Applied Micro Circuits Corporation (AMCC) reported results for the second quarter of fiscal 2011 which beat estimates, but the outlook for the third quarter was weak. Applied Micro recorded revenues of $66.0 million in the second quarter of fiscal 2011, up 8.5% sequentially and up 34% year over year and beat management’s guidance of $60.5 − $62.8 million.
On a sequential basis, all the three product families recorded sequential growth in September. Product revenue came in at $62.2 million, up 8% sequentially. Within the product mix, processor revenues were $3 million, up 5% sequentially.
Business growth was fueled by strength in the telco, enterprise and small/medium business segments uniformly. Transport revenues came in at $31.2 million, up 11% sequentially. License revenues came in at $3.8 million, up 15.0% sequentially. OTN business in the September quarter was up approximately 18% sequentially fueled by a solid quarter at Cisco (CSCO) and Alcatel-Lucent (ALU).
Applied Micro recently acquired Denmark-based chipmaker TPACK A/S for $32 million in cash. For the September quarter, the TPACK revenues of $0.1 million are aggregated with licensing revenues. On a geographic mix, sales to North America accounted for approximately 35% of total revenue. Sales to Europe contributed 20% and sales to Asia contributed 45%.
Two sub-contractors represented equal to or more than 10% each of the quarterly revenue − Hon Hai at 14%, and Flextronics at 10%.
On the call, Applied Micro stated that the company was expecting to catch up on the delinquent processor shipments but it was not able to. Nevertheless, Applied Micro managed to source and ship more transport products than anticipated.
Orders slowed down, particularly in September. Several orders were pushed out off to the December quarter and the March quarter. The upcoming two quarters will continue to be a bit weak due to inventory corrections, channel adjustments and end-customer deployment issues. Management stated that the slowdown in push-outs were due to a combination of excess inventory and a variety of inventory imbalances. The inventory imbalance was the result of having some parts built but not all that is required to deploy end-system solutions.
Lead times for transport products improved significantly during the quarter but supply constraints for the processor side of the business continued without any improvement. Applied Micro ended the quarter with a book-to-bill of 0.96.
Gross margin (excluding restructuring items and stock-based compensation) came in at 68.9% compared with 67.6% in the previous quarter and 60.0% in the year-ago quarter. The improvement in gross margin was driven by favorable product mix (higher licensing revenues), improved manufacturing yield and efficiencies. Operating expenses came in at $35.8 million, up from management’s guidance of $33.8 million -$34.8 million due to increase in R&D expense and the timing of $0.5 million repayment that was delayed into the December quarter.
Operating margin improved to 14.6%, up from 12.2% in the previous quarter. On a reported basis, net income came in at $3.6 million or 5 cents per share compared with net income of $1.4 million or 2 cents in the previous quarter and a net loss of $6.7 million or 10 cents in the year-ago quarter. Excluding one-time items but including stock-based compensation expense, net income came in at 10 cents per share, beating the Zacks Consensus Estimate of 7 cents.
During the quarter, Applied Micro generated $11.0 million of cash from operations and used $4.5 million in capital expenditures and repurchased 2.5 million shares for $23 million. Applied Micro exited the quarter with cash and equivalents of $182.6 million, down from $222.5 million at the end of the previous quarter.
Day Sales Outstanding (DSO) was 32 days, up from 30 days in the previous quarter and management expects DSO to range from 30 to 42 days in the coming quarters. Applied Micro ended the quarter with inventories of $17.6 million, almost flat with the previous quarter. Inventory turns for the quarter were just 0.7, significantly down from 4.5 at the end of the previous quarter. Given the industry-wide lengthening of lead times and various parts shortages, the company is planning to increase its inventory to provide supplies to its customers on time.
Guidance
Going forward, Applied Mirco expects product revenues to decline to $62 million, +/- $2 million. This is down from $66 million reported in the year-ago quarter due to increase in distribution inventory and related adjustments. Applied Mirco was however, positive on growth beyond the two upcoming quarters. 3G and LTE deployment are expected to be the growth drivers. OTN deployments are also estimated to gain traction.
Processors have registered several design wins in the enterprise and consumer segments that will either ramp more aggressively or begin shipping in the next few quarters. Datacom physical layers are also projected to grow and expected to get a boost in the second half of 2011. Applied Micro estimates revenues to grow around 15% − 20% in fiscal 2011 and targets net income between 45 and 50 cents.
Applied Micro expects to catch up on delinquent processor shipments in the December and March quarters. Gross margin is expected to be around 67.5%, down from the first quarter due to the expected higher processor shipments and customer mix.
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