ERShares Entrepreneur ETF
Q4 2008 Earnings Call Transcript

Published: 6 Feb 2009

[Operator:]

Ladies and gentlemen, good afternoon. At this time I'd like to welcome everyone to the Entropic Communications Conference Call. I will repeat these instructions after management completes their prepared remarks, (Operating instructions). Today's conference call is being recorded. And now, I would like to turn the call over to Debra Hart, Director of Investor Relations for Entropic Communications. Please go ahead, ma'am.

[Debra Hart:]

Thank you. Good afternoon, everyone and welcome to Entropic Communications Fourth Quarter 2008 Conference Call. Leading the call today are Patrick Henry, President and CEO, and David Lyle, our Chief Financial Officer. Before we begin, I would like to remind you that various remarks that we make on this call concerning

[Patrick Henry:]

Thank you Debbie, and thanks to everyone for joining the call today. Entropic's Q4 2008, revenue was $29.5 million, a 7% sequential decline from Q3. On a year-over-year basis we grew 19% to $146 million. If you include the $15 million of revenue generated by RF Magic in the first half of 2007 prior to the acquisition, the year-over-year revenue growth was 6%. Dave will take you through the numbers in greater detail and discuss guidance for the first quarter later on the call. But first, I would like to recap the quarter's highlights. In Q4, despite tough market conditions Entropic made significant progress towards our key initiatives. We demonstrated a market leadership by shipping our 20 millionth unit of our MoCA-compliant c.LINK chipset for home networking and our 20 millionth DBS Outdoor unit silicon solutions supporting the satellite market. We began to ramp our Channel Stacking Switch solution at BSkyB through an OEM relationship with Global Invacom. We announced in our CSS technology is embedded in MTI's award-winning 12-channel One Cable Solution that received the 2008 Innovation Product Award from the Hsinchu Science Park Administration. We introduced the industry's first hybrid multi-mode CMOS silicon tuner, which supports both analog and digital signals for cable and terrestrial set-top boxes, televisions and CAM tuner modules. We also announced two new design wins for this product. We introduced our third generation c.LINK solution for MoCA home networking developed on 65 nanometer CMOS process technology, the EN2510, which provides a smaller footprint, lower power consumption, and low overall system costs for our customers. And we announced new MoCA design wins with Actiontec and NETGEAR for Ethernet to Coax Bridge products focused on consumer retail in the professional installation market. We added to our executive ranks during the quarter and I am pleased to welcome Vinay Gokhale to the Entropic team. Vinay joined us in early January as Senior Vice President of Marketing and Business Development. Vinay will lead all facets of our marketing function, including product definition, product management, technical marketing and communications and will lead our business development activities working with triple-play service provider partners worldwide. Vinay brings a broad experience base in marketing and in business development functions to drive further adoption of Entropic's technology. We also recently made changes to our Board of Directors. Umesh Padval has been named Non-Executive Chairman of the Board as we separate the roles of Chairman and CEO. This will strengthen our Board's independent leadership and we are very excited to have Umesh assume this greater role with the company. Turning to our home networking business, let me take you through the current status of service provider deployments and some recent OEM design wins. Verizon, our largest home networking deployment of our MoCA chips, announced in a earnings call last week that they had their best FiOS quarter ever with record net additions for both FiOS TV and FiOS internet. In Q4 they added a record 303,000 new FiOS TV customers ending the year with just over 1.9 million subscribers and a penetration rate of 21% based on homes open for sale. They also added 282,000 net new FiOS internet customers, ending 2008 with 2.5 million FiOS internet subs and a penetration rate of 25% based on homes open for sale. In the FiOS department, Entropic provides three MoCA chips for every FiOS internet installation and on average an additional three MoCA chips for every FiOS TV customer. Verizon has passed 12.7 million homes as the end of 2008, approximately 700,000 homes ahead of the planned FiOS roll out schedule. Verizon indicated in their earnings call that their FiOS triple-play service remains at the center of their consumer strategy and they will continue to expand FiOS triple-play availability as they further penetrate existing markets and enter new urban markets later this year. FiOS average revenue per user or ARPU continues to grow and is now at over $133 per month. The number of homes open