Nick Kormeluk – Investor Relations Kishore Seendripu – Chief Executive Officer and President Adam C. Spice – Chief Financial Officer.

Tore Svanberg - Stifel Nicolaus & Company, Inc. Ross Seymore - Deutsche Bank Anil Doradla – William Blair Gary Mobley – Benchmark Capital Alex Gauna – JMP Securities Quinn Bolton – Needham & Company.

Good day, ladies and gentlemen. Welcome to the MaxLinear Second Quarter Earnings Conference Call. Today’s call is being recorded. At this time, I'd like to turn the conference over to Mr. Nick Kormeluk. Please go ahead, sir..

Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's second quarter 2014 financial results. Today's call is being hosted by Dr. Kishore Seendripu, CEO; and Adam Spice, CFO.

During the course of this conference call, we will make projections or other statements regarding future conditions or events related to our products and business.

Among these statements, we will provide information relating to our current expectations for third quarter 2014 revenue, including expectations for revenue growth in our cable, terrestrial, satellite and other target markets; gross profit percentage and operating expenses and our current views regarding trends in our markets, including our views of the potential for growth in our cable, terrestrial and satellite markets.

These statements are forward-looking statements within the meaning of Federal Securities Laws, and actual results may differ materially from results reflected in these forward-looking statements. We are subject to substantial risks and uncertainties that could adversely affect our future results.

Our business and future operating results could be adversely affected if our current target markets, including the terrestrial, cable and satellite markets, do not grow, or if we are not successful in expanding our target addressable markets through the introduction of new products.

In addition, substantial competition in our industry, potential declines in average selling prices, risks relating to intellectual property protection and outstanding intellectual property litigation and cyclicality in the semiconductor industry could adversely affect future operating results.

A more detailed discussion of these risk factors and other factors you should consider in evaluating MaxLinear and its prospects is included under the caption Risk Factors in our filings with the Securities and Exchange Commission, in particular, our most recently filed 10-K and 10-Q as well as our soon to be filed 10-Q for the second quarter of 2014.

These forward-looking statements available are made as of today, and MaxLinear does not currently intend and has no obligation to update or revise any forward-looking statements. The second quarter 2014 earnings release is available on the company’s website at maxlinear.com.

In addition, MaxLinear reports gross profit, income or loss from operations and net income or loss, and basic and diluted net income or loss per share in accordance with GAAP and, additionally, on a non-GAAP basis.

Our non-GAAP presentations exclude the effect of stock-based compensation expense and its related tax effect, accruals under our equity settled performance-based bonus plan, expenses related to a prior patent litigation matter with Silicon Laboratories and outstanding patent litigation with Cresta Tech.

Management believes that this non-GAAP information is useful because it can enhance the understanding of the company's ongoing economic performance. And MaxLinear, therefore, uses non-GAAP reporting internally to evaluate and manage the company's operations.

MaxLinear has chosen to provide this information to investors to enable them to perform comparisons of operating results in a manner similar to how the company internally analyzes its operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today.

The earnings release and reconciliation is available on our website, and we ask that you review them in conjunction with this call. And now, let me turn the call over to Kishore Seendripu, CEO of MaxLinear..

Thank you, Nick, and good afternoon, everyone. Thank you all for joining us today. Before jumping into the financial highlights, I would like to note that in the second quarter of 2014 we realized record revenues. We grew our top line by approximately 10% sequentially and 20% year-on-year.

Our sequential revenue growth in the quarter reflected strong movement in Cable, combined with growth across hybrid TV tuner and terrestrial set-top box shipment. We also witnessed the continuation of the initial phase of the ramp in the Satellite gateway shipment.

We believe that satellite gateway and satellite digital outdoor unit applications represent both an exciting new addressable market and a multi-year revenue growth opportunity for MaxLinear. Moving on to the financial specifics, Net revenue in that second quarter of 2014 was $35.6 million above the midpoint of our guidance.

GAAP and non-GAAP gross margin in the second quarter were approximately 62.5% and 62.6% respectively above the high end of our guidance. GAAP net loss in the second quarter was $600,000 or $0.02 per diluted share, and non-GAAP net income for the second quarter was $5 million or $0.13 per diluted share.

I will now discuss current trends in our business. In the second quarter of 2014, Cable exhibited sequential growth and strength and stood at 69% of our total revenue versus 67% in the prior quarter.

Growth in Cable outpaced our expectations for the second quarter growing approximately 12% sequentially led by DOCSIS 3.0 gateway applications particularly in data gateway and media server applications.

Based on the current bookings and backlog and the exceptionally strong growth witnessed in the first half of 2014, we expect that growth in Cable revenues are likely to moderate in the third of 2014. Adam, our CFO will provide more details in his third quarter guidance a bit later.

In the second quarter, we experienced strong and relatively balanced growth across the range of our DOCSIS 3.0 solutions. These solutions range from our wideband eight-channel solutions to our newest 16 and 24 channel full spectrum capture cable receivers addressing 1 gigabit per second DOCSIS 3.0 cable modem applications.

We also experienced a return to growth in cable media server gateway applications across the range of operators. We believe that as the media server model continues to expand in its deployment footprint, we are well positioned to exploit these exciting growth platform opportunity with our leading full spectrum capture cable receiver solutions.

