ERShares Entrepreneur ETF
Q2 2013 Earnings Call Transcript

Published: 1 Aug 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2013 Entropic Earnings Conference Call. My name is Derek, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Ms. Debbie Hart. You may proceed.

[Debra Hart:]

Thank you, Derek, and good afternoon, everyone. Participating on today's call are Patrick Henry, President and CEO; and Dave Lyle, our Chief Financial Officer. During the call, Patrick and Dave will present our second quarter 2013 results and our short-term outlook, and then we'll open it up for questions. Throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related report on Form 8-K describe the differences between our GAAP and non-GAAP reporting and present a reconciliation between the 2 for the periods reported in the release. We have also posted a schedule on the Investors section of our website, which includes our quarterly reconciliation of our GAAP to non-GAAP gross margins, 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-K and 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'll turn the call over to Patrick.

[Patrick C. Henry:]

Thank you, Debbie, and thanks to everyone, for joining on the call today. In Q2, our revenue was $70.6 million and earnings per share was $0.01 on a non-GAAP basis. Revenue was within our guidance range and we're able to slightly beat guidance for EPS due to improvements in gross margin and cost control. Later on the call, Dave will take us through to the Q2 numbers and discuss guidance for the third quarter. But first, I'd like to provide a general update on our business. In the past few weeks, we experienced a number of unexpected challenges within our business. The combination of these issues is causing us to significantly lower our outlook in the short-term. The key influences impacting our short-term outlook are

[David Lyle:]

Thanks, Patrick. Second quarter revenue was $70.6 million, down about $4 million sequentially from $74.5 million in Q1. Revenue is down sequentially in both connectivity and set-top box SoC products. We had 3 customers who accounted for greater than 10% of our revenue during the quarter

[Patrick C. Henry:]

Thanks, Dave. Clearly, we're all very disappointed with this near-term outlook and the trough we are currently experiencing in our business. Fortunately, we have a strong balance sheet to weather this near-term softness as we continue to turn around our SoC business that we acquired from bankrupt Trident and execute our integrated product strategy. While this turnaround is taking longer than any of us had anticipated, we still believe in our strategy and we are winning significant new designs with both our bundled and discrete solutions. We are also executing well on our next-generation integrated products and we expect to get them to market cost effectively with initial integrated solutions sampling later this year. We continue to get excellent reception to our new product roadmap from both cable and satellite pay-TV service providers in the U.S. and globally, and we continue to win significant new business with this product portfolio. As I mentioned earlier, we have already won a number of new major programs, and we believe more than half of these design wins will begin to deploy by Q1 2014. We have made significant steps to improve our overall organization from reductions in OpEx to acquiring the industry-recognized Mobius Semiconductor team, which will expand our expertise in analog mixed signal, and is critical to our core business. We continue to innovate and bring new silicon to market, including our latest MoCA 2.0 solution, which is our first chip that leverages the latest 28-nanometer process technology. Additionally, we are driving ahead with our Comcast Reference Design Kit or RDK initiatives and, most importantly, we are on track to sample our first integrated set-top box system-on-a-chip plus MoCA 2.0 solution for the HEVC video decoding later this year. We remain resilient in our mission to be a key global silicon supplier in the connected home entertainment market. Despite these short-term setbacks, we remain optimistic that our new products and our design win pipeline will allow us to gain market share and yield significant revenue growth and profitability in the larger growing market. That concludes our prepared remarks. Now Dave and I will take any questions you have.

[Operator:]

[Operator Instructions] And our first question is coming from the line of Gary Mobley from Benchmark.

[Gary W. Mobley:]

Starting out with the third quarter revenue guidance, it looks to be a delta, a decrease of about $15 million sequentially. And I was hoping that maybe you could share with us some additional details regarding how that decline should be attributed to set-top box SoC business versus the connectivity business. And then, specific to DIRECTV's new inventory management scheme, how long would you expect that to persist?

[David Lyle:]

I can take that. This is Dave. So the split between both connectivity and set-top, the $15 million decline is relatively evenly split between those -- both set-top and connectivity. On the connectivity side, the biggest impact is really related to DIRECTV. On the set-top side, it's really about HD-DTA pressure as well as the old legacy business falling -- continuing to fall off before we start ramping some of our new products.

[Gary W. Mobley:]

Okay. And then -- and looking at the DIRECTV business specifically, how much of the sequential revenue decline in the September quarter is a function of the Genie platform becoming more prominent and, hence, the retrofitting of old boxes no longer existing, what were taking place and then how much of it is attributable to the new inventory management system?

[David Lyle:]

Yes. And without giving away too much detail, it's both -- on the connectivity piece, with regards to DIRECTV, it's relatively equal in terms of sequential decline.

[Gary W. Mobley:]

Okay. And besides the partnership with Zenverge, what else was cut in the reorg from the R&D perspective?

[Patrick C. Henry:]

No other major programs were cut. We delayed a couple of things by about a quarter that weren't as time-sensitive from a customer standpoint. So some of it was incremental efficiency improvements, and we are focusing more on the analog mixed signal stuff as well as software, enablements for some of the chips.

[Operator:]

Your next question is from the line of Hamed Khorsand, BWS Financials.

[Hamed Khorsand:]

Just really a couple of questions. What are the risks of your design wins being skipped over by the time customers already have moved forward?

[Patrick C. Henry:]

We don't see that as a possibility at all, at least based on what our customers are telling us. And if you look at Comcast being one of the flagship deployments, they're actually getting more aggressive. They had their conference call this morning, around getting more aggressive in terms of IP-based video deployment. And in fact, Brian Roberts in his keynote at the National Cable Show mentioned that they planned to launch cloud-based DVR nationwide, which is a key catalyst for driving the products that we're servicing, which are -- include gateways as well as client set-top boxes. So they want to take a little bit longer to kind of get everything ironed out, but they seem to be highly committed to it. And that, we can leverage into other cable MSOs in North America as well as internationally. So we feel good about those. There's additional design wins that we haven't been able to publicly announce that also we're on track to ship early next year as well. And we feel confident based on talking to the end customers that this is their -- their solid deployment plan is to use those products.

[Hamed Khorsand:]

And how much clarity do you have into Q4 as to what customer order trends will look like?

[David Lyle:]

Well, we only -- Hamed, we only guide one quarter out, and we have very good visibility in the quarter that we guide, so we don't really guide Q4. But I think the inventory issues that we're having right now will persist slightly beyond Q3, and then we'll have to see how it goes.

[Hamed Khorsand:]

Okay. And then do you think any of this issue is a fallout from the competition being ahead of you or do you think this is all service provider-generated?

[Patrick C. Henry:]

We think it's service provider-generated. In the end, it really breaks down into a couple main areas. I mean, we have a high level of customer concentration at our big end customers, DIRECTV, Comcast, Time Warner and yes, we have some inventory issues. We do have some share loss based on Genie that we won't be shipping as much deck. I think, at this point, we probably are equally sharing the MoCA business with our largest competitor in MoCA, Broadcom, and they really dominate the integrated solutions. We still dominate the discrete solutions. Our expectation is as we start shipping the bundled solutions early this year and into 2014, we'll gain market share back and then also continue to increase market share, as we have our integrated solutions shipping later next year.

[Operator:]

[Operator Instructions] Your next question is from the line of Frank Keller, Barclays.

[Franklin Keller:]

I have a question for you. As MoCA 2.0 products, as they continue to ramp and as you continue to have further 28-nanometer tape-outs, just wanted to try get an idea as to how those feed into the R&D costs that you might see associated with tape-outs?

[David Lyle:]

Yes, Frank, there are quite a few product developments on 28-nanometer at Entropic, and so we'll see the impact of those over the next -- actually, several years. And those are pretty expensive tape-outs, well above $1 million, as high as $2 million. So we'll see fluctuations in OpEx related to that, but we're going to do our best to minimize those fluctuations when they come by keeping pretty tight on OpEx in general.

[Franklin Keller:]

And how much lead time do you guys -- is this like something that you discover inter-quarter or is it something that you have pretty well good visibility into heading into the quarter? Just trying to...

[David Lyle:]

Are you talking about tape-outs?

[Franklin Keller:]

Yes.

[David Lyle:]

We have pretty good visibility in terms of what our targets and schedules are for those but, again, in terms of external communication, we try to look one -- we guide one quarter out and try not to indicate too much so competitors don't get a hint of what we're doing.

[Franklin Keller:]

Of course. One last question. So just the cost savings associated with how you guys are reorganizing Zenverge. Now I know that that's probably part of something -- some larger organizations that you have going on at the company, but I wondered to what extent those cost savings associated with that program are offset by Mobius acquisition and then also any further acquisitive activities you guys may undertake?

[David Lyle:]

Well, clearly, that allows us optimize OpEx. A lot of those, the R&D headcount that we're working -- headcount that was working on that particular project were reassigned and to put more focus on other projects.

[Operator:]

Your next question is from the line of Tore Svanberg, Stifel, Nicolaus.

[Erik Rasmussen:]

This is Erik Rasmussen calling for Tore. I wanted to get back to the share loss you talked about. It seems like it's worse than you had thought, or least the DECA falling off faster than you had initially thought. Where do you think the business is split now in terms of the share for the market and do you see that getting worse? And how low do you think your share in that space gets to before you see some improvements with new products?

[Patrick C. Henry:]

I think the low point now -- I mean we had -- it's lower than we thought because the DECA did drop off more quickly. I think probably equal -- we have an equal share with Broadcom with our gaps and then ST has a little bit. I don't think anybody else really has any material share right now, and ST is somewhat limited. They've got some older-generation Cisco platforms for U.S. cable. But it's really us and Broadcom and there's other guys trying to enter the market, but we really don't see any volume from any of them at this point.

[Erik Rasmussen:]

Okay. And with the -- in the past, you talked about getting accretive with the acquisition in the SoC business at the end of '14, is this pushing? Now with some of these delays in your initial ramp and thoughts on how that business is going to trend, what are your thoughts now in that? I know you don't give forward guidance, but can you give us some color on that?

[Patrick C. Henry:]

We still have a pipeline, the design wins that not only could make the business accretive but get us back in the model by the tail end of 2014. But it's early to call and we've got, obviously, some near-term challenges in the business that we got to work through. We'll have a better sense as we kind of see where things return to as a baseline once we work through this inventory and start seeing the initial ramps and how those are going. But it's still possible to achieve that.

[Erik Rasmussen:]

Okay. And finally, the -- normally Q1 has some seasonality, but the way the business is trending, you're pushing things out. Do you think that's going to be an up quarter, and the early part of next year, being stronger contributors versus your typical seasonal pattern?

[Patrick C. Henry:]

Part of the reason why we're benefiting from the seasonal uptick right now is we just don't have as much exposure, especially at DIRECTV. Some of that will also help us from the seasonality as we go to the first part of next year as well, and we should have new designs ramping to help pace some of the seasonality that we would typically see in the first half.

[Operator:]

Your next question is from the line of Harlan Sur, JPMorgan.

[Harlan Sur:]

I guess -- I apologize, I jumped onto the call a bit late, so beyond the third quarter, and I think you might have mentioned this, Patrick, but I believe Comcast is still talking fairly positively about the ramp of their X2 platform which is, I believe, the platform where you guys have a pretty significant amount of dollar content. Are you still thinking that that's something that's going to ramp this year or is that something that you think that's being pushed out into 2014?

[Patrick C. Henry:]

We're trying to be conservative and saying early '14. It could be next quarter. And we've got some initial indications that we could see some initial volume next quarter. I think the real significant volume is in '14.

[Harlan Sur:]

Okay. And then as it relates to the partnership with Zenverge, so I apologize, you're terminating the partnership but are you still continuing to work with them? And if not, obviously, transcode technology is kind of a key part of these next-generation connected home architecture. So if not Zenverge, who are you leveraging for your transcode technology?

[Patrick C. Henry:]

Yes. At this stage, we're continuing to partner with Zenverge, but more for joint reference design purposes. We've historically had a partnership strategy to address the gateway market, in the cable side that also includes Intel for the DOCSIS piece, so we'll continue to work with Zenverge. We just won't be providing an integrated product and a timeframe. And discussing that with customers, they seem to be okay With the strategy that we're taking there, at least in the near-term.

[Harlan Sur:]

Okay. And then my last question, again, going back to kind of the next generation X2 platform, so obviously, a lot of sort of near- to midterm headwinds here, but do you feel as strongly about your dollar content capture and opportunity with the X2 platform as you have had previously or do you think that with some other, sort of near-term disruptions, maybe some more market share shifts, that your positioning there has changed a bit?

[Patrick C. Henry:]

No. I think our positioning kind of across-the-board in IP-based video delivery at Comcast and other cable MSOs is excellent, not only on the gateway and server side for video but also data gateways and also client boxes. So as that ramps, I think our exposure is really good, and I think we're going to benefit significantly from that ramp as it occurs.

[Operator:]

And at this time, I'm showing no further questions in queue. Ladies and gentlemen, that will conclude today's conference. Entropic thanks you for your participation, and you may now disconnect. Have a great day.