The market certainly didnt like what it saw and heard from Microsemis (NASDAQ:MSCC) fiscal second quarter results, as seen in the nearly 10% selloff on Friday. While weakness in the wireless sector is a concern and Microsemis valuation wasnt exactly undemanding, I think this may be shaping up as a buy-the-dip opportunity for investors looking for good below-the-radar GARP stories in semiconductors.
Microsemi is looking to make significant content inroads in commercial aerospace and satellites, while continuing to benefit from a strong position in defense and a growing presence in FPGA. Add in the potential to leverage its timing expertise into the auto and industrial automation verticals, and there is worthwhile long-term potential here. Ive changed little in my model after this quarter, and my fair value remains in the mid-$30s.A Decent Enough Quarter
In what is proving to be a lackluster quarter for chip companies, Microsemi delivered a pretty good set of results. Revenue was just slightly (about 1%) below the sell-side target, growing 3% from last year and falling about 2% from the prior quarter. Gross margin was stronger than expected (up 260bp yoy GAAP and 190bp non-GAAP), and although operating expenses were a little higher than expected, operating margin still improved (740bp GAAP, 490bp non-GAAP) and drove a two-cent bottom line beat.
Communications remained the largest business for Microsemi, but also the weakest as revenue rose 3% yoy and fell 12% qoq. Defense saw 9% and 3% growth, while industrial was flat/down 5%. The smallest segment, aerospace and satellite, was also the strongest, as revenue rose 12%/19%.
Turning back to communications, business was weak overhaul (China, backhaul, etc.), though broadband modems were an area of relative strength. On the aero/sat side, Microsemi saw a rebound in the sat business, and that helped push gross margins higher than expected for the quarter. Last and not least, industrial was tamped down by weakness in energy and medical devices - which doesnt seem so surprising in light of the lackluster CRM results from St. Jude Medical (NYSE:STJ).
To Microsemis credit, management continues to do a good job with its FPGA business. While Xilinx (NASDAQ:XLNX) and Altera (NASDAQ:ALTR) underwhelmed the Street with revenue declines of 8%/5% and 6%/9%, Microsemi reported 14% and 5% growth. On the flip side, weakness in the communications market seems to have really shown up in the results of the timing business (though energy played a role too), as revenue fell 15%/9%.Was Guidance Really That Bad?
I can understand that the Street is now getting nervous about the health of the communications vertical, particularly given the commentary of Xilinx, Altera, and Texas Instruments (NASDAQ:TXN) and managements own comment that second-half demand isnt likely to live up to prior expectations. Its not unfair for investors to want to scale out of Microsemi on a soft outlook for a market that supplies about a third of the revenue.
That said, I still think that may prove to be a hasty decision for more long-term oriented investors. Managements guidance for the next quarter basically bracketed existing expectations and although management didnt specify the book-to-bill (other than above 1.0) or order levels, they did say that bookings were a new record, with strength in aerospace, satellites, and defense.
With Boeing and other commercial aviation companies accelerating their production activities, this is a multiyear opportunity for Microsemi to make significant content wins. The company has focused on the electrical power side of the commercial aviation opportunity with products like FPGAs and transient volt suppressors and hopes to add an incremental $75 million in revenue from electrical power conversion.
On the satellite side, the company has started sampling its new radiation-hardened FPGA (the RTG4), a product that offers triple the performance and 7x more density than older chips. Management believes that the RTG4 could add $100 million in addressable market opportunity, while displacing ASIC content could be an opportunity three times as large.Timing More Of A Work In Progress
From virtually no presence years ago, timing has grown into a major (roughly 20% of revenue) opportunity for Microsemi. This is a business line where management believes it is the market leader (with Integrated Device (NASDAQ:IDTI) as a close second and Silicon Labs (NASDAQ:SLAB) further back) and where there are opportunities to grow across multiple verticals.
Wireless backhaul is the most obvious large market opportunity at present, but its also one where weak communication spending is going to be a headwind until companies like Ericsson (NASDAQ:ERIC) see a pickup in demand. Carrier ethernet and data center are also emerging as bigger opportunities for Microsemi, with both offering potentially mult-hundred million dollar opportunities. Looking further ahead, auto and industrial automation could also become bigger factors. As chip content increases both within cars and on factory floors, timing products that ensure synchronicity are going to become more important.The Bottom Line
Including the Vitesse transaction (which should close relatively soon), I believe that Microsemi can double its revenue over the next ten years. I also believe that 60% gross margins are attainable in the (relatively) short term and that a recovering satellite industry should help that cause. All told, I continue to value Microsemi on the premise of FCF margins in the 20%s and annualized FCF growth in the low double-digits. Discounted back, that gives me a fair value a little above $36. An EV/revenue valuation based upon expected operating margin (there is a solid correlation over time between margins and EV/rev multiples in the chip sector) supports a somewhat higher fair value, but still in the $30s.
