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PMC-Sierra, Inc. (NASDAQ:PMCS)

40th Annual JP Morgan Global Technology, Media and Telecom Conference Call

May 16, 2012 4:10 pm ET

Executives

Michael W. Zellner – Vice President and Chief Financial Officer

Analysts

Harlan Sur – JPMorgan

Harlan Sur – JPMorgan

Good afternoon. My name is Harlan Sur, semiconductor analyst here at JPMorgan. Very pleased to have Mike Zellner, Chief Financial Officer of PMC here with us today. I’ve asked Mike to provide us with a brief overview of PMC that will be followed by a few questions from myself, and then we’ll go ahead and turn it over to the audience.

So, Mike, thank you very much for joining us today, and the floor is yours.

Michael W. Zellner

Harlan thanks. Thanks for inviting us. The conference has been good. We’ve had a lot of good one-on-ones. So, I’ll start with, just at a high level, talking about a few – the way we would like to profile the Company, and then we’ll get into some more details as Harlan said. So, we see ourselves as a semiconductor innovator, of course that’s transforming networks really that connect, move and store digital content, so a very high-level concept.

To give it a little more color, when you think about, we’re in both the storage sector in terms of doing both controllers and expanders. We’re in the optical network previously kind of thought was wireline, where we have a focus kind of in the metro switching infrastructure, as well as kind of the edge with fiber-to-the-home products that are both ONT and ONU, which is kind of a head end, as well as client side. And then we have a piece that’s focused on the backhaul part of the network.

And, in each of those at some level, they’re very similar in that. We are again developing the semiconductor solutions that actually direct of that content and direct that digital content. So, although the markets are somewhat different, the sort of engineering underpinnings are very similar.

As a company, we were founded in 1984.We went public in 1991.We have our headquarters in Silicon Valley, in Sunnyvale. About 1,500 employees worldwide and our 2011 revenues were $654 million. So in terms of those market storage, for 2011, storage for about 60% of the revenue of the company. Optical, which again is made up of both fiber-to-the-home or PON, if you as well as metro switching technologies is about 25% of the company’s revenue. And the mobile, which again is backhaul type predominantly underpinned by our network processors that came to us through our acquisition of Wintegra is about 15% of the company’s revenues.

We’re well positioned to capitalize on some of these mega trends that I think you’re all familiar with, with everything being digitized and being brought on and off the edge of the network with these wireless devices we’re using as well as wired solutions, where our franchise player in that market we’ve been there, quite a long time certainly on the Comm IC is where the Company was founded. But even in storage we’ve been there a significant player of six plus years.

And strong financial performance, I mentioned the revenue. We’ve grown about 2.5 times as the industry in general over the course of the last sort of five or six years. We have an operating target of 25% to 30% operating profit. We’ve been in that range, often we don’t happen to be in it in Q1, but we believe we can get back there by the end of the year.

Gross margins in the high 60s to 70% range. We suggest that we thought we could [even get] up into above that 71%, 72% by the end of the year. So, we think a solidly managed company and well positioned to take advantage of these sort of mega trends that are out there in terms of being able to help the world sort of move digital information around.

Harlan Sur – JPMorgan

Great. Thanks for those opening remarks Mike. So, fundamentals for you in the industry, especially in the markets that you serve, storage, optical, and mobile, saw fairly weak demand trends in the second half of the year through the first quarter of this year. But the team at PMC saw bookings growth of 25% in the first quarter, book-to-bill is great than 1.1%, and I think you expect it to be back to kind of normalized revenue run rates by the fourth quarter of about $60 million, $70 million. I guess the first question, we’re asking just to all of our companies here, just to get a pulse of what’s happening in the near-term markets. But have you continue to see your bookings kind of continue to raise it higher as Q2 as unfolded here?

Michael W. Zellner

I would say that that it sort of unfolding as we’ve seen it and it has been strong. It hasn’t been ripping, I would say. But it’s definitely been strong into the right and we think healthy. In terms of the markets I would say we have probably most of our clarity in storage and that seems to be strong, robust in growing.

