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Executives

Michael Zellner - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance

David Climie - Vice President of Marketing Communications and Investor Relations

Gregory Lang - Chief Executive Officer, President and Director

Analysts

Cody Acree - Williams Financial Group, Inc.

William Harrison - Signal Hill Capital Group LLC

James Schneider - Goldman Sachs Group Inc.

Harlan Sur - JP Morgan Chase & Co

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

PMC-Sierra (PMCS) Q1 2011 Earnings Call April 28, 2011 4:30 PM ET

Operator

Good day, and welcome to Q1 2011 PMC-Sierra Earnings Call. Today's conference is being recorded. It is Thursday, April 28, 2011. At this time, I would like to turn the conference over to Mr. David Climie, Vice President of Marketing Communications. Please go ahead, Mr. Climie.

David Climie

Thank you. Good afternoon, everyone, and thank you for attending our investor conference call. With us on the call today is Greg Lang, President and CEO; and Mike Zellner, Vice President and CFO. Please note that our first quarter 2011 earnings release was disseminated today via BusinessWire 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'd like to ask a second question, please re-queue with the operator. Thank you, and I will now turn the call over to Mike Zellner.

Michael Zellner

Thanks, Dave. I'll review our first quarter 2011 results and financial position, and then turn it over to Greg to discuss our business activity in detail. Revenue in the first quarter was at the high end of our outlook and slightly lower on a sequential basis at $157.4 million. This represents a decrease of $1.9 million or about 1% compared with Q4 revenue of $159.3 million. This was anticipated mainly as a result of customers working down inventory and was largely offset by having a full quarter of revenue from our acquisition of Wintegra, which we completed in November last year. Greg will provide further details around revenue in his comments to follow. In Q1, we have one customer that represented greater than 10% of our revenue calculated on a 12-month basis, namely HP. Non-GAAP gross margin in the first quarter was again slightly at the high-end of our outlook of 68.3, up slightly from 68.2 in Q4. On a non-GAAP basis, operating expenses increased by $3.5 million from $72.4 million in Q4 to $75.9 million in Q1. This increase, which was in-line with our outlook, was primarily the result of having a full quarter of operating costs for Wintegra in Q1 compared with only five weeks in Q4. Also we had the effects of the annual reset of employee benefits at the beginning of the calendar year in completion of planned investments and R&D projects. In Q1, our non-GAAP operating margin was 20% compared with 23% in Q4. We expect to return to our targeted range of 25% to 30% within the year.

Non-GAAP tax provision was lower sequentially at $1.4 million compared to $2.5 million in Q4 mainly due to a change in mix of income across our foreign subsidiaries. Non-GAAP net income for Q1 was $30.6 million or $0.13 per share on a diluted basis compared to $34.6 million or $0.15 per share generated in Q4.

Q1 GAAP net loss per share was $0.03 versus $0.05 diluted net income per share in Q4. The decrease was mainly the result of acquisition-related costs, including a full quarter of amortization of purchased intangible assets and lease termination expenses recorded in Q1.

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 that will provide an outlook will be posted on our website under the Financial Report section of the Investor Relations tab.

The primary reconciling items for Q1 are as follows: $11 million in the amortization of purchased intangible assets, $6.3 million in stock-based compensation expense, $900,000 of non-cash interest expense, $10.4 million of acquisition-related costs, $3.4 million accrual for lease termination costs for an exited facility and $4.5 million of income tax-related adjustments as described in our press release.

Turning to the balance sheet. We ended the quarter with over $413 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at the end of Q1, net of the $68.3 million face value of our convertible notes with $345.4 million, an increase of $11.2 million in Q4. This increase primarily relates to $9.4 million of positive cash flow generated from operations adjusted for non-cash items, $7.1 million of cash from employee-related stock issuances, offset by $4.2 million of IP purchases and capital expenditures. Our cash flow generated from operations in Q1 was lower than typical mainly due to timing differences in settlement of receivables and payables. For example, $13 million of accounts receivables was collected in the five days following a fiscal quarter end.

