GigPeak's (GIG) CEO Avi Katz on Q1 2016 Results - Earnings Call Transcript

| About: GigPeak, Inc. (GIG)

GigPeak Incorporated (NYSEMKT:GIG)

Q1 2016 Earnings Conference Call

April 18, 2016 05:00 PM ET

Executives

Jim Fanucchi - Darrow Associates

Avi Katz - Chairman, CEO and Founder

Darren Ma - VP and CFO

Analysts

Wayne Loeb - Cowen & Company

Richard Shannon - Craig-Hallum

Doug Friedman - Sterne, Agee

Krishna Shankar - ROTH Capital

Dave Kang - B. Riley

Operator

Good afternoon, ladies and gentlemen and welcome to the GigPeak First Quarter Fiscal Year 2016 Financial Results Conference Call. As a reminder, this conference is being recorded for replay purposes through May 02, 2016. In addition, the call is also being webcast and may be accessed in the Investors section of the GigPeak Web site.

At this time I’d 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 Darren Ma, CFO of GigPeak. After the market closed today, GigPeak issued a press release discussing its financial results for the first quarter of fiscal year 2016. The release is currently available in the Investors section of the Company’s Web site. As a reminder, the financial results for the first quarter of fiscal 2016 include only the performance of GigOptix, which change its name to GigPeak effective April 05, 2016 and do not include any financial results of Magnum Semiconductor as the acquisition closed on April of 5th after the close of the first quarter.

Please be advised that 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, April 18, 2016. GigPeak 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 Q1 in the Investors section of our Web site.

I will now turn the call over to Avi.

Avi Katz

Thank you, Jim. And welcome everyone to our first quarter 2016 financial results conference call. Today I will review our recent performance for GigOptix as a standalone company and discuss our outlook for GigPeak for the following quarter. Again as a reminder while the results of the first quarter pertains solely to the performance of GigOptix, the GigPeak outlook for the second quarter will include already the contribution from Magnum Semiconductor but only for the period post the closing of the acquisition which took place on April 5th.

Quarter one was an exceptional quarter, apt to conclude our exactly nine years of history of GigOptix going back to our inception in 2007. In close of the chapter, just before we completed the acquisition of Magnum Semiconductor and renamed the company as GigPeak as of April 05, 2016 we delivered yet again another quarter of historic record revenue, the eighth sequential quarter [indiscernible] highest ever gross margin, enhanced profitability and generated record free cash flow, I'm delighted to report on these results as we continue to enhance our financial performance in line with our last four year's trends. Those last years of continuous success gave us indeed a solid foundation upon which we can now launch the next chapter of the enterprise, the other acquisition of Magnum and the extension of our portfolio and market activities.

The revenue for the first quarter was $11.4 million up 3% from the $11.1 million revenue in the previous quarter and higher than our initial guidance for the quarter, despite the traditional seasonality slowdown that impact our served markets in the first annual quarters. Compared with the first quarter last year of $9.1 million revenue was up 25% continuing our strong annual sales growth of over 20% year-over-year since 2009. Gross margin both non-GAAP and GAAP continued to improve reaching record level of 69%, and 68% up from 67% and 65% respectively in the previous quarter. We also generated yet again record non-GAAP net income of $2.4 million or $0.05 per diluted share again ahead of our $0.04 per diluted share initial guidance for the quarter compared with $2.2 million or $0.05 per diluted share last quarter. And our adjusted EBITDA increased as well to a record of $3 million up from $2.9 million last quarter.

This quarter we also delivered exceptional all time high record free cash flow of $2.8 million which was 3.5 times higher to the entire free cash flow we've generated during the fiscal year 2015. This excellent set of financial results demonstrates the continued strength of our business model and core businesses and execution and a selected business growth we have experienced in all our served markets and product lines. While the demand for our product continues to increase we added a number of high quality distributors across the globe in the first quarter of 2016. We signed agreements with two of the largest distributors in the industry, UKC Holding in Japan and Avnet in China, both of those reputable distributors will allow GigPeak to expand our current market reach and will provide the growth of sales expertise which should enable us address new market segments and farther growth of revenues.

