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PMC-Sierra Inc. (PMCS - Analyst Report) has adjusted second quarter 2012 earnings of 10 cents per share, beating the Zacks Consensus Estimate of 5 cents on improved revenue, lower-than-expected expenses, favorable foreign currency movements and a lower share count.

The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.

Revenue

PMC-Sierra reported revenue of $137.8 million in the second quarter, up 4.3% sequentially but down 19.4% from the year-ago period. The result was on the lower end of management’s expected range of $136 million to 144.0 million. However, revenue was slightly above the Zacks Consensus Estimate of $137.0 million, driven by strength in the Optical end market segment.

Revenue by Market Segment

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

The Storage segment generated 62% of second quarter revenue, down from 66% 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 declined 2% sequentially due to a slower-than-expected ramp of Romley. Management stated that design wins and various new products released in the quarter should help the company to continue its market share dominance.

The Optical market segment generated 23% of sales, up from 20% in the prior quarter. The segment’s revenue increased 22% sequentially driven by one-time projects in China, Russia, Africa and an OTN build.

The Mobile market segment accounted for 15% of sales, up from 14% in the prior quarter. The segment revenue was up 9.0% sequentially, driven by improved base station shipments in Japan and Europe and improved mobile backhaul router shipments in China and North America.

Operating Results

Reported gross margin for the quarter was 70.0%, up 80 basis points (bps) from 69.2% in the comparable year-ago quarter driven by a favorable product mix.

PMC-Sierra reported operating expenses of $97.6 million, which were 0.8% higher than the year-ago quarter of $96.8 million. Research and development and selling, general and administrative costs, were both up as a percentage of sales from the year-ago quarters. The net result was an operating margin of (0.8%), compared to 12.6% in the year-ago quarter.

Net Income

On a fully diluted GAAP basis, PMC-Sierra recorded a net income of $26.5 million (12 cents per share) compared to $16.7 million (7 cents per share) in the year-ago quarter.

PMC-Sierra generated adjusted net profit of $23.2 million compared to $32.2 million in the comparable quarter last year. The fully diluted pro forma earnings per share came in at 10 cents, compared to 14 cents in the year-ago quarter.

Balance Sheet & Cash Flow

PMC-Sierra exited the second quarter with cash, cash equivalents and short-term investments of approximately $169.5 million, down from $291.1 million in the prior quarter. Trade receivables were $65.6 million, up from $62.8 million in the prior quarter.

Cash flow from operations was over $8.1 million, down from $11.9 million in the previous quarter.

During the quarter, PMC-Sierra announced that it has entered into an accelerated stock buyback agreement to repurchase an aggregate of $160 million of its common stock. The company will acquire these common shares as part of its $275 million stock repurchase program announced on March 13, 2012.

Guidance

For the third quarter of 2012, PMC-Sierra expects total revenue in the range of $130–$138 million, flat-to-down 6% sequentially. Management expects the Storage segment to improve in the third quarter, while Optical and Mobile segments to remain flat sequentially.

Non GAAP gross margins are expected in the range of 70–71% and operating expenses at $75 million.

Our Take

PMC-Sierra delivered a decent second quarter, with both revenue and earnings beating the Zacks Consensus Estimates. We are encouraged by the strong growth in the Optical segment, introduction of several major products, new design wins during the quarter, and hence expect fast recovery in the coming quarters.

However, the company announced a conservative third quarter guidance due to continued uncertainty in end market demand.

Over the long term, PMC-Sierra is well positioned for growth and is gaining share in its key served markets of server/storage, wireless infrastructure and optical communications. Through 2012, we expect cloud and data center build-outs, and storage demand to increase substantially, each of which will act as a solid catalyst for the company.

The company faces stiff competition, particularly from Marvell Technology Group Ltd. (MRVL - Snapshot Report) and Broadcom Corp. (BRCM - Analyst Report).

Currently, PMC-Sierra has a Zacks #3 Rank, implying a short-term Hold recommendation.
 

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