Maxlinear Inc (MXL) 2016 Q3 法說會逐字稿

Good afternoon. My name is Germaine and I will be your conference operator today. At this time, I'd like to welcome everyone to the Q3 earnings conference call. (Operator Instructions). Thank you. Mr. Gideon Massey, Investor Relations, you may begin your conference.

Thank you, Operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's third-quarter 2016 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO, and Adam Spice, CFO.

During the course of today's conference call, we will discuss our financial performance and review our business activities for the third quarter. After our prepared comments, we will take questions.

Our comments today will include various forward-looking statements within the meaning of applicable security laws including, without limitation, statements relating to our current projections, forecasts and expectations with respect to fourth quarter 2016 revenue and revenue contributions from key product markets, gross profit percentage and operating expenses on a GAAP and non-GAAP basis, the potential impact on our business of recent acquisitions and acquisitions we may pursue in the future, and our current views regarding opportunities and trends in our markets including our current views of potential for growth in each of our target markets.

These projections, expectations and other forward-looking statements involve substantial risks and uncertainties and our actual results may differ materially from currently forecasted results. Risks potentially affecting these statements and our business generally include substantial competition, in particular from increasingly large players as our industry consolidates, potential declines in average selling prices and factors that could adversely affect our operating expenses such as litigation, asset impairments or restructuring. In addition, our target markets, including target markets we may pursue through future acquisitions, may not grow in the manner or at the rates we currently expect. We face risks associated with consolidation trends in our operator markets and we face integration risks associated with acquisitions.

For a more detailed discussion of the risks and uncertainties potentially affecting the forward-looking statements we make today and our business generally, we encourage investors to review the sections captioned Risk Factors in our previously filed quarterly reports on Form 10-Q for the quarter ended June 30, 2016 and our quarterly report on Form 10-Q for the quarter ended September 30, 2016, which we expect to file shortly with the SEC. Any forward-looking statements are made as of today, and MaxLinear does not currently intend and has no obligation to update or revise any forward-looking statements.

The third-quarter 2016 earnings release is available in the Investor Relations section of our website at www.maxlinear.com. In addition, we report certain historical financial metrics including gross margins, operating expenses, net income or loss, and net income or loss per share on both GAAP and non-GAAP basis. Our non-GAAP presentation excludes certain expense items as discussed in detail in the press release available on our website. The press release available on our website also includes a reconciliation of our GAAP and non-GAAP presentations which we encourage investors to review. It is not our intent that the non-GAAP financial measures discussed today replace the presentation of MaxLinear GAAP financial results. We are providing this information to enable investors to perform more meaningful comparisons of operating results and more clearly highlight the results of core ongoing operations in a manner similar to management's analysis of our business.

We do not provide a reconciliation for forward-looking non-GAAP gross margin and operating expense guidance which excludes estimates for stock-based compensation expense, bonus accruals, acquisition-related expenses and restructuring charges. Each of these expense items is explained in greater detail in the press release. The timing and amounts of these future expenses, which we would need to provide a reconciliation of non-GAAP margin and operating expense guidance, are inherently unpredictable or outside our control to predict. Accordingly, we cannot provide a quantitative reconciliation of forward-looking non-GAAP estimates without reasonable or unreasonable effort. Material changes to any of these items could have a significant effect on our guidance and future GAAP results.

Lastly, this call is also being webcast and a replay will be available for two weeks. And now let me turn the call over to Kishore Seendripu, CEO of MaxLinear.

Thank you, Gideon, and good afternoon, everyone. Thank you all for joining us today. Before jumping into the details of the financial results, we are very excited by the progress we have made in the integration of the wireless infrastructure business units acquired from Microsemi and Broadcom in Q2 and Q3 of 2016 respectively. Our customer engagements over the past quarter have increased our confidence in both the current technology platform and our roadmap initiatives in the wireless infrastructure markets.

We also continue to aggressively pursue growth opportunities in wireline network infrastructure consisting of high-speed fiber optic interconnect for data center and telecom markets as well as fiber node solutions for next generation cable networks.

The fundamental underpinning of our infrastructure market initiatives and our operator broadband access and connectivity markets is a core CMOS RF mixed signal SoC technology platform. This scalable technology platform enables MaxLinear to address the growing, sizable, and diversified market opportunity that will be in excess of $4 billion by 2020.

Our revenue of $96.3 million in Q3 of 2016 is in line with the prior guidance range, down 5% sequentially and up 1% year over year. Consistent with our guidance, we experienced strong satellite gateway demand along with full quarter contributions from our recently acquired wireless infrastructure businesses. Strength in these revenue categories was offset by seasonal weakness in our cable data CPE platforms.

In the third quarter we also experienced the expected step back in highspeed fiber optic interconnect shipments due to seasonality and supply normalization following an unnaturally strong second quarter resulting from the catchup shipments to customers suffering from supply shortages in the preceding quarters. Despite the advance impact of the continuing Entropic legacy video SoC business right now and the expected seasonal cable data business weakness, we were able to maintain a relatively flat revenue top line.

Our top line revenue resilience highlights the increasing success of our long-term strategy of diversifying our revenue streams against the large and growing broadband access, wireless and wireline communications infrastructure markets.

Our GAAP and non-GAAP gross margins lifted to 57.6% and 63.1% respectively as we experienced mix shifts within our operator infrastructure and other revenues. Continued tight operating expense management resulted in year over year expansion in both GAAP and non-GAAP operating margins to 11% and 30%, respectively versus 2% and 26% in Q3 2015 respectively. We also delivered strong operating cash flow generation of $18.4 million which included the impact of the purchase of Broadcom wireless backhaul assets in third quarter.

