PMC-Sierra, Inc. Q4 2008 Earnings Call Transcript

| About: PMC - (PMCS)

PMC-Sierra, Inc. (NASDAQ:PMCS)

Q4 2008 Earnings Call

January 29, 2009 5:30 pm ET


David Climie - VP Marketing Communications

Greg Lang - President & CEO

Mike Zellner - VP & CFO


Jim Schneider - Goldman Sachs

Sameer Galusha- Barclays Capital

David Wu - Global Crown Capital

Sandy Harrison - Signal Hill

Dan Morris - Oppenheimer

Scott Jones - JPMorgan

Cody Acree - Stifel Nicolaus

Kevin Cassidy - Thomas Weisel Partners

Ruben Roy - Pacific Crest


Good day, ladies and gentlemen. Welcome to the PMC-Sierra 2008 Q4 Earnings Release and conference call. Today's conference is being recorded. Today is January 29, 2009. It's my pleasure to introduce Mr. David Climie. Please go ahead, sir.

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 fourth quarter 2008 earnings release was disseminated via Business Wire after market closed, and a copy of the release can be downloaded from our website.

Before we begin, I'd 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 demand, inventory levels, pricing, exchange rates, taxation rates and other risks 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're asking your question during the Q&A session of today's call, we request that you limit yourself to one question, and if you'd 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.

Mike Zellner

Thanks, Dave. I'll review our fourth quarter 2008 results and financial position and then turn it over to Greg to disclose our business activity in detail. PMC-Sierra's fourth quarter showed slower sales activity due primarily to a weaker global economy.

Revenue in the quarter was $120.8 million, versus $139.4 million in Q3. Our turns business, meaning those orders booked and shipped within the same quarter, was 18% of revenue in Q4, compared with 26% in Q3.

By region, Asia continued to generate the strongest results in the quarter, the geographic breakdown as follows, China 33%, Japan 18%, other Asia Geos 24%, North America at 18%, Europe and other Geos at 7%.

In Q4, revenue from EMC accounted for 12% of overall revenue for the quarter. No other customer accounted for more than 10% of revenues.

On a non-GAAP basis, gross margin decreased from 66.2% in Q3 to 65.5% in Q4. The decrease was primarily the result of additional obsolescence provision recorded in the quarter.

On a non-GAAP basis, operating expenses were down $800,000 to $57.3 million in Q4, versus $58.1 million in Q3. Operating expenses were lower in Q4 due to continued expense reduction initiatives, lower payroll related costs influenced by the utilization of vacation time. This was partially offset by higher photomask and wafer cost on increased tape-outs in Q4.

In the fourth quarter, our non-GAAP operating income before other income and taxes was $21.8 million, or 18% of sales. Net interest income of $300,000 in Q4 was significantly lower than the $1.5 million in Q3, due to lower yields on our conservative portfolio of short-term investments.

Our non-GAAP tax expense was $5.3 million for the quarter, compared to $6.3 million in Q3. This was mainly due to the change in our product and foreign income mix. Non-GAAP profit after-tax for Q4 was $16.8 million, or $0.07 per share on a diluted basis. Q4 GAAP net income per share was $0.06 on a diluted basis.

The comparable GAAP measures for each of gross margin, operating expenses, operating income, provision for income tax, 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 Q4 are as follows: $5.1million in stock-based compensation expense, $9.8 million in the amortization of purchased intangible assets, $13.8 million net gain on the repurchase of senior convertible notes, $4.3 million asset impairment related to a supplier contract termination, $4.5 million net foreign exchange gain on the company's foreign tax liabilities, and $2.2 million net income tax effect on the above.

Turning to the balance sheet. During Q4 the company repurchased $58.7 million from its outstanding convertible notes in the open market for $43.8 million, for a net gain of $13.8 million.

Following the repurchase, the balance of our convertible notes at December 28th, 2008 was $68.3 million. As a reminder, we had repurchased 98 million of our convertible notes in Q1 of 2008.

Net of our $68.3 million convertible notes. We ended the quarter with $239.2 million of cash, cash equivalents, short-term investments and investment securities; an increase of $27.8 million from Q3. This includes $209.7 million invested in the reserve funds, which continues to be in the process of liquidation. These are classified in our balance sheet as short-term investments.

