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Entropic Communications (NASDAQ:ENTR)

Q2 2012 Earnings Call

August 01, 2012 4:30 pm ET

Executives

Debra Hart - Director of Investor Relations

Patrick C. Henry - Chief Executive Officer, President and Director

David Lyle - Chief Financial Officer

Analysts

Ruben Roy - Mizuho Securities USA Inc., Research Division

Blayne Curtis - Barclays Capital, Research Division

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

William S. Harrison - Wunderlich Securities Inc., Research Division

Hamed Khorsand - BWS Financial Inc.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Aalok K. Shah - D.A. Davidson & Co.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Alex Gauna - JMP Securities LLC, Research Division

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Q2 2012 Entropic Communication Earnings Conference Call. My name is Claire, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Debbie Hart, Director, Investor Relations. Please proceed, ma'am.

Debra Hart

Thank you, Claire, and good afternoon, everyone. Participating in today's call are Patrick Henry, President and CEO; and Dave Lyle, our Chief Financial Officer. During the call, Patrick and Dave will present our quarter results and our short-term outlook, and then we'll open it up for questions.

Throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the 2 for the periods reported in the release. We've also posted a schedule on the Investor Section of our website, which includes our quarterly reconciliation of our GAAP to non-GAAP gross margins, operating expenses and taxes.

During this conference call, we will make forward-looking statements regarding future events and anticipated operating or financial results of the company. Actual events or results could differ materially from those projected in the forward-looking statements.

Please refer to our SEC filings, including our most recent 10-K and 10-Q, which contain important factors that could cause actual results to differ materially from the forward-looking statements. We undertake no obligation to revise or update publicly any forward-looking statement to reflect future events or circumstances.

And now, it's my pleasure to introduce Patrick Henry.

Patrick C. Henry

Thank you, Debbie, and thanks, everyone, for joining the call today. Entropic delivered record revenue of $83.1 million and better-than-expected EPS for the second quarter. We saw strengths from both our connectivity and set-top box SoC products, which led us to outperform our initial revenue targets. We also reported stronger earnings and gross margins due to mix, solid product cost improvements and expense discipline. All in all, we made significant progress towards our longer-term objectives.

I'll provide some highlights before turning the call over to Dave, who will review the Q2 numbers in more detail and provide guidance for the third quarter. Then I'll provide a bit more color on our business trends and opportunities before opening the call for your questions.

From an organizational standpoint, we recently made an addition to our executive team. I'm pleased to welcome Charlie Lesko, as our new Senior Vice President of Worldwide Sales. Charlie is a seasoned executive, with more than 20 years of experience in direct sales, management, operations, marketing and business development in the semiconductor industry. Charlie brings a strong combination of experience and energy that will be instrumental to Entropic's growth, as we continue to lead the charge toward ubiquitous connected home entertainment.

Moving to business highlights. The integration of set-top box SoC acquisition is going extremely well. With the addition of the set-top box SoC assets, we are now a broader-platform company that has world-class SoC products and technology optimized for the delivery of traditional pay-TV broadcast,, with support for IP video-streaming services today and into the future. We also recently announced a small technology acquisition of assets from PLX Technology. Through this transaction, we acquired PLX's digital channel stacking switch technology and corresponding assets. The acquired IPN assets are complementary to our current DBS ODU product portfolio and will strengthen our long-range strategic position in the satellite to IP market.

Satellite to IP is where satellite signals are converted to Internet protocol, or IP, for distribution over an IP network to any IP-enabled client device, making content available to more devices throughout the home. We believe home connectivity is a multi-year secular growth market, driven by several industry and service-provider trends.

First, there continues to be increases in HD attach rate and upgrades in multi-room DVR deployments.

Second, pay-TV operators are rolling out new services as they migrate to IP-based video delivery. And finally, the transition to digital signals internationally continues to open up new opportunities for us.

Now I'll turn the call over to Dave for a review of our second quarter results and our third quarter guidance. Dave?

David Lyle

Thanks, Patrick. Second quarter revenue was $83.1 million, a 41% sequential increase, primarily due to revenue contribution from the acquisition of the set-top box SoC business from Trident. Connectivity product revenue and set-top box SoC product revenue, each exceeded our original expectations by several million dollars. We beat our original revenue and non-GAAP EPS guidance by about $7 million and $0.05, respectively. We beat the revised revenue guidance provided in late June by over $1 million, which allowed for $0.01 of upside to the revised non-GAAP EPS guidance.

We saw sequential revenue growth from our connectivity products, mainly due to higher HD penetration rates and upgrades at our service provider end customers. The upside on our set-top box SoC products came from relief and supply chain constraints ahead of schedule.

We had 2 customers who accounted for greater than 10% of our revenue during the quarter, WNC at 24%; and Motorola at 11%. We supply WNC our MoCA and analog CSS products in support of the DIRECTV deployment. We supply Motorola our set-top box SoCs and MoCA products for cable and telco service providers.

Our non-GAAP gross margin in Q2 was 54%, above the high end of our original guidance of 52%. Excluded from Q2 non-GAAP gross margin was about $180,000 in stock-based compensation expense and $1.8 million of amortization of purchased intangibles.

Non-GAAP operating expense was better than expected at $35 million versus our previous guidance of $36 million, as a result of continued expense discipline.

Our Q2 ending worldwide headcount was 685 employees. Our non-GAAP operating expenses excluded $3.5 million of stock-based compensation expense, approximately $2.8 million of transaction and integration costs associated with the set-top box SoC acquisition and $700,000 of amortization of purchased intangibles.