Now moving to the specific business highlights of the third quarter of 2016, operator revenues declined 6% sequentially and accounted for 76% of total revenue in the quarter. Within the operator-based revenue mix, we experienced strong demand for 4K resolution satellite gateway RF frontend shipments offset primarily by seasonal declines in cable data and video frontend and related MoCA companion devices. We also saw some demand softness in MoCA satellite connectivity applications due to the timing impact of certain customer platform transitions.

Within our operator family, the cable DOCSIS data gateway market is an exciting strategic growth platform for us, particularly as we start to see initial data service deployments around the new multi-gigabit cable DOCSIS 3.1 standard. Consistent with the prior expectations, we shipped in excess of 100,000 units of total DOCSIS 3.1 analog frontend SoCs and programmable gain amplifier chip sets. We continue to be excited about the underlying market dynamics supporting the DOCSIS 3.1 product cycle as well as our technology and market leadership position in cable data frontends and companion CGAs and MoCA connectivity solutions.

Also within our operator family, we experienced the strongest quarter on quarter revenue growth yet in our satellite gateway 4K resolution full-spectrum capture receiver deployments, which were driven by new gateway launches across multiple Tier 1 satellite operators across Europe.

Despite the headwinds from our legacy Entropic analog channel stacking outdoor unit revenues, we remain excited by the long-term prospects in the channel stacking market as it transitions from legacy analog to digital. Revenues from our digital channel stacking outdoor unit products declined modestly sequentially in Q3. We are currently forecasting resumption in demand growth in Q4 and see continued strong double digit growth for this business into and through 2017.

Lastly within our operator business, MoCA connectivity continues to be an increasingly strategic part of our business. MoCA continues to expand from being simply a whole-home PVR conduit to a critical high-banded wired backbone connectivity solution that enables robust delivery of broadband data and video throughout the connected home. This MoCA backbone normally allows operators to provide uncompromised gateway decline via connectivity, but also enhances subscribers' wi-fi whole home coverage through the deployment of MoCA to wi-fi adapters.

At the CableLabs' Summer Conference and at IBC over the summer, our demonstrations of our latest multi-gigabit MoCA 2.5 solution, which is the industry's first 2.5-gigabits-per-second wired connectivity solution, generated enthusiasm from a range of broadband operators in North America and Europe.

Moving to our infrastructure and other product revenue category, revenue was roughly 17% of total revenues in the quarter. Consistent with our guidance, the full quarter contributions from wireless infrastructure acquisitions offset a step back in high speed interconnect shipments. This step back was due to seasonality and a reduction in shipments in what was an exceptionally strong second quarter when we pulled through demand from prior quarter supply constraints. However, our current backlog suggests strong growth in Q4 and sets us on a path to exceed the high end of the $10 million to $20 million revenue range we forecasted for this product category at the start of the year.

We continue to make progress in our high-speed fiber interconnect product expansion initiatives. In Q3 we shipped initial sample quantities of two new products, the MxL2025 100-gig per second quad leader driver of the metro markets. We also sampled MxL9101, our first quad TIA solution addressing the ramping 100-gigabit [45dB] per second NRZ mark inside the data center interconnect market.

Customer feedback has been extremely positive for both these products and our design engagements are broadening well beyond our two lead Chinese telecom highspeed fiber interconnect driver customers. Before the end of the year, we hope to have multiple [DA] products and three different laser drivers generating revenue in support of 100-gigabit and beyond data deployment across data center, metro, and long haul markets.

Moving on to wired infrastructure, that backhaul business we acquired from Broadcom brought with it strong relationships and design wins with numerous Tier 1 and Tier 2 OEM customers. We believe that we have now rightsized the business relative to the acquired revenues and roadmap synergies while forecasting meaningful growth in the coming quarters.

The wireless access business which we acquired from Microsemi in April of this year is also now contributing growth, nearly doubling quarter over quarter from its partial quarter Q2 2016 contribution. We expect double digit sequential growth in both wireless backhaul and wireless access in Q4. As we look forward, we are excited with the progress being made in establishing a path accelerating scale and leverage across the wireless infrastructure platforms. We believe that these recent acquisitions are already yielding the customer channel technology platform leverage we envisioned from the very outset.

Lastly, legacy video SoC revenues derived from the Entropic acquisition were $7 million in the quarter, declining to 7% of total revenues versus 8% in the prior quarter. As expected, the weakness owed to declines in cable HD DTA deployments, which were slightly offset by [less strong buys from IP clients] of devices into the satellite market. We continue to forecast relatively stable decline of our legacy Entropic SoC revenues as the market transitions to ultra-HD 4K resolution devices and the legacy SoC platforms reach a terminal end-of-life phase.

Before I turn the call over to Adam Spice, our Chief Financial Officer, I would like to reiterate that we are extremely pleased to have delivered a strong third quarter, owing to the increasing diversification of our revenue streams across our target broadband, access wireless and wire line infrastructure markets. Our expanding portfolio of market-leading broadband access and connectivity solutions has positioned MaxLinear to address the key challenges faced by operators across the portfolio of CP and infrastructure platforms. Additionally, our recent wireless infrastructure acquisitions in combination with our organic wireless and wire line initiatives significantly accelerate the emergence of MaxLinear as a leading technology solutions provider in the large and exciting wireless and wired infrastructure markets. We look forward to sharing more information regarding the progress in our infrastructure initiatives in the coming months.