Ive been bullish on Microsemi for a while now (as well as a shareholder), and Im in no rush to exit the position. I do worry that further weakness in the communications sector could lead to dicey guidance, but then it seems that the defense and aero/sat markets are outperforming and could potentially offset that news. All told, while the Street may hit pause on this name for a little while (especially with two bullish initiations in recent weeks), I think this could be a good chance to add some shares.
SAN DIEGO (TheStreet) -- Celladon (CLDN) said Sunday that its experimental gene therapy for heart failure, Mydicar, was a total bust. To its credit, management was fully transparent about the mid-stage clinical trial results, even owning up to negative results in the headline of the press release. On the primary and secondary endpoints of the heart failure study, Celladons Mydicar failed to demonstrate any benefit over placebo, the company said.
Shares of Celladon will surely collapse Monday, but more interesting will be seeing what effect the companys blowup has on otherhigh-flying gene therapy stocks -- Bluebird Bio (BLUE - Get Report), UniQure (QURE), Spark Therapeutics (ONCE) -- if any.
Must Read: 10 Stocks Carl Icahn Is Buying
Corinthian Colleges Inc. has shut down its remaining 28 for-profit career schools, ending classes for about 16,000 students the biggest collapse in US higher education. All campuses will be closed effective Monday, Corinthian said Sunday. The company, which owns the Everest, Heald, and WyoTech schools, said it will work with other colleges to try to place the students. Corinthian collapsed last summer after the US Education Department curtailed its access to federal student aid. The Santa Ana, Calif., company agreed to sell half of its 107 campuses to Education Credit Management Corp. in November amid allegations it falsified grades, attendance, and job-placement rates. Corinthian was ordered April 17 to stop enrolling students in California, where most of the schools are. It was also fined $30 million for misrepresenting job-placement rates to attract students to Heald business schools. Efforts to sell Heald were unsuccessful, the company said Sunday. Corinthians California schools were not part of the sale to Education Management because the states attorney general refused to sign off, preferring to seek restitution for students. Last week, the Education Department said it will consider forgiving federal loans for students who can show they were defrauded by Corinthian. The company has been under investigation in 20 states, was sued by the Consumer Financial Protection Bureau, and is facing three federal criminal probes. The schools had 72,000 students last summer, and Corinthian got $1.4 billion in federal student aid in 2013 alone.
Senator seeks ban on marketing of e-cigarettes to kids
Neal Communities reported 27 home sales in its six active communities in Lee and Collier counties during March. The total sales volume reached $9.2 million, while the average home price came in at $316,000. Amy Daugherty sold the remaining three homes to sell out Villa Palmeras in Estero and two at Estero Place. At Coastal Key in Fort Myers, Cindy Burnham was the top New Home Sales Associate. Jeff Connery and Leslie Liddle continue to thrive in sales at Watermark in Fort Myers. Jackie Nary sold two homes at Canopy in Naples. At Reflection Lakes in Naples, Lisa Marie Fetters sold three and Ryan Johnson sold five.
John R. Wood Properties
These agents have joined the company.
Elaine Zacka, a licensed real estate agent, has joined the Bonita Springs office. Originally from Philadelphia, Zacka worked in accounting and business administration before real estate. She is a member of the Naples Area Board of Realtors (NABOR).
AJ Fischer has joined the company as a licensed personal assistant at the Old Naples office and as a member of Team Sims. Originally from Auburn, Alabama, Fischer has worked in the real estate industry since 1986. She was the 1997 Realtor Associate of the Year with NABOR and Florida Realtors (FR), 2003 Florida Chapter Womens Council of Realtors (WCR) President, and 1997 WCR Naples Chapter President. She is also a member of NABOR.
Mary Jo Chamberlin is a licensed real estate agent in the North Naples office. Originally from Ohio, Chamberlin earned a degree in interior design from Kent State University and attended University College London, studying masters coursework in construction economics and management. She is a member of NABOR.
Ashley Valentine is a licensed real estate agent in the North Naples office and a member of the Valentine Group of Naples. Originally from Tampa, Valentine holds a degree in business marketing from Florida Gulf Coast University. She has worked in the real estate industry for three years and is a member of NABOR.
Abbie Valentine is a licensed real estate agent in the North Naples office and a member of the Valentine Group of Naples. Originally from Bayville, New York, Valentine holds degrees in psychology and economics from Bushnell University. Before real estate, he played professional golf for eight years. He is a member of NABOR.
Kathleen Adair is a licensed real estate agent in the Bonita Springs office. Originally from Lima, Ohio, Adair worked in credit management before real estate. She is the recipient of multiple relocation services awards and is a member of the Bonita Springs-Estero Association of Realtors (BEAR).
