PMC-Sierra, Inc. Q2 2009 Earnings Call Transcript

| About: PMC - (PMCS)

PMC-Sierra, Inc. (NASDAQ:PMCS)

Q2 2009 Earnings Call Transcript

July 23, 2009 5:30 pm ET


David Climie – VP, Marketing Communications

Michael Zellner – CFO

Greg Lang – President and CEO


Yang Tang – Pacific Crest

Kevin Cassidy – Thomas Weisel Partners

Dan Morris – Oppenheimer

Sandy Harrison – Signal Hill

James Schneider – Goldman Sachs

Alan Minchin [ph] – Bigger Advisors [ph]

Romit Shah – Barclays Capital

Srini Pajjuri – CLSA


Good day and welcome to the PMC-Sierra 2009 Q2 Earnings Release Conference Call. (Operator instructions) Today's conference is being recorded. Today is Thursday, July 23rd, 2009.

And it is now my pleasure to introduce your host Mr. David Climie. 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 second quarter 2009 earnings release was disseminated today via Business Wire after market closed, and a copy of the release can be downloaded from our website.

Before we begin, I would 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 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 are asking a question during the Q&A session of today's call, we request that you limit yourself to one question. And if you would like to ask a second question, please re-queue with the operator. Thank you.

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

Michael Zellner

Thanks, Dave. I'll review our second quarter 2009 results and financial position and then turn it over to Greg to discuss our business activity in detail.

PMC-Sierra’s second quarter demonstrated a solid quarter of performance. Revenue in Q2 was $123.2 million. This was at the high-end of our guidance for the quarter, and an increase of $20.6 million or 20% over Q1. Our SRC RAID-on-Chip revenue got off to a good start at HP, and our Fiber-To-The-Home business showed strong results both in China and Japan.

Our turns business, meaning those orders booked and shipped within the same quarter, was 23% of revenue in Q2, compared with 34% in Q1.

By region, Asia continued to generate the strongest results in the quarter. The following geographic breakdown on revenue is provided on a build to basis. The breakdown is as follows

China 47%, Japan 14%, other Asia 24%, North America 13%, Europe and other 2%.

In Q2, we had two customers that represented greater than 10% quarterly revenues, namely ZTE and HP.

Gross margin in the second quarter was a very strong 68.2% or 390 basis points higher than Q1 primarily due to the strength of our WAN infrastructure business. An analysis of the increase from Q1 is as follows, 200 basis points gain from product mix, yield improvements, and cost reductions achieved during the quarter; 110 basis points increase due to the effect of fixed cost over higher sales volumes in Q2; and finally 80 basis point increase from not having a zero-margin customer funded ASIC mask set in Q2 as we had in Q1.

On a non-GAAP basis, operating expenses were flat to Q1 from $53.3 to $53.2 in Q2, as we maintained our operating expense discipline throughout the organization.

In Q2, we are pleased to have achieved non-GAAP operating income before other income and taxes of $30.8 million or 25% of sales, which is at the high end of our targeted operating margin range of 20% to 25%.

The non-GAAP tax provision was 1 million in the quarter compared to 600,000 in Q1 primarily due to changes in product and income mix across different tax jurisdictions. Non-GAAP net income for Q2 was $29.7 million or $0.13 per share on a diluted basis matching our non-GAAP diluted earnings per share basis from Q2 of last year, which was our peak revenue quarter.

Q2 GAAP net income per share was $0.03 versus a loss of $0.02 in Q1. 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.

The primary reconciling items for Q2 are as follows

$9.8 million in amortization of purchased intangible assets, $5.6 million in stock based compensation expense, $2.9 million in net foreign exchange loss on the company's foreign tax liabilities, and $2.5 million of net income tax effect from these and other items described in the press release.

Turning to the balance sheet, net of the $68.3 million face value of our convertible notes, we ended the quarter with over $286 million of cash and cash equivalents, short-term investments, and investment securities, an increase of $36.6 million from Q1.

