PMC-Sierra Tops Q3 Earnings on Strong Sales; Guides High
PMC-Sierra Inc. (PMCS) reported adjusted third-quarter 2014 earnings of 9 cents per share, beating the Zacks Consensus Estimate by a couple of cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.
Revenues
PMC-Sierra reported revenues of $135.5 million in the third quarter, up 6.9% sequentially and 5.5% from the year-ago period. Reported revenues beat the Zacks Consensus Estimate of $134.0 million. The increase was driven by broad-based strength in the company’s storage products, partially offset by weak demand for optical and mobile products.
Revenues by Market Segment
The Storage segment generated 72% of third-quarter revenues, up from 65% in the second 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 18.1% sequentially and 16.7% year over year due to strong demand across all storage end-markets, servers, hyperscale data centers, storage systems and Flash. Also, revenues from Flashtec Controllers increased more than 40% sequentially. PMC-Sierra’s 6-gig and 12-gig SAS and SATA controllers also witnessed strong growth with the recent Grantley launch.
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 stated that with the Grantley transition underway, industry’s movement to 12-gig SAS will accelerate, helping the company to maintain its market share dominance.
The Carrier segment generated 16% of sales, down from 20% in the prior quarter. Segment revenues were down $6.5 million due to a temporary slowdown in base station deployments and a pushout of Optical Transport Network (:OTN) backbone deployment in China. On a sequential basis, OTN and mobile revenues were down 13.2% and 16.9%, respectively. The decrease was attributed to lower legacy Sonet and SDH revenues.
Management stated that its third-generation OTN product family called DIGI as additional line cards will expand the OTN revenues, going forward. With the ramp up of the new DIGI-based platforms, the company expects to increase its market share in the OTN business.
The Mobile segment accounted for 12% of sales, down from 15% in the prior quarter. Segment revenues were down sequentially due to the WinPath business which was affected by weakness in mobile backhaul for 3G and 4G deployments.
Operating Results
Reported gross margin for the quarter was 70.2%, down 80 basis points (bps) sequentially and 110 bps from the year-ago quarter. The decrease was due to unfavorable product mix.
PMC-Sierra reported GAAP operating expenses of $87.7 million, down 2.9% from $90.3 million incurred in the year-ago quarter. As a percentage of sales, research & development expenses decreased from the year-ago quarter, while selling, general & administrative costs increased. The net result was a GAAP operating margin of 5.5% versus 1% in the year-ago quarter.
Net Income
Pmc-Sierra, Inc - Earnings Surprise | FindTheBest
On a GAAP basis, PMC-Sierra recorded a net income of $5.5 million or earnings of 3 cents per share compared with a net loss of $3.2 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 $16.53 million compared with $12.48 million in the last quarter. Pro-forma earnings per share came in at 9 cents compared with 6 cents in the last quarter.
Balance Sheet & Cash Flow
PMC-Sierra exited the third quarter with cash, cash equivalents and short-term investments of approximately $125.4 million versus $107.6 million in the prior quarter. Trade receivables were $57.0 million, down from $58.4 million in the last quarter.
Cash flow from operations was $22.5 million versus $28.4 million in the prior quarter. Capex was $3.6 million versus $4.6 million in the earlier quarter.
In the reported quarter, the company did not repurchase any stock.
Guidance
For the fourth quarter of 2014, PMC-Sierra expects total revenue in the range of $132–$139 million, flat sequentially at the mid-point. The Zacks Consensus Estimate for revenues for the upcoming quarter is pegged at $139.0 million. On a non-GAAP basis, the company expects gross margins in the range of 70–71%; operating expenses in the $71.5–$73.5 million range; tax provision to be approximately $1 million and earnings per share of 11 cents, assuming a share count of 202 million. The Zacks Consensus Estimate for the upcoming quarter is pegged at 9 cents per share.
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 carrier and mobile segments performed poorly in the quarter, we are encouraged by the improvement in the storage segment, 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 2014.
Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include NeoPhotonics Corporation (NPTN), TriQuint Semiconductor (TQNT) and Inphi Corporation (IPHI). All these carry a Zacks Rank #2 (Buy).
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