ERShares Entrepreneur ETF
Q3 2014 Earnings Call Transcript

Published: 10 Nov 2014

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Entropic Conference Call. At this time, all participants are in a listen-only mode. (Operator Instructions) As a reminder this conference is being recorded for replay purposes. And now I’d like to turn the conference over to your host for today to Debbie Hart, Senior Director of Investor Relations. You may begin.

[Debra Hart:]

Thank you, Francis, and good morning, everyone. Earlier this morning we announced that Dr. Ted Tewksbury will be taking over as interim President and CEO, succeeding Patrick Henry, who has led Entropic for the last 11 years. Therefore on today’s call I’m joined by Ted Tewksbury; and Dave Lyle, our Chief Financial Officer. During the call, Patrick and Dave will present our third quarter 2014 results, provide Q4 guidance, discuss the restructuring actions we announced earlier today and our operating model going forward, and then we'll open the call for your questions. Throughout this call, we’ll be discussing certain non-GAAP financial measures. Today’s earnings release and the related report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the release. We’ve also posted a schedule on the Investors Section of our Web site, which includes our quarterly reconciliation of our GAAP to non-GAAP gross margin, operating expenses and taxes. During this call, we will make forward-looking statements regarding future events and anticipated operating or financial results of the Company. Actual events or results could differ materially from those projected in the forward-looking statements. Please refer to our SEC filings, including our most recent 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances. And now, I’m very pleased to turn the call over to Ted.

[Ted Tewksbury:]

