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GigOptix Inc. (NYSEMKT:GIG)

Q1 2014 Earnings Conference Call

May 1, 2014 05:00 PM ET

Executives

Jim Fanucchi - Darrow Associates

Avi Katz - President and CEO

Curt Sacks - SVP and CFO

Analysts

Krishna Shankar - ROTH Capital

Dave Kang – B Riley & Company

Ryan Downie - Sidoti & Company

Operator

Good afternoon and welcome to the GigOptix First Quarter Fiscal Year 2014 Financial Results Conference Call. As a reminder, this call is being recorded for replay purposes through May 15, 2014. In addition, this conference is also being broadcast live over the Internet and maybe accessed in the Investor Relations section of GigOptix’s website at www.gigoptix.com.

At this time, I would like to turn the conference 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 first quarter of fiscal year 2014. The release is currently available in the Investors Section of the Company’s Web site. Please be advised 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 Commission

Forward-looking statements are based on the Company’s beliefs as of today, Thursday, May 1, 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 the 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 outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, 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 first quarter fiscal year 2014 conference call. Today I’ll review our recent performance and important events and discuss our outlook for the second quarter and beyond.

Let me first start with a brief overview of our first quarter financial results, which would be discussed in more detail by Curt later in this call. First, revenue was $7.4 million, up 7% from the first quarter of 2013 and 3% above the guidance of $7.2 million we provided for the quarter back in February. Product revenue, which excluded any NOE and joint development program revenue grew more than 10% year-over-year compared with the first quarter of 2013. Non-GAAP gross margin was 60% this quarter, representing our sixth consecutive quarter of gross margin at 60% or above, delivered a positive adjusted EBITDA order representing our 11th consecutive quarter of positive EBITDA. And we ended the quarter with approximately $20 million in cash.

We are very pleased with our first quarter revenue performance, especially when taking into consideration the traditional first quarter Challenging seasonal trends that impact many of our markets where we are playing in. Most exciting for us was the 16% year over year increase in our high speed communication product line revenue led by the exceptional growth of tripling of our E-band wireless sales comparing to the first quarter of 2013. With this continuous growth we’ve experienced across several of our product lines, we are confident that during this year we will continue to increase our revenue and deliver as per our previous guidance, higher revenue than in 2013.

I’d like to turn now to our first quarter product line performance. I will start with the high speed communication product line which includes our optical and E-band wireless products and accounts for 72% of the first quarter revenue, up from 66% in the first quarter of 2013. In breaking down our high speed communication revenue and as I’ve mentioned before the E-band wireless has exceeded our expectations and grew at an exceptional rapid pace of more than 340% from the first quarter of 2013 revenue and up 30% sequentially over the fourth quarter of 2013.

Hence we believe that GigOptix is in the process of establishing a leading position in the emerging backhaul point to point E-band wireless chipset market. Industry analysts forecast that this market is expected to grow at compounded annual growth of more than 100% for a base of $2 million in 2013 and over the next few years.

E-band technology is being deployed at a fast pace as it is part of the growing micro and bigger sales infrastructure that supports the emerging LTE network installation worldwide. For example, in highly concentrated urban areas, carriers are planning to deploy more RF system, as of course a second use to increase high speed transmission capacity technology rather than using the traditional ground based infrastructure that is much more expensive. We have identified this opportunity a couple of years ago and acted quickly to meet this growing demand and establish the first mover advantage by putting our high frequency RF wireless program in place. Building on our legacy, high speed, high frequency optical communication core competencies and expanded to develop the advanced E-band and E-band wireless compound products. As a further proof point of our strong position in this market, on April 16 we announced a substantial purchase order of $1.5 million from our E-band power amplifier devices we received from one of our Tier 1 customers. We also mentioned that we expect to deliver E-band sales in 2014 that will nearly double our total E-band sales of $1.7 million we generated in 2013.

Our overall telecom related revenue was up slightly from the same quarter a year ago and from the previous quarter, reflecting a sizeable increase in quarterly device shipment volume, yet offset by about 20% average sale price decline as of January 1st as a result of the new negotiated prices in the telecom market.

