MACOM Technology Solutions Holdings Inc (MTSI) 2004 Q1 法說會逐字稿

Excuse me every one, 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 welcome you forward for questions.

At that time, instructions will be given as to the procedure to follow, if you would like to ask a question. I would like to turn the conference over to Mr. Biddiscombe. Sir, you may begin.

Thank you Jeremy. I would like to welcome everyone to our conference call discussing the results for our first fiscal quarter of 2004. Joining me on the call today is Raouf Halim our Chief Executive Officer. I will begin the call with a review of our quarterly income statement and balance sheet. Raouf will then provide a product and market overview as well as our outlook for the current quarter. We will then open the call to your questions.

Before I begin, I want to remind you that our comments today will include statements relating to our future results including guidance on revenue, gross margin, operating expense, and other targets for our fiscal 2004 second quarter that are forward-looking statements as defined by the Private Securities 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, market demand for our new and existing products, availability of capital needed for our business, our ability to reduce our cash consumption, successful development and introduction of new products, design wins, order and shipment uncertainty, fluctuations in manufacturing yields, product defects, intellectual property infringement claims by others, and the successful implementation of the company's expense reduction initiatives, as well as, other risks noted in our earnings release and our filings with the SEC.

Consistent with prior quarters, I would also like to remind everyone the results we will discuss today are from the pro forma income statement before amortization of intangible assets, special charges, and certain other non-operating gains and losses. We use the pro forma financial information internally to evaluate and manage operations. We provide this information because we believe it provides the best insight into the operating performance of our company.

Please review our full gap financials and the reconciliation of the pro forma financial information to the compatible gap information that were included in our press release and our Form 8-K furnished to the SEC today. Copies of both documents are available in the Investor Relation Section of our Web site at www.mindspeed.com.

Turning now to the financial results for the first fiscal quarter of 2004. Mindspeed continued to deliver significantly improved financial performance over the prior quarter, meeting or exceeding expectations in all key financial areas. Today we announced first quarter revenues of $26.7 million, up 15% sequentially from the prior quarter, an upper hand of the guidance range we provided one quarter ago.

The sequential revenue growth was primarily driven by continued strength in our metro access markets with exceptional demand for our PE (ph) carrier and Voice Over IP products. We also experienced a strong pickup in bookings throughout the quarter, especially from North American customers. The America's region contributed 49% of first quarter revenue, up 32% sequentially.

The Asia-Pacific region contributed 38% and Europe 13%. Our top ten customers this past quarter, in order of revenue contribution, was Cisco, Nortel, Alcatel, Volley, Lucent, Siemens, McData, ADC telecom, ZTE, and NEC. Cisco again was our only greater than 10% end customer including both direct and indirect sales through third parties.

Gross margin was $18.6 million or 70% of revenues including a roughly four-percentage point benefit from the sale of products written off in fiscal 2001 exceeding the guidance of 68% provided a quarter ago to primarily it is a favorable product mix.

Underlying gross margin, excluding the effect written off inventory, was 66%. Operating expenses of $32.4 million reflect a decrease of $2.1 million or 6% from expenses of $34.5 million in the prior quarter and slightly better than the guidance we provided one quarter ago.

As a result, our pro forma operating loss was $13.8 million, an improvement of 24% over the prior quarter's operating loss of $18.2 million, again exceeding our expectations of a sequential improvement of 15 to 20%.

Other expenses and a provision for income taxes in the aggregate resulted in a net credit of approximately $22,000. We would expect these items to have a minor impact on the income statement for the foreseeable future. As a result, our pro forma net loss improved 23% over the prior quarter to $13.7 million or 15 cents per share based on approximately 94.6 million average shares expanding for the quarter. The total number of shares expanding at the end of the quarter was approximately 95.7 million.

Turning now to the balance sheet, our total cash consumption, which we defined as the net decrease in cash and cash equivalents, for the December quarter was $13.4 million. This represents 57% reduction from the last quarter's cash consumption of $21.3 million and was significantly ahead of the 25% reduction we expected at the beginning of the quarter, primarily due to improved working capital management.

Over the course of the past two quarters, we have reduced our quarterly cash consumption by $19 million to almost 60% from third quarter fiscal 2003 levels. Cash burn from operations, which we define as operating and investing activities was $17.6 million, including roughly $3 million in restructuring payments associated with our previously announced cost reduction initiatives.

Capital expenditures were $2.2 million and depreciation was $3 million. We continue to expect the quarterly capital expenditures were averaged between 1 and $2 million going forward.

Net cash generated by financing activities was $4.2 million principally consisting of proceeds from the exercise of stock options. Our cash and cash equivalents at the end of the quarter totaled $66.7 million. Receivables were $14.4 million resulting in BSOs of 48 days relatively consistent with the prior quarter.