In terms of mobile that is specifically the backhaul and backhauling of data into the metro, we’ve seen an up tick there as well. Generally speaking I would say, carrier spending has been a bit opaque, and so the fact that we got a bit of an up tick in mobile was encouraging. If you go from our first quarter actual revenue number of $132 million sort of the mid point of guidance of $140 million that $8 million increment is split roughly half between storage and mobile and of course mobile being a smaller piece of the business on a percentage basis, is higher there.

The one area that has been continues to be challenging actually is on the optical side, we feel very well position, great design wins, but frankly there doesn’t seem to be a lot of momentum currently in terms of the carrier spending on that area. Certainly the words that we get from pulsing both our customers as well as the carriers or i.e. our customers’ customers is that in earnest, it should start in the back half of the year, certainly by Q4, but we’ll see. As we own there, this has been pushed out a number of times.

So, we probably need a little bit of hope in that regard to get to the higher end of that range that you made up, Harlan, of $170 million. We think we can get to the lower side or $160 million with pretty much in storage side as well as a little help out of the mobile side, and that’s kind of the difference right to get to the higher side, in addition to that we need a little help on the optical side, so we’ll see.

Harlan Sur – JPMorgan

So on the mobile segment of your, where you are guiding for some growth during the second quarter. I think the way that you guys characterize it, that was some of the run rate business, which sort of was exposed to some of the inventory kind of work-downs by your customers in the first half of last year that coming back and as we think about the big growth driver for your mobile and wireless business going forward is really about the Wintegra part of the business and backhaul build outs that are going to be riding on top of the OTE carrier capacity expansions.

And so as we’ve talked to most of the other guys that play in the wireless infrastructure segments of market, everybody is saying that they’re seen a good forecast for a pickup in the second half of the year, but no orders and backlog for that. I’m wondering as the team at PMC-Sierra started to see, given some I think your parts tend to be a little bit more longer lead times. But have you started to see some of the orders and backlog indicating that we are going to see this sort of meaningful step up carrier CapEx spending in the second half of the year?

Michael W. Zellner

Well, two ways I think about it. I mean to answer your question directly. We’ve seen a modest pickup. So, at least we’re seeing a little movement.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

So that’s good of course. The other thing to consider is that as the carriers describe or put some prioritization in the areas that that they will spend or begin to spend, certainly the backhauling of all the data that is coming off of these towers is definitely a pain point for us. So, they’ve sort of earmarked the backhaul area as a place that they will begin spending first if you will.

So, both because we’ve seen a little bit of lighter day, not a lot admittedly, but at least some and kind of the comments around that we’re feeling reasonably positive about at least being able to get some modest level of growth in it certainly in Q3 and Q4.

Harlan Sur – JPMorgan

And then within your optical segment, I think the team talked about the qualification and the design in cycle times taking roughly on the order of 2X longer relative to the prior generation technology, which is SONET, and obviously, the next-generation that we’re talking about is the optical transport network or OTN technology. So, roughly about 2X longer for these products to kind of get to market and deployed into the carrier networks.

And I guess the first question there is, why is it taking so long? Is it the complexity of the network protocols and the next-generation network architecture? Is it the macro economic environment that’s kind of slowdown the progression of the build out of the metro networks? I would love to get your thoughts on that.

Michael W. Zellner

Sure. The way I see it, there is really two factors to causing a bit of inertia here. One is, certainly over the last 10 years, the OEM equipment vendors have come up with more increasingly productive equipment of course, as they’ve come out with new models, but the basic technology at a base level has been the same, as you observe.

