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GigOptix Inc (NYSEMKT:GIG)

Q2 2014 Earnings Conference Call

July 28, 2014 5:00 PM ET

Executives

Jim Fanucchi - Darrow Associates

Avi Katz – President, Chief Executive Officer

Curt Sacks – Senior Vice President and Chief Financial Officer

Analysts

Krishna Shankar - Roth Capital

Dave Kang – B. Riley & Company

Jorge Rivas - Craig-Hallum Capital Group

J. Mark - Twin Capital

Operator

Good afternoon and welcome to the GigOptix Second Quarter Fiscal Year 2014 Financial Results Conference Call. As a reminder, this conference is being recorded for replay purposes through August 11, 2014. In addition, the call is also being broadcast live over the Internet and maybe accessed in the Investor Relations section of GigOptix Web site 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 second 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, Monday, July 28, 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 second quarter fiscal 2014 conference call. Today, I’ll review our recent performance and important events and discuss our outlook for the third quarter and beyond.

Let me first start with a brief overview of our second quarter financial results, which will be discussed in more detail by Curt later on this call. Total revenue was $8 million up 18% from the second quarter of 2013, while the product revenue alone grew 28% year-over-year and above the midpoint of our guidance of revenue of $7.7 million for this quarter as we provided in our last call in May.

The high-speed communication product line which encompassed our telecom, datacom and wireless product generated $5.6 million in this quarter compared to $4.6 million in the same period last year representing total revenue growth of 23% at this line over the same quarter last year. Affecting our high-speed communication product line revenue performance a little more, this is the first quarter in the history of GigOptix that we see our datacom revenue higher than our telecom revenue. More so, combining the datacom device revenue which grew about 120% year-over-year and the wireless device revenue which grew 214% year-over-year we’ve exhibited a combined revenue of $3.6 million this quarter for those lines, which represent about 45% of the Company’s total revenue this quarter up from 26% in the second quarter last year.

We’re delighted to see such a meaningful increase in the revenue from our short range communication link devices combining the metro, datacenters and wireless devices and into the consumer homes. This strong revenue performance means that our total revenue in the first half of 2014 stands at $15.4 million up 12% from the $13.8 million in same period last year and 23% product revenue growth for the same period.

We believe that the revenue this fiscal year is now on pace to grow at higher rate than the asked 10% rate we discussed earlier this year. Curt will address our guidance later on in this call.

Non-GAAP gross margin remain high at 59% this quarter over the 58% we have just guided in our last call and earnings per diluted share were $0.01 compared with a loss of $0.02 last quarter. We also had another quarter of positive adjusted EBITDA this time of $1 million representing our 12 consecutive quarters we’ve delivered positive adjusted EBITDA results.

Our balance sheet remains strong with approximately $18.5 million in cash and no debt at the end of the quarter.

Regarding our revenue performance in the second quarter, I do want to point out that while we have seen a slowdown in the telecom market, it will remain an important part of our business. However, we’re slowly transitioning away from relying so heavily on the telecom market for the largest part of our revenue. We view this as a very positive step since the telecom related market we serve our more volatile and subject to greater seasonality fluctuation due to unpredictable CapEx spending from the major carriers and are smaller in size, slower in annual growth and exposed to continued price erosion pressures much more than the datacom and the backhaul wireless market that we’re serving.

The profitable second quarter serves as a proof point that the strategy we implemented over the last few years to focus our product development and expansion into the market that offer a larger total available market growth which include the short range communication links from the metro downwards, hence datacom and backhaul wireless are delivering the growth result we targeted and discussed in our early calls this year.

Turning now to our second quarter product line performance. I will start with high-speed communication product line which includes our telecom and datacom optics as well as the backhaul wireless product, and accounted for 70% of the second quarter total Company’s revenue up from 67% in the second quarter of 2013.

In breaking down our high-speed communication revenue and as I’ve commented earlier the backhaul wireless E-Band related sales have been increasing rapidly up 45% sequentially and 214% from the same quarter last year to a record high of $1.3 million of revenue this quarter.

You will remember GigOptix was a pioneer in introducing the point-to-point backhaul wireless E-Band devices back in late 2012. We choose a noble technology concept, this includes only two components a gallium arsenide power amplifier and silicon germanium transceiver devices. We delivered to the market a low-price high functionality integrated transceiver for the backhaul point-to-point wireless interconnections. There is no doubt that the backhaul point-to-point wireless infrastructure more so at the E-Band frequency is being deployed in the fast pace.

Recent financial analyst reports have highlighted a pick in wireless spending as part of network densification trend by major global carriers, as they add it to the LTE coverage projects. This LTE infrastructure build outs which include the small cell devices are now just beginning to be deployed in the urban and metro areas by carriers at a lower cost and higher reliable means to deliver high-speed connectivity over the last kilometers to the customers.

