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Executives

Debbie Hart – Director, IR

Patrick Henry – President and CEO

Dave Lyle – CFO

Analysts

Tore Svanberg – Thomas Weisel Partners

Daniel Amir – Lazard Capital Markets

Ruben Roy – Pacific Crest Securities

Sandy Harrison – Signal Hill

Alex Gauna – JMP Securities

Hamed Khorsand – BWS Financial

Aalok Shah – D.A. Davidson

Tim Luke – Barclays Capital

Entropic Communications, Inc. (ENTR) Q4 2009 Earnings Call Transcript February 3, 2010 5:30 PM ET

Operator

Good day everyone and welcome to the Entropic Communications fourth quarter 2009 earnings conference call. Today's call is being recorded. At this time for opening remarks and introduction, I would like to turn the conference over to Ms. Debbie Hart. Please go ahead, ma'am.

Debbie Hart

Thank you, Cynthia, and good afternoon everyone. This is Debbie Hart, Director of Investor Relations for Entropic Communications. We appreciate you joining us for today's call. If you haven't yet seen our fourth quarter earnings release, you can access it on the Entropic Web site at Entropic.com. This conference call is also being broadcast live from our Web site. A recording of this conference call will be available later today within about two hours of the call's completion and will remain available for phone and Internet playback for two weeks.

Participating in today's call are Patrick Henry, President and CEO and Dave Lyle, our Chief Financial Officer. During the call, Dave and Patrick will present our fourth quarter and year-end results and our short-term outlook, and then we will open it up for questions.

During today's call, we will refer to several non-GAAP financial measures. We present this information in order to provide investors with useful information regarding our results of operations and business trends. We have included reconciliations of these non-GAAP measures to their most directly comparable GAAP measures in today's earnings release. We have also posted a schedule on the Investor section of our Web site, which includes the historic quarterly and annual reconciliation of our GAAP to non-GAAP gross margin and operating expenses.

Next, I'd ask you to please note that the information we are about to discuss includes forward-looking statements, which are subject to risks and uncertainties. The company's actual results could differ materially from any results expressed or implied by such forward-looking statements. Factors that could contribute to such differences include, but are not limited to, those described in the company's SEC filings, including the risk factors section of our most recent quarterly report on Form 10-Q. The forward-looking information that is provided by the company in this call represents the company's outlook as of today. Subsequent events and developments may cause the company's outlook to change. Therefore, this conference call will include time-sensitive information that may be accurate only as of the date of this live broadcast, which is February 3, 2010. We do not undertake any obligation to update any forward-looking statements made by us.

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 fourth quarter revenue is $35.1 million, up 13% from the third quarter. Non-GAAP net income of $3.6 million increased 148% from Q3. This represents a record level of net income for the company and allowed us to post a non-GAAP EPS for the quarter of $0.05 and a GAAP EPS of $0.01. All-in-all, it was a great quarter and Q1 looks to be solid as well.

Dave will take you through the numbers in greater detail and discuss guidance for the first quarter. But, first, I'd like to discuss some of the trends we're seeing in our business starting with our home networking product line.

Verizon's FiOS service offering was the initial deployment of our MoCA home networking products and FiOS and Entropic's first wave of growth for MoCA from late 2005 until mid 2008. Entropic is now entering what we referred to as our second wave of growth for MoCA.

In addition to Verizon, we are now teaming up with other Pay-TV service providers including DIRECTV and a number of cable MSOs in the US to support their multi-room DVR and connect to home entertainment deployments. The second wave of MoCA growth has the potential to quadruple the total available unit market opportunity for MoCA chips compared to the Verizon deployment alone and provides a significant revenue diversification opportunity for Entropic.

This diversification already began to play out in a substantial way in our Q4 2009 results. We expect this second wave of MoCA growth to continue for the next couple of years. And starting in late 2011 or 2012, we expect the subsequent or third wave of growth in MoCA to kick in. The early signs of the third wave of growth are already starting to emerge in the marketplace, wholly driven by IP-based video delivery by both traditional Pay-TV service providers and so called over-the-top video service providers.

We expect this third wave of growth will increase traction for MoCA products and the retail aftermarket and drive MoCA expansion in the international markets. Verizon changed the plans we have by being the first Pay-TV service provider to deploy multi-room DVR functionality and was the first service provider to bring differentiated services to their subscribers by using MoCA home networking chips and set-top boxes and other devices.

In the FiOS deployment, Verizon deployed three MoCA chips for every FiOS Internet installation and on average, an additional three MoCA chips for every FiOS TV customer. In their earnings call last week, Verizon announced that they had 153,000 net new FiOS Internet customers and 153,000 net new FiOS TV customers in the fourth quarter.

Compared to the first half of 2009, net subscriber additions for FiOS had been weaker the last couple of quarters. However, Verizon indicated in their call that they have changed their promotional activity in the first quarter and they have seen initial success with these new promotions.

Although, we are disappointed by the softness in Verizon's net new subscriber additions, their current relative weakness in Entropic's business at Verizon highlights the strength in Entropic's non-Verizon MoCA business and our other product lines.

New MoCA deployments, including the recently announced deployment by DIRECTV continue to help provide top line revenue growth in Q1 2010. Over the last week, we announced that DIRECTV, the largest satellite television service provider in the world, has selected Entropic's MoCA silicon for integration into their set-top boxes to support multi-room viewing and other home networking capabilities.

DIRECTV has about 18 million subscribers in the US and we're very pleased to expand our relationship with DIRECTV beyond our Channel Stacking Switch products for their single wire module or SWM outdoor units. Entropic's technology will help enable a new generation of Coax-based home networking capabilities for DIRECTV subscribers nationwide.

The deployment as a combination of (inaudible) work in the development of our MoCA solution in the frequency range that is ideally suited for DIRECTV SWM-enabled satellite TV deployments. This is a large milestone for Entropic on a couple of fronts.

First, this is our first DVR deployment for MoCA, expanding the MoCA footprint outside of the telco and cable TV MSO segments. And second, a couple of the Entropic MoCA and CSS technology ensures the cross value of our products. DIRECTV set-top boxes utilizing Entropic's MoCA silicon are currently in production and will be in customers around later this quarter.

In addition to the newly announced DIRECTV deployment, Time Warner Cable, Coax Communications and Bright House Networks, the second, third, and sixth largest cable operators in the US, each have announced plans to deploy new MoCA 1.1 enabled set-top boxes later this year for multi-room DVR and other connected home entertainment services.

We continue to focus on the other tier-one cable service provider in the US, Comcast, as a key target for us. This past December, Comcast indicated that they intend to rollout multi-room DVR as a service in 2010 and committed to using MoCA. We are also seeing initial momentum from tier-two cable MSOs as they move to enhance their product offering and our OEM customers start to promote MoCA for multi-room DVR. A good example of this can be seen in our recent design announcement with Pace Americas for their new home content sharing solution which is currently in trials with several different cable MSOs, including Buckeye Cablevision, Mediacom Communications and Sunflower Broadband. The initial group of cable operators and industry cooperatives working at Pace opens up the target market of up to 26 million subscribers for this new technology.

