MACOM Technology Solutions Holdings Inc (MTSI) 2003 Q3 法說會逐字稿

Excuse me, everyone. I would like to introduce Simon Biddiscombe, chief financial officer of Mindspeed, who will chair this afternoon's conference call. Please be aware that each of your lines is in a listen-only mode. At the conclusion of Mr. Biddiscombe's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedures that follow if you would like to ask a question.

I would now like to turn the conference over to Simon Biddiscombe. Sir, you may begin.

Thank you Sheila.

I'd like to welcome everyone to our third quarter conference call, our first as a public company. Joining me on the call today is Raouf Halim, our Chief Executive Officer, who will start the call with a few highlights of our exciting past month. Then, I will provide a review of the quarterly income statement and balance sheet, after which Raouf will discuss product and market highlights and provide our outlook for the coming quarter. We will then open the call for your questions.

Before we begin, I want to remind you that our comments today will include statements relating to future results that are forward-looking statements as defined in the Private Security and Litigation Reform Act of 1995. Actual results may differ materially from those projected as a result of certain risks and uncertainties including, but not limited to, those noted in our earnings release, our form 10 registration statement, and other filings with the SEC. I would also like to remind everyone that the results we will discuss today are from the proforma income statement before amortization of intangible assets, special charges, and certain other non-operating gains and losses. We believe this approach provides the best insight into the operating performance of our company.

Our reconciliation of the historical proforma information, to GAAP, is included in our earnings release, a copy of which is available on our Web site at www.mindspeed.com. I will now turn the call over to Raouf.

Thank you, Simon.

As most of you may already know, on Friday, June 27th, we completed the long-awaited spin-off of Mindspeed to the shareholders of Conexant Systems. On Monday, June 30th, Mindspeed shares began trading on the American Stock Exchange under the symbol MND.

We are very pleased with the market's reception to our spin-off from Conexant Systems, as well as the positive response from our customers worldwide. Speaking on behalf of the Mindspeed team, we are very excited about the opportunity to achieve success as an independent, focused company and to build significant long-term value for our shareholders.

Today, Mindspeed is a well-capitalized public company. We have roughly $100 million in cash and cash-equivalents, and a $50 million revolving credit facility from Conexant Systems, which we believe will be more than adequate to fund our return to profitability.

Our transition to a standalone public company has been quite smooth, led by a highly experienced management team that has been working closely together for many years, and now complemented by a seasoned, high-caliber board of directors. We are convinced that Mindspeed has the potential to create significant long-term shareholder value, based on several factors.

Our focus on key metro and access market applications, which are expected to grow faster than the overall telecom infrastructure equipment market, and established presence in adjacent enterprise storage segments, and our broad product portfolio-with significant share captured of multiple, high value, new product design cycles that Tier 1 OEMs worldwide. In summary, we believe Mindspeed is better positioned today from a product focus, market position, and execution perspective than we have ever been in our history.

I will now turn the call over to Simon for a review of our third quarter financial results.

Thanks Raouf.

First of all, I will address our income statement. Today we announced third quarter revenues of $20.2 million, up 10% sequentially from the prior quarter and in line with the upwardly revised outlook we provided a month ago. This sequential revenue growth was driven by improved demand across the majority of our product families, which Raouf will discuss later in his section.

Gross margin was $13.7 million, or 68%, of revenues-including a roughly 3 percentage point benefit from the sale of products written off in fiscal 2001. This performance was in line with our expectations and represented the fifth consecutive quarter in which we have delivered gross margins in excess of our long-term model-65%.

Operating expenses of $38.7 million reflect a 2% decrease from the prior quarter. Benefits from our cost-reduction initiatives were largely offset by accelerated and spending late last quarter, supporting the of several important new products.

Our fiscal third quarter operating expense level reflects more than a 50% reduction from our peak level in fiscal 2001. We remain on track to achieve our target quarterly operating expense goal of $31 million etched in this calendar year, realizing the full benefit of the cost reduction initiatives in the March 2004 quarter.

Our proforma operating loss was $25 million, an improvement of 6% over the prior quarter's operating loss. Other expenses and a provision for foreign income taxes in the aggregate resulted in a net credit of a half million dollars. We would expect these items to have a minor impact on the income statement for the foreseeable future.

As a result, our proforma net loss improved 9% over the prior quarter, to $24.5 million, or 27 cents per share, based on approximately 89 million shares outstanding.

Turning now to the balance sheet. Our cash consumption for the June quarter was fully funded by Conexant, and was $32.4 million, including approximately $5 million in restructuring charges associated with our previously announced cost-reduction initiatives. Our cash and cash equivalents the current quarter totaled $101.5 million. Capital expenditures and depreciation were $1 million and $3.5 million respectively. We would expect quarterly capital expenditures to continue in the range of $1- to $2-million going forward.

