PMC-Sierra Inc. F4Q09 Earnings Conference Call

| About: PMC - (PMCS)


F4Q09 Earnings Call

January 28, 2010 4:30 p.m. ET


David Climie - VP Marketing Communications

Greg Lang - President and CEO

Mike Zellner - Vice President and CFO


Mike Burton - FBN Securities

Srini Pajjuri - CLSA

Jeff Osborne - Thomas Weisel Partners

Eric Ghernati - Banc of America/Merrill Lynch

Romit Shah - Barclays Capital

Ruben Roy - Pacific Crest Securities

Jim Schneider - Goldman Sachs

David Wu - GC Research

Allan Mishan - Brigantine

Sandy Harrison - Signal Hill


Good day. And welcome to PMC-Sierra 2009 Q4 Earnings Release and Conference Call. Today’s conference is being recorded. Today is January 28, 2010.

It is now my pleasure to introduce your host, Mr. David Climie. Please go ahead, Mr. Climie.

David Climie

Thank you, Andrew. Thank you. And good afternoon, everyone. Appreciate you attending our investor conference call today. With us on the call is Greg Lang, President and CEO; and Mike Zellner, Vice President and CFO. Please note that our fourth quarter 2009 earnings release was disseminated via business wire after market close 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 risk factors 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 a question during the Q&A session of today’s call, we request that you limit yourself to one question. If you would like to ask a second question, please requeue 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 2010 results and financial position and then turn it over to Greg to discuss our business activity in detail.

PMC-Sierra had a strong fourth quarter and reported its third consecutive quarter of sequential growth. Revenue in Q4 was $139.5 million. This was at the high end of our guidance for the quarter and an increase of $8.6 million or 6.6% over Q3.

Our turns business, meaning those orders booked and shipped within the same quarter was 23% in Q4, compared with 21% in Q3.

By region, Asia continued to generate the strongest results in the quarter. The following key graphic breakdown of revenue is provided on a bill-to basis. The breakdown is as follows, China 38%, Japan 13%, other Asian 33%, North American 13%, Europe and others at 3%.

Note that the 38% referred to for China, of this approximately one third relates to OEMs and two-thirds to contract manufacturers. In Q4, we had one customer that represented greater than 10% of revenues calculated on a rolling 12-month basis, namely HP.

Gross margin in the fourth quarter was 68.2%, compared to 66.2% in Q3, primarily due to having two customer funded basic asset sets at zero margin in Q3, of which there were none in Q4. In addition, the effect of fixed costs over higher sales volumes and variation in product mix contributed to the improvement.

On a non-GAAP basis, operating expenses increased as expected from $50.9 million in Q3 to $54.5 million in Q4. This was in line with our outlook on expenses provided at our last quarterly conference call.

Quarter-over-quarter, spending increased primarily due to R&D spending related to our enterprise storage business and some weakening of the U.S. dollar versus foreign currencies, including hedge straights.

In Q4, we are pleased to have achieved non-GAAP operating income before other income taxes of $40.7 million or 29% non-GAAP operating margins. Non-GAAP tax provision was $1.9 million in the fourth quarter, compared to $1.3 million in Q3, primarily due to higher income levels and changes in the product mix and across our different tax jurisdictions.

Non-GAAP net income for Q4 was $39.2 million or $0.17 per share on a diluted basis, representing a $4.7 million or 14% increase over Q3 non-GAAP net income of $34.5 million.

Q4 GAAP diluted net income per share was $0.06 versus $0.12 in Q3. This decrease was driven primarily by higher provisions for income taxes in Q4, including changes in deferred taxes, primarily FX related and changes in our FIN 48 liabilities.

The comparable GAAP measures for each of gross margin, operating expenses, operating income, provision for income taxes 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.

Primary reconciling items for Q4 are as follows. $9.8 million in amortization of purchased intangible assets, $5.2 million in stock-based compensation expense, $2.4 million net foreign exchange loss on the company’s foreign tax liabilities and $5.8 million of net income tax effects from these and other items as described in the press release.

