Kaleyra, Inc.

Jim Fanucchi – Darrow Associates, IR Avi Katz – Chairman, Chief Executive Officer Curt Sacks – Chief Financial Officer

Richard Shannon – Craig-Hallum Capital Group LLC Krishna Shankar – Roth Capital Partners LLC Dave Kang – B. Riley & Co.

Thank you, operator, and thanks to all of you for joining us. Our speakers today are Dr.

Avi Katz, Chairman and CEO; and Curt Sacks, CFO of GigOptix. After the market closed today, GigOptix issued a press release discussing its financial results for the third quarter of fiscal year 2014.

The release is currently available in the Investors section of the Company’s website. Please be advised that the matters discussed in this call contain forward-looking statements or projections regarding future results or events including, without limitation, the possibility of a proposed transaction with GSI Technology Incorporated.

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. This call does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval regarding any proposed transaction with GSI Technology Incorporated or otherwise.

Forward-looking statements are based on the Company’s beliefs as of today, Monday, October 27, 2014. GigOptix undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by law 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. I will now turn the call over to Avi.

Thank you, Jim, and welcome everyone to our third quarter of fiscal 2014 conference call. Today, I’ll review our recent performance and important events and discuss our outlook for the fourth quarter and beyond.

Let me first start with brief overview of our third quarter financial results, which will be discussed in more details by Curt later in this call. Revenue was $8.5 million, up 16% from the third quarter of 2013, 6% up from our previous quarter and above the high point of our revenue guidance of $8.4 million we provided in our July call.

This strong performance in quarter three means our total revenue in the first nine months of 2014 stands at $24 million, up 13% from $21 million in the same nine-month period last year. Non-GAAP gross margin improved to 61% this quarter from 59% in the previous quarter.

Non-GAAP net income was the highest ever in GigOptix history as we generated $730,000 and the earnings per share was $0.02 per diluted share. Adjusted EBITDA of $1.4 million was also the highest ever in GigOptix history, being our 13th consecutive quarter of EBITDA profitability.

And finally, our balance sheet remains strong with approximately $18.1 million in cash and no debt at the end of the quarter. Our record non-GAAP net income and adjusted EBITDA as well as improved GAAP results in the third quarter validate the positive impact of the actions we’ve taken over the last 24 months in driving revenue growth through restructuring of our worldwide global sales and marketing organization and improving efficiencies by restructuring our back end operations in the engineering organization.

I will turn now to our third quarter product line performance discussion starting with the high-speed communication product line which included our optics and wireless product and accounted for 64% of the third quarter corporate revenue. Within our high-speed communication revenue, where telecom represents 56%, datacom represents 39% and the remaining revenue coming from the wireless business, we are excited with the exceptional revenue growth in our optics related revenue, namely telecom and datacom together, of almost 20% growth from the previous quarter.

On the telecom side, we experienced a tremendous, almost 50% growth over the previous quarter driven primarily by our successful product introduction and acceptance of our 100 gigabit per second coherent linear multichip driver modules for multiple telecom applications. As I have mentioned in prior calls, for the last two years we have shipped more of the current generation 100 gigabit per second coherent drivers, namely the limiting drivers, than all our competitors combined.

We believe that with the current successful introduction of our new 100 gigabit per second coherent linear driver, we will maintain this lead position in the industry in the years to come. For your information, the linear market has just been launched for production this quarter and is just starting to gain traction now.

Many industry analysts forecast that while linear approach is taking off now, it will become the dominant 100 gigabit per second telecom infrastructure protocol in the years to come before the industry migrates to 400 gigabit per second generation later on. This information is supported by what we have heard from our industry contacts who continue to expect the build out of the 100 gigabit per second linear coherent market to start in the first half of calendar 2015.

This expected growth gives us confidence that we will see continuous growth in our telecom related revenue next quarter and into 2015 through the current shipment of the 100 gigabit per second limiting and linear drivers and followed later by shipments of the 400 gigabit per second drivers. In addition, we remain at the forefront of the migration from the 100 gigabit per second CFP to CFP2 form factor platform.