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. On Q3 revenue of $96.3 million, GAAP and non-GAAP gross margins for the third quarter were approximately 57.6% and 63.1% of revenue, respectively, versus our original guidance of 58.5% to 60% for GAAP and 63% to 64% for non-GAAP gross margin. The delta to the midpoint of our guide was primarily driven by slightly unfavorable mix within our operator business as well as within infrastructure and other, and approximately 10 basis points attributable to distributor bad debt reserve. This compares to GAAP and non-GAAP gross margins of 61.9% and 63.8%, respectively, in the second quarter of 2016, and GAAP and non-GAAP gross margin of 53.6% and 56.7%, respectively, in the year-ago quarter. The delta between GAAP and non-GAAP gross margins in the third quarter was primarily related to the amortization of $5.2 million of acquisition-related purchased intangibles and inventory step-up.

Q3 GAAP operating expenses were approximately $44.8 million, $800,000 above guidance with the delta due primarily to the impairment of in-process research and development related to our wireless access business, which were largely offset by lower-than-forecast run rate operating expenses.

The acquisition-related in-process R&D impairment stemmed from the decision to terminate a wireless access development program. Rather than continue this project, we have chosen to redirect and combine our teams' efforts to longer lived and more technology differentiated 4.5 and 5G access transceiver developments.

GAAP operating expenses included $3.1 million for the amortization of purchased intangible assets, $600,000 in acquisition and integration related fees and expenses, and $300,000 of restricted merger proceeds and contingent consideration related to our Physpeed acquisition

Also included in GAAP operating expenses were accruals related to stock-based compensation and stock-based bonus and incentive plans were $6 million and $1.9 million, respectively. Consistent with 2015, payouts under our 2016 performance bonus plan are expected to be settled primarily in shares of MaxLinear stock, with second-half 2016 awards if any being issued in 2017. Net of these items, non-GAAP OpEx was $31.5 million, $1 million below our prior guidance of $32.5 million and $900,000 higher than Q2 of 2016 and up approximately $2.4 million from the year-ago quarter.

There were several drivers of lower than forecasted non-GAAP operating expenses including lower professional fees related to accounting and audit, lower prototyping activity, and more modest headcount additions relative to plan.

Third-quarter GAAP OpEx attributable to R&D was up approximately $1.9 million quarter on quarter and was up approximately $2.4 million year on year at $25.9 million, which included stock-based compensation of $4.2 million, $1 million of which related to second-half 2016 stock-based bonus plan accruals and $200,000 to Physpeed deferred merger proceeds and contingent consideration, reflective of the attainment of 100% of the Physpeed acquisition-related performance based milestones. With the last of these earnouts having been achieved, I want to acknowledge the praiseworthy contributions from our Physpeed team and our MaxLinear colleagues helping us realize both the strategic objectives as well as the meaningful financial contributions from our first acquisition two years ago.

Excluding these items, third-quarter non-GAAP R&D was up approximately $1.7 million quarter on quarter, and approximately $2.2 million year on year to $20.5 million. Within the sequential R&D increase, there was $1.5 million and $400,000 related to increased headcount and occupancy expenses, respectively, both related to our wireless backhaul acquisition. These sequential increases were partially offset by $500,000 in reductions in prototyping expenses and $100,000 in reductions in imbedded IP spending.

Third-quarter GAAP OpEx attributable to SG&A was up approximately $1.1 million quarter on quarter and down $7.9 million from the year-ago quarter to $17.6 million. GAAP SG&A expenses included $3.1 million for the amortization of acquired intangible assets, $1.9 million in stock-based compensation, and $900,000 in stock-based bonus plan accruals and incentive compensations, $600,000 in acquisition and integration costs, and $100,000 in contingent consideration related to the Physpeed acquisition.

Excluding these items, third-quarter non-GAAP SG&A was down $700,000 on a quarter-on-quarter basis and up $400,000 from the year-ago quarter to $11.1 million, with the sequential decrease driven primarily by lower payroll related items, commission expenses, and professional fees.

At the end of the third quarter of 2016, our headcount, which includes the impact of our wireless backhaul acquisition, was 571 as compared to 523 at the end of the second quarter of 2016 and 508 at the end of the third quarter of 2015. We continue to evaluate our staffing levels globally, particularly following our recent acquisition activity, to strike a balance between driving near-term bottom-line operating leverage and staffing key long-term growth initiatives. We continue to look to drive operating leverage by appropriately balancing hiring across our locations in the US, India, China, Taiwan, Israel, and Canada.

GAAP income from operations was $10.7 million in Q3 compared to income from operations of $22.4 million in the prior quarter and income from operations of $1.7 million in Q3 of last year.

GAAP earnings per share in the third quarter were $0.14 on fully diluted shares outstanding of 67.8 million. This compares to GAAP EPS of $0.33 per share in the prior quarter and GAAP EPS of $0.03 in Q3 of last year. Non-GAAP earnings per share in Q3 were $0.43 on fully diluted shares of 67.8 million compared to $0.50 in Q2 of 2016 and $0.40 per share in Q3 of last year.

Moving to the balance sheet and cash flow statement, our cash, cash equivalents, and investments balance decreased $66.2 million from the end of Q2 2016 to approximately $110.2 million, an increase of $5.4 million as compared to the $104.8 million in Q3 of last year. Our cash flow from operations in the third quarter of 2016 was approximately $18.4 million versus $32.3 million generated in the second quarter of 2016 and $22.1 million in the year-ago quarter. The sequential decline in cash flow from operations was influenced by a more linear shipping quarter versus a frontend loaded Q2 and its related impact on receivables. And more notably, timing related outflows related to our Broadcom wireless backhaul acquisition including but not limited to back payments to the Israel Tax Authorities, which are subject to full refund, and acquired inventory.