for sales of FiOS TV during Q4 grew to 9.2 million TV homes from 8.2 million in the prior quarter and the number of homes open for sales to FiOS internet service grew to 10 million homes from 9.1 million homes in the prior quarter. This is a positive sign for Entropic for the mid-and-longer term. The MoCA market opportunity outside Verizon is also gaining momentum. We can continue to be on track with two new Tier 1 service provider deployments to drive revenue in the second half of 2009. In addition we expect there to be other Tier 1 service providers moving into trials with MoCA set-top boxes by mid-year with planned deployments late this year. We will keep you posted as more information becomes public regarding the timing and scope of each service provider's deployment plans. On the local retail front consumer electronics manufacturers Actiontec, D-Link and NETGEAR have each recently launched Ethernet-to-MoCA bridge products. This is evidence of a growing consumer need for highly reliable wired home networking solution fueled by the popularity of new downloads and streaming over the top videos services. Consumer electronics devices like Voodoo, Slimbox, TeVo, Sony PS3 and Microsoft Xbox 360 many of which have included Netflix and other streaming video services all have an Ethernet port for connecting to the internet. Generally TVs are located in a different room than the broadband connection and most U.S. homes don't have Category 5 structured wiring. An Ethernet-to-MoCA bridge allows consumers to use the existing in the home [type] cabling to connect room-to-room by a reliable high performance MoCA home network suitable for streaming multiple HD videos with pristine quality. Revenue expectations for this part of our business are modest in the short-term but on a longer term we believe these local retail products provide large opportunity and complement to our service provider deployments. Turning to our satellite outdoor unit business, this product line consists of a Band Translation Switch or BTS family and our Channel Stacking Switch or CSS family. EchoStar DISH Network continues to utilize our BTS products in more than 95% of all installs. Our second generation BTS solutions are featured in EchoStar’s recently announced DPP 33 switch and the DISH 500 Plus integrated LMBs. Our ongoing product development collaboration with EchoStar is creating technology that improves customer quality, value and control. We're shipping our CSS solutions to DIRECTV and saw solid growth as we ramp in DIRECTV's integrated single wire module or SWM outdoor unit deployment in Q4. In early December, DIRECTV announced that they will suspend all but the most critical capital projects. This will impact the rate of deployment of DIRECTV's SWM enabled ODUs during the economic downturn. DIRECTV is committed to deploying their SWM, utilizing our CSS technology in higher-end HD installs and we still have a goal to reach 100% attach rate for all new HD installs over time. We believe, the value proposition of CSS will play out and provide additional opportunities within DIRECTV longer term. On the international front, BSkyB, which is a news corp affiliate started deployment of their single cable router products for multi-dwelling units using our CSS solution. Entropic is working to expand, our single cable foot print, within BSkyB and other news corp international satellite service providers over time. Moving to our high speed broadband access product line, we continue to make progress. We currently have small active deployments in Japan, Korea and Northern Europe. In addition, we continue to work on trials ramping under early deployments in Mainland China, which we believe can provide a significant longer term revenue opportunity. In our Silicon TV Tuner product line, we recently announced the EN4020 and industry's first hybrid multi-mode CMOS silicon tuner. Hybrid means it supports both analog and digital signals. Multi-mode means you don't have to have a dedicated tuner for each specific market segment and application. Thus the EN4020 can be software configured by the various digital TV market applications. This reduces the need for television and set-up box manufacturers working on tuner suppliers to carry large inventories of different tuner derivatives. Entropic's all-CMOS device significantly reduces the manufacturing cost and allows us to break through the cost floor of many traditional CAM tuner modules. The silicon tuner markets for digital TV is in early stage of ramping volumes and specifically, Entropic is in early revenue stage in this market. We expect our tuner products to ramp later this year and are encouraged by some early design wins for our new CMOS silicon tuners. I'd now like to turn the call over to Dave Lyle, our Chief Financial Officer, who will provide the details of our fourth quarter performance and our first quarter guidance. Then I’ll provide some closing remarks and will open the call for your questions. Dave?

