Entropic Communications, Inc. Q1 2009 Earnings Call Transcript

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 |  About: Entropic Communications, Inc. (ENTR)
by: SA Transcripts

Entropic Communications, Inc. (NASDAQ:ENTR)

Q1 2009 Earnings Call

April 30, 2009 5:00 pm ET

Executives

Debra Hart - IR

Patrick Henry - President and CEO

David Lyle - CFO

Analysts

Daniel Amir - Lazard Capital Markets

Sandy Harrison - Signal Hill

Tim Luke - Barclays Capital

Hamed Khorsand - BWS Financial

Ashish Rao - Credit Suisse

Operator

Ladies and gentlemen, good afternoon. At this time I'd like to welcome everyone to the Entropic Communications Conference Call. During the presentation all participants will be in a listen-only-mode. A question and answer session will follow the Company’s formal remarks. (Operator Instructions).

I will repeat these instructions after management completes their prepared remarks. Today's conference is being recorded. And now, I would like to turn the call over to Debra Hart, Director of Investor Relations for Entropic Communications. Please go ahead, ma'am.

Debra Hart

Thank you. Good afternoon, everyone and welcome to Entropic Communications first quarter 2009 conference call. Leading the call today are Patrick Henry, President and CEO, and David Lyle, our Chief Financial Officer.

Before we begin, I would like to remind you that various remarks that we make on this call concerning our expectations or beliefs about the future, including remarks about our future financial results, anticipated product deployment by service providers market trends, our goals and our prospects, all constitute forward-looking statements for the purposes of the Safe Harbor provision under the Private Securities Litigation Reform Act.

These forward-looking statements and all other statements that may be made on this call that are not historical facts, are subject to a number of risks and uncertainties that may cause actual results to differ materially from the results indicated by such statements. We refer you to our most recently filed Form 10-K, in particular, to the section entitled “Risk Factors” and other reports that we may file from time-to-time with the SEC for additional information on factors that could cause actual results to differ materially from our expectations. Forward-looking statements we make on this call, speak only as of today's date. And we undertake no obligation to update these statements.

In addition, Entropic reports gross margin, operating expenses 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.

Management believes the non-GAAP information is useful because it can enhance the understanding of the Company’s on going economic performance. And Entropic therefore uses non-GAAP reporting internally to evaluate and manage the Company's operation.

Entropic has chosen to provide this information to investors to enable you to perform comparisons of operating results in a manner similar to how the Company analyzes its own operating results. The full reconciliation of the GAAP to non-GAAP financial data can be found in our earnings release issued earlier today and we ask that you review it in conjunction with this call. We have posted a GAAP to non-GAAP reconciliation on our website for your convenience.

Now I'll turn the call over to Patrick Henry. Patrick?

Patrick Henry

Thank you Debbie, and thanks to everyone for joining the call today. Entropic's Q1, 2009, revenue was $24.1 million, slightly ahead of the midpoint of our guidance, our non-GAAP gross margins were strong at 52.4%, and we are diligent in our cost control efforts holding operating expenses of $16.9 million. We exited the quarter with $31.5 million in cash, cash equivalents, and marketable securities on the balance sheet.

Dave will take you to the numbers in greater detail and discus guidance for the second quarter later in the call, but first I’ll like to recap some of the key events which have occurred since our last quarterly conference call.

We recently seen strong momentum in support of the MoCA standard and our MoCA products. Time Warner Cable with second largest U.S. cable operator were held with 13 million pay-TV subscribers, recently announced plans to deploy, New MoCA-Enabled set-top Boxes to deliver Multi-room DVR and other connected Home Entertainment Services to its subscriber base later this year.

The new set top boxes utilizing in traffics MoCA 1.1 chipsets will enable subscribers to access, share and place a video recording throughout the home. Cox Communications is the third largest cable television company in United States with approximately 5 million pay-TV subscribers is adopting MoCA technology for high performance delivery of HD video and other multimedia content around the connected home. Cox Communications plan to deploy new MoCA-certified set-top boxes to deliver multi-room DVR and other connected home entertainment services to its subscriber base later this year.

These set-top boxes also use Entropic's MoCA 1.1 chipsets. The Time Warner and Cox announcements further validate MoCA as the factor of standards for connected home entertainment. These new tier 1 service provider deployments of our MoCA home networking solutions will provide new revenue streams starting in the second half of 2009, with a continued ramp in 2010.

Verizon the largest home networking deployment of our MoCA chips announced in their earnings call earlier this week another solid quarter for FiOS subscriber editions. They added 298,000 net new FiOS internet customers and 299,000 net new FiOS TV customers.

