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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

Analysts

James Schneider - Goldman Sachs Group 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

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

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

David Wu

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

William S. Harrison - Signal Hill Capital Group LLC, Research Division

PMC-Sierra (PMCS) Q2 2012 Earnings Call July 30, 2012 4:30 PM ET

Operator

Welcome to the PMC Second Quarter 2012 Earnings Conference Call. My name is Christine, and I'll be your operator for today's conference. [Operator Instructions] Please note, today's conference is being recorded. I will now turn the call over to Jennifer Gianola, Director of Investor Relations. You may begin.

Jennifer Gianola

Thank you, Christine. 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 a discussion of the business and key highlights from the second quarter 2012, and Mike will then discuss the financial results for the second quarter of 2012 and the business outlook for the third quarter of 2012. Please note that our second quarter 2012 earnings press release was disseminated today via BusinessWire 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, customer concentration, bookings rate, changes in inventory, supply constraints, foreign exchange rates and volatility in global financial markets, and other risk factors that are detailed in the company's Securities and Exchange Commission filings. Actual results may differ materially from the company's projection. 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 on our press release issued today. In addition, a GAAP to non-GAAP reconciliation of financial measures noted in our outlook will be posted to 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

Thank you for joining us today, and welcome to our second quarter earnings call. I'm pleased to report that the second quarter revenues were up 4% sequentially in line with our expectations. Specifically, reported net revenues of $138 million and $0.09 non-GAAP EPS. We also introduced several major new products that have been well received by our customers on a global basis. While we're pleased to see growth, we're seeing the macro environment challenge the pace of recovery in every geography and product area. In my discussions with our end customer, it's clear that the economic challenges have caused concern and uncertainty in their outlook. With the current environment at hand, we're very focused on project execution, operational efficiency and tightly managing our expenses.

As you recall from our analyst day, our business focus is on transforming networks that connect, move and store big data. Network demands have grown far beyond people making and receiving cell calls and consumers everywhere now streaming full-length movies and videos and are watching live television on billions of devices around the globe. We are convinced that the fundamentals behind our key growth drivers remain intact. We're focus on delivering these transformative products, winning the sockets that matter and positioning ourselves for great leverage as the world economy recovers and our business continues to strengthen. With this backdrop, I'll now discuss the results for Q2.

While we're pleased with the sequential growth, the mix was a bit different than we expected. Storage came in weaker than our initial expectations while our Optical business performed better than expected. At the top level, the Storage Network segment was 62% of total revenue, down from 66% in Q1; optical revenue came in at 23% of the total, up from 20% last quarter; and Mobile revenues came in at 15% of the total, up from 14% last quarter. And for those of you tracking the legacy portion of our revenue, it was 9% of our total revenue in Q2.

I'll start with the storage and market segments. Our storage business in Q2 was down about 2% versus last quarter due to a slower Romley ramp than expected. Going forward, we expect to see growth for the balance of the year. We continue to execute well in terms of design wins and delivering new products. We were the only RAID Controller vendor to ship a PCI Express Gen 3 chip with the new Romley generation of servers and continue to be the only PCI Express Gen 3 based RAID solution in the market. For reference, PCI Gen 3 runs at 8 gig versus 5 gig for Gen 2 and delivers roughly double the performance across this critical interface.

The next major transition of SAS technology is the migration from 6-gig to 12-gig SAS. We've been working very closely with all the major storage and server OEMs, showcasing our industry-leading controller and expander products. Our traction in these engagements is going quite well and we believe we're very well positioned to continue to grow our share with the 12-gig generation of products.

In addition to our 12-gig controllers and expanders, in June we announced the industry's first 12-gig SAS flash controller for the next wave of enterprise-class solid-state drives. Why is this important? Well, flash-based drives are the only type of drive that can take advantage of 12-gig performance, as spinning disks are far too slow. In other words, there's no need for 12-gig without a 12-gig SSD. And PMC is the only company in the industry with an end-to-end solution. PMC's 12-gig SAS flash manager enables more than 300,000 IOPS in 2.5-inch SAS SSD, easily more than double the performance of today's 6-gig SAS SSDs. And compare that to today's fastest hard drives today, they operate at about 500 I/Os per second. So the performance of one of our new 12-gig SSDs is on the order of 600x faster than a spinning hard drive, 600x faster. When paired with the industry's highest performing protocol controller, PMC's 12-gig SPCv controller, cloud server and big data storage manufacturers can deliver a stunning 2.4 million IOPS per second in an 8-drive enterprise class flash subsystem. We're excited to be participating in the solid-state drive controller market segment and expect to be providing design win updates on this family of products shortly.