[Dave Lyle:]

Thanks, Patrick. Fourth quarter revenue was $29.5 million, down 7% sequentially from $31.7 million in Q3, as we continued to see tightening inventory levels at both Verizon and our direct OEM customers with our multi products. This is in light of the fact that Verizon continues to grow its subscriber base for its FiOS service as they reported last week in their earnings call. The decline in Entropic's revenue for MoCA was partially offset by a sequential increase in revenue from our Channel Stacking Switch product being sold into DIRECTV's SWM deployment as they sold the supply chain and ramped into volume and supported a traditionally strong fourth quarter. Because our revenue shifted towards the richer mix of DBS outdoor unit products in Q4, our non-GAAP gross margin for the quarter was up almost 300 basis points to 53.5% from 50.6% in Q3. Non-GAAP gross margin excludes $1.6 million of amortization of purchased intangibles associated with prior acquisitions and approximately $78,000 of stock-based compensation expense. Non-GAAP operating expense of $16.5 million in Q4 improved from $17.3 million in Q3. Aggressive cost reduction efforts implemented during Q3 have been successful and have allowed us to offset non-recurring product development expenses like tape out. Q4 total headcount of 297 employees worldwide declined by six heads from the third quarter as we controlled hiring in light of our operating expense control measures. Our Q4 non-GAAP results exclude $3 million in stock-based compensation expense, approximately $700,000 in amortization of purchased intangibles for prior acquisition and as a result of our annual asset impairment review of goodwill and long-lived assets, $113.2 million from goodwill and intangible asset impairment write downs. The write downs were taken due to a combination of factors including the current economic environment, Entropic's operating results and a sustained decline in Entropic's market capitalization. The goodwill and intangible asset impairment write down does not affect the company's day-to-day business operations, cash balance, or competitive position. Net interest income for the quarter was approximately $79,000 and an income tax benefit in the amount of $167,000 was recognized in the quarter. We recorded a non-GAAP net loss in the fourth quarter of $400,000, an improvement from a non-GAAP net loss of $1.2 million in Q3. We recorded a non-GAAP net loss per share of approximately one $0.01 based on a basic weighted average common share count of approximately 68.2 million shares. We recorded a GAAP net loss per share of $1.74. Our Q4 GAAP net loss per share would have been $0.08, if we excluded goodwill and intangible asset impairment write downs. With regard to our cash position, we ended the quarter with approximately $34.4 million in cash, cash equivalents, and marketable securities; an increase of approximately $2.3 million from Q3. The increase was primarily due to solid execution on collections as well as one large accounts payable disbursement item that fell into our current quarter. We continued to invest our cash, cash equivalents, and marketable securities in high grade investments and money market funds with no exposure to auction rate securities and other short-term investments mature within the next quarter. Entropic has no bank debt and has had no foreseen need to utilize our $10 million accounts receivable line of credit. Our DSOs were 43 days in Q4, an improvement from 57 days in Q3. Our inventory turns were 2.9 times on a non-GAAP basis, a slight improvement over Q3 turns of 2.8. We believe this turns number will improve as our OEMs and end customers return to more typical inventory levels over time. For the full fiscal year, revenue was up 19% year-over-year on a GAAP basis from $122.5 million in 2007 to $146 million in 2008. Year-over-year revenue growth would have been 6% if we included $15 million of pre-merger revenue from RF Magic in the first half of 2007 before the merger closed June 30, 2007. Now, I'd like to provide our guidance for the first quarter of 2009. In Q1, we expect top-line revenues to decline to approximately $22.5 million to $25.5 million, a 14% to 24% quarter-over-quarter decline. Our first quarter revenue outlook reflects a difficult economic environment where our direct OEM customers and end customers continue to tighten inventory levels and where visibility remains limited. More specifically with regard to DIRECTV's SWM deployment which uses our CSS products. We saw a very typical pre-ramp build in Q4. With a more difficult economy and tightening capital expenditure budgets, we believe we will see a slower CSS ramp and this will result in a sequential decline in revenues in Q1. As a result of a product mix shift towards our home networking products in Q1, we believe non-GAAP gross margin will be at our target model of 50% to 52%. Excluded from Q1 non-GAAP gross margin is approximately $60,000 in stock-based compensation expense and approximately $400,000 of amortization of purchased intangibles. The reduction in amortization of purchased intangibles in cost of goods sold versus prior quarters is due to the impairment write-down we recorded in the fourth quarter of 2008. We believe non-GAAP operating expense will increase approximately $900,000 sequentially to between $17.3 million and $17.5 million in Q1, due primarily to increased tape out charges from new products during commercialization as well as typical increases in payroll taxes in the early quarters of each in a year. We don't expect the material change in headcount and will continue our cost containment measures, which include a delay in annual salary increases. Please note that we will exclude from our non-GAAP operating expense; approximately $3 million for stock-based compensation expense. As a result of the impairment write-down of purchased intangible assets in the fourth quarter of 2008, there is no material amortization of purchased intangibles in the first quarter. We expect to generate less than $100,000 in net interest income and we do not expect to record any material income tax expense in Q1. We estimate that our non-GAAP basic weighted average share count will be approximately 68.6 million shares in the first quarter. Assuming the mid-point of our guidance, we would expect to report a non-GAAP loss per share of approximately $0.07. Moving to the balance sheet, we expect cash, cash equivalents and marketable securities to be approximately $30 million at the end of Q1. With regard to DSOs, we expect DSOs to get back to a more typical 50 days in Q1. We expect inventory turns in Q1 to improve slightly from Q4 as we work off higher than normal inventory levels. So now, I'll turn it back over to Patrick.

