MACOM Technology Solutions Holdings Inc (MTSI) 2004 Q2 法說會逐字稿

Thank you, David. I would like to welcome everyone to our conference call discussing the results of our second quarter of fiscal 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 the product and market overview and our outlook for the current quarter. We will then open the call to your questions. Before we begin I want to remind you that our comments today will include statements relating to our future results, including our financial outlook for our fiscal 2004 third quarter, so that forward-looking statements, as defined in 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 those noted in our earnings release and our various filings with the FEC.

Consistent with prior quarters, I would also like to remind everyone that 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 our operating performance. We provide this information because we believe it provides investors with additional insight into the underlying operating performance of our company.

We encourage you to view our GAAP financial results and the reconciliation of the pro forma information to the comparable GAAP information included in our press release and our Form 8-K furnished to the FEC today. Copies of both documents are available in the investor relations section of our Web site at www.mindspeed.com.

Turning now to our financial results for the second fiscal quarter of 2004, Mindspeed again delivered significantly improved financial performance over the prior quarter, meeting or exceeding our expectations. Today we announced second quarter revenues of $30.8 million, up 15% sequentially from the prior quarter and at the high end of the guidance range we provided one quarter ago. This sequential revenue growth resulted primarily from continued strength from our Metro Access markets, with particularly strong demand for our voice over IP products.

The Asia-Pacific region contributed 46% of second quarter revenue, up 42% sequentially. The Americas region contributed 38% and Europe 16%.

Looking at our quarterly revenue breakdown by product family, multi-service access voice over IP solutions contributed more than 25%, T/E carrier and ATM/MPLS process solutions contributed approximately 35% and 20%, respectively, with high performance analog devices contributing the balance of revenues.

Our top ten customers this past quarter, in order of revenue contribution were Cisco, Rahway(ph), Nortel, Siemens, Alcatel, Lucent, ADC Telecom, Fujitsu, AXC and ZumTE(ph). Cisco again was our only greater than 10% end customer including both direct and indirect sales through third parties.

Gross margins was $22.9 million, or 74% of revenues, again exceeding our guidance of 68% provided a quarter ago. This performance improvement included a nine percentage point benefit from the sale of products written off in fiscal 2001. This benefit was primarily driven by the long awaited resumption of demand for certain of our multi-service access solutions, particularly in high-growth applications such as voice over IP.

The underlying gross margin for the business, excluding the effect of the written off inventory, was 65%, in line with our expectations and consistent with our long term operating model.

Pro forma operating expenses of $31 million dollars reflects a decrease of $1.4 million, or 4% from expenses of $32.4 million in the prior quarter, achieving the pro forma operating expense target we set for ourselves one year ago when we announced our plan to spin off as an independent company.

As a result our pro forma operating loss was $8.2 million, an improvement of 41% over the prior quarter's operating loss of $13.8 million, again, significantly exceeding our expectations of a sequential improvement of at least 20%.

Other expenses and the provision for income taxes in the aggregate resulted in a net charge of approximately $146,000. 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 39% over the prior quarter to $8.3 million, or eight cents per share based on approximately 98.2 million average shares outstanding for the quarter.

The total number of shares outstanding at the end of the quarter was approximately 99.3 million. Compared to the same fiscal quarter of fiscal 2003, our second quarter pro forma net loss improved 69% from $26.9 million to $8.3 million.

Turning now to the balance sheet. Our total cash consumption, which we define as the net decrease of cash and cash equivalence for the March quarter, was reduced by almost a half to $7.1 million from the prior quarter's cash consumption of $13.4 million and significantly exceeded the reduction of at least 25% we'd expected at the beginning of the quarter.

Over the course of the past three quarters, we've reduced our quarterly cash consumption by $25 million, or almost 8% from third quarter fiscal 2003 levels.

Cash burn from operations, which we define as operating and investing activities was $13.8 million, an improvement of 22% over the prior quarter, including roughly $2.3 million in restructuring payments associated with our previously announced cost reduction initiatives.

Capital expenditures were approximately $1 million and depreciation was $2.8 million. We expect the quarterly capital expenditures to average about $2 million going forward. Net cash generated by financing activities was $6.7 million, compared to $4.2 million in the prior quarter, principally consisting of proceeds from the exercise of stock options. Our cash and cash equivalence at the end of the quarter totaled $59.6 million.

Turning now to working capital, receivables were $15.7 million, resulting in DSOs of 46 days, slightly better than the prior quarter.

As we communicated on our last earnings call, we consciously increased net inventories from $3.9 million in the first quarter to satisfy anticipated customer demand. This resulted in second quarter net inventories of $9.8 million and inventory terms of 3.2, below our target range of five to six terms.

Gross inventory including amounts previously written off totaled approximately $70 million at the end of the quarter. Total current liabilities were $27.7 million, a decrease of $1.5 million.

Total restructuring reserves exiting the quarter were $5.7 million. 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 second quarter of fiscal 2004. We delivered a 15% increase in revenue at the high end of our guidance range. Compared to the same quarter last year, second quarter revenue was up 68%. We also achieved our pro forma quarterly operating expense target of $31 million, a key goal we set for ourselves one year ago and we cut our cash burn almost in half, demonstrating continued significant progress towards cash break even.