GigOptix is the leader enabling of this point-to-point backhaul technology which requires the high frequency transmissions over 50 gigahertz range.

To further expand our wireless backhaul capabilities and in order to accelerate our introduction to the market of our new and complimentary V-Band devices at the 50 gigahertz to 60 gigahertz. Last month we announced the acquisition of Tahoe RF Semiconductor, a privately held developer of leading edge RF analog IPs and fully integrated systems and sub-system on a chip.

This transaction plays perfectly into our long-term plan to continuously enhance our leading position in the emerging RF device market. For the benefit of our investor I wish to summarize the reason that motivated us to make this decision to invest in the acquisition of Tahoe RF asset.

First the purchase enhanced our engineering capabilities in developing advanced devices for several growing markets such as in the wireless domain, including the rapidly growing LTE cellular infrastructure that is being built in support of the ever growing demand from mobile data stream for smartphones.

Secondly, we are now stronger player in the evolving small cell market through our expertise in the E-Band and V-Band spectrum. Tahoe RF added a meaningful CMOS and silicon germanium RF device IP library for emerging and high volume applications, such as wide frequency point-to-point wireless backhaul including 60 gigahertz V-Band to augment our already leading 70 gigahertz to 90 gigahertz Earnings-Band technology.

The deployment of small cell is expected to grow and exhibit in order of magnitude larger volume in the next five years than the regular cell in urban areas, driving the demand and growth of V-Band values that is expected to accelerate in the next two years to volumes much higher than the E-Band by 2017.

Thirdly, the Tahoe RF Technology gives us a building block to enter adjacent new consumer RF markets, including Global Navigation Satellite System GNSS, such as the GPS system, low power and low noise transmitters and amplifiers and specific consumer electronics on automotive systems. These capabilities have already been incorporated to the Company’s working plan for 2014 and 2015, and business development active engagement.

I am very pleased to announce today less than a month after the closing of the acquisition, the release of our first product that is based on the acquired technology from the Tahoe RF team. This product is our first RF GNSS receiver that will address the growing intelligent transport system market to be deployed in the coming years.

The October 2013 report from the European GNSS agency suggested that this market is expected to grow 42 million devices by 2017. And hence this market size obviously got our attention when we’ve evaluated the quality of the Tahoe RF technology towards acquisition. This device integrates the bulk of receive chain for both upper and lower GNSS band with 12 bits of real digital down converted GNSS signal, and is available now from GigOptix as an engineering sample for immediate purchasing.

Later this week we plan to ensure a detailed press release that will provide the exact specifications and functionalities of this excellent device. We are very excited about the addition of Tahoe RF team now named as the GigOptix-Auburn RF Design Center, as they support these opportunities we see in front of us with our RF business. With this acquisition not only we have enhanced our immediate IP and product technology arsenal, but we’re confident that this expert excellent engineering team will be meaningful contributor to our expected definite growth in fiscal 2015 and beyond.

Turning back to our product line on the datacom side; after a slower first quarter this year this was impacted mainly by normal seasonal trends in timing of orders. Datacom related product revenue was up significantly, with sales increased 39% sequentially and 120% from quarter two of last year. As I have mentioned before, GigOptix products are in the sweet spot as the transition from copper to fiber connectivity in the datacenters and the shorter range link accelerator.

We’re partnering directly with several module integrators to support the current installation of short and long reach 40 gigabit and 100 gigabit QSFP+ transceivers and active optical cables engine, their customers newly build mega datacenters and supercomputing parts.

We believe that most of our datacom device that have been sold to our customers and are being installed in those very modern mega datacenters that are being built by the web 2.0 leaders such as Google, Amazon and Cisco.

As one financial analyst noted in recent report the increasing placement of datacenter outside of the metro core urban center is driving a rapid increase demand for 40G and 100G wavelengths for inter-datacenters connectivity with datacenters still located in the metro core region.

This evolution is expected to continue for an extended period of time. And with our already leading position as the last sold device merchant provider for the 40 gigabit per second active optical cable market, GigOptix see this trend being very positive in supporting our growth into the foreseeing future. Our overall telecom related revenue declined from the same quarter a year ago and from the previous quarter.

We believe that second quarter marked an inflection point in our telecom business as our customers are transitioning from the first generation of 100G coherent limiting transceiver technology to the second generation of the 100G coherent Linear base transceivers. Hence consuming the first generation inventory and starting the ramp up, production order for the 100 gigabit per second Linear coherent devices as of this quarter.

In addition the build out of the 100 gigabit metro infrastructure market using the Linear technology is also coming slower than the industry had first thought, and is now expected to kick off in the first half of 2015.