Moving to the Terrestrial and Satellite TV markets, consistent with prior guidance revenues from Terrestrial and Satellite broadcast increased approximately 5% sequentially. We observe modest growth attributable to both hybrid TV and set-top box applications along with contribution from the continuing initial ramp of our satellite Gateway solutions.

As we look forward into the second half of 2014, we not only expect significantly stronger demand for a 65-nanometer super radio tuners, addressing a broad range of hybrid TV and set-top box applications but also for our ISDB-T tuner-demodulator SoC shipping into Latin American pay-TV operators.

In the satellite TV market, we experienced growth from the early ramp of our full spectrum capture cable receiver gateway application into our first operated deployment and expect to realize growth in the second half of 2014 as a second operator prepares for volume deployment.

Supporting our growth outlook for satellite we recently announced and jointly demonstrated with ST Microelectronics an Ultra HD HEVC satellite server platform.

With this exciting collaboration within MaxLinear and his team Microelectronics is targeted at the growing number of satellite pay-TV operators looking to deliver broadcast 4K Ultra HDTV services along with other value-added features, such as multichannel recording, multi-room viewing and content streaming to multiple devices throughout the home.

We are very pleased about the pipeline of design wins we have garnered for our digital channel stacking SoC at major global satellite pay-TV operators addressing the satellite digital outdoor unit market.

With the recent tape-outs of production mask sets for our satellite digital outdoor unit solution, we are well poised to support initial volume production at the end of this year.

In conclusion, we delivered record revenue in the quarter driven by strong growth in demand for DOCSIS 3.0 cable gateway applications, seasonally typical modest growth in terrestrial revenues and the continued initial early phase ramp over satellite gateway shipments.

We continue to be optimistic that our growing design in pipeline in the satellite TV gateway and digital outdoor unit markets is poised to become a meaningful component of our revenue mix as we progress through 2014.

As always, we continue to evaluate and target a new addressable markets for our industry-leading broadband Full-Spectrum Capture RF front-end technology platform in areas beyond cable, terrestrial and satellite TV applications.

We look forward to providing additional color on our target addressable market expansion and efforts over the next several quarters. Now let me turn the call over to Mr. Adam Spice, our Chief Financial Officer, for the review of the financials and our forward guidance..

Thank you, Kishore. I will first review our results and then briefly discuss our outlook. In summary, our Q2 revenue was $35.6 million, which was above the midpoint of our prior guidance and came in at better than expected gross margins which contributed meaningfully to the operating leverage as evidenced in our results.

As Kishore noted, strength was witnessed predominantly in cable data gateways and media servers the continued ramp of satellite gateway solutions and moderate growth in terrestrial TV applications.

Now moving to the rest of the income statement, GAAP and non-GAAP gross margin for the second quarter were approximately 62.5% and 62.6% of revenue respectively, above the high end of our prior guidance of 61% to 62% on both a GAAP and non-GAAP basis.

This compares to GAAP and non-GAAP gross margin of 61.7% and 61.8% respectively in the first quarter of 2014, and GAAP and non-GAAP gross margin of 58.1% and 61.9% respectively in the year ago before.

Our Q2 GAAP operating expenses increased $1.7 million sequentially to $22.6 million, which includes $3.7 million of stock-based compensation, $1.2 million for an accrual related to our performance-based equity bonus plan for 2014, and $700,000 in net professional fees related to the Cresta Technology patent litigation matter which was disclosed in our previously filed 10-K for the year ended December 31, 2013.

Consistent with 2013, payouts under our 2014 performance bonus plan are expected to be settled in shares of MaxLinear stock. Net of these items, OpEx was $17.0 million, which was up $700,000 sequentially but $500,000 lower than our guidance $17.5 million, and up from $14.5 million in the year-ago quarter.

Second quarter GAAP operating expenses attributable to R&D was up approximately $800,000 quarter-on-quarter, and up $1.6 million year-on-year to $13.9 million, which included stock-based compensation of $2.4 million and $700,000 accrual related to the 2014 bonus plan.

Excluding stock-based compensation and bonus plan accruals, R&D was up approximately $400,000 on a quarter-on-quarter basis to $10.8 million.

Within this sequential $800,000 increase in R&D spending, stock-based compensation and stock-based bonus accruals step-up was approximately $400,000 with reminder drive by payroll related increases from a combination of an annual merit process, our Q1 and Q2 headcount additions and increases in embedded IP licenses for recent tape-outs, which were offset by lower equipment rentals, mats costs, and travel-related spending.

Second-quarter GAAP operating expenses to SG&A increased approximately $900,000 on both quarter-on-quarter and year-on-year basis to $8.7 million which included $1.3 million in stock-based compensation, $600,000 in bonus plans accruals and $700,000 in net professional fees related to the previously mentioned Cresta Tech patent litigation.

Excluding stock-based compensation, bonus plan accruals and the net professional fees relating to the Cresta Tech patent litigation, SG&A was up $300,000 on a quarter-on-quarter basis to $6.2 million, driven by the full-quarter effect of incremental hiring and facilities expansion-related expenses in India and Carlsbad.

At the end of the second quarter 2014, our headcount was 362 as compared 344at the end of the first quarter 2014 and 297 in the year-ago quarter, we continue to add R&D headcount globally to staff growth initiatives and are able to drive operating leverage in R&D by appropriately balancing hiring across our R&D design centers in the U.S., India, China and Taiwan.

