Adjusted earnings (excluding special items but including stock-based compensation expense) of 82 cents surpassed the consensus mark by 9 cents. Revenues of $443 million exceeded the consensus mark by $3 million.
The results were driven by improving product mix and operational efficiency. Management sounded upbeat on the company’s pace of streamlining business.
Microsemi continues to focus on strategic areas such as storage and field-programmable gate array (FPGA) and get rid of non-core operations.
We believe strategic positioning, strong fundamentals and efficient execution to be tailwinds for Microsemi. Over the last one year, the Microsemi has outperformed that Semiconductor - Analog and Mixed industry. While the stock gained 38.9%, the industry gained 32.3%.
Let’s delve deeper into the numbers.
Revenues
Revenues for the quarter were up 1.7% sequentially but slightly down year over year. It came within management’s guidance of $430–$450 million.
Revenues by End Market
Microsemi generates revenues from the Communications, Defense & Aerospace, Data Center and Industrial markets.
Around 38% ($168 million) of Microsemi’s quarterly revenues came from its largest end market, Communications, which increased 6% sequentially and 5% year over year. The increase was driven by continuous strong growth across optical products, broadband gateway end markets returning to growth, improved inventories at China.
The Defense & Aerospace market generated 25% of sales ($112 million), up 1% sequentially but down 15% year over year. Satellite bookings and shipments were strong. Initial results from new radiation tolerant FPGA, RTG4 were satisfactory.
The Data Center segment ($98.4 million) generated 22% of fiscal first-quarter revenues. The segment decreased 3% sequentially but increased 15% year over year. Despite the impact of seasonality, the segment performed well driven by continued momentum in performance storage solutions.
For this segment, management expects growth from market share gains driven by flash business and NVME transition.
Industrial market generated 15% of sales, down 1% sequentially and 3% year over year. The year-over-year decline was the impact of last year’s divestiture. Medical and semiconductor capital equipment delivered strong results.
Microsemi Corporation Price, Consensus and EPS Surprise
Pro-forma gross margin was 64.1%, up 66 basis points (bps) sequentially and 320 bps year over year. The increase was driven by higher revenues, a favorable product mix, operational efficiency and consolidation.
Adjusted operating expenses of $162.2 million decreased 5.8% sequentially and 9.4% year over year. Operating margin of 27.5% was up 355 bps sequentially and 686 bps year over year.
Microsemi generated GAAP net income of $41.2 million or earnings of 35 cents per share against net loss of $212 million or loss of $1.93 per share a year ago.
Balance Sheet
Cash and cash equivalents balance at the end of the fiscal second quarter was $191.2 million, up from $173.9 million in the last quarter. Operating cash flow was $121.5 million compared with $77.6 million in the previous quarter. Capex was $16 million compared with $10.5 million in the previous quarter.
Inventories were $213.6 million compared with $210.4 million in the previous quarter. Accounts receivable was $232.4 million compared with $223.6 million at the end of the prior quarter.
Guidance
Microsemi expects third-quarter fiscal 2017 revenues in the range of $448–$468 million. The Zacks Consensus Estimate of $455.9 million is within the guided range. Non-GAAP earnings per share are likely to be within 94 cents–$1.04. The Zacks Consensus estimate is currently pegged at 80 cents.
Zacks Rank and Better Picks
Currently Microsemi is a Zacks Rank #3 (Hold) stock. Better-ranked stocks in the broader technology sector include Alphabet Inc. GOOGL, Internap Corporation INAP and Monolithic Power Systems, Inc. MPWR, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Long-term expected earnings per share growth for Alphabet, Internap and Monolithic Power are 16.3%, 3% and 17%, respectively.
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