Consistent with earlier commentary regarding linearity in the quarter, our days sales outstanding for the third quarter was approximately 45 days, or 7 days more than the prior quarter and 5 days more than the year-ago quarter. As a reminder, we only recognize revenue on a sell-through basis, and as such, we're not subject to revenue fluctuations caused by changes in distributor inventory levels. Our inventory turns were 5.7 in the quarter compared to 5.6 in the second quarter and 4.7 turns in the year-ago quarter.

That leads me to our guidance. We expect revenue in the fourth quarter of 2016 to be in the range of $85 million to $89 million. Built into this range, we expect operator revenues to account for roughly 76% of overall revenue, infrastructure and other approximately 22%, and legacy video SoC approximately 2%. More specifically, within operator, we expect growth to be driven primarily by a resumption in growth in cable analog frontend shipments, which will be more than offset by lower satellite 4K gateway frontend shipments after an exceptionally strong Q3 and a larger than anticipated stepdown in analog channel stacking shipments as a primary operator customer for the solution is making a relatively hard cutover to digital channel stacking.

Within infrastructure and other, we expect strong growth from our highspeed interconnect products and expect mid-teens sequential growth from our combined wireless backhaul and access solutions.

Lastly, within our legacy video SoC markets, we expect a final large stepdown resulting from the end of life of a satellite IT client platform. Weathering the realities of decline of legacy revenues is never pleasant, even if consistent with forecasts and disclosures. However, we are pleased with the resilience of our core broadband operator franchise, in particular cable's forecasted return to growth in the current quarter and the growth contributions from our rapidly diversifying wired and wireless infrastructure initiatives which we believe are in the very early stages of their growth.

We expect GAAP gross profit margin to be between 57% and 58% of revenue, with the sequential decline driven by the purchase price accounting impact of the Broadcom wireless backhaul acquisition, and non-GAAP gross profit margin to be between 63% and 64% of revenue in the fourth quarter. Our gross profit margin percentage forecast could vary plus or minus 2%, depending on product mix and other factors.

We continue to fund strategic development programs targeted at delivering attractive top-line growth as we look forward into 2017 and beyond, with a particular focus on infrastructure initiatives and our goals of increasing the operating leverage in the business.

We expect Q4 2016 GAAP operating expenses to decrease approximately $2.3 million quarter on quarter to approximately $42.5 million, with the largest decreases coming from the nonrecurring nature of the wireless access in-process R&D impairment loss, a seasonal decline in stock-based compensation and payroll taxes, as well as lower occupancy expenses and consulting fees partially offset by an increase in tape out expenses, accounting fees, and approximately $2 million in restructuring charges as we continue to rightsized our operations following our recent acquisitions.

We expect that Q4 2016 non-GAAP operating expenses will decrease approximately $1 million sequentially to $30.5 million driven largely by the earlier referenced seasonal stepdown in payroll taxes and reductions in occupancy and consulting fees offset by higher tape out expenses.

In closing, we are pleased to report the successful close of a very eventful third quarter 2016. Our progress in integrating newly acquired growth vehicles while diversifying our product portfolio has helped us to realize revenue increases year over year. We generated strong cash flow from operations of approximately $18.4 million despite navigating through seasonality in our core broadband business and revenue headwinds from declining legacy Entropic products.

We are excited about the progress we are making in expanding our served addressable markets while demonstrating tight operating expense management. We believe the increased diversification of our business through strategic acquisitions and organic development initiatives position us to benefit strongly from the growing demand for broadband, bandwidth, across consumer, operator and wired and wireless infrastructure platforms.

And with that, I would like to open the call to questions. Operator?

(Operator Instructions). Tore Svanberg, Stifel Nicolaus & Co.

So you gave us some good visibility on the legacy video SoC business and how that's expected to decline in Q4. How about the analog channel stack switch? Could you talk a little bit about how much that contributed this quarter and how you're expecting that you decline for the next couple of quarters?

Hey, Tore, this is Adam. Yeah, the analog stacking business delivered pretty much as we thought it would in our previous guidance for the current quarter. But Q4 is stepping down quite a bit which is, again, built into the range we provided, stepping down to about call it around $7 million in the quarter, in Q4. That's the approximate range.

Very good. And you talked about the cable business coming back. Could you elaborate a little bit on that, especially in reference to the beginning ramp of DOCSIS 3.1?

Hi, Tore, this is Kishore. Yes, we shipped, we shipped we said 100,000 units of DOCSIS 3.1 devices and they are still in the beginning throes of ramp on DOCSIS 3.1. And we have not -- we are still waiting. We really think that the bigger part of the ramp happens in the second half of 2017 and currently the increase in revenues we are projecting are primarily associated with the resumption in cable demand for DOCSIS 3.0, 24-channel devices. So we have not yet seen what I'd call the stronger part of the ramp for DOCSIS 3.1 yet and the current expectation is still it's going to be a second half phenomenon.

Very good. And in the past you've given us milestones on new businesses like you did with optical. Would you care to do the same on wireless infrastructure? What's your target at this point for 2017?

Yeah, Tore, I guess we can take a stab at that. It's always difficult when you're looking that far out, but I think having closed now, getting both the backhaul and the access business under the umbrella for full quarters in Q3 and looking forward, for the second half of 2016, let's call that roughly a $14 million-ish contributor for the second half of 2016. Certainly we're expecting run rate increases from that. So I think next year, if folks are thinking in the $30 million to $40 million range, I think that's kind of a very reasonable, conservative place to put the goalpost. I think if you look back at how we set the goalpost on our highspeed optical interconnect, we said that going into 2016 -- and that business was very nascent as well, we only did about $3 million in 2015 revenue for highspeed interconnect. And we said that 2016 would be in the range of $10 million to $20 million. And as Kishore said in his prepared commentary, that we'll be at or above the high end of that range of $10 million to $20 million on that highspeed interconnect product line. So I think hopefully we've generated a track record of being conservative on where we set people's expectations for these new businesses and hopefully exceed those. But I think that's probably a decent, conservative place to kind of think about the range. And again, knowing where we are in the second half of 2016 should also give you a little bit of help in calibrating.

