Maxlinear Inc (MXL) 2014 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the MaxLinear second-quarter earnings conference call. Today's call is being recorded.

At this time I would like to turn the conference over to Mr. Nick Kormeluk. Please go ahead, sir.

Good afternoon, everyone, and thank you for joining us on today's call to discuss MaxLinear's second-quarter 2014 financial results. Today's call is being hosted by Dr. 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 related to our products and business. Among these statements we will provide information relating to our current expectations for third-quarter 2014 revenue, including expectations for revenue growth in our cable, terrestrial, satellite, and other target markets; gross profit percentage and operating expenses; and our current views regarding trends in our markets, including our views of the potential for growth in our cable, terrestrial, and satellite markets.

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 the terrestrial, cable, and satellite markets, do not grow; or if we are not successful in expanding our target addressable markets through the introduction of new products.

In addition, substantial competition in our industry, potential declines in average selling prices, risks relating to intellectual property protection and outstanding intellectual property litigation, 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 most recently filed 10-K and 10-Q, as well as our soon-to-be-filed 10-Q for the second quarter of 2014.

These forward-looking statements are made as of today, and MaxLinear does not currently intended has no obligation to update or revise any forward-looking statements. The second-quarter 2014 earnings release is available on the Company's website at MaxLinear.com.

In addition, MaxLinear reports gross profit, income or loss from operations, net income or loss, and basic or diluted net income or loss per share in accordance with GAAP and, additionally, on a non-GAAP basis. Our non-GAAP presentations exclude the effect of stock-based compensation expense and its related tax effect, accrual under our equity-settled performance-based bonus plan, expenses related to a prior patent litigation matter with Silicon Laboratories, and outstanding patent litigation with Cresta Tech. 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 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 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 2014, we realized record revenues. We grew our top line by approximately 10% sequentially and 20% year on year.

Our sequential revenue growth in the quarter reflected strong momentum in cable combined with growth across hybrid TV tuner and terrestrial set-top box shipments. We also witnessed the continuation of the initial phase of the ramp in the satellite gateway shipment. We believe that satellite gateway and satellite digital outdoor unit applications represent both an exciting new addressable market and a multiyear revenue growth opportunity for MaxLinear.

Moving to the financial specifics, net revenue in the second quarter of 2014 was $35.6 million, about the midpoint of our guidance. GAAP and non-GAAP gross margin in the second quarter were approximately 62.5% and 62.6%, respectively, about the high end of our guidance. GAAP net loss in the second quarter was $600,000 or $0.02 per diluted share, and non-GAAP net income for the second quarter was $5 million or $0.13 per diluted share.

I will now discuss current trends in our business. In the second quarter of 2014 cable exhibited sequential growth and strength and stood at 69% of our total revenue versus 67% in the prior quarter. Growth in cable outpaced our expectations for the second quarter, growing approximately 12% sequentially, led by DOCSIS 3.0 gateway applications, particularly in data gateway and media server applications.

Based on our current bookings and backlog and the exceptionally strong growth witnessed in the first half of 2014, we expect that growth in cable revenues are likely to moderate in the third quarter of 2014. Adam, our CFO, will provide more details in his third-quarter guidance a bit later.

In the second quarter we experienced strong and relatively balanced growth across the range of our DOCSIS 3.0 solutions. These solutions range from our wideband eight-channel solutions to our new to our newer 16- and 24-channel full-spectrum Capture cable receivers, addressing 1 gigabit per second DOCSIS 3.0 cable modem applications.

We also experienced a return to growth in cable media server gateway applications across a range of operators. We believe that as the media server model continues to expand in its deployment footprint, we are well positioned to exploit this exciting growth platform opportunity with our leading full-spectrum Capture cable receiver solutions.

Moving to the terrestrial and satellite TV markets, consistent with prior guidance, revenues from terrestrial and satellite broadcasts increased approximately 5% sequentially. We observed modest growth attributable to both hybrid TV and terrestrial set-top box applications, along with contribution from the continuing initial ramp of our satellite gateway solutions.

As we look forward into the second half of 2014, we not only expect significantly stronger demand for our 65-nanometer super radio TV tuners, addressing a broad range of hybrid TV and set-top box applications, but also for our ISDB-T tuner-demodulator SoC shipping into Latin American pay TV operators.

In the satellite TV market we experienced growth from the early ramp of our full-spectrum Capture cable receiver Gateway application into our first operator deployment and expect to realize growth in the second half of 2014 as the second operator prepares for volume deployment. Supporting our growth outlook for satellite, we recently announced and jointly demonstrated with ST Microelectronics an Ultra HD HEVC satellite server platform. This exciting collaboration between MaxLinear and ST Microelectronics is targeted at the growing number of satellite pay TV operators looking to deliver broadcast 4G Ultra HDTV services along with other value-added features, such as multichannel recording, multiroom viewing, and content streaming to multiple devices throughout the home.

We are very pleased about the pipeline of design wins we have garnered for our digital channel stacking SoC at major global satellite pay TV operators addressing the satellite digital outdoor unit market. With the recent tape-outs of production mask sets for our satellite digital outdoor unit solution, we are well poised to support initial volume production at the end of this year.

