PMC-Sierra, Inc. Q3 2008 Earnings Call Transcript

PMC-Sierra, Inc. (PMCS)

Q3 2008 Earnings Call

October 16, 2008 4:30 pm ET

Executives

David Climie – Vice President, Marketing and Communications

Gregory Lang – President and Chief Executive Officer

Michael Zellner – Vice President and Chief Financial Officer

Analysts

James Schneider – Goldman Sachs

Shawn Webster – J.P. Morgan

Sandy Harrison – Signal Hill Group LLC

David Wu – Global Crown Capital

Dan Morris – Oppenheimer

Ruben Roy – Pacific Crest Securities

Romit Shah – Barclays Capital

Presentation

Operator

Welcome to the PMC-Sierra 2008 Q3 earnings release and conference call. (Operator Instructions) It’s now my pleasure to introduce your host, David Climie.

David Climie

With us on the call today is Greg Lang, President and CEO and Mike Zellner, Vice President and CFO. Please note that our third quarter 2008 earnings release was disseminated today via Business Wire after market close 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 will be making forward-looking statements that involve risks and uncertainties. These risks and uncertainties include but are not limited to product demand, inventory levels, pricing, exchange rates, taxation rates, and other risks factors detailed in the company’s Securities and Exchange Commission filing. 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.

Thank you and I’ll now turn the call over to Mike Zellner.

Michael Zellner

I’ll review our third quarter 2008 results and financial position and then turn it over to Greg to discuss our business activity in detail.

PMC-Sierra’s third quarter demonstrated another solid quarter of performance. Revenue in the quarter was $139.4 million versus $139.8 million Q2 with Q2 being our highest revenue quarter since fourth quarter of 2000. Our turns business, meaning those orders that are booked and shipped within the same quarter, were 26% of revenue in Q3 compared with 25% in Q2. In Q3 revenue from Hewlett-Packard exceeded 10% of overall revenue for the quarter. No other customer accounted for more than 10% of revenue.

By region, Asia continued to generate the strongest results in the quarter with the geographic breakdown as follows; China 30%, Japan 17%, other Asia 26%, North America 20%, Europe and other at 7%. These proportions were largely consistent with Q2.

On a non-GAAP basis gross margins in Q3 increased 100 basis points from 65.2% versus 66.2% in Q3. This improvement is due in large part to a second quarter above the line expense associated with a current production tape out. On a non-GAAP basis operating expenses were up $900,000 to $58.1 million in Q3 versus $57.2 million in Q2. Operating expenses were higher in the third quarter due to a second quarter $1.6 million R&D related government grant. This impact was partially offset by decreases in photo mask and wafer costs on fewer tape outs in Q3.

In the third quarter our non-GAAP operating income before other income and taxes was

$34.1 million or 24.5% of sales at the high end of our targeted operating margin level of 20 to 25%. That interest income of $1.5 million in Q3 was consistent with $1.4 million in Q2. Our non-GAAP effective tax expense was $6.3 million for the quarter, up from $5.2 million in Q2. This was mainly due to change in our product and board income mix.

Although it’s difficult to predict a quarterly tax expense due to the impact of our FIN 48 position on foreign earnings, we expect a quarterly non-GAAP tax expense to be between $5 and

$7 million depending on product and foreign income mix. Non-GAAP profit after tax for Q3 was $29.2 million or $0.13 per share on a diluted basis.

Q3 GAAP net income per share was $0.07 on a diluted basis. The comparable GAAP measures for each of non-GAAP gross margin, operating expenses, operating income, tax expense and net income can be reconciled to the related non-GAAP amounts previously mentioned using the information presented on our reconciliation of GAAP net income to non-GAAP income included in our press release issued today.

The primary GAAP to non-GAAP reconciling items for Q3 are as follows; $5.4 million in stock based compensation expense, $9.8 million amortization of purchased and tangible assets, $800,000 net foreign exchange gain on the company’s foreign tax liabilities, $300,000 net reversal of restructuring tools related to facilities, $400,000 recovery on a previously booked investment loss, and $800,000 net income tax recovery.

Turning to the balance sheet as of September 28, 2008 the company has a total of $272 million invested in shares of the Reserve International Liquidity Fund and the Reserve Primary Fund. A portion of these shares have been reclassified from cash and cash equivalents to short term investments and investment securities due to redemption delays announced by the funds, based on maturity dates of the underlying securities in the funds.

