Update: PMC-Sierra Reports Flat Revenues And EPS But Beats Estimates And Guides For A Strong Q3

| About: PMC - (PMCS)


Revenues and earnings beat estimates, with sales flat and GAAP loss at $0.02 per share, Non-GAAP EPS of $0.09 per share. Q3 guidance was strong.

The thesis has been working well, with several new strong product launches as expected and improved financials. The stock has been volatile, in-line with other small-cap semiconductors.

I reiterate my long thesis and maintain a $9 target price achievable within 24 months, offering a ~30% upside.

PMC-Sierra, Inc. (NASDAQ:PMCS) reported strong results for the second quarter ended June 28, 2014, beating both on revenues and EPS (SEC filing, conference call, press release). Net revenues reached $126.5, up 0.2% Q/Q and down 1% Y/Y. GAAP net loss was $3.5M, or $0.02 per share, compared to $4.2M during the previous quarter, or $0.02 per share. Non-GAAP net income totaled $18.3M, or $0.09 per share, compared to $16.0M, or $0.08 per share. Strength in both PMCS' optical and mobile products more than offset lower revenue from its storage products due to inventory consumption at two of its larger customers.

The storage segment revenues fell 4.7% Q/Q and generated 65% of revenues on weak demand in Q1 from large enterprise storage customers which caused some inventory draw-down in Q2 instead of only new orders. Some inventory drawdown is expected to last into Q3, with stronger trends towards the end of the quarter, and in Q4. Nevertheless, PMCS has scored a big design win with the third Tier 1 customer in this space, giving it now a clear competitive strength with Tier 1 customers. In the future, increased demand is expected to come from ramp-up of 12G SAS design wins associated with the Intel's Grantley launch in the second half of 2014, helping the company to continue its market share dominance. Flash controllers are expected to experience stronger Q3 sales as well. The optical segment revenues were up 11% Q/Q and generated 20% of sales due to strength in the Optical Transport Network (or OTN) business, driven by deployments in India, Russia and Korea, partially offset by lower fiber-to-the-home revenues in Japan. The Mobile segment accounted for 15% of sales, up from 12% in the previous quarter, with revenues up 20% Q/Q based on strong growth in 3G and 4G telco network upgrades deployments. Legacy sales represented 7.3% of revenues.

For the rest of 2014, four key areas are expected to contribute to growth: 12G SAS, flash controllers, OTN and RF products. After years of heavy R&D investment, PMCS sees these product cycles start bearing fruit. For the third quarter of 2014, PMCS guides revenues in the range of $130M to $138M, up 6% sequentially at the middle of the range. OTN revenue is expected to be up sequentially again, but the overall carrier revenue should be down a few million. The mobile segment will also be down a bit due to weaker China LTE spend. However, PMCS' current storage backlog suggests a double-digit Q/Q growth in this largest segment, with broad growth over all markets and regions of the storage segment, with all four main growth drivers expected to contribute.

All in all, I see solid demand on the most important storage segment, built on PMCS' strong products resulting from years of R&D investments that will continue to bear fruit. PMCS will maintain its leadership position in storage and carrier technology space. I reiterate my long thesis, which has been working well so far on new product launches and improved financials. The stock was up ~30% in its peak since my recommendation, while retreating recently as small-cap, semiconductor stocks prices and sales are volatile. I maintain my price target of ~$9 per share within 24 months.

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