Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PMC-Sierra (NASDAQ:PMCS)

Q2 2013 Earnings Call

July 29, 2013 4:30 pm ET

Executives

Jennifer Gianola

Gregory S. Lang - Chief Executive Officer, President and Director

Steven J. Geiser - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Srini Pajjuri - CLSA Limited, Research Division

Sundeep Bajikar - Jefferies LLC, Research Division

Operator

Hello, and welcome to the PMC Second Quarter 2013 Earnings Conference Call. My name is Meisha, and I will be your operator for today's call. [Operator Instructions] Please note this conference is being recorded. I would now like to turn the call over to Jennifer Gianola, Director of Investor Relations. Jennifer Gianola, you may begin.

Jennifer Gianola

Thank you, operator. Good afternoon, everyone, and thank you for joining the call. With me today are Greg Lang, President and CEO; and Steve Geiser, Vice President and CFO. Greg will begin the call with a discussion of the business and key highlights from the second quarter 2013, and Steve will then discuss the financial results for the second quarter of 2013 and the business outlook for the third quarter of 2013.

Please note that our second quarter 2013 earnings press release was disseminated today via BusinessWire after the market closed, 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 a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, PMC's limited revenue visibility due to variable customer demands, market segment growth or decline, customer concentration, bookings rate, changes in inventory, foreign exchange rates and other risk factors that are detailed in the company's SEC 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. Note that PMC undertakes no obligation to update any forward-looking statements.

Please note that for each of the historical non-GAAP financial measures mentioned on this call, a full reconciliation to the most comparable GAAP financial measures is included in our press release issued today. In addition, a GAAP to non-GAAP reconciliation of financial measures noted on our outlook will be posted on our website under the Financial Reports section of the Investor Relations tab.

[Operator Instructions] Thank you, and I will now turn the call over to Greg Lang.

Gregory S. Lang

Thank you for joining us today, and welcome to our second quarter earnings call. We reported that our second quarter revenues were up 2% quarter-on-quarter at $128 million, within the expected revenue outlook. Second quarter is also the first up quarter we've had in the past 4 quarters. On a non-GAAP net income was -- non-GAAP basis net income was $16.3 million, and non-GAAP EPS was $0.08 per share, right at the midpoint of our outlook and up 22% from the first quarter. The second quarter was largely in line with our expectations. The environment continues to be challenging due to economic softness, cautious enterprise and carrier spending.

And as we look forward to the second half and beyond, we remain excited about the new product cycles in front of us and expanding addressable markets across all of our major businesses. Over the next 6 quarters, we expect new revenue growth from our Flash controller wins, 6-gig data center wins, 12-gig SAS share wins, the ramp of our OTN product families and later, in 2014, we expect our first revenue from our Remote Radio Head products. With the continued growth of data creation and data traffic, we're very optimistic about our growth prospects. But in this environment, we'll continue to tightly manage our expenses without major compromise to long-term growth and ensure our resources are invested in the areas that enabled us to grow as our markets recover and focus on winning the sockets that count across our target market segments.

And with that backdrop, I'll give you an overview of the results for Q2. Our carrier business was up 11% over Q2, driven by major product areas of our optical and mobile market segments. Optical was up 7%, while the mobile segment was up 16%. Storage revenues were down $1.5 million, or 2%, reflecting continued weakness in enterprise spending. At the top level, the storage market segment represented 65% of total revenue, optical came in at 21% and mobile revenues came in at 14% of the total. For those of you tracking the legacy portion of our revenue, it's approximately 7% of total revenue in Q2 and we expect Q3 to be down to approximately 5%.

Now I'll provide a bit more detail on each market segment, starting with storage. Our storage market segment was down 2% versus last quarter, lower than expected due to continued sluggish enterprise spending. In fact, 5 of our 6 largest server and storage customers were down quarter-to-quarter after a disappointing Q1. But on a positive note, we continue to see healthy build-outs at our hyperscale data center customers offsetting most of the enterprise weakness. I'm pleased to report that the second quarter, we posted record revenues again in our data center products.

Last quarter, we expanded our Adaptec 6-gig SAS storage product line with the industry's first and only low profile 24-port RAID adapter, enabling new dense architectures for hyperscale or space-limited data centers. With 24-port's native in the device, this product triples the storage connectivity by replacing up to 3 8-port RAID adapters and more than doubles the performance of competing solutions, significantly reducing space, cost and power.