The primary reason for the increase in the company's net cash position are as follows: positive cash flow from operations, $14.6 million, $14.9 million gross gain on the repurchase of our convertible notes, offset by $1.7 million associated with purchases of capital and intellectual property.

Accounts receivable decreased $6 million to $40.2 million. This reflects 30 days sales outstanding based on our quarterly sales volumes. Our receivable profile remains healthy despite the challenging economic environment. Our net inventory at the end of Q4 was $34 million, a decrease of $4.4 million from the prior quarter. Net inventory turns on an annualized basis were 4.9, consistent with the prior quarter turns of 4.9.

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

Greg Lang

Thanks Mike. In the fourth quarter, we delivered revenue of $120.8 million, coming in slightly above the midpoint of our revised revenue range. We benefited from a healthy enterprise storage market in Q4 where our revenues improved quarter-to-quarter, while our other businesses experienced lower demand given the tough economic conditions.

During the quarter, we tightened our SG&A expenses and generated $22 million in non-GAAP operating income, which resulted in a non-GAAP operating margin of 18%. While this level is below our corporate target range of 20% to 25%, it was a good finish to the year given the macro environment.

But before I talk about the fourth quarter in more detail, I'd like to take just a minute to talk briefly about our performance in 2008. Our revenues increased 17% year-over-year, with growth coming from three of our four areas of business. This performance was driven by our growth investments in storage and Fiber-To-The-Home.

In communication infrastructure, our core WAN infrastructure business held in nicely year-over-year, and our Fiber-To-The-Home business was the fastest growing business for the company with revenues increasing 74% compared to the prior year.

In the enterprise storage market, we had a very strong design win year and we expanded our product line significantly. With new product cycles coming on-stream in 2009 and 2010, we expect enterprise storage to be our largest business in 2009.

On a financial note, we maintained 65% gross margins last year and our non-GAAP operating margin improved from 14% in 2007 to 22% in 2008, generating $117 million in 2008 non-GAAP operating income versus $64.5 million in 2007, an 81% increase. And net cash grew by nearly $100 million or over 70% year-over-year.

The work that PMC team has done over the last few years has substantially improved our business model, our balance sheet and our growth profile, all of which puts us in a good position to weather the current economic storm.

So, now let's talk about the fourth quarter by end market. Our enterprise storage business benefited from improved sales in the fourth quarter in both Fibre Channel and SAS. In Q4, we matched the prior quarter's record number of design wins for enterprise storage and that activity included wins with two new customers for 6-gig SAS expander switches and our 8-gig Tachyon Fibre Channel Controllers.

We are well positioned as our customer base begins the transition to 6-gig SAS-2 and 8-gig Fibre Channel where we have an expanded product line. We believe the general industry shift to 6-gig SAS will start with the first production revenue beginning in Q2, enterprise servers, followed by the first 6-gig SAS storage systems in the second half of this year.

With regards to our 6-gig SAS RAID-on-chip solution called the SRC, we're now shipping on HP's upgraded Smart Array Controller cards. These 6-gig SAS cards are backward compatible to 3-gig SAS and allow HP's current G5 ProLiant platforms to significantly improve system performance by more than 2X.

As we mentioned before, our SRC RAID-on chip has been designed into HP's next generation ProLiant platform and we expect to see revenues starting to ramp later this quarter as Intel’s Tylersburg platform goes into volume production.

In addition, our partnership with IBM for the joint development of 6-gig RAID technology is tracking well, and we're working closely with them on other storage platform solutions using our products. We believe this partnership will provide the opportunity for further growth in the storage business and our storage business in late 2009 and early 2010 timeframes

In our WAN infrastructure business, which covers both wireline and wireless devices, we experienced a slowdown in Q4 compared to a strong Q3, largely due to lower activity levels in North America, Europe and Japan.

However, during the fourth quarter, our communication business with Chinese OEM customers improved sequentially. This improvement was due primarily to the build out of 2G and 3G wireless networks in China, as well as Metro Optical Transport Equipment for both the China domestic and international markets.