We reduced net inventories slightly in the quarter to $3.9 million resulting in inventory turns of 8.4 exceeding our target range of 5-6 turns. Gross inventory including amounts previously written off totaled approximately $67 million at the end of the quarter. Total current liabilities were $29.2 million, a decrease of $2.8 million. Total restructuring reserves exit in the quarter was $7.7 million.

Connecting the call over to Raouf, I want to say how pleased we are to have moved to the NASDAQ National market and commenced trading there on December the 15th. While the American Stock Exchange served us well following our spin off in June. NASDAQ is clearly the premier stock market for growing technology companies such as ours. I would now like to turn the call over to Raouf for his comments on the quarter.

Thank you Simon. I am very proud of our performance in the first quarter of our fiscal year 2004. We met or exceeded our expectations in every key financial measure and continued to execute on our road map to profitably. Revenues from three of our four product families grew sequentially with particularly outstanding performance in both PE carrier and multi service access Voice Over IP solutions.

During the quarter, we experienced a temporary inventory buildup in the supply chain serving the fiber to the home market in Japan resulting in a decline in shipments of high performance analog products. Despite this, Mindspeed delivered to the high end of our revenue expectations. A strong testimony to the leverage of our broad product portfolio. I will provide more detail on this temporary supply chain inventory correction in my discussion of our high performance analog family.

Over the past three quarters, we have increased Mindspeed's quarterly revenues by almost 50%. We are experiencing a pickup in both telecom and Datacom infrastructure spending across all major geographies. Driven by demand for the access, aggregation, and network equipment that Mindspeed silicon addresses.

In addition to renewed growth in traditional TDM based application, we are benefiting from increased spending on next generation technologies such as Voice Over IP, MPLS Interworking, and fiber-based broadband access where we have strong positions. This pickup is now extending beyond our traditional large Q1 customers to encompass a number of smaller equipment suppliers.

New products launched in the fiscal year 2001 and thereafter again contributed more than half of the sequential revenue growth this past quarter with the balance of the growth contributed by run rate products launched prior to fiscal year 2001.

Now, let me share a few key highlights of the quarter. Revenues from our PE carrier transmission products increased 50% sequentially. Specifically, revenue from DS3 E3 products decreased 133% sequentially. Primarily driven by increasing deployment of next generation metro optical platforms designed to increase the capacity, flexibility, and speed for metropolitan networks.

Today, deployments have been concentrated in North America by carriers including AT&T, BellSouth, and Verizon. Revenues were also up sharply from multi service access products increasing 41% over the prior quarter driven by increased demands for our Voice Over IP processors from customers in the Asia-Pacific region or shipments in telecommunications carrier equipment as well as for converged voice data enterprise networks.

Mindspeed Voice Over IP processors are now been deployed in virtually all major carrier networks in the Asia-Pacific region including China Telecom, China Netcom, China Realcom, and China Unicom, as well as, Yahoo Broadband in Japan and Chunghwa Telecom in Taiwan.

Our Voice Over IP products are also shipping in the initial Voice Over IP deployment in North America with service providers such as Vonage and MCI. Our execution on design wins was excellent this past quarter with an increasing percentage of wins at focus accounts. Overall, our design wins were well diversified from the both geographic and market perspective. 32% of our wins were in the Americas, 34% in Asia-Pacific, and 34% in Europe.

In addition, we are successfully diversifying well beyond Wireline infrastructure applications into new market segments. During the quarter, approximately 60% of our design wins were in carrier, wireline applications with the remaining 40% in a mix of enterprise, wireless, and fiber-based applications.

Most encouraging to us this past quarter are design win opportunity pipeline expanded strongly across all of our product lines. This expansion is particularly pronounced at focus accounts for both our multi-service access Voice Over IP solutions as well as our high performance analog products across a broad spectrum of enterprise, wireless, and wireline equipment types.

Examples include IPPDs, voice gateways, optical edge devices, storage switches, and passive optical network or palm systems. We believe it is increasingly the case that are Q1 customers are more confident in the industry recovery and they are investing more R&D dollars into the development of strategic new platforms, addressing a combination of green field appointments as well as upgrades of existing networks.

Additionally, our new products are addressing a substantially larger amount of dollar content in these new platforms. For example, the average selling price of our integrated DS3 E3 LIU Framer Device is almost three times the price of our standalone LIUs for new designs. I would now like to discuss each of our four key product families in more detail.

Starting with our high performance analog product portfolio; as I mentioned at the outset, revenues declined as a result of a temporary inventory buildup of our PMD module devices in the supply chain serving the fiber to the home markets. We believe this PMD inventory issues is a two-quarter phenomenon and we should see our assumption of shipment growth in our third fiscal quarter, i.e., next quarter.

The market fundamentals remain very healthy for this next-generation broadband technology. Fiber to the premise deployments continue to exhibit strong growth with the estimated instal base for worldwide fiber to the home the subscribers topping the one million mark last quarter.

