Maxlinear Inc (MXL) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by, and welcome to the MaxLinear Third Quarter 2010 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions.

(Operator Instructions)

This conference is being recorded today, Thursday, October 28, 2010.

I would now like to turn the conference over to Suzanne Craig.

Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's third quarter 2010 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; Joe Campa, VP of Finance; and Brendan Walsh, VP of Business Development.

During the course of this conference call, we may make projections or other statements regarding future conditions or events relating to our products and business. Among the other statements concerning future events or projections, we will provide information relating to our current expectations for fourth quarter 2010 revenue, our current view regarding trends in our markets, including their size and potential for growth, and our competitive position in our target markets.

These statements are forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities and Exchange Act of 1934, and are subject to substantial risks and uncertainties that could adversely affect our future results. Our business and future operating results could be adversely affected if our target markets do not grow for any reason as we currently anticipate, if we experience substantial competition, including as a result of pricing pressure or as a result of cyclicality in the semi-conductor business, and for other factors.

A more detailed discussion of these risk factors and other factors you should consider in evaluating MaxLinear and its prospects is included under the caption Risk Factors in our filings with the SEC. We caution you that such statements are just projections. Accordingly, our future results may differ materially from such projections.

These forward-looking statements are made as of today and MaxLinear does not currently intend and has no obligation to update or revise any forward-looking statements. The third quarter 2010 earnings release is available on the Company website at maxlinear.com or you may call our offices at 415-217-7722 and we will fax you a copy.

In addition, MaxLinear reports gross margin and net income and basic and diluted net income per share in accordance with GAAP, and additionally on a non-GAAP basis. Our non-GAAP presentations exclude the effects of stock-based compensation expense and the one-time adjustment associated with an error relating to the tax treatment of deferred revenues for 2009 and 2008.

In addition, our non-GAAP presentation has also assumed the conversion at all times during the reporting period of our previously outstanding preferred stock. All shares of preferred stock were converted into common stock immediately prior to the closing of the IPO. Management believes that this non-GAAP information is useful because it can enhance the understanding of the Company's economic performance and MaxLinear, therefore, uses non-GAAP reporting internally to evaluate and manage the Company's operations.

MaxLinear has chosen to provide this information to investors to enable them to perform the comparisons of operating results in a manner similar to how the Company analyzes its operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and available on our website, and we ask that you review it in conjunction with this call. And now, let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

Thank you, Suzanne, and good afternoon, everyone. Thank you all for joining us today. We had record revenue in the third quarter of $18.5 million, up 14% from a year ago quarter and up 2% over the second quarter of 2010. GAAP and non-GAAP gross margins in the third quarter were 70%. Non-GAAP operating margin was 15% and GAAP operating margin was 9%. Non-GAAP net income for the third quarter was $2.9 million, with earnings of $0.08 per diluted share, and the GAAP net income of $1.4 million, or $0.04 per diluted share.

I would like to now first speak to the near-term and longer-term trends we are seeing in the marketplace. Late in the third quarter, we saw the impact of current semi-conductor market uncertainties in the form of purchase order reduction and/or rescheduled delivery dates for previously booked shipment.

We believe customers' decisions were related to macroeconomic uncertainties in our consumer markets and conservatism in inventory management by OEMs in the light of this situation. However, we believe that there has been no competitive impact to our design in both existing and new customer platforms.

As Joe will discuss later, we expect that the demand softening late in Q3 will continue into Q4. However, this slowdown has in no way affected or dampened our long-term view of our target markets. We continue to see strong customer traction for existing sockets and are consistently securing new design wins.

We currently expect growth to resume in 2011 as we enter new product cycles consisting of our SoC products for our North America and EU cable market. Further, as our customers' inventory levels of our digital terrestrial TV and set-top box products are depleted, we expect a new product replenishment cycle to commence.

In the third quarter, we continued to gain traction with our market-leading RF receiver and RF SoC solutions with design wins across all of our market segments. We are particularly encouraged that during the quarter our new high performance and low power cable products achieved meaningful revenue growth, both in terms of absolute dollars and also as a percentage of our revenues. This growth in cable validates our active strategy of increasing our total available market with innovative new products.

As we have mentioned before, MaxLinear is well positioned to take advantage of the global trend of increasing consumer demand for high-speed broadband wireless and wireline connectivity and the proliferation of multi-media content and services across different broadcast media. These mega-trends are driving the need for multiple broadband video and data receivers in a single device.

These devices fall into two categories. First, set-top box and gateway applications with multiple-channel receivers supporting only one broadcast standard, which could be cable, terrestrial TV, or satellite. And second, applications such as IPTV and hybrid IPTV set-top boxes in which each receiver among the multiple receivers supports a different standard.