GAAP loss from operations was $300,000 million in Q2, compared to the loss from operations up of $800,000 in the prior quarter and loss of $2.8 million in Q2 of last year. Non-GAAP income from operations was $5.3 million in Q2 compared to income from operations of $3.8 million in the prior quarter and $3.9 million in Q2 last year.

GAAP net loss per share in the second quarter was $0.02 on basic shares outstanding of 36.1 million. GAAP net loss per share includes $3.7 million and stock-based compensation expense, $1.2 million for an accrual related to our 2013 performance based bonus plan; and $700,000 in net professional fees attributable to the Cresta Tech patent litigation.

This compares to GAAP net loss per share of $0.02 from the prior quarter and net loss of $0.09 in Q2 of last year. Net of these items are non-GAAP earnings per share in Q2 were $0.13 on fully diluted shares of 38.8 million, compared to $0.10 per share in Q1 2014 and $0.11 per share in Q2 of last year.

Moving to the balance sheet and cash flow statement. Our cash, cash equivalents and investments balance increased $2.8 million sequentially to approximately $92 million, an increase $10million compared to $82 million in Q2 of last year.

Our cash generated from operations in the second quarter of 2013 was $7.6 million, approximately $3.5 million greater than in the first quarter of 2014 and $1.3 million more than the year-ago quarter.

Our days sales outstanding for the second quarter were approximately 55 days, or 3 days less than the previous quarter and approximately 1.5 days less than the year-ago quarter. As a reminder, we only recognize revenue on a sell-through and as such we are not subject to revenue fluctuations caused by changes in distributor inventory levels.

Our inventory turns were 5.1 in second quarter compared to 4.7 turns in the first quarter and decline relative to the 5.5 turns in the year-ago quarter. That leads me to our guidance. We expect revenue in the third quarter of 2014 to be in the range $36.5 million to $38 million.

Built into this range, we expect cable revenues to be down sequentially 2% to 5% and terrestrial and satellite revenues to increase approximately 20% to 25%. More specifically, within cable, we expect the growth in media server and video applications to offset weakness in the data modem gateway and DTA applications.

Within Terrestrial and Satellite, we expect majority of the growth in the quarter to come from seasonally strong hybrid TV shipments along with broad strength across a range of Terrestrial TV set-top box applications and the continued ramp in the Satellite gateway shipments.

We expect GAAP and non-GAAP gross profit percentage to be approximately 62% to 62.5% in the third quarter. Our gross profit percentage forecast could vary plus or minus 2% depending on product mix and other factors, in particular, the relevant contribution of cable, terrestrial and satellite applications.

We expect Q3 2014 GAAP operating expenses to increase approximately $2 million relative to the Q2 2014 quarter to $24.6 million, with the increase driven primarily by tape-up related expenses for two production 40 nanometer masks related to our digital channel stacking outdoor unit initiatives and to a lesser extent payroll expense reflected on the full quarter affect or incremental Q2 hires anticipated Q3 hiring, 28 nanometer tools cost and the ongoing Cresta Tech IP litigation.

We similarly expect that Q3 2014 non-GAAP operating expenses will increase sequentially approximately $1.5 million to $18.5 million. With the increases driven by the previously referenced payroll satellite outdoor tape-outs, incremental hiring and increased spending on 28-nanometer design tool.

In closing, we are pleased to report record Q2 revenues which were above the midpoint of our guidance and with accompanying gross margins that were above our recent historical actions and guidance range.

We remain excited at our prospects in the satellite TV market, supported by a design win pipeline to this new TAM expansion opportunity that continues to progress towards production volume deployment. With that, I'd like to now open the call for questions.

Operator?.

Thank you. [Operator Instructions] and our first question comes from the Tore Svanberg with Stifel..

Yes, thank you, and congratulations on the record revenue. A few questions. First of all, you guided cable to be down 2% to 5% sequentially. I was hoping you could elaborate a little bit on that. Is that primarily just on the inventory adjustments, or are you actually seeing a slowdown in demand as well. Thank you..

we are also seeing some softening in demand right now but this is a late late-breaking event for us. And at this point it is hard to comment on the inventory, could it be a mix of both because there is some inventory in the channel, it’s possible but we are not being able to verify right now. So those are the facts right now. And I hope that answers..

Yes. No, that's great. And I know you typically don't guide more than a quarter out but this year you sort of had that third leg on the stool, which is satellite. Maybe you could talk a little bit about the ramps there.

I mean it looks like you are expecting growth in Q3, but could we get some more material revenue contribution there in Q4, potentially bucking weakness and seasonality in cable..

Yes, I think I will give you little bit more color on that, but first things first. I think we are making fantastic programs in our design-wins pipeline where we are securing more designs and forming them up and we just released, this is a very unique event for us in this quarter.

We released two production masks for satellite outdoor units, they are two distinct categories of operators and the fact that we released two production masks implies we addressing all of them. So we are very-very excited actually the chips are back in house and they are performing very well the production mass that's the first part of it.

And clearly we have released this because we are expecting some initial shipment of satellite digital outdoor units toward the end of the year, Adam mentioned that in his part of the script.