At the ECOC Trade Show last month, our joint venture partner BrPhotonics demonstrated the first industry workable 100 gigabit per second TOSA designed specifically for the CFP2 transceiver form factor based on our Thin Film Polymer on Silicon, or TFPS, small form factor DP-QPSK Mach-Zehnder modulator. We remain the sole provider of the TFPS modulator and believe that all other existing modulator technologies will not be able to offer the same performance as our TFPS based product.

What we cannot predict is whether and when the industry will migrate to the TFPS based CFP2 platform, but if an when it does happen, we will be in a good position to be a leader in this transition. Now moving to the datacom business, where we also continue to experience very strong demand and currently expect to exceed $8 million of revenue in 2014, approximately doubling the product revenue of this line's shipment in 2013.

Also this quarter in addition to our ever-growing business of the 4-channel of 14 gigabit per second devices for the QSFP+ 40 and 64 gigabit per second datacom transceivers and active optical cables, or AOCs, where we are positioning as a sole merchant provider of those devices, we are delighted to inform you that we just started shipping our newly introduced and highly demanded high volume single channel 40 gigabit per second SFP+ driver and TIA devices. Mobile devices are being deployed as essential part of the newly introduced next generation hyper scale datacenters.

Our success in deploying our datacom devices is driven predominantly by our direct and very close partnership with several transceiver, AOC and equipment manufacturers to support their current rapidly growing installation demand of short and long reach 10 gigabit per second, 40 gigabit per second and 100 gigabit per second SFP+ and QSFP+ transceiver and AOC [entrants] [ph]. As stated earlier, as the connectivity of the datacenters continue to move from copper to fiber, we see an excellent growth opportunity for our transceivers and AOC device solutions.

It is worthwhile to educate that each of the newly installed AOCs used up to four of GigOptix devices, namely two Transimpedance Amplifier devices and two driver devices. Based on this transitional trend in the datacom industry and our robust business growth in this segment since 2011, we are confident about the strong future growth of this business through 2015 and beyond as the industry continues to massively deploy the 40 gigabit per second transceivers and active optical cable and move later on as of middle of 2016 into the 100 gigabit per second generation.

Turning to our wireless business. We were disappointed that the revenue declined to approximately $300,000 from $1.3 million in the previous quarter.

The reasons for the decline are straightforward. First, as I mentioned in our call last quarter, we’re coming off an exceptionally strong second quarter of wireless sales and these forecast that the wireless revenue would likely come down in quarter three due in part to the seasonal pattern in this business.

Second, we temporarily held major device shipment to a specific European contract manufacturer for one of our key customers as they worked through some internal financial issues. We looked into the situation and took conscious decision to hold more than $400,000 of already booked shipments in order to mitigate any potential financial collision risk and allow for time to negotiate reasonable payment plan for this contracted manufacturer.

This event did not occur till very late in the third quarter and accounted for most of the sequentially quarterly revenue decline of our wireless business. Looking forward, now that we have put in place the contractual payment agreement with this CM, we believe that if we begin to see a recovery of the wireless device revenue in the fourth quarter and we will end the year with revenue that will almost double what we have generated out of this line in 2013, as well as that we continue to present good growth through the fiscal year 2015.

Also related to our wireless business, you will remember back in June we acquired Tahoe RF Semiconductor, a privately held developer of leading edge analog RF IPs and fully integrated system on a chip. By now we have already completed the full integration of the team into GigOptix and already have seen tangible results this quarter.

In July we announced sample availability of global navigation satellite system RF receiver for use in road, maritime, agriculture, and surveying applications that was developed by this team. This device is expected to be one of several RF focused products that we will bring to the market during the next year based on the team's innovation.

Moving now to our industrial or ASIC product line. Revenue increased almost 30% over the previous quarter to a total of approximately $3.1 million.

You may remember that in our last call I mentioned that the ASIC industry is moving to smaller geometries and away from the largest structure of the ASIC geometries that we have served over the last few years. To support this transition, earlier this year GigOptix introduced our new ASIC Sunrise family of products that extended our traditional Sunset Rescue line of product into the lower 60 and 40 nanometer technology and completed our popular line of customized ASIC devices.

