Maxlinear Inc (MXL) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the MaxLinear second-quarter earnings conference call. During today's presentation all participants will be in a listen-only mode. Following the presentation the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, August 1, 2013. And I would now like to turn the conference over to Nick Kormeluk, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's second-quarter 2013 financial results. Today's call is being hosted by Kishore Seendripu, CEO, and Adam Spice, CFO.

During the course of this conference call we will make projections or other statements regarding future conditions or events relating to our products and business. Among these statements we will provide information relating to our current expectations for the third quarter 2013 revenue, including expectations for revenue growth in our cable, terrestrial and other target markets, gross profit percentage and operating expenses, our current views regarding the risk of future mask impairments and our current views regarding trends in our markets including the anticipated impact of new design wins and the size and potential for growth in and expansion of our markets including satellite.

These statements are forward-looking statements within the meaning of federal securities laws and actual results may differ materially from results reflected in these forward-looking statements. We 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 current target markets, including cable market, do not grow or if were not successful in expanding our target addressable markets in areas such as satellite through the introduction of new products.

In addition, substantial competition in our industry, potential declines in average selling prices, intellectual property litigation such as pending matters between MaxLinear and Silicon Labs, and cyclicality in the semiconductor industry could adversely affect future operating results. 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 Securities and Exchange Commission, in particular our most recently filed 10-K for fiscal 2012, subsequent quarterly filings and our upcoming 10-Q for the second quarter of 2013.

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 second-quarter 2013 earnings release is available on the Company's website at MaxLinear.com.

In addition, MaxLinear reports gross profit, income or loss from operation and net income per loss and basic and diluted net income per loss per share in accordance with GAAP and, additionally, on a non-GAAP basis. Our non-GAAP presentation, excluding the effect of stock-based compensation expense and its related tax effect, expenses of investigation related to export compliance matters, accruals under our equity settled performance-based bonus plan, expenses associated with our acquisition of certain new market-related technology licenses, expenses related to our current patent litigation matter with Silicon Labs and mask-related asset impairments.

Management believes that this non-GAAP information is useful because it can enhance the understanding of the Company's ongoing 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 comparisons of operating results in a manner similar to how the Company internally 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. The earnings release and reconciliation is available on our website and we ask that you review them in conjunction with this call. And now let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

Thank you, Nick, and good afternoon, everyone. Thank you all for joining us today. Before jumping into the financial highlights I would like to note that in the second quarter of 2013 we realized double-digit year-over-year revenue growth derived from our industry-leading products targeting some of the most exciting and dynamic broadband front-end applications such as cable DOCSIS 3.0 data modems, media server gateways, hybrid televisions and set-top boxes.

As a result, in the second quarter we were able to generate record revenue, increase cash flow from operations and scale revenue from our legacy markets. We also made solid progress towards opening up new market applications such as satellite TV for our industry-leading broadband RF receiver solutions.

Moving to the financial specifics, net revenue in the second quarter was $29.8 million, up to 12% from the first quarter of 2013 and up 22% on the year-ago quarter and above the high end of our guidance.

GAAP and non-GAAP gross margin in the second quarter was 58% and 52% of revenue respectively. GAAP net loss in the second quarter was $2.9 million or $0.09 per diluted share and non-GAAP net income for the second quarter was $3.8 million or $0.11 per diluted share.

I will now discuss current trends in our business. Consistent with our prior guidance, our cable business continued to grow in the second quarter of 2013 with revenue increasing approximately 8% related to the first quarter of 2013. As such the increased demand for our cable modems -- cable solutions was broad-based.

We experienced solid growth in both cable data and traditional cable video set-top box applications and stronger double-digit growth coming from our video server gateway applications. This growth was offset by minor weakness in the demand for cable DTAs.

Here are some of the specifics related to our cable revenue. In the second quarter of 2013 cable represented 67% of our total revenue. Momentum continued to build for our next generation DOCSIS 3.0 products, specifically our 16 and 24 channel full-spectrum capture cable receivers which entered volume production in the second quarter.

