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Executives

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

Suzanne Craig - The Blueshirt Group

Gregory Lang - Chief Executive Officer, President and Director

Analysts

Sandeep Shyamsukha - Auriga USA LLC

James Schneider - Goldman Sachs Group Inc.

Ruben Roy - Mizuho Securities USA Inc.

Sundeep Bajikar - Jefferies & Company, Inc.

Harlan Sur - JP Morgan Chase & Co

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

PMC-Sierra (PMCS) Q2 2011 Earnings Call July 21, 2011 4:30 PM ET

Operator

Good day, and welcome to the Q2 2011 PMC-Sierra Earnings Call. Today's conference is being recorded. It is Thursday, July 21, 2011. At this time, I would like to turn the conference over to Suzanne Craig. Please go ahead.

Suzanne Craig

Thank you, operator. Good afternoon, everyone, and thank you for joining the call. With me today are Greg Lang, President and CEO; and Mike Zellner, Vice President and CFO. Greg will begin the call with the discussion of the business and key highlights from the quarter, and then Mike will discuss the financial results and the business outlook for the third quarter of 2011. Please note that our second quarter 2011 earnings press 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 would 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 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 this call, a full reconciliation to the most comparable GAAP financial measure is included in our press release issued today. In addition, a GAAP to non-GAAP reconciliation of financial measures that we will provide in our outlook will be posted on our website under the Financial Reports section of the Investor Relations tab. [Operator Instructions]

Thank you, and I will now turn the call over to Greg Lang.

Gregory Lang

Overall, we had an excellent quarter. Our Q2 revenues came in at the high end of the guidance range that we provided last quarter at $171 million or approximately 9% sequential growth. Storage and optical market segments led the growth with a double-digit increase from storage and a high single-digit increase in our Metro and Fiber To The Home optical market segments. In fact, it was a record quarter for us in storage as our SAS-2 leadership position strengthens.

In the optical market segments, we're recovering from back -- recovering back to end market levels and are seeing the continuation of the ramp of our OTN products. From an earnings perspective, we achieved $40 million in non-GAAP operating income or 24% of revenue, which is approximately 29% growth from Q1.

Now I'd like to provide an update about our market segmentation. Traditionally, we've talked about revenue splits between our enterprise and WAN Infrastructure market segments. Given our growing emphasis i1n mobile infrastructure, we'll add a third segment starting now. Our new market segments are storage, optical and mobile networks.

Storage is primarily our OEM and channel storage products, as well as the printer ASICs, as they are most aligned with our enterprise storage customer buying patterns. Our optical network segment includes our WAN communication products focused on metro and access networks, including SONET, ATM and Fiber To The Home. And lastly, our mobile segment will include mobile backhaul, T1/E1, SERDES devices, as well as a few other small volume devices sold into the wireless infrastructure market.

To give you some historical perspective, the full year 2010 revenue breakout by market segment is 53% for the storage network segment, 35% for the optical network segment and 12% for the mobile network segment. In Q1 2001 (sic) [2011], the market segment's breakdown would be 55% for storage, 27% for optical and 18% for mobile.

And in the quarter we just finished, our storage network segment was 57% of revenue, the optical Network segment was 27% of revenue and the mobile network segment was 16% of revenue.

Now I'll give you a little bit more color on the results by each segment. As I mentioned earlier, we had another record quarter in our storage market segment, as our leading SAS-2 design win position continues their production ramp. We experienced growth in Fibre Channel, 6-gig SAS and channel products and currently anticipate continued growth as the end market remains robust and as customers migrate to their 6-gig platforms. Printer processors were also up after working down inventory last quarter.

We made a few major announcements this quarter as well. We announced our latest Tachyon SPCv protocol controller for storage systems. This device sets the new high bar for performance in SAS controllers in the industry with up to 750,000 IOPS performance, which is double the prior generation.

We're also pleased to have our 6-gig SAS controllers with the next-generation high-speed PCI express bus, or PCIe Gen 3, working very well in our ecosystem testing. I'm quite placed with the progress we're making, building on our heritage as a leading provider of high-quality, leading-edge, high-speed interface designs.