In the FiOS deployment, Entropic provides three MoCA chips for every FiOS internet installation and on average an additional three MoCa chips for every FiOS TV customers. And now we believe the channel inventory issues associated with the Verizon deployment is now behind us. The service provider deployment model is an essential part of Entropic's MoCA business about 90% of TV homes in the U.S. get their TV programming and their DVR for pay-TV service provider viewer cable, satellite or telco. According to the research firm SNL Kagan they are now with 31 million DVR homes in the U.S. and this figure is expected to nearly double the 59 million homes by the end of 2012.

Once consumers get used to watching TV with a DVR, they want that capability in every TV in the house. Multi-room DVR over our MoCA network offers the service provider and consumers alike with a more cost effective approach for the second and third room of DVR service and offers anytime, anywhere access to all the DVR content no matter where it’s stored. Additionally, MoCA home network provides a platform from which other revenue generating services can easily be added overtime such as downloadable movie services, PC to TV content sharing and online gaming.

Early this quarter, some of our direct OEM customers made important product announcement related to the newly announced cable TV service provider deployments of MoCA.

Motorola recently announced the Whole Home DVR solution, with their DCX3400-M and DCX3200-M, tru2way-enabled cable TV set-top boxes. With Entropic's MoCA technology the solution creates a multimedia network using existing coaxial cables in consumers homes. The MoCA network is capable of transporting high-definition video, high-quality digital voice and high-speed data to TV, DVRs, game consoles, wireless access points and home computers.

Cisco also announced a new generation of cable TV set-top boxes which include Entropic second generation MoCA 1.1 chip set. Cisco's new set-top box the Explorer 8600 HDC contains the MoCA platform solution deliver what Cisco calls the Connected Life at Home. These set-top boxes enable new services powered by IP technologies over the MoCA network.

In addition to the new cable deployments and our existing deployment with Verizon, we believe our MoCA Home Networking Solutions coupled with our Channel Stacking Switch or CSS technology enable competitive advantage to satellite service providers. ASTRA, the leading provider of satellite service in Europe, recently hosted their ASTRA Industry Days. We participated in this event by showcasing a live ASTRA satellite feed utilizing our CSS technology, combined with an Entropic enabled MoCA network on the same collateral infrastructure. The combination of CSS and MoCA technology lowers installation cost and provides new opportunities for increasing average revenue per user or ARPU to your home networking services and applications.

Together MoCA and CSS offer satellite operators proven, ready-to-deploy technology solutions that are reliable, cost effective, robust and future-proof, which can help improve the operator’s top-line and bottom-line.

An emerging opportunity for our MoCA products is been driven by streaming media and downloadable movie services and we've made initial progress with our MoCA retail aftermarket efforts.

Our consumer electronics customer, NETGEAR, Actiontec and D-Link each have branded offering for Ethernet-to-Coax Bridge products utilizing our MoCA chips. These bridge products are available through online outlook and bricks and mortar retailers, including Fry's and Best Buy. Initial reviews, of the first MoCA retail networking products are very positive, with the streaming media capabilities of the technology being the distinguishing benefit, compared to other home networking technologies.

Our customers are actively promoting their products and educating the market on the benefits of MoCA. For example, if you Google MoCA in a nutshell, you'll find a NETGEAR video explaining in layman's terms what a MoCA Bridge can do for consumers. NETGEAR has placed their MoCA bridge products in over 200 Best Buy stores to-date.

The market opportunities for our MoCA home networking products is expanding and by applying our deep technological expertise towards next generation MoCA. We are well positioned to continue to be the MoCA market leader.

We are now sampling our third-generation MoCA 1.1 silicon solution fabricated in 65 nanometer CMOS, offering OEMs lower cost, lower power and a smaller footprint.

To-date, Entropic remains the only high volume source of MoCA silicon solutions, and our recent design wins further extend our leadership in the market. Our product strategy remains focused on delivering best in class discrete MoCA products, for OEMs and further pushing the MoCA performance envelope.

In addition, as competition enters the market with volume shipments, sometime in 2010, we believe we’ll have a compelling strategy to compete longer term by partnering with other industry leaders who provide complementary technologies.

On the partnership front, we're collaborating with Cavium Networks on the creation of a new second generation reference design that realizes synergies in both Cavium, Entropic's core competencies. Cavium's network processor currently sits next to Entropic's MoCA chips and Actiontec's broadband home router being deployed in the Verizon FiOS deployment.

With Cavium we can develop home networking products designed to accommodate household increasing consumption of digital content, data traffic and high definition video over our MoCA home network. By working together, we have produced optimized reference designs that deliver service rich, high performance solutions at compelling cost points and power levels to address the needs of service providers.

Customer premises equipment products based on Entropic and Cavium joint reference designs ideally suited for fiber-to-the-home internet and IPTV service deployments. We are also working with Texas Instruments to develop a new Optimized MoCA-Enabled DOCSIS 3.0 development platform targeted at home-media gateways and cable service deployments.

