Brian Nugent - Investor Relations Kishore Seendripu - Chief Executive Officer Adam Spice - Chief Financial Officer.

Tore Svanberg - Stifel Ross Seymore - Deutsche Bank Anil Doradla - William Blair Gary Mobley - Benchmark Quinn Bolton - Needham & Company Krishna Shankar - ROTH Capital.

Good day, and welcome to the MaxLinear Q4 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Brian Nugent. Please go ahead, sir..

Thank you, operator. Good afternoon, everyone, and thank you for joining us on today's conference call to discuss MaxLinear's Fourth Quarter 2015 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 relating to our products and business.

Among these statements, we will provide information relating to our current expectations for first quarter 2016 revenue, including expectations for revenue trends in our cable, terrestrial, satellite, high-speed interconnect, and other target markets; gross profit percentage; and operating expenses.

The impact of our acquisitions of Entropic Communications and Physpeed, and our current views regarding trends in our target markets, including our current views of the potential for growth in each of our target 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, satellite, high-speed interconnect, and infrastructure markets do not grow as we currently expect, or if we are not successful in expanding our target addressable market through the introduction of new products.

In addition, substantial competition in our industry, potential declines in average selling prices, risks arising from consolidation in our industry and among broadband operators in our principal target markets, risks relating to intellectual property protection and outstanding intellectual properties litigation, integration risks associated with Entropic Communications and other acquisitions, if any, and cyclicality in the semiconductor industry could adversely affect future operating results.

A more detailed discussion of these risks 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 Form 10-Q for the quarter ended September 30, 2015, and our other SEC filings.

We expect to file our Form 10-K for fiscal 2015 later this month, and encourage investors also to review the information and risk factors discussion that will be included in that filing.

These forward-looking statements are made as of today, and MaxLinear does not currently intend, and has no obligation to update or revise any forward-looking statements. The fourth quarter 2015 earnings release is available on the Company website at MaxLinear.com.

In addition, MaxLinear reports gross profit, income and loss from operations, and net income and loss, and basic and diluted net income and 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 effects, accruals under our equity settled performance-based bonus plan, outstanding patent litigation, deferred merger proceeds, change in fair value of contingent consideration, severance and restructuring charges, impairment and amortization of acquisition-related intangibles and purchased inventory step-up, non-recurring acquisition and integration-related expenses, production mask impairment, and release of valuation allowance due to net deferred liability acquired.

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 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, Brian, and good afternoon, everyone. Thank you all for joining us today.

Before jumping into the details of the financial results, we are pleased to report fourth quarter revenues of $98.9 million, bringing to close what proved to be an incredibly exciting year of revenue expansion, transformative operational scale, and cash generation for our investors. Full year 2015 revenue increased 126%.

This was enabled by the expansion of our broadband platform, owing to the acquisition of Entropic in April 2015; meaningful early revenue contributions from our high-speed optical interconnect solutions, addressing data center, metro, and long-haul network infrastructure markets; and the strong ramp of product shipments from our organic initiatives in our core satellite, pay-TV, and cable data gateway markets.

The strength in fourth quarter 2015 revenue was broad-based, with a double-digit sequential increase in operator revenues offsetting anticipated softness in legacy video SoC revenues.

The upside to the midpoint of our prior revenue guidance range was driven primarily by a stronger-than-anticipated ramp of high-speed optical interconnect solutions addressing 100 gigabits per second long-haul fiber network upgrades in China. We also delivered meaningful gross margin expansion and record operating cash flows in Q4 2015.

We expect further improvement in gross margin in Q1 2016, as we steadily advance towards our long-term corporate target of 60%-plus gross margins.

The record cash generation from operations of $25 million in Q4 2015 also reflects positively on our continued focus on supply chain optimization, tight operating expense management, and the successful integration of Entropic. Now, moving to the specific business highlights for the fourth quarter of 2015.

The revenue in the fourth quarter of 2015 was $98.9 million, up approximately 4% sequentially, and 205% on a year-over-year basis. Sequentially, operator revenues grew 10% and accounted for 76% of total revenue in the quarter.

More specifically, these operator revenues benefited from particularly strong MoCA shipments into both satellite and cable platforms. We also experienced growth in shipments of channel stacking satellite outdoor units, and RF mixing of front ends for cable video applications. Cable data revenues were approximately flat.

However, we witnessed beneficial booking trends supporting strong cable data growth expectations for the first quarter of 2016. The DOCSIS data gateway market continues to be an exciting and strategic growth platform for us, which enables us to address the expanding over-the-top video and data markets.

At the Consumer Electronics Show in early January, we demonstrated our multi-gigabit DOCSIS 3.1 modem gateway CPE platform. We expect major cable operators to ramp shipments of DOCSIS 3.1 data gateways in the second half of 2016. We believe that this upgrade cycle will generate solid revenue growth over the next several years.

