PMC-Sierra Management Discusses Q4 2013 Results - Earnings Call Transcript

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PMC-Sierra (NASDAQ:PMCS) Q4 2013 Earnings Call January 30, 2014 4:30 PM ET


Suzanne Schmidt - Managing Director

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

Steven J. Geiser - Chief Financial Officer, Principal Accounting Officer and Vice President of Finance


James Schneider - Goldman Sachs Group Inc., Research Division

Dean Grumlose - Stifel, Nicolaus & Co., Inc., Research Division

Sundeep Bajikar - Jefferies LLC, Research Division

Ryan Goodman - CLSA Limited, Research Division


Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the PMC-Sierra Fourth Quarter 2013 Earnings Conference Call. [Operator Instructions] This conference is being recorded. I would now like to turn the conference over to Suzanne Schmidt of -- excuse me, with The Blueshirt Group. Please go ahead.

Suzanne Schmidt

Thank you, operator. Good afternoon, everyone, and thank you for joining the call. With me today are Greg Lang, President and CEO; and Steve Geiser, Vice President and CFO. Greg will begin the call with a discussion of the business and key highlights from the fourth quarter of 2013, and Steve will then discuss the financial results for the fourth quarter of 2013 and the business outlook for the first quarter of 2014. Please note that our fourth quarter 2013 earnings press release was disseminated today via BusinessWire after the market close, and a copy of the release can be downloaded from our website.

Before we begin, I would like to point out that during the course of this conference call, we will be making forward-looking statements that involve a number of risks and uncertainties. These risks and uncertainties include, but are not limited to, PMC's limited revenue visibility due to the variable customer demands, market segment growth or decline, customer concentration, bookings rate, changes in inventory, foreign exchange rates 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 projections. For further information about these risks and uncertainties, please read the company's SEC filings, including our Forms 10-K and 10-Q. Note that PMC undertakes no obligation to update any forward-looking statements.

Please note that for each of the historical non-GAAP financial measures mentioned on this call, a full reconciliation to the most comparable GAAP financial measures is included in our press release issued today, and a GAAP to non-GAAP reconciliation of financial measures noted in our outlook will be posted on our website under the Financial Reports section of the Investor Relations tab. [Operator Instructions] Thank you.

And I will now turn the call over to Greg Lang.

Gregory S. Lang

Thank you for joining us today, and welcome to our fourth quarter and full year 2013 earnings call. We completed 2013 with solid financial results marked by fourth quarter revenues of $126.1 million in the upper portion of our outlook range. Our non-GAAP net income was approximately $18.5 million and non-GAAP EPS was $0.09 per share. This translates to just over 15% operating margin.

For the full year, we reported revenues of $508 million, down 4% year-over-year as we were impacted by weakness in enterprise storage and server spending during the year, as well as $12 million decline in legacy carrier products. Although 2013 proved to be a challenging year, I'm encouraged to see the fourth quarter finish stronger and storage revenue matching the best quarter in 2 years.

And with this backdrop, I'll give you a little bit more background on the Q4 results. Storage revenues were up $6 million or 6.5%, primarily due to strength in our SAS and Flash product lines. Our carrier revenue was down approximately $8 million or 19% quarter-to-quarter, with the optical down by $5.5 million and mobile down by $2.7 million. In terms of mix, storage represented 71% of total revenue, optical came in at 16% and mobile came in at 13% of the total revenue. For those tracking the legacy portion of our revenue, it was approximately 4.5% of total revenue in Q4 compared to 6% in Q3.

Now a bit more detail in each of the market segments. Our storage business is at the center of the Big Data transformation. We're delivering leading silicon and software solutions with the greatest density and performance in the industry, all designed for next-generation cloud and enterprise data centers. And now with our Flash controllers, having a strong footprint in the world's largest data centers, we will continue to accelerate and expand our market position.

Revenues form our storage business increased by 6.5% versus last quarter, better than expected and primarily due to new customer ramps in our storage system products and early Flash controller revenues. In the fourth quarter, we continue to secure design wins in cloud data centers with our new I/O controller and HBA products. Our cloud data center revenue nearly doubled from 2012 to 2013. And we expect to continue to grow faster than the market in 2014 based on our design win position and short-term opportunities.

