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GigOptix, Inc. (NYSEMKT:GIG)

Q4 2013 Earnings Conference Call

February 11, 2014 05:00 PM ET

Executives

Jim Fanucchi - Darrow Associates

Dr. Avi Katz - Chairman and CEO

Curt Sacks - CFO

Analysts

Krishna Shankar - ROTH Capital

Richard Shannon - Craig-Hallum

Dave Kang - B Riley & Company

Quinn Bolton - Needham & Company

Operator

Good afternoon and welcome to the GigOptix Fourth Quarter and Fiscal Year 2013 Financial Results Conference Call. As a reminder, this conference call is being recorded for replay purposes through February 18, 2014. In addition, the call is also being broadcast live over the internet and maybe accessed in the Investor Relation section of the GigOptix website at www.gigoptix.com.

At this time, I would like to turn the call over to Jim Fanucchi of Darrow Associates. Please go ahead sir.

Jim Fanucchi

Thank you operator and thanks to all of you for joining us. Our speakers today are Dr. Avi Katz; Chairman and CEO and Curt Sacks, CFO of GigOptix. After the market closed today, GigOptix issued a press release discussing its financial results for the fourth quarter and fiscal year 2013. The release is currently available in the investor section of the company’s website. Please be advised that the matters discussed in this call contain forward-looking statements or projections regarding future results or events. We caution you that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially, actual results may differ materially from our statements or projections, additional risks, uncertainties and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the Company’s filings with the Securities and Exchange Commissions.

Forward-looking statements are based on the company’s beliefs as of today, Tuesday, February 11, 2014. GigOptix undertakes no obligation or responsibility to publically update any forward-looking statements for any reason except as is required by the law even if new information becomes available or other events occur in the future.

In addition today, we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP. A table that outline the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings released which we have filed with the SEC and I refer investors to this document.

I will now turn the call over to Avi.

Avi Katz

Thank you Jim and welcome everyone to our fourth quarter and fiscal year 2013 end of the year conference call. Today I’ll review our recent performance and important events and discuss our outlook for the first quarter and beyond.

Let me first start with a brief summary of our financial overview in this quarter which would be further discussed shortly by Curt. Our revenue increased 7% over the third quarter to $7.8 million and was above the quarterly guidance we did in October 2013 of 5% quarterly growth. This increase come on top of the 7% sequential increase we recorded in the third quarter over the second quarter of 2013. In addition, when factoring out the $900,000 in one-time government revenue in the fourth quarter of 2012, the actual product related revenue in the fourth quarter of 2013 increased about 11% from the same quarter a year ago. Non-GAAP gross margin was 60% in this quarter representing our 5th consecutive quarter of gross margin at the 60% or above. And we delivered a non-GAAP profitable quarter with a significant $900,000 in hand by adjusted EBITDA.

During the quarter, we completed a public offering of common stock the generated net proceeds of about $12.5 million allowing us to end the quarter with more than $20 million in cash and with no debt whatsoever.

We’re delighted to experience the institutional invest of interest in this offering and the fact that the offering was largely oversubscribed reflect the short and long term value that those investors sees in GigOptix.

I want to thank our new investors, now representing about 30% of our shareholder base for the trust and welcome all of them on Board.

With this being our first fiscal year end call now, it is important for me to highlight first, some of 2013 achievements which we likely to provide the company’s growth foundation for 2014 and beyond.

In 2013, we executed on many of the stated programs we discussed in pervious calls over the last year. Introduced many new products and enhanced substantially our strategic partnerships with key light house customers. We’re delivering industry leading products to our tier 1 customers and expect to accelerate this in 2014. This resulted in top line growth of about 10% in the second half of 2013 which was at the high end of the industry average and exactly in power with our projections for the datacom and telecom markets recovery after the slow start at the early part of 2013.

As you may remember, we started 2013 facing a deep slow down in optical communication industry. Immediately in January when we recognized the problem, we responded to the sudden slow down demand by lowering significantly out cost structure through meaningful reduction in our workforce, salary reduction and other measures. Those actions lead to reduction of about 7% in the company’s non-GAAP operation expense in 2013 versus 2012 which shed an immediate and long term lasting impact on our balance sheet and income statement.

In September 2013, we were delighted to bring to ending the 2.5 years of civil court litigation against MACOM, its subsidiary Optomai, Inc. and three former employees of GigOptix who founded Optomai. In the term from fully and final dismissing of the civil case MACOM made a one-time settlement payment of $7.25 million which allowed us to put behind the destructive activities associated with this trade secrets misappropriation case.

Farther strengthening of our balance sheet to place as I just mentioned earlier with successful completion of our December public offering, which allowed us to exit 2013 completely debt free and have more than $20 million net cash available now. This money will be used for strategic growth opportunities through acquisitions, investment initiative, partnerships or special development projects, all in attempt to get new products and innovation to the marketplace in an accelerated manner.