Within our satellite family of products, revenue growth resulted from the continued ramp of digital outdoor unit products at Tier 1 European and North American operators, and by the strong demand for MoCA products.

The recent and previously announced design wins together strengthen our belief that MaxLinear's satellite platform is gaining strong revenue momentum with Tier 1 operators. Specifically, at CES, we announced that Sky UK selected MaxLinear's 12-channel Full-Spectrum Capture satellite receiver in its Sky Q gateway set-top box.

Launched in January 2015, Sky Q not only enables customers to watch up to five screens simultaneously while recording four other channels, but also allows customers to IP stream video content from the Sky Q gateway to tablets and smartphones.

On the digital channel stacking front, we announced that Unitron has started shipping its latest multi-switch solutions based on MaxLinear's digital channel-stacking switch, the EN5520, to Tier 1 European operators.

We also announced that MTI is in production with its new satellite digital outdoor unit using MaxLinear's MxL868 digital channel-stacking solution, which is capable of supporting the delivery of multiple streams of concurrent ultrahigh definition, or 4K, content over a single coax.

Moving on to MoCA, which is our whole home broadband data and video connectivity solution, the noted revenue strength in MoCA and the fast evolving positive customer and operator dialogue has significantly elevated MaxLinear's strategic position and value in the broadband connected home operator ecosystem.

In January, we announced the MxL3705, the world's first fully integrated MoCA 2.0 system solution that enables greater than gigabit per second data rates. This announcement was significant for a number of reasons.

Broadband operators who were investing in platforms capable of delivering multi-gigabits per second data speeds into the home are actively seeking in-home, high quality-of-service networking solutions to eliminate the subscriber bandwidth bottlenecks inside the home.

The MxL3705 is the first MoCA device in the world capable of gigabit-plus networking speeds, and addresses these in-home bandwidth bottlenecks. Moving to infrastructure and other product revenues, which was roughly 10% of our total revenues in the quarter.

Growth in these revenues, which we are extremely excited about resulted from the continued ramp in shipments of our high-speed optical interconnect products from our Physpeed acquisition, specifically our long-haul 100 gigabit per second laser drivers shipping to Chinese OEMs.

Our high-speed optical interconnect revenue surpassed $2 million in the fourth quarter, easily exceeding the $1 million target we laid out for Q4, and at the time of Physpeed acquisition. We are continuing to build on Physpeed's foundational technology, leveraging MaxLinear's world-class engineering and operations capabilities.

We have recently introduced an expanded family of high-performance TIA solutions addressing the emerging 100 gigabit per second fiber optic data center, metro, and long-haul data network opportunity.

Our current momentum and unique engineering capabilities portend a leadership role for MaxLinear in the exciting market for 100 gigabit per second and 400 gigabit per second solutions in the data center and transport markets.

We expect the demand for ever-faster optical high-speed data network infrastructure equipment will drive strong revenue growth for years to come. In the other category, strong demand for consumer digital-to-analog converter terrestrial set-top box products compensated with a seasonal decline in hybrid TV tuner shipments.

We are really excited and pleased about the advanced stage in progress of our network infrastructure development initiatives in wireless backhaul and cable fiber node markets. We currently expect to sample wireless backhaul solutions in 2016 that will begin contributing to our infrastructure revenues in 2017.

The innovations resulting from our leading analog mixed-signal RF technology platform, and our lead customer engagements, increase our confidence in our ability to address the large infrastructure target addressable markets.

Finally, for a quick summary of our legacy video SoC revenues derived from the shipments of cable, HD-DTA, and satellite IPTV client SoCs. The revenues were $14.3 million, decreasing to 14% of overall revenue versus approximately 20% in the prior quarter.

As expected, we witnessed softness in cable HD-DTA demand, but current backlog points towards sequential revenue growth in Q1. In conclusion, we are extremely pleased to have delivered a quarter of strong revenue growth and cash generation from operations. The integration of Entropic is now largely complete.

Our combined expanded portfolio of market-leading broadband access and connectivity solutions makes us strategically relevant to operators globally. We are in a strong position to address the key challenges faced by our operator partners, namely delivering higher bandwidth into and distributing richer multimedia content throughout the home.

Our stated revenue diversification and TAM expansion efforts into high bandwidth wireless and wired infrastructure markets are also gaining momentum. We look forward to sharing more information regarding the progress of our ongoing infrastructure initiatives and new developments in our core broadband focused markets.

Now, let me turn the call over to Mr. Adam Spice, our Chief Financial Officer, for a review of the financials and our forward guidance..

Thank you, Kishore. I will first review our results, and then briefly discuss our outlook. As Kishore noted, our Q4 revenue was $98.9 million, consistent with prior guidance. Now moving to the rest of the income statement.

GAAP and non-GAAP gross margin for the fourth quarter were approximately 56.4% and 58.1% of revenue respectively versus our prior guidance of 55% for GAAP and 57.5% for non-GAAP gross margin.

