Kaleyra, Inc.

Jim Fanucchi – IR, Darrow Associates Avi Katz - Chairman and Chief Executive Officer Darren Ma - Chief Financial Officer

Krishna Shankar - Roth Capital Wayne Loeb - Cowen and Company Richard Shannon - Craig Hallum Ted Moreau - Barrington Research Dave Kang - B. Riley & Co.

Gus Richard - Northland Capital Market Douglas Freedman - Sterne Agee

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

Avi Katz, Chairman and CEO, and Darren Ma, CFO of GigOptix. After the market close today, GigOptix issued a press release discussing its financial results for the third quarter of fiscal year 2015.

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.

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 this day, Monday, October 19, 2015.

GigOptix undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by law even if new information becomes available or other events occur in the future. In addition today, we will be discussing non-GAAP financial measures.

These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP. A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC and I refer investors to this document.

In addition, we have posted an updated corporate presentation with the trended financial results through Q3 in the investors section of our website. I will now turn the call over to Avi.

Thank you, Jim, and welcome everyone to our third quarter fiscal 2015 financial results conference call. Today, I will review our performance in the past quarter, as well as other important events and discuss our outlook for the fourth quarter of 2015.

I am very pleased to share with you that this third quarter marks the all-time record financial performance quarter since the inception of GigOptix, both from revenue and from all aspects of profitability. This continuously improved financial results over the last three years clearly shows that our business strategy to expand into high growth markets, both organically and through strategic acquisitions, accompanied by tight cost control and enhanced efficiencies is generating the exceptional financial performance we have continuously strived for and discussed with you over the last few years.

I would like to first briefly review the third quarter results and then comment on our progress in our business and customer base. Revenue in the third quarter were the highest ever in our eight years of operations, increased for the sixth consecutive quarter to $10.4 million, up 23% from $8.5 million in the third quarter year ago, and up 6% from $9.8 million in the previous quarter.

Also in this quarter, our product revenue increased by almost 30% from the third quarter a year ago further demonstrating the gross demands for our products in the market, our successful deployment programs and our customer acquisition traction. We also delivered record GAAP and non-GAAP gross margins of 64% and 66% respectively, which drove record GAAP and non-GAAP net income as follows; record GAAP net income from normal business operations was $1 million or net income of $0.03 per diluted share, and record non-GAAP net income that was $2.3 million or net income of $0.06 per diluted share.

In this quarter, we also achieved record adjusted EBITDA of $3 million, up from $2.8 million in the previous quarter and more than doubled the $1.4 million in the same quarter last year. Cash and cash equivalents as of September 27, 2015 were $35 million, which includes the approximately net $16.5 million raised through an underwriting public offering of common stock closed in August.

Cash and cash equivalents were up and almost doubled from the $18.4 million by end of the second quarter of 2015. This excellent quarter three financial performance further enhance our financial results for the first three quarters of 2015.

Hereby, I would like to summarize our year-to-date results. Revenue record of $29.3 million, an increase of $5.4 million or 23% from $23.9 million for the same period a year ago.

Record non-GAAP net income of $5.1 million, an increase of about $4.8 million or more than 14 times increase from the $335,000 for the same period in 2014 and record adjusted EBITDA of $7.2 million, increase of about $4.8 million or doubled from the $2.4 million for the same period in 2014. These numbers are self-explanatory and exhibit clearly the financial success story of GigOptix with a vast majority or about 90% of the year-over-year revenue growth has been transferred into the corresponding profit increases during 2015.

This is a great and clear testimonial to the professional financial leadership and efficiency enhancements we have installed and driven in GigOptix. Fiscal year 2015 so far has been tremendously successful here and we project this momentum to continue through the fourth quarter of 2015 and into 2016.

We are delivering an exceptional P&L quarter. We also significantly enhanced our balance sheet with the successful completion of an oversubscribed underwritten follow-up public common stock offering which was done in a very tough market.

As we have discussed earlier, the sole purpose of enhancing the balance sheet was to support further strategic moves and acquisitions to enhance the continuous fast growth of the company. Indeed, very shortly, after we completed the public offering, we successfully completed the strategic acquisition of the Korean company called Terasquare for about $5.2 million in cash and established our fully-owned operational subsidiary in Seoul called GigOptix-Terasquare-Korea or GTK which will become our center for ASIC product design and development.

For background, Terasquare was a six years old venture capital-backed privately held fabless semiconductor company that had developed and sampled superior high speed digital and analog silicon seamless devices such as clock data recovery or CDRs, devices for short link optical communications. With the addition of GTK, we are now strongly positioned to further increase our high speed cloud-based link market-share by having a complete and superior IC portfolio of industry leading 100 Gigabit per second datacom chipset solutions for Ethernet, Fiber Channel, and InfiniBand data center connectivity.

We believe that this transaction will be accretive as of the first quarter of 2016, further enhancing our 100 Gigabit per second datacom revenue starting in the middle of 2016 and it will be obviously substantiating our already dominating position in the 40 Gigabit per second cloud and datacenter link into the 100 Gigabit per second QSP 28 links and later on deployed advanced applications such as the PAM-4 systems when they will be introduced in no earlier than late 2017 or 2018. Terasquare is another example in our long history of acquiring and integrating companies in the most financial prudent manner.