On the very outset, MaxLinear's go-to-market strategy has maintained a sequence of four market-transforming steps, with each step building on the success of its predecessor. Firstly, validate the market for CMOS tuners in single tuner application such as digital-to-analog converted set-top boxes, PCTV, and mobile TV applications.

Second, expand our market presence with highly differentiated, low power tuners in multi-tuner applications such as PVR set-top boxes. Third, increase ASP and footprint in customer devices through integration of the front end, RF, and demodulator in a single chip. And finally, establish market leadership with revolutionary broadband communication front end SoCs that incorporate multiple channel tuners and demodulators in a single CMOS system one chip solution. Today, we are well on our way to validating this strategy.

I will now review our cable, consumer, automotive and mobile con sectors in this context. In our consumer segment, we saw strong revenue growth for most of the third quarter from our digital television receiver and PCTV products. This strength offset weakening demand in the latter part of the quarter, particularly for our RF receivers targeting the European set-top box market.

In the Japanese television market, where we have a leadership position in RF receivers for digital TV reception, we continue to have strong design win momentum. As a Company, we first proved the benefits of our low power broadband CMOS RF technology in single-tuner applications. We are now building on that [praxis] by increasingly focusing on multiple receiver application such as televisions and set-top boxes with built-in PVR functionality, where low power and small size are indispensable.

Earlier this month, we announced that Hitachi Media Electronics is using our MxL135RF receiver for its lineup of multi-tuner television solutions, taking advantage of our ultra low power consumption per tuner. Despite the design win momentum, in the near-term we are expecting demand softness in the fourth quarter for Japanese digital television receivers due in part to seasonality and the anticipated year-end reduction of governmental incentives for energy-friendly, low power electronics.

We are excited about the longer-term growth prospects for our digital television receiver product family. With Japan's transition to digital-only TV broadcasts next July, the demand for tuners for digital TV reception in Japan is expected to exceed 50 million units annually. The Japanese ISDB-T digital TV standard has also been adopted in South America where the rollout has just begun.

Given our substantial market share of digital television RF receivers, we expect that the MxL135RF product family will be a mid and long-term growth driver for the Company worldwide. The MxL135RF has recently been designed to set-top boxes by three leading set-top box makers for Brazil and Argentina digital TV market.

In the latter part of 2011, we expect our digital television receiver and receiver SoC revenues to be further augmented by our MxL301 hybrid TV tuner IC. The hybrid TV tuner IC is aimed at TV OEMs for hybrid analog and digital TV reception applications.

Our RF receiver products were among the first direct on-board commercially deployed CMOS receivers in the digital television set-top box market. As a result of the cost savings to customers, we gained a significant position in the digital terrestrial TV set-top box market.

Similarly, the recently secured design wins at two major TV OEMs for tuner on-board implementation of hybrid digital and analog TV reception. With the rollout of new generation back-end TV SoCs in late 2011 with integrated analog DVD demodulator functionality, we expect to benefit from the direct on-board designs of our hybrid RF receivers which directly interferes with these new back-end TV SoCs.

Despite the current weakness in the EU digital set-top box market, primarily due to recent macroeconomic uncertainty, we continue to maintain our strong position in the market and secure new design wins. In August, we announced that our MxL5007T RF tuner had been deployed in hybrid IPTV set-top boxes in the UK for receiving free-to-air high-definition television channels and internet content.

In line with our growth strategy, we are also expanding our footprint in customer devices with our MxL101 tuner demodulator SoC product designed into and shipping to major European OEMs for the high-definition mpeg4 and PVR set-top boxes.

The market for hybrid IPTV and PVR set-top boxes is expected to grow rapidly in the coming years. Our low power and highly integrated tuner, [dmote], and SoC solutions are particularly well suited for the higher definition mpeg4 and PVR set-top boxes.

Turning to the cable market, we were pleased to see a meaningful ramp in the third quarter of our cable tuner demodulator SoC products, mainly MxL241 and 242. Our cable RF receiver and associated products together contributed just over 10% of our revenue in the third quarter.

In the cable market, simultaneous reception of multiple channels to provide broadband data, voice, and video requires complex multi-channel receiver technology. Each receiver has severe budget and size constraints while meeting the stringent performance requirements of broadband cable. Our cable tuner demodulator SoC products, MxL241 and 242, with their ultra low power consumption, small size, and superior performance have won key design wins at major cable OEMs worldwide.

Today, cable operators are seeing increased competition from satellite and fiber network providers. Operators are responding by upgrading to broadband docks as people are [endured] digital cable networks. The resulting set-top box upgrade cycle represents a significant opportunity for our Company's future revenue growth. However, the timing of the growth is subject to cable operators' rollout plans.