Hence for those two reasons and while we have already started this quarter’s shipment of our 100 gigabit per second Linear products for production deployment by our main customers, we believe that the full ramp will come later than the industry initially expected but will continue to be essential part of our revenue growth in the balance of this year and in 2015. As such we currently believe our telecom revenue will increase slightly during the balance of the year and will be enhanced even more again in early 2015.

With this I do want to be clear that no matter when the eventual up cycle hits, GigOptix is ready to retain its lead position as an active participant in the current 100 gigabit per second Linear coherent products for the long-haul and metro market. As well as being a leader in the future 400 gigabit per second Linear market, product that we are already shipping as of now for customers evaluation.

Regarding our Industrial ASIC product line, revenue bounced back nicely from the last quarter increasing to $2.4 million up 15% sequentially and up 7% from the same quarter last year. From a longer term perspective, as the ASIC industry moves into smaller geometries and away from the large structured ASIC geometry that we have served over the last few years, we’ll continue to evolve with introduction of the new product offerings.

You may remember that earlier this year we introduced our new ASIC Sunrise family of products that extended our traditional Sunset Rescue line of products into the lower 40 nanometer technology, to complete our popular line of customized ASICs and FPGA converting ASIC devices.

During this transition period we continued to expect ASIC revenue to be somewhat lumpy, as the foundries we have worked with are ending some of the availability of these old geometries. However we are seeing an increase in our ASIC related joint development programs, which gives us confidence that during this transition period our ASIC revenue this year would be somewhat flat to slightly up from fiscal 2013.

Our corporate JDP opportunities for all of our product lines remain strong as we delivered approximately $840,000 of JDP revenue in the second quarter, up from about $700,000 last quarter.

The latest programs included activities such as development of an advanced TIA for the 100 gigabit per second Linear coherent telecom market. Development of high sensitivity TIAs for advanced natural interfaces and 3D consumer application as well as wireless ASIC development. For fiscal 2014 we continued to believe that our JDP program revenue will likely be in excess of $3 million.

Now I’d like to move to other parts of our business. Our Brazil Photonics or BrP, our Brazilian joint venture in progress is progressing as we expected. BrP is scheduled to complete the build out of their facility in Campinas, Brazil by the end of 2014 and remains on track to ship sample volume of its Silicon Photonics product in 2015.

We remain excited about this joint venture addressing the American Silicon Photonics field and enhancing GigOptix position with this technology and within the Brazilian market. Also as part of our efforts to continuously improve the operational efficiencies within our organization and effective today, we are implementing an enterprise wide change in our organization structure in the Company where we will operate under functional organizational structure rather than the product line structure that we operated over the last few years.

The need for change became more apparent in recent months as we diversified our revenue mix by expanding into parallel markets such as RF and consumer applications. And more so as immediate complementary act to the successful completion of the consolidation of the acquisition of Tahoe RF, which provides excellent cross sell opportunities to our entire product line businesses.

With these new opportunities we found that the products line structure was not conducive to deliver most efficient execution on the growth plans we have in place. Hence this new structure will allow for a focused corporate cross functional sales and marketing operations across our broader product portfolio.

As part of the change today announced that Dr. Raluca Dinu has been promoted to the newly created position of Senior Vice President of Global Sales and Marketing. Raluca has been a key member of our executive team since the acquisition of Lumera Inc. in December 2008, most recently serving as GigOptix’s Vice President, the General Manager of the High Speed Communication Product Line. A strong technical background in the markets we serve and long time relationships with our current and targeted customer will play a vital role as we expand our revenue channel.

In addition, Anil Chaudhary, previously our Vice President and General Manager of the ASIC Product Line who joined GigOptix as part of the acquisition of ChipX in November 2009, will assume the newly created role of Vice President of Government Affairs and Strategic Accounts. In this role, Anil will leverage on his 30 years of experience in the semiconductor arena to enhance GigOptix engagement with the government as well as with the key government strategic contractors that are already or will become GigOptix customers for the entire cross-section portfolio of our products.

As I close my remarks, I want to reinforce management objectives regarding our short and long-term financial goals and what we will do to deliver high shareholder value as a micro-cap public company. We have previously communicated that the first milestone was to generate consistently positive adjusted EBITDA. We have done this for the last 12 straight quarters during the three years since 2011. And as you remember, we’ve delivered $2.4 million of adjusted EBITDA in the entire fiscal year 2013 and here now in quarter two we have delivered $1 million of this adjusted EBITDA.

Second milestone was to generate consistent non-GAAP profitability. We achieved positive non-GAAP EPS this quarter and in four out of our last six quarters, going back to the first quarter of fiscal 2013. While sensitive to the somewhat lumpiness of this metric, we plan to continue and enhance this trend and strive to keep it positive as we move forward. Now we have the building blocks in place to generate greater sales and the higher revenue should cover for the increased overhead associated with our growing business. This will put us on a faster track to reach our next milestone which is to achieve consistent GAAP profitability and net cash flow generation. While we are not in a position today to predict when GAAP profitability will occur, we are on right trajectory together and I look forward to updating you on our progress on this metric in the following quarters.