While the majority of the growth last quarter was driven by Japan, we are now starting to see early deployments and trials in Korea, China, and other countries. Also based on recent carrier announcements, we now expect that fiber to the premise deployments will also pickup in North America over the course of the next one to three years.

Additionally, we continued to win new designs, increasing our market share at key marginal manufacturers addressing the fiber to the home markets. Last quarter our PMD design wins included Mitsubishi, Samsung, and NEC. With these wins, we are now shipping product to virtually all the optical module manufactures that service fiber to the home market, including Fujitsu, Sumitomo, WTD a subsidiary of Fiberhome in China, Delta Electronics in Taiwan, and many others.

Turning to our high performance analog switching products, we crossed a significant milestone this past quarter; shipping more than 2.5 million cross point switchboards since first entering the market in 1999. Our broad offering of cross point switches provides a central connection wiring technology for incoming and outgoing signals in a variety of high speed communication systems.

Mindspeed was the first company to integrate quick channel, independent, clock and data recovery devices, CDRs along with adjustable input equalization and output pre emphases capabilities into a cross point switch. Features that are used in the newest generation of smaller foot prints, high-capacity telecom, Datacom, broadcast video, as well as, fiber channel storage systems.

Our cross point switches offer capabilities extending beyond traditional telecom applications enabling Mindspeed penetrating segments. In fact, during this past quarter, we announced our first cross point switch products targeting the video broadcast markets.

Our new 72 x 72 and 144 x 144 cross point switch devices support data rates up to 1.6 gigabits per second and are optimized for both standard and high definition television routing and switching systems. There is significant interest in our new video cross point switch products as evidenced by a multiple video design wins this past quarter, including one a key Japanese broadcast equipment supplier, Ekagami Electronics.

I would now like to turn to our multi service access portfolio. Revenues from our Voice Over IP solutions again grew dramatically over the fourth fiscal quarter of 2003, particularly from customers in the Asia-Pacific region.

We had strong shipments of multi service access, Voice Over IP processors to leading customers such as Alcatel, Siemens, Volley Technologies, ZTE, and LGE or applications including voice-over packet trunking gateways, access and media gateways, digital loop carriers, as well as, enterprise routers.

It is becoming increasingly evident that Voice Over IP is gaining rapid market traction in major markets worldwide. In Japan, Yahoo Broadband now has more than 3 million Voice Over IP subscribers and there are multiple ongoing carrier deployments in China. We believe the next phase of Voice Over IP adoption will begin in the Americas in 2004, as evidenced by the numerous deployments announced to date. Most notably by Verizon, SBC, Sprint, and AT&T.

From a subscriber's standpoint, IP telephony service provider Vonage has already signed up 85,000 customers in the United States. Mindspeed is extremely well positioned to capitalize on the strength of global adoption through out leadership Voice Over IP Technology and existing strong market positions.

During this past quarter, we won a key design for our Miro Integrated Voice Processor with a major Japanese OEM for a Voice Over IP trunking gateway with deployments planned for NTT. In addition, we scored design wins for our Chagall PBX on a chip including two to one networking orients and we remain on track to ramp volume shipments of Chagall in the first half of this calendar year.

And now trying to our PE carrier portfolio, revenue grew very strongly on a sequential basis as I mentioned earlier. We continued to benefit from the widespread resumption of demand for both wireline and wireless networking equipment with particularly strong demands for our highly integrated high port counts DS3 E3 products for shipment in next duration metro optical equipment.

As I mentioned earlier, revenue from our DS3 E3 products grew a 133% this past quarter. Primarily driven by shipments to Lucent and Nortel for their Metropolis DMX and OPTera Metro 3500 platforms, respectively. Deployment of these systems in North America is ramping. As telecom carriers including AT&T, BellSouth, and Verizon upgrade their metropolitan networks to handle an ever-increasing need for high band with connectivity.

During the past year, the Metro optical markets have seen a significant increase in contract awards and the vast majority of these awards are from new network deployments with equipment Mindspeed DS3 E3 silicon is designed into. In addition, we expect to benefit from the Giga B contract recently awarded by the US Defense Information Systems Agency since we have strong positions in both fiscal 15454 Metro platform and the Juniper M- and T-series routers with our PE product family.

During the quarter, our PE carrier design wins further demonstrated our product leadership as well as the success of our market diversification into mouthful equipment types including Metro optical systems, broadband DLCs and DSLAMs, wireless infrastructure, as well as, Enterprise routers.

Specifically, we scored a significant number of new design wins with Q1 OEMs worldwide, especially with our high port counts DS3 E3 product portfolio. We won multiple DS3 E3 designs at Cisco Systems at Nortel-Telrad, at Volley technologies, and others. In addition, we experienced a significant pickup in design activity for our OC3 framer and HDLC product families. Winning designs at key customers including Harbor Networks in China, Siemens, UT StarCom, ZTE, others.

