MaxLinear, Inc. (MXL) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Jumen, and I'll 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, forecast and expectations with respect to fourth quarter 2016 revenue and revenue contribution from key product markets. Gross profit percentage and operating expenses on a GAAP and non-GAAP basis; the potential impacts 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 the statements in our business generally include substantial competition in particular from increasingly large phase 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 to future acquisitions may not grow 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 in our business generally, we encourage investors to review the sections caption Risk Factors in our previously filed quarterly report 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 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 is not our intend 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 comparison of operating results and most 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 tiny 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 about the progress we have made in 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 note solutions for next-generation cable networks. The fundamental underpinning of our infrastructure market initiatives and their operative broadband access in connectivity markets is either 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 essence 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 were offset by seasonal weakness in our cable data CPE platform. In the third quarter we also experienced the expected step back in high-speed fiber-optic interconnect shipments due to seasonality and supply normalization following an unnaturally strong second quarter resulting from the catch-up shipments to customers suffering from supply shortages in the preceding quarters. Despite the advanced impact of the continuing Entropic legacy video SoC business wind-down and the expected feasible cable data business weakness, we were able to maintain relatively flat revenue topline. Our topline revenue resilience highlights the increasing success of our long-term strategy of diversifying our revenue streams. It was the large and growing broadband access wireless and wireline communications infrastructure markets. Our GAAP and non-GAAP gross margins were 57.6% and 63.1% respectively as we experience mix-shifts between our operator and 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 for the third quarter 2016, operator revenues declined 6% sequentially and accounted for 76% of total revenue in the quarter. Within the operator base revenue mix, we experienced strong demand for 4K resolution satellite gateway RF front-end shipments offset primarily by seasonal declines in cable data and video front-end 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 transition. 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 standards. Consistent with the prior expectations, we shipped in excess of 100,000 units of total DOCSIS 3.1 analog front-end SoCs and programmable gain amplifier chipsets. 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 front-end and companion PGAs 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 deployment 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 its base simply a BVR conduit to a critical high bandwidth wired backbone connectivity solution that enables robust delivery of broadband data and video throughout the connected homes. This MoCA backbone not only allows operators to provide uncompromised gateway to clients wired connectivity but also enhances subscribers Wi-Fi home coverage through the deployment of MoCA to Wi-Fi adapters. At the Cable Labs Summer Conference and IBC summer demonstrations of our latest Multi-Gigabit MoCA 2.5 solutions within the industry's first 2.5 gigabit 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 setback in high-speed interconnect shipments, this setback was due to seasonality and a reduction in shipments from what was an exceptionally strong second quarter, when we fulfill demand from prior quarter's supply constraints. However our current backlog suggest strong growth in Q4 and sets us in a path to exceed the high end of the $10 million to $20 million revenue range we forecasted in 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 product, the MxL2025 100-gig per second quad-laser driver for the Metro markets. We also sample MxL9101 our first quad-TIA solution addressing the ramping 100-gigabit four by 25 gigabits per second NRZ mark inside the datacenter interconnect market. Customer feedback has been extremely positive for both of these products and our design engagements are broadening well beyond our two lead Chinese telecom high-speed fiber interconnect, diver customers. Before the end of the year, we hope to have multiple TIA products and three different laser drives generating revenues in support of 100-gigabit and beyond database deployments across datacenter, metro and long-haul markets. Moving on to wireless infrastructure, the backlog 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 right sized 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’re excited with the progress being made in establishing a path accelerating scale and leverage across the wireless infrastructure platform. We believe that these recent acquisitions that already yielding the customer channel and technology platform leverage that envisioned from the very outset. Lastly legacy video SoC revenues derived from the Entropic acquisition. We have $7 million in the quarter, declining to 7% of total revenue versus 8% in the prior quarter. As expected, the weakness owed to declines in cable, HD-DTA deployments, which was slightly offset by last time buys from IT clients of devices into the satellite market. We continue to forecast relatively steep decline of legacy Entropic SoC revenues as the market transitions to ultra HD 4K resolution devices and the legacy SO platform to 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 of 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 CPE and infrastructure platform. Additionally, a reason wireless infrastructure acquisitions in combination with the 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 of the 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, 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 of 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 for 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 to continue this project we’ve chosen to redirect to bind our team’s 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 be settled primarily in shares of MaxLinear stock with second half of 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, $900,000 higher than Q2 of 2016 and up approximately $2.4 million from the year-ago quarter. There were several drivers lower than forecasted non-GAAP operating expenses including low 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 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 the second half 2016 stock-based bonus plan accruals and $200,000 of Physpeed deferred merger proceeds and contingent consideration reflective of the attainment of 100% of Physpeed acquisition related performance based milestones. With last of these earn-outs having been achieved and acknowledge the price worthy contributions from our Physpeed team and MaxLinear colleagues helping us realize both the strategic objectives as well as a 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 embedded IP spending. Third quarter GAAP OpEx attributable to SG&A was 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 compensation, $600,000 in acquisition and integration costs, acquisition and [indiscernible] 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 sequential decrease driven primarily by lower payroll related items, commission expenses and professional fees. At the end of the third quarter 2016, our headcount which includes the impact of our backhaul, 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 the 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 U.S., 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 and increased $5.4 million as compared to $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. This sequential decline in cash flow from operations was influenced by more linear shipping quarter versus front end loaded Q2 and its impact on receivables and more notably, timing related outflows related to our Broadcom wireless backhaul acquisition including but not limited to VAT payments to the Israel tax authorities which are subject to 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 seven days more than in the prior quarter and five 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 front-end shipments, which will be more than offset by lower satellite 4K Gateway front-end shipments after an exceptionally strong Q3, and a larger than anticipate step down in analog channel stacking shipments as the primary operator customers for the solution is making a relatively hard cut over to digital channel stacking. Within infrastructure and other, we expect strong growth from our high-speed 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 the final large step down resulting from the end-of-life of a satellite IP client platform. Weathering the realities of the decline of legacy revenues is never pleasant, even if consistent with forecasting 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 price 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 topline 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 non-recurring 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 right size 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 step down in payroll taxes and reductions in occupancy and consulting fees offset by higher tape out expenses. In closing, we’re 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’re 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’d like to open the call to questions. Operator?