In conclusion, we delivered record revenue in the quarter, driven by strong growth in demand for DOCSIS 3.0 cable gateway applications, seasonally typical modest growth in terrestrial revenues, and the continued initial early-phase ramp of our satellite gateway shipments. We continue to be optimistic that are growing design win pipeline in the satellite TV gateway and digital outdoor unit markets is poised to become a meaningful component of our revenue mix as we progress through 2014.

As always, we continue to evaluate and target the new addressable markets for our industry-leading broadband full-spectrum Capture RF front-end technology platform in areas beyond cable, terrestrial, and satellite TV applications. We look forward to providing additional color on our target addressable market expansion efforts over the next several quarters.

Now 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 $35.6 million, which was above the midpoint of our prior guidance and came in at better-than-expected gross margins, which contributed meaningfully to the operating leverage, as evidenced in our results. As Kishore noted, strength was witnessed predominantly in cable data gateways and media servers, the continued ramp of satellite gateway solutions, and moderate growth in terrestrial TV applications.

Now, moving to the rest of the income statement, GAAP to non-GAAP gross margin for the second quarter were approximately 62.5% and 62.6% of revenue, respectively, above the high end of our prior guidance of 61% to 62% on both GAAP and non-GAAP basis. This compares to GAAP and non-GAAP gross margin of 61.7% and 61.8%, respectively, in the first quarter of 2014 and GAAP and non-GAAP gross margin of 58.1% and 61.9%, respectively, in the year-ago quarter.

Our Q2 GAAP operating expenses increased $1.7 million sequentially to $22.6 million, which includes $3.7 million of stock-based compensation; $1.2 million for an accrual related to our performance-based equity bonus plan for 2014; and $700,000 in net professional fees related to the Cresta Technology's patent litigation matter, which was disclosed in our previously filed 10-K for the year ending December 31st, 2013. Consistent with 2013, payouts under our 2014 performance bonus plan are expected to be settled in shares of MaxLinear's stock. Net of these items, OpEx was $17.0 million, which was up $700,000 sequentially but $500,000 lower than our guidance of $17.5 million and up from the $14.5 million in the year-ago quarter.

Second-quarter GAAP operating expenses attributable to R&D was up approximately $800,000 quarter on quarter and up $1.6 million year on year to $13.9 million, which included stock-based compensation of $2.4 million and a $700,000 accrual related to the 2014 bonus plan. Excluding stock-based compensation and bonus plan accruals, R&D was up approximately $400,000 on a quarter-on-quarter basis to $10.8 million.

Within the sequentially $800,000 increase in R&D spending, stock-based compensation and stock-based bonus accrual step-up was approximately $400,000, with the remainder driven by payroll-related increases from a combination of our annual merit process, our Q1 and Q2 headcount additions, and increases in embedded IP licenses for recent tape-outs, which were offset by lower equipment rentals, mats costs, and travel-related spending.

Second-quarter GAAP operating expenses attributable to SG&A increased approximately $900,000 on both a quarter-on-quarter and year-on-year basis to $8.7 million, which included $1.3 million in stock-based compensation, $600,000 of bonus plan accruals, and $700,000 in net additional fees related to the previously mentioned Cresta Tech patent litigation. Excluding stock-based compensation, bonus plan accruals, and the net professional fees related to the Cresta Tech patent litigation, SG&A was up $300,000 on a quarter-on-quarter basis to $6.2 million, driven by the full-quarter effect of incremental hiring and facilities expansion-related expenses in India and Carlsbad.

At the end of the second quarter 2014, our headcount was 362 as compared to 344 at the end of the first quarter of 2014 and 297 in the year-ago quarter. We continue to add R&D headcount globally to staff growth initiatives and are able to drive operating leverage in R&D buy appropriately balancing hiring across our R&D design centers in the US, India, China, and Taiwan.

GAAP loss from operations was $300,000 in Q2 compared to loss from operations of $800,000 in the prior quarter and a loss of $2.8 million in Q2 of last year. Non-GAAP income from operations was $5.3 million in Q2 compared to income from operations of $3.8 million in the prior quarter and $3.9 million in Q2 of last year.

GAAP net loss per share in the second quarter was $0.02 on shares outstanding of 36.1 million. GAAP net loss per share included $3.7 million in stock-based compensation expense, $1.2 million from an accrual related to our 2014 performance-based bonus plan, and $700,000 in net professional fees attributable to the Cresta Tech patent litigation.

This compares to GAAP net loss per share of $0.02 in the prior quarter and net loss of $0.09 in Q2 of last year. Net of these items our non-GAAP earnings per share in Q2 were $0.13 on fully diluted shares of 38.8 million compared to $0.10 per share in Q1 of 2014 and $0.11 per share in Q2 of last year.

Moving to the balance sheet and cash flow statement, our cash, cash equivalents and investments balance increased $2.8 million sequentially to approximately $92 million and increased $10 million compared to the $82 million in Q2 of last year. Our cash generated from operations in second-quarter 2014 was $7.6 million, approximately $3.5 million greater than in the first quarter of 2014 and $1.3 million more than the year-ago quarter.