This compares to GAAP and non-GAAP gross margin of 53.6% and 56.7% respectively in the third quarter of 2015, and GAAP and non-GAAP gross margin of 60.8% and 60.9% respectively in the year-ago quarter.

The delta between GAAP and non-GAAP gross margins in the fourth quarter was primarily related to the amortization of $1.6 million of acquisition-related purchased intangibles, and approximately $100,000 related to stock-based compensation and stock-based bonus accruals.

Q4 GAAP operating expenses were approximately $64.5 million, $23.5 million above guidance, due to $17.8 million impairment of Entropic in process R&D related to their digital channel-stacking development efforts at the time of the acquisition, a $3.8 million impairment of Physpeed in process R&D related to their CDR developments, and a $2.3 million restructuring charge primarily stemming from the former Entropic facilities.

These acquisition-related in-process R&D impairments are a product of rationalizing duplicative digital channel-stacking development, which for a variety of factors, resulted in our organic MaxLinear solutions largely displacing future demand for Entropic digital channel-stacking solutions to a point where the future estimated cash flows from the Entropic solutions could not support their carrying value.

We are very comfortable with the competitive positioning of our rationalized channel-stacking portfolio, and this impairment should not be seen as any challenge to our prospects in the digital channel stacking market.

The in-process R&D impairments related to the Physpeed CDR developments are a result our current decision to prioritize driver and TIA initiatives over discrete CDRs, which is consistent with Kishore's earlier comments related to the current ramp and exciting opportunities in our high-speed optical interconnect markets.

GAAP operating expenses also include $5 million for the amortization of purchased intangible assets acquired from Entropic, $500,000 in restricted merger proceeds and contingent considerations related to our Physpeed acquisition, and $200,000 in severance charges related to Entropic integration synergies.

Accruals related to stock-based compensation and stock-based bonus plans were $4.1 million and $3.1 million respectively. And we incurred $300,000 of net professional fees related to the Cresta Technology's patent litigation, where Cresta has appealed the ITC's determination that was unfavorable to them.

Consistent with 2014, payouts under our 2015 performance bonus plan are expected to be settled primarily in shares of MaxLinear stock. Net of these items, non-GAAP OpEx was $27.4 million, $1.1 million below our prior guidance of $28.5 million, $1.7 million lower than Q3 2015, and up approximately $9.9 million from the year-ago quarter.

The underage relative to guidance resulted from our ability to achieve incremental Entropic-related efficiencies, combined with the slower-than-expected organic hiring and lower-than-expected tape-out expenses and IP purchases that pushed into Q1 2016.

Fourth quarter GAAP OpEx attributable to R&D was down approximately $900,000 quarter-on-quarter, and increased $8 million year-on-year to $22.6 million, which included stock-based compensation of $2.9 million, $2.3 million related to the 2015 stock-based bonus plan incentive awards, $200,000 in Physpeed deferred merger proceeds and contingent consideration, and $100,000 from the amortization of purchased intangible assets acquired from Entropic.

Excluding these items, fourth-quarter non-GAAP R&D was down approximately $1.2 million on a quarter-on-quarter basis to $17.1 million. Within this R&D spending, design tools tape-out expenses declined $1 million and headcount-related expenses declined $900,000, partially offset by a $200,000 increase in embedded IP purchases.

Fourth-quarter GAAP OpEx attributable to SG&A was down approximately $7.5 million quarter-on-quarter, and up $8.4 million from the year-ago quarter to $18 million.

GAAP SG&A expenses included $4.9 million in amortization of Entropic intangible assets, $1.3 million in stock-based compensation, $700,000 in stock-based bonus plan accruals and incentives compensation, $300,000 in Physpeed deferred merger proceeds, $300,000 in net professional fees related to the Cresta Tech patent litigation, and $100,000 in severance charges.

Excluding these items, fourth quarter non-GAAP SG&A was down $500,000 on a quarter-on-quarter basis to $10.3 million, driven by a $300,000 decline in both payroll-related items and outside services, partially offset by a $200,000 increase in commissions and a $100,000 increase in fees and expenses related to patent filings, tax, and audit.

At the end of the fourth quarter of 2015, our headcount was 500 as compared to 505 at the end of the third quarter of 2015 and 379 at the end of the fourth quarter of 2014.

We continue to evaluate our staffing levels globally, particularly following the acquisition of Entropic, to strike a balance between driving near-term bottom-line operating leverage and staffing key long-term growth initiatives.

We continue to look to derive operating leverage by appropriately balancing hiring across our locations in the U.S., India, China, and Taiwan, with our Bangalore design center now representing our second-largest design location worldwide.

GAAP loss from operations was $8.7 million in Q4 compared to income from operations of $1.7 million in the prior quarter and a loss of $4.5 million in Q4 of last year. GAAP loss from operations was $43.6 million for the full year 2015 versus GAAP loss from operations of $8.9 million for 2014.

