PMC-Sierra Inc. (PMCS) Q3 2014 Earnings Conference Call October 27, 2014 4:30 PM ET
Executives
Joel Achramowicz – Director, IR
Greg Lang – President and CEO
Steve Geiser – VP and CFO
Analysts
Kevin Cassidy – Stifel
Ryan Goodman – CLSA
Sandeep Bajikar – Jefferies
Operator
Good day ladies and gentlemen, and welcome to the PMC Third Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Mr. Joel Achramowicz. Please go ahead.
Joel Achramowicz
Thank you, Keith. Good afternoon, everyone. And thank you for joining our call today. With me today are Greg Lang, PMC’s President and CEO and Steve Geiser, the company’s Vice President and CFO.
First, Greg will begin the call with a discussion of our business and key highlights from the third quarter of 2014, then, Steve will then discuss financial results for the third quarter while also providing some comments regarding our business outlook for the fourth quarter of 2014. Please note that our third quarter 2014 earnings press release was disseminated today via Business Wire after the market closed, a copy of the release could 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 rates, changes in inventory, foreign exchange rates and tax 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. 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 the 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 in our outlook will be posted on our Web site under the Financial Reports section of the Investor Relations tab.
Thank you. And now I’m pleased to turn the call over to PMC’s President and CEO, Greg Lang. Greg?
Greg Lang
Thank you for joining us today, and welcome to PMC’s third quarter 2014 earnings call. I’m pleased to report that PMC’s Q3 revenues were up 7% sequentially to $135.5 million. And well above the midpoint of the outlook range provided to you.
Tremendous strength and sales of our storage products outweigh the anticipated declines in the carrier products. OpEx came in lighter than expected which helped our bottom line. Non-GAAP net income of $22.5 million was up 23% from Q2 and non-GAAP EPS $0.11 per diluted share was also up nicely from $0.09 in the quarter, a very solid Q3.
And I believe PMC is poised for growth thanks to our broad line-up, new products and the potential revenue opportunities available in the markets we serve.
In terms of mix for the third quarter, storage represented 72% of Q3 revenues, Optical at 16% and Mobile at 12% top line revenues. Our legacy site and ATM revenues declined as expected to 4% of total revenues in the third quarter from 7% last quarter. And we anticipate that this percent will remain at 4% to 5% percentage points in the current quarter.
With this as a backdrop, I’d like to give you more detail on the Q3 results by our critical end-market segments. First, in the storage end-market. Storage revenues expanded sharply in our third quarter to $98 million compared to $83 million in the second quarter and $84 million during the same quarter a year ago. This 18% sequential revenue growth was broad-based across all of our storage end-markets, servers, hyperscale data centers, storage systems and Flash.
Growth in our 6 gig and 12 gig SAS and SATA controllers RAID in HBA, really kicked in with a recent Grantley launch and our hyperscale data center business rose almost 20%. While our new Flashtec controllers demonstrated strong sequential growth of more than 40% of a mid-year low in Q2.
Also as expected, we saw the completion of a Q2 inventory correction at a large customer resulting in a more typical spend for this customer. We remain confident in our goal of realizing incremental market share gains in the SAS controller and switch segment of at least 10% over the next 18 to 24 months. The objective is based on customer design wins we’ve already won.
With Grantley transition underway, we expect that the industry’s movement to 12 gig SAS will accelerate and PMC should be the leading beneficiary of this trend.
Our recent decision to license HP Smart Array storage IP and establish a new design center in Houston was perhaps the most exciting announcement for us this past quarter. It reflects our intense desire to craft one the industry’s top storage software stacks for high densification and high performance data management and connectivity for both hyperscale and enterprise data centers.
And a refunding from HP for about two years is expected to offset the additional operating expenses as former HP engineers join the new group. PMC intends to provide new semiconductor, storage and software products to HP as well as other customers using this new base of technology and talent.
These new smart arrays and smart HBA products should result in a substantial new number of accretive selling opportunities for our storage business with appreciable upside beginning in 2016 and beyond. I can say that our relationship with HP has never been better than we look forward to working with and serving the strategic customer for many years to come.
PMC remains a clear leader in storage densification as evidenced by our introduction a few weeks ago of the industry’s first 16-port 12-gig SAS and 6-gig SATA storage controllers for the hyperscale data center market segment. These devices are siblings of high density RAID controllers offering the lowest power and double the density of our competitor’s product and only with a single chip.