Each acquisition we have executed since our inception in 2007 has became accretive within one quarter of closing and has provided building blocks to enhance and synergize our product portfolio. The Terasquare transition is no different and is critical for our plan to substantiate our position as the industry’s premier one stop shop supplier and leader of datacom high speed links chipset solutions at bandwidths of 100 Gigabits per seconds and beyond.

Let me now turn to the summary of our third quarter product lines and end-market performance. As discussed earlier, our revenue growth in quarter three was led by a 7% increase in our product revenue over the previous quarter and a significant, almost 30% increase, over the third quarter of 2014.

The combination of the increased revenue, continued strong margin and robust expense control resulted in the all time record high profitability of GigOptix. Sales from our high speed communication business, which included our telecom, datacom and RF wireless segments was $7.6 million, up 15% from the prior quarter and 41% up from the same quarter a year ago.

This continued improvement was led mainly by yet another very strong quarter in our 40 Gigabit per second and 100 Gigabit per second drivers and amplifiers for the datacom transceivers and active optical cables that populate the newly installed cloud mega datacenters. This business represents 73% of our total revenue in quarter three, up from 67% last quarter.

In 2015, we have experienced increased demand for our datacom, 40 Gigabit per second active optical cable and transceiver devices. We currently expect 40 Gigabit per second product to continue to be the dominating device in the datacenter connectivity through 2016.

The next generation of 100 Gigabit per second product will continue to be qualified through the rest of this year and 2016 and we expect production volume sales of this product family to start in the second half of 2016 and to overtake the 40 Gigabit per second device volume shipment sometime in late 2017. We believe that the deployment of this current generation of NRZ modulated devices, both in 40 Gigabit per second and in 100 Gigabit per second will last at least three more years before any other modulation schemes such as PAM-4 will replace it.

We are very excited about our datacom opportunities which will continue to be driven by the unprecedented demand in the cloud, datacenter, social and web 2.0 applications, internet of things or IOT and big data environments. Through a combination of our strong IP superior product portfolio in relationship with our leading customers in datacenter market, GigOptix is poised to maintain its position as a primary supplier for the current 40 Gigabit per second and 100 Gigabit per second NRZ modulation products and the future next waves of connectivity protocols.

On the telecom side, we remain the prime supplier of – in 100 Gigabit per second and 200 Gigabit per second devices used for both long-haul and metro applications. And initiating also our qualification shipments of 400 Gigabit per second devices for the long-haul applications.

In the third quarter, we continued to ship those devices to our legacy long-haul telecom customer while starting initial shipments to some new telecom metro customers. As customers increased deployment of the 100 Gigabit per second metro systems and we continue to acquire new opportunities for these applications, we are bullish about our metro business growth for the balance of 2015 and more so into 2016.

I am proud to share with you that today GigOptix is likely the only device supplier in the telecom market that offers qualified devices both at the GPPO gold box form and in the surface mounted technology or SMT form which qualify us as a one stop shop for telecom customers that wishes to purchase devices for both long-haul and metro respectively. Sales from our industrial ASIC product line also continue to grow as we continue to shift our focus from our legacy customized ASIC products to high speed optical and RF ASICs new generation while acquiring new customers in various new market segments.

We recently announced a substantial $6.1 million purchase order to be fulfilled through the next few quarters with a large aerospace commercial and defense contractor. This latest contract is on top of the $7.9 million deal with a separate aerospace and defense contractor that we announced late in May of this year.

With those total of $14 million of purchase orders to be fulfilled in today at the avionics industry, we are in a very good position to continue to add more customers and business in this segment and grow our business through 2016 and beyond. In summary, our third quarter of 2015 was indeed an exceptional quarter producing all time record financial results.

We expect our revenue momentum to continue in quarter four with approximately $10.7 million in sales resulting in another quarterly record and maintaining the high profitability levels. The fourth quarter revenue would also drive total sales for fiscal year 2015 to about $40 million, which would represent about 21% growth over the fiscal 2014 and establishes a new record for financial year revenues, net income and profit levels.

While we are very pleased with our progress so far this year, I am convinced that the trajectory of our organic business growth alongside with the potential future strategic acquisitions will deliver even better results in the years to come further increase the company’s valuation significantly and the shareholders returns. In closing, I want to profoundly thank all of our stakeholders and in particular our dedicated family of employees, our committed customers, partners, suppliers and investors that trust and support over those many years of operations.

Let me now turn the call over to Darren for a detailed review of our third quarter financial results. Darren, please go ahead.

Thank you, Avi. Good afternoon, everyone.

Before discussing our fourth quarter outlook, here is the summary of the Q3 results. Revenue in the third quarter of 2015 was a record $10.4 million, ahead of the most recent guidance we gave in the July call.

This revenue is up 6% from the second quarter of 2015 and also represents a 23% increase from the third quarter a year ago. On a percentage basis, our high speed communications revenue accounted for 73% of our total revenue, with industrial accounting for the remaining 27%.

