GigOptix's (GIG) CEO Avi Katz on Q4 2015 Results - Earnings Call Transcript

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GigOptix, Inc. (NYSEMKT:GIG)

Q4 2015 Earnings Conference Call

February 8, 2016 5:00 p.m. ET


Jim Fanucchi - Darrow Associates

Avi Katz - Chairman and CEO

Darren Ma - CFO


Wayne Loeb - Cowen & Co.

Doug Friedman - SterneAgee CRT

Krishna Shankar - Roth Capital

Dave Kang - B. Riley & Co.

Richard Shannon - Craig-Hallum Capital Group


Good afternoon and welcome to the GigOptix Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call.

As a reminder, this conference call is being recorded for replay purposes through February 22, 2016. In addition, the call is also being webcast and may be accessed in the Investors section of the GigOptix website.

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. Our speakers today are Dr. Avi Katz, Chairman and CEO, and Darren Ma, CFO of GigOptix.

After the market closed today, GigOptix issued a press release discussing its financial results for the fourth quarter and fiscal year 2015. The release is currently available in the Investors section of the Company's website.

Please be advised that matters discussed in this call contain forward-looking statements or projections regarding future results or events. We'd 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, February 8, 2016. GigOptix undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by 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 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. We have also posted an updated corporate presentation with the trended financial results through Q4 in the Investors section of our website.

I will now turn the call over to Avi.

Avi Katz

Thank you, Jim. Good afternoon and welcome everyone to our fourth quarter 2015 and the entire fiscal 2015 financial results conference call. Today I will review our recent performance and discuss our outlook for the first quarter of 2016, the entire fiscal year 2016, and other important events.

We're delighted to report today the results of quarter four 2015, which was yet another record quarter for GigOptix for both highest revenue and highest gross margins. The revenue for the quarter was $11.1 million, up 6% from the $10.4 million revenue in the previous quarter. Gross margin both non-GAAP and GAAP continued to improve, reaching record levels of 67% and 65%, up from 66% and 64%, respectively, in the previous quarter.

We're also proud to report the fantastic 2015 annual results. This past year was a record fiscal year in the history of the Company. Indeed 2015 was a transformational year for GigOptix, which marks an inflection point in the Company's growth and development.

In 2015 we significantly enhanced our technology and profits foundations, extended our customer base and our global market reach, and established solid grounds for continuous growth towards our $100 million revenue target, by the end of 2015 - I'm sorry, by the end of 2017, as we have previously communicated to you.

Most of all, we are proud to have delivered significant shareholder value of $0.19 non-GAAP earning per diluted share in 2015, more than quadrupling the $0.04 profitability in 2014. At the same time, the market cap of GigOptix increased to more than $140 million in early 2016, almost four times higher than the $38 million market cap of early January 2015. This increase is accompanied by substantial increase in the average daily volume trade, reaching now about 600,000 shares trades, up from about 65,000 shares a day a year ago.

In parallel to the financial results enhancement, we completed another successful secondary public offering of about $17 million in August 2015, resulting in significant increase of the institutional shareholders ownership. The money raised in this offering, like the early offering we executed, has been and will be used solely for strategic investments and acquisitions and not for working capital.

I'm also pleased to report that our analyst research coverage extended in 2015 to seven firms that follow now GigOptix, up from only three at the beginning of the year.

When I hosted our earning call exactly one year ago in February 2015, I was confident that 2015 would be an improvement inflection point in the history of the Company both from business and with meaningful increase of our active market segments, customer base extension, revenue growth, and increased shareholder value. I guided that 2015 would be year of continuous growth from 2014.

We started 2015 forecasting annual revenue increase of 13% to reach $37.5 million, up from $32.9 million in 2014. We projected the non-GAAP gross margin will be in line to 2014 at around 60% and the annual adjusted EBITDA growth of 25% to about $5.1 million from $4 million in 2014. As a result of our expectation at the time, we projected the overall non-GAAP profitability earnings per share to be about $0.07 in 2015, up from $0.04 in 2014.

While we had come off very strong 2014 and projected very optimistic outlook for 2015, as I've just recapped, we are delighted that we have delivered much better 2015 annual results than our original expectations. Our 2015 revenues came in at $40.4 million, up 23% from 2014 revenue, and almost doubling our regional annual growth guidance. Our annual non-GAAP gross margin came in at 65%, up 4 percent points from 2014 and above our guidance. Our EBITDA came at $10.1 million, up from 2-1/2 times -- up more than 2-1/2 times than the $4 million in 2014. And finally, our non-GAAP diluted earnings per share profitability increased to $0.19, up more than 4 times to the $0.04 number of 2014.

Indeed 2015 was a proof of the successful strategy of our Company. In eight years, all bootstrap, driven by the hard work of the team, combining internal development of innovative products, further bolstered by bullish strategic moves such as licensing of technologies like we have done in licensing the wireless E-band technologies from IBM in 2012.