[Patrick Henry:]

Thank you, Dave. To summarize, this quarter's results showed

[Operator:]

(Operator Instructions). We will take our first question from Tim Luke with Barclays Capital. Please go ahead.

[Debra Hart:]

Tim, are you there?

[Operator:]

Mr. Luke, your line is open. If you could please check your mute button, or pickup your handset. Mr. Luke, are you there? I am not hearing a response. We will move to our next participant. We will go to Sandy Harris with Signal Hill. Please go ahead.

[Sandy Harrison:]

Thanks. Good afternoon everyone.

[Patrick Henry:]

Hey, Sandy.

[David Lyle:]

Hello, Sandy.

[Sandy Harrison:]

So, I can certainly understand the limited visibility. We've heard that from a number of companies out there. But, just to kind of understand the delta between 22.5 and the 25.5 and as much as you can share with us, what determines the low-end versus what determines the high-end? Is it one order or is it one OEM, ODM? What should we be thinking?

[Patrick Henry:]

I think we're going to see, at least right now, a lot of more turns business during the quarter than we would ordinarily see, and it's kind of across the product lines. We’re just trying to be conservative on our guidance to make sure that, whatever we put out there, we do have. David, you want to provide any color on that?

[David Lyle:]

Yeah, I think there is not a particular customer or product line that we’re pointing to. I think that’s the important thing.

[Sandy Harrison:]

So basically, the point is, without knowing or without having the backlog, it got sort of spread out a little bit to what you could do.

[David Lyle:]

Yeah.

[Patrick Henry:]

Yeah and that's why we are writing with a little broader range than typical.

[Sandy Harrison:]

Got you. And then, if you listen to the comments that we've heard from both CISCO, CES as well as last night on the call, they talked about the importance of connectivity and they talked a bit about some of the set-top box business. When you guys look forward, have the carriers given you any further visibility than you had a quarter ago, one they're going to release? I guess, asking it differently, if they confirmed or changed their plans on some of their deployments at this point, or is it still sort of steady as you go?

[Patrick Henry:]

From a design win perspective and from a deployment timing perspective, things are relatively on track with the two Tier 1 operators that we've talked about historically and we are seeing some momentum with some additional Tier 1 operators that are not getting a little bit more serious about moving into trials and at least preliminarily talking about initial deployments late this year. How much volumes those are going to drive? I think is really going to be driven by the overall macro economy and what goes on there, if things continue to deteriorate from an economic standpoint, even though they do have deployments. We'll have to see kind of how aggressive they get with those deployments. I think the two things that are working in our favor are that MoCA is clearly becoming the de facto standard in the market around connected home entertainment specifically in US with all the major Tier 1 carriers and operators with the exception of AT&T. And that's evidenced by who is in the MoCA alliance and who is actively participating. I think the other thing that bodes well for us is that both AT&T and Verizon continue to have a great deal of success with launching both the viewers product and the files product respectively, which is turning away somehow more subscribers from both satellite as well as cable. And one of the primary differentiators that those two services have are the multi-room DVR service, which indicates that Verizon is enabled by MoCA.

[Sandy Harrison:]

Got you. All right. Thanks for that clarification.

[Patrick Henry:]

Sure.