Non-GAAP gross margin was 66%, and gross profit increased sequentially by approximately $400,000 representing an all time record for the company. Q3 gross margin was up approximately 5 percentage points from the 61% gross margin in the third quarter a year ago.

During the fourth quarter of 2015, we expect our gross margin to remain in the mid-60s. Non-GAAP operating expenses in the third quarter of 2015 were $4.5 million, up slightly from $4.4 million last quarter and flat from $4.5 million in the third quarter a year ago.

We continue to manage our expenses tightly while continuing to invest in innovations and will generate future revenue. In the fourth quarter, we expect total operating expenses to be up about $0.4 million driven primarily by the Terasquare acquisition and in consolidation into GigOptix.

On a GAAP basis, quarter three 2015 was $1 million net income or $0.03 per diluted share. This compares with GAAP net income of $0.5 million or $0.02 per diluted share in the prior quarter and a GAAP net loss of $0.8 million or a loss of $0.02 per share in the third quarter a year ago.

Q3 2015 non-GAAP net income was a record $2.3 million, or $0.06 per diluted share, and represents the sixth straight quarter of non-GAAP net income. This compares with non-GAAP net income of $2.1 million or $0.06 per diluted share in the second quarter of 2015 and a non-GAAP net income of $0.7 million or $0.02 per diluted share in the third quarter a year ago.

In quarter three, we delivered $0.06 earnings per share after taking into account the weighted average share counting increase resulting from the public offering. Based on the timing of the fund raising close, weighted shares used to calculate Q3 diluted EPS were approximately 38.5 million shares.

For quarter four, we expect the weighted average share count to be approximately 46.8 million diluted shares reflecting a full quarter of the additional shares. We again achieved the highest ever positive adjusted EBITDA at approximately $3 million in the third quarter completing 17 straight quarters of positive adjusted EBITDA.

In the first three quarters of 2015, we achieved revenue of $29.3 million, which was up 23% compared with the same period a year ago. In addition, we generated $5.1 million of non-GAAP net income in the first three quarters of 2015 versus $0.3 million in the same period a year ago, yielding $0.14 earnings per diluted share and the current year-to-date compares to $0.01 earnings per diluted share in the same period a year ago.

Now, turning to our balance sheet. Our cash and investments balance at the end of quarter three 2015 was approximately $35 million, up from $18.4 million at the end of Q2.

The sequential increase was driven by the $16.5 million of net proceeds received from the public stock offering. In addition, we also achieved free cash flow of $0.5 million during Q3, while accounts receivable increased $1.7 million sequentially and accounts payable declined by $0.3 million sequentially.

As a reminder, the ending quarter free cash balance does not includes approximately $5.5 million in cash paid for the Terasquare acquisition, which will be accounted for in the fourth quarter. Q2 inventory was approximately flat at $6.8 million.

We continue to maintain our inventory levels to support our ongoing revenue growth and new products primarily in our high speed communications business. Days sales outstanding in Q3 was 84days, up from the 73 days in the prior quarter primarily driven by the increase in accounts receivables.

In Q3 2015, we spent approximately $0.2 million on CapEx, in Q4 we expect our level of CapEx investments increase due to further investment to support our fast-growing segments driving revenue growth in 2016. Depreciation and amortization for quarter three was approximately $0.9 million similar to the previous quarter.

Now turning to the guidance. We currently believe that fourth quarter revenue will be an all time high $10.7 million, up 18% from the same quarter last year.

Based on this guidance, we will deliver record annual revenue of approximately $40 million, which is an increase from our previous guidance of at least $39 million we gave in July and the $37.5 million we gave in February representing an improvement of approximately 21% from fiscal year 2014. To summarize our quarter three 2015 financial results, we achieved record revenue and also the most profitable quarter in the company’s history from an adjusted EBITDA, non-GAAP net income and GAAP net income basis excluding the one-time gain from a litigation settlement in Q3 2013.

We look forward to discussing our Q4 2015 financial results with you on early 2016. With that, I will turn the call back to the operator for questions.

. Yes, Avi and Darren, congratulations on some very nice results.

As you look at the guidance for Q4, can you talk about what areas of strength you are seeing and kind of your visibility on the telecom datacenter and the ASIC business? Do you see balanced growth in all those three segments as you go into Q4?

Hi, Krishna, thanks for the question and thanks for being on the call. As we have demonstrated over the last three years and as it’s reflected in our PowerPoint presentation that we just refreshed and put on our website about a hour ago, we put a lot of emphasis on growing all our business segments in a relatively same rate putting the same development, R&D and some of the marketing efforts to make sure that we keep the balance.

So for quarter four, I expect the high speed segment to grow in similar rate to the ASIC and within the high speed segment, while we are not banking anymore to datacom, telecom and RF, we see a good contribution from all the segments, particular telecom and datacom to the continued growth. So, yes, we will continue to see a balanced growth between the industrial ASICs and the high speed communication.

