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PMC-Sierra Misses Q3 Earnings by a Penny

PMC-Sierra Inc. (PMCS) reported adjusted third-quarter 2013 earnings of 6 cents per share, missing the Zacks Consensus Estimate by a penny due to a challenging environment and slower-than-expected carrier spending, partially offset by solid expense management. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.


PMC-Sierra reported revenues of $128.9 million in the third quarter, up 0.8% sequentially but down 2.1% from the year-ago period. The sequential increase was due to strength in the Storage and Mobile market segments, partially offset by weakness in the Optical segment.

Reported revenues were toward the lower end of management’s expected range of $126.0 million to $134.0 million.

Revenues by Market Segment

The Storage segment generated 66.0% of third-quarter revenues, up from 65.0% in the second quarter. Its products include controllers based on Fiber Channel, Serial Attached SCSI and Serial ATA that enable the development of external and server-attached storage systems.

The segment increased 2.0% sequentially due to SAS and RAID solutions and improved enterprise spending. The company expects the Adaptec 12-gig SAS/RAID adapters or Series 8 product line introduced in the last quarter to see strong interest from large data center customers. Management stated that design wins and these new products should help the company to continue its market share dominance.

The Optical segment generated 20.0% of sales, down from 21.0% in the prior quarter. Segment revenues were down 3.0% sequentially due to weakness in the legacy Sonet/SDH business. However, Optical Transport Network (:OTN) continued to witness strength in the last quarter due to LTE build outs in China.

The Mobile segment accounted for 14.0% of sales, flat with the prior-year quarter. Segment revenues were up 2.0% sequentially due to strength in the WinPath family of processors.

Operating Results

Reported gross margin for the quarter was 71.1%, up 70 basis points (bps) sequentially as well as from the year-ago quarter, driven by higher revenues and a favorable product mix.

PMC-Sierra reported GAAP operating expenses of $90.3 million, down 75.6% from $369.7 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 profit of $1.4 million, up from an operating loss of $276.9 million in the year-ago quarter.

Net Income

On a GAAP basis, PMC-Sierra recorded a net loss of $2.7 million or a loss of 1 cent per share compared with a loss of $274.1 million or ($1.31) per share in the year-ago quarter.

On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $12.8 million compared with $9.5 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 third quarter with cash, cash equivalents and short-term investments of approximately $100.7 million versus $136.3 million in the prior quarter. Trade receivables were $60.9 million, up from $57.5 million in the prior quarter.

Cash flow from operations was $8.0 million versus $23.0 million in the prior quarter. Capex was $4.0 million versus $2.9 million in the prior quarter. In the reported quarter, the company spent approximately $17.0 million for stock repurchases.


For the fourth quarter of 2013, PMC-Sierra expects total revenue to be flat to down 8% or down 4% at the midpoint. Management expects the storage segment to be slightly up sequentially, due to the early Enterprise Flash Controller revenues. Additionally, the carrier business is expected to be down slightly, due to slower-than-expected carrier spending.

Our Take

PMC-Sierra, Inc. engages in design, development, marketing and support of semiconductor solutions by integrating mixed-signal, software and systems expertise in North America, Europe and Asia. The bottom-line results missed our expectations by a penny.

Though the optical segment performed poorly in the quarter, we are encouraged by the improvement in the storage and mobile segments, introduction of several major products and new design wins.

However, the company provided weak fourth-quarter guidance and stated that it does not see any material improvement in the end markets, indicating signs of a challenging macroenvironment. Therefore, lack of visibility and macro uncertainty may keep the share price range bound in the near term.

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, each of which will act as a solid catalyst for the company through 2013.

Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Melco Crown Entertainment Limited (MPEL), Kemper Corporation (KMPR) and Fiserv, Inc. (FISV). All of these carry a Zacks Rank #1 (Strong Buy).

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Read the Full Research Report on MPEL
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