To illustrate the leverage of our technology and hyperscale data centers, this past quarter, one of our largest data center companies -- one of the largest data center companies in the world deployed 2,000 petabytes of disk storage attached to PMC controllers, one of the largest single deployments in our history. It showcases the insatiable and critical need for our enterprise storage solutions to address the explosion of data in the market. Many of the world's leading hyperscale data centers are connected by PMC technology, with more in the preproduction and late-stage evaluation phase of our products. The world's Big Data has been moved, collected and stored by our transformative technologies.

On the server side, I'm also pleased to say that our non-HP revenue surpassed HP revenue for the first time as we see strong results in data centers and growing share with several OEMs. In the micro server market segment, we have a strong position in HP's Moonshot program with our disk interconnect products and expect these products to ramp in the second half of this year.

In our SAS business, based on current design wins, we expect to increase our market share of the 12-gig transition by over 10% in servers and storage systems. Our success is due to the help of our silicon with production-grade silicon available since last November, unmatched density, IOP performance and lowest power per port. We look forward to the second half. We are excited about the early customer product launches that will occur this summer with our 12-gig SAS product family. We expect to see server OEMs offer 12-gig solutions this fall, while the storage OEMs are expected to follow in the second half of 2014, reaching critical mass late next year.

Now moving on to one of the most dynamic and rapidly growing parts of the storage market, Flash-based storage. We're excited to announce that we completed the acquisition of IDT's Enterprise Flash Controller business on July 15. As you know, Flash is already causing major disruption in the enterprise storage due to the dramatic performance advantage of solid-state drives, a once-in-a-decade opportunity. With the addition of this talented team, our mission is to shift the market from its current proprietary, poorly integrated and low performance solutions to the fully integrated standards-based solutions with best-in-class performance. Production material of the world's first NVMe Express solutions starts shipping to customers this quarter. NVMe Express, or nonvolatile memory express, is the standard interface for accessing solid-state drives on a PCI Express bus. We expect to see our early customers in production in Q4 this year and a steady stream to follow in Q1 and Q2 of next year.

The new team has secured an impressive list of customer design wins across Tier 1 NAND vendors, hyperscale data center operators, SSD vendors and OEMs, all as a result of their product and time-to-market leadership. We believe that we have a 12-month lead and today, we have the only NVMe Express solution in the market.

To showcase how the NVMe Express standard ecosystem is evolving into this delivery of real products, on July 18, Samsung announced the industry's first 2.5-inch PCI Express NVMe solid-state drive, which is expected to be available in the second half of this year. The new product is expected to deliver 6 times the IOP performance of the prior generation. We applaud their leadership in this space and expect to continue to see a series of announcements moving forward as various SSD manufacturers ramp their designs into production.

I'd like to add the customer reaction to this transaction has been extremely positive due to the team's Flash controller leadership, combined with the storage expertise at PMC.

Now on the 12-gig SAS Flash controller front, our production silicon is back from fab last week. Our firmware is maturing on track and customer designs are underway. We expect to see revenue ramp in early 2014 for our initial customers and grow with the storage system's transition in the second half of 2014. Our storage business is the center of Big Data trends and we are well positioned to deliver leading solutions for next-generation enterprise storage data center and cloud services.

Now I'll move to the carrier business, which is up 11%, a little better than expected at the time of Q2 guidance. The details are as follows: the optical segment was up 7% in the second quarter on top of a solid first quarter. The increase is due to OTN growth and another record OTN quarter for us, as well as PON strength from continued marketing initiatives by NTT. OTN strength has come primarily from China as they lead the world in OTN deployment and we continue to expand our design win footprint globally. We're pleased to see 2 quarters of OTN growth and expect a third in Q3, a clear sign that OTN programs are ramping.

I'm pleased to tell you that our production silicon for our first 100-gig OTN processing silicon is back from fab and looking good. Customers are pushing hard for the end of the year and early 2014 shipments to customers. Our design win position remains dominant and we continue to see interest in design wins pushing OTN to the edge of the network, first in access aggregation then business networks. In the last 3 quarters, we've been busy supporting our multiple customer engagements in trials and live demos of our 100-gig OTN processor to 8 of the top 10 carriers in the world.

