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Applied Micro Circuits Corporation (NASDAQ:AMCC)

Q2 2013 Earnings Conference Call

October 25, 2012, 17:00 PM ET

Executives

Bob Gargus -- SVP and CFO

Dr. Paramesh Gopi -- President and CEO

Analysts

Patrick Wang -- Evercore Partners

Shawn Simmons -- Oppenheimer & Company

Sandy Harrison -- Wunderlich

Vijay Rakesh -- Sterne Agee

Christian Schwab -- Craig-Hallum Capital Group

Christopher Longiaru -- Sidoti & Company

Brian Thonn -- Kingdom Ridge Capital

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Applied Micro Circuits Corporation Earnings Conference Call. My name is Diana and I'll be the operator for today. At this time, all participants are in a listen-only mode. Later, we will take questions. (Operator Instructions). And as a reminder, this call is being recorded for replay purposes.

I would like to turn the call over to your host for today Mr. Bob Gargus, Senior Vice President and Chief Financial Officer. Please go ahead.

Bob Gargus

Good afternoon, everyone and thank you for joining today's conference call. On the call with me is Dr. Paramesh Gopi, our President and CEO.

Before turning the call over to Paramesh, I want to remind you that forward-looking statements discussed on this call, including guidance that we will provide on revenue, non-GAAP gross margins, non-GAAP operating expenses, and certain other financial targets are based on the limited information available to us today. That information is likely to change.

There are numerous risks and uncertainties that affect our business and may affect these forward-looking statements, risks such as product development and introductions, design wins, manufacturing and supply availability, product demand and mix, the impact of personnel reductions and departures, employee relations and the integration of new or moved operations, risk resulting from macroeconomic conditions and markets, and other risks as set forth in our SEC filings, including our Form 10-K for the year ended March 31, 2012.

Our actual results may differ materially from these forward-looking statements. AppliedMicro assumes no obligation to update forward-looking statements made on this call. I want to point out that AppliedMicro has several analysts to cover our stock and this creates a range of variability relative to the Street financial models. When we say Street estimates, we mean the consensus of the major analyst models and not necessarily the guidance that was given by the Company.

With that, I'm going to turn the call over to Paramesh. Paramesh?

Dr. Paramesh Gopi

Thanks, Bob. Let's start with the general overview of second quarter fiscal year 2013 before going into details on the individual product lines. Here are some highlights of the September and our related guidance.

We exceeded the top line for the September quarter and met the bottom line. Our overall increased gross margin from the higher revenue was offset by additional expenditures associated with our 64-bit ARM server on a chip platform development.

September quarterly profits would have been a positive 1.1 million or $0.02 EPS without the ARM related expenditures and were a loss of $10.5 million or $0.16 EPS inclusive of the ARM expenditures. Overall, book to bill for the quarter was 1.05.

We will be guiding revenues up to the 8% to 12% sequentially for the December quarter and we are entering the quarter with a healthy 81% in backlog at the start of the quarter. Turns required to make the December quarter would be the second lowest we have done since the first quarter of fiscal year 2011.

X-Gene, the world's first ARM v8 64-bit server on a chip platform is executing to schedule and our design win momentum continues to be extremely strong. More details as well as additional use regarding this category defining product will come out at the ARM Technology Conference next week. Our strategy to converge processes and connectivity into the data center is working well and our new products are beginning to ramp.

Finally, we remain committed and on track to achieving quarterly breakeven in the upcoming March 2013 quarter at the $55 million to $60 million revenue level. With that, let me get into each of the product lines with the business update, design wins and new product picture as well as a brief summary.

Let's begin with our connectivity business. Despite the rather flat overall market for optical components in the September quarter, APM's connectivity business continued to grow, fueled by the success of our new product ramps as we transition into a data center product focus.

The new products defined as those released in fiscal year 2009 or later and mostly aimed at the data center grew from 19% in the March quarter to 24% of connectivity revenues in the June quarter and reached 33% of connectivity revenues this quarter. This success reflects strong penetration in the newest customer systems and LAN cards that are growing disproportionately when compared to legacy products.

A fine example of this would be Cisco's ASR 9k platform. Product revenue for the connectivity products was $21.3 million for the September quarter and was up 22% sequentially over the June quarter.

Let's look at what drove the improvements in our connectivity business. Our data center PHY products are showing very strong strength, led by our breakthrough CMOS QPSK 100-gigabit per second Mux and Gearbox product lines, while our PQX family of OTN data center products continued to gain traction.

The QPSK 32-gig transmitter for coherent optical modules has taken advantage of a redesign cycle by numerous module producers and more than seven of them have chosen us in the September quarter alone. Our Gearbox product has the best telecom rate performance of any CMOS mixed signal device in the industry making it the component of choice for metro and data center scale out platforms.

PQX has now become the default leading edge-router PHY platform for WDM and DWDM systems for both metro and core networks. Its production ramp continues at multiple customers and it's well on our way to becoming our flagship product. The combination of PQX in our soft silicon products provide the most compelling converged telco service provider data center platforms for networking and cloud system OEMs.

APM's data center products, led by our QT2225 Ethernet PHY continue to gain traction. I'm extremely excited to announce that we've won two major Tier 1 design wins for our 10GBASE-T copper Triveni products that will begin to ship about a year from now. Our ultra low-power data center short-reach product with its very low power requirement is a key differentiator in our 10GBASE-T offering. Again, all this is consistent with our overall transition to a data center focused semiconductor company.

In summary, our connectivity business is growing based on our new products despite the generally muted overall market conditions. We've successfully entered the 10GBASE-T market and our mixed signal PHY products are ramping very nicely. Overall, our analog and mixed signal expertise has been demonstrated with greater success in multiple products.

