GigPeak, Inc. (NYSEMKT:GIG) Q2 2016 Earnings Conference Call July 25, 2016 5:00 PM ET
Jim Fanucchi - Darrow Associates
Avi Katz - Chairman and CEO
Darren Ma - CFO
Wayne Loeb - Cowen & Company
Steve Smigie - Raymond James
Tim Savageaux - Northland Capital Markets
Quinn Bolton - Needham & Company
Richard Shannon - Craig-Hallum
Good afternoon, and welcome to the GigPeak Second Quarter Fiscal Year 2016 Financial Results Conference Call. This conference call is being recorded for replay purposes through August 8, 2016. In addition, the call is also being webcast and may be accessed in Investors section of the Gig's Web site.
At this time I'd like to turn the call over to Mr. Jim Fanucchi of Darrow Associates. Please go ahead, sir.
Thank you, operator, and thanks to all of you for joining us today. 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 disclosing its financial results for the second quarter of fiscal year 2016. The release is currently available in the Investors section of the company's Web site.
Please be advised that the matters discussed in this call contain forward-looking statements or projections regarding future results or events, and we caution you that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially. Actual results may differ materially from our statements or projections. Additional risks, uncertainties and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the Securities and Exchange Commission.
Forward-looking statements are based on the company's beliefs as of today, Monday, July 25, 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 Q2 in the Investors section of our Web site.
And I will now turn the call over to Avi.
Thank you Jim, and welcome everyone to our second quarter 2016 financial results conference call. Today, I will review our recent quarter performance and discuss our outlook for the third quarter of 2016.
As a reminder, the result of the second quarter includes approximately 11 weeks of financial results of Magnum Semiconductor, which we acquired on April 5. The result of the first quarter of 2016 and the second quarter of 2016 only refer to the former GigOptix performance prior to the acquisition of Magnum and establishment of GigPeak.
The second quarter was an exceptional quarter as we exceeded our initial revenue guidance and delivered the increased profitability, all enabled by swift integration and consolidation of Magnum into GigPeak within this last quarter and continuous excellence in performance and our operational execution.
We delivered another quarter of record revenue, highest ever non-GAAP gross margin, and record non-GAAP net income and adjusted EBITDA. To summarize the quarter, revenue in the second quarter increased for the twelfth consecutive quarter and came in in record of $15.4 million, up 35% from the previous quarter and 56% above the second quarter of 2015.
Gross margin continued to increase with non-GAAP gross margin increased to a record high of 71%, the highest ever in the company's history. This is up from 69% in the last quarter and 66% in the first quarter of 2015. A favorable mix of our high-margin products comprising the new Broadcast MX product line and the other GigPeak highest margin products contributed to the continuous margin improvement.
Our non-GAAP net income reached record level of $2.6 million. When factoring the higher share count this quarter due to our acquisition and funding strategic activities, this translates to $0.05 earning per diluted share. This compares with net income of $2.4 million and $0.05 per diluted share last quarter.
Our adjusted EBITDA of $3.9 million was also an all-time record, which significantly exceeded by about 30%, the $3 million of adjusted EBITDA we generated in the previous quarter. It's clear that this excellent financial results continue to demonstrate the success of our historical business strategy that combines organic growth with targeted multiple strategic acquisition. This approach further substantiates our solid financial foundations as we drive the business towards continuous future growth during the quarters to come.
During the June quarter, in addition to the completion of the Magnum acquisition in the early part of the quarter and the company's excellent operational execution, we also completed in June a very successful oversubscribed public offering of common stocks that generated net proceeds to the company of approximately $25 million in order to further strengthen our financial position. It should be noted that most of the shares issued at this funding were purchased by brand new institutional investors.
As we have discussed before, the primary purpose of debt [ph] financing was to strengthen our balance sheet for potential further acquisitions that -- delivered strategic growth and may include acquisitions of critical technologies and scalable businesses. While the timing of any acquisition is uncertain, we intend to continue maintaining our focus on multiple global attractive acquisition targets exactly as we have done and demonstrated in the past, and more so through the acquisition of Terasquare in late-2015 and Magnum this quarter.
I would like now to move to discuss our business and marketing development. We continue to develop GigPeak to address a greater number of cloud connectivity served markets and streamline our customer and go-to-market programs. Please be reminded that GigPeak's stated focus mission is to enable high-speed and high-quality information streaming over the network end-to-end from the core of the network to the end-user. Hence we focus our resources on development and delivery of semiconductor products that enable lower power consumption, faster data connectivity, and superior video content quality streaming and broadcasting in every compressed bitrates. This strategy is deployed in order to enable a more efficient use of the network infrastructure footprint, package a higher number of channels into the tighter [ph] cross section and improve the network total cost of ownership.
With our product portfolio today, GigPeak has the unique capability to address both the speed of data transmissions for all transmitting business served in the network, as well as the quality of the compressed data streaming through the network itself. The rapid growth in the streaming video content, which has accounted for more than 75% of today's network data streaming and data center content storage will continue to drive even further demand for our products and continuous growth of GigPeak's business.
When analyzing our revenue performance please be reminded that as we have discussed in our previous earning calls, since January 1, 2016, GigPeak reports only one revenue number for company, and don't breakout revenue by product lines. This is done for competitive reasons, and to secure our confidential agreement with our customers. Under our newly realigned business, as we have discussed earlier, we track now two general product line areas, which contributes as follows to the overall revenue. The first segment, which we address the Above the Cloud product segment generated roughly two-thirds of our last quarter's revenue.