This new 100-gig platform is called DIGI internally. It represents a family of solutions that enable transport and router ports in multiple configurations. For example, we support OTN switching and/or OTN muxing applications. We also support dynamic resizing optical bandwidth, essentially virtualizing every port. And the device can deliver 12 ports of 10-gig, 3 ports of 4-gig, or 1 port of 100-gig delivering the industry's highest density solution and the only integrated OTN switching solution on the market.

Stepping back for a moment. It's worthwhile to note that we started investing in enabling OTN switching approximately 5 years ago because we anticipate exploding requirements in the transport market. Today, believe -- we believe we have at least a 1-year lead on the competition and continue to secure design wins on an ongoing basis and now we're finally starting to see the early design wins ramp.

On May 1, 2013, Internetix published a new report on a global service provider survey of OTN. According to the survey, OTN switching is gaining in popularity and the number of carriers planning to use it is rising. This year, 86% of the respondents, which is even higher than the 76% last year, are planning to deploy OTN switching, all of which plays to our strength. Optical transport networks play a critical role in providing the interconnect infrastructure required to efficiently and reliably deliver cloud-based services and PMC is at the center of this major trend in the industry.

Now on to the mobile end market segment where revenues were up 16% versus the prior quarter, back to healthier levels. This increase was due to strength in the WinPath family of processors with CapEx of the 2 largest carriers in North America up double digits in Q2. We expect this business to remain roughly at these levels until broader LTE deployments take place.

In the second quarter, we announced the availability of our fourth-generation WinPath4 mobile backhaul processor, industry's first backhaul processor that enables mobile operators to scale their capacity in their backhaul networks while transitioning to Layer 3 Packet Transport Networks. As the newest member of PMC's leading WinPath processor family, WinPath4 and our proven Carrier Ethernet software suite eliminates bottlenecks caused by growing deployment of 4G LTE. Our unique Carrier Ethernet Router-on-a-Chip architecture combine switch and router functionality in a single platform, enabling OEMs to offer a new class of LTE equipment that enhances functionality and eliminates the need for 2 platform deployments.

Lastly, we continue to make good traction on our -- with our customers in the Remote Radio Head market segment focused on addressing the challenges of supplying mobile network capacity. Today, 5 of the top 6 mobile infrastructure OEMs design boards and are seriously evaluating our UniTRX chipset for micro and small cell base stations.

Now for our outlook for Q3 2013. As we look to Q3, we expect the current climate to continue but are planning for another modest growth quarter. Turning to our outlook, we expect Q3 revenues to be in the $126 million to $134 million range, up about 2% at the midpoint. Considering today's backlog, we believe that storage will be up sequentially, driven by improved enterprise OEM customer demand. We also believe the carrier side of the business will be flat to up slightly, largely dependent on the carrier spending in the second half. As most of you know, China Mobile LTE deployments are delayed by at least a quarter to late this year or next.

So to wrap up, we continue to demonstrate solid performance in an uncertain environment and believe we are entering new product cycles and expanding addressable markets in the second half of 2014 that position us well to grow the business. Today, our business focuses on transforming networks that connect, move and store Big Data. And as you all know, data creation and data traffic continues to grow at a rapid pace. We believe the fundamental drivers for our main growth areas in Flash, data center, 12-gig SAS transition, OTN, mobile backhaul and Remote Radio Head solutions remain firmly intact. Further, we believe our design win position in each of these segments will allow us to grow share over the next few years.

So with that, I'll hand it over to Steve for details on the financials and our outlook.

Steven J. Geiser

Thanks, Greg. I'll now discuss our second quarter financial results and comment further on our outlook for the third quarter of 2013. Second quarter revenue of $127.9 million was near the midpoint of our outlook range in a macro environment that remains challenging. Sequentially, Q2 revenue was 2% higher than Q1, and Greg provided further details around this by each of our storage, optical and mobile end market segments. In Q2, we had 2 customers which accounted for more than 10% of our revenues, calculated on a rolling 12-month basis, namely HP and EMC. Non-GAAP gross margin remained consistent sequentially in the second quarter at 70.6%, up slightly from 70.4% in Q1 and also within our outlook range for the quarter. On a non-GAAP basis, operating expenses came in at $74.8 million in the second quarter, favorable to our outlook range due to a continued emphasis on expense control.

