Kaleyra, Inc.

Jim Fanucchi - Darrow Associates Avi Katz - Chairman and CEO Darren Ma - CFO

Quinn Bolton - Needham & Company Steve Smigie - Raymond James Richard Shannon - Craig-Hallum Wayne Loeb - Cowen & Company Tim Savageaux - Northland Capital Markets

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 GigPeak. After the market closed today, GigPeak issued a press release discussing its financial results for the third quarter of fiscal year 2016.

That release is currently available in the Investors section of the company's Web site. Please be advised that the matters discussed in this call due contain forward-looking statements or projections regarding future results or events, and we caution that such statements are in fact predictions that are subject to risks and uncertainties that could cause actual events or results to differ materially.

Actual results may differ materially from our statements or projections. Additional risks, uncertainties and factors that could cause actual events or results to differ materially from these forward-looking statements may be found in the company's filings with the Securities and Exchange Commission.

Forward-looking statements are based on the company's beliefs as of today, which is Monday, October 17, 2016. GigPeak undertakes no obligation or responsibility to publicly update any forward-looking statements for any reason except as is required by law even if new information becomes available or other events occur in the future.

In addition, today we will be discussing non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with GAAP and should not be considered as a substitute for or superior to measures of financial performance prepared in accordance with GAAP.

A table that outlines the reconciliation between the non-GAAP financial measures to GAAP financial measures is included in our earnings release, which we have filed with the SEC, and I refer investors to this document. We have also posted an updated Corporate Presentation with the trended financial results through Q3 in the Investors section of our Web site.

I'll now turn the call over to Avi.

Thank you Jim, and welcome everyone to our conference call to discuss our third quarter fiscal 2016 financial results. Today, we review our recent performance and business trends, as well as discussing our outlook for the fourth quarter of 2016.

I’m pleased to announce that GigPeak delivered another quarter of record revenue and enhanced profitability, proving again the successful strategy we’ve in place to drive greater scale in our business and increasing profitability by focusing our business on cloud connectivity through networking and broadcasting application. Our revenue growth continues to be driven by the global demand for more bandwidth and enhanced transport efficiency of the communications byte, which are essential to support the ever-increasing distribution of video and digital media content across the cloud.

Indeed, GigPeak product strategy addresses the market that transformed the fabric of our society. Our products support primarily the real-time high-speed and high-quality streaming of the exploding global cloud data traffic, driven by the new megatrends.

This includes mobile and broadband applications, which are projected to grow to 9 billion mobile subscribers, 7.7 billion broadband subscribers, and 6.3 billion smartphone subscribers in the next five years by 2021. It also reflects teen’s increasing their smartphone/video traffic viewing at home by 85% over the last five years period, since 2011.

Finally, they also present the major growth in the data center capacity with 6 million new servers are expected to be installed every year for the next 10 years to handle more than 200 million emails per minute worldwide and hundreds of petabytes of video per month. Connectivity that provides enough bandwidth, with high-speed and high-quality video compression to enable the highest possible information density streaming, is absolutely a key for today and tomorrow’s socially connected world, and this has become the focus of GigPeak’s business and will remain so for the years to come.

Now, I’d like to shortly summarize the record quarter we’ve just closed before I turn it to Darren for a deeper discussion. Revenue increased this quarter to a record of $15.8 million, representing a 52% increase from the third quarter of 2015.

Non-GAAP gross margin increased to a new high of 72% exhibiting GigPeak's best ever quarter and one of the highest gross margin figures across the entire semiconductor universe. The record revenue and gross margin combined with our religious tight expense controls resulted in a non-GAAP net income of $3.5 million, that’s best in our nearly 10 years of history.

This profitability allowed us to exceed the non-GAAP EPS guidance and deliver $0.05 earnings per diluted share consistent with the previous quarter, in spite share count increase by approximately 12 million shares, or about 20% from last quarter to this quarter due to the highly successful and oversubscribed fundraising we completed in late June 2016. The increased profitability is also reflected in the adjusted EBITDA, which came this quarter at $4.6 million, another new record in our 10 years history.

This represents a 53% improvement above the $3 million of adjusted EBITDA we generated in the third quarter of 2016 and 18% improvement above the $3.9 million adjusted EBITDA we generated in the second quarter of 2016. We are even more excited about continuous improvement of our profitability in view of our continuous high investment of about 33% in R&D, innovation for future generations of technology development, and new cutting-edge products.

Why we’re delighted with the third-quarter performance, we strongly believe our future business and financial prospects in fourth quarter of 2016 and beyond into 2017 are been brighter, driven by few major factors. First is the mass proliferation of broadcasting and networking data center services to support the fast cloud environment growth.

It is recommended with a pending expansion of next-generation optical infrastructure build out both in China to support the provincial and the metropolitan [ph] range, which would serve roughly 100 new cities each with population of about 1 million people and in many other major economic regions around the world. Those are the overarching factors which will generate the new huge greenfield installation opportunities as it pertains with the Datacom networking and broadcasting infrastructure.

In addition, the global Web 2.0 Cloud Titans are looking to expand and upgrade their inter and intra-data center infrastructure over the next 18 months. As a reminder, GigPeak has to date commanding position in an existing 40-gigabit per second market that served as the foundation working horse for the current data center interconnect environment, a technology platform that is expected to last through 2018 and beyond.