During the third quarter and as part of this trend, we saw increased purchasing of the largest geometry devices mainly from our test and measurements and Mil/Aero customers. We believe this enhanced trend will continue through the first quarter and into the first part of fiscal 2015 as the foundries we have worked with will continue the proactive trend to end the availability of this old geometries and incentivize customers like GigOptix to move to a new design using smaller geometries.

In closing, I’m very pleased with GigOptix record profitability and performance in this third quarter. We have been non-GAAP earnings positive for five out of the last seven quarters and have now delivered 13 straight quarters of positive adjusted EBITDA.

This quarter we lined up a record for positive performances. We’re also confident that with the revenue guidance we've provided today, we’ll generate annual revenue growth of approximately 12% over fiscal 2013.

I want to restate that we constantly continue to drive the company to achieve even better financial results every quarter, both in the top-line and in the bottom-line. While our steady growth has yielded consistent financial improvement with our focus now on our next milestone, which is continue improving of the GAAP performance toward profitability and consistent cash generation.

With the building blocks in place through a more diversified product portfolio aiming and addressing high growth markets, one can see that we are on the right trajectory to achieve this next milestone. I look forward to updating you on our progress each quarter in the next calls.

Now I’d like to address a couple of others business matters. First, since I recognize that there has been a lot of interest in our proposed acquired GSI Technology, which was first announced on August 19, 2014, I would like to spend a few minutes on this matter.

Due to disclosure rules, we are prohibited from providing any additional details to what we have already announced publicly. So I will reiterate the public release data as of today.

The proposed deal structure is per share consideration of $6.50. This include $2 per share in cash paid by GigOptix, GigOptix common stock at approximately $1.33 per share, and a special cash dividend of $3.70 per share payable to GSI Technology's shareholders.

For reference, GSI Technology shares price as of Friday, October 24 was $4.82. To support the proposed transaction, we have also announced that we received a commitment letter from Opus Bank to fully finance the cash portion of this consideration paid for GigOptix.

We’ve estimated that the combined financial profile would represent approximately $86 million in revenue over the most recently reported trailing 12-month period ended in June and that combine companies would be adjusted EBITDA positive and immediately accretive upon closing of this deal. This combination is expected to establish a differentiating one-stop-shop with cutting edge solution to potential benefit our mutual customer which include, among many others, Alcatel-Lucent, Cisco Systems and Huawei Technologies, enhance the combine company’s revenue in a very unique way and obviously enhance the value for all shareholders.

We continue to urge the GSI Technology Board of Directors to engage with us to discuss in detail our attractive offer which presents as of today a total value premium of approximately 35% to the GSI Technology share price. We’ll continue to assess our ongoing actions and directions based on the GSI Technology Board of Directors and shareholders' engagement, willingness and expressed interest to initiate a dialog with us.

Secondly as we have received questions regarding items in our 2014 shareholders' Annual Meeting proxy, I want to spend a moment addressing in particular proposal three in the proxy. This proposal asks shareholders to approve an increase of a total number of shares of capital stock that the Company is authorized to issue to 100 million from its current limit of 50 million shares which was the sold shares budget used since establishment six years ago when the company became public in 2008 and that as of today is almost completely consumed.

The Board of Directors believe that the additional authorized shares of common stock, which is an amount that has been considered reasonable under the guidance of parties that focus on corporate governance advisory, will give the company the necessary flexibility to issue shares for various corporate purposes, including in particular capital raising or strategic M&A transactions and enable us to take timely advantage of market conditions and opportunities. The Board also believes that failure to approve this proposal would seriously restrict our ability to manage our capital needs on continuous [indiscernible] to the detriment of our shareholders' interest.

More importantly, approval by the stockholders of this proposal will avoid the possible need and associated expense to call and hold a special meeting on an expedited basis for that purpose at a later date when the opportunity shows and thereby enabling the Company to act quickly upon such an opportunity and generating shareholder value. As noted in the proxy, the Board of Directors recommended that you all vote for on this proposal.