[Operator:]

We will take our next question from Daniel Amir with Lazard Capital Markets. Please go ahead.

[Daniel Amir:]

Thanks a lot. With regards to your visibility, and you've commented that obviously Verizon's subscribers is doing fairly well, and there is a reduction of inventory by Verizon that I guess is negatively impacting you guys for the past couple of quarters. And do you think, it will get to the bottom in the second quarter in terms of inventory at a level where Verizon and other carriers will start ordering again, just with the current demand that they have, or is this going to be something that may still take two or three or more quarters?

[Patrick Henry:]

I think a lot of its going to depend upon what happens to the broader economy and how that impacts subscriber growth. I think everybody, right now, is just being super cautious. Everybody is taking inventory positions in a down-to-levels that are very well into the way you would carry for an ongoing basis which means, people are just concerned, number one. And number two, they're relying on the supply chain to come through with any upsides. That can only last for so long, if in fact there is subscriber growth. So, a lot of it really depends upon how the overall economy develops and how subscriber growth happens over the next quarter or so.

[Daniel Amir:]

Okay. Have you seen any change in terms of ASPs in the market as some of your competitors have recently announced products? Do you see something changed in the competitive landscape that is impacting pricing?

[Patrick Henry:]

We've always been pretty aggressive in terms of forward pricing our products, because we've got a service provider deployment. We make typically long-term commitments to our OEM customers and we continue to be on track with traditional price erosion that we see. It's nothing extraordinary or different than what we've seen historically there. The competitive announcements around CSS, specifically in MoCA is more in a sample stage at this point. We do think we'll see a stronger competition as we enter the latter part of this year and some amount of market share loss really in 2010 based on those competitive products, but part of our rationale in being aggressive in terms of going to 65 nanometer. It has given us a position to be able to compete more effectively on price as those products get into the market late this year and in early 2010.

[Daniel Amir:]

Okay. And in terms of the OpEx levels, you have the tape out this quarter. Should we expect OpEx to decline into the June quarter or kind of stay at these levels?

[David Lyle:]

Yeah, I think at least in the first half they are going to stay at around these levels especially with the increase in payroll taxes that you experienced in the first part of the year. And then it's going to depend on a lot on timing of other tape outs that occur over the next year.

[Patrick Henry:]

I think that the one kind of caveat to that would be that we've got to monitor what's happening in kind of the broader economy and is that going to impact our top-line. We see that the economy really continues to deteriorate and it starts affecting our business in a bigger way, we will obviously make the appropriate OpEx reductions. Right now, we have some very important kind of long-term R&D initiatives that we have underway that don't drive immediate revenue, but we feel are important to the overall strategy of the company and we continue to support everything at pretty aggressive levels there. So, if things did get a lot worse obviously we would have to respond from additional OpEx cuts.

[Daniel Amir:]

Okay, thanks a lot.

[Patrick Henry:]

Sure.

[Operator:]

We will take our next question from John Pitzer with Credit Suisse. Please go ahead.

[John Pitzer:]

Yeah, good afternoon, guys. Thanks for taking my question. Dave, just to say on the OpEx, just for some clarity. When you look at the $900,000 increase going into the March quarter, how much of that is the tape out versus the increase in payroll taxes and I guess if you [ex] those out, would OpEx have been down sequentially? For example, are you still doing things relative to the revenue decline with the core OpEx number?

[David Lyle:]

I won't break out the detail of the change, but I think we continued our operating expense control. So we’re still seeing some goodness out of that. Actually we saw a lot of goodness out of that in Q4. I don’t think Q4 is an aberration if that’s what you’re asking. I think the combination of the payroll tax increase as well as the tape out is driving that incremental spend.

[John Pitzer:]

And then Patrick, you talked a little bit about mix shift back towards to the MoCA product in the March quarter. Can you help us understand, how strong that mix shift is occurring relative to DIRECTV on the SWM build in the December quarter? Is MoCA actually going to be up in Q1, or, help me understand, how much the mix shift is moving?

[Patrick Henry:]

Well, really, we will not break out the revenues by product line because it does tie very directly to the service provider deployments at this stage. Once we get a broader set of deployments within MoCA or within CSS, and the broader sell it after unit business, we might be able to break down a little bit more. I think Dave pretty much covered the ratios, the level of detail, that we’re comfortable at. Dave, do you want to add any color on that?