In our optical market segment, we saw high-speed single growth -- excuse me, single-digit growth in both our access and metro products. We believe Asia has recovered to near end market run rates, while North America continues to work down inventory. Our OTN products continue to ramp nicely and a bit ahead of our earlier forecast. As we said last quarter, we expect North America to recover and our new OTN products to ramp, which will help this business grow in 2012.

In the second quarter, we also announced the industry's first symmetric 10-gig EPON solution with advanced OTDR line diagnostics, advanced power management and traffic management. Additionally, we announced a 4-port 1-gig EPON version with the same advanced features.

In the metro and long-haul market, we announced we're entering the 40-gig coherent market with silicon that provides substantial improvements to the distances carriers can deploy expensive regeneration equipment. We're excited about the prospects for these new industry-leading solutions.

In our mobile network segment, our revenue was roughly flat. The softness was due to continued inventory consumption as well as a pushout of 2 major OEM platforms to later in the year. We expect these platforms to ramp up later this year and also resume growth in this market segment.

In the quarter, we also won an award for our Universal Front End device, the NGN Magazine Leadership Award in the network technology category.

Now a few words on our outlook for Q3 2011. We currently anticipate revenue in the range of $171 million to $181 million in Q3, a 14-week quarter. We started the quarter with about $151 million in backlog, so we need about 16% turns to hit the midpoint of our guidance. This compares with history that suggests 20% to 25% or more is normal for turns. But with the Japan supply concerns settling down, bookings are adjusting down to normal levels. So as you would expect, our visibility is less than it was a quarter ago, and we took a conservative approach in our guidance.

Overall, I continue to believe that our end markets are healthy. The fundamental growth drivers are in place and put simply, PMC is enabling the next generation of storage, optical and mobile networks that provide new levels of performance for Smart phone services, video streaming and cloud computing. We're extremely well positioned to meet the needs of the infrastructure that sits behind these exciting new applications.

So with that, I'll hand it back to Mike for more details on the financials.

Michael Zellner

Thanks, Greg. I'll discuss our second quarter 2011 financial results and comment further on our outlook for the third quarter.

As Greg highlighted, the second quarter revenue of $171 million came in at the high end of our outlook range for Q2 and was 9% or $13.6 million higher than Q1 revenues of $157.4 million. In Q2, we had one customer that represented greater than 10% of our revenues calculated on a rolling 12-month basis, namely HP.

Non-GAAP gross margin in the second quarter was 69.4%, slightly above our outlook and 110 basis points above Q1's 68.3% due to changes in product mix. On a non-GAAP basis, operating expenses increased by $2 million from $75.9 million in Q1 to $77.9 million in Q2. This increase of about 2.5% was slightly lower than expected with continued focus on expense control.

The increase over Q1 was from planned investments in R&D projects and annual merit increases, partially offset by lower employee-related benefit costs, as annual limits for certain contributions are reached in the normal course during second quarter.

In Q2, we achieved a strong non-GAAP operating margin result of 24%, underpinned by the revenue growth and related improvements in gross margin previously noted. This compares to 20% non-GAAP operating margins in Q1.

Non-GAAP tax provision was lower sequentially at $1 million compared to $1.4 million in Q1, mainly due to change in mix of income across our foreign subsidiaries. Non-GAAP net income for Q2 was $40.2 million or $0.17 per share on a diluted basis, led by the key drivers that Greg mentioned, compared to $30.6 million or $0.13 per share generated in Q1.

Q2 GAAP diluted net income per share was $0.07 versus $0.03 net loss per share in Q1, the improvement mainly a result of higher revenues in Q2 as well as acquisition-related costs and lease termination experienced -- expenses recorded in Q1.

The primary items reconciling GAAP to non-GAAP net income for Q2 are as follows: $11 million in amortization of purchased intangible assets, $7 million in stock-based compensation expense, $900,000 of non-cash interest expense, $1.2 million of acquisition-related costs and finally, $2.7 million of income tax related adjustments as described in our press release issued today.

Turning to the balance sheet. We ended the quarter with $460 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at the end of Q2 net of the $68.3 million face value of our convertible note was over $390 million, an increase of $46 million from Q1. The increase primarily relates to strong, positive cash flow generated from operations of $58 million, offset by $6.3 million of cash used for repurchasing stock, net of the proceeds from employee-related stock issuances and approximately $6 million of IP purchases and capital expenditures.