Let's go to our processor business now. The largest volume platforms in the enterprise and cloud data center comprised top of rack and dense wiring closet switches. These switch platforms are transitioning from lightly managed to Software-Defined Network, SDN, platforms. This is fueling the need for multi-core, multi-ICE, low power embedded processors in the control plane.

This benefits AppliedMicro because it plays to the strength of our PacketPro embedded product line where we combine PowerPC and ARM architectures on a single monolithic [die]. We are expecting seven design wins to begin production ramps later this year. We also secured multiple design wins on large document processing platforms.

Pricing remains very competitive in the enterprise, the small and medium business and consumer markets and we just released our APM 86190 and 86290 products which will begin to ramp late this quarter. Processor product revenues for the quarter were $23.8 million and were up sequentially by 6%.

Let's look at what drove the improvements in our processor business. Our first wave of 40-nanometer TSM based designs will ship from customer development platforms to full production in the next six months. This will mark a significantly reduced dependence on IBM as a fab partner and represents a major step in the execution of our strategic objectives.

Now let's turn to X-Gene, our ARM v8 64-bit server on a chip platform solution. APM with its X-Gene architecture remains the clear leader and category creator in the ARM 64-bit cloud server market with plans to be shipping for revenue in late calendar 2013 to early calendar 2014.

The unique architecture of X-Gene takes into the account the real workload requirement for public and enterprise cloud servers. As we've previously announced, X-Gene will combine world class server processing with very unique and difficult analog and mixed signal IO to create and optimize total cost of ownership or TCO solution for clouds then on workloads. Our solution will satisfy the demand for market that is almost $5 billion and expanding rapidly.

I'd like to take a few moments to point out the significance of the X-Gene platform in the wake of us creating and leading the 64-bit cloud micro-server revolution. X-Gene incorporates that ground-up, clean sheet, full custom 64-bit processor core that was designed for 3 gigahertz operation.

X-Gene includes full enterprise grade security, ECC, RAZ and other secular virtualization features that are standard and expected across the enterprise and cloud infrastructure. X-Gene includes a ground up, scalable, low-powered terabit per second coherent fabric that enables large scale out systems.

X-Gene also uses fully integrated mixed signal interfaces such as 8, 12 and 32 gigabit per second serial IOs, PCIe Gen3 and 10-gigabit Ethernet native. AppliedMicro is uniquely qualified to leverage our entire analog and mixed signal portfolio. From our data center optical physical air devices to our copper twisted-pair 10-gig transceivers, all of which are set to fuel our base business growth.

X-Gene is the world's first server on a chip platform that will be the basis for ARM v8 with cloud server platforms. Leveraging our analog and mixed signal assets from our base connectivity business puts us in a unique and highly differentiated leadership position as we see and drive the cloud server – the cloud micro-server market.

Early trends in cloud computing show that data center hosting remains strong. Markets worldwide are exhibiting strong supply and demand dynamics resulting from increased demand for data center outsourcing. A recent Gartner report highlighted strong Internet data center demand for servers and this is a type of environment where low end servers and vendors outside the top 10 pervade.

These vendors again outpace the broader market going 17.5% year-on-year, almost quadruple the aggregate rate and accounted for 55% of the growth of the market as a whole. An example of this trend is NASDAQ's FinCloud teaming up with Amazon to offer both dealers and traders cloud services that meet regulatory and compliance requirements. This is perhaps the first of many cloud services that target the special needs of a given vertical.

I'm excited about the fact that we are ahead on several product development and deployment milestones. Please plan on joining us at the ARM Technology Conference on November 1 in Santa Clara for further details.

Earlier today we announced the first of several key ecosystem partnerships for X-Gene. Red Hat Software, a world leader in cloud and enterprise computing and software along with ARM publicly acknowledged support for our groundbreaking sever on a chip platforms for cloud and enterprise deployment, validating our role in category creation and leadership in this rapidly growing, heightened market.

This first announcement is a start of a groundswell of ecosystem partners moving towards establishing X-Gene and 64-bit ARM as key enablers for a next generation of cloud and enterprise data centers.

With that, let me turn the call over to Bob. Bob?

Bob Gargus

Thanks, Paramesh. Second quarter revenues were 46.3 million, up 5.0 million or 12% compared to the prior quarter and down 29% compared to the same quarter a year ago. The 46.3 million was approximately $1 million above the Street consensus. Sales to North America accounted for 37% of total revenues, sales to Europe contributed 21% and sales to Asia contributed 42%.

Wintec, a global logistical support vendor, accounted for approximately 20% of September quarter revenues compared to 18% in the June quarter. There were two distributors that were more than 10%; Worldwide Avnet which accounted for 28% which was the same in the June quarter and Flextronics which was 12% and less than 10% in the June quarter.

Distributor revenues for the last quarter were approximately 30.2 million compared to 26.9 million for the prior quarter. Inventory in the channel based on sell-through numbers decreased to 51 days compared to 66 days for the June quarter.

Turning to the P&L, our second quarter non-GAAP net loss was in line with the Street consensus, a loss of 10.5 million or minus $0.16 per share compared to the non-GAAP net loss of 11.4 million or $0.18 per share for the prior quarter.

Our non-GAAP operating margin was a negative 24.9% of revenue and increased 5.3 points from a negative 30.2% achieved in the last quarter. Our non-GAAP EBITDA for the quarter was a negative 8 million or 17.2% of revenues compared to a negative 9.6 million or 23.4% of revenues for the prior quarter.

The second quarter non-GAAP gross margins including licensing was 57.5% compared to 57.8% for the June quarter. This was at the higher end of our guidance of 57% plus or minus half a point. Looking forward to the December quarter, we are expecting licensing revenues to be approximately 1.0 million and we are expecting overall gross margins for the December quarter, including licensing to be approximately 57.5% plus or minus half a point.