So a decision to add bandwidth by adding the next model of a similar technology is a much more straightforward decision than sort of re-architecting the entire network with a whole new set of protocols and everything else. So this is a big step for the carriers and a step that hasn’t happened in a very long time for them, probably like 12 years or something. and as a result, they want to make sure they’re getting it right. So they’re actually staying in trial phase much longer than they have when they’ve just come out again with kind of the newest model of a similar technology that we’ve experienced over the past ten years or so. So that’s one piece of it.

and then the other piece they’ve got challenged certainly in the west, they’ve got challenged business models and they have all of us that are complaining about the size of our mobile bill and meanwhile we’re all consuming more and more data pushing it on to and pulling it off of the edge. and there’s a substantial amount of customer that has to happen in order to make that occur in a robust manner, as we know. So I think both because they were struggling around their own business model and trying to get that [soused] out as well as you wanting to make sure that has they really step off the curb in a very big way with a whole new architectural approach to the infrastructure, there is taking, it’s just taking more time.

Harlan Sur – JPMorgan

So as you have discussions with your customers and I know one of the strengths of the PMC team is you have relationships with your customer’s customers, which would be the carriers, any sense about when these guys are potentially thinking about starting to upgrade their networks?

Michael W. Zellner

Well again, the indication that we’ve gotten is that it will be (Inaudible) in the back half of the year and whether that means the last month of the year or July or now, but probably closer to the last month of the year to be honest. But we have got an indication that they’re getting ready to take some more substantive steps in the not too distant future. So that’s kind, so that’s part of what as I mentioned earlier, a little help in that regard would get us, would allow us to get to the 170 side of that range that we talked about for Q4.

Harlan Sur – JPMorgan

Right. And then just as importantly so, let’s say that your, this part of your business continued to kind of remain at sort of the current run rate levels, you would still be able, you still feel pretty confident about getting to the lower end of that guidance range for the fourth quarter?

Michael W. Zellner

Correct.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

Both of what we see in storage as well as on the mobile side.

Harlan Sur – JPMorgan

Great, okay. Fiber-to-the-home, it’s been a relatively sluggish business for the team; very lumpy growth one-quarter, inventory burned the next quarter. But if I set that aside, I mean the team has got you basically own the Japan fiber-to-the-home market. And this is huge growth opportunity; as it relates to the broadband build outs that are taking place in China, which the PMC team is trying to take advantage of. but at the same time, like many of the other broadband technologies that we’re familiar with whether it’d be DSL or cable as soon as the subscriber growth rates and the proliferation starts to occur, you see a myriad of other semiconductor companies stepping into that market and there’s probably 10 guys now going after the fiber-to-the-home market. And so I guess, and the good news is that given the aggressive pricing declines, there has been some consolidation in the FTTH semiconductor market. But I guess my question for you is, is the PMC team going to slug it out and be the last man standing or would it be more advantageous for the team to look at more of a rational way to kind of exit this business kind of going forward.

Michael W. Zellner

Well we’re certainly not intending to exit the business. It’s a nice business for us. it certainly hasn’t grown as you observed at the levels that we’re originally anticipated for many reasons, one that build out in the west, it hasn’t really happened in earnest et cetera. But rationalizing, I think is a good way to characterize it as some of these larger players get involved Broadcom, Qualcomm others, in our relative competitive position hasn’t changed much in the short-term. But at some level, the market isn’t large enough to sustain some of these bigger players that are jumping in. So obviously, there’s something going on. It looks like some of the bigger players are going to come up with a solution where they come up with a device like a residential gateway type of solution where they’ll take the client side of the pond and pull it in as part of that solution.

There’s two pieces of silicon again, one being the OLT, which is the infrastructural side that’s very strong for PMC. we absolutely intend on staying focused on that. In the client side, as well actually in the short-term and in Japan, Japan we probably have 80% of that market. So on a go-forward basis, our strategy will certainly be to continue to develop solutions for our customers in Japan to make sure that they can progress things forward and in the rest of the world, we will likely make most of our investments from here to be more oriented to the OLT side. there is not a lot going on in the very short-term on the RG side, but it seems pretty obvious to us in a little bit of a longer-term, that’s unlikely what will occur. So we won’t sort of get in that mix that’s where it goes.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

We don’t have some of the other parts that some of the bigger guys do to have and in any case, I think the RG shakeout could be interesting and it’s not necessarily anything that we want to get involved in?