In the third quarter, we started shipping to major cable OEMs who are suppliers to three major cable operators -- two in the US and one in Europe. Most recently, the FCC also approved the deployment of high-definition digital-to-analog converted set-top boxes for US cable operators in addition to the standard definition set-top boxes. Our MxL241 has been designed into two or three high-definition cable digital-to-analog set-top box platforms, being evaluated by major OEMs for deployment in 2011.

To ensure a continued technology leadership in the third quarter, we announced our 65 nanometer CMOS-based digital cable front-end SoC product, the MxL261. MxL261 is the industry's first eight-channel cable receiver SoC featuring the widest RF input frequency capture bandwidth which allows network operators increased flexibility to deploy their data networks.

It is ideally suited to meet customer requirements of eight downstream channel capture reception in DOCSIS 3.0 [Bs] advanced digital cable deployments worldwide. Further, the MxL261, with its [dualflat] configuration, can easily address the multi-channel needs of the large cable/video set-top box markets.

Among other features, the MxL261 integrates several costly external components and significantly simplifies customer design. By integrating multiple receivers and demodulators in a single system on chip, the MxL261 revolutionizes the front-end architecture of advanced multi-channel set-top boxes and gateway products. Please see our website for additional technical background on this exciting new product which represents the fourth generation of our core broadband RF mixed-signal technology platform.

Lastly, in our cable segment earlier in the quarter, we also announced design wins for our MxL201 RF cable tuner at China-based CAMEO Communications, a broadband and ethernet product company, and Coship Electronics, one of China's largest set-top box manufacturers. New legislation in China enabling cable operators to offer internet and telephone service to customers creates a huge market opportunity defined by the build-out of an all-digital DOCSIS cable network nationwide.

Sales of our RF receiver products into the automotive TV market segment, where we have a significant market position, were up in the quarter due to increased shipments of TV-enabled in-cabin navigation systems for automobiles in Japan. While the demand for TV functionality as a built-in option in cars remains stable, we are expecting some seasonally lower shipments in Q4 for this segment.

As we have indicated to you previously, sales from our mobile TV end market will continue to represent a smaller portion of our revenue. Our primarily mobile market today consists of a mature market for RF receivers for the Japanese handset markets and accounts for a decreasing portion of our revenue. In the third quarter, we secured a direct on-board design win at a Tier 1 Japanese handset maker using our MxL750 tuner demodulator SoC product slated for shipment starting the first quarter of 2011.

Turning now to operations. We recently qualified our second CMOS foundry as a major supplier for our high volume receiver products. With the addition of a new CMOS foundry in addition to a primary supplier, UMC in Taiwan, we have not only expanded our silicon [vehicle] manufacturing capacity, but also further diversified our manufacturing supply chain. In line with our strategy and timelines, we have now successfully implemented a multiple foundry supply chain, which ably complements our multiple supplier base manufacturing capacity for chip assembly, tests, and packaging.

In conclusion, in the third quarter we had record results though we did revise the guidance downward in the face of macroeconomic uncertainties affecting semi-conduction markets in the near-term. We expect these uncertainties to continue to affect [starting up] our segments in the fourth quarter as well. We expect overall revenue to return to growth in the first quarter of 2011 as inventory levels at our customers' premises decline and as new product cycles in cable and digital television markets assert themselves.

We are greatly encouraged by promising new market opportunities and new product cycles involving our new cable and digital TV SoCs and hybrid TV tuners for TVs in the latter half of 2011. We're also excited about our continued design win momentum, indicating a growing revenue pipeline at established industry leaders across our end markets. Now, let me turn the call over to Joe Campa, our Principal Financial Officer, for the review of the financials and our forward guidance.

Thank you, Kishore. I will first review our results and then briefly discuss our outlook. In summary, Q3 was a strong quarter for the Company. Revenue for the third quarter was $18.5 million, which represented 2% growth sequentially from the prior quarter and 14% growth year-over-year. We had two customers, each accounted for more than 10% of our revenue, which is unchanged from the prior quarter.

In our press release, we reported both GAAP and non-GAAP results. Please refer to our press release for the detailed reconciliation between GAAP and non-GAAP results. Our third quarter non-GAAP results exclude $1.2 million from stock-based compensation expense and $286,000 of a one-time income tax adjustment.

Now moving to the rest of the income statement. Non-GAAP gross margins for the third quarter were 70%, compared to 70% in the second quarter and 66% in the year-ago quarter. For the third quarter, we had guided in the 67% to 68% range with a 2% plus or minus differential depending on mix and other factors. Our higher margins in the third quarter are due primarily to a favorable product mix. Non-GAAP operating expenses were $10.2 million, which included $6.5 million of R&D expense and $3.7 million of SG&A. Our non-GAAP operating expenses were up 2% from the prior quarter.