In the Optical end market segment. As I mentioned earlier, the 22% growth was a positive upside. The upside was driven by onetime projects in China, Russia, Africa and an OTN build which we don't expect to repeat in Q3, but nonetheless, it's good to see some signs of life in the carrier part of our business. In Fiber To The Home, we continue to build our leadership position. Technical evaluations of our key 10-gig EPON ONU and OLT opportunities continue to progress well in Japan and China. In the second quarter, we garnered a number of wins across EPON, GPON and 10-gig EPON, covering all the major regions, Japan, China, Korea and North America. We currently anticipate 10-gig revenue to start ramping in 2013.

During the quarter, we announced that we're expanding our leadership in optical transport with the second-generation, HyPHY OTN processor family that enables Metro OTN. It's a product platform we call, HyPHY flex.

The HyPHY flex device is the industry's first single-chip ASSP to deliver ODU 0 and ODUflex for 1-gigabit per second switching in an OTN network. This new set of features delivers a tight coupling with 1-gig ethernet, paving the way for OTN use well into the packet-based access network.

We also taped out our third-generation OTN processors last month. This new family will allow us to deliver the same level of integration, power and cost benefits to 100-gig networks. With these tape outs, we believe we completed about 85% of our investment in OTN with continued design win traction, and today 7 of the top 9 OEMs are using our HyPHY and/or META devices. We're in a great position when carriers start the next phase of their OTN deployments.

Now on to the mobile end market segment. In our mobile market segment, where revenues were up 9% due to improved base station shipments in the Japan and European customers and improved mobile backhaul router shipments in China and North America, data traffic growth continues to force the need for a transition to packet backhaul where our Wintegra processor platforms are uniquely positioned. We had another solid quarter for design wins in Q2 with wins in fiber and microwave backhaul equipment, driven by the OEMs' need to provide differentiated, programmable packet functionality in all IP networks. We also won new opportunities in LTE-based small cell and macro base stations and we secured a 3G win at a Chinese Tier 1 customer.

Although Q2 showed signs of strength over Q1, mobile deployments remain choppy, primarily due to the macroeconomic factors in the various regions. On our analyst day, we discussed our entrance into the mobile Radio Head market, which represents a big growth opportunity for PMC. Specifically, we announced the industry's lowest power and most integrated radio transceiver, chipset for the macro base station designs. PMC's new UniTRX chipset replaces up to 14 discrete devices and reduces board space and power by more than 50% for the equivalent multi-standard base station radio designs. We believe this opens up a several hundred million dollar new market segment for PMC with revenues starting in late 2013.

Our very low-power, highly integrated radio chipset is going to change the way that radios will be designed and operators can use these new designs to increase network capacity so all of us can have a better 4G and LTE mobile experience.

Next, our outlook for Q3 2012. As we look to Q3, we're seeing continued uncertainty in end market demand. We expect Q3 revenues to be in the range of $130 million to $138 million, flat-to-down 6% from our previous guidance. Considering today's backlog, we believe that our storage products will grow in Q3 while Optical and Mobile will retreat to roughly Q1 levels. With regards to our second half outlook, we expect gross margins to stay in the 70% to 71% range and expenses to be reduced to approximately $75 million per quarter, on par with early 2011 levels. While revenue is recovering slower than we anticipated, we have improved our gross margin and expenses earlier than projected. As revenues recover, we continue to believe we can operate at the 25% to 30% operating income level with revenues in the $160 million to $170 million range.

Looking forward, the fundamental drivers behind our investments to transform networks that connect, move and store big data are soundly intact. We're well positioned with our technology leadership in Storage, Optical and Mobile networks. These networks must move to new technology and PMC is delivering the innovation to enable these transitions. We believe customer and channel inventories are lean. Combined with our focus on improving gross margin, reducing OpEx and reducing share count, we have positioned ourselves for a highly-leveraged recovery. With that, I'll hand it over to Mike for details on the financials and our outlook.