Now I'd like to use the reminder of Magnum to read for us many of the key topics I discussed in our call on April 4th, when we announced the acquisition of Magnum Semiconductor and the rebranding of the combined company as GigPeak. The acquisition which was closed on April 5th was valued at approximately $54 million. Next, based upon the average closing price of GigOptix stock for the trailing 30 days prior to the closing on April 5th we issued approximately 6.9 million shares to Magnum's shareholders and used the additional approximately $36.2 million in net cash most of which was used to repay Magnum's outstanding debt and other liabilities. The cash we used was a combination of cash on hand, occurrence of additional indebtedness through a low interest $50 million term loan and about $7.2 million of pool against our existing revolving line both provided by our long-term and valued partners Silicon Valley Bank.

In connection with the acquisition we rebranded GigOptix to GigPeak together represent the broadening scope and capabilities of our Company and to reflect our mission of focusing all design activities on applications that enable network and cloud connectivity, touching the cloud. Launching GigPeak represents the next stage of our growth, through acquisition we have significantly extended our financial profile of the open the major new growth market through a large product portfolio and expanded our customer base by adding several Tier 1 names to our already strong existing list. Coming out of this acquisition we expect to have two customers generating greater than 10% revenue this year Nokia, formerly Alcatel-Lucent, and Cisco. In addition we are excited by the meaningful growth of our targeted available market through this acquisition growing from about $1 billion to about $5 billion and many new opportunities this combination of companies offer to extend our business beyond our historical activities in the telecom and datacom enterprise network market. Into the enterprise broadcasting and farther into cloud connectivity, broadcasting net end, IoTs and consumer markets.

As I mentioned before from served markets perspective we are combining GigOptix's leading high end enterprise networking connectivity portfolio with Magnum's world-class expertise in video broadcasting, operation and analytics, creating GigPeak as a leading fabless IC and software solution enterprise has farther enhanced our vision of enabling high speed and high quality information streaming end-to-end over the network from the networks core to the end user. They substantiated our long-term plan of touching the clouds through the enterprise system and the end user applications. Together not only we will maintain domination position in the markets served by GigOptix but with the addition of Magnum’s portfolio we have put together a roadmap that will comprise the best of breeding technologies from both companies.

To be clear this synergy will not show up the full results overnight. Some of the new products we plan to bring to the market are just getting on the roadmap and will take about a year to bring out. Such as for example a potential advance, digital streaming for IoTs and home security applications, hence we will continue to grow our business and revenue this year from both companies existing products while we expect a new enhanced revenue from the synergized product portfolio to begin to show revenue worth in the middle of 2017 and beyond.

Let me share with you again our mission focus which is to develop and deliver products that enable lower power consumption, faster data connectivity and superior compression video of content quality all in order to enable more efficient use of the network infrastructure footprint and improve of its total cost of ownership. Through the integration of the two companies, products and technologies GigPeak has a unique capability to address both the speeds of data transmission and the quality of the compressed data streaming through the networks, driven mostly by the video contents which is a source of more than 75% of the network data streaming and the data center storage on today's networks.

From the end user’s perspective GigPeak addresses the two major bottlenecks in the network, the speed of the data transmission and the amount of bandwidth the data consumes within the network. Our solution would be designed to maintain and improve the network efficiency today and meet the further demand in the future. In general the industry sees the network infrastructure consolidation into two segments, the enterprise networking segment, mainly the datacom, telecom, and growth capping application, and the data center to the cloud connectivity applications which is emerging as the Web-com segment.

We've established GigPeak with a vision that our solution will be delivered and create advancements to both segments of the network infrastructure. Hence we are fast to provide faster and better compressed quality streaming from the network's core to the end user which enables a streaming of more channels per given cross sectional pipe delivering better utilization of the network footprint and thus enabling the reduction of the infrastructure and overall total cost of ownership. We believe that the product and technology portfolio we have put together through the merger provides mix of material agnostic integrated systems devices, multiple chip modules, system in a package, system on chip and various software application and products which will allow solid and unique toolbox to GigPeak to address successfully those opportunities I've just discussed and to come with a unique solution for the benefits of our customers.

Financially, we're in a process of fine tuning our operational model, post the acquisition and identifying the operating synergies in order to farther maximize our cost structure. Throughout 2016 we will collocate Magnum's imperious operations into the headquarters in San Jose. In addition we will consolidate our network, IT, financial and legal systems as well as the global operator which will further streamline our expenses. All of these actions will contribute to the overall cost reduction once they are completed in the next six to nine months. And with this, I would like to turn the call now to Darren for a review of our financial results and I'll be back with few summary comments, Darren please go ahead.