We’ve ended the quarter with $350.2 million of cash, cash equivalents, short term investments, and investment securities, an increase of $27.9 million from Q2. Net cash, inclusive of the above items, is $223 million after deducing the $127 million in convertible notes.

The primary reason for the increase in the company’s net cash position were as follows; positive cash flow from operations $22.9 million, cash receipts from stock issuance of $8.5 million, offset by $3.4 million associated with expenditures on capital and intellectual property. Accounts receivable increased $1.4 million to 46.2 which reflects 30 days of sales outstanding based on quarterly sales volumes.

Our net inventory at the end of Q3 was $38.4 million, an increase of $0.5 million from prior quarter. Net inventory turns on the annualized basis were 4.9, down slightly from the prior quarter’s turn of 5.2.

I will now turn the call over the Greg for his briefing.

Gregory Lang

PMC delivered solid results in Q3 2008 with revenue of $139.4 million coming in above the mid-point of the outlook revenue range that we provided on our earnings call in July. Revenue in the third quarter was up 19% year-over-year with growth in all four major end markets. Sequentially revenue was approximately equal to the prior quarter’s level of revenue.

Overall backlog at the end of the third quarter was just slightly below the backlog at the end of the second quarter this year. Total design wins for the company in the third quarter were up almost 40% year-over-year and the estimated revenue and production value of those Q3 design wins was double that of the same period last year. This was due largely to strong design wins in enterprise storage as well as our WAN in construction business.

In the third quarter we generated non-GAAP operating income of $34.1 million compared with $26 million in the third quarter one year ago, a 31% increase year-over-year. This is the company’s best result in almost eight years and represents a non-GAAP operating margin for Q3 of 24.5%.

Now I’ll comment by end market segment. In our wireline and wireless infrastructure business, we saw double digit growth in Q3 driven largely by our Asia and emerging markets, in particular China. Following the announcement in China that six carriers were consolidating into three larger carriers, we experienced an increase in demand for our devices that go on a 2G and 2.5G wireless base station backhaul platforms and metro aggregation.

We’re seeing carriers such as China Telecom, which now has a CDMA network following the consolidation within the carriers, start to upgrade its network infrastructure already so they can better compete with China Mobile. All three of the carriers, including China Unicom and China Mobile, have announced very aggressive building programs over the next two to three years for the 3G wireless and backhaul networks. We’re pleased to see the increased capital spending planned and the healthy level of competition that will emerge amongst these three carriers.

We’re also starting to see some traction in our wireless infrastructure business in India and some parts of Latin America as well, which are relatively new end markets for us.

During the third quarter we secured several architectural design wins in our WAN infrastructure business, with a broad base of top tiered telecom OEM. We had 50% more design wins compared to the same period last year and estimated revenue production value of those wins is also 50% higher than the last year. The bulk of these wins came from our metro optical transport products and our highly integrated switching devices at three key customers.

We also captured four additional design wins with our CHESS family of devices and several wireless backhaul wins with the TEMUX 336 product being [believed]. I’m also very pleased to announce that in Q3 we won the award for Communications Semiconductor Supplier of the Year from Fujitsu, which is a great vote of confidence from one of our key telecom partners where we’ve made new inroads in terms of design wins in their new platform.

Our enterprise storage markets remained healthy in the third quarter. During our last earnings call we reported that a small pocket of inventory existed in our stores business and as we progressed through Q3, that inventory has been worked off. We did experience a pickup in demand for our 4 gig copper channel devices in Q3, in particular for EMC’s Clarion CX4 series of mid-range storage systems that went into production with our 4 gig chip.

During the quarter we also saw improved demand for 3 gig SAS/SATA Control interconnective devices compared to the prior quarter. In the third quarter of this year, we matched our record number of design wins for our enterprise storage devices with our OEM customers, and that activity included wins with two of our leading products, the 6 gig SAS expander switches and our 8 gig Tachyon Fibre Channel Controllers.

We believe that we’re very well positioned as our customers begin adopting 8 gig Fibre Channel and 6 gig SAS in 2009. With regards to our 6 gig Raid-On Shift solution that’s designed into HP’s next gen ProLiant platform, we expect to see revenues start to ramp in Q1 as the [Powersburg] platform begins [going] production.