Non-GAAP operating expenses were 38.1 million compared to our guidance of 37 million plus or minus half a million. The operating expenses were higher than our guidance mainly due to incremental R&D costs related to our X-Gene project as it approaches take-off. For the December quarter, we are expecting our operating expenses to be in the range of 38 million to 38.5 million.

Our non-GAAP interest and other income was 0.7 million. Interest income is expected to be approximately 0.6 million for the December quarter and we expect our tax rate to continue at the 3% rate for the next several quarters. The share count for EPS purposes was 64.9 million shares. Looking forward at the December quarter, we expect the share count to be approximately 66 million shares, the increase primarily due to additional quarterly grants related to the Veloce acquisition and additional shares related to our employee retention program likely to vest in November.

Turning to the balance sheet, our cash and investments totaled 89.7 million or approximately $1.37 per share at the end of the second quarter, a decrease of approximately 6.5 million from the June quarter. Our DSO at the end of September was 28 days and we expect this to be in the range of 30 to 42 days going forward. Our inventory turns for the September quarter were 4.3.

The bottom line is that DSO and inventory on the balance sheet as well as in the channel have improved for two quarters. Revenues have expanded and we are guiding up for the December quarter. Gross margins have stabilized and could increase later in the year. Our development schedules are on track and X-Gene is going well.

The only thing that is slightly negative is the drop in cash, but we are well on our way to fixing that. As previously stated, we should break even in the March quarter and should exit fiscal year 2013 with approximately 70 million of cash on our balance sheet.

Turning to GAAP, as you know, our non-GAAP financials exclude certain items required by GAAP. Our net loss on a GAAP basis was 21.6 million versus a net loss of 23.4 million last quarter. The difference in our second quarter GAAP net loss of 21.6 million and our second quarter non-GAAP net loss of 10.5 million is a delta of 11.1 million. The 11.1 million is primarily comprised of one, 2.3 million for the acquisition of Veloce; two, 7.6 million of stock-based compensation and three, 1.3 million of amortization of purchased intangibles.

A complete reconciliation between GAAP and non-GAAP financials can be found on our earnings release, which can be found in the Investor Relations section of our website. Please note that there is no reconciliation for forward-looking non-GAAP measures.

That concludes my remarks. Let me turn the call over to Paramesh. Paramesh?

Dr. Paramesh Gopi

Thanks, Bob. In summary, we are executing to a plan exactly as we outlined to you two quarters ago and last quarter. We made the September quarter and are guiding sequential revenues up to be 8% to 12%. I want to emphasize that our book to bill is strong and our guidance depends on 19% turns based on our increased revenue guidance.

I will also note that while the macro climate curtails visibility, our OTN and data center service provider wins are secure and are poised to ramp. Our product mix is changing and growing with the strategy which is to position our company towards a large growth data center market and our execution is on track.

I will once again confirm that our commitment is to breakeven in the March 2013 quarter as we approach the $55 million to $60 million revenue level. Please join us at the ARM Technology Conference on November 1 in Santa Clara to get an important update on our groundbreaking X-Gene platform.

With that, let me turn the call over to Bob. Bob?

Bob Gargus

Thank you, Paramesh. Just before going to Q&A, let me specifically recap our guidance for the September quarter. Total revenues to be up 8% to 12% sequentially with the midpoint of approximately $51.0 million. Total gross margins of 57.5% plus or minus half a point. OpEx roughly $38 million to $38 million. Interest income of $0.6 million and a tax rate of 3%.

That concludes our formal remarks. Operator, please provide instructions to our listeners for the queuing process.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question will come from the line of Patrick Wang, Evercore Partners.

Patrick Wang -- Evercore Partners

Hi, guys. First question, I was hoping you could maybe kind of walk us to how you get to breakeven in the March quarter? When I take a look at what you're guiding for OpEx, here in the December quarter it would imply that either a pretty strong ramp into the March quarter or compensation on the OpEx side, if you could help out with that please?

Bob Gargus

So Patrick, we're not really ready to get into a lot of detail relative to how we're going to accomplish this. I can tell you that we have a complete plan as to how we're going to do it. It does involve some revenue growth, some margin expansion and it does have us reducing operating expenses accordingly. But because we haven't officially announced some of those details to employees and other things that would be involved, it would be inappropriate for us to kind of preannounce it now.

Patrick Wang -- Evercore Partners

Okay, no, I understand…

Dr. Paramesh Gopi

And Patrick, I'll add one more piece of color there. As you know, when we started this, we were going to – the key part of our Company was to essentially focus us towards a large scale data center market and part of it was essentially revolving our entire strategy on the ARM architecture, a lot more focus relative to future products and a transition out of the IBM fab for our legacy products. So it is completely congruent to Bob's point with where we said we were going to go when we started this entire X-Gene exercise.

Bob Gargus

I'll just add also with the tape out of X-Gene in the December quarter, you kind of have your expenses heading a high point at that point in time because of tape-outs and other things. So hopefully, you'll – let's put this way, in the January call, we'll be able to go through all the details.

Patrick Wang -- Evercore Partners

Got you. Paramesh, at the very end, I caught you saying something about 55 million to 60 million kind of revenue ranges. Is that kind of a preliminary view of generally how you guys keep growing to the next quarter?

Dr. Paramesh Gopi

Actually that's what we committed earlier in the year, so I nearly restated what we've been saying for the last two calls, right? Bob, if you want to add color to that?

Bob Gargus

So my color is going to be that we only give guidance one quarter at a time, so we've given the December quarter. And if – from a CEO perspective, I'd much rather guide us to be breakeven at the low end of that revenue range than the high end.

Patrick Wang -- Evercore Partners

Got it. That's helpful. And then just for my second question, Paramesh, can you take us through some of the key milestones that we have ahead of us for X-Gene before we start seeing production revenues, I think you said kind of late '13 or early '14 in the calendar year? And then also to that note, if you could address the competitive situation, I think that we've heard a lot of chatter from some of the other competitors out there, private company and other public company. Could you please enlighten us?