Darren Ma

Thank you, Avi. Good afternoon everyone. As a remainder the Q1 2016 financial results I am presenting today are for standalone GigOptix and do not include any contribution from the recently acquired Magnum Semiconductor.

Revenue on the first quarter of 2016 was a record $11.4 million higher than the guidance we've provided in our Q4 call despite the normal seasonal softness. Quarter 1 revenue was approximately 3% higher than the fourth quarter of 2015 and also represents a 25% increase from the first quarter a year ago. As noted in the press release, beginning with these Q1 2016 results, we’ll only be reporting one revenue number for the entire business. Non-GAAP gross margin was a record 69% up approximately 2 percentage points from the prior quarter and up approximately 7 percentage points from the 62% gross margin in the first quarter a year ago. The improvement was driven primarily by an increase in sales of higher margin products. Those profit dollars were also a record at $7.9 million for the first quarter. We expect gross margin to be approximately 70% in Q2.

Non-GAAP operating expenses in the first quarter of 2016 were $5.5 million up from $5.1 million last quarter and up from 4.9 million in the first quarter year ago. The sequential increase was primarily driven by the $0.4 million of normal seasonal expenses such as payroll taxes, normal annual audit fees and trade show expenses. Our initial expectations from operating expenses in Q2 are that they will be in the range of $7.7 million to $8.1 million. The increase from Q1 is primarily driven by the additional expenses related to the Magnum acquisition. Onetime expenses pertaining to the consolidation and collocation of the Magnum Mel Peters team into the GigOptix or GigPeak San Jose office, additional investments in tape outs related to new product introductions and Sarbanes-Oxley related compliance requirements that I discussed in our February call.

In that, we anticipated that over the course of the year operating expenses will fluctuate based on the timing of R&D investments for new product developments, as Avi mentioned earlier, now that the transaction has closed and we are starting to integrate the two companies, we continue to identify synergies that should further reduce our operating expenses in the second half of the year. We are currently expecting approximately $0.5 million in operating expense synergies in the second half of 2016 and an additional $0.5 million of annual synergies in 2017. Q1 2016 non-GAAP net income was a record $2.4 million or $0.05 per diluted share and represents the eighth straight quarter of non-GAAP net income. This compares with non-GAAP net income of $2.2 million or $0.04 per diluted share in the prior quarter and non-GAAP net income of $0.7 million or $0.02 per diluted share in the first quarter a year ago.

Please keep in mind that the 48.2 million diluted share count in Q1 does not include the full dilution of the approximately 1.8 million shares related to the PDSTI direct investment in GigOptix back in March nor the approximately 6.9 million shares related to the Magnum acquisition. We anticipate exiting Q2 with the fully diluted share account of approximately $58 million. On a GAAP basis quarter one net loss was approximately $50,000 or a net loss of $0.00 per diluted share. These Q1 results included approximately $800,000 of acquisition related operating expenses. This compares with GAAP net income of $0.3 million or $0.01 per diluted share in the prior quarter and a GAAP net loss of $0.06 million or a loss of $0.02 per share in the first quarter a year ago. Adjusted EBITDA for the first quarter was a record $3 million completing 19 straight quarters of positive adjusted EBITDA. This compares with adjusted EBITDA of $2.9 million in Q4 2015 and adjusted EBITDA of 1.4 million in Q1 2015.

Turning to our balance sheet, our cash and investment balance at the end of quarter one 2016 was approximately $36.8 million compared with 30.2 million at the end of Q4. The sequential increase was driven by the approximately $4.7 million of net cash direct investment from PDSTI and timing of cash payments from customers offset by the $1.2 million invested in Anagog in January. Most importantly we achieved record free cash flow of approximately $2.8 million during Q1 more than 3.5 times the free cash that was generated in the entire 2015. The quarter one cash balance does not reflect the approximately 36.2 million net cash used to purchase Magnum Semiconductor nor the $22.2 million of term and accounts receivable revolving debt line from Silicon Valley Bank. As a result, we’ll have interest expenses of approximately $270,000 in quarter two, which will be reflected below operating expenses in the income statement.