Our days sales outstanding for the second quarter were approximately 55 days or three days less than the previous quarter and approximately 1.5 days less than in the year-ago quarter. As a reminder, we only recognize revenue on a sellthrough basis, and as such, we are not subject to revenue fluctuations caused by changes in distributor inventory levels. Our inventory turns were 5.1 in the second quarter compared to 4.7 turns in the first quarter, and declined relative to the 5.5 turns in the year-ago quarter.

That leads me to our guidance. We expect revenue in the third quarter of 2014 to be in the range of $36.5 million to $38 million. Built into this range, we expect cable revenues to be down sequentially 2% to 5% and terrestrial and satellite revenues to increase approximately 20% to 25%.

More specifically, within cable we expect growth in media server and video applications to offset weakness in the data modem gateway and DDA applications. Within terrestrial and satellite we expect the majority of the growth in the quarter to come from seasonally strong hybrid TV shipments, along with broad strength across a range of terrestrial TV set-top box applications and the continued ramp of satellite gateway shipments.

We expect GAAP and non-GAAP gross profit percentage to be approximately 62% to 62.5% in the third quarter. Our gross profit percentage forecast could vary plus or minus 2%, depending on product mix and other factors, in particular the relative contribution of cable, terrestrial, and satellite applications.

We expect Q3 2014 GAAP operating expenses to increase approximately $2 million relative to the Q2 2014 quarter to $24.6 million, with the increase driven primarily by tape-out related expenses for two production 40-nanometer masks related to our digital channel stacking outdoor unit initiatives and, to a lesser extent, payroll expenses reflective of the full-quarter effect of our incremental Q2 hires, anticipated Q3 hiring, 28-nanometer tools costs, and the ongoing Cresta Tech IP litigation.

We similarly expect that Q3 2014 non-GAAP operating expenses will increase sequentially approximately $1.5 million to $18.5 million, with increases driven by the previously referenced satellite outdoor unit tape-outs, incremental hiring, and increased spending on 28-nanometer design tools.

In close, we are pleased to report record Q2 revenues which were above the midpoint of our guidance and with accompanying gross margins that were above our recent historical actual and guidance range. We remain excited at our prospects in the satellite TV market, supported by a design win pipeline for this new TAM expansion opportunity that continues to progress towards production-volume deployments.

With that, I would like to now open the call to questions. Operator?

(Operator Instructions) Tore Svanberg with Stifel.

Yes, thank you, and congratulations on the record revenue. A few questions. First of all, you guided cable to be down 2% to 5% sequentially. I was hoping you could elaborate a little bit on that. Is that primarily just some inventory adjustments, or are you actually seeing a slowdown in demand as well?

This is Kishore. You know, the slowdown on moderation in cable -- there are two components to it. One, we believe we had a stronger quarter in Q2 than we had expected.

And number two, we are also seeing some softening in demand right now, but this is a late-breaking event for us, and at this point it's hard to comment on the inventory. Could it be a mix of both, because there is some inventory in the channel? It's possible. But we have not been able to verify right now. So those are the facts right now.

Yes. No, that's great. And I know you typically don't guide more than a quarter out. But this year you sort of had that third leg on the stool, which is satellite.

Maybe you could talk a little bit about the ramp there. It looks like you are expecting growth in Q3, but could we get some more material revenue contribution there in Q4, potentially bucking weakness and seasonality in cable?

Yes, I think I will give you a little bit more color on that. First things first: I think we are making fantastic progress in our design win pipeline. We are securing more designs and firming them up.

And we just released -- this is a very unique event for us -- in this quarter we released two production masks for satellite outdoor units. There are two distinct categories of operators, and the fact that we released two production masks implies we are addressing all of them. So we are very, very excited.

Actually, the chips are back in-house and they are performing very well the production masks. That's the first part of it. And then, clearly, we have released this because we are expecting some initial shipment of satellite digital outdoor units towards the end of the year. Adam mentioned that in his part of the script.

The second part of this -- the satellite ramp. I think we have always mentioned that the real part of the ramp is going to be really loaded in Q4. And so far we feel that we are making good progress towards it. And I think that is on course.

There are no negative indicators that such a ramp would not happen at this point in time. We have now with supply agreements in place with major end customers, and one of the operators is now nicely shipping.

So we plan to add another major one, and we feel very good about our available satellite positioning in these. And primarily, myself, I am very happy about the satellite outdoor unit also being ready to ship when the customers are ready to take. We hope to ship some initial volume at the end of the year, and next year we should see a nice blend of more diversified revenue for the Company.

Very good. And when we look at Q3 guidance, it looks like the mix is going to shift a little bit towards terrestrial. I assume the reason why you are maintaining gross margin the same at this quarter is primarily due to the strength in ISDB-T?

Actually not. There is a mix of factors. One is that, firstly, you must know that one of the things Adam mentioned is that the strength in the gross margin in second quarter also is attributable to the fact that we had a nice bump-up in the 24-channel cable product. So the mix shift is in place now, and we are seeing some positive benefits of it.

Secondly, we are also seeing some operational scale in reducing the cost of our 65-nanometer node, which benefits our old cable products. And then, thirdly, we are also seeing, because we are building up scale in the hybrid TV, we are able to get some operational efficiencies squeezed there as well.