Our non-GAAP operating margin came in at 12% in Q2. Net interest income was about $200,000 for the quarter. Our Q2 non-GAAP results exclude a charge of approximately $900,000 relating to the fair value accounting treatment associated with our investment in privately held Zenverge.

Our second quarter non-GAAP tax rate was 22%. This is higher than previous expectations of about 14%, due to an increase in our view of profitability for the remainder of the year versus prior expectations.

Our GAAP tax rate was 31%, which included a one-time benefit, due to a reversal of a reserve of uncertain tax positions during the quarter.

Non-GAAP net income was $7.8 million, resulting in earnings per share of $0.09, based on a fully diluted weighted-average share count of about 89.5 million shares. GAAP net income in the second quarter was about $200,000, and we were breakeven on a GAAP EPS basis.

With regard to our cash position, cash and investments was approximately $162 million at the end of Q2. During the quarter, we generated approximately $8.5 million of cash from our business operations. Please note that working capital accounts increased significantly, primarily due to the set-top box SoC asset acquisition.

DSOs for the second quarter were 45 days, and inventory turns were at about 4x.

Now I'd like to provide our guidance for the third quarter of 2012.

In Q3, we expect Entropic's top line revenue to be in the range of $88 million to $89 million, a 6% to 7% increase over Q2. We expect both connectivity and set-top box SoC products to contribute to our revenue growth. We continue to see strength at our service provider end customers, with solid HD attach rates and a growing upgrade market. This is increasing natural demand for our products, as well as driving inventory-replenishment activity, benefiting both our MoCA and DBS ODU product lines. We've made significant progress regarding supply chain constraints with our set-top box SoC business and believe all supply constraints will be resolved by the end of Q3.

Moving on to gross margin. We expect non-GAAP gross margin for Q3 to be about 51%. We will exclude from Q3 non-GAAP gross margin about $200,000 in stock-based compensation expense and $2.2 million in amortization of purchased intangibles.

We expect Q3 non-GAAP operating expense to be about $36 million, an increase over Q2, reflecting a full quarter of operating expense from the set-top box SoC business. If we had a full quarter of set-top box SoC operating expense reflected in Q2 instead of the 11-week stub period, Entropic's total operating expense for Q3 would be about flat.

Our non-GAAP operating expenses will exclude $3.9 million of stock-based compensation expense. Also excluded will be approximately $200,000 of transaction and integration costs and $800,000 of amortization of purchased intangibles associated with the set-top box SoC business acquisition.

We expect interest income to be about $200,000. Our Q3 non-GAAP results will exclude a charge of approximately $800,000 relating to the fair value accounting treatment associated with the investment in Zenverge.

Our non-GAAP tax rate in Q3 will be about 22% and our GAAP tax rate will be about 43%.

Non-GAAP net income in Q3 is expected to be about $7.3 million at the midpoint of guidance, resulting in earnings per share of about $0.08, based on a fully diluted weighted-average share count of about 90.5 million shares.

We expect our cash and investments balance at the end of the third quarter to be approximately $160 million or $1.77 per share.

We expect DSOs to be about 40 days, and we expect inventory turns to improve to about 4.5x in Q3.

Before I turn it back to Patrick, I wanted to make a few comments about our recent acquisitions.

On July 6, we closed the acquisition of digital CSS intellectual property and related technology from PLX. The purchased assets relate to the design and development of a digital channel stacking switch semiconductor technology for approximately $8 million. In addition to the asset purchase agreement, Entropic will pay a one-time $4 million licensing fee for intellectual property, which is related to the acquired assets.

About $7 million of the purchased price and license fee was paid in cash in July. The payment of the remaining purchase price is subject to the achievement of certain milestones. Additional quarterly amortization expense associated with purchase accounting will be about $200,000 depending on the final classification of the purchased assets. In connection with the asset purchase, Entropic also hired a small team of engineers from PLX.

With regard to our acquisition of the set-top box SoC business, which closed on April 12, 2012, we feel the integration is going well. And in fact, we are ahead of schedule on all key fronts. For financial modeling purposes, based on purchase accounting requirements, our GAAP financial statements will include about $12 million per year over the next several years of purchased intangibles related to the transaction.

Now I will turn it back to Patrick to discuss core trends and business updates across our connectivity and set-top box SoC products.

Patrick C. Henry

Thanks, Dave. As you can see, we're making significant progress on our strategy to transform the whole home-entertainment experience. As the only pure-play platform semiconductor company in the connected home-entertainment space, we are delivering a portfolio of connectivity and set-top box SoC solutions that reliably and securely deliver and process digital video and audio content into and throughout the connected home.

Looking at the IMS Research numbers, they estimate our total available market as growing from $2.3 billion in 2011 to $3.5 billion by 2015. Our strategy is to focus on the fastest-growing segments, which include connectivity and processing solutions that enable the transition from broadcast to IP video delivery and distribution.

We're squarely positioned to capture a large portion of this multibillion-dollar market, as we continue to innovate and offer differentiated solutions. As an example, our set-top box SoC solutions will be integrated into the Comcast Xfinity Reference Design Kit or RDK.

As a leading silicon vendor for Comcast RDK, we are preparing cable-ready silicon that allows developers and OEMs to rapidly bring the market new IP-client boxes capable of seamlessly connecting to a cloud-based DVR server or an advanced gateway in the home all over a MoCA home network.

We also announced that Comcast is using our set-top box SoC solutions in their newly launched Xfinity HD video-calling service. This new Skype over Xfinity calling service is being rolled out nationwide and is the latest example of how we are working with service providers to bring innovative new products to their subscribers.