Our net inventory at year end was $37.5 million, a decrease of $13.6 million from prior quarter. $9 million of this change relates to the inventory of Wintegra, including having worked through the inventory-related sales fair value adjustments required under purchased accounting. We also saw a decrease in our deferred revenue from Q4 to Q1, which relates to inventory at our distributors.

Our net inventory turns increased to 6.3x compared to 5.2x in Q4. This is in line with our target for inventory turns of 6x. Similarly, we saw an improvement in inventory turns of our product at distributors as mentioned. So overall, we believe inventory, including at distributors, remains well-managed and lead times from our boundary partners have maintained normal levels.

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

Gregory Lang

Thanks, Mike. As Mike mentioned, our first quarter results came in above the midpoint of our Q1 outlook. Net revenues were slightly above $157 million. Gross margins remained strong at just over 68% and non-GAAP EPS of $0.13 was $0.01 ahead of analyst consensus estimates. So now a few comments by market segment. Our storage market segment came in a bit ahead of expectations as our top tier external storage customers continue to ramp their 6-gig SAS platforms in the first quarter, which mostly offset the seasonality that typically occurs in Q1 each year. We were also pleased to see a major customer work through most of their excess inventory and is now on their way back to normal levels.

The storage end market remains very healthy as our largest external customer, EMC, reaffirmed the positive outlook for the remainder of 2011. Our customers continue their transition to higher performance 6-gig SAS platforms with increasing PMC content and we continue to win new designs from North America, Europe and Asia with our industry-leading 6-gig SAS two-chips set. We also announced in Q1 the availability of our new series 6 RAID controller with 0 maintenance cache protection. A feature that provides the highest level of maintenance-free data protection available and as a solution that is getting very good traction with our channel customers. In the Wide Area Network Infrastructure market segment, activity was a bit lighter than expected in the first quarter. Revenue in China improved after bottoming out in Q4 last year. And in Europe and North America, customers continue to work down inventory levels in the first quarter. So directionally, we believe our WAN infrastructure business will improve in Q2.

In the OTN market segment, we're shipping our 10-gig and 20-gig HyPHY devices or Packet Optical Transport platforms and secured additional design wins for these devices with Chinese, Korean and North American customers as well as our meta 20-gig solutions for carrier Ethernet switch routing platforms.

In the first quarter of this year, we generated a couple million dollars of revenues. And I’ve mentioned before, we shipped HyPHY devices to 15 of the top 16 transport OEMs and META devices to four of the top five router OEMs. Our HyPHY devices provide multiservice End-to-End OTN switching, all in a single chip. With the HyPHY device reaching production, we did a teardown of the top competing solution based on a 40-nanometer FPGA and a competitors' OTN device. The PMC solution consumed 19 watts of power while the competitive solution consumed 55 watts of power. That's 19 watts versus 55 watts. In the physical board space, the PMC solution is less than half or 56% less to be exact. We also estimated the 28-nanometer generation of products and expect the same dramatic power and space savings for PMC-based solutions, and power matters. Carrier and data centers around the world see power as one of their largest operating expense items, if not the largest. Cutting it in half is a huge deal.

For the full year, we're estimating about $10 million in OTN revenue subject to the Verizon deployment schedule in the U.S. and when AT&T starts its OTN deployments. And based on external third-party data, the adjustable market for OTN semiconductors is expected to grow at a CAGR of about 30% over the next five years from $140 million to about $550 million in 2015. Now this may be a bit aggressive, but the deployment of OTN equipment will happen as carriers worldwide transition to packet-based network equipment. And we are investing in new product offerings to the 40-gig and 100-gig market segments as well, securing new customers and design wins in this area with highly integrated, innovative, low-power solutions. With regards to our wireless access market segment, we benefited from a full quarter of revenue from Wintegra in Q1, which was in line with our outlook provided during our last earnings call. We're expecting revenues from this business to be up again in the second quarter of this year as planned and believe we're on track to being able to deliver the approximately 20% year-to-year growth as we had talked about when we acquired the business in Q4 last year. We continue to garner new design wins with European and North American customers and are making good progress with new customers in Asia as well.