[Operator Instructions] And we do have a number of questions. The first question comes from the line of Tore Svanberg.

Can you give us some good visibility on the legacy video SoC businesses and how that’s expected to decline in Q4? How about the analog channel-stack switch, can you talk a little bit about how much that contributed this quarter and how you're expecting that to decline for the next couple of quarters?

Hi, Tore. This is Adam. The analog channel 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 build into the range we provided stepping down to about I’d call 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 the DOCSIS 3.1?

Hi, Tore. This is Kishore. Yes, we shipped we said 100,000 units of DOCSIS 3.1 devices and this is still in the beginning flows 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're protecting are primarily associated with the resumption in cable demand for DOCSIS 3.1, 24 channel devices. So, we have not yet seen what I call a 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 some 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 '17?

Hi, Tore. I guess you know we could take a stab at that, it’s always difficult when you are looking that far out. But I think having closed down 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 at roughly 14ish million dollar contributor for the second half of 2016. Certainly we’re expecting run rate increases for 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 goalposts. I think if you look back at how we set the goalposts on our high-speed optical interconnect, we said that going into 2016 that we were – and that business is very nascent as well that we only did about $3 million in 2015 revenue for high-speed interconnect. And we said that 2016 would be in a 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 the high-speed interconnect product line. So I think hopefully we've generated a track record of being conservative on where we set people's expectation for these new businesses and hopefully exceed those. I think that's probably a decent conservative place to 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'd just like to offer additional color. Our backhaul outdoor unit RF mixed signal chip is now sampling to customers quite rapidly. And we're really benefiting from the platform synergies of having the backend modem. So you – and there is a big variance or a range between what the RF piece will do from the low to the high side. So I think there is some good upside opportunities with the combination of our RF and the modem solutions we've acquired by virtue of owning the platform bundle if you will. And the chip is doing very, very well, so we're quite excited about it. And we hope to send it to production in the middle of next year, so that we're ready to accept customers' demand for the product.

Okay. 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 store? Is there certain design wins or certain events that you know we need to follow in order for that to be a reality? Thanks.

So there are designs, there have been ongoing designs with – we now already have sample two generations of product of MoCA since the Entropic acquisition, one was the MoCA 2.1 chip which supports about 1.3 gigabits per second solution and that actually is being designed, it’s already been designed into a MoCA Wi-Fi adaptor in certain deployments that will happen in the North American cable operators. No, I cannot tell you exactly who it is but we expect those revenues to start in the middle of 2017 and with regard to the 2.5 gigabit per second, the chip is just sampling now. So therefore there is a number of keys as to when that gets deployed as a successor generation to our MoCA 2.1 WiFi 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.