As we've mentioned in previous calls, we have design wins that represent more than 10% share gains in the transition from 6-gig to 12-gig SAS. We continue to secure new 12-gig design wins in major server and storage OEMs with our end-to-end SAS and SAN architecture. We expect the majority of these wins to start to ramp up with Intel's Grantley launch in the second half of 2014, with some early revenue in Q2.

We're also pleased to see new third-party reviews of our data center-optimized Adaptec products, recognizing our industry-leading performance. A recent review of our Adaptec Series 7 RAID card family by the Storage Review noted the benefits of flexibility and performance, while another review in TweakTown noted how the end-to-end solution provided by our family of products is built to address the changing landscape of the data center. Links to both of these reviews can be found on our website, and we're proud to have our Advanced Technology recognized by these industry experts.

We also recently announced the new architecture built for the Open Compute platform that reengineers the conventional data center rack for maximum power efficiency, serviceability and investment protection. Our Adaptec 78165 low-profile/MD2 form factor was designed for high-density server environments, delivering 24 ports of hard disk and Flash interconnect over 3 times that of our competition.

In our Flash storage product line, our revenue ramp is exceeding expectations to date. We reached full production in the fourth quarter with the industry's first PCI Express NVMe family of controllers. Additionally, we have thousands of production devices in the hands of our customers and expect our design wins and revenue to continue to ramp in Q1 and beyond.

Today, we're one of the few suppliers offering both PCI Express and SAS-based Flash controllers and the only NVMe ASSP on the planet in production. And we're delivering the industry's greatest density and performance at our RAID chips, protocol controllers and switches delivered via our silicon and software solutions. All of this puts us at the center of the Big Data transformation and poised to meet the needs for next-generation cloud and enterprise data centers.

Now I'll move on to the carrier business, which was down $8 million overall, in line with our expectations. Details are as follows: The optical revenue was down $5.5 million sequentially in the fourth quarter, largely driven by 2 factors: Our PON OLT shipments in Japan were down double digits after the completion of a network buildout, which expanded the reach of PON, while client-side, ONU shipments remained stable. We also experienced reduced orders across our SONET product line, as our customers got ahead of carrier rollouts.

Now contrasting that, we saw our fourth straight quarter of growth in our OTN products. Early sales of our third-generation family called DIGI more than offset excess inventory in our first and second generation hi-fi products. This new generation of products is just starting to ramp, so we expect to see growth throughout the next few years.

The largest carrier in the world also continues to be the most aggressive in deploying OTN, with plans to push the technology further towards the edge of the network to manage both mobile and enterprise traffic. Our Tier 1 customers confirm this as a worldwide trend. As well, cloud data center operators are seeing OTN as the technology of choice for the growing inter-data center traffic. The efficiency of OTN switching is being realized as being deployed and this will accelerate adoption.

In 2013, we established a leadership footprint in OTN switching. DIGI 120 is PMC's third generation of multiservice OTN processors, and our first entry into the 100-gig market. DIGI 120 and META 120 are uniquely positioned in the market as the industry's only platform that enables OEMs to leverage a common R&D investment to address the most dense 10-gig and 100-gig transponders, muxponders, OTN wrapping cards, OTN switching line cards.

DIGI's OTN switching architecture has enabled PMC to earn design wins at 8 of the top 9 optical transport OEMs and 3 of the top 5 Carrier Ethernet switch and router OEMs. These OEMs have successfully trialed their systems based on DIGI 120G and META 120G in some of the -- with some of the world's largest telecom and cloud service providers. In Q1 of this year, DIGI-based systems will be handling production traffic at 3 major service providers. Our design win position across many of the major OEMs puts us in a great position to see continued growth in a segment that we believe will exceed $500 million in 2017.

Now onto our mobile business, where our revenues were down $2.7 million versus the previous quarter. After a strong Q3, our WinPath business was flat across customers, with the exception of one who experienced lower than expected demand for 3G base station and has burned off inventory. Our T1/E1 and legacy ATM business was down more than the WinPath family, as some carriers moved to all-IP wireless backhaul. That being said, we continue to see and hear aggressive plans in China, the U.S. and Europe for both 3G- and 4G-based stations where we have content.