As we mentioned in the last conference call, the Chinese government has consolidated six carriers into three larger ones. And a couple of weeks ago, the three carriers were awarded the long awaited 3G licenses for domestic wireless operation. They are now moving forward rapidly at their plans for deploying their own networks that they compete against each other for new customers.

Based on the carriers and the government's announcement today, the domestic Telcos are currently estimating they will spend approximately 200 billion RMB on their networks over the next two years or approximately $40 billion. We believe about half of that will occur this year and that the actual CapEx spend on 3G wireless equipment in 2009 could be between $4 billion and $6 billion.

The largest carrier, China Mobile, has plans to expand its TD-SCDMA network to 238 cities by the end of 2009, and build out its base station network with an additional 60,000 3G base stations this year.

The main suppliers of wireless equipment are: ZTE, Huawei, and Datang. And we currently are seeing an increase in orders from these OEM customers for TE multiplexing, inverse multiplexing, and baseband radio switching devices.

Our products play mostly in the backhaul portion of the network where traffic is taken from the base stations to the controller and then aggregated and transported back to the central office as well as in the Radio Access Network portion of the wireless network infrastructure.

We are slightly more content in 3G platforms than 2G in China and we're agnostic to which 3G standard is being deployed. Beyond China Mobile's plans for TD-SCDMA, China Unicom 3G License is for WCDMA, and China Netcom is for CDMA-2000.

And, we have content in the platforms of the domestic OEMs, who are delivering equipment into these carriers as well. China Netcom has announced plans to build its 3G network to reach 280 cities by year end and China Telecom has a 3G coverage target of 100 cities this year, while it continues to build it's its own 2G network at the same time.

In addition, we're starting to see some traction in our wireless and wireline devices in India, and we recently announced that ECI Telecom, a global equipment provider has selected our ADM 622, ARROW 2488, TEMAP 84 and HDLIU devices for its BroadGate Multi-Service Provisioning Platform, which is doing very well in the South Asian market.

So, overall our design wins in our traditional WAN infrastructure business kept pace with the prior quarter with many of those wins coming from our metro transport products and highly integrated switching devices for Tier 1 customers.

We also captured additional design wins with our CHESS product family and announced during the quarter the ZTE has selected our CHESS transport architecture for its Unitrans product line. So ZTE has a modular, scalable transport solution based on PMC for its customers, both domestically and internationally.

In Fiber-To-The-Home, our EPON business in Japan and China slowed as expected in the fourth quarter due to inventories being worked down and our Chinese OEM customers waiting for the next Fiber-To-The-Home RFQ to come from China Telecom.

In Japan, our Fiber-To-The-Home business decreased as NTT East and West finished its first phase next generation network deployment. The second phase will continue through 2009, although at a lower level than Phase I.

With regards to China, our customers are still working down inventory, targeting China Telecom, and we expect that to be completed in the first quarter this year. We're also encouraged that China Telecom has issued an RFQ this month regarding its requirements for 2009 as it moves from its field trials in 2008, into broader deployment of FTTH in 2009.

We're currently hearing that the China Telecoms unit volumes requested, maybe 20% to 30% higher this year compared to last, so this could improve activity levels in the Q2 timeframe and later as inventories come down. And we also expect to see deployment plans from China Mobile and China Unicom for their FTTH programs in the second half of this year.

In Q4, our design wins in FTTH were up slightly compared to the prior quarter and we secured several important GPON, OLT and ONU design wins with OEMs for the Korea and Indian markets.

In addition, we are engaged with three of our key customers on 10 gig EPON systems as the carriers and service providers look at next generation fiber systems.

Last but not least, in our microprocessor business, we continue to experience a decrease in the fourth quarter due to the low demand and excess inventory levels in both the laser printer and enterprise network markets. While we've seen several new devices going into production for the laser printer market, we are seeing our customer to work down their inventory levels first.

Given current demand in the corporate and enterprise markets right now, we expect that the process would be worked through in the first half of the year with potential improvement in the second half. With regards to network attached storage, we now have a solution for both the desktop and rack mount markets

Now, let me switch gears to the outlook for Q1. Based on our backlog and bookings to date, we currently anticipate PMC-Sierra’s revenues in the first quarter of 2009 to be in the range of $90 million to $100 million.