The second segment, which we address as the Under the Cloud product segment generates roughly one-third of the previous quarter's revenue. The Above the Cloud product line segment includes all the high-speed and high-quality cloud enterprise connectivity products, namely the telecom core in metro markets, the data centers' communication markets, and the professional broadcast and video streaming products. The Below the Cloud segment includes the wireless access, backhaul, and 5G products, and the commercial and Mil/Aero ASIC products used at the end-user terminals, such as test of measurements, medical equipment, virtual and augmented reality systems, as well as in the Internet of Things.
Those applications that's comprised among other, high frequency ASICs, high-speed ASICs, and two ultra-high bandwidth ASICs serves the Below the Cloud applications to support faster and more ambiguous connectivity for consumers, enterprise, and the IoT users. I would like to offer now some commentary on the catalysts for growth in each of those market segments.
Within the HX line, which is our device for data center transceivers and active optical cables, including TIAs, virtual drivers, DML drivers, and CDR devices, we continue to exceed expectation, and perform solidly in shipping devices for all speeds and all distances of the network. We're excited to see the continuous growth demand for the 40-gigabits per second QSFP+ product generation, which has been and will stay the working horse for the industry during 2016, and through the 2017 year. As the sole merchant provider of those 40G devices, GigPeak obviously maintain a strong competitive advantage, and enjoy continuous revenue growth, driven by the strong demand generated by the mega data center installation of all the major Web 2.0 OEMs.
While the 40G NRZ continue to be the primary revenue growth driver over the last few years and through 2016 for our HX line, we've also experienced over the last couple of quarters initial demand for our 100-gigabit per second NRZ complete chipset for both the short-range applications with our VCSEL drivers, TIA, and CDRs, and for the long-range application with our DML drivers, TIA, and CDRs.
Based on our roadmap and the customers' feedback for our products, we believe that our 100-gigabit per second chipset line of products exhibits superior performance compared with the competition in the industry, mainly as it pertain to its low power consumption. Our 100-gigabit per second devices account for about 10% of our HX line revenue in the last quarter, where the devices are shipped now mainly for qualification purposes, and very early stage production at some of the pioneered defined applications.
We are confident that our 100-gigabit per second business will continue to grow over the next several years as the industry will start immigration from the 40-gig to the 100-gig energy technology generation, and thus we will maintain and grow our current meaningful market share at this continuously rapid growing data center connectivity market.
On the TIAs line which is our telecom business, we are delighted to eventually see the initial deployment of the 100-gigabit of second Linear Coherent for Metro applications which augments the shipment of our current generation of the 100-gigabit of second Linear Coherent for the long haul applications. We are all obviously pleased with this trend into the higher deployment volume and margin exhibited by the metro products which should delight the S&P technology where GIG TIA has a significant differentiation and excellent product performance.
Our MX line compiled the newly acquired broadcast in IT video streaming product which delivered superior video quality compression in the lowest bitrates. As we focused our new MX targets to applications solely in the enterprise broadcasting customers, we have experienced a strong shipment performance through this quarter delivering high margin and continuous revenue growth. We strongly believe that the MX enterprise video broadcasting line or product is a natural expansion to our HX data center and connectivity product lines making our total product portfolio offering to the work to the zero data center OEM customers, reacher and more compelling. This and existing product also delivered meaningful and continuous revenue growth from cross-sell opportunities serving the ever growing cloud data center infrastructure installed base.
Our EX wireless access, backhaul, satellite and 5G devices as well as the CX chip for commercial and Mil/Aero enterprise solution and customer end-user terminals continue to exhibit growth in demand for the new and advanced released products. We are delighted to see the high level of interest of this new generation of high speed and high frequency AC products designed based on our existing technologies in the various product lines and big demanded by our commercial and Mil/Aero existing as well as new customers such as the individual and the valid industries. Cloud generated generic wireless and security products systems and IoT customers. We are confident that overtime our ongoing success with the later set of customers will support continuous growth of revenue and profitability as the potential volume for those deployments maybe very significant.
Now with this, I would like to turn the call to Darren for a review of our financial results and I'll get back to you later on with a few summary comments. Darren, please go ahead.
Thank you, Avi. Good afternoon everyone. I'm pleased to present the Q2 2016 financial results, which is our first quarter that includes the contribution from the former Magnum Semiconductor.
Revenue on the second quarter of 2016 was a record $15.4 million, and higher than the guidance range of $15 million to $15.3 million provided in our Q1 call. Quarter two revenue was approximately 35% higher than the first quarter of 2016 and also represents a 56% increase from the second quarter a year ago.
With the remainder of the income statement, I will start with GAAP and then move to the non-GAAP financial results. The most notable change between GAAP and non-GAAP will be an additional approximately $700,000 of expense related to the amortization of intangibles from the Magnum Semiconductor acquisition. Of this $700,000 there were about $600,000 of amortization of intangibles expense and cost of goods sold which is recurring quarterly for the next 7 years. In addition there is approximately $100,000 of recurring quarterly operating expenses over a shorter life span.
GAAP gross margin was 66%, down approximately two percentage points from the prior quarter and up approximately three percentage points from the 63% gross margin in the second quarter a year ago. As noted earlier, the ongoing GAAP gross margin will be impacted mainly by the $600,000 of the amortization of intangibles starting in Q2 2016.