In the fiber access market segment, our Fiber To The Home business in Q1 was flattish sequentially as expected. And with increased spending in PON deployments in China this year, we're expecting that trend up in the second quarter. In Q1, we announced the industry's leading products in Fiber To The Home, including the industry's first real 10-gig OLT or carrier-side [indiscernible[. It provides symmetric 10-gig EPON OLT service, sophisticated traffic management, the most advanced power management available in the Fiber To The Home industry as well as optical line of diagnostics, and we already have several major customer design wins with this new device. We also announced the new multiport 1-gig solution that eliminates the need for an expensive switch and provides advanced traffic management similar to the 10-gig device mentioned above. One of the largest OEMs is designing it in right now. And finally, we announced the industry's first EPON ONU device with an integrated optical analog front end, which significantly reduces the cost, size and power of the ONU for our customers.

Now a few comments about our supply chain situation in Japan. In short, we do not currently anticipate a supply issue in Q2 or for the balance of the year. We have no fab exposure and are actively working on second source calls for the package resin and compound materials that are tight right now.

On the revenue side, Q1 was a slow quarter for Japan due in part to an inventory correction at one customer and normal inventory balancing prior to Japan's fiscal year end. Our current Japan backlog and forecast from customers suggest growth in Q2. So with that, let's look at the second quarter outlook.

With the Q1 book-to-bill greater than 1 and $158 million in backlog today, we currently anticipate that PMC's revenue in the second quarter of 2011 will grow 4% to 9%. Concerns about Japan-related supply issues have increased our visibility, so the 6% turns needed is less than the past few quarters. We expect to see all four of our major end-market segments grow on the second quarter. The sequential growth in revenues will be led by Enterprise Storage market segment, followed by Fiber To The Home, WAN Infrastructure and microprocessors. Overall, I believe that our end markets are very healthy and the fundamental growth catalysts are in place. To put simply, PMC is enabling the next-generation wired, wireless and storage networks to provide new levels of performance for smartphone services, video streaming and cloud computing. No other company is better positioned to deliver the infrastructure behind these exciting new applications than PMC. With that, I'll turn the call back over to Mike for more details on the second quarter outlook.

Michael Zellner

Thanks, Greg. I'll now provide more information about our Q2 outlook. Considering current levels of demand, our expectation of booking rates throughout the balance of the quarter, we estimate that our potential revenue for PMC-Sierra in Q2 in the range of plus 4% to plus 9%, which equates to $164 million to $172 million as Greg mentioned.

Just-shipped and shippable backlog at March 28 was approximately $136 million. And as of today, it is approximately $158 million indicating that we would gain approximately 19% turn from the end of March and 6% turns from this date to get to the midpoint of our revenue outlook for Q2.

On a non-GAAP basis, we expect our overall gross margin percentage in Q2 to improve slightly over Q1 and be between 68.5% and 69%. Non-GAAP operating expenses in Q2 are expected to be in the range of $79 million to $80 million, increasing from the $75.9 million in Q1. Approximately 2/3 of this change results from annual merit increases, the full impact of hiring in Q1 and the effect of foreign exchange on our foreign operations. The balance relates to other investments and R&D projects.

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

We expect the non-cash tax provision in Q2 to be between $1 million and $2 million. As a reminder, the tax expense can be impacted by a number of variables associated with our ASP 740 liabilities, including but not limited to, a change in foreign income and product mix.