Additionally, we announced that Hitron has selected our 24 channel full-spectrum capture cable front end receiver for its new family of DOCSIS 3.0 cable modems and gateways which are capable of delivering speeds of up to 960 megabits per second or close to 1 gigabit per second [layer] 24 bonded downstream channels.

Our full-spectrum capture cable receivers continue to enable new cable applications such as the video and media server gateway architecture which is garnering strong momentum in both North America and Europe. We believe that these applications are creating compelling revenue per box opportunities for MaxLinear.

Moving to the terrestrial and satellite TV markets. Terrestrial revenues increased approximately 23% quarter on quarter, reversing the decline observed in the prior quarter. Our ISDB-T digital TV standard terrestrial tuner Demodulator SoC solution remained the dominant growth driver of our terrestrial revenue in the second quarter. This solution [impresses] the satellite pay-TV and set-top box market in South America and the digital television market in Japan. We also experienced growth from the continued ramp of our 65 nanometer CMOS hybrid TV super radio solution.

Some notable highlights and the terrestrial market in second quarter of 2013 are -- Samsung launched mass production of television shipments using our 601 global hybrid TV tuner. We believe this design is the first direct silicon tuner on board implementation inside of Samsung television. It also represents a significant milestone for silicon tuner adoption in the television market by a major Tier 1 OEM.

We announced that several leading OEMs are using our MxL603 silicon tuner device in new Internet video set-top boxes shipping into the US market. These new boxes are enabling the recent major consumer trend of accessing video content from over-the-top video service providers like Netflix, YouTube, Hulu and Amazon instant video.

We announced several new terrestrial design wins with leading OEMs for the satellite pay-TV market. Technicolor and Kaon Media have selected our ISDB-T digital TV standard tuner Demodulator device, MxL683, for new hybrid satellite and terrestrial set-top boxes for deployment in the Latin America pay-TV market.

We also announced two reference platform design wins with STMicroelectronics. One is the DVB-T2 set-top box design using the MxL603 super radio tuner for the emerging free-to-air and hybrid terrestrial set-top box markets in Europe and Southeast Asia.

The second is a small form factor cost optimized set-top box design for Latin America regions such as Brazil. These digital converter boxes are necessary to ensure that homes will continue to receive free television services after the planned analog broadcast blackout which is expected to begin in 2015.

Moving to the highlights in the second quarter 2013 of our target addressable market expansion efforts into satellite TV. Here are some highlights. In satellite we had previously announced a partnership with SES Astra, Inverto and Abilis System to develop the industry's first IP-LNB that utilizes a revolutionary MxL584 full-spectrum capture eight channel satellite receiver.

In the second quarter we announced a design win into Unitron 16 channel SAT to IP multi-switch targeting multi-dwelling unit applications. SAT to IP multi switches extend the functionality of traditional satellite multi-switches to provide satellite TV content to IP enabled devices such as tablets, laptops, smartphones, IP set-top boxes and connected TVs.

We are very excited by our close collaboration with major satellite TV operators in North America and Europe in defining advanced media seller gateway and (inaudible) architectures for the home and for the outdoor unit also called the LNB. Currently there are two distinct silicon devices for the satellite outdoor unit or LNB market slated for tape-out in the second half of 2013 which will positively impact our revenues in the latter half of 2014 and beyond.

Additionally, in the second quarter of 2013, one of the major North America operators selected MaxLinear to develop advanced broadband receivers for their next-generation gateways to be deployed in 2015. We believe this new opportunity has a very beneficial effect on our strong product cycle base revenue growth trajectory and we are excited to have kicked off this project.

In conclusion, we are excited by the broad strength of our cable business and the resumption of growth in our terrestrial receiver product shipment. They are greatly induced by our steady progress towards realizing the fruits of our two plus years of development effort in satellite-TV.

We're also expanding our target addressable market with our industry-leading broadband and full-spectrum capture RF front-end technology platform in new markets beyond satellite-TV. With that let me turn the call over to Mr. Adam Spice, our Chief Financial Officer, for a 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, our Q2 revenue was a record $29.8 million and above the high-end of our prior guidance. As Kishore noted, growth in our revenues from cable was broad-based and cable continues to be poised to continue to drive top-line growth in 2013.

