Microsemi Corporation’s (MSCC) adjusted earnings in the fourth quarter of fiscal 2014 of 56 cents per share exceeded the Zacks Consensus Estimate by 4 cents due to higher volume which resulted in stronger revenues.
Revenues
Microsemi reported revenues of $303.3 million, up 3.8% sequentially and 21.1% year over year. Fourth-quarter revenues also beat the Zacks Consensus Estimate of $302 million and were toward the higher end of management’s guidance range of $299–$305 million.
In the reported quarter, book-to-bill ratio was greater than 1.
Revenues by End Market
Microsemi generates revenues from the Defense & security, Aerospace, Communications and Industrial markets.
The Defense & security market generated 27% of sales, up 1% sequentially and 8% year over year to $81.0 million. The increase was aided by improved market environment.
Management expects this end market to continue to witness growth based on improving defense budget, growing foreign military sales and normalize inventory channels.
Around 36% of Microsemi’s quarterly revenues came from the Communications market which increased more than 10% sequentially and 60% year over year to $111.0 million. Management attributed the improvement to strengthening LTE spending worldwide. Strong demand for home Gateway applications also contributed to the rise.
The Aerospace segment generated 14% of fourth-quarter revenues. The segment improved 1% sequentially to approximately $44.0 million. The increase was attributable to improving content growth trends in electronic-oriented aircrafts and strong growth in commercial aircrafts.
Management believes that the commercial aircraft end market will remain strong backed by industry growth. Also, management expects stronger satellite business beginning from the December quarter.
The Industrial market generated 23% of sales, flat sequentially but up 20% year over year to $68 million, driven by strong demand for medical equipment, partially offset by slower sales in the energy exploration end markets. Additionally, increasing demand for solar, laser, electric vehicle and battery charging have contributed to the revenue growth.
Revenues by Product Areas
FPGAs generated 24% of fourth-quarter sales, up 9% year over year driven by new design wins and ramp up of the SmartFusion2 and IGLOO2 devices. The company’s SoC FPGAs are used in multiple end markets namely, Aerospace, Defense, medical, and industrial end markets. Management stated that it will continue to improve its capabilities in the FPGA business, expanding the revenue base.
Mixed-signal RF accounted for 25% of the revenues, up 0.3% sequentially and 2% year over year, driven by strong demand for voice circuit and powered-wireline Ethernet products. Mixed-signal RF products have various applications — especially Power over Ethernet solutions — a broad power management portfolio, center ICs, enterprise Wi-Fi product amplifiers and power amplifiers.
Timing products revenues accounted for 20% of sales, up 1.5% sequentially.
Management believes that with the increasing demand for bandwidth, the need for precise timing solutions will increase, boosting revenues.
Legacy and others were up 5.7% sequentially in the quarter, accounting for 31% of the total fourth-quarter sales.
Margins
The reported gross margin was 56.4%, up 390 basis points (bps) sequentially but down 60 bps from 57% in the year-ago quarter. The sequential increase was due to favorable product mix.
Operating expenses of $137.6 million were higher than the previous quarter’s $115.9 million. As a percentage of sales, both general & administrative as well as research & development (R&D) expenses decreased slightly from the year-ago quarter. The net result was a GAAP operating margin of 11%, up 30 bps year over year.
Net Income
Microsemi generated GAAP net income of $32.8 million or earnings of 34 cents a share compared with a net profit of $14.1 million or earnings of 15 cents in the year-ago quarter.
Excluding special items but including stock-based compensation expense, non-GAAP net income was $53.2 million or earnings of 56 cents compared with $34.9 million or earnings of 38 cents in the year-ago quarter.
Balance Sheet
Cash and cash equivalents balance at quarter-end was $162.2 million, down $21.1 million from the third quarter. Cash generated from operations was $59.6 million and capex was $10.6 million, netting a free cash flow of $49.0 million.
Inventories increased 4.2% to $205.0 million from $196.7 million in the previous quarter. Days of inventory were 139 days, an improvement of 1 day from the prior quarter. Accounts receivable were $191.2 million versus $184.2 million at the end of the prior quarter. Days sales outstanding (DSOs) were 57 days versus 59 days in the prior quarter.
Guidance
Microsemi provided guidance for the first quarter of fiscal 2015. Revenues are expected to be flat sequentially (+/-2%). The Zacks Consensus Estimate for revenues is pegged at $303 million. Non-GAAP gross margins are expected to be down slightly to 56% and depreciation and amortization expense is likely to be below $31.9 million. Earnings per share are expected to be within 63–68 cents, well above the Zacks Consensus Estimate of 54 cents.
Management expects capital spending to be approximately $10 million in the upcoming quarter.
Our Take
Microsemi reported a decent quarter with both top- and bottom-line figures exceeding the Zacks Consensus Estimate, driven by strong demand for its products.
In the last quarter, the company gave an encouraging guidance. It expects sequential dollar growth in all the end markets, indicating improving demand environment and increased visibility.
Additionally, the company’s focus on security and increasing electronic content per device and customers will eventually boost its market share.
However, management will continue to invest in FPGAs and mixed signal RF product offerings, which might increase the expenses, in turn impacting operating margins in the near term.
Microsemi has a Zacks Rank #3 (Hold). Other stocks that are performing well at the current levels include Autobytel Inc. (ABTL), Mercadolibre, Inc. (MELI) and zulily, Inc. (ZU). While Mercadolibre and zulily sport a Zacks Rank #1 (Strong Buy), Autobytel carries a Zacks Rank #2 (Buy).
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