But as importantly we’re in position to expand this complete Datacom chipset dominating position into the 100-gigabit per second market, if and when it eventually emerge to serve the data center infrastructure in a Company, the current [ph] 40-gigabit per second generation. However, if the 100- gigabit per second market that would be eventually leapfrogged by a 200-gigabit per second market using the PAM4 architecture, which some in the industry are beginning to seriously discuss and we will enjoy the first mover benefit since GigPeak is today the only supplier that already ship both the PAM4 drivers and TIAs for customers evaluation.

The potential leapfrog from 40-gigabit per second NRZ technology directly into the 200-gigabit per second, 400-gigabit per second PAM4 in the data centers may mimic similar trend that took place in the telecom [indiscernible] market back in 2010 where the market in general skipped the deployment of the 40-gigabit per second format and move directly from the 10-gigabit per second generation into the 100-gigabit per second generation, which turned to be a more cost-efficient and better support of the markets need then. Having a complete Datacom chipset portfolio to dominate the present generation of technology and the supply, the chipset to any future selected technology that will be picked by our customers to enhance the data center connectivity, gives GigPeak a very meaningful advantage in this markets or segment and we look forward to deliver on this opportunities and to grow our footprint in the data center inter and intra links markets.

Now I'd like to discuss specifics of our business. As we’ve discussed in the past, we break our business into two areas.

This are the Above the Cloud and Below the Cloud segments. The Above the Cloud segment includes all the high-speed and high-quality cloud enterprise connectivity products, namely the telecom, core, and metro markets, which is known as our GX product line.

The data center communication that includes both short reach and long reach and is known as our HX product line and the professional broadcasting which is the MX product line. This business contributed about two thirds of our overall revenue on an ongoing basis.

The Below the Cloud segment, that includes the wireless access products, which is EX product line, and a highly profitable commercial and Mil/Aero ASIC base products used by enterprise customers for end using terminals, such as test and measurement and medical equipment, virtual and augmented reality systems, as well as GPS and GNSS systems. Our application serving the Below the Cloud segment supports faster and more ubiquitous connectivity for consumers and enterprises and accounts for about one third of our overall revenue.

I will first analyze the Above the Cloud business. As you all know, GigPeak was pioneer and remains the forefront of delivery high-speed devices that enable the active optical cable transceivers connectivity technology that power the data center evolution.

Our HX line, which includes our data center transceivers and active optical cable TIAs, VCSEL and drivers, DML drivers, and CDR devices for both long reach and short reach exhibited in the third quarter record for the number of shipment devices, revenue generation, and backlogged orders. This business has been growing nearly 60% year-over-year since 2011.

This revenue stream comprises about 90% of the ship devices being 40-gigabit per second and 10% being 100-gigabit per second and in total represent more than 30% of our entire revenue in the third quarter. This is enormous pressure -- there is an enormous pressure on business and data centers to keep the pace with exploding traffic demand constantly driven and driving new architectural paradigms in highly scalable platforms built to handle the massive complex workloads of the networks.

At the forefront of this change of the technology giants Web 2.0 players which are GigPeak's end-users. With our highly invested innovative development efforts and continuous support from our customers, we’ve obtained the rare position as being the only supplier with all three generation of speeds that enable us not only to serve today’s needs, but those of the future as well.

This include the 40-gigabit per second NRZ, 100-gigabit per second NRZ, and 200-gigabit per second and beyond PAM4. But as important is constantly spearheading the technology direction -- directions which are exchanged as it pertains to the deployment of higher speeds in advanced modulation technology generation, we continue to partner with the leaders in the industry to tailor integrated solution that satisfy the future product trends in data center connectivity, such as developing devices to support the on board photonics and potential silicon photonics optical connectivity.

I’m confident that no matter how the speed and architecture evolution plays out in the data center and connectivity industry, we will maintain a strong competitive leadership advantage and enjoy continuous revenue growth driven by the strong demand from all the major Web 2.0 data center OEMs, as we’ve continuously demonstrated over the last five years. Let me now address the GX line, which is our telecom business, comprising both the long haul products and the metro products.

Until recently we’ve focused solely in developing and supplying primarily drivers for the long haul based on hermetic sealed package technology also known as Gold Box Multi-Chip-Modules or MCMs. With a continuous price erosion of this particular family of products due to the intense competition and their corresponding drop of the gross margin, we’ve transitioned our development investment into primarily the development of drivers family for the metro connectivity based on the surface mounting technology or SMT, as well as the deployment of competitive -- development of competitive transimpedance amplifiers or TIA family of products for both long haul and metro applications.

In addition to the shipment of our 100-gigabit per second SMT drivers over the last couple of quarters to key metro customers, late in quarter three, we announced the introduction of the low power consumption and cost to competitive dual channel 32G linear TIAs. This product is designed for 100-gigabit per second to 200-gigabit per second coherent linear DWDM optical receivers and is fit for use in a number of current deployed fiber optics receiver modules.

We believe that our linear TIA product, which is being evaluated by key customers around the world as we speak, could be disruptive competitive replacement products to the current solutions available in the market that present a very attractive alternative to our customers. Being able to increase our product footprint in the 100-gigabit per second telecom market, more so with the higher margin metro drivers and TIA products, we will support enhanced revenue and profitability for the GX line into 2017, as we enjoy the benefits of this growing market.