On a sequential basis, expenses were essentially flat with Q1. As anticipated, we incurred higher tape-out related expenses, but this increase was offset by lower labor-related costs. The reduction in labor cost was driven by a combination of lower employee benefit cost and some reduction in personnel. This resulted in non-GAAP operating margin of 12.1% for the second quarter, up sequentially compared to 10.5% in Q1. Non-GAAP net income was $16.3 million, or $0.08 per share, as compared to $13.4 million or $0.07 per share in the first quarter of 2013 with the increase mainly driven by the higher revenue in Q2. Q2 GAAP net loss per share was $0.02 versus $0.03 net loss per share in Q1. The primary items reconciling GAAP to non-GAAP net income for Q2 are as follows: $10.8 million in amortization of purchased intangible assets, $6.2 million in stock-based compensation and $2.7 million in termination costs. You can see our press release issued today for a full reconciliation.

Turning to the balance sheet. We ended the quarter with approximately $309 million of cash and cash equivalents, short-term investments and investment securities. This is a $12 million increase over our Q1 ending position of $297 million. This increase arises primarily from $23 million of cash generated from operations, partially offset by approximately $6 million used for stock repurchases completed during Q2 and approximately $5 million used for purchase of capital assets and IP.

As you know, shortly after our quarter end, we paid approximately $96 million in cash purchase consideration for our acquisition of IDT's Enterprise Flash Controller business. Adjusting for that, our cash and cash equivalents, together with all investment securities, is approximately $213 million. Our net inventory at the end of Q2 was $30.5 million, $4.8 million higher than the prior quarter due to a combination of staging incremental inventory -- incremental strategic inventory and support of key product ramps and modest changes in product mix relative to forecast.

Net inventory turns, of course, were affected by the increase I just described but remained at a good level in Q2 at 5.0x compared to 5.8x in Q1. Q2 ending deferred revenue decreased slightly from Q1 to $6.9 million from approximately $8 million in Q1, which relates to inventory at our distributors. Overall, our inventory, including our distributors, remains well managed. In terms of lead times from our foundry partners, they have remained stable and we have adequate wafer supply to meet our forecasted demand.

Now I will turn to outlook for the third quarter of 2013. As Greg mentioned, we expect revenues to be in the range of $126 million to $134 million, an increase of 2% over the second quarter at the midpoint. This takes into account current levels of demand and our expectation of booking rates through the balance of the quarter.

Judged backlog at the end of Q2 was approximately $95 million. This implies turns of 27% from the beginning of the quarter to reach the midpoint of our revenue outlook. This level of quarterly turns would be consistent with the rate realized over the past 5 quarters, which have ranged from 24% to 30%.

On a non-GAAP basis, we expect our overall gross margin percentage in Q3 to remain in the range of 70% to 71%. Non-GAAP operating expenses in Q3 are expected to be down compared to Q2 in the range of $71 million to $73 million, a $2 million to $4 million decrease from Q2 even while absorbing the IDT team. The improved expense profile is largely due to reduction in carrier R&D after successfully passing major milestones on our next-generation OTN and backhaul products. This, in turn, is expected to drive a greater-than-25% sequential growth in non-GAAP operating profit from Q2 to Q3, based on the mid-look -- on the midpoint of our outlook range.

We expect interest income on cash and investments in Q3 to be approximately nil, considering the cash purchase consideration paid near the beginning of this quarter for the Enterprise Flash Controller business acquisition that I mentioned earlier. We expect our non-GAAP tax provision in Q3 to be approximately nil. As a reminder, tax expense can be impacted by a number of variables associated with our ASC 740 liabilities, including, but not limited to, a change in foreign income and product mix.

Non-GAAP earnings per share are projected to be $0.10 based on the midpoint of our outlook range and assuming a diluted share count of 206 million.

Finally, a few comments regarding our stock repurchase activity. In the second quarter, during the brief period after we announced the acquisition of IDT's PCIe Flash Controller business and before our trading window closed leading into quarter end, we repurchased shares at the maximum rate allowable within the 10b-18 trading limit. This resulted in approximately 900,000 shares being repurchased for $5.5 million. In the coming quarters, the company will continue to assess the best use of its capital resources and may continue to repurchase shares opportunistically up to the full amount of the outstanding authorization previously approved by the board, which currently stands at approximately $110 million.