Now let me share four key highlights of the quarter. First, revenues came from three of our four product families and grew sequentially with outstanding performance from our multi-service access voice over IP solutions which more than doubled over the prior quarter and comprised more than 25% of second quarter revenues. This performance was driven by sharply increased demand for voice over IP solutions and carrier infrastructure applications worldwide. Here in the US, the FCC has indicated that it supports minimal regulation for voice over IP services, which should spur further acceptance.

Recent deployment announcements by AT&T, Cablevision and several regional Bell operating companies also demonstrate that voice over IP is accelerating beyond traditional trunking applications into voice over broadband as well as enterprise networking.

Voice over IP is entering the mainstream, deployments are ramping and Mindspeed is extremely well-positioned in this exciting market.

Second, revenues from our high-performance analog product family also grew sequentially this past quarter. In particular, revenues from our physical media dependent, or PMD devices were up almost 20%, primarily resulting from increased shipments of 10 gigabit Ethernet devices, the module manufacturers supplying high speed box-to-box connectivity solutions and local area networks in central office environments.

Deployment of fiber to the home network connections in Asia remains robust and the temporary supply chain inventories we reported last quarter are burning off just as we had anticipated. In fact, we expect to increase PND(ph) shipments to Asian-based optical module manufacturers serving this expanding market in this current third fiscal quarter.

Third, our execution on design wins was superb this past quarter as we capitalized on an expanding opportunity pipeline to score a large number of significant design wins of key customers with major platforms. Total wins more than doubled sequentially over the first fiscal quarter. We are particularly excited about our continuing success at winning high-valued designs with our voice over IP solutions as well as our high performance analog products across a broad spectrum of enterprise, wireless and wireline infrastructure. Design wins were especially strong in the Asia-Pacific region, which accounted for more than 50% of our wins this past quarter, with significant penetration at UTStarcom, Marway and ZTE.

We continue to diversify into new market segments beyond wireline infrastructure applications. Again this quarter approximately 55% of our design wins went in a diversified mix of enterprise, wireless and fiber-based applications, with the remaining 45% in traditional carrier wireline applications.

Finally, we introduced multiple strategic new products over the past month in our voice over IP and high-performance analog families, the results of our targeted R&D development activities over the past several years. These included our new Comcerto carrier convergence voice over IP processor as well as nine new analog products rounding out our comprehensive family of broadcast video solutions targeted at both standard and high-definition television applications.

We are increasingly confident in our expected revenue growth trajectory for the second half of fiscal 2004. While the end markets we serve are clearly recovering, more importantly, Mindspeed is participating in multiple high-growth markets with breakthrough products resulting from many years of development investment. I will elaborate on these fiscal second half growth drivers later in my outlook remarks.

I would now like to discuss each of our four key product families in more detail, starting with our multi-service access products. We are beginning to benefit from many years of significant investment in voice over IP, just as this exciting market is clearly accelerating on a global basis. We are seeing a significant number of design opportunities, supporting next generation voice over IP networks, particularly in China, where telecom carriers now regard voice over IP as equally important to driver as 3G wireless technology in planning, upgrading and building up their network infrastructures.

Revenues from our multi-service access voice over IP processors more than doubled over the first fiscal quarter of 2004, with shipments to tier-one equipment manufacturers, including Cisco, Siemens, Wahway(ph), Alcatel, LG Electronics and ZTE(ph) China.

During the quarter LGE became one of the first major equipment suppliers to begin shipping wireless systems based on our Miro voice processor. LGE is deploying Miro in its STAREX-IS CDMA 2000 wireless-based station controller, which is designed to handle up to 4000 channels of wireless voice incorporating Mindspeed's patented selectable mode vocoder, or SMV technology for improved voice quality and bandwidth efficiency in TDMA networks.

This past quarter SBC Communications announced that it has selected the Siemens SURPASS hiG1200 voice over IP media gateway, which is based on our Miro voice over IP processor. In addition, Cablevision selected Siemens to deploy its voice over cable service, also based on Mindspeed voice over IP silicon.

We expect these and other deployments will benefit Mindspeed significantly over the next several years. In addition, we won multiple new voice over IP designs this past quarter for our Miro voice processor, including Siemens, GTE and Harbor Networks. We scored a large number of design wins for our Chagall Silicon PBX on a chip and we remain on track to ramp volume shipments of Chagall this summer.

On March 22, we launched the first device in the family of next generation of voice over IP products, targeted for wireless and wireline networks Comcerto secure carrier convergence processor. Comcerto is the industry's highest density system on a chip, offering telecommunications equipment manufacturers a single device that continuously transmits highly secure carrier-class quality voice with integrated voice encryption, authentication and denial of service protection.

The device is fully hardware and software compatible with our previous generation Miro voice processor, which itself is already designed into voice over packet equipment high multiple OEMs worldwide. Comcerto delivers two gigahertz of digital signal processing, or DSP power and is capable of processing more than 500 channels of secure, carrier-class voice over IP for wireline applications such as next generation digital loop carrier equipment and optical line terminals used in passive optical networks, or PON.

For wireless applications it can process more than 100 channels of Mindspeed's patented CDMA selected-mode vocoder, or SMV technology, which enables the highest quality and lowest bit rate wireless transmission of any voice-coder on the market. It also offers a complete suite of voice codecs and protocols for GSM and wideband CDMA wireless networks.