The significant progress we're making with telco, cable and DBS service providers is tangible evidence that MoCA is winning the standards war and becoming the fastest standard for home networking and digital entertainment.

We are also making good initial progress in the retail aftermarket for our MoCA home networking products which is really a precursor of anticipated third wave of growth of MoCA which will be driven by IP video delivery to the home. At the Consumer Electronics Show or CES held in early January, home connectivity was a significant theme.

Blu-ray players, game consoles and many televisions now come with Ethernet jacks, making it capable of connecting to the Internet. This connectivity can enable consumers to use applications such as Netflix's streaming video service, Voodoo, YouTube, and it also allows personal content sharing from one device to another.

For consumers to enjoy these over-the-top viewing applications, they can pull up Category 5 structural wiring throughout their house. This is an expensive and cumbersome process. Alternatively, they can stream video over a WiFi network, but then they must settle for Best-effort's quality of service. While WiFi is an excellent technology for portability and for whole home data, when used for streaming video applications, it can fail at random times and for reasons that aren't apparent to the consumers which in turns can create a frustrating user experience.

In many cases, streaming video over WiFi network requires buffering and causes glitches and paused video frames. It's hard to debug and there is no guarantee that fixes will stay fixed.

Interference, buffering and latency are all related problems with WiFi for streaming applications, especially when streaming HD video. Sporadic interference can be partially mitigated by buffering and re-transmission, but these remedies increase latency in addition to reducing throughput.

Our MoCA network using Ethernet Coax provides an ideal solution for streaming video and over the top services. At CES, we announced the design win for a new 4-Port Ethernet to MoCA Bridge with Wistron NeWeb or WNC.

The WNC 4-Port MoCA Bridge can attach to an Internet Ready TV, Blu-ray player, Game Console and other Ethernet enabled consumer electronics products. The WNC 4-Port MoCA Bridge makes it possible for consumers to connect an entire home theatre to the Internet, using the existing Coax Cable in home.

Other consumer electronics customers, Actiontec, D-Link and NETGEAR also have branded offerings for Ethernet to MoCA Bridge products, using Entropic's home networking chips.

We clearly see WiFi as an important complementary technology to MoCA and believe that both technologies will be used in the home. WiFi for portability and home data networks and MoCA for streaming HD video and other multimedia content room to room throughout the home.

As the market for over the top viewing moves from the early adopter stage to the main stream market, we expect consumers will demand true HDTV and Blu-ray quality of service for their streaming video needs.

MoCA is a home networking technology built from the ground up to support streaming media applications in the home, including multiple streams of HD quality video. That is why, Pay-TV service providers with the true quality of service video offering have selected MoCA over other home networking technologies for this application.

Longer-term in the MoCA market, we believe there is an emerging trend towards IP video delivery from incumbent Pay-TV service providers as well. This trend will also help to drive the third wave of growth of MoCA.

Entropic hosted an RVU Alliance demo at CES and provided a glimpse of what may be coming in the future. The demo showcased a video gateway in thin client architecture. This architecture potentially provides a significant cost reduction to the service provider and consumer alike versus the traditional DVR and set-top box deployment architecture.

The thin client capability can eventually be embedded in HD TV sets, Blu-ray players and other consumer electronics products, further reducing cost by eliminating the thin client altogether.

Our demonstration showed that a MoCA network provides enough bandwidth to support the capabilities of this architecture, while streaming multiple HD programs to various rooms throughout the home.

CES really showed the future of consumer electronics and the Internet. Connectivity is only the first step with networks becoming the standard feature on HD TVs, Blu-ray players and gaming consoles.

Over time, consumers will demand higher quality (inaudible) HD streaming video services, 3D movies-on-demand and live streaming sports broadcasts on the highest quality HDTV and 3D format to every TV in the house, all of which will increase the need for a MoCA home network that supports reliable simultaneous streaming of multiple HD video streams.

From a pay TV service provider perspective, the explosion of 3D content, 3D capable equipment and forthcoming 3D TV channels will create an insatiable appetite for bandwidth driving the near-term requirement for MoCA 1.1 and longer term for the emerging MoCA 2.0 standard.

The MoCA 2.0 standard will provide over two times the data rate in basic mode and over four times the data rate in enhanced mode versus the current MoCA 1.1 standard.

I would now like to spend a few minutes updating you on our MoCA Partnership Strategy. Entropic develops partnerships with best of breed companies and experts in their respective technology domains. Our collaborations with Atheros, Cavium, Intel, NXP, Sigma Designs, Texas Instruments and ViXS show how we can target specific product segments to produce best in class solutions for our customers. Our partnership strategy may initially start with doing reference designs, which OEMs can take to market very quickly.

Longer term, these partnerships allow us to collaborate on market opportunities and to align product roadmaps and silicon feature sets. We announced earlier today our collaboration with BroadLight, a leader in BPON and GPON technology which allows each company to capitalize on its core capabilities and leverage our combined expertise.

Together, we are able to deliver a total system solution. BroadLight and Entropic have been working together to ensure our products are optimized to bring out the best performance of GPON and MoCA technologies.

By collaborating with BroadLight, we continue to build on momentum for MoCA enabled technology. Entropic is the leader in MoCA, with our solutions are mature and field proven.

Likewise, BroadLight is a leader in PON. Our partnership allows us to align technology roadmaps to develop and deliver optimized MoCA enabled optical network terminals or ONTs.

At CES, we also highlighted our partnership with Atheros and demonstrated the ease with which MoCA and HomePlug AV can co-exist and bridge the two technologies to distribute multimedia to anywhere in the home.

Entropic's sales relationship brings together solutions based on the most prominent, reliable and broadly deployed wired home networking technology standard available today.

Our partnership demonstrates our commitment to serve the needs of operators and end customers for delivering multimedia content, while ensuring backward compatibility to existing standards.

Partnerships remain a key element of our long-term MoCA strategy and we expect to continue to announce additional collaborative relationships in the future.

Turning to our DBS outdoor unit business, this product line consists of our Channel Stacking Switch, or CSS family and our Band Translation Switch, or BTS family of products. Our satellite outdoor unit products simplify the installation of satellite TV service.

We are shipping our CSS solutions to DIRECTV for their integrated single wire module, or SWM ODU deployment. Each of DIRECTV's SWM enabled satellite dish products uses three of Entropic's CSS chips. Historically, DIRECTV deployed their SWM ODU in new high-end HD installations.

However, in the second half of Q4, we saw an uptick in demand as DIRECTV began to use the SWM enabled dish antenna for all new HD installations.