Harlan Sur – JPMorgan

Got it, okay. Do you have any questions from the audience?

Question-and-Answer Session

Unidentified Analyst

Just wanted to see if you have any comments on Verizon’s CapEx for the second half, I know there was a previous presentation that went through kind of some of the large ware, AT&T and T-Mobile were going through this acquisition and they kind of slowed down over last half of last year, beginning part of this year and they should kind of pick up. Verizon seems like, they’re well ahead of or at least ahead of AT&Tians in terms of the 4G roll out. Any thoughts on why Verizon would really pickup meaningfully as or is it just more steady?

Michael W. Zellner

I think in the – they certainly have begun to deploy their 4G solutions ahead of AT&T and so on. I mean I personally actually move to Verizon for that reason. But I think that and that will continue, I think there their pace will a bit ahead of some of the carrier certainly in the west. But I still don’t it’s going to be a huge snap up from the kind of pace that they’re at today. I think it’s going to be sort of maybe modest increases from the levels of spending that they have but it’s kind of steady as you go until. At some point, they’ll obviously start to feel some competitive pressures from some of the other folks and then maybe you don’t go up a notch. but I think in the short-term, it will be sort of more the same with a slight trajectory upwards.

Unidentified Analyst

So the flip side in terms of AT&T and T-Mobile, do you think they’re going to need to step up their investment as they’ve kind of slowly gone behind the curve or...

Michael W. Zellner

Yeah. I absolutely do, it’s really a matter of timing. and again, whether it happens in the back half of this year or maybe late in Q4 and then more significantly in 2013, I’m not sure, the kind of the discussion is that it should start happening in earnest certainly in Q4. but again, we’ll see, because it’s been pushed out so many times I’m personally a little reluctant to sort of bet the bank on that one. But we’ll see it’s certainly by in the next several years; it’s going to have be just a substantial investment by all the major North American carriers to get their infrastructure in place.

Harlan Sur – JPMorgan

Any other questions out in the audience? Why don’t we turn to your storage business I’ve always thought and I continue to believe that storage is one of the crown jewels of the business now for PMC, just given the storage outlook and you guys are 100% focused on enterprise storage. and as we think about some of the trends there, the one number that always comes to my mind is that in good times and in bad times what we’re seeing is consistent 45% to 50% petabyte growth in demand from the enterprise, storage segments of the market. So that’s just a very nice tailwind for your business kind of on a go-forward basis.

and so as raise your storage business, you are emerging from an inventory correction in Q4 and Q1 with a strong backlog here. how much of the growth in your storage business that you’re seeing right now is been driven by a couple of things, number one, the Romley transition versus inventory replenishment or HDD recovery, I thing you guys have alluded to the HDD recovery having some impact as it relates to your storage systems business. And then you also have sort of a third or fourth tailwind here, which is the SAS-2 market share ramp into some of your SAN based customers?

Michael W. Zellner

Sure. So, I’ll take them one at a time in no particular order. I would say the inventory correction that actually occurred as a results of the tsunami problems in Japan, first of all, you can kind of see the inventory build if you look that sort of our second and third quarter revenue levels and storage last year, actually third quarter was a largest quarter ever for us in storage, of course the little dirty secret is they weren’t just buying for Q3. It turns out there also buying for Q4 and Q1.

Harlan Sur – JPMorgan

Right, right.

Michael W. Zellner

But in any case that’s pretty much behind us as we all know there turned out not to be a supply issue as a result of that disaster. So, the OEMs could therefore, bleed down the inventory that they had built up to guard against that. So that’s pretty much behind us now. And in terms of the drive shortage, as it relates to the flooding disaster, it really didn’t impact the OEM side of things much, where it did impact us a bit is on the channel side.