Michael W. Zellner

Thanks, Greg. First, for those of you who saw the 8-K filing of our press release there around 11:40 a.m., it was released earlier than instructed due to a third-party error. We are in the process of resolving the issue and we'll make sure it doesn't happen again. Obviously, everything's fine with it, just a bit early.

Okay, I'll now discuss our second quarter financial results and comment further on our outlook for the third quarter of 2012. Second quarter revenue of $137.8 million came in within our outlook range, and increased 4% sequentially over the first quarter. Greg provided further details around this by each of our Storage, Optical, Mobile end market segments. In Q2, we had 2 customers, which each accounted for more than 10% of revenues calculated on a rolling 12-month basis, namely HP and EMC. Non-GAAP gross margin in the second quarter was 70.3%, up 120 basis points from the 69.1% in Q1, driven mainly by product mix with a higher proportion of revenues this quarter from our Optical end market segment.

On a non-GAAP basis, operating expenses were slightly favorable to our outlook range for the quarter, coming in at $77.2 million, a decrease of $1.1 million from Q1. On a sequential basis, the decrease was a result of lower employee benefit-related costs and our continued management of expenses in light of the macroeconomic environment, partially offset by higher tape outs and other R&D-related costs. This resulted in non-GAAP operating margin of 14% for the second quarter, as expected, compared to 10% in Q1. Non-GAAP net income improved by over $7 million from $14 million or $0.06 per share in Q1, to $21.3 million or $0.09 per share in the second quarter.

In addition to the improved revenue and operating margin, we benefited from foreign exchange and realized investment gains on securities liquidated to fund our stock buyback programs. Also the lower weighted average number of shares outstanding during the period contributed to the improved non-GAAP net income per share result, although we won't see the full benefit of the reduction in share count until next quarter.

Q3 GAAP net income per share was $0.12 versus $0.41 loss per share in Q1. This increase is mainly due to the recognition of $28.5 million tax benefits of certain U.S. tax credits, including $20 million of foreign tax credits from a withholding tax payment made in the second quarter. This was related to the intercompany dividend that we highlighted last quarter to fund our stock buyback programs. This compared with $85.4 million of tax provision in Q1, again, primarily related to the intercompany dividend. The primary items reconciling GAAP to non-GAAP net income for Q2 are as follows: $11.6 million in amortization of purchased intangible assets; $7.3 million in stock-based compensation expense; $1.1 million in acquisition-related costs; $900,000 of noncash interest expense; $25.7 million of income tax-related adjustments; and in addition, there are certain other items as described in our press release issued today.

Turning to the balance sheet. We ended the quarter with $340 million of cash and cash equivalents, short-term investments and investment securities. Our cash position at the end of Q2, net of the $68.3 million face value of our convertible note, was $272 million, a decrease of $167 million from Q1. This decrease resulted primarily from a total of approximately $166 million used to execute the repurchase of our stock, as well as the related $20 million withholding tax payments associated with the intercompany dividend highlighted earlier, $9 million used for purchase of fixed assets and intellectual property, partially offset by over $28 million of operating cash flow, excluding the $20 million withholding tax just mentioned, which was higher than the $11.9 million generated in Q1, primarily due to normal working capital changes and, of course, the benefit of higher revenues in Q2.

Our net inventory at the end of Q1 was $29.2 million, approximately $2 million lower than the prior quarter as we continue to tightly manage our inventory levels, particularly in the current economic environment. Net inventory turns for Q2 were higher at 5.7x compared to 5.3x in Q1. Q2 ending deferred revenue was $1.6 million lower than Q1 at $14.8 million, which relates to inventory at our distributors.

Overall, our inventory including at distributors remains well managed. In terms of lead times from our foundry partners, they have remained stable and we have adequate wafer supply to meet our forecasted demand.

We continue to execute against our previously announced $315 million stock buyback authorization. During the second quarter, we retired approximately 23 million shares, most of which was under our ASP agreement with Goldman Sachs, along with some that we bought back under a 10b5-1 program. In Q3, we'll get the full benefit of these buybacks and expect our diluted share count will be reduced to approximately 211.5 million shares.

