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PMC-Sierra (NASDAQ:PMCS)

Q3 2011 Earnings Call

October 27, 2011 4:30 pm ET

Executives

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

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

Suzanne Craig - The Blueshirt Group

Analysts

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

William S. Harrison - Wunderlich Securities Inc., Research Division

Harlan Sur - JP Morgan Chase & Co, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

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

James Schneider - Goldman Sachs Group Inc., Research Division

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Srini Pajjuri - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Sundeep Bajikar - Jefferies & Company, Inc., Research Division

Operator

Good day, and welcome to the Q3 2011 PMC-Sierra Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. 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 Mike will then discuss the financial results and the business outlook for the fourth quarter of 2011. Please note that our third 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 PMC's limited revenue visibility due to variable customer demand, market segment growth or decline, orders with short delivery lead time, customer concentration, change of an inventory, foreign exchange rates and volatility in global financial markets, and other risks 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 Form 10-K and Form 10-Q.

Note that PMC undertakes no obligation to update any forward-looking statements. Please note that for each of the historical non-GAAP financial measures mentioned on this call, a full reconciliation to the most comparable GAAP financial measures is included in our press release issued today. In addition, a GAAP to non-GAAP reconciliation

[Audio Gap]

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 S. Lang

Thanks, Suzanne. The third quarter marked another period of very solid performance for PMC. Our third quarter revenue came in at $173 million, within the range we guided in July. The results were led by another record quarter in storage through OEMs, channel and data center customers. This growth was offset by softness in our Optical business which returned back to Q1 levels. Strong gross margin and expense control helped us achieve 24% non-GAAP operating income and $0.18 per share of non-GAAP earnings.

At the top level, the Storage Network segment was 60% of total revenue, up from 58% in Q3. Optical revenue came in at 24% of the total, down from 26% and Mobile came in at 16%, consistent with 16% last quarter.

Now for a few more comments by segment. As I mentioned, we had another record quarter in the storage market segment, growing 6% sequentially. We saw growth in SAS, as our leading SAS-2 design one position continues its production ramp. We also expressed growth in Fibre Channel, data center and channel sales, and currently expect continued strength as the end market remain solid. We had a number of major accomplishments this quarter.

First, we reached production status on the industry's first PCI Express GEN 3 SAS Controller, continuing our leadership in RAID-on-Chip designs. We also announced the family of Tachyon controller-based encryption solutions for securing cloud storage. The new 6-gig SAS controllers integrate line-rate data encryption, providing a central, scalable and cost-effective means to secure and manage stored data. This follows our 8-gig Fibre Channel encryption solutions that are shipping in Tier 1 storage systems today. We see growing interest for encryption across our customer base and as cloud computing becomes more of a -- becomes a reality everyday.

We announced the new Adaptec Series 6 rate RAID adapter with maxCache 2.0 SSD caching, designed to accelerate data center and cloud computing application performance. This is PMC's second-generation SSD caching solution and adds support for write caching to expand the application workloads that can benefit from this technology. The Series 6Q with maxCache improves the quality of service and offers up to 13x improvement in I/O operations per second, and a 13x reduction in the applications latency.

Up next, in our optical market segment, we saw approximately a 9% decline, which included some modest growth in OTN, offset by continued weakness in Metro and access sales. OTN continues on a path to beat our 2011 estimate while the overall end market is soft. PON access was also down this quarter as Japan catches up after the tsunami. We continue to gain traction in the OTN market, with 7 of the top 9 optical OEMs expected to be in production by the end of this year with our current solutions, and are well on our way to expand this position in our 100-gig generation of products.

Now in our mobile market segment, our sales were up by 3%, lead by growth in Wintegra processes, offset by some T1/E1 sales. Wintegra's growth is very positive given the climate but below our original expectations for 2011, largely due to the delayed platforms from key suppliers in China and Europe.

Two new cell site routers were released to production based on our latest WinPath3 processors, both from market leaders and mobile backhaul equipment. We also expect 2 additional cell site router platforms to be released by the end of Q1 2012.

So in addition to these market segment developments, I wanted to give you an update on 2 other business items. Earlier this week, we announced the acquisition of privately held RAD3 Communications. RAD3 is a small private company with leading-edge capability in DSP, algorithm and forward error correction technology that we will leverage in our storage and optical network products. We're excited to welcome the RAD3 team to PMC.