In summary, we are very happy with our second quarter performance and progress we are making in several high growing areas. Through today’s call, we hope that our shareholders now has a better clarity and appreciation to the programs we are driving within GigOptix, as we have just launched this month into our eighth year operation. The new product introduction program we’ve been working on for the last few years, are now bearing fruits as evidenced by our nearly 28% product revenue growth year-over-year compared with the second quarter of 2013. The recent acquisition of Tahoe RF will further enhance our new market opportunities and combined with our existing internal product introductions and our continuous plans for further strategic growth this year and beyond, makes us optimistic about our future growth in 2014 and into 2015.

Finally, it’s important for me to once again personally thank our many stakeholders, including our committed employees, partners, suppliers, customers and of course our investors with a continued support and trust in GigOptix. Now with this, I’d like to turn the call over to Curt for his financial review. Curt please go ahead.

Curt Sacks

Thanks, Avi. We are pleased to report our results for the second quarter of fiscal 2014. Revenue in the quarter was $8 million, ahead of the guidance range of $7.6 million to $7.8 million, we provided on our last call. As Avi mentioned, this represents a 9% increase from last quarter and an 18% increase from the year ago quarter. During the second quarter, we saw increases in both our high speed communications and industrial businesses. High speed communications increased 6% sequentially due to strong demand from our datacom and RF related revenue, partially offset by a decline in our telecom related revenue.

On the industrial side, we experienced a 15% sequential increase due to a project win during the quarter that led to immediate revenue. We expect revenues from both high speed communications and the industrial line to increase again in Q3. We have two customers greater than 10%, Alcatel which accounted for 23% of our Q2 revenue and [indiscernible] a European distributor of our e-band related parts accounted for 11% of Q2 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 59%, which was in line with the guidance I provided on our last call. The Q2 gross margin compares with 60% last quarter. The change in gross margin was due to increased overhead related cost to support our datacom and wireless chip shipments during the quarter. This increase in overhead was partially offset by a favorable product mix towards our datacom and RF related products.

In Q3, we expect our gross margin to be at a similar level to the second quarter due to revenue and product mix and to remain at this level through the remainder of 2014. Joint development program revenue in Q2 was approximately $840,000 a bit higher than the JDP revenue of about $700,000 in the first quarter. As we previously noted revenue from joint development programs is generally at 100% gross margin. This is due to the complicated nature of these projects, the uncertainty of our achievement of the associated milestones and our ownership of the underlying IP generated from such programs.

Your therefore take the related expenses into R&D as incurred. We expect JDP revenue in the third quarter will be approximately flat with the second quarter. Non-GAAP R&D expense declined 14% sequentially to $3 million. This compares to $3.5 million for the first quarter. As I discussed in our last call, the sequential decrease was expected due to higher spending in Q1 on engineering tape-outs and related project costs. R&D expense will increase in Q3 due to the higher engineering headcount resulting from the acquisition of Tahoe RF which closed at the beginning of the third quarter.

We currently expect third quarter R&D expense will be approximately $3.4 million and believe this should be the level of R&D expense we will experience through the remainder of 2014. I will give you additional details on the Tahoe RF acquisition later in my prepared remarks.

Non-GAAP SG&A expense was down about 10% sequentially to $1.5 million in Q2. This compares with $1.6 million in the first quarter. The decrease in SG&A expense was primarily due to reduction in the annual audit cost and industry tradeshows that fell in our first quarter. We believe quarterly SG&A will be at a level of approximately $1.5 million for the remainder of the year. With the higher revenue and lower operating expenses in the quarter, we are pleased to have returned to a positive non-GAAP net income which was $269,000 or a net income of $0.01 per diluted share in Q2.

This non-GAAP net income was the highest we have achieved in the last two years. The Q2 net income compares with the net loss of $664,000, were net loss of $0.02 per share in the first quarter. We also generated positive adjusted EBITDA of nearly $1 million during the second quarter, representing our 12th straight quarter of positive adjusted EBITDA. This was up from approximately $50,000 in the first quarter of the year.

Turning now to our balance sheet. During the quarter, we saw inventory decreased by nearly $470,000 from Q1, ending the quarter at $4.3 million. The decline in inventory was due primarily to the transfer of approximately $250,000 of inventory to CPqD as part of our contribution to the BrPhotonics joint venture and reduction of work in process inventory during the quarter due to shipments at quarter-end.

We anticipate inventory will remain approximately flat over the next quarter. Accounts receivable increased during the second quarter to $7 million from $6.1 million at the end of Q1. The increase was primarily due to the linearity of shipments during the quarter resulting in DSOs increasing to 79 days. We generally expect DSOs to be in the mid-70s range based on our geographic and customer concentrations. CapEx in Q2 was approximately $240,000. We believe CapEx will be between $300,000 to $400,000 dollars per quarter for the remainder of the year.