With Comcerto, Mindspeed offers our telecommunications equipment customers an extremely powerful and versatile voice over IP processor to enable compact and cost-effective systems across a full range of wireline and wireless voice protocols and architectures. There is significant interest in our new Comcerto carrier processor and we have already scored one very important tier-one design win with that product.

Now turning to our high performance analog product portfolio. Revenues were up due to increased shipments of 10-gigabit Ethernet TMD devices for high speed connectivity applications in local area networks, or LANs as well as telecom central office equipment.

As I previously mentioned TMD inventory supply chains are burning off consistent with our expectations and we anticipate renewed revenue growth from shipments to optical manufacturers in Asia in the current third quarter.

The market for the next generation of fiber to the home, broadband technology remands strong as fiber to the premise deployments continue to grow, particularly in Japan. NTT has announced plans to spend more than $2.5 billion to expand its fiber access networks this fiscal year, which accounts for more than a third of NTT's total planned capital expenditures in 2004.

NTT's goal is to expand its fiber deployments to 80% of its total subscribers. We are also encouraged by the increasing momentum of fiber to the premise technology in North America. Spurred by the FCC's decision to relax the unbundling rules for investment in last mile(ph) broadband access facilities, several regional Bell operating companies are cooperting in a joint fiber to the prem procurement contract and the Telecommunications Industry Association, or TIA and the Fiber to the Home Council are working with the FCC on regulations to speed up deployments of these new passive optical networks, or PONs.

During the quarter, we won a very large number of PMD designs with module manufacturers addressing the fiber to the prem market, including Hitachi, Mitsubishi and Panasonic.

We now count amongst our customers virtually all the optical module manufacturers that serve the fiber to the premise market, including Fujitsu, Sumitomo, Delta Electronics and many many others.

Two weeks ago we announced a significant addition to our family of broadcast video products targeted at high-definition and standard definition broadcast applications. We have expanded our family of video crosspoint switches to include a four-by-four channel crosspoint, quad-channel reclockers and fixed-configuration devices for applications ranging from switches to small and medium sized video routers and distribution amplifiers.

These devices all offer advanced performance and reliability features, along with the industries lowest power consumption and reduced costs by 50% report as compared to alternative solutions.

We also introduced a family of single-channel physical media interface devices, which include the video/cable equalizer, a reclocker and a video cable driver. This family of devices offers superior telecommunications caliber performance coupled with a 50% reduction in power consumption compared to competitive solutions.

These new products are a key step forward in our expansion into the broadcast video markets, which we initiated last November with the introduction of the industry's first 72x72 and 144x144 crosspoint switches optimized for broadcast video applications. With the addition of these new products announced last week, Mindspeed now offers one of the industry's most extensive semiconductor offerings for studio, broadcast and distribution video applications.

Now turning to our T/E carrier portfolio. Revenues declined slightly on a sequential basis, primarily due to lower shipments of T1E1 devices. This was offset by strong demand for other products in our broad T/E carrier portfolio addressing wireless, DSLAM and enterprise router applications, specifically to tier-one customers such as Siemens, Nokia and UTStarcom.

We also continue to experience strong demand for our SONET, ATM physical layer solutions at AFC, Siemens and Rahway(ph) in the deployment of broadband infrastructure worldwide. We had a banner quarter in new designs across a broad portfolio of T3E3 solutions, HDLC devices and infrasmoke(ph) flexing(ph) over ATM or IMA processors for use in equipment such as axis concentrators, eSLANs, 3G wireless networking equipment, multi-service provisioning platforms.

Examples of key new T3E3 design wins include Cisco for a next generation metro box, Samsung for an enterprise router, and UTStarcom for a 3G wireless platform. Our new 32-port IMA product family has interoperability testing at the University of New Hampshire Independent Lab, which further strengthens our engagement with key customers, such as UTStarcom, Alcatel, AFC and ZTE.

Finally, in our ATM/MPLS processor portfolio, revenues grew sequentially for the fourth quarter in a row. Our programmable network processors offer the sophisticated traffic-management features required to bridge legacy ATM networks with next generation MPLS and internet protocol networks.

As these networks converge, the market for our internetworking processors is growing in applications such as core and edge routing, multi-service switching and DSLAMs. We continue to capitalize on a very strong design opportunity pipeline for traditional wireline networking applications as well as new market segments, including wireless, enterprise applications, voice over packets and next generation WAN routers.

This past quarter we won a key network processor enterprise design at Cisco Systems for its next generation OC3 ATM linecard, designed to update Cisco's broad install base of WAN-access enterprise routers.

We also secured wireless infrastructure design wins at ZTE as well as at Siemens. We also won designs for traditional wireline applications at Alcatel, at Waway(ph) and Metdevices(ph).

In conclusion, Mindspeed once again delivers significantly improved sequential performance in the second quarter of fiscal 2004 as we continue to execute on our roadmap back to profitability. We are confident that we will grow our revenues from the $30.8 million we delivered in the second quarter to achieve our pro forma operating profit break even level of approximately $45 million in quarterly revenues before the end of calendar year 2004. Combined with the overall market recovery, we expect three primary growth drivers for Mindspeed revenues in the second half of fiscal 2004.