Lastly, we continue to make progress in the mobile radio market. We released our 3-piece chipset to production, which is the industry's first integrated radio chipset for mobile pay stations. This unique chipset solved several of the major challenges facing equipment OEMs, while trying to address the challenges of LTE capacity. We provide a common radio platform from pico to macro, drive down the footprint of the radio subsystem, reduce power and support a broad range of instantaneous bandwidth. We've won small cell and macro designs at the top 5 accounts but are still in the middle of a major design win cycle. We've launched a second-generation radio chipset development to support LTE advanced and even wider bandwidth. We expect early revenue at the end of 2014 and more material revenue in 2015.

Next, I'll move to our outlook for Q1 2014. We expect Q1 revenues to be in the range of $100 million to -- excuse me, $120 million to $128 million. Considering today's backlog, we believe that both storage and carrier revenue will track with the top-level guidance. Given the current bookings, we believe Flash controllers will grow again this quarter, offset by somewhat less than the normal seasonal decrease in the balance of our storage products. In the carrier arena, we expect another quarter of growth in OTN, offset with continued weakness in PON and backhaul.

As we enter 2014, I can point you to 4 key areas that represent our growth drivers. First, in the area of cloud data centers. Our advanced products offer the densest solutions available today. And with the design wins we have achieved, it's clear that this is absolutely critical for the second phase of evolution in data centers, marked by the ever-growing need to increase density in their systems.

Second, we see the Flash controller business, particularly, PCI Express, as a very exciting space. This is a new area so it's challenging to gauge exactly the timing of adoption, but we're pleased with the traction that we've achieved already and what we can see contributing to first half growth in 2014.

The third key growth driver we see for this coming year is with 12-gig SAS, where we've won designs that represent over 10% share gains for this transition. This will become more important for us with the Intel Grantley launch and we view this as a second half 2014 driver.

Finally, we remain very optimistic about our position with OTN switching and radio head solutions that are starting to ramp now through the end of the year. We believe that with our latest generation of OTN products designed into all of the top tier suppliers, it's just a matter of how quickly carriers can get them into their production networks.

In summary, with the continued escalation of data creation and data traffic, we remain optimistic about our leading edge technology driving our growth, as we help to transform the networks that connect, move and store Big Data.

So with that, I'll hand it over to Steve for details on the financials and our outlook.

Steven J. Geiser

Thanks, Greg. I'll now discuss our fourth quarter financial results and comment further on our outlook for the first quarter of 2014.

Fourth quarter revenue was toward the upper end of our outlook range at $126.1 million, 2.2% lower than Q3. In Q4, we had 2 customers, which accounted for more than 10% of our revenues, calculated on a rolling 12-month basis, namely HP and EMC. Non-GAAP gross margin in the fourth quarter was in our typical operating range of 70.9%, up slightly from 70.1% in Q3 and within our outlook range for the quarter. On a non-GAAP basis, operating expenses came in at $70.3 million for the fourth quarter, near the midpoint of our outlook range and roughly flat with the third quarter.

In an effort to streamline our product investments, we implemented a number of organizational changes in the fourth quarter. These changes better align our resources for future growth needs and resulted in a net production and full-time employees of approximately 5% at quarter end versus the prior quarter. This reduction did not result in material savings in the fourth quarter as a result of when they occurred but will have a favorable impact going forward.

Non-GAAP operating margin was 15.2% for the fourth quarter, down slightly sequentially compared to 15.8% in Q3. Non-GAAP net income was $18.5 million or $0.09 per share, down from $20.0 million or $0.10 per share in the third quarter of 2013, on a small decline in revenue. Q4 GAAP net loss was $16.7 million or $0.08 per share versus $0.01 net loss per share in Q3.

The primary items reconciling GAAP to non-GAAP net income for Q4 are as follows: $13.5 million in amortization of purchased intangible assets; $6.8 million in stock-based compensation expense; $4.1 million in severance costs, primarily associated with the reduction in force previously mentioned; and $12.2 million in tax expense. The majority of which is net deferred tax expense associated with changes in assessment for certain income tax credits. You can see our press release issued today for a full reconciliation.

Please note, as described in the notes to our earnings release issued today, our comparative financial statements for the 2012 year have been revised to correct the misapplication of accounting principles related to our accounting for deferred income taxes in uncertain tax positions, resulting in a reduction to GAAP tax provision. There are no changes in the total tax loss carryforwards, taxes payable, cash or non-GAAP results in any period. To the extent that there are any further revisions, they will be reflected in our upcoming filings, so please read them when they come out.