Increased penetration our attach rate at DIRECTV significantly increases the number of CSS chips we ship to DIRECTV on a quarterly basis. One benefit of the CSS technology is the ability to support easy upgrades where the consumer can add set-top boxes by simply plugging them in with no new wires or truck rolls needed.

Our CSS technology is part of DIRECTV's overall strategy to simplify the installation process and create a reliable video distribution system for consumers who want to enjoy a connected home lifestyle.

SWM is a key component in the DIRECTV and Multi-Room viewing service which also used Entropic's MoCA technology. Entropic's close cooperation with DIRECTV during the early phase of system design ensured that the two technologies, CSS and MoCA seamlessly coexist on the same wire.

Longer term, the combination of SWM, MoCA and RVU allowed DIRECTV to realize the vision of enabling consumer electronics products that were capable of receiving full feature DIRECTV content without the need for separate client set-top boxes.

We are also beginning to further expand our revenue from the DBS outdoor unit product line internationally.

We are currently working with several international operators and their OEMs to deploy CSS single-cable solutions for volume ramp beginning later this year.

We expect demand for single wire technologies will continue with the proliferation of DVRs and HDTVs worldwide.

The international Free to Air or FTA satellite market provides an additional opportunity for our DBS ODU product line, especially in the higher end single family and multiple dwelling unit markets, where set-top boxes and DVRs are deployed.

FTA markets are embracing the value of our CSS technology with deployments in regions such as Germany that have a large FTA footprint.

Entropic's CSS technology enables reuse of existing cabling to support multiple tuners and set-top boxes, thereby lowering system costs and installation costs.

Our BTS family of satellite products is used by EchoStar Dish Network and their DISH Core products to enable single-cable runs to their award winning DVR products and continue to provide a nice run-rate business for us.

Turning to our silicon TV tuner product line, we're encouraged by design win traction for our CMOS silicon tuner. Entropic's CMOS tuner is a best in class performance hybrid multi-mode tuner that can address both analog and digital signals for international cable, and domestic and international terrestrial TV markets.

The TV tuner market is starting to switch from the screen implementation to the silicon tuners and the world is converting to digital television while needing to maintain legacy support for analog TV. Entropic is building a significant design win footprint across the broad range of end market applications including digital TV and set-top box. We believe we are well positioned for significant growth in our tuner business in 2010 and beyond.

In our broadband access product line, Entropic remains focused on driving new deployments of our access technology in international markets with a specific focus of Mainland China. Entropic's broadband access revenues are still modest. However, if all goes well with our trials China, this could be an additional growth driver for Entropic in late 2010 and beyond.

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

Dave Lyle

Thanks, Patrick. Fourth quarter revenue increased 13% to $35.1 million in Q4 from $31 million in Q3, just above the high end of our previous guidance. Significant top line revenue growth in light of softness in Verizon's FiOS deployment with our MoCA products demonstrated a rapidly diversifying business for Entropic.

Our fourth quarter revenue growth was driven by OEMs preparing for initial launches of our MoCA products by new service providers, increased penetration of our CSS product in the DIRECTV satellite deployment, and increased demand for our BTS products deployed by DISH Network.

These growing revenue streams somewhat offset lower revenue from OEMs supporting the Verizon FiOS deployment. Verizon's net sub additions for the September quarter were down by one-third from the June quarter levels. This impacted Entropic's Q4 Verizon MoCA revenue by a similar amount. Yet, we were able to grow top line revenue through this softness with new MoCA customers and other product line revenue growth.

Our top 10% customers in Q4 were Motorola, our MoCA customer supplying multiple OEM products to multiple service providers at 23%; Zinwell, a customer of our Channel Stacking Switch product at 10%; and WNC, a customer of both our MoCA and CSS product also at 10%. No other customer accounted for more than 10% of sales during the quarter.

Non-GAAP gross margin in Q4 was 52.9% at the high end of our previous guidance range and a 100 basis points increase from 51.9% in Q3, as we saw strengths from both DIRECTV and DISH Network with our higher margin DBS-ODU products. Excluded from Q4 non-GAAP gross margin is $40,000 in a stock based compensation expense and $400,000 are purchased intangibles amortization.

Non-GAAP operating expense increased approximately 3.5% quarter-over-quarter from $14.7 million in Q3 to $15.2 million in Q4. Our Q4 ending worldwide headcount was 262 employees, an increase of 7 from the prior quarter. Our Q4 non-GAAP operating expense excludes $2.1 million of stock based compensation expense. As a result of 13% revenue growth, strong gross margins and solid expense control, non-GAAP operating margin doubled from 5% in Q3 to 10% in Q4, demonstrating the inherent operating leverage in our business model.

Net interest income and income taxes for the quarter positively impacted the quarter by about $200,000 due mainly to a year-end income tax benefit. We recorded profitability on both a GAAP and a non-GAAP basis in Q4. Non-GAAP net income in the fourth quarter was $3.6 million, an improvement from $1.4 million in Q3 and GAAP net income was $1 million in Q4, an improvement from a GAAP net loss of $1.2 million in Q3.

This is the highest level of profitability since the company's inception in 2001 and it is the first time in the company's history that we recorded GAAP profitability. We recorded non-GAAP earnings per share of $0.05 based on a fully diluted weighted average share count of 74.9 million shares. GAAP earnings per share was $0.01.

Despite a slow start in the first half of the year, we were profitable on a non-GAAP basis for the full fiscal year 2009 and reported a non-GAAP net income of about $150,000 on $116 million of revenue.

With regard to our cash position, we ended the quarter with $35.3 million in cash, cash equivalents and marketable securities, an increase of $1 million from Q3. Our cash balance primarily benefited from the higher revenue base. Cash flow from operations for the quarter was $1.2 million. Our DSOs improved to 41 days in Q4 from 47 days in Q3, primarily due to better revenue linearity during the quarter as well as upside from cash collections at the end of the quarter.

Our inventory turns were four times.

Now, I would like to provide our guidance for the first quarter of 2010. In Q1, we expect revenue to be in the range of $36 million to $37 million, a quarter-over-quarter increase of between 3% and 5%. We expect to grow top line revenue despite Verizon's FiOS net subscriber additions in the December quarter dropping by 25% over the levels reported for the quarter ending in September.

Our first quarter revenue outlook reflects growth for OEMs preparing for initial launches of our MoCA products by new service providers and continued penetration of our CSS products at DIRECTV. We expect these increases to be somewhat offset by lower revenue from OEMs supporting the Verizon deployment.

We believe non-GAAP gross margin will be in the range of 52.5% to 53.5% in Q1. We will exclude from Q1 non-GAAP gross margin $40,000 in stock based compensation expense and $400,000 of amortization of purchased intangibles. We believe non-GAAP operating expense will increase from $15.2 million in Q4 to between $15.6 and $15.8 million in Q1, an increase between 3% and 4%. The increase is primarily due to payroll taxes which are higher in the first half of the year. We will exclude from our Q1 non-GAAP operating expense $2.1 million for stock-based compensation expense. At the midpoint of these guidance ranges, non-GAAP operating margin would be 10%.