Headcount growth was modest, increasing to 204 at quarter end from 202 in the prior quarter and 145 at the end of the third quarter last year. We actually increased our R&D headcount by four in the quarter while reducing headcount and SG&A by two as we continue to hire for key R&D positions. Our non-GAAP R&D and SG&A expenses reflect 35% and 20% of our revenue for the quarter, respectively.

Non-GAAP operating income was $2.9 million in Q3, compared to $2.7 million in the prior quarter and $2.6 million in Q3 of last year. Non-GAAP net income was $2.9 million in Q3 as we were able to utilize our net operating losses, or NOLs, to offset taxable income.

Non-GAAP earnings per share in the third quarter were $0.08 on pro forma, fully diluted shares outstanding of 34 million. The difference between the fully diluted non-GAAP earnings per share of $0.08 and the fully diluted GAAP earnings per share of $0.04 is due to stock-based compensation expense of $1.2 million in the quarter as well as a one-time income tax adjustment of $286,000.

Moving to the balance sheet, our cash and short-term investments balance was approximately $98 million, compared to $92 million in the prior quarter. Our cash flow from operations in the third quarter was $7.6 million. Accounts receivable totaled $4.5 million at the end of the quarter, compared to $8.4 million in the previous quarter. The days sales outstanding for the third quarter were approximately 22 days; that's compared to 42 days in the previous quarter.

The decrease in accounts receivable on a quarter-over-quarter basis reflects a decrease in shipments to our distributors in the last month of the third quarter to bring distributor levels more in line with our near-term sell-through revenue outlook. I remind you that we only recognize revenue on a sell-through basis, so we are not subject to revenue fluctuations caused by changes in distributor inventory level.

Our in-house inventory at the end of the quarter was $6.4 million, compared to $4.2 million in the previous quarter. Our inventory turns were 4.1 in the third quarter, compared to 6.1 in the prior quarter. Our owned inventory levels, consisting primarily of work in process, increased due to a slower than expected sales of our RF receivers for set-top box products for European end market over the near term and the expected ramp levels of our new cable SoC products.

That leads me to our guidance. We expect revenue in the fourth quarter of 2010 to be down on a quarter-over-quarter basis and to be in the range of approximately $14.5 million to $16 million. We expect continued softness in the market for our digital-to-analog set-top box products for European end markets.

Further, with the anticipated expiry of governmental incentives for low energy consumer devices in Japan, it appears that end customer inventory of our products for consumer and automotive may be relatively high and could result in lower fourth quarter revenues in these segments.

In North America and Europe, we expect our cable revenues to continue to increase on a quarter-over-quarter basis on both an absolute and percentage basis. We expect non-GAAP gross margins to be in the range of approximately 66% to 67% as we expect our new cable SoCs to comprise a larger percentage of our revenues in the fourth quarter.

Given the near-term revenue outlook, we are carefully managing our discretionary operating expenses and I expect total operating expenses to decline in the fourth quarter from Q3 levels. I expect continued investment in our product roadmap to be offset by reduced expenses in other areas and seasonal payroll expense reductions in the fourth quarter.

In summary, we believe that our third quarter revenue results reflect our positive overall financial and business momentum despite the near-term slowdown in revenue growth and anticipated decline in revenue for the fourth quarter. With that, I would like to now open the call to questions. Operator?

Thank you, sir.

(Operator Instructions)

And our first question comes from the line of Tore Svanberg with Stifel Nicolaus. Go ahead, please.

Hi. This is Eric calling in for Tore. I just want to dig into the softness that you're seeing in Q3. Can you just kind of give us a little bit more color or content around that? And maybe also comment on why you feel a little confident going into Q1, that you could potentially be up sequentially from Q4 guidance?

Hi, this is Kishore. Hi, Eric. The softness or weakening demand in Q3 was really a late quarter phenomenon for us. So what started as a weakening demand in consumer markets, we also -- it flowed into three domains. One is the digital television for the Japanese market, the European set-top box market, and also some level of weakness in the in-cabin displays for the automotive segment.

And so what we did was, as is required, we met all our customers because all our markets, and we got a very good understanding of what they're looking at, their own through-put and their own expectation as well as their own inventory levels. It's very clear to us that they are in the process of depleting their inventory levels to a minimal state and then -- so based on that information, we feel that we are probably leaving a trough some in the fourth quarter and we can begin to see increases in shipments and revenue in the first quarter.