Finally, we closed a quarter with cash and investments of $18.5 million and no debt. The change in cash during the quarter was primarily due to working capital purposes. We anticipate using some cash for normal working capital as well as payments related to the acquisition of Tahoe RF in the third quarter but expect that our cash will remain approximately $18 million while remaining debt free. Before providing our third quarter guidance let me give you a short update on the BrPhotonics joint venture and Tahoe RF acquisition.

Regarding BrPhotonics, during the second quarter, we completed the transfer of the IP, equipment and inventory to BRP. The transfer resulted in our investment in the unconsolidated affiliate on our balance sheet. Also during the second quarter, we recognized a $331,000 loss for our 49% ownership share in BrPhotonics. This loss is excluded from our non-GAAP result. The net investment in BRP on our balance sheet at the end of the second quarter including this loss, is $125,000. We expect this investment of $125,000 to be recognized as a loss in the third quarter, capping our loss from this subsidiary. We expect no further losses from the subsidiary after Q3.

For Tahoe RF, we successfully closed the deal on June 30th, which means this acquisition effective on the first day of our third quarter. We acquired substantially all the assets of Tahoe RF including its IP portfolio, equipment, and inventory by assuming approximately $500,000 in liabilities. Through the acquisition, we have added 10 employees to our team primarily RF engineers focused on the high growth areas of wireless communications that Avi discussed in his remarks.

While as I mentioned earlier, R&D expenses will increase starting in the third quarter, we expect this transaction will have a positive financial impact on our financial results through new design wins as we move into 2015.

Now looking at our guidance for the third quarter of 2014, with continued strong demand in our product lines, we believe third quarter revenue will increase to a range of $8.2 million to $8.4 million, representing an increase of approximately 12% to 15% above the third quarter a year ago. Given the strong performance of the first two quarters of the year combined with our third quarter revenue outlook, we are now increasing our revenue guidance for fiscal 2014. We currently expect revenue for 2014 to grow up to 12% above fiscal 2013. This compares with the prior guidance of up to 10% growth we provided earlier in the year.

With that, I will turn the call back to the operator for questions. Operator?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we will take our first question from Krishna Shankar of Roth Capital. Please go ahead.

Krishna Shankar - Roth Capital

Yes, Avi and Curt congratulations on the raised guidance for fiscal year ’14 revenues. As you look at the second half of the year, do you expect growth in Q3 both in the communications, datacom and telecom area in other words have you sort of passed the bottom in telecom here in Q2?

Curt Sacks

Hi, Krishna and thanks for the question. Yes, we believe we hit the bottom for telecom and expect to see telecom to continue to growth throughout the year. And to your earlier question, we expect growth in both sides of business high speed communications and ASIC in Q3, so expecting to see demand continue to be strong in both areas of the business.

Krishna Shankar - Roth Capital

Okay and Avi can you talk a little more on the Tahoe semiconductor acquisition and how that would contribute to revenues in 2015 versus what you had before with e-band wireless? What would be sort of the drivers for revenue growth in wireless backhaul for rest of this year and next year?

Avi Katz

Sure, thanks Krishna for your comments and the question. We have been very fortunate in introduction of our first generation of power amplifier to the e-band. And being pioneering this application, we have seen substantial amount of revenue growth as we mentioned over the last year and half, since we introduced the product. As a result, following on this success and as we’re preparing to release to the market, our silicon germanium E-band transceiver chip as we discussed, to be honest we became very, very short on engineering resources and being somewhat limited resources as we try to embark and as we want to embark on new areas of the wireless pertaining particular to the complementary frequencies for the small cells that support the LTE infrastructure.

Our work on V-band is ongoing and we’re very excited about our ability to come to the market with winning product in the foreseen future and we want to support this development. We see some other interesting applications in variety of frequency band to support the new worldwide wireless infrastructure that will be putting in place by many players. And we just felt this point of time that if we can figure out the team of expert that can join GigOptix as cohesive team and bring the skill to the play sort of each flows and running, will be very fortunate and this is what we did with Tahoe RF. And those product releases in addition to new consumer electronic areas as I mentioned, as we move more and more into the high speed appliances in the consumer, I mentioned for example the GNSS and I mentioned in our previous discussion devices such as high sensitivity amplifier to support 3D and motion detection. All those requires obviously skills, experience and more importantly a larger team of innovative and smart engineers that can contribute to alleviate product.

So, all of us are already in the work plan, all of us are already introduced and delighted with the fast pace of this consolidation. As you know we have done many acquisition for GigOptix as part of our DNA and I will tell you that this team has been the fastest consolidated team we have had in the company. And we expect to see revenue taking off on this product, it will come from this team as early quarter one of 2015.