Spinning out futuristic technologies to generate more values from joint ventures, like we have done in establishing BrPhotonics in Brazil in 2014, minor investments in promising partners like we have just done with analog in - Anagog in Israel, and continuous acquisition of strong technology companies, to careful market segment penetration and establishing new verticals, like we have done by acquiring Terasquare in Korea in late 2015, to generate our GigOptix Terasquare Korea entity's subsidiary in Seoul.

I could not be more proud of accomplishment of GigOptix this past year, and want to personally thank the GigOptix family members for their hard work and dedication and the entire team of our stakeholders for support and trust.

Now as we move toward the next year, we project 2016 to continue being an exciting year of solid growth. We currently expect it to be the fourth consecutive year of double-digit revenue growth, with an initial revenue projection of $46 million for the year, representing about 14% annual growth, comprising the linear stable quarter-over-quarter growth like we've done in 2015. We will strive to hold our quarterly non-GAAP gross margin to at least 66%, which will allow us to slightly increase our capital expenditure to proportionately support the revenue growth we expect next year.

We plan our P&L to ensure that we can translate our growing opportunities into another year of profitability, which in turn should also deliver meaningful shareholder value.

Now in change from our previous conference call formats and to allow more time for Q&A for many of the new analysts that are now following GigOptix, I want to turn the call over to Darren at this point so he may provide a complete review of the fourth quarter and fiscal 2015 financial result. I will then come back to review the product development, market progress, overall business and outlook, as well as make some forward-looking comments to set the stage for how we see 2016 unveiling.

So, Darren, please go ahead.

Darren Ma

Thank you, Avi. Good afternoon everyone. Here's a summary of our Q4 2015 and full year 2015 financial results.

Revenue in the fourth quarter of 2015 was a record $11.1 million, approximately 4% higher than the most recent guidance we gave in the October call. This revenue is up 6% from the third quarter of 2015 and also represents a 23% increase from the fourth quarter a year ago. The improvement was primarily driven by the continued strength in our high-speed communications business.

On a percentage basis, our high-speed communications revenue this quarter accounted for 69% of our total revenue, with industrial revenue accounting for the remaining 31%.

Full year 2015 revenue was $40.4 million, up 23% from fiscal year 2014 revenue of $32.9 million, reflecting double-digit growth in both of our high-speed communications and industrial product lines. I should also point out that full year 2015 revenue was up 8% from the midpoint of our initial guidance -- annual guidance of $37.5 million provided in February 2015.

Quarter four 2015 non-GAAP gross margin was a record 67%, up 1 percentage point from the prior quarter and up approximately 5 percentage points from the 62% gross margin in the fourth quarter a year ago. The improvement was driven by higher-margin product mix and operational efficiencies. We currently believe that this level of quarterly gross margin will continue through 2016.

Gross profit dollars were also a record at $7.4 million in the fourth quarter and $26.3 million for the full year 2015. Full year non-GAAP gross margin was a record 65%, up from 61% in 2014. Non-GAAP operating expenses in the fourth quarter of 2015 were $5.1 million, up from $4.5 million last quarter and up from $4.7 million in the fourth quarter a year ago. The increase was primarily driven by the $0.4 million of GigOptix Terasquare Korea, or GTK, recurring operating expenses. Please be advised that following normal seasonal trends in our business, the first quarter operating expenses are expected to be higher due to higher payroll taxes, normal annual audit fees and trade show expenses, for a total increase of about $400,000 above Q4, which will taper down in subsequent quarters.

In addition, as a result of our significant market cap increase in 2015, which more than tripled over the last year, the Company must meet Sarbanes-Oxley compliance requirements this year, which dictates additional recurring quarterly operating expenses of about $100,000. As a result of these items, we expect total operating expenses in Q1 to be up approximately $0.5 million.

Q4 2015 non-GAAP net income was $2.2 million or $0.05 per diluted share, and represents the seventh straight quarter of non-GAAP net income. This compares with non-GAAP net income of $2.3 million or $0.06 per diluted share in the third quarter of 2015 and non-GAAP net income of $0.09 million or $0.03 per diluted share in the fourth quarter a year ago.

In quarter four 2015, we delivered $0.05 diluted earnings per share, which includes the $0.4 million of reoccurring GTK expenses and the full quarter impact of the approximately 10.6 million share count increase resulting from the public offering completed in Q3 2015.

On a GAAP basis, quarter four net income was $0.3 million or $0.01 per diluted share. This compares with GAAP net income of $1 million or $0.03 per diluted share in the prior quarter and a GAAP net loss of $1.1 million or a loss of $0.03 per share in the fourth quarter a year ago. Quarter four 2015 GAAP net income included $0.5 million of GTK reoccurring operating expenses.

Adjusted EBITDA for the fourth quarter was approximately $2.9 million, completing 18 straight quarters of positive adjusted EBITDA. Included in the Q4 FY2015 adjusted EBITDA were $0.4 million of reoccurring GTK operating expenses. This compares with adjusted EBITDA of $1.6 million in Q4 of 2014 and adjusted EBITDA of $3 million in Q3 of 2015.

In 2015, we achieved revenue of $40.4 million, which was up 23% compared with the same period a year ago. In addition, we generated $7.3 million of non-GAAP net income in 2015 versus $1.2 million in 2014, yielding earnings per diluted share of $0.19 in 2015 compared to earnings per diluted share of $0.04 in the prior year.