We're also encouraged that a combination of hybrid TV and ISDB-T digital terrestrial TV set-top box applications delivered the anticipated growth in terrestrial revenues in Q2 reversing softness in recent quarters.

Now moving to the rest of the income statement. GAAP and non-GAAP gross margins for the second quarter were approximately 58% and 62% of revenue respectively versus our prior guidance of 61% to 62% for both GAAP and non-GAAP gross margin. This compares to GAAP and non-GAAP gross margin of 63% in the first quarter of 2013 and 62% in the year ago quarter.

The divergence and GAAP and non-GAAP gross profit in the second quarter was due to approximately $1.1 million of expenses related to the impairment of previously capitalized production masks for which future use is no longer expected. Currently we do not believe there is risk of significant future mask impairments as the remaining net book value of masks currently capitalized totaled $1.4 million as of June 30, 2013 and we believe our process for determining the capitalization of masks is adequate.

Our Q2 GAAP operating expenses were $20.1 million, which includes $3.3 million of stock-based compensation, $1.2 million for an accrual related to our performance-based equity bonus plan for 2013 and $1.1 million in net professional fees related to the Silicon Labs patent litigation.

Consistent with 2012, payouts under our 2013 performance bonus plan are expected to be settled in shares of MaxLinear stock. Net of these items OpEx was $14.5 million which was below our prior guidance of $15.5 million, driven primarily by a slower than anticipated headcount ramp and continued tight focus on discretionary spending items and the delay of previously anticipated Q2 R&D tape-out related expenses in the quarter.

Second quarter GAAP OpEx attributable to R&D was up approximately $800,000 quarter on quarter to $12.3 million, which included stock-based compensation of $2.2 million and $900,000 related to the 2013 bonus plan. The increases in R&D spending relative to Q1 2013 were primarily due to increased payroll, stock-based compensation and bonus plan accruals due in part to the increase in headcount.

Second-quarter GAAP OpEx attributable to SG&A was up approximately $400,000 quarter on quarter to $7.8 million, which included $1.2 million in stock-based compensation, $300,000 in bonus plan accruals and $1.1 million in net professional fees related to Silicon Labs patent litigation. The increases in G&A were driven in part by professional fees related to patent filings, commission expenses related to higher revenues and for payroll-related items similar to those described for R&D.

At the end of the second quarter 2013 our headcount was 297 as compared to 281 at the end of the first quarter 2013. We continue to add headcount, staff growth initiatives and to continue to gain operating leverage in R&D by appropriately balancing hiring across our R&D design centers in the US, India, China and Taiwan.

GAAP loss from operations was $2.8 million in Q2 compared to the loss from operations of $2.2 million in the prior quarter and GAAP loss from operations of $2.5 million in Q2 of last year. GAAP net loss per share in the second quarter was $0.09 on basic shares outstanding of 33.7 million.

GAAP net loss per share includes $1.1 million of expenses related to the impairment of previously capitalized production masks for which future uses no longer expected, $3.3 million in stock-based compensation expense, $1.2 million for an accrual related to our 2013 base bonus plan, and $1.1 million in net professional fees attributable to the Silicon Labs patent litigation.

This compares to GAAP net loss per share of $0.07 in the prior quarter and loss of $0.08 in Q2 of last year. Net of these items our non-GAAP earnings per share in Q2 was $0.11 on fully diluted shares of 35 million compared to $0.07 per share in Q1 2013 and $0.05 in Q2 of last year.

Moving to the balance sheet and cash flow statement, our cash, cash equivalents and investments balance increased $4 million from Q1 2013 to approximately $81.3 million, and a decrease of $3 million as compared to $84.3 million in Q2 of last year. Our cash generated from operations in the second quarter 2013 was $6.2 million, approximately $5.4 million more than in the first quarter of 2013 and approximately $5.3 million better than the year-ago quarter.

Accounts receivable totaled $17.9 million at the end of the second quarter of 2013 compared to $18 million in the prior quarter and $14.9 million in Q2 of last year. The days sales outstanding for the second quarter was approximately 57 days, or three days greater than the previous quarter, and approximately eight days more than the DSOs in the year ago quarter.

