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PMC-Sierra Beats on Q1 Earnings

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PMC-Sierra Inc. reported adjusted first-quarter 2014 earnings of 5 cents per share, exceeding the Zacks Consensus Estimate by a penny. The adjusted earnings per share exclude one-time items but include stock-based compensation expense.


PMC-Sierra reported revenues of $126.5 million in the first quarter, down 0.3% sequentially but up 1.0% from the year-ago period. Reported revenues were above the Zacks Consensus Estimate of $124.0 million. The increase was driven by strong demand for the company’s Flash and Optical Transport Network (OTN) products.

Revenues by Market Segment

The Storage segment generated 69.0% of first-quarter revenues, down from 71.0% 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 4.0% sequentially due to weakness in the storage products except Flash controllers. However, PMC-Sierra witnessed strength in SAS and Flash product lines. The company expects the Flash controllers, Adaptec 12-gig SAS/RAID adapters to see strong interest from large data center customers. Management stated that the majority of these 12-gigdesign wins will start to ramp up with Intel's Brantley launch in the second half of 2014, helping the company to continue its market share dominance.

The Carrier segment generated 19.0% of sales, up from 16.0% in the prior quarter. Segment revenues were up $3.3 million sequentially due to strength in the OTN business. The OTN products continued to witness strength in the last quarter and increased more than 50% sequentially — the fifth straight quarter of growth.

The Mobile segment accounted for 12.0% of sales, down from 13.0% in the prior quarter. Segment revenues remained flat sequentially due to decrease in the WinPath business, offset by an increase in the legacy ATM business shipping into 3G backhaul.

Operating Results                                

Reported gross margin for the quarter was 70.3%, down 30 basis points (bps) sequentially but up 20 bps from the year-ago quarter. The sequential decrease was due to lower revenues and an unfavorable product mix.

PMC-Sierra reported GAAP operating expenses of $91.8 million, down 2.1% from $93.8 million incurred in the year-ago quarter. As a percentage of sales, research & development expenses decreased from the year-ago quarter, while selling, general & administrative costs increased. The net result was a GAAP operating loss of $2.9 million versus operating loss of $6.0 million in the year-ago quarter.

Net Income

On a GAAP basis, PMC-Sierra recorded a net loss of $4.2 million or a loss of 2 cents per share compared with a loss of $8.5 million or a loss of 4 cents per share in the year-ago quarter.

On a non-GAAP basis, PMC-Sierra generated adjusted net profit of $9.43 million compared with $8.14 million in the last quarter. Pro-forma earnings per share came in at 5 cents compared with 4 cents in the last quarter.

Balance Sheet & Cash Flow

PMC-Sierra exited the first quarter with cash, cash equivalents and short-term investments of approximately $92.5 million versus $110.9 million in the prior quarter. Trade receivables were $56.6 million, up from $56.1 million in the prior quarter.

Cash flow from operations was $10.6 million versus $33.0 million in the prior quarter. Capex was $3.7 million versus $5.0 million in the prior quarter. In the reported quarter, the company spent approximately $11.5 million for stock repurchases.


For the second quarter of 2014, PMC-Sierra expects total revenue in the range of $121–$129 million, down 1.2% sequentially at the mid-point. On a non-GAAP basis, the company expects gross margins in the range of 70–71%; operating expenses in the $70–$72 million range; tax provision to be approximately $1 million and earnings per share of 8 cents, assuming a share count of 200 million.

Our Take

PMC-Sierra, Inc. engages in design, development, marketing and support of semiconductor solutions by integrating mixed-signal, software and systems expertise in North America, Europe and Asia. The company top- and bottom-line results exceeded our expectations.

Though the storage segment performed poorly in the quarter, we are encouraged by the improvement in the carrier segment, introduction of several major products and design wins.

However, the company provided weak first-quarter guidance, indicating a challenging macro environment. Therefore, 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 market share gains in 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 2014.

Currently, PMC-Sierra has a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include GrafTech International Ltd. , Siemens Aktiengesellschaft and IAC Interactive . While GrafTech International sports a Zacks Rank #1 (Strong Buy), Siemens and IAC Interactive carry a Zacks Rank #2 (Buy).

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