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Executives

Jennifer Gianola -

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 -

Analysts

James Schneider - Goldman Sachs Group Inc., Research Division

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

Harlan Sur - JP Morgan Chase & Co, Research Division

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Ruben Roy - Mizuho Securities USA Inc., Research Division

Sandeep Shyamsukha - Auriga USA LLC, Research Division

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

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

Cody G. Acree - Williams Financial Group, Inc., Research Division

PMC-Sierra (PMCS) Q4 2011 Earnings Call February 6, 2012 4:30 PM ET

Operator

Welcome to the PMC-Sierra Q4 and Full-Year 2011 Earnings Conference Call. My name is John, and I'll be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Ms. Jennifer Gianola, Director of Investor Relations. Ms. Gianola, you may begin.

Jennifer Gianola

Thank you, John. 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 fourth quarter and full year 2011, and Mike will then discuss the financial results for the fourth quarter 2011 and the business outlook for the first quarter of 2012. Please note that our fourth quarter and full year 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 will be making forward-looking statements that involve a number of risks and uncertainties. These risks and uncertainties include but are not limited to PMC's limited revenue visibility due to variable customer demand, market segment growth or decline, orders with short delivery times, customer concentration, changes in inventory, affect of natural disasters on supply, foreign exchange rates and volatility in global financial markets and other risk factors that are detailed in the company's SEC 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 measures 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.

Gregory S. Lang

Thanks, Jennifer, and welcome to our call. Before I discuss our outlooks in near term -- our results and near term outlook I'd like to spend a few moments to reflect on what we've accomplished in 2011 and over the past few years. PMC finished 2011 with $654 million of revenue, 3% growth over 2010, and 46% growth from the $449 million of revenue we generated in 2007, or roughly 2.5x the industry growth rate. And in that same time period, we increased our non-GAAP earnings per share by over 250%. We achieved this growth despite one of the most volatile periods in the industry, and simultaneously working down our legacy exposure from roughly 30% of total revenue to approximately 10% of total revenue today. We've refocused our technology strategy around 3 major market segments that are critical to enabling the storage and bandwidth required to support the explosion of data traffic from video and more capable mobile devices.

Our growth has come from our storage and mobile investments. In storage, we entered the market and captured the leading technology and share position in 6-gig system silicon as well as the largest server OEM. This allowed us to report our largest quarter ever in Q3 2011 and grow a business that now represents over 60% of our revenue. And in mobile backhaul, we've captured the #1 position in hybrid backhaul designs that will enable the transition to packet networking and wireless backhaul. Along the way, we also reasserted our leadership in the Metro network by delivering the highest integration and most advanced OTN switching silicon that the industry has seen to date. Looking ahead, we will maintain our focus on being the semiconductor innovator transforming the networks that connect, move and store digital content. With the rapid proliferation of mobile devices and fat video content, packet-based networks and bandwidth requirements will continue to expand at a rapid pace. This demand is driving enterprises and carriers to upgrade and improve their storage and network capacity and performance. And PMC is at the center of enabling the infrastructure required for these fundamental traffic growth drivers.

So with this as a backdrop, I'll now discuss the results for Q4. The fourth quarter 2011 was a challenging time for the semiconductor industry, however, PMC performed in line with expectations. We reported $0.13 non-GAAP EPS on net revenues of $152.6 million. Revenues were down in Q4 due to a 14-week Q3, as well as inventory consumption.

Now I'll turn to provide a bit more color on the recent Q4 results by the end market segment. At the top level, the Storage Network segment was 64% of total revenue, up from 61% in Q3. Optical revenue came in at 23% of the total, down from 24% and mobile came in at 13%, down from 18% last quarter. Our Storage business in Q4 was down just under 17% coming off our largest quarter ever in Q3. If we factor in the 7.5% for the 14-week quarter of Q3, we're roughly flat quarter-to-quarter. However, we clearly see signs of inventory consumption, and a potential impact from hard drive shortages happening at major accounts that will continue into Q1.