Further, we see global service providers beginning to demand higher-performance, open-standards set-top boxes from traditional Linux devices to newer Android implementations in order to take advantage of the growing wave of consumer applications.

Our SoC platform, with its ARM-based core and advanced 3D graphics, enables pay-TV operators to merge traditional broadcast, video-on-demand and IP-based content, providing consumers a richer TV experience and enabling new revenue-generating opportunities for service providers.

Switching gears to our connectivity business. In Q2, we maintained our lead in MoCA 2.0 by announcing we were the first company to deliver MoCA 2 production silicon. MoCA 2 enables pay-TV operators to implement their next-generation architectures to deliver advanced services to their subscribers.

Finally, I'm pleased to announce in our DBS ODU product line, our powerful channel stacking switch technology has been tapped by Unitron Group for deployment by BSkyB. This is a further testament that our analog CSS technology remains the de facto standard for single-cable solutions that seamlessly deliver direct broadcast satellite to the home.

Recognized by third-party research firms as the global market-share leader in wired home-networking solutions and with our position as the #3 global and #2 U.S. market-share leader in set-top box SoC solutions, we are armed with a more diverse product portfolio and strengthen partnerships to deliver the highest-performing, most reliable home entertainment experience across device platforms.

That concludes our prepared remarks. And now, David and I'll be happy to take any of your questions.

Debra Hart

Claire, could you please provide the instructions for people to enter into the Q&A?

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Ruben Roy with Mizuho Securities.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Patrick, I had a question on just kind of near-term trends around the set-top box business. It sounds like the Q2 millions -- you mentioned a couple of million dollars of better-than-expected revenues out of the set-top box division, based on supply constraints easing a bit sooner. I'm wondering, as you look ahead into Q3, is that what's driving the strength there as well? Or are you seeing some of the new products start to kick in like in the DTAs?

Patrick C. Henry

Yes, Thanks, Ruben. In Q3, we are seeing a combination of both increase, easing a kind of a similar supply chain issues. And our operations team has just done a great job with our supply chain partners to fix some of the problems we inherited there. And we'll be completely out of the woods by the end of Q3. But we are starting to see the initial ramp in some of the new businesses, including the HD-DTAs, but we're still at an early stage of that ramp.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Great. And then Dave, on the gross margins, nice job there, too. Obviously, in Q2 and then with the guidance for Q3, you guys said that -- thought that, as you started to integrate set-top box, that we'd be looking at somewhere in the mid-40s to high-40s gross margins. With the 51% gross margin guidance, is this sort of where you're going to level off and stabilize? Or is there another leg-down potentially?

David Lyle

I think the gross margins, the -- we've already made some decent improvements on the gross margins. We still have a long way to go on the set-top box SoC side, as we had discussed in prior -- in our prior call. But in general, I think, instead of being kind of in this mid-40s to high-40s percent, is a -- for the whole company, we'll be probably on a higher end of that.

Ruben Roy - Mizuho Securities USA Inc., Research Division

Okay. And if I could just finish off, is the 20 -- I -- you mentioned that the 22% non-GAAP tax rate is based on your expectations for higher profitability for the year. So I guess that, that's going to follow through to year end and into next year.

David Lyle

Well, we're only -- the tax guidance that we give is something that we hope will end up being the tax rate for the entire year. So 22% is a good way to model it. We'll have to see how profitability goes through Q4 also and assuming we deliver on our Q3 number here.

Operator

Your next motion comes from the line of Blayne Curtis with Barclays.

Blayne Curtis - Barclays Capital, Research Division

Maybe if you could talk about -- I just want to follow up on the question that -- on the set-top box business. At this point, when you look at September, are you fully caught up there? Or is that business is going to still come back through the year, just from a supply perspective? And then, if you could just frame the magnitude there, is that the strongest segment for you into September, will be helpful?

Patrick C. Henry

Yes. So we're going to see growth in both connectivity and set-top box SoC in the third quarter. By the end of the quarter, we expect to be kind of fully caught up from a supply constraints standpoint, so we'll still have some headwinds based on supply in Q3, but Q4 will be kind of our first full quarter where we won't have those types of issues.

Blayne Curtis - Barclays Capital, Research Division

Got you. And then Patrick, on the connectivity side, you've had several good quarters in a row. Can you talk about what drove that business as far as is it cable or satellite? And you mentioned upgrades. But is it a particular operator that's pushing the promotions? Or is it more broad based for June and then into September as well?

Patrick C. Henry

Well, I mean, it's broad based. But I would say the biggest contributor, because they're biggest operator from our standpoint, is DIRECTV. And they've had a ratcheting up in HD attach rates. So that would be, I think, the biggest factor and just kind of reflected in WNC's numbers being so good as well. But we are just seeing, generally, HD gaining more traction in muti-room DVR with the launch of service by pretty much everybody in the U.S. market now, that being kind of the basis of competition in driving the overall market towards a multi-room DVR solution and the vast majority of that is based on MoCA-based solutions.

Blayne Curtis - Barclays Capital, Research Division

Got you, that's helpful. And I just want to clarify, Dave, you talked about the tax rate for the remainder of the year, but is that what continues in the next year as well? Because previously, I think you had talked about 15%?

David Lyle

No. I think that will continue for the remainder of this year. I think we'll have a little higher tax rate next year, probably in the mid-20 somewhere. But we'll have to see how that comes out.