In terms of working capital, receivables were $12.1 million, resulting in DSOs of 54 days, somewhat higher than our long-range target of 45 days, primarily due to the timing of cash receipts from distributors. Reduced net inventories by $1.1 million in the quarter to $5 million, resulting in inventory turns of 5.1, within our target range of 5 to 6 turns. Gross inventory, including amounts previously written off, totaled approximately $71 million at the end of the quarter.

Restructuring reserves in the quarter were $14 million. Cash payments associated with these reserves were primarily related to facilities and EDA tools that are no longer in use. We are in active negotiations to significantly reduce cash outlays associated with these obligations.

And finally, as a part of the spin-off transaction, we issued Conexant to acquire 30 million shares of our common stock. These have a 10-year life, and are first exercisable one year from the date of the spin-off. They are priced at $3.41 per share, based on the first 10 days average volume weighted average price. If exercised, Mindspeed could receive up to an additional $102 million in cash. I would now like to turn the call back over to Raouf for his comments on our quarterly product and market highlights.

Thank you Simon. Our Mindspeed team is very excited about this milestone in the history of our business. We are beginning to see the benefits of years of investments, to create the diversified product portfolio and significant market positions Mindspeed enjoys today- as illustrated by the following key data points.

First Asia Pacific revenues grew 37% sequentially in the past quarter and represented 38% of our revenues, while the Americas and Europe contributed 51% and 11% respectively. The network infrastructure build-out in Asia Pacific remains strong, and our growth this quarter is a testimony to the solid customer relationships that we have built over many years, with leading OEMs such as Technologies, ZTE, Alcatel Shanghai Bell, NEC, Fujitsu, Samsung, and LGE.

Second, new products launched in fiscal year 2001 and thereafter contributed a significant portion of our sequential revenue growth this past quarter, with particularly strong demand for such products with high-performance analog solutions, ATM network processors, and DS3 E3 LIUs.

Third, from an end market perspective, the enterprise market contributed an estimated third of our revenues, and the balance-- or almost two-thirds of our revenues-were generated from Access and Metro Carrier end markets. And finally, revenues were fairly evenly balanced this past quarter, between our high performance analog products, our carrier transmission solutions, and finally the combination of our ATM and multi-service access processor families, with each contributing between 28% and 36% of our total revenues.

I would now like to cover some specific product family highlights. Our high performance analog product portfolio is comprised of our cost-point analog switching products, our SerDes products, and our PMD product lines. This portfolio experienced solid demand from key customers, such as McData, Technologies, ZTE, and Agilent, amongst others.

During the third quarter, sales of our family of high performance Crosspoint switches grew sequentially, highlighted by strong demand for storage applications. In addition, we launched two new 4 by 4 Crosspoint switches, with performance of up to 3.2 Gigabits, as well as a family of multi-rate quad and octal clock and data recovery, or CDR functions, integrated our patented amplified signal conditioning technology.

Targeted at gigabit Ethernet, Fibre Channel, Infiniband, and SONET applications, these products offer our customers increased system design flexibility and faster time-to-market.

Shipments of our high performance analog PMDs remain strong, to Asia Pacific based module manufacturers for fiber to the home service deployments, especially in Japan, as well as for from cellular base station equipment in China, where, for example, China Netcomm is initially deploying its wireless systems in cities such as Shanghai. We also began ramping shipments of our Quad SkyRail SerDes tranceiver products to key customers in Europe as well as Asia for Metro Optical Edge equipment.

Multiple high performance analog product design wins were captured this past quarter at key OEMs, such as Alcatel, Agilent, Fujitsu, , as well as at Tell Labs, LGE, and Lucent, for a variety of applications including Optical Modules, Metro, as well as enterprise equipments.

Turning to our carrier transmission portfolio. We again benefited from continued wireless infrastructure buildout at the Asia Pacific region, and the renewed deployment of equipment by service providers worldwide, as they responded to broadband infrastructure demand.

During the quarter, we further strengthened our DS3 E3 market position, with multiple LIU design wins at key OEMs including Cisco Systems, Lucent, LGE, and ZTE in China. We now have DS3 E3 LIU design wins with almost every single Tier 1 OEM worldwide.

We also achieved a major milestone with the launch of the industry's first complete DS3 E3 STS1 line card on a chip product. This groundbreaking product delivers a 50% reduction in component counts, and a 30- to 40% reduction in power consumption compared to multiple discreet devices. This complete line card on a chip enables our customers to significantly reduce their materials, while substantially expanding our dollar content, on their line cards.