Our net inventory at the end of Q2 was approximately $34 million and over $3 million lower than the prior quarter. We also saw a sequential decrease of approximately $1 million in our deferred revenue from Q1 to Q2, which relates to inventory at our distributors.

Our net inventory turns for Q2 was 6.2x compared to 6.3x in Q1. This remains in line with our target for inventory turns of around 6x. We saw improvement in inventory turns of our product at distributors as well.

Overall, we believe our inventory, including at distributors, remains well-managed, and lead times from our foundry partners have remained at normal levels. In summary, we had a great second quarter as demand for our storage and optical network products drove revenues towards the high end of our expectations. Additionally, ongoing expense and operating controls enhanced our strong financial results.

Now I'll turn to the outlook for our third quarter. Considering current levels of demand, our expectation of booking rates to the balance of the quarter, we estimate the potential revenue for PMC for Q1 is in the range of $171 million to $181 million, as Greg mentioned. Judged, shippable backlog at the end of Q2 was approximately $151 million indicating that we would need approximately 16% turns from the beginning of the quarter to reach the midpoint of our revenue outlook for Q3.

The level of turns is lower than what we consider typical for our businesses, which is more than -- more typically in the range of 20% to 25%. We expect to return to these levels as some of the macro factors, including the Japan situation, continues to settle down.

On a non-GAAP basis, we expect our overall gross margin percentage in Q3 to be consistent with Q2 at approximately 69.5% plus or minus 50 basis points. Non-GAAP operating expenses in Q3 are expected to be in the range of $80 million to $81 million compared to $77.9 million in Q2, mainly due to the extra week we have in the fiscal quarter.

We expect non-GAAP net interest income to be about $0.5 million, which is primarily net interest from our cash position offset by servicing of our outstanding convertible notes. We expect our non-GAAP tax provision in Q2 to be $1 million to $2 million. As a reminder, the tax expense can be impacted by a number of variables associated with our ASC 740 liabilities including, but not limited to a change in foreign income and product mix.

Regarding share count, we ended the quarter with a diluted share count of approximately $238 million. At the end of Q3, our diluted share count is expected to be approximately the same.

With that, operator, we would like to open up the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Jim Schneider.

James Schneider - Goldman Sachs Group Inc.

Greg, I was wondering if you could provide a little bit of detail. With respect to the outlook, how much of the outlook is being impacted for Q3 by the mobile pushouts plus the inventory effects you guys are seeing right now? In other words, without that effect, if you didn't have that, how much higher would the outlook be?

Gregory Lang

The -- was mobile pushouts, and what was the second part?

Michael Zellner

The impact we're seeing from Japan or the inventory.

Gregory Lang

Yes, the outlook for Q3, we're coming off a strong Q2. The backlog that we started the quarter with was very solid. But we are going through the transition of kind of the early, more forward-looking bookings after the tsunami in Japan, which gave us a lot of visibility to a more normalized booking pattern that we're seeing today. And the bottom line of that is that our visibility is less than it was a quarter ago. So we've been a little bit cautious on the backlog there. And in terms of the mobile piece, specifically in terms of ramping new products and where we would have expected a little bit of growth there, we're probably talking about in the few million dollar range of what we're -- what we might have seen, had things been ramping up on the timeline that we had hoped. So I don't know that would be a huge swing factor for us. I think the bigger issue is just kind of the less visibility we have in the quarter, given the things are kind of coming back to normal.

James Schneider - Goldman Sachs Group Inc.

Okay, fair enough. That's helpful. And as a follow-up, could talk about the -- what you're seeing from Chinese customers right now? There's been a lot of talk in the market about optical and WAN potential pushouts in that region. Is that something you're seeing from your customers right now? Or is things pretty much fully recovered at this point?

Gregory Lang

It feels like they've recovered. And this is speaking for all the different optical products from the WAN to the access side. We're kind of back to what I would call normal levels, not necessarily peak levels, when things got a little bit crazy with the 3G deployments, but back to kind of normalized run rates. So if there's -- if there are big pushouts or changes in the outlook there, we're not seeing it. We're seeing it actually -- it's recovered actually. They've been up now the last 2 quarters in a row, and our forecast is to be up slightly again this quarter. So it feels to us like we're back to more normal business levels with that part of our business in Asia.