So across the board our operations team is doing a wonderful job of really squeezing out margins. And that's allowing us to gain market share, for example, in terrestrial TV markets. And the fact that ISDB-T and demod is also going to grow is a very good thing, because that also helps the margins.

But I would not attribute it to one factor. We are doing all of the above. And you must note that we are shifting more and more to 40-nanometer product line, and 40-nanometer has hit the sweet spot on the supply set of equations for a lot of companies, and so it is for us as well.

One last question -- I know it's sometimes hard to measure your business this way, but how much of your revenue today comes from full-spectrum Capture-type products?

It's hard, but I will give you an approximate guess, because I just happened to see the numbers right now. Approximately it's about, now, 20% of our quarterly revenue. And it's all in cable.

So it's really -- we are really very excited about that. It's not only going to lead towards an expansion of our portfolio into satellite, but I think it's going to do wonderful things for our TAM expansion in infrastructure markets as well. And it's going to be a while before those play out, but we feel very good with the resonance of our messaging when we meet infrastructure customers.

Sounds good. Congratulations on the results. Thank you.

Ross Seymore with Deutsche Bank.

Starting off with the cable side, as well, on my side of things: I know it's hard to know if it's demand or excess inventory related. But how do you think that plays out when you get into the fourth quarter? Is that something where you believe normal seasonality kicks in there? Would it be a little bit better, a little bit worse, depending upon the inventory? Any sort of color on that would be helpful.

I think this is very, very interesting, because what we are seeing softening almost looks like a typical Q4 brought in advance a little bit into Q3. So having said that, and given the other stuff that's going to ramp, we normally don't guide for Q4. Right? So our expectation is this: that maybe it will not be as bad as it normally was in the Q4s previously.

But as we head more into the quarter, and we will be meeting you at Deutsche Bank in the investor conference, we hope to shed more color. But we feel that maybe it's a little bit ahead of time, the Q4 kind of effects -- not right now, but that's premature to talk about until we do the full channel check.

And it might be hard, again, since you haven't done the full channel check, but even for what you are seeing today, any inkling that there's some share shifts going on, maybe at the back end, that's leading to some changes at the front end? Any of that as a potential cause of the softness?

Actually, personally, we have not seen any share shift. To be honest with you guys, some small changes in expectations with our lead customer does impact our revenue forecasting. And that's exactly what has happened.

So we have not lost any design share. If anything, I really am excited, actually, that the media server gateway shipments have really grown very strongly, actually, over the last quarter. Maybe Adam can yield a little bit more color later. But that really bodes very well for us. If anything, I think with the offering of the 24-channel, we are very well positioned.

Now, the more important thing is that -- will the continue to -- share mix change toward 24-channel continue to happen at a rapid pace or not? That is hard to predict for Q4. But if that share mix continues to change, we don't see any reason for any negative bodings on how things play out.

I guess the last question is on the satellite side. I know you've talked about, if I remember right, I think $5 million to $7 million in potential revenues this year and then a stronger ramp next year. Are you guys on track for that? And how should we think about the relative sizing of what you believe it could be in 2015 off of that 2014 bogie?

So I'll just give a little bit color before Adam gives a little bit more guidance. I would say this: that I really feel that, touch wood, that things should be on track. Whether it's $7 million or $5 million, it's hard to predict right now because of the steep ramp in Q4. And on 2015 things look very much on good track and traction.

And let me give Adam a chance here to answer the question a little bit more precisely.

I'll give you a little more color, too, on your inventory question. It does -- again, we don't have too many data points, but one thing that we can point to is that we are -- with some of the customers that we are seeing softness in Q3 for cable, they are actually booking in Q4.

So it doesn't sound to me, based on that behavior, that you've got any kind of persistent inventory issue that's building out there, or else they wouldn't be placing any orders for Q4 this early. So that gives some level, some degree of comfort that this probably is more what Kishore mentioned earlier, which is maybe just a little bit of an early phenomenon that usually evidences itself more in Q4 has maybe gotten pulled in a little bit.

But we are not seeing a knee-jerk reaction of, hey, we are not even going to place orders for Q4. We are actually seeing orders being placed for Q4. So that's a good sign, I think.

When it comes to the ramping of the satellite business off of the 2014 base, it feels like this -- based on where we think the ramp is happening, is it -- would it be overly aggressive just to point to, say, a $20 million to $30 million type of contribution from satellite next year? I don't think so.

That seems like a fairly comfortable place to be, based on where we think the ramp is going to be happening. We had always hoped for a little bit more upside on the top of that, but I think that that's probably not an unreasonable place to be right now as far as how we see the design wins ramping and so forth.

I think that has also got some conservatism built into it based on, hey, you know, not everything ramps aggressively, linearly, up and to the right. And so we've got that factored into that range, also.

And just to be clear, you mean $20 million to $30 million is the range in total, not on top of whatever you do this year?

That's correct.

Not incremental, but absolute?

Yes.

Perfect. All right, guys. I'll go away.