Regarding share count, we ended the quarter with a diluted share count of approximately $234 million. At the end of Q2 our diluted share count is expected to be approximately $238 million. As mentioned before, a GAAP to non-GAAP reconciliation of these financial measures will be posted on our website. With that, we'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co

From a shipment perspective, Greg, was it pretty linear through the first quarter or was it more back-end loaded? And what do you expect in terms of shipment linearity in the second quarter?

Gregory Lang

The linearity was reasonably, I would call it, fairly normal in Q1. It was -- Q1 tends to start a little bit slow probably due somewhat to the holidays, et cetera and get -- kind of got stronger throughout the quarter. Q2, I think, will be more linear throughout the quarter.

Harlan Sur - JP Morgan Chase & Co

And then maybe if you could just answer the same question as it relates to order linearity through Q1 and what have you seen so far, sort of order linearity through the second quarter?

Gregory Lang

Well the bookings rate -- I mean if we go back to the last call, the bookings rate had certainly picked up in the March timeframe when the disaster struck in Japan. Not long after that, we saw -- it picked up substantially. Actually, April was I think our best bookings month ever. The positive of that tragedy is that customers are giving us much more visibility. So if we look out right now, that real strong bookings month at April didn't all happen in Q2, or wasn't all scheduled for Q2, people are booking out through Q3 and some of it out into Q4 right now. So we've got a really nice set of visibility right now in the Q3, and Q3 is well ahead of what we would normally be booked at this stage. So it’s given us more visibility and it's helpful to the plan a business, especially when some of the supplies are tight.

Harlan Sur - JP Morgan Chase & Co

And it sounds like order momentum is kind of still sort of on an upward trajectory, right, if I kind of read between the lines.

Gregory Lang

Yes, could clearly the -- it was trending positive before the earthquake, which was kind of what we expected and it definitely took a jump up, settled down a bit but it's still at a healthy clip, it's still -- order rates today are still healthier than they were at the beginning part of Q1. So I think that's reflective of the general inventory consumption issues being behind us in most of the segments.

Harlan Sur - JP Morgan Chase & Co

Okay, and then just one follow-up question, the Intel/Romley based servers kind of start to rollout in the third quarter, when do you expect to see your server rate business fundamentals start to reflect this upgrade cycle? Are you seeing a little bit of that in Q2, or is the Romley rollout more of a Q3 impact for you guys?

Gregory Lang

I think it's going to be later or will be later in that window as opposed to earlier. I don't expect it to happen in Q2.

Operator

The next question comes from Jim Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc.

I was wondering if you could provide some more detail in the outlook in storage. You're talking about being the strongest grower in Q2. Do you expect that to be more led by the FAS products on 6-gig or more by the server rate products or is there something else going on there?

Gregory Lang

It's actually across the board. Historically, Q1 has been a bit soft seasonally, but I think as you probably have saw from some of the equipment guys, as well as our numbers, that actually was a very healthy Q1 as far as that goes. We get a little extra uplift from that as well because of the SAS-2 transition that's coming. So we're seeing it across the business in fiber channel, in SAS 1, SAS-2, as well as in the [indiscernible] server market, so it really is strong across the board.

James Schneider - Goldman Sachs Group Inc.

Fair enough. And then if you could discuss the WAN business a little bit. How are you seeing that going into Q2? Are there any particular regions that are kind of leading that, or are there any of are going to remain soft? You've talked about the regions in Q1, but if you could provide some outlook regionally by Q2, that will be helpful.

Gregory Lang

Yes, I think it's actually a similar as to last quarter. It seems as though China peaked earlier, bottomed out earlier and is coming back earlier than North America and Europe. North America and Europe are still a trailing, and I would say of the final two, North America is probably coming back a little bit slower than Europe at this point. So it's very similar to what we saw last quarter. China is kind of leading the bounce-back and the other two are coming back a little slower.

James Schneider - Goldman Sachs Group Inc.

That's helpful. And if I could sneak in one last one for Mike. Mike, do you expect to any kind of other step-ups in OpEx as we move through the rest of the year, or are we kind of done with at least the merit-based and kind of the benefits-based stuff? Are there any new projects do you expect to really step-up in the back-half?

