PMC-Sierra CEO Discusses Q3 2010 Results - Earnings Call Transcript

PMC-Sierra CEO Discusses Q3 2010 Results - Earnings Call Transcript
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PMC-Sierra Inc. (



Q3 2010 Earnings Call

October 21, 2010 5:30 pm ET


David Climie - VP, Marketing Communications & IR

Greg Lang - President and CEO

Mike Zellner - Vice President and CFO


James Schneider - Goldman Sachs

Ruben Roy - Pacific Crest

Srini Pajjuri - Calyon Research

Mark Lipacis - Morgan Stanley

Sandy Harrison - Signal Hill

Harlan Sur - JPMorgan

Kevin Cassidy - Stifel Nicolaus

Mike Burton - FBN Securities



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Good day and welcome to the Q3 2010 PMC-Sierra earnings call. As a reminder, this conference is being recorded. Today is Thursday, October 21, 2010. It is now my pleasure to introduce your host, Mr. David Climie. Please go ahead, Mr. Climie.

David Climie

Good afternoon, everyone, and thank you for attending our investor conference call. With us on the call today is Greg Lang, President and CEO and Mike Zellner, Vice President and CFO. Please note that our third quarter 2010 earnings release was disseminated today via Business Wire after market close, and a copy of the release can be downloaded from our website.

Before we begin, I would like to point out that during the course of this conference call we'll be making forward-looking statements that involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, product demand, inventory levels, pricing, exchange rates, taxation rates and other risks that are detailed in the company's Securities and Exchange Commission filings. Actual results may differ materially from the company's projections.

For further information about these risks and uncertainties, please read the company's SEC filings, including our forms 10-K and 10-Q.

Thank you. And I will now turn the call over to Greg Lang.

Greg Lang

Thanks, Dave. As you may be aware, we issued two press releases this afternoon, one relating to our third quarter 2010 earning results and the other announcing that we signed a definitive agreement to purchase Wintegra.

I'll first review our quarterly earning results for Q3, give an outlook for Q4 and then ask Mike Zellner to provide details on each. And then I'll finish with comments on the strategic benefits around the Wintegra acquisition. In the third quarter this year, we generated $162 million in revenue, up slightly from the prior quarter.

Revenue improved sequentially in our microprocessor and enterprise storage market segments, the latter primarily due to a full quarter of revenue from the Adaptec storage channel acquisition in Q2 this year. The growth was in part offset by declines in our WAN infrastructure market segment.

On the earnings front, we generated approximately $44 million in non-GAAP operating income in Q3, and we achieved a 27% non-GAAP operating margin in the third quarter. During the last four quarters the company has generated solid cash flow which has resulted in our cash plus investments on the balance sheet increasing by $136 million to $555 million by the end of September this year.

So now let's talk about the results by end-market segment. In the Storage market segment, the enterprise IT spending environment remained healthy in Q3. In the Server market segment, our six gig radon chip business increased again in Q3 and recorded our best ever quarter.

Our fiber channel products were flat quarter-over-quarter, while our SAS devices were down slightly, as we completed the digestion of a small amount of 3 gig SAS inventory during the quarter. We expect to see our top two storage customers continue to ramp their new 6 gig SAS platforms in Q4 and into next year.

Our design wins improved in the enterprise storage for the third quarter in a row and we're now seeing Hitachi's virtual storage platform go into production with our 6 gig SAS expanders and controllers.

In June, we closed the purchase of Adaptec's channel storage business and the operation is now being fully integrated into PMC, including a full quarter of revenue. Without this incremental channel revenue, the OEM portion of our storage business was down slightly due to inventory consumption.

In the Wide Area Network infrastructure market segment, which includes both our wireline and wireless infrastructure products, activity declined in Q3 as many of our customers worked on inventory levels during the quarter. While we had anticipated this going into Q3, we did not expect it to be as broad-based.

As a result, our WAN infrastructure activity in both North America and China were each down sharply. Japan and Europe on the other hand saw improved activity quarter-over-quarter in Q3.

In Q4, we will start shipping our 10-gig and 20-gig Hi-Fi devices for Optical Transport Networks, or OTN platforms into the metro and aggregation equipment. While it's still a very early stage of deployment, we're very encouraged to see the beginning of convergence into packet-centric network architectures.

PMC is unique in that we've targeted our solutions in the most difficult areas of the OTN deployment, namely, the high volume aggregation and metro areas of the network where carriers require end-to-end multi-service OTN switching. Our Hi-Fi chips enable this aggregation of multiple services, as well as OTN switching in a single device with very low power.

We expect OTN deployment to be a long term secular growth driver, and we look to improve our share in this market segment over time. Based on design wins secured year-to-date, we believe we will be the leading OTN ASSP provider, as our customers ramp their designs over the next couple of years.

In broadband access, our Fiber to the Home business in Q3 was flat to a strong Q2. NTT continued to add customers and extend its fiber network into more regional areas, and in addition our Fiber to the Home business in Korea improved sequentially in the third quarter. This is offset by the China business being softer, as both China Telecom and China Unicom delayed their second-half bids.

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