GAAP loss per share in the fourth quarter was $0.14 on basic shares outstanding of 61.9 million. This compares to GAAP earnings per share of $0.03 in the prior quarter and a net loss of $0.06 per share in Q4 of last year. For the full year 2015, GAAP loss per share was $0.79 compared to full year 2014 GAAP loss per share of $0.19.

Non-GAAP earnings per share in Q4 were $0.46 on fully diluted shares of 65.2 million compared to $0.40 per share in Q3 of 2015, and $0.05 per share in Q4 of last year. For the full-year 2015, non-GAAP income per share was $1.27 compared to full year 2014 non-GAAP EPS of $0.32 on a fully diluted basis.

Moving to the balance sheet and cash flow statement, our cash, cash equivalents, and investments balance increased $25.7 million from the end of Q3 2015 to approximately $130.5 million, and increased $51.1 million as compared to the $79.4 million in Q4 of last year.

Our cash flow from operations in the fourth quarter 2015 was approximately $24.6 million versus $22.1 million generated in the third quarter of 2015 and cash used of $5.8 million in the year-ago quarter.

Our days sales outstanding for the fourth quarter was approximately 39 days or 1 day less than the prior quarter, and 13 days less than the year-ago quarter. As a reminder, we only recognize revenue on a sell-through basis. And as such, we are not subject to revenue fluctuations caused by changes in distributor inventory levels.

Our inventory turns were 5 in the fourth quarter compared to 4.7 turns in the third quarter and 5 turns in the year-ago quarter. That leads me to our guidance. We expect revenue in the first quarter of 2016 to be in the range of $100 million to $105 million, consistent with our January 6 outlook.

Built into this range, we expect operator revenues to account for roughly 75% of overall revenue; infrastructure and other, approximately 9%; and legacy video SoC, approximately 18%.

More specifically, within operator, we expect growth to be driven primarily by satellite gateway, as our key customers resume the rollouts of next-generation platforms; and in cable across both video and data platforms.

Within infrastructure and other, we expect declines in consumer terrestrial set-top box and hybrid TV to be largely offset by the continued early ramp in high-speed interconnect revenues derived from long-haul laser driver shipments supporting 100 gigabits per second deployments in China, as discussed earlier.

Within our legacy video SoC market, we expect the growth to be derived from North America cable HD-DTA deployments more than offsetting softness in satellite IP client shipments. We expect GAAP gross profit to be approximately 57% of revenue and non-GAAP gross profit percentage to be between 59% and 60% of revenue in the first quarter.

Our GAAP gross profit percentage forecast could vary, plus or minus 2%, depending on product mix and other factors.

We continue to fund strategic development programs targeted at delivering attractive top-line growth in 2016 and beyond, with a particular focus on infrastructure initiatives, and our goals of increasing the operating leverage in the business.

We expect Q1 2016 GAAP operating expenses to decrease approximately $26 million quarter-on-quarter to approximately $38.5 million, with the largest reductions coming from the removal of in-process R&D and restructuring charges in Q4 and the roll-off of amortization of purchased intangibles.

We expect these reductions to be partially offset by $1.5 million increases in tape-out expenses and seasonally adjusted payroll taxes, as well as $700,000 of increases in embedded IP purchases and outside services that pushed from the fourth quarter as mentioned earlier.

We expect Q1 2016 non-GAAP operating expenses will increase $3 million sequentially to approximately $30.5 million, driven by the earlier-referenced items, excluding impairments, restructuring, and amortization of intangibles.

In closing, we are pleased to put a cap on a very eventful and successful 2015 by reporting Q4 revenue increases that were broad-based and contained positive indicators for the future of our core operator markets, then our strategic market expansion initiatives in the infrastructure markets.

These favorable revenue trends combined with world-class product and supply chain management and tight operational expense controls drove strong operating cash flow generation.

We believe the increased diversification of our business through strategic acquisitions and organic development initiatives position us to benefit from the growing demand for bandwidth across consumer, operator, and infrastructure platforms. And with that, I'd like to now open the call to questions.

Operator?.

[Operator Instructions] And we’ll take our first question from Tore Svanberg with Stifel..

Yes, thank you, and congratulations on the strong results. A few questions. First of all, can you just talk a little bit about your relative visibility? It sounds like backlog is moving in the right direction on most of your segments. So if you could just add a little bit of color there, that would be great..

I would say, Tore, this is Adam. Our backlog coverage going into the quarter was pretty consistent with prior quarters. We've had good visibility recently.

I think that's a combination of the change in the composition or complexion of our business as we become less and less dependent on turns-oriented consumer businesses and more on operator and infrastructure type of opportunities.

So, we had very good backlog coverage, north of 80%, which is kind of the watermark that we typically like to look at to get comfortable with our forecast looking forward..

Good, thanks. And it sounds like DOCSIS 3.1 is finally starting to ramp for you at least based on your discussions with customers.