But I also want to come back to the fact that the increase in the first quarter revenue is also a result of the product cycle growth we are seeing in the cable SoC product. While we were originally forecasting a steeper ramp of cable revenues, and we had [POs] from our OEMs to reflect that, that steepness of the ramp, it still was lesser than anticipated, both by our OEMs and [oursales].

However, the cable ramp is healthy and is meaningful. It was 10% of our revenues in third quarter, and we seem to be gathering some momentum on those shipments. So based on that, we feel optimistic that Q1 will be a growth revenue for us.

Okay. Just following up, what you said on the cable side. Are you still able to stick with your target of 20% for cable this year or is that kind of pushed out a little bit just because of the softness?

I wouldn't call the cable a softness phenomenon. I would like to emphasize the fact that in cable, the first time the sockets are being deployed by the operators, they use an existing rollout of 4x4 modems and EMTs in the cable market for the last one year. And what we are doing is that we are getting designs that are now what's going to be the default deployment of 8x4 type of data devices.

So if you add in all those designs with respect with some of the big OEM customers, so that the mix of the rollouts changing from 4x4 to 8x4, we would start seeing a surge in our shipments of products. So cable is not a softness in the market.

Having said that, you may have followed-up some of the announcements from OEMs today and yesterday, that the third quarter was a record shipment of DOCSIS 3.0. In fact, of data modems in general, whether it's DOCSIS 2.0 or DOCSIS 3.0 during the third quarter, so I believe that the steepness being lesser is actually a phenomenon of the operator's decision to [abort] a change in the mix rather than the fact that our own designs are any way neglected.

So we feel pretty good with where we are. We have secured design wins with major OEMs, shipping to three major operators in North America and Europe -- one in Europe, two in North America. And we also have another operator that is -- to whom -- an OEM supplier for whom we have started shipment as well. We feel pretty good about it.

So coming back to your answer about toward the end of the year run rate basis in terms of cable share against our revenues, I think that I said the third quarter ended at 10%. And given the review of revenues for the fourth quarter, it would be not unreasonable to think that we will land somewhere in the vicinity of the original guidance itself.

Okay, thank you. And getting back, you've mentioned that you've secured a second foundry. Were you seeing any sort of difficulty in being able to capture some of that capacity? Were you capacity constrained? Were you not able to deliver to some of your customers? Maybe just comment on it.

We've always had a very -- what do you call, the right word is [capecious] supplier chain. Our capacity has always been very good, even during the tough times that many of our peers failed last year. We have always fulfilled our customer requirements and supplies, though our inventory levels in the last year were a little bit small.

So along the same lines, this time we had no such supply issues. Our bringing on a second foundry in place is in the process of just managing our shop better so that we have a diversity of suppliers. That typically over the longer term leads to better cost structures and also manufacturing capacity and more diversity to any fluctuations in supply capability of one of the suppliers.

Okay, thanks. And just one final one, if I can. On the consumer side, you mentioned, and TV, you mentioned Hitachi. In terms of TV, where do you see your biggest opportunity right now?

Our biggest opportunity right -- the opportunity has got two parts to it, right? One part is what you're in right now that surges the revenue and [there's another] part of the opportunity that is doing to double up in the latter part of 2011 in which we believe is also -- would be a good 2012 story.

So getting back to the earlier part of it, we have shipped more digital terrestrial television tuners than anybody else in the world into TVs. So that is the biggest opportunity [front], and it's primarily the Japanese end market. And though some of those OEMs do -- have shipped some TVs into the North American market as well.

So as Japan switches over to full digital in July, many of the OEMs are making decisions to not support analog broadcast reception. As it happens, the number -- the demand for digital still TV tuners in the TV market in Japan -- I don't know the exact number, but in my estimation it's about almost doubling from what is the available addressable digital TV tuner market for us today. So I think that's a very big opportunity.

And Hitachi, in this particular case, is all digital even though the analog switch-over has not happened yet. And in this particular case are using triple RF receivers for supporting PVR function picture-in-picture and the reception of the main channel itself. So I think it's a great opportunity for us.

Coming back to the rest of the TV opportunities that's going to double up a little bit slower, the latter of the 2010, that's primarily a hybrid TV opportunity. Hybrid I mean analog digital reception, and that is going to be -- if you look at the major OEMs, they're either in Korea or in Japan, and the other OEMs in China cumulatively -- these three bunches together supply most of the world's hybrid TVs. So end of '11, the bigger opportunity would be the hybrid TV opportunity for us to outside Japan markets.

That's helpful. Thanks. Good luck. Thank you, guys.

Thank you.

Thank you, sir. And our next question comes from the line of Ross Seymore with Deutsche Bank. Go ahead, please.