Last week we made our first 12-gig products public consistent with our track record of dramatic performance leadership, we demonstrated record-setting 12-gig SAS performance for cloud and tiered storage. Specifically, we announced the availability of our 12-gig SAS controllers, RAID-on-Chip controllers and expanders. The controllers have demonstrated over $2 million IOPS performance, roughly double the nearest competitor. The reason this kind of performance is so powerful is that Solid State Drives can deliver 100x more IOPS than spinning drives. This has required a new level of performance from the controllers that we're now payable to demonstrate. Additionally, our embedded controller delivers 16 SAS ports providing more than twice the density of any competing product. On the expander front, we have a family of products including the highest density 68-port device, that when combined with our 16-port controller, can double the density of an OEM system versus any other competitive solution.

This combined level of performance and integration will unleash the full potential of SSDs in the data center with more than 100x more performance than traditional hard drives. And we continue to win designs and grow share in SAS-2 including at our largest customer. And with our performance and integration leading 12-gig SAS products, we have won 2 major Tier 1 customers and believe we will continue to grow share at the 12-gig transition in 2013.

Now in the Optical market segment, we saw approximately 16% decline which was driven by inventory consumption across our Metro and legacy segments, while our PON products were roughly flat. We believe we've worked through most of the excess inventory and are now near the bottom with our Optical customers. More importantly, the legacy reductions we experienced in 2011, dropping by roughly half as a percentage of total revenue, will substantially reduce the headwinds to growing going forward.

In new designs, we continue to gain traction in OTN, and today 7 of the top 9 OEMs are using our HyPHY device. During the fourth quarter, we announced that our HyPHY OTN processors are the industry's first to provide full architectural support of the Optical internetworking forums, new OTN over-Packet-Fabric Protocol implementation agreement. The OIF initiative is important because it aims to help the industry develop an ecosystem for interoperable, OTN switching and the silicon and Optical -- at the silicon and Optical equipment levels.

Now in the mobile market segment. Our sales were down by about 26% due to excess inventory at major customers. We believe we have reached the bottom of this cycle in backhaul while the fundamental business drivers remain robust. Data traffic continues to explode driving the need to transition the packet backhaul, while our Wintegra processor platforms are uniquely positioned with the leading design win status. We now have more than 100 design wins in the WinPath3 family with less than 10% of those wins currently in production status. We expect to see more and more rollouts happen in 2012 as our customers finish their next-generation platforms and carriers expand their LTE rollouts.

Next, our outlook for Q1 2012. As we start 2012, the challenging environment is impacting our near-term outlook, although we are seeing solid signs of improvement beyond Q1 that I will talk to you in a moment. We expect Q1 revenues to be in the range of $130 million to $136 million, or down 11% to 15%, which is greater than the seasonal decline for our -- would be expected for our business. There are a couple of major factors at play here. From a seasonal perspective, our business is typically down in Q1 but on top of that it's also complicated by the impact from the hard drive supply constraints. We believe our mobile segment will be roughly flat as it appears to have largely hit the bottom of the cycle. In the Optical segment, we'll be down a few million dollars with continued weak carrier spend in Japan year-end in PON.

Storage will be impacted by the normal seasonality and the impact of drive shortages after the floods in Thailand. As you may be aware, nearly all of our storage devices connect to a disk drive. The net impact is roughly double the normal 6% to 8% seasonality for Q1.

Now to the good news. We're seeing very positive signs in bookings since December -- a signal that the correction is coming to an end. Perhaps the most telling is that our average weekly bookings in January have increased 30% over Q3 and Q4 average levels. And our book-to-bill ratio is in excess of 1.2. All great signs of businesses looking out and OEMs are confident in the recovery from hard drive shortages experienced today. As you know well, the semiconductor industry is cyclical, has been especially so in the past 3 years with economic and natural disasters contributing to the normal fluctuations. In this environment, we remain laser-focused on executing our leadership strategy in Storage, Mobile and Optical markets. We continue to gain share in all of our major focus segments and continue to deliver industry-leading solutions while delivering solid financial metrics. We squeezed expense levels and expect to finish 2012 at first half 2011 levels after an R&D investment bubble winds down late in Q2 this year. This will allow us to reduce OpEx in the second half and get back to our 25% to 30% operating range without compromising investment and continued growth.

We remain excited about our 3 core areas of investment and their prospects for growth and we're encouraged by the early signs of recovery and believe 2012 is positioned well for growth with our strong position in Storage, Optical and Mobile, and now with lesser headwinds from the legacy products.