In each of our end markets, we expect our revenue to decline in Q1 given the current market conditions. Inventory levels are being worked on in a seasonally slower quarter. The good news is that we've seen improved bookings in the January timeframe and enter the quarter with backlog that requires relatively low level of turns to achieve our Q1 revenue outlook range.

That said, we're facing a pretty tough global macroeconomic headwinds and our visibility is pretty limited, so continued stress may well impact our outlook for Q1 as well as 2009. Overall, I believe the supply chain is in much better shape than it was following the 2001 high-tech bubble. OEMs, contract manufacturers, distributors and component suppliers have acted quickly this time around to reduce inventories and this should help us get back to real [end] demand faster.

Based on our Q1 estimates, we currently anticipate PMC's revenue will decline approximately 30% between the end of Q3 last year and the midpoint of our revenue guidance for Q1 and this is about the low-to-middle portion of our peer group.

Needless to say, we focused on a number of belt-tightening activities to reduce our expenses, while preserving our investment in our main growth engines in storage, Fiber-To-The-Home, printer solutions and core communication products.

Mike will cover this in more detail when he describes our guidance. As we look forward, I believe that PMC's product positioning in our target markets is excellent, our Tier 1 customer relationships are strong, and we have some solid new design wins and product cycles that are starting this year.

Despite the tough current market conditions, I believe we'll benefit from the trends of OEM selecting fewer and stronger semiconductor suppliers going forward in both, the communications and the enterprise infrastructure markets. So with that, I'll hand the call back over to Mike for details on our outlook for the first quarter.

Mike Zellner

Thanks, Greg. I will now provide more information about our Q1 outlook. Judged, shipped, and shippable backlog at the beginning of Q1 was approximately $68 million. Considering current levels of demand and general uncertainty as to the booking rates throughout the quarter, we estimate that the potential revenue for PMC-Sierra's for Q1 is in the range of $90 million to $100 million.

As of today, judge backlog including shipped plus shippable is approximately $87.5 million, indicating 8% turns required from this date to get to the midpoint of our revenue outlook for Q1. On a non-GAAP operating basis, we expect our overall gross margin percentage in Q1 to decrease from 65.5% in Q4 to 63% plus or minus 25 basis points.

A120 basis points of this decline is product mix related due primarily to increased volume in Fiber-To-The-Home products, and a decrease in our discrete microprocessors. 80 basis points is due to the effect of fixed costs on lower revenue, and the remaining 50 basis points is driven by a customer funded ASIC mask set at zero margin, partially offset by favorable inventory and cost variance expectations.

We expect that our product margins will be relatively stable throughout the year and our fixed costs should remain relatively flat. Therefore, we expect that gross margins should improve as our revenue recovers.

With regard to our continued focus on efficiencies, our non-GAAP operating expenses are expected to be approximately $55 million, or about $2 million lower in Q1 compared to the $57.3 million in Q4 and $3 million lower than Q3. This comes during a quarter that we also have payroll reset costs of approximately $1.5 million. During the same period, we also increased our investment by approximately $1 million in our RAID software program with IBM.

In essence, we have decreased our spending by nearly 10% over the past four months. Some of our key cost saving initiatives include implementing a reduction in force, suspending salary and increases globally -- salary increases globally, excuse me, and suspending Company 401(k) contributions.

As Greg mentioned, although we are very focused on cost savings, we have maintained all of our key development efforts. We expect non-GAAP net other income to be approximately zero, which is primarily net interest income from our cash position, offset by servicing our outstanding convertible notes.

We expect the non-GAAP tax expense to be between $2 million and $3 million. As a reminder, the tax expense can be impacted by a number of variables associated with our FIN 48 liabilities, including but not limited to a change in foreign income and product mix.

Regarding share count, we entered Q4 with a basic share count of 223 million and a diluted share count of 224 million. In the first quarter, our diluted share count is expected to be between 224 million and 225 million. For the first quarter of 2009, we plan for the following significant GAAP to non-GAAP reconciling items.