Hi, guys. Kishore, talking about the mix side of things with the 8x4 -- going to the 8x4 versus the 4x4. Talk a little bit about what you think it's going to take to get that mix to switch over and why you think the carriers are a little hesitant to do so today.

I hear you ask. There is no hesitation in terms of the operators' changes. It's just that the timing of the rollout typically -- as we are learning, Q4/Q1 is a period in which operators typically make decisions and they're also making purchasing decisions regarding allocations for next year.

The 8x4 box is a little bit more versatile box, gives the operators better capability to compete against the fios and other competitive telcos or what you want to call it -- service providers. And those negotiations dragged on a little bit longer than we had hoped for, since we do not control the outcome.

But having said that, 8x4 is a default rollout. In fact, there will be no other rollouts than 8x4s in about two quarters or so, and this is the beginning of the rollout and it's happening pretty healthily. Maybe we are being a little more exuberant than we should have been maybe two weeks ago, but I think I feel pretty good right now, where we are on the shipments.

I guess, and then switching gears really quickly to the OpEx side for Joe. When you talked about putting some OpEx controls, talk about any sort of magnitude you could place on that for 4Q. And then, are those sorts of controls going to allow you to change what we otherwise would have thought for 1Q OpEx as well?

Yes. Actually, it's sort of two buckets, if you will. There are some kind of seasonal effects, like we have an annual Christmas shutdown and that helps on the OpEx side somewhat. And there are also payroll effects -- most of the payroll taxes and certain segments of it you max out in sort of the first three quarters.

But we are restricting our new hires in the R&D area. We are deferring some programs just maybe a quarter or two relative to building infrastructure for future growth for the Company. And given that, I think that we're looking at bringing our expenses pretty close. And given the revenue projections, somewhere just above break-even.

Break-even, okay, that would -- assuming you mean on a pro forma basis?

Yes. On a GAAP basis, yes. Non-GAAP basis, excuse me.

Right. And then, do you expect those sorts of limitations to persist into 1Q as well or do you actually have 1Q OpEx up because all of those kind of end-of-year things reverse themselves?

Well, the majority of those are actually not one-time. But again, we're going to get a little bit of benefit because of the seasonal factors, but we'll continue our conservative approach on the expenses until we start to see the revenue ramp.

I wanted to say, Ross, that we are not curtailing any R&D expenses on all the projects that we have [on suched] as we enter this period. There is no impact on the projects. If anything, all our 65 nanometer SoC projects beyond the cable MxL261, there is one, this [analog] product that is going to hit primetime sometime in the middle of the year, which we have been closely guarding.

So we are going full gears on our R&D investments that predicate the revenue for 2013 and 2014 as well. So the curtailment to the extent of hiring is the hiring has been restricted primarily to core competency recruitment in our mixed signal design digital communication systems and (inaudible) areas which are critical to our SoC planning and execution moving forward.

I guess the last question -- so, if you're going to drop roughly $3 million from 3Q to 4Q at the mid-point, how would you describe that $3 million split by either your end market, or if you want to describe it from kind of an inventory contraction versus whatever other cause -- macro, et cetera?

You said two things there, that one is end-market distribution [OpEx] and then the inventory correction [OpEx]. I think what we would like to emphasize is that we recognize revenue on a sell-through basis to the extent that we -- and therefore, the inventory correction piece on our customer side that affects our sell-through forecast, but beyond that doesn't affect any other revenue that we are portraying to you.

So regarding the end-markets of the $3 million drop you said, I look at it as a leverage that a small company's revenues create, right? When things go down, the percentage is bigger. When things go up a little bit, the percentages are higher and [evolves] the direction as well. So it's what you call good fortune in both directions, hopefully.

So what we're doing is that -- with respect to this $3 million, the breakdown comes between consumer, in the consumer markets, and then the slowness of the ramp of the cable market. And I would say roughly speaking once you attribute that to be about 60% consumer and 40% cable slowness in the third quarter.

Okay, thank you.

Thank you. And our next question comes from the line of Sanjay Devgan with Morgan Stanley. Go ahead, sir.

Hey, guys. Thanks so much for taking my question. I just wanted to touch back on the new foundry diversification efforts for a moment. I was just going to -- if you could kind of help me understand -- walk through the rationale for the diversification? I understand you guys had more than enough capacity at UMC, so I'm just trying to understand the strategic rationale for that?

Well, the strategic rationale was laid out early on 12 months ago, right? When the markets where in quite tight supply from (inaudible) to manufacturers, but I think that strategic rationing has become even more important today. Because as we move to our 65 nanometer CMOS products, the number of suppliers for high performance, sub-deep, sub-micro and CMOS technologist are very far and few.

