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Microsemi Corporation's (MSCC - Analyst Report) adjusted earnings in the second quarter of fiscal 2014 came in at 38 cents per share, which missed the Zacks Consensus Estimate by 3 cents.

Revenues

Microsemi reported revenues of $287.0 million, up 12.3% sequentially and 22.0% year over year as well as above the Zacks Consensus Estimate of $286 million.

In the last quarter, book-to-bill ratio was greater than 1, driven by orders for longer lead time products.

Revenues by End Market

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

The Defense & security market generated 27% of sales, up 25% sequentially to $79.0 million. The increase was aided by synergies from the Symmetricom acquisition and improved market environment.

Around 35% of Microsemi’s quarterly revenues came from the Communications market which was up 3% sequentially to $100.0 million. Management attributed the increase to strength in packet timing, OTN sales in Asia and increased share gains from a new sapphire clock management product family. Also, strengthening telecom spending worldwide, including emerging markets such as China and India, is benefiting the company.

The Aerospace segment improved 8% sequentially to approximately $43.0 million and generated 15% of second-quarter revenues. The increase was attributable to improving content growth trends in electronic-oriented aircrafts and strong growth in commercial aircrafts.

Going forward, management believes that growing product mix and strong industry fundamentals will continue to benefit this end market. Additionally, the ramp up of more electronic aircraft such as Boeing 787, Airbus A350 and A380 will lead to significant content growth.

The Industrial market generated 23% of sales, up 17% sequentially to $65.0 million, driven by strong demand for ultra-low-power RF products.

Going forward, management expects strong revenues from this end market from the ramp up of new chip scale atomic clocks which helps in energy exploration applications and other new programs.

Margins

The reported gross margin was 50.7%, down 340 basis points (bps) sequentially and 600 bps from 56.7% in the year-ago quarter. The decrease was due to unfavorable product mix.

Operating expensesof $141.3 million were higher than the previous quarter’s $121.7 million. As a percentage of sales, both general and administrative and research & development (R&D) expenses decreased from the year-ago quarter. The net result was a GAAP operating margin of 1.4%, down 360 bps year over year.

Net Income

Microsemi generated GAAP net loss of $8.7 million or loss of 9 cents a share compared with ($2.9) million or loss of 3 cents in the year-ago quarter.

Excluding special items but including stock-based compensation expense, non-GAAP net income was $36.2 million or earnings of 38 cents per share compared with $28.6 million or earnings of 31 cents in the year-ago quarter.

Balance Sheet

Cash and cash equivalents balance at quarter-end was $205.2 million, down $12.9 million from the first quarter. Cash generated from operations was $30.2 million and capex was $8.7 million, netting a free cash flow of $21.5 million.

Inventories increased 6.6% to $202.1 million from $216.3 million in the previous quarter. Days sales outstanding (DSOs) were 59 days, flat sequentially.

Guidance

Microsemi provided guidance for the third quarter of fiscal 2014. Revenues are expected in the range of $287–$293 million, up 1.0% sequentially at the mid-point. Non-GAAP gross margins are expected to increase in the range of 20–100 bps and earnings per share are expected to be within 55–61 cents.

Our Take

Microsemi’s second-quarter earnings missed the Zacks Consensus Estimate due to higher-than-expected operating expenses.

In the last quarter, the company gave an encouraging forward guidance. It expects sequential dollar growth in all the end markets, indicating improving demand environment and increased visibility.

Also, Microsemi’s R&D program remains on track, helping the company to manage its expenses well. Additionally, the company’s focus on security and increasing electronic content per device and customer will eventually boost its market share.

However, management expects expenses to increase in the upcoming quarter due to heavy investments in FPGAs and mixed signal RFs.

Microsemi has a Zacks Rank #3 (Hold). Other stocks that are performing well at current levels include Montage Technology Group Limited (MONT - Snapshot Report), ON Semiconductor (ONNN - Analyst Report) and CSR plc (CSRE - Snapshot Report). All these stocks sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on ONNN
Read the Full Research Report on MSCC
Read the Full Research Report on CSRE
Read the Full Research Report on MONT


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