First, amortization of purchased accounting costs associated with past business acquisitions. Second, stock option expense as required under FAS 123(NYSE:R). Third FX gains or losses on our net foreign tax liabilities and 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-GAAP items associated with our restructuring or other costs, positive or negative, are always possible.

With that, we'd like to open the call to questions.

Greg Lang

Michael, if you could proceed with the queue for questions, thank you.

Question-and-Answer Session


(Operator Instructions). First question will come from Jim Schneider of Goldman Sachs.

Jim Schneider - Goldman Sachs

Good afternoon, and thanks for taking the question. First of all, Greg, could you talk about a relative to the midpoint of your guidance? I mean, clearly there is a decline across the end markets, but I think you mentioned that microprocessors would be down but Fiber-To-The-Home would be up. Can you talk about the rest of the business? And where it is relative to the midpoint?

Greg Lang

Are you talking about for Q1?

Jim Schneider - Goldman Sachs

For Q1, sorry.

Greg Lang

Yeah, both Fiber-To-The-Home and the microprocessor business are going to be flatter than the other two, because I think it's almost as if the timing of those two took a big hit last quarter, and the down side that will see this quarter is heavily driven by our two bigger businesses in both communication products, as well as the storage business.

Jim Schneider - Goldman Sachs

Understand. And then maybe could you just address, you mentioned a couple of things happening in Q2, potentially the resumption of the Fiber-To-The-Home business, maybe some business for backhaul in China, as well as the bigger step-up in the ramp of the HP servers. Can you help us understand, are those the right things to think about coming into the P&L in Q2 or what's the facing of those things?

Greg Lang

I think there is probably two big questions for us right now as we get into Q2 and Q3. One is, has revenue basically have the end markets essentially kind of hit a relative low point and have we worked through the inventory that kind of built up when demand fell off so quickly.

If we work through the inventory, which we think on the Fiber-To-The-Home front will be through that later in this quarter, and early into the next quarter, and also in the other businesses, we should see some growth in our business, just kind of coming back to normal end markets level, end market levels.

The second, and that's true across all the businesses. It's just kind of keeping an eye on when we've actually kind of worked through the excess inventories, so we can drift back up to the end market levels.

The second part of it is, we do have some meaningful new product cycles coming on in the storage business. One is on the SRC side with the HP ProLiant server launch of Tylersburg platforms and then the second is just the general market transition to SAS 2 this next year where we expect to have some meaningful share gains in that segment.

So those are kind of the revenue drivers for us, if you will. In general, that's one of the things that's helping us today that could also pick up in the second half is the 3G deployment and the general energy in the infrastructure market in China. As I mentioned in the comments earlier, that has been strong. It actually grew quarter-to-quarter. We expect it to be strong again this quarter. That can also help give us uplift in the balance of the year.


Next question will come from Romit Shah of Barclays Capital.

Sameer Galusha- Barclays Capital

Hi, guys, this is Sameer Galusha calling in for Romit Shah. Mike. Mike it will be great, if you can help me understand on the storage business. Last quarter you mentioned you went into the quarter about 90% covered and there was some turns activity. I'm wondering how is the business looking this quarter in terms of the coverage so far.

Mike Zellner

Actually as we mentioned last quarter and our results in Q4, storage was up and storage kind of continues to be the area that we expect to be kind of the growth engine for us going forward. That will continue as the HP ProLiant SRC related chip begins to go into production for us.

Greg Lang

And, specifically on your question about coverage on basically backlog. To date, we're about the same level as you mentioned we said on the call last time. We're in the 90% range. Actually, overall for the company, if you look at the midpoint of our range from basically this point forward, we need to turn about 8% to hit the midpoint of our range. So it's lesser than last quarter. But as we know, a lot of things can happen in this kind of environment.

So, our turns to go at this point is actually less than it was at this point last quarter overall for the business and about the same in the storage part of our business.


The next question will come from David Wu of Global Crown Capital. Please go ahead.

David Wu - Global Crown Capital

Yes, good afternoon. On the enterprise storage side, I think that this is like eons ago, but sometimes during 2008 you were sizing the HP opportunity of something in the order of $35 million, potentially for calendar 2009. And I wondered, whether we're still of that kind of magnitude, or have things changed meaningfully?