During the previous year we continue to see strong demand for all our product line. Yes, I would like to emphasize our fast traction in the datacom related products. Recent analyst reports discussed that the Web 2.0 datacenter expansion shows no signs of slow down. As an example, one of the largest web infrastructure firm recently noted in their call that their fourth quarter of 2013 total capital expenses increased more than 100% compared with fourth quarter of 2012 level. A large portion of this spend noted with being used to support datacenter growth with management noting that the majority of the expenditure were used on the new generation of optical fiber datacenter constructions driven by both the core business and their application. Being the sole invention provider of the high speed 40g and 100g parallel optic devices and amplifiers to enable these datacenters and cloud connectivity, placed GigOptix at a lucrative position to continue to grow our business and revenue this year out of this market.

Now turning to our 2013 fourth quarter performance, and starting with the high speed communication business, which includes our optical and RF e-band products, where we have seen a total optical revenue increase of more than 30% over the fourth quarter of 2012. This impressive growth can be attributed primarily to our parallel optic device business that serves the datacom, the cloud applications and the consumer electronics high speed connectivity markets, and it represents about 30% of our total optical communication revenue. The other parts of our optical communication business is the long haul and core telecom devices, which was up slightly from the same quarter a year ago.

I remind you that our products this market address solely the fast growing 100 gigabit and 400 gigabit per second coherent (Ph) markets, where we are the leading supplier of the driver devices and we expect to see an increase in this business as our customer enhance the 2014 investment in the 100g capital expenses as they’re also moving now to deploy the 100g coherent infrastructure into the metro (Ph) segments. As an example, recently the main Chinese telecom carrier announced that they were increasing the investment in the LTE and wireless backhaul deployment that will use the 100 gig technology as a backhaul infrastructure.

Nevertheless, as we project the growth potential of this segment we have to be aware of the fact that while the delivery volume indeed continue to increase in a meaningful way the average sales price see continuous erosion due to the atomization of this technology and hence, impact the overall generated revenue for days to come. Our RF e-band program was still small in terms of overall revenue in 2013 exhibited a nice growth and doubled itself in the fourth quarter of 2013. As we have established GigOptix as a lead provider of e-band wireless backhaul point to point chipset with many of our customers. Our e-band power amplifiers have been now qualified by leading wireless OEMs and it is expected that this related revenue will continue to grow into 2014 as telecom carriers build out their small micro and pico cell infrastructure in the highly congested urban areas.

Our industrial ASIC product line revenue, which is used in general industrial applications such as high speed system measurements, medical equipment and military and aerospace applications, was up 9% in the first quarter of last year from the prior quarter. Here, we have seen several new opportunities to expand it to higher margin businesses and new customer base. [Indiscernible] are increasingly coming now to GigOptix when looking for low cost high turnaround ASIC device for customized applications in existing and in emerging markets. This would be primarily focused on applications where one has a small volume demand that can’t justify the normal high cost associated with the investment in developing a new standard IC or the use of high cost of FPGA unit. Exiting 2013 with good momentum in our industrial business segment, we currently expect the 2014 revenue to grow to higher level than it was in the last year being generated by high gross margin and long life cycle product.

As you are aware, in 2013, we also expanded the number of joint development programs with key strategic customers where we generated about $4 million in GDP revenue comparing with about only 3 million in 2012. It is our expectation that the 2014 GDP revenue will be roughly in line with 2013. This program cut across all our business lines as we partnered with leading global telecom, datacom and consumer electronics companies.

Another meaningful initiative we took in 2013 was targeting the new market of high speed optical lens for the consumer electronic applications, as an example, we developed a very high sensitivity RF amplifiers which enabled significant enhancement of features resolution in applications such as gesture and motion wise recognition, natural tracking, optical engine and 3D laser camera in IR detection technology that maybe used by major OEMs in areas including smartphone, phablet and interactive TVs.

All these consumer products rollout will come at various stages in late part of 2014 and into 2015, so it’s maybe too early today to predict the timing and size of relevant potential revenues, so we’re confident enough to forecast some incremental revenue into our overall revenue in 2014.

Finally, as you may have already seen and as a result of the intensive effort during 2013, today we jointly announced with CPqD a world recognized leading Brazilian based optical communication research and development organization, the execution of definitive agreement to incept a newly established joint venture company named BrPhotonics, LTDA, should be headquartered in Campinas, Brazil. The newly incepted company is chartered to develop and commercialize 100 gig and up to 1 terabyte per second silicon photonic devices.

This joint venture between CPqD and GigOptix is unique and extremely synergistic that CPqD brings a world of silicon photonics knowledge, device design, optical device packaging, system design and testing capabilities; and GigOptix brings a world developed thinned film polymer on silicon technology. Both combined to enter and serve the emerging silicon photonics market. In addition, CPqD will provide a complete operational financing for this venture for the first operating year host the company in Campinas and provide an established entry for GigOptix into the Brazilian market.