Now turning to our balance sheet. Our cash and investment balance at the end of quarter 2015 was approximately $30.2 million, compared with $35 million at the end of Q3. The sequential decrease was driven by the $5.2 million paid to acquire Terasquare.

In addition, we also achieved free cash flow of $0.8 million during Q4. Free cash flow for full year 2015 was a positive $1.6 million compared to a free cash flow of negative $1.2 million for 2014.

Q4 2015 net inventory was approximately flat at $6.9 million from Q3. Despite higher shipments sequentially, we continue to maintain our inventory levels to support our ongoing revenue growth in new products, primarily in the high-speed communications business. Days sales outstanding in Q4 was 87 days, up from the 84 days in the prior quarter.

In Q4 2015 we spent approximately $0.7 million on CapEx. In Q1 we expect to maintain a similar level of CapEx investments, primarily from production assets to support the expected revenue growth from new products in our high-speed communications business.

Depreciation and amortization for quarter was approximately $0.9 million, similar to the previous quarter.

Now turning to the guidance. We currently believe the first quarter revenue will be approximately $11.1 million, in line with or slightly above the previous quarter, and up 23% from the same quarter last year. Based on our current visibility, we also believe that 2016 annual revenue will be approximately $46 million.

In summary, 2015 was a transformational year financial for GigOptix, where we achieved a record annual revenue, our first year of annual GAAP profitability, record annual non-GAAP net income, and record adjusted EBITDA. Full year 2015 non-GAAP earnings per share increased to $0.19 per diluted share from $0.04 per diluted share in 2014. Finally, we achieved record positive free cash flow in 2015.

With that, I'll turn the call back to Avi.

Avi Katz

Thank you, Darren, for a great report.

In the final section of my prepared remarks, I would like to assess the business trends that drove the record revenue in fourth quarter of 2015. This was [inaudible] shipments over the fourth quarter of 2014.

Sales from the high-speed communications business, which includes our telecom, datacom and RF wireless segments, was approximately $7.7 million or 69% of the fourth quarter revenue, up slightly from the prior quarter and up 28% from the same quarter a year ago. This continued improvement was primarily driven by another very strong quarter of growth in our datacom business related to our dominated market position in the 40-gigabit per second, 100-gigabit per second drivers and amplifiers for the transceivers and the active optical cables that populated the ever-growing mega-datacenter installed base driven by the major Web 2.0 OEMs such as Amazon, Google, Facebook, Microsoft and Cisco.

We are very pleased with the continuous 2015 annual growth of the datacenter-related business that we launched in 2011, which continued to almost double itself year over year. We are optimistic, based on the March research, customer feedback and our backlog as of today, that our datacenter-related business, both in the current 40-gigabit per second NRZ and the next-generation 100-gigabit per second NRZ devices, which will start to be deployed toward the late part of this year and more so into 2017, will continue to grow for the next few years.

From an end-user market perspective and as per market research, Web 2.0 scale operators report their fourth quarter of 2015 [inaudible] were in line with their initial expectations [ph]. One of the [inaudible] industry leaders such as Microsoft, Amazon and Facebook reported $4 billion [ph] of investment, which is ahead of the industry estimates and which is expected to continue and grow during the entire 2016.

Now since I've been asked recently about our views on the state of the technology pertaining to the datacenter connectivity, more so about the prospects of shifting from the current NRZ modulated base infrastructure to futuristic modulator schemes such as Band 4 [ph], I would like to take two minutes to share our thoughts.

There's no doubt that the current working generation in the datacenter is the 40-gigabit per second NRZ technology where GigOptix is the device sole merchant supplier, and which will continue to be the prime working horse during 2016 and 2017. We strongly believe and adopt [ph] all of our key customer views that this generation will start to taper out and slowly be replaced by the faster generation of the 100-gigabit per second NRZ devices during 2017.

We participated actively in the industry and standard communities' discussions that define the coming rollout and potential impacts of future generations such as Band 4 [ph] to replace the NRZ modulation technology. Like other in the industry, GigOptix believes that the dual wavelength Band 4 technology will become the protocol of choice for the future products beyond 200-gigabit per second generation.

However, if you'll note, there's a meaningful impact, if at all, on the datacenter configurations in the next two to three years as we believe, which will continue to use the NRZ modulation scheme for both 4D and 100-gigabit per second products. Once the future generation 100-gigabit per second NRZ product will become obsolete, if the industry starts to move to the 200-gigabit per second speeds and beyond, likely around 2018, Band 4 [ph] modulation will become the technology of choice and start to be deployed.

Based on this timeline and while seeing continued solid growth of the NRZ generation of products for the next few years, we have timed and launched the development of devices for these futuristic technologies, including but not limited to Band 4 [ph], while working closely with our Lighthouse customers to be sure that we support the specs and product release timeline. We are confident that our solid leadership as a provider of devices to the datacenters through the 40-gigabit per second and 100-gigabit per second NRZ generations position us as a futuristic winning supplier to our customers for the Band 4 [ph] generation when and when it will become relevant.