We expect the net effect of interest income and income tax expense in Q1 to be immaterial. Therefore, non-GAAP earnings per share would be $0.05 based on a fully diluted weighted average share count of about 76 million shares.

Moving to the balance sheet, we expect cash, cash equivalents and marketable securities to be about $37 million at the end of Q1. With regard to DSOs, we expect DSOs to be in the mid-40s in Q1 and we expect inventory turns to be about four times.

Now, I will turn it back to Patrick for some closing remarks.

Patrick Henry

Thank you, Dave. To summarize, we are very excited about the team's solid execution, our revenue growth and our profitability both on a GAAP and a non-GAAP basis. We continue to see our company's vision playing out with our MoCA products being deployed in the new Pay-TV service provider offerings and our other product lines showing strength.

Our MoCA business is now becoming sufficiently diversified with telco, cable and DBS deployments, which helps offset softer quarterly sub adds at any single service provider. And our other product lines are beginning to penetrate the large markets they serve. Our partnership strategy around our MoCA product line continues to expand with new partnerships being forged each quarter.

Our satellite outdoor unit business is beginning to grow as our attach rate at DIRECTV increases and as we penetrate international markets with CSS. Our Silicon Tuner and Broadband Access products should contribute to revenue in a more meaningful way in 2010 and we view them as important building-block technologies.

We believe we will grow our top line revenue this year as the markets we serve continue to drive towards ubiquitous connected home entertainment. Longer term, we believe that the trend to deliver IP-based video will drive a third wave of growth in MoCA beyond the current wave, which is being driven by new multi-room DVR service provider deployments.

We are very excited about the opportunity in front of us and we believe we have a solid product portfolio and product road map as well as a compelling long-term growth strategy. That concludes our prepared remarks. Now, Dave and I will be happy to answer any questions you may have.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes, thank you and good quarter. Two questions, first of all, could you talk a little bit about the Verizon FiOS service? It looks like you are expecting that business to be down about 20% sequentially again in the March quarter. When would you expect that to start stabilizing, especially given that there are now launching their new marketing efforts?

Patrick Henry

Thanks, Tore. We are anticipating that – they are basically at the bottom and they are turning it around based on kind of soft feedback we have from them. We won't know until the end of the March quarter kind of how things turn out, but I think that the new promotions that they are running which are based on – giving away the free DVR server, lot of Quad Play bundling, more aggressive pricing, a lot of these things seem to be getting some initial traction and the initial kind of soft feedback we are getting around that is quite positive. So although we're going to experience some more difficult in Q1 based on their Q4 results, we are hopeful that towards the end of Q1 or definitely in Q2 we should start seeing a little bit of a recovery in that business.

Tore Svanberg – Thomas Weisel Partners

Very good. And moving on to Comcast, looks like they are pretty committed to MoCA, maybe some potential deployments in 2010. If they do deploy in 2010, when would you potentially have to start seeing some of that business?

Patrick Henry

Yes. We can't really comment specifically on unannounced cable MSO deployments. I think we have said generally, we expect in the second half cable to be a bigger growth driver in the overall MoCA business for us and cable operators typically go slow before they goes fast. Generally, within the cable MSO world, right now, we are seeing (inaudible) moving to kind of some soft marketing launches and then I think we will start seeing geographic launches within the next quarter across the cable MSOs. But early second half is where I think we have the potential to really see that as a bigger growth driver for us.

Tore Svanberg – Thomas Weisel Partners

Very good. And then moving on to DIRECTV and their MoCA deployment, it looks like there is an 18 million unit opportunity there. How should we expect that to ramp through time? Is that similar? Is it fairly slow in the beginning or do you think you already started to see some meaningful units already in the first half of the year?

Patrick Henry

Yes. I don't know if DIRECTV talks specifically about their launch plan. Typically, what they'll do is they're launching some percentage of the US with a new technology, maybe a third or half of the US and then over the next quarter, pan out to a nationwide type of a launch. So I think that business is going to continue to ramp for us throughout 2010 and possibly in the 2011. One of the things that really bodes well for the company is I think we are also seeing a really big ground swell or purchase of HDTVs which basically is the precursor to people upgrading their Pay-TV service from standard def to high def service.

So most of the products we are going into really are going to benefit from consumers upgrading their service from standard def to high def service and this is with DIRECTV, this is also what Verizon, but also with the cable MSOs. So I think that provides us a good opportunity as that part of the market continues to expand.

Tore Svanberg – Thomas Weisel Partners

Very good. And then just lastly on the outdoor satellite business, it has been pretty strong in the last couple of quarters. How do you expect that business to track going forward? Is it going to be some potential lumpy growth or do you expect that business to show more steady growth there in 2010?

Dave Lyle

I mean, we're – (inaudible) we have a few planes going over, that's why I keep passing everyone. So, I guess we are in the flight pattern today. The satellite business generally, seasonally strong period in Q4 and Q1, usually a little bit seasonally softer in Q2 and that would be especially the case for our run rate business at EchoStar. And the case for the DIRECTV business, we are ramping there into – from kind of the high-end HD market to all HD. So, we are going to continue to see expansion in that in Q1.

Unclear exactly how that's going to look in Q2 at this point, but we also see international satellite service providers starting to deploy CSS later this year as well. So I'd say generally throughout the year that should be a growing business for us. We might see a little bit of softness in that business in Q2 though, because that is a seasonal soft quarter especially for the big tier-one guys.

Tore Svanberg – Thomas Weisel Partners

Sounds good. Thank you very much.

Patrick Henry

Sure. Thanks, Tore.

Operator

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

Daniel Amir – Lazard Capital Markets

Thanks a lot. Congratulations on the quarter. A couple of questions here. In terms of the – assuming that Verizon starts coming back as you'd previously answered in the question, what type of revenue base do you think we should be at the end of the year in terms of breakdown in telco, cable and satellite? Is cable going to be bigger than the telco side, or is the telco going to be bigger than the cable by the end of next year?

Patrick Henry

Yes. I know it's – we really don't kind of break things down like that and we really don't want to provide guidance beyond the current quarter. I would say generally, if you look historically when Verizon was our only deployment of MoCA, they represented north of 70% of the overall revenue of the company. As we kind of moved into this Q4 period, they lost than half of that in terms of our overall revenue. And I think even with the spring back in Verizon, the other businesses are going to be growing at a more rapid clip. So the Verizon component of our overall business is maybe a third of our business and decreasing from there.

I think the satellite opportunity and the cable opportunity each are as big as the Verizon deployment over time. So, we should see pretty uniform distribution and diversification of our revenue across the MoCA business, while at the same time, we are also seeing pretty substantial growth in our non-MoCA produce lines as well. So I think generally, we are going to see continued diversification of the revenue stream across multiple service providers and multiple products.