Now turning to the outlook for the third quarter of 2012. As Greg mentioned, we expect Q3 revenues to be in the range of $130 million to $138 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 of Q2 was approximately $100 million. This implies turns of approximately 25% from the beginning of this quarter to reach the midpoint of our revenue outlook. This level of turns is similar to the turns achieved during Q2. On a non-GAAP basis, we expect our overall gross margin percentage in Q3 to remain in the range of 70%, plus or minus 50 basis points. Non-GAAP operating expenses in Q3 are expected to be lower than Q2, and in the range of $75 million, plus or minus $0.5 million. Our continued active management of operating expenses will allow us to achieve with a level similar to early 2011 in the upcoming quarter, which is earlier than previously anticipated. We expect a non-GAAP net interest income to be around $300,000, 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 Q3 to be approximately $0.5 million. As a reminder, tax expense can be impacted by a number of variables associated with our ASC 740 liabilities, including, but not limited to, a change in foreign income and product mix.

Non-GAAP earnings per share is projected to be at $0.09, based on the midpoint of our outlook range and assuming a diluted share count of 211.5 million.

Before we open the call for questions, I wanted to take the opportunity to make a personal announcement. I will be leaving PMC to pursue earlier-stage opportunities outside the semiconductor industry. Greg and I have agreed upon a transition period targeted to be through the filing of our third quarter financials in early November. Between now and then, we'll be working to identify a suitable replacement and, of course, I will remain focused on my responsibilities here at PMC until that time. On the business side, I am very proud of all that we have accomplished over the past 5 years and continue to believe that we of the products and position to deliver substantial value to our customers in the markets we serve and take advantage of the expanding SAM [ph] in each of the mobile, optical and storage markets. I'm also very proud of the finance team here at PMC who are so talented and work very hard to ensure our financial results are consistently delivered in a transparent, accurate and timely manner. With that, we will open the call to your 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

Greg, I was wondering if you could talk about the outlook for Q3 a little bit, maybe give us some color around the pieces of communications business that will be down, which ones will be down the most. And do you think this is the effect of just the overall end market slowing, or do you think there is also the effect of share loss or potentially legacy declines as well?

Gregory S. Lang

Actually, the decline in Q3 is really kind of going back to Q1 levels. We had some onetime things happen in Q2 across actually both kind of attritional Metro products as well as our backhaul products, that won't repeat in Q3. And as I mentioned earlier, it was good to see some signs of life, however, it's not going to carry through into Q3. So I wouldn't think about it as a decline off of the prior run rate. It's more of the -- we have these onetime events in Q2 that won't repeat themselves in Q3.

James Schneider - Goldman Sachs Group Inc., Research Division

Okay, fair enough. And then as a follow-up, I think you've talked before about Q4 trying to hit that $160 million run rate. I'm assuming that's no longer the target at this point and can you confirm that? And if so, when do you think you may be able to get back there?

Gregory S. Lang

Well, clearly, with the kind of the disappointing growth in revenue in Q3, we won't -- I think it's going to be harder for us to get to that $160 million threshold in Q4, so I think that that's a fair statement. Just as a reminder, there was a few data points that we shared with you when we were giving you the kind of the outward guidance, if you will. There's just several things we wanted to try to communicate. So the other pieces of that were gross margins targeting the 70% to 71% range. We're there this quarter in the guidance that we just gave. Expenses at $75 million, we're there this quarter with the guidance we just gave and then the intention to get back to the 25% to 30% operating income level when we do get to that $160 million to $170 million range. So those are the parts of the formula, I think, are still very much intact, but looks like revenue's taking a bit longer to recover.

Operator

The next question comes from Harlan Sur from JPMorgan.

Harlan Sur - JP Morgan Chase & Co, Research Division

On the storage growth outlook for Q3, is the growth normal seasonality or is it inventory replenishment or are you starting to get some pull through from Romley? And additionally, are both of your segments and external storage and server contributing to the growth?