Additionally, I'm pleased to welcome the addition of 2 new board members during the quarter: Michael Klayko, CEO of Brocade Communications; and Dr. Richard Nottenburg, formerly CEO of Sonus Networks and Chief Strategy Officer for Motorola, joined the Board in August. We look forward to working with these 2 seasoned communication network industry executives and their contributions to the continued growth of PMC.

Now a few words on our outlook for Q4 2011. We currently anticipate revenue in the range of $150 million to $160 million in Q4. We need about 20% turns from the beginning of the quarter to hit the midpoint, consistent with history of approximately 20% to 25% turns in a given quarter. We believe each of our segments of business will experience a sequential decline. And some of the decline is due to a 14-week Q3, but I believe it's also due to the uncertainty in the global economic and political climate. We're encouraged by today the U.S. GDP report, and Eurozone debt plans, and we'd like to see that result in greater confidence in the infrastructure markets we serve. Looking ahead, we're mindful of these macro issues and we'll remain focused on delivering the innovative solutions that are enabling transformation of storage, optical and mobile networks while maintaining our operational discipline at the same time.

So with that, I'd like to hand it over to Mike for details of the financials and our outlook.

Michael W. Zellner

Thanks, Greg. I'll now discuss our third quarter 2011 financial results and comment further on our outlook for the fourth quarter. Third quarter revenue of $173.3 million came in within our outlook range for Q3 and which is slightly higher than Q2 revenues of $171 million. It's also 7% higher year-over-year. Greg provided further detail around this in his comments. In Q3, we had 2 customers that represented greater 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 69.8%, in line with our outlook and 40 basis points above Q2, 69.4%, due to changes in product mix.

On a non-GAAP basis, operating expenses increased by $1.4 million from $77.9 million in Q2 to $79.3 million in Q3. This increase of about 2% was slightly lower than our outlook for the quarter due to our continued focus on expense control. The increase over Q2 was mainly due to the extra week in our Q3 fiscal period, as mentioned in our last conference call. In Q3, we maintained a strong non-GAAP operating margin at 24%, consistent with Q2. Non-GAAP tax provision was slightly lower sequentially at $900,000, compared to $1 million in Q2, mainly due to changes in mix of income across our foreign subsidiaries. Non-GAAP net income for Q3 was $42.1 million or $0.18 per share on a diluted basis compared to $40.2 million or $0.17 per share generated in Q2. The bottom line increase resulted from the continued strength in storage and mobile integrated, as noted in our comments on revenue, as well as maintaining our discipline in cost control.

Q3 GAAP diluted net income per share was $0.20 versus $0.07 in Q2. The increase was mainly a result of $29.4 million accounting gain on the release of our previously accrued liability for the earn out related to our acquisition of Wintegra. This contingent consideration was released as Wintegra's revenue are expected to come in below earn out levels. Also in Q3 we had some foreign exchange gains on the revaluation of our foreign tax liabilities contributing to the increase.

The primary items reconciling GAAP to non-GAAP net income for Q3 are as follows: $29.4 million gain on liability for contingent consideration, $11 million in amortization of purchased intangible assets, $7 million in stock-based compensation expense, $3 million write-down of IP, $900,000 of non-cash interest expense, and $1.3 million of income tax-related adjustments and certain other items as described in our press release issued today.

Turning to the balance sheet, we ended the quarter with $474 million of cash and cash equivalents, short-term investments and investment securities. Our tax position at the end of Q3, net of the $68.3 million fixed value of our convertible note, was $406 million, an increase of $14 million from Q2. The increase relate primarily to the following: strong positive financial cash flow generation from operations of over $46 million, offset by approximately $24 million of cash used for the repurchasing of stock, net of proceeds from employee-related stock issuances, and approximately $4 million of IP purchases in capital expenditures. With regard to the stock repurchases, I am pleased to confirm that during Q3, we completed our previously announced stock repurchase program for 2011, repurchasing 6.1 million shares during Q2 and Q3 for a total of $40 million.

Our net inventory at the end of Q3 was $40.8 million, approximately $7 million higher than the prior quarter. This increase relates predominantly to a combination of specific customer programs and replenishment of stock on higher volume products. Our net inventory turns for Q3 was lower at 5.2x compared with 6.2x in Q2. Additionally, we saw a slight sequential decrease of approximately $600,000 in our deferred revenue from Q2 to Q3, which relates to inventory at our distributors.