With that, I'll hand the call over to Mike for details on the financials and our outlook.

Michael W. Zellner

Thanks, Greg. I'll now discuss our full year and fourth quarter 2011 financial results and comment further on our outlook for the first quarter of 2012. For the full-year 2011, we reported revenues of $654.3 million, which is up 3% over 2010 annual revenues of $635 million. Despite the challenging micro -- macro environment, we outpaced the semiconductor industry which was at 0.4% for the year. Non-GAAP gross margins were 69.2% for 2011, up from 68.1% in 2010. Non-GAAP operating margin was 22% in 2011, down from the 27% in 2010, and on a non-GAAP basis, we generated $0.60 net income per share on a diluted basis compared to $0.72 in 2010.

Fourth quarter revenue of $152.6 million came in within outlook range for Q4. Greg provided further detail around this in his comments. In Q4, 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 fourth quarter was 62 -- 69.2%, in line with our outlook and 60 basis points lower than Q3's 69.8% mainly due to the effect of fixed costs on lower revenue.

On a non-GAAP basis, operating expenses also came in within the outlooked range for the quarter at $77.1 million, a decrease of $2.2 million from Q3. This decrease from Q3 was mainly due to the effects of the extra week in our Q3 fiscal period and lower employee benefits cost in Q4, partially offset by higher tape out and other R&D related expenses. In Q4, non-GAAP operating margin of 19% compared to Q3's operating margin of 24% on lower sales due to the macro macroeconomic conditions as Greg explained.

Non-GAAP tax provision was 0, compared to $900,000 in Q3 mainly due to a change in mix of income across our foreign subsidiaries. Non-GAAP net income for Q4 was $29.1 million, or $0.13 per share on a diluted basis compared to $42.1 million, or $0.18 per share generated in Q3.

Q4 GAAP diluted income per share was $0.11 versus $0.20 in Q3. This decrease was mainly the result of a $29.4 million accounting gain on the release of our previously-accrued liability for the earn-out related to our acquisition of Wintegra recorded in the prior quarter and lower revenues in Q4. Also in Q4, we had some foreign income losses on the revaluation of our foreign tax liabilities as compared to gains in the prior quarter. These decreases to net income were partially offset by a Q4 net income tax recovery of $16.5 million, as compared to a provision for income taxes of $5.4 million in Q3 on a GAAP basis.

The primary reconciling items of GAAP to non-GAAP net income for Q4 are as follows: $11.1 million in amortization of purchased intangible assets; $6.7 million in stock-based compensation expense; $900,000 of non-cash interest expense; $15.1 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 $514 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at the end of Q4 -- net of the $68.3 million face value of our convertible note -- was $445 million, an increase of $39 million from Q3. This increase primarily relates to strong positive cash flow generated from operations of over $47 million, partially offset by $6.7 million of investing activities for IP purchases and capital expenditures. Our net inventory at the end of Q4 was $40 million, approximately $1 million lower than the prior quarter. Net inventory turns for Q4 were 4.7x, slightly lower compared to 5.2x in Q3 as expected. Q4 ending deferred revenue was about the same as Q3 at approximately $16 million, which reflects our inventory at our distributors.

Overall, our inventory including our distributors remains well-managed and lead times from our foundry partners are also at normal levels. In summary, we view our fourth quarter results favorably as we achieved our outlook targets despite further weakening in general market conditions during the quarter.

Now turning to our outlook for the first quarter of 2012. As Greg mentioned, we estimate that potential revenue for PMC for Q1 is in the range of $130 million to $136 million. This takes into account current levels of demand and our expectation of booking rates through the balance of the quarter. Judged backlog at the end Q4 was approximately $85 million. This implies turns of approximately 36% from the beginning of the quarter to reach the midpoint of our revenue outlook. This level of turns is achievable based on the significantly-improved bookings that we have experienced in January, including our book to bill being in excess of 1.2, as Greg mentioned.