And the second part of it is the satellite ramp, I think we have always mentioned that the real part of the ramp is going to be really loaded in Q4 and so far, we feel that we are making good progress towards it and I think that is on course.

There are no negative indicators that such a ramp would not happen at this point in time, we have now put supply agreements in place with major end customers and one of the operators is now nicely shipping.

So we plan to add another major one and we feel very good about the way our satellite positioning is and primarily myself I am very happy about satellite outdoor unit also being ready to ship when the customers are ready to take, we hope to ship some initial volume at the end of the year and next year we should see a nice blend of more diversified revenue for the company..

Very good. And when we look at Q3 guidance, it looks like the mix is going to shift a little bit towards terrestrial.

I assume the reason why you are maintaining gross margin the same at this quarter is primarily due to the strength in ISDB-T?.

Actually not. there is a mix of factors. One is that, firstly you must know that one of the things Adam mentioned is that the strength in the gross margin in second quarter also is attributable to the fact that we had a nice bump up in the 24-channel cable products. So the mix shift is in place now and we are seeing some positive benefits of it.

Secondly, we are seeing some operational scale and reducing the cost of our 65 nanometer node which benefits our old cable products and then thirdly, we are also seeing because we are building up scale in the hybrid TV, we are able to get them operational efficiencies squeezed there as well.

So across the board, our operations team is doing a wonderful job of really squeezing out margins and allowing us to gain market share for example in terrestrial TV markets and the fact that ISDB-T demand is also going to grow is a very good theme because that also help some margins but I would not attribute it to one factor, we are doing all of the above and you must note that, we are shifting more and more to 40 nanometer product line and 40 nanometer has hit the sweet spot on the supply set of equations for a lot of companies and so it is for as well..

Okay, one last question -- I know it's sometimes hard to measure your business this way, but how much of your revenue today comes from full-spectrum Capture-type products?.

It’s hard but I will give you an approximate guess because I just happen to see the numbers right now, approximately it’s about now 20% of our quarterly revenue and its only cable. So it’s really, we are really very excited about that.

It’s not only go to leap to us as an expansion of our portfolio into satellite but I think it’s going to do wonderful things for our entire expansion in infrastructure market as well and it’s going to be a while before those play-out but we feel very good with the resonance of our messaging when you meet the infrastructure customers..

Sounds good. Congratulations on the results. Thank you..

Thank you, Tore..

Thank you. And we will continue onto our next question from Ross Seymore with Deutsche Bank..

Hi guys.

Starting off with the cable side, as well, on my side I think I know it's hard to know if it's demand or excess inventory related but how do you think that plays out when you get into the fourth quarter? Is that something where you believe normal seasonality kicks in there? Would it be a little bit better, a little bit worse, depending upon the inventory? Any sort of color on that would be helpful.

.

Ross, hello. I think it’s a very-very interesting, what we are seeing softening almost looks like a typical Q4 brought in advance a little bit into Q3.

So having said that and given the other stuff that’s going to ramp, we normally don’t guide for Q4, right? So our expectation is this that may be it will not be as bad as it normally was in the Q4s previously. But as we head more into the quarter and we will be meeting you at Deutsche Bank in an investor conference.

We hope to shed more color but may we feel that may be it is a little bit ahead of time the Q4 cannot affects right now but that’s premature to talk about until we do the channel check..

And it might be hard, again, since you haven't done the full channel check, but even for what you are seeing today, any inkling that there's some share shifts going on, maybe at the back end, that's leading to some changes at the front end? Any of that as a potential cause of the softness?.

Actually personally we have not seen any share shift I mean to be honest with you guys, some changes in the expectations with our lead customer does impact our revenue full casting and that's exactly what is happened.

So we have not lost any design share of anything, I really have excited actually that the media server gateway shipments have really grown very strongly actually over the last quarter, maybe Adam can yield a little bit more color later but that really goes very well for us.

If anything, I think with the offering with the 24-channel, we are very well positioned. Now the more important thing is that will it continue to share mix change toward 24-channel continue to happen at rapid pace or not that is hard to predict for Q4.

But if that share mix continues to change, we don’t see any reason for any negative votings on how things play out..

And I guess the last question is on the satellite side. I know you've talked about, if I remember right, I think 5 million to 7 million in potential revenues this year and then a stronger ramp next year.

Are you guys on track for that? And how should we think about the relative sizing of what you believe it could be in 2015 off of that 2014 bogie?.

So I just give you a little bit color before Adam gives a little bit more guidance. I would say this that I really feel that touchwood that things should be on track whether it’s 7 or 5, it’s hard to predict right now because there is a steep ramp in Q4 and on 2015 things look very much on good track and traction.

And let me give Adam a chance here to answer that question little bit more precisely..

Yes, Ross, I will give you little more color to on your inventory question. It does—again we don’t have too many data points but the one thing that we can point to is we are some of the customers that we are seeing softness in Q3 for cable they are actually booking in Q4.

So it doesn’t sound to me based on that behavior that you got any kind of persistent inventory issues that’s building out there, Ross. They wouldn’t be placing any orders for Q4 this early.

So that kind of gives some degree of comfort that this probably is more what Kishore mentioned earlier which is may be just a little bit of an early phenomenon and then you usually evidence itself more in Q4 as may be got pulled in little bit but we are not seeing knee-jerk reaction of, hey, we are not even going to place orders for Q4.