I would just like to offer additional color. Our backhaul outdoor unit RF mixed signal chip is now sampling to customers quite rapidly and we are really benefiting from the platform synergies of having the backend modem. So -- and there's a big variance or a range between what the RF piece will do from the load with hindsight. So I think there's some good upside opportunities with the combination of our RF and the modem solutions we have acquired by virtue of owning the platform bundle if you will. So we -- and the chip is doing very, very well, so we are quite excited about it and we hope to send it to production in the middle of next year so that we are ready to accept customers' demand for the product.

Good. Just one last question. You talked about MoCA potentially being the backbone, broadband backbone in the home. You talked about sampling the 2.5 chip here not too long ago. When can we start to see the realities of that concept or is there certain design wins or certain events that we need to follow in order for that to be a reality? Thanks.

So the RF designs, there have been ongoing designs with, as you know, we have sampled two generations of product, of MoCA, since the Entropic acquisition and one was the MoCA 2.1 chip which supports about 1.3 gigabit per second solution. And that actually is being designed, has already been designed into a MoCA wi-fi adapter in deployments that will happen in the North American cable operators. Now I can't tell you exactly who it is, but we expect those revenues to start in the middle of 2017. And with regards to the 2.5 gigabit per second, that chip is just sampling now. So therefore, there's a number of keys as to when that gets deployed as a successor generation to our MoCA 2.1 wi-fi adapter bridge configuration. So I think you will see design win momentum developing through the rest of the next year and it will really enter mass production I would say at the end of 2017.

Quinn Bolton, Needham & Co.

Hi, guys, nice job on the tight control of OpEx. I just wanted to ask on the satellite gateway, it sounds like you guys saw a nice uptick in revenue in the third quarter. You mentioned some new customer ramps in Europe. Wondering if it's the same customers but just different sort of countries within Europe or are you expanding your customer base to either new service providers or new ODM partners?

You know, I do not have a good recollection of what we told you before. Obviously we have said that a number of Tier 1 operators across Europe, so that's a pretty consolidated landscape. All the properties are tight properties now. So you are right that if you call in the same family, yes, this ramp is going on with various properties that actually selected designs independently before they consolidated. And now in the respective countries we are starting to see ramps happen.

Having said that, the design, the chips are similar flavors or a little bit less or more capabilities. And even though they are in the same (inaudible), the designs are very different. So yes, they are ramping in different countries in Europe. And then at the same time you are also seeing strong uptick of our product within the US and North American operator. And then there are some of the design activities that are at the beginning of smaller shipments outside of those territories. So that's where we are in the ramp and it's going quite well. So if you just looked to Adam's guidance, Adam actually gave a little bit of a step back in Q4 on satellite gateways because we believe that with the initial ramp and there's some level of inventory buildup at the newer operators and we hope that that will clear up and off the initial ramp onwards, we are going to see nice growth in revenues.

And a sort of follow-up on the digital channel stackers, it sounds like you've seen your lead customer on the analog channel stacker side start a hard cutover to digital channel stackers. Have you seen that customer place orders or do you have orders in backlog from that customer now on the digital channel stacker side?

So let me give a little bit of characterization of how operators order products, okay? Sometimes we really struggle to rationalize the order patterns. Having said that, the analog channel stacking, as based on the backlog that we have in place, it appears to be a hard cutover, steeper than what we told you earlier. However, the company's overall revenues have proved very resilient because of strong organic growth drivers and new product categories are doing very well. So getting back to your question on this North American operator and are they ordering more digital channel stacking, the answer is, it doesn't appear so. But we are already shipping, we have been shipping to them. And so I really think that there is some level of uncertainty to their action plans and therefore the backlog is not coming through and obviously we're spending a lot of time talking to them. It's a very, very large organization and we don't have much clarity, but at this point our assumption is that it will be a steeper cutoff, but I could be completely wrong. But I want to withhold that statement until I know for sure that I am wrong.

And Kishore, maybe just following up, and understanding you don't have perfect visibility yet, but do you think it's a function of they're cutting down at the analog channel stackers and then trying to bleed off any existing inventory before ramping up the new digital channel stacker orders and so it may just be a timing thing? Or do you think there's some risk that maybe they have started digital channel stacker purchases with your competitor sort of leading the way here first?

No, not at all. It is the former of what you have said. Basically I think it's just the timing uncertainties. And believe it or not, they gave us a forecasted volume that they think there is a future demand of certain quantity of units, but they are unable to tell us when they will place the orders. So I really think it's a case of them making their plans for next year more appropriate and therefore we do not have the backlog to reflect what their true demand could be with respect to their plan for transition to digital channel stacking. So I wish I could tell you more without saying that we know the demand better than they do, but I will not say that.

Well, Quinn, also, really quickly, too, I mean yes, the analog channel stacking is declining pretty quickly. But at the same time, we do see sequential growth in our digital channel stacking as well. It's up over 20% sequentially Q3 to Q4 in our current forecast. So I think we are seeing growth on the digital side, it's just it looks like timing is exacerbating kind of the net effect between those two categories of channel stackers.

Brian Alger, Roth Capital Partners.

Hi, Guys. Just a quick follow-up with Quinn's questions. Is there a reason that we're seeing better strength internationally with the digital stacking right now or is it just the decision process with the domestic customer?

