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PMC-Sierra Inc. (PMCS - Analyst Report) reported adjusted fourth-quarter 2013 earnings of 4 cents per share, missing the Zacks Consensus Estimate by a penny. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.


PMC-Sierra reported revenues of $126.1 million in the fourth quarter, down 2.2% sequentially and 2.6% from the year-ago period. Reported revenues were below the Zacks Consensus Estimate of $128.9 million. The decrease was due to weakness in the Carrier and Mobile market segments, partially offset by strength in the Storage segment.

Revenues by Market Segment

The Storage segment generated 71.0% of fourth-quarter revenues, up from 66.0% 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 6.5% sequentially due to new customer ramp ups and strength in SAS and Flash product lines. The company expects the Flash controllers, Adaptec 12-gig SAS/RAID adapters to see strong interest from large data center customers. Management stated that the majority of these 12-gigdesign wins will start to ramp up with Intel's Brantley launch in the second half of 2014, helping the company to continue its market share dominance.

The Carrier segment generated 16.0% of sales, down from 20.0% in the prior quarter. Segment revenues were down $8 million sequentially due to weakness in the Sonet product line and weak PON OLT shipments. However, Optical Transport Network (OTN) continued to witness strength in the last quarter due to LTE build outs in China.

The Mobile segment accounted for 13.0% of sales, down from 14.0% in the prior quarter. Segment revenues were down $2.7 million sequentially due to lower-than-expected demand for 3G base station.

Operating Results

Reported gross margin for the quarter was 70.5%, down 60 basis points (bps) sequentially and 120 bps from the year-ago quarter, driven by lower revenues and an unfavorable product mix.

PMC-Sierra reported GAAP operating expenses of $95.3 million, up 9.6% from $87.0 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 loss of $6.4 million which compared unfavorably with an operating profit of $6.0 million in the year-ago quarter.

Net Income

On a GAAP basis, PMC-Sierra recorded a net loss of $17.0 million or a loss of 8 cents per share compared with a profit of $14.1 million or 7 cents per share in the year-ago quarter.

On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $8.14 million compared with $12.8 million in the last quarter. Pro-forma earnings per share came in at 4 cents compared with 6 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 $110.9 million versus $100.7 million in the prior quarter. Trade receivables were $56.1 million, down from $60.9 million in the prior quarter.

Cash flow from operations was $33.0 million versus $8.0 million in the prior quarter. Capex was $5.0 million versus $4.0 million in the prior quarter. In the quarter, the company spent approximately $54.0 million for stock repurchases.


For the first quarter of 2014, PMC-Sierra expects total revenue in the range of $120 million–$128 million, down 1.7% sequentially at the mid-point. On a non-GAAP basis, gross margins are expected in the range of 70%–71%; operating expenses are expected in the range of $71 million–$73 million; tax provision is expected of approximately $1 million and non-GAAP earnings of 7 cents per share, assuming a diluted share count of $196 million.

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. Both the top- and bottom-line results missed our expectations.

Though the carrier and mobile segments performed poorly in the quarter, we are encouraged by the improvement in the storage segment, introduction of several major products and new design wins.

However, the company provided weak first-quarter guidance, indicating a challenging macro environment. Therefore, 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 2014.

Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include Melco Crown Entertainment Limited (MPEL - Snapshot Report), Kemper Corporation (KMPR - Snapshot Report) and Fiserv, Inc. (FISV - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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