Microsemi Offers Encouraging Outlook (revised) - Analyst Blog


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Microsemi Corporation's ( MSCC ) adjusted earnings per share (EPS) for the second quarter of fiscal 2012 missed the Zacks Consensus Estimate by 3 cents.

Microsemi reported revenue of $249.3 million, up 3.5% sequentially, 20.2% year over year and much better than management's expectations of a 1-5% sequential increase.
Revenue by End Market

Microsemi generates its revenue from the Defense, Aerospace, Enterprise & Commercial and Industrial markets.
The largest chunk of Microsemi's quarterly revenue came from the Communication market, which constituted 31% of sales. Management saw a rise in demand in wireless LAN products, which did not perform well in the previous quarter. It also saw a strong performance in voice circuit and PoE products. The company also introduced many new products in which the power conversion products saw rapid expansion in the end market. While the flooding in Thailand caused some setbacks, management stated that production of many new products has now started.
The Defense & security market generated 29% of sales, increasing 3.0% sequentially. Management attributed the increase to contributed stabilization in the market. Microsemi is focused on the introduction of new products that it expects will result in market share gains. The market itself offers significant growth potential,, as spending on U.S. military electronics is on the rise (independent market research indicates growth at 4.0% CAGR from 2012 to 2017).  Therefore, Microsemi stands to gain from both market expansion and share gains.
Aerospace generated 21% of revenue, increasing 8.0% sequentially, as commercial air remained strong and the satellite business started coming back. The satellite business typically has very long lead times; therefore, with its growing contribution to revenue, the visibility of segment revenue automatically increases. 
The Industrial market was flattish in the last quarter, with a 19% revenue contribution. While this is a diverse market, the medical sub-segment remains the area with best prospects. Management stated that the medical segment continued to stabilize in the second quarter. Microsemi expects that Medtronic ( MDT ), its longtime customer will grow in importance in the coming quarters, which along with its new products will help to capture the market share.
The defense, aerospace and medical markets largely consume Microsemi's high reliability chips, while the other markets use its analog/mixed signal products.
The reported gross margin was 52.9%, up 70 basis points (bps) from the previous quarter's 52.2%. The gross margin was up 830 bps from the year-ago quarter. The rise in gross margin was due to relocation of their manufacturing facilities from Thailand. This resulted in improved manufacturing efficiencies and product cost absorption.
The operating expenses of $120.8 million were lower than the previous quarter's $126.4 million. The operating margin expanded 480 bps sequentially and 850 bps year over year, touching 4.5%. The sequential increase was entirely because of the lower cost of sales both sequentially and year over year, the effect of which was partially offset by higher R&D year over year and down sequentially and flattish SG&A as a percentage of sales.
Net Income
The total adjustments for the second quarter of 2012 were $34.7 million or 40 cents per share, compared to $91.1 million, or $1.06 a share in the previous quarter and $119.9 million ($1.40 a share) in the year-ago quarter. Excluding these special items, the pro forma net income was $29.9 million (12.0% of sales) compared to $100.7 million (48.6%) in the year-ago quarter and $46.5 million (19.3%) in the previous quarter.

Including inventory adjustments, restructuring charges, acquisition-related costs, amortization of intangibles and other items that were excluded from the pro forma calculation, the GAAP net loss was $4.8 million ($0.05 per share) compared to loss of $19.1 million ($0.22 per share) year over year.
Balance Sheet
The cash and investments balance at quarter-end was $121.4 million, down $12.1 million during the quarter. Cash generated from operations was $41.4 million and capex was $14.2 million, netting a free cash flow of $28.6 million.
Inventories decreased 5.2% in the last quarter. DSOs went up from 47 to around 52 days. DSOs have shown great improvement over the past year and a half due to on time shipping delivery as the company recovered from the Thai flood.
Microsemi provided guidance for the third quarter of fiscal 2012. Accordingly, revenue is expected to grow 3-5% sequentially and non-GAAP earnings per share are expected to increase 11-19% to around $0.51-$0.55, much higher than the 44 cents that analysts were expecting when the company reported.
Our Recommendation
The Zacks Rank on Microsemi shares is #3, which implies a Hold rating in the near term (1-3 months). We are also neutral on the long-term basis.

(We are re-publishing this article to correct a mistake. The original Microsemi earnings blog, published May 2, 2012, should no longer be relied upon.)

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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 Nasdaq, Inc.

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