As we have continued to enhance our domination as a sole merchant provider of the 40-gigabit per second over the last few years and with the full integration of the Terasquare acquisition and the design of our newest CDR device being completed, accompanied by the completion of our internal DML device development program, we are now strongly positioned to further increase our cloud-based datacom-linked market share by delivering a complete 100-gigabit per second datacom solution for ethernet, fiber channel and [inaudible] datacenter connectivity.

In a few weeks we expect to publicly release a complete 100-gigabit per second chipset to provide one-stop shop solution for the short-range and long-range datacom links including CDR and DML devices. Those devices go alongside our long-time available industrial leading 100G big-sell [ph] TIA drivers which position GigOptix with the strongest next-generation data portfolio, including 40G and 100G, and for all required link lengths.

In quarter four, our telecom business continued to see solid demand for our long-haul 100-gigabit per second coherent linear driver, augmented with an installation of our 200-gigabit per second coherent linear drivers, which is becoming the prime long-haul telecom technology as the market transitions to this higher speed in 2016 and 2017. In parallel, we have completed the development of the next generation of 400-gigabit per second devices which are entering now the qualification stage, with a plan of full production release in 2017.

In addition to the long-haul application, the industry sees the initial rollout of the 100-gigabit per second metro infrastructure in 2016. In our view and based on the good number of new customers worldwide that have qualified our metro products and have taken the initial manufacturing devices now, the metro opportunity is poised to enhanced our telecom business in the second half of 2016 and beyond, which may be a very meaningful catalyst for our growth, more so as some market research suggest that the metro traffic will account for about 66% of the total IT telecom traffic by 2019.

The third piece of our high-speed communication business is evolving - is the evolving high-speed point-to-point deck haul even market. As I mentioned in prior calls, this infrastructure is moving to an advanced qualification stage, which creates optimism about the communication and commercialization potential for our E-band system such as system-in-a-package, transceivers, and so on. As we communicated before, our belief is that the small and micro-cell infrastructure will indeed begin to ramp later this year.

Turning to our second business of the industrial ASIC product line, the revenue in the fourth quarter continue to grow and reached $3.4 million, up 22% from the previous quarter. This ASIC line has already started to be transformed from the legacy backend-design focused products into the new generation of complete design of dedicated and customized advanced ASIC devices.

Our CMOS skills, alongside the other expertise and skill in the Company, such as high-speed and ultra-wide bandwidth device designs, provide the foundation for the meaningful enhancement of our product portfolio in 2016 and beyond. This year we will extend through organic development and strategic growth our vision of enabling the high-speed information streaming end-to-end of the network, leveraging on our strong position in the enterprise connectivity network segments of the core metro edge and access to reach into consumer connectivity segments.

With this vision in mind, we are well-positioned for this activity being a material-agnostic company and having a wealth of domain knowledge and expertise in various diversified disciplines that are required to design and productize the world-class devices for those applications. In 2016, we'll already enter [ph] and engage with customers in the consumer connectivity marketing, engaging a few of those opportunities in the fast-growing family of wireless and WiFi CMOS, low-power and ultra-wide bandwidth devices. Those customers are actively in the new emerging and large-term segments such as indoor tracking and navigation, advanced security applications, and Internet of Things.

A clear strategy to shift the focus from our CMOS legacy product into RF ASICs, as we have been discussing openly for the last year, while acquiring new customers and new technologies in various new market segments, showed already initial success in the second part of 2016 and is reflected by the 15% annual growth in the sales from the industrial ASIC product line over the previous year.

As we continuously explore ways to enhance our future product offering in the new markets we are engaging, last month we announced an investment of about $1.2 million -- an initial 10% stake in Anagog Ltd., an Israeli-based software developer of the world's largest crowd-sourced parking and traffic network.

For your information, Anagog has perfected mobility status algorithms aligned for advanced on-phone machine learning capabilities for the best use experience. Their platform delivers ultra-low battery consumption with a high level of privacy protection. With a rapidly growing mobility status software developer kits, or SDK, and their installed base all over the world, future application will include outdoor and indoor positioning navigation and cloud connectivity, with low power consumption, enabling big data analytics. We believe that those software-building blocks may be beneficial for some future advanced ASIC device GigOptix may develop.

So in summary, 2015 was indeed a fantastic year for GigOptix. And looking into 2016, not only do we see another exciting year of continuous growth for our current business and product development efforts, as we have just discussed, we also will enhance our business segment activities using our proven and successful business model, which will likely include alongside the initial development and internal growth new acquisitions and other strategic activities.

These important activities will ensure that GigOptix remain at the forefront as a key supplier in the rapidly-growing green cloud connectivity markets for the enterprise and the consumer network links.

Closing, I want to again thank all our stockholders and in particular our dedicated team at GigOptix who have done so much to get us where we are now, as well as our partners, suppliers, customers and investors, for the trust and support.

Let me now turn the call over to the operator to start the question-and-answer session. Operator, please go ahead.