On a non-GAAP basis, we expect our overall gross margin percentage in Q1 to be approximately 68%, plus or minus 50 basis points. The expected decrease in Q4 is primarily due to the effect of fixed costs on lower revenues and some assumptions regarding product mix. Non-GAAP operating expenses in Q1 are expected to be in the range of $78 million to $79 million, slightly higher than the $77.1 million in Q4, mainly due to the annual payroll reset of employees benefits at the beginning of the calendar year, partially offset by lower tape out activity in Q1.

We expect non-GAAP net interest income to be about $0.5 million, which is primarily net interest income from our cash position offset by servicing our outstanding convertible notes. We expect our non-GAAP tax provision in Q1 to be approximately $0.5 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 entered -- we ended the quarter with a diluted share count of approximately 232 million. At the end of Q1 our diluted share count is expected to be approximately the same. I'd like to take this opportunity to remind you that despite our lower Q1 outlook, we see demanding getting back to more normal levels based on the booking status that Greg referenced and our long-term targeted operating metrics remain intact.

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

Question-and-Answer Session

Operator

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

James Schneider - Goldman Sachs Group Inc., Research Division

Greg, I was wondering if could give us some color on the signals you're getting from your customers in the Optical and Mobile segments right now. Clearly you're seeing inventory corrections similar to many of your peers throughout the industry. What kind of visibility do you have in terms of the snap back in demand? Do you think it's going to be more of a Q2 event or a Q3 event by the time customers feel more comfortable building back their inventories or just organic demand returns. And any color on what segments of the telecom networking space you expect to come back first?

Gregory S. Lang

Good question. The carrier spending really trailed off in the latter part of last year, which kind of led to both the combination of lesser demand, but also then working through the inventory that was built up behind that. When it picks back up is a key question that I don't have the perfect answer to. I think there had been some reports, for example, there's one out today I think from Jefferies, that suggest that North America spending will start to accelerate this year again and pick up. So that would be a great sign to see, but I think right now we're seeing weakness or softness from every major market from Europe to North America to Asia. And it does seem like the fundamental growth drivers are there to require the network buildups we've been talking about. And we look forward to that resuming. In terms of where it might happen. I think the 2 key areas that are clearly going to happen is mobile backhaul, and I'll put that in the context of LTE. As carriers rollout more LTE capabilities, we expect them to also rollout next-generation backhaul, which includes hybrid backhaul support for both PDM, as well as packet-based backhaul to deal with these never-increasing -- constantly-increasing traffic loads. That's one area. And then we think the complement to that is actually in the Metro network where we expect carriers to pick up their OTN deployments and start ruling those out. Some of the pause here may be simply a matter of rearchitecting the network. That's obviously not simple but it does take some time to map that out and we think that could be part of the reason there has been a bit of a pause. But those are the couple of areas that we expect there to be a substantial rollout over the next couple of years.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And as a follow-up, right now, 54% of sales come from Storage, that seems pretty high and probably since all the communications really itself is depressed. Any sense that over the longer term as communications comes back, what fraction of your sales steady state you think you're going to see over the longer term in the Mobile and Optical segments.

Gregory S. Lang

Well, it's hard to predict what the actual percentages would be. I do expect Storage to stay well above 50% for us, that is clearly a key growth area for the company, in addition to the other 2. But we don't necessarily expect that growth to flatten out. So I think that this 60-ish, maybe it's a 60-plus or minus 5% might be the right place to target for our Storage segment.

James Schneider - Goldman Sachs Group Inc., Research Division

And that will be over a couple year period? The storage will be north of 50%?

Gregory S. Lang

Yes, yes.

Operator

Our next question comes from Sundeep Bajikar from Jefferies.

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

Question on Storage. Can you give us some color on PMC's storage exposure particularly in the cloud data center, which as a category seems to be growing rapidly but PMC storage revenues are declining, so I'd love to understand that connection?

Gregory S. Lang

The revenues actually are declining as a temporary phenomenon as we described in the script. The flooding in Thailand is clearly having an impact on the hard drive industry across the board. I think that there's been plenty of reports out on that. It's been a fairly devastating impact to that entire supply line. The beneficiaries of that in the short term are basically Seagate and its supply line. But overall, they haven't been able to keep up with demand and it has impacted sales. So you've got a slowdown and some -- on top of normal seasonality to deal with there. We do see the backlog that's building for Q2 as quite healthy, quite strong. Some of the bookings that were made earlier directly related to this category. So we expect that business to come back very nicely with the recovery of availability of drives in the channel. Excuse me not in the channel, but in the overall supply chain.