The other thing I was wondering is the business, the co-development of RAID software with IBM. When would it result in any revenue contribution for you? Did I hear late 2009 or early 2010?

Greg Lang

Hello, David. Yes, your memory serves you pretty well. We said $30 million to $35 million potential impact for the HP business this year as it's kind of in the ramping up phase. I think since that time that was probably at the technology event we have a while back, but since that time I think the launch of the platforms, the Intel platforms has been delayed a little bit, maybe about a month, but we still think that that range is still an achievable range for 2009.

The second part of your question on the IBM RAID part of the business. We do believe that could generate some revenue late in this year, but I think we'll see that having a big impact on our top and bottom line will be in the 2010 before.


The next question comes from Sandy Harrison of Signal Hill.

Sandy Harrison - Signal Hill

Thanks. Typically you guys do well in these downturns by taking market share. Greg, could you spend a quick second talking about the competitive landscape? A lot of companies have to make decisions about other products they'll be introducing and you guys are sort of in 6 months or 18 months into new products. Could you talk a little bit about that for us?

Greg Lang

Yeah, you know, it's a great question. We do think it's a little bit hard to predict exactly where it will come from. But we do think that both customers, as well as on the supplier side. This is going to be a pretty tough trench to work through.

Fortunately, we went into it probably amongst the strongest of our direct competitors in the group, and I think that (inaudible). We also think this is your alluding to -- we also went into it with some pretty strong momentum on the share front. We had talked quite a bit about some of the substantial share gains we had made on the SAS-2 front and the server RACK front…

Those obviously don't go away. But I think what this positions us to do is actually strengthen our position. We're a leader in most of the traditional technologies in the communication space in T1/E1 SONET, ATM… that I think will give us an opportunity to demonstrate our strength and our resiliency, basically our critical mass in the next generation OTN network.

So, I think that will pick up ground in that arena. I think there will be some of our competitors out there that were kind of on the edge to start with that may fall by the wayside. But I think this will definitely lead to us getting stronger in time as we go forward. And, so it's in that sense, a silver lining in a dark cloud.


The next question will come from Dan Morris of Oppenheimer.

Dan Morris - Oppenheimer

Hi, guys. Just looking at your guidance and where backlog is today, it seems like you guys are being pretty conservative. Is that mainly because -- can we read into that, that visibility is deteriorated? And is there any way to quantify it, maybe in terms of lead times or something like that?

Greg Lang

You're right. We're being cautious and I think the times we weren't being cautious, especially after kind of the last quarter. Just to give you a couple of data points. As I mentioned, we have about 8% turns to go for this quarter. Last quarter based on where we ended up, we had about 13, the quarter before, about 14; the quarter before, 11, 12. So we're typically in this teens range. So, we're being a little bit cautious but I think it's warranted, given the times.


The next question will be from Scott Jones of JP Morgan.

Scott Jones - JPMorgan

Hi, gentlemen. This is Scott calling in for Shawn Webster. I just had a question on OpEx, you said it was going to be down a couple million this quarter and you commented that you reduced expenses by about 10%. I was wondering if you look over the rest of 2009, how you expect it to trend? And what flexibility you have with any additional cost cutting measures if they were deemed to be necessary?

Mike Zellner

You know, we're really looking, as you can imagine, under all the rocks to make sure that we're operating the company as efficiently as we can and that will continue. You know, we took some, as, again, using our Q3 as a benchmark and considering some of the natural increases that we talked about, both in support of the partnership with IBM on RAID as well as the Q1 impact, natural impact of increasing expenses, we reduced things about 10%.

So we will continue that focus. Obviously there tends to be a little bit of a further natural step down kind of more in the back half of the year, as those first half fringe benefit things roll off, of course. We're certainly not intending on increasing our infrastructure at all from here. So we're going to leverage it.

So naturally, there may be a little bit of a drop off. We're not obviously guiding that. In addition, as I think I've said in other calls, we forward hedge the FX impact on your company and in the back half of the year, we'll begin to get the benefit of the change in the exchange rate that's occurred. Canadian dollar versus the US dollar as you know, we have a pretty substantial operation in the Vancouver area.

