Microsemi Corporation’s (MSCC) first quarter earnings for fiscal 2010 were in line with the consensus. 

Revenue 

The company reported revenue of $112.8 million, which was up 2.9% sequentially and down 13.6% year over year. Revenue was within management’s guided range of a 1-4% increase. 

Revenue by Product Line and End Market 

Microsemi’s Analog/Mixed Signal products cater to three end markets—mobile/connectivity, notebooks/LCD TVs/display and industrial/semicap. 

The mobile/connectivity business (14% of revenue in the last quarter) grew 23.8% sequentially and 22.0% from the year-ago quarter. The business continues to be driven by the WLAN product line, although demand for POE products is also picking up. The segment promises to be one of the strongest in the next few quarters. 

Notebooks/LCD TVs/displays generated 8% of revenue, representing a sequential increase of 26.1% and a year-over-year increase of 23.2%. This was the second straight quarter that the segment saw double-digit revenue increase. The LCD TV market continued to be driven by strength in China, where Microsemi’s CCFL backlights again picked up some market share. Automotive display, which started stabilizing and LED TV shipments, which started ramping at three new customers also contributed. 

The industrial/semicap brought in just 7% of revenue in the last quarter, although the markets started showing signs of recovery. Going forward in 2010, this market could be one of the strongest for Microsemi. Segment revenue grew 14.1% sequentially, although it was down 28.5% year over year. 

The High Reliability product line also caters to three end markets—defense, commercial air/space and medical. 

The defense segment generated 39% of first quarter revenue, up 1.2% sequentially and down 2.2% year over year. Acquisitions, new products and growing electronic content in defense equipment continued to help growth in the last quarter. 

The commercial air/space markets generated 23% of revenue, down 0.5% sequentially and 23.3% year over year. The slight sequential decline is because of the SEMICOA revenue loss, as the company completed the first full quarter without SEMICOA. While the recession has had a significant impact on air traffic, both cargo and passenger traffic appears to be improving. The satellite business was strong, with both acquisitions and organic growth contributing. 

The medical segment (9% of quarterly revenue) is usually more resilient. However, the company is still dependent on a handful of customers to generate the bulk of ICD revenue and its largest customer continued to burn inventory in the last quarter. This resulted in sequential and year-over-year declines of 23.5% and 50.3%, respectively. A growing customer base and better market conditions should help growth in ICDs and improving credit conditions should drive MRI equipment sales this year. 

Orders 

Bookings growth continued in the last quarter, yielding a book-to-bill ratio of over 1. Lead times in the analog/mixed signal business shrunk from the normal level of 10-12 weeks to 6-8 weeks in the September quarter and remained at that level in the December quarter as well. Overall high-reliability lead times have shrunk from 20-30 weeks and have been at 15-26 weeks in the last three quarters. Satellite lead times remain in the 36-week range. 

Margins 

The pro forma gross margin was 49.6%, up 106 basis points (bp) from the previous quarter’s 48.6%. The operating expenses of $30.0 million were higher than the previous quarter’s $28.5 million. An increase in shipments out of Ireland, as well as higher volumes in the analog/mixed signal business drove the gross margin improvement. 

The operating margin was 23.0%, up 45 bps sequentially from 22.6%. Lower COGS and SG&A expenses as a percentage of sales offset the slight sequential growth in R&D (as a percentage of sales). 

Net Income 

The pro forma net income of $21.1 million, or 18.7% of sales, compares with $19.3 million, or 17.6%, in the previous quarter and $28.7 million, 22.0%, in the year-ago quarter. Special items in the last quarter were transitional idle capacity, restructuring charges, share-based compensation, intangibles amortization and one-time legal charges, which had a net impact of -$0.16 per share on a tax adjusted basis. 

Including these items, the fully diluted GAAP income per share was $0.10 compared to a loss of $0.38 and income of $0.16 per share in the previous and year-ago quarters, respectively. 

Balance Sheet 

Microsemi has a strong, debt-free balance sheet. Inventories declined 4.5%, with inventory turns increasing from 2.4x to 2.5x. The cash and investments balance at quarter-end was $234.9 million, up $18.2 million sequentially. The company spent $3.2 million on capex in the last quarter. DSOs went up from 52 to 58 days. The increase in the last quarter was probably due to heavier sales. DSOs have shown great improvement over the past year or so, indicating much-improved collections. 

Guidance 

For the fiscal first quarter, management sees revenue growth of 2-4%, a 100-200 bp increase in the GAAP gross margin, relatively flat operating expenses and an effective tax rate of around 18%. The non-GAAP EPS is expected to come in at around $0.26-$0.27. Stock-based compensation is expected to be around $6.5 million and capex around $3 million. 

We reiterate our Neutral rating on Microsemi shares.
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