The primary reason for the increase in the company's net cash position were as follows: Positive cash flow from operations of $34.8 million, which exceeded our strongest quarter from last year, cash received from stock issuance of 3 million offset by 2.2 million associated with expenditures on capital and intellectual property.

Accounts receivable increased 5 million from 45.4 million, which reflects 34 days sales outstanding based on a quarterly sales volume, which is down 2 days compared to the prior quarter.

Our receivables profile remains healthy despite the challenging economic environment. Our net inventory at the end of Q2 was 25.5 million, a decrease of 5.4 million from the prior quarter. Net inventory turns on an annualized basis was 6.2 compared to 4.8 in Q1, as we worked down our inventory particularly in the area of Fiber-To-The-Home.

It's also important to note that we have reduced our net inventory over the last three quarters by 12.9 million from 38.4 million at the end of Q3 08 to 25.5 million at the end of this quarter, managing it tightly during the market downturn. Subject to continued improvement in general market conditions, we would expect some increases in our net inventory balances going forward to support related revenue.

With that I'll now turn the call to Greg for his briefing.

Greg Lang

Thanks, Mike. In the second quarter, we generated $123.2 million in revenue, which was at the high-end of the $114 to $124 million range that we provided during our April earnings call, and approximately 20% sequential growth. As expected, we benefited from strong growth in our enterprise storage and Fiber-To-The-Home business as well as continued robust activity in China in Q2 from our wireless and wireline businesses.

With higher revenue, strong gross margin mix and continued cost control, we generated close to $31 million in non-GAAP operating income in the quarter, up $18 million from the prior quarter. This equates to approximately 25% non-GAAP operating margin, which is the highest operating margin the company has achieved in 8.5 years, and better than the second quarter in 2008, when we had peak revenues that were 12% higher than Q2 this year.

So, now let us talk about the second quarter by end market. In Q2, we experienced improved bookings throughout the quarter and achieved an overall book-to-bill of just under 1.1 with a solid backlog position going into Q3. We believe that we are still working through some inventory in certain areas of our business, but in general the pipeline is getting clearer.

We also believe that we will be back to end market consumption levels in most of our businesses by the end of Q4. In our enterprise storage business, we saw activity improve in the second quarter following the weak Q1 this year, and the increase in business was primarily due to the ramp of our 6Gb/s SAS RAID-on-Chip device. In April, our 6Gb/s RAID-on-Chip device called the SRC started shipping into HP’s next generation ProLiant G6 servers, along with our 6Gb/s SAS Expander switch device, and shipments picked up nicely for us in Q2 as the HP platform started growing.

The HP G6 servers are sitting with our SRC device, embedded on the motherboard for racks, blades, and towers, and as I have mentioned previously it has been expected to generate approximately $35 million in revenue in 2009 from this new product. As you are aware, (inaudible) from Intel is being well received in the market, and given the performance of the pieces at HP’s new G6 server platform provides with the industry’s best grade performance in the high-end storage throughput ratings, we believe that we are tracking ahead of our earlier estimate of $35 million for the SRC this year.

In addition we announced in Q2 that one of our storage partners Promise Technology, a leading RAID storage solution provider was selected by NEC for its new 6Gb/s SAS server platforms. Promise’s 6G RAID controller card is powered by our SRC RAID-on-Chip device. And this is another example of our 6Gb/s SAS leadership position in the server market.

Our joint development work with IBM continues to progress well on the new 6Gb/s RAID technology, and we're accelerating some parts of that development program with them right now. As I mentioned previously, we strongly believe that this partnership will provide the opportunity for further server storage growth for PMC starting in early 2010.

In the storage systems segment of the market, we believe the industry has started to transition to 6Gb/s SAS with 3 Gb/s SAS in Q3. This will begin to pick up in the Q3 and Q4 timeframe. PMC has a strong design position and storage systems that our 6Gb/s SAS we have both controller and expander solutions, we believe that we will be increasing our market share in this segment as the industry slowly transitions.

Now in our Wide Area Network Infrastructure business, which includes both our wireline and wireless infrastructure products, we had another solid quarter in China, while activity levels in North America and Europe stabilized during the quarter. In China, the three carriers remained focused on their build-out programs for 3G over the next two or three years as well as improving the aggregation in metro transport networks to handle the increasing levels of data and video traffic that are coming in from the edge.