As a reminder, industry research [indiscernible] predicted that 100-gigabit per second coherent linear forward shipments will grow at a CAGR of about 25% to 30% through 2020. This will be accompanied by the next generation of higher speed coherent generation, potentially based on a single wavelength solution for both line cards and pluggable modules, creating further opportunities for revenue growth for GigPeak.

Also regarding the metro market build up, some financial analysts that mentioned recently, the metro spending with large North American carrier is now beginning to ramp with significant no achievements taking place. While there has been some discussion that the pace has been slower than originally expected, analysts continue to believe that most carriers will start the upgrade of their metro infrastructure to the 100-gigabit per second technology by early 2017.

Let me address now the broadcasting product line, which we believe would be game changer for us over the next couple of years and offers natural augmentation to our networking product line. We are investing heavily in Broadcasting segment with a focus on the high-volume and highly profitable enterprise broadcasting customers, addressing the next wave of video generation and distribution applications.

Our new broadcasting line addresses primarily encoding software stack solutions and continue to exhibit strong demand from key lighthouse broadcasting customers. The combination of the best in the industry high video quality encoding software stack and our close partnership with the partners to deploy this package into their standard available processors and FPGAs, creates a new and promising trend of go-to-market in this industry.

We certainly view our Broadcasting segment as an integral part of the solution we are offering to many of our customers, mainly supporting their mission to enhance the efficiency of the pipe serving the cloud in order to increase the density of the enabled numbers of streamed channels, while constantly reducing the infrastructure total cost of ownership. We believe that combined networking and broadcasting data center product lines makes our total product portfolio offerings for the Web 2.0 data center OEMs much more compelling.

Now shifting to the other side of our business, mainly the Below the Cloud business, where we had another very good quarter in our highly profitable ASIC base product line. With introduction of a new unique design, we recently completed the few initial tape-outs of low geometry CMOS based high-speed and ultra-wide bandwidths commercial product for various applications such as indoor tracking, virtual reality gaming, and security system.

This segment continue to support about 25% of our Company's revenue and with very high margins. In summary, we’re very encouraged by the continuous growth of our networking and broadcasting product portfolio with solid and constant business growth of our high profitable Datacom broadcasting and high reliability ASIC product lines and are projecting that these non-emerging revenues from our new telecom products to support even faster high margin revenue growth through the year of 2017.

And now with this overview, I’d like to turn the call to Darren for a review of our financial results and I will get back to you with few summary comments. Darren, please go ahead.

Thank you, Avi. Good afternoon, everyone.

As Avi have discussed, we had a great quarter. And I'm pleased to present the exceptional financial results for Q3, 2016.

Revenue in the third quarter was a record $15.8 million and above the high-end of the guidance range of $15.4 million to $15.6 million we provided on the July call. Q3 revenue was approximately 3% higher than the second quarter and 52% higher than the third quarter a year-ago.

The sequential revenue growth was primarily driven by the continued strong demand for IC shipments in the data center market, which was dominated by 40-gig QSFP+ devices, as well as the newer 100- gig products. We do not see demand for our 40-gig products letting up anytime soon.

And looking at our GAAP results, GAAP gross margin was 67%, up approximately 1 percentage point from the prior quarter and up approximately 3 percentage points from the 64% gross margin in the third quarter a year-ago. GAAP operating expenses in the third quarter of 2016 were $9.8 million, up slightly from $9.7 million last quarter and up from $5.6 million in the third quarter a year-ago.

As a reminder, the yearly change is associated with the Magnum acquisition that we completed in April. GAAP net income in Q3 was approximately $700,000 or $0.01 per diluted share.

This compares with GAAP net income of $85,000 or $0.00 per diluted share in the prior quarter and GAAP net income of $1 million or $0.03 per diluted share in the third quarter a year-ago. Included in the GAAP financial results are costs related to the Company's acquisition and other strategic development activities.

These were approximately $750,000, $470,000 and $110,000 for the period ended Q3 fiscal year '16, Q2 '16, and Q3 '15, respectively. Now moving on to our non-GAAP financial results.

Non-GAAP gross margin was a record 72%, up approximately 1 percentage point from the prior quarter and up approximately 6 percentage points from 66% in the third quarter a year-ago. These improvements were again driven primarily by a favorable shift in product mix, an increase in sales of networking and broadcasting higher-margin products and absorption from inventory builds.

Gross profit dollars were also a record at $11.4 million for the third quarter. For Q4, we expect gross margin to be about the same as Q3.

Non-GAAP operating expenses in the third quarter were $7.7 million, down from $7.9 million last quarter and up from $4.5 million in the third quarter a year-ago. Despite having a full quarter of Magnum expenses in Q3, the sequential decrease in OpEx was primarily driven by the lower expenses resulting from the synergies we have achieved to date.

As a reminder, when we announced the transaction, we had expected cost synergies of approximately $500,000 in the second half of the year and we remain on track to achieve this target. Q4 non-GAAP operating expenses are expected to be in the range of $7.9 million to $8.1 million.