Turning now to the balance sheet. We ended the fourth quarter with approximately $214 million of cash and cash equivalents, short-term investments and investment securities. This is a $4 million increase from our Q3 ending position of $210 million. This increase arises from $33 million of cash generated from operations and a $30 million drawdown on our revolving credit facility, partially offset by $54 million in stock repurchases completed during Q4 and $5 million of capital purchases.

Our net inventory at the end of Q4 was $28.7 million, $3.3 million or 10% lower than at the end of the prior quarter. With tight control of manufacturing activities by our operations team and sales coming toward the upper end of the outlook range, we drove net inventory turns up to a healthier 5.2x in Q4.

Q4 ending deferred revenue balance increased slightly to $7.5 million from approximately $7.2 million as of the end of Q3, which relates mainly to inventory at our distributors. Overall, our inventory including net 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 demands.

Now I will turn to our outlook for the first quarter of 2014. As Greg mentioned, we expect Q1 revenues to be in the range of $120 million to $128 million. This takes into account current levels of demand and our expectation of booking rates through the balance of the quarter. On a non-GAAP basis, we expect our overall gross margin percentage in Q4 to remain in the range of 70% to 71%. Non-GAAP operating expenses in Q1 are expected to be in the range of 71% to $73 million, approximately $2 million higher than Q4 at the midpoint of this range. This increases the result of a several million dollar increase from the annual reset of employee benefits at the beginning of the calendar year, partially offset by cost reduction measures associated with the organizational changes that took place in Q4 that I mentioned earlier.

We expect other income in Q1 to be at breakeven, with interest income on cash balances largely offset by financing costs related to our line of credit. We expect our non-GAAP tax provision in Q1 to be approximately $1 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 for Q1 are projected to be $0.07 based on the midpoint of our outlook range and assuming a diluted share count of $196 million.

Finally, a few comments regarding our stock repurchase activity. In the fourth quarter, we repurchased 9.4 million shares for $56.3 million, of which $2.6 million was settled in Q1 of '14. In total, since the authorization of the $275 million share repurchase program by the board in March 2012, we have repurchased a total of approximately 40 million shares worth $239 million. In the coming quarters, we will continue to assess the best use of our capital resources and may continue to repurchase shares opportunistically up to the full $36 million of outstanding authorization.

With that, we'd like to open the call up to questions.

Question-and-Answer Session


[Operator Instructions] And our first question is from the line of Jim Schneider with Goldman Sachs.

James Schneider - Goldman Sachs Group Inc., Research Division

I was wondering if you could, Greg, comment on the broad carrier CapEx environment the you're seeing right here? What are your customers telling you about whether CapEx is kind of directionally going up, down or sideways throughout the year? It seems like there's some various pockets of inventory and some pockets of strength. So just kind of wondering if you could characterize that overall? And then specifically comment on your ability to participate in the China LTE buildout this year.

Gregory S. Lang

Yes, Jim. Sure. I think the carrier CapEx expectations that we're seeing are basically flattish, probably with the exception of the China LTE buildout. And I think the big question is that -- those are big numbers, but the question is how much are people spending on equipment that our content is designed into? So we do expect to see the OTN part of the spend to go up throughout the year, probably throughout the next several years, as people transition their networks. But at the top level, I think it's a flattish environment. The one big place that I think a lot of people have been excited about, although it's been delayed a couple of quarters is the China LTE buildout. And then we will have some participation there on the wireless backhaul front, primarily, in the early part of the buildout. But to the extent that continues on into 2015, we could also see some radio revenue from that as well.

James Schneider - Goldman Sachs Group Inc., Research Division

That's helpful. And then I was wondering, as a follow-up, it seems like, as you said, you're doing better on some of the enterprise Flash controller programs. Can you maybe talk about your -- any revision to your expectation in terms of what revenue opportunity you could see in 2014 sort of in the base and its upside pace?

Gregory S. Lang

Yes, the comment there that I made earlier was that we thought we would see somewhere in the order of $2 million to $4 million of revenue in 2013. And we beat the top end of that, so that's -- that was a good place to start. Our current expectations for Q1 is another quarter of good growth and one that gets us well on the way to the range that we guided, which was somewhere in the range of $20 million to $40 million. So we feel good about how we finished last year, how we're starting this year. Not ready to kind of narrow that range yet or change it, but we feel like we're well on our way to getting -- to hitting it.