As we mentioned during last quarter’s earnings call, we are expecting that our China Telecom business, which was strong in the first half of the year will slow in the second half of the year as the build-out rate of 3G Wireless base stations will be less than in the first-half.

In terms of new product developments in our WAN infrastructure business earlier this week we announced two leading devices that will enable the conversions of high bandwidth data, voice and video services over the optical transport network or OTN. This is the industry's new standard for providing simultaneous support for carrier Ethernet, video, storage area network, and SONET and SDH protocols.

Our new family of products named HyPHY reduces line current variance by 75%, achieve power savings of 50%, and enable IP optimized networks throughout a new class of equipment called optical transport platforms. For example, Fujitsu's Flashwave 9500, which is enabled by our new HyPHY 20-Gig device, combines Ethernet, modem, and sonnet/SDH transport capabilities into a single platform for both aggregation and transport.

Leading carriers will be deploying this class of equipment, because it allows them to reduce costs while incrementally adding bandwidth or changing service mix without doing a forklift upgrade. We have other OEM design wins with our HyPHY products as well, and we expect these to benefit PMC in 2010.

In the Fiber-To-The-Home business, we experienced a strong recovery in revenue after a couple of quarters of inventory correction and deployment transitions. Our Japan EPON business increased in Q2 following a weak Q1 as both NTT East and NTT West began deployments of their next phase of their next-gen network. Japan remains a global leader in Fiber-To-The-Home subscriptions and we are encouraged that NTT has been targeting another 2.5 million new EPON FTTH subscribers again this year, while accelerating new video services to its customers.

In China, our Fiber-To-The-Home business was robust in the second quarter as expected after inventory levels at our OEM customers had bottomed out in Q1 and China Telecom announced a much broader deployment of EPON FTTH services. This year the centralized bid indication from China Telecom was for about 5 million subscribers, now it appears that deployments will be much higher than that, supporting approximately 10 million subscribers.

In addition a second carrier, China Unicom is now proceeding with its broader program after running trial deployments last year. China Unicom’s centralized bid indication for this year is expected to be in the range of about 5 million subscribers.

So it is encouraging to now see two carriers in China now deploying EPON networks, while China Mobile continues to elevate both EPON and GPON systems. Also, just a reminder, the PMC is the only component supplier that has both E and GPON solutions, which positions us well in the Korean market, where carriers are deploying both technologies.

After a couple of slow quarters, last three of four quarters, Korea is coming back and we're expecting the SK broadband, which was formerly called Hanaro to begin deployments of GPON in the second half as well as Korea Telecom will slowly start building out its EPON network.

So looking ahead we are working with carriers and key customers on the next generation technology, specifically Symmetric 10 gig EPON, which delivers 10 gigabits per second upstream and downstream. We have demonstrated our 10 gig end-to-end solution, which is completely interoperable with the millions of EPON ONUs that we have already deployed based on PMC’s EPON technology, and we're currently working with 8 major tier-one OEMs, with regard to our new10-gig EPON technology solution.

In our microprocessor business, we continue to experience lower levels of activity in the second quarter as expected, but inventory levels have been worked down in both the laser printers and enterprise networking market. We believe we are on track to see improved level of activity in this business over the next two quarters this year.

Now, a couple of words on our outlook for Q3. Based on our backcloth and bookings to date, we currently anticipate PMC-Sierra’s revenues in the third quarter of 2009 to be in the range of $125 million to $135 million or approximately 2% to 10% growth on a quarter-over-quarter basis.

It is interesting to note that we are within about 7% of our peak from last year at the midpoint of $130 million. We anticipate this growth will be largely driven by our enterprise storage business and our microprocessor business in the third quarter, while the WAN infrastructure and Fiber-To-The-Home businesses are expected to slow a bit. We experienced improved bookings each month throughout the second quarter, and entered into the current quarter with strong backlog.

We are once again calling for only modest turns this quarter given the seasonality of Q3, as well as being prudent given the current levels of spending in the markets that we serve.