The Entropic-TI collaboration brings together the latest generation of solutions from our respective companies. Our efforts will produce cost effective and scalable eMTA or voice cable modem and gateway reference designs. These development platforms will enable OEMs and cable service providers to easily and quickly bring MoCA-Enabled DOCSIS 3.0 solutions to market in order to provide a robust, whole-home entertainment network for HD video content and other multimedia entertainment.

As the market and technology leader in MoCA, and through partnerships with industry leaders such as Cavium and TI, we believe we can continue to win and maintain market leadership in the MoCA market.

Turning to our DBS Outdoor Unit business, this product line consists of our Band Translation Switch, or BTS, family, and our Channel Stacking Switch, or CSS family of products. In Q2, we are entering a seasonally softer quarter in our DBS ODU business. EchoStar DISH Network continues to utilize our BTS products in more than 95% of all installs. We are shipping our CSS solutions to DirecTV for their Integrated Single Wire Module, or [SWiM] ODU deployment. DirecTV's plan of record is to deploy their SWiM ODU utilizing our CSS technology in new high-end HD installs.

We still have a goal to reach a 100% attach rate for all new HD installs overtime. We believe the value proposition of CSS will play out and provide additional opportunities within DirecTV and other satellite service providers longer term.

In other areas, Entropic remains focused on driving new deployments of our broadband access technologies in international markets, with a specific focus on China. Broadband access revenues are still modest from a Company perspective, since these volumes are primarily based on large-scale trials and small-scale deployments

Large scale deployment timing for broadband access products will likely be reached sometime in 2010. We still expect revenue for broadband access products to grow modestly in late 2009 but we don't expect it to be a growth driver for the overall Company top line until 2010.

We expect our tuner products to ramp later this year and encouraged by some early design wins for our new CMOS Silicon Tuner. Entropic's all CMOS device significantly reduces the manufacturing cost and allows us to break through the cost floor, of many traditional discrete CAN tuner modules. We expect our tuner products to contribute more materially to revenue in late 2009 and into 2010.

I’d now like to turn the call over to Dave Lyle, our Chief Financial Officer, who will provide the details of our first quarter performance, and our second quarter guidance. Then I'll provide some closing remarks, and we’ll open the call for your questions. Dave?

Dave Lyle

Thanks, Patrick. First quarter revenue was in the midpoint of our previous guidance at $24.1 million, down approximately 18% sequentially from Q4. Non-GAAP gross margin in Q1 was 52.4%, down from 53.5% in Q4, but above our previous guidance of 50% to 52%. Excluded from Q1 non-GAAP gross margin is approximately $400,000 of the amortization of purchased intangibles from prior acquisitions. Stock-based compensation was immaterial in Q1 for the purposes of calculating GAAP gross margin.

Non-GAAP operating expense, increase from $16.5 million in Q4 to $16.9 million in Q1, but remained well below our previous guidance of $17.3 to $17.5 million.

Sequential operating expense growth, is due primarily to incremental [tapeout] costs, associated with next generation product development efforts.

Q1 ending worldwide headcount, of 244 employees was down 18% from Q4, as we implemented a restructuring plan on March 22, which entailed a reduction in force of 55 employees and resulted in the closure of two design centers, one is Kfar Saba, Israel and another in Nice, France. Had we not implemented the restructuring plan, Q1 ending headcount would have been 299 approximately flat with Q4.

Our Q1 non-GAAP operating expenses, exclude $1.1 million of restructuring charges, $208,000 of intangible asset impairment charges associated with the shut down of our Israel facility and approximately $2.8 million in stock base compensation expense.

More specifically regarding our restructuring plan, total restructuring charges are $2.1 million primarily consisting of employee benefit from severance arrangements. $1.1 million of the total restructuring charges were recognized in Q1, and the remainder an additional $1 million will be recognized in Q2. This is higher than our original estimation of $900,000 for restructuring charges, primarily due to higher than expected severance charges and longer statutory termination notice periods, related to the shut down of our two international sites in France and Israel.

The restructuring plan will be substantially completed by the end of Q2.

Net interest income for the quarter was $59,000 and income taxes for the quarter were immaterial. We recorded a non-GAAP net loss in the first quarter of $4.2 million, a decline from a non-GAAP net loss of $400,000 in Q4. We recorded a non-GAAP net loss per share of approximately $0.06 based on a basic weighted average common share count of approximately 68.8 million shares

And we recorded a GAAP net loss per share of $0.13.

With regard to our cash position, we ended the quarter with approximately $31.5 million in cash cash-equivalent and marketable securities a decrease of approximately $3 million from Q4. Cash expenditures made in Q1 related to the restructuring or minimal as the restructuring took place at the end of the quarter.

Most of the cash expenditures related to the restructuring will take place in Q2. Entropic has not drawn down on our $10 million account receivable line of credit, which we recently extended an additional year to April 2010.