Turning to the balance sheet, we ended the quarter with over $453 million of cash and cash equivalents, short-term investments and investment securities. Our cash position net of the $68.3 million face value on convertible notes is $385 million, reflecting an increase of 38 -- $33.8 million from Q3.

The primary reason for the increase in the company’s cash position is attributed to positive cash flows generated from operations of $31.5 million. In addition, we received cash from employee-related stock issuances of $4 million partially offset by expenditures of $1.8 million associated with capital and intellectual property.

Accounts receivable increased $2.4 million to $50.7, which reflects 33 day sales outstanding based on the quarterly sales volume. This was consistent with prior quarter’s DSOs and remains a healthy collection profile.

Our net inventory at the end of Q4 was $31.5 million, an increase of $5.2 million from the previous quarter. Net inventory turns on an annualized basis were 5.6, compared with 6.8 in Q3.

During Q4, we increased our inventory levels to meet growing demand, notably in our enterprise storage business. The increased level of inventory gets us near our goal return of around six.

I will now turn the call over to Greg for his remarks.

Greg Lang

Thanks, Mike. You know, as Mike noted, we generated $139.5 million in revenue in Q4, which is 6.6% above the prior quarter, meaning, at the high end of our revenue outlook range for the fourth quarter and we’re very pleased to see that our quarterly revenues in Q4 returned to the peak quarterly levels that we achieved in 2008.

On the earnings front, we generated close to $41 million in non-GAAP operating income in Q4, which is up $5 million or 14% higher than the prior quarter. This Q4 financial performance equates to a 29% non-GAAP operating margin, the revenue and earnings results are the highest of the company in nearly a decade.

Despite the tough economic conditions in 2009, we saw our enterprise storage, Fiber To The Home and micro processor business grow each quarter throughout the year.

In particular, the revenue from our storage business doubled between the first quarter and the fourth quarter last year, driven largely by the success of our new six gig radon ship device shipping into HP, as well as, a general recovery in the enterprise storage spending in the second half of the year.

In 2009, our enterprise storage business was the largest contributor to our annual revenue for the first time in the company’s history.

The strong performance across our business units allowed us to achieve a year-over-year revenue decline of only 5.5%, despite the most challenging economic environment since the tech bubble in the early 2000s and despite the 2009 revenues being slightly lower. We were able to generate $120 million in non-GAAP operating income, which is $3 million higher than the income generated the prior year.

In part, we were able to achieve this through improved gross margin, which were up by 130 basis points year-over-year and by tightening our operating expenses, which were lower by 7% compared to 2008.

The end result was that we were able to deliver an annual non-GAAP operating margin in 2009 of 24.2%, compared to 22.3% in 2008. Our balance sheet also remains strong, having added a $146 million to our cash position in 2009 for a net cash balance of $385 million at the year end.

So now let’s talk about the fourth quarter by end market. In the enterprise storage market, we saw activity improve again this quarter, growing in the double-digit percentage range sequentially.

After bottoming out in Q1 last year, our enterprise storage business has increased each quarter throughout the year, achieving a record high in Q4. The primary growth drivers in the fourth quarter were a strong broad-based recovery in our Fibre Channel business, as well as, an uptick in our three gig SAS devices.

In the external storage systems market, the industry is also transitioning to a new six gig SAS platforms from three gig and we started to experience improved activity in this area the fourth quarter as well.

We have a strong design position in six gig SAS storage systems with both controller and expanders solutions and some new customers in the segment, including a growing customer base in China.

As a result, we believe that we’ll be seeing net incremental revenue in the six gig SAS external storage market of approximately $25 to $30 million in 2010.

Our six gig SRC radon ship device, which began to ship in HP servers in the first half of 2009 did well in Q4, as enterprise storage spending improved and IT departments focused on the benefits of new six gig server platforms.

We previously estimated that we generate approximately $35 million in revenue in 2009 from the SRC device but we exceeded those expectations this past year as HP ramped throughout the year. We’re still estimating approximately $75 million per year in revenue from this device at HP in 2010, so there could be approximately $30 to $35 million of additional revenue in 2010 from this device shipping into HP alone.