Daniel Amir – Lazard Capital Markets

Okay. And with relates to kind of the next wave of MoCA and beyond, multi-room DVR, it seems like MoCA as a technology really cornered the market here in the US But kind of the IP delivery side, I guess there is kind of other technologies that have started taking off, it's WiFi et cetera. I mean, what needs to happen or what and when it needs to happen, do you think that MoCA really starts going into that next phase?

Dave Lyle

I think that this is specifically in the over the top video delivery service market so as multiple components in the third wave of growth. The first one is kind of the over the top opportunity, the second one is the move of traditional pay TV service providers from the current video delivery mechanism, the modern IP-based video delivery, and then the third components are really international. So, on the over the top feeds, I think you are seeing WiFi as being kind of the predominant technology out there today. We are really in the early adopter market for that part of the business and I think the focus right now in over the top pay TV service providers is first and foremost to get their application embedded in as many consumer electronic products is possible.

So if you look at the Netflix streaming service as an example, they are now in PS3, they are in Xbox 360, they're now even in Wii. Vizio [ph] announced at CES that they are now in most of the major branded TV manufactures, with the exception I think of Panasonic and Sony. So that's kind of the first and foremost objective is given in as many platforms as possible.

The second thing that they are focused on is to get the consumer to at least use the service once. And as it turns out, if you include WiFi as opposed to just including an Ethernet jack, the attach rate of people actually trying the service at least once is about 2X. So, WiFi definitely provides that immediate benefit of saying, okay, somebody is going to try the service, at least use it and see how it goes.

The disadvantage of WiFi is really going to be evidenced as you start moving through the mainstream part of the market where the quality expectations of video are basically set, and the bar is set by their current incumbent pay-TV service providers. So, just start having more streaming sports content and more things where people have a quality viewing experience get us back on the use of services, unless you have a high quality FatPipe that delivers the video quality very reliably. I think that's going to take a couple of years and that's when MoCA really starts to get additional traction.

We did start having initial conversations with TV set manufactures. These are obviously confidential customer discussions, so I can't mention customer names, but where TV set manufacturers are starting to come to us about plans to embed MoCA in TV sets over time.

In a similar timeframe, we see the potential of incumbent pay-TV service providers like DIRECTV with our view moving to more of the same client architecture which also has the potential to push MoCA into TV sets, and also in a similar timeframe like in Northern Europe, where there is coax infrastructure and Europe will really lag the US in both DVR and HDTV deployment by a couple of years. We see an opportunity for MoCA to deploy there. So we see multiple things happening that drive that with the biggest factor being this IP video distribution and the need for quality of service.

Daniel Amir – Lazard Capital Markets

Okay. Great. Thanks a lot.

Dave Lyle

Sure.

Operator

We will take our next question from Ruben Roy with Pacific Crest Securities. Please go ahead.

Ruben Roy – Pacific Crest Securities

Thanks. Hi, Patrick.

Patrick Henry

Hi, Ruben.

Ruben Roy – Pacific Crest Securities

I had a question sort of focused on Verizon, when you have other exciting ramps starting, but just when you talk about potentially seeing some sort of recovery end of Q1 maybe in Q2, can you elaborate a little bit on your assumptions there. Are you expecting some sort of bounce back in sub growth or just kind of a flat lining of the declines that we have been seeing, kind of what you're expecting?

Patrick Henry

Verizon's public comments have really been continue to focus on a million new – net new sub adds a year. So that would translate to about 250,000 a quarter. They did 300,000 per quarter in Q1 and Q2 last year and then they did I think 200,000 in Q3 and 150,000 in Q4. So, they ended up doing a million last year as well, but a little bit slow on the back half. I think with the promotions that they are running that say that they are getting initial success, I think it's trending more towards that kind of run rate type of a business, which should be somewhere between 200,000 and 250,000.

As they have kind of gone through the slower period over the last couple of quarters, they have continued to order less and they are keeping inventory positions pretty tight. So there should be a spring back associated with that at some point. When accounting on that and our numbers that we provide for guidance for Q1, so if that happened in Q1, there could be some potential upside. But, assuming that they did get that kind of bounce back in Q1, we should see a Q2 bounce back pretty strong for us because there is not – like there is a ton of excess inventory in the channel and they continue to ratchet it down to kind of whatever the current run rate is.

Ruben Roy – Pacific Crest Securities

Great. That's really helpful. Thanks, Patrick. And then just one another question around the comments that you made on the CSS technology, HDTV and then the fact that you have demonstrated compatibility between obviously your CSS solution and your MoCA solution, is that something that you think ends up being a hurdle for other eventual MoCA competitors or maybe is a better way think about that perhaps thinking that it's just another step being qualified, and that gives you some extra insurance I guess in the near term HDTV, any details on what your – what you can say there?

Patrick Henry

Yes. I mean, that is a really long-term barrier to entry to other MoCA suppliers. I think other MoCA suppliers will eventually be able to support portions of the DIRECTV deployment. Historically, at least, when DIRECTV launched a new set-top box platform, that platform stays around for a while. So, it's more of one when (inaudible) in the next landing zone from a design cycle is. So, I think we have got a good runway in front of us, well in basically every set-top box that has MoCA in it at DIRECTV for quite a while, although we are not starting a fight for kind of the next generation.

So I don't really see it as a long-term barrier to entry. But the thing that is kind of interesting about us that kind of make your question when we think about this, is that there are opportunities outside of DIRECTV in the international markets where they are starting to move towards single wire technologies using CSS. And as those markets start to move towards multi-room DVR and HDTV, the MoCA-CSS combo has significant benefits in those other geographies. So kind of the system works that we have done allows us to fan out to additional opportunities over time.

And the other thing that counts as a benefit there is all of the major set-top box manufacturers that support the DIRECTV deployment now have products that they can then start to socialize with other international satellite service providers using MoCA. So you get some leverage off of the tier one design into some of the other opportunities internationally. So I think all those things end up being pretty positive for both our CSS business and our MoCA business longer-term.

Ruben Roy – Pacific Crest Securities

Yes. That makes sense. Okay, thank you very much, Patrick.

Patrick Henry

Sure. Thanks, Ruben.

Operator

We will take our next question from Sandy Harrison with Signal Hill. Please go ahead.

Sandy Harrison – Signal Hill

Great. Good afternoon, everyone.

Patrick Henry

Hi. Sandy.

Sandy Harrison – Signal Hill

Hey, don't know if you guys had a chance to kind of digest and look through the recent announcement by one of the competitors in the MoCA chip space, and an acquisition in sort of a tangential technology in the set-top box upon [ph], what's sort of your immediate reaction on that? Is this more to be read into that about perhaps a change in strategy or even an acknowledgement of falling behind?

Patrick Henry

I think you are probably talking about Broadcom's recent announcement of acquiring Teknovus.

Sandy Harrison – Signal Hill

Correct.