We are actually seeing orders being placed for Q4. So that's a good sign I think.

When it comes to the ramping up of the satellite business after 2014 base, it feels like – based on what we think the ramp is happening, is it would be aggressive overly aggressive to point to say 20 million to 30 million type of contribution from satellite next year, I don’t think so.

And that seems like a fairly comfortable place to be based where we think the ramps could be happening. We would always hope for a little bit more upside on the top of that but I think that's probably not an unreasonable place to be right now as far as how see the design, design-wins ramping and so forth.

I think that's also got some conservatism built into it based on hey, not everything ramps aggressively, linearly up into the right. So we got that factored into that that range also..

And just to be clear, you mean 20 to 30 is the range in total, not on top of whatever you do this year?.

That's correct..

Not incremental, but absolute?.

Yes..

Perfect. Alright guys. Thank you..

I just want to give a little bit more color of why I said that maybe it’s—we are seeing in early Q4 boarding year, the reason because when we look into cable market, now that it’s a kind of stabilized marketplace for us on the data side.

Generally when we do customer deals, we know we talk about what could be the annual value of shipments for data gateways and so on and so forth. So that approximately turns out to be right in what sequence it happens, it’s a little difficult. Which quarter is up and down, normally we assume fourth is down.

However we ship may be half a million dollars more than what we anticipated for Q2, and that's the reason you see the earnings leverage as well and the great job we have done in controlling the OpEx.

So that also adds into the comment if the entire year is sort of bounded and you are seeing ups and downs what Q4 looks like, so we feel there is no alarm on that situation for now..

Okay, great. Thank you..

Thanks Ross..

Thank you. And we will continue onto Anil Doradla with William Blair..

So, Kishore and Adam, why do you think that we are seeing some of that seasonality potentially ending up in the September quarter?.

We have no reason to think that the seasonality of Q4 is happening in Q3. It just that the way the odd ordering or the exuberance was for Q1, Q2. We feel that may be there is sort of tampering of that as they head towards the second half of the year.

And remember, I just now told that we look into whole year volume and if that thesis remains intact then maybe we are seeing in early Q4 affecting Q3 or spread between Q3 and Q4..

No, I could say that as we look into Q3, I don’t think we have a particularly speculative Q3 cable forecast because we are very-very fully booked to the numbers that we are filling into our guidance range on the cable side of things.

So again there is room or maybe there is still a lot of time in the quarter where things could play out, we are just kind of giving you the latest and greatest but I think risk balanced view of what we think the demand look likes in the quarter..

And was this at any particular customer, or it was spread across multiple customers?.

I already qualified that that much of the effect is from our major customer of ours and not spread across the other customers..

And on the September quarter guidance, can you give some sense of how much you are expecting out of the satellite?.

I would say that satellite has been ramping nicely since it first started in Q4 of last year from a very-very small number, built nicely throughout the first half. Again, as it is Kishore mentioned in Q4, larger hockey stick if you will but we are going to be in the likely some million dollar contribution in the third quarter from satellite.

But again that doesn’t, I don’t think moderate what we believe our bogies for Q4. We have said before that we have some internal aspirations where we would like to see satellite to be roughly in the 10% of the total revenue mix in the fourth quarter of this year. As Kishore mentioned, I think we are still generally on track to be in that range.

So, we feel that things are progressing pretty much as we would have accepted..

Very good. And finally, on the TV side, terrestrial, you have added 20% plus. When I look at some of your peers, they are talking about a little softness in the TV market.

Can you explain kind of the disconnect between what some of the peers are talking about and your strength in the terrestrial business?.

Okay, I think that's a very good question. And I think there is a way I would answer. Some of the guys were giving you, talk about hybrid television. They are leaning of two or three major customers, right.

And they have had those customers for a while and now you are seeing a natural impact of a very limited growth between those sockets and the aggressive ASP impacts due to competition. In our case, it’s just the opposite. We have been gaining all the newer sockets whenever there is a battle, we are wining them very nicely.

So for us its new design layering in that have started shipping or beginning to ship, so I think that's where the difference is. We are wining designs that are beginning to ramp and the others are pretty much limited in the sockets that they have very little growth within those sockets and very limited wins outside those sockets..

Very good. Okay, thanks a lot guys and congrats..

Thank you..

Thank you. And we will go on to our next caller, Gary Mobley with The Benchmark. Please go ahead..

Hi, guys. Let me also extend my congratulations on a strong quarter. Let me also add a comment that I guess seeing the moderation in ARRIS Group's third-quarter guide this afternoon and, as well, their bookings, I guess it's understandable why you are expecting some moderation in your cable-related business.

But moving on to gross margin, I think your long-term target is about 60%. You are running about 62% to 65% here in the middle part of the year. So I'm wondering if you are at a point now where you are willing to raise that long-term gross margin outlook, at least to the 2015 timeframe..

Hi Gary. I would say that we have been pleasantly surprised.

Our intend is certainly not to sandbag anybody on the gross margin but we surprised by the, I see the improvements that our supply chain team and our engineering team has done to reduce test times and you will get yield up and those kinds of things you do when you are in the volume situation and I think we have done a great job.