We continue to believe that PMC is uniquely positioned as a key supplier in the growing Internet infrastructure markets, and that we are only in the early stages of 3G and 4G mobile service development as well as IP TV, video streaming and advanced teleconferencing, all of which will tax carriers’ existing network infrastructure.

We believe that our product positioning in our Tier 1 customer relationships remain very strong, and we should continue to benefit from products cycles into the second half of this year and well into next. The cost discipline we have in place will continue throughout the organization, and our goal will be to keep our quarterly expenses flattish in the second half of the year as I mentioned last quarter, with the exception of an occasional tape-out [ph] fluctuation. This cost discipline will help provide leverage to the business model and allow us to work into our new target operating margin range of 25% to 30%.

So with that I will now hand the call back over to Mike for more details on our outlook for the third quarter.

Michael Zellner

Thanks, Greg. I'll now provide a bit more detail about our Q3 outlook. Judged, shipped and shippable backlog at the beginning of Q3 was approximately 103 million.

Considering current levels of demand and our expectation of booking rates through the balance of the quarter, we estimate that the potential revenue for PMC-Sierra for Q3 is in the range of 125 to 135 million as Greg mentioned.

Judged backlog today, including shipped plus shippable is approximately 119 million, indicating that we need approximately 8% turns from this day to get to the midpoint of our revenue outlook for Q3.

On a non-GAAP operating basis, we expect our overall gross margin percentage in Q3 to return to the range of 65% to 66% and decrease from the 68.2% achieved in Q3, where we had a high portion of the telecom product mix and lower ASIC sales. Considering these factors, we expect a balanced overall mix in Q3 returning us to our normal margin levels.

Non-GAAP operating expenses in Q3 are expected to be in the range of $51 million to $52 million, slightly lower than the $53.2 million in Q2 due to our continued focus on efficiencies and cost control, coupled with some expected benefit from our foreign exchange hedging.

On the general note, depending on the number and timing of tape-outs, which do vary from period to period, our expenses could be affected by 1 million to 2 million in any given quarter.

We expect non-GAAP net other income to be 200,000, which is primarily net interest income from our cash position offset by servicing our outstanding convertible notes.

We expect non-GAAP tax provision in the third quarter to be approximately flat with Q2 on a dollar basis. As a reminder, the tax expense can be impacted by a number of variables associated with our FIN 48 liabilities, included but not limited to a change in foreign income and product mix.

Regarding share count, we ended Q2 with a diluted share count of 227.9 million. In the third quarter, our diluted share account is expected to be between 229 and 231 million.

For Q3, we plan for the following significant GAAP to non-GAAP reconciling items. First, amortization of purchased accounting costs associated with past business acquisitions; two, stock option expense as required under FAS 123R; three, FX gains or losses on our net foreign tax liabilities; and four, income tax effects of the above adjustments and other tax items as specified in our reconciliation of GAAP to non-GAAP measures included in our press release issued today.

Additional non-recurring items associated with restructuring of other costs positive or negative are always possible.

So with that, we'd like to open the call up to questions.

Question-and-Answer Session


Thank you, sir. (Operator instructions) The first question comes from Ruben Roy from Pacific Crest. Please go ahead.

Yang Tang – Pacific Crest

Hi guys, this is Yang for Ruben. Can you guys provide a little bit more color on your storage business outside the HP ramp?

Michael Zellner

Yes, sure. I will take that. In general if you roll back to Q4, we had a very strong Q4 last year in storage, and we felt a little uncomfortable with that given the general environment, and in Q1 that kind of came to – came through as basically over, we ended up with too much inventory out in our customer base. So, Q1 was soft, Q2 we were burning through inventory, but we're starting to actually see that actually come back. Right now on kind of the system side, the storage system side of our business.

So I would say by Q4 we are going to be pretty much back at full speed in that storage system part of that business, but clearly Q1, Q2 regarding inventory and for a portion of our business in Q3, we will be burning some inventory, but we're starting to see it come back in some areas.