Krishna Shankar - Roth Capital

That’s great and my final question, can you give us an update on the BrPhotonics joint venture in terms of new product definition, when that might contribute to revenues and any milestones there?

Avi Katz

So, first of all as I mentioned we are delighted with the Brazil Photonics and we just came back from our quarterly Board review. We think the progress is also very fast in terms of establishing the build-up in the infrastructure. There are two areas of development that are growing in parallel in Brazil Photonics, one of which is the small form factor with CFP2 TOSA, which show transceiver and an optical device which is based on the TFPS, a polymer modular from GigOptix. Those small front factor transceivers are now available in working engineering samples and we’ll introduce our current release production with engineering sample in the next few weeks as part of our, I think I mentioned during our last call of our program in the ECOC and that’s coming in Europe in September.

And in parallel to this introduction which we hope will catch a lot of attention and get more and more customers to evaluate them as viable alternative for the TOSA and the CFP2 form factor, in parallel we are progressing on our Silicon Photonics program with few very focused devices that we believe are presenting the fastest band to revenue in terms of introduction of Silicon Photonics.

I mean talking about volume engineering samples as I mentioned, I expect to see revenue into BrPhotonics in the first half of 2015 in a meaningful manner. And I think that’s good just management from GigOptix point of view, beyond quarter three, don’t expect to see any further losses that will impact our financial whatsoever. So basically roughly about $0.5 million of losses we are going to inquire in our books, all inclusive, give us the access to this outstanding Silicon Photonics technology, very large engineering pool in Brazil. And hopefully as we roll into 2015 I’ll be able to begin to report on wins and successes in revenues from this subsidiary.

Krishna Shankar - Roth Capital Partners

Great, thank you.

Avi Katz

Thank you, Krishna.

Operator

And next we’ll hear from Dave Kang of B. Riley.

Dave Kang – B. Riley & Company

Thank you. Good afternoon. First question is Curt what was the product gross margin?

Curt Sacks

It was I believe it’s 54%, Dave.

Dave Kang – B. Riley & Company

And then should we expect product margin to be around mid-50s going forward? Even though we have higher margin datacom and E-Band RF stuff ramping.

Curt Sacks

Lot depends on as you mentioned in the product mix as well as certainly ASP pressures, et cetera. I think mid-50s is a reasonable way to think about it, Dave.

Dave Kang - B. Riley & Company

Got it, and then I was hoping to get some more info on the tower. So, regarding your third quarter guide, how much of tower revenue is built into that and what was the transaction price, doesn’t sound like it was all that much.

Curt Sacks

Yes, on the transaction price, as I mentioned in my remarks, we assumed liabilities of about $500,000 and there will be some of that cash paid out in the third quarter. With that $500,000 that we acquired, substantially all the assets, the IP associated with Tahoe RF, some inventory and some equipment.

Dave Kang - B. Riley & Company

So here have a whole lot of revenues at this point?

Curt Sacks

No.

Avi Katz

Dave, like we’ve done in previous acquisitions, it’s always our intention to multiple all the revenues, don’t sit into GigOptix’s financial or business model and launch the entire resources in support of the revenues we believe are going to be the core for GigOptix.

Dave Kang - B. Riley & Company

Got it, and then on the RF side. Can you just talk about the visibility or all that growth both year-over-year and sequentially? Is that just coming from one customer that 10% customer, or are there other customers? And can you just talk about your pipeline going forward?

Avi Katz

So just to clarify, Dave, this one customer as Curt mention is a distributor. It’s our European distributor serving variety of customers in Europe. As you know, they’re very big concentration of RF, E-Band and V-band customers are in Europe, Central Europe and Western Europe and this distributor is a expert in distributing of wireless RF.

Dave Kang - B. Riley & Company

So who are the big players then that’s currently buying your product, the end customers? I’m more interested in end customers I mean. Are we talking couple or maybe handful, at this point?

Avi Katz

If you look into the overall market as it pertain to LT small cell support and frequencies above 50 gigahertz there is probably handful of customers. And I believe that we are supporting all of them.

Dave Kang - B. Riley & Company

Got it, all right and just, Curt, can you remind me what the GDP revenue was? I was juggling couple of calls, so.

Curt Sacks

It was approximately $840,000.

Dave Kang - B. Riley & Company

And you said that’s going to be kind of flat in the third quarter.

Curt Sacks

Yes, relatively flat and about up to by $3 million for the year probably between Avi and his prepared remarks talked about it.

Dave Kang - B. Riley & Company

And then just one more on the BrP side, you said, how much of loss is expected in the third quarter and then I guess it goes away after the third quarter?