Thank you, Debbie, and thanks to everyone for joining the call today. I'm delighted to be joining you this morning as Entropic’s newly appointed Interim CEO. Having served on Entropic’s Board for the past four years, I continue to be impressed with the Company’s deep expertise in RF, analog/mixed signal and DSP, the core enabling technologies in connectivity. We invented MoCA, which has become the standard for home networking of digital entertainment and we also invented the single-wire satellite outdoor unit or ODU technology which simplifies installation of satellite TV service. Well I’m disappointed in the Company’s recent financial performance, I’m encouraged by our opportunity to streamline the Company and refocus our core competencies on the connectivity business. I look forward to working more closely with this talented team and applying my turnaround experience to ensure Entropic returns to profitability and delivers value for shareholders. We have a lot of ground to cover today. Our third quarter results and update on the strategic review process, the actions we announced earlier this morning that accelerate the achievement of profitability and some preliminary color on our growth strategy. I’ll start with the top level results. In Q3, revenue was $43.2 million, and our non-GAAP net loss for the quarter was $0.11 per share. Revenue was within the revised guidance range the Company provided in September and we beat our EPS expectations on higher gross margins and lower operating expenses. I’ll ask Dave to go through the Q3 numbers and discuss guidance for the current quarter a little later in the call. But first I’d like to discuss the other announcements that we made this morning and the future of the Company. As you’re aware, on September 16 of this year we announced that we were considering a wide range of strategic alternatives available to the Company. In connection with this review, we’ve talked to a diverse group of interested parties and have contemplated various options. While we’re not going to provide interim updates on our ongoing process, I can’t say that we’re continuing to actively pursue opportunities and support ongoing discussions. As a result of the strategic review, the management team with the Board’s full support and involvement developed and have begun to execute a strategy to assure a return to profitability in the near-term with a path to stable and profitable growth in the long-term. As such, we decided to narrow our focus on our core competencies in high performance RF, analog/mixed signal and DSP. Entropic has superior capabilities in these areas that are difficult or impossible for others to replicate. Our renewed focus on these core competencies will allow us to continue to invest in differentiated products for connectivity, while simultaneously reducing our overall cost structure. Looking ahead, we see meaningful opportunities to drive long-term revenue growth, expand our addressable market, and improve profitability. This refocus strategy will allow us to lower our non-GAAP operating expenses to $20 million to $21 million per quarter in Q1 of 2015, which will establish our quarterly revenue at about $40 million. We expect that most of the necessary headcount reductions will be completed by the end of this quarter. We expect to begin 2015 with approximately $100 million of cash, and are targeting to be profitable on a non-GAAP basis in the first quarter of 2015. We will provide more specific financial guidance for 2015 on our Q4 financial results conference call in early February. Going forward, in the set-top box market, we will continue to sell and support our video SoC products that are already commercialized or in production. Given, however, our renewed focus, we will not be developing any new set-top box SoCs. I want to assure our customers that we are committed to supporting their product deployment and we'll continue to invest in customer programs for our existing SoC products at the same level we always have. We’ve brought numerous set-top box products to market, including our cost optimized family of SoCs or DTA, Zapper, and IP-Client. With these end products in production, we expect existing set-top box SoCs to contribute meaningful revenue for the next three years or more. With regard to the bundled SoC, plus MoCA design wins that we have previously talked about, we expect to see volume for two IP-Client design wins in Q1 of 2015. One is where the Tier 1 MSO and the other is with a major satellite service provider. However, we have removed from our outlook the bundled SoC plus MoCA design win at one large North American MSO, as we no longer have confidence that it will deploy due to changes in the operators device roadmap. We continue to engage with all major service providers on other SoC and MoCA solutions and we do have other design wins, we expect to contribute to revenue in 2015. These include SoC design wins for HD-DTAs, and MoCA design wins for other devices supporting IP video and broadband platforms. Today's restructuring actions will allow us to pull in our time to profitability while making meaningful and smart investments in our core product categories to drive growth. Now let me provide a little color on some of the market catalysts that will support the longer-term growth of our connectivity business. I'll start with our MoCA networking product line. For set-top boxes and DVRs, the industry has moved from discrete MoCA solutions to integrated SoCs that include MoCA functionality. Outside of these operator deployed boxes, we believe there is an opportunity for discrete MoCA in the broader consumer electronics market, driven by the industries transition to all IP Video delivery, the growing number of wired and wireless devices in the home, and the need for reliable connectivity to all of the screens in the home. The transition to IP Video and the gateway client architecture, it’s already underway and we see a proliferation of connected devices. According to a Cisco study, in 2015 worldwide IP traffic will near a zettabyte or a 100 billion gigabyte. The number of connected devices will also grow at nearly two and half times the world population and for the first time IP traffic from mobile and wireless devices will exceed that of wired devices. In order for service providers to monetize this opportunity, they must be able to deliver reliable connectivity to all of the wired and wireless screens in the home. MoCA is uniquely positioned to provide the necessary infrastructure, quality of service, coverage and bandwidth needed to support all the activities that take place concurrently in a highly connected home. MoCA backbone allows for greater Wi-Fi quality of service and reliability throughout the home. So just as many cable, telco and satellite service providers are providing MoCA in their gateway and IP-Client, we believe we will increasingly see MoCA deployed in adapters that extend the wireless coverage in a home by leveraging the MoCA backbone to drive whole home data and video coverage. We are beginning to see shipments and revenue contributions in these product categories. Look for products on the market called ECAs or Ethernet-to-Coax Adapters, WECAs or Wireless Ethernet-to-Coax Adapters and WVBs or Wireless Video Bridges. We will continue to drive innovation within the MoCA home networking market to meet the increasing in-home bandwidth needs of service providers and consumers alike. Often complementing the video services of the traditional operators, over the top or OTT opportunity is also fuelling more connected devices in the home. We have seen numerous OTT announcements recently, both from content suppliers such as HBO, CBS and Viacom and from streaming media devices makers such as Roku, Amazon, Google that clearly demonstrate the growing foothold of OTT service. Today these streaming media devices can be connected to the MoCA backbone using ECAs or WECAs, and we expect to see new categories of connected video devices include MoCA in their future design. Turning to our direct broadcast satellite or DBS ODU solutions, we see continued expansion of single-wire technologies worldwide. Our Channel Stack Switch or CSS technology generates a significant revenue stream for Entropic and we continue to win designs internationally with our analog CSS products. With regards to digital CSS, we believe the market will transition to digital in a more meaningful way in 2016 and we are currently working with multiple Tier 1 operators to design in our industry leading next generation solutions. Our digital CSS technology is recognized as the industries smallest, highest performing lowest power solutions on the market. We will continue to assert our leadership in this area through advancement in our core CSS markets as well as capitalizing on adjacent product and application opportunities in this very high volume worldwide market. In other applications of our core technologies for coax communication, we have leveraged our MoCA technology into products that serve the broadband access market; specifically for geographies with fiber optic cabling is broadly deployed. We have some traction in China today and expect our revenue to remain stable at current modest levels through 2015. Longer-term we see opportunities for higher speed broadband in the U.S market and Europe and expect to participate as this market develops. By leveraging our RF analog/mixed signal and DSP technologies and capitalizing on the full capability of coax to support multi gigabit services, we can help establish coax as the last hop connection in deep fiber installations. Moving forward, Entropic will be a more streamlined company as we focus on our core businesses centered on our technology leadership in RF, analog/mixed signal and digital signal processing for the connectivity market. We have strong customer relationships in our core market and are highly regarded for our innovation and technology leadership. We intend to maintain profitability, while we pursue the robust longer-term growth opportunities in the broader connectivity market. We intend to provide an update on these initiatives in future calls. Before turning the call over to Dave, I’d like to thank Patrick Henry for his 11 years with the Company. He has helped to set the foundation what I believe is a bright future ahead. Now, I’ll ask Dave to review the third quarter results, provide our Q4 outlook and the financial implications of our new plan. I’ll then make some brief closing remarks before we open the call for your questions. Dave?