I just want to give a little bit more color of why I said that maybe it's we are seeing an early Q4 boding here. Reason -- because when we look into cable markets, now that it's kind of a stabilized marketplace for us on the data side, generally when we do customer deals, we talk about what could be the annual value of shipments, volume of shipments for data gateways, and so on and so forth.

So that approximately turns out to be right. And in what sequence it happens -- it's a little difficult, which quarter is up and down. Normally, we assume fourth is down. However, we shipped maybe $0.5 million more than what we anticipated for Q2. And that's a reason you see the earnings leverage as well and the great job we have done in controlling our OpEx.

And so that also adds into the comment. If the entire year is so rebounded, and you are seeing ups and downs what Q4 looks like -- so we feel there's no alarm on that situation for now.

okay, great, thank you.

Andil Doradla with William Blair.

So, Kishore and Adam, why do you think that we are seeing some of that seasonality potentially ending up in the September quarter?

We have no reason to think that the seasonality of Q4 is happening in Q3. It just had to be the old ordering exuberance was for Q1-Q2. We feel that maybe there is a sort of a tempering of that as they head towards the second half of the year.

And remember, I just now told that we look at the whole-year volumes. And if that thesis remains intact, then maybe we are seeing an early Q4 affecting Q3 or spread between Q3 and Q4.

I would also say, Anil, too, that --

But it sounds like --

Go ahead, sorry.

No, go ahead, sorry.

No, I was going to say that as we look into Q3, I don't think we have a particularly speculative Q3 cable forecast, because we are very, very fully booked to the numbers that we are building into our guidance range on the cable side of things.

So again, there's room, or maybe -- there's still a lot of time in the quarter where things could play out. We are just giving you the latest and greatest, I think, risk-balanced view of what we think the demand looks like in the quarter.

And was this at any particular customer, or it was spread across multiple customers?

I already qualified that, that much of the effect is from a major customer of ours and not spread across the other customers.

And on the September quarter guidance, can you give some sense of how much you are expecting out of the satellite?

So I would say that satellite has been ramping nicely since it first started in Q4 of last year from a very, very small number. Built nicely throughout the first half.

Again, it is, as Kishore mentioned, a Q4 larger hockey stick, if you will. But we are still going to be in the -- likely it's sub-$1 million contribution in the third quarter from satellite.

But again, that doesn't, I don't think, moderate what we believe our bogie is for Q4. We have said before that we have some internal aspirations where we would like see satellite be roughly in the 10% of total revenue mix in the fourth quarter of this year. As Kishore mentioned, I think we are still generally on track to be in that range. So we feel that things are progressing pretty much as we would have expected.

Very good. And finally, on the TV side, terrestrial, you have added 20% plus. When I look at some of your peers, they are talking about a little softness in the TV market. Can you explain the disconnect between what some of the peers are talking about and your strength in the terrestrial business?

Okay. I think that's a very good question. And I think this is the way I would answer. Some of the guys are giving you talk about hybrid television. They are leaning on one or two, two or three major customers. Right? And they have had those customers for a while. And now you are seeing a natural impact of very limited growth within those sockets and then the aggressive ASP impacts due to competition.

In our case it's just the opposite. We have been gaining all the newer sockets; whenever there is a battle, we are winning them very nicely so far of these new designs layering in that have started shipping or are beginning to ship. So I think that's where the difference is.

We are winning designs that are beginning to ramp. And the others are pretty much limited to the sockets that they have, with little growth within those sockets and with very limited wins outside those sockets.

Very good. Okay, thanks a lot, guys. And congrats.

Gary Mobley with Benchmark.

Let me also extend my congratulations on a strong quarter. Let me also add a comment that seeing the moderation in ARRIS Group's third-quarter guide this afternoon and, as well, their bookings, I guess it's understandable why you are expecting some moderation in your cable-related business.

But moving on to gross margin, I think your long-term target is about 60%. You are running about 62% to 65% here in the middle part of the year. So I'm wondering if you are at a point now where you are willing to raise that long-term gross margin outlook, at least to the 2015 timeframe.

Gary, I would say that we have been pleasantly surprised. Our intent is certainly not to sandbag anybody on the gross margin. We have been pleasantly surprised by the -- I'd say the improvements that our supply chain team and our engineering team has done to reduce test times, and get yields up, and all those kinds of things that you do when you are in a volume situation. And I think they've done a great job.

So I don't think that right now we see anything that would cause us to move us out of our ordinary range. Say if -- kind of in the 60% to 63% range feels about right.

Keep in mind that, obviously, Q3 is going to increase in the mix for terrestrial, which is typically lower gross margin; and then you have Q4, which is again going to be more seasonally driven towards these terrestrial products. I think earlier in the call we mentioned that some of that mix is actually -- within terrestrial is helpful to margin than it has been historically because of the ISDB-T tuner demod, with a little bit better margins there than a tuner-only product, in some cases.

So I would say that as we ramp into the third leg of our business, which is satellite, we believe satellite is going to look a lot like our corporate average does today. So I think the addition of satellite, both on the gateway and on the outdoor unit market, will help offset the natural continued compression in margin that you should expect on the terrestrial side of the business.