Overall, despite the current macroeconomic environment, as Greg described, we believe our inventory, including our distributors, remains well-managed and we anticipate our inventory turns to move back towards our targeted level of 6x. Lead times from our boundary partners have remained at normal levels.

In summary, we had a solid third quarter in line with our expectations. Our operational execution and cost discipline helped us achieve these strong financial results for the quarter.

Now turning to our outlook for the fourth quarter. Considering current levels of demand and our expectation of booking rates throughout the balance of the quarter, we estimate that potential revenue for PMC for Q4 is in the range of $150 million to $160 million, as Greg mentioned. Just shipped and shippable backlog at the end of Q3 was approximately $124 million, implying turns of approximately 20% from the beginning of the quarter to reach the midpoint of our revenue outlook for Q4. This level of expected turns is considered to be normal range for our business.

On a non-GAAP basis, we expect our overall gross margin percentage in Q4 to be consistent with Q3 at approximately 69.5% plus or minus 50 basis points. Non-GAAP operating expenses in Q4 are expected to be in the range of $77 million to $78 million, lower than the $79.3 million in Q3, mainly due to an extra week in that quarter, as well as maintaining our fiscal discipline especially in light of current market conditions. We expect non-GAAP net interest income to be about $0.5 million, which is predominantly net interest income from our cash positions, offset by servicing our outstanding convertible notes. We expect our non-GAAP tax provision in Q4 to be approximately $1 million. As a reminder, tax expenses 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 $234 million. At the end of Q4, our diluted share count is expected to be approximately the same. With that, we'd like to open the call to questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from James Schneider from Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could start off on the outlook. In terms of which segments you expect to be down the most versus the least, can you maybe give us some color on that, please, and do you expect any of the segments to be up?

Gregory S. Lang

Of the 3 major segments, we expect them each to be down in the next quarter. The one that will be down the least will be storage, probably in the order, at our current outlook or if you really ask me right now, maybe on the order of 68%, and then in the 2 communication business segments, both mobile and optical, as far as we can tell right now, probably similar levels in the teens decline quarter-to-quarter.

James Schneider - Goldman Sachs Group Inc., Research Division

And then as a follow-up, can you maybe just give us some color on the customer situation in terms of inventory? Obviously, there's a customer inventory correction across the board in the industry right now. Can you maybe give us some color on across the communications customers and storage customers, what inning of the de-stocking phase we're in right now, and whether you see kind of any stabilization there or do you think that continues into Q1?

Gregory S. Lang

It's hard to predict. I think what we're seeing and what you're referring to, at least in my view, is kind of the ripple effect of the tsunami concerns and the anxiety that came out of that from a supply situation, so we're clearly working through some of that inventory. I think that it started in the quarter we just finished, in Q3. I think that was born out by our results from a lot of folks, including ourselves, and I think that, that continues in Q4 and when we come -- when we finish that up, it's hard to say but I can see that being finished. We're reaching the tail end of that in Q1. I mean, I think it's important to note that this -- that this position we're in right now, and make this as a more general industry statement, is a lot healthier than it was in Q4 of 2008, Q1 of 2009 largely because the shock to the end markets is more because we've been kind of running in this, I'll call it distressed economic environment for a while. And the amount of buildup, I believe, is less because it didn't follow -- I mean, the last time around, we followed, I think, 3 quarters of constrained supply, which had people playing a lot of excess parts. So I think in that sense, the supply chain is in far better health than it was back in 2008.

Operator

The next question comes from Sandy Harrison from Wunderlich Securities.

William S. Harrison - Wunderlich Securities Inc., Research Division

A couple of questions. Greg, kind of following up on your comments about all the areas being down next quarter. As you've talked to your storage customers, has any of their outlook or do you see a fair amount of their more skepticism based upon their ability to get drives? I guess, the Thailand issue seems to be trying to find its way through the channel and I think initial and final thoughts have been outside of the hard drive makers themselves, that they should be pointed out. Have you calculated that in your guidance, and then you're hearing that from any of your storage customers about some concerns about that for the quarter?

Gregory S. Lang

I think I believe people are sorting through what the impact for Thailand would be. For us, we have no direct impact to our business from a supply standpoint. But as you point out, we do have indirect in terms of -- if this has an impact on some of our large storage OEMs or in their channel, that would obviously impact us, that slowed down some of their shipments. I'm sorry, I would argue that no one really has a clear answer of how that's going to shake out this quarter. I think there's probably also differences in terms of how the product gets allocated to the different market segments and I would venture to guess that the big strong storage OEMs will probably get priority over some of the smaller customers and perhaps the channel. So for us, we may see the impact first or most in the channel. As of this point, we don't have an indication of that, but that's where I would expect to kind of run into at first.