Q1 2016 inventory increased slightly to $7 million from $6.9 million in Q4. Days sales outstanding in Q1 was 73 days, down from the 87 days in the prior quarter. In 2016, we spent approximately $0.7 million on CapEx. After two quarters of our investments, we believe the CapEx in Q2 will be approximately $0.5 million. Depreciation and amortization for quarter one was approximately $960,000, similar to the previous quarter.

Now turning to the guidance, the initial Q2 2016 revenue outlook is expected to be approximately $15 million to $15.3 million, which will include about 10 weeks of sales from the recently closed acquisition of Magnum Semiconductor and is subject to potential revenue adjustments pertaining of purchase accounting rules. In summary, Q1 2016 was a record year where we achieved record quarterly revenue, non-GAAP gross margin, non-GAAP net income and adjusted EBITDA. These results demonstrate the continued strength of our financial model and provide the strong foundation as we look forward to integrate the recent acquisition of Magnum Semiconductor.

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

Avi Katz

Thanks Darren. And in summary, I’d like to reiterate few points that are important as we enter the new chapter of our enterprise and jointly support the continued growth of success of GigPeak to the next level. First, as we are recognizing GigPeak fourth acquisition to address a greater number of served markets and stream line our customer and markets program. We will report, our financial results beginning on January 1st on this year without the historical classification of High-Speed Communications and Industrial ASICs, as we did it in the previous years. We will look for one number as Darren has suggested. We are likely move later this year to structure the company along two business lines, the enterprise networking, which will comprise the telecom, datacom and broadcasting, and which will be named as GigOptix product line and the consumer and cloud connectivity, which will be named the GigCloud line. When we complete this realignment in the future, we will then start to report our financial according to those two business lines.

Second as we enter quarter two 2016 and look into our financial model for this quarter, we expect the initial revenue outlook for the quarter, which already takes into consideration a period of only about 10 weeks of Magnum Semiconductor revenue contribution since the acquisition was closed on April 05th and potential revenue adjustment pertaining to accounting practices of both the inherited deferred revenue and the purchase accounting rules to be in the range of $15 million to $15.3 million, this represents an increase of about 33% on the first quarter of 2016 and about 55% from the second quarter of second quarter of 2015. In addition, we will maintain our very strong gross margin and while we will see the initial increase in expense o this quarter due to the acquisition of Magnum as Darren described and the interest related expenses, we will expect to maintain our recent profitability levels. I also want to reiterate our optimism regarding the achieving of the annual financial guidance, we provided you in our call two weeks ago.

To summarize, I’m really excited about opportunity that already in front of us. With the broader product portfolio expand addressable market growing portfolio lead Tier 1 blue chip global customers many of reachable very express enthusiasm of this transaction and enhanced financial position we believe GigPeak will deliver even better financial results in the future, which in turn should translate into further enhancement of shareholder value. I also want to share with you that we have already made significant progress in the consolidation of the companies post the merger that took place only two weeks ago and our confident in our ability and plan to complete the consolidation by the end of this quarter.

Now in closing, I really want to again welcome our new GigPeak team members that came to us from Magnum and acknowledge the entire GigPeak team, who are working so hard those days through the initial stage of this consolidation. It’s also an opportunity in the right time to thank the GigOptix team for delivering exceptional quarter one results and generating excellent shareholder value through this last quarter and the entire last few years. In addition, I want to thank all our partners, suppliers, customers and investors for their continued support over the years and through this transition period. Now with this, I’d like to pass the call to the operator for the question-and-answer session. Please go ahead.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] And we'll go first to Wayne Loeb with Cowen & Company.

Wayne Loeb

First question would be, in Q2 what is the expected or the anticipated revenue contribution for Magnum? And what would be the proportion from let's say legacy GigOptix?

Avi Katz

We, as I just mentioned in my prepared comments we will not break for now the revenues that we concluded -- the restructuring and the consolidation of the companies. It's prudent to say that the lines that we are serving will continue to grow and it's -- once we conclude the entire analysis of the accounting percentage of the deferred revenues and the purchase accounting we'd be able to provide a more solid answer to your question.

Wayne Loeb

Could you talk a little bit about the seasonality of Magnum's revenues and how you model that throughout the year?