Dr. Paramesh Gopi

Sure. I think the – let's start by saying that we're extremely, extremely pleased with what we've done so far. I think that on the last call, I had outlined two or three key events that will occur. One was obviously the silicon, the other was obviously the ecosystem and the third was the customer base. All these three form the vertices of a triangle that will basically lead to customers adopting X-Gene and the cloud micro-server market. So I want to reemphasize that we were the first licensee for ARM.

We built our own core, groundbreaking core. We talked to you about FPGA platforms, the proof that we have a complete enterprise grade operating system already and announceable today should tell investors that from a 64-bit perspective, there's no doubts or there's nothing else that needs to be validated. I hope you saw the press release this morning which talked about the amount of work that the Red Hat guys, ARM and us have done to really feed the real part of the cloud micro-server market for 64-bit ARM.

From a competitive perspective, the one thing I want to emphasize that I probably haven't emphasized in the past and will become more obvious as X-Gene becomes real going forward is that there is no company on the planet that has the portfolio of mixed signal assets that AppliedMicro has that will be leveraged to provide a truly low TCO solution. For instance, all of our announced shipping for revenue transceiver parts, backlink parts, SerDes parts, physical layout parts, each one of them have spun their way into the X-Gene platform and into the architecture.

The reason we are able to provide a true server on a chip with the type of fabric and mixed signal integration that we can talk about and the TCO that we even talked about, is exactly the combination of the portfolio of our mixed signal and analog technology along with our 2.5 to 3 gigahertz processor technology that is unprecedented in this space. So from a competitive position, our view is that we are not just a year and a half to two years ahead on the core, there is no other competition that has our suite of data center mixed signal and analog PHY assets.

So from taking and really driving not just the ecosystem but when you form factors, the new TCO, the new actual size and density requirement, there is no other company that has or competitor that has that portfolio of technologies that is being brought to bear. I would really invite you to come to the ARM Technology Conference because not only will it show you the amount of progress we've made, but also give you a real vista into what it takes not to put together a demo platform but a production, quality ecosystem that will be married into the highest integration of mixed signal and analog along the industry groundbreaking processor technology.

Bob Gargus

This is Bob. Patrick, you can probably conclude from those remarks that you'll see several additional announcements that have come out of TechCon, but we're not going to talk about them today.

Dr. Paramesh Gopi

We'll just tease you, I guess, is all I'd say.

Patrick Wang -- Evercore Partners

Got it. So I guess stay tuned. Well, I look forward to that. Thanks so much and good job guys.

Dr. Paramesh Gopi

Thanks.

Bob Gargus

Thanks.

Operator

Your next question comes from the line of Rick Schafer, Oppenheimer & Company.

Shawn Simmons -- Oppenheimer & Company

Hey, guys. This is Shawn Simmons calling in for Rick. I'd just like echo my congratulations on a great quarter and guide. Just looking into the December quarter, I mean most of you peers are obviously are guiding for sequential declines, right, in a very tough macro environment, whereas you guys are guiding up 10% at the midpoint. What's driving that growth is that on the OTN and connectivity side, does that continue into the calendar fourth quarter or are we starting to see some of that processor ramps, any more color on that would be great?

Bob Gargus

So we'll see growth in both, okay. I think you may see the processor piece grow a little bit more in dollars in the December quarter than the connectivity, but you'll see quarter-to-quarter growth in both. I think it's reflective of the gross margin kind of more or less staying flat in that perspective. And the confidence we have is just based on the amount of backlog we have and as we've pointed out, the number of turns is the second lowest we've had to do in a long time with lowest being last quarter. So it kind of continues that trend. And also if you look at the way things are poised from an inventory point of view, I mean we're down in the 50 days of inventory in the channel and our turns are at 4.3, so we – if demand does pick up in anywhere, it doesn't matter whether it's the channel or direct, it's going to come through to us pretty quickly.

Shawn Simmons -- Oppenheimer & Company

Okay, great. And then I guess switching gears back to X-Gene, I guess you guys expect to be in silicon by this quarter. I guess is that on the 40-nanometer side or is that 28-nanometer, is that both? If it's just 40-nanometer one, would you expect the 28-nanometer part to be available?

Dr. Paramesh Gopi

So just remember that we talked about this. Our goal was 28-nanometer, 3 gigahertz was what we publicly announced and if you want more details, I'd direct you to TechCon.

Shawn Simmons -- Oppenheimer & Company

I'll be there. And then I guess just my last question focusing more on the balance sheet. Bob, can you just talk about a minimal cash balance, I know you guys just publicly stated in the past that it's kind of around that 70 million to 75 million and it sounds like you're going to hit that right at the end of the March quarter. Any more color around that would be great?

Bob Gargus

So right now, I'd say we're poised to end the year at about 70 million. That might be give or take a couple of million based on certain severance actions and stuff take place that's part of what we go through. But I'd say that's a reasonable number for us. Ideally, we'd like it to be 75, but it's not that far away. And if we get the breakeven, then we won't be burning cash. So I think overall things are working out pretty well.

Shawn Simmons -- Oppenheimer & Company

Okay, great. Thanks, guys.

Operator

Your next question comes from the line of Sandy Harrison, Wunderlich.

Sandy Harrison -- Wunderlich

Thanks. Good afternoon, guys.

Dr. Paramesh Gopi

Hey, Sandy.

Bob Gargus

Hi, Sandy.

Sandy Harrison -- Wunderlich

So a quick question, Paramesh, you hit on a couple of things in your prepared remarks and on one of the early questions mainly about IO. So if you look at what you guys are coming to market with, the suggestion is it truly is a server on a chip with all the IO and other networking capabilities on it.

