PMC-Sierra Posts Decent 2Q

PMC-Sierra Inc. ( PMCS - Analyst Report ) has reported second quarter 2011 earnings of 14 cents per share, beating the Zacks Consensus Estimate of 12 cents. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenue

PMC-Sierra reported revenue of $171.0 million in the second quarter, up 6.0% from $160.7 million in the year-ago period, and comfortably ahead of the Zacks Consensus of $168.0 million. Results benefited from strong demand for storage and optical network products. The ramp of 6Gb/s SAS system and the growth in Fibre Channel led to a double-digit growth in the storage segment.

Revenue by Market Segment

Starting from the second quarter of 2011, PMC-Sierra is reporting its revenue in three market segments — Storage, Optical and Mobile networks.

The Storage segment generated 57% of second quarter revenue. Its products include controllers based on Fibre Channel, Serial Attached SCSI, and Serial ATA that enable the development of external and server-attached storage systems.The growth in Fibre Channel, 6-gig SAS and channel products, and SAS-2 design wins led to the double-digit growth.

The Optical market segment generated 27% of second quarter revenue. The company saw single-digit growth driven by strong demand for both access and metro products.

The Mobile market segment generated 16% of second quarter revenue, which was roughly flat sequentially. The softness was due to continued inventory consumption as well as orders from two major OEMs that were pushed out.

Operating Results

Excluding acquisition-related costs, but including stock-based compensation expenses, non-GAAP gross profit increased 6.3% year over year to $118.4 million. Non-GAAP gross margin was 69.2%, compared to 69.3% in the year-ago quarter.

Total operating expenses of $84.6 million were up 25.5% from the comparable year-ago quarter’s $67.4 million. The increase was due to investments made in research and development projects and annual merit increases. The non-GAAP operating income (including stock-based compensation expenses) came in at $33.8 million, down 21.9% year over year. The operating margin decreased 710 basis points year over year to 19.8%. The decline in operating margins was mainly a result of higher operating expenses that outpaced the 6.4% increase in revenue.

The quarter’s GAAP net income was $16.7 million or 7 cents per share, down from $30.1 million or 13 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $32.8 million or 14 cents a share compared with $41.9 million or 18 cents a share in the year-earlier quarter.

Balance Sheet & Cash Flow

PMC-Sierra exited the quarter with cash, cash equivalents and short-term investments of approximately $2.65 billion, up from $2.06 billion in the prior quarter. Trade receivables were $71.0 million, down from $80.1 million in the prior quarter. Cash flow from operations was $58.0 million, up from $9.40 million in the previous quarter. Capital expenditure slipped to $2.92 million from $2.94 million in the prior quarter. During the quarter, PMC-Sierra did not repurchase any shares.

Guidance

For the third quarter of 2011, PMC-Sierra expects revenue in the range of $171–$181 million. Non-GAAP gross margin is expected to be consistent with the second quarter at approximately 69.5% (plus or minus 50 basis points). Non-GAAP operating expense is projected in the range of $80 million to $81 million, net interest income at about $0.5 million, and diluted share count to be flat sequentially at approximately $238 million.

Our Take

PMC-Sierra delivered a modest second quarter, beating the Zacks Consensus Estimates with respect to earnings per share. We believe that the company has provided a decent revenue guidance, reflecting healthy end markets. In the quarter, PMC-Sierra ramped varied new products, which will lead to further growth in all the three market segments, storage, optical and mobile networks. However, the company faces stiff competition from Marvell Technology Group Ltd. ( MRVL - Snapshot Report ) and Broadcom Corp. ( BRCM - Analyst Report ) as well as customer concentration risks.