Question-and-Answer Session


Thank you. [Operator Instructions]

And our first question comes from Wayne Loeb with Cowen & Co.

Wayne Loeb - Cowen & Co.

Hi. Congratulations on the great quarter and thanks for taking my question.

So, historically Q1 [inaudible] I think mostly to the telecom spending. So, could you give some granularity on Q1 on the -- what you see as the datacom versus telecom mix? And is the -- and can you talk about like how that is changing your seasonality going forward?

Avi Katz

Hi, Wayne. Thanks for the question and thanks for joining the call.

You know, we, yeah, stopped breaking the high-speed communication segment by datacom, telecom and wireless. But prudent to say that, with the guidance of $11.1 million for this quarter, we see -- and basically the history of the 2015 -- we see proportional growth on both segments, both the industrial ASIC and the high-speed connectivity, which basically overcount [ph] the, as you said, the normal seasonality slowdown in quite a while. We all know that the Lunar New Year, the Chinese New Year, budget adjustments and so forth, always impact the first quarter. We don't see the slowdown at this point in time. In fact, we are delighted to see four to six -- showing week six of this quarter, we see a very, very solid backlog which basically support this $11.1 million adjusted guidance.

I'm going to say that both telecom and datacom maintain the same growth level that we've seen over the last year.

Wayne Loeb - Cowen & Co.

Okay, thank you. And going forward for 2016, do you have some idea what you would see the datacom split between 40-gig and 100-gig for the year?

Avi Katz

So, you know, let me start by stating the obvious. Visibility in this industry is usually no more than quarter. If you are lucky, visibility in two quarters when major project are taking off. So we guide the rest of the year based on where we see as today, the backlog and the customer plans which we did discuss with all our customers over the last two months.

So we see, as I mentioned in my prepared comments, we see linear growth quarter over quarter exactly as we've done last year. In the datacom, as you mentioned, I think that the vast majority of the revenue this year will stay in the 40-gig. And if I look to the deployment in the mega-datacenters, again vast majority of the deployment continues to be the 40-gigabit per second, the NRZ technology.

It's prudent to believe that 100G is getting into evaluation, and as I mentioned earlier, we expect to see the 100GB coming more as important revenue generator in 2017.

Wayne Loeb - Cowen & Co.

Thank you. Just one quick balance sheet question. So the increase in goodwill and intangible assets, was that entirely due to the Terasquare acquisition or are there other items we should consider?

Darren Ma

Hi, Wayne. Yes, that's primarily driven by the Terasquare acquisition.

Wayne Loeb - Cowen & Co.

Thank you very much.

Avi Katz

Thank you, Wayne.


Thank you. Our next question comes from Doug Friedman with SterneAgee CRT.

Doug Friedman - SterneAgee CRT

Great. Thanks and congratulations guys on the strong results and thank you for taking my question.

When we look -- if I could focus again on just the full year guide, Avi, your $46 million number, well, that is 14% year on year, it would sort of require rather low growth rate, almost below seasonal, for the June and September, and almost a declining year-on-year growth rate as you would exit the year. Is there something in the business that is making you be at level of cautiousness as opposed to sort of the north of 20% year-on-year growth rate your business has been performing at for the last couple of quarters?

Avi Katz

Right. Thanks for the call -- for the questions, Doug, and again for joining us.

I think that the latter part of your statement reflects our position. We've all along been very, you know, very conservative and very bottom-line driven -- or bottom-up driven. We are trying to project as we see visibility. I'm delighted that quarter one is guided now to be flat or in line to slightly increase to quarter four, which is again countering the slow seasonality of quarter one. And overall, coming from $11.1 million quarter, the model that you're putting, which is linear quarterly growth quarter, will drive us into the $46 million, which I believe is a conservative model as we see it today.

Just to remind you, again if you recap my prepared comments, we rolled into 2016 guiding 12% growth from 32.9 in 2014 to 37.5 in 2015, and we continue to update and upgrade our forecast as the year unveiled. You know, we ended delivering twice as much growth as we actually projected in the beginning of the year, and we did it in a very consistent manner quarter over quarter.

There's nothing that I'm concerned about this year. In fact, I see our positioning stronging -- getting even stronger as it pertains to datacenters, the new rollout of the 40G datacenters, in particular in China. I see our rolling out a fantastic product line for the 100-gigabit per second datacenters, and I see a continuous domination it goes to high-speed telecom drivers moving into 200G, which would be the working horse this year. I also am very excited about the opportunities of growth with the new ASIC devices we are putting out in the market.

So I'm very optimistic about the year. I have no concern about a slowdown toward the end of the year. I think that, you know, based on where the market is today, the uncertainties in the macro economy, you know, variety of other elements we all see from the channel situation, from the oil price and what-have-you, the instability in the Middle East, we'd just like to be cautious, and nothing in our business that's driving me to believe that the growth will not be as strong as it did last year.

Doug Friedman - SterneAgee CRT

Great. Thanks for that detailed answer. If I could ask a little bit about your ability to deliver to the customer demand. We've heard some in the ecosystem talk of some supply constraints and their inability to ramp. Are you running to any challenges meeting your customer demand? And if you could give us some insights into how far out your backlog is presently stretching.