[David Lyle:]

Thanks, Ted. Let me start by saying how pleased I’m to have Ted join us as Interim President and CEO. Of those of you who don’t know Ted, he is an experienced semiconductor executive with a proven track record of building and leading successful teams, creating visionary new products and growing businesses. I have the benefit of his guidance as a Board member since 2010 and I have the utmost confidence in his leadership. Ted has deep domain expertise in analog intensive mixed signal and RF technologies and is highly respected in the industry. Having served on the Entropic Board for the past four years, he had a comprehensive understanding of both our challenges and our opportunity. And I look forward to working closely with him to deliver on our objectives and enhance shareholder value. Turning to our third quarter results, revenue was $43.2 million, a 14% decline from Q2 and consistent with our revised guidance. We had three customers who accounted for greater than 10% of our revenue during the quarter, WNC, a supplier into DIRECTV and other satellite service providers at 30%, Actiontec, a supplier to Verizon and multiple cable MSO at 17%; and MTI, a supplier of DBS ODUs to multiple satellite operators at 11%. Our non-GAAP gross margin in Q3 was 59%, due to product mix as we had lower revenue contribution from our set-top box SoC products, which have a lower gross margin profile than the corporate average. Excluded from Q3 non-GAAP gross margin was about $100,000 in stock-based compensation expense and $2.7 million of the amortization of purchased intangibles. Non-GAAP operating expense in Q3 was $35.4 million, which is about $1.1 million lower than previous guidance due mainly to additional savings resulting from our expense-reduction effort and incremental cost decreases related to our previously announced restructuring activities. Our Q3 non-GAAP operating expense excluded $4.5 million of stock-based compensation expense, $250,000 of amortization of purchased intangibles, $600,000 related to IP litigation defense primarily from the ViXS lawsuit, which was settled in September. $2.2 million in restructuring charges related to our June 2014 action and $7.1 million in impairment charges related to our decision to seize development of new set-top box SoC product. Other income was about $200,000 for the quarter and our third quarter non-GAAP tax expense was $200,000. Our GAAP tax expense was $120,000. Q3 non-GAAP net loss was about $10 million, resulting in a net loss per share of $0.11 based on a basic share count of about 89 million shares. GAAP net loss in the third quarter was about $28 million, and GAAP loss per share was $0.31. GAAP results include charges in the amount of $9.6 million made in connection with the refocused strategy announced today and our previously announced restructuring plan. With regard to our cash position, cash and investments as of September 30, were approximately $107 million, a net cash decline of about $14 million during Q3. This includes $2.8 million used for share repurchases during the quarter, which equates to 839,000 shares repurchased at an average share price of $3.30. It also includes about $1.5 million in restructuring related cash outlays. During the quarter, cash used in our business operations was about $8 million. DSOs for the third quarter came in at 63 days, and inventory turns decreased to about 5x. Now I'd like to provide guidance for the fourth quarter of 2014. In Q4, we expect Entropic's top line revenue to be about $42 million to $43 million. We expect non-GAAP gross margin for Q4 to be 55% to 57%, down from Q3 levels as we expect more meaningful revenue contribution from set-top box SoCs in the quarter, primarily for HD-DTA deployment. We will exclude from Q4 non-GAAP gross margin about $100,000 of stock-based compensation expense and $2.7 million in amortization of purchased intangibles. We expect Q4 non-GAAP operating expense to be about $30 million. This guidance includes $2 million in savings from today’s restructuring action. Our non-GAAP operating expense will exclude $3.9 million of stock-based compensation expense, $250,000 of amortization of purchased intangibles, and approximately $11 million in restructuring and impairment charges. We expect other income to be about $200,000. We expect our GAAP and non-GAAP tax expense in Q4 to be about $200,000 due mainly to foreign tax. Based on this guidance, we expect a non-GAAP loss per share of $0.07 on a basic share count of about 90 million shares. Our GAAP loss per share is expected to be $0.26. We expect our cash and investments balance at the end of the fourth quarter to decline sequentially by about $7 million to $100 million. This decline is based on expected cash use from operations, capital expenditures and costs associated with the restructuring, offset by $5.5 million federal tax refund received in the fourth quarter from NOL carryback. We expect DSOs to be down slightly from Q3 to about 60 days and we expect inventory turns to be about 6x in Q4. Now I'd like to give more details on our renewed strategy and its financial impact on the P&L. As you may recall on June 9, we announced that we have implemented a restructuring plan with the goal of reducing quarterly non-GAAP operating expense to about $32 million per quarter by Q4, which would provide $24 million in savings on an annualized basis and lower our quarterly non-GAAP breakeven revenue from about $71 million when announced to about $60 million once fully implemented. That plan is proceeding as anticipated and as you heard from our Q4 guidance, we expect to successfully meet the operating expense reduction target we outlined in June. Our refocus strategy and the actions we announced today will allow us to lower non-GAAP operating expense to about $20 million to $21 million per quarter subject to fluctuations related to non-recurring items such as tape-out expense. This is a reduction of $11 million to $12 million per quarter or about 36% from our prior operating expense target at $32 million and at least a $44 savings on an annualized basis. Combined with the actions announced in June, we’ve reduced our non-GAAP operating expense by $68 million on an annualized basis. The implementation of this plan began today and we expect much of the positive financial impact of the savings to be seen by the end of this quarter and the full impact by Q1. These measures should allow us to lower our quarterly non-GAAP breakeven revenue from about $60 million today to about $40 million. Although we only guide one quarter out in light of the refocused strategy and restructuring, I wanted to provide some color on our expectations as we enter 2015. We expect Q1 2015 revenue to be about $40 million and we are targeting to be profitable on a non-GAAP basis in Q1. Upon completion of the new restructuring plan, which includes closing facilities in Shanghai, Belfast and San Jose, we expect to have headcount below 300. The restructuring and headcount reduction was roughly proportional throughout the organization by function. Related to this restructuring, we expect to record charges through our GAAP P&L as follow

