PMC-Sierra, Inc. ( PMCS)

Q4 2010 Results (Qtr End December 26, 2010)

January 27, 2011 4:30 p.m. ET


David Climie - VP, Marketing Communications & IR

Mike Zellner - VP and CFO

Greg Lang - President and CEO


Ruben Roy - Pacific Crest Securities

Sandy Harrison - Signal Hill Group LLC

James Schneider - Goldman Sachs

Harlan Sur - JPMorgan



Good day, ladies and gentlemen, and welcome to the Q4 2010 PMC-Sierra Earnings Call. Today's call is being recorded this Thursday, January 27, 2011.

At this time I would like to turn the conference over to Mr. David Climie, Vice President of Marketing Communications. 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 fourth quarter 2010 earnings release was disseminated today via BusinessWire after market close and a copy of the release can be downloaded from our website.

Before we begin, I'd 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 demands, inventory levels, pricing, exchange rates, taxation rates and other risk factors that detailed in the company's SEC 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'd request that you limit yourself to one question, and if you'd like to ask a second question, please re-queue with the operator. Thank you.

And I'll now turn the call over to Mike.

Mike Zellner

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

As expected, revenue in Q4 was slightly lower on a sequential basis at $159.3 million, a decrease of $3 million or 2% compared with Q3 revenue of $162.3 million. The Q4 revenue included approximately $6 million of revenue from our acquisition of Wintegra which closed on November 18, 2010. In Q4 we had one customer that represented greater than 10% of our revenues calculated on a rolling 12-month basis, namely HP.

On a non-GAAP, gross margin in the fourth quarter was 68.2% compared with 67% in Q3. This increase of 120 basis points was driven by product mix with a greater proportion of sales of higher margin WAN infrastructure products this quarter and lower sales in the area of microprocessors and Fiber to the Home as expected.

On a non-GAAP basis, operating expenses increased by $7.4 million from $65 million in Q3 to $72.4 million in Q4. Approximately half of the increase relates to the operating cost of Wintegra since the completion of the acquisition in mid-November. And the balance related to continued investment in R&D projects as planned as well as incremental tape-out cost.

In Q4 our non-GAAP operating margin was 23% compared with 27% in Q3, mainly due to Q4's lower revenue profile. Non-GAAP tax provision was higher as expected in the fourth quarter at $2.5 million compared to $1.6 million in Q3.

Non-GAAP net income for Q4 was 34.6 million or $0.15 per share on a diluted basis, representing an $8.3 million decrease from the $42.9 million or $0.18 per share generated in Q3. Q4 GAAP diluted net income per share was $0.05 versus $0.06 in Q3.

Please note that for each historical non-GAAP financial measure mentioned on this call, that a full reconciliation to the most comparable GAAP financial measure is included in our press release issued today. In addition, our GAAP to non-GAAP reconciliation of financial measures that will be provided in our outlook will be posted on our website under the Financial Reporting section of the Investor Relations tab.

The primary reconciling items for Q4 are as follows -- $7.4 million in amortization of purchased intangible assets, $5.6 million in stock-based compensation expense, $800,000 of non-cash interest expense, $6.7 million of acquisition-related costs, $4.5 million gain recorded on our previous investments in Wintegra, $3.8 million recovery of our investment in the reserve fund, and $10.8 million of income tax related adjustments as described in our press release.

Turning to the balance sheet, we entered the quarter with over $583 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at year-end net of the $68.3 million face value of our convertible notes in the $181 million short-term bridge loan relating to the Wintegra acquisition was $334 million, a decrease of $153 million from Q3. This decrease primarily relates to approximately $204 million cash paid on the acquisition of Wintegra net of their cash acquired, $5.9 million of IP in capital expenditures, offset by $49.3 million of positive cash flow generated from operations adjusted for non-cash items and an additional $3.5 million of cash for employees related to stock issuances. In addition, please note that the short-term bridge loan related to the acquisition of Wintegra that was outstanding at our year-end was repaid in its entirety early this month.

Accounts receivable decreased $7.5 million to $69.3 million. Excluding Wintegra, we had 36 days of sales outstanding based on our quarterly sales volume, which remains a very healthy collections profile.

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