Why PMC-Sierra Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of PMC-Sierra  dropped more than 14% during intraday trading Tuesday after the semiconductor specialist reported disappointing third-quarter earnings results.

So what: Quarterly net revenue fell 2% year-over-year to $128.9 million, which translated to an adjusted net income of $20 million, or $0.10 per diluted share. For reference, though adjusted net income was in-line with analysts' estimates, revenue fell just short of expectations for sales of $130.24 million.

In addition, PMC-Sierra management stated on the company's subsequent earnings conference call they expect Q4 revenue to be "flat to down 8%," or in the range of $118.59 million to $128.9 million. That's well below average expectations for sales of $135.87 million.

Now what: Management blamed the shortfall primarily on customers who they believe "slightly over-built inventory [...] in Q2 in anticipation of the LTE rollout in China, which looks to be starting a little slower than [they] anticipated."

As it stands, then, it looks like PMC-Sierra should still be able to benefit from the rollout, but its positive affects simply won't arrive as quickly as they had hoped. That said, the company also asserted they expect to see new revenue growth from a number of other areas, including enterprise flash controller wins, the ramp up in its OTN product families and, later in 2014, its first revenue from "Remote Radio Head products." With shares trading at just 12 times next year's estimated earnings, then, patient long-term investors could be rewarded if all goes as planned.

In the meantime, however, investors should also note PMC-Sierra is still unprofitable on a GAAP basis, so I think it's worth approaching shares with caution until more concrete signs of improvement surface.

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The article Why PMC-Sierra Shares Plunged originally appeared on Fool.com.

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