Gregory S. Lang

Yes, I think in Q3, the growth that we'll see in storage is actually more Romley-related because we did have, I think, some higher expectations entering into the first quarter and the revenue upside that we saw in the first quarter. And I don't believe that the transition of the ramp happened as quickly as customers expected it to, so we burned a little bit of that off last quarter and we'll see it come back to some extent this quarter. Having said that, I think that the whole industry is looking at a lesser-than-normal -- whether you're looking at consumer or PC or storage where we'd normally see some seasonality upside in Q3, it's coming in, in a much less-than-normal type of seasonality, in my view, across all of those segments.

Harlan Sur - JP Morgan Chase & Co, Research Division

And then, you also, Greg, sort of highlighted your confidence about maybe potential or further growth in this segment for the fourth quarter. Just wondering if you're seeing some signs in terms of order backlog for continued growth in storage in Q4? How are you coming to that conclusion that you'll see growth for the remainder of the year?

Gregory S. Lang

All right. Q4 is still a ways out there, but we do think that we will see some growth on the server side of our business and the storage side, which both tend to be strong in the fourth quarter. And we expect to see kind of another step up on the server side getting back to kind of a normal run rate, if you will.

Operator

The next question comes from Ruben Roy from Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Greg, I just wanted to follow-up on that last question. It sounds like growth for the balance of the year is based more on seasonality as you look longer term than anything that you're seeing today after -- I guess, what you could say is a little bit of a disappointment in Q2 in terms of how orders are shaping up. Is that the correct assessment?

Gregory S. Lang

And the assessment is what again? The...

Ruben Roy - Mizuho Securities USA Inc., Research Division

Yes, in terms of just growth for the balance of the year in storage, so as you look out into Q4. I know you guys had thought that coming into Q2, that you would see growth for the balance of the year for the storage business, which you had a little bit of a slower Romley ramp. I'm just wondering if you're basing that on just seasonality at this point or if there have been any changes in bookings trends?

Gregory S. Lang

Mostly based on seasonality and kind of getting back to a normal run rate on the server side.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay, and then switching over to the Optical side of the business. I'm just trying to understand when you look at the Fiber To The Home business and you think about longer-term growth, are you going to depend, do you think, on 10-gig EPON ramps to drive further growth? Are we kind of at a run rate here we have to wait for those ramps in 2013 to drive growth for that business or are there other dynamics going on that can get you to growth as you look out into next year?

Gregory S. Lang

For the Optical part of the business, I would say that the strongest growth potential we have there is in the OTN arena, not in Fiber To The Home. Our Fiber To The Home growth expectations have been, I think, tamped down for the last couple of years as we've seen a lot of price erosion with the competitive environment that's out there. So our growth outlook really in Optical is driven by OTN for the next few years. Now having said that, I do think that there is opportunity for an uptick if and when we see carriers pickup on 10-gig and drive 10-gig deployment into their network. We know Japan is very interested, for example, in doing this -- NTT in Japan, I should say, to drive the substantial reduction in power usage in their network, which we think is possible with 10-gig. And that, obviously, reduces our operating costs and lowers their overall powerful footprint, which is very important right now in Japan with the kind of the turning off of the nuclear source in Japan. So we do see that as a potential upside, but I would say the first driver for us in growth in the Optical space is going to be in OTN.

Operator

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

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

On the gross margin for the second quarter it was up because of product mix, but you're keeping it flat. Can you say what have you done to improve gross margins? And then, as Optical and Mobile improve, do you expect to be able to go above 70% gross margin?

Michael W. Zellner

Yes, I'll take it. So, we continue to be pretty successful in terms of maintaining on the pricing side and driving down costs. And so it's a good observation. Obviously, relative to Q2, if things work out from a mix standpoint like we outlooked it will be stronger orientation again to storage. So it's really about just being able to continue to work on the cost side and being able to take the benefit of that to the P&L.

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

Okay. And on the 12-gig Flash and SAS, do you see that as being a late Romley or will it be the next generation, the BRIC land-based servers?

Gregory S. Lang

I think the 12-gig generation of products both on the controllers as well as the Flash side, we're probably talking about the middle of next year 2013, before we see revenue ramp. The overall ecosystem, whether you're talking about drives or controllers, I think it will take about that long to come together and also that's probably a likely place you'll see the server OEM start to offer it in their server platforms with the next speed bump out of the server roadmap.

Operator

The next question comes from Srini Pajjuri from CLSA Securities.