Our DSOs were 64 days in Q1, up from 43 days in Q4, primarily due to Q1 shipments being more heavily weighted towards the back half of the quarter. Our inventory turns were 3.1 times on a non GAAP basis, a slight improvement over Q4 turns of 2.9, primarily due to a 20% reduction in net inventory levels.

Now I’d like to provide our guidance for the second quarter of 2009. In Q2, we expect top line revenue to increase to approximately $25 million to $26 million, a 4% to 8% quarter-over-quarter increase.

Our second quarter revenue outlook, reflects an improvement in our MoCA business from the Verizon FiOS deployment as Verizon is showing strengthen in its FiOS business and Verizon’s OEMs have resumed ordering more inline with end consumption.

We expect this improvement in revenue to be somewhat offset, by a sequential decline in revenue from our DBS Outdoor Unit business, at both EchoStar Dish Network and DirecTV, as we enter a seasonally soft quarter, and as DirecTV limits CSS penetration to premium HD satellite dish installations.

We believe non-GAAP gross margin will be 51% to 52% in Q2, due to a product mix shift towards our home networking products.

Excluded from Q2 non-GAAP gross margin is approximately $75,000 in stock-based compensation expense and approximately $400,000 of amortization of purchased intangibles.

We believe non-GAAP operating expense will improve significantly, from $16.9 million in Q1 to between $14.5 million and $14.7 million in Q2, a 13% to 14% quarter-over-quarter decrease.

This is primarily due to our recent restructuring and to a lesser extent, to lower tapeout expenses in Q2, compared to those in Q1.

We will exclude from our non-GAAP operating expense in Q2 approximately $2.4 million for stock-based compensation expense and $1 million in restructuring charges.

We expect net interest income and income tax expense in Q2 to be immaterial. Assuming the midpoint of our guidance, we would expect to report a non-GAAP net loss of approximately $1.5 million. We estimate that our non-GAAP basic weighted average share count will be approximately 69.1 million shares in the second quarter.

Assuming the midpoint of our guidance, we would expect to report a non-GAAP loss per share of approximately $0.02.

Moving to the balance sheet, we expect cash, cash equivalents and marketable securities to be approximately $28 million at the end of Q2. This is a decrease of $3.5 million from Q1, and a large portion of this decrease is due to the restructuring that will result in cash expenditures of approximately $2.2 million in Q2.

Most of the remaining $1.3 million decrease reflects tapeout charges and a one-time tester purchase, both incurred in Q1, but will be paid for in Q2.

With regard to our DSOs, we expect DSOs to improve and be in the range of 55 to 60 days in Q2. We expect inventory turns in Q2 to improve slightly from Q1.

So, now I'll turn it back over to Patrick.

Patrick Henry

Thank you, Dave. To summarize, our recent restructuring has substantially lowered our current breakeven revenue to under $30 million per quarter, which will allow us to get profitability faster and allow us to more quickly capitalize on the operating leverage in our financial model.

Our core MoCA business at Verizon is back on track, and we have additional MoCA revenue opportunities as Time Warner and Cox deploy MoCA based set-top boxes later this year.

MoCA momentum continues and MoCA is becoming the [fact] of standard for home networking and digital entertainment.

Our product strategy remains focused on delivering best-in-class discrete MoCA products for OEMs and further pushing the MoCA performance envelope. As competition enters the market with volume shipments sometime in 2010, we believe we have a compelling strategy to compete longer term by partnering with other industry leaders who provide complementary technologies.

We see downloadable movie services as being a new killer app for MoCA, which has the potential to drive additional revenue stream for MoCA retail products later this year and into 2010.

Our DBS Outdoor Unit business, provides tremendous value to the satellite service providers and we believe this part of the business will grow as we further increase our attach rate at DirecTV, deploy our CSS products internationally and as the economy recovers.

Our broadband access and silicon tuner products will contribute to revenue in a more material way later this year and into 2010, and we view them as important building-block technologies. We are very excited about the opportunity in front of us, and we believe we have a solid product portfolio and product roadmap, as well as a compelling long-term strategy.

This concludes our prepared remarks. And now Dave and I’ll be happy to answer any questions you may have.

Debra Hart

Jamie, if can you repeat the instructions for the question-and-answer session?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll take our first question from Daniel Amir with Lazard Capital Markets.

Daniel Amir - Lazard Capital Markets

Thanks a lot, thank you for taking my call. A couple of questions here, first of all on the Verizon situation, you are mentioning that it’s come back now to a normal I guess more normal shipments here. Help us to understand a bit as we compared the last year when the revenue base was a lot higher those FiOS subscribers continue to be pretty solid at Verizon. How should we see it coming back to potential the level of that, you had a Verizon in the first half of 2008? Or is that something that we should only really see once we come out of the recession?

