PMC-Sierra Inc. (PMCS) has reported fourth quarter 2011 earnings of 13 cents per share, beating the Zacks Consensus Estimate of 10 cents on lower-than-expected expenses. The adjusted earnings per share exclude one-time items, but include stock-based compensation expense.
Revenue
PMC-Sierra reported revenue of $152.6 million in the fourth quarter, down 4.2% from $159.3 million in the year-ago period. Revenue also missed the Zacks Consensus Estimate of $155.0 million, impacted by one less operating week because of a 14-week third quarter and weakness across all three market segments.
In the reported quarter, bookings increased more than 30% over the prior two quarters, leaving PMC-Sierra with a book-to-bill ratio of over 1.2x, reflecting strong signs of recovery in 2012 from hard drive shortages.
Revenue by Market Segment
Starting from the second quarter of 2011, PMC-Sierra reports its revenue in three market segments: Storage, Optical and Mobile networks.
The Storage segment generated 64% of fourth quarter revenue. Its products include controllers based on Fiber Channel, Serial Attached SCSI, and Serial ATA that enable the development of external and server-attached storage systems. The segment declined 17% sequentially due to inventory consumption and floods in Thailand.
Management believes that Storage revenue will be negatively impacted by hard-drive shortage in the first quarter. However, the 12 Gig products recently released for cloud and tiered storage should help the company to continue its market share dominance.
The Optical market segment generated 23% of fourth quarter revenue. The segment’s revenue declined 16% sequentially due to customer inventory reduction and weakness in both legacy and metro products.
The Mobile market segment generated 13% of the total revenue, which was down 26.0% sequentially due to excess inventory at major customers.
Operating Results
Excluding acquisition-related costs, but including stock-based compensation expenses, non-GAAP gross profit decreased 2.9% year over year to $105.4 million. The sequential decline was due to weaker-than-expected revenue.
Non-GAAP gross margin was 69.1%, compared to 68.1% in the year-ago quarter. Cost of revenue was down 7.1% year over year to $47.2 million.
Total operating expenses of $83.6 million increased 7.5% from $77.8 million in the comparable year-ago quarter. The increase was due to investments made in research and development projects and annual merit increases.
The non-GAAP operating income (including stock-based compensation expenses) came in at $21.8 million, down 28.8% year over year. The operating margin decreased 490 basis points year over year to 14.3%. The decline in operating margin was mainly the result of higher operating expenses.
The quarter’s GAAP net income was $28.4 million or 12 cents per share, up from $10.9 million or 5 cents in the comparable quarter last year. Excluding special items but including stock-based compensation expense, non-GAAP net income was $29.9 million or 13 cents a share compared with $24.2 million or 10 cents a share in the year-ago quarter.
Balance Sheet & Cash Flow
PMC-Sierra exited the fourth quarter with cash, cash equivalents and short-term investments of approximately $2.87 billion, up from $2.44 billion in the prior quarter. Trade receivables were $59.2 million, down from $64.5 million in the prior quarter.
Cash flow from operations was over $47.0 million, up from $46.2 million in the previous quarter. For the first time, PMC-Sierra authorized a share repurchase plan, buying back 6.1 million shares for a total cost of $40 million in 2011.
Guidance
For the first quarter of 2012, PMC-Sierra expects total revenue in the range of $130-$136 million, much below the Street consensus of $153.0 million due to the macro weakness.
Non GAAP gross margin is expected to be approximately 68% (+/- 50 basis points), primarily due to weaker revenue. Operating expenses are expected to be in the range of $78-$79 million, reflecting an increase of $2 million sequentially on annual payroll increases. Non GAAP net interest income is expected to be at about $0.5 million and tax provision at approximately $0.5 million.
Our Take
PMC-Sierra delivered a modest fourth quarter, with earnings beating the Zacks Consensus Estimate. The first quarter guidance was hit by the inventory correction and macroeconomic slowdown. We believe the company’s high debt burden and lack of visibility may keep the share price range bound.
Over the long term, PMCS is well positioned for growth and is gaining share in its key served markets of server/storage, wireless infrastructure and optical communications. We remain encouraged by the strong bookings growth in the last quarter and expect fast recovery in the coming quarters. Through 2012, we expect cloud and data center build-outs, and storage demand to increase substantially, each of which will act as a solid catalyst for PMCS.
However, the company faces stiff competition, particularly from Marvell Technology Group Ltd. (MRVL) and Broadcom Corp. (BRCM).
Currently, PMC-Sierra has a Zacks #3 Rank, implying a short-term Hold recommendation.
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