First, continued increased shipments of our voice over IP product family for both carrier and enterprise networking applications. Second, continued volume ramp of our high performance analog solutions and in particular shipments of our PMD devices, the module manufacturers supplying the fiber to the premise market in Japan and other parts of Asia. And third, increased shipments of our T3E3 and SONET transmission solutions, including the volume ramp of our complete T3E3 linecard on a chip in the second half of this fiscal year.

And now turning to our outlook for the current third fiscal quarter. We are encouraged by the strength of this quarters backlog across a broad spectrum of our product lines. As a result we expect our third quarter revenue to be up approximately 15% sequentially. We expect overall gross margin for the third quarter to be roughly 68% and to maintain total quarterly pro forma operating expenses at approximately $31 million.

As a result, we expect to improve our pro forma operating loss by at least 10% and expect to further reduce our cash consumption to less than $5 million in this current quarter.

That concludes our formal comments today. Operator, let's open the lines for questions.

Thank you, sir. At this time, we'll open the floor for questions. If you'd like to ask a question please press the star key followed by the 1 key on your touchtone phone now. Questions will be taken in the order which they are received. If at any time you would like to remove yourself from the questioning queue, please press star followed by 2.

Once again, if you'd like to ask a question please press the star key followed by the 1 key on your touchtone phone now.

Our first question comes from Jeremy Bunting with Thomas Weisel Partners.

Thank you. You always give so much information in your prepared comments that it's kind of hard to think of things to ask, but I want to focus on two areas. One on the balance sheet. What is your anticipated cash burn in fiscal Q3? Then I have one other question.

It's Simon, Jeremy. The expected cash burn in fiscal Q3 is approximately $5 million. It's expected to be just below that kind of number.

Great, outstanding, thank you. Next question is also a finance question. Could you describe the current status of the warrants held by Conexant and what your anticipation is of what Conexant might do with those warrants, say, over the next six months? Thank you.

Sure this is Simon again, Jeremy. So, first of all, the current status of those warrants, really, nothing has changed. The warrants, as you know, were granted to Conexant at the point of separation, and those warrants become exercisable on June 28 of this year.

We are two separate public companies obviously and we are not engaged in a tremendous amount of conversation with Conexant around their warrant. Clearly there are a series of outcomes which we believe that are in the best interests of both our shareholder base and also in the best interest of Conexant as it thinks about strategies as to how to dispose of its position over an extended period of time.

I think the right thing to do is point you really what Conexant has said about its intentions with regard to the warrant, and clearly in their most recent 10-Q, they were very explicit about what they intended to do with it. So, they're obviously the right people to ask what their intentions are with regard to the warrant. From a slightly tactical/analytical perspective, what I would say right now is that with the stock price where it is, we would expect the diluted impact to be somewhere around 15 million shares. So it's obviously on a net share settlement basis nowhere near 30 million at this point in time. Our expectation is $6.80, which is roughly where the stock closed today. We'll end up with roughly 15 million shares of incremental dilution.

Ok, Simon. Thank you very much.

Our next question comes from Sandy Harrison with Pacific Growth Equities.

Hey, good afternoon guys. On some of your prepared remarks earlier you were talking about a voice over IP product where you were seeing some success in it sounded like the carrier side. Prior to now we've been seeing a lot of it in the enterprise side. Is this a meaningful shift? Is this something you think is sustainable? What else could you point to in what kind of looks to be ultimately a positive change?

Sandy, this is Simon, and I'll let Raouf add anything if he wishes to. First of all, essentially everything we've shipped in the past has been carrier-oriented. As you know, the Chagall product that we have is our enterprise play and what we've communicated is really we've only shipped Chagall at sample levels at any point in the past few quarters and we expect to see that ramped production with the first set of customers in the second part of this year. So, it's always been to date essentially a carrier play and not an enterprise play.

Raouf, you got anything?

Yes, the only thing I would add, Sandy, is that our participation in the voice over IP market has frankly been in that part of the world that has experienced the most dramatic growth in voice over IP installations, which is primarily in Asia. We have a very high degree of market share, both with exporters of voice over IP gateways into countries like Korea, like China, like Japan, as well as with local OEMs, people like the Wahway(ph), ZTEs of this world, as well as LGE and others. And we believe that to date on the carrier side the vast majority of voice over IP deployments have been in Asia. Now, we believe that that's going to change as we have already seen, there have been a number of announcements by North American carriers of their intentions to deploy voice over IP services right here in the U.S. in this calendar year, so we do expect the voice over IP will start taking off with the carrier space on a global basis, not just in Asia, but that's just starting, frankly, and that will be an incremental positive force in the carrier space.

The enterprise, we're coming-that's a new segment for us. We have what we believe to be some very unique products in that area such as the Chagall product that Simon mentioned briefly. We have a number of design wins with that product and we expect revenue to start ramping approximately the summer timeframe of this year.

Got you, ok. And then could you talk a little bit about the backlog and you saw the growth in it. Could you give us a little quantification on that, and then one last follow up?

Sure. I mean, I think really the only color we've given on that backlog very comfortably supports the guidance that we're providing of the 15% sequential growth. We've also commented that the backlog growth and strength, if you will, is quite broad based. It's across a very broad spectrum of our product line, so it's very far from being one device with one customer, even a single product line. It's quite broad based.

And then, as you've said, your net inventories have increased this quarter. Do you expect it to stay at these levels, or do you expect it to come down a little bit just so we can model for that segment?