The higher operating expenses are driven primarily by investments in engineer and wafer tape-outs and next generation Datacom products. Non-GAAP net income in Q3 was a record $3.5 million or $0.05 per diluted share.

This is the 10th straight quarter in which we’ve generated non-GAAP net income. Our Q3 performance compares with non-GAAP net income of $2.6 million or $0.05 per diluted share in the prior quarter and non-GAAP net income of $2.3 million or $0.06 per diluted share in the third quarter a year-ago.

The Q3 EPS was calculated with the weighted average, diluted share count of 69.4 million in shares, which now reflects the full impact of the June public offering. This compares with 57.7 million shares in Q2 and 38.5 million shares for the same quarter a year-ago.

For Q4, we expect the fully diluted share count of approximately 72 million shares. Adjusted EBITDA for the third quarter was a record $4.6 million, completing 21 straight quarters of positive adjusted EBITDA.

This compares with adjusted EBITDA of $3.9 million in Q2 of 2016 and $3 million in Q3, 2015. Turning to our balance sheet.

Our cash and investments balance at the end of Q3, 2016 was approximately $38.4 million compared with $45.8 million at the end of Q2. The sequential decrease in cash resulted solely from the payback of financial instruments.

First was $7.1 million on a revolving line of credit. With this pay down, we now have the full $14 million line of credit available for future needs.

Second, we use $750,000 to pay down part of the $15 million term loan leaving our remaining principal balance of approximately $13.8 million. Between these two actions, we expect our interest expense to decrease by about $80,000 per quarter to approximately a $160 million in Q4.

Free cash flow was approximately positive $1.2 million during Q3, compared to the negative free cash flow $1.4 million last quarter. Q3.

2016 inventory increased to $11.2 million from $9.1 million in Q2, primarily driven by inventory builds to replenish broadcast related products inventory and to support the continuous growth and strong demand for Datacom products. Day sales outstanding in Q3 was 82 days, down from the 84 days in the prior quarter.

In Q3, 2016, we spent approximately $420,000 on CapEx. We expect Q4 CapEx to be approximately $600,000.

The increase is driven by investments into production [indiscernible] and equipment to support primarily our Datacom demand, an additional production automation equipment for telecom, metro related products. Depreciation and amortization for the quarter was approximately $1.9 million flat from the prior quarter.

Now turning to the revenue guidance for Q4, 2016. We currently expect revenues to be in the range of $16 million to $16.2 million.

We see no let up in demand and believe Q4, 2016 will be another quarter of record revenue with the growth coming from our higher-margin products. Using the midpoint of this revenue guidance range, we expect fiscal 2016 full-year revenue to be approximately $59 million.

In summary, Q3 was another record financial quarter with the highest ever revenue and profits. We expect Q4 to be equally strong, which would result in 2016 being our best financial year ever.

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

Thank you very much, Darren. As we enter the last stage of fiscal 2016, I could not be happier with the progress we've made in the Company, Our unique innovative business model is sound.

We’ve a strong and growing product portfolio addressing fast-growing markets and our financial position continue to improve as we expect to grow our total adjusted EBITDA this year in about 50% compared to 2015, while more than doubling our free cash flow generation. We see 2016 shaping up to be the best in the history of the Company and I'm confident that 2017 would be even better.

While I’m pleased with our results so far this year as we’ve heard from Darren, I’m even more excited about our new strategy -- strategic and business directions of the Company. Spearheading the combined networking and broadcasting cloud connectivity, as well as with the Company's road ahead, we’re actually deploying the strategy of touching the cloud by combining broadcasting and networking together.

The investment we’ve made in recent years are delivering superior results. Industrial trends are in our favor, leading to sold-out conditions with many of our products.

We firmly believe that this current enhanced networking upgrade cycle would be strong and enduring, driving or driven by the massive Web 2.0 data center construction and robust continuous 40-gigabit per second demand environment for the next few years, future 100- gigabit per second and 200-gigabit per second upgrades in the data centers and the increased deployment of 100-gigabit per second and 200-gigabit per second and beyond the coherent linear transceivers in the telecom, metro markets. Those trends will be all accompanied by the emerging trends in the broadcasting industry, which introduce promising opportunities for a high-quality video compression infrastructure installation.

In closing, I want to again acknowledge the Gig team -- at the GigPeak team, who have continued to work tirelessly throughout the last quarter to make the Company a stronger and more profitable firm. In addition, I want to redirect my thanks to our partners, suppliers, customers and investors for their continuous and ongoing support.

And with this, I’d like to pass the call to the operator for questions-and-answer session. Please go ahead.

Hey, Avi. Hey, Darren.

Congratulations on the very strong cash and nice outlook for the fourth quarter. Avi, just wanted to start with the telecom business.

It sounds like you guys are kind of trying to actively manage your exposure to the long haul segments and ramp SMT packaging for metro and the TIAs for metro. Can you give us some sense, what that revenue profile looks like in telecom?

It sounds like you maybe managing a business to a near-term trough at some point and then you see growth as the Metro and the TIA application start to ramp. So can you just kind of walk us through your kind of expectations for that telecom business?

Right. Thanks, Quinn for joining the call.

I think that in general, telecom definitely provide continuous growth opportunities mainly with the metro install base. The driver side and all inclusive in the TIA side, I think the volume both in long haul and metro are attractive to us.