So, I think naturally it's going to drift down a bit from here. If the conditions continued to worsen, which we've called this the best we can, and we think we're solid, and things will begin to shake out in the back half of the year. If that turns out to be wrong, then we'll continue to look at things. We've I think proven before that we take the steps we need to take to make sure that the financial structure of the company remains healthy.


And the next question comes from Cody Acree of Stifel Nicolaus.

Cody Acree - Stifel Nicolaus

Thanks, guys. Just one quick question. In the Fiber-To-The-Home market, with China trials sounding like they're coming toward and in with some Asian design wins that are increasing in Korea and India. Can you start to put some quantification around maybe the size, the total available market opportunity for Fiber-To-The-Home and then post this inventory correction? What are your expectations for kind of lumpiness of this given that there is a big consumer component of this? Should we continue to expect the high volatility one quarter to the next Fiber-To-The-Home?

Greg Lang

Yeah, that's a hard one to call but let me start with kind of the first part of the question, how big do we really think the market is. And I'm going to give you a number that's a little bit further out in time. But, we think this market can be a $300 million to $400 million market for the parts that we participate in and for the segments that we participate in and we're at a small fraction of that today. So we think that there is good, healthy growth in this business as we go forward. I think that's kind of a three to four year time horizon type thing.

In reality, we really just have Japan with full deployment, Korea with some small deployments and then China in the trial phase. So, we really haven't hit the ground running in a lot of the other regions of the world. So, that's really what needs to happen for this market to really take off in a broad way. That also is a part of the answer to the question about the volatility. As you know, the broader the customer base, and in this case the broader the regions and the carriers that are involved, the less volatile the business will be, because there will be some natural diversification of the ups and downs of the trials and deployments that happen.

It's not really driven by the consumer phenomenon. It's driven more by carrier decisions on how they plan to deploy the technology. As you know, it requires fiber, in many cases that's new infrastructure that has to be put in the building, in the ground, and on the poles or whatever; and so the carriers really control and determine how much and how fast gets deployed. They chose to be very aggressive in Japan, so it happened quickly. They're looking to be more aggressive in China...

So, our view of it is, we're the very, very clear leader in EPON today, which is the primary technology across Asia. We now have GPON products, which will be the primary technology across North America and Europe. We started to win our first designs there, actually interestingly enough in the Asian market again.

And so our view of this is, we need to make sure that we keep our leadership position so as these carriers start to ramp up and deploy more products we're in the best position to capitalize on that growth. And I think to date, we've been able to maintain a very strong position there and now it's time to see how the carriers deploy the technology.

Next year, it looks like China's got a fairly aggressive stance which is about 20% to 30% growth, just at China Telecom and that doesn't include China Unicom and China Mobile, who haven't started to deploy products yet there.

So, I think the outlook is pretty good for us. The broader economic issues of course probably weigh on everybody in terms of how aggressive they want to be, but I think our position is strong and we're ready when the markets take off.


The next question will come from Kevin Cassidy of Thomas Weisel Partners.

Kevin Cassidy - Thomas Weisel Partners

Thanks for taking my question. A couple of questions. On the bookings you mentioned improving in January, can you give any more color on that, relatively how much improvement?

Greg Lang

Yeah, I'm not sure the position of the bookings is terribly meaningful because there's a lot behind it in terms of fear, emotion and [fun] et cetera. But what I can tell you is that bookings slowed down in October. They hit a low point in November. They popped up several million dollars in December and are up again in January. So if that's a trend -- that two months is a trend then perhaps we saw the low point and we're going to start working our way back to end market volumes here over the next quarter. So that's our optimistic view, but we have to see how things shake out for the rest of this quarter.


The next question comes from Ruben Roy of Pacific Crest.

Ruben Roy - Pacific Crest

Thanks. Greg, I've got two questions for you. One, GPON. You mentioned the first design wins I think in Asia, but I think back at the Tech Analyst Day last year, you were talking about potentially having the opportunity to get into the North American market with GPON. Any update there?