So the way I'd think about that, Sandy - this is Simon. I think it's going to stay relatively close to this number for purposes of thinking about a Q3 closing position, so at the June 30 position, I think it's going to be roughly in that $10 million range still, but clearly the expectation is that the terms will attract back toward the range that we expect them to be in for the longer term.

Ok, great. Thanks, guys.

Our next question comes from Charlie Glavin with ThinkEquity Partners.

Thanks, guys. Elaborating a little more on this, Sandy. Well, for most of the breakeven guidance that you've given, you guys have not relied on North America or Europe really rebounding. One, has that changed, and, two, you mentioned in terms of the voice deployment may be getting a little more detail on the backlog. Can you specify or give a little more color on those two geographies, and where else you're seeing good support, beyond voice.

Oh, sure. So, your first question first. I guess I would say that, yes, we do believe that Asia will continue to be a source of strength for Mindspeed now and in the future. As you well know, we have a very strong presence there. Recent activity in North America, be it tenders, awards, as well as ramps of in particular the metro transport states, have been quite positive, and give us incremental confidence in our performance in the next three quarters here.

Beyond that, I don't think that we would give any particular - or guide to any particular change in our perspectives for revenues over the next three quarters. I mean, clearly, we feel more confident every day that goes by in terms of achieving our breakeven buyer before the end of this calendar year, as we now see that the number of geographical markets are strengthening.

But, as you know, product lines can fluctuate and demand profiles may not necessarily be totally consistent, so I think we're very comfortable with - and increasingly comfortable with our perspective on a breakeven buyer before the end of this year is all I would say on that, Charlie.

Maybe, if I could, or to Simon, in regards to your gross margin guidance, that's nine percentage points worth of upside from selling off previously written off inventory. It would be just under $3 million. Would you - with the organic gross margin being about 65%, with a guidance of 68%, can you give a little bit more color maybe in terms of the mix as well as the quality of the backlog in terms of how much of that is anticipated? Do you still have pretty deep pockets as far as what you could tap into over the next year to two, but could you give a little more clarity as far as how much you're expecting to draw down on that? And, if possible, where?

Sure, and I think I would first of all start by saying this is obviously the seven or eighth quarter in a row where we've delivered margins in excess of the 65% long-term target that was set by ourselves. There was a nine percentage point benefit this quarter, as you correctly point out, Charlie. As I think about modeling the margin, and as I think about the 68% we provided today, I'm assuming roughly a two to three percentage point benefit associated with sale of product that was fully written off back in the fiscal 2001 timeframe.

And obviously it becomes very mix dependent as the quarter progresses. If there is opportunity for it to be in excess of that number, if the mix comes in, then there's absolutely no doubt about it.

And I guess one last question, coming back to the inventory, because I imagine that will be a question you guys will get over the next couple of weeks. Not only in terms of building it up, but given what happened with the PMDs in Japan, any sort of comments you want to make in regards to either foundry supplies or anything you saw away from the Japanese PMD channel inventories as they've been bringing down, as far as other areas where you've had to build up. Is it voice, is it HPA, or other areas?

Actually, Charlie, in terms of where we decided to make the strategic builds, it was across the entire business. There are obviously a handful of products that we believe are going to drive significant amount of growth in the second part of the year, but literally in every product family, we looked at the needs for product to support customers moving forward.

So, across the board, we have taken strategic inventory positions. That's the first observation. The second observation is, we don't believe at this point in time that there are any phenomena out there that bear the same characteristics of the PMD issue that we saw back in the September timeframe, so we don't think there are any of those out there at this point in time to give us any concern over our ability to actually sell the product that we've built.

Great.

And then thirdly, in terms of what we're seeing from our foundry partners, there is absolutely no doubt that things are tightening up and have continued to tighten up over the course of the last quarter. And that is something that continues to - both Raouf and I - Raouf and I are spending a tremendous amount of time paying attention to that issue within the business. And we frankly believe it further supports some of the inventory builds that we've undertaken over the course of the last quarter.

Great. Thanks, guys. Sorry, Raouf.

Well, yes, I just wanted to add one minor comment to that, and I think we made the same comment when we reported on last quarter. We did experience once again a large number of last-minute orders, quite a flurry of activity in the last sort of two or three weeks of the quarter. We were able to satisfy some of those orders, but we certainly could not satisfy 100% of them.

So there was a very meaningful amount of business that we could have taken, but just because of the last-minute nature of these orders and the fact that we didn't have products staged exactly as the profile came in, we could not, once again, satisfy 100% of it. So the results we're taking the more strategic, proactive approach that Simon articulated.

Raouf, I've used up my time, but could you elaborate a little bit more? What type of products were coming in, quickly, and have you see that carry over into April as well?

We have seen very strong booking strength this month of April, Charlie. Very strong. The pickup was across a number of our product lines. I remember particularly ATM products, framers and voice over IP is taking my mind as product lines where we saw this flurry of last-minute orders.

Great. Thank you.

Our next question comes Carter Driscoll with Independent Research Group.

Hi, gentlemen, how are you?

A couple questions if I may. In the past year, you had started talking about you're pushing the enterprise side, specifically for storage applications and it's seemingly a little bit deemphasized recently. Maybe you could talk about what you are seeing and why you may or may not be deemphasizing applications in that market. And then I have a couple of follow ups.