They’re capable of more than 1 million IOPS for the all the most demanding Cloud software applications and for top SSD performance. Along with our solid line-up of dense RAID card solutions, HBAs and 12 gig SAS and 6 gig SATA controllers are positioned in the storage and market continues to strengthen and grow. And we’re determined to remain the storage industry’s connectivity leader.
Also of note in our storage group was nice progress from our new and exciting Flashtec. Our Flash controller revenues were up by couple of million dollars during the third quarter despite the deployment delay by one of our top data center customers to Q1 of 2015.
NVMe based drives remain the future for PCI-Express SSDs and we’re extremely well positioned at the high-end with wins across Flash manufacturers, hyperscale data centers, storage OEMs and SSD suppliers. We now have three major customers in production with our Flashtec controller products and revenues ramping at each of them.
Last week, the website Tweaktown published a review of Samsung’s 2.5-inch PCI-Express SSD family highlighting the performance and density leadership of this new family of drives. The article is worth a read.
Another customer Toshiba announced its new Z-drive 6000 at Intel’s developer forum in September which also employs our Flashtec controller. In addition to these new product announcements, we have a strong pipeline of new designs across all of our end-markets entering production later this year and early next year.
You may have also noticed that we announced an exciting new Flashtec nonvolatile DRAM drive in early August during the Flash Memory Summit Santa Clara, California. This drive, which we expect to ship in early 2015, has received a great deal of attention from potential customers who need a persistent DRAM memory solution.
A special super-cap charge store ensures fast data backup to flash memory in the event of a power failure. We expect the customers who use this new PMC technology for fast write caches, in-memory databases, file systems journaling and other applications that require very high performance and the loss of data would be catastrophic.
There is a lot happening with our new Flashtec product, so we remain confident that our total Flashtec controller revenues for the full year 2014 will fall in the $25 million to $30 million range up from $5 million we shipped in the second half of last year.
Furthermore, as we look into 2015, demand for our Flashtec memory controller products and NV-DRAM drive should remain very strong leading to double-digit revenue growth in this product line over the fiscal 2014 results.
Now, I’ll move to our carrier business. Our carrier revenues came down off second quarter levels. The $6.5 million decline was slightly more than expected due to a temporary slowdown of base station deployments and a pushout of OTN backbone deployment in China. As such, optical declined to $21.7 million from $25 million in the second quarter after a very strong first half, and mobile revenues were $15.7 million in the third quarter declined from $18.9 million in the second quarter.
Most of the optical weakness was attributed to lower legacy Sonet and SDH revenues that returned to a more normal level from the second quarter. Also, China Mobile delayed a large OTN backbone award but we believe it will happen later this quarter giving us uplift in Q1 in the balance of 2015.
PMC’s third generation OTN product family called Digi continues to draw significant attention across the industry and we’re very excited about the market potential of our industry leading position in the sector.
We have more than 60 Tier 1 designs and the list continues to grow. Of these design wins, more than 30 should be reaching production status by year-end. We anticipate – this would put us in a great position to see continued growth in 2015. We continue to work with all top 8 optical transport OEMs and with three of the top 5 carrier Ethernet router OEMs to get these platforms into production.
Now onto the mobile market segment where our revenues were down $3 million versus previous quarter, all product lines tied to base station deployments experienced reduced revenues as customers reported a slowdown in general and China specifically after robust Q2. This concluded our legacy ATN business as well as our WinPath family devices.
Meanwhile a bright spot for the mobile group during the quarter was a remote radio head products, where we saw sequential growth off a small revenue base. We continue to see very exciting long-term upside potential for this business which remains key to returning our mobile business back to the growth color.
We expect to see the first production platforms, were released with our chipset during this current quarter. PMC is reinventing base station radio design to enable our customers to deliver more radio variance, deliver them faster, for better utilization of available spectrum and with lower power and a dramatically smaller footprint.
And we’re enabling this with a fraction of the time in resources of traditional discreet designs, more to come later as we’re still in the early innings of this incremental $100 million market opportunity.