Operator

Your next question comes from the line of Gary Mobley with Benchmark.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

On your connectivity business, I was hoping that maybe you can break out the ODU business versus MoCA. And I know you're not going to give me the exact revenue number or mix percent, but maybe you can give us some sense of the relative strength for each on a quarter-over-quarter basis.

Patrick C. Henry

Yes. We're not going to break things out at that level of granularity, but we saw growth in both businesses of both product lines in addition to the SoC business. So we're really seeing kind of strength across the board right now. Some of it is on the SoC side, easing the supply chain issues. But we are actually seeing strong demand for HD services and upgrades and muti-room DVR which, even in the SoC business, we see some benefits associated with that.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Sure. And I'm asking really more for your opinion on this topic, but I'm assuming DIRECTV has been promotional because of the DISH Network Hopper program. And just wondering, from your perspective, what do you -- how do you think about the longevity of the DIRECTV business remaining strong? And then secondarily, how do you think inventories are shaping up out there in the supply chain?

Patrick C. Henry

Yes. I think DIRECTV has continued to perform incredibly well over a period of years and any time somebody thinks that they're going to slow down, they seem to continue to do really well. So -- and that's in the North American market, where we anticipate they're even doing better than the Latin America market, where they're seeing really incredible subscriber growth. I think that, that's a longer-term opportunity for us as well. But I just think that there's a broad trend towards HDTV, towards DVR -- multi-room DVR. And even in the other service providers, we see strength in those businesses, not only in North America but globally, as you see them move towards more HD. From an inventory standpoint, because there was a ratcheting up in HD attach rates, a part of the upside in revenue we saw last quarter was to kind of fill that void, because you have a higher run rate and a higher inventory requirement to support that. I think we're probably in a more balanced sense now, so I think we're in pretty good shape there. But it was -- there were already very tight inventory positions and when the HD attach rate has ratcheted it up, even they just needed more supply in order to be able to fulfill those orders.

Gary W. Mobley - The Benchmark Company, LLC, Research Division

Okay. And Dave, correct me if I'm wrong, but the long-term gross margin target for Entropic, with Trident -- the Trident businesses, roughly 52%, plus or minus a couple of hundred basis points, and I think the expectation was for the achievement of that in the, let's call it, 2000 -- late 2013 and 2014 time frame and then as well accretion, perhaps, coming in the 2014 time frame. Any update on those target dates and target margin assumptions?

David Lyle

Yes. The long-term model for the company is 50% to 52% gross margins, 18% to 20% operating margins and that actually hasn't changed even with the acquisition of the set-top box SoC business. We also talked about the set-top box business itself -- set-top box SoC business itself being accretive by the end of 2013 -- Q4 '13, and then being as a corporation in a long-term model at the end of Q4 '14. And we haven't changed those goals. We have made some pretty good progress, actually, in a very short period of time and we're pretty excited about. But we still have a long way to go to achieve some of those targets, including gross margins on the set-top box SoC business which, as you know, Gary, is below our long-term target and we've got a lot of work to get it above -- or to get it to our long-term model. So there's still plenty of work to do, and we're not ready to change those targets.

Operator

Your next question comes from the line of Anthony Stoss with Craig-Hallum.

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Could you take us through your view on -- you talked about the integrations going faster, when might we see products that are fully integrated between the Trident and your MoCA side? Also Patrick, if you won't mind talking about kind of your expectations on international launches and a quickie Zenverge update and what kind of opportunities you see there?

Patrick C. Henry

Okay. Let's see if I got all 3 of those. Have we got all 3 of them? So on the set-top box SoC business, I mean, we're in the middle of our kind of 3-year strategic, long-range planning process right now, where we're defining a lot of new products. But even before having new products, we're seeing new bundling opportunities with our existing indisrete MoCA business with SoCs. And we're winning MoCA business that I think would have been a lot more difficult for us to win, if we didn't have both things under one roof. So I think there's -- our bundling strategy is working, and I think it's resonating with customers. And we're getting some new opportunities because they now see a clearer path to an integration roadmap, with both of our connectivity and our SoC solutions. So if you look at, from a product roadmap standpoint -- I mean, any time you're developing new products, it's a 12 to 18-month development cycle followed by a 12-plus-month design and cycle before you launch with pay-TV service providers. In fact, we'll see initial products that have SoCs with integrated MoCA late next year and revenue resulting from that by the latter part of 2014, with 2015 being the real ramp year associated with those products. But we've got a lot of things that we're already doing from a bundling standpoint that are benefiting us. With respect to Zenverge, things are going well. They're continuing to win business with us in a partnership mode, where opportunities -- where there's requirement for transcoding plus MoCA. Same way we're not doing an official bundling, but we're collaborating with them, with key customers and delivering systems solutions around that, in some cases, also partnering with Intel there as well, where Intel provides DOCSIS 3 solutions. So that partnership is going well. The joint development is going well and it's on track. So we feel good about that. From an international standpoint, can you repeat exactly what you're looking for there?

Anthony J. Stoss - Craig-Hallum Capital Group LLC, Research Division

Just kind of timing of international MoCA launches for you guys.

Patrick C. Henry

Yes. So in Europe, there is MoCA already being launched by UPC. I think there's a broader opportunity there with Liberty Global that we're pursuing, and all the other major cable operators in Europe are also looking at that as kind of a potential way to go. But nothing else turned out today from a European standpoint. Latin America, we're continue to make good progress from a design-end standpoint, and I think we'll see some launches later this year, really with the ramp in 2013. And we're even seeing some initial interest in mainland China from one large operator. Everybody is kind of watching that particular operator on what their plans are for using MoCA for home networking. So we are seeing some initial design-win traction outside the U.S. and all the key geographies that would be important from a MoCA standpoint.