GAAP operating expenses in the second quarter of 2016 were $9.7 million, up from $7.7 million last quarter and up from $5.7 million in the second quarter a year ago. The sequential increase was dominated by the additional payroll and other expenses associated with the Magnum acquisition, and it includes approximately $100,000 of recurring quarterly amortization intangibles expense mentioned previously. The increase from the same quarter a year ago was driven by approximately $470,000 of acquisition-related operating expenses and expenses from the Magnum and the Terasquare acquisition.
GAAP net income in Q2 was approximately $85,000 or net income of $0.06 per diluted share. This compares with the GAAP net loss of $50,000 or a net loss of $0.00 per share in the prior quarter and a GAAP net income of $0.5 million or net income of $0.02 per diluted share in the second quarter a year ago.
Non-GAAP gross margin was a record 71%, up approximately two percentage points from the prior quarter, and up approximately five percentage points from the 66% gross margin in the second quarter a year ago. The improvement was driven primarily by a favorable shift in product base and increase in sales of higher margin products. Gross profit dollars were also a record at $10.9 million for the second quarter. We expect gross margin to be approximately 70% in Q3.
Non-GAAP operating expenses in the second quarter were $7.9 million, up from $5.5 million last quarter, and up from $4.4 million in the second quarter a year ago. The sequential increase was primarily driven by the higher expenses associated with the additional headcount pertaining to the Magnum acquisition. Q3 non-GAAP operating expenses are expected to decline to a range of $7.7 to $7.9 million, even though Q3 will include a full quarter of expenses related to Magnum's payroll and operations as opposed to only 11 weeks in Q2.
As you can see, we are on track to achieve and exceed the approximately $0.5 million in operating expense synergies in the second half of 2016 as we discussed in our last conference call. We anticipate that over the course of the year, operating expenses may fluctuate based on the timing of R&D expenses, mainly tape-outs and licenses required for new product developments.
Q2 2016 non-GAAP net income was a record $2.6 million or net income of $0.05 per diluted share and represents the ninth straight quarter of non-GAAP net income. This compares with non-GAAP net income of $2.4 million or net income of $0.05 per diluted share in the prior quarter and non-GAAP net income of $2.1 million or net income of $0.06 per diluted share in the second quarter a year ago.
Keep in mind that this Q2 net income includes approximately $260,000 of interest expense for the term loan and line of credit that we set in place that partially support the Magnum acquisition. In addition, the EPS was calculated with a weighted average diluted share count of $57.7 million shares. This compares with $48.2 million shares in Q1 and $33.9 million shares for the same quarter a year ago. For Q3, when accounting for the full quarter of shares related to the June public offering, we anticipate exiting the quarter with a fully diluted share count of approximately 71 million shares.
Adjusted EBITDA for the second quarter was a record $3.9 million, completing 20 straight quarters of positive adjusted EBITDA. This compares with adjusted EBITDA of $3 million in Q1 2016 and $2.8 million in Q2 of 2015.
Now turning to our balance sheet; our cash and investments balance at the end of quarter two 2016 was approximately $45.8 million, compared with $36.8 million at the end of Q1. The sequential increase in cash was driven by three events. One, we had a cash inflow of approximately $22.1 million comprising $15 million of a five-year term loan and $7.1 million drawn out from the revolving line of credit. Two, $24.2 billion net cash inflow from the secondary public offering in June; and third, we used $37.2 million in cash with the acquisition of Magnum Semiconductor in early April.
Free cash flow was approximately negative $1.8 million during Q2. This compares to the positive free cash flow of $2.8 million and positive $1.1 million the same quarter a year ago. This negative cash flow in Q2 was driven primarily by our need to pay down acquisition-related costs post closing of the Magnum acquisition. We expect to resume positive free cash flow in the third quarter.
Q2 2016 inventory increased to $9.1 million from $7 million in Q1 primarily driven by the Magnum-related product inventory and inventory built to support the continuous growth of our Datacom products. They filled outstanding in Q2 of 84 days up from 73 days in the prior quarter. In Q2 2016 we spent approximately $550,000 on CapEx. We expect Q3 CapEx spending to be approximately $700,000.
Depreciation and amortization for Q2 was approximately $1.9 and $900,000 increase from the previous quarter driven primarily by the amortization of intangibles from the Magnum acquisition and to a lesser extent additional investments for software licenses. Now turning to our revenue guidance for Q3 2016 we expect to have another quarter of record revenue. We currently expect revenue to be in the range of $15.4 million to $15.6 million and about 50% growth over the third quarter of 2015.
In summary we achieved a record quarter where we achieved record quarterly revenue, non-GAAP gross margin, non-GAAP net income and adjusted EBITDA during our first quarter as an integrated company.
With that, I will turn the call back to Avi.
Thank you, Darren. As you can see we are vastly different company today than a year ago. In the last year we have completed two major acquisitions, continue to make strategic investments and completed two common stock public offerings. The footprint of our company's customer base and product portfolio are significantly larger today and have a much stronger financial profile with about 50% high revenue today, gross margin that exceeded 70% and much higher profitability levels including generation of about $4 million of quarterly adjusted EBITDA.
With this financials and business stronger foundation that we have developed over the last few years, we continue to see promising long term growth opportunities as our expanded product portfolio continue to win applications and penetrate new and larger Cloud connectivity-related emerging markets.