Patrick Henry

Yeah, so hey, Daniel this is Patrick. Our peak Verizon shipment quarter was Q2 of last year. We actually shipped a lot more unit than actual demand supported during that quarter, and that’s part of because the inventory issue. The other thing is most of the product that we shipped during that time was our first generation MoCA, which had substantially higher ASPs, as we have consistently talked about. We see about 25% ASP erosion per year, so the same number of units would be substantially less dollars based on that. So we do see we're kind of more in a run-rate basis going into Q2, and the revenue that we'll do with Verizon although we don't break it out separately, reflects where that's going to be.

Now, Verizon subscriber growth grows to the more than 300,000 units per category, than there is some potential upside there, but the current run rate, that's reflected in what we're forecasting for Q2.

Daniel Amir - Lazard Capital Markets

So you basically feel that Verizon now is back to a more normal, in normal shipments in terms of your business with them.

Patrick Henry

Yes, so our direct customers are the OEMs, people like Motorola, Actiontec, Westell, folks like that, Tellabs. Our ordering patterns are more consistent with what we see in terms of end demand right now. We had a probably our toughest quarter in Q1, where inventory was tightened down even more than what we originally thought when the downturn first hit us, but now we're back into a kind of more normal ordering pattern.

Daniel Amir - Lazard Capital Markets

Okay and on the cable side, could you give us a bit of potential impact that we could see this year, I mean timing of deployments is this initially going to be like when Verizon started are we looking at that type of shipments or just give us, if you can give us any clarity on kind of how this is going to start playing out here?

Patrick Henry

Yes, on both Time Warner’s and Cox’s announcement, they announced plans to launch later this year. They didn't get more specific than that. I'm not certain what their attach rate is going to be, clearly there is a lot of value in second and third room of DVR, to have a multi-room DVR strategy.

My understanding is about half the set-top box units shipped into U.S. Cable or DVRs, which are great candidates for having MoCA in a high percentage of those products. And then they would also have a non-DVR kind of client type of product that they would sell for second and third-room DVR. But, it's uncertain U.S. Cable is somewhat different than Verizon, where Verizon was greenfield, number one, and then number two U.S. Cable has an established installed base, so it's more of an upgrade plan as opposed to new subscribers. So unclear exactly how that's going to roll out, but I think it definitely is a compelling value proposition as they're starting to sell second and third room of DVR.

Daniel Amir - Lazard Capital Markets

When shall you start seeing the impact, I mean is that two three months ahead. When would you start to expecting to start seeing some shipments into that channel?

Patrick Henry

Yes, our standard lead times are in the 16-week range, so you would assume that somebody were going to start launching products in Q4, we should see some Q3 shipments. As we get into more of a run-rate business, there's a little bit longer cycle time within the channel, but a lot of time is for initial deployments people will airship stuff instead of shipping that by boat, so I wouldn't expect to see things a lot more in advance than, say one quarter in advance. And usually things start a little bit easy and then they turn on more aggressively as you start deploying in more and more regions.

Daniel Amir - Lazard Capital Markets

Okay. And the last question before I get back into the queue. On can you give us some clarity on MoCA 2, when is that, what's the timeline of that, when is it coming out? What’s is Verizon looking at it right now or not?

Patrick Henry

Yeah, I can't really comment on any specific service provider things looking at it. We do know that, there's a number of service providers that are MoCA members, including the Verizon, Time Warner, Cox, DirecTV, Comcast, EchoStar, so they're all involved in the MoCA standards body. Specifically, specification work is underway on MoCA 2.0. The primary market requirement around it is 400 megabits per second net throughput as the main improvement, and MoCA is expecting that ratification would be sometime in the mid to late summer of the MoCA 2.0 specification.

Daniel Amir - Lazard Capital Markets

Okay, thanks a lot.

Patrick Henry

You bet.

Operator

We'll take our next question from Sandy Harrison with Signal Hill.

Sandy Harrison - Signal Hill

Thanks good afternoon.

Patrick Henry

Hey, Sandy.

Dave Lyle

Hey, Sandy.

Sandy Harrison - Signal Hill

Just a couple of other questions if we could on the cable obviously focusing on what you guys can talk about and what you can't, but when you look at sort of the other cable opportunities, while Time Warner and Cox have announced MoCA in your estimation, when you look at the set-top box manufacturers, whether it's Cisco or Motorola, I mean, how many different SKU do they actually make for the different carriers? So, for example, would a box that they're selling to Time Warner or to Cox from Cisco or Mote, is there a chance that that box would also be sold to or Comcast or somebody out there, and how different would that box ultimately be?