So I don’t think that, right now we see anything that would cause us to move aside of our—out of our ordinary range. And I will say kind of in the 60% to 63% range feels about right, keep in mind that Q3 is going to increase in the mix for Terrestrial which is typically lower gross margin.

And then you have Q4 which is again going to be more seasonally driven towards this terrestrial products.

I think earlier in the call we mentioned that some of that mix is actually within terrestrial is helpful to margin, then it has been historically because of the ISDB-T tuner demod, with a little bit better margins there than a tuner-only product, in some cases.

So I would say that as we ramp into the third leg of our business which is satellite, we believe satellite is going to look a lot like our corporate average does today.

Now I think the addition of satellite both on the gateway and on the outdoor unit market will help offset the natural continued compression margin that you should expect on the terrestrial side of the business. So I do think that those things pretty much balanced each other out which is good.

I think a year ago, I don’t think I would have predicted that we would be in an increasing gross margin environment as we head into the second half, at least into the Q3 of this year. So we are pleasantly surprised but I don’t think it would be prudent to point people towards the gross margin range, not 63 points at this point..

Okay.

Kishore, I appreciate your comments on how the mix of 24-channel cable solutions impacted the gross margin, but could you talk a little more in depth about the ASP trends on that front? How is the mix toward 16 and 24 channels on the cable side impacting the overall ASPs? And if you are not willing to share the specifics on the ASP trends, maybe if you can talk about whether or not your unit volumes were roughly in line with the 12% overall growth in cable-related revenue in Q2..

Let Adam give the numbers actually. You will be very encouraged with how the mix has moved to the 24 channels. But 16 channels is becoming less and lesser factor in fact, maybe we hit peak of 16 channels for this quarter may be and then it’s going down. So I think to the benefit of 24 channels, Adam why don’t you put in the numbers here..

So I would say that the, we are certainly getting the benefit of the mixed advantage of 24 channel versus 16. So if you want to think about the rough ratio of 16 to 24, it’s closed on the order magnitude where out of full spectrum capturing cable, probably close to 75% or 80% of those volumes are toward the 24 channel already.

So as Kishore mentioned, 16 seems to have the market has moved pretty aggressively from 16 to 24 channels which something that we wanted to see happen and then it looks it following through on that. And so of course, you get lot of benefits with that including the uptake in ASP of the 24 solutions versus the 16 channel..

I noticed that CapEx was up quite a bit in the quarter, more than twofold year over year. And your PP&E, as a result, spiked up. I'm just wondering if you could share with us what sort of investment was made there..

Sure. So there are actually two areas of investments there to talk about. One is the fact that we did have the production mass that was capitalized in the quarter, so that was about between $600,000 to $700,000 for that particular item. And then there was the CapEx related to our Carlsbad headquarters facility move.

We moved from our legacy facility to a new facility last month which provided significantly more lab space for engineers and so forth. So that was really resumed by those two things, the headquarter facility move and the capitalized tape-out expanse..

Got you. Alright, forget about the move. Alright thanks guys..

[Operator Instructions] and Alex Gauna with JMP Securities. Your line is open please go ahead..

Nice quarter from me as well. I was wondering, Kishore, you said that this cable development was relatively late-breaking. I know you've given a lot of color around it, but did you actually get cancellations and is there any color in terms of is this your new (inaudible).

There were no cancellations at all. It just that we get the forward forecast and we monitor it every time and then there was a moderation in that forecasting process. So the bookings reflect accordingly.

So there were no cancellation per say but I think may be implied in your question is a fact that may be the way we would entering the quarter what is the bookings look like and what is the at the point of the earnings call and I think this time when we entered the quarter we were about 70% booked and at the earnings calls we have about 80% booked.

If you recall from the previous quarters, we are more booked at this point than we are today. There are two factors to it. One is that the cable gets the lots more lead time in the booking, so we benefit from that. And the turns business which is basically the terrestrial market, we don’t get that visibly at this point in earnings call.

So with increased in turns business this quarter combined with the moderation of the cable demand, we find ourselves to 80% booked and therefore we are cautious about guiding any higher than what we have given you in the range so far.

Does that answer your question Alex?.

Yes, it does. Thank you. And I know you talked about maybe that it seems like a little bit of a pull-in of seasonality in Q4. But is it not fair to say that this isn't exactly a seasonal blockbuster quarter, necessarily, for cable.

Is that fair?.

Historically it has been a second and third quarter. Yes, second and third quarter somewhere in between, we hit the peak months.

You are absolutely right but however third quarter tends to be overall for revenues a very peaky quarter for us and so where as cable comes especially strong toward the end of the second quarter, beginning of the third quarter and depending on the which months you will end the bookings, I would say for the company as a whole the revenue in third quarter has tend to be peaky one..

Okay and I know you've already talked about this as well. But your guidance is really strong on the gross margin line, considering terrestrial is up.

Is it not fair to assume that if the mix comes back to maybe a more normal balance with some of your cable coming back and some of your other newer products, especially in the OTU satellite market starting to ramp, you've got some really nice gross margin accretion potential.

Is that fair?.

It’s very-very hard to forecast that far out when satellite is not ramped yet and in the initial parts of the ramp. So it’s hard to figure out what operating advantages you will get in terms of cost of goods sold at this point.