Hence we are constantly focusing on developing new products that serve emerging market segments and enable further improvement of the profit margins while in parallel to what we are doing here we are also reviewing our investments in some of the legacy lower margin products. As Darren mentioned the current expectations of Q3 is for revenue in the range of $15.4 million to $15.6 million which would be another record for the company's revenue and would represent an increase of about 50% from the same quarter a year ago. In addition, we will maintain our very strong gross margins and as he projected to lower operational expenses level comparing to the second quarter we expect to improve our recent profitability levels. We are also reaffirming our previously announced annual revenue guidance of about $58 million for 2016.
Finally, I would like to make comments in response to few investor questions which we have received lately about our current analyst coverage. Due to recent restructuring of one firm and analyst departures and changes of few other firms that had to historically followed the GigPeak and its predecessor GigOptix, some of those firms have ceased providing coverage to the company.
However, I am pleased to report that two new firms started coverage of GigPeak in the last few weeks. Hence we maintain now a list of five high quality firms that provide research coverage on the company. With a high number of changes happening in the last few months this may have caused some short term fluctuations with a consensus model that are available to many investors on the various online financial platforms that aggregate and disseminate consensus numbers. We expect the data to correct itself after the updating research notes that would be published post this call.
I would like to summarize now this call by expressing my sincere excitement about the expectations from the future and the exceptional results we have achieved in this second quarter and stigma optimism again about opportunities that are ahead of this quarter in the balance of 2016 and the years to come, as we continue to focus our activities solely at the rapidly-growing cloud connectivity market applications.
In closing, I really want to again acknowledge and express my gratitude to the entire GigPeak team who is continuously working hard and delivering excellent results during this last quarter, and specially for supporting of the sizable consolidation of our latest acquisition. In addition, I obviously want to thank our partners, suppliers, customers, and investors for their continued support in the past and through this last quarter's transitional life period.
And with this I'd like to pass the call to the operator for question-and-answer session. Please go ahead.
Thank you. [Operator Instructions] And we go first to Wayne Loeb with Cowen & Company.
Hello. Thank you for taking my question, and congratulations on the quarter. First thing that's jumped out at me; the 71% gross margin is a record for GIG, it's very impressive. What I'm trying to get at is how sustainable do you think that 71% gross margin is for the next few quarters? How do you see the product mix changing in the second half? And can you give us some help on how we should think about the gross margins overall going forward?
Hi, there. Wayne, thanks for attending this call. Indeed 71% is a highest record for the company, and we are very proud and pleased with this number. It's obviously a contribution of a very favorable product mix, with the high margins mainly coming from applications in the Above the Cloud, data centers, and Broadcast business, as well as Under the Cloud with end-user terminal connectivity. We, as I think we guided, we expect to see a similar level of margin in the range of 70% there for quarter three, and we will have to maintain our project for quarter four to a later date, when we have a better visibility into the mix in quarter four.
Obviously, for company like GigPeak, which have five different product lines, the ability to deliver high margin depends solely on our ability to balance the mix of the products, invest and harvest according to the different product margins, and being able to be innovative and drive to the market continuous high-margin products to sustain this high level.
As I mentioned in my prepared comments, we continuously evaluate and revisit our legacy products and our investment in products that are becoming highly commoditized and dropping the margins. GigPeak being a small-scale company which grows very fast as we've seen over the last few years has to be very cognizant of maintaining high margins to allow us to continue investment in a meaningful scale in innovation.
If you look to our numbers, as we have published today, you can see that we continue to invest in R&D in the range of 30% to 35%. I think our last quarter was 35% investment in R&D. And we definitely consider the innovation to be our growth engine catalyst, and hence we had to drive high margin to enable this investment.
So again, just to summarize, for quarter three, I think that Darren guided you at around 70% margin, and please bear with us to a later date when we can project a more clear and more granular way quarter four.
So a follow-up on that question, I believe that Magnum is the highest gross margin business in GigPeak. If you exclude Magnum, could you say if you saw any expansion in gross margins for the remaining part of GigPeak?
Well, without referring to your postulation on which product line is highest margin, I will tell we have a few product lines that [technical difficulty] high margin. And we don't break revenue or profitability by product lines for, as I said, for competitive reasons and for NDA purposes, but I will tell you that the product line that we are developing over the last few years, including Magnum, but not explicitly Magnum are carrying very high margins comparing to the corporate effort.
One more, if I may, can you talk about the relative strength of 40-gig active optical cables? For the entire year of your Datacom business, how much do you expect it to be 100-gig-driven, and also then, when do you see in time the crossover for you between 40-gig and 100-gig revenue in the data center?
Well, you know, I mean I think that -- let's start generically, Wayne. I think the juries [ph] are still out, and there's a lot of controversy on between various analysts, including people that are on the call today in market studies pertaining to when the crossover point is going to happen.
I personally don't believe 100G's event is meaningful event for this year, and I think that 40G as I clearly stated in my open comments, has been fast-growing market in the last four years, and it's continue to grow fast this year and in 2017. I don't believe there is any slow in 40G. And from GIG point of view, we don't see any slow neither on the volume nor on the overall revenue delivered this year comparing to last year.
Being said, we are very cognizant. We've been very cognizant over the last few years to the transition in some point of time in future from 40G NRZ to 100G NRZ containing the four-channel, the 25 or 28 gigabit per second, and maybe 12 channels and for larger bit rate -- I'm sorry, for larger bandwidth, as well as the following generation of the PAM4 for 200 gigabit per second and above. All those products are on our product roadmap. In fact, we would be the first competitor in the market per supply in the market to put out 100G big cell drivers and TIAs. We have the devices already in production with a number of customers for the last two years. We've completed the acquisition of Terasquare to allow augmentation of the CDR array to our product portfolio, and release the very successful DML devices to the market to address the 100G.
