Q2 2013 Earnings Call Transcript

Transcript Call Date 07/22/2013

Operator: Good day ladies and gentlemen and welcome to the Q2 2013 PLX Technology Earnings Conference Call. My name is Ashley, and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session. As a reminder, this conference is being recorded for replay purposes.

I’d now like to turn the conference over to your host for today, Mr. Art Whipple, Chief Financial Officer. Please proceed.

Arthur O. Whipple - CFO: Good afternoon, and thank you for joining us today. The delay in the start of this call was a result of an error on the part of the conference call provider. We apologize for any inconvenience that may have caused.

I will start this session with a review of our second 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 relating to the introduction and adoption of new products, financial guidance, the development of next generation technologies, the Internet machines litigation and other areas, and will be made in both our prepared remarks and 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 today July 22, 2013, and in our various SEC filings, including our report on Form 10-K for the year ended December 31, 2012 and on our report on Form 10-Q for the quarter ended March 31, 2013.

Let's discuss the results of operation. Net revenues for the second quarter were $26.8 million, up 2.4% from $26.2 million last quarter. PCI Express revenues increased by 7.8% to $20.1 million, a new record. Compared with the second quarter of 2012, PCI Express revenues increased by 16.9% from $17.2 million and now represents 75% of revenues. Connectivity revenues decreased by 10.9% to $6.7 million. A decrease in connectivity revenues was anticipated in Q2 as the prior quarter sales included some last time buy shipments for several devices within this product line.

In the second quarter, gross margin was 56.1%. This compares with 59.2% in the prior quarter. The strong margin in the first quarter and the lower margin in the second quarter, both reflect unusual product and customer mix. Year-to-date gross margin was 57.7%

On June 19, the judge in the ongoing Internet Machines litigation in the Eastern District of Texas ruled on a series of post-trial motions relating to the jury verdict rendered in February 2012. Although these rulings were generally not in our favor, we believe that the documented errors in the trial and the case presented will have a different outcome at the appellate level. We expect to see a ruling by the middle of 2014. Even though we expect to win the appeal, the current rulings necessitate that we accrue for possible damages for accounting purposes. We had already accrued $1 million in connection with the verdict, and during the second quarter we accrued an additional $900,000 for post-verdict royalties and interest based on the judge’s ruling. Also based on the judge’s order for the devices with its feature, we will start accruing a 9% royalty on U.S. sales to cost of goods starting in the September quarter. This translates to a margin impact of less than 1% for PLX overall. If we eliminate the feature for applications that do not use it, this margin impact drops significantly. We are making these accruals based on GAAP requirements, but we believe that it is likely that these accruals will be reversed when we complete the appeal process in mid-2014. Accordingly, we are identifying these accruals those amounts that we will remove when we present our non-GAAP measures.

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