In return, GigOptix will act as the exclusive marketing and sales organization from BrPhotonics worldwide as well the silicon photonics opportunity a recent industry recent report issued last month noted the Silicon Photonics global market revenue is estimated to grow from about $90 million in 2013 to more than $400 million in 2020 which represents a compounded annual growth of about 25% over the next 7 years. By combining forces to address this fast growing market BrPhotonics will strive to bring TIPS (Ph) and the silicon photonics product to the market in the most efficient and timely manner.

And we’re all optimistic about the successful outcome of this endeavor. Please refer to our today’s press release and 8-K filing for more details pertaining to BrPhotonics. In summary, the fourth quarter 2013 was a strong ending to a very good year for GigOptix in which we enhanced the solid financial and business foundation for the long-term growth of the company. We have established a clear path to continue driven improvement in both our high speed communication in industrial business through the recent and planned new product introductions expect to take to place during 2014.

I’m encouraged with the positive momentum we carried into 2014 and strongly believe that we will see revenue and adjusted EBITDA numbers in 2014 which will exceed the 2013 level as we continue to execute on progressive organic and strategic growth program. I’d like to conclude my comment by thanking our extremely hardworking and dedicated employees, our partners, our suppliers, customers and the investors for the continuous support and trust in GigOptix.

With this now, I’d like to turn the call over to Curt for his financial review.

Curt Sacks

Thanks, Avi. We are pleased to report our fourth quarter and annual results for fiscal 2013. Revenue in the quarter was $7.8 million ahead of guidance we gave of an increase of 5% on our October call then aligned with our preannouncement on January 14. This represents a 7% increase from the third quarter of 2013. As we saw an increase in both our high speed communications business and our industrial ASIC business, hereafter I will primarily discuss our non-GAAP results. We see the tables included with our press release for reconciliation of GAAP to non-GAAP financial information. Non-GAAP gross margin was 60%, marking with 5th three quarter at or above 60%. Gross margin was 62% third quarter 2013; the sequential decrease in margin was due primarily to normal inventory reverses taken in the fourth quarter. During the first quarter, we expect our gross margin to be in the high 50s due to revenue and product mix.

In general we believed this will be the level of gross margin we will experience 2014. During Q4, our joint development program revenue was approximately $800,000 nearly flat with the JDP revenue in the third quarter. As we previously noted, revenue from joint development programs is generally of 100% gross margin, these projects are complicated in nature are achievement of the associated milestone is uncertain. Therefore, take the expenses in to R&D as incurred. JDP revenue is recognized when we have both earned and met the project milestones for billing. We expect JDP revenue in the first quarter to be approximately flat with the fourth quarter.

When excluding the JDP revenue, non-GAAP gross margin was 55% compared with 57% in the third quarter of 2013. Non-GAAP R&D expense in the fourth quarter of 2013 was $3.2 million compared to $3.6 million for the third quarter. As a reminder in Q3, we incurred over $600,000 for three engineering tap outs but we do not experience the same level of project release expenses during the fourth quarter.

As we look to the first quarter of 2014, we have made the decision to accelerate certain engineering projects for a high speed communication business and we see growth opportunities in the coming 12 to 18 months. Therefore, we believe R&D expense will increase in Q1 of approximately $3.6 million before decreasing back to a normalized rate of approximately $3 million in the second quarter.

Non-GAAP SG&A expense for the fourth quarter of 2013 was $1.5 million compared to $1.6 million in the third quarter. For the year, our SG&A expense was down over $2 million from 2012, as we did a job of restructuring particularly our general and administrative function.

Typically, SG&A expenses are higher in the first quarter of the year due to our yearend audit, federal tax related expenses and industry trade shows where we have an active presence. We believe selling general and administrative expenses to be approximately $1.7 million in Q1 before coming down to our more normalized rate of approximately $1.5 million in the second quarter.

Non-GAAP net income in the fourth quarter was $51,000 or $0.00 per diluted share, this compares to a non-GAAP net loss of $681,000 or $0.03 per share reported in the third quarter of 2013. On a GAAP basis net loss in Q4 was $1.5 million or $0.07 per share. This compares to GAAP net income of $3.5 million or $0.16 per share reported in the third quarter of 2013.

You may remember our GAAP results in Q3 were positively impacted by litigation settlement in which we received a onetime net gain of $5.7 million. During the fourth quarter our adjusted EBITDA was approximately $900,000 our revenue growth continues the strong margins and control spending resulted in a significant improvement and $64,000 of adjusted EBITDA we recognized in Q3.