And as you stated most of – actually all of your competitors who are looking at doing something like this don't have the breadth of product. Clearly, you looked at different options before you came to market of doing a complete solution versus more processor-oriented with some hooks but not a lot of hooks and you determined that it made more sense to come with a much more complex solution than less.

With that in mind and recognizing of how we looked intimately at these things, what are the options that the other players have to do in order to even sort of look to complete on a level here, first of all? And then the second question is, are you trying to do too much? Are you cutting into some special sauce with some of these players or is this really what you think you need to be successful?

Dr. Paramesh Gopi

So Sandy, let me start by saying that this strategy was written three and a half years ago, so it's been a very deliberate road to where we are today. X-Gene was not an afterthought. X-Gene was not a copy. X-Gene was conceived after a real, real deep dive into understanding how we rethink a complete cloud server. So if I – I want to take you back to kind of when I started to take over the Company in 2009, the Company's fundamental technology expertise was mixed signal IO for telecom networks. And the Company at that time had an embedded processor business based on an embedded core of (inaudible) from IBM.

And when we got here, the thought process was how do we really reposition the Company to go after a very large market? So before the word cloud server was fashionable, we had the unique opportunity of intercepting the trend by talking to the actual key cloud service provider, the top guys in the world, who actually managed their data centers for profit. And one of the big things was energy costs in TCO. So if you look at it, the inception of X-Gene started with rethinking a server grounds up. So in order to rethink a server, there's three major components, right? There's essentially the IO or the communications component. There's the computing component and then there is the scale out of the fabric component to have a lot more cores for these independent Internet workloads, right? Open source workloads.

So what we ended up doing was we decided that from day one, all the investments we would make, believe or not, every single announced product that is shipping for revenue today, has an imprint on our first and second and third generation X-Gene silicon platforms coming up. And it's amazing to us because the people who run these data centers all wanted to make sure that the IO that they're going to use are the lowest power IO, the most comprehensive integrated IO, the lowest latency IO. So to be able to control all of these pieces required us to think grounds up of the technology that we needed. So I think we took a really, really deliberate large step to do this. And every part of X-Gene has been proven out in a commercially shipping product on the communications side.

So the processor pieces of it was groundbreaking pieces that are going to come to bear to be mated with our communications strategy that has been the DNA of the Company for a very long time. So we're very confident because if you do something like this, we have to rethink the server, we have to make sure that they're making the right trade-offs and most importantly, we have to listen to customers and make a large change to the TCOs. And there is nothing more important than combining communications with computing to change the effective TCO in the data center.

Bob Gargus

And don't lose sight of the fact too that we've stated that it creeps out here in about less than two months here roughly. So you can infer from that we're pretty close.

Sandy Harrison -- Wunderlich

Got you. And then just sort of transitioning to some of the other products, you talked a little bit about some of the wins you've had in your copper 10-gig. Are you benefiting from the exit of one of your competitors or the selling of one of your competitor's technology to another company, is that something that's helping you guys on the design win front?

Dr. Paramesh Gopi

Actually, it's funny, right? The biggest technology enabler for 10-gig in the data center for copper was the ability to cancel cell phone and walkie-talkie interference. Our clear differentiator is the lowest power, zero packet loss ability of our DSP in our 10GBASE-T physical layout devices. So think about it this way, we announced the 10GBASE-T product, the market essentially came to us and fundamentally we are able to now use that IP once again, a key part of the server, LAN was the key part of the server, to not only go and drive and have customer sponsored NRE-bearing designs that we're starting for the data center, but also make it part of X-Gene going forward.

Sandy Harrison -- Wunderlich

Got you. And then Bob, you talked – I mean if you do the math, if you're at a midpoint of 51 for December, then the suggestion to getting to the lower end of breakeven at 55 would suggest an 8% sequential for the March quarter to get it breakeven, but you've also intimidated that you're looking at managing or potentially doing something with the cost structure as well with some of the expenses coming off here. So as we model, recognizing you're not giving guidance, but as we model going forward, should we be modeling more towards a revenue number or more towards an expense number, because either way we can get to breakeven?

Bob Gargus

Yeah, so I think you math number on the revenue is in the right ballpark. But no matter what you use, whether you use 55 or 60, you won't get there unless you take a reasonable bite out of the OpEx, okay? And some of that we can do by tightening our belt on things, by having lower number of tapeouts, by the re-useable of some of the IP box, but some will be also done with good old fashion, more painful process. So as I said, we'll give more detail about that in January.

Sandy Harrison -- Wunderlich

Okay. Thanks for taking my questions, guys.

Dr. Paramesh Gopi

Thanks.

Operator

Your next question comes from the line of Vijay Rakesh, Sterne Agee.

Vijay Rakesh -- Sterne Agee

Hi, guys. I'm completed sold on the X-Gene, so I'm not going to ask too many questions on that but can you just tell the near-term ramps, very good in our top line pickup and near term on September, December here and even going into March. You mentioned copper PHY, what else – can you give some more granularity there on what are the other markets you're seeing growth?

Dr. Paramesh Gopi

Well, I think we've given you guys a list of like 10 – up to 12 new products that we said we had completed and all we're really doing is confirming that those are now beginning to ramp, okay, which is what we said should happen, as towards the end of this calendar year they would ramp and that is what's happening. So I mean things are working out exactly as we've been saying for a couple of quarters and I couldn't be happier, because I had my fingers crossed, because it should work that way. But when it does actually work, you just kind of breathe a sigh of relief, right?

Vijay Rakesh -- Sterne Agee

Yeah. Okay. And going back to the X-Gene side, you said late 2013 ramp. How was the pricing – have you guys looked at what the pricing margin structure on those versus your traditional products?