In the wide area network infrastructure market, which includes both our wireline and wireless infrastructure products, we saw pickup in activity primarily from North America and European customers.

We’re continuing to see a steady recovery in Telco spending in North America and we are getting very good design win transaction for our new OTN transport products in that market.

As we enter the second half of 2009, we expected slower activity in China over these two quarters, following what was a very robust first half of the year. Several of our Chinese customers continue to work down their inventory levels in Q4.

However, we have seen a solid recovery in ordering from our customers in Asia, as they continue their three-year buildout of both 2G and 3G wireless infrastructure networks, as well as, their wireline access and metro transport systems.

For example, we’re seeing Chinese carriers move to the next phase of their planned build outs with China mobile announcing a plan for approximately 70,000 base stations in 2010. China Telecom and China Unicom will also continue their buildouts in 2010.

Now, please note, while China is certainly a very important market for PMC, during the fourth quarter of business with Chinese OEM customers on the wireline and wireless side of the business represented less than 10% of our quarterly revenues and approximately half of that product ends up going into OEM platforms that are then exported outside of China.

Now, in the broadband access market, our EPON business in Japan was slightly lower in the fourth quarter. NGT is planning to move more of their broadband subscribers from BDS to EPON going forward, as well as, adopting the 10 gig symmetric EPON connectivity for its next gen network. NGT is providing enhanced video services for its EPON customers and continues to target just over $2 million new subscribers each year.

In China, our Fiber To The Home business was down slightly in Q4 as expected, but we’re encouraged by the recent activity of China Telecom. In 2009, China Telecom added 9 to 10 million EPON subscribers and they have recently indicated that they are targeting a 50% increase in Fiber To The Home deployment in 2010 to 15 million subscribers for the year.

The other strong wireline carrier in China, which is China Unicom, had been planning to add approximately 5 million subscribers in 2009 for Fiber To The Home, but they started out quite a bit slower than their, in their deployments.

So in China, we’ll believe that we’ll see improved activity likely in the Q2 timeframe as China telecom’s next phase begins to roll out and hopefully in that same tame frame, we’ll begin to see China Unicom start deploying to the Fiber To The Home network more aggressively. The third carrier, China mobile is still evaluating both GPON and EPON at this time and they put out a small bid for both protocols in the first half of 2010.

In our micro processor business, we continue to experience solid recovery in our end markets with double-digit growth in Q4, as inventory levels were depleted in the first half of 2009.

Growth at our laser printer business was the primary driver in the fourth quarter but we also experienced a slight increase in activity in the enterprise networking market as well.

And now for the first quarter outlook. Based on backlog and bookings to date, we currently anticipate PMC-Sierra’s revenues in the first quarter of 2010 to be in the range of $148 to $152 million or approximately 6% to 9% growth on a quarter-over-quarter basis.

We anticipate this growth will be largely driven by WAN infrastructure, which is experiencing a strong recovery on both the wireline and wireless side of the business. Enterprise storage is expected to be flattish, which is very positive given that Q1 is typically a seasonal down period for the storage business.

During Q4 and early in the first quarter of 2010, we’ve experienced strong bookings activities and as a result, we have a solid backlog position. We’re calling for a very low level of turns this quarter to meet our revenue target range, a lower level of turns that in Q3 and Q4 of last year.

There are some shortages in the semiconductor supply base -- supplier base, which usually causes end customers to book further in advance to make sure they meet their lead times.

As a result, our bookings for Q1 and Q2 are coming in earlier than normal. We believe that channel inventory remains healthy and we’re not seeing any inventory builds at our disty. In fact, our disty inventories were down 4% on average in the fourth quarter last year compared with the prior quarter.

So in summary, with rapid growth in video traffic digital media, 3D traffic across mobile networks and increasing requirements for storage and access, I believe that the wired, wireless storage networks must continue to be upgraded over the next several years.

These drivers position PMC for solid growth in 2010 and 2011, as we both have new product cycles and new customers that will benefit us over the next several years. Not only did PMC weather a tough 2009, we delivered the best financial results in nearly 10 years and we are poised for excellent growth looking forward.