Our current expectation is that while the volume of the telecom shipments will continue to grow during the year -- 2014 year, as a result of the global 100 gigabit per second telecom CapEx increase in this year, our overall telecom revenue will grow modestly this year, compared to 2013 due to this new price points that I’ve just mentioned. Our telecom product development investment focus will continue to be primarily in the 100 gig and 400 gigabit per second area, in line with the global telecom carrier trends of moving to high speed infrastructure.

One of the primary industry analyst firms recently noted that they expect the 100 gigabit per second market to remain strong through at least 2018. Also the main China telecom carriers along with other large global providers recently reiterate that they will increase their investment in the LTE and wireless backhaul development and deployment that will use solely the 100 gigabit per second technology as the big one. This should bode very well for GigOptix as our main telecom and wireless customers are key suppliers to the China carriers. On the datacom side product revenue was up more than 10% from the same quarter in 2013 due to the rapid transition from copper to fiber connectivity in the datacenters trend that most industry analyst predict to continue to accelerate this year and through 2015.

Replacing copper with fiber is a great opportunity for GigOptix. We already have significant market share in the device for the parallel 40 gigabit per second active optical cables that are now being deployed in the datacenters to replace the copper cables. With high an IP barrier for entry and since most of our competitors have been acquired by vertical integrators in the last couple of years, GigOptix is last to be the sole merchant provider to this 40 gigabit per second parallel devices. We are partnering directly with several equipment manufacturers in addition to the active optical cable manufacturers to support their current installation of short and long reach 40 and 100 gigabit per second QSFP class transceivers and active optical cable agents engine as their newly build mega datacenters and supercomputing parts.

As I’ve just mentioned, both these product areas are expected to grow through the foreseeable future and more so as a major web [ph] 2.0 players asserting their own dependent datacenters and are looking to increase speeds across even longer distances within their datacenter infrastructure.

Now I’d like to make few comments on our industrial of ASIC product line. This line’s revenue, which is used in general to serve industrial applications such as high speed test and measurement, medical equipment and military and aerospace applications continues to represent close to 30% of our overall corporate revenue through the first quarter of this year. This quarter, we see new opportunities for us as we look at the new trends within the ASIC industry pertaining to the move into smaller geometries in a way from the largest structure of the ASIC geometries that we have served over the last few years. We are actively responding to this trend. For example, last month we introduced our new ASIC Sunrise family of products that extended our traditional Sunset-Rescue line products into the lower 40 nanometer and 28 nanometer technologies to complete our popular line of customized ASIC devices. In doing so we are enabling the next generation of ASICs to address many new applications such as the emerging markets of the intensive computing applications and we’re looking forward to see this business growing.

To be clear our entry into the smaller geometries of ASIC market is evolving and while we believe that there is a good promise for us in this new generation of product, we want to be cautious through this fresh transition period. Hence we project our industrial ASIC revenue in 2014 to be relatively in line with 2015 revenues.

Our joint development programs or JDPs for all our products remain strong as we delivered approximately $700,000 of JDP revenue in the first quarter. For the year we believe that our JDP program revenues will likely be in excess of $3 million. Some of the programs we are currently working on, including the development of the next generation telecom, low power consumption and high sensitivity 100g coherent carrier devices which will complement our industrial limiting and leaner 100g drivers and provide our customers with a total solutions in attractive and unprecedented prices and performance.

Moving now to the other part of the business. As you may remember, in our last call we announced the inception of strategic joint venture with CPqD, a leading Brazil-based optical communication research and development organization and this JVP was called Brazil Photonics or BrP and it is located in the high tech city of Campinas at the Sao Paulo State in Brazil.

I am pleased to report that as of today, the transition of both GigOptix and CPqD IT and equipment assets into the Brazil Photonics is going well. With the progression of the inception of Brazil Photonics, we have now completed the shutdown of GigOptix facility in Bothell, Washington while at the same time Brazil Photonics continues the build out of their facility in Campinas in Brazil.