I think -- okay, let me catchup with the question with respect to we do not, we are not seeing any competitive changes (inaudible) the channel that's reflected in any undue loss of share or us not getting our fair share of the victories in digital channel stacking within this big North American operator. It is just that we don't have certainty about their volume or placing timing issues. So having answered that, getting to Brian's question here, there is no such thing. We have been doing very well across the categories. Obviously given from the high that we had in analog outdoor unit that is North American operator. Clearly any share loss, any share under a supplier means we lose revenue and that's what we are observing. However, our channel stacking design wins and volumes at be it dish or some of the skype properties are going very well. And we are winning most of the sockets. So I think -- and we are not yet seeing the international outdoor digital cable stacking outdoor unit shipments really fully deploy across all our design wins. So there's more growth to come, as Adam mentioned. If you fast forward to two years out, if you combine our satellite deeply frontend digital stacking business, we do not see why the revenue will not be in the $100 million range as a pure category.

One thing, Brian too, I think that some of the commentary may have been confused a little bit. Where the international focus in satellite that we were talking out earlier on the call was really the new customers ramping, that was on satellite frontend gateway side. So there's a -- if you think about our satellite businesses as having to angles to it, you've got the digital outdoor and analog outdoor units and you have the 4K gateway frontends. The growth, the strong growth that we saw from Q2 to Q3 was really coming from international 4K gateways ramping versus any dynamic on the digital channel stacking side.

Right, I think I get it. It just seems more like a timing issue in terms of the digital stacking being adopted broadly internationally. And currently we're just not really sure what the domestic guy is doing. Moving on that side of it, can we talk a little bit about the infrastructure side with the Broadcom technology and integrating that with what you guys have had in-house? I know there's been some discussion with regards to the quality of the RF matching up with your digital aspects. Where are we in the integration and where are we in terms of customer adoption?

Okay, like I mentioned earlier, the -- MaxLinear's fully integrated CMOS RF outdoor unit which covers 5 gigahertz to 45 gigahertz, all the microwaves spectrum, is really doing very, very well. We are in the process of pairing our RF to work with the acquired modem and providing a fully contained solution. And we are happy through the process and we are already sampling to some customers and some customers are designing in the combination. So that's going very well and that's where the initial revenues of our RF will come.

Our RF design wins at the bigger Tier 1 players will take a little bit longer time. Even though we are working with them, they generally have a longer cycle to revenue, and that will show up much more toward the end of next year. But throughout the whole period, you will see increases in revenue as the combination picks up steam and the category as a whole is going to be a very, very nice revenue growth generator for us for the years to come.

Great. Thanks for the clarification.

Ross Seymore, Deutsche Bank.

Thanks for letting me ask a question. I just had some clarification on the 76% of revenues going to the operator segment. Can you run through the puts and takes on that? Obviously I know that you're going to lose the better part of say $4 million or so sequentially on the analog channel stacking side. The other subcomponents in operator, can you refresh me on how that behaves or those behave sequentially?

Yeah, Ross, let me give you kind of the high level puts and takes. If you think about, again, you mentioned that analog channel stacking is the biggest headwind kind of as a percent -- well as a percent, that's kind of the one that stands out the most. But so what you have in the puts and takes, you're having higher percentage of the revenue within that 76% coming from cable. Because cable is resuming its growth, as Kishore mentioned, as DOCSIS 3.0 shipments on the 24-channel side resume their growth pattern. And then what you're seeing is that is kind of largely an offset to what's happening on the satellite side, both on the analog channel stacking and on the 4K gateway. So if you want to think about the rough mix, it was getting close to 50/50 within operator between satellite and cable and now it's skewing more back towards maybe 60/40 in favor of cable over satellite. So a bit of rebalancing happening in the fourth quarter from what we saw in Q3.

Then I guess if we switch over to the expense side of the equation, you've done a good job managing the OpEx side of the equation in this last quarter and in your guide. Conceptually, how should we think of that from an absolute dollar figure as we move through 2017?

Yeah, so we've got -- we believe we've staffed up the organization to the point where we can fully fund these strategic development initiatives that we've been articulating to yourselves. And we believe right now that we've got a very good chance of being able to hold our operating expenses flattish to our Q4 numbers that we just provided. So we're feeling optimistic that we're going to be able to retain a very tight control over OpEx growth as we move into 2017 and throughout 2017.

I guess my last question, just going over onto the balance sheet, I know you had the inventory pop up because of the inclusion of the [Provegen] asset, but generally speaking, is there anything else that's going in there on the inventory side of things? And conceptually, how should we think of that going forward whether it be a dollar change into the fourth quarter or an overall days or turns target that you have longer term?

You know, ultimately we'd like to be in 6 turns or greater. It's been a while since we've been here because there's been a lot of different moving pieces and we've had different things that we've been kind of growing inventory in advance of ramps so we don't leave any revenue on the table when demand kind of presents itself. So I would say, Ross, if you're kind of modeling at 6 turns, I think that's about right.

(Operator Instructions). Anil Doradla, William Blair & Co.

Just a couple of clarifications. So Adam and Kishore, what is the digital stacking revenue today? And the reason I ask is how do we put it in perspective given that you talked about getting to $100 million in revenue?

Well, Anil, let me clarify that just to make sure you heard that correctly. The satellite gateway frontend plus the channel stacking business will reach $100 million revenue the next two to three years is what I mentioned. So you have to look at it from that perspective, the combined product categories that are the future platforms. So the analog channel stacking, Adam gave the number for next quarter being approximately $7 million. Adam, could you help with the digital channel stacking?