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

Quick follow-up on Fibre Channels. So as the Fibre Channel connectivity transitions over to SAS with the disc interfaces, what is kind of your outlook on how much of that business you can recapture with SAS? How should we think about through 2012?

Gregory S. Lang

Our share position on Fibre Channel is quite good and it maps pretty closely with our share position on SAS-2, so as that transition happens, we believe that we'll maintain a comparable share of the market. Where we expect to grow is actually on the other end, on the disc connected part of SAS where our share will double with that part of the market between SAS-1 and SAS-2. So as the market moves to SAS on both the front end and the back end, I should say SAS-2, we're in a very good position to gain share in those arenas.

Operator

Our next question comes from Harlan Sur of JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

Given all the moving pieces of your business, you've got the legacy workdowns, the inventory drawdowns by your customers. Greg, what's kind of your view on the normalized revenue run rate? I just want to get a sense of when the business does snap back, once we get through all of kind of the near-term challenges. Is that roughly, maybe around $155 million, kind of $160 million level that we kind of saw in the Q1 time period of last year? Any color there would be great.

Gregory S. Lang

Yes, I think it's fair to say that the Q2 numbers and maybe some -- and part of Q3, although Q3 probably got a benefit out of the 14-week quarter there, but I think the Q2 number was on the high side because of the Japan, I'll call it safety buying, just getting some safety stock in place. So the number is probably south of the $171 million that we saw in Q2, but I think it's probably north of $160 million. But that's probably a reasonable range, in that range. I think in terms of maybe your next question is when do we expect to get back to that level. I think that we'll see a nice rebound in Q2 and it will be the second half when we start getting back to, I'll call it normalized end market levels.

Harlan Sur - JP Morgan Chase & Co, Research Division

Great. And then just a quick followup, so given that your book to bill has been very strong, you said 36% turns from the beginning of the quarter. What about your current turns remaining in the quarter in order to hit your Q1 targets?

Michael W. Zellner

As you know, at the time of the call, it can bounce around, so we tend -- we've moved to just giving, coming into the quarter. That being said, it's a bit of an unusual quarter. So I can say that it's significantly less than 20% from the time of the call. So that, of course, along with the profile that, as Greg mentioned, our bookings scenario is frankly north of 1.2, we feel very confident that we can hit revenues within the range that we talked about.

Operator

Our next question comes from Srini Pajjuri from CLSA.

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Greg, on the storage side, can you talk about where your market share is in 6-gig, both on the server side as well as on the system side? And as we transition to 12-gig, what should we expect in terms of potential share gains? I mean you mentioned that you expect to commit a gain share here.

Gregory S. Lang

Yes. On the system side, we have -- on system side for 6-gig, we have design wins at every major system OEM. You can kind of go through the top 5 guys there. We have a strong position at each of those. I think, overall, our market segment share position is probably in the order of 60-ish percent for SAS-2, 60% to 65% in that range. And then on the server side, we have a strong position in the channel, probably in the order of 20% to 25%. And then we also have a very strong position with the largest server OEM out there. So that's kind of today. In the 12-gig generation, we were awarded 2 Tier 1 design wins this past month as we got silicon out in the customers hands. And we believe that we can grow share both on the system side as well as expand some of our share on the server OEM side. I don't believe given kind of the position that we are in today in the markets that there's going to be a giant shift in share, but I do believe we can continue to take a piece here and there to expand our share.

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Okay. And then just as a followup, you said your PON business was relatively flat in Q4 despite the fact that Q3 was a 14-week quarter. I'm just wondering, trying to understand what's driving that strength and what's your expectation for that business for the first half of this year?

Gregory S. Lang

Yes. So the business in Q4 was actually -- was reasonably healthy and it's actually was coming out of both Japan and, to some extent, China as well. This quarter, we're actually -- is a bit softer because Japan does a year-end kind of cleaning up. I do expect, and we've already seen some pull-ins from Japan, I do expect Japan to pick up nicely in Q2 and we expect to see continued health out of China as well. So I think this business, it will have a solid year once we get rolling and past the Japanese fiscal year.