Will that allow the cable business to continue its momentum? Or is it going to be a ramp later on in the year and then we need a bridge to get there?.

Tore, this is Kishore. I think our cable data business is pretty healthy. We did not see the growth we had expected in this quarter, in the past quarter, but we have good strong backlog in Q1, so we feel pretty good. The business is growing.

We are also seeing some momentum associated with the lesser channel account as well, not at the expense of the growing number of channel – 24-channel boxes. And I don't think we will need a bridge. I think as we grow 24-channel market share and the 32-channel boxes, it nicely transitions to DOCSIS 3.1 in the second half of 2016.

So we really feel we are very well positioned to grow our cable data business on a revenue basis with a strong market position in the data segment..

Very good. And on the infrastructure side, obviously you saw some upside this quarter.

Can you just remind us what your expectations are for that business contribution this year? And when will we start to see some contribution coming from your wireless infrastructure products and not just your optical products?.

We expect our infrastructure revenue, which is primarily the optical products, this year somewhere between $10 million and $20 million. Obviously, based on the momentum, we look at it as a very favorable direction headed in. So I think that will be a very strong statement about our products.

We are launching a number of new TIA and driver products for the data center as well. And later, it will be followed by our product portfolio towards single Lambda Solutions, whether it's 100 gig, 200 gig, or 400 gig products, as the market develops for that. So I think we are very well positioned for that.

However, in this particular year, we expect revenue on the optical side primarily coming from drivers followed by TIAs. Moving to the wireless infrastructure, we hope to be sampling in 2016 what we would think is the world's first single-chip broadband RF, all the way to 5 gig to 45 gigahertz RF transceiver for the backhaul outdoor units.

However, we do not expect revenue contribution from that product in 2016. We expect that to happen sometime in the middle of 2017. As you can imagine, the lead time to the revenues, post-sampling, all the product qualifications for such a complex product will take some time. So the revenues will start the middle of 2017.

That is the expectation today for our backhaul products..

Great. Just one last question for Adam. And Adam, this might not be a very fair question, but you are at 70 days of inventory now. You've got a lot of new things ramping this year.

Is this a level that feels a bit tight or are you actually fairly happy with his level?.

I think we feel pretty comfortable where we're at right now with where our inventories are. I would say, though, as typically as we move forward to ramping new product areas, I think normally you'll have to build up a little bit more inventory to not leave revenue on the table. And certainly, we'll lean forward and do that when the time is right.

I think on the stuff that's been ramping more aggressively, as Kishore mentioned, on the interconnect side, we've been actually just struggling to try to build inventory. We've actually been shipping behind demand.

We've had more demand than we could ship just because we've been constrained on the production side, because we want to make sure we're shipping very high-quality, reliable products into these high-quality infrastructure markets. So I'd say, right now, we're actually probably behind where we need to be.

So to your point, it's a little bit tight; certainly tight on that side. I think in the rest of our business, I think we feel very comfortable that these are established run rate businesses. And I think we just want to keep our supply chain as tight as we can. I think our team does a great job doing that..

Sounds good. Congratulations again, guys..

Thank you..

We’ll go next to Ross Seymore with Deutsche Bank..

Hi, guys, congrats on the quarter. Just to start with Adam on a couple of margin questions. Adam, can you talk a little bit about what's driving the gross margin up in the first quarter? It seems like the mix given what the legacy side was doing would be a little bit of a headwind. But the margins seem to be going the other way..

Yes, I would say that, overall, certainly we actually indicated that the legacy SoC market will be increasing in the first quarter. So actually it's not really as much mix as it is a fact that just our supply chain team continues to find ways to optimize the system from owning the Entropic assets for a longer period of time now.

So we've got no longer period – we've had soak time, if you will, to get more benefits out of the supply chain and they're doing a great job doing that. I think it's really more of a function of that more than anything else, Ross. I don't think you should look at mix as really being the driver of the gross margin improvements.

It's really more inefficiencies on the supply chain side..

Yes, actually, I kind of meant the opposite. It seemed like mix was going to be a headwind, not a tailwind so it made it all the more impressive..

Yes, exactly. Yes, we're overcoming that in getting – but to be fair, too, our ops team is getting benefits across the product portfolio. We're getting them in all areas. So it's not like it's just sequestered to one particular part of the product families. It's pretty much across the board. So, yes, it's impressive on that front..

If you recall, Ross, when we had done the Entropic acquisition we said it'll take about 6 months to 9 months to start seeing the synergies on the COGS side to play into the system. We have identified three areas.

[Indiscernible] was the R&D synergies, where we are not duplicating our investments, and we had pretty much a perfect match on the sales channel SG&A side. And the third one, the last one – and we sort of just take the longest time was the COGS energy. And here we are getting the benefit of it.

And more importantly, because of the scale, all of our product lines are benefiting from the COGS scale that we today have..