The digital channel stacking is running north of $5 million in the fourth quarter. So if you want to think about between $5 million and $6 million in Q4 contribution for digital channel stacking. And then of course you've got your satellite frontend. So if you think about kind of in the Q3 period, if you exclude MoCA that are on the satellite platforms, just purely look at channel stacking plus gateway, you're looking at about call it close to kind of a call it $25 million-ish run rate right now. So Kishore mentioned, it's really kind of not far off of that today, but what you've got is you've got kind of a mix change that's happening right now, right? So you're on kind of a $25 million per quarter run rate in the third quarter, but you've got one large category where we were kind of the only provider in analog channel stacking going to a kind of shared market for digital channel stacking. So again, it doesn't require any kind of a huge leap of faith to come back into $100 million quarter, because that's kind of the run rate we're on today. There's just some volatility within that mix that we see in the next several quarters as we transition from that dominant position in analog to more of a shared position on the digital side.

So when you talk about the next quarters' guidance, I think you talked about digital stacking around 20%, 25% of the breakdown. Do you assume a comeback or a pickup at this large customer from the digital stacking point of view? You guys talked about lack of visibility there. Are you assuming you'll get some revenues from there or you're just not accounting for them right now?

We're not just accounting for any revenue increase on the digital channel stacking from this particular North American operator. Just to give you clarity, we're already shipping digital channel stacking for this North American operator and we have been shipping and we were the first ones shipping there. It's just that there are two or three product categories of digital channel stacking and that's where we expect to lose share of revenues. And that clarity is yet not there in terms of the timing of it.

Great. And when I go from analog to digital, can you talk about absolute dollar ASPs? Are we talking about $5 product in the analog world going to another $5 product in digital? Or are you seeing a stepdown in the pricing or step-up?

Okay, so let me walk you through this. There is only one operator where all this consternation comes from. It's in North America. It's a large operator. We have 100% of the sockets and now -- we had as Entropic 100% of the sockets there. So the analog -- there are three chips that go into each satellite outdoor unit on the analog channel stacking side for gaining the channel stacking function. Together the three chips sell for somewhere between $8 to $10, let's call it $10. And the digital channel stacking for equal or greater functionality sells somewhere between $5 to $7. The reason I give you the range is because it's our chip versus our competitor's chip and we do not know what the expect prices of each of our products are. So you can see that the price gets slashed anywhere about 40% or so definitely when you move analog channel stack into digital channel stack for each satellite outdoor unit. And then on top of that, you apply a share loss for us from 100% to let's say 50/50 or 40/60 or 60/40, which we do not know at this stage. So you add to that, you add the extra layer of the share loss to it, then you are seeing all the revenue losses that we are talking about in analog channel stacking, analog channel, sorry. That math you can work through now.

(Operator Instructions). Gary Mobley, Benchmark Capital.

Hi, guys. I had a follow-up question to Ross's question about OpEx. In the past, Adam, I think you've had a step up in OpEx because of payroll tax adjustments and maybe some annual merit increases. Are you saying you don't expect that typical step up in Q1?

You'll see the seasonal step up in payroll, but there are other offsets. And I mentioned for the year I think that, again, for the year if you take our Q4 run rate that we just provided in our guidance, and you take that Q4 times four, that's pretty much where we think we have a chance of holding 2017 overall OpEx to. There will be some quarter to quarter variability driven by seasonal items such as the payroll that you referenced, but I wouldn't call them particularly significant.

Okay, thanks for that clarification. I guess since early August, you guys have done a good job at articulating the challenges presented by a couple different Entropic product groups as it relates to growth headwinds. I know there's been a lot of focus on the analog [SWN] stuff. But all things considered, the cable data seasonality, the puts and takes in the infrastructure business and whatnot, would you go as far as to say Q4 might be the revenue trough as we wind down some analog SWN business in the Entropic set top box business?

I think it's a little hard to say right now, Gary. I think that one good thing that you can look to in our guidance that we just provided is the fact that if you use the analogy of a band aid getting ripped off, it is getting ripped off even faster than we thought it would be a quarter abo. And I think what you're seeing is strength from our core franchises coming through. So normally you'd think -- we weren't expecting the big drop-off from Q3 to Q4 in the analog channel stacking segment that we're seeing. I mentioned it was going to be about $7 million from the prior quarter and it's running about $12 million. So we shaved about $5 million sequentially off the analog channel stacking. And then if you look at what's being shaved off of video SoC that we breakout, we're also shaving about call it $5 million off that as well. So you've got $10 million sequentially coming out of these two kind of end of life platforms from Entropic. And yet the guidance that we provided is very consistent with what people were expecting before these larger than expected declines. So that basically just tells you that the strength from the infrastructure side and strength from our core operator franchise is really kind of carrying the day. So I would say that we incrementally feel better about where we are because of those strengths in our core and emerging businesses despite having even faster headwinds present themselves on these legacy pieces. But it really is too early to tell whether or not Q4 is the trough or not. I think certainly we need a little bit more time under our belt as we progress through the quarter to say whether that's going to be the case.

But I think what we can say is that we believe in 2017 there will be an inflection point where we can feel much, much better about kind of where all the growth is coming from. Because if you look at the amount of headwind that's really left from those two legacy businesses of analog, analog channel stacking and legacy video SoC, it's not that much. You're talking about a total of $9 million of revenue contribution in the fourth quarter. So we've really kind of passed through most of that. There will be revenue contributions still in 2017 from those two legacy businesses. We'd been thinking that the contribution in 2017 was going to be $10 million to $20 million from those residual businesses. I think now, based on the fact that they're falling off faster than they were before, you can probably assume more at the lower end of the range than the higher end of that range. But I think we're also, again, seeing again some stronger than expected contributions from not only our newly acquired businesses but also from our core cable and satellite franchises as well.