As I mentioned, again in my opening comments, we've seen about 10% of our revenue in the last couple of the quarter of the data center product coming out of the 100G. And we'll ship as much as needed. I can tell you that there is an ever-growing demand for 100G. At this point of time, we're shipping it for progressive qualification programs with a variety of customers, as well as for very specific for a 12-channel by 28 gigabit per second applications that are demanding early-stage deployment and cannot through the 40G.
So in summary, from the way we see it, we are absolutely not supply-limited in any of the devices that are required for the long reach and for the short reach of the data centers, including 40G and 100G, and we believe this from meaningful revenue point of view till the end of 2017.
Thank you very much.
We'll go now to Steve Smigie with Raymond James.
Great, thanks a lot guys, and all have my congratulations on a really nice quarter and guide there. I just wanted to follow-up a little bit on Magnum here. You've had it in-house for a little while now. Any positive surprises after you got in there and looked at what you have there in terms of product and any updated thoughts on the outlook there for that business generally speaking?
Hi, Steve, good to have you on the call and thanks for joining us, I'll start by telling that we are very pleased with the consolidation of Magnum. If it all, I'm positively surprised by the great motivation of the team and overall spirit of GigPeak members. We've done many acquisitions in the last few years. This was probably among the most successful ones in the pace and smoothness of the consolidation. Not only we closed this acquisition only three months ago, in April 5, but we have collocated all the Silicon Valley employees to one facility. We have collocated most of the activities in this one facility. We've put our arms around the consolidation and the integration of the entire SG&A systems altogether. The financial systems are consolidated. Operations are consolidated, sales and marketing is consolidated. Our algorithmic team in Waterloo has been instrumentally involved in what we're doing here. And we had a great reviews and meetings with all the major customers of previously Magnum now at the GigPeak MX line.
As long as we can deliver the video quality to the expectations of our customers and continue to improve the product line, particularly on the broadcasting -- the enterprise broadcasting to maintain high-density, and having [ph] reducing latency I think we will be in a very good shape. This product is an excellent product, and provided few major customers that are really enjoying deploying of this product. And in the spirit of GigPeak, we are very closely involved with the customers and going with them to the market hoping to support the success.
So, as we sit today here, we are very excited about what we've done. We think this was a natural extension of our product portfolio. And as I mentioned in my opening comments, really a natural opportunity to provide a much more comprehensive and much more attractive portfolio to our data center customers. If you look to our HX line, which provide an inter and intra connectivity to high speed 40 to 100-gigabit per second data centers or mega data centers, and you look to this product that provides an excellent compression at low bitrates, and have very high video quality for the broadcasting players, which are on the Zen [ph] data centers, you can see in opportunities for cross-sale, you can see in opportunities for bundled solutions. And again, the feedback we get so far is exceptionally good. And as I said, we are very excited with the results, both from the production point of view, from financial point of view, market penetration. So all in all, I think this is one more excellent acquisition for GigPeak.
Great. And just to follow-up on that, you've obviously raised some money here, a good history of adding technology where there's been already a lot of investment, and you're able to pick it up at a better rate than the original investment. And you've been able to scale up margin and revenue. Can you talk a little bit about if you see other opportunities now? And I had a few quick housekeeping questions after that. Thanks.
Sure, thanks a lot Steve. When we look an acquisition in general, I think I mentioned that in previous calls, we are looking into a real win-win solution based on a three-legged stool. One of which it has to be a complete synergistically -- it has to be a complete synergistic to our current product line, namely supporting our mission of enabling high-speed and high-quality streaming over the network end-to-end. Second thing, it has to be accretive financially. And the third thing, it has to provide business execution that is attractive, namely a good customer base, good market penetration, brand naming and so forth, obviously ability to maintain key players.
Magnum was a great opportunity that we came across, and we are constantly looking for similar opportunities. Obviously, when you are running the kind of growth rate that we have here at GigPeak, particularly when the financials are as pristine, as you can see, with very high margin and high profitability; it's getting a bit harder to find in the ecosystem a company that can fit into this structure. But we constantly review and go through a deal, so that it's pretty significantly. I mean, I think as mentioned in the past, we constantly see two deals a week, and we are very, very, very picky, very, very conservative on what we pick to move on.
It's very likely that in order to continue increase the product portfolio and maintain critical mass in any one of the activities we're doing, whether it's the optical connectivity, or whether it's the quality broadcasting and streaming, end-user terminals, ultra-high bandwidth devices, it's very likely to add more acquisition that will provide more building block as well as more scale. And we'll continue to deploy the same screening parameters we're doing here, as I mentioned. For now, I don't think the question is whether we are going to continue this organic and strategic growth. The question obviously is when the next one will happen. And again, there's no timeline for it because it is a very grueling and very intense process we go again before we decide to move on to the next target.
Great. And just real quick, sorry if I missed it, but for other income and tax rate, anything unusual we should expect there or is it -- just any color on how that might trend going forward into September, and maybe beyond. Thanks.
Hi, Steve, this is Darren. So the main thing is just interest expense as we continue to have the debt on our balance sheet. So that's typically in the -- about $260,000 to $270,000-a-quarter range.
Okay, great. Thank you.
Thank you, Steve.
We go now to Tim Savageaux with Northland Capital Markets.