Hence I request that you take the time to purchase shares as promptly as possible in order to ensure your presentation at the meeting and trust that you will continue to stand by the company and cast your vote to support our recommendation. I’ll also like to remind our shareholders that if you own GigOptix shares as of the record day of October 1st, you are invited to attend our Annual Shareholder Meeting, which will be held at our offices at San Jose, California on November 13th at 8 o'clock in the morning Pacific Time.

I look forward to seeing some of our holders at this year’s meeting. Finally, I want to thank again our shareholders, all the stakeholders, including our loyal and hardworking employees, partners, suppliers, customers and of course our investor for continued support and trusting GigOptix.

Now I'd like to turn this call over to Curt for his financial review. Curt, please go ahead.

Thanks, Avi. We’re pleased to report our results for the third quarter of fiscal 2014.

Revenue in the quarter was $8.5 million, ahead of the guidance range of $8.2 million to $8.4 million that we provided on our last call. As Avi mentioned, this represents a 6% increase from last quarter and a 16% increase from the year ago quarter.

Leading the growth was our industrial business, increasing 27% sequentially as we experienced stronger demand of our larger ASIC geometry products, ahead of the expected shift by our customers towards smaller geometry products starting in 2015. High-speed communications revenue decreased 4% due to the decrease in our RF business that Avi noted earlier, which was nearly offset by a very strong demand in our telecom business while our datacom business also remained robust.

We had one customer greater than 10% during the quarter, Alcatel, which accounted for 32% of Q3 revenue due to strong demand of the newly introduced 100G linear driver product. Hereafter, all the results I provide will be non-GAAP.

Please see the tables included with our press release for a reconciliation of GAAP to non-GAAP financial information. Non-GAAP gross margin increased two points sequentially to 61%, marking a return of our gross margin above the 60% threshold.

We were pleased to see margin back above 60%, as a decrease in our overhead related costs, coupled with a favorable product mix in our industrial business, led to an improved overall gross margin. During the fourth quarter, we expect our gross margin to be approximately 60% due to revenue and product mix.

Joint development program revenue in Q3 was approximately $700,000, a bit lower than the approximate $840,000 in the second quarter. As we’ve previously noted, revenue from joint development programs is generally at 100% gross margin.

This is due to the complicated nature of these projects, the uncertainty of our achievement of the associated milestones and our ownership of the underlying IP generated from such programs. We therefore take the related expenses into R&D as incurred.

We expect JDP revenue in the fourth quarter to be approximately flat with the third quarter. Non-GAAP R&D expense remained at $3 million in the third quarter.

Despite the addition of the Tahoe RF engineering team, our expenses were flat with the second quarter as the increased headcount related expense from the Tahoe RF team was offset by a decrease in project related expenses and a small restructuring of our San Jose engineering team. As I have discussed previously, our engineering expenses can be lumpy given certain project related spending, and we do anticipate our fourth quarter R&D expense to increase due to project spending.

We currently expect fourth quarter R&D expense will be approximately $3.2 million. SG&A expense for the third quarter of 2014 was $1.5 million or flat compared to the second quarter.

We’ve done a good job of managing our SG&A expenses over the first three quarters of 2014 and expect SG&A expense to remain at $1.5 million in the fourth quarter. With the higher revenue, improved margin and flat operating expenses in the quarter, we generated non-GAAP net income of $730,000, the highest ever in our company’s history.

This net income resulted in earnings of $0.02 per diluted share in Q3. The Q3 net income compares with a net income of $269,000 or $0.01 per diluted share in the second quarter.

We also generated $1.4 million of adjusted EBITDA, which is the highest positive adjusted EBITDA in our history. This record adjusted EBITDA quarter also represented our 13th straight quarter of positive adjusted EBITDA as EBITDA increased from approximately $1 million in the second quarter of the year.

Turning to our balance sheet. During the quarter we saw inventory decrease by nearly $270,000 from Q2, ending the quarter at $4 million.

The decline in inventory was due primarily to decreased raw material inventory on hand at quarter end. We anticipate inventory will remain nearly flat over the next quarter.