Sounds good. Thank you.

Your next question comes from the line of Quinn Bolton.

Nice job on the tight results of OpEx. I just wanted to ask on the satellite gateways, it sounded like you guys saw 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 you expending your customer base to either new service providers or new OEM partners?

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 Sky properties now, so you are right that if you call them the same panel yes there is ramps going on with various properties that actually selected design independently before they consolidated and now in their respective countries, we are starting to see ramps happening. Having said that, the design, the chips are similar flavors or little bit less or more capabilities and even though they are in same Sky umbrella, the designs are very different. So yes they are ramping in different countries in Europe. And at the same time, we're also seeing strong uptick of our product within the U.S. and North American operator and then there are some of the design activities that are at the beginning of small shipments outside of those territories. So that's the way we are in the ramp and it's going quite well, so we just looked at Adam's guidance, Adam actually gave little bit of satellite base because we believe that is initial ramp and there is some level of inventory build up at the newer operators and we hope that will clear up and off the initial purchases and then Q1 onwards, we got steady nice growth in revenues.

And sort of follow-up on that on the digital channel stackers, it sounded like you've seen your lead customer on the analog channel stacker side star up cut over 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?

Okay. So let me look - let me give a little bit of characterization on how operators order products, okay sometimes we really struggle to rationalize their order patterns. Having said that, the analog channel stacking as based on the backlog that we have in place appears to be hard cut over cheaper than what we told earlier. However the company's overall revenue is very resilient because the strong organic growth drivers and new product categories are doing very well, so getting back to your question on this North American operator there are already more digital channel stacking, the answer is these doesn’t appear so but we are already shipping what 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 are spending a lot of time talking to them, it's a very, large, large organization and we don’t have much clarity but at this point our assumption is that it will be steeper cut off but I could be completely wrong. So but I want to be told that statement until I know for sure that I'm wrong.

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

No not at all, it's just the former what you've said basically I think this is just the timing uncertainties and believe it or not it give us a forecasted volume that they think there is a future demand of certain quantity of units. But then they’re unable to tell us when they will place the orders, right. 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 the 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 would not say that.

Well, Quinn, also really quickly two, I mean, yes the analog channel stacking is declining pretty quickly, but at the same time we do see sequential growth on our digital channel sacking as well, it’s up over 20% sequentially Q3, Q4 in our current forecast. So I think we’re 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.

Got it. Thank you.

Your next question comes from the line of Brian Alger.

Hi guys, just a quick follow-up with Quinn’s questions. Is there are 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 catch up with that question with respect to. We do not – we are not seeing any competitive changes fully verify to the channel that reflect any undue loss of share or as 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, order placing, timing issues. So having answered that getting to Brian’s question here, there is no such thing. I think we’re doing very well across the categories. Obviously given from the high that we had in analog outdoor unit at this North American operator clearly any share loss, any share in another supplier means we lose revenue and that’s what we’re observing. However, our channel stacking design wins and volume that be a dish or some the Sky properties are going very well and we are winning most of the socket. So I think – and we have not yet see the international outdoor, digital channel stacking outdoor unit shipment, really fully deploy across all our design wins. So there’s more growth to come as Adam mentioned. And if you fast forward to two years out, if you combine our satellite DPA front end digital channel stacking business, we do not see why the revenue will not be in the $100 million range as a pure category.

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

All right, I think I get it. It 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 segment 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 RF matching up with your digital aspects, where are we in the integration and where we’re in terms of customer adoption?

Okay. Like I mentioned earlier, the MaxLinear is fully integrated CMOS RF outdoor unit, which covers a 5 gigahertz to 45 gigahertz, all the microwave 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 half through that process and we’re 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’re working with them, they generally have a longer cycle to revenue and that will show up much more towards the end of next year. But throughout the whole period, you will see increases in revenue as a combination picks up steam and the category - as a whole, is going to be a very, very nice revenue growth generate for us for the years to come.

Okay. Thanks for the clarification.

Your next question comes from the line of Ross Seymore.

Thanks, I got math question, 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?

