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PLX Technology, Inc. (NASDAQ:PLXT)

Q1 2013 Earnings Conference Call

April 22, 2013 5:00 pm ET

Executives

Arthur O. Whipple - Chief Financial Officer, Principal Accounting Officer, Vice President of Finance and Secretary

David K. Raun - Chief Executive Officer, President and Director

Analysts

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Operator

Thank you for joining the PLX Technology First Quarter 2013 Financial Conference Call. [Operator Instructions] Mr. Arthur Whipple, CFO of PLX, will lead off. Mr. Whipple, please proceed.

Arthur O. Whipple

Good afternoon, and thank you for joining us today. I will start this session with a review of our first quarter financial performance, and David Raun, our CEO, will provide more information on our business and recent events.

As we begin, I'd like to point out that certain statements made in the course of this call regarding our expectations and associated projections will be forward-looking statements. These statements will include comments related -- relating to the introduction and adoption of new products, financial guidance, possible strategic relationships, the development of next-generation technologies and other areas, and will be made in both our prepared remarks and in the subsequent Q&A session. Our forward-looking statements deal with future events and are subject to risks and uncertainties, and our actual results could differ materially from our current expectations. Some of the factors that could cause such differences are described in our press release dated April 22, 2013, and in our various SEC filings, including our report on Form 10-K for the year ended December 31, 2012.

Let's discuss the results of operation. Net revenues for the first quarter were $26.2 million, up 12% from $23.4 million last quarter. PCI Express revenues increased by 14.8% to $18.6 million, a new record. Connectivity revenues increased by 6% to $7.6 million. This increase was primarily due to some last-time buy shipments for several devices within this product line.

In the first quarter, gross margin was 59.2%. This compares with 58.4% in the prior quarter. The strong margin reflects unusual product and customer mix, and is expected to return to the 58% level in the second quarter.

Excluding stock comp, R&D and SG&A spending came in at $5.7 million and $5.9 million, respectively. SG&A costs were slightly higher in this quarter, reflecting start-of-the-year expenses including payroll taxes and audit fees. Both numbers were lower than we had expected when we provided our business outlook in January.

Some of our planned hiring took place later than expected and costs associated with consultants were also delayed. Shortly after the IDT transaction was announced, we began the process of divesting our 10 Gigabit Ethernet business. Spending for severance and other costs associated with discontinued operations was largely completed in the fourth quarter. Costs in the first quarter for discontinued operations were $57,000.

We expected to return to profitability early this year. The combination of strong revenues, strong margins and lower OpEx yielded a GAAP profit of $2.6 million. This quarterly profit is the best result we have had since the March quarter of 2000, when we reported a GAAP profit of $3.4 million.

We also present non-GAAP measures in our press release that we believe are helpful to investors. Excluding such things as discontinued operations, acquisition and restructuring costs, amortization of intangibles and stock comp, our non-GAAP P&L shows net income in the past 3 years and the most recent quarter. Our non-GAAP P&L this quarter, $3.8 million, is the highest value we have ever reported.

On the balance sheet, cash and investments declined by $3.1 million in the current quarter to $13.6 million. This was the result of $6 million of liability -- in liabilities that we paid down during the quarter, offset by cash generated by operations. We recently expanded our line of credit with Silicon Valley Bank, from $10 million to $15 million.

Inventory declined by $1 million to $9.6 million, as we shipped PCI Express products to meet strong customer demand. Accounts receivable was $13 million compared with $10.6 million last quarter. The increase reflects a less linear shipping pattern in the first quarter, with about 50% of revenue in the last month of the quarter. DSO stood at 45 days for last quarter, collections remain excellent.

Now David Raun will provide further comments on the business.

David K. Raun

Thank you, Art. As communicated during our last earnings call, our objectives going into 2013 were to execute to a new plan and demonstrate to our shareholders that we can be a growing, profitable company.

We said we would bring down spending, avoid further acquisitions, become profitable, and produce revenue growth from PCI Express. To that end, we are starting to show some results. With virtually all the costs associated with the discontinued operations behind us, PLX's reported financials are a reflection of a growing, profitable PCI Express business.