Avi Katz

Right. So let me take your question step by step. Again remember, GigOptix in general, in whole, is a fabless semiconductor company. So as long as I don't see limiting factors with foundries, we don't project and not predict any demand -- I'm sorry, any supply issues coming upon us. Our major foundries are among the largest in the world. We are using, mainly for silicon germanium, the global foundries, we're using, you know, we're using for CMOS places like UMC, Global Foundries, TSMC, you know, [inaudible] plays [ph] like Win [ph].

Again, you know, we are not probably as exposed to supply chain issues pertaining to supply chain manufacturers, the work we are doing in [inaudible] manufacturing, for multi-chip models both for fiber net [ph], and we have not seen any supply limits there. In fact, I will tell you that our key factor not to suffer to the -- any potential supply problem is our ability to project in order to forecast. If we can only meet the timelines and the lead time for the foundries, I think we will not see any supply problem as we've seen -- as we've not seen in the years before. So, you know, this is how we address the issue of demand and supply, again if we will face any difficulties because we as GigOptix have failed to plan correctly or failed to order materials correctly, which is not the case [inaudible].

No in regard to backlog, as I said, the visibility for orders in this industry is pretty limited, for both datacom and telecom, you know, if we can see, you know, three months ahead, I think we are lucky. Usually, and I mentioned this number before, when you enter into a new quarter, you enter with no more than 20% order to the target, your revenue that we are guiding the Street. The fact that we've been very accurate on guidance so far should be related to the fact that we have developed algorithms that allow us to look into the back-view [ph] mirror and behaviors and project the behaviors come forward [ph].

So in GigOptix's system of orders of materials is ordering to a forecast based on the, again, based on the behavior algorithms developed from the various customers. So, from ordering point of view, usually we enter the quarter with 20% backlog to delivery or to the goal. I'm pleased to tell you that, as I mentioned earlier, that today, in week six of this quarter, our backlog is solidly supporting the number again.

I hope --

Doug Friedman - SterneAgee CRT

Great. Thanks for taking -- yes, that was really helpful. Thank you.

Avi Katz

Thank you, Doug.


Thank you. Our next question comes from Krishna Shankar with Roth Capital.

Krishna Shankar - Roth Capital

Yes. Avi and Darren, congratulations on excellent 2015 results and the very good outlook.

As we look at 2016, Avi, you've laid out sort of a 14% base case revenue scenario, where could be upside to that set of baseline forecast you've now given for 2016? Could the upside be on the datacenter side or on the telecom or the industrial ASIC side, you think?

Avi Katz

I think that -- and again, thanks for a good question -- I think that, again, trying to be toward the conservative, looking to quarter one and quarter two -- I think, and again given the constraint that may be imposed upon us with the global macro economy and so forth, I think there's an upside in a couple of places. I think the upside has to do with the telecom side, mainly the metro deployments, the 100-gigabit per second metro is -- can be a strong supporter of faster growing in the telecom. I think it's clear to me that there are [ph] customers around the world that are engaging in the metro systems in 100-gigabit per second linear coherent.

I think another upside will be faster deployment of the 200-gigabit per second, linear coherent drivers for long-haul telecom. So GigOptix upside can also pertain to successful deployment and successful introduction of our new family of 100-gigabit per second and 200-gigabit per second TIAs.

I think that in datacom, we'll see how the market develop here, but 40G showed a very strong quarter one and quarter two from orders point of view, and I think that the 100, you know, we'll look for it to really see a good adoption of 100-gigabit per second chipsets for the active cables and transceivers, and again depends how fast this will move by the new datacenter installation.

And I think consumer electronics, or what I call now in my prepared comments, I call it the consumer connectivity or consumer cloud connectivity, is going to be a real opportunity here.

You know, a lot of people are talking here today about IoT or Internet of Things, but from GigOptix point of view, it really translates to a simple concept. If you have domain knowledge in running customized, dedicated CMOS devices, with RF interfaces, with the wide [inaudible] connectivity interface [inaudible] knowledge in ultra-wide bandwidths that we brought from the datacom world, so as I said, it can roll over expertise that we are bringing from the enterprise connectivity, the datacom, the telecom to datacom, ending into the connectivity of consumers, we basically have devices that can roll into a variety of applications, indoor and outdoor, pertaining to again the [inaudible] IoTs and the many, many of those that can be addressed, all the way from security, you know, devices, into indoor tracking, navigation, home gateway and so forth.

So I think that this phenomenon just in high level equation [ph], I think this phenomenon that we've seen with telecom and datacom are converging and meeting the metro, the said phenomena may drive the conversion of the, if you will, the datacom access into the consumer connectivity where those areas will overlap and the same disciplines will be deployed - that have been deployed into longer links will now be deployed into shorter links.

So, yes, I think that in the industrial ASICs or the consumer connectivity, we could see a lot of upside in that.

