Entropic Feels the Pressure

Expects Weak Q3 Guidance, Citing Mix of Design Win Delays, HD-DTA Deployment Sluggishness, and DirecTV Product Transitions
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The situation at set-top chipmaker Entropic Communications can be summed up thusly: Things are just tough all over.

The company has run into a confluence of “unexpected challenges,” company president and CEO Patrick Henry said on Entropic’s second quarter earnings call Wednesday afternoon. Among them: delays in new design wins, slower than expected demand and deployment ramps for HD digital terminal adapters (DTAs), and a product transition at DirecTV that is causing inventory issues for Entropic’s Multimedia over Coax Alliance (MoCA) business.

Those factors contributed to weak third quarter guidance of between $55 million to $57 million, well off the $74 million analysts were anticipating. As a result Entropic shared dropped 10.16% to $3.98 each on Thursday. Those shares were down 10 cents (2.53%), to $3.88 each in mid-day trading Friday.

The company has also been making adjustments. In June, it announced a restructuring that included a 10% layoff, and in July, Henry said, Entropic scuttled its joint development project with Zenverge, its partner for video transcoding silicon. Entropic took an investment impairment charge of about $4.8 million in the second quarter as it was writing off its equity investment in Zenverge. 

In September 2011, Entropic invested $10 million in Zenverge, leading a $20.5 million fourth round of funding. Henry said Entropic will continue to develop joint reference designs with Zenverge,  noting that the companies have won deals together in products such as the Comcast XG5, a headless gateway with an on board transcoder.

Delays in HD-DTA deployments continue to vex Entropic, which expanded more deeply into the set-top chip business last April via its $65 million  acquisition of Trident Microsystems.

“Our flagship deployment in HD-DTAs continues to show a delay in ramp,” Henry said. "Based on recent feedback from this MSO, we believe the ramp has been pushed out until mid-2014, as they continue to work through their nationwide deployment plan.” He said Entropic is also seeing an unrelated slowdown of HD-DTA shipments at “another major U.S. cable MSO” due to short term capital belt tightening. He said Entropic expects that capex issue should be resolved by the first quarter.

Henry didn’t identify either MSO by name, but Comcast is among operators that are relying heavily on DTAs and has been testing HD versions.

And Entropic’s original bread and butter business, MoCA silicon, is also dealing with a rough patch.

DirecTV, Henry said, is deploying its new Genie gateway server architecture faster and more broadly than anticipated, meaning it is no longer refurbishing older generation set-tops and teaming them with adapters that use Entropic MoCA chips.

Looking ahead, Entropic is “driving ahead” with products that support Comcast’s Reference Design Kit (RDK) initiatives, including the all-IP Xi3 client device that will support the new X2 platform and Comcast’s coming cloud DVR service.

“We’ve got some initial indications that we could see some initial volume next quarter,” Henry said, with respect to RDK-based products that support X2. “I think the real significant volume is in 2014.”

For the second quarter, Entropic posted a net loss of $39.99 million (44 cents per share) on revenues of $70.6 million, down from $83.1 million in the year-ago quarter.

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