Dr. Paramesh Gopi

We are going to announce pricing. What I can tell you is that we will price based on value adds relative to the market, okay, meaning that we have no set number to margin to a specific gross margin level, but we're going to price to, of the market and to the value adds that we can bring. So for example, if I could cut the power in half, I don't see any reason why I have to sell at a discount to Intel, for example, right? So I mean we'll get to that because the world is always changing, so we'll have to see what's the market pricing and that is the middle of next year and then give more details on pricing and stuff like that and our product will come up.

Vijay Rakesh -- Sterne Agee

Got it. Okay. And the last question here, on the licensing side you see any pickup there as you go through early next year, let's say?

Dr. Paramesh Gopi

I think the licensing will ramp probably from the current level of about $1 million to almost $2 million this quarter by the time we get to the last half of next year.

Vijay Rakesh -- Sterne Agee

All right, great. Thanks a lot.

Operator

(Operator Instructions). Your next question comes from the line of Christian Schwab, Craig-Hallum Capital Group.

Christian Schwab -- Craig-Hallum Capital Group

Hey, guys. Congratulations on the execution. As we look – 10-gigabit Ethernet copper PHYs, how much revenue will you do this calendar year and what do you think it can be next?

Bob Gargus

Basically none. We said this could ramp in the next calendar year, okay, but we have three design wins there and one of them is very sizable and the other two are good size, put it that way.

Christian Schwab -- Craig-Hallum Capital Group

So how big could it be in '14?

Dr. Paramesh Gopi

I think if you look at the total numbers of ports – I won't answer it, I will give kind of a margin…

Christian Schwab -- Craig-Hallum Capital Group

Give me like a broad – give me, oh, my god, Bob should we fired or somebody should be fired, and gosh, (inaudible) a bunch of money…?

Dr. Paramesh Gopi

I can give you the margins. I think last year, the total margin – this has been an eight-year market cycle that is waiting to happen. So last year I think the total industry shifted probably less than 20,000 to 30,000 units as a whole, right, because of the interference problem, because of all the technology hurdles and the power hurdles. I believe that the technology started to ramp with the second half of Romley taking effect in the data center. So you should look at the timing as being correct with the start of the technology being widely adopted.

But if you look at anybody's forecast, whether it's IDC, Gartner and so forth, they're talking about between 3 million and 8 million ports in 2014, right, in terms of the data center – I'm talking about both sides, right? So you're talking about 3 to 6, because if it's 3 million on the switch side, it's times two for the switch side. So it's a very, very nice market that is yet to ramp but the amazing part about this and the reason I'm excited about it is it's yet another part of the arsenal because as a company now, we have every single semiconductor component required to build a server, we are not dependant on anybody for anything.

Christian Schwab -- Craig-Hallum Capital Group

Could you remind us what the ASP is?

Bob Gargus

For these things -- I'll give you a range for these things depending on some features and other things can go probably from $8 to $14 for it.

Christian Schwab -- Craig-Hallum Capital Group

How much PQX your data center interconnect at 10 and 40-gig, how much of that did you ship in '12 and how much of that will you ship in '13?

Bob Gargus

Can you repeat the question again?

Christian Schwab -- Craig-Hallum Capital Group

On the PQX data center interconnect chip family, how much have you shipped in '12 and how does that look for the next couple of years?

Bob Gargus

It's still climbing and I think it's up about 25% year-to-year for this year and I think it will still climb double digits next year. In fact, I'm almost pretty comfortable with that.

Christian Schwab -- Craig-Hallum Capital Group

Right. Like 1 million to 1.2 million or what should we be thinking?

Bob Gargus

No, PQX is probably north of $15 million a year.

Christian Schwab -- Craig-Hallum Capital Group

Perfect. As we look to the X-Gene serve interconnect family, so we're going to tape that out, we're going to start shipping in '13 and we're going to get to '14, just let me know where I'm going. We've said numerous times that we expect the data center product family and I'm going to go through all three of those so you know where I'm going between the PQX, the X-Gene and the Gearbox which I think are probably your three primarily growth drivers. And when do we get to that potential $150 million to $200 million in incremental revenue above our base business, just so you know why I'm asking all these questions. So back to the X-Gene, as we look at that product family then, what kind of range of revenue could that be in, in '14?

Dr. Paramesh Gopi

So I think that in – I'm not sure if I want to go that far out at this point in time. I'll just tell you that it's tens of millions of dollars worth of potential to be very explosive, one. Two, the $150 million to $200 million of revenue growth that we talked about previously was also in conjunction with about $100 million drop on the legacy side. So we were saying that we should get our business into the $250 million to $300 million timeframe and about a 24 to 30-month timeframe and that excluded any of the X-Gene and that was six to eight months ago when we said that. So if you look at the Street models, most of these guys have it on the 240 to 250 range for next year. So I could almost argue we're right at the bottom end of what we said and that would be only about 18 months, okay.

With another year you're going to get to the 300 which I don't think will be unreasonable or at least that kind of path doesn't appear to be unreasonable right now, not that I'm trying to give guidance for fiscal year '14 just yet but I'm just saying I think if you follow the math, everything we promised in terms of the ramp of those and the direction that the numbers are going are headed right there. We get to the 55 million number in the March quarter, hypothetically, that's going to put you out to 220 range, okay, there on an annual run rate point of view. So I think things are tracking really, really closely to exactly what we said.

Bob Gargus

Yeah, just remember Christian that X-Gene unlocked a brand new market, right? I mean today the market is $1 billion for cloud servers. By 2014 that's going to be almost a $4.5 billion to $5 billion market, when we open those client server adequately. And so the earnings power of our Company is phenomenon because of what we can do if the portfolio of technologies that we are bringing to bear on this high growth margin.

Christian Schwab -- Craig-Hallum Capital Group

Right. And since you started teasing us earlier, I assume that you'll elaborate next week about a substantial customer partnership regarding the X-Gene product that bears that design?