And as many of you may know, we purchased the channel assets of Adaptec couple years ago and because we saw pretty much directly to the OEMs. But we didn’t have a really distribution asset in play that would allow us to go for that part of the market to us. In that market it actually has been impacted probably about maybe 20% impacted and it hasn’t come fully back yet. We don’t think it will be fully back actually even in Q2, but by Q3 it should be. So, it is sorting itself though. That’s again a smaller piece of the overall storage business…

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

But it did impact it there. On the enterprise side, it didn’t impact it, while it didn’t really impacted essentially to any measurable degree. In terms of Romley, again data center, the way that you characterize that they tailwind associated with the growth in demand for the storage of data is perfect in this one, because data center manager, they tend to like to run their data centers with a little bit of headroom. Many of them pick nothing that magic about it, but about 20% headroom.

And then as they start seeing their capacity fill up to 90%, and above they’re in buying more equipment. And if they need it, they need it, and whether the model that they can buy is it have to be based on the next version from Intel i.e. Romley, it actually doesn’t matter, because they’re not going to let them sales run out. So, as a result it’s one of those things that it’s a requirement purchase that just occur. So, as a result you don’t end up with the bunch of pent-up demand, simply because they’re buying it as they needed.

That being said, on the margin there could be a bit to the degree that there were some sort of projections going out about equipment that they need and maybe in those cases, wait a little bit to get the latest and greatest perhaps. But it really isn’t a significant impact. The drivers in the businesses you mentioned SAS-1 to SAS-2…

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

We went from 30% share to 60% share, that transition we’re in the midst of that transition now. And we believe that “the world would be fully transition to 6-gig or SAS-2 by the end of the year.” So, that’s a nice tailwind for us in storage that way. We have a tailwind associate. We still have a nice profile of fiber channel. On the controller side, the fiber channel technology is staying intact. On controller side is staying intact on the expander side. It’s waning a bit over time to the benefit of SAS, and again we have 60% of that market.

But there is an ASP uplift that’s associated with some very cutting-edge encryption technology that we have associated with their fiber channel offerings. And on the storage server side, we intend on in our growing share in the channel, certainly once we get through this little drive issue. It’s back to the races on that. We also are getting some nice business.

Dell proper is actually on the storage server side, is a customer of our competitor. But Dell DCS, many times uses a PMC solution and this is kind of their white box approach where the data center, the could data center many time dictates, they have design control and they dictate to the contract manufacturer, which is how Dell DCS is acting, want to use, and so we have a number of design wins in that way.

Harlan Sur – JPMorgan

So, that’s actually interesting. I didn’t know that you had a footprint in Dell. So, DCS is their data center group?

Michael W. Zellner

That’s correct.

Harlan Sur – JPMorgan

How you think about it?

Michael W. Zellner

That’s correct. That’s exactly right.

Harlan Sur – JPMorgan

Okay. And they’re using your server rate solution, is that they’re using.

Michael W. Zellner

That’s right.

Harlan Sur – JPMorgan

Okay, interesting. As you guys transition your customers to SAS-2 and that’s going to be a tailwind and I think that’s probably will drives a lot of the growth to get to your targets in the fourth quarter. The interesting thing about the storage market is that, as you’re ramping, you’re already working on capturing design winds for the next-generation of technology, which is SAS-3…

Michael W. Zellner

That’s right.

Harlan Sur – JPMorgan

Right. And I think Greg said on the last call that, he doesn’t expect a whole lot of shares, if maybe the PMC team picks up an incremental, one or two percentage points of share. But Greg did mentioned something pretty interesting and you also actually bought it up as well, which there are some value-added capabilities that you are implementing with some of these new technologies, things like encryption for example on your controllers, given your customers focus on security. So maybe talk more about some of these value-added features that the team is working on? And what kind of ASP premium can we expect for this type of new functionality?

Michael W. Zellner

Yeah, it really does bring some of these things and encryption is a great one. Security is a huge issue, especially as you think of the way that we are all at least considering, storing things in the cloud and all that. Encryption can be very competitive advantage of those that are offering those kinds of solutions. So it’s a very significant value add. And you’re right, as a result of that, we’re able to get premium ASPs.