Now, turning to our outlook for Q4 2004. We expect Q4 revenues to be in the range of $132 million to $139 million in the quarter, that’s $132 million to $139 million. At the midpoint of this range, revenue would be roughly flat with a strong Q3. On the heels of a particularly strong performance in the third quarter, we’re expecting Q4 storage revenues to be essentially flatter down slightly.
Q3 growth across the product line is expected to remain largely intact in Q4 with some sequential upside from 12 gig share gains offset by hyperscale data center lumpiness. It’s worth mentioning that at this anticipated level, combined revenues for the second half of 2014 would be approximately 12% higher in the second half of 2013.
On the carrier side, we anticipate a slight increase from Q3 with OTN growth tied to the China 100 gig rollout and growth in mobile driven by sales of our new remote radio products as initial designs ramp into production.
So, in conclusion, with these new product cycles gaining traction, the prospects for secular growth into 2015 and beyond look very promising. Our storage portfolio will lead the way as we close this important transition year, while the following four pillars of product strategy remain integral to our long-term objective of growing the company.
First our core SAS business, as the Intel Grantley launch leads to new system and server builds in the market, our strong 12-gig product line positions us to achieve our objective of gaining more than 10% market share over the next 18 to 24 months from both enterprise and data center sectors.
Our clear strength in density and drive switching places at the center of the move towards densification of our hyper scale data center and we fully expect to benefit from this fast growing segment of the market.
Second, our Flashtec controller and NV-DRAM drive business, we’re at the market leading and performance leading NVMe supplier in the industry. We have tremendous potential to build a sustainable long-term growth business with hyperscale data center customers, storage systems and SSD drive OEMs.
Our OTN business is the industry leader today. We continue to see solid interest for our Digi family of products, and we have an excellent list of design wins and production rollouts to show for. We fully expect to see this growth to continue as our customers release their platforms into production and we pursue new design opportunities with our strong product line-up.
Lastly, the early stage remote radio head products offer long-term growth in a new market segment for the mobile business with material revenue contributions expected in the back half of 2015.
On a separate note, today we also disclosed that our Vice President of worldwide sales, Rob Liszt, has resigned effectively December 8. We thank him for his passionate service to PMC over the past eight years and wish him the best in his charitable endeavors.
Finally, I’d like to remind all of you that we’re planning to continue our efforts to meet with as many of you as we can in the weeks ahead. So look for us at the Morgan Stanley conference next week in Boston and at Credit Suisse and Raymond James events next month in Phoenix and New York City respectively. Check our website for details.
And with that, I’ll hand the call over to Steve for further details on PMC’s third quarter financials and fourth quarter outlook. And then we’ll take your questions.
Steve Geiser
Thanks Greg. I will now discuss our third quarter financial results and comment further on our outlook for the fourth quarter of 2014.
Third quarter revenue was above the midpoint of our outlook range at $135.5 million, up 5.5% from the third quarter of 2013 and up 6.8% over the prior quarter. In Q3 we had two customers, which each accounted for more than 10% of our revenues, calculated on a rolling 12-month basis, namely HP and EMC.
Non-GAAP gross margin in the third quarter was 70.4%, near the midpoint of our outlook range for the quarter of 70% to 71%. Gross margins have been maintained around the 70% to 71% range for the past 10 quarters.
On a non-GAAP basis, operating expenses came in at $71.9 million for the third quarter, approximately $2 million below the midpoint of our outlook range mainly due to a short delay in tape-out related expenses from late Q3 to early Q4.
Operating expenses were up approximately $0.7 million sequentially from the second quarter of 2014, primarily due to a non-recurring increase in German pension expense which resulted from a change in the discount rate used to estimate this future liability.
Non-GAAP operating margin was 17.3% for the third quarter, a 230-basis-point improvement from 15% in Q2 ‘14 driven by higher revenues in Q3 ‘14 over relatively stable operating expenses between quarters.
Non-GAAP net income was $22.5 million or $0.11 per share, up 13% from $19.9 million or $0.10 per share in the third quarter of 2013 and up 23% from $18.3 million, or $0.09 per share in the second quarter of 2014.
Q3 GAAP net income was $5.5 million or $0.03 per share, an increase of $0.05 per share compared with a net loss per share of $0.02 in both Q3 ‘13 and Q2 ‘14.