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Mike, could you tell us what the backlog is as of today, and then I have a follow-up.

Michael W. Zellner

Well, you may recall, I don't know a couple quarters ago, we stopped giving backlog at the time of the call because it moves around so much it loses its meaning relative to previous periods. So again, coming into the quarter, it was 25% turns, that's consistent with what we actually executed to in Q2. So we feel confident in the kind of the midpoint of our guidance.

Srini Pajjuri - CLSA Asia-Pacific Markets, Research Division

Fair enough. And then on the buyback, Mike, I know you obviously had $315 million, it looks like you spent about $160 million to $170 million of that. Just wondering why, I mean, why do you -- I guess, what's the strategy behind only going, only putting $160 million to $170 million in that ASP program and what's just driving for the rest of the remaining balance of it?

Michael W. Zellner

Sure. So there are some limitations on how much of a buyback you can do at once. You get into some nuances, tender offer type of nuances and things like that. We didn't think it was appropriate to get involved in. So we will -- once this clears, once this straight clears with Goldman, then we will at that time, assess what the right next steps are. Obviously, we could do -- go into doing open market purchases opportunistically. We can do another ASP. So we'll decide that when the time comes and as we talked about it when we originally did it, this should clear either middle to late Q4, potentially Q1 and then we'll take the next steps.

Operator

The next question comes from Brendan Furlong from Miller Tabak.

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

Question for you on the Wintegra business. Some of the OEMs that you supply into are saying that they're seeing a turn in the U.S. wireless infrastructure business but the rest of the world remains pretty weak. But I would have thought that the U.S., you guys would have seen a benefit from the U.S. coming from your customers.

Gregory S. Lang

Yes, we did actually have a bump up in Q2. At this stage, we don't see it actually continuing into Q3. And this is, hopefully, this is a sign that bookings will start to pick up in the carrier space in general. As you guys are all aware, it's been off a good year at this stage. And at some point, we believe that they're going to have to reinvest in their networks and sooner or later they'll start coming back. So it was good to see some positive bumping around in Q2, but at this stage we don't see the bookings to show it continuing into Q3.

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

Okay. And then on the Flash drive or the SSD stuff for the enterprise in 2013, who are you mainly working with within the ecosystem to get those design wins and position yourself to capture the revenue there?

Gregory S. Lang

Well, one of the things that you're probably aware of is to do an effective controller in the Flash word, the memory devices themselves are very unique case by case. So we're spending a lot of time with the Flash vendors to make sure that we get the parts characterized correctly, we get the right life endurance, life extension endurance characteristics. So that's part of the ecosystem that we're working with. Although, I think, your question was around drive makers and who we would work with on the drive side. We actually don't have a public -- have not made a public announcement yet, but you should probably see that from us in the next couple of months with the first of the announcements there.

Operator

The next question comes from David Wu from Indaba Global.

David Wu

Greg, can you talk a little bit about your customers. A number of companies has seen their customers indication weaken in the month of June. Did that happen to you also? And can you say what would have to change for your service provider customers and/or the storage guys to have more confidence in the business?

Gregory S. Lang

Yes, so the first part of your question in terms of people seeing kind of bookings roll-off pretty sharply in June, I think that we saw similar weakness there. Perhaps we saw it start a little bit earlier. We tend to get reasonable visibility into the bookings rate given the nature of our products. But clearly, there was the weakness in the mid-to-late part of the quarter as you identified. Part 2 of your question, I wish I knew that answer. That's probably a good question for those guys. But I think all of us are -- have big questions about kind of the macroeconomic environment, and I think until people get confidence around the globe, I think we're going to get cautious behavior from our customers and in their end markets. So I think it has a lot to do with general recovery. And as we see that, hopefully, we'll see our business normalize a bit as well.

Operator

The next question comes from Sundeep Bajikar from Jefferies & Co.

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

Could you talk a little bit about business conditions in the cloud data center, particularly things like Dell data center services, for example, or the Adaptec business overall? It seems that Intel's Romley shipments have been fairly robust, so it would be helpful to understand if you're seeing similar trends or what the differences might be. And perhaps as part of that, just kind of share with us your views on supply chain inventories. Would it be fair to think that we'll see another quarter of inventory burn again in Q3?