Operator

The next question comes from Harlan Sur.

Harlan Sur - JP Morgan Chase & Co

Greg, on the guidance, can you just give us a sense of what's growing and what is not within your 3 major segments? So it sounds like storage is going to be growing nicely in the third quarter. It looks like -- did you say that optical was going to grow, and that mobile and wireless is going to be down sequentially?

Gregory Lang

No, I didn't say that. I actually didn't really comment on where the growth is going to come from. Because I think at this stage, it really depends on where the turns come from. And we don't have a clear, precise picture of where that's going to be. But I think each one of these major segments could grow in the next quarter. How much, where it comes from, it remains to be seen.

Harlan Sur - JP Morgan Chase & Co

Okay, and then of the mobile customers that pushed out from Q2, when do these customers expect to ramp these projects? And then subsequently, when do you expect to start to ship silicon into these customers that pushed?

Gregory Lang

Yes, so let me just give a little more background here. There are literally dozens of designs that are in process, and the whole transition, which we think LTE will probably be the biggest catalyst around or behind, the whole transition to packet-based mobile backhaul is in its infancy. So we're very, very early in this technology cycle. These are brand new platforms. People are rushing as fast as they can to get them to market because the demand is there. So having delays is not an unusual thing at this stage of the market. The good news is the designs are very actively being -- and aggressively being pursued. And so there are several that we know of that are still targeting to ramp up, and there are non-trivial designs to ramp up later this year, and we're working aggressively with those customers to try to help make sure that happen. There are also several more, many more, that are actually targeted to ramp up in 2012. So this is again very early in the technology cycle, and we still feel very positive about our position in that cycle and the growth potential there. It's just moving out a little bit from where we thought it would be a couple quarters ago.

Harlan Sur - JP Morgan Chase & Co

Just one last final question. So you didn't really talk about server fundamentals. Can you just give us a sense for server fundamentals in Q2? And your expectations as it relates to your guidance for the third quarter?

Gregory Lang

Yes, that's a good question. Overall, the data center and server space or the enterprise part of our business has been very strong. I think you've seen those kind of strong results out of EMC this week. We've seen it in our own business. And the server side, as a subset of that, also appears healthy. I think the one big question, and I don't know -- I don't profess to be an expert in this, but there is a big transition coming later this year into new server platforms. So does that provide another catalyst for new system sales, new growth? Perhaps, and it's probably out in the first part of next year as opposed to the back half of this year. So I do think that the transition coming could be another opportunity for new energy in that space. But right now, it seems to be very, very healthy.

Operator

Your next question comes from Sundeep Bajikar.

Sundeep Bajikar - Jefferies & Company, Inc.

I guess just another follow-up on the mobile side, particularly Wintegra. It seems like you're growing without any competition in the real sense in that market. So can you just help us understand what your top challenges are in getting to your 20% growth that you've said you would have in 2011? Or if that number has changed?

Gregory Lang

Well the challenges are, as we mentioned earlier, is ramping the new platforms into production. That's where the growth will come from. Some of the -- actually, I guess, it's that simple is that we need to see the base business solid, and we need to see the new platforms grow, and as I was just kind of going into a little more detail, there are a broad number of platforms that are under development, and we're just working hard to help get those out the door.

Sundeep Bajikar - Jefferies & Company, Inc.

And do you still think the 20% year-on-year growth in that business is reasonable? Or do you think that has changed?

Gregory Lang

I think it's too soon to tell. We're in the middle of the year. It's still possible. But I think, given the pipeline pushouts, the expectations are less than they were a couple of quarters ago.

Sundeep Bajikar - Jefferies & Company, Inc.

And then one last question from me, if I can. You've talked about the ramp in SAS-2. Can you just help us understand the dynamics relative to Fibre Channel in terms of how it impacts and helps the overall growth, which you see from the storage business?

Gregory Lang

How Fibre Channel impacts the overall growth.

Sundeep Bajikar - Jefferies & Company, Inc.