Particularly noteworthy we won an OC3 channelized chipset design at Volley technologies for our next-generation router, supporting packet over sonnet and ATM applications as part of the Volley joint venture with 3Com. This highly integrated chip set captures significant dollar content for line card for Mindspeed.

During the past quarter, we also introduced the industry's most highly integrated and power efficient 32 port single-chip inverse multiplexing over ATM or IMA processor. IMA devices are used to aggregate traffic for multiple T1E1 and DSL circuits and equipment such as access concentrators, DSLAMs, and 3G wireless networking equipment on multi-service platforms.

Our new 32-port device consumes 40% less power than any other IMA solution on the market. We secured multiple design wins this past quarter for IMA portfolio, including a key win at DTE for 3G wireless infracture equipment.

Finally, in our ATM MPLS processor portfolio, revenues grew sequentially for the third quarter in a row driven by strength in wireless infracture and network access equipment including DSLAMs, access routers, pay station controllers, and fiberoptic access networks.

Each of these networking platforms depends on ATM transmission where we enjoy a very strong position. Key network processor customers in the first quarter included Cisco Systems, Nortel, Alcatel, ZTE, NEC, as well as, Juniper Networks. Our network processor design win opportunity pipeline is the strongest it has been in the past two years. Particularly within the Asia-Pacific region.

We are successfully diversifying well beyond traditional wireline applications into new network processor market segments such as wireless enterprise applications, voice-over-packet gateways, and next generation WAN routers.

For example, this past quarter, we secured design wins at Nokia and Volley for CDMA wireless based stations with Harbor Networks for an enterprise switch and a DTE for a voice-over-packet system. We also secured the first design win for our new TSP3 traffic management and layer 2 inter-working processor with Juniper Networks.

In addition to network processor wins in these new market segments, we continued to gain share in our traditional ATM MPLS markets this past quarter capturing e-design wins with OEM such as Volley, Harbor Networks, and Redback.

In conclusion, Mindspeed delivered significantly improved performance for the first quarter of fiscal 2004. Our focus over the past two years on developing leadership products and capturing share within the metro access market is clearly paying off.

We are particularly excited by our rapidly expanding design win opportunity pipeline coupled with our already strong positions with our four key product families. I would now like to turn to our guidance for the current quarter.

We again expect our second quarter revenue to be up 10 to 15% sequentially yielding a revenue range between 29.4 and $30.8 million, our highest revenue level in ten quarters. We expect overall gross margin to be roughly 68% and we anticipate further lowering our total pro forma operating expenses to $31 million achieving on schedule the target we announced almost one year ago.

As a result, we expect to prove our pro forma operating loss by at least 20% and expect to further reduce our cash consumption by at least 25% to less than $10 million this quarter.

We also remain confident that we will achieve our pro forma operating profit break-even level of approximately $45 million in quarterly revenues before the end of calendar 2004. That concludes our formal comments today. Operator, lets please open the lines for questions.

Thank you sir. At this time, we will open the floor for questions.

[OPERATOR INSTRUCTIONS] Our first question comes from Mark Roshnan (ph) of Edam (ph) Company.

Great! First, talk a little bit about what is your backlog? It looks like owing to this quarter relative to the past couple quarters and the order patterns we have been seeing in the US pickup, is that continued into January?

Mark this is Raouf. Regarding backlog, what we are experiencing this quarter is quite consistent with the backlog experience that we have had over the past couple quarters, meaning that at this time, our total backlog is higher than what it was for the current quarter, as compared to the backlog we had in place 90 days ago.

So we are quite comfortable with our position at this time relative to the guidance we are providing. In terms of order trends; the order trends are quite healthy. The near term positive for us is frankly the pickup that we started to experience particularly in North America and we have seen no abatement in that, if you will.

OK. You are right. You have talked about a second customer on the storage side. Have revenues from that kicked in or is that still something that has been happening?

Revenues from that customer have not yet kicked in. We are expecting to have some amount of contribution from that customer next quarter, which will be our third fiscal quarter, but we think meaningful ramp is probably in the second half of this calendar year.

That said, I would add to that Mark that we actually are competing right now for a number of potentially quite significant design wins or design opportunities in the storage space specifically with our cross point switches and things are starting to look up quite nicely in that space. We have nothing to report as of today but we hope to be in a position on our next earnings call to announce some potentially very meaningful design wins in that area as well.

OK great! The inventories were down, given the expected rise in revenues, was that something planned or that just happened?

Mark, this is Simon. It actually just happened and I do not think there is any doubt in our minds that turns at 8.4 is not something that is sustainable in the long term, so we would actually expect that number to move back up towards the normal range this quarter or maybe observation of working capital management was the principal reason that the cash was better than we expected it to be. The inventory was a part of that and clearly as I said, that is not sustainable.