That's very helpful. My next question would be on that legacy SoC business, going up in the first quarter for seasonal reasons, et cetera. But just remind us on how you expect the trajectory of that to go; as I know, at some point in time, that's going to fall off.

So investors, I think, would be helped to know what sort of pace of fall-off you expect..

Ross, I think it's very hard to predict a pace because, as you know, the legacy SoC revenues are attributable to these highly volatile HD-DTA and IPTV client SoCs. And the Nvidia product is not a must-have for the operators, in terms of the – how rapidly they want to invest on it. It tends to be very time dependent.

The beginning of the budget cycle, they allocate more money for HD-DTAs. And as they approach the end of the annual cycle, they go tepid on that. And so it's very hard. So generally you see – you may see a strong Q1 and then softness again in Q4; and Q1, Q2 being strong, and Q3, Q4 becoming soft.

So, it's hard to predict that, but let me give you a little bit of an arc and trend on that. The sources of these revenues on the HD-DTA side are primarily now Time Warner and Cox. And then the IPTV side, it's a large satellite operator in the U.S. So, I think that these are going to be phased out as they ramp their new product replacements.

And you should expect that over the next two-year window, in somewhat of a volatile fashion, you should start seeing a ramp down of these products, while there will still be some sporadic revenue from these products.

So, I don't think a two-year window is a bad one to model – some level of decline, some substantial amount of decline for the SoC revenues..

I know you guys partner with various of the back end, the processor providers, in your different markets. One of them apparently is exiting much of their business, STMicroelectronics.

Can you talk a little bit about how that may or may not impact your business as far as having another back end or in this case, I guess one less back-end guy to partner with?.

As you are aware, on our satellite gateway platforms today, we are the prominent if not the only satellite front-end Full-Spectrum Capture receivers for these new gateway devices at major Tier 1 operators in the world. And we are the front end for every possible back end you could imagine.

So one of them is, indeed, ST, and there's some couple of major designs that we are in front of them. And these designs are just ramping, so these usually have a pretty long product cycle, about 3 years to 5 years of revenues.

And there's full assurance from ST to the customers that they will be supporting them on the designs that are already in shipment and ramping. So we don't feel any concern about those designs. In the meanwhile, of course, as ST vacates the spot, you have other aspiring SoC players on the back end, like MStar [polysilicon] coming up the pike.

So, I think that for the interim and long-term I would say three to five year cycle – our existing design wins that are just about to ramp or are ramping, we don't feel any level of concern with ST as our back end.

In the meanwhile, obviously we are collaborating with other back-end SoC vendors for future designs, which we have already been working with them thus far. So, I think that's the most important thing for us, that there is no concern about existing design wins that are just ramping, or about to ramp with ST as a back end.

And they are being fully supportive of those platforms, and informed the operators as such..

Perfect. Thank you..

We’ll go next to Anil Doradla with William Blair..

Hey guys. So clearly, congratulations on the gross margin front. Very impressive. You talked about certain testing, certain manufacturing processes. And I think when we look back, you guys did refer to 2016 playing along these lines. But Kishore or Adam, can you guys dig a little bit deeper? You guys historically have been around in 62% gross margins.

Do you think the current efforts that you are taking can revert you guys back to your historical gross margins?.

Anil, absolutely, that is the quest, right? And as our optical interconnects are ramping, they become a more substantial part of our revenues; as the wireless infrastructure revenues start in 2017; and beyond that, our cable fiber node in 2018.

And I think that there are multiple vectors that will drive good margin upside from the current margin levels. And these are all – will be above our long-term corporate margin targets of 60%-plus. Obviously, 62% is a good bogey, being from the past.

But given the nature and the change in the profile of the Company – much more infrastructure-focused, R&D investments going on – I would like to say the ambitions are far more than that. But at this point, our long-term corporate margin target is 60%-plus. And we hope to get back to the 62% in the next 12 to 15 months if everything works out fine..

Great. But if I take that and slice it in a different way, in your synergies of manufacturing, testing with the Entropic systems, how far are you along in terms of extracting synergies on that, on the margin front – gross margin front, specifically? Not necessarily new products, but just purely from a manufacturing and testing point of view..

I think it's just started. But there are two parts to the synergies. One is just pure pricing, and the other one is engineering effort. And I think, at this point, we are seeing the benefits of pricing coming into play on the supply side.

And then you're also seeing the benefits – and those generally get baked in, because they only happen once a year typically. The big one then happens in the middle of the year would be very, very small fractions. For the engineering related to testing, and so on and so forth, on the existing products, those benefits are just about to start.

So I believe that there's more improvement opportunities as we head into the year. And there's wireless – optical interconnects with greater gross margin than the regular corporate, as they stabilize there. So there's a mix effects as well on the video SoC sides, as Ross was asking.