Arthur Shafran is a licensed real estate agent in the Old Naples office. Originally from New York, Shafran holds a degree in economics from New York University and an MBA in international finance from the University of California Los Angeles (UCLA). Before becoming a real estate agent, he worked as a real estate developer and held executive positions in the electronics industry. He is a member of NABOR.
Janie Pappas is a licensed real estate agent in the Old Naples office. Originally from Lexington, Kentucky, Pappas holds a degree in English from Hollins College, Roanoke, Virginia. She was a top producer award recipient in 1998, 1999 and 2000.
Alec Frankel is a licensed real estate agent in the Bonita Springs office. Originally from the USSR, Frankel became active in the real estate industry in 1989. He is a member of NABOR.
Peter Riccardelli is a licensed broker associate in the Old Naples office and a member of the Napoleon Real Estate Team. Originally from Massachusetts, he is a member of NABOR.
Patrick ONeill is a licensed real estate agent in the Bonita Springs office. Originally from Cleveland, Ohio, ONeill holds a degree in communications from Ohio University. Before real estate, ONeill worked in national advertising sales and marketing. He is a member of BEAR.
Hank Cassi is a licensed real estate agent in the North Naples office. Originally from New York, Cassi attended Coastal Carolina University. He has worked in the real estate industry for 14 years and is a member of NABOR.
Allison Callas is a licensed real estate agent in the North Naples office. Originally from New York, Callas worked in technology sales and marketing, graphic design, hospitality and cosmetic sales before entering the real estate industry in 2013. Callas is a member of NABOR.
Sandra Ventre Richards is a broker-associate in the Old Naples office. Originally from Washington, DC, Richards holds a bachelors degree from St. Marys College, a masters degree from the University of San Francisco, and a PhD candidate at the University of Maryland. Richards was a member of the Presidents Circle Top Producer in 2013 and 2014.
The luxury custom homebuilder has expanded and added Jessica Bradford, Melissa Martin, Scott Windler, Garry Brown and Allison Thress.
A native of Massachusetts, Bradford moved to Naples in 2010. She joined the team as a client liaison responsible for assisting clients with selections and design in the Miromar Lakes Beach Golf Resort and West Bay communities. She has set up a one design center with vendors and works daily with trade partners and the on-site project manager. She previously worked with local interior design firms for five years. She earned her bachelor of science in interior design from the New England Institute of Art.
Martin, a native Floridian, joined the company as a client liaison in the Miromar Lakes Beach Golf Resort. Her duties include assisting buyers with selections, data input, vendors and on-site trade partner communication. She was instrumental in setting up a design center both on and off site. She is a graduate of Florida SouthWestern State College.
Windler has more than 30 years of experience in the construction industry in Florida. He relocated from Indiana in 1978 to Florida. He joined Gulfshore Homes as the superintendent for the communities of Grey Oaks Golf Country Club and The Estuary at Grey Oaks. Windler handles all aspects of the building process on site including inspections, control of construction progress regarding timeliness and operations, review specifications and blueprints, scheduling trade partners, quality control and owner meetings.
Brown was hired as a superintendent for the West Lake Court community in West Bay. He is responsible for the day-to-day operations of the custom villa homes during the entire building process, overseeing and scheduling with trade partners, local inspections with the county, and communication with the on-site staff and owners. Brown has been in the construction industry for 18 years in Naples and on the east coast of Florida in single-family and condominium construction. He is a graduate of Florida Atlantic University and Broward Community College. He also served in the United States Air Force for four years.
Thress joins the corporate office as an accounting clerk. She maintains accounts payable, insurance, lien releases and assists with IT under the direction of the controller. Thress relocated from Ohio to Florida in 2009. She has worked as an accountant and controller with two companies in Fort Myers and Cape Coral. She has 25 years of experience in accounting and is a graduate of Muskingum Area Technical College.
Downing-Frye Realty Inc.
The company announced its top three agents for 2014. The Top Overall Agent was Lauren Fowlkes; the Top Sales Agent was Christopher Braun; and the Top Listing Agent was Janice Gover.
Team awards in the Naples office: the top sales team winning the Platinum Award was the Nancy Burgess Team; the second team winning the Gold Award was the Gary Helms Team; the third team winning the Silver Award was the Bridgette Foster Team and the fourth team winning the bronze award was the Michael and Anna Bryant Team. Also from the Naples Office, the 2014 Rising Star Award went to Chris Lecca.
The Bonita Springs/Estero team awards: the top sales team winning the Platinum Award was the Domain Group; the second team winning the Gold Award was the Sullivan Team; the third team winning the Silver Award was the Saunders Group; and the fourth team winning the Bronze Award was the Melissa Wychocki Team. The Bonita office Rising Star Award went to Denise Stilwell.