Okay, and then with respect to the Terasquare acquisition you had said that that would be accretive. Can you talk a little more about that acquisition?

What kind of products it will contribute and whether that is for 40 Gig datacenters or 100 Gig datacenters going forward?

Right, so as we all talked about it, GigOptix always developed the portfolio of products based on financial drivers of return on investments towards develop inside, build it inside or to acquire it outside. When we look to the overall high speed connectivity of fiber into the server, the current generation of the NRZ 40 Gigabit per second modulations, basically required the electro optic engine to comprise really only the optical devices, the Photo Detector and a VCSEL laser and two RF devices inside, one of which is the TIA, the Transimpedance Amplifier behind the photo detector and one of which is the driver for the VCSEL basically for the Vertical-Cavity Surface Emitting Laser.

So the 40 Gigabit per second NRZ modulation, which is a current work horse in the datacenter, GigOptix is a dominant, basically it’s a sole merchant supply of the RF devices of the drivers and the TIAs. As it goes to 100 Gigabit per second and the NRZ modulation and later on in other modulations, there is an increased demand for improvements of latency and cross talk at this high speed.

Therefore, the – particularly the CDR, the clock data recovery devices that are currently residing in the [phi] [ph] and the server itself had to be moved into the engine in close proximity to the TIAs and the drivers. In other words, in the 100 Gigabit per second electro optic engine, you expect to see in addition to the current devices that we have in the 40 G which are photo detector and VCSEL as well as drivers and TIA you expect to see two CDRs, one to drive - one to support the driver and one to support the TIA.

So the overall increase – there will be an overall increase of RF devices if you will from two devices, driver and TIA today, the 40 Gigabit per second, into four, driver TIA and two CDRs into 100 Gigabit per second engine. So, we had the CDR on our roadmap for couple of some – for a couple of years.

We look into a variety of alternatives in incorporating the CDR into our portfolio and like we always have done before, we had timed the investment in this new technology to the requirements by the market by our key customers and ended with a resolution that in buying or acquiring Terasquare to provide the CDR is by far the most efficient best financial investment that we have done, more so because we believe that Terasquare CDRs are proved and sampled by customers to be the most efficient and the best CDRs in the market. As an example, we have already demonstrated with our key customers and in the ECOC show couple of weeks ago that GigOptix is the only company in the industry today that can demonstrate a multi-mode fiber link of 300 meters using our current 100 Gigabit per second VCSEL drivers and receivers, the 8204 family incorporated with our new CDR that we acquired from Terasquare which we call HXC42400.

So, for the current generation of the NRZ modulation, 40 Gigabit per second which will continue to be the work horse for the next year till 2016 and the next generation of the NRZ modulation which is going to be the 100 Gigabit per second which will be active and lead the deployment all the way through 2017 or even 2018 CDR was required for us in this is why I brought it in. Moving forward into longer term deployment such as the PAM-4 that we believe will not come before 2018, the entire linear links will require CDRs and other digital devices such as DACs and ADCs and other elements that are existing today with Terasquare and again, we have a wide product portfolio that we have acquired in this acquisition that will serve us for the next three years through the continuous increase of speed in the NRZ modulation and as we move later on toward 2018 and beyond into other advanced modulations in 100 Gigabit and beyond.

Great, thank you and congratulations on the good results again.

Thank you very much Krishna. Thanks for your support.

Hi, thanks for taking my questions and congratulations on the quarter. My first question is, we’ve recently seen some datapoints indicating that datacenter growth may be slowing going to the end of this year.

Are you seeing any impact in your datacom business?

Hi, Wayne. Thanks for joining us.

No, we’ve not seen it in quarter three and I don’t see it in the booking for quarter four.

Okay. In regard to the 40 Gig migration, what inning would you say we are in, in the 40 Gig datacenter migration?

And second part of the question is, can you estimate how much of that growth is coming from new datacenter builds out versus server upgrades in existing datacenters?

Right, so, if I understand your question correctly, otherwise correct me, I don’t see migration yet from 40G to 100G. It’s not happening yet.

I mean, people are sampling 100G in a very early stage. I would say it’s a very low single percentage of shipment that we have done and any other industry player have done on the 100G.

So, as I mentioned earlier, the 40 Gigabit per second is here to be the work horse for 2015 for 2016 and definitely for the first part of 2017. So I think the migration as I mentioned in my prepared comments, the migration to 100 Gigabit per second NRZ devices will not start before the middle of next year and to be honest I think the 100G will overtake 40G toward late 2017 or maybe even later dependent on the satisfaction of the customers with the 40G generation which is now the workhorse in the industry.

Okay. What I might ask actually is, how much growth do you think there is left at 40G?

So, I think there is a lot of growth yet in the 40G. I think we have not – we have on the hockey stick.

If I have to judge by the orders, the 40G in GigOptix we still have a long way to go.

Okay. So in this quarter, ASICs represented a smaller percentage of your overall revenue.

So considering these two recently announced aerospace and defense contracts, what is your view of the ASICs as a percentage of sale going forward in 2016?