In addition, Brazil Photonics continues actively to recruit a team of talent engineers into the Company to ramp up the development activities, as well as their engagements and the financial activities with the Brazil government agencies. As further Brazil Photonics inception plan, the two companies are integrating their contributed assets together. GigOptix, its Thin Film Polymer on Silicon or TFPS modular technology and CPqD, its Silicon Photonics and DSP technologies. This is being done in the most innovative and cost effective manner, being financed at large by Brazilian government and operationally being backed by CPqD and therefore this joint venture is off to a very successful start.

The swift [indiscernible] of Brazil Photonics was on display at the latest OFC show that took place in San Francisco in March where we presented the first BrP demonstrated product, namely the 100 gigabit per second integrated DSPs based CFP2 TOSA transceiver reference platform only couple of months after the inception the BrP took place. The product was well received and we’re continuing to advance our efforts to bring it to the market to shipments of customers evaluation sets this quarter. Separately, Brazil Photonics is expecting its first silicon photonics order from a Tier 1 telecom customer this quarter with a global shipping samples in volumes of this product in the early of 2015. We remain very excited about the prospects of Brazil Photonics, which plays GigOptix through this joint ownership into the emerging technology field of silicon photonics.

In summary, we are satisfied with our start of 2014. With our intensive new product introduction programs and the go to market initiatives we have in place, we can see market share gains in our areas of activity particularly in the high speed communication applications. Combined, we see clear pass to continue revenue growth and enhancement over the course of this year and beyond.

Finally, I would like to thank our many stakeholders including our employees, partners, suppliers, customers and of course our investors for continued support and trust in GigOptix. And with this, I’d like to turn the call over to Curt for his financial review. Curt please go on.

Curt Sacks

Thanks, Avi. We are pleased to report our first quarter results for fiscal 2014. Revenue in the quarter was $7.4 million, ahead of guidance we gave of $7.2 million on our last call. As Avi mentioned, this represents a 7% increase from the year ago quarter due to the strength of our high speed communications business. Revenue was down 6% from the fourth quarter of 2013 due to a normal seasonal slowdown in our telecom related business as the majority of the annual price reductions hit in the first quarter. We have customer greater than 10%, Alcatel, which accounted for 28% of our Q1 revenue

Hereafter all the results I provide will be non-GAAP. Please see the tables included with our press release for a reconciliation of GAAP to non-GAAP financial information. Non-GAAP gross margin was 60%. This marks the 6th straight quarter gross margin was at or above 60%. Gross margin was flat sequentially with the fourth quarter of 2013. We were pleased to see margin remain at 60% as our product mix, coupled with improved material cost offset the seasonal pricing pressure that occurs in our telecom business during the first quarter of the year. During the second quarter, we expect our gross margin to be in the high 50s due to revenue and product mix. In general we believe this will be the level of gross margin we will experience through the remainder of 2014.

During Q1, our joint development program revenue was approximately $700,000, a bit lower than the JDP revenue in the fourth quarter. As we previously noted, revenue from joint development programs is generally 100% gross margin as these projects are complicated in nature, our achievement of the associated milestone is uncertain and we maintain the ownership and benefits of the IP generated from such programs. We, therefore, take the related expenses into R&D as incurred. We expect JDP revenue in the second quarter will be approximately flat with the first quarter.

When excluding the JDP revenue, product non-GAAP gross margin was 56%, compared with 55% in the fourth quarter of 2013. Non-GAAP R&D expense in the first quarter of 2014 was $3.5 million compared to $3.2 million for the fourth quarter of 2013. You may remember from our last call the sequential increase was expected due to higher pending on engineering tape outs and related projects costs. We believe R&D expense will decline in Q2 as we won’t have the same level of project spending. We currently expect second quarter R&D expense will be approximately $3.1 million. In general, we believe this will be level of R&D expense we will experience through the remainder of 2014.