The increase in DSO's is largely attributable to revenue being increasingly derived from direct sales rather than through distributors and our larger direct customers negotiating extended payment cycles. We remain comfortable with the quality of our accounts receivable's aging and experienced very limited bad debt expense. As a reminder, we only recognize revenue on a sell-through basis and as such we are not subject to revenue fluctuations caused by changes in distributor inventory levels.

Our in-house inventory at the end of the quarter was $9.4 million, up approximately $700,000 compared to the $8.7 million in the previous quarter and up approximately $800,000 versus the year-ago quarter. Our inventory turns improved to 5.2 times in the second quarter compared to 4.5 turns in the first quarter and improved relative to the 4.8 turns in the year-ago quarter.

That leads me to our guidance. We are pleased to note that we expect revenue in the third quarter of 2013 to increase approximately 4% to 7% sequentially to $31 million to $32 million. Built into this range we expect both cable and terrestrial revenues to increase on a quarter-over-quarter basis. More specifically we expect the growth forecast in cable to come predominantly from data applications and growth from terrestrial to come from hybrid TV tuners.

We expect GAAP and non-GAAP gross profit percentage again to be approximately 61% to 62% in the third quarter. Our gross profit percentage forecast could vary plus or minus 2% depending upon product mix and other factors, in particular the relative contribution of cable and terrestrial applications. We continue to fund strategic development programs targeted at delivering attractive top-line growth in 2013 and beyond with a focus on increasing the operating leverage in the business.

As we entered 2013 we had expected non-GAAP OpEx to be bounded in the range of $14.5 million to $16 million per quarter. As we put the first half of 2013 in the rearview mirror we've come in on the low side of OpEx having reported $14.2 million and $14.5 million in Q1 and Q2 respectively.

The combination of these OpEx underages, along with the upside in gross margins, have enabled us to exceed non-GAAP EPS expectations for the last couple of quarters. As Kishore mentioned earlier in the call, we are excited about the opportunities that are being created as a result of our close collaboration with major satellite TV operators in North America and Europe. And we are well underway in executing on these incremental opportunities to drive revenue in 2014 and 2015.

Relatedly, the OpEx underage of $1 million in Q2 relative to our prior guidance pushes to Q3 as we incur R&D expense items owing to multiple pay downs and increased R&D headcount required to address the new satellite gateway opportunity that Kishore mentioned. Specifically we are augmenting staffing and critical engineering disciplines such as systems, RFIC, field applications and also in sales account coverage to support these exciting opportunities.

We remain committed to increasing the operating leverage in the business and are having great success in balancing incremental hiring across our R&D design centers in the US, India, China and Taiwan. As such we expect to Q3 2013 GAAP operating expenses to increase approximately $3 million relative to the prior quarter to $23 million. With stepped up payroll-related expenses, which will include the full quarter effect of our incremental Q2 hires anticipated Q3 hiring, a step up in Silicon Labs' litigation- related spending and 40 nanometer R&D mask and tape-out related expenses previously mentioned.

We expect that Q3 2013 non-GAAP operating expenses will step up a lesser amount of approximately $2 million to $16.5 million due to previously referenced payroll-related increases and a step-up due to 40 nanometer R&D mask and tape-out related expenses.

In closing, we are pleased to report revenues in Q2 that were above the high end of our guidance combined with gross margin improvements and tight OpEx control that delivered operating leverage in our business model and correspondingly positive operating cash flow along with significant improvements in our non-GAAP bottom-line results.

Our guidance for Q3 revenues to grow 4% to 7% despite a challenging macro growth environment signals confidence in our strong product cycle momentum. With that I would like to now open the call to questions. Operator.

(Operator Instructions). Tore Svanberg, Stifel Nicolaus.

Congratulations on the record results. A few questions here. First of all, last quarter you talked about pretty solid bookings momentum and backlog coverage for Q2. Could you talk about how that stands as we are entering Q3?

Hello, Tore, this is Kishore. I think we continue to have a good momentum in our bookings, but we are entering Q3 at about the same rate of bookings we entered in the second quarter -- in the guidance for the second quarter at the end of Q1, so we had -- we normally used to have a benchmark of about two thirds bookings to the guidance. However, as our business has became much more operator centric we have better visibility, more lead time and today we stand in excess of 80% of our bookings for the guidance that we have just given you.

