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PMC-Sierra Inc. (PMCS - Analyst Report) reported adjusted second quarter 2013 earnings of 5 cents per share, in line with the Zacks Consensus Estimate. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

PMC-Sierra reported revenues of $127.9 million in the second quarter, up 2.2% sequentially but down 7.2% from the year-ago period. The sequential increase was due to strength in the Optical and Mobile market segments, partially offset by economic softness and weakness in the Storage segment.

Reported revenues were toward the lower end of management’s expected range of $126.5 to $134.0 million.

Revenues by Market Segment

The Storage segment generated 65% of second quarter revenues, down from 68% in the first 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 decreased 2% sequentially due to continued sluggish enterprise spending. The company expects the Adaptec RAID adapters or Series 7 product line expanded in the last quarter to see strong interest from large data center customers. Management stated that design wins and these new products should help the company to continue its market share dominance and offset most of the enterprise weakness.

The Optical segment generated 21% of sales, up from 20% in the prior quarter. Segment revenues were up 7% sequentially, driven by strong growth in Optical Transport Network (OTN) revenues as well as strength in Passive Optical Network (PON) revenues. PON is used by carriers worldwide to facilitate higher speed service to residences and enterprises. The OTN strength primarily came from China as it leads the world in OTN deployments.

The Mobile segment accounted for 14% of sales, up from 13% in the prior-year quarter. Segment revenues were up 16% sequentially due to increased carrier spending by two of its largest carriers in North America and strength in the WinPath family of processors.

Operating Results

Reported gross margin for the quarter was 70.4%, up 20 basis points (bps) sequentially and 40 bps from the comparable year-ago quarter, driven by higher revenues and a favorable product mix.

PMC-Sierra reported operating expenses of $84.9 million, down 1.3% from $86.0 million incurred in the year-ago quarter. As a percentage of sales, both research & development expenses and selling, general & administrative costs increased from the year-ago quarter. The net result was a GAAP operating margin of (4.3%) compared with (0.8%) in the year-ago quarter.

Net Income

On a GAAP basis, PMC-Sierra recorded a net loss of $4.2 million or a loss of 2 cents per share compared with a loss of $0.1 million or breakeven results in the year-ago quarter.

On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $9.5 million compared with $13.7 million in the year-ago quarter. Pro forma earnings per share came in at 5 cents compared with 6 cents in the last quarter.

Balance Sheet & Cash Flow

PMC-Sierra exited the second quarter with cash, cash equivalents and short-term investments of approximately $136.3 million versus $106.9 million in the prior quarter. Trade receivables were $57.5 million, up from $57.3 million in the prior quarter.

Cash flow from operations was $23.0 million versus $14.4 million in the prior quarter. Capex was $2.9 million versus $4.6 million in the prior quarter. In the quarter, the company spent approximately $6 million for stock repurchases.

Guidance

For the third quarter of 2013, PMC-Sierra expects total revenue in the range of $126–$134 million, up about 2% sequentially at the midpoint. Management expects the storage segment to be up sequentially, driven by improved enterprise OEM customer demand. Additionally, the carrier business is expected to be flat to up slightly, depending on the carrier spending in the second half of the year.

Our Take

PMC-Sierra, Inc. engages in design, development, marketing and support of semiconductor solutions by integrating mixed-signal, software and systems expertise in North America, Europe and Asia. The company’s second quarter earnings were in line with the Zacks Consensus Estimate driven by higher revenues, offset by economic softness, cautious enterprise and carrier spending.

The storage segment performed poorly in the quarter but we are encouraged by the improvement in the optical and mobile segments, introduction of several major products, and new design wins. Hence, we expect fast recovery in the coming quarters. The company also provided modest third quarter guidance, indicating 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 market share gains in 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 #2 (Buy). Investors can also consider some other stocks with a positive Zacks Rank and an expected surprise prediction or ESP Read: Zacks Earnings ESP: A Better Method).

InvenSense Inc. (INVN - Snapshot Report), Earnings ESP of +8.33% and a Zacks Rank #2 (Buy)

Gartner Inc. (IT - Snapshot Report), Earnings ESP of +1.96% and a Zacks Rank #2 (Buy)

Scientific Games Corporation (SGMS - Analyst Report), with an ESP of +100.0% and a Zacks Rank #3 (Hold)

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