We are managing the Company to continue its high margins and high profitability and are really less interested in any kind of product line that impulse aggressive competition with ever growing unreasonable price erosion. And you know we make our choices basically on the case-by-case customers and case-by-case product.

With regard to revenue broke -- break by telecom Datacom, [indiscernible] away from this question, as I’ve already mentioned the Above the Cloud represent two-thirds of our revenue and Below the Cloud, mainly our ASIC base product line represent about third with our product line. We definitely continue to deploy a longer strategy that allow us to maintain the competitiveness.

I would rather keep the way [indiscernible] for -- only for competitive benefit. But as you know and that you rightfully pointed out, our interest is definitely keep growing as a higher volume install of the metro and the new TIA family that you’re putting out there is a very competitive and very attractive alternative to our customers as we see much higher margin in those two lines.

Got it. Just sort of one follow-on that.

When would you expect the TIAs to begin to ramp in volume? Is that kind of a yearlong design in cycle, could it be shorter?

And then a second question, as you continue to manage the mix, you’ve done a fantastic job driving margins to 72% guided to a similar level in the fourth quarter. As you look at 2017, it sounds like Datacom will continue to be strong.

Hopefully the Magnum product line will continue to be strong. Is there any reason why you would think you couldn’t maintain that sort of 72% margin in the 2017 or are there other product mix shifts that you foresee that might bring the margin back close to the 70%?

This is tricky question and let me try to decide for a -- couple of points as you know which are very interesting to me. First of all, I think the team here is very cognizant and super careful about the ASPs and margins.

And in the same time we are pushing products to the market in full evolution [indiscernible] with customers. You ask me about the TIAs, I think as we are -- as I said as we’re in the evolution stage with many customers, TIA is tricky part.

It has to pass our quality assurance and our quality deliveries has to pass the customers evolutional qualification. And obviously it has to -- all integrated into the end-user system scheme of products.

I mean, if our 32G and later on the 64Gbaud TIAs, we will meet the expectations. I expect to see a completion of evolutional qualification into quarter four and definitely hope to see beginning of take off in early 2017.

And I will keep posting and keep informing the forum at our first call in 2017 was about to the progress. We -- with regard to the gross margin, it’s a very tricky question depending a lot on how fast we would be able to shift our broadcasting product into wider audience in the market and there is very big interest in our self respect [ph], which as I mentioned in my prepared comments, its considered to be the superior in encoding stack in the market.

And the other thing is obviously where we are all sort of sitting on the sideline and watching is what kind of trends, the data center industry will take? If the market will move into 100-gigabit per second from the 40G and started to see the move in 2017, margin maybe a bit weaker, because [indiscernible] as a whole is already in the lower ASPs.

If the market will behave the way we project here in GigPeak, there is a very continuous, very strong demand for 40G and moving there again to PAM4, I think the opportunities here are stronger for higher margin in 2017. So with regards to the model for 2017, I’d like to maintain the right to share to all of you as I always do in the first call of the year where I will give you outlook for revenue, as well as expand -- expect expenses and the gross margin.

But as I sit here today and as Darren mentioned in his comments, for quarter four we don’t see any reason to believe that the profitability would be low in the quarters ahead.

Great. Thank you Avi.

Thank you, Darren.

Thank you very much.

Great. Thanks a lot, Avi.

Just wanted to follow-up a little bit on sort of last question. I’m not -- I’m sorry if you touched on in terms of revenue, but I think you’ve given some color maybe 2017 could be around $70 million.

This was for the [indiscernible] model, does that seem like a reasonable number at this point?

So, hi, Steve. Thanks for joining us.

We’ve not guided to 2017 and I will -- I’m committed to do I think on our first call next year. I’ve seen all the models from -- we’ve five [indiscernible] cover us.

I’ve seen [indiscernible] I think the consensus was -- is give or take the number you gave, but I mean the Company has not yet guided to next year.

Okay, great. I was hoping you could talk a little bit on 200G and what your customers are saying there that and did you feel like you’re going to skip over a 100G pretty quickly or only have a limited amount there?

You know, Steve, I mean this is a great question. I mean, I’ve been hoping to have in one day, that was like few investment bankers conference in the next few months and I do hope, but looking forward to get a good firm dialog in discussions, so we can put all the wisdoms together and figure out where the market is going.

It really remind me a lot as I mentioned in my prepared comments. It really remind me a lot of this uncertainty in the 2009, 2010 period in the telecom when people were trying to [indiscernible] with the future of a 10G whether it's going to go to 40G, it could be [indiscernible] or whether it's going to 100G, limiting [indiscernible] at this point of time at GigPeak or GigOptix at this time, we made a firm decision to skip 40G and to go to 100G directly and we’ve been lucky and fortunate to win the market needs in the point of time.

With datacenters, I think it’s a bit more tricky. I think that the power -- the vectors and factors that impact the decision of the market to move from 40G, either to 100G, to 200G, and 400G, PAM4 are a bit more complex.

It pertains elements such as the RF devices, TIA drivers, the CDRs. It pertain to optical devices readiness and obviously the DSP readiness.