[Ted Tewksbury:]

Thanks, Dave. By focusing on our core strengths in RF, analog/mixed signal and DSP, we'll continue to build a stronger, more valuable Entropic. We operate in growing markets, and we have significant competitive advantages in world-class technology that we can leverage as we move forward. My commitments are as follows

[Operator:]

Thank you. (Operator Instructions) And your first question will come from the line of John Pitzer from Credit Suisse. You may begin.

[Ryan Carver:]

Hey guys, this is Ryan Carver for John. Thanks for taking the call. Question on the gross margin, you guys obviously beat the guidance you provided and it seems like the core business, I guess, we just look back has been operating at a far more profitable level than perhaps even before the Trident acquisition. Can you just walk through some of the drivers that are helping this, this increased profitability and I guess as it correlate to that, given that the gross margin performance and I guess the gross margin drag of the existing SoC business, what’s the motivation for not to exiting that business entirely given the potential or the likelihood downward impact to your profitability?

[David Lyle:]

I can take that. This is Dave. On the gross margin front, we have always said in the past that the connectivity business in general has a higher gross margin; there is a lot of RF technology that generally commands a premium from a gross margin standpoint. SoC business historically we’ve been selling much lower than our corporate gross margin averages throughout the entire SoC product line. When we bought the Trident assets, Set-Top Box SoC assets two plus years ago, we inherited some products that we continue to sell which are great products but just a little challenge on the gross margin front. We made some progress there, and in fact are going through a transition to one of our newer discrete SoCs which will help gross margin on that entire pipeline, but we’re not quite there yet. We’ll see some improvements in 2015 as we ramp those products.

[Ryan Carver:]

Great. Thanks. And then, I guess as a follow-up question, you talked about sort of migration from analog to digital on the CSS side. You talked about a number of the other drivers for your existing business. I guess specific to the CSS, what’s the confidence factor that you guys are going to be able to re-win on the digital side market share that will be enough to offset the potential declines in the analog side? And then, I guess, as a corollary to that, on the SoC bundled side, what gives you guys confidence that these, the two existing designs, the Tier 1 MSO and the satellite bundle are going to go to production given that the one that fell out and the more rapid than expected movement towards higher definition Ultra HD STB solutions?