The primary items reconciling GAAP to non-GAAP net income for Q3 ‘14 are as follows, $9.9 million in amortization of purchased intangible assets, $5.2 million in stock-based compensation expense, and $1 million in acquisition related expense. You can see our press release issued today for a full reconciliation.
Before turning to the balance sheet, I will first provide details on some of the financial elements of our recently announced agreement to license HPs core Smart Array software, firmware and management technology, which Greg discussed earlier.
The total acquisition to be paid by PMC to HP is $52 million, paid in four installments, the first of which occurred upon close of the transaction on September 4 of this year, and the last of which will be paid in January 2017.
Payment of these installment is not subject to any contingencies, and there were no liabilities assumed in the transaction. PMC expects that this transaction will not have a significant impact on the 2014 P&L, will be very modestly accretive in 2015 and with a more substantial contribution to top and bottom line growth in 2016 and 2017.
Further details regarding this transaction will be disclosed in our upcoming filings, so please read them when they come out.
Now, in regards to our balance sheet. We ended the third quarter with a net cash position of $228 million. We define net cash as cash and cash equivalents, short-term investments and investment securities, net of outstanding debt.
Our Q3 net cash position was approximately $15 million higher than our Q2 ending net cash position, and rose from $22.5 million of cash generated from operations, and $7.3 million of employee stock purchase plan proceeds and stock issuances from exercise of employee stock options, partially offset by $10 million paid for the first installment of the HP transaction and $3.6 million of capital purchases.
Please note there were no amounts drawn against the revolving debt facility as of the end of the third quarter and no amounts drawn during Q3 or as of today.
Our net inventory at the end of Q3 was $34.6 million, $3.2 million or 10.2% higher than at the end of the prior quarter. With strategic inventory build-up on an anticipated increase in demand in the next two quarters, coupled with tight control of manufacturing activities by our operations team, we continue to maintain net inventory turns at 4.7 times in Q3.
Q2 ending deferred revenue balance increased to $5.5 million from approximately $5.2 million as of the end of Q2, reflective of the relatively light levels of inventory held by our point-of-sale distributors.
Overall our inventory including at 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.
In the third quarter we had no stock repurchase activity. The company continually reassesses the best use of our capital resources and may continue to repurchase shares opportunistically up to the remaining $27 million of outstanding authorization.
Now I will turn to the outlook for the fourth quarter of 2014. As Greg mentioned, we expect Q4 revenues to be in the range of $132 million to $139 million, or flat sequentially plus or minus 2 to 3 percentage points. This takes into account current levels of demand and our expectation of booking rates through the balance of the quarter. On a non-GAAP basis we expect our overall gross margin percentage in Q4 to remain in the range of 70% to 71%.
Non-GAAP operating expenses in Q4 are expected to be in the range of $71.5 million to $73.5 million, slightly above Q3 at the midpoint of this range. This increase is mainly the result of an additional tape-out activity in the fourth quarter, partially offset by the Q3 pension liability adjustment not expected to reoccur in Q4. We expect other income in Q4 to be nil, with interest income on cash balances largely offset by financing costs related to our line of credit.
We expect our non-GAAP tax provision in Q4 to be approximately $1 million. At the midpoint of our outlook range, non-GAAP earnings per share for Q4 are projected to be $0.11 flat with Q3. The EPS outlook for the fourth quarter assumes a diluted share count of 202 million.
And with that we’d like to open the call up to questions.
Question-And-Answer Session
Operator
Thank you. (Operator Instructions) We’ll take our first question from Kevin Cassidy with Stifel.
Kevin Cassidy – Stifel
Thanks for taking my question. On your NAND flash customers, can you say exactly how many design wins you have right now?
Greg Lang
I don’t have the number off the top of my head. But I would put it in the 15 to 20 range of material size design wins.
Kevin Cassidy – Stifel
Okay.
Greg Lang
And it ranges, the range of customers, by the way it ranges from hyperscale data center guys, drive guys, flash manufacturers as well as some of the appliances of flash hybrid and all flash array type of appliances, and it covers that whole spectrum.
Kevin Cassidy – Stifel
Okay, great, and it sounds like it is up quite a bit. Also, the visibility that you’re getting from the hyperscale companies, can you talk a little bit about that? You mentioned lumpiness, but do you see – or are they giving you any forecasts at all?