I mean here in Gig, we have invested just enough to be ready not only to maintain and grow our 40G presence and maintain a very, very dominating footprint, but we have already released over the last two years a good superior set of [indiscernible] drivers DIAs, a company over the last few was the superior CDR in the market. So if the market decided to go 100G NRZ, we are ready to go and we’ve already -- our device in very late stage of evaluation and in fact in production, particular with initial early [indiscernible] which are more of the optical connectivity to the, if you will, to the board itself.

So on board optical connectivity is where we see the deployment of energy and we have been there for quite some quarters, it's a very good delivery. If the market will decide to move into 200 and 400G PAM4, we’ve set out the pioneers.

We’ve the advantage of fresh mover with TIA and drivers PAM4. I believe that to the best of my knowledge, GigPeak is the only supplier of the TIA and drivers PAM4 for the datacenter, both short reach and long reach today.

But again in the next few months I'm sure that all of us we will get smarter, I can definitely tell you that I’ve heard personally a few customers in the last few months talking about skipping the 100G NRZ and going into the 200G PAM4. But this is a subjective point view and it's not definitely any kind of a consensus.

I mean, I'll be there to learn with all of us how the market is moving.

Okay, great. And if I could just squeeze one more in on acquisitions, on Terasquare could you give an update on R&D roadmap there?

And then on Magnum, what milestones could we be watching for to see sort of bigger adoption for that platform?

Right. So it's a very, very deep and very wide question.

So I'll try to shorten this. First of all, I believe the Gig, as we’re today, we're definitely in a position we have huge amount of tools in our toolbox and we don’t have to go beyond what we’ve today strategically, but really spend time organically on developing what we’ve and come to the market, continue to deliver the market a superior integrated solutions and chipsets for Datacom, telecom, and broadcasting.

We are very pleased with both the acquisition you’ve mentioned. On the Terasquare, we acquired them in August 2016.

Here we are a year later with a completion of a very successful limiting TIA -- I’m sorry limiting CDR tape-out and deployment for evaluation customers for 100-gigabit per second NRZ. And we are on the verge of taking out our next generation linear CDRs to support the PAM4 applications.

So, this was I think from technology point of view, great success in the acquisition and the truth of matter is that I think that, I’m not going on the lean stating that we’ve the more superior CDR for 100-gigabit per second NRZ solutions today. For Magnum, again, I think exceptional success in the acquisition.

First of all, financially we have made it that we turn it to be accretive within the first sixth day of the acquisition. We have changed the strategic direction from what this company had before we acquired them into focusing solely on the enhancement of our superior high video quality encoding stack, partnering with major leaders in the market that had their own CPUs.

GPUs, and APGI. So this partnership where we’re riding on the open source [indiscernible] platforms to deliver our stack is very encouraging and very unique in the market as is today.

So, I think that between those two acquisitions I see a great roadmap tracking. You know since the acquisition was completed and we have just finished our strategic planning for the next 2017, and I can see a good stack of [indiscernible] both of them as I mentioned on the Terasquare, which is our -- part of our HX line, continue its development of CDR to support the data centers needs, extend long devices, integrated devices limiting linear devices and on the MX line, our broadcasting line continues enhancement of the software stack by further integration and variety of a software element some of which are confidential and proprietary, some of which are market -- open market knowledge [indiscernible] moving to the next gen from ABC to the [indiscernible] encoding and adding into the stack.

So pretty reach of pretty enhanced roadmap on both of them.

Great. Thank you.

Hi, Avi, I will echo the congratulations on other great quarter. So keep up the great work.

Just a few questions from me. Maybe following up on the topic introduces earlier about your telecom TIAs, I think you said that there were 32-gigabit the leader in that market is held that position for quite some time, seem to be a fairly sticky product out there.

What are the specs or what’s your approach here to try to penetrate the market and make a meaningful dent in their very strong market share?

Thanks for joining us Richard. Indeed, there is a encompass in the market, that’s been there for a long time.

It was a very good product and like any other product in our industry let alone many other industries, but this industry there is always demand from customer to prevent monopolies and to enable second and third supplier. As you look into the long haul, driver suppliers for example, today there is probably half a dozen suppliers which obviously created a great alternative opportunities for the end-user -- for the OEMs, but created a lot of price pressure in a margin and cost erosion and revenue erosion to the suppliers in the device level.

Like in the drivers in the TIA, I think it's while products are sticky, customers are always looking for cost efficiency. Definitely when it come to the second wave of introduction and since we believe that 32Gbaud has a long life and a long leg for the next three to four years, particularly as this goes to metro deployment, I believe that our product, if only are competitive, would be driven to the market by our great customer relationship, by the fact that customer -- that markets want to break monopolies and by the fact that we are -- we have deployed a lot of time and effort to develop a very cost efficient -- a very cost-effective product and we are going to selecting a fair and reasonable gross margin out in the market.

Okay. Fair enough.

I also want to follow up on the discussion within the Datacom space with your CDR. You gave some detail on how to go back through the trend shift and read all that detail.

But I just want to reiterate if you didn't already mention that, have you won any designs with a 100-gig CDR yet or when -- what’s the timeframe by which that might happen?

So, in general, Richard, I think it's a fair statement to -- make the following statement. So one, 40-gigabit per second is the sole work horse in the data center industry today and I can tell you that many data centers were supposed to be over -- projected to be 100-gigabit per second.