We will leverage the strong financial performance to continue to invest in R&D and drive best in class topline growth as well as bottom line results.

So with that, I’ll now hand the call back over to Mike for more details on our outlook for the first quarter of 2010.

Mike Zellner

I’ll now provide more information about our Q1 outlook. Judge, ship and shippable backlog at the beginning of Q1 was approximately $127 million. Considering current levels of demand and our expectations of booking rates throughout the balance of the quarter, we estimate that our potential revenue for PMC-Sierra for Q1 is in the range of $148 to $152 million, as Greg mentioned.

Judge backlog today, including ship plus shippable is approximately $145 million, indicating that we would need approximately 15% turns from the beginning of the quarter and 3% turns from this date to get to the midpoint of our revenue outlook for Q1.

We believe this tight revenue range and lower levels of turns makes since, given the early bookings we are receiving from our customer base.

On a non-GAAP operating basis, we expect our overall gross margin percentage in Q1 to be in the range of 67% to 68%. Non-GAAP operating expenses in Q1 are expected to be in the range of $58 to $59 million, increasing from the $54.5 million in Q4, primarily due to higher takeout activities in Q1, higher R&D expenses, as we continue to invest in topline growth areas, as well as, the reset of our employee benefits at the start of the year.

On a general note, depending on the number and timing of takeouts, which do vary from period-to-period, our expenses could be effected by a couple of million dollars in any given quarter.

We expect non-GAAP net and other income to be $500,000, which is primarily net interest from our cash positions offset by servicing our outstanding convertible notes.

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

Regarding share count, we ended Q4 with a diluted share count of $233.8 million. In the first quarter, our diluted share count is expected to be between $234.5 to $236.5 million shares.

For the first quarter, we plan for the following significant GAAP and non-GAAP reconciling items. First, amortization of purchased accounting costs associated with past business acquisitions, stock option expense as required under FAS 123R, FX gains or losses on our net foreign tax liability and income tax effect 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.

Additionally, nonrecurring items associated with restructuring and other costs, positive or negative are always possible.

And with that, Andrew, would you please open the call for questions?

Question-and-Answer Session


(Operator Instructions).

David Climie

Andrew, do you have any questions in the call --in the queue?


I’m waiting for the queue. No, there’s no questions on the line. Just a moment. Please stand by. Yes. We have a question from Mike Burton with FBN Securities. Please go ahead.

Mike Burton - FBN Securities

Hey, guys. And congrats on the results. Just wondering if you could talk a little bit about what we can expect from China going forward here. Is that business do we expect it to be a little bit more lumpy as we go through the year or is it -- or should we see a gradual progression there?

Greg Lang

Yeah. I think, this is Greg. I think the history would suggest it will be lumpy. I think history would also suggest it will be stronger in the first half and lesser in the second half. So seems like we’re on a good path right now with some, a nice resumption of bookings.

The other thing we have going on I mentioned a little bit earlier is historically, especially on the Fiber To The Home front, it’s really been primarily China Telecom. But as soon as China Unicom starts to pick up, we could see some back half enhancement in what we would normally see, just having another carrier on board moving Fiber To The Home type of products.

The 3G buildout we do believe is a three-year type of buildout. This is essentially year number two. So, I think, we still have a ways to go before we get to the end of that.


Our next question comes from Srini Pajjuri with CLSA. Please go ahead.

Srini Pajjuri - CLSA

Thank you. Mike, first, clarification on the margin front. You said the gross margin would be about 67 to 68.



Srini Pajjuri - CLSA

Hello? Hello?

David Climie

Please go ahead. Go ahead, Srini.

Srini Pajjuri - CLSA

Oh! Sorry about that. So my question is given that the WAN is growing and my understanding is LAN has a higher margin, so why wouldn’t the margins be higher than 68?

Mike Zellner

Well, again, I mean, you saw our results for Q4. We, forecast these based on the weighted average of various products that go in there and when you look at that, as I said, we roll out forecast it comes right in the middle of that range. So we think that’s the right level, I don’t quite know how to answer the question but I always have to think...