Non-GAAP SG&A expense for the first quarter of 2014 was $1.6 million, compared to $1.5 million in the fourth quarter of 2013. The increase in SG&A expense was primarily due to our year end audit costs and industry tradeshows. We believe SG&A expense will come down to approximately $1.5 million in the second quarter and we expect this will be the level of SG&A expense we will experience through the remainder of 2014. Non-GAAP net loss in the first quarter was $664,000 or a net loss of $0.02 per share. Even with the increased spending noted above, we were able to maintain a positive adjusted EBITDA during the first quarter. In Q1 our adjusted EBITDA was $47,000, our 11th straight quarter of positive adjusted EBITDA performance.

Now turning to our balance sheet. During the quarter we saw inventory increase by just over $100,000 from the fourth quarter of 2013, ending the quarter at $4.8 million. We anticipate inventory will remain approximately flat over the next quarter. Accounts receivable increased during the first quarter to $6.1 million from $5 million at year end. The increase was primarily due to the linearity of shipments during the quarter resulting in DSOs increasing to 74 days. We generally expect DSOs to be in the mid-70s range based on our geographic and customer concentrations. Our outstanding receivables are primarily current and within turns. CapEx in Q1 was approximately $500,000 and should remain at this quarterly level over the remainder of 2014.

Finally we closed the quarter with cash and investments of $19.9 million and no debt. We anticipate using some cash for working capital purposes in the second quarter but expect that our cash will remain in excess of $19 million, our remaining debt free. One note on the BR Photonics joint venture Avi spoke about. As per the inception plan, we currently expect to complete the transfer of the equipment, inventory and IP to BRP by the end of this quarter. The value on our books is approximately $500,000 and this transfer will be reflected in our Q2 financial statements as a minority investment in BRP on our balance sheet.

Now looking at our guidance for the second quarter of 2014. In Q2, we currently expect revenue will increase due primarily to the strength of our high speed communications business and be in the range of $7.6 million to $7.8 million. This would represent an increase of 11% to 14% above the second quarter of last year. With the increase in revenue and decreased spending I discussed earlier, we also expect to generate improved bottom line and adjusted EBITDA performance. Also as I mentioned in our last call, we continue to believe that total revenue in 2014 may grow approximately 10% above 2013 levels.

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

Question-And-Answer Session

Operator

Thank you, Sir. We will now begin the question and answer session. (Operator Instructions) Our first question comes from the line of Krishna Shankar with ROTH Capital.

Krishna Shankar - ROTH Capital

As you look to the June quarter can you give us some color on which end markets will grow in the June quarter for you within what communications and ASIC business?

Avi Katz

Second quarter looks like in line with the growth in the first quarter. I think that what you see as of today -- see a continuous increased demand on the telecom and the 100 gigabit per second. I think its clear shift going from limiting to linear technology which is worse than our product portfolios of today. We continue to see strong and increasingly strong demand on the drivers of TIA for the 40 gigabit per second parallel active cable for datacenters. Again we enjoy both the hybridization if you will of the datacenter effect on our business as well as the fact that quite frankly we are today in a very good place, being sole provider of this merchant. We see increasing customer -- overall customer name and customer demand for these products. So I think that as we mentioned, datacom continue to grow year-over-year. In fact if you compare the volume shipments of datacom, quarter one this year for example to a year ago and as we look forward, I think the volume keep growing and market is mature and demand has continued to grow by all those customers.

Obviously E-band continues to be strong as we see today. I think as I mentioned the fact that LTE is coming through and the installation base continues to grow pull more and more of those devices today, micro and pico cells. And it’s pretty interesting to see market adjust with basically the launch last year and growing at the rates that we have just mentioned, almost unprecedented.

So I think on the high speed communication, I see growth on all the areas that we’ve just mentioned. On the industrial, we see continuous growth and we, as I mentioned, we have expectation that the low geometries will create new opportunities for us, particularly the 14 nanometer and 65 nanometer.