Right, so I think with – as I mentioned earlier, we strive to continue to keep about two-thirds of our shipments coming from the high speed connectivity and one-third from the ASIC business. I think it’s a stable and very healthy mix.

It’s just in the cycle, but you know, I would not apply too much way to the size to fluctuation of couple $100,000 here or there. I think it’s based on customer fulfillment and if you see move of couple $100,000 here or there within plus minus 5% typical normal fluctuations in this industry.

Okay. So not really limited.

Okay, thank you very much.

Thank you, Wayne. Thanks a lot.

Hi guys and I’ll offer my congratulations as well. A great quarter and guide here.

Thanks for taking my questions as well. Let’s see, I guess, first question from me on your gross margins in the third quarter, an exceptional number especially given the fact that your ASIC business looks to be down a little bit sequentially, which I generally understand to be a good gross margin product business for you.

Can you help us understand what the drivers are for growth just by that change in mix?

Right. So, thanks a lot for the good words and live with you on call.

Again, I would not – as I mentioned to Wayne, I will not apply too much weight to the swing of $200,000 or $300,000 on the industry ASIC. We are building our business on current dimension of customers.

There is a huge backlog as you know on the industrial ASIC or what you mentioned we are sitting on a very big backlog in particular into the avionics, commercial and military applications. There is more to come in variety of other market segments.

It’s a very active business for us in particular as we move it forward from traditional customized ASIC to be acquired from ChipX in about seven years ago into really modern design and high speed and RF ASIC and again if you look to the skill that we have acquired in Terasquare for example, the GTK center we have in Korea today all of them are basically analog and digital ASIC design. All of them are expert and low geometries design and lot of them – two-third of these employees are PhDs, one-thirds are masters in engineers and I think what you will see much more excitement from the ASIC line in the years to come.

You asked, so I mean, I would not refer the continuous improvement of profitability to mix between the ASIC and the high speed at this point of time. If I have to answer your question, the truth of the matter is that, while we maintain a very healthy direct margin, we continue to drive improvement efficiencies in the variables and the overhead allocations and as you look to the spreads in the direct margin and the gross margin, we pay a lot of attention to continue to approve- to bring more health into this and again in a company of 100 people, and I should have mentioned that with the acquisition of Terasquare we’ve just crossed the 100 employees in GigOptix.

I think our situation is improving as we continue to grow organically and mainly through acquisitions, I believe that there is more flexibility built in this model as we basically spread the overhead in the – and advances on larger number of employees. So, I think that, honestly, that the continuous improvement in gross margin has to be attributed really to financial discipline more than anything else.

Okay, fair enough. Avi, you had some prepared reserve remarks on this topic and then you just mentioned some – here a minute ago regarding your ASIC business.

If I wrote down my notes here and I probably didn’t get it as quickly as it went by that I think you seem to be suggesting a transition from older line industrial focused ASICs to a more RF communications. If you can help me understand exactly what you meant by that and does that mean we are going to see, maybe a low as you transition to newer product lines, I don’t want to put words in mouth, but can you help me understand exactly what your points with those comments was please?

Sure, thanks a lot and again, I apologize if I was not clear. So, thanks for allowing me the opportunity to clarify it.

We will continue to manage two product lines. The high speed communications that comprise devices and go to the transceivers and active cables and datacom, in telecom and in the wireless point-to-point backhaul.

And on that side we will have the ASIC that will serve variety of industrial segments such as mill aero, avionics, test and measurement, automotives, gaming, entertainment, internet of things and so on and so forth. The transition is more – which are more related to the nature of the design.

Historically, we launch into the ASIC line when I needed a digital and ASIC skills in GigOptix by acquiring ChipX that was mainly dealing with back-end RTL and APGA conversion technologies. As we move forward and we continue to enhance our knowledge and high speed and high frequency, we find more and more applications whereby which customers need a niche player like GigOptix can bring to the market high speed or RF ASICs to a variety of segments not only to communications.

And we found this to be very attractive niche for us particularly as we move forward.

Okay, great. And I appreciate that.

I hope that helps you.

Yes, yes, much better. I misinterpreted what I heard.

So I appreciate the opportunity to ask that question here.

I am not sure you missed it better, but I believe that that was misleading. So I apologize.

No problem.

That’s cleared probably by now.

Yes, that’s great. Thank you.

Maybe one more question here and I will jump out of line. Avi, you mentioned, within your telecom business talking about some emerging opportunities with metro.

If you could maybe clarify for us how much of your telecom related coms business is long-haul versus metro today and where you see that going maybe exiting next year or whatever timeframe you’d like to talk about?

So, GigOptix’s activities in the telecom started in its very, very high-end and low volume of the submarine cables seven, eight years ago. And as we established more and more confidence in our ability to provide the high quality high reliable system to the market, we went down into the long-haul telecom which is really terrestrial cables up to 400 kilometers which were our major effort over the last few years, particularly as it pertains to the GPPO connected multi-chip models.