Accounts receivable increased during the third quarter to $7.7 million from $7 million at the end of Q2, increasing our DSOs to 82 at quarter-end. The increase to our AR balance was primarily due to the linearity of shipments during the quarter, as well as the receivable balance from one customer who has requested extended payment terms remaining outstanding at quarter-end.

We have worked with this customer on an extended payment plan and don’t anticipate any issues with collectability. We generally expect DSOs to be in the mid-70s range based on our geographic and customer concentration.

CapEx in Q3 was approximately $330,000. We believe CapEx will be approximately $300,000 in the fourth quarter of the year.

Finally, we closed the quarter with cash and investments of $18.1 million and no debt. During Q3, cash declined approximately $400,000.

However, it is important to note that our current assets remain nearly flat at $30.5 million, while total liabilities declined approximately $700,000 and we paid out over $350,000 during the quarter associated with the acquisition of Tahoe RF. We anticipate cash to be flat in the fourth quarter as we expect cash generated by operations to be offset by normal working capital purposes.

Before providing our fourth quarter guidance, let me give you a short update on the BrPhotonics joint venture and the Tahoe RF acquisition. Regarding BrPhotonics, you may recall that the net investment in BrP on our balance sheet at the end of the second quarter was $125,000.

During the third quarter, we recognized a $125,000 loss on our 49% ownership share in BrPhotonics. This loss caps our losses from the subsidiary and there will be no further losses related to it.

Regarding Tahoe RF, we successfully closed the deal on June 30th, which made this acquisition effective on the first day of the third quarter. As a reminder, we acquired substantially all of the assets of Tahoe RF, including its IP portfolio, equipment and inventory by assuming approximately $450,000 in liabilities, over $350,000 of which was paid out during the third quarter.

Through the acquisition we have added 10 employees to our team. And we continue to expect this transaction will have a positive financial impact on our financial results through new design wins as we move into 2015.

Now looking at our guidance for the fourth quarter of 2014. With continued strong demand in both of our product lines, we believe fourth quarter revenue will increase to a range of $8.5 million to $8.8 million, representing an increase of approximately 8% to 12% above the fourth quarter a year ago.

This also means we expect that at the midpoint of our fourth quarter guidance, fiscal 2014 revenue will be approximately 12% above fiscal 2013. At the same time, we will see improvement in all of our profitability metrics for all of fiscal 2014 compared with the prior fiscal year.

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

Well, congratulations on some nice numbers here. A few questions for me, I guess first on the telecom side.

You had a very good quarter, it sounds like you are starting to ship some linear drivers. Why don’t you give us a sense of how broad of a base of customers you have for that?

Do you have more than one there? Can you characterize the design wins, et cetera, please?

Hey Richard, Avi here. Thanks for the question.

As many other previously deployed 100G, the market is driven mainly by one customer as a pioneer and followed by probably half a dozen other customers that will start to deploy early next year. So we reported today on production shipments of the first hundreds of drivers.

And I think that as the market will make choices and selections, as other customers will make the selection of the linear drivers, we will have more clarity on how much more business, how many more customers we are winning here. I think it’s prudent to say that most of our other customers are still evaluating and making their choices particularly related to the metro and the other people that are playing in the long haul telecom are still also working on a final selection of the suppliers.

And then also on TIAs, can you give us your outlook there of how your efforts are going to break into that part of the market as well?

So like in the driver, there is a new generation of TIAs that are obviously matching the 100G coherent linear. And I think that again, coming as later to the market TIA provider, we are still working on setting a position here.

And I continue to be positive and optimistic about our ability to come to the market with the superior products somewhere in the beginning of the next year.

A question or two perhaps on the datacom side of your business. First of all, I guess in the fourth quarter, what do you expect the trend to be there?

I know the third quarter was roughly flattish, 80% year-on-year, but flat sequentially. How should we think about the fourth quarter?

I think that first of all from unit shipment point of view, I think that we continue to see ever growing demand. The units for the QSFP+ I think are seeing some price erosion as the volumes increase and the commercialization takes place.

