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PMC-Sierra Inc. (PMCS - Analyst Report) has reported third quarter 2011 earnings of 15 cents per share, beating the Zacks Consensus Estimate of 14 cents. The higher gross margins and effective cost control measures led to higher earnings in the last quarter. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.
PMC-Sierra reported revenue of $173.3 million in the third quarter, up 6.8% from $162.3 million in the year-ago period, but below the Zacks Consensus Estimate of $176.0 million and the Street consensus estimate of $177.0 million due to the significant decline in the Optical 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 60% of third 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 segment saw a 6% rise sequentially on growth in Fiber Channel and data centre as well as continued ramp of 6-gig SAS.
The Optical market segment generated 24% of the total third quarter revenue. The segment’s revenue declined 9% sequentially, due to weakness in both access and metro products.
The Mobile market segment generated 16% of the total third quarter revenue, which was up 3.0% sequentially on strong Wintegra sales, partially offset by the weakness in T1/E1 sales. Wintegra was relatively strong but below expectation as significant programs were delayed in both China and Europe.
Excluding acquisition-related costs, but including stock-based compensation expenses, non-GAAP gross profit increased 11.1% year over year to $120.7 million. Non-GAAP gross margin was 69.6%, compared to 66.9% in the year-ago quarter.
Total operating expenses of $86.0 million were up 22.7% from $70.1 million in the comparable year-ago quarter. 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 $34.7 million, down 9.9% year over year. The operating margin decreased 370 basis points year over year to 20.0%. The decline in operating margin was mainly the result of higher operating expenses that outpaced the 6.8% increase in revenue.
The quarter’s GAAP net income was $47.3 million or 20 cents per share, up from $15.2 million or 6 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $35.1 million or 15 cents a share compared with $37.3 million or 16 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 $2.44 billion, down from $2.65 billion in the prior quarter. Trade receivables were $64.5 million, down from $71.0 million in the prior quarter.
Cash flow from operations was $46.2 million, down from $58.0 million in the previous quarter. Capital expenditure was lowered to $2.28 million from $2.92 million in the prior quarter.
For the fourth quarter of 2011, PMC-Sierra expects all three major end markets (Storage, Optical and Mobile) to decline sequentially in the January quarter due to the general macro weakness. Overall, revenue is expected in the range of $150–$160 million, much below the Street consensus of $183.0 million. Non-GAAP gross margin is expected to be consistent with the third quarter at approximately 69.5%.
PMC-Sierra delivered a modest third quarter, beating the Zacks Consensus Estimate with respect to earnings per share. However, the fourth quarter guidance was hit by the macroeconomic slowdown. Additionally, the company’s high debt burden and lack of visibility may keep the share price range bound.
While it is true that the ramp of Romley and the ongoing transition to 6G SAS will be positive for PMC’s longer-term performance, the company’s position in the key served markets of server/storage, wireless infrastructure and optical communications could be impacted by continually strengthening competition, particularly from Marvell Technology Group Ltd. (MRVL - Snapshot Report) and Broadcom Corp. (BRCM - Analyst Report).
Particularly, Currently, PMC-Sierra has a Zacks #4 Rank, implying a short-term Sell recommendation.
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