Analyst Conference Summary

conference date: August 27, 2009 @ 1:45 PM Pacific Time
for quarter ending: August 2, 2009 (second quarter fiscal 2010)

Forward-looking statements

Overview: Did better than revised guidance and sequential growth, but not up to last-year's results

Basic data (GAAP) :

Revenue was $640.6 million, up 23% sequentially from $521.4 million but down 24% from $842.6 million in the year-earlier quarter.

Net income of $58.5 million was up sequentially from negative $111.5 million but down 25% from $78.4 million year-earlier.

EPS (earnings per share) were $0.09, up sequentially from negative $0.18, but down 18% from positive $0.11 year-earlier.

Guidance:

For fiscal Q3 revenue $680 to $730 million. All end markets are expected to grow sequentially. Non-GAAP gross margin 55%. Operating margin should improve. Non-GAAP EPS $0.18 to $0.26. GAAP EPS $0.09 lower than non-GAAP.

Conference Highlights:

Excellent results with better than anticipated revenue, improved gross margins, reduced costs.

Non-GAAP net income was $118.7 million or $0.18 per share. 55.3% non-GAAP gross margin, up 305 basis points from year-earlier, best since 2003. 20% non-GAAP operating margin, about flat from year-earlier despite decreased revenues.

25% of sequential revenue growth came from new products and made up about 5% of total revenue. Expect trend to accelerate in fiscal Q3.

Storage end market products grew over 20% sequentially, for about half of total revenues. Expects single digit sequential improvements in Q3, in line with industry growth. New customer gains will materialize mid 2010. Solid state drive controller revenues ramping quickly, but only a tiny party (<1%) of the overall market. Benefits are clearer in enterprise markets than in consumer storage.

20% of total revenue was from mobile and wireless products, and rose 20% sequentially. Expect another 20% sequential jump in q3. There was 100% growth in demand for 11n wireless devices. Mobile Wi-Fi hotspots for 3G are a good example of new devices using our products.

Application processor customer end market interest is strong. Used in electronic picture frames, e-books, printers, etc. "We are only beginning to scratch the surface of the opportunities of our application processors."

Communication processor program continues to ramp. We are waiting for our customers to announce new products before we announce our wins. We believe our long-term strategy in cell-phones will lead to long term market success.

Networking end market revenues were up over 10% sequentially, for about 20% of total revenue. Expect low-double-digit growth in Q3. Switching product family delivers excellent performance. We are growing market share.

Kirkwood and Discovery Innovation series single and multiple processor products have a strong adoption rate in small-form factor computing. We have shipped thousands of development systems.

Expects $40 to 35 million in stock option expense per quarter going forward; it was $30 million this quarter.

Cash and equivalents were $1.3 billion, $196 million sequentially. Cash flow from operations $182.3 million. Free cash flow was $175 million.

$211 million inventory, up 4% sequentially. Expects increasing inventories going forward.

Cost of goods sold was $288.1 million, leaving gross profits of $352.6 million. Operating expenses of $285.0 million included $192.7 million for R&D, $32.4 million for selling and marketing, $28.6 million for general and administrative, $26.4 million for amortization, and $5.0 million for restructuring. Operating income was $67.5 million. Other income was $0.3 million. Income tax provision was $9.3 million.

Q&A:

Should gross margins remain at high end of current range? Our intention is to keep it there. There is a possibility of fluctuations from product mix.

R&D spending? We have one of the largest R&D investments in the industry. There may be specific areas where we need to add some resources, but mostly we are set.

Enterprise market? That is our networking segment. We are guiding up 10% sequentially for fiscal Q3. We are seeing acceptance of the technology we have been developing.

Combo customers and revenues? Wi-Fi plus Bluetooth device, etc. Those are ramping in next six months to a year. We do not pre-announce customers.

Hard drive shortages? We did see some tightness in our supply change because our customers did not anticipate the strength of the recovery. But we were usually able to serve our customers' last minute requirements. We are increasing wafer starts and inventory.

Holiday outlook and slow season after? We feel much better about it than we did last year. Consumer sentiment seems to be improving. We feel good about a double-digit sequential revenue growth for Q3. Our products are getting great customer acceptance.

Expansion of operating expenses? We will invest opportunistically. If revenues ramp we will have to reward employees. Tapeouts also cause fluctuations from quarter to quarter.

New products that contributed to revenues? Combo products, next-generation application and communications processors. There are other devices we are working on that we don't want to talk about yet, that may see revenues two years down the road. We want to be the one-stop shop for integrated electronic solutions for our customers. We have very good opportunities for growth in the next several years.

Chatter about a competitor getting back into RIM, replacing you? Verizon is CDMA, which we do not build products for RIM in. But we do 3G solutions for RIM.

Backlog? We were about 10% higher than normal coverage at the beginning of the quarter.

Biggest incremental growth drivers for 2010? Consumer markets are the big opportunity because we can integrate multiple functions on a single chip. We can add functions at a reasonable cost.

Digital TV and Blu-ray? An opportunity for the next several years. We are sampling devices but not expecting revenue soon.

We will continue to have above-industry margins as long as we are able to build products that our competitors cannot match.

XScale processor margins? In application and communication processors we have been revamping our product lines to have more integrated capabilities. These will give us better margins in the long run.

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