Operator

Our next question comes from Ruben Roy from Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Greg, first on the legacy business. You mentioned that it dropped down to around 10% of revenues, I think, exiting 2011. I'm just wondering what you think about that business as you look ahead? Do you think it kind of flat lines at that level or the $65 million, do you think there's kind of a further depreciation of that business as you look out over the next year or 2?

Gregory S. Lang

I think, as a percentage of revenue, I think it will continue to decline, but at a slower rate. Last year was actually a pretty substantial decline, and I think it was a combination of both the kind of a slowdown in carrier spend, as well as just the legacy profile of the product. So the good news is we did actually work through it a lot of that in the last year. We could see some of it actually pick back up, if carrier spend ticks back up, but I don't expect it to get back anywhere close to the levels it was in the past. So on a percentage, I would expect it to go down. And if I was to model something, I'd probably model something from this level at the 10% to 15% a year type of range from a go-forward revenue level. In terms of kind of absolute dollars, 10% to 15% down a the year for the legacy part of the business.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay. And in terms of the booking strength, were there any particular areas of strength, either in mobile or optical, which were down a lot or was it kind of broad based?

Gregory S. Lang

It was fairly broad based, although I would say that storage, especially given the -- kind of the correction that's going through right now with the flooding in Thailand in Q1, we definitely have seen a pronounced pickup in storage backlog as we go into the next quarter.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay. And then the final question on that point as it sounds like there's about a $7 million hit or impact since you said that you're going to be down double the 6% to 8% normal seasonal. So do you expect -- are you getting any indication that you'd get that $7 million back in Q2?

Gregory S. Lang

Yes, with the backlog that's coming in, I think we're going to get a decent chunk of that back. So the short answer is, we think we're -- yes, we think we'll get a good part of that back in Q2.

Operator

Our next question comes from Sandeep Shyamsukha from Auriga USA.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

I just wanted to get a little bit more clarity on your mobile business. You claimed from Wintegra, you have 100 design wins, out of which only 10 have gone into production. So what are the factors which are delaying things from getting into production? Is there some change of architecture going on at the customer front or is it just more cautious spending on their end?

Gregory S. Lang

So yes, let me clarify the data point and then it might be -- make a little bit more sense to you. So the comment was around WinPath3. This is our latest generation of process to platform. Has just started to ship in production status, I believe it was end of Q1 of 2011. So that's where we talk about these 100 new designs and about -- and less than 10% are actually in production status. And I would call this just kind of the normal gestation period of kind of getting final silicon, working on getting the software final that runs those platforms and then putting them into test and trials before they reach production status. So there's nothing unusual or challenging about this. It's kind of the normal gestation period of new silicon. So we do expect to see those ramping up throughout the year and frankly into 2013. But it's just an indication of, I think, some positive tailwinds we have in the Wintegra part of the business.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

Great. Just wanted to get a sense of your Wintegra acquisition. Since then, the mobile business, I mean, has, as a percentage of revenue, it went up, but it has come down sharply. I mean, how do you foresee it going forward? I mean, let's say, at what levels do you think it will stabilize at eventually?

Gregory S. Lang

Yes, hard to predict what all the growth rates will be in the different businesses. I do expect though the mobile part to bounce back. I mean, the mobile part of the business got hit with all the rest of the carrier pullback in spending in the last year, and we clearly saw it in this business as well. So I do expect it to bounce back. It does appear that it's -- we could see a little uptick of growth this next quarter, so it feels like we've kind of turned that corner. So I do think that we'll see that bounce back over the next couple of quarters to a, I'll call it more normal level of -- or more normal split, I should say.

Operator

[Operator Instructions] Our next question comes from Sandy Harrison from Wunderlich.

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

So just following up on a prior couple of questions. You talked about some of the wireless platforms that you were in and that those were going to start to come to market now that the chip's out. In the slowdown -- I guess the question's beyond just the wireless -- in the recent recent slowdown we've seen on the broader markets, have you seen any share losses, I guess, is question one. And then question 2 would be, do you expect any of your customers, with their challenging environment, to have changed their plans on their platforms or not put as many platforms out as they had originally thought about?