With 12% growth, record PCI Express revenues, tight cost controls and improved margins, we saw a dramatic improvement in profitability compared to recent history. A majority of our enterprise data center customers increased demand for PCI Express products in the quarter. PCI Express Gen 3 switch revenue almost doubled over Q4, as customers rolled out new products based on this latest technology.

We also saw increases from key customers in the embedded market, with our older Gen 1 and Gen 2 products. In terms of our product and technology roadmap, all of our 12- to 48-lane Gen 3 switches are now in production. Our 64- to 96-lane devices are sampling with production planned for Q3. Our PCI Express Gen 3 solutions dominate the market with 18 announced products.

Further, we are on track to bring our ExpressFabric solutions to market later this year, with revenue ramping in late 2014. We continue to work closely with several global partners, who plan to take advantage of the compelling proposition that ExpressFabric offers, by driving cost and power down in the data center.

In closing, we are excited by the PCI Express market opportunity and continue to execute against our plan. The record design wins achieved in 2011 and 2012, with the market leaders in the growing data center space, are ramping in production this year and next. We anticipate solid revenue and earnings for years to come from our in-the-box switch solutions.

Our highest-ever PCI Express switch market share, now more than 70%, combined with winning nearly all the Gen 3 designs, helps ensure this growth. With that, let me pass it back to Art to discuss Q2.

Arthur O. Whipple

Thank you, Dave. In the second quarter, we expect PCI Express revenues to increase again with greater shipments to the enterprise storage communication, and to a lesser degree, the high-end motherboard graphics space. In terms of our legacy connectivity business, as we have noted for several years, we have seen a steady decline in this product line as the product -- programs we sell into wind down.

During the first quarter, we saw unusually high sales as a result of last-time buy shipments for certain products that are being discontinued. In Q2, we expect a decrease of approximately 20% in Connectivity revenues, as we are coming off an unusually high revenue base in Q1. We expect to return to a steady decline, going forward, executing -- exiting the year with Connectivity revenues accounting for only 20% or less of our total business.

Therefore, we expect revenues to be approximately $25.5 million to $27.5 million in the second quarter of 2013. This reflects growth in PCI Express products and continuing declines for Connectivity products.

Gross margins are expected to remain strong at approximately 58%. Our non-GAAP OpEx spending is still expected to be approximately $52 million in 2013. The quarterly spending will be lumpy. Our first quarter was a little lower than expected.

For the second quarter, we're expecting GAAP operating expense of about $13.4 million, including about $600,000 of stock comp and other GAAP items. There will be several million dollars in tape-out costs at some point later in the year. Let me now open up the lines for questions related to the business.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Christian Schwab with Craig-Hallum Capital Group.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

As we look to the PCI Express revenue in the second half, can you talk about visibility of next-generation design wins coming to market? I know you talked about the 12- and the 48-lane now in production, and that's what drove the PCI Express switches for Gen 3 to double. But we got the 64 through 96 coming in the second half into revenue. Can you quantify either the price difference or the size of the design wins, based on those type of devices? Or said another way, can you talk about a number of design wins that are ramping, that is causing the growth over the last few quarters versus a year ago, and what we could maybe expect in the second half of this year?

David K. Raun

So the second half of the year will primarily still be the first Gen 3 parts just because of the time for people to do the quals and get into production is quite long. But there will be some new designs from the 64- to 96-lane devices, and they do go at higher ASPs and higher margins. But the overall Gen 3 business, for us, will continue to grow throughout the year because most of these Gen 3 designs have not gone into production with the lower lane count, the 12 through the 48. And these are going into everything from line cards to servers to storage systems to routers, which is primarily our historic customer base. And then on top of that, we have some business which is much smaller in the high-end PC and the graphics space.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Can you quantify for us, just roughly, generically, how many design wins we have in the 12- and 48-lane, either by number or by customer? And how many are currently ramping, and how many you would expect to ramp by the end of December?

David K. Raun

Let's see, how can I quantify that? Well, as far design activity in 2012, over 1/2 the design activity was in Gen 3, which is a number much larger than the current type of revenue profile we're seeing. So that's going to spread out throughout the year. What was it, the second -- the number of customers, we're talking about over 100 customers using Gen 3.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Okay, fabulous. And just on the ASP and margin differential, can you just make sure I don't get ahead of myself? Just how much more expensive, say, a 96-lane Gen 3 switch device will be versus a 12 or 48? And is the margin profile a couple points better, or is it more than that?