Rated average shares are outstanding in the fourth quarter of 2013 were 22.5 million shares. First quarter, our weighted average share count will be approximately 31.6 million shares outstanding resulting from the stock offering we completed in the December.

Looking at our fiscal year results, revenue in fiscal 2013 was $28.9 million compared with $36.7 million in 2012. The decrease in revenue during 2013 was primarily due end of life related sales company’s ASIC and RF product groups retained to the prior ChipX and Endwave acquisitions as well as the recognition of nearly $900,000 of government contract revenue in Q4 of 2012.

Non-GAAP net loss for fiscal year 2013 was $398,000 or $0.02 per share this compares to non-GAAP net income of $406,000 or $0.02 per diluted share in 2012. GAAP net loss for the year was $1.9 million or $0.09 per share which included $3.6 million in stock-based compensation expense, $1 million in restructuring expense, $4.8 million of net proceeds from litigation, $846,000 of litigation and financing related compensation expense and $1 million in amortization and tangible assets.

This compares to GAAP net loss of $7 million or $0.33 per share reported in 2012. One note of these results, we experience a significant decline in our stock-based compensation expense or continuing employees during the year and nearly $5 million in 2012 to just over $3.5 million in 2013; as we successfully restructured the company early in 2013. We do believe stock-based compensation expense will be approximately $1 million in the first quarter of 2014.

Turning now to our balance sheet; during the quarter we saw the inventory remain nearly flat within third quarter, $4.6 million. We anticipate inventory will remain approximately flat over the next quarter as well. Accounts receivable decreased significantly during the quarter to $5 million from $7.1 million in the prior quarter. The decrease was primarily due to the linearity of shipments during the quarter and some timely collections just before year-end.

DSO was decreased to 58 days, generally expect DSOs to be in the mid 70s range based on geographic and customer concentrations. Our outstanding receivables are primarily current and within terms. Finally, we closed the year with cash and investments of $20.4 million and no debt which is up from $9.3 million which excluded $6 million drawn from the company’s line of credit at the end of Q3.

Our higher cash balance reflects two nearly $12.5 million we raised through the sale of shares late in the quarter. We do anticipate using some cash for working capital purposes in the first quarter but expect that our cash flow will remain in excess of $19 million or remaining debt free.

Now looking forward to the first quarter and 2014 as a whole. First, as we noted in our press release, in the first quarter we expect revenue will decline due to the normal seasonal pricing reductions that occur in our High-Speed Communications business. We expect first quarter revenue will be approximately $7.2 million. While we don’t offer financial guidance more than one quarter at a time, based on what we’re hearing from our customers for their business plus our expected product rollout that Avi discussed earlier, as of today I believe we could see relative approximately 10% in 2014.

In relation to the potential impact our 2014 financial results from the joint-venture we announced today, we believe there will be little net impact to our non-GAAP operating results this year. The possible top line growth I just gave excludes any estimated impact to our partnership.

Our R&D expenses related to the Thin Film Polymer on Silicon, TFPS, decreased during the last three quarters of the year as well as development efforts will be assumed by the of BR Photonics. However we’re accelerating certain other R&D projects related to high-speed Communications and we currently believe any decline in the engineering expenses related to the just formed JV will be mostly offset by these accelerated R&D programs.

As Avi noted GigOptix will be contributing equipment inventory and IP related to our TFPS technology to the joint-venture. We will contribute equipment and inventory valued on our books at approximately $500,000. The IP is not currently valued on our books. There will be no direct impact on our financial statements or the transfer of the IP. GigOptix does not have a controlling interest in the newly formed venture.

GigOptix will not be contributing cash or investments to the venture and we will not be liable for any future asset infusions or debt of the newly formed company. Therefore JV will be treated on our balance sheet is a minority investment of subsidiary in the amount of the contributed tangible asset and we will include the GigOptix portion of the JV’s results below our operating line in our GAAP interim statement.

On a GAAP basis I expect the joint-venture will result in a total operating loss of approximately $500,000 over the final three quarters of fiscal 2014. This loss will be recorded below our operations line. And there will be no impact on our non-GAAP results.

With that I’ll turn the call back to the operator here for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now begin the question and answer session. (Operator Instructions)

Our first question is from the line of Krishna Shankar with ROTH Capital; please go ahead

Krishna Shankar - ROTH Capital

Congratulations on good fourth quarter results. As you look at your guidance for both the first quarter 2014 where you indicate perhaps 10% revenue growth; can you talk about the drivers which will result in that growth both in optical communications, wireless, and the industrial ASIC business, what are some of the growth drivers?