Operator

Your next question comes from the line of Sandy Harrison with Wunderlich.

William S. Harrison - Wunderlich Securities Inc., Research Division

So a couple of quick questions. As far as -- it sounds like you're having some success, Patrick, per your last answer of the question about your bundling opportunity. Have you seen any change in sort of the competitive landscape or the landscape, given your success? Or in other words, are some of your partners becoming more acutely aware of the opportunity you guys are creating? Or how is that whole ecosystem sort of evolving now that you have this everything integrated and working together?

Patrick C. Henry

Yes. I mean, we still have a lot of work to do to kind of get things fully integrated, but we're definitely making good progress, 110 days and whatever it is. But a lot of the catalysts behind this acquisition is driven by OEM customers, as well as end customers pay-TV service providers. That makes a lot of sense that the strategy is resonating with them, because they were a key catalyst of making it happen. But I think, there's big opportunities there for us from a competitive landscape. It continues to be the usual suspects that are out there, Broadcom being the largest player in this market. We're running into them quite a bit. We occasionally run into STMicro, not as much so. They're pretty much out of the U.S. market, except for some legacy designs that they have. And other folks like Sigma are more in the IP-based set-top box market and not in traditional broadcast. Intel is in this market to some extent on the SoC side, but they have had much more success on the gateway and server side and in the DOCSIS gateway market, where we're partners with them. And then we continue to be partners with other folks that are out there, Qualcomm Atheros with their Wi-Fi solution, Marvell with their network processors and Wi-Fi. So we have definitely more of a collaborative set of partners out there, as opposed to kind of overlapping competitive solutions for the most part.

William S. Harrison - Wunderlich Securities Inc., Research Division

Got you. And then on the competitive situation with other technologies, seeing more and more articles talking about -- and industry reports talking about how MoCA continues to get traction in the U.S. and it's again more complementary with Wi-Fi than competing. What are some -- or how are some of the other technologies you're going against as you become more international, things like G.hn and HomePlug? How are you coming on to those in some of these newer markets, which you're moving into?

Patrick C. Henry

Yes. I mean, you really have 4 main kind of home-networking technologies that are out there. MoCA, the various power line technologies, where HomePlug AV is really the de facto industry standard, and G.hn is trying to break into that. You've got HomePNA, which really hasn't been adopted in any kind of real volume outside of the AT&T U-verse deployment. And then you've got Wi-Fi. And I think, Wi-Fi and MoCA appear to be the 2 kind of dominant standards that are out there, in wire-based network in MoCA and then in wireless network in Wi-Fi. We've always seen Wi-Fi as being more complementary than competitive with MoCA, where you have a good availability of in-home coax, which exists in the U.S. market, also in Latin and South America, also in Europe, also in China. I think MoCA's going to do very well over time, because it provides the most reliable, robust, secure way of delivering video throughout the house. But there are certain locations where you may want to have fixed devices that there isn't a coax connection there or where you have portable devices that need to be supported. And Wi-Fi is a very good solution for that, and Wi-Fi continues to get better and better with each successive generation. But it's a best-efforts technology, as opposed to a true quality of service technology that you get with MoCA.

William S. Harrison - Wunderlich Securities Inc., Research Division

And David, finally for you, gross margins are running nicely here, and I think somebody approached the question one way. Is there an event up and coming that we should be looking for that could cause this gross margin run that you've had here to decline? I mean, we've talked about some of the new products coming out with lower margins. Is there something we should be modeling or thinking about going forward to that? Or is this just things are running well until they don't?

David Lyle

Well, the set-top box SoC business, we had talked about before, has a lower gross margin profile and that's part of our really -- real hard work we have to go do. We've made great progress, but we have a lot of work to do over a long period of time to get within model. I think we're seeing some of that great progress already, but we still have work to do. The comment about -- historically, I said, "Hey, with the -- I think the low end of the gross margin range as a corporation will be in the mid-40 gross margin percent to the high 40s." We've kind of -- have a better view on that now that we've got this internally and have some time to work on it. And I think that's going to be -- have a floor more in the high 40s than it is going to be mid to high 40s.

Operator

Your next question comes from the line of Hamed Khorsand with BWS Financial.

Hamed Khorsand - BWS Financial Inc.

Just a couple of questions here. Talking about the shorter-time frame as far as the integration goes. Does that mean that your process of moving away from NXP is shortened as well?

Patrick C. Henry

Yes. On supply chain partners -- I mean, we have a 18-month deal with NXP with a 6-month tail associated with it. We've always had intent to move some of those products out of the NXP supply chain into a more traditional supply chain. There are some kind of legacy products that we'll continue to source through NXP over a longer period of time. So it's kind of a mix. But on the ones that we did have an intent to move out, our operations team has done a really good job getting the things done, both from a test engineering and product engineering standpoint, as well as with our traditional supply chain partners to kind of make those moves. In some cases, even ahead of schedule. So things are going very well there. But NXP, over the next year or 2, is going to continue to be a supply chain partner for us.

Hamed Khorsand - BWS Financial Inc.

Okay. And then on the STB side, are we -- the last call, you were talking about $30 million marks. Are we there yet? From a revenue standpoint?