OK, then the last one. The Voice Over IP, historically a lot of the equipment used in conventional DSPs, how quickly do you think the industry is going to transition from this regular DSPs to integrated specific solutions?

That is a good question Mark. I mean, generally speaking, I really only see one particular segment where there is any potential for migration away from general purpose programmable DSPs, something that has caused little more hard wired.

That segment happens to more in single service, single function edge applications, like just predominantly one application, lets say, ADPCM over ATM type networks. Even in that application, there are a number of reasons why DSP platform is perhaps a better choice in hardwire platform.

Outside of that, the functionality in the Voice Over IP space is by no means stable, I mean, there is increasingly new features, new performance requirements, new enhancements, new interoperability, that is required and our customers, we believe, are best served with a programmable platform that allows us to continue to grow the feature set, to support them during design, as well as, support them during field deployments with a programmable flexible platform and I think that a vast majority of our customers see it that way.

Do you have a sense for what your market share is in the Voice Over IP space right now?

That is a tough question to answer. Let me take the carrier space first and then I will talk of the enterprise. Very briefly, in the carrier space, it is hard to say exactly what out share is, but you can look at the OEMs who are today shipping Mindspeed, as compared to those who are shipping other DSP vendor solutions.

I think we have come up with a range that at the very low end may be 30% share and maybe as high as 70% share on the carrier side. It is somewhat in that range. Obviously, it is a little early to call market share because this market is ramping very rapidly, but our customers as you may know in this space include people like Cisco Systems, include Alcatel, Siemens, Volley Technologies, ZTE, and others.

We are generally considered to have a fairly pretty significant share, but the tenders are still going down, so it is hard to say who is going to have how much share at the end of the day in terms of OEMs and as a result, how the share is going to shake out from the silicone perspective. On the enterprise side, we came into that space approximately three quarters ago with our single chip PBX device that I mentioned earlier in my comments, the Chagall device.

That device has captured a very significant number of design wins on a global basis including the two that I just referred to earlier, top tier networking OEMs. Again, it is a little hard to say what our share is since the product is a one-of-a-kind product. There is no one else out there today with a PBX and IP PBX on a chip that can compete with it. So, it is a little early to tell, but we think we are in a very good position to capture a very significant share in the enterprise as well.

Thanks a lot.

Thank you sir. Our next question comes from Charlie Glavin, from ThinkEquity.

Hey guys! Nice quarter. A couple of house key things. Very quickly, tell me in terms of some of the more Gap dates as far as -- should we expect any additional change in terms of amortization or special charges since you did not have any, as well as, could you give more color in terms of the interest income? I think you actually guided for no expectation, but may be it is your cash management, I do not know, but a little more guidance on that, and then also share count?

Yes, so let us start with the amortization. Charlie, that is going to continue the way it is for an extended period of time. Probably, at least the next three to four quarters and then it has stopped tearing off pretty quickly after that.

With regard to the special charges, we are actually expecting nominal special charges this quarter. It is probably less than half a million dollars in total. OK, so that will be the March quarter I am talking about specifically there.

Then what we had been saying as it relates to guidance for everything that they are basically below the pro forma operating, last line is that those items effectively net to zero and this quarter they net 22K or something in that kind of range. So, the expectation is that those numbers are going to be very small moving forward.

Sorry, you asked a question about share count?

Current stock prices, Charlie, my expectation is what we average share count for the second quarter is going to be roughly 98 million shares and then I think it is going to increase at something like 3 million shares per quarter after that.

In regards to, without sounding too greedy, in terms of -- Raouf you had mentioned that your backlog looks better than it did 90 days ago entering into the December quarter, but given some of the ramps that we saw including the DSOs, could you give a little color in terms of (1) The linearity of the orders? (2) Whether actually you can carry over in terms of shipments out as either deployment by your OEMs or in terms of actually being able to get the products to satisfy the upside?

OK Charlie, so in terms of linearity, actually last quarter was a little more linear than prior quarters, which we found to be quite encouraging. In terms of carryover, I am not totally sure I understand your question. Let me just say that we did experience a large number of expedites towards the latter part of the month of December where customers had orders in place that may have been three or four, in some cases even five months out in time.

We all of a sudden pulled those orders in requesting the product to be shipped to them within 24 hours, an indication to us that the supply chain is essentially, if not completely depleted, certainly running pretty low on overall inventory in the channel.

We did our best to accommodate those pulling request by our customers and we were able to in most cases though not in all cases. I am not sure if that addresses your carryover question, perhaps if it has not, you could elaborate a little more on that.

In terms of, more specifically DSOs, looks like they did spike a little bit more and one could be due to the expedite, but also does any of that have to do with either a mix of the customers or just the lateness of the expedites?