Avi Katz

I think that the guidance for the year, as provided by Curt, like the 10% or about increase in our revenue and it’ll be homogeneously distributed across the two product lines. We have seen good opportunities -- new good opportunities in the industrial segment. We have announced one of them last week over the new applications and we believe that this revenue will continue to grow from last year’s based on these new opportunities high margins and long-term existence and longevity of those products. On the high speed communication segment there will be continuous growth in volume pertaining to 100 gigabit per second telecom delivery as I mentioned in my comments it has to be considered in view of the continuous erosion of the ASP (Ph) of those devices but we’ll see continuous growth in this revenue. And obviously the parallel optics devices relating to datacenter cloud connectivity and consumer electronic high speed links will be driving continuous growth of this segment.

So I think the major contributors here would be in the 100g coherent moving into 400g coherent and the parallel optics. Obviously we expect to see the e-band devices that we exceeded in the markets not as conventional as last year contributing their share in the growth and within this 10%. With regard to quarter one I think that Curt made a comment we look into the volumes that we’re able to ship we look into the seasonal slowdown pertaining the new Chinese New Year and other effects of the first quarter and we plug into it also again the new wave speed particularly in the telecom world that were negotiated and become effective as of January 1st. So quarter one reduction or the quarter down numbers reflects merely the seasonal effects that we discussed.

Krishna Shankar - ROTH Capital

Okay. And Curt can you give us some indication for the trajectory of OpEx for the entire year for 2014?

Curt Sacks

As I mentioned in my prepared comments I thought R&D would be about $3.6 million in the first quarter and then we’ll start to see more normalized rate of about $3 million a quarter after that and I think right now we’re estimating that $3 million to continue through the remainder of the year. And then on the SG&A side I think we do see in general in the first quarter a bit of a bump as of our audit, payroll taxes and of course the trade shows we participate in, so that will come up to a number that 1.7 as I mentioned. And after that I expect somewhere in the neighborhood of $1.5 million in SG&A through the remainder of the year per quarter. And I think that’s safe to think about and that’s currently how we’re thinking about the rest of the year throughout many expenses.

Operator

Our next question is from the line of Richard Shannon with Craig-Hallum Capital Group. Please go ahead.

Richard Shannon - Craig-Hallum

Few questions from me. As you look at your first quarter guidance how does, what are the trends requirements record to hit that number and how does that compare with your normal quarter and maybe even your normal first quarter of the year?

Avi Katz

Richard, can you repeat your question the line was breaking when you attended the question, I’m sorry.

Richard Shannon - Craig-Hallum

All right, no problem I’ll repeat again. So as you look at your first quarter guidance what are the trends requirements to hit that number and how does that compare with the normal quarter and the normal first quarter of the year?

Curt Sacks

Sure Richard. So I think in general what we’re seeing from the end of the quarter was similar type level of backlog that we have had previously which was a bit under 50% I think sort of 40% of the range will be coming into this quarter. Now it’s a similar level to what we’ve seen in Q1 in the past so given what we know from our customers what we’re hearing with some of our larger customers we were comfortable with the 7.2 number that we gave. So I think overall it’s about same that we saw in the last quarter one for level of backlog coming into the quarter and our comfort level with the 7.2 is based on conversations with our customers and where we’re at currently.

Richard Shannon - Craig-Hallum

Okay. Follow up on the first quarter guidance. Can you give us a sense of three different items, first of all in your RF segment you had a very nice fourth quarter, do you expect to maintain at similar levels and also how do you view the change in both your telecom and datacom segments of optical?

Avi Katz

Right. So let me take that its Avi here Richard. On the RF the solid growth that we’ve seen last year pertains completely to the introduction of our new family of RF power amplifiers into the e-band so the amplifiers are 73 gigahertz and 83 gigahertz. As you may recall from previous calls we are releasing to the market this year a complete line up of two devices those gallium arsenide power amplifiers associated with silicon germanium devices which are the transceiver devices which we have already evaluated and we are preparing to release in a production manner during quarter two of this year.

So I think that we are pretty confident about the continuous growth of RF power amplifier as we see it now for quarter one, quarter two and we definitely optimistic about our ability to satisfy our customers’ expectation with the silicon germanium device after the evaluation of the first round of the samples we pull out to the market. So I think from RF point of view, [indiscernible] market is catching up, I think we’re in a good position there we’re well recognized with few of the lead wireless OEM companies and I think we’ll have a fair chance to continue to grow out in similar rate, not faster.

Richard Shannon - Craig-Hallum

Okay, appreciate those thoughts. And couple of more questions for me. You had mentioned during your capital raising events last quarter that one of the potential uses of that capital would be for strategic opportunities, can you characterize the M&A environment out there in terms both of targets as well as potential evaluations?

Avi Katz

Right, we continue - as you know we continue to review the deal flow constantly and we obviously run a complete ROI and financial analysis on every opportunity that we see in terms of M&A target. We have looked into variety of companies and we continue to look variety of companies that provides innovation and further depth and ways to our RF and mixed-signal technology and platform at GigOptix. As we look into GigOptix, we see it as a powerhouse for RF and mixed-signal high-speed devices and with that to continue to enhance and build on this platform as we reach to new market.