[David Lyle:]

I think that we don’t want to get into that much detail at this point.

[John Pitzer:]

And then, last question from me guys. When you look at the Ethernet MoCA bridge, can you help me understand a little bit the sales cycle there? You said, not very meaningful to the back half of the year, but it sounds like that’s more of a direct consumer sale and I’m just trying to figure out what the margin profile and sales cycle around that will look like?

[Patrick Henry:]

Yes, the NETGEAR in dealing products is positioned more in the kind of straight consumer retail products from what they are telling us. This is really directed at these, over-the-top video service applications, the Netflix type of applications, which are embedded and use a variety of different consumer electronics products, and where you don't have category 5 cabling in the home so you can use MoCA. I think, out of the gate, like any new products these consumer electronics guys usually, introduce a high-end product, more to a skimming price strategy. So, we wouldn't expect to see a lot of volume on the front-end. NETGEAR announced their initial product, in time for Black Friday last year, but it was just through online retail. And I think, what we will see is them giving in the more bricks-and-mortar retail see what the customer uptick is. And if there is evidence of being big then they'll accelerate in kind of more broadly base to the plans. A lot of this is going to be based on two kinds of bundling opportunities there are; with some of these bigger box consumer electronics products that embed some of these services. So, it's kind of at an early stage, but we would be able to kind of give you better updates as we move along. And right now, we don't have big numbers in our internal forecast and plan around those; but I don't think it looks like, especially with streaming video services for the web, at least now they have caught up, they could drive pretty substantial volumes over time.

[John Pitzer:]

Fair. And Patrick, help me understand the anticipated margin model for this product relative to the core business is about the same?

[Patrick Henry:]

Yeah. It's going to be about same. Probably a lot of large, traditionally our MoCA products , are below the target range of 50 to 52 and the satellite outdoor unit products being kind of high performance sort of products are above the range.

[John Pitzer:]

Great. Thanks guys.

[Patrick Henry:]

Sure. Thanks, John.

[Operator:]

(Operator Instructions). And we will take our next question from Tore Svanberg with Thomas Weisel Partners. Please go ahead.

[Evan Wang:]

Hi there. This is Evan Wang calling in for Tore Svanberg.

[Patrick Henry:]

Hi Evan.

[Evan Wang:]

Hi, I have just a couple of questions. One is about your accounts payable being down this quarter. Does that reflect in anyway the linearity in your December quarter and what can we read from that for the coming quarter?

[David Lyle:]

Yeah, I wouldn't read anything into it for the coming quarter. I think that's about all I can say at this point.

[Evan Wang:]

Okay. And also, regarding your outlook for the March quarter, could you comment on what kind of trends business relative to past quarters that you need to reach your targets?

[David Lyle:]

Yes, again, we don't want to talk too much detail about background and linearity if we can. We actually provided a wider revenue range, which does indicate you're going to have a little bit some linearity this quarter.

[Evan Wang:]

So, to reach within that range, would the turns be, say consistent with historic turns or is it a lower turns or higher turns. Could you give qualitatively any kind of color on that?

[David Lyle:]

I think Patrick mentioned earlier that it's going to be a little different than our historical turn business this quarter, just because visibility is down and predictability is a little tough in our business.

[Evan Wang:]

Okay, thanks. That's fair. Thank you very much for taking my question.

[Patrick Henry:]

Thanks Evan.

[David Lyle:]

Sure

[Operator:]

We will take our next question from Anton Wahlman with Spherix. Please go ahead.

[Anton Wahlman:]

Hey, David and Patrick, can you hear me?

[David Lyle:]

Yeah.

[Patrick Henry:]

Hi, Anton.

[Anton Wahlman:]

Yeah, Patrick you said something. I just wanted to clarify that I wasn't sure whether I heard it correct or not, but after you mentioned that you had two Tier 1 operators for MoCA that you were believing you were going to start ramping here towards the latter stages of the year. You said something about some new devices and I wasn't quite sure what you said there?