If you look at our gross margins over the course of time, we’ve been pretty successful in not only maintaining, but actually grow them. And if you consider where our gross margins are today, and with the backdrop that one of the areas everybody realizes, we have very high gross margins, simply because of R&D required is in the optical space.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

But as I mentioned, optical is really challenge right now. So, on the surface, you would think…

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

Gross margin should be actually degradation because of this.

Harlan Sur – JPMorgan

Right.

Michael W. Zellner

But in fact they’re growing, and it’s these reasons. We’re being – we’re very successful in maintaining and growing pricing because we continue to deliver some of these incremental pieces of value. And meanwhile, our operations organization, which is we think second and none continually drives down the costs and it’s really allowing us to maintain these gross margins.

Remember, we’re talking about potentially getting up to the 71%, 72% gross margin by the end of the year. We mentioned that, and that’s with very, very modest growth on the optical side, which historically or traditionally has been a wider gross margins profile for us.

Harlan Sur – JPMorgan

Right. So, you did an interesting acquisition, not that long ago. You acquired the SAS expander portfolio from Maxim, and I think this was mainly for the SAS-3 transition, which starts to take place next year. And I think that at full run rate, this business has the potential to generate about $35 million to $40 million, at least from Maxim, it was I think generating that kind of revenue run rate on the SAS-2 generation.

So, as you look at the SAS-3 in your customer engagements and you’ve looked at an integrated the Maxim team, is that the type of incremental revenue you expect once the SAS-3 starts to ramp kind of full run rate back half of 2013, 2014 is kind of this incremental $35 million, $40 million in revenue per year?

Michael W. Zellner

We actually think we can – we should be able to do that in a bit more, because we’re actually bringing our own knowledge into this mix. So just to make sure, it’s clear. There is two main areas in storages, the storage system and the storage server. And on the storage system that’s the SAS transition. We’ve had both expanders and controller. On the storage server side, they’re also expanders.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

We only carried the controllers that the rate base controller. We didn’t have the expander side on the storage system side that was shared between LSI and Maxim. So this actually brings a piece of the storage system expander business to us that we didn’t have it all before.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

And so I think the profile that you mentioned in very doable, when we bought the, and it’s the 12-gig solutions when we bought the 12-gig IP from them in the small engineering team that came with it. We left behind their six-gig expander server revenue. So they kept that. So now that’s we’re lined up to get into that market and so I think that those kind of revenue profiles are very real and to the degree that we can, we can gain share with our competitor, we could even grow it a bit from there and again, we’ll see if we are successful, we absolutely think we’ll be able to maintain what we have and potentially expand it. Because there are aspects of this 12-gig solution that we have that we can sort of pull into that what they had and make it. We think an even more compelling offering.

Harlan Sur – JPMorgan

We’re trying to financial, so at the fundamental environment plays out, as you would expect, as you mentioned, the team expects to get to 160, 170 million in revenues by the fourth quarter of this year, that’s about 18% growth from this quarter, gross margins I think you guys are expecting 70% plus operating margins kind of in that 25% range. On OpEx declines that are roughly about three to four percentage points below the OpEx levels from where we are today. So I guess my first question is you kind of walked us through how you get to that 160 to 170. So first question is your confidence level in terms of hitting that target range from a revenue perspective in the fourth quarter and then number two talk about some of the cost reduction initiatives that are going to drive the OpEx decline as you move through the second half of the year.

Michael W. Zellner

Sure. So, we’re confident with the caveat that we need a little help in the mobile space and we’re already seeing that is carrier spending and I think you talk to anybody that’s in this space and I think they’re going to be a little cautious when it comes to carrier spending, but the reason that we felt that we could credibly give that ranges, because we’re already seeing an up tick at least modestly in the mobile side. And we can get at least at the lower end of that range pretty confidently with both what we’ve seen storage as well as the mobile side and if something comes to on the optical side that’s benefit you could get us to the higher level.

