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PLX Technology, Inc. (NASDAQ:PLXT)

Q4 2009 Earnings Call

January 25, 2010

Executives

Arthur Whipple – Chief Financial Officer

Ralph Schmitt – President, Chief Executive Officer

Analysts

Blake Harper – Signal Hill

Richard Shannon – Northland Securities

[Hank Bannister – Maxon Research]

Operator

Welcome to the PLX Technology, Inc. fourth quarter 2009 earnings release conference call. (Operator Instructions) At this time I would like to turn the call over to Arthur Whipple, CFO of PLX Technology.

Arthur Whipple

Good afternoon and thank you for joining us today. I’ll start the session with a review of our fourth quarter 2009 and year end 2009 financial performance and Ralph Schmitt; our CEO will provide more information on our business. I will then provide some 2010 financial estimates. There will be an opportunity for your questions after our prepared remarks.

As we begin I’d like to point out that certain statements made in the course of this call regarding our expectations and associated projection will be forward-looking statements. These statements will include comments relating to the introduction and adoption of new products, the projection of financial results, the development of next generation technologies and other areas and will be made both in 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 January 25, 2010 and in our various SEC filings including our reports on Form 10-Q for the quarters ended March 31, June 30 and December 30, 2009 and on Form 10-K for the year ended December 31, 2008.

Our press release issued earlier today includes financial statements and other information related to our performance this quarter and full year. Let’s take a look at some highlights of that information.

Net revenues for the fourth quarter were $26.6 million, up 24% from $21.6 million last quarter and up 88% from $14.2 million for the same quarter a year ago. The fourth quarter revenue is a record for PLX beating the previous record of $23.4 million in the second quarter of 2008.

The increase in revenues this quarter was led by PCI Express which grew 54% quarter over quarter to $11.9 million. This number is a record for PCI Express which slightly exceeded the previous peak in the June quarter of 2008.

Connectivity revenues also showed healthy growth with a 28% increase quarter over quarter. Storage revenues were down 22% reflecting seasonal weakness in consumer storage.

PCI Express revenues, storage revenues and connectivity revenues were 45%, 17% and 38% of revenues respectively.

For the full year revenues were $82.8 million, up 2% from 2008. PCI Express revenues were $31.8 million down 16% from $38.1 million in 2008. It should be noted that our distribution inventory grew by $2.5 million during the quarter, but stayed flat at 37 days due to higher consumer by end customers.

In the fourth quarter gross margin was 59.1% and was higher than expected. Gross margin for the year was 56.7%.

Operating expenses for the fourth quarter were $13.4 million including $938,000 of stock compensation and amortization of acquired intangibles. Quarter on quarter R&D and SG&A costs net of stock compensation charges were both down slightly.

We had a credit provision for income tax of $194,000 for 2009. We continue to maintain a full valuation allowance on our deferred tax assets.

We are reporting net income of almost $2.6 million for the quarter. This is the second highest quarterly net income for PLX since we’ve been issuing public financial statements. The record for the company was $3.4 million reported for the first quarter of 2000 at the height of the dot com bubble.

On the balance sheet, cash and investments increased by $1.5 million in the current quarter to $40 million. Accounts receivable was $9.2 million for DSO of 32 days. The particularly lower DSO reflects unusually strong shipments early in the quarter.

We had $9.6 million or 81 days of inventory on hand at the end of the quarter. Also at the end of the quarter we had 197 full time and five part time employees. This compares to 216 full time employees and five part time employees at the end of March 2009 after the dust had settled on the Oxford acquisition.

Now Ralph has comments on the business.

Ralph Schmitt

I must first state that it is with great pleasure that I congratulate the PLX team on an outstanding quarter. Top line revenue, gross margin and metrics exceeded expectations and even our internal plans.

Two quarters ago I announced that we’ll be GAAP profitable by the end of the year and our employees delivered on that promise, and it is their commitment and dedication that makes this such an outstanding team. It is not a situation where the rising tide lifts all boats. We’ve made progress in customer design wins allowing us to grow more rapidly than the industry.

Our enterprise business PCI Express products led the way with a record quarter as Art mentioned. A baseline to this growth, we’re seeing a rebound in IT spending driven by data center needs and expansion.

We also continue to see the proliferation of this technology as we saw some new application such as mother boards and industrial systems emerge while communications and enterprise storage continue to expand.

We also had an excellent quarter with our consumer network attached storage product as this market continues to become more and more mainstream. The ability to share videos, pictures and music to multiple PC’s and other consumer platforms is proliferating.

The most recent generation of products have a very high ease of use factor with a price point that is close to DAS products. PLX enables this both through low cost silicon and high value software. While NAS was strong our DAS products saw the typical seasonal downtrend that happens in the fourth quarter.

In the quarter we also saw a rebound in our connectivity products driven primarily by the communications and industrial markets. The products in this category are typically USB and PCI based. These products have higher gross margins purchased mostly by smaller customers through the distribution channel.