William S. Harrison - Wunderlich Securities Inc., Research Division

And then a quick follow-up on the storage -- excuse me, on the Wintegra business. You guys had signaled last quarter that 2 of your opportunities had been pushed out. Sounds like more and more of the carriers are pushing out general till next year, whether it be for balance sheet dressing for year end or whatever it may be. Have you guys seen any material change to what you had expected Wintegra to be at sort of exiting this year, following your push out at 2 customers last quarter? And again, how is 2012 figuring out, in your view, kind of after we get through this near-term sort of uncertainty?

Gregory S. Lang

Yes. I think that we characterize this probably best just at a general level, seems so carriers are finishing the year fairly cautiously. Having said that, there's not really a new view on Wintegra. We think that the year this year was -- didn't grow as much as we expected it to, probably grew on the order of roughly 10% year-to-year, which is not bad given the climate. But we expected it to grow a bit more than that. That was driven by a couple of major platforms being pushed out into next year. We are still seeing major product rollouts, as I've mentioned in my earlier part of my comments, that 2 major platforms just came out: one from the market leader and one from a somewhat smaller player in North America. But good important design wins are rolling out to the markets, so that's all good and I think what that leaves us to is to believe that the year that we thought we're going to have this year in Wintegra, we'll see next year and we'll be able to see good strong double-digit performance for that business going into next year.

Operator

The next question comes from Srini Pajjuri from CLSA.

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Greg, on the 14-week issue, I'm just trying to quantify how much of the revenue was impacted in Q3 and if not for 14 weeks, what would the guidance have been?

Gregory S. Lang

Yes, it's both in terms of the impact for Q3 and Q4. I think it's -- our world isn't necessarily divided on weak-link boundaries, so it's a little tough. I mean, if you just do straight math, it's on the order of 7.5%, 7.7%, something like that. I think it was probably worth at least a few points both in terms of Q3 benefit, as well as Q4 reductions, so that's my best guess, at least a few points, the straight math calculation would have it at 7.5%.

Srini Pajjuri - Credit Agricole Securities (USA) Inc., Research Division

Okay, and then on the storage business being down, it looks like the demand conditions aren't that bad and also, the servers are doing okay. I'm just wondering what's causing the decline? And then last night, one of your competitors has claimed that they have a design win at HP on the Romley generation, just trying to kind of get your read on that.

Gregory S. Lang

On the storage business in particular, we've had as you guys -- I think where we've had several vary strong quarters in a row, stronger than kind of the macro would suggest this as you would expect. And I -- so I think part of what we're seeing now is, in some of that strength may have -- might have been I'll call it the anxiousness out of the tsunami, out of Japan, so I think we're seeing a little bit of digestion right now. I think there's also potentially a little bit of preparing for the next transition, the Romley transition working down some of the product that's out there. And of course, we'll see that ramp back up in Q1. In terms of the competitor comments, the comments from -- were actually no different than the comments last quarter that there is a -- there's kind of a niche I/O product that they announced that they have won the design win on. Our view of that is really unchanged as well, which is our relationship, our position with HP is very strong and we expect actually to grow share inside of HP's business with the Romley generation, and growing share means growing from roughly 90 to something better than 90, so there's not a lot of incremental share that you gain but that gives you an idea of the magnitude of what was won or not won by the other guys.

Operator

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

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

Maybe just to expand on the Romley thought, how much of that do you think slipped from fourth quarter to first quarter, revenue wise?

Gregory S. Lang

It's -- from our -- from where we sit, it's pretty difficult to call, frankly. I know that there's some speculation that people are waiting for these new platforms for purchases, so there could be some pent-up demand around that. I know that Intel had some words to say around that. There's also kind of the normal -- you work through kind of the older inventory, get started on the new stuff. So I think that there could be a couple of million dollars of that kind of movement from quarter-to-quarter, but I think it's probably early to tell what the precise numbers will be until we get a little closer to the end of the year.

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

Okay. Maybe just as a follow-up on that. In fourth quarter, we've had some companies saying that they're seeing good order rates going into first quarter. Are you seeing any evidence of that?