Curt Sacks

And so we recognized a loss in the second quarter, $331,000 we’ll recognize, probably we expect to recognize another $125,000 in the third quarter and that within the last loss we will recognize.

Dave Kang - B. Riley & Company

Got it. All right. Thank you.

Curt Sacks

Thank you, Dave.

Operator

And Jorge Rivas of Craig-Hallum Capital Group has our next question.

Jorge Rivas - Craig-Hallum Capital Group

I wanted to delve deeper on the 100 gig business. So do you guys just expect telecom to be flattish in 2014 compared to 2013?

Avi Katz

So Jorge it’s Avi. Thanks for calling in. I will give you the view of the world from where we see it and complete its objective. I think it’s fully augmented and supported by the recent reports from our counterparties and peers in the industry and more supplementary support. But here is how we see the world. There is a very good build up of 100G long-haul limiting coherent technology in the last couple of years and we actually enjoyed it. And we had a great run and participated with field lead program in this industry.

I think that middle of this year there was initial evaluation of the 100G coherent leaner technology, which is the next generation which is a bit difference than the limiting. And as major customers on the long-haul are shifting gears from the limiting first generation to the leaner, there was a dry-up of the inventory as they started to complete the evaluation and started to build-up inventory towards a leaner in the long-haul.

So this traded the typical inflection point in technology transfer transitioning from FirstGen to NextGen. So I think this is one element. As I mentioned in my prepared comments, the other issues as we all know for industrial reasons the build-up of the 100G leaner metro infrastructure was pushed out to the first half of 2015 originally fill to the numbers when we put the plan for 2014 we may have thought all of us about metro introduction toward the second part of this year, which would have definitely drive and will drive the volume much higher than when it’s deployed on into the long-haul.

So I think that we’re not very surprised about the slowdown in quarter two. It’s the slowest quarter we’ve seen in the last year and half. But again it’s still very strong, it’s going up from -- also remember when you’re talking about overall revenue and this technology, please remember that comparing year-over-year we should also take into consideration about 20% to 25% ASP erosion comparing to last year. So, there is a much higher volume that just to make-up for the overall revenue that we see, that we report year-over-year.

Now moving forward, telecom locked up on 100G coherent I mean there is no -- that the 100G coherent is the only protocol that is going to take up in the long-haul and metro. So I think we should all be cautiously optimistic, but realistic about what’s happening in the telecom.

In installed base, we’ll continue to 100G. We believe it’s going to be into loan-haul and metro moving into leaner technology. And as I think we mentioned, we see rebounding of the telecom 100G as we move into second half of 2014 and probably much stronger take-off in 2016 once the metro installations are really becoming affected. So I mean from GigOptix’s point of view, we see it as one of our flagships we’ve done, we see that it will, I will call it seasonal but rather technology transfer, technology transition inflection point, we’ve seen the same in the world move from 10G to 100G, there was a couple quarters of low revenue as people geared up to 100G and consume the 10G inventory.

And I think I mean it’s not made -- we still growing at this point of time since growing we have started the datacom or the backhaul point-to-point wireless. But it’s an industry that is here to last. It’s an industry that’s beyond the point of, or beyond the point of evaluation qualification. And with the time adjustment, I think we all will see, we see good progress in this technology.

Jorge Rivas - Craig-Hallum Capital Group

Thanks for the clarification. And then wondering about your outlook on the RF business, are you going to stick to your just above 3 million for the year? It seems like you guys are going to easily going to pass it by a mile?

Avi Katz

Well, I want to be cautious about it. Listen, we, I think, couple of months ago, we advised that we expect this year to about double the revenue at the RF last year, which was about $1.7 million. I think we’re very bullish about this number. I don’t think we’re going to miss this guidance at all. That being said again please bear in mind the following; it’s a brand new industry, E-Band installation are literally taking off the ground this year, a lot of them are done in Europe and Europe as you know summer time is vacation time, maybe still down by seasonal effects, like any other new install base we have to be totally careful about fluctuation based on the inventory adjustment (inaudible).

So while we see it going very strong this year, I don’t want to go super optimistic and over the numbers we’ve guided. Obviously, there will be modification in the next few months, towards the next call, we will update all of you. At this point of time, I think it’s a good market, as we said. We see a nice revenue for this year. But we have to give the market forces to work and create the equilibrium as we move forward.

Jorge Rivas - Craig-Hallum Capital Group

Okay, fair enough. Thanks a lot guys that’s all from me.

Avi Katz

Thanks Jorge.

Operator

And we’ll take our final question from J. Mark of Twins Capital. Please go ahead.

J. Mark - Twin Capital

Thank you very much. Congratulations to all the management team on their better than expected quarter and your guidance for Q3. I just have a couple of questions, first can you go into more detail on the various revenue opportunities you see coming from the Tahoe RF acquisition? Specifically, going into the sort of minimal amount that you paid for, it sounds like you’re bringing a lot of leading edge technologies to the Company. Can you sort of give us some backdrop on this and tell us your thoughts on sort of the ROI going forward from the coming acquisition?