Yes, Ross, so give me kind of the high level puts and takes. If you think about the - again you mentioned that the analog channel stacking is the biggest headwind kind of as a percent - that’s kind of a little one that stands out the most, but – so what we have in the books space, you’re having higher percentage of the revenue within that 76% coming from cable because cable is resuming its growth. As Kishore mentioned, its DOCSIS 3.1 shipments on a 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 staking 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 favorite cable over satellite, so there’s a little bit of rebalancing happening in the fourth quarter from what we saw in Q3.

And I guess if we switch over to the expense side of the equation. You’ve done the 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?

Yes, so we believe we strapped up the organization, the point where we can fully fund the strategic development initiatives that we can articulate 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 number 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.

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

We ultimately - we would like to be in six turns or greater, it’s been a while since we’ve executing - there is a lot of moving pieces and we've had different things that we've been kind of growing inventory in advance of ramps. So we don't need any revenue on the table when the demand kind of present themselves. So Ross, if you’re going to modeling six turns, I think that’s about right.

Great, thank you.

[Operator Instructions] Your next question comes from the line of Anil Doradla.

Just a couple of clarification, so Adam and Kishore, what is additional stacking revenue today and the reason I asked is that how - what we protect in perspective given that you talked about getting to $100 million in revenue.

Anil, let me clarify that. I just to make sure you’ve heard that correctly. The satellite gateway front and plus channel stacking business will reach on $100 million revenue in the next two, three years is what I mentioned. So you have a look at from that perspective, the combined product categories that are the future platforms. So the analog channel stacking, again I didn’t give the number for next quarter being able to approximately $7 million. Adam, could you help with the digital channel stacking?

Digital channel stacking is running north of $5 million in the fourth quarter. So if want to take about between $5 million and $6 million in Q4 contribution from digital channel stacking and then of course you've got your satellite front-end. So if you think about kind of in the Q3 period, if you exclude MoCA that are on the satellite platform, just purely look at channel stacking plus gateway you are looking at about, close to – called it 25 million dollar run rate right now. So well 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, all right. So you're on kind of $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 kind of a shared market for digital channel stacking. So again that’s – it doesn’t require any kind of huge leap of faith to come back into $100 million per quarter because that’s kind of the run rate we’re on today. There are just some volatility within that mix that we see in the next several quarters as we transition from that dominant position of analog to more of a shared position on the digital side.

And so when you talk about the next quarter’s guidance, I think you talked about digital stacking around 20% to 25% of the breakdown. Do you assume a comeback or a pick-up at this large customer from a digital stacking point of view. You guys talked about lack of visibility there. Are you assuming by Q4 you will get some revenues from there or you’ve just not accounted for that right now?

We’re not just accounting for any revenue increase in digital channel stacking on this particular North America operator. Just to give you clarity, we’re already shipping digital channel stacking for this North America operator in we have been shipping and we were the first one 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.

All right. And when I go from analog to digital, can you talk about absolute dollar ASPs. Are we talking about $5 product in analog or going to another $5 product in the digital? Are you seeing a step down in the pricing or step up?

Okay, so let me walk you through it. There is only operator where all these consternation comes from, it’s in North America, it’s a large operator. We’ve 100% of the sockets 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 getting the channel stacking function. Together the three chips sell for somewhere between $8 to $10, let’s call it $10, okay. And the digital channel stacking for equivalent 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 exact price 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 stacking through digital channel stacking for each satellite outdoor unit. So and then on top of that you ought to 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're seeing all the revenue losses that we are talking about in analog channel stacking –analog channel. I did that math, you can work through now.

It makes sense. Thank you very much.

[Operator Instructions] Your next question comes from the line of Gary Mobley.

Hi, guys. I had a follow-up question to Ross’ question about OpEx. In the past, Adam I think you’ve had a step up in OpEx because of the 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 we look at the – 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 to 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. All right, thanks for the clarification. I guess since early August you guys have done a good job at articulating the challenges presented by a couple of different Entropic product groups as it relates to growth headwinds. I know there is a lot of focus on the analog swim stuff but all things considered the cable data seasonality, the puts and takes in the infrastructure business and what not would you go as far as to say Q4 might be the revenue trough as we wind down some analog swim business in the Entropic set-top box SoC business?