[Ted Tewksbury:]

Yes. This is, Ted. I’ll take that one. On the dCSS side, first of all, we’re already by far the market share leader in analog CSS as you well know, and that’s a very high gross margin, high value product. We do expect the transition to digital to occur starting in 2015, but really in the earnest in 2016. We are already shipping our Gen1 digital Channel Stacking Switch today. The Gen2 Switch is in development and close to introduction. And as I mentioned in the prepared remarks, that has the lowest power and the highest performance of any of the products on the market. So, we’re very confident that we’re going to continue to be the leader in digital CSS just as we were in aCSS. As far as the bundled SoC plus MoCA solutions, we’ve already got the current design wins locked and loaded with that MSO that I mentioned in the prepared remarks as well as the North American satellite service provider, and those will be going to production in Q1 of 2015, its -- with that the service provider is very far long in that deployment. The reason the other one got killed was because of a change in one of the service provider’s plans where due to the advent of 4K/Ultra HD, they reprioritized and focused on that to the exclusion of some of the OEMs that were making boxes for the HD IP client, which was the box that we were in. So with the reprioritization of their roadmap which led to are not going to production with that product, but the other two are locked and loaded and going to production in Q1.

[Ryan Carver:]

Great. And last question for me, on the core connectivity side of the business. I think one of the questions sort of ongoing about Moore's Law and the ability for companies to maintain scale going forward as developments continue to move down process nodes and cost get elevated as you continue to move forward. What are your thoughts around sort of maintaining scale and being able to continue to develop your core connectivity solutions such that you’ll be able to compete with some of the larger competitors who will have position in the bundled offerings, and have -- or had potentially a much larger sort of war chest to continue investing?

[Ted Tewksbury:]

Well, I don’t think we have a scale problem when it comes to our core connectivity products. We have sufficient resources dedicated to that activity, and as a result of these actions we’re now going to be able to make sure that that continues at the right level to be successful. But we win through product innovation, features and performance. So, we’re not concerned about lacking scale in that business.

[Ryan Carver:]

Good. Thanks guys. Good luck.

[David Lyle:]

Thanks.

[Operator:]

Your next question will come from the line of Tore Svanberg from Stifel. You may begin.

[Tore Svanberg:]

Yes. Thank you. A few questions. First of all, if we look at I guess, Q1 you’re looking at $40 million in revenues. What would the mix look at -- at that revenue run rate between I guess the three business units with one of them obviously eventually fading away?

[David Lyle:]

Yes. I’ll take that, Ted. In terms of detail around Q1, we’re not going to give too much color there except, I can go through a little bit about what's happening from a qualitative standpoint. First of all there was a question earlier, and I just want to make sure I address which kind of leads into your question which is that the SoC business itself is still going to be a robust business for us in terms of revenue generation which is why we’re going to continue to invest in supporting our customers as well as even new design wins where we have opportunities on that front. We’ve got great products that we’ve developed, that were developed even prior to the acquisition in ’12 and that we continue to develop over the past two plus years. What we’re not doing is investing in a long-term roadmap. So we’re not going to -- the investment that’s needed to support the longer term SoC roadmap is at this point prohibitive for us. So that’s why we made that choice. So I don’t want to underestimate the profitability actually that we’ll see at the SoC business itself. That being said, the SoC business we are seeing some ramps not only in the new design wins that Ted, had talked about, but also on the HD-DTA front which we’re actually pretty excited about. And then in terms of the connectivity business, we think typically we see some seasonal softness in the first half, so we might see some pressure there. We are however on the CSS front, we feel pretty good about analog CSS being -- remaining strong. We think that transition will start happening in really a meaningful way in 2016, but we’ll start to see some penetration on digital CSS to a very small degree in the second half of 2015.

[Tore Svanberg:]

Okay. Very good. And maybe as a follow-up to the sort of mix question, Dave, you guided obviously gross margin here near-term to come in at 55% to 57%, but as we look at the new business here longer term should we still assume that, that to be the range, 55% to 57%?

[David Lyle:]

No. We have an unusual mix, last this past Q3 and Q4, and with ramps on the SoC side that will pull down gross margins a little bit. So I think we’ll probably be in this 52% to 54% range. We’ll see how some of these designs kick in. So right now, I think that’s generally where we should be.

[Tore Svanberg:]

Very good. And Dave, could you just give us a sense about how big the discrete MoCA business is? I don’t know if you want to talk about it from a market or even Entropic specific perspective, but just trying to understand when could there be an inflection point there for that to become a much bigger percentage of your revenue?