Very good, thank you. And the ISDB-T business seems to be quite lumpy; it was down in Q1, up very nicely Q2. It sounds from your comments that it is going to be maybe a little bit slow again in Q3. So could you just elaborate a little bit on the lumpiness there, please?

Tore, I would not consider the ISDB-T business to be any less or any more lumpy than a typical operator business. If you recall, the ISDB-T tuner Demodulator SoCs ship into the pay-TV satellite operator market in South America predominantly. And so, it's an operator type of bookings. So we have good visibility and we anticipate that we will have meaningful growth going into the third quarter. So I do not know what caused you to conclude that it was going to be coming down. But that is not the case actually, it is actually growing.

Okay. No, I thought maybe Adam said that the bulk of the growth from terrestrial is coming from TV tuner, so that is why I came to that conclusion. But that's (multiple speakers).

Tore, this is Adam. I will give you a little clarity. So, yes, you are correct, the majority of the growth that we are forecasting in our terrestrial business for Q3 is going to come from the hybrid TV tuner and not from the ISDB-T.

So I would say that your observation -- or taking away from my comments that the revenue would be roughly flat from ISDB-T tuner Demod quarter on quarter is relatively accurate. We do believe that there is some upside opportunity in that particular area. But, yes, the growth is predominantly forecasted to come from hybrid TV tuner and not from the ISDB-T tuner Demod.

Very good. And on the satellite business, it looks like the design wins are piling on now. So should we expect some revenues already here in the second half, or it's still primarily a 2014 revenue story? And also, will you start to break out revenues from that segment?

Tore, like we have been consistent about our guidance of the satellite revenue start being in the latter half of this year. And we've always said that we will have a meaningful revenue start from the point of view of the customer profile. However, it would not be meaningful to affect the revenues in this particular year. However, in 2014 we expect them to be really strong momentum generators as we approach the second half of next year.

So we will have good revenue growth in the first two quarters, but to be meaningful it will take a little bit more time. So we are not yet sure yet whether we are going to break it up into satellite and terrestrial yet, but eventually the goal is that we'll give you a lot of clarity on our satellite growth as well. So we will provide you that breakout, but I am not sure that is going to happen in the first two quarters or so.

That sounds fair. Last question, you recorded a design win with Samsung for your TV tuner in Q2. I was wondering, does that start to contribute to revenues in Q3 or is that revenue that kicks in later than that?

Actually, this is one of those -- the design wins we have with Samsung we are very excited. It is the first tuner onboard implementation according to our knowledge on any of the Samsung TV platforms. And so, this was a one-off effort, they started to see the migration of the tuner on the platform, how successful they're going to be. They are very excited, we are very excited. So we are recording revenue as you speak for this particular model and we are hopeful that this design will now proliferate to more models in the Samsung TV lineup.

Sounds good and congratulations again on the record results.

Ross Seymour, Deutsche Bank.

Yes, this is Mike Chou for Ross. Congratulations on a strong quarter and guide. Just a question on the fourth quarter, just wondering what you guys normally see as far as seasonality goes for the fourth quarter. And maybe talk about how your expectations for fourth-quarter might be affected by product launches that will be coming late in the year?

Hello, Mike, this is Kishore. We have been speaking for the last few quarters about when we have had questions about how the fourth quarter of the year shapes up. And we have already expressed apprehension with the fourth quarter given the record of fourth quarter that we have always been down quarters. However, in our case, like you rightly pointed out, it's a product cycle driven story.

And at this stage I would argue that we would hope that it's more a flat quarter than a down quarter. However, we would feel more comfortable thinking that preparing for a little bit down quarter. The reason being is that any of the new design products that we are launching, there are two categories -- one is the operator category be it the satellite operator or the cable operator, and the other one is the consumer side.

The consumer terrestrial side tends to be turns business, and then the operator side seems to -- tend to be platforms that are hard to predict when they start launching. So you could have easily some slips. At this stage I would say that the best case the fourth quarter is a flat quarter, but I would be cautionary and say we internally are preparing for a down fourth quarter.