Avi Katz

So, we are still again looking into it today, we believe that Magnum products are in line with the seasonality of the GigOptix products for the period GigOptix products so GigPeak in general is serving today [indiscernible] enterprise side and usually quarter one is the low seasonal quarter, so I think this is the answer to this year.

Wayne Loeb

Final question, I know you are not breaking it out and what I'd like to acknowledge that is even further divided but could you give any color as far as the relative strength you're seeing in datacom versus telecom?

Avi Katz

So, as I have mentioned few weeks ago and in my last calls, I mean -- telecom has been a stable product for GigOptix and now GigPeak. We've seen a constant demand for the 100-gigabit per second in the long haul going to the 200-gigabit per second and further in the future to 400 gigabit per second. We are in the initial stages of the metro deployment of 100G which is not creating major revenue to anyone at this point in time. On the datacom again GigOptix has done a tremendous job on concluding the occurrence of [indiscernible] 40G line over the last few years and we continue to see a strong demand for this part. We start to see a demand for our 100-gigabit per second demand on the QSFP28 for evaluation in particular and most from that we have a total solution including the CDR devices from our recent acquisitions. So, in general our traditional enterprise related [indiscernible] products have shown continued strength this last quarter.

Operator

And we'll go next to Richard Shannon with Craig-Hallum.

Richard Shannon

I guess just maybe a couple of questions from me and maybe I'll follow-up from one from the last out here but I think in the last conference call you talked about the base, or prior GigOptix thinking about 14% annual revenue growth for the year, you obviously beat that by a little bit in the first quarter, is that a number you still support today if you're looking at it from that perspective or that number be somewhat higher?

Avi Katz

So we don't see any slowdown in our business, hence I'll stick to this number for now. And as I said in my answer to Wayne, once we put arms around the impacts of this transaction on the overall revenue coming from Magnum we'll be able to further sharpen this number but for now we're holding this number.

Richard Shannon

Maybe a quick question on the datacom side here, you mentioned briefly in your prepared comments about your Terasquare acquisition from last year, when do you expect to hear like internally see the fruit of that of those labors and when could that be revenue contributor, is that something that happens this year? And then also kind of following on within the datacom space, about your 100-gig product do you expect any revenues happening this year or is that more of a 2017 story?

Avi Katz

So, again from where I'm sitting today, we don't see any difference or any change from the [indiscernible] from we've discussed in February. So, to answer your two questions, number one on the CDR, the acquisition of Terasquare this product relates exactly and solely to the 100-gigabit per second, there's no demand for the CDR and dimensions on the 40-gigabit per second. So, the increase on revenue for this product line obviously goes hand-in-hand with the increased demand for the 100-gigabit per second and a QSFP28, so as we see it continue to be evaluated and getting into initial production stages later on this year we will be interesting in letting taking off towards the later part of this year and obviously we'll start to see or we expect to see truth I've said the overall 100G and activities we have here in last two year's impacting their revenue in a more significant manner in 2017.

And just to put everything in a right perspective, as we have launched and releasing the OFC two weeks ago, our 100-gigabits per second datacom solution comprise today the entire tool box that is required for both short reach and long reach QSFP28 namely VCSEL drivers and TIAs and DML drivers as well as CDRs for those activities and we have demonstrated them all few weeks ago. So we obviously are enjoying the good wave of success in the 49 gigabit per second and we are out there in the forefront and we're working with all our current customers in quantifying and bringing in our 100 gigabit per second so when the markets really start to take off we'll be there to enjoy the fruits of this transaction or this transition whenever it takes place.

Richard Shannon

Avi my last question is on OpEx I don't know either for you or Darren. You gave us some numbers about tier expectations for second quarter OpEx I think Darren you said 7.7 to 8.1 if I caught that correctly. Talking about some synergies to some extent in the second half of the year then flowing more into next year, but I think you're also alluding to potentially some investments in Magnum some of which could be fairly deeps of micron that I imagine could be, could spike, I don't want to use the word spike but could increase for a couple of quarters or something like that. How should we think about the, kind of the near term and maybe even medium term OpEx outlook here. Where could it go either in dollar or in revenue, percents of revenue terms as we look out a few quarters?