Patrick Henry

Okay. So, I think that just rounds out another portion of products lines that they want to be involved in. Historically, Broadcom didn't have an EPON or 10G-EPON product. They think they developed a GPON product internally, which is used and they are going after basically the Alcatel-Lucent business internationally and also at Verizon with their GPON product.

EPON is used in some other international geographies and we are starting some – to see some initial indications from service providers, cable service providers that may want to deploy deep fibre architectures where 10G-EPON could be an important technology. So, it's really kind of (inaudible) for us to some extent move or partner with PMC-Sierra and kind of the EPON and 10G-EPON space really more around our Access business because Verizon using GPON. So, we basically partner with BroadLight for the GPON business in Verizon and they'll partner more with PMC-Sierra for the EPON and 10G-EPON. So, not really directly related to us, but I think it just rounds up some additional products that Broadcom feels like they need to be in for their telco access space.

Sandy Harrison – Signal Hill

What you think with them, Broadcom now occupying more of the silicon within the set-top box, what do you think customers' willingness to continue to give Broadcom even more geometry within the set-top boxes from that perspective?

Patrick Henry

All in key stuff [ph] that GPON or EPON silicon really doesn't go into the set-top box per se. It goes more into a separate product which is more of an optical network terminal or an ONU, an ONU in the case of a multiple dwelling unit or an OMT in case of a single-family unit. So, it really doesn't give them additional real estate there. Broadcom is a big player in DSL and they are already in GPON. So I think that EPON stuff really kind of rounds out the overall set of products that they can sell into the carrier access market. So that's unfair. It's more orthogonal [ph] to us. They are already kind of in the set-top box as fees paid, so their integration strategy with MoCA around there is something what we have known about when dealing with for quite some time, so doesn't really change the competitive dynamic for us.

Sandy Harrison – Signal Hill

Got you, thanks. And then kind of some of the things you are seeing in China in the c.LINK products, any sort of change in the dynamics of those markets in some of these newer technologies and then some of the broadband really start to reach 10-gig in the basement and other areas like that?

Patrick Henry

Most of the stuff we're seeing in China right now is that there is a commitment by the government to really try to strengthen the cable MSOs to be an alternative broadband access service provider to the major telcos. So, that kind of bodes well for what we are doing there. Coax is definitely the access solution of choice for the cable MSOs and there is a couple of different Ethernet-over-Coax technologies that are being trialed, our c.LINK access being one of those. And there is currently not really a bake-off, but kind of a technology comparison going on with the various different solutions.

So, I think over the next year, we are going to see that play out, is that going to be a big opportunity for anybody and specifically is that going to be a big opportunity for Entropic. But it seems like we're doing all the right things that kind of position ourselves well for that market and (inaudible) for big revenue this year, but definitively it's like a call option where we're continuing to fund that activity to see if it could potentially get big.

Sandy Harrison – Signal Hill

Great. That's all we got. Thanks for taking my questions.

Patrick Henry

Yes. Thanks Sandy.

Operator

We will take our next question from Alex Gauna with JMP Securities. Please go ahead.

Alex Gauna – JMP Securities

Thanks very much. I know you have addressed this in a number of different ways, but I am a little bit unclear in terms of the business going into Verizon for the current March quarter, are you expecting it to be down sequentially from December? And did I hear right that perhaps less than a third of revenue is what you are looking for, is that correct?

Dave Lyle

Yes. We are not breaking out specifically (inaudible). It's roughly a third of our business in Q4 and it's going to be sequentially down in Q1. Verizon's sell-through from a net subscriber adds, we are down about 25% Q3 to Q4. So, we will see something similar in Q1 for us. Despite that, we still feel comfortable with the guidance we are providing which gives like 3% to 5% top-line growth.

Alex Gauna – JMP Securities

Okay. And then in terms of your visibility or backlog coverage for the current quarter, do you need to do any turns business to get your guidance and typically what kind of lead time you get from Verizon, if you don't mind me asking?

Patrick Henry

So within the current quarter, we have really good visibility. We have several lot of [ph] turns business, but generally we have great visibility in the current quarter. Part of our turns business is because we are in the Motorola hubbing program. So, we recognize revenue on so out of the hub and so into the hub. That creates some level of churns business for us. Also, our chain of business have some level of churns component associated with them. But generally, we feel like we have really good visibility in the current quarter and we feel that way about this quarter as well.

As far as Verizon goes, Verizon isn't a direct customer. They (inaudible) with guys like Motorola and Actiontec and Alcatel and people like that, and then those are our direct customers. So we typically get like a 12 month rolling forecast. We have 16-week lead-time that we quote to our customers. They usually don't kind of filling out of those, but we usually have pretty big coverage to our lead time. So generally, customers are pretty good about at least giving us 12 to 13 weeks sort of thing. Am I [ph] right, Dave?

Dave Lyle

Yes, that's right.

Alex Gauna – JMP Securities

Okay. And then if I could follow that of last one, you talked about a number of different moving pieces to seasonality and new product ramps for the June quarter. At this juncture, let's say holding Verizon steady and assuming no recovery, and I know you said you saw promising signs. With all the moving pieces, will you expect enough sequential June [ph] at this juncture?

Patrick Henry

We don't provide guidance more than one quarter out.

Alex Gauna – JMP Securities

Okay. Fair enough, congratulations. I am getting back to (inaudible).

Patrick Henry

Thanks Alex.

Dave Lyle

Okay, thanks.

Operator

We will take our next question from Hamed Khorsand with BWS Financial. Please go ahead.

Hamed Khorsand – BWS Financial

Hi guys. Just a couple of questions. Could you just walk through this DIRECTV MoCA deployment? DIRECTV use three chips for their outdoor unit. This MoCA, will it be just one chip for every set-top box that's deployed that's MoCA enabled, could you just walk me through that?

Patrick Henry

Yes. So, basically in a multi-room home which is going to be a HDTV home in the case of DIRECTV, we would get SWM enabled DISH antenna so that is three CSS chips. And then on average in US homes, you have three TV sets. Assuming every one of those is connected to DIRECTV servers, we'd get three set-top boxes, typically a DVR and then a couple of HD clients. So, that would be three MoCA chips in that home as well.

Hamed Khorsand – BWS Financial

Okay. And as far as DIRECTV and MoCA, is DIRECTV rolling out MoCA enabled set-top boxes for all subscribers or the particular segment?

Patrick Henry

The boxes that they announced are in HD DVR and in HD clients. So it's really focused on the HD portion of the market where they are going to provide multi-room capability.

Hamed Khorsand – BWS Financial

Okay. And as far as AT&T goes, AT&T is using different technology, but they are going to the Solo set-top box refresh. Will they move away from HPNA or do you think they'll just stay with that technology?