Greg Lang

The only thing we mentioned is last quarter we had no zero margin tapeouts.

Mike Zellner


Greg Lang

Which tends to kind of bring things down a bit that will be the other item that we expect to have happen.

Mike Zellner


Srini Pajjuri - CLSA

Okay. And then on the OpEx guidance, Mike, you said there are some tapeout costs that are included in the OpEx to 58 to 59 I believe. So my question is, will that stay at that level for the next few quarters or once the tapeouts are done, is there an opportunity to bring them down?

Mike Zellner

Yeah. You know, obviously we don’t guide beyond the next quarter out, which is the case. If you’re looking to build the models, I would say you should target kind of the high 50s for the pursuing quarters.

Let me just give you a couple of items that impact it beside the tapeout that you mentioned. You know, we also have the FX rate, which impacts us probably a couple million dollars a quarter actually from the lower points in the last back half of 2009. So as you know, we have a large operation in, in Barnaby, Canada.

So that impacts us, tapeouts can impact us, depending on when it does occur, as we’ve mentioned. Obviously we have in the first half the impact of the resetting of the benefits that impact us by about $1.5 million. And we have been making some kind of strategic adds in our resources in the area of R&D both in storage and in the package network.

So when you consider all of that, my recommendation is you think about spending in the high 50s, as you look forward to your model in the other quarters of the 2010 timeframe.


The next question comes from Kevin Cassidy with Thomas Weisel Partners. Please go ahead.

Jeff Osborne - Thomas Weisel Partners

Hi. This is [Jeff Osborne] for Kevin Cassidy. Just a quick question. Can you talk a little bit about Fiber To The Home in Korea, I may have missed that earlier on the call, how that’s progressing?

Greg Lang

Yeah. Fiber To The Home in Korea actually was up quarter-to-quarter but keep in mind it’s actually quite a bit smaller than either the Japan or the China buildout. So I didn’t comment specifically on it earlier and it was up slightly, but again, it’s quite a bit smaller than the other two by a factor of almost four or five. So it doesn’t have a huge thing.

The positive thing is both HANORO which is now SK Telecom and KT Telecom both have pretty aggressive plans to roll out broadband in the country that’s a big initiative to enhance the current position. So we do expect Korea to be strong but it is dwarfed by the other two big markets.


The next question comes from Eric Ghernati with Banc of America. Please go ahead.

Eric Ghernati - Banc of America/Merrill Lynch

Yeah. Thanks very much for taking my question. Can you give us a sense on how much the absence of zero cost mask helped your gross margin in Q4 and also if you can breakdown, the benefits from mix improvement that it had on gross margin? Thanks.

Mike Zellner

Yeah. I mean, we can call you later and take some of those details offline, but again when you have -- when we do have zero margin mask sets, obviously you have the weighted average impact of that. It’s essentially paid for by the customer and come through at zero margins. But if you need more detail in terms of some of those specifics, we can take it offline.


The next question comes from Romit Shah with Barclays Capital. Please go ahead.

Romit Shah - Barclays Capital

Hey, guys. Nice quarter. Just on the outlook, very solid guide for Q1 and I think within that you talked about storage being flat. Greg, is this just reflective of a broader recovery in the, excuse me, the enterprise storage segment or are you getting some incremental revenue from HP as well?

Greg Lang

I think it’s probably best to characterize it as general recovery in the last quarter, the fourth quarter, for example, a lot of the strength, a lot of the upside came out actually out of the Fiber Channel and SAS part of the business. The strength in Q1 we expect, the business, the server business that we have to continue to be strong. But I think the piece that is staying stronger than we might have normally expected with a normal seasonality is going to be the balance of that Fibre Channel and SAS business.

So it is we believe kind of general recovery in that space. You recall, it was hit pretty hard in the first quarter, so we’ve been kind of steadily coming back and it seems to be running at a very, a very healthy pace right now.


The next question comes from Ruben Roy with Pacific Crest Securities. Please go ahead.