Our partnership with IBM for the joint development of 6 gig Raid technology is also progressing well and we’re working closely with them to import the IBM Raid stack to our Raid-On Chips [teleconnect]. We believe this partnership will provide the opportunity for future growth in our storage business in late 2009 and early 2010 timeframe.

In the Fiber-to-the-Home arena, EPON deployments in Japan were healthy in the third quarter. However, we did experience a slowdown in both China and Korea in last quarter. As we indicated in our last call, our Chinese customer is shifting into China Telecom’s field trials had ordered quite extensively in the first and second quarters of this year, and they’re still burning off that inventory. We expect it to be completed by late in the fourth quarter and EPON to pick up in China going into 2009.

While the quarter-to-quarter decline in Fiber-to-the-Home was disappointing, it’s important to note that our business was still up over 50% from last year’s level. During the past quarter we were excited to announce our highly integrated second generation GPON devices for the Fiber-in-the-Home deployment. This GPON family included a four port OLT for the central office and ONT for the customer premise and a GPON residential gateway. All of these new devices have proven interoperability in a wide range of commercial GPON systems.

And we’ve won design wins in both China and Korea with our GPON ONTs. Some of these solutions may end up being deployed in Asia, but can also be used in the European GPON market. PMC is the only component supplier in the market today that has both EPON and GPON semiconductor solutions.

In addition, we have successfully demonstrated that the industry’s first end to end 10 gig EPON solution in four Asian markets, including Japan, China, Korea and Taiwan, as a number of carriers are examining 10 gig EPON solutions for higher capacity and aggregation capability. And in Taiwan there are some new 1 gig EPON RFQ’s going out this next quarter, and PMC will be actively bidding on the incremental business opportunity there.

In the WiMAX access area, we added four new multi-band devices to our WiMAX RFIC solutions for broadband wireless subscriber equipment. These new devices enable WiMAX system designers to leverage a single radio design into CPE and network interface cards for all five popular broadband wireless radio band. And we’re getting good traction with the number of Asian OEMs in this area.

In our microprocessor business we experienced a decrease in Q3, primarily due to lower levels of activity in the laser printer market. In this area of network attached storage, we continue to target opportunities for [nav] solutions and hydro IP surveillance network market. We’ve made good progress in this area but it’s still a bit premature to talk about design wins in this area yet.

And now on to our outlook. Based on our backlog in bookings to date, we currently anticipate PMC’s revenue in the third quarter of 2008, excuse me, the fourth quarter of 2008 to be in the range of $125 to $135 million. The breakdown by market segment looks like this. In the storage end market, we expect revenue to grow quarter-to-quarter. We have not seen a drop-off due to the macroeconomic issues and have over 90% of the forecast booked. In the communication infrastructure market, we also anticipate another strong quarter once again driven by demand in China and emerging market.

The two areas of weakness are the printer business and the Fiber-to-the-Home business. The printer business is one major area where we’re seeing a slowdown in user spending, so we’re dealing with reduced demand as well as extra inventory. The net result is a several million dollar decline in revenue in fiscal Q4.

In our Fiber-to-the-Home business we anticipate a weak quarter of demand due to another quarter of low revenue in China, while our top two customers finish burning inventory and in addition NTT will slow its next generation OLT deployment as they have finished the highest density portion of the project. We currently anticipate this falloff will result in a several million dollar decline quarter-to-quarter.

Looking forward we believe Fiber-to-the-Home revenue will begin to grow again in Q1 of 2009. With the global macro issues facing us our visibility is fairly limited. Continued stress may well impact our outlook for Q4 as well as for 2009.

But overall I believe our product position in our target markets is excellent. Our tier one customer relationships are strong. We had some solid new design wins starting to produce revenue in early 2009 that will help us grow share in the markets that we serve. So with that I’ll hand the call back over to Mike for more details on the outlook for the fourth quarter.

Michael Zellner

Thank you Greg. I will now provide more information about our Q4 outlook. Judged, shipped, and shippable backlog at the time at the beginning of Q4 was approximately 99 million. As of today, judged backlog including shipped plus shippable is approximately 105 million, indicating 19% turns required from this date to get to the mid-point of our revenue guidance for Q4.