As the market started to move from 10 Gigabit per second into 100 Gigabit per second deployment in the metro, we obviously started to develop this technology two years ago particular with an emphasis on SMP lower cost drivers. And delightfully, we see the market indeed moving to metro 100G metro which will become the standard by early to middle of 2016 and as I mentioned in my prepared comments, we are priding ourselves of having both solutions, superior qualified solutions, both the GPPO multi-chip model and the SMP which is very unique position.

I don’t believe that there is any other competitor in the market that has both of those qualified in production level and the reason we are excited about the metro is, as you all know as I recently read from the market analysts I think metro provides much higher volume – installed volume anywhere between three to five x over the long-haul. So as you go down from 400 kilometers into the 40 kilometers into the datacenters regime, I think we will see much larger opportunities in terms of installed base starting early next year.

I can only tell that GigOptix took upon itself to continuing to drive very hard to become a major player and dominating player in the metro devices and proudly we have lined up a good number of customers already, new telecom customers for the metro area and I hope that we will see more success as we move to 2016. So from revenue base point of view and how much percentage will be in the long-haul versus the metro, Richard I’d like to ask your patience with me as I work out to project the 2016 and I am sure that we’ll colors in our next call in early 2016.

But it’s going to be growing important contributor to the telecom beyond the current long-haul business that we have exceeded over the last two years.

Okay, appreciate the color. I will jump out of line.

Thank you for taking my questions.

Thank you very much and congrats guys. Great work.

Getting back to the Terasquare acquisition, Avi, you talked about the additional CDR content within the transceiver devices, does this, as you go from previously having the TIA and the driver, it’s now having two CDRs and so you doubled your content. But does your total adjustable market, your TAM inside the transceivers, does that double as well or is it or the ASP is a little bit different?

Thanks a lot for the question. I think there are few elements here that I would like to decipher so just to be clear, one of which is, there is no need for CDR in the current 40 Gigabit per second generation.

The CDR resides in the five and the current CDR we’ve been acquiring from Terasquare and will continue to developed under the GTK is going to address the high speed formulation. So for the 40 Gig there is no CDR deployment.

As we move to 100G, the opportunity as you said is doubling the number of devices in the electro optic engine. From the dollars point of view, it’s early to about it because we are now and our competitors are now offering some configuration that didn’t comprise a CDR and really in the evaluation and qualification volume.

So there is no price set here for volume production and to be honest we are just starting the round of negotiations with a variety of customers on the attendance for next year. So it’s early for me to talk to you about the TAM or SAM in terms of dollars.

But I think the point to takeaway from this dialogues is, that obviously as we move to 100 Gigabit per second as I said in middle of 2016 into 2017 and 2018 the overall kilo material pertaining to GigOptix devices to the RF devices and the optic engine will grow as to be larger portion of the overall cost of the active cable or the materials of the transceiver. So I feel it’s early to talk about the ASPs on the devices, but again, I hope that I’ll be able to provide more color next time we’ll meet in early 2016.

Sure, now that’s helpful too. And then, within the HSC segment, you previously were talking about the long-haul versus the metro opportunity for next year, Just kind of wondering if you can compare, are you more excited about metro and HSC and the telecom epic to it or are you more excited about the datacenter and the datacom opportunity for 2016?

Right, now this is the question, I’ll give you an holistic answer to it. I’ll tell what I am really excited after so many others in this industry, I am really excited to see a stand out in this case it’s 100 Gigabit per second that is going to cover the entire natural communication all the way from the back-haul and so from the backbone infrastructure all the way to the fiber-to-the-home and to the optic at home.

I am very excited to see it because this will take away all the bottlenecks that we as an end-user are seeing. Again, all of us are living in a congested metro areas know that when rush hours hit at 8’o clock in the evening, there is no way you can get a decent streaming of content, no matter how big your pipe is, no matter how much the download the various carriers are offering you.

So I am very excited to see 100 Gigabit per second connecting all the way from the submarine cables into the long-haul, into the metro, into the datacenters, into the fiber-to-the-home and before too long. From a business point of view, I think that we are going to see convergence.

I mean, we call it high speed connectivity for reasons. I think the convergence is going to before too long to takeaway the distinction between telecom and datacom.

Already today, if you want to split hertz the question is whether metro belong to datacom or metro belong to telecom which is really not important because, as I said, what’s important is, we’ll be able to have pipes of 100 Gigabit per second all the way to the home or to the datacenters for starters. From our business we are preparing and we are developing and investing resources in developing both of them.

We have a great solution in the long-haul. We dominated leaner 100 Gigabit per second coherent and long-haul.

We extended it to 200 Gigabit per second which is going to be the workhorse in the long-haul and so in the longer reach telecom next year. And you know it’s going to go to 400 Gigabit per second probably in 2017, 2018.

So, I think the long-haul telecom is moving as a leading cursor if you will moving from 100 Gigabit per second workhorse this year into 200 Gigabits next year and 400 gigabits the year after or two years later and we are delightfully playing there as a very meaningful player. I think that we are definitely in the forefront as we pertain to 100 Gigabit per second metro application for telecom and as I said, we are definitely dominating as a sole provider the 40 Gigabit per second in the shorter region datacom and we will be sure that this position will not be comprised as we move to 100 Gigabit per second.