Greg Lang
Yes, we do get forecast but forecasts are not the – they tend to be – we tend to get big orders based on project build-outs. So it is, I think it is kind of a little bit of the nature of the beast there and a couple of them all, have an up quarter in one and then a down quarter the next minute, it tends to kind of move the needle a little bit.
But last quarter was a very strong quarter this quarter would be down a little bit on the hyperscale side. But it’s like I said, even with the forecaster’s ability we get, we do get lumpiness.
Kevin Cassidy – Stifel
Okay, great. I will get back in the queue, let others speak.
Operator
We’ll take our next question from Ryan Goodman with CLSA.
Ryan Goodman – CLSA
Hi guys, thanks for taking the question, question on the competitive environment, just on the flash markets. There is, not a lot of merchant NVMe solutions out there on the controller side. There has been some M&A over the last year that has gotten rid of some of the merchant guys, but one of your major competitors did announce a product in August. So I was just curious if you have seen any change or just any impact of the competitive landscape there and what you anticipate maybe over the next year?
Greg Lang
Yes. I think – I would say that this part of the flash SSD market is still one of an emerging category, meaning it’s the well-established interfaces that are out there today are heavily, the volumes biased towards SATA interfaces as well as SAS. Those were the traditional stores interfaces and that’s what most people have been able to move on quickly.
I think with the advent of a PCI-Express based drive with much higher performance combined with the NVMe software interface which makes it a non-proprietary, standards based solution, I think the combination of those factors will make PCI-Express drives the leading both volume as well as dollar size drives but it will take, I would probably estimate on the order of three to four years for that transition to occur in completeness.
The drives that are out today, the NVMe drives that are out today tend are a little bit higher end, ours is at I would the highest performance end of the market, but a lot of the volume tends to be in the consumer, the client space.
So, I would expect to see some alternatives come out in the market that are targeting more of the consumer space. And that will also help me catalyst I think for the market transition to move from the traditional legacy interfaces in SATA, SATA primarily because I think SAS ports will be out there for a while with all JBOD infrastructure that’s out there.
But as we get more offerings, I think it will be good to have the, to help the overall market transition away from SATA and towards PCI express. And it will happen, I think in every price point in the market from consumer to mid-range to the high end. And we just happen to be on the front-end, the high-end part of this shift.
So, I would just summarize everything I think with some more entrants in the marketplace, it will help be a catalyst to actually move the market to this new interface where we’re really focused.
Ryan Goodman – CLSA
Okay. And then at that high end in the NVMe area, you haven’t run into too much in terms of – I mean, outside of in-house solutions, maybe you haven’t seen too much competitively from the other third-party vendors. At the high end in the NVMe space.
Greg Lang
Yes, I think of the three solutions that I know, that are shipping in production from people who are building the SSDs themselves, two of them are based on ours and the third one would be Intel if that’s the one you’re referring to.
And if you look at the specs, our drives are much higher performance than the competing alternatives. So we do see the competition it being there but we also feel like we have both the power and density advantage over the alternatives in the market.
Ryan Goodman – CLSA
Okay, great. And then, just a question on the 12-gig SAS transition and just this whole server refresh we are seeing around Grantley. Just could you tend to describe to me, of that target – I know you guys have put out an $80 million to $100 million opportunity longer term.
I’m just trying to get a feel for how much of that is coming from the share gain that you’ve discussed and how much of that is just from the overall market growing through a server refresh around the Grantley launching with Windows Server 2003 expiration coming up, could you – any color you could add around that?
Greg Lang
Yes. Most of the growth that we have articulated with this around this $80 million to $100 million number is based on over 10% share gains. It will take some time I think it will take, if we start the clock back in September when Grantley started this ship, we think it’s probably an 18-24 month cycle before we get, let’s say 80% of the way through largely through the transition. But that that is a finite period of time. But it will take the next several quarters I think to get that into a meaningful place.
We did start with a couple of million last quarters a few, and we’re going to see a couple of million more in Q4, so it’s definitely started. But we have ways to go, still very early on in the transition.
Ryan Goodman – CLSA
Okay. And then if I could just slip one in and then I’ll get back in the queue, just on the OpEx. So, I understand there was some pushout or some of the tape-outs you expected in Q3 going to Q4, and then you’d lose some of the costs that you had discussed the one-time stuff in Q3. As I look out to next year, does that mean we should be expecting OpEx to come down a little bit in Q1 and that’s kind of the steady run rate as we model beyond there?