Krishna Shankar - Roth Capital

Great. Thank you. And then you, you know, laid out a case for a very long profitable cycle for the 40-gig datacenter deployment and 100-gig first ramping up with NRZ and then moving to Band 4 [ph] by late 2017, 2018. Are there any constraints near term in terms of widespread adoption of 100-gig? Is it, you know, the availability of 25-gig lasers or is it the Broadcom switch chipset which, you know, which Avago recently merged with Broadcom, so can you talk about some constraints which may slow down 100-gig deployment and keep 40-gig to mainstream for some time?

Avi Katz

Yeah. I think, Krishna, I think your point is [inaudible] to be honest, we are a very big beneficiary of -- beneficiaries of the slowdown in the 100G. I think the last year sort of proves people that, you know, datacom is a complex game. The parallel optics is very complex. It's not straightforward, even if you want to increase your capacity, you cannot just rush from one generation to the next generation, because it's a complex configuration, mainly limited by -- or mainly gated by the ability to release reliable and high-yield commercial optical devices more so the [inaudible]. And as well as, you know, the [inaudible] obviously, the system level.

So we are definitely taking -- we've definitely seen a great revenue on the 40G all way from 2011 till 2015. As I mentioned in my prepared comments, we almost seen a doubling of the volume shipment year over year in the last four years. I don't know - I cannot project today the volume shipment of 40G devices this year, but I can see a very strong demand for the first six months of this year, as we see it today.

And 100G is more complex, it's comprised of more devices in the engines, it -- it delivers more complex issues such as latency and cross-talk, as we bring four channels of 25 or 28-gigabit per second into the small form factor of the transceiver. I think people are addressing it. I think you're absolutely right saying that the introduction was much slower than project.

To be honest, like everything we're doing in GigOptix, we have a roadmap that allow us to drive revenue as we develop the next generation, as we jokingly say here, we always like to be eat while we are hunting. And our 100G system, as I said, the chipset is ready to roll and we are going to release in public in the next few weeks. Whenever it's come, we'll be ready for it.

I really don't believe, and as I said in the prepared comments, I don't believe that there's any reason to believe that the NRZ modulation will change -- will be changed or will decide, in lieu of a new futuristic modulation schemes counting. So for this year, to be honest, for 2017, I think between the 40 and 100G NRZ technologies, then datacenters will be covered.

Krishna Shankar - Roth Capital

Great. Thank you.


Thank you. [Operator Instructions]

We take our next question from Dave Kang with B. Riley.

Dave Kang - B. Riley & Co.

Thank you. Good afternoon. First of all, I do have some questions regarding numbers.

I may have missed it, but Darren, did you give out CapEx for fourth quarter and perhaps this year's budget?

Darren Ma

Yes. So on the CapEx front, in Q4 2015 we spent roughly $700,000 on it. And we expect that to be about the same for quarter one, similar level of investment.

Dave Kang - B. Riley & Co.

Okay. And then regarding OpEx, so, you said about half-million increase, you said -- I didn't get this $400,000 increase. Is that mainly Terasquare, or can you explain that $400,000 increase this quarter?

Darren Ma

Yes. So let me recap. So in quarter, we had, on a non-GAAP basis, we had $400,000 of incremental expenses related to Terasquare.

Dave Kang - B. Riley & Co.


Darren Ma

Going from quarter four to quarter one, we have our seasonal expenses such as higher payroll taxes, our normal annual audit fees, trade show expenses, and Sarbanes-Oxley, which will increase our OpEx by $500,000. But we expect the $400,000 of seasonal expenses to taper off in the following quarter.

Dave Kang - B. Riley & Co.

So there $400,000 pretty much go away in second quarter, or is it kind of slow taper, or any --

Darren Ma

That's correct. It'll ramp off completely in the --

Dave Kang - B. Riley & Co.

I see.

Darren Ma

-- in the following quarter, but, you know, with the only variable being tape-out expenses.

Dave Kang - B. Riley & Co.

Got it, got it. And then on -- I think somebody may have asked this already about the supply chain, and you've, Avi, you've talked about from your supply point of view. But what I wanted to know is, at least a couple of optical component vendors have talked about some kind of component bottlenecks. So, are you being impacted by the bottleneck, maybe it's not your products but maybe somebody else's product that's kind of holding everybody up? Are you impacted by that kind of bottleneck situation?

Avi Katz

Right. So I mean, Dave, it's a good point. I mean the only bottleneck where -- that may impact our business is pertaining to the deployment of the 100-gigabit per second NRZ devices to the datacenters. And as I mentioned, my point of view, saw the impact, because, I mean, as long as 100G is not deployed, I'm shipping 40G, so I'm okay with it.

Dave Kang - B. Riley & Co.

Right. Actually I was -- actually it was more on the telecom coherent side, I think that's where the bottleneck is, so, can you talk about the coherent market, the supply chain?

Avi Katz

Yeah. I mean I, again, from where I'm sitting today, I can report on a solid backlog. I mean, I don't see any slowdown on our coherent activity, not [inaudible].

Dave Kang - B. Riley & Co.

Got it. All right. Any update on the BrPhotonics as far as -- especially on the revenue contribution?