David K. Raun

Each device has its own margin profile. The smallest lane counts, the 12s, 16s would have the lowest, and the 48s are nice and healthy. And then as you get into the 96, they increase more. But overall, it all kind of blends to this high-50s, mid-50s to 60-range. We do have some products that can drift up into the 80% range.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Great. And then have you guys seen any pickup in the strength in the Gen 3 switches for multi-control or solid state drives yet? Or is that still -- I know last quarter you talked about a number of design wins at Tier 1. I think 3, Tier 1 design guys. Have you started to see any measurable revenue from that, or is that more of a second half event?

David K. Raun

We've continued -- we've had revenue from this. It just hasn't been the largest part of our business, and we've continued to see new design wins. We picked up a more couple solid ones by Tier 1 suppliers this quarter.

Operator

Your next question comes from the line of Krishna Shankar with Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

For the quarter, what was the mix between PCI Express revenues and legacy revenues for Q1?

David K. Raun

71 and 29.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

71 and 29, okay. And then as you look at the market, it sounds like you have a good momentum in PCI Express Gen 3. How do you see the data center, server and router markets shaping up? I know there's been some comments on macro weakness and IT spending. Can you talk about the specific customers and end markets you're addressing and the health of those markets?

David K. Raun

Well, specific customers, I can't talk about, but the -- relative to the general market, we've -- because we're in newer platforms which are ramping, we see it as positive, the second half of the year. These are where the premier guys, primarily in routers, storage systems and servers. So it's within all of those.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. And you stood -- in the ExpressFabric, you said some products will be sampling later this year, and revenues late 2014, you said?

David K. Raun

Yes. So the -- although we are supporting customers from -- with different things to allow them to develop using our products, the actual silicon that they would use in the end product will be available near the end of the year.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

And what could that add to your addressable market in terms of revenues over the next couple of years, the ExpressFabric product line?

David K. Raun

Yes. So the way we look at it is, by the 2015 timeframe, if we're talking about a SAN, we're talking about it being about a $200 million market, and by 2017, a $400 million market. That's considering not explosive growth. If we're more successful than we think we are, it could be greater than that.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

That includes ExpressFabric and PCI switches, or just ExpressFabric?

David K. Raun

The combination.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

The combination? Okay.

David K. Raun

Yes. It doubles the business out over time.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay, great. And should we model the legacy revenues as continuing to drift down in 2014? Or is there kind of a plateau at which it kind of stays beyond the end of 2014?

Arthur O. Whipple

I think it will continue to drift. I think you'll have the same dynamic we had in the first quarter of this year, as we, from time to time, have last-time buys on product that we're taking to end-of-life. So it will probably not be as monotonically down, as it will easy to model. But I think the kind of the long-term drift is still the same. And certainly on an annual basis, it's down into the right 20-ish percent, depending on what actually happens.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. So down about 15% to 20% a year?

Arthur O. Whipple

In that range, yes. It's hard to tell at this point. I mean, we're -- obviously, these products have been in production for 10 to 15 years. At this point, they are getting long in the tooth. Still great margins and no investment, but long in the tooth.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Great. And then since the IDT deal was aborted, can you talk about the competitive landscape out there? Dave, anything you see in terms of the competitive landscape, either in terms of other competitors or new technologies?

David K. Raun

As far as PCI Express and standalone switches, we haven't seen any new developments to impact the Gen 3 product that we're launching with. We've historically seen our primary competitor IDT over the years, but in the Gen 3 space, we don't see them very often. And we haven't seen anyone new show up. When we get into the ExpressFabric, of course, we're competing against other things like Ethernet and InfiniBand, to coexist with them in the data center.

Operator

There are no further questions in the queue at this time. I would now like to turn the call back over to David Raun, for any closing remarks. Please proceed.

David K. Raun

Although we have significant work to do, I believe this quarter was a step in the right direction. PLX is uniquely positioned as the top supplier of PCI Express switching to the market leaders throughout the fast-growing data center. Our strong design activity, increased market share and dominant Gen 3 portfolio should fuel our growth for years to come. The entire organization is focused on PCI Express. Expenses are in control, innovative new products are in development and continued growth in PCI Express is expected. Thank you for your time.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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