter is pegged at $131.0 million. On a non-GAAP basis, the company expects gross margins in the range of 70–71%; operating expenses in the $73–$75 million range; tax provision to be approximately $1 million and earnings per share of 10 cents, assuming a share count of 202 million. The Zacks consensus earnings estimate for the upcoming quarter is pegged at 7 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 both the top and bottom-line results exceeding our expectations.
Though the storage segment performed poorly in the quarter, we are encouraged by the improvement in the carrier and mobile segments, introduction of several major products and design wins.
Over the long term, PMC-Sierra is well positioned for growth and market share gains 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 2014.
Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Analog Devices (ADI), Agilent Technologies (A) and Fairchild Semiconductor International Inc. (FCS). All the stocks carry a Zacks Rank #2 (Buy).
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