Avi Katz

So I will take the [indiscernible] and then obviously Darren could chime in, but here is how we think about it, we as I said in my prepared comments we're standing by the guidance we've given for the year, and when you look through it, you know Magnum is definitely a interesting new piece of the technology and product for GigOptix, but GigPeak now is addressing these five micron opportunity with both the CDR by the way the different sectors work and the devices are coming from Magnum. To this end the expenses for this year are actually have been modeled in the listing again in the annual guidance we gave and we, at this of point we guide for quarter two, trying to put our arms around exactly the work plan, the roadmaps, and we don't see any need to change the overall annual guidance for now, I mean if there be new things that will be added based on pulling in or pushing out in the roadmap different demand for software building blocks or different demand for the geometry that will be used in our next-gen of devices coming from what we call the MX line or the Magnum line, we'll definitely update you in the next call, but for now we're standing by the year operating expenses that we have guided there for the quarter and for the year.

Richard Shannon

Okay. And if I could just follow up lastly on Darren's commentary there, so talking about identified synergies for OpEx in the second half of I think a $0.5 million, is that per quarter or for the year, and the number's also, I'm sorry Darren.

Darren Ma

Go ahead Richard.

Richard Shannon

I'm sorry to interrupt you I didn't hear your answer Darren.

Darren Ma

I just said that $0.5 million was for the entire second half of this year.

Richard Shannon

Okay, and then the $0.5 million for 2017 that was over the entire year then.

Darren Ma

That's correct yes.

Operator

And we'll go next to Doug Friedman with Sterne.

Doug Friedman

Quick one I guess if you could maybe give us a little bit of a status on sort of visibility and what you're seeing in the optical networking markets, obvious there's been any change in lead times demand or any inflections that have been noted intra quarter?

Avi Katz

You know I'm grappling with the answer because again I think that GigOptix has a different angle but many other players that you may cover or other people are having interest we have a very loyal sort of customers that on the datacom that we've been serving for last two or three years or four years, and we've not seen a slowdown in demand from them as of today. So when I'm looking to this quarter you know you seem like that in quarter two and all that's quarter two, just putting it altogether, reflect continuous growth on the product lines all across. On the 100 gigabit I think it's again where I'm seeing it and the datacom is in a evaluation periods and work with customers that's trying to get to the market with their OEMs with 100 gigabit per second, on the QSFP28. And again this is preproduction so I mean if there's any impact there can be pulling in or pushing out of the evaluation which will impact the beginning of the production ramp up on this 100G datacom. So I don't see any slowdown as of today, on the datacom to be specific, on the telecom again our view our spectrum's pretty narrow because we're supplying mainly 100 gigabit or 200 gigabit per second, for the long haul and there I think the demand has been stable and [indiscernible] and we see the continuous single to low double-digit growth year-over-year so I don't see, as of today I don't see any slowdown in the enterprise network any longer.

Doug Friedman

We met at the Optical Networking Conference probably about a month ago, you guys had introduced several new products, can you give us maybe some sort of an update on which products there were of most interest to your customer base and which ones you're most excited about going forward?

Avi Katz

We had a great demo of the datacom in particular because I think that you know every this OFC, a lot of it was pretty hard on the where the data centers are going, the cloud-based datacenters and datacenters and I felt that our demonstration of the long reach and short reach 100 gigabit per second to 28 gigabits per second for the times forward was exciting and I think it's created a lot of interest on the many customers in the far east in particular. So I think that our ability to integrate the best indeed CDR have kept us from the acquisition of Terasquare maybe the lowest power consumption links the [indiscernible] in our competitors in the industry today. And our long history of delivering VCSEL drivers of TIA from the 40 gigabits I think gave us a good headway and a good head start if you will as we move forward.

So this is definitely was a very successful for us through those and later on. In fact we're traveling the world, we're constantly seeing in demonstrating those evaluation keys in the systems performance and functionality which we are obviously making a very optimistic and very happy about this product line. Even more exciting to us because, it's really incorporating a global activity our VCSEL drivers and TIAs are generated and the design in Zurich and actually Zurich and we you got Phoenix what called the Zurich our CDR all generated in our GigOptix-Terasquare Korea, and GTK and our DML drivers are generating 100 gigabit as for the San Jose so the overall group we're working across both boundaries across geographical business and putting together a really superior solution to the market.