So I do think that those things pretty much balance each other out, which is good, I think. A year ago I don't think I would have predicted that we would be in an increasing gross margin environment as we head into second half, at least into Q3 of this year.

So we are pleasantly surprised. But I don't think it would be prudent to point people towards a gross margin range north of 63 points at this point.

Okay. Kishore, I appreciate your comments on how the mix of 24-channel cable solutions impacted the gross margin, but could you talk a little more in depth about the ASP trends on that front? How is the mix toward 16- and 24-channel on the cable side impacting the overall ASPs? And if you are not willing to share the specifics on the ASP trends, maybe if you can talk about whether or not your unit volumes were roughly in line with the 12% overall growth in cable-related revenue in Q2.

I'll let Adam give you the numbers. Actually, you will be very encouraged with how the mix has moved through the 24 channels. But the sweet 16 channel is becoming a less and lesser factor. In fact, it's -- maybe they have hit a peak of 16 channels for this quarter, maybe, and then it's going down, I think to the benefit of 24-channel. Adam, why don't you go to the numbers here?

So I've would say that we are certainly getting the benefit of the mix advantage of 24-channel versus 16. So if you want to think about the rough ratio of 16 to 24, it's close on the order of magnitude where of our full-spectrum Capture in cable, probably close to 75% or 80% of those volumes are towards the 24-channel already.

So as Kishore mentioned, Anil, 16 seems to have -- the market has moved aggressively from 16 to 24 channels, which is something that we wanted to see happen, and it looks like it's following through on that. And so, of course, you get a lot of benefits with that, including the uptick in ASP of the 24 solution versus the 16-channel.

Okay. Last question for me: I noticed that CapEx was up quite a bit in the quarter, more than twofold year over year.

Yes.

And your PP&E, as a result, spiked up. I'm just wondering if you could share with us what sort of investment was made there.

Sure. So there's actually two areas of investment there to talk about. One is the fact that we did have the production mask that was capitalized in the quarter. So that was about -- between $600,000 and $700,000 for that particular item.

And then there was the CapEx related to our Carlsbad headquarters facility move. We moved from our legacy facility to a new facility last month, which provided significantly more lab space for our engineers and so forth. So that was really -- it was driven by those two things, the headquarters facility move and the capitalized tape-out expense.

Got you. All right, forgot about the move. All right. Thanks, guys.

(Operator Instructions) Alex Gauna with JMP securities.

Nice quarter from me as well. I was wondering -- Kishore, you said that this cable development was relatively late-breaking. I know you've given a lot of color around it, but did you actually get cancellations? And is there any color in terms of is this your new (technical difficulty)

Well, there were no cancellations at all. It's just that, you know, you get the forward forecast, and we monitor it every time. And then there was a moderation in the forecasting process. So the bookings reflect accordingly. So there were no cancellations, per se.

But I think maybe implied in your question is the fact that -- maybe the way would answer it is that entering the quarter, what did the bookings look like? And was it at the point of the earnings call? And I think this time when we entered the quarter, we were about 70% booked. And at the earnings call we were about 80% booked.

If you recall from the previous quarters, we are more booked at this point than we are today. There are two factors to it. One is that cable is the -- cable gets a lot more lead time in the bookings. So we benefit from that. And the turns business, which is basically the terrestrial markets -- we don't get that visibility at this point in the earnings call.

So with increased in turns business this quarter combined with the moderation in the cable demand, we find ourselves 80% booked. And therefore we are cautious about guiding any higher than what we have given you in the range so far. Does that answer your question, Alex?

Yes, it does. Thank you. And I know you talked about maybe that it seems like a little bit of a pull-in of seasonality in Q4. But is it not fair to say that this isn't exactly a seasonal blockbuster quarter, necessarily, for cable. Is that fair?

You know, historically it has been -- second and third quarter -- yes, second has been -- second and third quarter, somewhere in between, they hit the peak months. You are absolutely right.

But however, third quarter tends to be overall for our revenues a very peaky quarter for us. And so -- whereas cable comes especially strong towards the end of the second quarter, beginning of the third quarter, and depending on which month you land the bookings, I would say for the Company as a whole the revenues, third quarter has tended to be the peaky one.

Okay, and I know you've already talked about this as well. But your guidance is really strong on the gross margin line, considering terrestrial is up. Is it not fair to assume that if the mix comes back to maybe a more normal balance with some of your cable coming back and some of your other newer products, especially in the OTU satellite market starting to ramp, you've got some really nice gross margin accretion potential. Is that fair?

It's very, very hard to forecast that far out when satellite has not ramped yet and you're in the initial parts of the ramp. So it's hard to figure out what operating advantages you get in terms of cost of goods sold at this point.

Having said that, we feel very good. Like Adam said, I want to reemphasize the fact that right now we feel comfortable guiding within 60% to 63%. And in the future we hope to -- we cross our fingers and see how it plays out. At this point I think 60%-plus margin is very high rate to be in in the first place. So I would be very cautious on raising expectations at this stage.

Yes. And I would add to that, Alex -- I think we have mentioned it many times before, but I don't -- the pricing environment, in particular in the hybrid TV tuner space, is very aggressive. So we've seen a pretty -- I would almost say dramatic reductions in ASP over the course of the last 12 to 18 months in that market.