No, not really, Charlie. Frankly, it is a bunch of little stuff. I wish, I was still at 45 days, it got up to 48 days but there is nothing indicative in the three days of incremental DSOs to suggest that this was very late quarter activity.

But I want to clarify one point that Raouf made. Raouf was taking about linearity there, that specifically related to the revenues. I think your question was specifically by the order pattern and what I would say about the order pattern is that we did see constant improvement throughout the quarter, so November was better than October and then the early part of December prior to the holiday season, that was certainly better than November had been, so the trend is absolutely moving in the right direction for the entire quarter.

What I was getting to is more in talking to some of the coming back from Asia and Taiwan recently was due to the timing of lunar new year. It is very different compared to other years and whether or not you in terms of both the linearity whether or not you actually saw some product that could have shipped in Q4 that has gotten carried over.

Given the orders though, Raouf, it sounds as if these are fresh orders. I asked the same thing at the -- (inaudible) and it seemed that they were getting fresh orders right now. What I was asking is essentially could you lead more revenue on the table then you could have recognized had you had all the products?

I cannot comment on your last question. I can simply say that these work pressure orders were absolutely right.

Okay. Last question, sorry for hogging time. I had asked your last quarter in terms of not so much recognition of where you did ship in terms of consumption. Given some of the deployments particularly say the Voice and other products picking up little bit quicker, as best as you can gauge, can you give a breakdown of where you think consumption of your product was not for surely where it was shipped to?

Yes certainly. This last quarter was interesting in that, for the first time we really experienced a very meaningful pickup in demand by North American customers. For shipment into North America, to North American Carrier Networks and so clearly we think from an end consumption perspective, the mix of Americas went up on a sequential basis quite clearly.

That said, we believe that at this point in time, the majority of the product that we are shipping to European customers as well as certainly all the product we are shipping to APAC those customers is ending up in Asia in fact. It is no secret that our biggest customers in Europe include Siemens and Alcatel and obviously they serve the local demand in Europe but the majority of the product, we are shipping them, for example Voice Over IP products, is ending up in Asia.

America has picked up but I think, it is tough for me to give you in percentages. I think overall probably demand or end consumption in Europe went down. APAC continued to be a very large percentage of the end demand and America has picked up for sure.

OK. I will not press it and thanks guys, good quarter again.

You are welcome, thanks.

Thank you sir. Next question comes from Carter Driscoll, from the Independent Research Group.

Good afternoon gentleman. If you could just possibly touch again on the fiber issue in Japan. Could you possibly just brush out a little bit whether you believe this was kind of a pause in end demand or whether it was another true clogging of the channel a little bit? If you could just talk about that first, then I have another question.

Certainly. Mr. Carter, this is Raouf. We are quite comfortable that what happened with our PMD products that addressed the fiber to the home market, again specifically in Japan. What happened with that is really a supply chain inventory problem. To make a long story short; in the latter part of our fiscal year 2003, meaning the September quarter or so, we had a very serious supply constraint shipping these products into a market that was ramping very strongly.

As a result, we think what may have happened is that a number of elements in the supply chain including distributors, maybe contract manufacturers as well, double ordered, maybe even triple ordered in some cases, because of the what was really a very painful supply situation but we caused them. Once we were able to catch up with the demand, we ended up with a little bit of an inventory bubble that impacted this past quarter.

The inventory is burning through. We have a pretty good sense of how big it is, we are monitoring obviously the burn of that product and the ship through of it and we are quite comfortable that next quarter, meaning our third fiscal quarter or the June quarter if you will, we will see a resumption in growth in that product line particularly.

I would also point out that some of the more complicated supply chain in this particular case because we ship PMDs to distributors and in some cases we ship to contract manufacturers, who ship to module ODMs or ship to OEMs, and ultimately our service providers, we got like 5-6 layers to the supply chain, in this case and it is not at all incomprehensible how this could happen and obviously we are monitoring it very carefully and we got a pretty good feel for it at this point again.

Thank you. Next question, as you mentioned fibers at home in North America, if you could give us a sense of how exactly you guys are going to benefit from that and particularly which OEMs or if you could kind of label which carriers you believe are most advanced in terms of the roll out and could you just give us a little sense of who you see in the pecking order.

Sure. Once again Carter, I would make the same comment I made earlier that we really do not see this market as being a very high growth market within calendar year 2004 within the Americas. OK, to be clear, it is real, it is happening in Japan, it is probably spreading to other parts of Asia such as China and Korea.

As I mentioned earlier and we are somewhat encouraged by the recent announcements in the US. Particularly from carriers like Verizon and others, that it could over time, that we could see fiber to the trend deployments within North America over time, but we do not think it is a meaningful market within calendar year 2004. It is perhaps a 2005-2006 kind of market.