Gregory S. Lang

So the first part of your question is on the backhaul front, no, I do not -- I have not seen any share losses. We continue, actually last quarter was a record quarter for design wins. So we continue to capture big chunks of this market. This is on top of some of the, I think, public design wins that are out there today. If you look inside the Alcatel-Lucent, who's a leading provider of Cisco backhaul router, Ericsson, you'll see PMC silicon in all of those leading designs. So our share position is still very strong. It really comes down to how soon carriers choose to roll out packet-based backhaul. Our platform is really geared towards helping that migration from TDM to packet with a hybrid-based design. And so if a carrier decides to kind of stick with a TDM based only solution for another generation, we won't participate as much there other than some T1/E1 products that we have. As they do move, which I believe that will coincide with LTE, we stand to gain nicely from both a share and a dollars per platform position. So that's part one to your question. Part two is on -- have we seen major changes in customer plans given the pullback in spending? And the short answer is, no, because I really see this as a kind of a new area where customers are kind of working on their second generation platform. I think a lot of people rush platforms to market over the last 24 months just to be there or to get there. And now they're looking at tuning up performance, tuning up capabilities and substantially lowering costs and power. And that's really where our value proposition is strongest. So I see that happening over the next 24 months as people roll out new platforms for this new capability and backhaul.

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

Got you. And then a quick followup question I guess would be, as I look at your characterization of book to bill being relatively strong and that you're booking into Q2, is that more about -- concerns on the part of customers that they're not going to be able to get parts, is that the fact that your lead times are still relatively stable or they expect to see them going up? It just seems like they're giving you guys a little bit better visibility into Q2 than they otherwise might other companies or other segments.

Gregory S. Lang

Actually, I don't believe that there is a special effort to give us more visibility right now. We're really not in the supply chain for the hard drive, we're more of kind of a secondary effect. So people aren't really concerned about our supply line like they might be about the hard drive part of it. I think this is kind of a normal lead times, normal visibility for us. But what is true is anytime you go through this kind of adjustment in the market from kind of a period of bookings, they are too high and you can go all the way back to the Japan tsunami days where bookings are higher than they are normally and you make this transition to kind of a bit of a trough. You wait and you watch for when those bookings kind of hit bottom and start to turn the corner and they turn the corner on a consistent basis so you can say, okay, yes, we've made it through that trough. And we saw our bookings start to make that turn back in kind of early part of December and they have continued through the month of January, which is why we have confidence where we feel like there's a good sign there that the business in the bookings environment has changed. We're getting back to normal levels because we've seen it sustain itself for something on the order of 6 weeks. And by the way, that 6 weeks also captured the Christmas holidays, as well as Chinese New Years, but yet we still saw this very strong uptick. So I think they are all very positive signs. We feel like we've seen the bottom and this is pointing to a much stronger 2012 than where we finished 2011.

Operator

Our next question comes from Brendan Furlong from Miller Tabak.

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

I'm wondering if you could just delineate a little bit between your distributors and your OEMs in terms of what you're seeing from end demand and a trough in the inventory levels.

Gregory S. Lang

Yes, the bulk of our revenue, over 70% of our revenue comes from direct OEM demand. So it doesn't -- we tend not to have a big distributor swing, and then we record our distributor revenue based on sales out. So we really -- there isn't really a distributor swing. In terms of the actual inventory distributors have on hand, we feel like that's at a very standard or normal level. There hasn't been a big bubble there that we need to work through. But it's based on sales out so it's -- the revenue is based on sales out, so we don't expect any big impact from a change in inventory at distis [distributors] anyways.

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

But you think that that direct, your basically -- your OEM customers' inventories are at trough levels?

Gregory S. Lang

Well, we think that's what they're getting down to. For example, the big adjustment this quarter is really due out of the storage business where they haven't received all of the supply that they'd like on the drive side, and so we're seeing some adjustment to that on top of the normal seasonality. So we think when we exit -- as we exit out of Q1, I think we're going to be much closer to that healthy level at the OEMs that we'd like to be.

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

Okay. And the last question is, you mentioned in the conversation early on that there seems to be some delay in the OTN market from possibly a rearchitecting of the network. That's something to do waiting for some like 100 gig or 400 gig to get up to speed or if you could just shed some light on that, that'd be great. I appreciate it.