There obviously are not specific target that we have progressed that can report on today but we’ll continue to look into it, and as we have announced today the initiative we had with BrPhotonics is very exciting approach to business as we team up here with world recognized leading development facility in fast growing market of Brazil. We spent many months on analyzing jointly the synergies, the financial structure of the deal, the business structure and I think that could give you a lot of data on how we structured the deal from financial point of view.

I think that CPqD is a well-renowned industry if you check their website, you can see all the development projects they have there. And this is a good where GigOptix through a very progressive approach and very careful analysis selected out of variety of options that we had as we looked into entering the Silicon Photonics we selected the partners that we could have provided value to him, he can provide value to us, it’s very and critical elements of innovation, it provides a great financial growth management and we are confident upon the execution because we tapped up with key leaders in this world we known organization.

So this is one example and this is what we’re doing all the time and again as we move forward we’ll identify and will identify the target, it is of mega interest and moving forward. We will obviously inform public.

Richard Shannon - Craig-Hallum

Okay, fair enough. One last question for me guys. Can you identify and quantity your 10% customers for the fourth quarter and I know you’ve talked about quantified Alcatel Lucent has, as your top customer, most of the last year and you’re seeing that continued, do you expect them to remain a top customer at a similar level as you through go this year?

Curt Sacks

Hi, Richard. So the answer of your first question quantified, Alcatel is 34% customer for us in Q4 and 33% for the entire year. There are only 10% customers for the full year. We continue to expect them to be a very important customer of ours. We continue to work additional important customers for a telecom business and we’re hoping to diversify that revenue some but we’ll always continue to see them as an important customer especially through 2014.

Operator

(Operator Instructions) Our next question is from the line of Dave Kang with B Riley & Company. Please go ahead.

Dave Kang - B Riley & Company

Thank you. Good afternoon, guys. Going back to the guide for first quarter, I’m assuming optical will be down but what about industrial ASICs business, is that going to be down or what’s the color there?

Curt Sacks

Actually, we’re thinking, right now, it looks like both sides of business we down a bit and on the telecom side but also bit on the ASIC industrial side as well and that just has to do a timing of some shipments and nothing has a real trend.

Dave Kang - B Riley & Company

Is it because of the some companies reporting that MEL Aerospace seems to be a little soft? Is that part of the reason or is there something else?

Curt Sacks

No, I don’t think so. I think that most across the line and it’s again in line with every one of our first quarter and last four or five years, I think they’re just as the difficult seasonality slowdown pertaining to some holidays around the world, but I didn’t see any change of business structure on the counter.

Dave Kang - B Riley & Company

So what is the percentage of military and aerospace in terms of total sales? Is it fairly significant or?

Avi Katz

They’re basically two-thirds of ASIC business which is about 30% of the entire business.

Dave Kang - B Riley & Company

So military areas two-third of ASIC business, okay. Can you provide more color as far as the business environment? Is it still choppy or is it trending in right direction or?

Avi Katz

Nice on the few relate to the industrial segment or to overall.

Dave Kang - B Riley & Company

No just military and aerospace segment?

Avi Katz

Right, so again, GigOptix is not probably the best indicator for this because we’re driving on a very long term contracts. I don’t think that we can represent the colors of this industry as we request, but I will tell you on our end of the military and aerospace, the customer based is pretty stable. We have been with them for five years. They’re in fact increasing our business of the structured ASIC and the industrial segment into other elements in other segment where there new emerging markets working fast particular and we’ve seen that advantage of serving those customers mainly on our ability to turnaround device design with engineers with two to three months. So I think 2014, you will see more business in our industrial side that will be pertaining just to the commercial world and not to the military.

Dave Kang - B Riley & Company

Got it. And then on the optical side, I guess you’ve said data coming is about 30% so telecom is about 70%. So let’s about the 30% datacom, so you said it was 40%, I’m assuming it was year-over-year?

Avi Katz

You’re talking about report, yes; it’s the year-over-year.

Dave Kang - B Riley & Company

You’ve said datacom was 40% in press releases, is that sequentially or year-over-year?

Avi Katz

I’m looking to the numbers now but I believe it to the year-over-year.

Dave Kang - B Riley & Company

Okay and then obviously there are not 10% customers, how would characterize those customers like mid single digits or not even that?

Avi Katz

You’re talking about datacom consumers?

Dave Kang - B Riley & Company

Yes, with datacom consumers.

Avi Katz

Datacom is a very-very distributor of customers. Our main customers are today, the active cable engine integrators and we have very good diversity of customers both in United States and in the fast east. There is no 10% customer in the datacom. And I think that we will see even more diversity now particular in view of as discussed last time, the appearance of one of our competitor acquisitions and which left us basically the sole merchant provider of those devices.