Patrick C. Henry

No, we're not back to the historical run rate that, that business as at in 2011, which I think -- in 2011, on a quarterly basis, that was running kind of in the $30 million a quarter range. We're continuing to make progress. Now some of that $30 million is based on legacy products, which a little bit of that business will erode away. So even if we ramp new products, some of that will replace existing revenue streams. But we still feel very good that there's a massive growth opportunity, not only as we grow with the market but also have the opportunity to gain market share in the SoC business, which we're already starting to do.

Hamed Khorsand - BWS Financial Inc.

So how much longer do you think before you can get to that threshold?

Patrick C. Henry

Yes. We're really not going to forecast revenue beyond the current quarter, and we're really not going to break out revenue based on product lines going forward. We think this is a holistic business, where MoCA really sells into the same markets that the SoC business does.

Hamed Khorsand - BWS Financial Inc.

I'm not looking for guidance. I'm just trying to understand you. You're talking about -- on a verbal basis, you're saying you're seeing growth. And I'm just trying to understand where you stand with the integration process, right? I mean, if we acquired a business with $30 million historical run rate and you're talking revenue is doing well and you're gaining market share, I want to know where you stand from a historical standpoint of this acquisition.

Patrick C. Henry

We're not going to break out revenue by product line.

Operator

The next question comes from the line of Raji Gill with Needham & Company.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Yes. Just a clarification on -- you said the non-GAAP gross margin in second quarter was 54%? Now that's coming down to 51% above, kind of I guess what other people are expecting to. But why is it coming down from 54% to 51%? And why was that high -- so high in the second quarter?

David Lyle

Our set-top box SoC business is growing. And remember, it has a lower gross margin profile versus our connectivity business. So it would imply that it's going a little faster than the connectivity business.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

So then going into the third quarter, we're not going to see that continue? You're guiding now to 51% gross margin.

David Lyle

Q2 was our starting quarter. We acquired the assets just after the quarter closed of Q1, so in April. That's really the first quarter to look at it on a combined basis, and that's why we have the 54%, which is actually lower than the prior quarter, which was based on solely the connectivity business. Going into Q3 is where you'll see set-top box SoC revenue outpace the connectivity revenue. And that's the product line with the lower gross margins so naturally, you're going to see it come down.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Got it, got it. And within the set-top box business, are you starting to see a ramp of some of the new products at your -- at the big cable MSOs? How do you characterize the ramp of the new chips at the -- for the set-top box business? And along those lines, can you sort -- can you characterize what's going on the legacy part of the set-top box business that you acquired from Trident?

Patrick C. Henry

Yes. On the new products, kind of new design-win opportunities, we're seeing the initial ramp in the Skype box to Comcast, as well as HD-DTAs in the U.S. cable market but at a very early stage of that ramp. We're also seeing some of those new products in HD markets internationally, probably the biggest being in China. And then from a satellite standpoint, we really don't see anything new at this point. But we are winning designs that we think that will ramp into production, as we get into 2013 and '14. What's the second question?

Rajvindra S. Gill - Needham & Company, LLC, Research Division

I can see part of the business of Trident that -- which you acquired, there was a legacy...

Patrick C. Henry

Oh, the legacy business. Yes. I mean, the legacy business, these are design cycles that are very long but the product life cycles end up being very long as well. So although some of that legacy business has tailed off, it tails off at a relatively slow pace. So we think that the revenue ramps that we're getting from the new products will more than outpace anything that's happening there.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

The improvement on the set-top box gross margins, which historically have been 40%, roughly, which I guess, my guess now is probably around 31% or 32%. What are the major drivers? Is it going to be the ramp of these new products, which have higher ASPs? Are you done with -- or is there more room on a cost reduction side? Is there more room on the copper-to-gold transition that's going on in the process now? Can you describe some of the drivers on the set-top box gross margin, please?

Patrick C. Henry

Yes. So I mean, there's not a single thing. There's a number of different things. And historically, I mean, if you look at the financials that were released, the historicals on the set-top box business were more closer to like 30% from a historical standpoint prior to our acquisition. So we think we have a lot of room for improvement. Some of those things are tactically related to supply chain, different assembly things like gold versus copper, as you mentioned; looking at different packages; looking at test-time reductions; a variety of different things that we have that are initiatives on current products; supply chain rationalization, which historically had a non-traditional supply chain through NXP. So there are some things we're moving into our more traditional supply chain, which both improves cost structure and availability. And then new products, eventually, as we're designing new products, which will be further out, but we'll get incremental improvements there as well. In some cases, some of the historical chips that were taped out included a superset of functionality that you couldn't charge for in some markets, and that's been a little bit of a drain on gross margins as well. So it's not a single thing, and it's going to take some time to get all the benefits to this. But we feel like we've got multiple initiatives under way, and we're making great progress on all of them.

Rajvindra S. Gill - Needham & Company, LLC, Research Division

Good. And last question for me, just on the OpEx, do you -- how much of that OpEx is going to be? What's the OpEx run rate going forward? And how much do you think -- or what's the kind of the core connectivity OpEx level? Or are you giving any kind of margins on the core connectivity operating margins?

Patrick C. Henry

Yes. I think that one of the things that is a great natural fit about these 2 businesses in putting them together is, even though it's an asset purchase and you don't get the traditional synergies you get through cost reduction after the acquisition, there's great synergies in terms of the 2 product lines. In the DBS ODU market, through the acquisition of the PLX technology, we get great leverage from an R&D standpoint that we've acquired some things as opposed to spending the R&D dollars through OpEx. That's going to provide us tremendous amount of leverage in our DBS ODU product line, while still providing a very compelling roadmap longer term. In the MoCA business, we're doing a lot of things already, continuing to cost reduce MoCA 2. We don't think that there's a big market opportunity in the next few years for our MoCA 3 solution that we can actually leverage a lot of the R&D resources that we've had historically working on MoCA into our set-top box SoC business and put kind of more wood behind the arrow of set-top box SoC products without increasing OpEx. So we are not going to continue to increase headcount. But as you look at the company going forward, it's not like there's a dedicated set of resources on set-top and a dedicated set of resources on connectivity. I think more and more resources over time are going to be placed on combined solutions that deliver both connectivity and processing to the market.