Gregory S. Lang

The first quarter I think, as we see it today, it's a long way away, but I would say it's kind of booking up normally, but it's still very early. I mean, it's too early to call whether our not that would be kind of a bounce-back quarter or not.

Operator

The next question comes from Brendan Furlong from Miller Tabak.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Along the line of the HTD question from earlier on, it looks like some of the optical component companies are also getting flooded out in Thailand and I'm just curious, have you talked to any of your optical customers that are potentially expecting a backup in the supply chain? I know you're not going to be directly impacted but in terms of the supply chain getting backed up because of optical components?

Gregory S. Lang

Yes, that's a good point. That is a big source for some source some of the suppliers there. And the short -- I think the short answer is the same as storage side, I think it's early to tell what the eventual impact would be, potentially a ripple effect, but we don't know. We don't have any percent data or feedback from our customers or other module guys, so I don't know what that will look like, so we're tracking that as well to just monitor and see what -- how that might affect us.

Brendan Oliver Furlong - Miller Tabak + Co., LLC, Research Division

Okay. And I guess the other question I have then is just on the OTN, you kind of briefly mentioned OTN in 100 gig. If you could maybe flash that out on what you think about -- what you're thinking about that for 2012?

Gregory S. Lang

Revenue wise for 2012, it's 0, so I wouldn't anticipate any revenue for 2012. That's when we'll get parts out in customers' hands and we'll start working on the production platforms that they'll bring out 2013 and beyond. So I think that's more of a couple-of-year time horizon but I put it in there to give you an idea of the kind of the strength we're building in this arena as it evolves.

Operator

The next question comes from Sandeep Shyamsukha from Auriga USA.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Your competitor yesterday talked about 12-gig SAS and potentially having a 9-month lead and starting to ship to some customers. Can you give us an update on your plans and how do you view the 12-gig SAS market right now?

Gregory S. Lang

The 12-gig SAS, just for clarity, there is not yet a standard for 12 gig. Actually there's not even a spec that's been issued from the standards group. I think we're getting close to that this quarter. So the idea that there is a 9-month lead is a bit of a misnomer. I think having a chip sampling before a spec is out is more of a test chip and that's kind of hard to say a test chip gives you a 9-month lead. The actual market expectations for us is I would think that the ecosystem, meaning, the standard things like drives, connectors, all that kind of stuff, will probably be ready, best case, in the fourth quarter of next year and probably late in the fourth quarter, maybe get delayed into the first quarter of 2013. So I think that, that market is starting to take shape but some of the comments that are out there are very premature. I'd also a comment on the -- just on the 9-month lead comment, we have -- starting with the SAS-2 generation, we have thoroughly exceeded our competitor in time to market and performance on every dimension from a SAS -- SAS-2 controller standpoint, and we continue that today. I think the comment that I made about the PC Express Gen 3 compatible part is the only one in the industry. The only one in the industry, so that's a product that starts shipping in the Q1 of next year. We'll be first with that as well. So will -- 12 gig is the next battleground and we're going to do just fine there, and certainly our goal is to expand our market share position in that generation of product.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Just had a quick follow-up on the Thailand flood issue. Has your guidance sort of taken -- I mean, is it being conservative or have you taken some of it into account yet or you are unsure where the impact might be?

Gregory S. Lang

It's hard to say. We're unsure what the impact will be and if any, how meaningful it might be.

Operator

The next question comes from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

I don't understand why you expect more turns of business in the fourth quarter when you only did 13% turns last quarter, posting typically in a weak demand environment, you tend to air on the side of being more conservative and just assume sort of last turns business, so what gives you guys confidence that you can do 20% turns versus 13% turns last quarter?

Gregory S. Lang

So that's a good question. If you recall, when we guided for last quarter, we guided kind of a unusually low turns number because we started with a very strong backlog, and we believe that a lot of that was due to kind of the concerns around supply after the tsunami. And so we expected that to normalize and come back down to more normal levels. Meaning, there would be fewer bookings during the quarter, fewer turns during the quarter. We think we've kind of passed through that and now we've kind of -- we're back to more -- a more normal "turns environment" which heads us back to the 20% to 25% turns that we typically have seen over the last several years. So it's really a bookings phenomenon rather than a -- in the phenomenon being we started really rich in Q3 and therefore expected fewer turns to finish.