And with that, we'd like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is James Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you can give us a little bit of an update, Greg, on the storage revenue profile you have and give us a sense of what percentage right now is tied to the OEM server business versus storage systems, versus channel and then data center. And then maybe give us any kind of color you're expecting going forward into Q3 in terms of what might be stronger versus weaker.

Gregory S. Lang

Yes. The first part of your questions, I'll break it into 2, in terms of kind of the breakout between -- actually, we're talking about the server and the storage system side. Actually, we don't break that out. I think the outlook for this next quarter, we expect to see a rebound in storage system guys, actually across the board on the -- of the traditional OEMs in that space both on servers, as well as storage systems. I think that Q2 was a bit muted because Q1 numbers for a lot of the system guys were pretty down from certainly sequentially and disappointing year-over-year. So I think we saw a little bit of cleanup this last quarter, expect them to get back to normal rates in the second quarter. In terms of the revenue breakdown by the different pieces, that -- we don't break that out.

James Schneider - Goldman Sachs Group Inc., Research Division

Okay. And then can you maybe comment on what you're seeing in the access business overall? I think you talked about PON being up a little bit but it seems a lot of your peers have planned to very, very strong access trends in some cases. So maybe help us understand what the moving pieces are of what they may be seeing versus yourselves.

Gregory S. Lang

Yes, the PON business for us has been up 2 of the last 3 quarters. We expect it to be up a bit again in the third quarter. So I think that's consistent with the trends that you were just talking about. Our participation in the access business per se is really concentrated around our PON business, which is heavily focused in the Asian markets, particularly in Japan and Korea and to a lesser extent, China. So I think those dynamics are fairly consistent with some of the strength that we've seen in those markets.

James Schneider - Goldman Sachs Group Inc., Research Division

Okay. And then maybe, Steve, can give us a sense about what the impact of the IDT acquisition is going to be for your third quarter? And any kind of guidance or sense of what OpEx is likely to do into Q4?

Steven J. Geiser

Yes. So consistent with our prior guidance, we are anticipating revenue as a result of the IDT transaction in the range of $2 million to $4 million for the second half of 2013 with a heavy concentration of that revenue contribution in the fourth quarter. So just getting started late Q3 but a significant portion of the $2 million to $4 million for the year will be in the fourth quarter. As it relates to expenses, the incremental expenses coming as a result of the transition of employee -- IDT employees as to part of the -- become part of the PMC team, those expenses were largely offset by reductions in our own internal Flash controller development efforts, so the expense increase is largely neutralized. And as a result, we would expect minimal impact in terms of a change to the operating profit in the second half of the year as a result of the IDT transaction but that it would be substantially accretive to the 2014 year.

Gregory S. Lang

We also guided, I think, previously, that we expect the OpEx to be in the low 70s. That's what we just guided to for Q3. We would expect that to be in that same ballpark for Q4 as well after absorbing the team.

Operator

Our next question is Ruben Roy with Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

First of all, Greg, in terms of the commentary around the carrier end markets in China Mobile specifically, we understand that there are some delays but there are also some component providers that are starting to see some activity. So when you're talking about 1 quarter or maybe more, do you have the sense now that you might start to see some activity as you head into Q4? Or for PMC Sierra, do you think that this is something that's more of a 2014 event?

Gregory S. Lang

No, I actually think that some of the strength that we've seen in OTN thus far this year is actually somewhat related to that. You can't build out of backhaul network without a, call it a metro network to carry the data traffic. So I believe that's part of what's been driving some of the upticks that we've seen in OTN for the last couple of quarters, expect another good quarter this quarter. So I think there's some related pull-along revenue that we've experienced. Going into the real deployment of the LTE systems in the second half, our participation in the next 2 to 3 quarters is going to be -- would be concentrated mostly on the backhaul front. And that isn't necessarily tied to what they put on the towers because they already have some level of performance that's there. So we would expect to see an uptick when they do start deploying that equipment, the exact timing of which isn't 100% aligned with what you do on the tower. So but we do expect later in the year, we'll see some uptick from China and then 2014 and '15 would be the primary beneficiaries.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay. And it sounds, like in terms of the OTN investment into new products where you guys are finished for now, did the investments that you've made to date, are they enough to address -- sort of you talked about a $500 million market by the time we get out to 2017 in OTN. I mean, do you have the parts in place to address that type of TAM? Or are you going to have to step up investments at some point over the next few years?