Operator

Your next question comes from the line of Aalok Shah with D.A Davidson.

Aalok K. Shah - D.A. Davidson & Co.

We've seen -- just a couple of quick questions. We've seen Comcast and Verizon report their sub-add numbers, and they haven't been all that impressive. And I'm guessing that DIRECTV has been much stronger for you guys. But given the weak results, particularly on the FiOS side, are you guys worried that there might be some excess inventory out in the channel?

Patrick C. Henry

It's not a real concern. I mean, things have been incredibly lean, historically, within Verizon, within cable, even within DIRECTV. And I think the thing that we saw last quarter was a ratcheting up of HD attach rates. So a portion, I think, of what we shipped latter in the quarter was some channel fill but really to give them enough inventory to support the new levels of demand that are out there. But it's not a major concern that we have. With respect to kind of the Comcast results, I mean, there's kind of a level of detail behind just sub-adds related to how well they're doing with premium service customers and also with their initiatives around analog reclamation in which they use HD-DTAs for. And I think that -- those 2 trends, which are both positive for our SoC product line, will continue. So I think that there's still some good positive kind of news out there around the overall market. Even though if you look at kind of the macro part of it, it wasn't quite as good as you would think.

Aalok K. Shah - D.A. Davidson & Co.

Okay, okay. Fair enough. And then in terms of -- Patrick, in terms of -- you just mentioned that inventory was pretty lean from a historical standpoint. Is there anything that we should also keep in mind as a promotion activity on the cable -- U.S. cable MSO side starting to pick up a little bit? And have you noticed anything materially pickup on the MSO side from for MoCA?

Patrick C. Henry

I think U.S. cable is definitely aggressively promoting HD and multi-room DVR and then selectively, some of these new advanced services like the Skype box, they have gone nationwide with that. So I think that a lot of things they're doing with Xfinity, which is more kind of battling the over-the-top service providers, they're getting more aggressive on that front. I think Time Warner is doing some of those same things. So they're really using -- the U.S. cable operators are really using their infrastructure around video-on-demand servers to do a good job of making sure they combat kind of over-the-top threat. And that -- it's not only the video-on-demand services, it's the lock they have on some premium content, including sports. Same way with the DIRECTV, they're using a combination of their content play, as well as technology, to really continue to do well in the overall market.

Operator

Your next question comes from the line of Tore Svanberg with Stifel, Nicolaus.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

A few questions. First of all, in talking about the set-top box design wins, as you sort of catch up with the supply situation by Q4, are these new design wins going to start ramping then, so we actually see the set-top box business growing? Or will it sort of flatten out a little bit?

Patrick C. Henry

We think the overall market is growing at a pretty rapid clip, and we're going to grow both with the market and gain market share. So we don't expect Q4 to be kind of a flattening situation for us. We think we're going to continue to see growth over the longer term. But the caveat that with, historically, in both of our businesses is kind of in the connect home entertainment business generally. There is some seasonality in Q1 and Q2. But we'll have to see, it's pretty far out from where we sit today. So sometimes, historically, we've been able to outpace the seasonality with some secular growth opportunities. But it's a little too early to call that at this point. But generally, the market's growing, and we have an opportunity not only to grow with the market but to grow by gaining market share.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. And you talked about the set-top box gross margin, and you have a lot of different levers there. I mean, I would think a node shrink could be quite important. If that's the case, when should we expect a major node shrink in that part of the business?

Patrick C. Henry

We've already announced 2 new products in the set-top box SoC space that are on 40 nanometer. The stuff that we're shipping today in production is on 65 and 45. So we've already got a node shrink that's out there already in production, sampling with customers that we're winning designs on that we'll start shipping second half of this year. And then from a product development standpoint, we're continuing to work on new things that are even more advanced than that. So it's definitely a key initiative for us, and some of those things we'll see some fruit from those, even as early as kind of late this year and into 2013. And as far as the new products that even go to a more aggressive process technology node, we'll see those being sampled in the latter part of next year and ramping in 2014.

Tore Svanberg - Stifel, Nicolaus & Co., Inc., Research Division

Very good. Last question is on the PLX assets for the CSS business. I'm just trying to understand exactly what this is. I mean, is this IP for more content for you per system? Or are you actually adding some functionality with those assets?

Patrick C. Henry

Well, as you move from the traditional analog CSS to digital CSS, there are some modest performance improvements but you also get lower cost, lower power. We think that, that's a roadmap and a trend that's out there globally, where we're obviously going to pursue business with DIRECTV but also with other major pay-TV service providers over time, with that set of capabilities. So you've got both digital CSS, as well, as you move to a trend of video servers and clients, a move towards satellite to IP is the next step in that roadmap. So this set of assets that we bought, even though it's a technology tuck-under, is an important set of things as we go into 2014 and beyond to help extend our DBS ODU roadmap.

Operator

Your next question comes from the line of Alex Gauna with JMP Securities.