So we’re reasonably confident with that, we’ll see as we progress to the year of course. On the spending side, there are two possibly, three pieces of the spending side and we’ll see if we get the targeted piece in Q3, but we may but for sure, we think we can get it in Q4. There’s a piece of it that frankly it’s easy and that’s the piece it’s associated with, and we saw the very large profile of employees in North America both between the U.S. as well as Canada and as we all know many people hit the end of their benefits profile as you are closing on end of the year. So that’s the part it’s sort of stepping of a lot.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

The will come, there’s another piece of it that’s certainly a little more strategic, we talked early about the fiber-to-the-home.

Harlan Sur – JPMorgan

Yeah.

Michael W. Zellner

With the big players jumping in and because we’re going to sort of orient to ONU future development towards what’s required in Japan and we’ll see how it plays out in the rest of the world. So we will orient our investment on the OLT side, it allows us to take a little bit more of a modest investment profile for the reason that we think will ultimately be dominated by the big guys. So we get to save a bit there and then the other thing as we have a major 100-gig solution ONU sorry, OTN based solution coming out in the middle of the year, it’s we’ll see if it ends up in queue, if it ends up taping out in Q2 or Q3, but in any case, once that tapes out, then we’ll able to pull back on our investment there, there’s not the next. There’s not another logical investment after that at least for the foreseeable future beyond the 100 gigs. So that again will also let us drawback our spending, so it’s really between those two things as well as kind of easy one that I mentioned associated with French that allowed us to the spending profile that we mentioned for kind of Q4.

Harlan Sur – JPMorgan

Got it. And then my last question on the team obviously recently execute in an accelerated buyback to the tune of about $160 million, you exited the first quarter with about $507 million in cash obviously with the profitability level and your margin profile you will continue to generate healthy levels of cash going forward. Maybe share with us some of your insights as it relates to uses of cash I mean obviously I think you are going to continue to invest in top and bottom line growth. What segments are you going to look at in terms of reinvesting more heavily and do you continue to expect to return cash to the shareholders?

Michael W. Zellner

I’m sure, so I certainly have said and Greg has mentioned a number of times potentially there is opportunities to grow our top line through M&A and we want to make sure we have the dry powder to do that. And if it became obvious that we didn’t have an immediate use for it then we would figure out a way to get it back to the shareholders we certainly don’t need that kind of money to run our company operationally that obvious. And you know we did the Maxim acquisition that was sub $20 million and at least in the short-term we don’t see another large sort of Wintegra size kind of acquisition. It doesn’t mean it couldn’t come in the future but as you mentioned we are generating $35 million to $40 million of free cash a quarter. So, we felt like you know at least in the short-term we needed to get some of this cash back it’s obviously a non-productive asset on our balance sheet. And so we were able to get a big piece of that cash into the U.S. part of the problem was much of it was overseas it continues to be generated overseas on a go forward basis but we were able to take a pretty big piece of this and pull it into the U.S. So snapshot today about 90% of our cash is in the U.S. and that was never the case. So we decided to take a pretty big first step in terms of committing about $160 million to do an accelerated buyback. We wanted to get the shares out of the base quickly get the benefit of that starting in Q3. In Q2 we will get a partial benefit because as you know EPS is calculated on an average share count (Inaudible) in Q3 and we partnered with a large bank in order to make this happen and over the course of the next six to nine months they will clear their position that’s associated with giving us 10% roughly 10% of the shares and allowing us to take those out of the mix. We felt like this was the better way to get some cash back to the shareholders. We could have we considered dividends we could have done that with the cash on an ongoing basis being generated outside the U.S. we didn’t want to get into a situation where we were obligated to at this point in the company’s at this stage in the company’s life to obligate doing an ongoing dividend when so much is being generated outside the U.S. that could change, that could change in the future but at least for you. And we still are not opposed at all to the, to an appropriate M&A transaction and so we wanted to make sure that this was a little bit more of a one-time thing or maybe a two time thing between the 10% and we have enough approved by the board roughly another 10%. But beyond that we wanted it to be kind of a one-time profile so that we could continue with this concept of if the right thing ends up allowing us to add shareholder value by augmenting what we are doing with an acquisition we could do that.

Harlan Sur – JPMorgan

Great, thank you. We are out of time. Mike, we want to thank you for your participation.

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