PMCS

PMC - Sierra, Inc. (PMCS)

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PMC-Sierra Inc. (PMCS)

F4Q09 Earnings Call

January 28, 2010 4:30 p.m. ET

Executives

David Climie - VP Marketing Communications

Greg Lang - President and CEO

Mike Zellner - Vice President and CFO

Analysts

Mike Burton - FBN Securities

Srini Pajjuri - CLSA

Jeff Osborne - Thomas Weisel Partners

Eric Ghernati - Banc of America/Merrill Lynch

Romit Shah - Barclays Capital

Ruben Roy - Pacific Crest Securities

Jim Schneider - Goldman Sachs

David Wu - GC Research

Allan Mishan - Brigantine

Sandy Harrison - Signal Hill

Operator

Good day. And welcome to PMC-Sierra 2009 Q4 Earnings Release and Conference Call. Today’s conference is being recorded. Today is January 28, 2010.

It is now my pleasure to introduce your host, Mr. David Climie. Please go ahead, Mr. Climie.

David Climie

Thank you, Andrew. Thank you. And good afternoon, everyone. Appreciate you attending our investor conference call today. With us on the call is Greg Lang, President and CEO; and Mike Zellner, Vice President and CFO. Please note that our fourth quarter 2009 earnings release was disseminated via business wire 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 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 would like to ask a second question, please requeue with the Operator.

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

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.

PMC-Sierra had a strong fourth quarter and reported its third consecutive quarter of sequential growth. Revenue in Q4 was $139.5 million. This was at the high end of our guidance for the quarter and an increase of $8.6 million or 6.6% over Q3.

Our turns business, meaning those orders booked and shipped within the same quarter was 23% in Q4, compared with 21% in Q3.

By region, Asia continued to generate the strongest results in the quarter. The following key graphic breakdown of revenue is provided on a bill-to basis. The breakdown is as follows, China 38%, Japan 13%, other Asian 33%, North American 13%, Europe and others at 3%.

Note that the 38% referred to for China, of this approximately one third relates to OEMs and two-thirds to contract manufacturers. In Q4, we had one customer that represented greater than 10% of revenues calculated on a rolling 12-month basis, namely HP.

Gross margin in the fourth quarter was 68.2%, compared to 66.2% in Q3, primarily due to having two customer funded basic asset sets at zero margin in Q3, of which there were none in Q4. In addition, the effect of fixed costs over higher sales volumes and variation in product mix contributed to the improvement.

On a non-GAAP basis, operating expenses increased as expected from $50.9 million in Q3 to $54.5 million in Q4. This was in line with our outlook on expenses provided at our last quarterly conference call.

Quarter-over-quarter, spending increased primarily due to R&D spending related to our enterprise storage business and some weakening of the U.S. dollar versus foreign currencies, including hedge straights.

In Q4, we are pleased to have achieved non-GAAP operating income before other income taxes of $40.7 million or 29% non-GAAP operating margins. Non-GAAP tax provision was $1.9 million in the fourth quarter, compared to $1.3 million in Q3, primarily due to higher income levels and changes in the product mix and across our different tax jurisdictions.

Non-GAAP net income for Q4 was $39.2 million or $0.17 per share on a diluted basis, representing a $4.7 million or 14% increase over Q3 non-GAAP net income of $34.5 million.

Q4 GAAP diluted net income per share was $0.06 versus $0.12 in Q3. This decrease was driven primarily by higher provisions for income taxes in Q4, including changes in deferred taxes, primarily FX related and changes in our FIN 48 liabilities.

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.

Primary reconciling items for Q4 are as follows. $9.8 million in amortization of purchased intangible assets, $5.2 million in stock-based compensation expense, $2.4 million net foreign exchange loss on the company’s foreign tax liabilities and $5.8 million of net income tax effects from these and other items as described in the press release.

Turning to the balance sheet, we ended the quarter with over $453 million of cash and cash equivalents, short-term investments and investment securities. Our cash position net of the $68.3 million face value on convertible notes is $385 million, reflecting an increase of 38 -- $33.8 million from Q3.

The primary reason for the increase in the company’s cash position is attributed to positive cash flows generated from operations of $31.5 million. In addition, we received cash from employee-related stock issuances of $4 million partially offset by expenditures of $1.8 million associated with capital and intellectual property.

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