Ruben Roy - Pacific Crest Securities

Thank you. Greg, you talked about some incremental revenue opportunities on the storage side of the business and then on the communication side, you talked about some recovery in North America and Europe. I was wondering if there is any way to potentially talk about incremental revenue opportunities in those geographies on the communications side.

And also when we hear about AT&T potentially raising CapEx by $2 billion for 2010 versus 2009 incrementally to be spent on wireline and wireless infrastructure. Can you help us out, what does that mean for PMCS if anything?

Greg Lang

Okay. So that maybe I’ll start with the last one because I think it leads into the first part of your question. I don’t think it’s a secret that the challenges that not just AT&T but several wireless carriers have had of actually moving all of this data traffic over their networks. They really weren’t built to move high volumes of data traffic. They were really built around voice, moving voice, voice traffic, which is very different, very different paradigm.

So we believe that’s actually going to drive a lot of infrastructure upgrades worldwide. That’s part of what’s driving the growth in China. If we believe it will drive more growth here. We believe it will be a key driver behind all of these carriers moving to 4G and LTE.

So with that kind of backdrop, the products that we have both in the short-term, the near-term TDM-based products, which basically all of these technologies are built around today, fit very well and we’ll benefit from that over the course of the next couple years. But part two is we also see a lot of these networks needing to move to a packet-based network technology because it’s far more efficient to move data traffic and we think that represents a very substantial opportunity for us as well because we have some unique offering in that space where we can help converge multiple services onto that OTN network. And so it’s really an enabler for a lot of carriers to move in a cost effective, power effective way in the coming couple of years.

Now, having said that through our upside for business, I think part of the reason for growth this next quarter is actually in our telecom portion of our product lineup and the enterprise part is contributing just by holding steady instead of having normal seasonality.

But if we go forward, I think it’s possible for us to have very healthy year on the telecom part of our business and as we exit the year, I think that’s when we’ll start to see growth out of the OTN part of our product family. We have a number of design wins there. We’re working feverishly to get that product out the door and into production, which will happen in the middle part of the year and then we’ll see revenues start to ramp up.

I think it will be a key part of our growth story for 2011, but it just starts in the second half of the year. So that’s kind of when our packet network business starts to really pick up.

In the interim, I think our growth story is really around the growth opportunities that we have in storage and we have a number of them both in the server, as well as, the system space. So hopefully that answers your question.


The next question comes from Jim Schneider with Goldman Sachs. Please go ahead.

Jim Schneider - Goldman Sachs

Good afternoon. Thanks for taking my question. I guess two questions for you. First of all, your business has changed a lot since it has been in previous years with storage being a much bigger piece of the business and micro processor being different, et cetera, as well as LAN.

As you think about Q2 and I know you didn’t give guidance that far out, how should we think about the normal level of seasonality for your business? That’s the first one and I guess the second one is. How we are thinking about the outlook for micro processors and what they could do in 2010, I know 2009 was pretty weak for most of the year. How are we thinking about that business? Is there anything that particularly changed or is it just cyclical?

Greg Lang

Yes. So in general, I’ll just comment to the on normal seasonality and the different businesses for Q2 type of timeframe. The last two years, which I’m not sure that’s enough for a trend, but the last two years have both been very good to the telecom business, I think actually going back three years has been good for the telecom business in the first half. Seems to be strong in the first half and then a little less so on the second half.

Storage on the other hand tends to be storage and the micro processor business tends to be stronger in the second half of the year as we get kind of more of an enterprise type of year end cycle.

So it’s actually a fairly complementary mix and then when I was talking about the telecom piece earlier, I was referring to both kind of the both wireline and wireless products, but also the Fiber To The Home products I would put in that same category, strong in the first half and then a little less in the second.

The last part of your question was on the micro processor business. That does kind of have both the printers and routers part of that business tends to have an enterprise like profile, which tends to be stronger in the second half, a little seasonally down in the first quarter flattish and then second quarter been up again in Q3 and Q4. So that’s -- those are the general kind of moving parts that I would expect to see throughout the year.


The next question comes from David Wu with GC Research. Please go ahead.