Dave Kang - B Riley & Company

Got it. And then moving to telecom side which is 70% of optical, so what is the rough mix between 100G and 40G?

Avi Katz

As I thought about your previous question, the 40% increase in datacom was quarter-on-quarter.

Dave Kang - B Riley & Company

Oh, sequential okay got it.

Avi Katz

And again it was very strong demand for devices in today active cables in particular.

Dave Kang - B Riley & Company

So most of 7% increase came from datacom with telecom basically flat, is that or did it actually go down?

Avi Katz

No, I think, you actually corrected and this is why I emphasized in my comment the important datacom business to us - I think that what we’ve seen, we’re seeing very healthy demand in the datacom with price points that are established correctly and fairly and don’t experience the same kind of erosion as we’ve seen in the telecom. In the telecom, while the volume grow and we continue to see grow volume growth quarter-on-quarter, the price erosion reflects pretty tight competition of the.

Dave Kang - B Riley & Company

But price erosion that’s more of first quarter event not fourth quarter, most of your peers are reporting very nice growth in fourth quarter.

Avi Katz

I think the volume point of view, we saw very good volume update. Just remember, we have been and the incumbent in the 100G drivers and this is why while continue to increase volume and maintain increased market share obviously our prices erode and maybe in line with the market maybe even more. I don’t know. I don’t have the benchmark but I can tell you that the major price erosion takes place with a new contract with other deploys in quarter. This continuous pressure from all the major OEMs, telecom OEMs to reduce the prices and the cost, the average sales price quarter-on-quarter.

Dave Kang - B Riley & Company

So going back to my first question about the mix between 100G and 40G, what’s the rough mix?

Avi Katz

So again Dave this is great question for Datacom.

Dave Kang - B Riley & Company

No just telecom only, telecom only.

Avi Katz

Telecom, as you know, we skipped the 40G.

Dave Kang - B Riley & Company

It’s all 100G then basically.

Avi Katz

A vast majority is 100G and moving into 400G as well. So we'll have 400G in the mix this year.

Dave Kang - B Riley & Company

And some of your peers are talking about capacity being an issue, how is your capacity right now?

Avi Katz

I don’t see limit at all in our telecom orders.

Dave Kang - B Riley & Company

So that is not an issue, got it. And then I think you answered most of my questions about the JV, so when can we expect some products and qualification and revenue ramp up? Can you just walk through that scenario, which your JV?

Avi Katz

So I think that -- if you look to the press release that we put out today, we already pre announced the release of CFP2 engineering sample. And this will be the first step reference platforms will come out from BrPhotonics.

Dave Kang - B Riley & Company

And that’s going to be at OFC in March?

Avi Katz

It will be in OFC in March, this will obviously include the current the TFPS device in a very advanced package, and it will be represented as a reference platform for transceiver integrated that we would like to use our device knowledge and you know integration knowledge.

Dave Kang - B Riley & Company

Now I’m assuming you’re sourcing ITLA right? Everything, except ITLA -- turnable laser?

Avi Katz

If you allow me we’ll come in few weeks we will come with complete spec of this part and we can then discuss it.

Operator

Our next question is from the line of Quinn Bolton with Needham & Company; please go ahead.

Quinn Bolton - Needham & Company

Hi, Avi, hi Curt. Congratulations on the nice December results. Avi, just back to a telecom side, obviously you guys faced the renewal price resets in the business in the March quarter, but can you give just a sense what units are doing or units hanging in there pretty well, just giving the overall demand environment or do you see some seasonality in the unit side as well?

Avi Katz

No, I think that you know from our customer base we see a stable demand for volume in quarter one. I think it's mainly the seasonality effect pertaining to deliveries into the Far East and incorporated with price erosion. This is I think what we see here and in fact as far as I understand it from our discussions with customers, there will be increased demand for 100G as people already announced that they are going to drive the 100G going now into the metro area as well which will increase the install base.

Quinn Bolton - Needham & Company

And then on the pricing for the 100G, obviously if volumes increases it moves into the metro, you talked about some of that, pricing pressure that you seen as a result. Does it feel like that pricing pressure is accelerating or do you think it's just kind of the normal migration that the pricing takes, 10 gig or 40 gig sort of did the same thing started in the long haul and move to metro and then ultimately into the short reach applications.

Avi Katz

I definitely consume with your theory. I think nothing is unusual comparing to previous generations. I think the only difference today comparing to what we have seen in previous generation is that once the overall industry, the entire OEM base decided to move into skip that is 40G and just stop the deployment of 40G and move to 100G which happened last year. There was accelerated demand on price reduction, so maybe over 2013 there was, it’s faster, if you will, high pressure on the price erosion between the beginning of the year and the end of the year but I think it’s reaching a normalized level. I think the industry is in concert with regards to cogs and the appropriate ASP and obviously they will continue demand for price reduction year over year. But I think it is going to be, now on it’s going to be in the normal rates that we seen the industry.