Harlan Sur - JP Morgan Chase & Co, Research Division

Okay. And I just got a quick follow-up. Maybe you can talk about your Access business in fundamentals, specifically with PON. So the China build up seems to be progressing at a pretty good clip. Is your PON business directionally going to be up in the fourth quarter? Just give us a little bit more color there, I would appreciate it.

Gregory S. Lang

The PON business, we have a big Japan element to our PON business as you are aware. In Japan, through the -- after the tsunami, basically still kept all of its demand on the books and took all of the parts, but I think what you're seeing now is they had to work -- that actually had an impact. And so we're seeing Japan to slow down a bit as they consume some of the inventory. I think they took more than they necessarily needed back in those days, and they're working through some of that right now. So that, by itself, will bring us down a little bit quarter-to-quarter in the PON business.

Operator

The next question comes from Dunham Winoto from Mizuho.

Ruben Roy - Mizuho Securities USA Inc., Research Division

This is Ruben Roy. Following-up on the PON business, Greg, thanks for getting more transparent around the segments but can you give us a rough idea of how big PON is and Japan, obviously, has some ups and downs, but it seems like that still is the majority of your PON business and it's a maturing business. So what are your longer-term growth assumptions for PON? And then as a follow-up on Wintegra, I understand that there's some push outs, et cetera, but how is design activity held up over the last 3 quarters and what is your longer-term growth outlook for Wintegra? I know that you've previously talked about a 20% clip for that business.

Gregory S. Lang

On the first part of the question for the PON business, so Japan continues to be on the order of 50% to 60% of our PON business and it's been a healthy solid piece of that business for several years with some ups and downs. That continues to be the case. We don't breakout the details of the -- by country there. On the Wintegra side, the growth projections of roughly 20%, I believe, are doable next year. My comment earlier, that's -- I guess what I was implying or referring to is the year we expect next year is kind of what we were thinking would happen this year, but I do believe that the products and the designs are in the pipeline. We have over 75 designs right now, design wins in the mobile backhaul space and with new platforms rolling out this quarter and over the next several months. So we think next year stacks up to be a very solid year because carriers need to make this migration to packet-based backhaul and we really have the best product in the market to help that evolution from today's TDM to the new world of packet. So we're in a very strong position as the world kind of embraces the LT generation of platforms.

Ruben Roy

Greg, just a quick follow-up on that storage systems side of the business, historically, Q1 has been your weakest seasonal quarter. Are there any product transitions, design ramps, et cetera, that would offset that typical seasonality this year?

Gregory S. Lang

That's a good point. I mean, I think that 2 things that might have an impact this year: one is just the fact that I do believe we're working through some inventory issues related to Japan earlier in the year, that could have a bit of a bounce back benefit next quarter; and then the other one is the Romley transition that's coming up and if we see some, bring it off this quarter and picking it back up next quarter could have a benefit as well. So this Q1, again, early -- it's too early to tell but this Q1 could be stronger than what we normally expect to see in a Q1 for storage and for the comp business for that matter.

Operator

[Operator Instructions] The next question comes from Sundeep Bajikar from Jefferies.

Sundeep Bajikar - Jefferies & Company, Inc., Research Division

A couple of longer-term questions on the mobile side. Could you help us understand if Wintegra would be more relevant if the network topology moves towards micro base stations for LTE, perhaps a couple of years out?

Gregory S. Lang

It doesn't -- it's independent of whether it moves to micro other than micro base stations will drive -- will carry more traffic and more backhaul will be needed. So I mean, I think this is part of the whole LTE transition of moving to more and smaller base stations, the traffic has to be carried and has to be aggregated and the carriers have to move to basically packet-based backhaul for productive movement of that data. So with that -- all of that points very strongly towards the solution that we have available today.

Sundeep Bajikar - Jefferies & Company, Inc., Research Division

Okay, great. And just one other question on the mobile side. Could you talk a little bit more about your new Radio Head solution, again targeting micro base station and in what timeframe you might see meaningful revenues from that?

Gregory S. Lang

We're -- so we're in the process of sampling major accounts with those products now. We technically haven't initially announced it I think, but we are actively working with major customers today on that front. From a revenue standpoint, I believe that's a 2013 revenue opportunity for us because these are kind of long cycle platforms need to get qualified, designed in, and tested in the network and then sold. So that will be a benefit in the 2013 timeframe. We've got very, very strong interest right now with the first round of parts that are out.

Operator

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

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