Again, I want to be cautious about this. It’s a new area for us. There is -- we are diving in full speed into this with a good expectation and with good customer references, but we will be smarter as we move in -- through this quarter in the next quarter to see the impact of four technology transfer or technology transition on the revenues. But generally speaking, I think you heard Curt's guidance for this quarter. We are pretty comfortable and convey that we will deliver as we guided.

Krishna Shankar - ROTH Capital

Great. And then what was -- can you indicate how many 10% customers you had and what was Alcatel Lucent as a percent of revenues?

Curt Sacks

It’s Curt. We did have 1 10% customer. It was Alcatel Lucent and that was 28% of business in the first quarter. Last year they were as you may know 33% of our business. So down a little bit on the concentration.

Avi Katz

I’ll add one comment to Curt’s comments here. I think in general you see increase of customers, obviously not becoming close to 10% but increase number of customer particular in the datacom world.

Operator

Thank you. Our next question comes from the line of Dave Kang with B Riley & Company.

Dave Kang – B Riley & Company

Just wondering what the orders were? And can you disclose the backlog entering the current quarter?

Curt Sacks

I think, as we answered. This is Curt. As we entered into the second quarter, the guidance we gave that at 7.6 and 7.8 that tells you about our comfort level. We haven’t broken out in previous quarters our level of orders, but coming into the second quarter, we are about the same place that we were as a percentage of the total amount booked for the quarter as we were in the first quarter. So that gives us confidence as we go into the second quarter without being too precise at the end.

Dave Kang – B Riley & Company

Can you at least tell us whether book-to-bill was positive or not?

Avi Katz

Yes. Dave, it’ Avi. I think we discussed in one of our previous calls, the fact that this overall supply chain, particular on the telecom, has shortened or increase in demand on delivering shorter period of time. Therefore we’ve seen a larger amount of orders coming through the quarter a turnaround within quarter. So I think that from book-to-bill if you will, we definitely have not seen any deterioration comparing to the first quarter or the quarter before. I think it’s consistent with what it is now enough.

Dave Kang – B Riley & Company

Okay. And then, can you also talk about some new customers in the pipeline?

Avi Katz

Sure. What we are seeing in particular -- and telecom, as we all know, the lay of the land is pretty defined. There’s maybe two ends of customer, two ends full of customers in telecom that are driving their overall market demand for, particularly for 100 gigabit per second into 500 gigabit per second. So you don’t expect to see significant increase of customer base in telecom. In the event wireless, prudent to say that the world today is led by maybe half a dozen, the major customers that are driving the infrastructure. I expect to see here growth of tele-customers. I wouldn’t say that new larger players have come to the game here, but I think we’ve seen few young companies that are coming with some innovation, small form factor transceivers, what have you, that are looking into our devices. But in general like the telecom, I think it’s pretty established market from the point with OEM. So again you have large six, seven customer that are driving most of the demand.

So where I see a real change of, if you will of the landscape is mainly in the datacom. There’s ever growing numbers of active optical cable and transceiver integrators. Good numbers are coming from the Far East, whether it’s China, Singapore, Taiwan where we see again a sizeable number of new customers. I would say also that particular with the acquisition of the last competitor we had over six, seven months ago in this area, we were very fortunate to inherit couple of large blue chip customers that are now pulling through our chips. So go to a limited expenses, the name of our customers based on the NDA. I think as I mentioned in my answer to Krishna and just now, datacom provide us with opportunities, new customer base and it’s very positive because not only we are exposed to new partners in the 40 gigabit per second but a lot of those guys are definitely driving now the demand for the probably 28 [ph] for the 100 gigabit per second next generation and the plan is perfectly now to get into the circuit and to [indiscernible] on evaluation by the prices and some other technologies. So basically just to summarize, I think where we’ll new direction and new players will be in the datacenters. So the competing firms, both through the integrators of the active cable and transceivers as well as end users and as I mentioned and we all know again I think that a lot of them are aware that 2.0 players are establishing their own independent datacenter which is again good opportunity to us.

