Microsemi (MSCC) Q1 Earnings In Line; Q2 View Favorable - Analyst Blog

Microsemi Corporation’s (MSCC) first-quarter fiscal 2015 adjusted earnings of 54 cents per share were in line with the Zacks Consensus Estimate.
 

Microsemi Corporation - Earnings Surprise | FindTheBest

Revenues

Microsemi reported revenues of $303.6 million, up 0.09% sequentially and 18.8% year over year. Revenues, however, missed the Zacks Consensus Estimate of $304 million narrowly.

In the reported quarter, book-to-bill ratio was greater than 1:1.

Revenues by End Market

Microsemi generates revenues from the Defense & security, Aerospace, Communications and Industrial markets.

The Defense & security market generated 28% of sales, up 3.7% sequentially and 33% year over year. The increase was aided by improved defense end market environment.

Management expects this end market to continue to witness growth based on improving defense budget and increasing foreign military sales.

Around 36% of Microsemi’s quarterly revenues came from the Communications market which decreased sequentially but increased 14% year over year to $210.0 million. Management attributed the sequential weakness to slower-than-expected carrier capex spending.

The Aerospace segment generated 13% of first-quarter revenues. The segment declined 8.4% sequentially to approximately $40.0 million. The decrease was due to weaker-than-expected recovery in the satellite business due to the continuing sanctions on shipments to Russia.

Management expects the satellite business to improve modestly in the upcoming quarter.

The Industrial market generated 23% of sales, up 1.7% sequentially and 24% year over year to $69 million, driven by strong demand for medical equipment, partially offset by slower sales in the energy exploration end markets.

Revenues by Product Areas

FPGAs generated 23% of first-quarter sales, down 3.4% sequentially but up 5.4% year over year. The weakness was due to lower-than-expected revenues from communications and satellite FPGA segments, partially offset 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. Management stated that it will continue to improve its capabilities in the FPGA business, expanding the revenue base.

Mixed-signal RF accounted for 29% of the revenues, up 18% sequentially and 19% year over year, driven by strong demand for voice circuits, ultra-low power radios and powered-wireline Ethernet products.

Timing products revenues accounted for 18% of sales, down 8.8% sequentially due to communication seasonality and weakness in industrial applications attached to oil and gas exploration.

Management believes that with the increasing demand for bandwidth, the need for precise timing solutions will increase, boosting revenues.

Legacy and others were down 5.6% sequentially, accounting for 30% of the total first-quarter sales.

Margins

The reported gross margin was 55.4%, down 100 basis points (bps) sequentially but up 130 bps year over year. The sequential decrease was due to unfavorable mix.

Operating expenses of $107.6 million were higher than the previous quarter level of $99.7 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 9.8%, up 700 bps year over year.

Net Income

Microsemi generated GAAP net income of $19.7 million or earnings of 21 cents a share compared with a net profit of $1.4 million or earnings of 1 cent in the year-ago quarter.

Excluding special items but including stock-based compensation expense, non-GAAP net income was $51.8 million or earnings of 54 cents compared with $33.9 million or earnings of 36 cents in the year-ago quarter.

Balance Sheet

Cash and cash equivalents balance at quarter-end was $183.0 million, down from $162.2 million from the fourth quarter. Cash generated from operations was $66.9 million and capex was $13.1 million, netting a free cash flow of $53.8 million.

Inventories decreased 1.1% to $202.8 million from $205.0 million in the previous quarter. Days of inventory were 139 days. Accounts receivable were $187.5 million versus $191.2 million at the end of the prior quarter. Days sales outstanding (DSOs) were 57 days.

Guidance

Microsemi provided guidance for the second quarter of fiscal 2015. Revenues are expected to be flat to down 4.5% sequentially. Non-GAAP gross margins are expected to improve 30 to 50 bps due to cost structure improvements. Earnings per share are expected within 64–68 cents, well above the Zacks Consensus Estimate of 57 cents.

Management expects capital spending to be approximately $9 million.

Our Take

Microsemi reported a decent quarter with both the top and the bottom lines matching the respective Zacks Consensus Estimate.

The company’s focus on security and increasing electronic content per device and customers will eventually boost its market share. The company continues to consolidate select facilities to improve its long-term cost targets.

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.

Stocks to Consider

Microsemi has a Zacks Rank #2 (Buy). Other stocks that are performing well at the current levels include M/A-Com Technology Solutions Holdings, Inc. (MTSI), sporting a Zacks Rank #1 (Strong Buy), and Autobytel Inc. (ABTL) and CSR plc (CSRE), carrying a Zacks Rank #2 (Buy).
 

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