I would like to make one final comment regarding the year’s results. 2009 is the company’s first growth year in the past three years. While some of this was accomplished through acquisition, it was also during a significant economic downturn. It shows that we will do whatever it takes to build a growing profitable business no matter what the market conditions.

Now, I’ll patch it over to Art to take a look at our expectations for Q1.

Ralph Schmitt

Let’s take a look at our first quarter 2010 business outlook. Please remember that the following statements are based on our current expectations and we do not intend to update or confirm this guidance during the quarter.

Based on end customer and channel checks we believe that we will have revenues of $27 million to $29 million for the first quarter. Gross margin will be subject to some variation resulting from product mix. We expect gross margin to be approximately 56%.

Operating expenses are expected to be approximately $15 million. Included in operating expenses are share based compensation and acquisition related amortization charges of approximately $900,000.

R&D costs will continue at relatively high levels reflecting planned new product development costs in the quarter. For the full year we are currently planning to spend approximately $65 million for R&D and SG&A excluding stock compensation charges.

We have completed our prepared remarks. Let’s open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Blake Harper – Signal Hill.

Blake Harper – Signal Hill

If you start off with the PCI Express growth, you’re talking about some of the catalysts there with the rebound in IT spending and data center. You talked earlier though about some of the mix that had gone on there and the drift away from the server into the other markets. Maybe you could talk about that and some of that was some of the catalyst that gave you some of the growth there and how you see that mix played out for you right now and where you see it going.

Ralph Schmitt

I think the trend has been happening now over the last couple of quarters. It’s just really continuing. In the fourth quarter the server revenue in PCI Express was about 40% of the total. In the beginning of the year it was almost 60%. That shift has started to happen. On a relative dollar basis, obviously though the server business has gone up during that time frame.

But what is I guess exciting for us is that some new things are popping up. I would not have anticipated being on mother boards as an opportunity. I’ll want to temper that a bit by just saying that it’s really on the high end of the spectrum, mostly around the graphics space mother board systems. But it is a new application area that we hadn’t forecasted or been involved with even just a few quarters ago.

The one area that just continues to proliferate really is in the networking space, very, very rapid growth there as more and more people are migrating away from proprietary solutions for PCI based solutions, the PCI Express.

Blake Harper – Signal Hill

Also last quarter you had talked about some supply constraints that you had and some availability with product but you did actually put up a pretty good number on the top line. I just wanted to know how that dynamic played out for you, if you still see the supply being tight or if you have that problem solved and how that affected your guidance that you just gave today.

Ralph Schmitt

That’s a lot of questions. But yes, it was a difficult quarter from a supply perspective and the operations team here really went over and above to keep impacting a higher number as the quarter went on. Our partners were very influential and obviously being able to support that and we appreciate their support.

I think we’re going to live through this for at least the next quarter or even the next two quarters because demand is still there obviously, based on the guidance that we showed you and based on what we have in the pipeline and our ability to supply and that mix that comes out, we believe that’s the correct revenue range to be talking about for Q1.

Typically, the Q1 quarter is either slightly down in general both in the consumer market space and typically in enterprise, and we’re showing a quarter that’s actually a growth quarter.

Operator

Your next question comes from Richard Shannon – Northland Securities.

Richard Shannon – Northland Securities

Congratulations on a good quarter and guidance. My first question, and you may have mentioned this briefly in your prepared comments but I just want to make sure I understand what’s going on there in terms of distribution and the benefit both for the fourth quarter and your guidance for the first. How much did that benefit? I know that’s something that’s accounted in the sell in model.

Arthur Whipple

We’re on the sell in model and pretty much every quarter since September 2008 we’ve actually been going the other direction. We actually had channel inventories at distribution go up about $2.5 million during the fourth quarter of ’09.

Richard Shannon – Northland Securities

Any benefit assumed for the first quarter guidance as well?

Arthur Whipple

I think probably a little bit. We’re still at historically relatively low levels at 37 days of inventory. We don’t think that’s really an appropriate level for our distributions to handle up side demand from their customers. So we’d like to see it go up a little bit more and they’re obviously running behind the curve in terms of the fact that the revenues curve continues to go up as well.

Ralph Schmitt

Just to add to that, I’d be a little careful about the $2.5 million number because that pretty much flows through to the customers on the other side based on higher demand. So they have to, and as Art pointed out, they’re really based on end of customer demand. We’re still at the exact same days of inventory as we were in the last quarter.

Richard Shannon – Northland Securities

Art you mentioned a goal for total OpEx in 2010. I’m curious what kind of split we should think about between R&D and SG&A or if you want to talk about trends during the quarter. And also are there any, I presume that assumes mass costs and I’m curious about any 40 nanometer costs that we should be thinking about for the year as well.

Arthur Whipple

There will be some. We’re not prepared to identify which quarters those are going to hit in. I would say that the current spending levels are going to be about as good an indicator as you have currently. We ended last year at $54 million. This next year is planned at $65 million.