I think the telecom as we take [indiscernible] which is a 46 and 64 gigabits for net application 100G was very exciting as well and again as we keep talking about six months for GigOptix we're probably the only company out there that have quality deliveries on both GPPO, closed box connection for a long haul telecom applications as well as S&P drivers for the metro. So we're all standing by here to see the metro market open for us and I think our products have already been qualified by a good number of customers. So I think again our ability to continue to drive the [indiscernible] to the high speed as we go to as the telecom really expending 100G and beyond through the metro applications and metro links will drive more success here. So really this is where we look-in today historical the product line of GigOptix which is comprising now good portion of the GigPeak enterprise networks looks to be continued growing and make us excited about continuously to invest in R&D because we see the fruits and the return on investment on both sided of the data [indiscernible].

Doug Friedman

Darren, if I could follow up with one quick one for you might have missed it if you offered what you would expect the interest cost in Q2 to be?

Darren Ma

Yes interest expense due to the loan we took out from Silicon Valley Bank both the term loan and the airline is approximately $270,000 for quarter two.

Operator

And we'll go next Krishna Shankar with ROTH Capital.

Krishna Shankar

So in the first quarter would you say that you saw equally balanced rent across data center, telecom and industrial ASIC or where any segments stronger than the other in terms of your revenues in the first quarter?

Avi Katz

Yes I think and again we prefer not to break it any further but all the product lines showed equal growth over this quarter.

Krishna Shankar

And then Avi, if you could talk a little more about the synergies with the Magnum Semiconductor acquisition, what product line or what sort of future growth opportunity do you see as holding the most promise in terms of integrating legacy GigOptix capabilities with what Magnum offers and so can you talk about their chips built for the traditional broadcast market and also the over the top, IT camera chips that you're working on?

Avi Katz

So we offer them the we have some [indiscernible] and obviously we want to [indiscernible] the number of the information that you're putting out for competitive reasons but we offered in our presentation as we posted in our Web site the fact the today a vast majority of the Magnum products are actually pertaining to be broadcasting to the head-end so it's all meeting the data center if you will where GigOptix provides today a product line that is as you know provide intra and inter data center connectivity and Magnum is coming out of the growth cutting side from the data center. Now the technologies again so from customer point of view there is very good synergy as it pertains data center OEMs. Going into technology again those are the activities we have in the data center in the data com where you provide the CDR hard drive and gig submicron geometries 40 nanometer, 28 nanometer, all that related on to lower geometries assumption cost and footprint.

From end user’s each point of view, we’ve seen in the previous years, we’ve seen the GigOptix industrial line taking more and more demonstrating more and more attraction in the optical ASIC applications, high frequency, high speed applications and Ultra Wide Bandwidth ASIC devices. Where were introduced to the market for a variety of applications such as indoor tracking, security applications, future royalty [indiscernible]. Obviously there when you bring data streaming capabilities and high quality compression capabilities alongside with the RS capabilities previously GigOptix becomes a solution that are offering now are much more sophisticated the Silicon system achieved it has both ability if you will to see through the video streaming and to talk if you will through the RFA Wi-Fi wireless in that capabilities. So this is how we see the portfolio growing and covering both the enterprise networking side of the telecom, datacom and the broadcasting as well as the cloud connectivity side of the IoTs end user consumers and home applications.

Krishna Shankar

And then just a follow-on question for Darren, any comments on gross margin trends in the second half of this year. Would you still expect them to be sort of in the 68% to 70% range going into the second half of this year?

Darren Ma

Yes. I think that’s a fair way to look at it, I think I mentioned there will be approximately 70% in Q2 and obviously we finished at 69% non-GAAP gross margin [indiscernible].

Operator

And we’ll go next to Dave Kang with B. Riley.

Dave Kang

Darren just a couple of clarifications, you said OpEx of 7.7 million to 8.1 million. Is that GAAP or non-GAAP?

Darren Ma

That is non-GAAP.

Dave Kang

Non-GAAP, got it, okay. And then also you said, I think you said second quarter of shares outstanding will be 58 million did I hear that correctly?

Darren Ma

Yes. 58 million shares outstanding for as our guidance for Q2.

Dave Kang

Got it, okay. And then Avi regarding your comments about 40 gig big and strong. But some of the optical modules guys are saying 40 gig is going down as the industry is moving to 100 gig. So wondering, you can just talk about why you’re still seeing strength in 40 gig, where as optical module guys are seeing 40 gig as slowing down?