The first member of this product family integrates a 12-port LIU with ATM and packet over SONET framers, mappers, and telecom application software. This highly integrated product enables our customers to develop higher-density, multi-service switches, metro-optical edge devices, enterprise edge routers, and many other systems-with greater scalability and faster time to market.

We are sampling this exciting new product at a number of major OEMs and we already have won 2 critical designs at industry-leading customers.

Within our ATM/MPLS processor portfolio, we experienced strong product demand from key Tier 1 customers, including Alcatel, Cisco, Nortel, Juniper, and LGE, for use in their access router, , as well as EDMA wireless infrastructure equipment.

The combination of our Traffic Stream network processor family and highly programmable, PortMaker software makes our network processing solutions ideal for a broad range of Access, Metro, as well as Internet router applications. Our integrated hardware and software solutions provide our customers with the flexibility to upgrade their existing equipment with new protocols and other software functionalities.

In fact, our network processing customers are increasingly turning to us for our software expertise, to fulfill complex ATM over MPLS Internet working requirements. As networks evolve, from cell-based to packet-based protocols, our deep software expertise supports a multitude of protocols and networking applications. This expertise is a key competitive differentiator that puts us in an excellent position to capitalize on these developing network opportunities worldwide.

During the quarter, we captured several design wins, for edge aggregation and wireless infrastructure equipment from Tier 1 customers, including multiple wins at OEMs such as ZTE, Hitachi, amongst many others.

And finally, in our multi-service Access processor portfolio, we are benefiting from the initial rollout of voice-over-packet services in the Asia Pacific region. Shipments of our voice-over packet processors are ramping, with a number of customers, including Technologies and ZTE in China.

On the design win front, we scored multiple voice-over-packet processor wins with ZTE for next-generation enterprise Gateway and applications, as well as key CDMA infrastructure platforms. We continued to secure design wins in the enterprise market for next-generation IP-PBX and Gateway applications with our Chagall voice-over-packet PBX on a chip product. Customers are attracted to the high level of integration, embedded encryption, and conferencing features of Chagall-which enables them to replace a complete card with a single chip.

Today, we have more than a dozen design wins with OEMs in North America and Europe, as well as ODMs in Taiwan. We expect to start shipments of Chagall late this calendar year and ramp production in the first half of 2004. In the wire-line carrier infrastructure market, we believe that we have captured a significant share of new voice-over-packet gateway designs with our Miro carrier-class voice processor. We have won Miro designs with a number of carrier infrastructure customers. The farthest along being LGE, which is currently in benchmark testing at Telecom. And we expect them to begin deployments of the voice access gateways later this year.

We're also in testing with several wireless equipment manufacturers in Asia, and expect to deploy Miro-based CDMA 2000 and wideband CDMA systems over the next few quarters. We are excited about the potential for both Miro and Chagall, with their proven, carrier-class software.

In conclusion, I'm very pleased with the way the Mindspeed team executed this past quarter. Our highly talented workforce has put Mindspeed in an excellent position today--with the right products, strong design win momentum, and deep Tier 1 OEM customer relationships, in the Metro, Access, and Enterprise markets. We believe these areas are where the infrastructure recovery will be soonest and strongest.

We remain confident that we will achieve our proforma operating profits break-even level of approximately $45 million in quarterly revenues before the end of calendar 2004. And now, turning to our expectations for the current quarter.

In the near term, we expect our growth in the Americas and Europe to come predominately from storage and enterprise networking applications. We are most excited about our growth prospects in the Asia Pacific region, where we have captured a significant share of multiple new product design cycles at Tier 1 OEMs.

We expect our growth there to be largely driven by fibre-to-the-home service deployments, as well as the ramp of voice-over-packet network services and growth in shipments of broadband equipment.

Customer order rates are continuing to improve. And, as a result, we expect our fourth quarter revenues to be up 10- to 15% sequentially. We also expect to maintain overall gross margins at roughly 68% this quarter. And we anticipate lowering our total operating expenses by at least $3 million this quarter, as we continue to make progress in our cost-reduction initiatives.

As a result, we expect to improve our proforma operating loss by 17- to 20%. That concludes our formal comments today. Operator, let's open the lines for questions.

At this time, we will open the floor for questions. If you would like to ask a question, please press the star key, followed by the 1 key, on your touch-tone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star2.

Again, to ask a question, press star1. Our first question comes from Jeremy Bunting, at Thomas Weisel Partners.

Good afternoon Raouf and Simon. This is Neville, calling in for Jeremy.