Based on this information, considering current levels of demand and general uncertainty as to booking rates throughout the quarter, again we estimate the potential revenue for PMC-Sierra in Q4 to be in a range of $125 to $135 million. On a non-GAAP operating basis, we expect our overall gross margin percentage in Q4 to remain approximately flat compared with Q3. We expect non-GAAP Q4 operating expenses to be approximately flat compared to Q3 levels. We are substantially hedged in our Canadian operating expenses at roughly par through Q2 2009.

We expect non-GAAP net other income, which is primarily net interest income from our cash position, to be approximately $1 million. As previously noted we expect the non-GAAP tax expenses to be between $5 and $7 million. As a reminder the tax expense can be impacted by a number of variables associated with our FIN48 liabilities, including but not limited to a change in foreign income and product mix.

Regarding share count we ended Q3 with a base account of 222 million and a diluted share count of 226 million. In the fourth quarter our diluted share count is expected to be between 226 and 227 million.

For the fourth quarter of 2008, we plan for the following significant GAAP to non-GAAP reconciling items. One, amortization of purchased accounting costs associated with past business acquisitions. Two, stock option expense as required under [files] 123R. And FX gains or loss on our net foreign tax liabilities and interest related to our unrecognized tax benefit. Additional non-reoccurring items associated with restructuring costs, positive or negative, are always possible.

With that, I’d like to open the call up to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from James Schneider – Goldman Sachs.

James Schneider – Goldman Sachs

First off, Greg, when you look out into Q4 in terms of demand, you mentioned storage seems to be relatively stable and you haven’t seen a fall off yet. Do you think that something is coming and can you comment on directionally if you took away any new program ramps you have starting in Q4 with new products, directionally which way do you think storage will be, up or down?

Gregory Lang

Yes. Some new program ramps really are not impacting the Q4 number in any material way. So that one is easy. But the first question you asked is quite a bit tougher. I think it’s pretty hard for any of us to predict how this quarter’s going to roll out. I would point out that storage is actually a pretty strategic asset. It’s not, you know, when enterprise spending needs to get squeezed down it tends to be more discretionary items, but storage is one that you pretty much have to put in place.

So the impact or the broader impact from a broader slowdown would be more muted I think in this area versus a more discretionary area. Having said that, our bookings are strong, we’re actually expecting to grow quarter-to-quarter in this business, and we’ve got almost all of it booked for the quarter. So while I think there’s some risk that we get when we get further in the quarter, people may come in and say, you know, can we push this out to the next quarter, so far and you know we’re, what, three weeks into the quarter, things are very solid right now for us to kind of forecast.

So if you take away any of those clouds, we feel very very good about where we are in the quarter. So it’s a very strong start.

James Schneider – Goldman Sachs

First if you can clarify that you believe that storage would be up as given your visibility today, and secondly is there any change to the wireline outlook you see in China? And then going into 2009 I think you mentioned several carriers are working on backhaul for the wireless build outs but do you think that is going to be a couple of quarter event and then they pull back a little bit? Or how do you see that right now?

Gregory Lang

Yes. Our book right now has storage growth in the storage business for us in this quarter. And that growth like I mentioned is over 90% booked right now. So there’s very few turns left to actually reach that growth number.

So part two of your question. You know, we believe that the China infrastructure build out that is going to be happening is actually a many quarter phenomena. I don’t think it’s something that will peter out here in the next quarter or two. There’s a lot of infrastructure that they have guided to put in place, or, excuse me, talked about putting in place.

The first phase of it is really getting kind of the 2, 2.5 g infrastructure in place, you know, essentially retrofitted so they have two, at least three competing networks with but right now China Mobile’s really the only one with a full network. So that’s driving demand today. We see that actually evolving into kind of 3 g growth next year as they start to finally deploy some equipment out there.

Having said that, they also have a non-trivial challenge from kind of a metro transport

deployment issue where if you go and you check into a nice hotel in Beijing, for example, or in

Shanghai, you plug into the 10 megabit Ethernet port they have in your room, you immediately

bog down into something that feels like a 9600 bit per second modem because the metro network family just isn’t there. So there’s a lot of network infrastructure, not only in China but in emerging markets that needs to get put into place. We thank that’s a several year phenomenon.

The last thing that I’ll say is on the broadband front is another area where this quarter and last have been soft because we’ve been digesting inventory. But we’re just in the trial phase in China for Fiber-to-the-Home type of deployments, so we also see that as a growth driver going forward for us as well in China. So we think that the outlook is bright. Unfortunately it’s lumpy along the way but we think the overall outlook is very bright for the growth there as well as other emerging markets.