I think it’s a little hard to say right now Gary, I think that the one good thing that you can look to in our guidance that we just provided is the fact that, to 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 ago and I think what you're seeing is strength from our core franchises coming through. And so normally we were expecting the big drop off from Q3 to Q4 in analog channel stacking that we’re seeing. I mentioned there is probably about $7 million from prior quarters is 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 break out, we're also shaving about I’ll call it $5million 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 provide is very consistent with what people were expecting before these larger than expected declines, right. 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 of our core and emerging businesses despite having even faster headwinds present themselves on these legacy pieces. But anyway it's too early to tell whether or not that Q4 is the trough or not. I think certainly we need 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 you know we believe that in 2017 there will be a 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 and 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 really kind of past through most of that. There will be revenue contributions still in 2017 from those two legacy businesses. We've 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 they are falling off faster than they were before. You could 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 franchise 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’ve 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’re cautiously optimistic whether you throw out the old numbers that’s up to you but I would say that 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 target upwards. We already indicated in the last call that definitely 62% or 65% will be the range we would be in and hopefully as infrastructure revenue keep growing, the video SoC out of the mix, the margin has an upward trajectory. And you maybe one day 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.

All right. Thank you, guys.

And you have a follow-up question from the line of 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’ve talked about maybe some increased outsourcing, obviously you know 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?

So you’re talking specifically about microwave backhaul, is it correct?

Correct yes.

Yes. So historically a lot of these big OEMs that is 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 millimeter-wave modem to 10 gigabit per second data rate as well. So we're really offering a full menu of modem capability that meets not only the present needs but future needs. So at this stage there are half the tier-1 operators who are still using internal silicon primarily because it's cheaper for them to use that today. But as they use our RF solution and they want to migrate to new carrier aggregation type really, really broad data bandwidth with Microwave Backhaul links. They'll have no choice but use our RF solutions and at the same time competitive prices on 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're seeing 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 modem because right now they are testing our RF solutions. So wherever they are not using the modem I feel absolutely gone go that they are going to convert to our modems because they are already using our RF solutions and the reverse is also true. I think the reverse is it almost given, because they're using a modem - they cannot use all the capabilities of modem they have to find RF piece of solution that we have today. Right so, I really think this is going to be a wonderful outcome for us. And how I see the timeline play out, the RF is start ramping in the second half of next year. And the modem will really be a nice clip because lot of platform that are transitioning with internal silicon to our silicon. At customers we already have design wins and then really picks up a few years pace through end of 2017, 2018 and in 2019, 2020 is when we're going to path to get to $100 million into the combined solution.

Sounds good and just one last one for Adam and Adam I don’t need to give you, need to give a headache here but the past accounting change for revenue recognition is going to quickest effect Q1 of 2018, just wondering how you guys are planning for that?

Now, it's definitely on our roadmap. As I mentioned earlier on our prepared remarks that recognized revenue on a sell through basis not sell in and of course that's going to have to be due to the other from the opposite direction in 2018. Our oldest - if you look at the legacy, well this I don’t use that term, if I look at historically, MaxLinear's earlier days and a lot of revenue that went through just the and that's become lesser and lesser over the years. So now to making a little bit of resurgence to just now because we are using some distributors for some of the infrastructure products and of course those are growing as I mentioned, so it's definitely something on our roadmap. But if we kind of taken at high level look at this point I don’t anticipate that it's going to really change things fairly dramatically at all. I think it's going to be pretty much for the most part it's a not event for us when this happens.

Okay. So you basically do like all that companies you restate historical maybe a few years and then when it's all said and done we'll probably see changes, in 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 lot of ways, we're going from being showing actual to now trying to make estimates for revenue through that channel. So personally to me it feels like the industry is going to a bit backwards, we're adopting them, but of course it's not our we’ve a lot of choice that adopted, but I really don’t think when everything is shaken out for us specifically. I don’t think you are going to notice much. I think it's going to be the noise.

And this is I'll add is that even when we build material, we really take transfer in lieu of our distributors talk and we really plan our build finished goods planning we do it based on sell through demand. So really the distributor is very transparent. So we don’t see it - we'll not see much impact even on sell-in basis. So it should be pretty transparent. And if any - of all the companies in the universe are looking at we are the most non- cataloguist direct sales company. And so we don’t like what they are doing but because it's non-conservative, but we should be just fine the ways things are.

Fair enough. Sounds good. Thank you, guys.

And we have one final question from the line of Quinn Bolton.

Had a quick follow up on tax rate. I think last quarter you sort of - tax rate increasing from 10% rate to a 20% rate for 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 still got - we got a fairly incentive 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 of using right now for 2017.

Thank you.

And we have no more questions at this time.