Patrick Henry

They have a stated goal to move away from Home PNA towards the ITU G.hn standard which is still on the draft format. So, the timing of them kind of moving to that, we'd like if they did, would be in kind of the – probably the 2012 timeframe. That's definitely an opportunity that we would like to pursue with MoCA 2 and we are focused on having a dialog with AT&T around that. But their current plan of record is definitely to move away from HPNA to something else in the current stated goal that they have to go to G.hn.

Hamed Khorsand – BWS Financial

Okay. And then as far as your Chinese testing goes, you have been talking about this for a while, but is there any progress at all, are we really just waiting for final regulatory approval?

Patrick Henry

Yes. I mean, we have progress, so we will continue to ship more units into three or four different MSOs over there. So this Access business is typically go pretty slow before they really take off. Based on the current kind of calendar that we are looking at from an approval standpoint, I think we will know a whole lot more if they're going to really going to go rush [ph] on this until latter part of 2010.

Hamed Khorsand – BWS Financial

Okay. And then lastly, as far as revenues go, this amount of revenue growth you have seen these last two quarters, Q4 and Q3, well you are projecting Q1, do you think you are at risk of some lumpiness with inventory build-up, or do you think that this (inaudible) is going to help you see sequential growth throughout the year?

Patrick Henry

I will not provide specific guidance on the current quarter. I would say, generally if we look at it from a market standpoint, we should be growing throughout the year, because we're ramping into new deployments. The Verizon business seems to be kind of at a bottom from a run rate standpoint. So if we do get any kind of movement there, it's going to be upside movement.

Currently, the way we're looking at, that's kind dampening in our growth a little bit because we kind of happen to grow through some software in the Verizon business. But if you look at the other MoCA based service provider deployments, we have multiple log in there, all kind of in a ramp stage. So we feel pretty good about the future from that standpoint.

Hamed Khorsand – BWS Financial

Okay, great. Thank you.

Patrick Henry

Sure. Thanks, Hamed.

Operator

And we will take our next question from Aalok Shah with D.A. Davidson. Please go ahead.

Aalok Shah – D.A. Davidson

Hey, guys. Couple of quick questions. Dave, on the gross margin, the guidance range 52.5% to 53.5%, the mix there I am sure is somewhat dependent on that, if you get to the higher end of the range, can you give us a sense of what you are thinking about that at this point? Is it definitively favoring more CSS or is MoCA now also kind of up to where the gross margins are for where CSS is at this point?

Dave Lyle

Sure. First of all, our long-term gross margin range is 50% to 52%. And we have been on the top end of that and are now exceeding it for several quarters now. So clearly the DBS ODU business which has higher margins in the RF product is contributing in a little bigger way than the other product lines. Going forward, I think it's really going to depend on how fast the ramp on the MoCA side actually happens. We thing we're going to continue to get growth out of DIRECTV as we penetrate further with CSS. But I think the MoCA market in general has a larger stamp, so there is potential there for that part to increase. I think at the end of the day, we're going to be able to hit somewhere in the 50% to 52% range quarter-to-quarter for at the foreseeable future.

Aalok Shah – D.A. Davidson

Okay. And then in terms of Verizon, can you walk us through a little bit of – I know you have had a quite a bit history now with them. But, in terms of quarters where they have done massive promotions, is there kind of a take rate that you guys – kind of a lag period that you see before the promotions really start to kick in terms of your business? Or is there correlation we can make with the promotion history?

Patrick Henry

Yes. I mean generally, if you just look at sell-through, net subscriber adds, we typically get a one-quarter lag before we get an impact on our business and we have seen that in the last couple of quarters. There have been kind of (inaudible) in terms of net subscriber adds. So, it would really be a June quarter impact to figure a pretty big spring back this quarter in terms of net subscriber adds. They seem to get pretty immediate feedback from the barely new promotions because they start getting sell-through associated with that pretty quickly. So, they seen kind of a medium impact and then we seen it like a one-quarter delay.

Aalok Shah – D.A. Davidson

And these promotions really started to begin in earnest what about couple of weeks ago?

Patrick Henry

I think we started seeing some stuff around, right after Christmas. They have been pretty gone out for well over a month now.

Aalok Shah – D.A. Davidson

Okay. And then in terms of CSS business, I think you guys said there are three to 10% plus customers, two of which were doing CSS. Is the DIRECTV and the EchoStar business done through those two customers that you mentioned for CSS?

Patrick Henry

Both of those are DIRECTV suppliers. Now in the case of WNC, they do both MoCA business and CSS business.

Aalok Shah – D.A. Davidson

Okay.

Patrick Henry

Now, we also supply CSS to other people besides DIRECTV, some of the international satellite deployments. Neither one of those guys are currently EchoStar suppliers, I don't think – are they Dave?

Dave Lyle

No.

Aalok Shah – D.A. Davidson

Okay. So, in the numbers, it would suggest that EchoStar wasn't a 10% customer, I would assume, correct?

Dave Lyle

I think there is two or three DISH suppliers at EchoStar today. So, they spread their business across, so it's conceivable that there could be – we don't want to break that out, we're just showing kind of 10%, but there are multiple suppliers to EchoStar.

Aalok Shah – D.A. Davidson

Okay. And then I know you guys don't give us mix between MoCA and CSS, but is there kind of a sense that maybe in the back half of the year, you're going to start to see that mix kind of tour [ph] and then this goes back to the first question, does the mix start to favor MoCA significantly maybe towards an 80/20 mix, is that something we should anticipate?

Patrick Henry

That seems like it could be a little bit of rich ratio there. I mean, if you look at kind of historically when we just had Verizon, Verizon was about 70%, the satellite outdoor unit product lines was about 25%, and everything else was about 5%. I think what we're going to see over time and it could be – it could vary quarter to quarter is the kind of MoCA business is going to be 60%, 65% of the overall business in other product lines including tuner, satellite and everything else, Access, probably like a third of the business.

Aalok Shah – D.A. Davidson

Okay. And last question, Patrick, in terms of what customers are asking you for, are they hammering you on price more so now that you are starting to pick up some more of these bigger customers, potentially bigger customers down the road? Are they saying, hey, we may start to go to the other supplier down the road, and if you give us a pretty good price, we will lock you in for a year? Can you walk us through kind of how this selling process works right now for MoCA?

Patrick Henry

Yes. In my experience, customers always want lower prices and they always beat you up on that whenever you see them. But, we feel like, we are negotiating long-term pricing contracts with people, so we have pretty good predictability on price. We rarely provide that kind of long-term perspective. Whenever we win new designs, there is a service provider base, so we have pretty good visibility. We have a pretty good felling that we will be able to stay in our gross margin target range of 50% to 52%, because we continue to invest in the product lines, in terms of cost reductions like moving our MoCA 1.1 products to 65 nanometer as well as the R&D that we are doing around the pre-MoCA 2.0 stuff. So, we felt pretty good about stuff and we feel we have competitive pricing and we continue doing business based on that.

Aalok Shah – D.A. Davidson

Okay. One more quick one. MoCA 2.0, when do you think they're expected to be shipping in volume?

