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PMC-Sierra Inc. (PMCS - Analyst Report) reported adjusted first quarter 2013 earnings of 3 cents per share, missing the Zacks Consensus Estimate of 5 cents. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.

Revenues

PMC-Sierra reported revenues of $125.2 million in the first quarter, down 3.2% sequentially and 5.2% from the year-ago period. Reported revenues were toward the lower end of management’s expected range of $123.0 million to $132.0 million due to economic softness and weakness in carrier spending, partially offset by strength in the Optical market segment.

The company’s book-to-bill ratio was greater than 1 for the second consecutive quarter, indicating improving demand.

Revenues by Market Segment

Since the second quarter of 2011, PMC-Sierra has been reporting its revenues under three market segments – Storage, Optical and Mobile Networks.

The Storage segment generated 68% of first quarter revenues, down from 70% in the fourth 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 decreased 6% sequentially due to lackluster demand in the traditional IT space. The company expects the Adaptec RAID adapters or Series 7 product line introduced in the last quarter to see strong interest from large data center customers. Management stated that design wins and these new products should help the company to continue its market share dominance.

The Optical segment generated 20% of sales, up from 14% in the prior quarter. Segment revenues were up 32% sequentially, driven by double-digit growth in Optical Transport Network (OTN) revenues and Passive Optical Network (PON) revenues returning to normal levels. PON is used by carriers worldwide to facilitate higher speed service to residences and enterprises. The OTN strength primarily came from China as it leads the world in OTN deployments.

The Mobile segment accounted for 13% of sales, down from 16% in the prior-year quarter. Segment revenues were down 22% sequentially due to weak carrier spending by two of its largest carriers in North America.

Operating Results

Reported gross margin for the quarter was 70.2%, up 120 basis points (bps) from 69.0% in the comparable year-ago quarter driven by a favorable product mix.

PMC-Sierra reported operating expenses of $83.0 million, down 5.8% from $88.0 million incurred in the year-ago quarter. As a percentage of sales, research and development expenses decreased from the year-ago quarter whereas selling, general and administrative costs increased. The net result was a GAAP operating margin of (3.4%) compared with (7.2%) in the year-ago quarter.

Net Income

On a fully diluted GAAP basis, PMC-Sierra recorded a net loss of $6.8 million or a loss of 3 cents per share compared with a loss of $67.4 million or 29 cents per share in the year-ago quarter.

On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $6.0 million compared with $7.4 million in the year-ago quarter. Pro forma earnings per share came in at 3 cents, flat year over year.

Balance Sheet & Cash Flow

PMC-Sierra exited the first quarter with cash, cash equivalents and short-term investments of approximately $106.9 million versus $181.4 million in the prior quarter. Trade receivables were $57.3 million, down from $62.1 million in the prior quarter.

Cash flow from operations was $14.4 million versus $11.9 million in the year-ago quarter. Capex was $4.6 million versus $9.1 million in the year-ago quarter.

Guidance

For the second quarter of 2013, PMC-Sierra expects total revenue in the range of $126.5–$134.0 million, up 1% to 7% sequentially. Management expects the storage segment to be up sequentially, driven by large data center customers.

Our Take

PMC-Sierra, Inc. engages in design, development, marketing and support of semiconductor solutions by integrating mixed-signal, software and systems expertise through its network in North America, Europe and Asia. The company’s first quarter earnings missed the Zacks Consensus Estimate by 2 cents on weak revenues.

The storage and mobile segments performed poorly in the last quarter but we are encouraged by the improvement in the optical segment, introduction of several major products, and new design wins during the quarter. Hence, we expect fast recovery in the coming quarters. The company also provided modest second quarter guidance, indicating some signs of stabilization.

However, 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 is gaining share in its key served markets namely 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 2013.

Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Investors can also consider some other stocks with positive Zacks Rankand Expected Surprise Prediction or ESP (Read: Zacks Earnings ESP: A Better Method).

Applied Materials, Inc. (AMAT - Analyst Report), Earnings ESP of +7.69% and Zacks Rank #1 (Strong Buy)

Fiserv Inc. (FISV - Analyst Report), with an ESP of +3.03% and a Zacks Rank #2 (Buy)

Amazon.com. (AMZN - Analyst Report), with an ESP of +60.0% and a Zacks Rank #3 (Hold)

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