Alex Gauna - JMP Securities LLC, Research Division

Dave, I know you talked about reaching a higher floor on your gross margins in the high 40s. And just correct me if I'm wrong, I believe that is a non-GAAP target. We're kind of there. And does that mean that we're going to hit the lows here this September quarter? Or is there a little bit more on the gross margin front, maybe to absorb in December?

David Lyle

I -- we won't guide past this current quarter, but I think you're thinking about it the right way. As the set-top box SoC revenue outpaces connectivity, if that happens, and the potential for upsides on the set-top box SoC revenue are there over time, just given the sheer size of the market and the opportunities for growth there, that product line has a lower gross margin profile. And so that would drag the corporate gross margins down a little bit. Based on what we see today, that's where the comment around the high 40s comes into play. At some point we could hit that, assuming we hit our revenue growth targets on the set-top box SoC side.

Alex Gauna - JMP Securities LLC, Research Division

Okay. And then with regard to kind of growth targets, I know Patrick, that you mentioned expecting an up December would be normal seasonality. Can you give us an idea, with the new business line, what normal seasonality might be in terms of sequential growth without asking you to formally guide December yet?

Patrick C. Henry

Yes. We -- typically, in our connectivity business, Q3 is our strongest quarter and then Q4 is pretty close to it. We get seasonality in telco and cable in Q1 and a little bit of satellite in Q1. But the biggest part of the satellite seasonality is in Q2. And after the Super Bowl and -- then they start kind of ramping up with their summer promotions. So the set-top box SoCs are sold into those same pay-TV service providers. We do get some global diversification with the acquisition of set-top box business where historically, in connectivity, north of 90% of our business was in the U.S. Now it's like 75-25, U.S. versus outside the U.S. And I think as our international business for satellite and for SoC, as well as connectivity ramps over the next few years, it's probably going to be more like 60-40. So we'll still see some seasonality in the first part of the year. But if things continue along the lines of increased HD attach rates, increases in upgrades, deployment of HD services globally, it's possible that the secular growth in the business could outpace that seasonality. But it's a little too early to call right now what's going to happen first part of next year.

Alex Gauna - JMP Securities LLC, Research Division

Okay. One more quick one if I could. I know you mentioned new engagements in Latin America. Is DIRECTV a part of that mix for you? I would imagine that, that's a natural segue into that market. Have they begun any shipments based on either your MoCA or your channel stacking?

Patrick C. Henry

Yes. So I mean, DIRECTV Latin America, which includes PanAmSat, as well as SKY Brasil, are definitely key targets for us. But we haven't announced any design wins or deployments in those operators at this point.

Operator

Your last question comes from the line of Krishna Shankar with Roth Capital.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Just a clarification, Dave. So you said the high end of the 40 -- 44% to 48% range, is that for corporate gross margins? I mean, I'm a little confused about the 51% gross margin for Q2 and the high 40s comment that you had for gross margins. Can you just clarify that?

David Lyle

Yes, I can. The guidance for Q3 is 51% on a non-GAAP basis for gross margins. The commentary around how low can gross margins go over time past the Q3 period, given that set-top box SoC has a lower gross margin profile and could be -- could ramp faster than the connectivity business can grow, that could drive corporate gross margins down into the high 40s. But it's pretty early in the game. We'll have to see where that goes.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. And then Patrick, you talked about sort of a $2 billion end large market for set-top box plus connectivity solutions. Are you still sort of sticking to that number? And of that, what mix of that do you think is integrated set-top boxes versus non-integrated discrete SoCs?

Patrick C. Henry

Yes. All SoCs have a high level of integration, including the SoC's we have in our product portfolio. What that -- the historical trend in SoC between our SoC set-top box product line don't have from an integration standpoint is integrated MoCA. So that's kind of the next couple of things we want to integrate. In the U.S. market for HD boxes, and MoCA is the de facto industry standard and there's a portion of that where we have that business with -- sometimes we sit alongside ST, sometimes we sit alongside Broadcom and sometimes we sit alongside our own SoCs. So over time, we think that the trend in that business, because it is basically ubiquitous in the U.S. market, there's going to be a large portion of the market that doesn't need integrated solutions with MoCA. There's other parts of the global market, where they'll use MoCA but they may use Wi-Fi. They may use other connectivity solutions. In some cases, if the attach rate isn't really real high, it doesn't make sense to integrate in those cases. So I think it's going to be a mixed bag. It's hard to break out a specific number for you. But definitely, looking at the customers we have, both OEMs and end customers, there is some advantages of having a MoCA integration roadmap that we're now able to implement, now that we have our own SoC product line. And it's not just any SoC product line, it's one of just a couple of players that are out there that have the right features that support traditional broadcast and IP-based video delivery and have a strong incumbency position, where our SoC business is #2 in the U.S. and #3 globally.

Krishna Shankar - Roth Capital Partners, LLC, Research Division

Okay. And then with regards to MoCA 2.0, can you talk -- now that you're shipping production silicon, can you talk about the ramp rate for that and the deployment of broadband gateways and next-generation architecture by the cable MSOs?

Patrick C. Henry

I think we're still at the very early stage of MoCA 2. I mean, it will experience kind of initial ramp later this year where we'll start getting some more meaningful revenue. But I think even throughout 2013, that the majority of shipments will continue to be MoCA 1.1. But the key thing is most of the new design-win activity is really around MoCA 2. So if you don't have those solutions, you're not going to be able to win the new designs.

Debra Hart

Great. Well thank you, all, for joining us today [indiscernible]. If you have any follow-up questions, feel free to give me a call. Thank you, and have a good evening.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

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