Steve Geiser
Yes, I don’t anticipate that there is going to be much of a drop-off per say. It depends on tape-out activity on a quarter-by-quarter basis. But I anticipate that non-GAAP OpEx in this low $70 million range, roughly $72 million a quarter is probably fairly sustainable but it’s going to flux up or down a little bit depending on tape-out activity in any given quarter.
I would also point out that typically in the first quarter of each year, we do see a bit of a seasonal increase in expenditures going into Q1 as you have a reset of all the benefit plans. And that’s typically been on the order of a couple of million dollars increase from Q4 to Q1, that’s more structural in nature.
Ryan Goodman – CLSA
Okay, thank you.
Operator
We’ll take our next question from Sandeep Bajikar with Jefferies.
Sandeep Bajikar – Jefferies
Hi guys, couple of questions on storage and then maybe one on mobile. Within storage, is it fair to think that the cloud portion is growing faster than traditional enterprise? If you could give us any color on the relative mix of enterprise versus cloud within your storage business, and tell us what we should expect in terms of progress from here that would be very helpful?
Greg Lang
Yes, actually hi Sandeep. The growth is coming from actually each of the areas. This last quarter, we had growth in hyperscale, we had growth in our traditional server customers, traditional storage customers and in flash. And I don’t actually, I don’t think that we would expect to see the hyperscale piece grow faster than the traditional enterprise for the one reason that we have these share gains with 12-gig coming on. And those share gains will be across all three of those customer basis, enterprise as well as server and hyperscale.
Barring that though, I think the end-market I think to your point, the end market in the hyperscale space is growing faster but the fact that we have some share gains coming across the board will I think even some of that out.
In terms of a breakdown, really difficult to do for us because we have products that go through reseller channels that go into datacenters. We have products that go into HP that end up in datacenters, products that go through Dell that end up in data centers etcetera. And then we have some direct sales as well.
So it’s hard to actually pin down all the pieces there for a reasonable estimate because we don’t have perfect knowledge of the downstream transactions.
Sandeep Bajikar – Jefferies
Okay, then I’m going to try this next question anyway. I guess what I was wondering is if you could provide some color on the competitive dynamics you are seeing in traditional storage versus in the cloud, given, obviously, you’ve talked about having a density advantage with share gains on the enterprise side. So I’m just curious, what’s the situation on the cloud side?
And then, related to that, is there – should we think in terms of any shift in storage mix from storage systems to server? Again, if, longer term, more growth is coming from the cloud or any color you might provide on that type of mix going forward would be helpful.
Greg Lang
Okay. Yes, so I think clearly with influence with hyperscale cloud guys there is definitely more emphasis being placed on server based storage solutions and we see that also in the offerings from some of traditional enterprise folks as well offering one or more server based solutions. So clearly that’s a underlying trend that’s being reflected in traditional enterprise as well as in hyperscale data centers.
So, that’s clearly a trend that we see. We have our solutions targeting the server based stores are differentiated by the fact that they have the highest density of any solutions on the market. So, let’s face that you could put eight drives previously, you can now put 16, so double the density of traditional products.
So, what we see as kind of the major dynamic over the next couple of years in the hyperscale data center part of the market is a move from kind of a generic motherboard in a rack type of design where they put 8 to 12 drives on it and call it good enough. We see a number of people in storage-intensive applications doing and looking for more and more dense solutions, reason being is they can get better leverage of the CPUs they’re putting in, better leverage from a power perspective and a better leverage from a space perspective.
So, in that kind of an environment, where there is an increasing amount of density people are looking to do, having the densest silicon, the densest ports offering in silicon puts us in a great position to pick up more of that market as they begin to move to denser and denser platforms.
Sandeep Bajikar – Jefferies
Okay, great. And then, just a last one from me on mobile, I guess, I’m just wondering how we should think about the growth profile in mobile and to what extent it might be dependent on ramp of this new remote radio head product?
Greg Lang
Yes, we – this year we’ll ship in the back half of the year we’ll ship several million dollars of revenue in that area but it’s not really enough to move the needle yet. I think it gets, it starts to get meaningful probably in the second half of next year where we can get a number of additional platforms in the production from different customers.