David Wu - GC Research

Yes. Congratulations on a good quarter. Maybe could you just give a very rough sketch about -- roughly for the relative weight of the core business segment in fourth quarter of last year? And I was wondering if there’s some speculation that the China 3G orders will start popping up again in the second quarter of this calendar year. Have you seen any evidence of that?

Mike Zellner

Yeah. So the first part of the question, David, is basically on a roughly speaking level, the communication part of our business, which I would put the wireline, wireless and Fiber To The Home products in for telecommunications. It was about 40% of our revenue last quarter. And then the enterprise side, which would include storage and the printer and router part of the business was about 60%.

And then the second part of your question about the China 3G and orders coming in, yes, we do see some early signs of that. There’s an announcement out by China Mobile putting in another 70,000 base stations in 2010 and we’re seeing some nice order pickup from that. That’s a key part of the growth that we’re seeing quarter-to-quarter, Q4 to Q1.


The next question comes from Allan Mishan with Brigantine. Please go ahead.

Allan Mishan - Brigantine

Hi. First, could you just clarify whether the LAN business was up or down sequentially and then any update on the IBM rate adapter, what you have to do to lock down that design and when could you potentially see revenue if you’re successful at that? Thanks.

Greg Lang

Yeah. On the WAN business I assume sequentially we are talking about Q3 to Q4, it was down slightly, which is pretty much what we expected and then it will be up -- it will be up -- both will be up in the Q1 timeframe, both being the wireline, wireless, as well as Fiber To The Home business.

On the second part of your question, on the IBM part, that’s a good question. We are actively working with them to port their rate stack and build drivers around our silicon and collaboration is going very well. We have not announced anything at this point but you can bet that we’re working hard to earn a piece of their business and we’ll be sure to announce that as soon as we can if we’re successful.


The next question comes from Sandy Harrison with Signal Hill. Please go ahead.

Sandy Harrison - Signal Hill

Yeah. Hey. Thanks. Greg in, your prepared remarks, you talked a little bit about enterprise storage and the storage systems and what your expectations were for ‘10. And so if I look at enterprise storage, it’s pretty straightforward as far as seeing additional growth in HP and then the potential of IBM you just talked about.

But I think the storage systems, when you talk about the $25 to $30 million increase. How much of that do you think is just in sort of the lifting of the tide and how much of it is you taking market share, given the fact you have both the expander, as well as, other products in the six gig versus you didn’t have it in the three gig?

Greg Lang

The bulk of this, Sandy, is the latter, which is basically in the six gig transition, we’ve gained a lot of share, more than, we believe more than double what we had on the three gig.

So as people move to those six gig platforms, which has been announced, we’ll benefit from just a share gain in that space. So we think there’s good growth potential there for us to share.


The next question is from Mike Burton with FBN Securities. Please go ahead.

Mike Burton - FBN Securities

Thanks again, guys. Wondering if you could give us your outlook for India right now and are you already benefiting from that market with reports that they are already up to 1 million 3G subscribers?

Greg Lang

Yeah. The India market is quite a bit smaller than the activity we see in Japan. The number one provider there on the infrastructure base is ECI, a company out of Israel, who we have a very good working relationship with. So, yes, we do see business from India today and not only through the relationship with ECI, but also in some of the other, other vendors that are selling to that market.

However, it’s a relatively smaller piece of the business compared to what we’re seeing in China. If we see a benefit, if there’s a big pop in kind of new infrastructure buildout, we would expect that to be more in the second half, after the auction is done in Q1. So that’s kind of a TBD for the second half of this year.


And the last question in queue is from Eric Ghernati again, please go, from Banc of America. Please go ahead.

Eric Ghernati - Banc of America/Merrill Lynch

It’s been asked. Thank you.


There are no further questions at this time.

David Climie

Okay. Thank you, Andrew. And thank you for attending our conference call today. We will be scheduling our first quarter 2010 conference call in the third week of April and at that time we’ll be reviewing quarterly results and providing an outlook for the second quarter. Thank you and that ends today’s call.


Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation. You may now disconnect your lines. And have a great day.

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