[Patrick Henry:]

I didn't mention new devices, but we've kind of historically talked about two additional Tier 1 service providers kind of launching in the summer time, ramping in the second half. We are seeing some additional traction with additional Tier 1 service providers that appear to be getting a little more serious moving into a more of an aggressive field trial stage with at least preliminary plans for deployment late this year. So, we are giving kind of broader base momentum, beyond the two Tier 1's that we've talked about historically.

[Anton Wahlman:]

So, two Tier 1’s sort of mid year, maybe currently second half of the year, and then you are saying basically you a shot at maybe getting some initial business with maybe another couple of significant operators perhaps before the calendar year closes?

[Patrick Henry:]

Yeah, one or two. Those two could slip pretty easily into the first part of 2010, but with the chance of getting some revenue in Q4.

[Anton Wahlman:]

And the nature of these MoCA deployments, obviously, we are talking about some combination of cable and/or satellite players would be essentially to go head-to-head with the Verizons of this world. The main application being multi-room DVR and we should be looking at typically at least two maybe three chipsets per household in those types of deployments given the nature of the architecture that those types of operators tend to pursue.

[Patrick Henry:]

Yeah, that's directionally accurate.

[Anton Wahlman:]

Okay. Well, that's all I had. Thank you, Patrick and David.

[Patrick Henry:]

All right.

[David Lyle:]

Okay, Anton.

[Operator:]

We will take our next question from Gene Weber with Weber Capital Management. Please go ahead.

[Gene Weber:]

Hi, Patrick and David.

[Patrick Henry:]

Hi, Gene.

[David Lyle:]

Hi.

[Gene Weber:]

And Debbie. Two questions, first, the simple one. In your guidance in the last call, you said that your ending cash was going to be around $31 million and you said there is going to be a large CapEx in this fourth quarter, and you came in obviously at $34 million in cash. Should we anticipate that big spend is going to be in the first quarter?

[David Lyle:]

No, in fact the big spend wasn’t relative to our cash position of big spend, it was about a $1 million for a tester. But we just had some great success in terms of our collections and I also talked about that as accounts payable item, that one item which was also a decent size, like a payable, that got questioned in Q1. It was more like a timing issue than anything else.

[Gene Weber:]

Okay. So, you’re saying you did make that. You did pay for that production level tester in the fourth quarter then?

[David Lyle:]

Yes.

[Gene Weber:]

Okay. And the more interesting question is on DIRECTV. Could you repeat what’s going on with the SWM product? You had said or Patrick had said in his remarks that DIRECTV has decided to slowdown some projects. Could you repeat that again and maybe give us a little more color?

[Patrick Henry:]

Yeah, so probably the best thing to do, in order to answer this question, is kind of important, to cover the value proposition in CSS first and then explain things in that context. There are three main immediate benefits for deployment of CSS in an outdoor unit installation. The first, in many cases you reduce the time and materials spend for installation, then CSS based outdoor units require a single cable drop from the roof antenna and in many cases the installer uses the existing cabling in the home and this can save installation time and installation cost. The second thing is, there is a likelihood to be what we call reduced pre-install chain and this is when a customer declines service after the truck has been rolled. In some cases, when a satellite TV installer destroys the cabling requirement for installation of satellite TV service they decide not to get the service because it's kind of an ugly situation. So, generally CSS based outdoor units can improve the esthetics of the installation for the home owner. And then third, we expect there to be improved reliability for CSS based outdoor unit installations, because you have fewer cables, fewer connectors and there is inherent reliability associated with those kinds of situations. So, there are a number of longer-term benefits for CSS outdoor units in addition to these, especially for upgrading to more advanced services, so kind of that's the backdrop. In the case of DIRECTV, the SWM outdoor unit which is based on our CSS is a more expensive dish than the traditional SWM line ODU. So the additional CapEx has to be covered somehow by OpEx savings to justify the product. And in today's kind of tough economic climate, companies are cutting back CapEx that can either be deferred or did not show an immediate tangible payback. And DIRECTV is really in the early stages of deployment of this technology in single family unit installs. And as they gain experience in more data about the benefits of the technology, we remain optimistic about the prospects of SWM ODUs being deployed in a larger footprint. Right now, our plan is really to deploy in kind of a high-end HD new installs, and as they gain more confidence in the technology they could roll it out more broadly.

[Gene Weber:]

Okay, so they are still using it but not in as many of their installations as they had planned on earlier?