Gregory S. Lang

Yes, I mean the transition from TDM to OTN package switching isn't a small one. It's not like going from one speed of Ethernet to another speed of Ethernet, although that's a nontrivial change. So there is some, definitely some network architecture work that has to be done. I'm just projecting that, that could have something to do with some of it, although we have seen carrier spending slow down across the board in multiple segments and around the world. So that may not be the case at all. It may just be the overall mood in the carrier space where they pulled back spending. So it is a nontrivial change and it is a nontrivial performance boost, so people may be taking a bit more time to get their plans in place. But we do think that it's inevitable and it's a place that the carriers need to go to support all the growing traffic. It's just a question of when they really adopt in URNs.

Operator

Our next question comes from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

So on the Wintegra business, I remember when you guys acquired them coming into PMC, they were roughly at about a $50 million, $55 million kind of annualized run rate. What was the Wintegra contribution last year and how big do you think it's going to be this year?

Michael W. Zellner

Wintegra ended 2011 in the mid-$50s million range, and going forward we do expect it to grow in the double digits, but we don't -- we're going to report it as part of the optical segment and not to try to break out the Wintegra products -- product line specifically.

Operator

Our next question comes from Sandeep Shyamsukha from Auriga USA.

Sandeep Shyamsukha - Auriga USA LLC, Research Division

I just wanted to get a little bit more clarity on your OpEx. I missed the statement where you said something about OpEx going up in first half and then maybe coming down in the second half, and what would be your expectations for your on-GAAP operating margins in 2012?

Gregory S. Lang

Yes, so that was a comment that I made earlier in the comments. We are actually investing heavily right now to finish up a 100-gig product in the OTN market, which will really help us kind of establish our position in the next round of OTN platforms out in 2013 and '14. Once that finishes up or it's not going to be totally finished, but once we wrap up the bulk of that big spend in Q2, we'll be able to peel back the spending back to first half of 2011 levels. And if Michael help me, that was...

Michael W. Zellner

Yes, sort of 77 to 79 kind of range spending on the quarter.

Gregory S. Lang

So we'd be able to pull back a few million dollars a quarter from where we are today.

Operator

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

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Michael, Greg, I'm just wondering you've still got the north of $400 million cash and I know you have a little bit of a buyback program here. Just wondering what your priorities are with the cash going forward?

Michael W. Zellner

Yes, I'll take it. We continually look at the capital structure. Obviously, we don't need that level of cash for operations. There is some unique aspects of it. 90% of it is actually outside of the U.S., so there's a lot of considerations. There are potential opportunities out there to augment organic growth. There's certainly nothing specifically on the horizon that way, but there are potentially some things that way. And obviously, if we can't otherwise come up with an appropriate use of the funds, it would make sense to get it back to the shareholders. So we do look at this, so we understand all of that, we look at it on a very regular basis. Virtually every board meeting, we look at it. So I guess the way to answer it is, capital structure is on our mind. We try to make sure that we have the most efficient structure that way and we'll keep looking at it going forward. Nothing specific to announce.

Operator

Our next question comes from Cody Acree from Williams Financial.

Cody G. Acree - Williams Financial Group, Inc., Research Division

Maybe a little help on the gross margin side. As you head through the rest of the year, just how mix impacts and getting back toward that kind of, I think a question earlier, was kind of a normalized revenue run rate?

Gregory S. Lang

Yes. So I mean, we've been obviously -- we've been pretty successful in keeping our gross margins in the high 60s, bouncing up almost to 70%. And once revenue normalizes, we have no reason to believe that it won't be right back there. It's down a bit here in the short term simply because of the obvious impact of volumes on the fixed structure. But there is some nominal impact of mix obviously, but we work hard to maintain our cost structure both in terms of the actual direct cost as well as overhead cost and check in. So we -- it's part of our model to make sure that we are running the company in the, like I said, 69%, 69.5% kind of percent range.

Operator

And we have no further questions at this time. Do you have any closing remarks?

Suzanne Craig

Sure. So thank you everyone for joining the call. We will have a replay. It will be available on our website, and also the number is 1 (888) 843-7419 and the passcode is 31547405. So thank you very much.

Operator

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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