Zarlink Third Quarter Fiscal 2010 Revenue Exceeds Guidance

Q3 revenue of $54.4 million exceeds guidance, margins improve to 52% of revenue and cash increases by 11% to $61.9 million.
Company guides for Q4 revenue growth driven by increasing customer demand for network timing and line circuit products

Zarlink Semiconductor (TSX: ZL) today issued third quarter Fiscal 2010 results for the three-month period ended December 25, 2009. All figures are is U.S. dollars unless otherwise noted.

Third quarter financial highlights include:

• Revenue of $54.4 million, exceeding the Company's guidance range of $52 million to $54 million;
• Gross margin of 52% of revenue, up from 50% of revenue in the previous quarter;
• Generated $6.2 million of cash, ending Q3 with cash and short-term investments totaling $61.9 million

"Revenue for the quarter exceeded guidance, gross margin improved significantly, and the business continues to generate solid operating cash flow," said Kirk Mandy, President and CEO, Zarlink Semiconductor. "Fourth quarter guidance highlights signs of recovery across core areas of our business. Most notably, there is growing demand for our timing products as carriers evolve their wireless networks to more efficiently support higher-bandwidth smartphone services, as well as increasing customer design activity for our line circuit products. This communications market strength, coupled with the long-term opportunity for our medical products as the new devices integrate wireless technology to support advanced applications and therapies, provides a solid foundation for further growth and increased profitability in the coming quarters."

Third Quarter Financial Results
Third quarter revenue was $54.4 million, compared with second quarter revenue of $53.6 million and $53.7 million in Q3 Fiscal 2009. Gross margin in Q3 Fiscal 2010 increased to 52% of revenue, which included $0.6 million in supply chain harmonization costs. In comparison, gross margin in Q2 Fiscal 2010 was 50% of revenue, which included $0.9 million in supply chain harmonization costs. Gross margin in Q3 Fiscal 2009 was 49%, which included integration costs of $0.5 million.   

R&D expenses in Q3 Fiscal 2010 were $10.9 million, or 20% of revenue, compared with Q2 Fiscal 2010 R&D expenses of $10.6 million, or 20% of revenue. S&A expenses in Q3 Fiscal 2010 were $11.2 million, or 21% of revenue, compared with Q2 Fiscal 2010 S&A expenses of $10.1 million, or 19% of revenue. Increased S&A expenses in the quarter reflect a weakening U.S. dollar, as many of the Company's S&A expenses are incurred in other currencies, and restructuring costs related to management team changes announced in the quarter.

Third quarter Fiscal 2010 operating income was $4.5 million, compared with Q2 Fiscal 2010 operating income of $5.2 million and a Q3 Fiscal 2009 operating loss of $1.0 million. Net income in Q3 Fiscal 2010 was $0.6 million or break-even per share, which included a non-cash foreign exchange loss of $2.7 million related primarily to Zarlink's Canadian dollar denominated debenture. Excluding the impact of foreign exchange, earnings per share were inline with Q3 guidance of $0.01 to $0.03 per share. In Q2 Fiscal 2010 Zarlink recorded net income of $0.7 million, or break-even per share, which included a non-cash foreign exchange loss of $3 million. In Q3 Fiscal 2009 Zarlink recorded net income of $12.1 million, or $0.09 per basic share and $0.08 per diluted share, which included a non-cash foreign exchange gain of $10.3 million.  

As a supplement to Zarlink's consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), the Company provides additional non-GAAP measures for operating income, net income (loss), and basis and diluted net income (loss) per share. For full reconciliation of GAAP to non-GAAP measures, refer to the schedule included with this press release.

Non-GAAP operating income for Q3 Fiscal 2010 was $7.3 million, compared with Q2 Fiscal 2010 non-GAAP operating income of $7.4 million and Q3 Fiscal 2009 non-GAAP operating income of $6.4 million. Non-GAAP net income in Q3 Fiscal 2010 was $6.1 million, or $0.05 per basic share and $0.04 per diluted share. For Q2 Fiscal 2010 non-GAAP net income was $6.3 million, or $0.05 per basic share and $0.04 per diluted share. For Q3 Fiscal 2009 non-GAAP net income was $5.6 million, or $0.04 per basic and diluted share.

Cash and short-term investments increased by $6.2 million to $61.9 million at the end of Q3 Fiscal 2010, compared with $55.7 million at the end of the Q2 Fiscal 2010 and $45.5 million at the end of Q3 Fiscal 2009.