Having said that we feel very good like Adam said and I want to reemphasize the fact that right now we feel comfortable guiding between 60% to 63% and in the future we hope to, we cross our fingers and see how it plays out. At this point, I think 60% plus margin is a very high territory to be in the first place.

So I will be very cautious on raising expectations at this stage..

Yes and I would add to that Alex. I think we have mentioned many times before but the pricing environment particularly in the hybrid TV tuner space is very aggressive.

So we have seen pretty, I would almost say dramatic reductions in ASP over the course of last 12 to 18 months in that market, hopefully that moderates but if it doesn’t moderate and we have don’t have a crystal ball as to whether or not pricing keeps going down or not in that market but if it does, one thing we have done as we have been successful in taking share in that market but it’s an ASP compression market where gross margins has result a compressing also.

So we are trying to take a very balanced view and say okay yes we have got some really nice parts of our business that have nice gross margin characteristics but clearly one of our growing businesses which is hybrid TV doesn’t have those same optics if you will from the gross margin perspective.

So it really is a balanced view and if we would have less success in hybrid TV then we currently forecast, there could some upward bias to gross margin but I think we have taken a pretty balanced view about where we think each of the parts of the business are going to be. And I think that's what you are seeing in our guidance right now..

Well, I was going to say -- I mean, that's what's so impressive right now, because we've seen the price competitiveness in hybrid; and yet you are winning in hybrid; and yet your gross margins are incredibly powerful right now.

Can you talk to me or us about what you are doing on the spec side to create such success without being detrimental to gross margin?.

I missed your thing.

Is it what you are doing on what Alex you just said, could you repeat that question please?.

I'm sorry. I was going to say that you have managed to have such success without deteriorating your corporate gross margin. I'm imagining you must be bringing some really nice benefits on the spec side to have this success.

Can you maybe touch on some of that?.

So I think it’s very fair to say that our performance is by far the best in the industry on the hybrid TV tuner performance and that helps a lot and then we have also tied with the new generation product that we have talked about which reduced the (inaudible) quite dramatically, so that allows us to do pricing.

That's a little bit more value spread even in this world where value is based on really just silica and not the account is not kept very good there by the customers. And thirdly the fact to the matter is we anticipated the price war so to speak.

And we designed accordingly the same time as the volume has picked, we were able to leverage on the supply side to get those benefits. I think I won’t just do a little bit of diversions here from this topic of gross margin but I really think the highlight for me personally is the kind of operating leverage we are developing on the OpEx side.

If you look at it, on the operating expenses side, Adam and team done a great job controlling the expenses. We have achieved a lot more R&D activity with lesser resource in R&D activities.

Therefore you have seen a great OpEx numbers right now and actually it looks very good relative to our guidance but however I think it’s even better if you look into the context of the fact that this quarter we are guiding with two 40 nanometer production maths embedded in OpEx, that's almost like a, I would say anywhere about 1.5 plus million dollars of mass expenses.

So if you look forward, I look forward to the rest of the year and I don’t see a plan where third quarter will appear the peak because I don’t see masks in the next of the year, rest of the year touchwood that I means if you do not have those tool maths that means wonderful things with OpEx once again.

And I think that our operations team, our R&D engineering team and on the SG&A side cost control management related to all the stuff you are doing, I think we really focused this year, beginning of the year to get operating leverage and that's yielding a lot of good results and it’s a bit of a polarized lenses, if you will, if you think about third quarter having to full blown mask expenses.

And it is escaping the attention, I think and that’s where we have done a bang of job here..

To give you an idea Alex and I think for the other folks on the calls, so as Kishore mentioned we came in quite a bit under Q2 for a variety of reasons, I think largely because the engineering team found less expensive ways to get a lot of stuff done and the fact that we didn’t hire as aggressively and where we did hire we got more of an international mixed benefit from that which has been very helpful.

And I think that if you look forward to say, I think the Q3 will definitely be high watermark for OpEx for the year and we should see a more return to more normal OpEx in the fourth quarter which should. There will be a step up from the Q2 levels but pretty modest, right.

So I think in a not to – and that's going to lean too far over the skies on the OpEx side looking forward but that's say Q4 should probably come in where we thought Q2 was going to coming in. So if you want to call that 17.5 so about $1 million step down from what we have guided for Q3 that feels about right.

And just to give you an idea of what’s been going on internally, we had as many tape-outs as a company in the first half of 2014 as we had for the entire year of 2013. So that gives you kind of an idea for the activity levels and the kind of the stuff that's working its way through the pipeline from design to production.

So I think that's also a very good indicator as we kind of look forward in 2015 and beyond. So I think the productivity has been great. I think we have been able to do with pretty modest resource expenditures and we are going to continue to try to drive that because we are all very-very focused on getting more operating leverage in this business..

Thank you. Congratulations again and nice execution. Keep it going..

Thank you. And I will go to our final question from Quinn Bolton with Needham & Company..

Thanks for squeezing me in here.

Kishore, just wanted to ask on the cable side of the business, did you see with the reduction in forecast, was that across both 8 and 24 channel modems or was it more specific to the 8 channel modems?.

Let us just take a look based on our bookings here Adam, take a look?.

So what was the question Quinn, is it 8 versus 24?.