Hopefully, that moderates. But if it doesn't moderate, and we don't have a crystal ball as to whether or not pricing keeps going down or not in that market. But if it does, one thing we've done is we've been successful in taking share in that market. But it's an ASP compression market, where gross margins, as a result, are compressing also.

So we're trying to take a very balanced view and say, okay, yes, we have got some really nice parts of our business that have nice gross margin characteristics. But, clearly, one of our growing businesses, which is hybrid TV, doesn't have those same optics, if you will, from the gross margin perspective.

So it really is a balanced view. And yes, if we were to have less success in hybrid TV than we currently forecast, yes, there could be some upward bias to gross margin. But I think we've taken a pretty balanced view about where we think each of the parts of the business are going to be. And I think that's what you are seeing in our guidance right now. And our lack of willingness to set growth rates at ceiling.

Go ahead, please, Alex.

Well, I was going to say -- I mean, that's what's so impressive right now, because we've seen the price competitiveness in hybrid; and yet you are winning in hybrid; and yet your gross margins are incredibly powerful right now. Can you talk to me or us about what you are doing on the spec side to create such success without being detrimental to gross margin?

I missed your thing. Is it what you are doing on what, Alex, you just said? Could you repeat that question, please?

Okay, I'm sorry. I was going to say that you have managed to have such success without deteriorating your corporate gross margin. I'm imagining you must be bringing some really nice benefits on the spec side to have this success. Can you maybe touch on some of that?

So I think it's very fair to say that our performance is by far the best in the industry on the hybrid TV tuner performance. And that helps a lot.

And then, right, we have also timed it -- the ne- generation product that we talked about, which reduces the bottom quite dramatically. So that allows us to do pricing that's a little bit more value spread even in this world of -- where value is based on, really, just silicon and not -- the accountings aren't kept very good there by the customers.

And thirdly, the fact of the matter is we anticipated the price war, so to speak. And we have designed accordingly at the same time as the volume has picked up. We were able to leverage on the supply side to get those benefits.

I think I want to just do a little bit of divergence here from this topic of gross margin. But I really think the highlight for me personally is the operating levels we are developing on the OpEx side. If you look at it, we -- on the operating expenses side, Adam and team have done a great job controlling the expenses.

We have achieved a lot more R&D activity with lesser resources in R&D development activities. Therefore, you've seen the great OpEx numbers right now. And actually, it looks very good relative to our guidance.

But however, I think it's even better if you look in the context of the fact that this quarter we are guiding with two 40-nanometer production masks embedded in the OpEx. That's almost like, I would say, anywhere between -- but I wanted to have plus $1 million of mask expenses.

So if you look forward, I look forward to the rest of the year. And I don't see a plan where, you know, this year, the third quarter will appear the peak, because I don't see masks in the next of the year -- rest of the year, touch wood. That means if we do not have those two masks, that means wonderful things for OpEx once again.

And I think that our OpEx, our operations team; our R&D -- their team; and on the SG&A side, cost control management relative to all the stuff we are doing -- I think we really focused this year, beginning of the year, to get operating leverage. And that's yielding a lot of good results. And it's a bit of a polarized lenses, if you will, if you think about third quarter, then, to full-blown mask expenses. And it is escaping the attention. I think that's where we have done the bang-up job this year.

To give you an idea, Alex, and I think for the other folks on the call -- so as Kishore mentioned, we came in quite a bit under in Q2, for a variety of reasons, I think largely because the engineering team found less expensive ways to get a lot of stuff done; and the fact that we didn't hire as aggressively, and where we did hire, we got more of an international mix benefit from that, which has been very helpful.

And I think that if you look forward, say -- I think that Q3 will definitely be the high-water mark for OpEx for the year, and we should see a return to more normal OpEx in the fourth quarter, which should -- it will be a step-up from the Q2 levels, but pretty modest. Right?

So I think, not to lean too far over the skis on the OpEx side looking forward, but I'd say Q4 should probably come in where we thought Q2 was going to come in. So if you want to call that $17.5 million, so about a $1 million step-down from what we have guided for Q3, that feels about right.

And just to give you an idea of what's been going on internally, we had as many tape-outs as a company in the first half of 2014 as we had for the entire year of 2013. So that gives you an idea for the activity levels and the kind of stuff that's working its way through the pipeline from design to production. So I think that's also a very good indicator as we look forward in 2015 and beyond.

So I think the productivity has been great. I think we've been able to do it with pretty modest resource expenditures. And we are going to continue to try to drive that, because we are all very, very focused on getting more operating leverage in this business.

Thank you. Congratulations again. Nice execution. Keep it going.

Quinn Bolton with Needham and Company.

Kishore, just wanted to ask: on the cable side of the business, did you see a -- the reduction in forecast -- was that across both 8- and 24-channel modems? Or was it more specific to the 8-channel modems?

Let us just take a look based on our bookings here. Adam, take a look.

So what was the question again, Quinn, on the 8 versus 24?