I think that we begin to see growing demand in the SFP+ and single channel, as I mentioned. But I think the overall demand for the [4x40] [ph] and the 56 gigabit per second is still very strong.

And we will stay strong for the next year or year and a half. I think the market just started to deploy the QSFP+ and full commercial volume was in datacenters and in the supercomputer farms.

There is a long way for the market to grow on this hockey stick till people will consider moving into next generation which should be 100G. It’s our estimate it will not happen before middle of 2016.

So I think that net-net while we don’t have a handle of what may be the price consideration that the customers, particularly the large customers may ask over the next few months and we still are trying to structure together the product mix between the 4-channel and single-channel, I think that overall, as I mentioned, when you look to 2014 over 2013, you see almost doubling of revenue from product shipment. And this trend, as we begin to think about the next year, I think will continue to show the same direction.

And maybe just to push you a little bit more on the last comment, Avi. Can you give us any better sense of what you think the range of possibilities are for your overall datacom business next year?

Obviously doubling is a difficult act to follow. But I think you’ve talked about doing 12% growth overall this year, is there any bogeys or ways that we can think about what you think your datacom business can do next year?

In general, I think that if you take a big view mirror, I think GigOptix came from approximately $2 million, $4 million to about $8 million over the last few years and the rest of the growth depend again on the rate of deployment in datacenters. I think that it’s too early for anyone of us to project what’s happening next year.

Based on the lack of visibility to the main end users, main customers such as Cisco, Google and Facebook, Amazon and the likes, which I don’t believe still place their stern forecast for the next year demand. But I’m sure looking on next two, three months, as we move into the end of quarter four and as we begin to shape up our plan for quarter one, we’ll have more visibility and obviously we share with you as part of our outlook toward 2015.

At this point of time, the only thing which we’re very positive about, we see ever growing demand from our customers, we see a lot of new customers coming in and the revenue growth from the lead major customers in the active optical cable and transceivers, this revenue growth trends are very solid.

Avi and Curt, congratulations on good third quarter results. Is all of the growth in the telecom driven by the 100 gig linear driver or did you see revenues in the limiting driver also in Q3?

We see a very healthy balance between the linear and the limiting. I mean we’ve been very fortunate to enjoy great limiting shipment generation one in 2012 and in 2013, tapering down and making place for generation two and the limiting which took off last year and very strong through this year.

And I think that what we’re seeing now is a very healthy mix point of time where you see nice plateau on the second generation of the limiting 100G drivers and the take off of the linear 100G driver as generation three. So I think that this point of time, this quarter, maybe the next quarter we’ll see a good healthy mix of both of the flavors.

And then in terms of the guidance for Q4, can you talk about the parts of the guidance 8.5 million to 8.8 million with telecom growth there, datacom, can you talk about the growth drivers for telecom and datacom going into the fourth quarter and what happens to the industrial ASIC business in Q4?

Again, as we all know, we are here into the fourth week of quarter four. Though it's a short quarter because of the holidays, we expect turns of about two-thirds of our revenue through every quarter, particularly because the supply chain in the datacom has a very short fulfilling time as push down the supply chain by the end users, people expect to deliver them in four to six weeks.

It's prudent at this point of time to say that basically quarter four will show slight growth as we’re projecting here from flat to slight growth. We don’t see any slowdown at this stage, but again it’s a short quarter we want to be very conservative.

We've seen in the last few years in particular on telecom side events where people may try to adjust inventory in the last months of the year. We have no indication to believe that this is what's happening this year, but we want to be conservative as usual.

Generally speaking, I think that we expect to see stable shipment revenue of the telecom, some uptick in the datacom and basically nice continuous strength of the ASIC industrial line. But again, it’s very - but in this industry as you know it's very hard to be forward looking in particular quarter four.

But as I say I think that we all the three elements that we see good demand as we’re speaking now.

And then the wireless I guess after very good second quarter it kind of fell off a bit in Q3. Do you have any new designs or any new customers there that you can talk about?