Michael Zellner

No, we don't really guide out beyond the quarter. That being said, I think, if you're looking to kind of dial-in what you might do in your models, kind of between, I would say the high 70s to low 80s would be a good way to look at it. We do have, as you know, we've talked about this before, you can have a tapeout in it or two in any particular quarter and it’ll move things around. But fundamentally, we're kind of where we think we'll be going forward. So I think that high 70s to low 80s is the right place to kind of model quarters out beyond the Q2 guidance I gave.

Operator

The next question comes from Cody Acree from Williams Financial.

Cody Acree - Williams Financial Group, Inc.

Can you talk a little about some of your new customers in the storage business some of the ramp that you have maybe seen a little slower than expected earlier on?

Gregory Lang

New customers, on the storage side, I guess maybe one way to look at it, there is a lot of -- it is a little bit harder to count then maybe actually six servers that are going out the door. But one way to think about it is NetApp last quarter, their CEO came out with a comment that they have been, they made it through about 50% of their transition to SAS-2, and I think that they are probably further along than any of the others that I'm aware of at this point. So that gives you kind of a general sense of where the SAS-2 transition is. The other two kind of big new customers coming on this year are IBM on the external storage side and Huawei, Huawei Symantec out of China. We've seen Huawei Symantec past few quarters and IBM is just getting started. We're just getting started with that business ramp.

Cody Acree - Williams Financial Group, Inc.

Can you talk a little about what's going in China from a competitive standpoint, for Fiber To The Home?

Gregory Lang

China, competitive standpoints for China, it's not a huge change in the past. I think I mentioned three major new products that we've come out in the last, in the last quarter sampling some last quarter sampling some other ones this quarter, and puts us in an extremely strong competitive position. So we've talked previously about some share losses that we had a couple years ago, the Teknovus before they were acquired. We think that we're going to be getting some of that back this year and improve our share position with some of these new products because they’re really unmatched in the market place right now, both at the 1-gig as well as 10-gig level.

Cody Acree - Williams Financial Group, Inc.

And then just lastly between Korea and China's ramps, what would you expect seasonality would look like for Fiber To The Home?

Gregory Lang

That's a great question. I don't know that I've -- we've never been able to nail down a seasonal picture other than Q2 seems to be a strong quarter. That seems to be the one consistent element for the last four years. But we do think that the second half is going to be strong. I expect, I believe that Japan will hang in there throughout the year. They seem to be fairly stable. We actually have someone there from that business unit last week, or this week, and the customers kind of reaffirmed their outlook and forecast for that region. So that's a real, real positive. That's a big part of the base. And then China, we actually expect to see China growing, steadily growing and there's really two reasons for it. One is just the build out of the infrastructure continues. So that's going to be a baseline, but they're also moving to more Fiber To The Home installations as opposed to Fiber To The Building. Which that will drive more client-end or ONU-end type of devices. So we think that the back half of the year has a good shot at being growth, continue to grow in the fiber business whereas in past years, it had been more of a flat or down period, burning off some excess inventory in other places. So I think the second half of this year is going to be stronger for Fiber To The Home.

Operator

The next question comes from Sandy Harrison from Signal Hill.

William Harrison - Signal Hill Capital Group LLC

Greg, you kind of hit on some of the things going on in China and Japan in the Fiber To The Home or just the fiber business. What are -- could you look at some of the other markets, I mean Korea and some of the other opportunities that you guys have been talking about for a couple years now? And how is the competitive landscape there? I've seen a lot of announcements particularly, I guess, the comparison of the EPON versus GPON in some of these. So if maybe you could give us a quick second and then kind of update us on some of the competitive threats, not only from other chip providers but also where the technologies are today and where you see sort of GPON versus EPON in that competitive positioning?