[Ted Tewksbury:]

Well we think that the overall MoCA market is about -- it’s a several hundred million dollar market, about a quarter of which is discrete today. However if you look at our entire connectivity business and the trends that we talked about over the top, the wireless overlay on top of a MoCA backbone, broadband access, DBS ODU, if you look at all of that as well as adjacent market opportunities that we’re looking at for some of our core technology full band capture and so forth, that we estimate about billion dollar market overall that Entropic will be able to address in the longer term several years out.

[Tore Svanberg:]

Very good. And Ted, just one last question or maybe as a follow-up to exactly that. If you look at the Company’s technology obviously, analog, mixed signal, RF, DSP, should we think about Entropic looking at adjacent markets within sort of the set-top box world? Or are you considering potentially doing some more infrastructure stuff?

[Ted Tewksbury:]

Well it’s premature to talk about any of that. I will be filling you in as we flush out our roadmap in the next 90 days or so. But there are a lot of adjacent market opportunities and application opportunities for these core technologies that the company has. I think the most obvious one immediately would be in Wi-Fi, but then there are also opportunities in wireless infrastructure 4G and 5G wireless infrastructure both on the macro as well as the small cell side. So, we’re looking at all of those, and we don’t want to tip our hand on what we’re doing as far as the roadmap is concerned, but we will keep you apprised in future calls.

[Tore Svanberg:]

Very helpful. Thank you, guys.

[Debra Hart:]

Thanks, Tore.

[Operator:]

Your next question will come from the line of Rajvindra Gill from Needham & Company. You may begin.

[Rajvindra Gill:]

Yes. Thanks for taking my questions. Just a question on the competitive landscape. If you’re kind of moving away from an integrated SoC solution which was the premise of buying Trident set-top box assets in the first place was in order to develop an integrated SoC. I’m just wondering how your competitive standing will be when you no longer support an integrated chip and discontinued offer bundled solutions. And I’m wondering how your competitors are going to respond to that and how the customers will respond to that. So I’m just wondering, the change in strategy after buying Trident because there clearly has been a change in strategy and just wondering how you think you’ll be able to avoid that without having an integrated SoC?

[Ted Tewksbury:]

Yes. That’s a great question. Let me just backup for a moment and address the larger issue of, why we got into SoCs to begin with, and why we’re choosing now to the change of strategy. We always knew that the connectivity would be basing the near to mid term decline due to the integration of discrete MoCA into SoCs, and of course that’s what drove the entire SoC strategy and the acquisition of Trident. However we also knew that longer term we would see a resurgence of growth in connectivity. You’re driven by some of the trends and market catalysts that I talked about, over the top, wireless, whole home connectivity, multi-gigabit broadband access and so forth. So, when we get to Trident acquisition we anticipated that it would provide a revenue bridge to take us through the period of integration of MoCA until these longer term drivers started to kick in. We were very successful in getting products introduced and getting them designed in. We talked about that on previous call. The problem -- the challenge that we faced was it was a very dynamic environment. You had 4K/Ultra HD coming on faster than any of us expected. And as a result service providers round up changing again their deployment plans and their device roadmap. That led to some of our design wins not going to full production. And without the revenue we were not able to invest in those new trends like Ultra HD, and as we all know this is a business that requires scale. We’ve got -- we’re competing with the big gorilla and we simply did not have the scale to invest which led to this strategic change where we’re supporting the existing products but not investing in any new products, which brings us to your question about the competitive landscape, now that we’ve collapsed or narrowed our focus on connectivity. In the connectivity business we already are a leader. We’re the dominant force there. So the competitive landscape will be a lot more favorable to us in this new strategy. Now, I think where you were going with your question is, how do we continue to sell those existing products when we no longer have a roadmap. And that is a challenge, and that was actually why we decided to discontinue new product development. Because we knew that even if we did do the integrated MoCA and the SoC and some of the other new products, its very unlikely that customers would design those products in on both the OEM and the service provider side because we didn’t have a roadmap. So that was what led to that decision. However we have very close relationships with our customers that have designed in our existing products and those deployments are already far along. We’re continuing to invest at the same level we always have to make sure there’s no interruption in customer programs and deployments. So we’re comfortable and confident that we will be able to continue to design in and sell and realize revenue from those existing products for probably another three years.