Avi Katz

Sure. Thanks for your supported comments and recognizing the value, may hopefully will, extract out of the acquisition power. I think that, see J, in addition to the following, this RF technology, as we all know, is really more of a master art, it’s not as a feel that people are teaching normally in schools a lot of experience and a long trial and error, (inaudible) if you will. GigOptix’s DNA is foremost RF and mix-signal in the arena of communications and, if you will, government and Mil/Aero areas.

Later on we launched our activities into the wireless by acquisition of the Endwave, few years ago -- three years ago, and acquiring licenses from IBM, but two years ago to augment a product portfolio that allow us to introduce ourselves as a major players in the high-frequency wireless in the E-Band. As we move forward, we always postulated that buying versus building, we always more effective and fastest in market is acquiring an asset rather development from ground zero.

Indeed in the case of our Tahoe RF, we have been in touch with a company like with many other companies in this industry for quite some time, probably three years. We’ve been in close relationship. We exchanged, over the last three years many discussion many ideas. And time came for Tahoe RF to a leadership to feel that they may be much more successful joining a company like GigOptix. So, the deal with Tahoe RF like with many other deals we’ve done is not based on the immediate payment for the acquisition [task] but rather the upside case of success.

Now, where do we see the three elements that I’d like to emphasize, I think some of them I mentioned in my prepared comments but let me summarize it for you. One of which is the LTE infrastructure demands now not only the E-Band, 70, 80, and 90 gigahertz band but also the 50 and 60 gigahertz bands, which is, I would say, not only the 70 to 80 gigahertz bands for the E-Band but also the 50 and 60 bands for the V-band. And there are many reasons for it --the former frequency of the E-Band is licensed the latter the V-band is not licensed. There are pros and cons we can talk about it. But bottom line, they are full complementary technologies at the company like GigOptix that wants to play a major role in providing amplifiers for the backhaul point-to-point wireless in support of the LTE infrastructure must have both of them. We feel more comfortable having folks from Tahoe RF, to augment the team as we launch in this endeavor.

Second thing is, there is a whole new programs in the industry pertaining to new players that are trying to wireless worldwide and going-in new ways of delivering communication to the end users. And those programs may demand even lower frequency bands, all the way down to 20 to 30 gigahertz. And GigOptix’s DNA does not include those levels of frequencies and again instead of developing in-house, we found a great team that has done this work for the last 15 years and all of which are very well experienced engineers, a lot of them came historically from IBM. And we found it very attractive for this thing to take over designs of more holistic and completed offering of values and bandwidths to support, again, those new worldwide wireless infrastructure with new players.

And so last thing is, as you can see in our PowerPoint presentation we adjusted that we have updated today, we continue to engage in high volumes of markets pertaining to datacenters, storage and consumer electronics. And we found the Tahoe RF to be fantastic team in terms of providing technologies in one of the most attractive market, which is advanced Global Navigation Satellite Systems, they’ve done a lot of work, they came with the good pool of qualified (inaudible) customers, and not only we acquired the engineering and the [IPS], but we acquired the relationship with lead players in the GPS world where we hope to pool those devices.

And as an example one of the analysts I just read recently suggested there is close to 50 million new GPS, new GNSS devices and systems that’s are being installed in the next two or three years. So I think this really the core of what we’ve done here. And like in the philosophy of GigOptix, we always want to engage in an industry that are probably two to three years from primetime, that develop a lead technology, establish a great partnership relationship with what we call the lighthouse customers, over the two or three leaders in the industry. And so as when the market open, we can just launch and enjoy the hockey-stick takeoff.

Just to summarize for you J, I suspect and I assume, more than suspect that we’ll begin to see the benefit of this low-cost acquisition within six to 12 months. And I think that when we’ll have the discussion in 12 months again I assume they’ll be able to report back to you on the direct revenue that came from this acquisition.

J. Mark - Twin Capital

Right, thank you, that’s exactly what I was looking for. The strategy is really coming together. So well done and again great job in the quarter. And thanks so much, that’s it from me.

Avi Katz

Thank you.

Operator

Thank you, ladies and gentlemen. That does conclude today’s question-and-answer session. And at this I’d like to turn the call back over to Jim Fanucchi for any additional or closing remarks. Please go ahead.

Jim Fanucchi

Thank you so much Li. And thanks to everybody for joining us today. We look forward to speaking with you again when we report our third quarter fiscal 2014 results later this year. Thank you and have a good day.

Operator

And that does conclude today’s conference. Thank you for your participation.

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Source: GigOptix's (GIG) CEO Avi Katz on Q2 2014 Results - Earnings Call Transcript
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