Gregory Lang

Yes, sure. There has been some buzz about EPON and GPON, particularly in China, and to some extent in Korea. But I think at a high level, the basics are still in place where Japan is heavily EPON-centric and will stay that way. Korea is a mix of EPON in GPON, and I think will probably stay that way based on -- by carrier choices. In China, while China mobile has deployed and I was going to say experimented because the volumes are quite small with GPON, the vast majority of deployments in China are EPON-based. So those territories, even though there has been quite a bit of noise, in particular about the China mobile experimentation, it's still primarily EPON driven in those three major markets with some GPON also in Korea. Now outside of those three major markets, I believe that there is going to be -- the primary push will be in and around GPON, I think that's going to be the primary technology. The one exception maybe is in the cable operator space as they look to expand their capacity, they may use EPON technology since it's the 10-gig capabilities are sooner and probably what they'll be looking at. Now having said that, that's just kind of EPON versus GPON environment. Our position in the EPON space is very solid and as I mentioned earlier, I think we'll expand share throughout the course of this year in EPON. But other thing that's coming along, as we also are starting to get some traction in GPON, probably won't impact our revenue numbers in 2011, but I believe that we could see some good announcements out of the GPON side of our business that will affect 2012 and beyond.

William Harrison - Signal Hill Capital Group LLC

And then it sounds like many of your customers are booking beyond lead times and giving you guys some visibility, and looking at Q3 and Q4 in your backlog, what sort of scrubbing have you done of those that there's not any hoarding or panic orders? I mean how comfortable are you able to go through that and then these customers that are giving you orders are they giving the guy with the socket next to you the same amount of orders and how are you reconciling those sort of two situations?

Gregory Lang

That's a good question, and I think a natural question. There are a couple of things that I would point to is, number one is the fact that we've got bookings out in the Q3 and then in the Q4. It gives me confidence that there is a meaningful part of our customer base that's taking this as a longer-term view and not just trying to grab every part they can but give us more visibility into what their needs are. And with that, I think we can meet all the requirements. So that I think is a real positive sign, Sandy, is that people aren't just taking a 60-day view or 30-day view “Let me see how many parts I can grab a hold of now”. They're definitely laying things out over time. Now what we do internally isn’t perfect. I don't know that there is a perfect way to try to capture any kind of excess ordering, but we do kind of some of the natural stuff that you would expect which is, for example, we'll look at their order rates versus their prior forecast. If they're meaningfully off the forecast that they had given previously or prior run rates, we'll go back and we'll have a conversation and challenge some of the data that’s in there. And frankly, we have run into a couple of cases where people were overdriving things, and we've been successful at pulling those down. So I don't think that there is a broad hoarding exercise going on right now. And as I said, think the kind of the orderly bookings that we have out through Q4 or into Q4 is a good indicator around that.

Operator

[Operator Instructions] The next question comes from Srini Pajjuri from CLSA.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Greg, given that inventory correction is mostly behind you guys and also the visibility seems to be improving, how should we think about the seasonality in the second half this year? Do you expect this year should be kind of normally seasonal for you or do you have any puts and takes that you expect?

Gregory Lang

The seasonality, I would expect to be, yes, I would expect it to be in the normal range in the second half. Q3 tends to be a solid quarter but Q4 tends to be our strongest, and I would expect to see that this year as well.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Okay, and then on the storage side, you kind of gave us an idea where the 6-gig transition is, I'm just wondering I mean could you put some numbers around it in terms of how big the market opportunity is in total and how should we think about that opportunity for PMC?

Gregory Lang

Yes, the overall 6-gig market opportunity is -- actually one way to look at it is, it's a transition from SAS-3 to SAS-1 -- excuse me, SAS 1 to SAS 2 and then the second way to look at it, it's also a transition from Fiber Channel connected drives to SAS drive. So there's two things going on there. We see in the next three years [indiscernible], actually I'll up the market data right now so I can give you a specific number, but we see it growing into several hundred million dollar market over the next few years and PMC's position in that is quite strong. Probably in excess of 60% share. So let me give you a quick number first. For 2012, which as we look out another year or so, the SAS interconnect market is something on the order of $300 million total and then there is the Fibre Channel component of it as well that will be shrinking. So if you net it out and say it's roughly $300 million, I think we're in a position to grab a good 60% of that for our SAS products

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

Would you say that 60% is all incremental, or is it going to be something less than that?