Gregory S. Lang

Yes, so the first part of your question, the data center part of our business is actually has been one of the, I would say, would be on the healthier side of the spectrum overall. We've seen good volumes through our big server OEM partners in the form of HP as well as Dell on the DCS side, so that appears to be going well. In the channel part of the business which we, of course, track that independently as well, it has actually struggled in some parts to keep up, in particular in Europe. We think it's a combination of just the drive shortages catching up for some of the smaller players, but also the macro conditions that are quite harsh in Europe, a good chunk of our business there. So we're looking to see that business kind of rebound a bit from a channel perspective over the next couple of quarters as the drive issue goes away and hopefully as the -- some of the economic concerns there also improve. The last part of your question.

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

Inventory burn again in Q3?

Gregory S. Lang

Inventory, yes, thank you. So on the inventory front, we feel like we're actually in very good shape at our distributors, as well as nearly all the OEMs. Probably the one place that you'd look like at and say that there's a -- we're working through the final remnants of it is really around the Romley transitions. So outside of that, we feel like we're in quite good shape. And the good news part of that is when business does start to turn, we'll probably see it pretty quickly because the new demand will end up in new orders very quickly instead of burning off some excess as they are still lying around.

Operator

The next question comes from Sandy Harrison from Wunderlich.

William S. Harrison - Signal Hill Capital Group LLC, Research Division

Just a follow-up on the prior question a little bit more. As you look at the September quarter and you talked a little bit about seeing some of the orders trailing off late into the June quarter, what's your expectations for linearity for September? Is it pretty heavily back-end loaded, is it moderately back-end loaded? What sort of shades of gray can you color for us there?

Gregory S. Lang

Well, right now we based our forecast for the quarter based on, I'll call it, a normal quarter with normal type of turns throughout the quarter. Having said that, September can be one of those quarters that people come back out of summer vacations and hit pretty back on revenue, so we could see some more back-end loading, but I think the way we protected the outlook is really consistent in kind of turns from the quarter that we just finished and that was fairly consistent with some normal quarters in recent history as well. So I think we're projecting normal turns environment, although sometimes Q3 can be a back-end loaded quarter.

William S. Harrison - Signal Hill Capital Group LLC, Research Division

Got you. And then as you look at the supply chain, you've seen relatively limited visibility, no pun intended, but if you've looked at it and say is this the new new, is this the way that the customers feel as though it can be where they can move things in and out, how much change is intra quarter are you guys seeing from pushouts and pull-ins and so forth? And is pretty much the customer base aware that this is not the norm going -- this will not be the norm going forward? Or do they continue to believe that this kind of lead time environment's going to be around for a while?

Gregory S. Lang

If I generalize, I think, customers right now are holding off on giving early orders on things that they don't necessarily feel concerned about supply. So I think that people are -- people understand that there's good capacity in the pipeline and probably inventory around and they have their own concerns about their own product outlook. So I think they're holding on and waiting for placing orders. So I don't think it's kind of a I'll call it, "normal business as usual" type of backlog environment. I think people are hanging on and waiting until they feel like they really needed to place backlog.

William S. Harrison - Signal Hill Capital Group LLC, Research Division

Got you. And then last one for me, are you seeing any mix shifts at your OEMs or any potential mix shifts at your OEMs that would cause some of the activities you're seeing in their bookings, i.e., some gaining while others losing or so forth, anything meaningfully? I'm not asking, obviously, name names here, but do you see anything potentially up and coming that you may have heard through the channel that would impact sort of your mix and your market share?

Gregory S. Lang

I don't believe that there would be anything that I would point to. I think over the last -- if you look over the last decade, there's been the strength in growth of the 2 large OEMs in China and the impact that they've had been on some of the global markets. And I think that, that continues although at a much lesser pace they've kind of hit a critical mass and also their growth has slowed. But if there's anything out there that you might point to, that's one that's certainly been there historically. But beyond that, I don't see any big share shifts happening in the other end markets that we're serving.

Operator

[Operator Instructions] There are no additional questions at this time. Thank you all for participating in the PMC Second Quarter 2012 Earnings Conference Call. This concludes the conference for today. You may all disconnect at this time.

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