So, all in all, I think that we just got started, and as we spread throughout the year -- as we move through the rest of the year and as we enter 2017, we should be in good territory, is my expectation, and what we are driving the Company towards..

Excellent. And Kishore, today you talked about optical; you talked about infrastructure.

But how much revenue comes specifically from data centers today? Do you guys have any revenues from that segment?.

I think this is a very good question. And I want to emphasize that currently our revenues are attributable to high-performance drivers in the long-haul – and primarily long-haul market in China – and to a small fraction in metro application. So, yes, it's a mostly in the transport area.

On the data center side, we have not started revenue yet, but we are sampling product. We got good design wins. And later in the – within the couple of quarters, we hope to start some revenue for 100 gigabit NRZ data center markets, primarily on the TIA side.

So, the real play in data center, for all players in the components market, is really when the market involves towards the PAM-4 markets with its – which we believe is going to be driven towards a single lambda 100 gigabit transceivers, and then four of those daisy-chained to support 400 gigabit per second markets in the data center.

So, I think that will be the real big driver when the data revenues will completely overtake the transport revenues. And we don't expect that level of shift happening until the end of next year, which is when there will be really credible products in the market for the data center transition to PAM-4 to begin to commence..

Very good. And finally, Adam, just a quick modeling question.

So for 2016, should we be looking at the tax rate at similar levels of 2015 or – for modeling purposes?.

Yes, we were running a little bit lower, as of late. But I think the rates that we were running at last year were probably the better place to be, if you want to forecast a little bit further out in time. .

Okay. Very good. Thanks a lot, guys, and congratulations again..

Yes..

Our next question will go to Gary Mobley with Benchmark..

Hi guys, congrats to a nice finish to the year. Most of my questions have been asked and answered, but I wanted to ask a modeling question on the OpEx.

Should we think about OpEx, off of the Q1 level to be somewhat flattish for Q2, Q3, and Q4?.

Yes. We don't give guidance beyond the current quarter. But what I said on the last call was I expected OpEx to bounce between, say, $29 million and $32 million as we move through 2016. There's going to be some up quarters and some down quarters just really driven by tape-out timing.

So, for example, this was Q1, as we talked up roughly $3 million quarter-on-quarter. It's a tape-out heavy quarter. There will be – I just can't tell you exactly beyond Q1 what the exact timing is going to be for the various tape-outs that remain for 2016. So I would focus more on, again, that range.

I think we've just announced one that was $30.5 million. I would expect that there's not going to be a lot of variance around that again. I think you're probably close to that same range for most of the quarters, going through, on average. But, again, there will be some volatility across the quarters.

I can't give you guidance right now because [indiscernible] is very fluid..

Understandable. Appreciate the help, though. Obviously, 2015 was a transformative year for MaxLinear, and essentially now you are a fairly sizable company, more than likely having, call it, $225 million, $250 million in cash at the conclusion of 2016.

Has the Board changed the thought process or are you promoting ideas to the Board regarding return of cash or use of cash, whether it be from an M&A standpoint and on that front, can you talk about how M&A valuation expectations have changed in recent weeks? And then, as well, are you more open to maybe a share buyback program?.

Yes, that's up pretty meaty set of questions there. I would say that – I'm not going to comment on the M&A context. I think we're in a very unpredictable environment right now. And certainly we've exercised a strategic option last year to go improve our business.

And I think we keep our eyes open looking for other opportunities, both big and small, private and public. So, we're just constantly swimming looking for opportunities that could fit that value.

I would say that in the context of how that fits into the way that we look at our capital, you're right, we will be adding significant amounts of cash per quarter, based on the business model that we're seeing today.

And our preference historically has been to keep that capacity available to go do strategic acquisitions to help us accelerate entry into markets that we know that we can add value in. So nothing has changed on that front. So I would say that the priority is a strong one towards using that capital to go acquire important assets.

And we don't see right now even though the Board does have a lot of fulsome discussion every Board meeting about the different options around capital returns to shareholders, that doesn't seem to be a high priority right now. It really seems to be on focused on strategic expansion rather than returns in other ways..

Okay. All right. That's it for me. Thanks, guys..

We’ll go next to Quinn Bolton with Needham & Company..

Hey guys, nice job on the results and outlook. Just sort of curious, you guys obviously gave us a preliminary look back around CES, and now that you've had another month under your belt, just wondering if you've seen anything change. Obviously, the overall revenue hasn't changed from what you said about a month ago.

But just wondering, in the various product lines, are you seeing any puts and takes in the business? And then second question on the analog channel-stacking switch side of things, you guys tend to have pretty good visibility.

As you look out to the end of that visible period, have you seen any indications that your largest customer for analog channel stackers has started the transition to digital channel stackers? Thanks..

Hi, Quinn, this is Kishore. You asked a bit, with the rundown about all of our business products here. So let me go with – you said, what has changed color or any new information regarding your businesses? I think, first and foremost, actually we are very excited about how strong MoCA has been, continues to be.