Thank you. The next question comes from Kevin Cassidy from Thomas Weisel Partners. Please go ahead.

Kevin Cassidy – Thomas Weisel Partners

I wonder if you could give a little more color on the China Unicom, you said they are bidding now and when do you expect that would go into production?

Michael Zellner

We think that is the second half of the year type of deployment, the RFQs are out. They are targeting roughly 5 million type of subscriber levels, which is quite healthy relative to what China Telecom has been doing, and they kind of have an extra year of practice at it. And so we expect that to benefit actually, we think that we have seen some of that benefit already and we expect it to further benefit our second half of the year in the china part of our business.


Thank you. The next question comes from Dan Morris from Oppenheimer. Please go ahead.

Dan Morris – Oppenheimer

Hi guys. I just wanted to clarify something that you mentioned in the outlook. You said that Fiber-To-The-Home and (inaudible) and I guess than related to that, you had already said prior that you expected some weakness in the wireless base station, but you thought that maybe the back half could compensate for that, and is that playing out to your expectations?

Michael Zellner

I'm sorry Dan. I don't know if everybody missed the first part of your question, but I did. I am at a customer's site, so I may have had a…

Greg Lang

Yes, it was cut out. Dan, could you repeat the first part of your question?

Dan Morris – Oppenheimer

Yes, the first part was just on your outlook. I think you mentioned that you expected WAN and Fiber-To-The-Home to be slow but does that mean it is just kind of a slower growth or does that actually mean it might be down next quarter?

Greg Lang

Yes, in both of those cases actually the Fiber-To-The-Home business is up very strong in Q2. We expect it to stay strong in Q3, but down a little bit from where it was in Q2, but still quite a bit higher than the Q1 levels that we saw in Q4 last year. So that business is very healthy. The balance of our business in the common [ph] infrastructure space for China, it is a step down from the revenue that we saw before. It is not lesser growth. It is a step down, and I think we have been pretty consistent say in the last couple of quarters. We expected the second half to be slower, and it is coming in about where we expected it.

It is probably on a quarter-to-quarter basis just a double-digit decline, but one obviously hasn’t swamped the balance of our business. So we feel like this is in line with where we thought we already would come in.


Thank you. The next question comes from Sandy Harrison from Signal Hill. Please go ahead.

Sandy Harrison – Signal Hill

Thanks. Could you guys talk a little bit about sort of the OTN opportunity, which you see it as the HyPHY product, I have heard from the channels are very, very strong product. Would you see the opportunity there from the term perspective, and who are the major players in it both from a customer as well as a competitor perspective?

Michael Zellner

Yes, that is a great question. First, let me just back up for a second on the technology itself. It is an essentially if you think about it as a – we have all been talking about packet networking and the need to move to packet networking to support these higher data rates, but it is remarkable at how much TDM-based networks still exist out in the marketplace, and the big reason for that has really been the lacking of number one, standards; and number two, silicons will enable a cost-effective and power effective solution to make that real in the telecom carrier part of the network.

So what OTN represents is the set of standards that allow that or enable that carrier grade Ethernet the ability to kind of basically put all the stuff in a package and send it over efficiently over a packet network, and then what we deliver with the HyPHY products is something that there is no other comparable product in the market in terms of the level of integration, complexity, power savings, and being able to reduce the number of line items or SKUs that our OEMs carry by 75% is a dramatic saving in R&D and logistics et cetera.

And so it really represents the first time that there is a silicon level of solution that enables extenders to take place. So, we are seeing kind of the convergence, a number of things coming together, standards are coming together, the technology and the need frankly by the carriers we think is going to drive a very good growth profile for us for several years to come in the metro part of our business. It is kind of the next generation if you will SONET, and it will eventually replace SONET networks, although we think there is a lot of legs in the SONET/SDH networks as well. So that is the first part of your question.

The second part of your question is how big do we think this business can be? You know, the overall market term for this is probably on the order of $150 million to $200 million if you think about it that way. And this is just a part of our wireline business. So it is a very nice additional piece and it is going to bring some life back into some older parts of our business. We are excited about the prospects not only in 2010, but for several years following it.