Makes sense. And just a quick follow-up. Sounds like these new products are starting to ramp pretty quickly. Just wondering maybe longer-term how do you expect those new products to impact your gross margins and maybe even OpEx puts and takes when these products -- or as these products ramp?

I will take this question in two parts. One is how it affects gross margin and I will let Adam comment more on the OpEx side of the equation.

On the gross margin side, I think as a business in general MaxLinear looks at market areas where we have the maximum impact with our RF mixed-signal technology. We expect that to bear good high margins with a 6 in front of it, and we do not have any product portfolios that we are pursuing that would be subtractive to our gross margin that we have today on the corporate gross margin.

However, we have we said that our gross margins fluctuate based on mix of plus or minus 2%. But looking at the horizon on the product roadmap we are working on really heavily RF mixed-signal intensive products and DSP intensive products, so we expect our gross margins to remain stable. Would that be fair, Adam?

Yes, that's accurate. So I'll take the second piece, Mike, which is the OpEx influence. And I think that, as I mentioned in my prepared commentary, the envelope that we were forecasting or expecting in the year to be a bit down between $14.5 million to $16 million, again, given our guidance that we just gave for Q3, we're kind of a little bit above that because we have been able to I would say push out some of the cost from the first half, a little bit in the second half. So not being grossly out of our envelope but just being a little bit over right now.

I think that what you are seeing is these new products just require more resources and particularly not so much from -- I guess if you want to look at where the bigger scale requirements are, it is really more on the customer support side of things. It is systems level platform, applications level (inaudible). So that is where we are adding the headcount, as I mentioned my commentary.

So I don't think you should expect any significant changes from what we have kind of been pointing folks towards as far as the operating model looks like. It is not a step change, it is not a whole new category of customers, it is not a new type of technology. It is very much in line with what we have been able to grow in our cable business. So hopefully that provides some color. Again, we don't expect any significant step ups as related to these particular product launches that we are entering into.

And also as we increase our revenues I think we should start bringing more leverage in the model as we look to the future years. And since the technology platform substantially doesn't transform but targets new TAM expansion opportunities, we should be able to slowly grow into the model that Adam speaks about, always about the long-term model for the Company.

That is very helpful. Thank you so much.

Quinn Bolton, Needham & Company.

Congratulations on the results and guidance. Kishore, I just wanted to come back -- you went through the satellite design wins and sort of engagements pretty quickly in the prepared comments, but it sounds like you have got a number of designs underway for North American satellite OEMs. Can you just sort of go into a little bit more detail on those different engagements?

The point here is that we are at some level -- to a level where we observed some confidentiality; however, at the higher level the two categories of products we are working on with the major operators in the world. And if you really look at the major operators in the world they have their affiliate operators in other parts of the world as well. And the two categories of products, one is with the gateway market which is the media (inaudible) architecture gateway boxes inside the home. And the other one is the outdoor unit, the one that fits outside the home.

And so, there are two categories of outdoor units implemented by two sets of operators (inaudible) or where they use different frequency band. So we have two distinct silicon sets for the outdoor unit LMB that we are just in the middle of a tape-out process in the next few weeks. And the other one is the home gateway architecture, the gateway client architecture where we basically have a full spectrum capture chip that supports a multitude of channels that get -- that basically get video decoded or transcoded and distributed over IP to client devices.

So those are the two categories. Now getting into the details of the gateway side of the market, the designs basically are in good momentum and we've got design wins in that category. And we have already announced our MaxLinear 584 chip that is for full-spectrum capture production, readiness of the chip for the satellite market, we just released the production mask, it is back, we are pretty excited about how it is doing.

On the -- to the category of gateway device for a completely new next generation advanced gateway that is absolutely confidential that we cannot speak about and we are specifically working with the promised engagement and (inaudible) business outcomes with a major operator. So this is as far as I can go into it, but I think the math is pretty easy to do.

If you look at the major operators, their volumes in North America and Europe and even worldwide and then they typically work with only one or two suppliers and if you think MaxLinear the RF front end player I think it will be very simplistic to run down the math on that and you will see that that is a pretty substantial opportunity for MaxLinear.