Quinn Bolton - Needham & Company

And then just sort of a related question, you talked about starting to see some of the initial activity around 400G and I assumed that you've got that sort of the drivers for 400G. Does that start to give you any relief on the pricing front as you start to see some activities on that front or is it still fairly -- that it doesn’t really help you much this year?

Avi Katz

Right, so obviously the main working horse in the industry, this year and next year will stay 100G equivalent. I think there is a foreign G equivalent in early stage of the evolve and you know I think the volumes are not as significant to be expecting in 2014 and it may have been meaningfully impacted their overall margin or of this high-speed communication devices.

Quinn Bolton - Needham & Company

Okay, great. And then just lastly on the JV, obviously you guy are bringing the modulators on the Thin Film Polymer on Silicon technology, I assume CPqD brings a lot of stock in photonics, but I mean are they known for sort of high-level integration, and a pretty small packages, can you just talk a little bit about their capabilities for those of us who aren’t as familiar with CPqD?

Avi Katz

Right, so prudent to say that CPqD is a world winner on development house for subsystem and systems for optical communications in Brazil. And they have a pretty elaborative website; you can actually access and see exactly the knowledge and what they're doing. But they are definitely very well known in the industry for integrations, for testing levels, system technique level and device development. They definitely are as a said the prime design house in South America pro optical system and I think that are in line and they're definitely standing shoulder-to-shoulder with the largest development institute in the world. I'd be happy to send you a URL, so you can actually access their website and see what they're doing.

Operator

Our next question is a follow up question from the line of Krishna Shankar with Roth Capital. Please go ahead.

Krishna Shankar - Roth Capital Partners LLC

Avi, as I look at your growth for the next 12 to 24 months -- it looks like the data center active optical component is a big growth driver. Where are we in terms of this conversion to regeneration data centers are back to optical cables. Are you still very early in that conversion and can you size for us the market opportunity you have in the data center active optical components for the next year or 12 to 24 month -- what's the revenue opportunity?

Avi Katz

Now this is a great question Krishna. I think that obviously and I agree with you, we see the parallel, our devices drivers and DAA whether it's four of the 12 channels and the 14 gigabit per second all the way to 28 gigabit per second. Being a very critical element in the revenue and the growth of the company, more or so we can see it spilling over into very fast emerging opportunity at the end of the consumer electronics.

As we see the market and where we park our devices are -- where our devices go to work in transceivers and active optical cables in data centers, both short wave, long range and others, the extended range. And prudent to say that everyone of those engine conceptual need two devices. Need one driver and one DAA so every cable I look into, I can envision four of GigOptix device sitting here. So this is my deal of material in active cable of this type.

From overall revenue perspective I think that as long as the installation of the mega data centers which continue to grow and to go as stronger as it goes now, we'll continue to see ever increased demand for those devices and it's growing in volume that are really are unprecedented. I think with GigOptix overall if I look to what we have shipped last year, I think that it's growing beyond the hundreds of thousands of devices shipment. It's going into the million, so I think this is where we see it. You know I'm tracking like you very closely, any announcement from the major OEM of the bidding data centers and I think the Web 2.0 and cloud application is driving the deployment. We definitely would like to be closely, partnering with our customers and particularly in this time when there is no competition out there, so we want to be sure that we are very friendly supplier very close partner and establishing the current in next generation designs with our customers in a manner that will lock us together as its partners.

I think that as we have seen in the last year, as we have seen -- we continue to see this year. I mean because prices are established and pulling the growing. I think that a lot of this growth this year will pretend to the data center opportunities. I think that again we'll be smarter to talk about the future opportunities as data centers to the end of this year when the data centers will really establish or when it be in a position that data center are established to support or caught up to support the bitrates that are stored over the network as we speak now.

And I think a major decision point will be for the data centers, once they have refurbished the entire infrastructure with 40 gigabit per second QSSB cable. The next timeline that will the later define is when they are going to begin to shift into the 100 gig active cable. Again this will establish a new dimension to the opportunities here, and to their architecture that we will or the device we'll go after. But I think that as we see today we have to summarize Krishna, we definitely see opportunities growth in the demand of devices from the existing customers and from the whole group of new customers that they're engaged in three to six months.

Krishna Shankar - Roth Capital Partners LLC

Thank you.

Operator

Mr. Fanucchi there are no further questions at this time. Please continue with any closing remarks.

Jim Fanucchi

Okay, thank you everyone. We appreciate you joining us today and look forward to speaking with you again when we report our first quarter fiscal 2014 financial results later this year.

Operator

Ladies and gentlemen, this concludes the GigOptix fourth quarter and fiscal year 2013 financial results conference call. Thank you for your participation, you may now disconnect.

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