Patrick Henry

Yes, so they do carry a few different SKUs. There's sometimes differences operator-operator with tier 1s. Especially right now there is the transition going on into tru2way type of platforms its kind of the new platforms that going forward. We see kind of pretty broad based deployment around that type of model across cable operators. Up to this point, Comcast has not announced specific plans to launch multi-room with DVR with MoCA, although I do believe they mentioned on their conference call that they plan to launch multi-room DVR and Comcast is a MoCA member.

Usually, in the tier 2, tier one and a half tier-two cable operators, they leverage heavily off of what the tier 1s do, so that provides additional opportunities. Say, for instance, that Time Warner and Cox launch multi-room DVR using MoCA, those products would then be available for sale to some of the other cable operators that are more kind of takers of the technology as opposed to drivers of the technology.

And, as you know, there's a significant number of tier 2s and tier one and a half, tier 2 cable operators in the U.S. that are also competing with the telcos on multi-room DVR. So we do see there is some additional opportunities there.

Sandy Harrison - Signal Hill

So there is actually a chance that there could be carriers or service providers shipping MoCA-Enabled boxes, with out them either deploying MoCA capability or even thinking about it at some point in the future?

Patrick Henry

It's a potential. I think the MoCA-based boxes are definitely going to be in the higher-end part of the market, initially which is only the DVR and HD part of the market, but if the second tier cable operators have customers that are ordering those kinds of services, it's conceivable, yeah you would get that going on.

Sandy Harrison - Signal Hill

Got you. Okay, and then the next area that we've often talked about on prior calls has been the satellite TV market. It sounds like the mix or the rollout schedule that DirecTV is talking about might be a little bit different from a perspective of a SWiM module. As far as the next move outside of cable, the logical progression would be to the satellite guys, and what sort of would be or what impediments are out there for the satellite guys, adopting MoCA into their network?

Patrick Henry

Neither one of the tier 1 satellite guys, either EchoStar, DISH Network or DirecTV have announced plans for multi-room DVR using MoCA, although both EchoStar and DirecTV are MoCA members and they're clearly targets for us, as folks that we would want to deploy multi-room DVR with.

Sandy Harrison - Signal Hill

Got you. And then, Dave, not to let you off the hook, as far as the tapeout schedule, that can have some pretty broad swings in your P&L, both positive and negatively, and so you sort of took it on the chin this last quarter and it's calmed down in the June quarter. What's a good way to model going forward? Do you have any other big tapeouts on the horizon? Should we add a little bit to the September and December quarter, assuming, what's the best way to kind of model for the variability here?

Dave Lyle

Yes, that's a tough one to model because tapeout schedules don't happen nicely every quarter, nice and evenly every quarter. In this particular quarter, we got hit with higher levels of tapeouts, but going forward in Q2, like we said in the guidance, we're going to get a little benefit from sequential quarter-to-quarter spending. At that time, we don't give guidance past Q2, but I think if you look kind of historically there has been pretty steady quarter-to-quarter tapeouts expenditures.

Sandy Harrison - Signal Hill

Got you. And then so is it fair to assume given that you aren't giving guidance, if you're at roughly $0.02 loss forecasted for the June on a $25 million to a $26 million, somewhere around a $28 million, $29 million number, would be a good breakeven start or a place to breakeven?

Dave Lyle

Yeah. I think if you took our long-term gross margin target at 50% to 52%, and assuming we continue to hit in and around that range and given where we guided in Q2 for OpEx, and assuming some growth throughout the year -- a little bit of growth throughout the year, you get to those numbers.

Sandy Harrison - Signal Hill

Okay. All right thanks for taking my questions guys.

Patrick Henry

Thanks Sandy.

Operator

And we’ll take our next question from Tim Luke with Barclays Capital.

Tim Luke - Barclays Capital

Thank you so much. As you guys think about the David, when you think about the shape of gross margins going forward, it sounds like on mix it's going to be slightly lower in the coming period. How do you envisage that progressing as you move through the year? And maybe, having done your restructuring, if you could provide some sort of sense about how you view R&D and SG&A spending as you move out in the year. That would be really helpful, too. Thanks.

Dave Lyle

All right, sure. So on the gross margin side again our long-term target is 50% to 52%. We've done a really good job, I think staying in and around that range for quite a long time, quarter-to-quarter, despite the product mix, and how it's been shifting back and forth between the home networking and the DBS ODU business, which are our two major drivers.

You know obviously, if we get a large up-tick in the home networking or the MoCA products, which as historically had gross margins just below our long-term target range it'll head more into the range, since obviously we've been above the range over the past quarter or so here. So, that's how I would look at the gross margin side of the equation.

On the operating expenses, we're not going to forecast past Q2, where obviously we just did a pretty large reduction in force, taking out 55 employees. So, adding a lot of employees is unlikely. We're going to add employees, critical employees, where we need to, but I don't think you're going to see a large increase there.

