PMC-Sierra, Inc. (PMCS)

Q2 2010 Earnings Conference Call

July 22, 2010 5:30 PM ET


David Climie – VP, Marketing Communications & IR

Mike Zellner – CFO

Greg Lang – President and CEO


Harlan Sur – JPMorgan

Kevin Cassidy – Stifel Nicolaus

Ruben Roy – Pacific Crest Securities

James Schneider – Goldman Sachs

Mark Lipacis – Morgan Stanley

Sandy Harrison – Signal Hill

Eric Ghernati – Bank of America/Merrill Lynch



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Previous Statements by PMCS
» PMC-Sierra, Inc. Q1 2010 Earnings Call Transcript
» PMC-Sierra Inc. F4Q09 Earnings Conference Call
» PMC-Sierra, Inc. Q3 2009 (Qtr End 09/30/09) Earnings Call Transcript

Good day and welcome to the Q2 2010 earnings release and conference call. Today's conference is being recorded. Today is Thursday, July 22, 2010. It is now my pleasure to introduce Mr. David Climie. Please go ahead, Mr. Climie.

David Climie

Thank you. 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 second 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 risk factors 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. If you're asking a question during the Q&A session of today's call, we request that you limit yourself to one question; if you'd like to ask a second question, please re-queue with the operator.

Thank you. I'll now turn the call over to Mike Zellner.

Mike Zellner

Thanks, Dave. I'll review our second quarter 2010 results and financial position and then turn it over to Greg to discuss our business activity in detail.

PMC-Sierra had a strong second quarter generating our fifth consecutive quarter of revenue growth. Revenue in Q2 was $160.7 million and reflected an increase of $7.9 million or 5.2% over Q1. On June 8th, we closed our purchase of Adaptec's channel storage business. Revenue contributed by the channel business for Q2 stub period was in line on pro rate basis with the fourth quarter revenue estimate of $12 million to $13 million indicated in our previous investor conference call.

Our turns business, I mean those orders booked and shipped within the same quarter was 14% in Q2 compared to with 17% in Q1. In Q2, we had one customer that represented greater than 10% of our revenue calculated on a 12-month rolling basis, namely HP.

Gross margin in second quarter was 69%, which was 90 basis points higher than Q1's 68.1%. This improvement was driven mainly by product mix partially offset by inventory related integration cost from our acquisition of Adaptec's channel storage business last month.

On a non-GAAP basis, operating expenses increased by $2.7 million from $59.3 million in Q1 to $62 million in Q2. This was in line with our outlook on expenses provided on our previous quarterly conference call. The increase relates mainly to planned hiring and investments in R&D as well as annual merit increases, stub period operating expenses included for the acquisition and foreign exchange on our foreign operation.

In Q2 our non-GAAP operating margin reached 30%, which is at the high end of our targeted operating margin range of 25% to 30%. The non-GAAP tax provision was slightly lower in the second quarter at $1.7 million compared to $2 million in Q1.

Non-GAAP net income for Q2 was $47.6 million or $0.20 per share on a diluted basis, representing a $4.1 million or 9% increase over $43.5 million generated in Q1. On a year-over-year basis, non-GAAP net income increased by $17.9 million or 60% from the $29.7 million generated in Q2 of 2009.

Q2 GAAP diluted net income per share was $0.13 versus $0.12 in Q1. The comparable GAAP measures for each of gross margin, operating expenses, operating income, provision for income taxes and net income are reconciled to the related non-GAAP amounts in our reconciliation of GAAP to non-GAAP measures included in our press release issued today.

The primarily reconciling items of Q2 are as follows; $6.8 million in amortization of purchased intangible assets, $5.7 million in stock-based compensation expense, $800,000 of non-cash interest expense, $1.5 million of acquisition related costs and $2.7 million of income tax related adjustments as described in our press release.

Turning to the balance sheet, we ended the quarter with over $500 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at quarter end net of the $68.3 million face value of our convertible note was $433 million, an increase of $15.2 million from Q1. The net increase relates primarily to the $47.7 million of non-GAAP net income in the quarter and $2.2 million of cash from employee related stock issuances offset by $34.2 million paid for the acquisition and $3.3 million of IP and capital expenditures.

In Q2, cash flow generated from operations was a strong $51.9 million, our highest in nearly a decade. Accounts receivable increased $19.6 million to $79.8 million including the acquired channel storage business. Excluding the effect of the acquisition, we have 39 days sales outstanding based on a quarterly sales volume. This was slightly higher in terms of days than we had in the prior quarter but remains a very healthy collection to profile.

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