PMCS (MM)

PMC-Sierra Inc. (PMCS) reported adjusted fourth quarter 2012 earnings of 10 cents per share, beating the Zacks Consensus Estimate of 8 cents on higher gross margins and lower-than-expected operating expenses. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenues

PMC-Sierra reported revenues of $129.4 million in the fourth quarter, down 1.7% sequentially and 15.2% from the year-ago period. Reported revenues were toward the higher end of management’s expected range of $121 million to $131.0 million due to strength in the Storage and Mobile market segments.

Revenues by Market Segment

Since the second quarter of 2011, PMC-Sierra has been reporting its revenue in three market segments – Storage, Optical and Mobile Networks.

The Storage segment generated 70% of fourth quarter revenue, up from 68% in the third 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 over 1% sequentially owing to improvement in 6-Gb SAS business and resumption of growth in the channel business. During the quarter, the company introduced various new products, including the next generation of Adaptec RAID adapters or Series 7 product line. Management stated that design wins and various new products released in the quarter should help the company to continue its market share dominance.

The Optical market segment generated 14% of sales, down from 20% in the prior quarter. Segment revenue was down 28% sequentially. This decline was due to weak spending environment and the declining legacy business. Inventory levels also remained low in this segment. However, management believes that the new products will help catalyze the Optical Transport Network (OTN) switching in metro networks.

The Mobilemarket segment accounted for 16% of sales, up from 12% in the prior quarter. Segment revenue was up 24% sequentially driven by an inventory correction and increased carrier spending by two of its largest backhaul customers.

Operating Results

Reported gross margin for the quarter was 71.7%, up 260 basis points (bps) from 69.1% in the comparable year-ago quarter driven by a favorable product mix.

PMC-Sierra reported operating expenses of $76.0 million, down were 9.0% from $83.5 million incurred in the year-ago quarter. Research and development and selling, general and administrative costs, were both up as a percentage of sales from the year-ago quarters. The net result was a GAAP operating margin of 4.6% compared with 7.0% in the year-ago quarter.

Net Income

On a fully diluted GAAP basis, PMC-Sierra recorded a net profit of $11.1 million or 5 cents per share compared with $28.4 million or 12 cents per share in the year-ago quarter.

PMC-Sierra generated adjusted net profit of $20.2 million compared with $28.86 million in the year-ago quarter. Pro forma earnings per share came in at 10 cents, compared with 12 cents in the last quarter.

Balance Sheet & Cash Flow

PMC-Sierra exited the fourth quarter with cash, cash equivalents and short-term investments of approximately $181.4 million versus $215.6 million in the prior quarter. Trade receivables were $62.1 million, down from $62.6 million in the prior quarter.

Guidance

For the first quarter of 2013, PMC-Sierra expects total revenue in the range of $123–$132 million, up 1.2% sequentially.

Our Take

PMC-Sierra, Inc. engages in design, development, marketing, and support of semiconductor solutions by integrating mixed-signal, software and systems expertise through its network in North America, Europe and Asia. The company delivered a decent fourth quarter, with earnings beating the Zacks Consensus Estimate.

We are encouraged by the improvement in the Storage and Mobile segments, introduction of several major products, and new design wins during the quarter and hence expects fast recovery in the coming quarters. The company also provided modest first quarter guidance, indicating some signs of stabilization.

However, 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 is gaining share in its key served markets namely 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). Investors should look out for some other stocks with positive Zacks Rankand Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

Broadcom Corp. (BRCM) has a Zacks Rank #2 (Buy) with an ESP of +10.26%.

InterDigital Inc. (IDCC) has a Zacks Rank #2 (Buy) with an ESP of +350.0%.

SanDisk Corp. (SNDK) has a Zacks Rank #2 (Buy) with an ESP of +1.61%.

 
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