Tim Luke - Barclays Capital

Thank you. Which is with respect to the alliance and collaboration with Cavium, when do you think that we might see the first fruits of that emerging? And then secondly just with respect to the competitive landscape and Broadcom’s emergences into the market. How do you see that time line developing, what are the latest dynamics there? Thanks.

Patrick Henry

With respect to Cavium, and we've already seen first roots of it with respect to the Actiontec design win for the broadband home router that goes into the Verizon deployment, and that was really based on some first generation design work that we did. It was based on second generation MoCA but it was the first generation reference design.

We've now expanded on that relationship in to next generation Cavium processors, which we're going to try to leverage those into fiber to the premises, as well as IPTV deployments. But we have a pretty good working relationship with those guys.

With respect to the competitive landscape, we saw a recent announcement by Broadcom around the time of the cable show, where they announced that they got MoCA 1.0 certification of one of their products in a reference design. And I believe in that release it said they're still sampling the early access partners.

So I think they’re still a little bit early in the product development stage, based on that. We're probably going to be competing with them on sockets with our 65 nanometer MoCA 1.1 product for designs over the next couple quarters. And we still expect them to be in the market sometime in 2010 and start driving some volume in that timeframe. It's about where we think they are.

Tim Luke - Barclays Capital

Lastly, if I may, just with respect to the your cash balance that you guided it to 28.5, what are some of the considerations that you're looking at as you sort of think about what you need to be a in terms of a cash position for ongoing investments in the product portfolio? And sort of what sort of strategies are you sort of weighing as you look at that? Thanks.

Patrick Henry

Yeah, I'll take a crack at it, and then Dave can kind of add some color commentary. A big part of the decrease in cash this quarter is really related to the one-time restructuring charge and, to a lesser extent, some tapeout and tester stuff. So if you just take those things out, we're kind of cash flow neutral.

The biggest use of cash going forward is going to be working capital. So, if the business really starts cranking upwards in a huge way, maybe we'll need more than $28 million, $30 million in cash, but we also have this working capital line in the event that we need tons of cash, because our business is really kind of knocking the socks off. But I think we're in pretty good shape from a cash standpoint, but Dave, maybe you can add some additional color on that.

David Lyle

Yeah, like I said in the guidance earlier, in Q2, most of the cash that we're spending this quarter, at least the net cash drain, is related to the one-time charges, restructuring and then paying off the tester. And you know we take cash management pretty seriously. We took actions back in August. We did a small RIF, reduction in force. We did obviously a bigger one last month, restructure, and lowered the breakeven to below 30 million.

We do expect some uplift in the second half if we can get these MoCA-based deployments going, and there's a lot of leverage in the financial model. And then on top of that, if we have some hyper growth, we've got a $10 million accounts receivable line in place if we needed it, although I think we're likely not going to need that kind of cash.

Tim Luke - Barclays Capital

And referring those things. How is your broad visibility at the moment, guys? How do you see things?

Patrick Henry

I am not sure if I understand the question. Can you repeat it Tim?

Tim Luke - Barclays Capital

You both referenced the opportunities for strong growth in second half of the year and how is the visibility on the potential scenarios for the second half?

Patrick Henry

Yeah, so we're not going to provide guidance beyond the current quarter, but obviously the pipeline is developing nicely with a couple of additional tier 1 service provider deployments. We're winning designs in the tuner business. We're in some smaller-scale deployments and large trials in the access business, which has some potential for some lift.

Assuming the economy recovers, I think there's also upside in the satellite business. Big part of DirecTV's decision to kind of ratchet back on attach rate on CSS was based on their desire to really cut CapEx. So the economy improves, I think there’ll be more potential of an invest mode.

They've always had a goal and I think Chase Carey said on their most recent earnings call that SWiM is a critical technology firm for their whole home experience, as they call it. So, I think there's a number of different things, that we have that have the potential to drive some pretty significant upsides as we get in the latter part of this year.

As far as visibility goes, we have good visibility in the current quarter, one quarter out. We got halfway decent visibility, but a lot of its dependent on how the economy goes over the next several quarters.

Tim Luke - Barclays Capital

Excellent. Thanks guys, good luck.

Patrick Henry

You bet, thanks Tim.

Dave Lyle

Thanks Tim.

Operator

(Operator Instructions) we’ll go next to Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial

Good afternoon, guys. My question is regarding inventory. Given that you guys are saying these new service providers will launch MoCA-Enabled set-top boxes, what kind of inventories already in place at Motorola and Cisco? Do you guys have access to that? And, how will that change as these new service providers bring on the service?

Dave Lyle

Well, I think it depends on which service provider and which OEM or OEMs, box OEMs, they're going to be using.