Gregory Lang

Incremental. Well, it's not incremental to today because we've already started the transition. So that will be kind of the net of the whole business that we can accomplish in that part of the storage products.

Srini Pajjuri - Credit Agricole Securities (USA) Inc.

And then my final question, on the OTN side, you said you did about $2 million, but the full year expectation seems somewhat low given what you already did for the first quarter, $10 million from $2 million, I'm kind of wondering why the ramp is somewhat slower?

Gregory Lang

That's a great question, and it really comes down to how quickly the carriers move from their pilot plans into deployments. Verizon is really the only big carrier that we're counting on moving into volume deployments in the metro part of their network this year. AT&T did announce that they're going to start their pilot in the later part of this year. So depending on how quickly they go through it, how big the pilot is, that could drive some more demand. And then you have other carriers around the world that are kind of in the same pilot stage and looking at how they deploy it. So it really comes down to how quickly it goes out. Most – excuse me, how quickly they roll out -- the carriers roll it out. Most of the demand to date has been in the long haul part of the network, or the core part of the network, and so that is already underway. But the expansion that's coming over the next few years is that capability moving into the metro part of the network and the metro or access part of the network, that's where a lot of the volume will come from. And it's really, we're on the front edge of that. So carrier by carrier, we're tracking. We're going to start tracking their deployment plans. But right now, Verizon’s at the front of the bus from a metro standpoint.

Operator

You have a follow-up question from Cody Acree from Williams Financial.

Cody Acree - Williams Financial Group, Inc.

Can you spend a minute on Wintegra. Obviously, you're still expecting to hit your target, but can you spend a little time on some details, of the integration and maybe where you're seeing the most growth?

Gregory Lang

Well, I think the -- so let me take the integration one first. Integration is going great. They had a very -- an excellent technical team. Their technical folks are working very well together. The people part of the integration is largely done. We've got joint teams working on new areas. Now we're looking at new areas and we're looking at how to leverage some of the capabilities that both companies bring to the party. So integration has been very, very good. From a business-backed standpoint growth and where we see the growth, really the biggest driver is going to be the growth of packet-based backhaul. Wintegra has, and this is the reason that we were enthusiastic about bringing them onto the company is they really have established themselves as the leader, winning most of the wireless backhaul sockets for, I'll call it, a hybrid-type of solution where you need to carry along some of the TDM technology while your transitioning to packet-based technology. And they really have the best solution on the market right now and have won most of those sockets. So as carriers move to more packet backhaul, which frankly is really the only practical answer to improving some of the data rates that are required for LTE, that will benefit us directly just by those design wins ramping up. So one way to look at it is LTE volumes ramp up, will ramp it. Our revenue isn't necessarily tied to LTE but that's kind of one indicator because that represents much greater data performance. And the second area of growth is, there is a few customers out there, one big one in China and a couple of others that we're working at trying to win. So we can even though they have the strongest share position of anybody, there are a couple of big customers out there left to win and we're working on that. That will actually just enhance our footprint in the space. So the biggest driver is really just the move to packet-based backhaul to support all of the smart phones that are being sold across the planet and gives us better performance, which I think all of us are probably feeling a bit of that with our smartphones today.

Operator

There are no further questions at this time. Please continue.

David Climie

Thank you, operator, and thank you for attending our call today. We will be having our second quarter earnings release late in July, in which time we'll be updating our quarterly results and giving you an outlook for Q3. So again thank you for attending today's call, and operator that's the end of the meeting and the call. Thank you.

Operator

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

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