Dave Kang – B Riley & Company

Right. Now you gave us some changes within your product segments. I was wondering if you can give us the actual numbers to along so we can establish some kind of base to figure out those changes. For example like high speed, maybe can you give us telecom versus datacom, I guess what E-band looks like. So that would be helpful?

Curt Sacks

Sure. So as Avi talked about during the call, we gave you the high speed communications was 72% and the ASIC business was 28%. Datacom was -- the entire business was just under a quarter of the business.

Dave Kang – B Riley & Company

Total sales?

Curt Sacks

Yes, for the total of the 7.4. The telecom business was just over a third of the business in total.

Dave Kang – B Riley & Company

And that’s mostly was like 40g 100g stuff?

Avi Katz

So on the telecom Dave it’s predominantly 100 g and 500 g and the datacom is today -- the only commercial high volume commercial deployment is a 40 gigabit 4x14 QSFP plus and there is some miner revenue on the 4x28 QSFP 28 which is the next generation of 100 g but it is really on the [indiscernible] valuation.

Dave Kang – B Riley & Company

And E-band, it sounds like you’ve - it does about $600,000-$700,000?

Avi Katz

That’s been $900,000.

Dave Kang – B Riley & Company

$900,000, got it. Okay, and lastly Avi you talked about introducing second gen TIAs and OFC. Just wondering if I can get an update? Are you still targeting second quarter availability?

Avi Katz

We talked about releasing of TIAs -- our new generation TIA in the second half of this year. So those device are way out there in the foundry pipeline and whenever they’re coming out, we’ll do the activities and release it to customers.

Operator

(Operator Instructions) And our next question comes from the line of Ryan Downie with Sidoti & Company.

Ryan Downie - Sidoti & Company

So you took a little bit of an ASP hit I guess in the 100g on telecom side but you’re still flat sequentially. Is that attributable to change in mix maybe or one of the other product categories performing well?

Curt Sacks

You’re talking about gross margin?

Ryan Downie - Sidoti & Company

Yes.

Curt Sacks

No, you’re correct. We did take hit on the telecom side, a bit of pricing pressure on telecom. We were able to offset that somewhat with some cost reductions with the materials. That’s part of the story. The other part of the story is mix shift and we shifted a bit towards the E-band business which was $900,000 this quarter nearly $1 million and that tends to have a bit higher margin than the overall corporate average. So those two things help keep the margin flat.

Ryan Downie - Sidoti & Company

Right. And I know you’re expecting it to kind of stay flat for the rest of the year. But I’m just speculating that there might be some opportunity there if the mix continues to shift towards E-band?

Curt Sacks

Well I think during my comments I mentioned that my expectation is that margin will be in the high 50s, the same currently and a concern that I had was just a bit of small amount of margin decline in the second quarter due to product mix. But as you mentioned, there are opportunities that we see as the business grows to see economies of scale, to spread our overhead cost over a larger base of revenue and to see some additional cost reduction. So during my prepared comments and in my current sort of realistic belief is we will see margin in the high 50s but there are opportunities for us to beat that and we hope to.

Avi Katz

Ryan this is Avi. Just to add on your model analysis here, again if you look to the trends we’ve mentioned here, we definitely see continues meaningful growth in the wireless and in the datacom, which are good product gross margin for us. We see the continuous price pressure on telecom. And again a lot depends as Curt said on how this is going to unfold in the next quarter or two. I think that toward the June call we’ll be smarter -- July call we’ll be smarter on seeing the actual trends in both the micro and pico sales in the LTE E-band, as well as the actual rate of deployment of the particular I’d say supercomputing farms which will obviously drive demand of our parallel datacom devices.

Ryan Downie - Sidoti & Company

Okay. Regarding the BrP order that you’ve talked about, you anticipate for the next quarter, is that for testing or is that going to be deployed commercially? Can you comment on that?