Dr. Paramesh Gopi

No, there are key things relative to performance, to ecosystem partners and we mentioned that we would announce one OEM or more relationships, but we also said by the end of the calendar year. So we're not going to promise that that's next week, maybe it is, maybe it isn't. We're not going to…

Bob Gargus

Why don't you come to ARM, we'll talk to you then.

Christian Schwab -- Craig-Hallum Capital Group

I hear you, Paramesh. And then Gearbox, the optical interconnected 100, is that something you guys are still super excited about too?

Dr. Paramesh Gopi

Absolutely. I mean if you look at it, I keep coming back to this line and I'll say probably the tenth time in this call, from our perspective our new products are really driving the growth with our X-Gene, right? Remember one thing, in spite of the macro we are seeing the new products replacing two things, our legacy products and getting us into the right data center market category that we defined we're going to go into when we first disclosed the expenses. So speaking from a very, very operating plan standpoint, we are – whatever we set out to do, we're doing. It's never perfect but guess what, for us to time every product to get NRE for these products, to get design wins locked into our high touch optical module-type products, by the way, they are all going into data centers and by the way, believe or not, fundamental technology is leveraged right in the X-Gene is phenomenon from where I stand. It represents three years of work, starting to make real significant adds to our top line, to our bottom line and even our strategic solidification of a highly differentiated, high earnings power small cap company.

Christian Schwab -- Craig-Hallum Capital Group

I get it. And then lastly on gross margins, as the debts at our product family ramps as a percentage of revenue and say, like I guess IBM technology kind of weans as far as a percentage of revenue, how good can gross margins get?

Bob Gargus

So I still expect gross margins to kind of be in the 57% to 62% range over the next say six quarters in rough terms, but as we've said all along that's a function of mix because we do have some lower margin embedded processor stuff that we sell to the consumer arena. So it's a little bit of the mix. And even though the PowerPC products will be slowing down over time here, it's not like they're going to go away, there's still that old adage of – the new stuff never ramps as fast as you think and the old stuff never dies as fast as you think.

Dr. Paramesh Gopi

Yeah, I mean to Bob's point and to give you one more piece of data as in my mind, I think we're at a point where all of our product cycles are trumpeting the macro to some extent.

Bob Gargus

Yeah.

Christian Schwab -- Craig-Hallum Capital Group

Congratulations on that. That's all the questions I have and congratulations on executing to a plan which has been, I think we all know frustratingly long to come to fruition. Congratulations.

Dr. Paramesh Gopi

Thank you.

Operator

Your next question comes from the line of Christopher Longiaru, Sidoti & Company.

Christopher Longiaru -- Sidoti & Company

Hey, guys. I want to add my congratulations.

Dr. Paramesh Gopi

Thanks, Chris.

Christopher Longiaru -- Sidoti & Company

So a lot of my questions have been answered. I just have just two really. First, will you be able to have a 28-nanometer product by next year? Did you say that or did I miss that or what's the timeframe on that?

Dr. Paramesh Gopi

If you remember when we did the Veloce acquisition and when we talked to you at last year's October TechCon, we said that we would follow – as with every server OEM, we have to follow the TPACK model. So when we do a generation of sever, it's 40 and 28 together. The relative timing of those we can talk about. But when we talked about the investments, we always maintain that it's for TPACK and that's the way the server companies look, usually two generations with one set of chords and one set of interconnects. So that's all I'll say. More and more details to follow.

Christopher Longiaru -- Sidoti & Company

Okay, that's fair. And just – I think there was an announcement by Plexus just talking about having a 64-bit ARM competitive solution. Can you comment on that at all?

Bob Gargus

I'm sorry, who did you…

Christopher Longiaru -- Sidoti & Company

Plexus.

Dr. Paramesh Gopi

They were a fantastic early provider with 32-bit market. I think they seated a lot of the interest for the ARM based micro-server market. I think they also got a 2014 product released based on a yet on-productized ARM core. Please remember that details are ARM core, they're not fully getting a core from ARM. Therefore the performance differential is going to ultra large. We said early on we are building a very, very brawny ARM core, not a mobile core that can be licensed from the likes of ARM. So there's a huge difference. But I will point you to the fact that our Company owns every single piece of analog mixed signals and switch IO from soup to nuts. And I think that should – there's more coming from a product technology portfolio perspective, we are so far, far ahead. It's like bringing a knife to a gun fight.

Christopher Longiaru -- Sidoti & Company

Okay.

Bob Gargus

And Chris, I think the last I knew with ARM core isn't projected to be done until sometime in the second half of next year. And even if somebody got a license that a, that's a general-purpose core. They still have to harden it and they still have to put the other elements of any kind of SoC input, output or whatever around it before they have a core or before they have a solution, not a chip. So you got to expect it's going to take some time. But after that – to not only do the work, get the chip back, de-bug it, whatever. There's a lot of – some of the competitors are just out there kind of arguing that they can pick up a license and get to finish silicon in 12 months. And I think if you talk to the more skilled or learned people on it, it's kind of like nobody really believes that's possible.

Dr. Paramesh Gopi

Yeah, bar none. But if you look at it, how many people have the networking portfolio that our company has that are shipping for revenue in 40 and 28-nanometer today.

Bob Gargus

You talk about ARM competitors, I say who has mixed signal and 100-gig analogs along with packet processing assets and a huge data center PHY asset base.

Christopher Longiaru -- Sidoti & Company

What you're basically saying is you have pretty much a 12 to 18-month head start than anybody.

Dr. Paramesh Gopi

I would say two to two and a half years.

Christopher Longiaru -- Sidoti & Company

You're saying two to two and a half years, okay, that's great. That's very helpful, guys. Thank you very much. That's helpful and congratulations again, great quarter.

Dr. Paramesh Gopi

Thanks, Chris.

Operator

Your next question comes from the line of Brian Thonn, Kingdom Ridge Capital.

