AMCC

Applied Micro Circuits Corporation (AMCC)

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Applied Micro Circuits Corporation (AMCC)

F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Bob Gargus – SVP and CFO

Kambiz Hooshmand – President and CEO

Analysts

James Snyder – Goldman Sachs

Dan Morris – Oppenheimer & Company

Sandy Harrison – Signal Hill

Christian Schwab – Craig Hallum Capital

Sanjay Devgan – Morgan Stanley

Brian Thonn – Kingdom Ridge Capital

Presentation

Operator

Good day ladies and gentlemen. Thank you for holding. Welcome to the Applied Micro Circuits Q2 2009 earnings conference call. As a reminder, today’s call is being recorded. Now, for opening remarks and introduction, I’d like to turn the conference over to Mr. Bob Gargus, Chief Financial Officer. Please go ahead sir.

Bob Gargus

Good afternoon everyone and thank you for joining today’s conference call. On the call today with me is Kambiz Hooshmand, our President and CEO.

Before turning the call over to Kambiz, I want to remind you that the forward-looking statements discussed on this call including guidance that we will provide on revenue, non-GAAP gross margin, non-GAAP operating expenses, and certain other financial targets are based on the limited information available to us today. That information is likely to change.

There are numerous risks and uncertainties that affect our business and may affect these forwardlooking statements including product demand and mix, product development and introductions, design wins, manufacturing, the impact of workforce reductions in the integration of new or moved operations, risks relating to macroeconomic conditions in markets, and other risks as set forth in our SEC filings including our Form 10-K for the year ended March 31, 2008.

Our actual results may differ materially from these forward-looking statements and AMCC assumes no obligation to update forward-looking statements made on this call. I want to point out that AMCC has several analysts that cover the stock and this creates a range of variability relative to the Street financial models. When we say Street estimates, we mean the consensus of the major analyst models and not necessarily the guidance that was given by the company.

With that, I’m going to turn the call over to Kambiz. Kambiz?

Kambiz Hooshmand

Thanks Bob and good afternoon everyone. Obviously the global credit crisis is putting pressure on the overall economy. In July, we were one of the first companies to indicate that telecom spending was slowing down. Since then, we have seen a number of telecom-related equipment suppliers provide negative earnings releases or guidance. These included key AMCC customers like CIENA and Northrop [ph].

We saw telecom-related orders continue to slow down through the September quarter. This was especially pronounced in the US. We also saw a slowdown in the North American distribution especially in September.

Despite these conditions, we delivered better than expected results for the September quarter. In July, we guided for revenues for the September quarter to be up 3.5% to 5.5% sequentially. We delivered 4% sequential revenue growth and we exceeded the Street EPS consensus by $0.02. I am very pleased with the results the AMCC team delivered in a very challenging environment.

AMCC is now a well diversified company that provides products into a variety of applications. Here, I’d like to discuss four of the key areas with you. First, in the telecom sector, we provide SONET and OTN solutions. Increasingly, our focus is on the transition from voice-centric SONET networks to data and Ethernet-centric OTN networks. The telecom sector represents around 40% of our total revenue.

The telecom slowdown has hit this segment hard, but we expect the effects of this slowdown to be temporary for two reasons. One reason is that unlike the tech meltdown of 2001 and 2002, carrier networks are running at high utilization rates. Therefore, we believe carriers will continue to upgrade and transition to high speed OTN solutions that favor AMCC. The other reason is that we have a number of product cycles and design win that will ramp throughout 2009. Hence, we’re optimistic that we will weather this slowdown and grow our revenues. I will give you specific examples of these design wins at a later part of this call.

The second key area is in the high-end enterprise networks. In many cases, these are financial institutions that use AMCC's OTN trainers and try to light their high-speed optical backbone networks. Obviously, this area is hit the hardest given the financial sector meltdown. While the recovery in the financial sector is likely to take much longer, this area represents less than 10% of our overall revenues.

The third area is in the data center where we provide solutions to process, transport, and store information. We provide the 10 gigabyte Ethernet connectivity, the packet processing, and the network storage solutions. This is a tale of two stories. Spending for the corporate data center is ramping down as the CFOs and CIOs react to the global crisis by slowing down any discretionary spending. However, the Internet data center with video and Web 2.0 applications continues to grow more sophisticated and continues to need higher speed and more storage. Thus, we do not see a significant slowdown in this sector and remain optimistic that a combination of our design wins and the ongoing demand for bandwidth and storage will minimize the effects of the overall weaker economy.

Finally, our profits that are in storage products go into a wide variety of embedded and vertical applications ranging from video editing, education and entertainment, as well as many others. The macro economy is affecting this area, slowing the conception of our storage and profits of products in the channel. This area represents about 25% of our overall revenues.

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