Avi Katz

Sure. As we talked -- one of the major motivations in establishing BrPhotonics was for GigOptix to get into the silicon photonics domain in a most cost effective and fastest time market method. CPqD has legacy of couple of years working on silicon photonics and developing a variety of their components. We as it is in very embryonic stage as here. We’re leveraging on our position as GigOptix and our position as sole sale agent -- sole sale and market agent for BrPhotonics worldwide. And we are getting interest from some of our traditional customers to silicon photonic devices that they may need in their systems. So our interest in promoting silicon photonics from the Brazil Photonics world is mainly in trying to commercialize the device and not to -- and to move it from the R&D stage into a full commercialization. So when we’re talking about parts we are talking about the desire to bring a commercial endeavor here. That being said, as you know in the stage of evaluation qualification surprises may happen and we can only hope the devices and the sample we bring to the market in the year or so will yield both price and performance in those customers to commercialize it.

Operator

Thank you. Our next question comes from the line of [indiscernible] with Craig-Hallum Capital Group.

Unidentified Analyst

First, I am going through the numbers that you share in your prepared remarks and did datacom actual decline sequentially?

Curt Sacks

I’m sorry, did datacom decline sequentially.

Unidentified Analyst

Decline sequentially? Yes.

Curt Sacks

No. Datacom is relatively flat. What we really talked and expected was the seasonal decline of telecom.

Unidentified Analyst

Okay. Was that business affected at all by the Asia PC market? We hear from few companies the SPC market was kind of soft in the first quarter. So just wondering what kind of dynamics you saw in that part of the business?

Avi Katz

Can you repeat from your last part of the question?

Unidentified Analyst

Sure. We hear from other companies that there was softness in the Asia PC market. So I was just wondering if that affected your datacom part of the business at all in the first quarter.

Avi Katz

Again, I have not seen any slowdown. In fact as I’ve mentioned if you look -- in I think in my comment, prepared comments I mentioned we’ve seen 10% increase on product revenue from this sector year-over-year. What I can see that the application we are deploying our devices in really been going to a -- we’re going to a full commercialization full productization and I have not seen any slowdown on orders from our – I would say from that. From the customers, they represent 80% on the datacom segment I’ve not seen any slowdown.

Unidentified Analyst

Then I wondered if you can comment on the competitive environment on 100 gig drivers, are you seeing any shares fits or new entrants as the market continues to grow?

Avi Katz

It’s a great question. I think that I’d like address two elements of your question, one which is competitive analysis, the other one is newcomers. I think that I would say at this stage of game it’s impossible for newcomers to get to market because as you know the 100g coherent first gen limiting devices were introduced about four years ago and the second gen has been in production for the last year and getting into full production this year. In fact the leading OEMs are moving into the third gen of the 100 gigabit per second coherent with the introduction of Linear Technology.

So I would say that this is very intense technology long evaluation qualification cycle hence the barrier for entry for a newcomer at this stage are too high. And the truth of the merit, this market is already capped. Its captive market by the current players. So to answer your question, I don’t think newcomers can come to compete into market at this stage, not to say this for next generation 400g or near the future 1 terabyte.

We’ll not see new players but for the current technology of 100g coherent, I don’t think newcomers are expected. But this on their landscape competitive, the competitors – yes, are maybe four or five major players and I think the market is accommodating those players. In general the 100g coherent drivers NTAA [ph] is a very well defined market. The numbers are not changing from the market analysis of last year. I think this market is taking over most of the infrastructure and the 40g over the next year or two and the major players, the 100g coherent are addressing and are serving properly you know the customers all the way from China, from Japan, United States and Europe. So I think the market is pretty -- I mean the landscape is pretty stable, the players are the same players that we addressed last year and I would suggest that probably it will stay at least for the next couple of years.

Operator

Mr. Fanucchi, we have no additional questions. Please continue with any closing remarks.

Jim Fanucchi

Great, thank you so much. Thank you everyone for joining us. As a quick reminder, we will be participating in the B. Riley conference on May 20the. Hope to see some of you there and we look forward to speaking with all of you again when we report our second quarter results. Thank you.

Operator

Ladies and gentlemen this concludes our conference for today. Thank you for your participation. You may now disconnect.

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