Our next question is coming from the line of Kevin Cassidy with Stifel, Nicolaus.

Dean Grumlose - Stifel, Nicolaus & Co., Inc., Research Division

This is Dean Grumlose calling in for Kevin. If you look ahead at growing your presence in the data center market over the next quarter and year, I was hoping you could help characterize what this business may look like. Do you expect it to be lumpy or concentrated or linear? Or any outlook you might be able to provide for that segment would be helpful.

Gregory S. Lang

Yes. Maybe I'll start just by kind of refreshing the places or the products or where we think we can get the most traction in the data center. And I'll keep it to kind of a 2014 type of response. The first place that we see opportunity and we're competing for designs and activities today is where we have our high-density RAID controllers, as well as HBAs, which are basically just high-speed SAS ports -- SAS and SATA ports. And the reason that we are excited about the opportunities around that product line is because we offer 3 times the density of any competing solution in a single chip. And so it allows the data center guys to build much higher density into their racks, which means it takes less footprint, takes less power and less costly. So we have a really meaningful advantage there, so that's area #1. The second area that I expect that we'll see growth this year in the data center space is in the Flash controller area, both directly where we have designs that 2 self builders, large data centers building their own Flash devices, or excuse me, Flash SSDs or cards, and then indirectly, through other people selling into those accounts with an SSD from a SSD manufacturer. So those are the 2 primary areas. The nature of the business is definitely project-driven. So you win a design for a period of time, you have that business, and then you go back and compete for another project. And it does tend to be a bit lumpy. So the goal for us is -- will be to get enough of it, so the lumpiness kind of diversifies itself away of it. But it is a lumpy business and -- but we think we have great opportunity in both of those product areas to grow our position.


Our next question comes from the line of Sundeep Bajikar with Jefferies.

Sundeep Bajikar - Jefferies LLC, Research Division

So in the data center, there seems to be a new class of high-performance memory and caching solutions, with products like [indiscernible] DIMM and ULLtraDIMM coming to market. What's your assessment of impact from these types of solutions on PMC's storage business, overall? And also what opportunities do you see for PMC to participate in this new class of devices or solutions? The -- I guess, if the hyperscale data centers, in a lot of cases, are building their own custom hardware. What does that mean for PMC's competitive position compared to the NAND memory suppliers, for example?

Gregory S. Lang

Okay. So let me start with the first part of your question. I think the area that you described, NVDIMMs, or MVD RAM or NVDIMM form factors, I think, it's part of a very exciting trend in the space, where we basically are seeing nonvolatile memories of different sorts, really, fundamentally change the architecture of server platforms and the data centers that they go into. And the reason it's exciting for us is because we have a world-leading platform today that we can use in those environments that are actively pursuing designs. Now all of these solutions don't necessarily solve the same problem. For example, an MVD RAM-type of a solution is certainly the fastest type of memory access you can get in a nonvolatile form, except for inside the chip. But outside of that, you're talking about an MVDRAM solution, that would be much faster, lower latency than a NVFlash type of solution. But we think there's places for both, because that memory is much more expensive. So what you make up in performance, you also have some capacity limitations but also cost in economics, things to consider. So we think that this is a market where the -- essentially, the memory continuum for these platforms is being redefined as we speak. And the good thing for us is we believe we can participate in several of these areas. So it's a very exciting time, also a very disruptive time. The second part of your question about data centers, who want to build their own systems and how that affects our competitive position. If I take your question literally, I see, really, primarily, 2 guys, maybe just one that are literally building their own systems. Most are still contracting out to ODMs in Taiwan, or they're working with big OEMs, such as HP, who can provide more service and more of a solution, but to your question, specifically, in that environment, where somebody may be using an ODM, a no brand, if you will, type of solution, we still have ability to precipitate in a couple of different ways. One is we've actually won a number of -- we call them I/O controllers, but basically I/O chips on a motherboard, where they basically -- the ODM will sell that into a data center. So we've won a number of those designs, and then we also offer those same kind of products in a card form that we call an HBA. And we also have RAID cards that we also can provide for that environment. So we feel like we can participate in both of these areas, and we're actively pursuing designs in both the traditional OEM space, as well as the unbranded ODM arena.

