Microsemi (MSCC) Q3 Earnings And Sales Exceed Estimates

Microsemi Corporation’s (NASDAQ:MSCC) third-quarter fiscal 2016 adjusted earnings of 62 cents per share exceeded the Zacks Consensus Estimate by 8 cents.

Revenues

Microsemi reported revenues of $431.4 million, down 2.9% sequentially but up 36.0% year over year. The sequential decline was due to the divestitures made last quarter.

However, revenues were slightly above the Zacks Consensus Estimate of $430 million and within the management guidance of $420–$440 million.

Revenues by End Market

Microsemi generates revenues from the Communications, Defense & Aerospace, Data center and Industrial markets.

Around 38% ($162 million) of Microsemi’s quarterly revenues came from the largest end market, Communications, which increased 1% sequentially and 41% year over year.

Microsemi’s communication infrastructure, Optical and Ethernet switching applications posted strong results. Management expects the Communications market to do well through the remainder of 2016.

The Defense & Aerospace market generated 26% ($113 million) of sales, down 15% sequentially and 14% year over year. The improved defense end-market environment led to the year-over-year improvement. In particular, the aerospace segment increased 13% year over year, supported by strong fundamentals in the commercial aviation markets.

Management expects this end market to continue witnessing growth backed by an improving defense budget and increasing dollar content.

The Data center segment ($92 million) generated 21% of fiscal third-quarter revenues. The segment increased 8% sequentially. This end market primarily comprises storage controllers, interconnect devices and board level products along with various power management and Ethernet switching products.

For this segment, management expects to see growth from market share gains driven by newer products such as 12 gig SAS solutions.

The Industrial market generated 15% of sales, down 3% sequentially and 4% year over year to $64 million. The results were hurt by the divestitures made last quarter.

Management expects acceleration in the industrial market in the second half of the calendar year. The increase is driven by a ramp up of high voltage power solutions into automotive EV charging stations in China.

Margins

Pro-forma gross margin was 61.9%, up 92 basis points (bps) sequentially and 488 bps year over year. The increase was driven by higher revenues, a favorable product mix, operational efficiency and consolidation.

Adjusted operating expenses of $163.1 million were down 8.9% sequentially but 41.1% higher year over year. Operating margin of 24.1% was up 340 bps sequentially and 353 bps year over year.

Net Income

Microsemi generated GAAP net income of $115.2 million or earnings of $1.00 per share compared with $14.7 million or earnings of 15 cents per share a year ago.

Excluding special items but including stock-based compensation expense, non-GAAP earnings per share were62 cents versus 59 cents in third-quarter fiscal 2015.

Balance Sheet

Cash and cash equivalents balance at the end of the fiscal quarter was $131.8 million, down from $153.1 million in the fiscal second quarter. Operating cash flow was $45.3 million compared with ($56.0) million in the previous quarter. Capex was $11.2 million compared with $12.4 million in the previous quarter.

Inventories were $231.2 million compared with $235.1 million in the previous quarter. Accounts receivable was $241.7 million compared with $211.9 million at the end of the prior quarter.

Guidance

Microsemi expects fourth-quarter fiscal 2016 revenues of $438–$458 million. The Zacks Consensus Estimate of $445 million is within the guided range. Non-GAAP earnings per share are likely to be within 83–97 cents, above our estimate of 66 cents.

Our Take

Microsemi reported a decent quarter with both the top and the bottom line exceeding the Zacks Consensus Estimate.

The company’s focus on improving product mix, operational efficiency, and consolidation, will drive revenues and help it achieve a better gross margin in the second half of calendar 2016.

Microsemi completed the acquisition of PMC-Sierra in Dec 2015and the integration remains well on track. During the fiscal third quarter, the company also completed its divestiture of non-core businesses to refocus on core areas like Internet of Things and automotive markets. It completed the sale of its non-strategic component of systems and packaging business to Mercury Systems. It also sold its Broadband Wireless Division, which was previously part of PMC-Sierra, Inc. to Max-Linear.

These initiatives will add to its expertise in timing and synchronization, weapons and contraband screening systems, power supply, and Ethernet and broadband infrastructure. Also, these divestitures free up capital for the development of higher-value ICs and system-on-chip (SoC) offerings, making the business model more profitable.

Stocks to Consider

Microsemi carriesa Zacks Rank #3 (Hold). Investors may, however, consider stocks such as MaxLinear, Inc. (NYSE:MXL) , Semtech Corporation (NASDAQ:SMTC) and Intel Corp. (NASDAQ:INTC) , each of which carries a Zacks Rank #2 (Buy).