Yes, just -- was the lower guidance for cable in Q3, was that more driven by a reduction in forecast for 8-channel modems, or was it across the board? I guess what I'm trying to ask is: you were seeing a shift from 8 to 24, in general. I think in the first half you saw stronger-than-expected demand for 8-channel modems, which was an encouraging trend. And I'm wondering, did we get a little over our skis just in 8-channel, or are you seeing --

Yes.

-- softness in the orders for 24 as well?

No, you've identified it. That's absolutely correct. We did -- it seems like -- I think like the market got a little bit ahead of itself for 8-channel. And so you are really seeing a moderation more in the 8-channel, and you are seeing continued growth, even in Q3 in our moderated guidance, for the 24-channel. So you are exactly right.

Okay, great. And then just wanted to ask, on the terrestrial side you have talked a couple times about strength in the second half, obviously guided up nicely for Q3. I just wasn't sure whether your comments about second-half strength -- are we to read in that you think terrestrial stays sort of flattish or potentially grows again in Q4?

So it's hard to kind of -- again, when you focus that far out. But typically, seasonality for TV is in Q3 for North America and Europe, and then we have started to see a trend towards strength for Chinese New Year for Q4.

So we think that we are going to see strength -- not as much strength in Q4 as we saw as far as growth. But we believe there will be growth, still, in Q4 in the terrestrial over Q3. And of course you have got a bigger component of satellite that we forecast being in the mix in Q4, which -- right now we combine those things together, the terrestrial and satellite together.

So certainly, when you take those two things together, yes, for sure we are looking -- nothing is for sure. But we are very confident that we will see that growth come through Q3 to Q4. But we have more seasonal strength for our TV and terrestrial set-top box in Q3 than in Q4.

But to put it differently, we expect to see on the terrestrial side maybe flatten out, given that we are expecting a ramp in satellite to be pretty steep in Q4. So all in all, a terrestrial/satellite combination growth. But you aren't going to see the seasonal dip in terrestrial that used -- we typically talk of in the previous years.

I guess I wanted just to focus in on the terrestrial if you excluded satellite. Terrestrial sounds like it's probably down some in Q4. Obviously, when you put the strong ramp in satellite, it's up as a group. But terrestrial as a stand-alone entity, probably down Q4?

No, I don't think so, actually.

Okay.

I think, to Kishore's point, it's probably more of a -- it will be a modest growth on the terrestrial TV and set-top box as a -- if you look at those two product families together, and then with real growth coming from satellite.

And in -- so satellite, you said a couple of times expectations that satellite could be about 10% of revenue in Q4. It sounds like it's still less than $1 million in Q3. If you get to 10% in Q4, it sounds like we go from about $1 million or less in Q3 to $3.5 million to $4 million in Q4. Terrestrial is flat, and it sounds like you may have seen some pull-in in seasonality in cable. So maybe that bodes well for cable.

It sounds like you got a pretty nice Q4. I know it's a quarter out. But is there anything incorrect in that line of thinking?

I don't think there's anything incorrect in the thinking, other than the fact that we are very gun-shy to talk about cable at this point for Q4, right? I think we have kind of indicated that we are actually getting bookings for Q4, despite giving guidance for a softened Q3.

So again, we don't think it looks like a major, major issue. But I think that's the only thing that's hard right now, because we were kind of surprised late in Q3 by the softening of cable for the quarter. So I really -- I don't think it's prudent for us to really talk much about Q4.

I think we are more comfortable talking about Q4 for TV and terrestrial set-top box and satellite, because there is a seasonality element to it which is a little bit more tangible. And there are some new design cycles that are also more tangible for us, especially in satellite, obviously. So it's just hard to make a call on cable, given the uncertainty that we just pointed to for the current quarter.

Got it. Understood. And then my last question -- could you remind us of the satellite gateway ramp? I think the first operator was a European operator that's ramping now. You have a second, I believe, European operator kicking in in Q4. And then can you tell us what is the lineup for 2015? And is it both US- and Latin America-based operators on the gateway side?

Absolutely. So you are absolutely right. The first one was a European operator. The second is going to be a major European operator, a much bigger one. And then there's an American operator lined up. There is a Latin American one that's lined up for whom -- whereas the American one, the Latin American ones -- we have bookings that reflect pilot shipments and beyond that are lining up in the first half of the year. And within those groups we have more than one platform. So all in all, between those four operators, we are going to see a major spike in the ramp or satellite gateways.

Now, the other part of the ramp that will happen -- we will just have initial shipments at the end of the year for satellite digital outdoor units. But those involve two major operators.

And in the really high-end platforms, that will start -- just start at the end of the year, but really ramp as we head toward the latter half of the first half of the year in 2015. So I would say there are four operators that are on the hook now for shipping. One is shipping nicely. One is coming online. And for one we have started shipping; there's a stop-and-go sort of situation with those guys. And there is one North American one that's going to come online by the end of the year, for whom we have booked bookings for initial pilot shipments.

Great. Thank you, Kishore.

And with no additional questions, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Thank you, everyone. As a reminder, we will be attending the Deutsche Bank One-on-One Conference in Las Vegas in the week of September 8. And we look forward to seeing many of you there.

We thank you for joining us today and look forward to reporting on our progress during the next quarter. Thank you all. Thank you, operator.

Thank you. And again, ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.