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Microsemi's Q3 Earnings Beat Estimates

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Microsemi Corporation’s (MSCC - Free Report) adjusted earnings per share (EPS) for the third quarter of fiscal 2013 came in at 42 cents, beating the Zacks Consensus Estimate by 4 cents or 10.5%.


Microsemi reported revenues of $242.6 million, up 3.1% sequentially but down 6.4% year over year. 

Revenues by End Market

Microsemi generates revenues from the Defense, Aerospace, Enterprise & Commercial, and Industrial markets.

The Defense & security market generated 31% of sales, down 6.0% sequentially to $75.2 million. Microsemi is witnessing strong booking growth in C4ISR, military avionics and cyber security applications.

Around 28% of Microsemi’s quarterly revenues came from the Communications market. Management attributed the 6.9% sequential increase to strength in PoE, timing and sync and voice circuit products. PoE expansion into new markets is another growth factor for Microsemi. However, management expects bookings to rebound, driven by seasonality, market share gains and expansion into small cell markets from the second half of 2013.

The Aerospace segment increased 3.1% sequentially to generate 19% of revenues, attributable to improving market conditions. Longer-lead time business remains soft according to management, although strengthening in other areas over the past three quarters will lead to growth in the next quarter.  

The Industrial market generated 22% of sales, up 13.4% sequentially. Microsemi saw strength in the solar market, which was offset by weakness in other areas. Microsemi's bookings improved in semicap, industrial lasers, MRI and other broad-line industrial applications.


The reported gross margin was 57.0%, up 27 basis points (bps) from the previous quarter’s 56.7% and 122 bps from 55.8% in the year-ago quarter. The sequential rise was due to higher volumes and favorable mix. The year-over-year expansion was due to a growing percentage of new high-margin products in the mix and cost reduction that were enough to offset the lower volumes.

Operating expenses of $113.1 million were lower than the previous quarter’s $121.7 million. The operating margin increased 538 bps sequentially and 27 bps year over year, touching 10.4%. Both research and development (R&D) and selling, general and administrative (SG&A) expenses decreased sequentially as a percentage of sales, which combined with a higher gross margin increased the operating margin.

Net Income

Microsemi generated GAAP net profit of $18.3 million or 20 cents a share compared with loss of $2.9 million or 3 cents a share in the previous quarter and income of $8.1 million or 9 cents a share in the year-ago quarter.

Excluding these special items, pro forma net income was $38.4 million (15.8% of sales) compared with $38.9 million (15.0%) in the year-ago quarter and $28.7 million (12.2%) in the previous quarter.

Balance Sheet

Cash and cash equivalents balance at quarter-end was $220.9 million, up $14.0 million during the third quarter. Cash generated from operations was $52.6 million and capex was $13.6 million, netting a free cash flow of $39.0 million. 

Inventories increased 2.4% to $166.6 million from $162.7 million in the previous quarter. Days sales outstanding (DSOs) decreased to 58 days from 62 days in the last quarter.


Microsemi provided guidance for the fourth quarter of fiscal 2013. Revenues are expected to increase 2–4% and the tax rate is likely to be6.0%. Non-GAAP earnings per share are expected to be around 51–55 cents.

Our Take

Though Microsemi’s third quarter earnings were better than the Zacks Consensus Estimate, the year over year comparisons were disappointing. However, the company provided a modest guidance.

The company is seeing weakness across its major markets, although its R&D program remains on track. Management is focusing on security and increasing electronic content per device and customer, which will eventually boost its market share.

However, uncertainty in short-term defense programs owing to apprehensions over ‘sequestration’ could temper the effects of increasing electronic content in defense applications.

Microsemi has a Zacks Rank #3 (Hold). Semiconductor stocks that are worth considering include Advanced Micro Devices (AMD - Free Report) , Microchip Technology Inc. (MCHP - Free Report) and Intersil Corp. , all carrying a Zacks Rank #2 (Buy).

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