This year our option -- our installed and build was 40-gigabit to second technology. So, I think that if I listen to my competitors and to my customers, like in GigPeak 90% of the shipment this year are in 40G and probably 10% are in 100G.

Vast majority of the 100G deliveries are on board optical connectivity, which are really drivers in TIA and does not require the CDR, because the synchronization is happening on the board. The rest of it with regard to optic, optical cable and transceivers, I think it's prudent to believe [indiscernible] that the evaluation and qualification by customers continue with two or three incompetents in the [indiscernible] and we feel pretty good about our ability to use our excellent relationship and our excellent traction in the 40G to win those design wins in the 100G when and where -- if and when the customer decide to move to 100G.

Our 100G devices includes CDR, very competitive and to say that we believe that our CDR is a -- based on power consumption for example is the superior CDR in the market. And TIA driver being a pin [ph] compatible to the 40G, heading the same controls and same knobs to tweak are easily to be deployed by customers even when they decide to move to 100G.

Okay, excellent. Maybe just one more question, we all jump at a line, I know there was a couple of past questions asking about what your revenue might -- revenue growth might look for next year.

Maybe I will ask you a slightly different way, how do you perceive the overall optical market growth rate to look like next year as a proxy for what GigPeak could do? Any way you can quantify what you think the outlook looks like Avi?

I think there are two ways to answer it. One of which is look back in the -- back to [indiscernible] and what it done on the last two years.

And I think it is prudent to say that organically we have grown all the way [indiscernible] anywhere between 15% to 20%, but maybe 12% at 20% depend on the year and the new markets we are entering. I don't see any reason to think about it different for the next, but as I told you, it's a preliminary analysis we are doing here and I will come with our projection and our guidance for the next year, early next year when I take the first call.

Secondly, it depends on the product that we decide to move in and this is all driven by our desire for gross margin and free cash flow. So, we definitely put a lot of attention in the top line, but I will tell you right here we will never sacrifice profitability to accelerate the top line, because I think it's definitely for small companies, it's a poor choice to make.

So if the market is going to move and I look to them at least in general, the consensus for example, Datacom is going to grow next year just as an example, 20%, 25%, and Telecom is growing to 5% to 10% just as the number as [indiscernible] in the ground is for now. We will be sure that you pick up the mix that would allow us to maintain our high profitability.

But as I said, I mean, I'll give you the model in a couple of months. I don't believe that I’m going to be investing different, which was -- between the last few years and so this is really how I think about it now.

Okay. I will look forward to hearing that in a quarter or so.

That's all the question from me, Avi. Thank you very much.

Thank you, Richard.

Thank you. Thank you for taking my question and congratulations on the quarter and the outlook.

Could you give us some more color on the record high gross margin? Was it due to mix towards different products or was it due to some upticks in certain part of carriers?

And in particular can you talk about the trend for gross margins in the Datacom products?

Right. So, obviously we're not breaking the gross margin by product line.

I think it’s prudent to say that its more confidential information of the Company. But I think that I'll rather respond to your -- former part of your question, I think that 72% margin reflected very good and very solid product mix.

As I mentioned, as we continue to emphasize the high margin products as we tailor [ph] the investments in the R&D and the SG&A. Again, if you look to the SG&A numbers, you just put out and you analyze what it done, we’ve not decreased one [indiscernible] investment in R&D.

In fact, I think it's from R&D [indiscernible] we continue to increase our investment. We believe that GigPeak in our first 10 years of existence, the future will strive on being in the cutting-edge of the deployment of new technologies and we continue to invest around 30% in our R&D.

So what we're trying to do is bring to the market product that are attractive. That's our unique, and in terms of the [indiscernible] approach and create excitement from customers that allow us to drive this margins.

So I think with the product mix has been our number one priority for all along and we will keep to do -- we'll keep doing it this way as we move forward.

Can you clarify is that product mix across your product lines going to the high margin lines or within the lines your product -- your GM is improving?

Both. I think both of them are right.

I mean, first of all, we definitely focus our attention into high margin product line, but within the product lines, we definitely -- we’ve [indiscernible], we definitely without low margin products we [indiscernible] them. We don’t have any interest to invest in that product [indiscernible] again to be so competitive that they erode unreasonably the margins as we like it in the Company here and received new products in the same product line and it enable us to ride the high margin trends.

So can you [multiple speakers].

So both of them are correct. If you look through the cross-section of the product, I can tell you the following.

Not only you will see emphasize is set on the high margin line, but you see within every line, you will see our emphasize on the high margin products.

Okay, great. My second question is, so like having [indiscernible] and now they’re modeling that 40Gig single mode fiber inside of the data center has already reached the peak level, while multimode fiber is still growing.

Is that consistent with what you're seeing in order patterns and discussions with customers? And the second part of that is you mentioned a 200-Gig leapfrog, if that happened when would the timing be for that, when would you know that would be a 2017 or 2018 story?

Wayne, this is a great question. I think it's definitely in line with the questions I’ve heard earlier from -- I think from Steve.

Let me answer the first one. I'm not surprised again, I mean, from my point of view in the 40G short reach GigPeak provides a total solution, VCSEL drivers and TIA.