Sundeep Bajikar - Jefferies LLC, Research Division

Okay, great. That's extremely helpful. As a follow up, I guess, on the -- you mentioned the new product on Open Compute architecture. Can you share a little bit more about the implications of what Open Compute means for the class of products that PMC sells? And how broadly do you think that architecture is likely to be adopted?

Gregory S. Lang

Yes, Open Compute is kind of a standards group, kind of initially catalyzed by Facebook but meant to be an industry standard setting body for these data center platforms. It seems to be picking up momentum. And for some people, for us, it's an opportunity to help shape the architecture of the platform, since we have the highest-density port counts of any solution in the market. That really helps to serve this next-generation platform, where people are trying to drive more into less space, or drive more power -- excuse me, less power, more capability into a smaller footprint. And that those are exactly the areas that our products are best suited for.

Sundeep Bajikar - Jefferies LLC, Research Division

Okay, great. And last one for me, if I could. It looks like the overall wireless infrastructure market opportunity this year is quite robust, and you're seeing, obviously, some benefit from that. So it would be helpful to understand to what extent PMC can take advantage of that opportunity with the new Radio Head products. So you mentioned about a revenue ramp in -- starting in the second half. Any color you can provide in terms of the shape of that ramp in the second half and then into 2015 would be helpful. And if you could characterize the opportunity on the basis of any particular mix or topology of the network. So for example more LTE or more small cell, if that helps or hurts your situation, that would be great.

Gregory S. Lang

Okay. Thanks for bringing that up. I answered the question earlier about the China buildout. I actually failed to mention that we will also participate in that indirectly through our OTN products, because they have to build up a metro network to be able to support the radio traffic. So we really participate in those 3 different areas. To your particular question on the Radio Head, I don't expect a meaningful -- a big amount of revenue in 2014. We'll see some early designs ramp up be put into pilots. They'll be both small cell and macro type of designs, although I expect the small cell designs to be out earlier. They seem to be moving fairly quickly as people scramble to get their, call it, production-ready platforms to market. So really, it's about 2015. Overall, we see the market on the order of $0.5 billion. Certainly, we won't get all of that, but we think we can get a reasonable chunk of that business. But it will probably take something in order of 4 years to grow into that market opportunity as designs ramp into production. So I know that's a general answer, but to summarize, we'll participate in small cell, we'll participate in macro. Don't expect a lot of revenue this year, but really starting to ramp up in 2015. We'll see some more pilot early production type of volumes in 2014 towards the tail end of the year.


[Operator Instructions] Our next question is from the line of Srini Pajjuri with CLSA.

Ryan Goodman - CLSA Limited, Research Division

This is Ryan Goodman for Srini Pajjuri. You mentioned a couple of the markets that you're looking out with the SAS and the PCI controller solutions, the self builders and the hyperscale, and also going after some of the traditional storage OEMs or ODMs that might supply to them. Also, looking at the SSD OEMs in SAS and even the NAND suppliers, can you talk a bit about those markets as well? And then just between the 4, maybe rank where you think the biggest opportunities are, both near term and long term?

Gregory S. Lang

I'm not sure I captured the first part of the question, but the biggest opportunities -- maybe, we'll come back to that in a second. I think, across the mix, the opportunities -- we have a bit of a summary chart in our IR deck, it's called New Product Cycles. And in it, we kind of describe a roughly $60 million to $80 million a year on an annual basis opportunity for expanding our footprint in the data center. That doesn't include Flash, but that's kind of our traditional SAS and SATA products. We see another potential $150-plus million type of opportunity in the Flash controller space. That being the biggest of the 4 that I mentioned. Something on the order of $80 million to $100 million in 12-gig SAS market share gains. And then in the radio market, on the order of $80 million to $100 million. So that's kind of how they round up. I think the Flash controller is one that we think has the biggest -- if you break them up that way, the biggest opportunity for us. And so can you repeat the first part of your question?

Ryan Goodman - CLSA Limited, Research Division

Yes. Sorry. So, I guess, within the Flash controller opportunities, I'm looking at the customer base. Would you say -- I'm looking at the buckets that are selling directly to some of these hyperscale self builders. I think you mentioned there's 1 to 2 out there. Or selling to the traditional storage OEMs who are supplying some of the other sort of self builders or supplying SSD OEMs themselves with controllers or supplying NAND suppliers themselves with the controllers. Just could you talk a bit about those different buckets and opportunities both near term and long term?