If you guys could comment on what you believe differentiates Mindspeed from your competitors, given the fact that you guys have been able to show very impressive sequential growth and to even more impressive for the September quarter. Why do you think that Mindspeed has been able to do that, as opposed to its peers?

Neville, this is Raouf. Let me address your question. We believe there are a number of reasons why we are in a relatively stronger position compared to a certain of our peers. These relate, number 1, to the breadth of our product portfolio, that covers not only older legacy infrastructure equipment where there are signs of a pickup in demand, but frankly also significant share captured in new product cycles that are just now starting to come to market and start ramping.

Good examples of the latter include voice-over-IP deployments in Asia, next generation storage switching applications, and certainly optical PMD deployments at the low end of the optical range, fast Ethernet, OC3, and even OC12 backhaul in growth infrastructure markets, particularly in Asia Pacific. We have invested very heavily in the APAC markets, as you may be aware, we have a strong channel in a number of key APAC countries, such as China, Korea, and Japan, by virtue of our historical presence, and investments that Conexant Systems has always made in those countries that we are now benefiting from, I think disproportionately, relative, perhaps, to certain of our peers.

And what brings about the confidence in the sustainability of this kind of growth? And I guess where I'm leading this question is: How much of this growth would you say comes from an inventory replenishment for older platforms versus newer fibre-to-the-home deployments?

Certainly. Let me address that. There are a couple of things. First of all, when we look at the mix of products and exactly the growth-where the growth came from in the quarter we just reported, as well as where we anticipate the growth to come from in the current quarter, in other words fiscal Q4, we see that the mix of new product ramp, or revenue contribution, from new products that have been introduced in fiscal year 2001 or thereafter- meaning newer products- is relatively rich compared to the revenue contribution from older products and what we generally refer to as run-rate business, which goes back to fiscal year 2000 and prior years.

In other words, we think that the mix, if you will, is getting richer, is continuously and constantly getting richer in terms of new products that are now finally ramping with key OEMs worldwide. So we look at that and we believe that those markets are just now turning on, and we expect that the ramp is really just at the beginning of the so-called S curve. We believe those markets that we have captured share in, that are just now turning on, will certainly continue to ramp for multiple quarters and possibly multiple years. And we're quite proud of the product set that we have brought to market and the position we have captured with those products.

And, hence, we believe this is not a one or two quarter phenomena. This is gonna be a sustained phenomena, for many quarters.

In terms of-more specific to your question about how much of this could be associated with inventory reload or inventory replenishment in the channel- I think it's fair to say that when we look at inventory on hand at our contract manufacturers who serve our customers, our partners and so forth, we actually believe that inventory levels right now are pretty close to an all-time low, and in fact, if there's anything that concerns us right now is that the inventory levels are so low in the channel, it's gonna be quite difficult for our channel partners to respond to certain of these market trends as they turn on. We're actually somewhat concerned that the inventory is perhaps too low, as opposed to too high. And we believe that our shipments are generally finding their way directly to the end customers well within the same quarter and there's very little inventory buildup in the channel that we can discern anywhere.

Simon, would you like to add to that?

No, I think you summed it up beautifully Raouf.

Thank you very much.

Again, if you would like to ask a question, please press the star key, followed by the 1 key on your touch tone phone now. Questions will be taken in the order in which they are received. If at any time you would like to remove yourself from the questioning queue, press star2. Again, to ask a question, press star1.

Again, that is star1 on your touch tone phone to ask a question.

Okay, Sheila.

Okay, sir, there are no further questions.

I'm sorry. We now have a question from , of Gilder.

Yeah, hi. Just a quick one regarding the warrants issued in connection. When and how will you treat those on a go-forward basis? You showed 89 million shares in the count. When does that number change, and how would it change over time?

You ought to think about it in a couple of ways, John. First of all, they're not actually exercisable for a year, so they won't kick in until June 27th of 2004. For purposes of thinking through treasury stock calculations of what our share capital may be for purposes of a fully diluted calculation, we've got models that tell us exactly what it would be, and I think the best way to think about it is that we're at a share price of $4 by way of example.

Yes.

On a fully diluted basis, including both warrants and the employee stock option, approximately another 20 million shares above the basic number of $90 million, so that would take you to roughly 110 million shares, including the warrant and employee stock options at that point in time.

Very good. Thank you.

Again, if you would like to ask a question, please press the star key, followed by the 1 key, on your touch tone phone now.

Okay, Sheila.

Okay, sir. There are no further questions:

Thanks very much. That concludes our conference call for today. On behalf of all of us at Mindspeed, thank you for participating this afternoon. We look forward to updating you on our performance next quarter.