Microsemi (MSCC) is set to report this week and even though I subscribe to the club that believes in not relying too much on the quarterly reports, this one might be worth tracking closely, given the timing. The initiatives undertaken over the past year do seem significant, especially in charting out a new long-term direction for the company in the fast changing semiconductor space, and the upcoming quarterly report might go a long way in not just highlighting the same but also defining the pace and success of the effort.
Some semiconductor names are working over the past few weeks, partly due to the comeback of topline growth at Advanced Micro (NYSE:AMD), but this week, with four biggies - Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG), Amazon (NASDAQ:AMZN) and Facebook (NASDAQ:FB) in the tech land reporting, macro trends might be in the driver seat overshadowing the developing stories like Microsemi, an opportunity for bottom-up investors.
Things worth looking for
Besides the usual quarterly expectations, which currently stands close to the guided numbers of around $420-440 million for the topline and 69-75 cents for the EPS, the continuation of financial synergies and early lead on the promised strategic synergies, especially the progress on the solution-based offerings, from the PMC acquisition should be evident by now.
Given the shape of the diversified portfolio after the acquisition and divestitures, approximately 30% from aerospace and defense, 36% from communications, 19% from data center and 15% from industrial during the last quarter, one can expect a relatively steady growth rate, with muted seasonality and less dependence on any particular socket or product. The growth should have better margins and driven by growing markets, e.g. data centers, communication, right products within the aerospace/defense and industrial markets. The results should highlight whether PMC's decent position in high-performance storage, optical and mobile networks is transferring to the combined company, while maintaining the momentum in Microsemi's core business.
From products and end-markets standpoint, communications, the largest end-market, should deliver growth on the back of strong performance in the gateway business, Ethernet switching, OTN markets and timing business. Aerospace and defense business should start to benefit from the expected second-half ramp in satellite products and decent demand in commercial air markets. The Data Center business, which now makes up close to 1/5 of the total business, should show benefits of having one of the most extensive product portfolios in the industry. FPGA products should also show benefits of relatively better competitive position and roll out of Gen 5.
How can Microsemi excite the investors?
With S&P 500 trading around 17 times expected earnings and Microsemi, with one of the strongest and predictable earnings growth stories, trading at less than 10 times forward earnings, not far from the levels seen during 2008-09, does not need to do much, other than executing on the plan. Indeed, looking at the disappointment visible in the Skyworks (NASDAQ:SWKS) numbers last week or expected softness in the Apple food chain, numbers on expected lines might offer reasons to cheer.
Debt, post acquisition, has been a concern and any sort of accelerated progress towards the goal of achieving a leverage ratio of 3 over next year and a half will be a welcome sign. Given the company had taken action to address $80 million worth of synergies from the acquisition by the end of last quarter itself, out of the previously mentioned $100 million of cost synergies, initial expectations of cost synergies from the acquisition might be proven grossly conservative.
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