[David Lyle:]

Yes. And I think adding on to that Ted, the discrete -- we understand that in the U.S. the integrated market for SoC is a challenging one, but the discrete SoC market internationally we think there are quite a few opportunities out there. International Zapper set-top boxes, IP set-top boxes. And then, back to the U.S. there are still discrete SoC opportunities which we’ve won in HD-DTA.

[Rajvindra Gill:]

And just a question on the digital CSS, I’m just wondering if you guys could talk about the competitive landscape there because your newest competitor there has talked about having a lead in their digital CSS solution and having a very nominal cost of around $5 level, and kind of pushing into DSS aggressively to support 4K video. I’m just wondering your conclusion that the market will transition later in 2016. I’m just saying, what's the basis of that relative to kind of what your nearest competitors were saying on the digital CSS side?

[Ted Tewksbury:]

Well, I think our competitors would agree that the market is pushing out for that. As far as cost is concerned, as I mentioned in the prepared remarks, we do have the smallest, highest performing and lowest power solution. We are a little behind our competitor with respect to the introduction of that product, but we’re very confident that those advantages will enable us to capture the bulk of the share in this market.

[David Lyle:]

And as the incumbent to fire for Channel Stacking Switch on the analog side which is the predominant technology out there today, we have pretty good visibility into where the service providers’ roadmaps are going and have to say that a lot of deep experience in terms of selling into service providers as far back as 2004 when the first -- the technologies came out. So we have pretty good understanding of how long these take to, in number one, get deployed, but also get deployed in a big way. And we think this is following the same curve, and so far I think we’ve been accurate that this is going to take time. We do see digital CSS starting to shift this year -- 2015, we just don’t think its going to be a big volume opportunity until 2016. So again, you’ll see second half a little bit of incremental revenue from digital CSS in the market but ’16 is I think really the year we’ll start to see much more penetration.

[Operator:]

(Operator Instructions) Our next question will come from the line of Krishna Shankar from Roth Capital. You may begin.

[Krishna Shankar:]

Yes. Can you give us an update on the exploration of strategic alternatives and talk about some of the issues you faced during that process. Is it cost structure kind of focus of the company and how you plan to address strategic alternatives with the new restructuring plan and what happens going forward?

[Ted Tewksbury:]

Yes. We can't talk about the details of the strategic process except to say that it is ongoing and active. What I can say is that we need to be profitable and have a robust roadmap for growth regardless of whether the company is ultimately acquired or even remain under standalone mode. So, that’s why we pursued this option of discontinuing the new SoC products and continuing to support the existing products and then focusing on the RF, analog and mixed signal for the connectivity business.

[Krishna Shankar:]

And as a clarification, do you still have the two, the integrated set-top box chips design wins or you’ve kind of exited the integrated set-top box chip market completely and have kind of lost those design wins that you had there for integrated set-top box chips?

[Ted Tewksbury:]

No, we have seized development of the integrated MoCA and SoC chip for the reasons that we talked about earlier, which is that, without a roadmap it would not be prudent for us to make the investments necessary to complete that, to bring it to market, to get it commercialized and support customer programs. We believe without a roadmap that the customer reception, adoption of that product would be limited.

[David Lyle:]

Sorry, Ted. The bundled opportunities are really what we’re talking about on the -- with regard to those two new design wins that we’re ramping in 2015. Those were not integrated products.

[Krishna Shankar:]

Okay. Thank you.

[Ted Tewksbury:]

Crystal clear. Bundled, we are still doing. Integrated, we are not.

[Krishna Shankar:]

Okay. Thanks.

[Operator:]

Your next question will come from the line of Alex Gauna from JMP Securities. You may begin.

[Alex Gauna:]

Thanks for taking my question. Good morning everybody. I was wondering Dave, you mentioned not being willing to give us a split on how you saw set-top boxes in Q1, but I’m wondering with these designs that are locked and loaded, are those contributing in Q1? And in terms of these new designs that are ramping, is it within the balance of possibilities that the set-top box business actually grows or is the tail on programs that are falling off such that we shouldn’t be thinking of this category as a growth but rather just a steady state decline type of business?

[David Lyle:]

Yes, good question, Alex. In terms of the Q1 guidance I talked about some typical seasonality on the connectivity side in the first half, so we’ll see pressure there. There is a little bit of remaining backseat MoCA that will follow-up, but not much left from that perspective. But yes, the set-top box SoC business can grow, we’re seeing, we talked about HD-DTA as an opportunity. But also those new deployments that we talked about will kick off in Q1 and generate a little bit of revenue. They always go slow before they go fast. So we should see revenue from that Q1.