So, looking forward, three to five years from GigOptix I think the contributions of telecom and datacom will continue to be equally important to us as we grow the company.

Okay, makes sense. Final question, Darren, just, you said, CapEx was going to be up sequentially for Q4.

What kind of – do you have just kind of a level that we can think about?

Yes, so, typically, our CapEx we primarily spend – invest in production assets and so forth. So if you look at the last couple quarters, we spent about $200,000 in quarter three and the quarter before that was about $700,000.

So you can kind of expect that within that range.

Okay, thanks.

Thank you, Ted. Thank you very much.

Thank you. Nice quarter guys.

First of all, did you have any 10% customers?

Yes, Dave, we have a 10% as we have announced last year on the 10-k, last year’s 10-k, the only 10% customer we had was Alcatel.

Okay.

We will get another announcement of 10% customer in this year’s 10-k.

Now did you experienced any kind of disruption with AOU selling their Italian facility to Flextronics and also obviously with their merger with Nokia, any kind of disruptions?

No, we continue to see things as usual. I think that obviously there are changes in the supply chain which is driving the training and the arrangement but at the end of the day Alcatel has been a prime customer for GigOptix.

We have lot of respect to the technology level of development and the business, to my point of view, we treat them as a customer for us regardless. So, we have not seen any – from our end we have not seen any disruptions.

Got it. And then regarding the metro customers, you are engaging with, how many are we talking about and what kind of a stage are you as far as the sales cycle is concerned?

I think it’s prudent to say it with – we are talking about hands full of customers and I think that they are anywhere between qualification to acceptance.

Got it. Now are these metro customer is same as datacom customers or are they totally different customer base?

I think the landscape of metro is a bit metro application telecom is a bit comp eluded most of them are new customers.

New customers, got it.

But I will not be surprised to see some customers that are investing in a datacenter infrastructure getting into the metro zone.

Got it and then you talked about, datacenter 40G and 100G is, mostly 40G right now, some of your transceiver customers they are kind of blaming Tomahawk. So what’s the status and do you really think Tomahawk is the main issue?

You know, I mentioned that you – probably look at it few days, telling you about Tomahawk like preaching to Moses on Ten Commandments but I’ll tell you right here, I hear a variety of things including the fact that the VCSEL 28 Gigabit per second is not ready for prime time yet. Maybe takes the deployment and therefore I am – as I told you few times in the past, I am not as excited about PAM-4 at this point of time because I think the industry has a long way to go and really bring you to 28 Gigabit per second VCSEL to prime time high yield and ready for production, let along the 56 Gigabit per second later that will be required for this time.

Okay, okay. Fair enough.

And then, just couple more, Avago is selling their fiber optic module business to Foxconn, any kind of impact, any kind of incremental business from Foxconn or is it’s early?

Well, listen, I mean, I think that for Avago to diversify from the module related business and put it in Foxconn which is definitely very capable. Maybe good news for a company like GigOptix I think every new module integrated come to the market provide an opportunity to win new business.

I think it’s a very positive news for GigOptix.

Got it, got it. Just, when talking about long-haul to metro, is there going to be some kind of a step-down in terms of pricing from long-haul to metro because obviously volume is much greater?

I think that the step-down prices has to do with, not with volume but with the complexity of the electronics, when you go to submarine cable you have to drive the signal integrity through 10,000 kilometers. It takes more sophisticated, more expensive electronic that take it to drive the signal integrity to 400 kilometers.

If you go from 400 kilometers down to 100 kilometers or 40 kilometers in the metro obviously electronics is not as complex and you expect to see a reduction in ASP as a result.

Okay, okay, and then, you may have talked about this, but whatever happened to your even and also the Tower acquisition, I mean, we continue to hear a lot of chatter about the small cells and all that, but when are we going to really see the actual deployments?

Right, so you have two elements in your question. The Tower acquisition occurred exactly a year ago was completely consolidated, integrated probably a quarter after we did it and they are not focusing at all only – that part of GigOptix devices and some of them are working on the high speed communication line, whether it’s point to point back-haul or whether it’s our telecom activities.

Some of them are supporting, engineers are supporting the ASIC line and new activities pertaining to the ASIC and variety of market segments that will probably disclosed in the future. So they have nothing to do, the Tower, and so they have nothing to do with our activities in point to point back haul RF.

This is a very – I am delighted with this acquisition. It has provided GigOptix a really fresh plot of ten outstanding engineers and they are in the high speed RF and we are definitely very excited about it.

With regard to the point to point backhaul as I said in my last call we are in a stage of the qualification of our system in a package with key light of customers and as I mentioned by the end of this year we will come out of the qualification and we will have visibility into next year. I think that there is no doubt that the micro cells for the point to point backhaul are going to be critical and I think that as of today, people believe that Eband is in this solution for the 4G and we are very optimistic about what it can do to our revenue next year again positioning successful completion of the qualification.

Yes, is it too early to talk about or maybe try to quantify it a little bit for next year, what we should expect?