SAS-2 versus Fibre Channel.

Gregory Lang

SAS, okay. So just to rephrase the question a bit for everyone. So some of the discs in the storage system part of our business are connected via Fibre Channel ports. We expect that to be replaced eventually by SAS-2 ports. And so that transition, we believe, is starting as higher end applications, basically, will move to SAS-2 type of ports. Our position in both is very strong. And as the transition happens, we expect to see revenue basically go from the Fibre Channel ports into the SAS ports. And from a PMC total perspective, it's the less interesting part of the SAS transition. The more interesting part of the SAS transition for us is going from SAS 1.0 connections to start with, which is the bigger part of the market into SAS-2. Our share goes from about 30% to roughly double that in that transition, and that's been driving part of our growth here in the last couple of quarters and will continue for the next several quarters because we're maybe 50%, 60% through that transition. There's still quite a bit of ways to go to finish that transition.

Operator

The next question comes from Kevin Cassidy from Stifel, Nicolaus.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

With the change in your reporting structure, is there any internal changes to -- is that the way your product groups are organized now?

Gregory Lang

No, it's the product. The internal structure hasn't changed. This is really just kind of us being up to articulate a little better, a little cleared what the dynamics in these different segments. There are some natural groupings of the different products we do, and so that's how we put those together. So it's a little cleared on the different large end market segments.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Okay, and as you look out maybe at the target, is this is a mix we could expect going forward, like all 3 groups kind of growing the same? Or do you expect this to end up being a 33% out of each group?

Gregory Lang

I do believe all 3 of the major segments will grow over time. They'll grow at different rates. I would expect maybe at the tail end of next year that the mobile section will grow -- or segment will grow faster than the other 2, primarily because we have some new major product ramps happening on the backhaul side but also on the radio head side. So that one might pull ahead of the other 2. But we do expect all 3 of them to grow over the next several years.

Kevin Cassidy - Stifel, Nicolaus & Co., Inc.

Okay. Maybe if I could ask one more, on the optical side, just access versus metro, can you say which area you're having better traction? And what the dynamics are of each one of those?

Gregory Lang

Better traction -- okay, so I'm not sure where that is, but I'll take a shot at a couple different angles. One is they both grew about the same amount last quarter, high single digits. So they're both good, solid quarter of growth. On the design win front, on the metro side, our -- we've talked in the past about having a very strong position in the next round of OTN deployments in the metro network, in particular metro switching -- or excuse me, OTN switching for metro networks and believe that we'll gain from both increased content in those platforms, but also increased share where our share in the SONET world is in the 20s, and we believe that, that can also double in the OTN world based on design wins that we've won. On the Fiber To The Home side or on the access side, we're the market leader there, still very strong position and with unchanged, really, share position in Japan, which is the most substantial part of the business, and we have a good, solid business position also in China and in Korea for EPON. And the competitive dynamics, they really haven't changed -- or the share positions really haven't changed a heck of a lot there in the last several quarters. So there's not a lot of new to report other than business is solid in those areas and grew nicely last quarter. The one area that I would comment on is -- one additional area is on the PON front or the Fiber To The Home front, GPON is the area that we have -- that we entered after EPON, that was kind of a second effort for us. We're starting to make some traction on that part of the business, but I would say it's going to be a few quarters before we see a revenue result out of that. But stay tuned on that front. That's a place that we're starting to get more enthusiastic about some of the design win prospects there.

Operator

The next question comes from Sandeep Shyamsukha from Auriga.

Sandeep Shyamsukha - Auriga USA LLC

Actually the first question I wanted to ask if you could provide what sort of market share you enjoy in the Fibre Channel storage systems market versus the SAS-2, so that we can compare how things would shift for you once the market transition happens.

Gregory Lang

Okay, this is on the disc side. So keep in mind there's a disc side of the storage system, and there's the network side. On the disc side, our share is up in the similar range as we've talked about for SAS-2, 60-plus percent, and so the transition to SAS-2 will maintain our position there. And so I think that was your first question. I think you had a second.