Hi, good afternoon, and congratulations on the strong execution and integration of Magnum. I maybe may have missed comments around kind of the 100-gig optical telecom part of your business, I'm wondering if you'd indicated what sort of trends you are seeing there and whether strength in China is factoring into any strength there. And then as you look forward, whenever if possible with an overall kind of flattish revenue guide to give us a sense maybe of what kind of sequential growth trends you are seeing if you can break it out maybe Above the Cloud, Below the Cloud or whether there are any product lines that stand out in terms of relative strength or weakness. Thanks.
Hi, thanks for joining us and definitely thanks for taking coverage in the company. We definitely appreciate it. With regard to the energy optical telecom, let's bear in mind there are two different areas here, one of which is the long haul pertaining to the very long distances relatively limited demand of install-base going from 100G to 200G into 400G maybe direct to the 400G, it depends on what again reports you read and what customers you are talking with. This is purely what is called the Gold Box Technology of the Hermetic field packages.
It's a qualitative part -- it's been a much for a while obviously GigOptix in the past was finally on delivering 100-gigabit per second limiting and later on linear coherent gold box and this applications. It's followed by the much more attractive segment which is the metro segment and like in any other applications this time the new technologies of filtering down and getting into a deploying into a shorter distances when you go under 400, 500 kilometers you're going to the metro regions, you are dealing with larger -- much larger install base as I mentioned in my comments we are delighted to see finally the metro taking off and initial more meaningful installation of 100G linear metro which obviously augment now the long haul.
The metro is using a lower cost technology, the S&P technology and is demanded by large number of customer base comparing to the long haul. So we see the 100G telecom in general being a market of its interest of growing demand. Its competitive markets and obviously margins are not yet high it's used to be continuing to deteriorate with ASP erosion but the good news for the second half of the year and the next year that again the 100G metro deployment is going to drive up the install base and therefore give opportunity to GigPeak, which is one of the leading provider of S&P technology in the market. And I'm very proud to tell you that we are shipping for aerospace production with good number of customers at this 100G metro. And this is the first quarter in fact we take off of 100G metro that was promising market for the last few years.
So I hope that I give you a bit more colors on the first quarter and with regard to this -- what you call the flattish revenue projection for quarter three, I would define it differently. I will define it as a continuous gross of revenue where the only impacts on the number which we believe is going to be it one more quarter of record revenue to the company with more than 50% growth in our year-over-year. The only reason we are bit conservative here as we've always been is because we have to be very cognizant and very careful about the impact of latest acquisitions, purchase accounting on overall revenue. As you know, this is not linear impact -- that purchase accounting may have on us. It maybe frustrating from quarter-to-quarter, it depends on few parameters, but we don't see sold out and continuous growth in the market and in fact we are very excited about the overall trend in the second half of this year.
Got it. And I could follow-up on the Datacom side briefly, it sounds like your commentary there is more kind of 40-gig is kind of hanging in there. As sort of this staple in advance of any meaningful ramp of 100-gig and not seeing any meaningful decline so should be thinking of kind of stabilities there, one of you could comment on that.
And also did you provide or could you provide any sort of geographic breakout for the business, you know to what extent you're still you're doing that on a reported basis, or whether that comes in the Q or what have you? Thanks.
So, first of all on the data center, I mean it's a commentary that came along in the last few calls. The one-on-one rule of marketing is when you don't have the products, you continue to hype and push the next generation but you may or may have not. We've been in great successful area in the data centers. We've been the first one of the first people in the industry to provide parallel optic devices for data centers. We've been very fortunate to be out there with a one of the first stronger QSFP first generation of four and 12 channels of 14 gigabit per second. And as of today we are the sole merchant provider of the 40-gigabit per second QSMP device to the market. Therefore, I'm proudly talking about our success in this area and keeping telling you that we didn't see slow down neither in the demand shipping units nor in the revenue general and we continue to see the very strong market with meaningful growth year-over-year.
With regard to the 100-gigabit per second to energy, there is no doubt that the market as the cloud continues to grow and demand for more streaming and more storage continue to grow. There will be shift in 1-gigabyte per second, and the data centers or the Datacom we follow exactly the same trends of the telecom eventually. There are many reasons for the 100-gigabit per second Datacom technology to give you late. We don't have to go it through now. There are many reasons some of which are technology, some of which are pricing and business outlook, some of which is existing of infrastructure. I will tell you that some people that six months ago, were talking very excitingly about the deployment of 100G just here in the corner, being a big topic of it, whether it's a suppliers or OEM are using 40G and announcing what 40G means, which we see continues the demand.
On the energy as I mentioned, it's about 10% of our Datacom revenue. It's started to get momentum about a quarter two ago. It's a nice 10% revenue particular in very specific applications as I mentioned. We believe we have probably the best product in the market in terms of low park assumptions. We definitely have a complete product portfolio today that comprises the entire bundle solutions that transceivers and active optical cable suppliers needs and we continue to push it through the market. So we are completely ready for the energy transition when it shows. From my point of view it's -- from gig point of view, its showing and we are ready to ship next year and we'll continue to ship the 40G in the mean time. But by now way I can tell you that see this on a 40G as of today.
Now with regard to the last question you asked about geographical distribution I think that overall from GigPeak's product portfolio, I see an equal distribution between Europe, Far East, and United States. I think some of those regions are stronger in telecom and Datacom. Some of the regions are stronger in broadcasting. Some of them are stronger in CX but in general when I'm analyzing our revenue by geographies, I think the top were equally first and third.
Thanks very much.