Gregory S. Lang

We have an interesting mix of customers there. We have design wins at the 2 biggest self builders from a data center perspective. However, we expect most of the rest of the world will be buying from somebody that provides drives of some sort, whether it's a card or a 2.5 inch type of form factor. So then you move into the guys who are providing those types of devices. We think the natural players there are kind of making themselves known already today with some of the market share positions they have on the Flash side, you got guys like Samsung and Micron. On the drive side, you have -- XME, they're doing -- manufacturing the chips, as well as doing drives. But you also have people like Western Digital and Seagate, et cetera, doing SSDs as well. And we have design wins in each of those categories, Tier 1 design wins in each of those categories, as well as designs into some of the appliance makers that are building essentially all Flash arrays for kind of the next-generation super high performance storage products. So we really have -- it's an interesting mix. I'm not sure exactly how the end markets will shake out, but it is a big market, so I'm sure several of these categories will continue to exist and track.

Ryan Goodman - CLSA Limited, Research Division

Okay. And then for a follow up, I just wanted to talk about and NVMe a little bit. I know you're pretty much first out of the gate, with an -- I guess an enterprise NVM solution. Could you talk a little bit about how that transition's going to look throughout this space? Like, what needs to happen in -- at the customer level? What needs to happen to the overall storage environment? What's the timing on this? What are the incentives for the customers to start buying these solutions? And what do you think, competitively, at this point?

Gregory S. Lang

Great question. NVMe is basically the name of the -- essentially, you can think about it as a driver, software interface for PCI Express-based Flash drives. The drives that are out there today are proprietary, and so the standard was really brought forth by the industry to try to standardize that, so a drive would work across multiple different OSs. So that's the importance of this. It kind of standards -- it standardizes PCI Express-based SSDs and drives a different store. So that's why it's important. The thing that we've done uniquely on supporting that standard interface is that we're providing the first single-chip integrated PCI Express to Flash interface that exists on the market. Today's solutions that are being sold -- or maybe I should say yesterday's solutions that are being sold, are rather built with very expensive, power-hungry FPGAs or they're multichip solutions 4, 5 chips to do the same thing we're doing in one. So the reason that's important is, obviously, it drives cost, it drives power, and it's actually a pretty dramatic step up in performance. So if you think about it from a PCI Express today versus where it's going, it's basically a silicon integration story, which I just described. But then you compare it with the other technologies out there like SAS and SATA. And PCI Express, because it's attached to the CPU bus, has absolutely the highest performance and absolutely the lowest latency by huge amounts. I think we have some comparative data points up on our website. But it's a night and day type of difference in performance. So what people -- the reason people are going to migrate to these technologies -- this technology we believe is: one, starting back at the beginning of the list, standardized interface, the best possible performance at the lowest power and lowest cost of the alternatives that are out there. So that's what's compelling about it. Now, how it gets adopted and what needs to happen to get it to be adopted, I think people need to evaluate the technology, decide to put in and start to deploy it. We're seeing that come out with some of the more aggressive OEMs right now. But these technology transitions are hard to predict in terms timing. And that's really where we are right now. We think that the value proposition is very compelling, but we are waiting to see how the market unfolds. And as I mentioned earlier, we're encouraged with the early start and the early revenue that we have in the space, so we hope that continues throughout the year.

Ryan Goodman - CLSA Limited, Research Division

Okay. And just quick follow-up on that. Do you think the standardization's going to happen more in the enterprise before client SSD drives, or other way around?

Gregory S. Lang

Actually, I think it's going to happen first in the cloud data centers. I think they seem to be the most performance- and power-sensitive. And this is kind of a no-brainer solution from those 2 dynamics. Maybe the other place we'll see it as enterprise data centers, where they have those kind of same requirements, super-high-performance and the desire to do that at lower and lower power levels. So those are the places or the environments that I think would be the early adapters.


Ladies and gentlemen, this concludes the PMC-Sierra Fourth Quarter 2013 Earnings Conference Call. If you'd like to listen to a replay of today's conference, please dial (303) 590-3030 or (800) 406-7325 and enter the access code 4660981. ACT would like to thank you for your participation, and you may now disconnect.

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