Brian Thonn -- Kingdom Ridge Capital

Hi, guys. Thanks for taking the question. Two questions for you. First off, Paramesh was just mentioning and you mentioned a couple of times prior about how you got mixed signal expertise that other don't have. Can you drill down a little bit on that? What does that actually mean? What features, what parts do you have that others either don't have or what they have is in your mind inferior to what you offer?

Dr. Paramesh Gopi

Yes. Let me take you back and I think the best analogy to provide, Brian, is if you look at the wireless market. Very few people in the wireless market can be winners in the wireless market, like the QUALCOMMs of the world are differentiated on two pieces of technology. Their radio technology which I call analog and their (inaudible) technology which I call mixed signal. Why? Because those are the two technologies that either let's you become differentiated and have large power to competition in the market, but there are also key ingredients of building the lowest power wireless handset or the lowest power wireless (inaudible).

Now if you come to the server and data center market, substitute radios with fiber optics – and by the way substitute the air with a cable because light has to travel through a fiber and substitute fiber optics with copper because sometimes data has to travel over wires. So we have all of the [pike] technology that you need to get data in and out of a server, whether it's backplanes, whether it's twisted pair or copper or whether it's fiber optics. What that does is give us – again, that's the basis for our base business today. And again when Bob was talking about the $150 million to $200 million of earning power that we're going to get over the next 12 months, that is because of those constituent technologies.

Now combine that with groundbreaking processor cores and a groundbreaking terabit fabric, okay? What you get is a very unique, non – I would almost say unique, single source company in the world that has the ability to provide the pipes in and out of a CPU, the pipes in and out of memory, all of the analog because when you're dealing with things like – we're building 40-gigabit and 100-gigabit per second backplanes that will tie a bunch of server chips together, guess what? That's 10x more than other (inaudible) company builds today in their base station, right? So the earnings power for us to be a large midcap company coupled with the fact that we are extremely unique in being the only company on the planet who offers fiber optics copper kind of communications, backplane communications along with a CPU core that's revolutionary and a fabric (inaudible) very, very, very highly differentiated unique point to have a very large earnings power funnel in front of us. Did I answer the question?

Brian Thonn -- Kingdom Ridge Capital

Yeah, that helps me understand…

Bob Gargus

This is Bob. For some not so technical people out there, the simple way to look at this is we talked all along about tomorrows servers being about latency and data movement, not about being compute intensive. And in order to move data, you need bigger pipes. So the combination of being able to supply the bigger pipes with the right level of computing is what X-Gene is all about.

Brian Thonn -- Kingdom Ridge Capital

That's good. Thanks a lot. That's really helpful, Bob. Now my second question is, there's been a lot of talk about software and I know (inaudible) announcement, obviously it's a positive. Can you help kind of break it down a little bit around how that helps you bridge the gap between where you are today and actual people – customers using your product? Another differences in terms of software that's used in an Internet data center versus what's used in a typical enterprise, but can you just help explain a little bit what the barriers are to getting revenue in an Internet data center from a software perspective and kind of how this helps you bridge that?

Dr. Paramesh Gopi

Let me try to break that on into two pieces. One is, remember that X-Gene is targeted at the cloud, right? So the cloud equals the Internet data center which is the largest growth segment of the entire server market. The cloud also dictates that it's open source, so the next Apache, Hadoop all of those components which are going to be (inaudible) what is going to help ship my first 50,000 or 100,000 units X-Gene chips, right? In order to do that, the most important thing is to have a stable open source operating system with an open source tool chain with an open source full supported, complete suite of application ready OS stubs and that's what today the announcements represented. So Red Hat is an enterprise software company, but (inaudible) represents the first set for the first –okay, so if you're going to go to a cloud data center, the likes of guys like – I'll make it up, like a rack space or a joint or people who are adopting micro-servers in the cloud, the minimum they would expect is (inaudible), because that tells that we can have a complete framework that is running today being easily transposed to an ARM 64 micro-server. So it is the number one proof point that says that the (inaudible) to revenue is paved for the cloud data center and the Internet data center.

Now what is also signifies is companies such as Red Hat don't go off and do something like this unless they see a map towards the enterprisation of the cloud. In other words, I'm speaking generically here but those types of companies get revenues from the enterprise. Why? Because the enterprise is shifting a lot of their data centers into the cloud, right? So as long as you see this as being another huge positive to the fact that this signals the start of the change of people from being, oh, we're just going to go after Internet data centers but phase 2 is now visible because phase 1 has become a reality. Did I answer your question?

Brian Thonn -- Kingdom Ridge Capital

No, it helps. I'll have to follow-up with you offline to understand that better.

Bob Gargus

I'll just add to it. If people are looking for proof points, it's not just Red Hat, I mean I'm sure you'll see others as we promised over the next 90 days or sooner. And I think imitation is the greatest form of flattery, look how much the discussion on ARM 64 did and how many new licensees and people asserting that they're going to do things and all of this, but it's like two years after we entered the race. And so now it's become like everybody is promising to do it.

Brian Thonn -- Kingdom Ridge Capital

Great. Okay. Thank you very much guys.

Dr. Paramesh Gopi

Thanks, Brian.

Operator

And there are no more questions at this time. I'd like to turn the call back to Mr. Bob Gargus, Senior Vice President and CFO, for closing remarks.

Bob Gargus

Thank you. We'd like to thank all of you for your participation today. There will be an audio replay of this call available on the Investor Relations section of our website. You can also access the audio replay of this conference call by calling 888-286-8010 and entering the reservation number 60491743. We will also file a copy of this script in an 8-K with the SEC in the next few days. Please feel free to call me if you have any additional questions. Again thank you for your participation on the call today and have a nice evening.

Operator

Thank you once again for participating in today's call. This concludes today's call. You may now disconnect and have a great day.

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