You know, I mean just to give a final color on this scene, you know, I maybe even see a continuous growth in North America compared to other regions but in general it's a pretty equally balanced.
Okay. Thanks a lot.
Thank you. And we'll now go to Quinn Bolton with Needham & Company.
Hi, guys. Congratulations on the nice cash and EBITDA number in the second quarter. Avi, I jumped on late, so I apologize couple of these questions have been asked and answered. But just first perhaps for Darren, you had mentioned that debt on the balance sheet therefore the interest expense in Q3, is that something you had said to keep on debt on a longer term basis just to keep the cash balances at higher levels in the event you find some attractive acquisition targets or will you look to pay that down at your cash from the recent follow on offering?
All right. Thanks, Quinn, for your question. So, for now we still have a debt on our books on our balance sheet. Really it depends on what we decide to do strategically with the money. As Avi mentioned before, there are potential acquisition target so for now we continue to have debt on our balance sheet and the interest expense on our income statement, so…
And so bottleneck purposes, I assume until further noted that you probably keep it on the balance sheet?
Got it, great. And then, Avi, just a question on the sort of the 40-gig versus 100-gig market obviously a lots of questions about where the market starts to transition; in your 40-gig market seems like a lot of your revenue comes from sort of the short reach parallel of devices and I'm just kind of wondering, what do you see in the 100-gig market.
It seems like a lot of talk in the 100-gig market is CWDM [ph] type module, its going over single mode fiber and I am wondering if there is a little bit of confusion herein the market where folks talking about 100-gig might be talking about a different distance or a different sort of used case of 100-gig where maybe some of the short reach 100 meter to 300 meter or shorter distances stay multi mode fiber and parallel lanes and that sort of prolong the life of the 40-gig; just wondering if you have thoughts sort of multimode versus single-mode in the data center.
Right, I think you mentioned firstly it depends on the reach whether we are going to go for multi mode to single mode when it is totally for long reach. In general we GigPeak eventually sorted our deployment in the data centers purely with VCSEL drivers and TIA. Therefore our device or our solution was explicitly offered as a total solution for the short reach capital I would say 200 meters and we did not have for many reasons certainly from not type of regionally EML drivers or DML driver to support the driving to the long reach.
So if you think about our portfolio it was in the 43 comprised TIA drivers for the short region, TIA is very good, it's definitely for the long reach. As we move to over the last few years to enhance our portfolio toward the 100G, we obviously saw the need to augment our offering with the DML drivers and we have realized to the market recently to gain those drivers.
So I think again our superior for many reasons and I think if you know the high opening exceptional again, we are going to put in the market very shortly a complete capital of our products and thereabout -- this DML driver is definitely in power and exceeding expectation of many comparing to many other competitors. So we believe that from 100G point of view we are going to support to maintain very good market share and the 100G both for the long reach and the short reach. We also added CDR which is essential for the 100-G by the acquisition transfer and completed in order to complete new tape-out -- devices are now available in the market.
So again, I think that as we mentioned earlier, I think there is a lot of drive and lot of motivation at the data center OEMs to keep 40G from now it's a technology that affected. I think the price points are focus of them. I think there is a high yield -- the ability both in the optical hand and in the semiconductor devices which is not the case by the way for 100G as you know. And I think that the senses yield from reality is something GIG people that already installed relative to large installed base at 40G. So I don't see motivation to just rush out for the 40G into the 100G.
Now as you may know and I'm sure you know, even people that are driving 100G, four, five, six months ago, as I mentioned in my previous comments for whatever reason decided to reverse this trends and to going to 40G and I can tell that I have at least three new mega data centers by major to the zero web players that consistently wanted to do 100G, but they are doing 40G. So I think the long life of the 40G is going to vanish and there is no doubt that 100G will take off because it will need more than with but I think it's not going to be the case but again this is objective opinion I know as much as anyone else now. My opinion is that it is not going to go -- I believe like telecom, in fact it will continue to grow and it will be a long period of co-existence of 40G as 100G takes out.
Great. And just you had mentioned that tell us where CDRs I think as we move from 40-gig modules to 100-gig modules, the CDR becomes I think required in almost every 100-gig module whether its short reach or long reach. Just did you talk about seeing some good success there, some good design win activity, was wondering if you might be able to provide a more color. And then also any thoughts you might have on a competitive landscape, who you see most in that CDR segment of the market? Thanks.
Sure. Thank you, Quinn. I think that -- for one, I do agree with your comments completely. I mean, we -- about three years ago when we put our five years roadmap for the data centers and had strategy for the next, you know, till 2018 and that pan forward into 2020, it was very clear to us that we must add to the portfolio CDR, limiting CDR for the 100G NRZ and had the Linear CDR for the tap [ph] fold. We went through the market. We had a variety of attempts you know in 2014 and 2015. We ended acquiring Terasquare, which we believe that has the most substantial foundations for limiting CDR.
We also believe exactly as you mentioned that every application of 100G will demand CDR next to the driver and next to the TIA. I think that it's very clear today that the CDR is moving into the optical, electro-optic entry into the optical transceiver. And again, we are very with advice that are very, very, very fast, and are working full concentrated without TIA and drivers, in fact this is the way we have developed it between August 2015 acquisition of Terasquare and today, as we stand today, we have ticked out a new generation CDR that are available in the market today and tested very successfully. And again, we thought very seriously against two, three other competitors that are out there in the market that there are complete portfolio drivers, TIAs and CDRs.