Great, and just a question on that special -- or specialized gateway that you are working. Is that effectively a custom ASIC for that particular OEM? And if so, is there any kind of development revenue or NRE revenue associated with it? Or are you going to incur those expenses and then just look to recoup those as you go to volume production on that design when it goes to production volume?

So, firstly the device we're working on, initially of course, it is for this lead operator customer who is driving it, who is guiding it, whom we are working with, obviously. But it is a standard device that we sold to other operators as well. So it is not a custom ASIC for a particular operator but it is a pretty defined one that is incredibly valuable for the new generation of platform that is driven by the particular large operator.

So there are no NRE's involved. If they were involved I think Adam would have shared that with you. Generally we would rather have customer commitments in other forms than particularly seek NRE because that could usually even reduce our flexibility to be able to sell the chip to other customers.

So, no, there are no NRE's involved, but there are some level of business engagement commitments involved which we will share with you as and when they develop. But it is really, really exciting that as a result of our execution the [post-spectrum] capture with satellite gateways existing architectures that they have chosen as a prime candidate to work with to implement the new architecture. So we are really, really excited about it

Great, thank you for that. And then just any -- can you give us some color in terms of the Gateway dollar content opportunity versus the outdoor unit or LNB dollar content? Is one significantly higher than the other? Can you share some sense of -- over the relative opportunity between those two applications?

So, you know, I want to be careful with the pricing stuff. But I would say that generally we have talked about our cable chips being about anywhere between $3 to $6 ranges. I would say that the satellite chips tend to be 2x that of cable.

And obviously the pricing -- in the outdoor unit you have a competitor substitute product pricing that is an analog implementation outdoor unit. And so the prices cannot be -- will tend to be in the range of probably $7 to $10 looking forward whereas the Gateway chips should be anywhere between -- on the low end of seeing similar numbers where the high-end should be higher than even $10. So that is the breakout basically within the two products.

Perfect.

And then if you go to the gateway, there are two kinds of gateways because some of these operators are in countries like South American where they have a lot of -- terrestrial reception is required in the boxes. And they support terrestrial reception along with satellite reception an equal number of channels.

So if you at the numbers up for our ISDB-T tuner Demodulator, so see one each requires or one terrestrial reception of satellite box, if there are three or four of those and you add that to four of those satellite channel receptions, you can see that the billable material inside a South America box, for example, could be well in excess of $10.

Great, thank you, Kishore. And then for Adam, I hate to bring up perhaps a sore point, but you had mentioned the I think it was a $1.1 million impairment of a mask in the second quarter where it sounds like you didn't think you'd be able to continue to sell those products. Can you give us a sense -- is that just an older terrestrial or an older cable product? What was that mask set?

Sure. Actually, Quinn, there were about -- that $1.1 million was the aggregation of two different mask sets, one was for the terrestrial market, one was for -- basically the first 40 nanometer device that we did for the cable market. And I would say that the good thing about (inaudible) the silver lining in the mask impairment is the fact that we -- it's not like it caused us any kind of revenue interruption because basically it just customers were migrated to derivative products.

So for example, on the cable side there was no impediment to ramping our cable full-spectrum solution in that instance because we had another part that came up and replaced that one. So it was really a matter of doing product enhancements that made the prior maps not have the future value associated with them. So once we had a superior solution that we know was going to be taken to market, that caused us to reassess and make the impairment as we did.

But again, the good news is it is not like it was -- they were faulty masks that resulted in product ramp delays that would influence future revenues. There is absolutely no risk of that we've already moved on and beyond and successors are actually shipping already.

And we have shipped some quantities of that impaired mask (inaudible) masks were considered more cost effective and the customers liked those more so we transitioned the customers out to it. And we're already in volume shipment of our 265 product, which is a 16 channel and 24 channel product to major customers in North America and the ramp has already started.

Okay. Okay, great. Thank you.

Anil Doradla, William Blair.

Great job. A couple of questions. You know you talked about the DTA weakness in tropicals that have that issue. Is this something that you believe is an end market that is in secular decline or there is some inventory build up? Any thoughts on that would help us.