[Patrick Henry:]

Yes. So, initially kind of before the heavy hit in Q4, from a general economy standpoint they are willing to kind of be a little bit more aggressive without having the data at this base time, of confidence that will eventually play out. I think now just generally and not knowing with CSS, with other technologies they're being more cautious to make sure that they preserve CapEx. And I don't DIRECTV is unique in that situation. I think a lot of the big service providers are really doing that in terms of tightening down CapEx.

[Gene Weber:]

Okay. But you didn't answer my question, Patrick. They are still, as far as you know, deploying, but they are being much more selective in deploying those higher end dishes that use you CSS?

[Patrick Henry:]

Correct.

[Gene Weber:]

Okay, great. Thanks very much. I appreciate the answer. It was helpful.

[Patrick Henry:]

Good.

[David Lyle:]

Thanks, Gene.

[Operator:]

(Operator Instructions). And we will take a follow-up from Daniel Amir with Lazard Capital Markets. Please go ahead.

[Daniel Amir:]

Yeah, one thing I missed earlier. Can you clarify again your stock-based comp this quarter and your amortization?

[David Lyle:]

Yeah. Historically, we've been with stock-based compensation we've been in the kind of the $3 million to $3.5 million quarter range and that obviously will continue. But because of the goodwill in intangible impairment write-down, you're not going to see a big amortization of purchased intangibles number hit each quarter. So that was really my point; whether its going to be a less reconciling items between GAAP and non-GAAP at the end of the day.

[Daniel Amir:]

So you would have only about $450,000, right?

[David Lyle:]

For amortization of purchased intangibles, yes, and that would be in addition to the $3 million plus per quarter on stock-based comp.

[Daniel Amir:]

Okay, so in addition to the $3 million? Okay.

[David Lyle:]

Yeah. It's historically that amortization of purchased intangibles numbers, was in the $2 million to $2.5 million a quarter range.

[Daniel Amir:]

Okay. So, going forward, we should look at it in the $3.5 million range?

[David Lyle:]

That would be safe to say.

[Daniel Amir:]

Okay, thanks.

[David Lyle:]

No problem.

[Operator:]

We will take a follow-up question from Anton Wahlman with Spherix. Please go ahead.

[Anton Wahlman:]

Yeah, just one more thing. Patrick, I know that G.hn was pretty active here certainly in December, not sure what happened in January, but maybe if you have an interest in laying out your thoughts on your position in this process over, and admittedly, obviously a long period of time, but this will take to make an interpretation.

[Patrick Henry:]

Yes. This is kind of to clarify for everybody else. There is a ITU standard being worked on called G.hn, which basically proposes the next generation wireline home networking technology that work on Coax Power Line and Twisted Pair. In the fall the ITU had, I don't even know what they called it; it wasn't a specification but kind of a pre-specification where they specified about 70% of the G.hn phi. I think it's called a draft resolution or something like that. We are pretty far away from our opinion about actually getting to a final spec related to G.hn. It's only kind of a spec, but a 70% completed [phi] and no completion on the Mac yet. So we are monitoring this closely. We are participating in the ITU standardization process. Our primary focus near-term is commercialization of our 65 nanometer MoCA 1.1 product and then really investing in MoCA 2.0, which is where most of our end customers are driving towards. Longer term as we look into maybe 2011, 2012, kind of the follow on for MoCA 2.0, G.hn could eventually become important in that timeframe, but it's still kind of uncertain right now.

[Anton Wahlman:]

Okay. That's helpful. Thank you.

[Patrick Henry:]

You bet, thanks Anton.

[Operator:]

At this time there are no further questions. Ms. Hart, I’m going to turn the conference back over to you for closing comments.

[Debra Hart:]

Great, thank you. We’d like to thank you all for participating today. There is going to be an audio replay of this call available in the IR section of our website. You can also access it by dialing 719-457-0820 and entering the reservation number 5633154. Please note that although this call will be available for replay, except for our historical results all information in the call is as of today's date, February 5th, 2009. We have undertaken no obligation or commitment to update any information presented today. Please feel free to call me if you have any additional questions. Again, thank you all for participating. Have a nice evening.

[Operator:]

Once again ladies and gentlemen, this will conclude today's Entropic Communications conference call. We do thank you for your participation. You may disconnect at this time.