The one thing I would tell you, and again this is what I am viewing in the market, I don't hear any positive feedback on any one of my competitors 100G offering today. I think every one of the competitors that are out there have an issue, whether it's mechanical issue or whether it's a design issue, power consumption; I think that this market is wide-open. And again, as I mentioned in my previous comments, I am delightfully low key talking about the 100G, because we are making very nice business out of 40G and there is no reason for us to push in the 100G, but I think that the GigPeak solution of TIA drivers, DML drivers, the TIA drivers for big cells, whether it's the demat [ph] drivers, augmented with CDR, which is very significant, very meaningful value-add proposition to customers.
Again, I rather not address each and every customer, I believe we have a competitive analysis on -- this came through the market by all our creditors and we understand where the competitor landscape is. I believe that GigPeak today proposed a very advanced and a very superior offering to the customers.
Thank you, Quinn. And again, welcome aboard. This is your first call with us, I appreciate it.
Thank you. We will now go to Richard Shannon with Craig-Hallum.
Hey, Avi, thank you for taking my questions, and congratulations on the second quarter. I think I will follow-up on the topic you were just addressing here in 100-gig CDRs, just kind of curious when do you expect to hear more about how well your Terasquare CDR is qualifying, is that something you will hear by the next quarter, by the end of the year or is this into next year?
Hi, Richard, thanks for the question. As I mentioned earlier, the CDRs are available in the market today.
Okay. I guess I didn't hear in your response to the last question about any successes, any qualifications so far, have you had any, or again, when do you expect to hear about those?
As I mentioned earlier, the 40G is what goes on the industry. And this is an investment technology than nothing is. All the rest are -- anything that's pretended to have 100G is in the early-stage of qualification and production as I understand it. And the number of potential customers in this market on the religious application of a data center and connectivity is pretty limited. We all know the names. And I can assure that each one of those customers is running big because the benefit now is with each one of the potential fixes out there. And I think that there are other new applications that are opening as 100G, CDRs are available whether it's for the copied CDR, whether to some building blocks coming out of the tech facilities, but I can tell you that the acquisition of Terasquare provided us very meaningful new family of products that are used in variety of applications; some of them as I said are religious, conservative in a central connectivity; some of those for others. For now, I can tell that there is no bad news we hear about the CDR in the market.
Okay, fair enough. I appreciate that update. Again, on the topic of the 100-gig Datacom; Avi, can you give us a sense of what your billed materials or potential maximum billed materials looks like between 40-gig in the short reach versus in 100-gig when you get to -- I would assume, long reach would be the best one with your drivers, TIAs and the CDR added to it, what's the -- if you can quote dollar figures if not may be kind of scale of increase in billed materials, that would be great to hear about.
Right. So, [I mean] obviously the way we have to look at it is following. On the 40-gigabit per second transceiver, you have one TIA. I mean, from RF device point of view, we have one TIA and one driver. In GigPeak situation, those two devices are Silicon Germanium BiCMOS provided through the FHP process of IBM. Those are tested. And [those] tested devices are shipped to the people of business transceivers. This is what our billing material in transceiver. If you go to optical cable, the short reach, we may have two-thirds, one on each side of the active cable. In the long reach, we may have a one TIA on each side of the active cable.
When you go to 100G, on top of those Silicon Germanium BiCMOS drivers and TIA, which have the -- basically the same technology that have been used to 40G to use the 100G; the same process, same BiCMOS process, on top of those devices now we have CDR that is CMOS device that is attached to each one of the devices. So yes, you may consider, you know, a four-channel CDR on each driver and on each TIA. So if you want to look into the billing materials, you can see that GigPeak is the success we are lucky to win, and designer is customer X. This customer X and he wants to bid to buy the entire partner solution from us, he will buy two CMOS -- I am sorry, two BiCMOS CDR drivers for 100G, which is usually 4x28 gigabit per second, two BiCMOS CD TIAs, which again are 4x28, and then, four CDR which are CMOS-based technology.
So, basically billing material, you know, 40G to 100G, if we are lucky to win this design and to be used solely for the application, you know, we are moving from one inactive cable, short reach for example, we are moving from a four [CD devices to four CD devices process for CMOS] devices. The one other change is that as I mentioned earlier in the 40G, we do not offer the drive, the DML drivers for the long reach; in 100G, we do offer it. So, it increase our ability to provide a tougher solution not only for the long/short reach, but also for the short -- for long reach.
Okay. And not to believe where the point, I appreciate all the detail, Avi, but anyway you can quantify the dollar content value going from 40 gigs to reach to the maximum 100-gig?
This question is an interesting one for me as well, on the 40G, we have something[ph] with the prices, those prices are researched in the market and certainly we know where it goes, and we know what the customers are asking on a yearly base. I think when we go to the 100G, definitely for volume, the power price is not set. As I mentioned, there is no volume, no one shipping volume on 100G, not that I believe. And all the shipments on 100-gigs today are in the early stage, so I think prices all over, I mean, to be honest I don't think the prices would be settled on the 100G devices.
Okay, fair enough. And I think that's all the questions from me guys, thank you very much, and congratulations on a good second quarter as well. Thanks.
Thank you very much.
And there are no further questions at this time. I will now turn the call back to Mr. Jim Fanucchi for closing remarks.
Great, thank you operator, and thanks again everyone for joining us on today's conference call. We do look forward to speaking with you again when we report the third quarter fiscal 2016 financial results in the October timeframe. Have a great afternoon.
This concludes our conference. Thank you for your participation.
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