So our strategy has got two components to it. There are existing high volume products that are in shipment today. We want to ensure that we are able to, while we transition to the SoC products that our receiver-only products can benefit the cost scaling down advantages that come with multiple suppliers. That's a big part of it.

One of the things that has not happened for MaxLinear the last two years is we have the price reductions, the semi-conductor companies typically rely on on an annual basis because of the short supply. And for us, it's critically important because we do believe in a high-margin Company, a Company that has believed and held the gross margins on a long-term basis 62% to 65%, and that is one of the business models that we really adhere to.

And in keeping with that, we may make decisions about cash cowing for the older product lines, and part of a good process to cash growing things is to make sure that you always maintain your margins as well and generate as much cash for the system as possible. So there is a bigger strategic rationale, if you would want to know about our existing products.

Got it. Okay. Thank you very much. And then I guess just lastly, Kishore, if you could just talk about -- you talked about how with your SoC products for cable set-top box, OEMs, you're definitely -- there's a willingness on their part to move, but it sounds like the service providers are a little more hesitant given the current economic environment. I was wondering, anything changes on those lines, or is it just ultra conservatism on their parts? I'm just trying to understand, did the hesitancy for rolling out new products to their customers from the service provider's standpoint?

This is one case where I wouldn't call it macroeconomic from our perspective, because we are a product cycle Company. This is one case where we are going to what I call break the mold and fight any softness. Because we are in the socket, we are shipping more products, and I've not seen the hesitation.

Typical seasonality in which operators negotiate with OEMs for pricing and volumes, and they've decided to use this period to do what they do annually. And we don't anticipate those discussions to drag a little bit, but now those are done and the ramp is healthy.

Actually, this is an extremely bright spot for the Company and I'm very excited about it, and even more energized by our MxL261 because there's no product like it in the world across any communication market that I am personally aware of. So I think that brings the [dialect] in our court. We have a roadmap, and I think that should excite even our OEMs and the operators with whom we have discussion fairly periodically.

Great. Thank you, guys.

(Operator Instructions)

And our next question comes from the line of Quinn Bolton with Needham & Company. Go ahead, sir.

Hey, Kishore. Hi, Joe. Kishore, I just wanted to follow-up on that question on the cable products. With the 261 now sampling, how quickly can you replace existing designs based on wideband tuners and the 241? Is that about a year long process or if folks have already designed boards, do you think you might be able to accelerate the production launch of it, of the 261?

I could not tell you when we are launching their products, but I can tell you that customers are actively evaluating and they've got [both through the evaluating part]; they're very excited. And if you were to ask me, Kishore, what does it take to get a part in the production at MaxLinear? Our first part that's come out is a wonderfully (inaudible) and we could take them to production within six months. It's not out of the realm of reality to think that somewhere in the second half of next year that these would ramp into production.

Okay, great. And then just given your commentary about the transition 8x4, I know that you're seeing strengths in the cable products here in the fourth quarter. Do you expect kind of a bigger hockey stick once we get out to the second quarter of next year when that sort of 8x4 modem becomes the default offering by the two -- at least the two North American cable companies?

So, let's look at it two pieces. By the way, given the steeping of the ramp I had projected in my mind earlier, I've decided not to play hockey (inaudible). From the land of hockey, we come from, but I don't play it anymore.

But coming back to this, there are two pieces to it. The first half is the -- there are a bunch of customers who were energized when we engaged early to break into this market. They are the ones that are going to be shipping. [Now go], we've got a few other OEMs that we've not been able to engage earlier. And now that we are engaged and designing with them based on 261 and 241 products, so those would come in the second half of next year.

So I think in a combined sense, you should see a healthy surge in the second half next year and healthy growth in the first half as well. But with regard to the hockey stick, I would say the long end of the hockey stick is maybe starting somewhere in the middle of next year. So I would look for a [leaner] ramp and listen to my word for the next two quarters of the cable after that.

Okay, great. And then just looking to the first quarter, can you just sort of walk us through the new products that begin to kick in in the first quarter? I thought you had mentioned some TV wins on the last quarter conference call that might start to kick in.

I know you earlier in the call talked about the hybrid opportunities being more of a second half 2011, but just trying to get a sense of how much Q1 is driven by the end of the inventory work-down and how much of it is new product ramp?

Okay, so I think more of the product ramp that we have forecasted into our mindset, because we are not guiding Q1 right now, is related to the cable products and to a lesser degree on the hybrid TV designs that we have started with a couple of OEMs that will start ramping.

[And in the modem[ TV, every TV OEM has got a certain number of SKUs. For example, if we talked about Sony, they have 1,000 TV SKUs. So literally a 1,000 TVs SKUs, and the product ratio designed across these platforms and that takes time, so I would say that a bigger part of the new product cycle ramp is related to cable.