On January 28, 2010 Zarlink declared a quarterly dividend of CDN$0.50 per share on its preferred shares (TSX:ZL.PR.A) payable on March 31, 2010 to preferred shareholders of record as of March 5, 2010. Dividends paid by Zarlink to Canadian residents are eligible dividends for Canadian income tax purposes.

Business Summary
Third quarter revenue from Zarlink's Communication Products Group was $33.8 million, compared with $34.2 million in Q2 Fiscal 2010 and $33.7 million in Q3 Fiscal 2009. Revenue in the quarter was impacted by expected seasonality for communications products for the residential gateway market, but the Company is seeing increasing customer design activity for its line circuit and network timing products. 

In the quarter, Zarlink added new design wins for timing products required by carriers as they transform their wireless networks to more efficiently and cost-effectively support high-bandwidth smartphone applications. Zarlink is also expanding the market opportunity for its timing products, with leading processor vendors incorporating the Company's Timing over Packet software to provide a complete synchronization solution for femtocells. Carriers are deploying femtocells, which are small basestations for residential and enterprise environments, to extend wireless coverage and improve voice and data services. To date, more than one million network ports are synchronized by the Company's packet network timing products.    

For the Company's Medical Products Group, Q3 Fiscal 2010 revenue was $7.9 million, compared with Q2 Fiscal 2010 revenue of $7.8 million and Q3 Fiscal 2009 revenue of $8.2 million. Short-term revenue for Zarlink's Medical products was impacted by general market softness for end-customers as hospitals slowed spending for heart rhythm devices, as well as extended FDA qualification approvals for a customer-specific platform. The long-term opportunity for Zarlink's medical telemetry products remains strong as equipment manufacturers integrate wireless technologies into advanced devices.

In the quarter, Zarlink announced an expanded relationship with Given Imaging. Zarlink's custom RF (radio frequency) radio chip is now in use in Given Imaging's new PillCam COLON 2 camera capsule for wireless examination of the colon. Zarlink's RF technology is also used in Given Imaging's camera capsules for visualizing the small bowel. In addition, Zarlink announced that the Self-Energizing Implantable Medical Microsystem (SIMM) microgenerator, which converts energy from the heartbeat into power for implanted medical devices, was named winner of the Emerging Technology Award at the Institution of Engineering and Technology's (IET) Innovation Awards.

Optical Products revenue in Q3 Fiscal 2010 was $4.5 million, compared with revenue of $3.8 million in Q2 Fiscal 2010, as the product group saw some recovery in its module and IC businesses. In Q3 Fiscal 2009 Optical Products revenue was $5.4 million. Custom and Other revenue in Q3 Fiscal 2010 was $8.2 million, compared with $7.8 million in Q2 Fiscal 2010 and $6.4 million in Q3 Fiscal 2009.

Fourth Quarter Fiscal 2010 Guidance
The opening backlog at the start of Q4 Fiscal 2010 was approximately $56 million, compared with an opening backlog of $45 million at the start of Q3 Fiscal 2010.

For Q4 Fiscal 2010, Zarlink is forecasting:
. Revenue between $56 million and $58 million;
. Gross margins between 52% and 53%, excluding supply chain harmonization costs of approximately $0.7 million;
. Operating expenses between $22 million and $23 million, excluding amortization of intangibles;
. Excluding any potential impact of foreign exchange gains/losses related to the Company's Canadian dollar denominated debenture, Zarlink expects Q4 earnings of $0.02 to $0.04 per share.
 
Analyst Conference Call
An open conference call for analysts will be held on January 28, 2010 beginning at 5:00 p.m. EST. Access the call by dialing 1-800-814-4860. Investors, media and other parties are listen-only. For a replay, call 1-877-289-8525, Access Code 4201481# or 416-640-1917, Access Code 4201481#. The replay is available until midnight on February 11th, 2010. A live audio webcast will be available through http://www.marketwire.com/ (Marketwire) or from the Company's website at http://www.zarlink.com/.

About Zarlink Semiconductor
For over 30 years, Zarlink Semiconductor has delivered semiconductor solutions that drive the capabilities of voice, enterprise, broadband and wireless communications. The Company's success is built on its technology strengths including voice and data networks, optoelectronics and ultra low-power communications. For more information, visit http://www.zarlink.com/.

Shareholders and other individuals wishing to receive, free of charge, copies of the reports filed with the U.S. Securities and Exchange Commission and Canadian Securities Regulatory Authorities, should visit the Company's web site at http://www.zarlink.com/ or contact Investor Relations.

Zarlink and the Zarlink Semiconductor logo are trademarks of Zarlink Semiconductor Inc.
 
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