So for one, I am not breaking the high speed communication to the given segment and not for any other reason but for competitive advantage reasons, but as I said, when I will come in February, with our projection for 2016, I think the colors on each of the segment will be pretty clear. I think that what Darren and myself have mentioned in our prepared comments, we are very bullish about the quarter four of this year.

We are very excited about carrying the continuous momentum into in 2016. We don’t see a slowdown in any of our businesses toward next year.

Got it. All right.

Thank you.

Yes, thanks for squeezing me and real quickly, just thinking about y our ASIC business, as we think about that as sort of a lumpy revenue line, it’s down sequentially. Is that a function of seasonality, again just help us on how to think about that revenue line going forward?

Right, thanks, Gus. No, I would – listen, if you look to the history, I think we are showing it in our website you have history of the revenue break by high speed communications and by ASIC over the last six quarters and I think that overall, we are growing the business from 2014 to 2015 and expect to see a growth of about probably 10% or 15% year-over-year.

I mean, again, as I mentioned earlier I will not call them move plus minus $100,000 to $100,000 of the lumpiness, because again, it depends on the fulfillment needs of our customers. I think the takeaway from this discussion as I mentioned early with a very large backlog particular to the ASIC the beauty about the ASIC line has much longer visibility than the high speed communication.

Most of this business is coming with a long horizon of purchase orders and fulfillment demand. So you know how it’s coming.

It’s easier to project the high speed communication and as I said, I think we will continue to see growth in the quarter four when you will look backwards what we are comparing the fiscal year 2015 to fiscal year 2014 you will see growth in this line which is very h healthy and I don’t think we are going to slow it down in 2016 as I mentioned. I think we will continue to see nice growth from both sides of the business.

Okay, and then, just can you talk a bit about 40 gig pricing and this seems to be lasting a little bit longer than people had originally thought as their additional pricing pressure. What is the price curve look like going forward?

I think like any other quarter that’s a product, 40 Gigabit per second datacom devices are to support the realistic prices of 40 Gigabit per second at the cables and transceivers and datacenter and we are working very closely with our customers to be for the business because they are under tremendous price pressure with their customers. But again, there is continuous monitoring of the ASPs and demand and different customers and end-user customers to continue to use the price.

Volume mix up lot of that’s in the – volume continues to grow significantly. It makes up a lot of this const reduction and remember this cost reduction is all the way down in supply chain all the way to our suppliers as well.

So, I think as volume grow, all of us have better leverage in terms of negotiating the prices and maintaining healthy margins.

Got it, okay, thank you very much.

Thank you, Gus.

Great, thanks for taking my question guys and congrats on the strong results. If I could quickly see what type of visibility you have into next year I know – is one of those companies that does produce volume purchase agreements and it’s about this time of year that historically they launch them or can you give any visibility in what they are looking for throughout next year?

Can you share that with us?

Hi, Doug, thanks for the question. Obviously, lot of discussions are under NDA so I apologize but as we know October, November time are the time of negotiating the tenders the datacom and telecom customers including some of the names you have mentioned.

I will tell that the business IC whether it’s datacom and telecom, I don’t see any slowdown for next year. I see healthy demand again pertain to metro, I am sorry pertaining to the long reach long-haul telecom, I see continuous demand in higher speeds.

Continuous install up in the new infrastructure as it pertains to metro again, we are not seeing yet the take-off on the commodity commercial demand, but I can see customers preparing for the prime time and we keep being involved in this as it pertains to 100 Gigabit per second, going down to the datacom, as I said, I don’t see as I sit today, I don’t see anything but continuous growth on the 40 Gigabit per second datacenter devices. So, I cannot share with you volumes here, because for one, it’s in negotiation but I from where I am sitting here don’t see settle down.

Okay, if I could maybe focus on one of the earlier questions asked that you had visibility into sort of call it the datacenter slowdown. I think when we – I think what they are pointing to you and what investors are concerned about is, Intel reported that cloud datacenter was very strong but the enterprise side of the business was a little bit weaker on the server markets for them and I am not sure do you have the type of visibility that you can tell the difference between, say, cloud datacenter and your enterprise customer?

It’s a good question, Doug. I mean, I am contemplating with this almost everyday here.

You see, I have provided – the customers that are building the active cables and the transceivers for the datacenter. So when you see GigOptix devices going out, they go to the people that integrate those sub-systems and then turnaround and sell it for the end-users which mainly are the web 2.0 players, I just by looking to the volume some of those devices go eventually to the major cloud players.

So, I suspect that most of my business, most of GigOptix devices end being in the datacenters and the cloud players and this is why we don’t see a slowdown.

Terrific. Thanks so much.

Understood.

I don’t think we see GigOptix devices too much into the enterprise servers, but we definitely know that goes to the cloud.

Terrific. Thanks so much.

Congrats on the results.

Thank you very much, Doug.

Yes, my questions have been answered. Thank you.

Great, thank you everybody. We reached our one hour threshold.

We do appreciate the tremendous participation today and look forward to speaking with you again when we report the fourth quarter and fiscal 2015 results in early 2016. Thank you and have a good day.