And we talked about the MoCA platform in satellite, in cable, growing very nicely. And we also announced our new products on MoCA 2.0 bonded for 1.2 gigabit MoCA. And there's a very, very strong reception for that, and we are also seeing with a lot of good design win momentum.

And we feel very excited that, over the next couple of years or so, MoCA will become another $100 million business for us. At this point, it's hard to exactly field the timing of it; it's so platform-specific. And then that's the most exciting part for me, because it's very, very important that the strategic technology we acquired from Entropic.

And then our engineering is combined to deliver the world's first multi-gigabit MoCA. Secondly, if you look at it, our digital audio is ramping very nicely, very strongly.

And right now, speaking at this instant of time, a major operator in North America is ramping very strongly and is not coming at the other operator, where they have not started their transition yet. So it's working on in our favor right now. But the risk is always that the timing risk, whenever analog audio goes down and digital audio replaces.

And then the adverse effect of reducing speeds and some sharing with another competitor on this particular operator. But, all in all, right now, digital audio is ramping very nicely. I think it grew by more than 50% on the levels it was, and with a major operator. Then another European operator we are ramping very nicely on digital outdoor units.

So on the analog audio, we have not seen the start of the decline at all. And the way things are going, we have not gotten the updated forecast yet for the new year due to the consolidation-related matter of this particular operator. And we hope to look at the forecast and give you more update as we see more color.

But at this point in time, we are quite pleased that the way the digital audio is ramping and the way the analog audio is looking, we're not seeing the adverse effect of it. That's the second element to it.

And then the third one is on the DOCSIS 3.1, while generally we have been guarded about how fast these markets ramp in the operator space, but it seems that there is a very good chance, in the second half, of DOCSIS 3.1 to ramp.

So while still the CableLabs has not figured out what would be the exact [certification] criteria in our mind, and we are very well positioned with that, with a major cable operator in North America. So, all in all, our organic – and then, of course, I would be really remiss if I did not mention our high-speed optical interconnect.

We are so excited about that. There is so much demand, and there's so much love for the products we are sampling. We really believe this could be one of the nicest Cinderella stories for us, in terms of acquisitions as we move forward.

And at the same time, because of these product acquisitions, we are getting a lot of tractions at major hyperscale data centers to our mixed-signal platform, and how we can be transformative in power integration in terms of the single lambda 100 gig and 400 gig market evolutions inside the data center.

So, I think as you noted, outside of the legacy video SoCs, where – that is where a little bit of a pause we have, because it's very volatile and we have not found a comfortable place there to give a commentary. But the rest of the stuff is kicking full steam, and we're quite excited about it.

And hopefully, the growth in our organic initiatives that we are seeing be it in satellite, digital ODUs, gateways, MoCA they are good enough to overpower the adverse effects of any declines in the video SoCs. But that remains to be seen, and it's a very volatile part of our business at this point..

Great. And then just a couple of follow-up questions. First on the Physpeed business, I think you mentioned the single lambda [indiscernible] market, you guys see maybe taking off as early as late next year. I think some of the others in the industry have talked about single lambda 100 gig not ramping until closer to 2020.

Where do you think the ecosystem is, especially in terms of the 56-gigabaud lasers that you need for single lambda PAM?.

I'd say you're going into the weeds there. But put it this way, the whole idea of PAM-4 is not about the lasers. It's about the silicon overcoming the deficiencies of the lasers. So, if the lasers were very good, there would have never been a PAM-4, let me put it that way. Or at least it would have been delayed much more.

So the idea is that the lasers would be the bottleneck is – I don't want to give you analogies of what it sounds like.

But the bottom line is that single lambda 100 gigabit is the only place where there's enough savings of power per bit, if you want to call, or cost per bit, where you are really 2 times better than what you would be with 100 gigabit NRZ.

Any intermediate solution would not get anybody there, it would just be a wash and so the motivation for transitioning to a 28 gigabaud solution is just not there. So, I have a different view. I think the market actually ramps in 2018.

Towards the end of 2017, you'll have credible solutions and we plan to be one of them.Now, regarding 2020, I would be in agreement that the 400 gigabit market really takes off at that time. But that would be four times 100 gigabit – four lanes of 100 gigabit PAM-4 solution.

So I think it's all consistent what I'm telling, and what the other guys are telling you about 2020. They are referring to 400 gigabit, four times 100 gigabit PAM-4 lanes. And I think 56 gigabaud lasers are not required if your PAM-4 works properly..

Q - Quinn Bolton:.

A - Kishore Seendripu:.

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Operator:.

Q - Krishna Shankar:.

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A - Adam Spice:.

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Operator:.

Q - Tore Svanberg:.

A - Kishore Seendripu:.

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A - Kishore Seendripu:.

Q - Tore Svanberg:.

Operator:.

End of Q&A:.

Kishore Seendripu:.

Operator:.