Thank you. The next question comes from James Schneider from Goldman Sachs. Please go ahead.

James Schneider – Goldman Sachs

Hi, good afternoon. I guess on the storage business, I think you talked about the expectation for HP Pro-Line to be potentially above $35 million for this year. Will you also expect that it could be more than $70 million, $75 million for next year, just given the strength of that platform, and then secondly could you just give us a little bit more detail on where we expect to see some revenues from the IBM relationship? Thank you.

Michael Zellner

Yes, on the first part, on the HP part, just to clarify, the comments that I made was that we have been targeting about $35 million for 2009. We thought that was achievable even when we hit kind of the economic skids, we thought that was still achievable in our estimates. And it looks like right now that it is the case, and it looks like we should pass that number in 2009.

2010 however, I think I will still stand by my $75 million number. I don’t know that we have got any indication right now that what will become of the economic environment and the server market sales, as well as our business which HP will represent something greater than that $75 million mark. So, it was really a comment more about 2009 and 2010 potential.

Greg Lang

And part two is of the IBM part of the relationship, you know, I think I have been pretty consistent in saying, we expect to see a trickle of revenue in Q4, maybe a little bit, but really the volume of possibility for us start to show up in the first part of 2010 and in the second quarter in particular.


Thank you. (Operator instructions) The next question comes from Alan Minchin [ph] from Bigger Advisors [ph]. Please go ahead.

Alan Minchin – Bigger Advisors

Hi, guys. Nice job. Can you tell us how strong the China service part of business was for you in Q2; I think back in Q1, you said it was doubled to 20%. So what was that number in Q2, and what are you expecting for Q3?

Michael Zellner

Well Q2 was pretty much in line with Q1. So we saw a big step up in Q1. It stayed up at that elevated level in Q2, and we're expecting it to kind of come down to a more normal level in Q3. That is probably the simplest way to explain it.

Alan Minchin – Bigger Advisors

Okay. And what was the primary source of upside for you this quarter? I mean I guess if that business was relatively flat, it would have to come from some of the other businesses, but where did it come from?

Michael Zellner

Well, two – both in the storage as well as in the Fiber-To-The-Home business. Both were very strong, both had very strong growth quarter-to-quarter, and on the storage site that was driven by the strength of the HP and the transition that they are going through within the (inaudible) generation of products that they have, which is going very well and then part two, in the Fiber-To-The-Home business, which has been kind of artificially low for a couple of quarters as we had customers burning of inventory and kind of pausing in-between programs, between their programs.

We saw both the inventory get consumed and programs get turned back on. So we saw a very nice jump back to a healthy level in the Fiber-To-The-Home business as well.


Thank you. The next question comes from Romit Shah from Barclays Capital. Please go ahead.

Romit Shah – Barclays Capital

Thanks, Greg sorry if I missed this, but I was just curious how much visibility do you have in your common [ph] infrastructure business beyond Q3? Are you expecting this business to start to grow again in Q4 or is it more likely in 2010?

Michael Zellner

Well, I would say the visibility is a bit challenged. I mean, we see and we believe that in the China part of the business that this is and we don't have any reason to doubt it today as we still see a two to three-year build out in the wireless infrastructure there. So that is a very positive. We expected this digestion period that is going on right now, but we do expect that to tick back up.

Perhaps not as rich as the first quarter when it was kind of a fast running start. But we do expect it to tick back up again. Beyond that the other thing that has been – that was being kind of covered up by the strength in China was our North America business, and frankly a lot of other developed parts of the world was quiet muted. It was inventory burn time for those market segments. We expect those to come back and do better in the latter part of the year. And then the last thing that I would mention is with this new product family that we brought out, and the need for these carriers to move on to this optical transport network, we think in 2010, we will see some growth – incremental growth in that business from that part of our (inaudible) as well.


Thank you. You have a follow-up question from Kevin Cassidy. Please go ahead.

Kevin Cassidy – Thomas Weisel Partners

Hi, yes, I was just wondering about your internal inventory, now that it sounds like some of the inventories in the channel have been flushed out, are you comfortable at the levels you are at now?