So, Carter, our push in the storage space, as you know, is primarily in the switching arenas, although we do have fiber channel serving these products, they're less of an emphasis for us than the high-performance switching solutions. But we continue to invest in those product lines and we continue to push them in the marketplace, with reasonably good success.

If your question is more around sort of the state of the SAN market, we remain long-term bullish on the market. There are a number of near-term dynamics that may or may not be all that positive.

If I go beyond that, I'm going to have to start commenting about specific customers, and, frankly, I'd rather not draw attention to particular customers' business dynamics at this point in the game.

Ok, fair enough. And if you could also talk about - there's a lot of chatter out there that - regarding Cisco and where it may or may not impact certain of its vendors. If you could talk about what you saw specifically. Obviously, they were still a constant (ph) customer, but if - versus the last couple of quarters, if they have been stronger or weaker, and in what particular areas.

Sure, sure. Actually, business trends for us at Cisco are very, very positive, Carter. We don't go into too much detail on particular customers, but I can just tell you in general that whether it's design win traction or whether it's actual backlog or turns coming through from Cisco Systems, all those trends are going in the right direction. We are feeling very positive, frankly, about our engagements with Cisco, our prospects at Cisco, and our business level at Cisco.

And you are correct that they remain our only greater than 10% customer, and actually on a sequential basis in fiscal Q2 grew over Q1. I'm very pleased with everything you see at Cisco.

Thank you, and then just lastly, you mentioned that you did have most of the power (ph) module makers that you could count as customers. Anyone notable that you still don't have that you're targeting?

No. There isn't anyone notable at this point in the game that we haven't already captured.

Thank you.

Ok.

Our next question comes from Aalok Shah with Pacific Crest Securities.

Hi, guys, a couple of quick questions for you. One was - and I know you've addressed the inventory issue a little bit, but maybe you can give us an idea of what in your inventory mix at this point - why are you comfortable with the inventories being where they are? I mean, it seems like you're ramping on a couple of new products and maybe that may explain it.

Second question is, on the previously written off material, how many more quarters of this do we have left, and how much is it going to fluctuate? Can you give us a sense for modeling purposes? Because it's kind of hard to figure out when exactly you'll break even if it continues to fluctuate like the way it has been over the couple quarters. And also maybe you can give us a sense of what turns in the business is like over the last few quarters.

That's a lot of assignments (ph). Let's start with where did we build inventory, ok? So as I said in talking to financial, and I think it was Charlie's question, earlier, we chose to build inventory across all of our product families, and we have done that based on a very detailed internal analysis of our expectations for our customers' demand and the ramps that we expect to see over the course of the next few quarters.

If I take you back to last quarter as the starting point, don't forget that terms last quarter were 8.4, and that is clearly not something that's sustainable within a semiconductor company that's growing the way we're growing at this time.

So, I'm not going to elaborate any more than to say that we didn't do this blindly. We did it with a very rigorous process behind it, and we're very comfortable and actually very pleased with the positions that we've taken, given some of the dynamics we see in the customers in terms of their last-minute ordering patterns and in terms of some of the patterns that we're seeing with our suppliers and the fact that things are pushing out as well.

So I ...

Simon, if I can follow up then. Do you expect the next quarter to - your inventory levels to stay roughly the same or increase?

I think what I said, Aalok, is that expected them to say substantially the same, at roughly $10 million.

Ok. Ok.

In answer to an earlier question. What were the other questions again?

The other questions were on the written-off materials. Can you give us a sense of how to even look at this ....

Sure, sure. So I think what I communicated is that I believe that we can continue to enjoy a benefit from that written-off material for at least a year, and that's based on our expectations, clearly in terms of talking to our customers. Frankly, I wouldn't be surprised if we sat here six months from now, and I still think it's at least a year or so, have something that continues to roll out on a quarter-to-quarter basis. So it's an extended period of time.

And is there a dollar amount attached to this that we can look at?

The fully written-off inventory?

Yes.

Yes, it's about $61 million worth of fully reserved inventory.

Sixty-one. Ok.

Yes, in my prepared remarks what I said was that we had $70 million worth of gross inventory. We've got roughly $10 million worth of net inventory, and therefore I've got reserves of $60 million, if you want to think about it that way, Aalok.

Ok, and I'm sure you've said this before, but can you go over it one more time as to what that inventory includes?

It's across the business, but there is the largest piece of the fully written off inventory related to our MSA DSP products.

So, let's say - just for a hypothetical sake that you've (inaudible) in the next two to four quarters. Are you concerned, then, at that point that your gross margins will be ending at the 65% level and what happens then?

Yes, look, I think what I have to say is that we have never communicated that we expect to sell all of that product. I mean, it's written off for a reason. The demand didn't exist for an extended period of time.

Well, assuming it's doubled quarter over quarter, I mean, almost tripled, actually, quarter over quarter, so it is material.

You've lost me in your thought process.

Well, it went from 1.1 million last quarter to just what you recognized to 2.8 million this quarter, so it is material.

Absolutely. Absolutely, which is why we went through the process of actually talking about it in the press release and talking about it on the call. So, as I said, I'm not back here in a position where I can guarantee that I believe the margin is going to be 72% or 74% next quarter. I'm comfortable committing that I expect it to be 68%. I'm comfortable committing that over the longer term, I expect the margin to continue to be at around the 68% true breakeven, which is what we've been saying for over a year at this point in time. And then secondly that we believe that once we are through the demand patents for that fully written off inventory that the margin will be a very sustainable 65%.