Operator

Your next question comes from Shawn Webster – J.P. Morgan.

Shawn Webster – J.P. Morgan

Can you talk about the gross margins? I think when we came into the quarter you thought that they’d be kind of flattish or maybe up a little bit, but where the upside came relative to your expectations coming into the quarter?

Michael Zellner

Yes. I mean there’s always a number of things that does impact margin. I mentioned the one item in Q2. But beyond that there’s you know as Greg mentioned we had a relatively stronger quarter in wireline over fiber and that carries a higher gross margin so there is some mixed things that benefited us quarter-to-quarter as well.

Shawn Webster – J.P. Morgan

Can you talk to us at all about where your mix is sitting today for your Fiber-to-the-Home business and your storage businesses?

Gregory Lang

The breakout, we don’t breakout the individual product lines, but basically in the communication infrastructure part of the business, we have the percentage of revenue for communication infrastructure for this quarter, just in terms of the breakout of what we would group as communications which is WAN infrastructure and the wireline piece is about 55%. And for the enterprise side, which captures our storage business plus our printers about 45%.

Shawn Webster – J.P. Morgan

Then you were talking about the strength in the wireless business, there’s clearly some catalysts out in Asia for you guys. Can you tell us what your mix of wireless and market is today?

Gregory Lang

We actually don’t breakout the wireless piece independently, but I think historically, I mean we look back and we evaluate where we think the equipment’s going and keep in mind we’re talking about wireless revenue but a lot of the revenue that we see is actually in backhaul. So a lot of wireline type of products going into wireless equipment if that makes sense to you. So we try to estimate where that’s gone and how much of its wireless. And there are times when it gets up to about one-third of the revenue mix for our overall com infrastructure business.

Shawn Webster – J.P. Morgan

Can you give us any color on the lead times and supply chain inventories? So this is your order lead times, I think. Earlier in the year it was like 10 to 12 weeks. Where is it sitting now and how do you see supply chain inventories?

Gregory Lang

In general the lead times are the same. I think our ability to expedite is better now because there’s more essentially just more capacity available. So we’re able to expedite faster now. We can because there is some slack in the system from a supply standpoint. We really don’t see any major supply constraints for us at this moment.

Shawn Webster – J.P. Morgan

And what’s your view on supply chain inventories?

Gregory Lang

In terms of looking out from our customers or?

Shawn Webster – J.P. Morgan

Yes. I mean for example last quarter you provided some color on the storage supply chain may be digesting some. Are there any areas that are tight or holding too much inventory right now?

Gregory Lang

The only place that we see, I did mention the storage piece that did pull our revenue down a bit last quarter that is done. That’s gone. We worked through that probably in the first month or so last quarter and that customers back ordering at full rates and helping us grow this quarter.

The only place that we see that we still have this issue is actually in the Fiber-to-the-Home business. Not that it’s bringing the revenue down in China any further than last quarter. It’s just not helping it grow this quarter with the slowdown in the NTT deployment. So that’s the one place that we’re still working off inventory from last quarter.

The other area that I mentioned is on the printer side of the business we’re seeing a decline. It’s a good chunk of the decline that we’re seeing this quarter and it’s really because the end market demand has slowed. I think you’ve heard that from other printer suppliers from an equipment perspective last quarter. And then we have the added complication that not only did the end market grow but there’s also some inventory. As their shipments slowed our inventory built up. So we’re burning off some inventory and adjusting to a lower revenue level.

We think we’ll be caught up with that by the time we exit the quarter. So we think next quarter we’ll be back to normal on the printer front for us.

Shawn Webster – J.P. Morgan

As you go into 2009 you’ve spoken a lot about your new storage ship ramp starting in Q1, which I believe is somewhat diluted to gross margins. As that ramps over the next let’s say year, what do you think your gross margins will do overall corporate?

Michael Zellner

Again it does have from a percentage standpoint obviously it impacts us to some degree but we still, you know, we’ve talked about having believing that our margins will be in the, you know, kind of low to mid-60s even after that. Even after that begins to ramp up. So we’ll see. Obviously the pie itself is larger from a percentage standpoint that impacts it a bit.

Operator

Your next question comes from Sandy Harrison – Signal Hill Group LLC.

