MSCC

Microsemi Corporation (MSCC)

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Microsemi (MSCC)

Q1 2012 Earnings Call

January 26, 2012 4:45 pm ET

Executives

John W. Hohener - Chief Financial Officer, Chief Accounting Officer, Executive Vice President, Secretary and Treasurer

Terri Donnelly -

James J. Peterson - Ceo, President, Director, Chairman of Executive Committee and Member of Special Committee

Analysts

Harsh N. Kumar - Morgan Keegan & Company, Inc., Research Division

Patrick Wang - Evercore Partners Inc., Research Division

Andrew Huang - Sterne Agee & Leach Inc., Research Division

Daniel M. Gelbtuch - Cantor Fitzgerald & Co., Research Division

Quinn Bolton - Needham & Company, LLC, Research Division

Christopher Rolland - FBR Capital Markets & Co., Research Division

Richard E. Schafer - Oppenheimer & Co. Inc., Research Division

Mark Delaney - Goldman Sachs Group Inc., Research Division

Jonathan Steven Smigie - Raymond James & Associates, Inc., Research Division

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Presentation

Operator

Good afternoon. My name is Patrick, and I will be your conference operator today. At this time, I would like to welcome everyone to the first quarter earnings conference call. [Operator Instructions] I would now like to turn the call over to Ms. Terri Donnelly to begin the conference.

Terri Donnelly

Good afternoon, and welcome to Microsemi's First Quarter 2012 Earnings Conference Call. I am Terri Donnelly, coordinator of this call. In a few moments, you will hear from and have an opportunity to ask questions of Jim Peterson, our President and Chief Executive Officer; John Hohener, our Executive Vice President and Chief Financial Officer; and Steve Litchfield, our Executive Vice President and Chief Strategy Officer.

A recording of this conference call will be available on the Microsemi website under the Investor section. Our website is located at www.microsemi.com. Microsemi issues guidance in the form of a limited business outlook on our expectations for the next quarter. This business outlook reflects our expectations as of January 26, 2012, and is continually subject to reassessment due to changing market conditions and other factors, therefore, must be considered only as management's present opinion.

Actual results may be materially different. However, management undertakes no obligation to update these or any forward-looking statements, whether as a result of new information, future events or otherwise. If an update to our business outlook is provided, the information will be in the form of a news release. We wish to caution you that all of our statements, except the company's past financial results, are just our current opinions, predictions and expectations. Actual future events or results may differ materially.

For a review of risk factors, please refer to Microsemi's report on Form 10-K for the fiscal year ended October 2, 2011, which was filed with the SEC on November 23, 2011.

That said, I'm going to turn the call over to John to discuss our financial results, and then Jim will address our end markets and overall business strategy. Here's John Hohener.

John W. Hohener

Thank you, Terri. Net sales for the quarter ended January 1, 2012 were a record $240.9 million, up 6% from the $227.3 million in the fourth quarter of 2011, and up 30.7% from the $184.4 million reported in the year ago first quarter. These results include a partial quarter of contribution from our Zarlink acquisition.

As forecasted, our non-GAAP gross margin decreased from the fourth quarter to 54.7% as we incurred additional costs dealing with relocation from Thailand to new sites, the under absorption of some costs due to our lower sales, overall product mix and the inclusion of Zarlink revenues at an initial gross margin lower than that of our core businesses.

Our non-GAAP gross margin was up, however, 110 basis points from the 53.6% reported in the year ago first quarter. We expect our non-GAAP gross margin to increase between 20 and 30 basis points next quarter due primarily to product mix. Our GAAP gross margin was 52.2%, which differed from the non-GAAP due only to non-cash purchase accounting adjustments related to the Zarlink acquisition and was down 490 basis points from the 57.1% in the fourth quarter of 2011, but up 70 basis points from the 51.5% in our prior year first quarter.

This quarter, non-GAAP selling, general and administrative expenses were $40.5 million or 16.8% of sales, compared to $38.1 million or 16.7% of sales in the fourth quarter and compared to $32.5 million or 17.6% of sales in the first quarter of last year. This dollar increase was due to the acquisition of Zarlink.

For the second quarter, we expect total SG&A to decrease between $0.5 million and $1 million. Compared to the first quarter, the SG&A change includes the addition of Zarlink for a full quarter, but will be offset by savings as a result of cost controls and spending efficiencies within the company.

Research and development costs were $39.6 million or 16.4% of sales, compared to $32.4 million or 14.3% of sales in the fourth quarter and compared to $24 million or 13% of sales in the year ago first quarter, again, with the increase in dollars due primarily to Zarlink.

For the second quarter, we expect total R&D to increase between $300,000 and $800,000. Compared to the first quarter, the R&D change includes the addition of Zarlink for a full quarter.

Our non-GAAP operating income was $51.8 million or 21.5% of sales, compared to $59.7 million or 26.3% of sales in the fourth quarter of 2011 or $42.4 million or 23% in the prior year first quarter.

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