And then secondly. In terms of the 3G rollout that you talked about and PMCS' participation there, can you just give us an update on where you play? I think that you sold probably sell some thousand chips into the base stations, but do you also benefit from net metro aggravation equipment and backhaul equipment into that 3G build out? Thanks.

Greg Lang

Yeah, so there are two parts. So the first part is on the GPON front for North America. Clearly that's a focus for us. North America shipments are still relatively modest, primarily out of the Verizon FiOS deployment, although I had PON actually installed at my house, now I can get here in the region that I'm in is actually BPON but they did tell me that AT&T is moving to GPON shortly too. So, AT&T will be moving to GPON as well, but still the volumes are very modest.

And our design win progress continues, we do not have a big victory to claim there yet, but we continue to work well with the leading suppliers there. So we continue to work on that but nothing to report at this point.

Part number two of your question is, we really participate in both areas that you mentioned on both 2G, as well as 3G base stations. One is and this is the bulk of the revenue dollars, by the way, is the backhaul portion.

So kind of our traditional strength in the core networks T1/E1 SONET ATM et cetera plays well there in backhaul. So the devices like TEMUX devices, IMA, HDLC Controller, [SRDs] E1 LIUs, et cetera. Those are all in more of the backhaul part of the network.

But we also do have some smaller, more modest revenue in the Radio Access Network portion of it, which as you mentioned is a PALADIN product, a Waveshaper product and a BRIC device which is essentially an interface device for those platforms as well.

So it's really weighted towards the backhaul traffic more than the front end, but we do participate in both.


And the next question will come from Sandy Harrison of Signal Hill.

Sandy Harrison - Signal Hill

Yeah, I just wanted to follow-up on that last comment. Greg was talking a little bit more about some of the base station. You guys participate more in the 3G markets, is that just your timing of when you enter the market with your new products, as if your products are more tailored to it. Just kind of understanding why that's a bigger opportunity for you.

Greg Lang

I think I commented that it is pretty similar. Our participation is pretty similar, particularly in the backhaul portion of those products are similar technologies in both at backhaul.

So, it is similar in both 2G and 3G and also among the different 3G standards, our participation is similar.


The next question comes from David Wu of Global Crown Capital.

David Wu - Global Crown Capital

Yes, I was interested in one more thing which is, you didn't mention anything about Fibre Channel business that's going from I guess 4 to 8-gig, or have I got it wrong? I think its 4 to 8-gig transition. Is that going to show up any in your P&L in the enterprise storage?

And given all the uncertainty, it does seem that your enterprise storage has a chance of actually growing in absolute dollars this year, particularly in the second half. Am I right about that?

Greg Lang

Yes, you're correct on both fronts. On the Fiber Channel Front, we think the market will start to transition to 8-gig Fiber Channel in the second half of this year. And some of these platforms may coincide with the 6-gig SAS-2 rollouts that happened on the storage side. So we see that starting to impact our P&L in the second half.

And then part two of what you said is, yes, we do think it's very possible, very likely that our storage business will actually grow this year in the environment, given the market share gains that we have been making over the last 12 to 18 months.

David Wu - Global Crown Capital

I just want to follow-up on one more thing. In the LSI logic conference call last night, they mentioned that they have design wins in all Top 10 of the server OEMs. I guess that includes HP as well? This is not unusual for multi-sourcing for a guy like an HP, but I was wondering whether your market share gain will expand beyond HP and possibly IBM?

Greg Lang

Yeah, the gains this year on the server side. Now I distinguish that because on the equipment side we have a stronger position, but we're new on the server side, which I think is what you're referring to.

On the server side, most of our volume will come from HP this year. Next year, as we get more traction on IBM and some of the smaller designs, we'll see some market share growth there, but most of the share gains will be on the HP front this year.


And, there are no further questions registered at this time. Please continue.

David Climie

It's great. Michael, I appreciate that and thank you all for attending our conference call today. We will be scheduling our first quarter 2009 earnings release for the third week of April and at that time we'll be reviewing the quarterly results and providing an outlook for the second quarter of 2009. So thank you and that ends today's call.


Thank you ladies and gentlemen. This will conclude the conference call for today. We thank you for your interest in participation. You may now disconnect your lines, enjoy the rest of your day.

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