And then, a lesser part of it is due to the hybrid TV tuner 301 RF. Then the rest of it is just a reversion of the growth from the decline due to inventory work-down and replenishment start. And second, even in their existing products have started many new designs that are closed and they are ramping to production as well.

And one thing I want to highlight to you is that we have a majority of the reprint designs for the mpeg4 set-top box [illusions] with their 101 DVB-T standard base set opportunity demodulators SoC. And the latter half of this year has been a pretty slow roll for them because of the softness in the European market. If that were to pick up, then you would see a pretty good, healthy drive from there as well. And not to forget that we also have designs that are purely for video set-top boxes, et cetera that are headed for markets like in Brazil for [Net Brazil] and such, and those ultimately drive new designs that will drive more revenues.

So I think [if] existing products with new designs that we are engaged with the Tier 1 because it took a longer time to get there, and then reversion from [the growth] from the inventory book down. And thirdly, and most significantly, cable product cycle growth. And to a very lesser extent than we have planned in our mind for revenues is the hybrid TV tuner. In a limited number of models, maybe a couple of tryout models by TV OEMs have gone direct on-board.

Okay. Just one last question, Kishore, on the hybrid tuner wins at the Tier 1 TV guys. Are those for Japanese platforms? Are they worldwide platforms or are they geography-specific?

The design wins we've gotten to date, when you talk of hybrid TV, clearly Japan's priority is not hybrid for us, and we've talked out it, right? And the market in Japan is still a bit limited for hybrid TV, especially given the analog switch-off that's going to start unveiling itself.

However, the Japanese TV OEMs are primary suppliers to the North American market, the mid-European market. And as you know, in the TV SoC that are all integrated, wondering working analog demodulator functionality, they're all North American NTSC demodulators back in TV SoC. And there, (inaudible) with the first original rollouts will be the end markets for North America NTSC-based hybrid products with the demodulators integrated into the back in SoC.

Okay, great. And then just one for --.

I just wanted to point out that that trend of integration will happen, and the next we believe in a year's timeframe in the [palseeker] market, and that's with our RF tuner-only product, will interphase directly to the back in SoCs and that's where we intend to play in the hybrid market. Hopefully, it happens earlier for us then latter. That's the basic expectation.

Okay, great. And then, just for Joe, the gross margin guidance. I think if I heard you right, 66% to 67%? I know you're mix-shifting to cable and that's primarily an SoC product, so that explains part of the decline. But just wondering also if there are some absorption issues? It just seems like you'd have to have one heck of a mix shift to cable to see a 300 to 400 basis point decline. So I'm just wondering if cable is kind of the biggest reason, but whether there are other reasons as well.

Yes. The gross margin will vary even within the market segment, so we have some mix even within the consumer, for example, it will vary. So it's not just a cable phenomenon.

Okay.

Cable is the predominant factor, SoCs are the predominant factor. But you should also keep in mind that we are ramping up products right now in cable SoC. The yields and gross margins for those products have not stabilized yet.

So what you will see -- maybe you won't believe me because every time you do better on a gross margins, but what you will see is that the gross margins we did [start out] guidance reflect the situation that sounds like a little bit bigger decline, but then we have more stabilization of the gross margin the next couple of quarters. Or if we do better gross margins, then it will have a little bit more slower decline, but we are taking a cautionary approach on the margin guidance.

Got you. Great, thank you.

And there are no further questions at this time, so I would like to turn the call back to Kishore Seendripu for any closing remarks. Go ahead, sir.

So, thank you, Operator. As a reminder, we will be participating in the [AEA] Technology America Conference in San Diego, the Stifel Nicolaus Annual Midwest One-on-One Conference in Chicago, and the Roth Semi 1-on-1 will be in San Francisco, all in November.

To conclude, despite the near-term slowdown in revenue growth, our long-term growth trajectory and growth vectors remain positive and unchanged. Based on our fourth quarter 2010 guidance and our performance of the last three quarters, we will be closing out 2010 with positive business momentum. The year 2010 will represent robust growth of revenues over our 2009 revenue of about $50 million.

We're also excited about our continued technology leadership with the launch of a fourth-generation broadband RF mixed-signal technology platform. We look forward to positive momentum and the resumption of our growth story in the coming year, primarily driven by new product cycles that are presented by our cable and digital TV SoC products. Thank you, all, for joining us today, and we look forward to reporting on our progress to you in the next quarter.

Ladies and gentlemen, this concludes the MaxLinear Third Quarter 2010 Earnings Conference Call. If you wish to listen to a replay of today's call, you may call 303-590-3030 or 1-800-406-7325, and the access code is 4370650. Thank you for your participation. You may now disconnect.