And also talk about the different aspects of wireless backhaul. And then I know that people such as Google have talked about using high-speed wireless, millimeter and microwave wireless in the last mile.

Can you talk about opportunities in your millimeter wave and the wireless in general?

Krishna, you do not believe in me. I always talk bold.

But I appreciate the opportunity. First of all with regard to the business in quarter three, I think we’ve given previous details on it.

I think that we expected some decline in the orders after a very stronger summer in quarter two. But I think as I mentioned, the vast majority of the decline came in on our intentional decision not to ship what we consider to be a higher collection risk situation.

I am happy that we did it, so we had full control of how to collect and how to move forward with this particular contractor manufacturing in Europe. So again, being in a market that has just launched in the very initial stages, I will not take this decline as an indication of market trends or GigOptix position whatsoever.

Now as it pertains to the market view as we see it here at GigOptix, rightfully so you mentioned that a lot of people are talking now about the last few 100 meters delivered in what we call the AirFiber system which is really the higher frequency wireless, particularly 100 to 500 meters. I think that there are two trends that we’ve seen in the point-to-point, there's backhaul and the small cells.

I think that people are focusing now on concurrent positions with higher end, higher frequency E-Band, both the 70 and the 80 bands. But again it’s a market that is embryonic, it’s just in the state of formation.

So I think that we see demand obviously much better than last year, as I said. Even in GigOptix compass we can see almost doubling the revenue of the device shipment comparing to last year.

I think that the next year this trend will continue and get even more exciting, because there is more and more discussion now on the use of the D-Band, the 6 gigahertz pertaining to smaller cells, lower cost and some advantage in smaller form factors. So between the four or five lead customers in the world, I think the standard is still open, people are looking at a variety of ways of putting together low cost small form factor transceivers.

I think that in general for GigOptix there's the choice to go into the last mile wireless or the point-to-point wireless was a very good choice. It’s too early for me to talk to you about product release beyond what I have announced already.

But I think that 2015 will be a very exciting year for GigOptix and the industry as it pertains to wireless to the point-to-point. I think it will become more and more the core and main stream of communication for this last mile.

And particularly now we stated with our actions what we think. We’ve acquired a small company called Tahoe RF about three months ago, which was solely brought to the company in order to substantiate and to enhance our abilities in the higher frequencies wireless.

So I think it’s going to be -- I think all of us are going to enjoy tracking in the next year. I think will be very dynamic area.

And then on the GSI proposal that you have, what are kind of the next steps and can you sort of outline towards what the next steps might be? I know you’re waiting to hear back from them.

So what are some of the next steps and your possible sort of actions here?

I want to say there is not much beyond what I have mentioned already. We almost daily assess our actions and our responses.

It all depends, as I said, on the stated willingness and the desire of the Board and more importantly of the shareholders of this company to move along the proposal we gave them. We still believe it’s a superior proposal and for both companies our company can be very beneficial.

But I will obviously continue to update you and the rest of the shareholders, the rest of the industry on material events by virtue of filing 8-Ks when time and when event takes place.

The first question is regarding the $400,000 that’s being withheld. How much of that will be recognized in the fourth quarter or at least reflected in your guide?

This is Avi. You get the guidance [accrued] (ph), which is what the company believes is going to be the guidance for quarter four in the penalty of those events.

So none of that is factored into fourth quarter guide?

Well, here’s the issue. The issue of this shipment is pure accounts receivable and the mitigation of risk on shipment on past due payments.

Our guidance here are independent of what is happening with the shipment.

And then, so 61% gross margin. What was the product gross margin?

It’s 58% I think.

Can you remind me whether this is about flattish or maybe up a little bit?

It's up -- 58% is higher than it has been in last year and a half. So, we’ve ticked up a bit in the third quarter, very nice product mix shift.

As I mentioned on the industrial side, nice product mix shift within that product group. So, overall it’s up during the quarter.

And then is there any margin differential between Limiting and Linear drivers?

It's a complex question. It's a complicated question to answer.

Remember there is two different stages, the Limiting is a mature product, it's a very [indiscernible] production delivery through the last year and a half. The Linear is just going to up.