[Alex Gauna:]

Okay. And then with regard to those new deployments, like Ted said, I know they are locked and loaded. But do you face some risk that they could make similar decisions to that other MSO, change their UHDTV timetables and put those programs in jeopardy prematurely?

[David Lyle:]

That’s always a possibility as we’ve learned. That being said, we have some pretty good confidence around these starting to ramp just based on the activity that we see in service providers as well as the OEMs.

[Alex Gauna:]

Okay. And then, one last one if I could. With regard to the MoCA business, if going forward other players remain active in the SoC space. I'm thinking like the ST micros or what Intel is doing. What’s the opportunity on the transceiver side for MoCA? And am I right in thinking that, that might be one of your most attractive business or divestiture for integration to one of those other players? Thank you.

[Ted Tewksbury:]

Yes. I don’t think it’s a candidate for divestiture right now. We consider that to be a core product category. In the near term we’ve seen possibility in existing service provider deployments. And then longer term as we’ve talked about over the top provides really a driver for a whole list of consumer electronics devices which will be connecting both wirelessly and through wires to a MoCA backbone for whole home connectivity, and many of those boxes will have MoCA inside. So, we see a growing opportunity for discrete MoCA, and we intend to continue to be the leader there.

[Alex Gauna:]

All right. Thank you very much.

[David Lyle:]

Thanks, Alex.

[Debra Hart:]

Thanks, Alex.

[Operator:]

Your next question will come from the line of Anthony Stoss from Craig-Hallum. You may begin.

[Anthony Stoss:]

Good morning, Ted and Dave. Maybe you could help us out with the whole, I guess, design win side of the MoCA with Wi-Fi. Just curious if you can talk about it since you have been launching products recently, if it is robust? Or how you kind of see it coming alive in the coming couple of years? And also to that end, do you feel confident that you have got the right employee base or relationships to get into these new more retail side of the market? Thanks.

[David Lyle:]

Yes, on the MoCA as a backbone for Wi-Fi extension, we’re already seeing with our design wins with our WECA product that Ted has talked about Wireless Ethernet-to-Coax Adapter and we think that the -- really we’re in the very early stages of deployments of those types of product for different purposes in the home buyer service provider. So we’re pretty excited about the prospects there, but trying to be real conservative on how long these market take to actually grow. They start slow and eventually get very large. So we think it’s going to take sometime until those devices really deploy with -- into the kind of market size that Ted was talking about earlier. And then from -- you’re talking about -- I think you asked question about the employee base. Do we have the right employees, employee base to do this? Yes, you know that -- after this current restructuring, we had a pretty thorough process to allow us to continue to invest at the levels we need to for our long-term roadmap on the connectivity side. So feel pretty good about the employees that we got to continue that roadmap.

[Anthony Stoss:]

All right. Thanks, guys.

[Ted Tewksbury:]

Thank you.

[Operator:]

And your next question will come from the line of as a follow-up from Tore Svanberg with Stifel. You may begin.

[Tore Svanberg:]

Yes, just a quick follow-up. So Dave, the $11 million to $12 million additional OpEx reduction, could you give us a very general sense of the split within R&D and SG&A. Is it going to be sort of half-half, or is it going to be more skewed than that?

[David Lyle:]

No, its pretty -- the total cuts that we made were pretty proportionate to R&D versus SG&A from an OpEx standpoint. So historically if you remember about two-thirds of our workforce has been on the R&D side and a third for the SG&A. So I think it will be kind of in the same magnitude.

[Tore Svanberg:]

Okay. And then, my last question on the bundled (indiscernible) business, the order to design wins that are going to ramp next year, are these going to be very gradual ramps, or are we going to see a more meaningful ramp in either the first or second half?

[Ted Tewksbury:]

Well typically the way these rollouts work is that a service provider will deploy in a specific geography or metropolitan area and then they will get feedback from users and then depending on the results, they will rollout more broadly. And we expect that deployment pattern to prevail in this case. So it will be relatively gradual.

[Tore Svanberg:]

Very good. Thanks again.

[Operator:]

And at this time, we have no other questions in the queue. I’d like to turn the call back over to Debbie Hart for your final remarks.

[Debra Hart:]

Thank you. Thank you all for joining us this morning. If you have any follow-up questions, feel free to call me directly or e-mail me and we will get back to you. Thanks so much.

[Operator:]

And ladies and gentlemen, this concludes your presentation. You may now disconnect and enjoy your day.