Sandy Harrison – Signal Hill Group LLC

As far as a lot of products that you guys are looking at in the storage space and some of the new ramps associated with the new chip sets, one question would be with some of the slowdown in the macro environment would this cause any of the potential new designs to move to the front or be accelerated in anticipation of some of the older products trailing off and inventory and things like that? Is there a catalyst somewhere here or a silver lining for lack of better terms?

Gregory Lang

That’s a good question. I don’t believe so. I think we’re on the cusp of this next generation platform out of HP which is a big part of the driver. But I don’t see that pulling in. I mean there’s a lot of other factors in the ecosystem that are well beyond our control. So we’re expecting that revenue to begin to ramp up next quarter, excuse me when I say next quarter I mean Q1 of 2009. And I don’t think that’s coming any faster. There’s too many other pieces involved there.

The other places that will see growth is with the transition to 6 gig SAS. We think our share should double in that transition. We think that’s going to probably start rolling out in the Q2 timeframe and pick up steam as we get later in the year.

And then the other area where there’ll be some modest growth is in the 8 gig Fiber Channel area where there’ll be an ASP uplift. But I think that’s the latest of these transitions where we’ll have some uplift, probably late in the 2009 timeframe.

I don’t think that the macro issues are going to accelerate any of those three storage drivers for us at this point. I don’t see that happening.

Sandy Harrison – Signal Hill Group LLC

And then as you guys look into the crystal ball and think forward, do you see any changes in the seasonality of your business? Do you see any things to be thinking of outside of these new product ramps in Q1 that could contribute to some of your opportunities? And sort of how are you guys thinking absent or seeing somewhat of a recovery in the end markets where seeing some of your market shares increase in some of these markets? How do you kind of see some sort of seasonal play for ’09 in our thinking for modeling?

Gregory Lang

I think it’s pretty tough to predict 2009 at this point although there are crystal ball. I think you said it correct. The crystal ball is now a silver ball and it’s kind of hard to see anything going forward. So I don’t think we have a good theory about that at this point.

Sandy Harrison – Signal Hill Group LLC

And as you talk with your customers and as they’ve delivered their message to you based upon your discussions, how would you characterize what it is the message they’re sending to you? Was theirs more fear driven and concern driven? Or is theirs more driven on canceling of backlog and canceling of orders that they’re seeing? I mean what’s your opinion, Greg?

Gregory Lang

Well the two categories of customers in kind of our two large businesses are on the infrastructure side, a lot of our growth, a lot of our strength there is coming out of emerging markets which need the infrastructure. They’re not in North America where a lot of the meltdown is happening. Clearly they’re not immune to it. But they’re not in the middle of the meltdown. So we don’t get much of a sense from those folks that they’re shaken by it as that much.

That might change as the ripple effects move out, but right now we don’t get the sense that there’s much impact in their thinking and their plans. Because frankly they just need the infrastructure to continue to grow their economies.

On the storage side, that’s the other place where the tone that I get is basically fairly bullish. People feel good about the strategic nature of the storage assets that people are buying and just cautiously watching the markets to see if there’s a slowdown as a result of some of the issues going on in the financial sector.

Sandy Harrison – Signal Hill Group LLC

And then just from a financial engineering perspective as you look out at your convert, you look out at your cash, you guys are throwing off some real attractive cash levels here on an operating basis and it doesn’t look like they’re going to decline dramatically. Are there opportunities out there to add to some of the markets that you’re working on? Are there opportunities to take advantage of some technology out there cheaply? Are you guys looking at it or what’s kind of your mindset here, Greg?

Gregory Lang

Yes. The answer’s yes we’re always looking at ways we can grow our business, grow our bottom line, grow both the top and the bottom line. Right now things are relatively cheap although at the same time people don’t want to sell at these prices. So we’re actively looking at but also being cautious a little bit. We’re leery of what the macro economy has on hold for us for the next year. But this is an ongoing process that we are constantly looking at, new areas for growing the business.

Sandy Harrison – Signal Hill Group LLC

And your ability to hire good people’s probably got to be picking up as well.

Gregory Lang

Yes that doesn’t seem to be holding us back at all.

Operator

Your next question comes from David Wu – Global Crown Capital.

David Wu – Global Crown Capital

I just want to ask two questions really. The first one is at this point, you know I think on analyst day we talked about the run rate sometime in calendar ’09 of HP business to hit a $50 million run rate or higher? Does that still look like a doable number based on what the customer at least is telling you?