Michael Zellner

Yes, I mean the levels, actually I would like to point out my comment on this already, but I think it is pretty impressive that we have been able to actually have inventory decline. These are the last three quarters where we were going through a pretty large revenue dip. I think we did run too low in a couple of areas where we had strength on the storage side and on the fiber side. And so we have a little bit to catch up on the front.

We also need to be putting in place a stronger pipeline for a richer revenue stream looking head. So I do expect our inventories to creep up a little bit. But we're still targeting in this five-ish type of turns range for the forward quarters as well.


Thank you. You have a follow-up question from James Schneider. Please go ahead.

James Schneider – Goldman Sachs

Yes, just to follow-up on the microprocessor business, I know you mentioned it slowed and you have been burning down inventory, is there any kind of visibility where you think the things that might be kind of turning around or actually improving substantially rather than just kind of grinding higher slowly?

Greg Lang

Yes, it will improve quite a bit this quarter, and so we think this is another one that certainly by the end of Q4, we should be back to more normal levels, I should say end market levels, which obviously are muted from where they were a year ago, but yeah, we definitely see signs we have backlog for this quarter that will be part of what grows this quarter along with the storage business. So that is starting to come back both on the enterprise networking side as well as the printer side of things.


Thank you. The next question comes from Srini Pajjuri from CLSA. Please go ahead.

Srini Pajjuri – CLSA

Thanks. Mike, I just joined the conference. Sorry if this question has already been asked and answered, on the OpEx coming down again this quarter, I'm just wondering you know what is driving that, and also how sustainable that improvement is. I'm just wondering how much you know currency is playing a role here versus sustainable savings?

Michael Zellner

So, as I mentioned, we are down a bit and a big piece of that is clearly, I think you know we have our back half hedged at about, I don’t know, around $0.80 on the dollar, and previous to this it was kind of at par. So that definitely helps. You know beyond that as I mentioned there are times when we have tape-outs that would cost them to be up a little bit in a particular quarter and you know it is not so much the case I guess for us in Q3. So it is, you know, I would say consider the kind of run rate that we saw in Q2, kind of a little more normal if you think of doing things a little longer term, but certainly in Q3 it seems like we are going to beat that by a million bucks or so.


Thank you. You have a follow-up question from Alan Minchin. Please go ahead.

Alan Minchin – Bigger Advisors

Hi, I know it is a tough comp, but was the Fiber-To-The-Home business up year-over-year in Q2?

Michael Zellner

I do – let us see, Fiber-To-The-Home business year-over-year, not it is pretty close. It was not higher, but it was pretty close.

Alan Minchin – Bigger Advisors

Okay, perfect. Thank you.


Thank you. The next question comes from Romit Shah. Please go ahead.

Romit Shah – Barclays Capital

No, my question has been answered. Thank you.


Thank you. The next question comes from Srini Pajjuri. Please go ahead.

Srini Pajjuri – CLSA

Sorry Mike, on the gross margin front, assuming that your mix doesn’t improve from here, that is China doesn’t come back and then storage continues to ramp and Fiber-To-The-Home improves a bit here, how should we think about your gross margins going forward, and is that going to have a meaningful impact or do you think you will be within that range that you have (inaudible)?

Michael Zellner

I mean on a going forward basis, you know, I will call it mid-60s, we would – we very much believe that we can maintain those gross margins, you know, we have had a lot of questions about you know over the past, whether the success we have had in the area of RAID-on-Chip is going to be problematic for us in that regard and absolutely not. I mean if our storage business, you know, SRC might be slightly below their average, but they have other products that cause them to drift back up. So, you know, we are solidly in the mid-60s.

Srini Pajjuri – CLSA

Thank you.


Thank you. Gentlemen, there are no further questions at this time. Please continue.

Michael Zellner

Thank you. Thank you for attending our conference call today. We will be scheduling our third quarter 2009 earnings release for the third week in October and at that time we will be reviewing our quarterly results and providing an outlook for the fourth quarter. So thank you and that ends today’s call.


Thank you. Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines and have a great day.

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