Ok, one final question on this, and then I'll let you go. On the mix of this previously written off material, can you quantify (ph) what's good and what's bad, what you can never sell, and what you can sell?

Well, I'll give it to you the same way as we've previously talked about it. I'm figuring in the best case half of it has the opportunity to sell based on what we know about current customers' programs. But the stark reality is that we do enjoy very long product life cycles and we've been surprised by some stuff that's come back after extended periods of time.

So right now, I'd say that at the very best case, half of it sells.

And the last question, I guess, was on the (inaudible) business. Is there any way to quantify how much (inaudible) business you're seeing in the quarter?

As you know, we don't provide that color - we don't provide that detail, but suffice to say from our color remarks that we're more confident about the ability to achieve the guidance this quarter than we have been in previous quarters, based on backlog positions.

Ok, great. Thank you very much.

You're welcome.

Our next question comes from Jeff Lauf (ph) with Credit Suisse First Boston.

Hi, just a question on the T&E business, since this is your biggest. That was up 50% sequentially in December, but down in the March quarter. I'm just wondering whether that comes back again and what sort of the underlying demand trends are there.

Yes, certainly. This is Raouf. Yes, we absolutely expect that our transmission business, which is the TE business, will grow in the June quarter over the March quarter. We have no doubt of that.

What we saw in the March quarter was a sequential softness in the T1E1 business, particularly. Those products tend to fluctuate a little bit based on specifics of customer shipments and tenders that have been awarded to specific customers. It may also have a little bit to do with the first quarter typical softness in carrier capital expenditures that drove most of that.

But we absolutely do expect our transmission business to grow in the June quarter over the March quarter.

Ok, and then the ATM MPLS business, when you highlighted the three primarily growth drivers for 2004, you mentioned voice, you mentioned (inaudible) optical, and then you mentioned T3E3, but not ATM MPLS. Can first (inaudible) for that business?

Yes, I mean, absolutely, we anticipate our ATM business to continue to grow. It's grown for four quarters in a row now. In fact, I would point out that the ATM business was the first of our four product families to grow sequentially, and it has continued to grow every quarter very nicely. And we anticipate that it will continue. The only question here is sort of on a relative basis, right?

And when I gave those - or when I made those comments about the three primary growth drivers, I was really thinking about the highest growth drivers from a sequential perspective, those that would provide the outside revenue growth. There is no doubt that the ATM business is one that will continue to grow, and also, frankly, one where we have tremendous design positions and market share today. We feel very good about that business.

Ok, thanks.

You're welcome.

Our next question comes from David Wu with Wedbush Morgan Securities.

Good afternoon, gentlemen. Two quick things, clarification. On the - you mentioned that the customers are giving you very - a lot of last-minute orders. I assumed they all read that the foundry capacity is tight. What are they - how - what is the pattern of their ordering? Are they sort of basically expect suppliers like yourself on the older products to ship in the afternoon if they call up in the morning, or are they giving you any lead times now in terms of what - how they expect deliveries to happen? And what is the expectation on newer products like voice over IP?

Have they changed their order placing patterns on you? It's just - another clarification I'd like to have is, when you mention ATM and MPLS network processors, I guess these are network processors, not pointer processors?

They are network processors. Let me go ahead and - get started answering your question here. First and foremost, regarding customer ordering patterns, I would say generally speaking that customer ordering patterns have in fact improved over the past quarter. In other words, we are finally starting to get a little more visibility than what we have experienced, let's say, over the course of the past year or so.

In other words, customers, generally speaking, are placing orders with more lead time than we have been able to enjoy in the past. The flurry of last-minute orders that I referred to is a phenomena that has been ongoing now for about at least a couple of quarters, or maybe three quarters. It's primarily outside of the voice over IP area. The voice over IP area, which is the one you specifically asked about, is as we mentioned earlier primarily a carrier focus for us. And customers tend to have a little bit better visibility into their - the tenders that they have been awarded, their plans for deployment and installation of next generation gateways. And therefore we get a reasonable lead time on those orders from voice over IP customers particularly.

Where we do get a lot of last-minute orders are with the high-performance analog products, products like PMDs, products like analog cross-point switches, also with some of our framer products, T3E3 and T1E1, where customers are still somewhat conservative in their ordering, and are primarily ordering to solid demand that they have on their books.

So you tend to see a little bit of that quite late in the quarter. Sometimes with lead times or request dates within 24 hours, in fact in some cases. And as I mentioned earlier, we're not always in a position to support those types of orders. As I mentioned, we had a very meaningful amount of orders that came through in the last two or three weeks of the month of March, some of which we were able to satisfy, and some, frankly, we could not, that spilled over into April.

It looks like the last-minute orders are the more mature products, which you happen to have them in that $60 million bucket of written-off inventory.

The answer is yes, we do have some of them, but we, like many other semiconductor companies, actually didn't build a lot of that stuff, the finished goods, in late 2000 and then into 2001. A lot of it is held in wafer form at this point in time, and therefore there is a lead time associated with converting that to completed product. But yes, some of that is in our fully written-off inventory.

Absolutely.

Thank you.

Our next question comes from Justin Martos (ph) with Graham Partners.

