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Microsemi's Earnings Beat, Revs Down

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Microsemi Corporation’s adjusted earnings per share (EPS) for the second quarter of fiscal 2013 came in at 32 cents, beating the Zacks Consensus Estimate by 2 cents or 6.7%.


Microsemi reported revenues of $235.3 million, down 5.0% sequentially and 5.6% year over year. 

Revenues by End Market                                                                        

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

The Defense & security market generated 34% of sales, up 4.2% sequentially to $80.0 million. Two major missile defense programs drove Microsemi’s revenues in the quarter. Management remains optimistic about Microsemi’s total solution approach, which is helping it add value to its offerings.

Around 27% of Microsemi’s quarterly revenues came from the Communications market. Management attributed the 17.2% sequential decline to broad-based weakness in the market caused by lingering macro softness.

The PoE, power management, RF and voice circuit product lines were particularly weak although timing and sync fared better. 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 declined 5.0% sequentially to generate 19% of revenues, attributable to sluggish 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 20% of sales, which was flat sequentially. Trimble saw softness in the solar market, which was offset by strength in other areas. Microsemi saw bookings improve in semicap, industrial lasers, MRI and other broad-line industrial applications.


The reported gross margin was 56.7%, down 86 basis points (bps) from the previous quarter’s 57.6% but up 383 bps from 52.9% in the year-ago quarter. The sequential decline was due lower volumes and unfavorable 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 $121.7 million were higher than the previous quarter’s $117.1 million. The operating margin contracted 528 bps sequentially but expanded 56 bps year over year, touching 5.0%. Both research and development (R&D) and selling, general and administrative (SG&A) expenses increased sequentially as a percentage of sales, which combined with the weaker gross margin pulled down the operating margin.

Net Income

Trimble generated a GAAP net loss of $2.9 million, or 3 cents a share in compared with income of $14.2 million or 16 cents a share in the previous quarter and loss of $4.8 million, or 6 cents a share in the year-ago quarter.

Excluding these special items, pro forma net income was $28.7 million (12.2% of sales) compared with $30.3 million (12.2%) in the year-ago quarter and $37.0 million (14.9%) in the previous quarter.

Balance Sheet

The cash and cash equivalents balance at quarter-end was $206.9 million, up $3.6 million during the second quarter. Cash generated from operations was $31.9 million and capex was $9.0 million, netting a free cash flow of $22.9 million. 

Inventories increased 2.3% to $162.7 million from $158.9 million in the previous quarter. Days sales outstanding (DSOs) increased to 62 days from 58 days in the last quarter.


Microsemi provided guidance for the third quarter of fiscal 2013. Revenues are expected to increase 2–4%, non-GAAP gross margins are expected to be 56.7–57.3% and the tax rate 7.0%. The non-GAAP earnings per share are expected to be around 47–50 cents, better than the Zacks Consensus Estimate of 38 cents.

Our Take

Microsemi reported a disappointing second quarter but 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 the 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).

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