The inventory requirements today, obviously, if deployments are happening at the end of the year, are not great. Anything related to Motorola, obviously, since its a big customer of ours currently, helps deployment timing. If there are new design win requirements with boxes, then that that'll take a little bit longer. But, overall, we've been working with not only our existing customers, but future customers on design wins for some time now.

Patrick Henry

Yeah, its generally set-top box manufacturers don't like to carry a lot of raw materials inventory. They try to use stuff within 72 hours of getting the product. And then, typically, the work-in-process inventory is anywhere from a couple of weeks, two to three weeks. Then, depending upon the shipping method, it could be, if they air freight something that could be week and a half.

If they go by boat, it could be a month to a month and a half, depending upon customs issues and what countries they are shipping to. So that's typically kind of the inventory that sits out there with an OEM once they get to a run rate business.

Typically, when they're in initial ramp phase they'll take a little bit more product up front to make sure that they can service their customers as they're ramping.

Hamed Khorsand - BWS Financial

Okay. And, are you seeing any kind of ramp now with these announcements or it’s just too early.

Patrick Henry

Yeah. The volumes associated with new deployments are modest at best. We really don't break things out by customer. We are doing business with obviously, Motorola is a big customer. They're an over 10% customer, so we're doing a lot of business with them. But the deployment timing of these new deployments really is the second half of the year, as we have stated in their announcement. So, we wouldn't expect to see any real volume stuff that would be a material contribution to our top-line, until later this year.

Hamed Khorsand - BWS Financial

Okay. All right, thank you.

Patrick Henry

You bet.

Operator

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

Ashish Rao - Credit Suisse

Thanks for taking our questions. This is Ashish Rao for John. Congratulations on the Time Warner and Cox announcements. You had discussed some ongoing momentum with international deployments, especially in China. Do you think you could give us a little more color on that? Is that also tied into MoCA and multi-room DVR? If so, are you concerned about the availability of homes with like multiple TVs and stuff in China vis-a-vis the U.S.?

Patrick Henry

So the broadband access business leverages heavily off of our MoCA R&D effort. The physical layer technology for broadband access is the same as it is for MoCA, so we don't have to do massive new chip developments for the broadband access business. It's really just a different software build.

It's a different MAC, as they call it media access controller. Because the access business is point to multi-point, where you typically do fiber to the building in a large multiple-dwelling unit and you need a way to bring the high-speed broadband access up to the apartment -- up to the customer premises. So it's, there is wide-based deployment of coax cable in China, as an example.

In fact, China has more cable subscribers than the United States, but they typically don't have multiple TVs per home. So we don't see it as a big MoCA opportunity, but potentially as a very large broadband access opportunity. These broadband access markets have a pretty long gestation period. Probably took five years for DSL to take off in China, but now it's the biggest DSL market in the world, as an example.

So they're looking at kind of next-generation broadband access. They don't want to fiber all the way to the customer premises. They're looking at a variety of different technologies. Entropic's c.LINK technology is one of the technologies on the short list approved by the government standards body, SARFT.

And, like I said, we're in large scale trials and assuming those go well we can expand beyond that footprint. It's something we see as a pretty good option for us. It's not a huge investment for the Company from an R&D standpoint. As the business starts to be successful, we can incrementally add resources as necessary to scale that business.

So, we see it as kind of an option for us to drive incremental top-line revenue. And we really don't see that in-home coax stuff as an issue, because it's not really a MoCA deployment, it's an access deployment.

Ashish Rao - Credit Suisse

Okay, thanks. Second question would be, do you think you are going to see a faster-than normal ASP erosion once the Broadcom begins to engage customers in the back half of the year?

Patrick Henry

We've been pretty aggressive in terms of moving down the price curve with our customers and now with our new 65 nanometer product. Typically, the ASPs don't erode kind of uniformly. You get more step function ASP erosion as you go from technology node to technology node. So we will see the 25% type of reductions going forward as we move to the next technology node.

And, as you probably know, our main competitor is also on 65 nanometer with their products, so they have an integrated solution where we have a discrete solution, there is benefit to both. But, we plan to continue to be aggressive on price and continue to try to win as many sockets as we can, and grow the overall size of the MoCA market, even as competition enters.

Ashish Rao - Credit Suisse

Thanks.

Patrick Henry

You bet.

Operator

And that does conclude our question-and-answer session. At this time, I'd like to turn everything over to Ms. Hart for any additional or closing remarks.

Debra Hart

Great. Well, we'd like to thank you all for your participation today. There will be an audio replay of this call available in the IR section of our website. Please note that although this call will be available for replay, except for our historical results, all information in the call is as of today's date, April 30, 2009. We undertake no obligation or commitment to update any information presented today.

Please check our website for information about our upcoming participation at financial conferences, and feel free to give me a call if you have additional questions. Again, thanks for joining in today. Have a nice evening.

Operator

That does conclude today's conference. Thank you for your participation.

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