And clearly there are more I’ll call it 40 nanometer take outs that are in that plan that were not in the plan for 2008 so you can assume based on that, that the rest of the spending is actually going down.

Richard Shannon – Northland Securities

My last question is on the PCI Express, very good numbers in the fourth quarter. I think the previous person talked about some of those things. I’m kind of curious about, it seems like your designs that you have now versus a year ago have a little bit more sustainability to them, a lot in the communications market. I’m curious about some of the ones that for instance Ralph you mentioned your response to one of the questions about the mother board market specifically and also maybe about graphics. How much sustainability is there with those kinds of designs versus the communications market?

Ralph Schmitt

That’s a great question. Clearly they’re radically different. The ramp up and ramp down time changed dramatically so the win in the comm market, just to stick with that thread for awhile, typically it takes two to three years until you see them and they lag for ten or some large number.

The mother board market as we stated wasn’t even on the radar screen ramps up in six months and ramps down six to nine months later. So there is some, call it volatility involved. It results in more margin pressure involved when you get into the more consumer oriented markets.

But quite honestly that helps us drive our cost on pretty much all the rest of the products. It helps our overall margins go up and again, legitimizes this whole PCI Express migration.

So I believe there will probably be some other newer applications we’ll start seeing over the next few quarters as well, and that’s really the challenge we have, is to proliferate it further.

Operator

Your next question comes from [Hank Bannister – Maxon Research]

[Hank Bannister – Maxon Research]

I was hoping that you could familiarize me a little bit more with the, because I didn’t quite understand with your guidance, what the OpEx expectations are sort of as you go through the year. You obviously gave it for the full year. Can you help me a little bit there because I don’t know how to model the R&D through the year, or is it pretty much just straight line?

Arthur Whipple

At this point I think that’s probably the best you can do. The actual fact is that it will be lumpy. When we have a $2 million take out at some point in the year, or maybe more than one, those quarters will be higher than the others. So you pretty much have to bear with us in terms of letting you know each quarter whether we think it’s going to be up or down but we believe that we have a good handle to be roughly in the $56 million for non-GAAP for the year.

[Hank Bannister – Maxon Research]

So should I assume that it might or might not fall into Q1?

Arthur Whipple

I think we’ve already told you that we’re estimating roughly $14.1 million non-GAAP for the first quarter so that’s probably not big enough to have a $2.2 million item in it.

[Hank Bannister – Maxon Research]

Tax rate through the year?

Arthur Whipple

I think they’re going to be, you probably can’t do them with a tax rate per se. I think we will, we have a multi tens of millions of dollars NOL’s which we will be able to use to offset some of the taxes as they develop during the year so I think the taxes are going to be small, under $200,000 for the year and mostly a function of the fact that we’re taxable in some foreign jurisdictions.

[Hank Bannister – Maxon Research]

And SG&A just kind of use this quarter and what you said on the conference call to sort of model that out?

Arthur Whipple

Yes, I think historically if you look at quarterly issues, there is some seasonality in the SG&A costs because of some upfront employee taxes that tend to go away fairly quickly for the head count that we have. So things like FICO go down fairly quickly. The other thing is, there are also seasonal costs associated with our accounting and legal costs associated with year end so this is probably the peak quarter for SG&A.

Operator

Your next question comes from Richard Shannon – Northland Securities.

Richard Shannon – Northland Securities

I’m curious if you had any 10% customers in the quarter.

Arthur Whipple

We had none in the quarter.

Richard Shannon – Northland Securities

And also curious how much your book to the point of your guidance for the quarter at the beginning of the quarter.

Arthur Whipple

The mid point of the guidance is about 75%.

Richard Shannon – Northland Securities

That seems higher than normal.

Arthur Whipple

It would be which is why it’s a little more predictable than normal because of the supply constraints we’ve talked about earlier. That’s really the issue here. The turns of business can be quite a lot more difficult to actually turn these days.

I’d say a little more than a quarter ago I think we talked about it last quarters call is that we did start showing our customers obviously extended lead times so they started reacting to ordering out more.

Operator

There are no further questions. I’ll turn it back over to our speakers.

Ralph Schmitt

It’s pretty amazing to have the type of quarter we just discussed when a year ago it seemed business had literally stopped dead in its tracks. The PLX team has shown that it does what it takes to drive shareholder value and we’ll continue on this course during this current year 2010.

We will remain frugal in our spending while continuing to drive top line revenue growth. We also commit ourselves to be market leaders through innovation.

Just a few weeks ago we were the first company to have built a fully functional 40 nanometer silicon enabled PCI Express generation three product. We have that product now and it’s functionally operating. This is yet another great accomplishment that will ultimately drive significant value for the company though not in the near term.

We beat to market even some of the world’s largest semiconductor companies with this technology so it just shows the innovative capability of the group here.

I feel the company is executing well to its plans and is prepared for whatever 2010 throws our way. We look forward to continuing to bring our shareholders consistent positive results. Thank you for investing and believing in PLX.

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Source: PLX Technology, Inc. Q4 2009 Earnings Call Transcript

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