Okay, last question for me. I know in the past you've talked about a non-GAAP gross margin target of 62%. You obviously exceeded that by 100 plus basis points in Q3 even with an unfavorable mix. So should we throw out that old 62% gross margin target and assume a non-GAAP gross margin in 2017 closer to 64%?

Gary, that's -- we are cautiously optimistic. Whether you throw out the old number, that's up to you. But I would say that we are, we feel with the adverse gross margin impacting stuff out of the mix, in time we will be at that point revising our gross margin targets upwards. We already indicated the last call that definitely 62% to 65% would be the range we would be in and hopefully as infrastructure revenues keep growing, the video SoC is out of the mix, the margin has an upward trajectory. Maybe one day we are better than that, and why not? But at this stage I would not advise you to go in any direction that would sound optimistic today.

Tore Svanberg.

Just a few follow-ups. First of all, Kishore, could you talk a little bit more about what you've heard from your customers in the wireless area? You talked about maybe some increased outsourcing. Obviously you don't have any orders right now, but I'm just trying to understand how this opportunity is going to develop meaning from outsourcing to more merchant supply from the likes of MaxLinear?

You're talking specifically for microwave backhaul, is that correct?

Correct, yes.

Yes. So historically a lot of these big OEMs have been using internal silicon and now there have been public announcements how they're going to source more merchant silicon. And if you really look at the backhaul landscape, we are the only company that provides merchant silicon that really meets the customers' needs, not just this year but all the way -- modem technology that goes from all the way to multi gigabit data rate. And we also have (inaudible) modem to 10 gigabits per second rates as well. So we are really offering a full menu of modem capability that meets not only the present needs, but future needs.

So at this stage, half the Tier 1 players are still using internal silicon primarily because it's cheaper for them to use that today. But as the use our RF solution and they want to migrate to new carrier aggregation to have really, really broad data bands with microwave backhaul links, they'll have no choice but to use our RF solutions. And at the same time, competitive pressures from those customers who are using our modem will force them to migrate to our modems as well. So we really feel that momentum is palpable. We are seeing a few of those guys already doing it. There are one or two guys left and I think that it's a matter of time before they use our modems because right now they are testing our RF solution. So whether or not they are using the modem, I feel absolutely gung-ho that they are going to convert to our modems because they're already using our RF solutions. And the reverse is also true. I think the reverse is almost a given. Because they are using our modem, they cannot use all the capabilities of modem (inaudible) RF piece of solution that we have today. So I really think this is going to be a wonderful outcome for us. And how I see the timeline play out, the RF could start ramping in the second half of next year and then the modem will really be at a nice clip because a lot of platforms that are transitioning from internal silicon to our silicon at customers we already have design wins, and that really picks up a few years' space through end of 2017, 2018. And in 2019, 2020 is when we are on a path to get to $100 million (inaudible) range as a combined solution.

Sounds good. And just one last one for Adam. And Adam, I don't mean to give you a headache here, but the FASB accounting change for revenue recognition is going to take effect Q1 of 2018. Just wondering how you guys are planning for that.

It's definitely on our roadmap. As I mentioned earlier in our prepared remarks, we recognize revenue on a sell-through basis, not sell-in, and of course that's going to have to be viewed from the opposite direction in 2018. Our old -- if you look at the legacy, I don't want to use that term, if you want to look at historically, MaxLinear in its earlier days had a lot of revenue that went through [DISB] and that's become lesser and lesser over the years. It's making a little bit of a resurgence through DISB now because we're using some distributors for some of these infrastructure products and of course those are growing as I mentioned. So it's definitely something on our roadmap, but we've kind of taken a high level look at this at this point. I don't anticipate that it's going to really change things very dramatically at all. I think it's going to be pretty much for the most part a nonevent for us when this happens.

Okay, so you're basically going to be like all the other companies, you'll restate historical maybe a few years and then when it's all said and done, we'll probably see changes in a couple of cents here and there difference?

Again, I don't -- we've always been very, very conservative on our revenue recognition and that's why we believe it's always been more conservative to recognize revenue on a sell-through versus sell-in. So in a lot of ways we're going from being, showing actuals to now trying to make estimates for revenue through that channel. So personally to me it feels like the industry is going a bit backwards with adopting this, but of course it's not our, we don't have a choice in that, it's been adopted. I really don't think when everything is shaken out, for us specifically, I don't think you're going to notice much at all. I think it's going to be in the noise.

Another thing I want to add is that even when we build material, we really take a transparent view of our distributors' stock and we really plan our product build, finished goods planning, we do it based on -rough demand. So really the distributor is very transparent. So we do not see -- we will not see much impact even on a sell-in basis, so it should be pretty transparent. And if any, of all the companies in the universe you are looking at, we are the most non-catalog-ish direct sales company. So we don?t like what they are doing, but because it's nonconservative. But we should be just fine the way things are.

Fair enough. Sounds good. Thank you, guys.

Quinn Bolton.

Quick follow-up on tax rate. I think last quarter you sort of encouraged us to think about tax rate increasing from a 10% rate to a 20% rate through 2017. Is that still the right way to be thinking about taxes or do you have a better outlook now that we're closer to 2017?

No, I think that's still the right way to look at it, Quinn. We've still got -- we've got a fairly intensive kind of tax assessment going on internally as to kind of our forward-looking roadmap given our NOLs and so forth. But I do believe that 20% is the right rate to be using right now for 2017.

And we have no more questions at this time.

Well thank you, Operator. As a reminder, we will be participating in the Stifel Nicolaus conference on November 10th in Chicago and we hope to see many of you there. With that being said, we want to thank you all for joining us today and we look forward to reporting on our progress to you in the next quarter.