The way we would benefit from it is two fold. Obviously, we will continue to address the silicon requirements for optical modules particularly OC3, OC12, and particularly BPAM or broadband, passive optical network favors the BPAM favor. Which is likely to be the high-going deployment within North America, possibly also the APAM to a more limited extent.

But we certainly have strong presence with the likes of the Alcatel, the AFTs, and other players in this industry, both products with module suppliers, meaning module manufacturers to supply those OEMs in some cases as well as with the OEMs themselves in other cases. That is as far as the module goes.

We also have line card silicon that goes into those platforms as well, ATM being a perfect example of that. It is likely that hence for long time it is going ATM centric, whether at the OT3 APALM level or OC12 BPALM level, both of those flavors are ATM centric. Obviously, our ATM MPLS network processors play directly into that space as well

Thank you. And then finally just, when did you begin your relationship with Vonage?

Well, we do not have a direct relationship with Vonage. One of our key customers in North America, I would rather not disclose the name, who is shipping our multiservice Voice Over IP products in their platforms, is the primary supplier of Gateways for the Vonage Network.

Not talking about the CPE or the consumer or a few other clients, attachments that since with the if you were the clients, attachment that sits with the customer prim, I am talking about the infrastructure side leading the voice gateways that Vonage has in their networks and one of our top customers in North America is supplying those gateways today in the exclusively Mindspeed Silicon.

You decline to actually name who that is?

Yes, I would really rather not. I think if you are familiar with the business, you probably will know quite well.

Thank you.

You are welcome.

Thank you. Our next question comes from Sandy Harrison, Pacific Growth Equities.

Thanks. Good afternoon guys. Coming out from Charlie's question, he was, I think asking earlier, to follow on to that, do you believe this the overall strength in the sector in general may have held back some upside and the fact that some of your customer may not has been able to get other components therefore not needing to demand additional component from you. Did you saw any of that and if you did, do you see that sort of lessening as we go into the first quarter here are increasing.

That is an excellent question. I do not really have an answer that I can quantify for you. I can simply give you some of the anecdotal input that we are getting from some of our top few customers and by the way, this applies to particularly to the North American top few customers.

In that, what we hear from those customers in general is that they are experiencing some real shortages particularly in terms of memory components and in some cases controllers as well. That they are worrying about right now actually more than the communication chip content. So number of those customers are trying to work on that problem, accelerate demands, put in longer lead time orders to other supplies of memory and micro controller products into their systems.

That is what we hear anecdotally. If we take that at face value, the implications, as you said, more pent up demand that could have been satisfied in the quarter had supply shortages of other components not existed. But this is purely anecdotal. I cannot give you statistics. I cannot give you data that stand behind us.

Great. And than you talk a lot about the applications that are going into and the new opportunities. It would be help in think if you could either prioritize the areas of growth that we should be looking for from you or the areas of which you guys expect to see the greatest growth? Is it going to come from Voice Over IP or is it going to come from existing legacy, or is it going to help us can prioritize what to look forward on board.

Yes absolutely. So Sandy, as you know we addressed this market place with a very, very broad product portfolio, perhaps one of the broadest in the industry. We are experiencing a pickup across virtually all our product lines at this point in the game. That said, the tide is not raising all boats equally.

Certainly some of our product families that are positioned to benefit from markets that are just trying to turn on or going to exhibit outside revenue growth on a sequential basis. An example of that certainly include Voice Over IP that you mentioned briefly and we do in fact anticipate that Voice Over IP is going to be one of the major drivers for instance, for our sequential growth in this current quarter, the March quarter over the December quarter.

We also would expect that due to experienced continued growth in a number of our other platforms, for instance some of our analog switching products, ATM, just because of the broad footprints into routers as well as access platforms is likely to also grow sequentially again.

So we are seeing pickup across the borders I mentioned earlier and it is coupled to pickup in run rate business which for us anyhow we define as products that we have in production in calendar year 2000 or in years prior to that. We are increasingly seeing a comeback for the product revenue stream.

So, it is a combination of those two. The return of the run rate business coupled to continued ramp of new products that we deliver to the market place over the past couple of years or so. We have particularly outstanding continued contributions, continued growth from the Voice Over IP portfolio.

Then a quick question Simon for subject near and dear to all of our hearts is distribution in the other channels, how are you guys experiencing that area and what do you feel about segments are going to contribute or that that channel could contribute in the next couple of quarters?

Sandy, if the questions specifically relating to what was seen with our distributors, certainly from a North American perspective, the trends out of the key distributor we have here are certainly moving in the right direction.

We certainly did in the December quarter and our expectation is that they are going to continue do so this quarter, so absolutely moving in the right direction. That is easy to talk about Asia or Europe at this point in time but nothing that causes us to think that things that will be anything other than improving. Did that answer the question, Sandy?

Great, and lastly talk about the rate for availability of pricing. How is that environment currently?