I think if you ask me this question in the next call after we’ll finalize all the negotiation on next year's prices after the market launching.

So, Linear will be kind of comparable to Limiting after a couple of quarters?

Again, even that is a bit of a more complex answer because it's in parts. I mean, one is a bit more complicated than the other.

The building materials will be different. But in general you expect to see the same trend [indiscernible] the marketplace.

And then as it gets more commercial, then there's cost reduction on both sides.

And then what are your expectation as far as pricing reduction expected in upcoming January? What’s the chatter out there?

So, we are just in the middle of this process. It's a real time report that I can give you now.

Again, it depends on different segments, depend on different customers and regions. In general, and what I am giving you now is nothing but my objective opinion and cannot be substantiated by any numbers.

I think the datacom which shows some decrease in margins because of the huge increase in commercialization, now I don’t know how it's going to impact the margin because remember, volume impact both cost and speed, it's a matter of again product mix, volume being [indiscernible] in terms of bundling, what’s the total solutions you offer and again who is the customer that's demanding and so forth. But in general, it's prudent to believe that as datacom is really maturing, the 4x14 which becomes the normal standard protocol in the datacenters, you see some prices over there, some ASP order there.

Again, I don’t know how it could impact the margin. It's too early to talk about.

On the telecom, I think again a good margin that we enjoy, particularly new generation such as the Linear drivers and driver/TIA to some extent may see some demand for cost reduction as it's maturing next year and will continue to replace Limiting.

But you think it will still be within that historically normal 10% to 15% or is it going to be beyond that?

Yeah, I think -- listen, I think that we've now got used of 15% growth of [indiscernible] when we're used to 5% to 7%. So, I think it's dynamic, it's going to be [indiscernible] industry.

I think from cost reduction impact on price and impact on margin, again from what I am seeing today, 2015 is not going to be different than 2014.

And then the pop you enjoyed in the telecom, almost 50%, so it sounds like there was just a pent-up demand for Linear, so that was sort of an aberration. What do you think the normal growth rate -- or what should we expect as far as normalized growth rate is concerned?

How is the visibility within your view?

It's almost similar to the question I think Krishna gave me. Remember, we enjoy very unique position where we are shipping Limiting and Linear together.

And I think that it's a dynamic that – again, customers in general have their dynamic -- two things are playing, device replacement of old generation with new generation and acquire new businesses. With regard to the former, we have some of the business from major customers.

And we know basically what the rate of replacement is projected. With regards to the latter, it's a dynamic situation, Any one of those OEMs are winning their business from a service provider on a daily basis or not.

So, I think that the persuasion will be rather than -- we feel very comfortable about the revenue levels that we’ve introduced in the quarter three moving forward. I think historically this particular telecom application was running at about [indiscernible] and most of the time we’re running about $2.5 million to $3 million in the memory numbers.

And we don’t perceive it to be similar pop-up to the event. I think it's a – and if you average last two years, I think about 3.5 million, probably $3 million on an average in the third quarter is a good number to model.

And lastly on BrPhotonics, I mean when should we expect some revenues out of those guys?

So again, I think we’re discussing with past levels. The issue with BrPhotonics is the following.

BrPhotonics is in sector development and this is why we enjoyed the financial rank which we've done down in Brazil where we can look forward to the list of products, enjoying the fact that the R&D is financed in different manner and does not impact the P&L of GigOptix at this point of time. So just as I look to their stage of development, as I look to market demand, as I look to trend, I think that initial revenues -- I think we talked about middle of next year, middle of 2015 is a good time to model for beginning to see something from their end.

But again, I want to be sure, we're clear on this, anything that's happened on the P&L of the BrPhotonics impacts only in the second order of magnitude, if at all, on GigOptix more than anywhere else. It may impact when it started the paid revenue based on the fact that GigOptix is the sole exclusive sales organization of the BrPhotonics.

But otherwise, it's really completely independent now.

Great. Thank you, operator, and thanks all of you for joining us today.

We look forward to speaking with you again when we report our fourth quarter fiscal year 2014 results. Have a good afternoon.