Gregory S. Lang

Yes, it's a good question. The first part of the question is, do the products of that we have today allow us to go participate and pursue that $0.5 billion market opportunity? The answer is, we believe, yes. We believe that between the family that we have in the 10- and 20-gig ports for the access part of the network, the 100-gig products that we're bringing into production right now, really covers a very broad range of the equipment that's in the market or will be coming to market. So that's good. Now we haven't taken our investment to 0 and don't plan to. But we did have a, I'll call it a bubble of kind of both catch-up and also some added tape-out expenses to get the latest generation out. That new level of spending is the level that we're running at today. That's actually what's allowed us to get down to the $70 million, the low $70 million range even after absorbing the 50 folks from IDT. So we'll continue to invest. It'll be at a lower level, but we think that level of investment will allow us to not only participate in that $0.5 billion but keep the roadmap and strong design win position going in the future.

Operator

Our next question is Kevin Cassidy with Stifel.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

When you're looking at second half '13 for the 12-gig SAS, is that -- I guess, are you requiring any new products from Intel, any new CPUs to drive the need for higher speeds? Or is the demand there currently?

Gregory S. Lang

Well, in the second half of this year, the big transition is actually a little transition by Intel called Ivy Bridge. And so that's the transition that I think people are trying to target, bringing some new capabilities to market. And the driver behind the performance, though, really isn't a new CPU transition from Intel, it has to do with the SSDs. Because, really, the only need for 12-gig SAS isn't the spinning disks because they don't really draw enough performance requirements for 12-gig, it really has to do with 12-gig SSDs, as well as 6-gig SSDs and getting enough throughput through the system. So I think the demand is there today. Now the challenge is getting kind of all of the pieces from the ecosystem in place. So the solution, the whole solution and the end solution can be made available. And that's clearly where we'll focus our energies from both the controller, as well as the switches or expanders that connect all the drives together and then the Flash controller itself that really enables that next level of performance. So I think the SSD is the primary driver, not Intel. And I think today's platforms, for example, could enable all that performance once you get the disk I/O in place. And that's really what 12-gig SAS is all about, is getting that disk I/O in place so you can deliver an end-to-end solution for SSDs.

Kevin E. Cassidy - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And just on the SSD controller from IDT. And I think also you had given guidance that -- or estimate that next year was going to be $20 million to $40 million. Has that changed at all?

Gregory S. Lang

No, we're going to stick with that and see how things unfold. But right now, that seems like a reasonable range for revenue next year for that part of the business.

Operator

Our next question is Srini Pajjuri with CLSA.

Srini Pajjuri - CLSA Limited, Research Division

Greg, on the 12-gig market, can you give us some numbers? Can you put this market into perspective? And also, when you talk about 10 points of share gain, are you banking more on the server side or are you -- is it the storage side? And then also, do you anticipate any ASP uplift as we go to 12-gig?

Gregory S. Lang

I'll start backwards on that one. I don't expect a big ASP uplift on the 12-gig generation. I think to hit the volume sweet spots in these platforms, it's hard to drive up costs on those, so I would expect kind of a comparable ASP, if you will. In terms of the share gains, we expect that we are going to rewin all or nearly all of the designs that we had previously and then pick up new share to gain that 10%. And as you're aware, we already have a very strong share position on the system side, storage system side. So I would expect to see more and more of that revenue coming from the server side. I don't have a per size breakout for you but I do think overall, if you look at the size, the opportunity, we think we can get at least another 10% of that based on design wins we have today. Was there a third part to your question?

Srini Pajjuri - CLSA Limited, Research Division

No, just wondering the total market opportunity. What's the size of the market in Intel?

Gregory S. Lang

Yes, the TAM charts that we -- or the SAM charts, I should say, that we share with you, I think, has 2012 market around $750 million, $775 million, something like that. So 10% or more than 10% of that, it's easy enough to do the math around where we're coming out.

Srini Pajjuri - CLSA Limited, Research Division

Sure. Then just one clarification. You said your legacy business will go from 7% in Q2 to 5% in Q3. What exactly is in that legacy revenues? And as it winds down, should we anticipate any impact on the gross margins?