In the 40G long reach, we provide only the TIA because we didn't invest in developing DML drivers based on the fact as we thought is a short cycle and boarding of point we do not justify it. I would tell you that I did not see any slowdown on the 40G TIAs for the long reach.

That being said, I will not be surprised at the trends that you mentioned is the right trend, because as we know the deployment of a new technology infrastructure start with a longer distance and then it goes down to the shorter distance. So your theory may be as well augments in reality based on the fact that the 40G long reach is probably saturated [ph] in this point of time, but as I told you I've not seen any slowdown on [indiscernible] TIAs on the long reach.

That being said, for the short reach both TIA and drivers, again as we said we continue to see increased demand for -- from our major customers. So this to address first part of the question.

The second one on 200G, like you I’m sitting and waiting to better understand. I think that the market will make a decision and have to make a decision in the next 6 to 12 months, while the 40G is very, very strong and I think it's here to stay definitely for the next year and [indiscernible] two years.

In some point of time market just to line out [indiscernible] go into go with the next generation otherwise they are not able to support the exponential continued growth of the data streaming. So I expect the [indiscernible] is to come out, maybe early part of 2017 with directions to the market with regard to the next generation technology.

I personally hope that all those decision would be made before the end of the year. I think it'll save a lot of money to not only to GigPeak, but to the entire industry in terms of investment in technologies that may or not -- may or may not be absolute based on the discussions.

Thank you very much.

Thank you, Wayne.

Hi. Good afternoon.

Maybe follow-up on some of the questions on the Metro TIA fronts. I think you have already kind of provided an outlook for potential timing there.

I wonder if you might be able to say a few words about the kind of relative size of that market opportunity? It seems like you're -- obviously the telecom business is not been in growth mode for some time, I would imagine that some traction here on the Metro TIA side could significantly change that, but I wonder at this point if you're able to provide any color on how significant an opportunity that might be for GigPeak as a whole and then I’ve a follow-up.

Right. So, Tim, thanks for the question.

First of all, I will start from the end. I would not, I mean, since I did not deliver in any of my comments the generality with regard to the mix in the telecom product line, I think it's prudent to understand from my pre-prepared comments that we continue to deemphasize low margin long reach drivers and we keep continue to emphasize the SMT and drivers and TIAs.

That being said, we continue to look for opportunities to return on investment and since we have done a lot of investment in the hermetic sealed packages, we definitely we would look to new opportunities to harvested as it pretends a long haul. In the Metro, indeed as we all expect, we expect to see an increase in demand for [indiscernible] linear technology in the Metro with a increased install base early next year.

And as I said, we continue to qualify this devices for a variety of customers and we see increase in the shipment of the SMT drivers. With regard to TIA, in general, I read all kind of numbers like you probably read and I think that rough and tough -- and again this is a Safe Harbor statement, maybe people are looking into -- [indiscernible] linear market, I don't know if you take a number of a million TIAs for this links per year, I think it's probably not far away from gravity.

Now the total revenue depends on the ASP that you’re putting this TIAs to the market. And I would [indiscernible] make it very clear, we’re pushing very hard to qualify the TIAs, but remember dynamics over the market is still how they are to be defined.

And I think it's an open competition between incompetent and few other contenders. So, while we are very proud of the product we are putting out there, I want to Safe Harbor by saying that at this point of time it would be too early for me to give you any projected numbers for the deployment of this [indiscernible], but I will tell you categorically to do every effort in our ability to commercialize this TIA line in the next six months.

Great. Understood.

And the follow-up is really focused on China. You made some comments I think around plans, [indiscernible] some sort of combination of additional long haul and maybe Metro type deployments into to provincial cities over in China, maybe driving a big opportunity.

I wonder if you were adjusting that on -- I assume that’s focused on the telecom part of the equation as well in terms of drivers for some demand for some of the new products, but I wonder if you could just sort of step back through China as a region in general for GigPeak and to the extend you see opportunities on the Datacom side as well. I would have assume on the face of it that’s more of a telecom focused opportunity, but I wonder if you can kind of just step back through your views on kind of current demand trends in China and opportunities for Gig?

Yes, I think that that’s a good question. I think that again -- historically we put less emphasis in China due to the margin pressures.

I think that the new trends and the new infrastructure tremendous growth in China over the last couple of years. The introduction of a -- of the ever growing demand for Datacom device, as well as a short distance Metro device creates new opportunities for us.

And I think that as reflected by virtue of our open announcement on nomination of the two new distributors locally in China, one is Avnet, other one is [indiscernible], which were openly announced by Gig over the last couple of months, both of which replaced our smaller previous partners in China. I think that this reflects on its own, our intention to continue enhance our activity in China.

We see the markets very attractive today. We see opportunities out there.

As you would know, also we had a private investment pipe back in February this year, done by Pudong Science and Technology Investor. And I would tell that we definitely will continue to put more and more attention and to the ability to proliferate and grow our businesses into China, which is now becoming larger markets for us much more interested -- much more interesting in terms of the business opportunity.

Thank you, operator, and thanks to all of you for joining us today. We’ve a busy investor calendar through the remainder of this calendar year.

We look forward to seeing many of you at investor events over the next, two to three months, and again speaking with all of you again when we report our fourth quarter and fiscal year 2016 results in early February. Thank you and have a good day.