Yes, just -- was the lower guidance for cable in Q3, is that more driven by a reduction in forecast for 8 channels modems, or was it across the board. I guess what I'm trying to ask is you are seeing a shift from 8 to 24, in general.

I think in the first half you saw stronger than expected demand for 8 channel modems which was an encouraging trend and I'm wondering, did we get a little over our skis just in 8 channel, or are you seeing softness in the orders for 24 as well?.

You have indentified that's absolutely correctly. It seems like the market got little bit ahead of itself for 8 channels so we are really seeing a moderation more on 8 channel and you see continued growth even in Q3 at a moderate guidance for the 24 channel so you are exactly right..

Okay, great. And then just wanted to ask, on the terrestrial side you have talked a couple times about strength in the second half, obviously guided up nicely for Q3.

I just wasn't sure whether your comments about second-half strength are way to read in that you think terrestrial stays sort of flattish or potentially grows again in Q4?.

So it’s hard to kind of again when you focus that far up but typically seasonality for TV is a Q4 for North America and Europe and then we start to see a trend toward strength for Chinese New Year for Q4. So we think that we are going to see strength, not as much strength in Q4 as we saw, as far as grow.

We believe there will be growth, still in Q4 in the terrestrial over Q3. And of course you have got a bigger component of satellite that we forecasting in the mix in Q3.

Right now we combined those things together, the terrestrial and satellite together, so certainly when you take those two things together, yes for sure, when you are looking nothing for sure but we are confident that we will see that growth come through Q3 to Q4 but we have more seasonal strength for TV and terrestrial set-up box in Q3 than in Q4..

But very differently we expect to see on the terrestrial side, may be flatten up, given that we are expecting ramp in the satellite to be pretty steep in Q4. So all in all with terrestrial satellite combination grows but you are not going to see the seasonal deep in terrestrial that we typically talk off in the previous years..

I guess I wanted just to focus in on the terrestrial if you excluded the satellite. Terrestrial sounds like it's probably down some in Q4. Obviously, when you put the strong ramp in satellite, it's up as a group.

But terrestrial as a stand-alone entity, probably down Q4?.

No, I don’t think so actually..

Okay..

I think to Kishore’s point it’s probably more of a—it will be a modest growth on the terrestrial TV and set-up box if you look at those two product families together. And then with real growth coming from satellite..

So satellite, you said a couple of times, sort of expectations that satellite could be about 10% of revenue in the Q4. It sounds like it's still less than 1 million in Q3. If you get to 10% in Q4, I mean it sounds like we go from about 1 million or less in Q3 to 3.5 million to 4 million in Q4.

Terrestrial is flat and it sounds like you may have seen some pull-in in seasonality in cable. So maybe that goes well for cable. It sounds like you got a pretty nice Q4. I know its a quarter out.

But is there anything incorrect in that line of thinking?.

I don’t think if there is incorrect in that thinking other than the fact that we are very gun-shy to talk about cable at this point for Q4 right. I think we have kind of indicated that we are still actually getting bookings for Q4 despite giving guidance for a soft in Q3.

So again we don’t think it looks like a major-major issue but I think that the only thing is hard right now because we were kind of surprised late in Q3 by the softening of cable for the quarter. So I don’t think it’s prudent for us to really talk much about Q4.

I think we are more comfortable talking about Q4 for TV and terrestrial set-top box and satellite because there is a seasonality element to it which is a little bit more tangible and there are some new design cycles that are also more tangible for us especially in satellite obviously.

So, it just hard to make a call on cable given the uncertainty that we kind of just pointed to the current quarter..

Got it. Understood. And then my last question just, could you remind us of the satellite gateway ramp, I think the first operator was a European operator that's ramping now. You have a second, I believe, European operator kicking in Q4. And then can you tell us what is the lineup for 2015? Is it both U.S.

and Latin America based operators on the gateway side..

Absolutely. You are absolutely right. The first one was the European operator, the second one is going to be a major European operator, a big much bigger one and then there is an American operator lined up.

There is a Latin American one that’s lined up for whom, whereas the American one the Latin American ones we have bookings that reflect pilot shipments and beyond that lining up in the first half of the year and within those groups we have more than one platform.

So all in all, between those four operators, we are going to see a major spike in the ramp for satellite gateways.

Now, there is another part of the ramp that will have and will just have the initial shipment at the end of the year for satellite digital outdoor units but those involved two major operators in the really high-end platforms that will start – just start at the end of year but really ramp as we head towards the latter half or the first half of the year in 2015.

So I would say there are four operators that are on hope now for shipping.

One is shipping nicely, one is coming online, for one we have started shipping there is a stop and go sort of situation with those guys and there is one North American but that's going to come on line by the end of the year for whom we have booked, bookings for initial pilot shipments..

Great. Thank you, Kishore..

Thanks, Quinn..

Thank you and with no additional questions, I would like to turn the conference back over to our speakers for any additional or closing remarks..

Thank you everyone. As a reminder, we will be attending the Deutsche Bank one on one conference in Las Vegas at the week of September 8, and we look forward to seeing many of you there. We thank you for joining us today and look forward to reporting on a progress to you in the next quarter. Thank you all, thank you operator..

Thank you. And again ladies and gentlemen that does conclude today’s conference. Thank you all again for your participation..