Sandy, this is Raouf again. In terms of capacity of your ability, let me break it out to front end and back end, if you will. On the front end meaning that the way for supply side of things, things are clearly tightening up. I think it is generally well known that TSMCs is our primary supplier of (inaudible) capacity and they are operating pretty close to 100%, if not a little bit above 100%. In fact in certain of the -- (inaudible) at this time.

The capacity is probably tightest in some of the more advanced geometries like - (inaudible) 0.13. The process technology is more complex. It involves a lot more steps and the amount of capacity available is more limited than say 0.15 and 0.18. The vast majority of our revenue generating products shipping today are in 0.15 and 0.18 where capacity is relatively speaking still available.

So we are all keen on that particular regard. All our newer products are in 0.13 microns such as the TSP3 next generation ATM and PLS network processor and so as those products start to ramp, I think we will be in a position to benefit from the increased capacity with TSMCs for instance is planning to bring online and for example the FAB14 30 mm 12 inch 0.13 FAB, just for instance.

The capacity right now in the front end is not limiting the growth of our business. On the back end though, assembly and test, we do have some very real challenges, particularly some of our top assembly providers who are running up against the stops now and lead times are certainly extending on the back end though not as much on the front end.

Thanks.

Thank you, our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thanks very much. You are seeing a recovery in telecom spending out of Q4 going to Q1 on a counter basis, in that, I think it is common with your peer group and you are still posting sequential revenue gains of sort of the magnitude that you outlined over the last three quarters, which you would be able to execute, then my question really is the timing of the telecom spending recovery coincidence or did you predict that it would happen exactly this time?

That is a great question Jeremy. I think, the reality is somewhere in the middle. We had expectations of how various pieces of the business were going to grow when we would have originally laid out the plan to invest the community back in the May time frame basically.

And there is no doubt that since that point in time, somethings have run a little hotter than we expected and somethings have run a little slower than we expected them to. So if you take the HPA business and specifically PMDs as it relates to last quarter, it was not our expectation when we laid out the plan that that business would decline in the first fiscal quarter of the fourth quarter. So there is no doubt that this is a broad portfolio of products that have great opportunity to have some products high perform and some products less than perform relative to our expectations.

From a global perspective Jeremy, let me add to that and say that we had laid out a scenario and I think that we had even communicated this several times that anticipating the Asia-Pacific from a telecom (inaudible) perspective would continue to be the brightest path from a global perspective.

We anticipated that the EMA region would be flat to may be slightly up in counting year 2004 and if we go back all the way, lets say to a year ago, we did not anticipate that the Americans would be picking up this way. What has actually transpired is APAC is pretty much on track with what we had always expected and consistent in living up to the expectations that we had and fully justifying the continued investments that we are making in the channel in Asia as well as in product developments in customer focus in Asia.

Europe has been a little bit of a disappointment frankly, relative to our baseline plan but that has more than offset by the increasing carrier CAPEX pick up in North America. So, as Simon said in essence, certain things go better than you expect and others may disappointment. So you cannot expect everything to go the right way all the time.

OK. I was just wondering how good your crystal ball reading is? Next question, if I may. You are talking about significant strength in the DS3 space and just from a carrier demand standpoint, is that surprising you that demand for DS3 is strong, rather than people sort of migrating faster to Ethernet-over-SONET architecture?

No, and really it is no surprise whatsoever to us. We have always anticipated that in fact DS3 services would become increasingly popular, particularly in North America and that has been somewhat accelerated by fractional DS3 pricing by carriers in North America much like fractional of T1 many years ago.

The cost of the service has come down. The cost of the electronics has come down quite dramatically, particularly given some of the very high port com products that we have delivered to markets and so forth. So, it does not surprise us at all. That said, Ethernet or SONET is an interesting market. To market that is starting to happen, but starting to happen in Asia first and we see it long-term as an important market.

Right. One last question. Have you seen any upswings in demand for RAC?

For remote access concentrators!

Yes.

We have seen some level of tender activity. The localized and relatively small volumes of tenders going down for dial-up remote access, primarily in certain parts of Asia that is certainly addressed by our silicon, by a number of our customers but it has been small, it has been localized, it has been limited.

We expect that there will be some pickup in the dial infrastructure, particularly in the Third World over the course of calendar year 2004, hard to quantify it and hard to say that it is really going to be all that meaningful at this point in the game.

But there is not any -- (inaudible) as you get into the US market, Cisco in particular, coming back -- (inaudible)?

For dial applications, no, very limited. As you know, we have some inventory of products that address dial and voice and we have been quite consistent saying that we expect that inventory to be depleted and demand to return for that particular product platform in the first half of this year and nothing has changed in that regard whatsoever.

OK. Thanks very much.

Welcome.

Thank you. Mr. Biddiscombe, there are no more questions at this time.

Thank you Jeremy. That concludes our conference call for the day. 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.