Sandeep Shyamsukha - Auriga USA LLC

Yes. And also if you could provide some more visibility -- I mean, or more color on which segments you have better visibility in terms of going into the next quarter in terms of inventory at customers and in the channel, versus -- do you have better visibility in storage versus optical? Or is it lack of visibility in pretty much all of these segments?

Gregory Lang

Well, from an inventory, you have an inventory question in there as well, I think. But from an inventory perspective, we feel like the channel part of the inventory as well as our own internal inventory is in very good shape. And the end market, if you will, our end customer, there still are some inventory issues. And we think that the bigger portions of those are in North America, and they're primarily in the optical and mobile part of our business. We're hoping that we get through that by the end of this quarter. I think it's kind of come clean out of -- or we've gotten back to end market levels in Asia, and in storage, we've kind of passed those. So this is kind of the last piece that we'd like to get through. The second part of your question, I think, was just in terms of visibility. I think we have comparable visibility in each of the segments. I don't think there's anything that stands out that says we've got a lot more turns to get in X segment versus Y segment. I think we started with healthy bookings across the board, and so nothing really stands out uniquely in that regard.

Michael Zellner

One other thing if I can add, Greg, is that -- I don't think you should have the impression that our visibility is any lower than normal. I think last quarter because of the situation in Japan, our visibility actually increased, and that one was really more the anomaly than this quarter frankly.

Operator

The next question comes from Ruben Roy from Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc.

Just 2 questions. First, Greg, I didn't really follow the Wintegra discussion, I guess. My question is within mobile networks, I assume Wintegra is a pretty big portion of that. Is that specifically where you're seeing pushouts? Or would you say the pushouts are more broadly based?

Gregory Lang

Pushouts. Okay, so you're talking about the platform, the new platforms ramping up. Right, okay, yes, so the new platform -- the new growth that we're expecting right now out of the Mobile segment is driven by the mobile backhaul piece and therefore, Wintegra. So that's the bulk of it, and that's what I was referring to. In terms of the 2012 comment that I made a little bit earlier about growth, we really won't see growth in the mobile segment for the new products that we're doing probably until the second half of 2012. Those are unannounced new products. But I just wanted to refer back to that from my earlier comments is that we have some new stuff coming up, but the revenue part of that equation doesn't really impact until -- for another year or so.

Ruben Roy - Mizuho Securities USA Inc.

Okay, and then just a couple quick ones for Mike. Mike, is the extra week going to add anything material, do you think, to the quarter? And if so, do you expect any tailwind into Q4? And then also, you guys are doing great on the storage side. I would have thought that gross margins -- or I wouldn't have thought they would have been so impressive. So as storage continues to do well, do you expect gross margins to kind of hang around up here?

Michael Zellner

Sure. So the week is -- when you think about how a week -- how a quarter goes through, it's not linear. So honestly, other than a little bit of expenses which we've noted -- that we've noted, it doesn't really cause a material difference from one quarter to the next. At least, certainly, that's the way we see it. And then in terms of gross margin, storage is at or above sort of company levels, so it's part of the reason that we've been able to maintain it. We worked really hard to make sure that we keep obviously our costs in check as well as maintaining pricing. So to answer your question, we continue to believe that we can deliver gross margins at these levels. And you're right, storage is one aspect of the company that's growing nicely -- has grown nicely for us and will continue to do so. But we don't think that's going to cost us any significant problems on the margin side.

Ruben Roy - Mizuho Securities USA Inc.

And that will continue when the channel storage business starts to ramp when you have your -- when you have the software transformed into your silicon, correct?

Gregory Lang

That's correct. In fact, we did -- we're actually shipping a board right now where that has actually already happened. So the market is in the process of transition, but we're shipping into the channel right now with our 6-gig solution.

Gregory Lang

And actually, to that point, most of what had been shipped previously into the channel was quite a bit lower margin product based on a very expensive third-party piece of silicon. We've got a much more cost-effective streamlined design based on our own silicon. So the margins in that business as that business grows, which is actually growing along with the rest of it, we should see some margin improvement out of that as opposed to a decline.

Operator

[Operator Instructions] There are no more questions at this time. Please continue.

Suzanne Craig

Thank you, operator. Thanks to everyone for taking part in our call today. We'll next report the third quarter later in October. Thank you very much.

Operator

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

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