Gregory S. Lang

Yes. I think the legacy revenue is going to bounce around 5% for a while because I don't think SONET is going to disappear right away. But the pieces that are in there are SONET ATM and some of our old MIPS CPUs that are kind of finding their ways down their end of life. And so I really think this particular, this SONET piece, will bounce around for the next several years because there's many, many geographies are still deploying it. So I would be thinking and modeling somewhere in the 5% plus or minus a couple of percent range for the next few years. Do not expect any impact on gross margin. I think when that part of our business was upwards of 30% or more, that would have been a bigger concern. But we've navigated through that well and I would expect it not have a meaningful impact as we go forward, especially if it sticks around this 5% plus or minus range.

Operator

Our next question is Sundeep Bajikar with Jefferies.

Sundeep Bajikar - Jefferies LLC, Research Division

Would you share with us, roughly, how big Adaptec was in the second quarter? And how should we think about the growth profile for Adaptec compared to the rest of the storage business, say, over the next few quarters? I guess, I want to know if any portion of SSD product revenues might potentially flow through the Adaptec business or not.

Gregory S. Lang

Yes. So we don't actually break up the revenue that way anymore and we don't report it that way. But I think the one data point I can share with you, I mentioned earlier, is that our -- if you look at our server business, our non-HP part of our server business is now bigger than the HP server business, which, I think, represents good growth in that part of our business. The other interesting part of that business is that the data center piece of it, a lot of the data center sales that we're getting outside of, call it, RAID on motherboard sales, it's all card-based business, which traditionally we would call kind of Adaptec since that was -- that represented kind of the board-based part of the business. So a lot of the strength that we saw in Q1 and in Q2, both of which were record quarters in the data center space, were driven by that board level business. So even the profile of that business has shifted from being kind of, I'll call it channel-centric, to being more data center integrator-centric, which I think is consistent with some of the trends that we've seen in that buying space. So we're seeing good growth there. And we expect -- actually expect Q3, I think this is a question that came up a little bit earlier, we expect Q3 to be down a little bit in that business, mostly because a big project was finished off last quarter which helped drive some of those first couple of quarter revenue numbers that we saw. But we expect it to grow again in Q4 and believe that this is actually one of the key growth drivers for us in the storage business. And if I kind of go back through what those key drivers are for storage, it's really, number one, is growth in design wins in the data center. That includes 6-gig design wins that we're getting today with our high-density 24-port products, both HPA, as well as RAID cards. The second piece is actually market share gains at 12-gig. When that starts to happen, it'll start at the end of this year but really come in full force probably in the second half of next year. And then last but not least, the other big one is in the Flash controller part of the business. So hopefully, that puts it in perspective. So I think we see something in the order of $60 million to $80 million of growth potential in data center design wins over the next couple of years.

Sundeep Bajikar - Jefferies LLC, Research Division

Okay. That's extremely helpful. And then on the second question, I just want to know if there's any way to size the Wintegra portion of the mobile segment versus your kind of even portion of the business? And if you're able to share any additional color on what types of deployment configurations you might be seeing for WinPath4, whether they are predominantly in hybrid backhaul or is it a mix of kind of discrete usages?

Gregory S. Lang

Sure, yes. On the mobile side, with the WinPath part of the revenue stream there is more than half, has been for a while, I think it will continue to be -- will continue to grow because the balance of the revenue that we capture in that category is mostly our T1/E1 stuff. And until our Radio Head products start to ramp in late next year, I expect that the WinPath piece will grow into an increasing -- increasingly large portion of that. The second part of your question on the -- on kind of the fit for the WinPath4 products, that product can move up to scale to about 40-gig -- gigabits per second type of bandwidth. So what we're seeing the people looking at that is either at kind of aggregation points. We have multiple different cell site routers they want to aggregate into one or just the super high-bandwidth location where there's multiple towers that are being fed into one cell site router. And I think in both of those cases, the added throughput is extremely valuable. You had a subtle, other part of your question there, hybrid versus not. It's being used both in hybrid, as well as kind of pure Carrier Ethernet or PTN type of applications as well. So it's really more -- driven more about do you need to be able to support multi-services and do you need to be able to scale up to 40-gig and then those applications we're seeing the most interest in the WinPath product family, WinPath4 product.

Operator

[Operator Instructions] Our next question is a follow-up from Ruben Roy with Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

My question was just asked and answered.

Operator

We have no questions at this time. Thank you, ladies and gentlemen. This concludes today's conference. Thank you all for participating. You may now disconnect.

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: transcripts@seekingalpha.com. Thank you!

Source: PMC-Sierra Management Discusses Q2 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts