ERShares Entrepreneur ETF
Q3 2013 Earnings Call Transcript

Published: 29 Oct 2013

[Operator:]

Good day, ladies and gentlemen, and welcome to your Q3 2013 Entropic Inc. Earnings Conference Call. My name is Dalou, and I will be your operator today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Ms. Debbie Hart. Please proceed, ma'am.

[Debra Hart:]

Thank you, Dalou, 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 third quarter 2013 results and our 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 non-GAAP and 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 conference 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 these 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'll turn the call over to Patrick Henry.

[Patrick C. Henry:]

Thank you, Debbie, and thanks to everyone for joining the call today. Our Q3 revenue is $56.4 million resulting in a net loss per share of $0.06. Dave will take us through the Q3 numbers in more detail and discuss guidance for Q4 later in the call. First, I'd like to begin by providing a general update on our business and our long-range strategy and objectives. Entropic is a leader in silicon software for the connected home entertainment market. We are recognized for inventing MoCA, the enabling technology for home networking of digital entertainment. MoCA is now the de facto industry standard and deployed by nearly all the major pay-TV service providers in the U.S., including Tier 1 operators such as Comcast, Cox, DIRECTV, DISH Network, Time Warner and Verizon. MoCA is also starting to gain traction in international markets, including Europe and South America, where Liberty Global and DIRECTV Latin America, respectively, have begun to deploy MoCA. We also invented the single-wire Outdoor Unit, or ODU technology, which simplifies installation of satellite TV service. Our satellite outdoor unit solutions are an important complementary technology for our satellite service provider end customers as they transition their in-home networks to IP video delivery and to gateway/client architectures. Key end customers for our ODU single-cable solutions include Claro TV, DIRECTV, DISH Network and SKY Italia. We are also an innovator and market leader in the emerging broadband access business over passive cable, also known as EoC, or Ethernet-over-Coax, primarily in China. In 2011, Entropic maintained the dominant position in both the MoCA and DBS ODU market. Today, however, about 70% of the MoCA market is sold into set-top box products where integration of MoCA into the set-top box system-on-a-chip, or SoC, is becoming critically important. In addition, the DBS ODU market is expected to transition from analog to digital CSS solutions over the coming years. At Entropic, we consistently seek to drive long-term earnings growth and shareholder value through the prudent execution of our capital allocation strategy and through opportunistic M&A. In addition, we are always looking for opportunities to be more competitive. In 2011, in response to a changing industry environment and recognizing the emergence of MoCA integration into set-top box SoCs, we determined to pursue a strategic acquisition to regain MoCA market share and expand our overall market opportunity. We developed a framework for our transformation that would position Entropic for long-term success and profitability. We've had both successes and challenges as we've worked to implement this plan over the last 2 years. So I want to take this opportunity to talk about the strategy we developed and where we stand today in the overall transformation of Entropic. In early 2012, we executed the transformational acquisition of the set-top box SoC assets from Trident Microsystems. Trident was one of the few companies that had field-proven set-top box SoC solutions in the U.S. and in international set-top box markets. They're recognized as the #3 player globally and the #2 player in the U.S. in the set-top box SoC market. In many cases, Trident set-top box SoCs were sold alongside Entropic's MoCA solutions. In fact, we had collaborated with Trident on joint reference designs, product road maps and had won key designs with them in set-top box and DVR products. Our OEM customers and pay-TV service provider partners encouraged us to find a way to put our technologies together on a single, integrated platform or risk being shut out of the set-top box market with our MoCA solutions. We saw the set-top box SoC assets of Trident as a strong complementary fit for our organization as we had significant channel and product synergies, and our management team had historic expertise in the broader set-top box SoC market. Once the acquisition was complete, we created an SoC and MoCA bundling strategy that would allow us to sell the acquired SoCs with our discrete MoCA chips, while focusing on developing and commercializing our integrated products. The set-top box SoC technology, intellectual property, patents and core competencies we gained from Trident are helping us to better monetize our investment in MoCA, and just as importantly, we are now able to serve a much larger addressable market. In 2011, Entropic's revenue was just over $240 million and was estimated to be about a $300 million market. Today, we're serving a market that is estimated to be $1.6 billion with potential to grow to $2.3 billion by 2016. Since 2011, we also completed 2 smaller technology tuck-in acquisitions

[David Lyle:]

Thanks, Patrick. Third quarter revenue was $56.4 million, a 20% sequential decline, which was consistent with the guidance we gave last quarter. As we indicated in our last earnings call, for the third quarter, we anticipated softness in SoCs for HD-DTAs, softness in MoCA adapters at DIRECTV and short-term inventory issues at DIRECTV, which resulted in a revenue decline for both CSS and MoCA. Together, these factors created a revenue drop for us in Q3. We had 2 customers who accounted for greater than 10% of our revenue during the quarter

[Patrick C. Henry:]

Thanks, Dave. Before we open the call for your questions, I'd like to touch upon the $30 million share repurchase program that our Board of Directors recently approved. First, the details. The share repurchase program is structured so that Entropic, at its discretion, may purchase in the open market or privately negotiated transactions. Share repurchases may occur beginning October 31, 2013, through September 30, 2014. The number of shares repurchased will depend upon the purchase price of the stock. The stock buyback also has parameters regarding price and volume, which will be incorporated into a 10b5-1 plan to allow program stock purchases to occur automatically during the repurchase period. In making the decision to authorize the repurchase program, the board reviewed a number of factors and determined that $30 million struck the right balance between returning capital to our shareholders, and maintaining a strong balance sheet for future business investments and a sign of strength for our customers. The board is confident in and stands fully behind the company's long-term strategy. The board shares our belief that Entropic is strongly positioned to be a key global supplier for the MoCA-enabled set-top box market and that, with all the technology and capabilities added to Entropic over the past 2 years, we are ideally suited to optimize the connected home entertainment experience to ensure the delivery, connection and secure consumption of multimedia content into and throughout the home and drive significant value for our shareholders. Today, Entropic has a complete and compelling product line and road map. And we're strongly positioned to not only grow with the market, but also to grow our share in the market -- the markets we're targeting. As service providers move their home entertainment networks to IP, they need a cost-effective IP client with a high level of security, which Entropic's SoC product road map provides. This transition to IP further validates the need for a robust wired backbone using MoCA and the need for single wire architectures for satellite broadcasts using our CSS technologies. As a key supplier of platform semiconductors focused on the connected home, we have a unique opportunity to capitalize in this market that is large and growing. Our mission and the DNA of our company has remained unchanged throughout the transformation over the last 2 years. We are focused on optimizing the connected home entertainment experience and believe we have implemented the right strategy to develop differentiated product road map, address core operator needs and produce high-volume design wins. I want to reiterate that our focus, as always, is on driving long-term growth and enhancing value for our stockholders. We are committed to successfully completing the transformation of Entropic, and I look forward to reporting on our continued progress in the quarters ahead. This concludes our prepared remarks. Now Dave and I will take your questions.

[Operator:]

[Operator Instructions] And your first question comes from the line of Sur, Harlan of JPMorgan.

[Harlan Sur:]

Good to see some of the re-acceleration in the business here in Q4. I know that -- I think, Dave, you mentioned seasonality impacts in the first half of next year. And I know visibility at this time is always tough. But given some of the tailwinds in Q4, you mentioned the X1 and X2 ramps in the first half of next year. Typically, Q1 has a little bit less seasonality than Q2. Would some of these drivers be able to maybe drive continued quarter-on-quarter growth in Q1 and then we see kind of the normal seasonal drop-off in Q2?

[David Lyle:]

Harlan, I'll take that. It's Dave. We don't guide more than one quarter out. But I think you're right. It's high -- growth into Q1 is highly dependent on the timing and size of the Comcast deployments. That can clearly be a revenue driver, albeit it'll be smaller in the first half before it really starts ramping in the second half. But typically our -- we get softness both in Q1 and Q2 because the end customers on cable and satellite are softer during those quarters by about 10%.

[Harlan Sur:]

Got it. Okay. And then, obviously, it's good to see that one of your HD-DTA customers is coming back. And again, it seems like you guys have some incremental confidence about the X1, X2 platform ramp. Are you starting to get more visibility, either forecast visibility or maybe some order visibility that gives you indications that this ramp will, in fact, commence in the first half of next year?

[Patrick C. Henry:]

Yes. I mean, we're already getting orders for the gateway. So that's in trials. It's expected to launch in the first quarter, probably again, initially, in a smaller market opportunity and then ramp from there. That'll be followed by the video or the data voice gateways, as well as the client devices. So Comcast is already pushing pretty hard with the existing kind of higher-cost, less-integrated platforms that are being deployed right now. And there's a desire to move to these more cost-efficient, power-efficient designs that are based on our silicon that are going into production. So feeling good about it. They definitely continue to be very aggressive with the overall deployment, and we're continuing to make progress with our OEM partners on deploying the various different platforms that use our silicon.

[Harlan Sur:]

Great, and then my final question. I think it was Patrick, you mentioned the move in DBS ODU from analog to digital. I know the team basically owns the analog market in this segment. Your competition has been introducing several products to go after the digital ODU market. How do you think about Entropic's market share prospects as the market moves to digital, and in what time frame do you expect this transition to happen?

[Patrick C. Henry:]

Yes. First off, I think as the market moves to digital, it's a much larger broader-based opportunity than what we've had historically with analog CSS. So although analog CSS has been a great business for us, especially at DIRECTV, and then we won international designs, and we continue to win designs based on analog CSS, we think digital provides us a pretty big opportunity globally. We think we're going to maintain our market leadership in that position. We've done the acquisition of PLX's digital CSS product. Some of the technologies that we've acquired from Mobius are also applicable to those markets in addition to other markets. So we feel like, based on feedback from customers, we're in a very strong position to continue to be a leader in the overall satellite outdoor unit market for years to come. The initial transition to digital, although on a smaller basis, is going to be late next year. I think the more broad-based transition happens in late '15 and 2016.

[Operator:]

The next question is from the line of Gary Mobley from Benchmark.

[Gary W. Mobley:]

In those comments, I think you mentioned in addition to the Xi3 Comcast box, there being some additional design wins for a bundled MoCA and SoC solution. I was hoping you could share some additional detail regarding that. Are those with some of your traditional Tier 1 pay-TV service providers? And what is compelling these service providers and the box suppliers to go with a bundled solution to where in recent history they demonstrated a pattern of going with an integrated SoC solution?

[Patrick C. Henry:]

Yes. I think the broader kind of -- we can't talk about specific end customers until they give us an opportunity to talk about that. But I think the general trend is based on, first off, leveraging what we've done with Comcast around RDK. We've got very proven solutions, both in terms of silicon and software as other cable and MSOs move in that direction, we've got very strong solutions to deploying that kind of RDK ecosystem. More broadly, there's just a desire for diversity of silicon supply, and we've been fortunate enough to have the right pieces necessary, both on the MoCA and the SoC side, to win some significant designs. And the customers are giving us some grace and allowing us to get back in the market with a belief that now that both the MoCA and the SoC are under one roof, that the integrated solutions are on the way. So we're getting kind of the road paved for us with some additional design wins based on bundled solutions that will eventually move to integrated solutions.

[Gary W. Mobley:]

Okay. How would you characterize your MoCA market share right now? Do you think it's bottomed, for the most part, now that most of your pay-TV service provider customers have gone with an integrated solution for set-top box designs?

[Patrick C. Henry:]

Yes. I mean, we're pretty much sharing the market right now with Broadcom, and ST is a third player that has a smaller amount of market share. So I don't know the exact numbers, but we're in the mid to high, kind of mid-40s probably, and Broadcom's kind of in the mid-40s, and ST has the balance. So there have been other companies that have said they have -- they're in the market, but we really haven't seen them in any kind of volume yet. Most of the design win activity that we're seeing is going on around MoCA 2, and we're clearly in a leadership position there. I think Broadcom will definitely get there, and there's others that are lagging. So I think we're -- we continue to be in a strong position. And as we launch and ramp bundled design wins, we have an opportunity to regain market share in the set-top box part of the business.

[Gary W. Mobley:]

Okay, last question for me. Do you think the -- much of the impact from DIRECTV changing the way it manages its inventory is behind you now or are we still dealing with that in the fourth quarter?

[Patrick C. Henry:]

We think it's pretty much in the rearview mirror at this point. So we've seen a return on our DBS ODU business there. The MoCA business didn't return as we kind of anticipated because there was some share loss with the move to the Genie platform on a more broad basis. But yes, the specific inventory stuff is pretty much behind us.

[Operator:]

The next question is from the line of Ruben Roy from Mizuho Securities.

[Ruben Roy:]

Patrick, just a follow-up on the answers to those last 2 questions. And it sounds like this level where we are with revenue is somewhere between $55 million and $60 million we could probably think of as sort of a baseline as we head into 2014. Obviously, there are some seasonal effects potentially on that revenue. But if you do get some of these incremental drivers then that would be growth on this sort of baseline. Is that the way to think about the top line at this point?

[Patrick C. Henry:]

That's the way I'm thinking about it. So I think it's -- we're at a baseline revenue. We've got new design wins, and there's some seasonal softness that might put some headwinds on that. But we're definitely in a position where we've won significant new designs that are ramping. A large amount of the legacy SoC business that we acquired is now kind of eroded down to a very small level. So we shouldn't see the headwinds associated with that. Similarly, kind of MoCA market share is kind of at a level where we feel it's going to be there for the next whatever, year or so, until we start ramping the volume on top of it. So that volume still could start ramping on top of it even in the first half of next year as we get the bundled design win shipping with Comcast, but then we'll see a more substantial piece of that as we get bundled design wins ramping with other OEMs and other pay-TV service providers.

[Ruben Roy:]

Okay. And then, Dave, a couple for you then. If you do get some of these new designs to ramp at Comcast and in the second half with the bundled solutions, are there any meaningful impacts to gross margin, do you think?

[David Lyle:]

It really depends on how fast some of these ramps are, but I do think that staying -- we've been kind of above our long-term model of 50% to 52%. As we ramp these and start getting some scale out of our revenues, we'll head down towards into that range. But in the meantime, I think, this 50% -- 52% to 53% range is, in the short term, at least, where we're at.

[Ruben Roy:]

Okay. And just a final question around the OpEx commentary that you made. It sounded to me like you're saying the first half of the year is when you're going to do some of these 28-nanometer tapeouts, I guess, and so we should be thinking sort of a pretty incremental rise in OpEx, and then that levels off as you get into the second half of the year. Is that right?

[David Lyle:]

Yes. I think that's a good characterization. We're also, in the first half, going to, aside from the tapeouts, of course, going to get out FICA tax reset, which has some impact to the upside of OpEx, as well as some of the other typical things with annual merits that happen in Q2, resets of the annual bonus accrual. So we'll have -- we will see the first half a little heavier on OpEx.

[Operator:]

The next question is from the line of Hamed Khorsand of BWS Financial.

[Hamed Khorsand:]

I'm just trying to figure out, going through my notes from the last call. What really happened this quarter from a progress standpoint? I mean, it seems like we're in a holding pattern for another quarter or 2 from the commentary of both calls, or am I mistaken there?

[Patrick C. Henry:]

Well, I think the difference between this quarter and last quarter is we are seeing a little bit earlier return of HD-DTAs. We are seeing kind of the DIRECTV stuff being in the rearview mirror in terms of the inventory issues. We haven't seen a substantial ramp in the Comcast business yet, although we've seen initial orders. So as we get into the early part of next year, we'll see that continuing to ramp. We have some seasonality in the first half. The thing that -- it doesn't show up in the top line immediately is the design win progress that we're making. And we've made some substantial design win progress over the last quarter as it relates to other end customers, other pay-TV service providers outside of Comcast with our bundled design wins. I think the other thing where we're continuing to make progress is on the new product development front, and we're continuing to march down that path with integrated products, and we're on track there.

[Hamed Khorsand:]

And given the timing of when these new design wins are supposed to get implemented, what's the risk of facing competition here, just splitting the supplying to those carriers?

[Patrick C. Henry:]

Well, I think we're going to see competition, but we're moving in the kind of bundled MoCA plus SoC space from 0 market share to something substantially larger than that. So we're actually going to be able to take market share from competition. But yes, we'll share the business with competition as that starts to ramp. No question about it.

[Hamed Khorsand:]

And where do you think your market share is now in MoCA?

[Patrick C. Henry:]

I think we just covered that, earlier in the call, we're probably kind of in the mid-40s, and Broadcom's kind of similar and ST has the balance.

[Hamed Khorsand:]

Okay. But your commentary was a little bit more negative as far as market share loss. How are you getting at the 40% figure?

[Patrick C. Henry:]

Well, we're counting up the amount that's out there and figuring out how much we're shipping versus what we think everybody else is shipping. So we think we're in that kind of range.

[Operator:]

[Operator Instructions] And our next question comes from the line of Philip Lee of Lazard Capital Markets.

[Philip Lee:]

Patrick, a question for you. The integrated set-top box, I guess, is set to sample end of this year, and is this on track for a second half '14 revenue impact? And if so, how much of the integrated set-top box will replace bundled revenue and how much will be new business?

[Patrick C. Henry:]

Well, the integrated product, if we do revenue next year, it's going to be very modest and very tail end of the year. We're currently going through our annual operating plan for '14 right now. We've got some real modest revenue in Q4, but it's more of a 2015 revenue driver. We do think it's a market expansion opportunity although it does replace some bundled solutions over time. So it's -- on a net-net basis, it will be additive. The more -- even more significant part of that though is that it's allowing us to address a broader base set of markets not only with the first product, but with the derivative products that we get off of that. So we're going to have a much more substantial product line. And we've really had to rebuild because of underinvestment by Trident. So I think it's going to be very competitive 28-nanometer, very power efficient, highly integrated, not only with MoCA but some of the other things that we're doing. So as we get into mid '14 from a design win standpoint and into '15 from a shipment standpoint, I think we're going to be much more strongly positioned than we have been up to this point.

[Philip Lee:]

Great. And just some clarification around the HD-DTA being pulled forward. So this is only at one customer. Is there any change to the status of the other customers?

[Patrick C. Henry:]

No, not at this point.

[Operator:]

Your next question is from the line of Blayne Curtis from Barclays.

[Mark Kelley:]

This is Mark Kelley on for Blayne. The first question is just about gross margins in terms of bundled versus integrated. I know we're still a little way out from seeing revenue for the integrated solution, but how should we think about as we start to look at 2015 numbers?

[David Lyle:]

Did you say 2015 numbers?

[Mark Kelley:]

Yes.

[David Lyle:]

Yes. Well I...

[Mark Kelley:]

I know you don't want to guide, but I guess, maybe just a general update.

[David Lyle:]

I think the integrated products are all 28-nanometer, so they're optimized for not only performance, but also cost and power. And so we've designed them to try to help us get into the long-term gross margin target, which is 50% to 52%.

[Mark Kelley:]

Okay, that's helpful. And then with the buyback announcement, do you guys have a timeline that you would be willing to share in terms of getting back to profitability with that in mind?

[David Lyle:]

Well, the buyback doesn't have a lot to do with the profitability, but we do look at it as a signal of confidence that -- in the long-term strategy. And that confidence has increased, hence, the stock buyback. In terms of profitability, we think we can get to profitability with the existing pipeline of designs that we have today, and feel pretty good about that. We haven't specified a time frame, obviously, because we only guide one quarter out.

[Operator:]

Next question is from Krishna Shankar of Roth Capital.

[Krishna Shankar:]

Yes. Dave, I missed the revenue guidance for the December quarter. Can you just quickly mention what your revenue outlook is for the December quarter?

[David Lyle:]

$57 million to $59 million.

[Krishna Shankar:]

Okay. And you did mention that you've seen some pick up in HD-DTA adapters. Is this with the -- can you give us some sense for where you're seeing the pick up? Is it with Comcast or some of the other cable providers? Can you give us some sense for the DTA business pick up?

[David Lyle:]

Yes. We haven't specified. There were several, though, that had delays from the last call, and we expected those -- some of those delays to recover in the Q1 time frame, Q2 time frame. So this is a quarter earlier.