Patrick Henry

Hard to tell. We haven't even announced the product yet. So, I think that you will probably see, we should look at kind of the – aligned with the kind of third wave of growth in MoCA. In 2012, we will probably start seeing MoCA to start coming into market in that time frame in decent volume would be my guess.

Aalok Shah – D.A. Davidson

Okay. Great, congratulations. Thanks guys.

Patrick Henry

Thanks Aalok.

Operator

And we will take our next question from Tim Luke with Barclays Capital. Please go ahead.

Tim Luke – Barclays Capital

Thanks. I think most of (inaudible) have been touched on. David, with respect to the way you have been planning your OpEx through the year, how should we be thinking about that from this $15.2 million that you have outlined here?

Dave Lyle

Right. At this point, we're very focused on increasing profitability quarter-to-quarter. So, we will continue to control OpEx accordingly. That taken out of the consideration, we have kind of grown 3% to 4% per quarter over two quarters and I don't thinks that's unreasonable going forward. But, I don't want to give any guidance until we actually get there.

Tim Luke – Barclays Capital

In mentioning for the calendar second quarter, you think that the DBS may see some seasonality. So, broadly are you planning that you would see sequential progression through the year, is that how we should think about the broader top-line revenue?

Patrick Henry

Not sure, if I understood the question, Tim, could you please repeat?

Tim Luke – Barclays Capital

I think you talked about in some of the areas seeing some seasonality in the calendar second quarter and I'm just wandering to what degree that may, in further, what the impact of that may be in terms of the broader revenue picture for the progression through the year?

Patrick Henry

Okay. So, I mean specifically in the satellite business, especially once we are moving to a run-rate like we are with EchoStar, we been kind of in a more mature business state for the last couple of years. That business experience is a little bit of seasonal softness in Q2. With DIRECTV, we are not rolling on a run rate business. We are continuing to ramp CSS and the SWM DISH antenna.

So, it's possible you get a little bit of seasonality there. It's possible that we kind of grow through it based on the product cycle that we are in there. And then on the MoCA business, I think we are definitely more in a product cycle type of structure. And then silicon tuners, they have a little bit of seasonal softness in Q1. As we go into Q2, there's definitely not going be anything softer than Q1. So, you probably should see flatter growth. So, I think you can add all that stuff together, you should see growth throughout the year for quarter-over-quarter sequential growth from a top-line standpoint.

Tim Luke – Barclays Capital

Just remind us where you are with your 65 nanometer migration and the new product delivery in the MoCA arena?

Patrick Henry

Yes. So we, on the 65 nanometer MoCA 1.1 product, we have been in production since September of last year. We have won some new designs based on that. We are starting to ship production volumes. But we have pretty decent volume this quarter on that product. In terms of the crossover point between that and the existing (inaudible) product, it's really kind of late this year where maybe it gets into kind of the 50/50 state and then kind of migrates into the 65 nanometer completely sometime in 2011, is kind of what we are thinking about right now.

Tim Luke – Barclays Capital

And you are alluding that pricing being sort of largely as you would have expected, is that what you are saying?

Dave Lyle

Yes. Pretty much where we expect it. I think we have talked about kind of worse case 25% ASP erosion a year. What we have seen historically is more kind of in the 15% to 20% range and we feel good. In other words, we are conservative there.

Tim Luke – Barclays Capital

One last question, Dave. You are saying that basic model is 50%, 52% gross margin, but you are now happy of sustaining at 52%, is that correct?

Dave Lyle

No, I said it's going to depend on mix between the DBS-ODU business and the rest of the businesses. And right now, the mix is obviously saving the DBS-ODU given where the margin guidance is in Q1, after that is going to depend on really how fast MoCA ramps. But even if it ramps in a pretty significant way, we still think we will be in this 50% to 52% range.

Tim Luke – Barclays Capital

Thank you so much, Dave.

Dave Lyle

Thanks.

Patrick Henry

Thanks, Tim.

Operator

We will take a follow-up question from Tore Svanberg with Thomas Weisel Partners. Please go ahead.

Tore Svanberg – Thomas Weisel Partners

Yes, thanks. Two follow-ups. First of all, as you look at the DIRECTV MoCA deployment, will that have similar lag as Verizon, meaning whatever net adds they will have, they will have like a quarter later impact on your business?

Dave Lyle

Well, right now, we are building product in advance of their launch, and they are launching in some percentage of the US They typically, with other product launches they have done, they're going some percentage of the US and then go nationwide a quarter after that. So, I think you'll see a continued ramp in that business over the next couple of quarters just based on that build-out. Then they typically move into a really seasonal strong area as they get into the fall and kind of through that time all the way through the Superbowl.

So I think that that business is going to continue to be a good ramp business for us throughout 2010 and even into early 2011. The thing that could drive growth even further than that is a bigger conversion away from standard def towards high def. Because we're high-def platforms, so as we see more and more consumers move their pay-TV service from standard def to high-def with DIRECTV as well as with everybody else in the industry, I think that's going to favor Entropic MoCA solutions.

Tore Svanberg – Thomas Weisel Partners

Very good. And the other question was, you announced this partnership with Atheros. I was just wondering what type of partnership that is. Is this more of a reference type platform, or are you just working with them on future home networking technologies?

Dave Lyle

Yes. So, the specific thing we mentioned in Atheros was something we are doing Intellon prior to Atheros acquiring them where we are showing both compatibility as well as bridging capability between MoCA and HomePlug AV, because there is maybe some places in the home where you don't have coax where you are still going to have this connected home experience, and you can use HomePlug to get to those particular sections of the home.

So we demonstrated that capability. A big part of what we are showing there is HomePlus AV is really the de facto standard within the powerline space. MoCA is really de facto standard within the coax space. And G.hn is trying to come in and say, okay, we are going to do everything for everybody, kind of solve the world's hunger problem of home networking, and which is not backward compatible with anything.

So what we are saying is, hey, there is a technologies already out there today that were backward compatible to installed base. We're working together to ensure that we have solutions that preserve the installed base. We are also providing everything you need in the home.

Tore Svanberg – Thomas Weisel Partners

Okay. Thank you very much.

Patrick Henry

Historically, we have also partnered with Atheros on WiFi to MoCA bridging products as well. So they have been a long-term partner of ours.

Tore Svanberg – Thomas Weisel Partners

Very good, thank you.

Dave Lyle

Sure. Thanks, Tore.

Operator

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

Debbie Hart

Yes. Thank you, Cynthia, and thank you all for your participation today. Feel free to call me if you have any follow-up questions. Wanted to let you know we will be presenting at the Thomas Weisel Conference early next week and we hope to see many of you there. Thanks again and have a nice evening.

Operator

Ladies and gentlemen, this will conclude today's conference call. We thank you for your participation.

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Source: Entropic Communications, Inc. Q4 2009 Earnings Call Transcript
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