Microsemi Lags Q3 Earnings on Higher Costs; Favorable View - Analyst Blog

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Microsemi Corporation 's ( MSCC ) adjusted earnings in the third quarter of fiscal 2014 of 46 cents per share missed the Zacks Consensus Estimate by a penny due to higher-than-expected operating expenses.

Revenues

Microsemi reported revenues of $292.3 million, up 1.8% sequentially and 20.5% year over year. Third-quarter revenues also beat the Zacks Consensus Estimate of $291 million and were at the higher end of management's guidance range of $287-$293 million.

In the last 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 27% of sales, up more than 1% sequentially and 5% year over year to $80.0 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 34% of Microsemi's quarterly revenues came from the Communications market which was up sequentially and 48% year over year exceeding $100.0 million. Management attributed the increase to strengthening LTE spending worldwide, including emerging markets such as China and India. Also, strong demand for Gateway applications contributed to the increase.

The Aerospace segment generated 15% of third-quarter revenues. The segment improved over 1% sequentially but was down 4% year over year to approximately $43.0 million. The increase was attributable to improving content growth trends in electronic-oriented aircrafts and strong growth in commercial aircrafts.

Management believes that commercial aircraft end market will remain strong driven by industry growth. However, this will continue to be offset by softer satellite revenues in the near term.

The Industrial market generated 24% of sales, up 5% sequentially and 29% year over year to $69 million, driven by strong demand for ultra-low-power RF products. Additionally, increasing demand for other medical equipment, solar, laser, electric vehicle and battery charging have contributed to the revenue increase.

Going forward, management expects strong revenues from this end market due to the ramp up of new chip scale atomic clocks which helps in energy exploration applications and other new programs.

Revenues by Product Areas

FPGAs generated 23% of third-quarter sales, up 6% sequentially driven by new design wins. 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 company's revenue base.

Mixed-signal RF accounted for 26% of the revenues, up 1% sequentially. Mixed-signal RF products have various applications, the notable products being 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% sequentially.

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

Legacy and others were up 1% sequentially in the quarter, accounting for 31% of the total third-quarter sales.

Margins

The reported gross margin was 52.5%, up 70 basis points (bps) sequentially but down 450 bps from 57.0% in the year-ago quarter. The gross margins included a $2.2 million non-cash purchase accounting adjustment related to the Symmetricom acquisition and $7.9 million for inventory write-offs from restructuring activities. The sequential increase was due to favorable product mix.

Operating expenses of $147.3 million were higher than the previous quarter's $113.1 million. As a percentage of sales, general and administrative expense increased slightly from the year-ago quarter, while research & development (R&D) expenses decreased. The net result was a GAAP operating margin of 2.2%, down 820 bps year over year.

Microsemi Corporation - Earnings Surprise | FindTheBest



Net Income

Microsemi generated GAAP net loss of $4.3 million or loss of 5 cents a share compared with a net profit of $18.3 million or earnings of 20 cents in the year-ago quarter.

Excluding special items but including stock-based compensation expense, non-GAAP net income was $43.7 million or earnings of 46 cents per share compared with $36.2 million or earnings of 38 cents in the year-ago quarter.

Balance Sheet

Cash and cash equivalents balance at quarter-end was $183.3 million, down $21.9 million from the second quarter. Cash generated from operations was $54.4 million and capex was $8.0 million, netting a free cash flow of $46.4 million.

Inventories decreased 2.7% to $196.7 million from $202.1 million in the previous quarter. Days of inventory were 140 days, up 2 days from the prior quarter. Accounts receivable were $184.2 million versus $193.8 million at the end of the prior quarter. Days sales outstanding (DSOs) were 59 days, flat sequentially.

Guidance

Microsemi provided guidance for the fourth quarter of fiscal 2014. Revenues are expected in the range of $299-$305 million, up 3.2% sequentially at the mid-point. The Zacks Consensus Estimate for revenues is pegged at $305 million. Non-GAAP gross margins are expected to increase in the range of 20-100 bps and depreciation and amortization expense is likely to be below $31 million. Earnings per share are expected to be within 62-66 cents, well above the Zacks Consensus Estimate of 51 cents.

Management expects capital spending to be approximately $9 million in the upcoming quarter.

Our Take

Though Microsemi's third-quarter earnings missed the Zacks Consensus Estimate, its top line was above our expectations due to strong demand for the company's 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 customer will eventually boost its market share.

However, management expects expenses to increase in the upcoming quarter due to heavy investments in FPGAs and mixed signal RFs.

Microsemi has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Analog Devices, Inc. ( ADI ), ON Semiconductor Corp. ( ONNN ) and Fairchild Semiconductor International Inc. ( FCS ). All these stocks carry a Zacks Rank #2 (Buy).


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: ONNN , ADI , FCS , MSCC

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