Avi Katz

Yeah, BrPhotonics continue to develop the products. I mean, you know, as you know, it has no impact on our P&L, no impact on our balance sheet. You know, [inaudible] when and wherever the -- when and if the [inaudible] the marketplace, as we'll, you know, enjoy sales commission. But otherwise, they are in the active [inaudible] mode of developing their devices, their products.

Dave Kang - B. Riley & Co.

Got it. And lastly, going back to the 100G coherent side. Is ALU still your major customer? Are there any other worthy [ph] customers to talk about?

Avi Katz

Yeah. For the telecom for the long-haul, ALU is our major customer, and this is one of the [inaudible] long-haul.

Dave Kang - B. Riley & Co.

Got it, got it. And basically, I mean, my understanding is the strength is really coming from both China and North America, and ALU has exposure to both regions, correct?

Avi Katz

You know, I mean, I think it's prudent to say that they can, you know, I've no visibility to my customers' customers. So I mean, I would like you and ask them [ph] that this is what's happening. But I've no -- I've nothing more concrete to add to your knowledge.

Dave Kang - B. Riley & Co.

Got it. All right, thank you.


Thank you. Our next question comes from Richard Shannon with Craig-Hallum.

Richard Shannon - Craig-Hallum Capital Group

Hi, Avi and Darren. Thanks for taking my questions.

I guess just probably a couple for me, maybe follow up on a couple of previous questions looking at the 2016 revenue bowl [ph] that you've put out there. Avi, is there any expectations built in either coming from Terasquare or market improvement in E-band or any [inaudible] or material amount of 100-gig datacom revenues in there? Can you, you know, help characterize what's assumed in that number, that $46 million number for this year please?

Avi Katz

Right. So the $46 million is basically a view of the world as we see it today from that bottoms-up analysis of our product [ph] lines and customer base. This includes all the parts that GigOptix have in our possession today, all the market segments and all the activities. So, because to your question, it also includes the number for initial introduction of the 100G CDR for example referring to the datacom market.

So the 40G -- I'm sorry -- the $46 million you see here and guiding for this year is what we see organic growth in the Company, 14% year over year, with the linear stable growth quarter over quarter, including all the product lines and all the ports that we are shipping to existing customers and customers that are engaged with us as of today. It does not include any upside that may come from new non-organic product lines or entities that we may acquire, neither from new customers that are not today on the funnel that we show [ph] here. And all of those are upside exactly like it was last year.

Richard Shannon - Craig-Hallum Capital Group

Okay, that's helpful to consider that. I guess my only other question is just to look at the landscape for 100-gig datacom. I guess a couple of questions inside [ph] here. Do you see the sourcing dynamics changing much as we get to 100-gig or 40-gig, the primary [inaudible] merchant supplier of these devices? Are you seeing competition emerge there? And are you seeing also any expectation of [inaudible] versus their ability to source internally?

Avi Katz

Thanks for the question. So, you know, [inaudible] 40G was an entry to the datacenters and there's not too many competition there and we enjoy a very good position. I think it's prudent to believe that for the 100G being an attractive, much larger market, we will see competition coming from a couple of other semiconductor device companies. I don't believe at this point of time that there will be sort of internal vertical integration competition with the modal builders because I think it's a very complex device and very complex to develop -- product to develop. And again I think what we win the markets with the 100G players is the -- really the, as usual, the cost performance benefits.

I think the biggest issue in the 100G, as I mentioned earlier, you're attacking [ph] four channels of 25 or 28-gigabit per second to a very small form factor. This creates a very dense RF environment, if you will. Crosstalk will be critical, latency will be critical, and most importantly, consumption numbers will be critical. So, you know, I believe that the winner of the 100G will be the guy that has the best performance of this small form factor.

I will just remind you, Richard, that 40G, we did not gain sole merchant provider position by coincidence. When we started this game in 2010, 2009, 2011, there were like four or five competitors. They -- all of them either disappeared or gobbled [ph] by vertical integrators.

So I think we'll see the same phenomenology. People not [inaudible] to the quality will disappear. Some of those guys will be gobbled and acquired by vertical integrators. And I think that the same dynamics will exist here for the next two or three years as 100G NRZ is becoming more and more critical to this industry.

Richard Shannon - Craig-Hallum Capital Group

Okay. Avi, appreciate all those detailed comments. I think that's all for me. Congratulations on a great 2015, and good start to this year as well. Thanks.

Avi Katz

Thanks a lot for your good comments. And again [inaudible] to all you folks [inaudible] supporting the Company through 2015 and into 2016. Again remember, our procedures and the way we forecast is trying to be conservative, trying to be in line with realities and convey to you exactly the visibility we have to the market. There's no hyping and no over-sales.


Thank you. It appears there are no further questions at this time. Mr. Fanucchi, I'd like to turn the conference back to you for any additional or closing remarks.

Jim Fanucchi

Great. Thank you, operator. And thanks to the many of you who joined our call today. We look forward to seeing a lot of you at investor events that'll happen throughout this quarter, and see everybody at the OFC Trade Show at the end of March at Anaheim.

Again, thank you for your participation, and have a good day.


This does conclude today's presentation. We thank you for your participation.

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