[Krishna Shankar:]

Okay. And when will some of these international design wins you have in China, South America and Europe, when will they start to contribute to revenues?

[Patrick C. Henry:]

We're seeing initial contribution now, and those will continue to ramp throughout '14.

[David Lyle:]

Yes, they're small contributors today as they typically do with all of these deployments. They go slow before they go fast. And so we think as that -- those markets start to change and head towards HD, IP video, et cetera, we think we're going to see the same kind of acceleration over time that we're seeing in North America. But it's going to take some time.

[Operator:]

Next question is from Anthony Stoss with Craig-Hallum.

[Anthony J. Stoss:]

Patrick, part of the reason why I think you bought Mobius was to use their technology to speed up your development of next-gen products and have a competitive advantage. I'd love to hear if it's living up to your expectation so far, and any color you can provide on how helpful that acquisition has been.

[Patrick C. Henry:]

Yes. We're continuing to make progress on new product development. There are some capabilities they have in terms of very high performance, low-power mix signal technology that's applicable not only to next-generation digital CSS, but also to Full-Band Capture solutions in the SoC market. And we don't have any products to announce on the phone today, but we're making excellent progress on the product road map that we've designed there.

[Operator:]

Your next question is from Alex Gauna of JMP Securities.

[Alex Gauna:]

Patrick, you mentioned earlier about your integrated product having a 2015-type of time horizon. Can you give us an idea of the kind of feature sets that the operators are looking for, for that product line? What needs to be integrated, what doesn't, and how you differentiate yourself? I mean, I think we're talking about a 4K world, right, in that horizon and maybe some of the other parameters that would differentiate the product.

[Patrick C. Henry:]

Yes. I mean, it's a broad set of things. I mean, the initial opportunity is in volume on clients and on non-DVR set-top boxes is really around HD and HEVC, possibly with up scaling to 4K p24, 4K p30. That's the initial stuff that we're getting out, and then eventually we'll move to true full-blown 4K p60 decode. But obviously, high level of integration including a Full-Band Capture support for all the next-generation conditional access systems, MoCA integration in some cases, high performance at low cost and low power becoming increasingly more important. So there's not a point solution. I mean, it's a portfolio of products, but we're able to leverage off of what we're doing on the initial platform. And since it's all going to be on 28-nanometer, we get significant reuse as we go to a variety of different products.

[Alex Gauna:]

And of these features and capabilities you just mentioned, are there areas where you have particularly strong IP or you're leveraging a head start that make you feel well positioned for that time horizon?

[Patrick C. Henry:]

Well, I mean, we have working solutions in the existing pay-TV service provider deployments. In some cases, we've gotten design out of those. But we have the software necessary, including all the different middlewares, the conditional access systems, the demodulators, the decoders, basically everything that's necessary in a proven set of solutions that we're now just moving that technical capability to 28-nanometer and providing the higher level of integration. So yes, will Broadcom be there, as well? Absolutely. They're going to be a key competitor, but will there be other people that can compete with us and Broadcom, not as likely. I mean, ST in some special cases, especially outside the U.S., where we feel like we have a very strong competitive position versus most competition. And even against Broadcom, we've made a faster transition to ARM versus their MIPS architecture, which has some advantages with some customers.

[Alex Gauna:]

And how does Intel and what their aspirations in this space fit into all of this?

[Patrick C. Henry:]

Intel is a key partner of ours. They're one of the 2 market leaders out there in DOCSIS 3. So on the cable gateway market, they continue to be a key partner for us. They have a much stronger competitive position on the server gateway part of the market, where we have a much stronger market position on the client and zapper kind of non-DVR set-top box portion of the market. So they're a great partner of ours, and we continue to work very closely with them on a number of opportunities.

[Operator:]

We have no more questions in queue. I will now turn the conference back to Ms. Debbie Hart for closing remarks.

[Debra Hart:]

Thank you, Dalou, and thank you to all of you for joining us today. Feel free to contact me with any follow-up questions you have, and have a good evening.

[Operator:]

Thank you, ladies and gentlemen for your participation in today's conference call. You may now disconnect.