Avi Katz

I hear your question, I mean, I can only reflect on [indiscernible] I mean I don’t see it is going down.

Dave Kang

Okay. And then just a few questions about Magnum, so it sounds like Cisco is their top customer how big of a customer is Cisco?

Avi Katz

We with Cisco are putting to the, I think is a large customer. I think it depends on year-by-year I have to look into the structure as it pertains to the combined revenue this year, but obviously we will file it and we’ll report it back once we have our arms around [indiscernible] to be larger than 10% in the [indiscernible].

Dave Kang

And then what about their past growth and then growth expectations going forward for Magnum’s business?

Avi Katz

So again, this depends a lot on where we expect both company businesses as we’re going to take the [indiscernible] business. But where we see definitely good opportunity with the existing market as it is, given the cost timing to digest this concession and go through the analysis. and I think that the numbers we have projected a couple of weeks ago after the acquisition give you this 2016 numbers and anything beyond it any other color beyond that we will give you as we move forward.

Dave Kang

And then just a couple of more if I could. Can you just talk about past, so I know you said you’re starting to invest in [indiscernible] product when can we expect [indiscernible] products. And then lastly if you can just give us an update on what’s going on with RF or for small cells?

Avi Katz

So we talked about in the past date we got [indiscernible] year roadmap and the data com data centers is 4G NOZ going strong this year. Opening the opportunity for 100 gigabit per second NOZ to come in and starting likely last year and beginning to take off, I don’t think again that is needed to cannibalize each other, I think it’s a couple of years, we’re going to follow then 100G will take over as more and more data center we build into [indiscernible] NOZ. And I think then after [indiscernible] will come in. We personally, we individually getting optics 100, and so the [indiscernible] would take place within [indiscernible] of 200 gigabit per second. From GigOptix point of view, I think I mentioned to you [indiscernible] on our road map for a long-term and we expect to release our platform sort of the devices portfolio this year.

Dave Kang

Is that going to cause R&D to kind of spike up a little bit or…?

Avi Katz

Yes, I mean the numbers we gave as of today those are number that we're seeing for the overall development of the -- in R&D and expense GigOptix.

Dave Kang

And then just my last question about the RFO for Small Cells?

Avi Katz

So, RFO in Small Cells I think it's an interesting question, there're a lot of the development in the wireless -- I mean the 4G, 4.5G, 5G, Small Cells running to peak of sales to support 5G, I think this is still in [indiscernible] as the industry did not lock on the standard neither for 4G and not the 5G I mean there's variety of frequency changes or frequency spectrum that people are talking about all the way from deploying of lower frequencies for the 5G all the way to e-band, so I think again we keep sitting here and watching on the sidelines what's happening with this industry as we evaluate our product with many customers, but going back to your question, the e-band for Small Cells is being evaluated and is continued to be evaluated for the traditional list customers and others that may have different applications available and we are all ready to see how the industry decision will go pertaining to moving into the 4.5 or into the 5G altogether.

Dave Kang

So, can we still expect sort of some e-band revenue next year or is there risk of being depth pushed out to 2018?

Avi Katz

We definitely expect the revenues starting next year and we did not saw it -- let's put it this way, our belief is the second [indiscernible] has not slowed down yet they are investment in development of the next gen or the content next gen e-band [indiscernible].

Dave Kang

And then and just one more question on linear drivers, so how big of a -- has linear caught up to a limited drivers yet or have they surpassed it, what's the status, or are they just beginning to ramp right now?

Avi Katz

I think for the 100G long haul linear is ahead of the limiting, I think within our let’s say it's a transition of [indiscernible] over last couple of years I think the industry is moving in general to linear altogether, it's more efficient dues of way of use of the network in general. So, limiting field there, historical and assistance are using limiting and it's still slowing down, but what we see taking off is the linear applications.

Operator

And ladies and gentlemen, this does conclude the Q&A portion of today's call. At this time I'd like to turn it back over to Jim Fanucchi for closing comments and remarks.

Jim Fanucchi

Okay, thank you everyone for joining us today. We look forward to seeing a lot of you at investor event that we have scheduled over the course of the June quarter and again look forward to speaking with you when we talk again to report our second quarter financial results in the July timeframe. Thank you and have a nice day.

Operator

And this does conclude today's call. We thank you everybody for your participation. You may now disconnect.

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