Right now, we think they’ll probably be two to get started this quarter, but I would think about second half of next year as being more interesting from a growth perspective. And if you want to think about numbers around that, if we did several million this year, we’ll do four or five times that next year, so it’s in the let’s call it the $15 million to $20 million range for growth next year.
Sandeep Bajikar – Jefferies
All right. Thank you so much. Great.
Operator
We’ll take our next question from Kevin Cassidy with Stifel.
Kevin Cassidy – Stifel
Thanks for taking my follow-up. Just some questions around the HP Smart Array IP. How many employee, additional employees did you bring on and are you allowed to sell this outside of HP?
Greg Lang
Yes, we brought on around 54 I believe the number was folks from the HP team in Houston. And to answer your second part of your question is, yes. We will have the ability to sell to non-HP customers. We believe that’s actually one of the advantages of the whole transaction, beyond the fact that we were previously both investing in and maintaining and adding capabilities to two different rate stacks.
And we’ve now basically at a macro level combined those two teams into one and can put those additional resources or extra resources on new areas of differentiation, both HP can do that as we can as well. But one of the opportunities for us is to take that product offering into new parts of the customer base.
Kevin Cassidy – Stifel
Okay, thank you.
Operator
(Operator Instructions). We’ll take our next question from Ryan Goodman with CLSA.
Ryan Goodman – CLSA
Hi, thanks for the follow-up. One more on the HP deal, just, can you help me understand, so you’ve said it will be moderately accretive, I believe, in 2015. And I think I understand the side with the increment costs coming with the facility, but you are getting some NREs to offset.
And one of the opportunities that you just mentioned is potentially selling some of the products using the technology to other customers. Is that the main driver of the initial accretion or is there something else? Can you just kind of help describe that?
Greg Lang
We expect to see accretion in both the business we do with HP as well as outside of HP. So, it’s, we think we can experience growth in both parts of the market. Some of it is better defined the pieces that were covered in the agreement with them are well defined. I mean, that’s why we can say that next year we’ll be in the high single-digits of millions from an accretion standpoint. $16 million to $17 million will be in the tens of millions. So it’s fairly well defined part of it and then the rest is opportunity for upside.
Ryan Goodman – CLSA
Okay. And then, just kind of a general question on what you’re seeing in the market for telecom. At the conferences in mid-September, things were sounding actually pretty good, I think it had been before a lot the other – some of your peers and just other vendors in this space have started pre-announcing and noticing that things were weakening.
I’m just curious, when did things kind of turn south just for the telecom spending environment for you guys, it sounded like I felt, the backlog sounded okay mid-September. Is that something we saw over the past few weeks? And it sounds like things are stabilizing a little bit based on the guidance, just any comments you have on that as we’re going into Q4? Thanks.
Greg Lang
Yes, when we gave our guidance at the beginning of last quarter, we did expect this part of the market to be down for us that was part of our guidance, part of what we communicated. So, I would argue that we saw that softness going into that guidance.
It did come in a little bit softer than we expected and storage came in quite a bit stronger, obviously had a bang up quarter in the storage front. But as far as the carrier softness here, we saw that at the time we guided but it just, it came in a bit weaker than even we saw at that point in time.
Now, the macro question or the bigger question about any inside in terms of going forward, we haven’t seen any pull-back on the commitment to the play LTE in China by any of the three major carriers, I think this is some of the lumpiness that we’re kind of used to seeing on the deployment side.
And related to that, the place that PMC participates more in China right now is actually on the OTN build-out that is happening kind of concurrently with the LTE build-out because they need bigger pipes to move the extra data.
But we see no kind of slowdown in the desire to deploy it’s really been kind of if anything a pause in there, deployment model to digest some of what they have. So, we expect the next year to be a solid overall for both wireless and wire-line deployments.
Ryan Goodman – CLSA
Okay. Thank you.
Operator
(Operator Instructions). It appears we have no further questions in the queue. At this time, I’d like to turn the conference back to our speakers for any additional or closing remarks.
Joel Achramowicz
I think that’s all for today’s call. I appreciate your participation. And again, be on watch for us our participation in number of upcoming conferences. And thank you very much.
Operator
Ladies and gentlemen, this does conclude today’s conference. We appreciate your participation.
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