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Microsemi Corporation (MSCC - Free Report) reported third-quarter fiscal 2017 non-GAAP earnings of 99 cents per share, which beat the Zacks Consensus Estimate by 18 cents. The figure grew 35.6% from the year-ago quarter and 8.8% from the previous quarter. The results were driven by improving revenue mix and operational efficiency.

Net sales of $458.1 million were in line with the Zacks Consensus Estimate. The figure increased 6.2% year over year and 3.4% quarter over quarter and was within the management’s guided range of $448–$468 million. The top-line growth benefited from robust contribution from the data center end market.

Management provided positive guidance for the fourth quarter. Despite sluggishness in China related to communications end market (expected to recover late year), we believe that Microsemi is well positioned to grow on the back of strong demand for its products in the data center as well as defense & aerospace end market.

Microsemi has lost 0.6% of its value year to date versus the 17.3% growth of its industry. We believe that the aforesaid factors will help the stock rebound going forward.



Quarter Details

Microsemi generates revenues from the Communications, Defense & Aerospace, Data Center and Industrial markets.
 

Microsemi Corporation Price, Consensus and EPS Surprise

 

Microsemi Corporation Price, Consensus and EPS Surprise | Microsemi Corporation Quote

Around 34.5% of Microsemi’s quarterly revenues came from its largest end market – Communications – which decreased 6% sequentially and almost 3% year over year to $158 million. The decrease was primarily attributed to softness in China, which negatively impacted broadband gateway and voice circuit products sales.

Optical communications products were up 5% sequentially and 17% year over year, benefiting from a stronger than expected initial ramp of the 100-gig metro build out by North American service providers.

The Defense & Aerospace market generated 25% of sales. The figure increased 2% sequentially and 1% year over year to $114 million. Radiation-tolerant FPGA revenues grew 20% sequentially.

Microsemi now expects radio-tolerant FPGA revenue growth of approximately 40% in fiscal 2017.

The Data Center segment generated 23% of sales. The segment sales increased 15% sequentially and 23% year over year to $113 million. Management noted that results benefited from increasing usage of its smart controller solutions on Intel’s (INTC - Free Report) newly released Parley platform. The company’s performance storage solution including NVMe tripled year over year.

Field-programmable gate array (FPGA) sales grew 12% from the year-ago quarter. Moreover, scalable storage solutions sales grew 17% sequentially and 38% year over year.

Industrial market generated 16% of sales, up 14% sequentially and year over year. Medical radio shipments and semiconductor capital equipment applications drove the growth.

Management expects modest, but continued strength in industrial end markets against the backdrop of a slowly improving economy, improving energy markets, continuing semi-cap strength as well as demand for emerging industrial automation and motor control applications.

Operational Details

Non-GAAP gross margin was 63.9%, down 30 basis points (bps) sequentially but up 200 bps year over year. The increase was driven by improved revenue mix.

EBITDA was $159.3 million up 5.6% sequentially and 19.1% from the year-ago quarter.

Non GAAP operating expense decreased 1% year over year and 0.5% sequentially to $161.5 million. As percentage of revenues, operating expense fell 140 bps from the previous quarter and 260 bps from the year-ago quarter.

As a result, non GAAP operating margin expanded 380 bps from the year-ago quarter and 120 bps from the previous quarter to 32.3%

Balance Sheet

Cash and cash equivalents balance at the end of the fiscal third quarter was $166.4 million, down from $191.2 million in the previous quarter. Free cash flow increased to $108.1 million as compared with $105.5 reported in the previous quarter.

Inventories were $231.9 million compared with $213.6 million in the previous quarter. Accounts receivable was $246.5 million against $232.4 million at the end of the prior quarter.

Microsemi authorized a new share buyback plan for the repurchase of up to $250 million of the company's common stock before Jul 31, 2019.

Guidance

Microsemi expects fourth-quarter fiscal 2017 revenues in the range of $463–$487 million. The Zacks Consensus Estimate is currently pegged at $469.7 million.

Management expects non-GAAP gross margins to be between 63% and 64%. SG&A is expected to decrease between $2 million and $3 million. R&D expense is expected to be flat or up $1 million.

Microsemi expects non-GAAP interest and other expense to be between $21 million and $22 million.

Non-GAAP earnings are likely to be in the range of $1.02–$1.14 per share. The Zacks Consensus estimate is currently pegged at 89 cents.

Management continues to expect free cash flows to exceed $400 million in 2017.

Zacks Rank & Key Picks

Microsemi currently has a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector are Infineon (IFNNY - Free Report) and Applied Optoelectronics (AAOI - Free Report) . Both the companies sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Infineon is expected to report earnings on Aug 1, while Applied Optoelectronics is set to report on Aug 3.

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