And the second one I was wondering in the infrastructure business, how much of the business right now is from the well called the mature economies like North America, Western Europe, and Japan and how much really is from the emerging economies?

Gregory Lang

On the first part of your question, the comment that we made is basically that, that we think at full strength, you know, full transition we think that business could be around $75 million a year type of business. But of course we’re just transitioning into that this next year and that just starts in Q1. So maybe we exit the year at 75, 80% of that run rate at the exit. And then the question becomes how much are we able to do in a year?

You know, I think being at half that run rate would be a very good start, so I’m not sure where the $50 million came from but $75 a year is what we think it could get to and then beyond that is all about the transition and what kind of assumptions we make there.

David Wu – Global Crown Capital

Can you talk a little bit about the infrastructure?

David Climie

The general breakout, and this is based on a build to analysis but about 65% of the WAN infrastructure business actually goes into Asia and certainly that would include the biggest markets which obviously are China and Japan for us there. The other 35% would be North America, Europe and rest of world.

But we also have to remember in that 65% number, a lot of that is actually going into contract manufacturers in Malaysia and Singapore and Taiwan as well. So approximately 40% of that 65% is going into those regions, so that may end up being distributed internationally. So that sort of gives you a breakout. But what we also want to emphasize is certainly for us on the Fiber-to-the-Home side in Korea, some wireless and wireline growth in India, and some emerging traction in Latin America. So those are all new emerging markets for us.

David Wu – Global Crown Capital

So the Fiber-to-the-Home is that part of the com infrastructure or is it different?

Gregory Lang

No it’s separate, David.

David Wu – Global Crown Capital

So roughly 40% of that 65% you talked about actually get consumed in Asia?

David Climie

Yes, about 40% of that 65% is going into contract manufacturers and that can end up going anywhere internationally.

Operator

Your next question comes from Dan Morris – Oppenheimer.

Dan Morris – Oppenheimer

Just a couple questions especially on the new products you announced or that you referenced in your press release. Could you give us a little bit of a timeframe for the GPON products and when you might see design wins and ultimately revenues from this product?

Gregory Lang

Yes. On the GPON front we have a couple of design wins there. The tough thing about trying to project revenue on the business is there’s not much that’s being deployed on the GPON front. Most of the deployments right now are in EPON. So you kind of have to back a little bit on that question and say where do we see GPON’s deployments coming about?

But I think we’re a good year away from seeing meaningful revenue coming out of that segment and our participation in it. So it’s still a ways out. This was basically getting some new parts on the market for us and having a very aggressive portfolio in both the GPON and EPON markets which should lead to some future revenue, but it’s not next quarter or the quarter after.

Dan Morris – Oppenheimer

With regards to the WiZIRD chip, the WiMAX WiZIRD chip I think that you previously said that you were expecting a decent revenue contribution in the second half of this year. Could you give us an update on where that stands?

Gregory Lang

Yes. I think the whole WiMAX space, the general deployments of WiMAX including here in North America with the Sprint Clearwire stuff as well as in India and other emerging markets has been delayed. And depending on how far you go back, it’s been delayed quite a bit, at least a year or so.

So I think we’re going to start seeing production deployments next year probably starting in Eastern Europe first and then followed by India and eventually some broader deployments to North America. I think there’s one city starting deployment now in North America. So it’s been slower than people expected it at this point, including our revenue.

Dan Morris – Oppenheimer

I think that your pond mix has historically kind of favored OLT’s versus ONU’s. With your mentioning the MTT’s kind of ramping down their OLT procurement, is there any change? Is there any impact to your margins with any kind of mixed shift with OLT versus ONUs?

Gregory Lang

At the top level we don’t expect a substantial hit to our margin. At the company level we’re guiding essentially flat. At a micro level, if you look into Part A versus Part B, there is definitely a margin difference. The ONU is more of a kind of a client side much higher volume and lower margin. And on the CO side it’s much lower volume and better margin. If that revenue comes down, we’ll see a shift.

To give you an example on early deployments, we’re seeing about – actually this evolves over time, because you put the CO infrastructure in place first, because then you put subscribers on it. So in China for example the ratio is about four to one, four clients to one central office site, or ONUs versus one OLT. In Japan which is a little bit more mature they’re now up to somewhere on the order of eight to ten ONUs for each OLT. So that gives you an idea of how things evolve over time. But at the company level we don’t expect an impact to our gross margin this next quarter.