So, Anil, I think this is a similar situation we were faced with -- when we were doing an earnings call (inaudible) earnings call and they gave a pretty negative view on the DTA market and at that time we had answered that we -- according to our forecasting process, we do not have any of those surprises. However, the DTA weakness is partly related to the fact that the rollout of the DTA in the cable market are slower than is expected.

There is one operator that is doing a pretty aggressive roll out and we cannot supply enough parts. And there is another operator that is sitting on inventory and is doing a much slower process. So all in all for us the DTA is not a pretty -- is a smaller fraction of our cable, video and set-top box business. So our forecasting method tell us that we will not have those kinds of surprises. So that is the good news on our side.

So with regards (inaudible) case, I cannot speak for their inventory levels or what caused their issues, but we do not have any surprises on our end. It is just a slow down on one particular operator's roll out, whereas the other operator is rolling out more aggressively and actually wants to pull in orders. So all in all we are forecasting a weaker DTA but nothing out of the normal I would say.

So, Kishore, it is fair to say that the dynamics in the DTA are totally independent from the dynamics with the 24 channel HM DOCSIS 3.0?

Absolutely, they are very different. The dynamic of the DTA is actually HD-DTA, it's not your traditional standard definition DTA. The cable operators are going through a second wave of DTA deployment so that they can move their standard definition DTA consumers also to higher definition DTAs so that they can free up more channels and upgrade them to better services.

So it is a very, very different phenomenon. So no impact whatsoever to the rollout of the over-the-top service accessing boxes or our 24 channel, 16 channel data modem gateway addressing products. And frankly we did read the script for entropic and I was surprised how there was such a big gap between our expectations and theirs. But I cannot speak for them.

Okay, great. Now switching gears to the satellite segment, is it fair to say that you've already got design wins or you are still working on the products and it still has to go out and you have to kind of your work your way through the design process? Clearly the body language is very positive, the opportunity is huge and looks like there are not many competitors. But can you walk us through from a design point of view and ramp point of view what gives you so much confidence?

So, Anil, yes we are really excited about satellite, it was a long effort on our part and we were a unique player who came to the market -- to the forefront to develop this kind of product. And at this stage if I say we do not have design wins I would be disingenuous. Yes, we have design wins. And secondly is that from the time of the hardware sampling and hardware production readiness, the satellite people take a longer time to launch a box than even they cable people.

So we have already been -- our full-spectrum capture satellite product has been designed into a number of boxes in North America and Europe. But there is almost a one-year lag between the sampling and the ramp. And we are just waiting for them to be (inaudible) their boxes and get them software ready and certified and to start rolling them out.

And having said that, our production silicon for full-spectrum capture satellite gateway is back and we are now simply production silicon for the final certifications that will take several months. So we think some guys will take a little lesser time / others will take a longer time. But we should be able to -- we are in a position to ramp this product as the customer's give POs and for which they have given small pilot quantity POs already. So, yes, the song has just started, we are pretty happy and that is the only reason this time I was bold enough to add a paragraph on satellite for you guys.

Excellent. And finally, would it be fair to say that the market share dynamics in the satellite would be similar to that in the cable where you will have like a duopoly or -- and then you could potentially be with almost 50% share or it's just going to be a little bit more crowded?

So, let me put it this way right now -- eventually it will be a duopoly, right. On the front-end side we are the only one with a silicon that works and that is tested, certified and affords a low power (inaudible) that you need. So we are the only front-end right now, but we should all know it won't last long, it won't last for beyond two to three years, two years let's assume. So right now assuming 50% is a pretty good way to go.

Very good, congratulations. And looking forward to it.

Thank you. I am showing no further questions in the queue at this time. I would like to turn the conference back over to management for closing remarks.

Thank you very much, everyone, and thank you, operator. As a reminder, I would like to let the folks know that we will be participating in the Deutsche Bank conference in Las Vegas on September 12 and the Stifel Midwest conference, the one-on-one conference November 7 in Chicago I believe and hope to see many of you there. We thank you all for joining us today and we look forward to reporting on our progress during the next quarter.

Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.