Operator

Your next question comes from Ruben Roy – Pacific Crest Securities.

Ruben Roy – Pacific Crest Securities

Greg on the Fiber-to-the-Home business you talked about potential return to growth in Q1. What’s giving you visibility and does that assume a return to growth in Japan perhaps on the CPE side?

Gregory Lang

No, Japan I think once they’ve worked this NGN deployment, they’re basically doing an overlay network for a next generation network, the big drop-off was really kind of finishing the big part of that. So I think they’re in kind of I’ll call it maintenance mode where they’re just adding subscribers on kind of a regular basis. So it’s in kind of a more mature network state. So that one we don’t expect a huge change. It’s going to be kind of adding subscribers on a normal basis.

The place where I think there’s growth is actually the place where we’ve taken a bigger hit in the last two quarters is in China. And that’s for two reasons. One is we’ve been working through this inventory now and we believe it’s going to be done, the work through or work off will be done this quarter. So just getting through that and getting back to selling in at a closer level than what’s selling out will give us some growth.

But there’s also a new bid that’s coming through in November, we think it’s going to be awarded in November that should drive kind of the next wave of deployment in China. So the risk to what we’re anticipating is really that if China decides not to put that out, they delay it for six months, nine months or whatever, there could be some risk in that. But right now our anticipation with communications we’re seeing is that that’s on track to come out in this next month and that would give us, in addition to the inventory work off give us some growth later this quarter.

Ruben Roy – Pacific Crest Securities

On the 6 gig rate on Chip, commentary you’re talking about not likely having acceleration given the macro, but I mean is that a product cycle that you think is fairly shielded against the macro and will indeed happen in Q1? Or is there some risk that that actually gets pushed out further into 2009?

Gregory Lang

Yes. This is public that this is HP’s, that the design we’re talking about is with HP and so I don’t want to comment on HP’s product lines because frankly I don’t know them. But just at a general level, when there’s a big platform transition that happens and the silicon and the software and the systems are all lined up behind it and the performance and the power saving that come with a process shrink, that’s almost like gravity.

It’s hard to stop those from happening because the cost benefit, performance and the power savings benefits are extremely compelling and so I don’t see the macro issues slowing that down at all. I think it’s a question of are all the pieces ready to go and if they are I think that most of these server OEMs are going to pull the trigger and start shipping products as soon as they can.

That’s my read on that.

Ruben Roy – Pacific Crest Securities

In terms of the storage growth in Q4 is that mostly coming from the 4 gig fiber channel?

Gregory Lang

Yes, some of it’s coming just from a little bit of bounce back because we were burning off inventory last quarter so there’s some just kind of getting back to normal levels. And then there’s also some 3 gig SAS that looks pretty strong that’s coming out as well. So those are probably the bigger areas that we’re seeing in growth.

Operator

Your next question comes from Romit Shah – Barclays Capital.

Romit Shah – Barclays Capital

I was just looking through the figures you provided and I go back to last quarter I think you were assuming something less than a 15% [turnstile] requirement to make your revenue guidance and instead this quarter it’s more like 20%. I was just hoping you could walk us through that please.

Michael Zellner

I think I quoted 19. I think that we had quite a substantial order pattern last year, sorry, last quarter out of China that kind of helped that be, you know, quite a nice profile for us there. So it’s 19 versus something a bit like in the last quarter. Yes it was 14 actually.

David Climie

What happened last quarter is we had a rush to bookings at the beginning of the quarter from China as they did the consolidation, so that’s really what kind of got us well ahead of the curve as they were scrambling to get parts on order. And that rush is normal like this quarter. So this 19% is actually in line with historical, typical kind of turns for the balance of the quarter.

Romit Shah – Barclays Capital

And would you characterize this quarter as being more front end loaded?

Michael Zellner

No. I mean, we’re not looking at this quarter as being unusual at all. We think this is a pretty typical seasonal quarter for us.

Operator

And there are no further questions registered at this time.

David Climie

Thank you. Thank you for attending our conference call today and we’ll be scheduling our fourth quarter 2008 earnings release for the third week of January. At that time we’ll be reviewing the quarterly results and providing an outlook for the first quarter of 2009. Again thank you for attending today’s call.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!