Yes, hi. Can you talk about just the growth you see on a quarterly basis for your different segments? You talked about for the sequential for the entire company, but if when you think about your T1E1, voice over IP, or however you want to talk about high-performance analog versus multiservice access versus transmission.

I can give you a little bit of a sense for that. I mean, I think we've been quite consistent in our perspective that the preponderance of the growth will come from two particular areas that will outgrow the rest of the business. Those two areas are voice over IP and high-performance analog, specifically.

Now, if you go past that and look at the transmission portfolio, which is comprised of T3E3, T1E1 products and also SONET, we're experiencing very healthy demand and very strong growth from T3E3 particularly. T1E1, as you may be aware, is an older technology, been around a long time, that market is fairly mature. It continues to grow overall, but at a much slower pace than T3E3.

ATM, as I commented earlier, is certainly the preeminent back-hall technology today. We have a very high degree of market share there. We expect to continue to grow our ATM revenues, but, again, I believe sort of T1E1, ATM will probably be a little bit below the corporate average. T3E3, high-performance analog and voice over IP will be above the corporate average, in general.

So I can't give you hard percentages, obviously, it fluctuates quarter to quarter, but I think just to give you color those are going to be the three high-growth areas and the others will be a little bit below the corporate average.

But, in response to an earlier question, you felt that I guess the T1E1 or T3E3 you said was flattish or flattish to down last quarter, and you sort of felt that you feel pretty pretty strongly it's going to be up this quarter. But can you give us any - like, in terms of that 15% growth, high-performance analog will grow, continuing much faster, voice over IP will continue to grow much faster - that's what just I'm trying to understand a little bit better, how you see the June quarter shaping up.

Right. Well, we're very comfortable with the guidance we've given for the June quarter. The color I was trying to provide you is really more of a long-term perspective. So if you, say, were to look for it in three or four quarters, we believe that by the end of that time period, you would see that those two platforms will have grown the fastest for us, again, voice over IP and high-performance analog, closely followed by T3E3 solutions, by the way.

As far as this current quarter is concerned, I mean, we feel very good about the breadth of the backlog strength that we're seeing. It's across virtually all of our product lines, so it feels very good right now.

Thank you.

You're welcome.

Our next question comes from Karl Motey with Wachovia Securities.

Hi, guys. A question on your voice over IP business. Any sense as to your current mix of products being shipped into RBAC versus cable MSO deployments. And also, in terms of your overall voice over IP exposure, what percentage of the overall service provider deployments are still ahead of you?

OK, Karl, this is Raouf here. As we mentioned earlier, the vast majority of our voice over IP shipments end up in Asia at this point of the game. That's where the carrier installations are most predominant today.

We are experiencing the beginnings of - the very early beginnings of - a market cycle in North America. But we believe it's going to be led by the cable MSOs and then eventually the RBACs will follow as well. But we think the RBAC phase is probably the last of the deployments in North America.

And so if you think about sort of a market model, if you will, the carrier space is first and foremost overseas, followed by deployments in North America within HFC or cable infrastructure, hurriedly followed by RBACs. The enterprise markets is another major segment that is very exciting to us, where we have some very strong leadership products today that are designed into tier ones that we expect to start benefiting from the ramp of those products let's say in the middle of this year.

And so we think that really the best is yet to come in terms of carrier voice over IP deployments in North America. Nothing particularly meaningful has been deployed quite yet. It's all ahead of us at this point of the game.

Ok, thank you.

Our next question comes from Jeremy Bunting with Thomas Weisel Partners.

Thanks again. Two very quick ones here. Is it right to assume now that your voice over IP revenues are now greater for the first time than the combination of ATM plus traffic management?

Jeremy, Raouf here. I think there are - off the top of my head, I think yes. I think that's right. So that's right. For the first time ...

First time, right.

For the first time, you're absolutely right. As we commented earlier, the voice over IP business was more than a fourth of our revenues this past quarter.

Ok, thank you. And last one. What sort of timeframe do you expect to be able to make customer announcements on the enterprise voice over IP carrier?

That's an excellent question. As you know, Jeremy, our ability to announce designs is very much tied into when our customers are comfortable with us making those announcements. We're typically under NDA with particular customers and we cannot disclose details of their plans and their platforms.

We are hopeful, though, that said, that in the second half of this calendar year, we will be in a position to disclose a good raft of them, if not all of them, but certainly a high percentage, particularly of the tier ones that are well underway with our Chagall enterprise voice over IP products today.

Ok, thank you very much, Raouf.

You're very welcome.

Our next question comes from Sharini Fisuri (ph) with Merrill Lynch.

Just a quick one on voice over IP. Just trying to get a feel for your dollar content for internal, how do you look at it, whether this is for gateway or for LAN card or for port.

Ok, let me take a shot at that, Sharini (ph). This is Raouf. All trunking gateways are not certainly born equally. They obviously come in different capacities. There's at the low end gateways of a relatively low complexity that people generally refer to as a pizza box, if you will, and our content in such a box would range between $1,000 and maybe $2,000. At the very high end, you have a class four trunking gateway, which is a high-capacity platform.

Our content in that platform may be as high as $20,000. It's a fairly broad range, I would say sort of between $1,000 and $20,000. A good number, average number, to think about, might be around $5,000 per gateway.

Ok, and does that change in, say, the XBoxes (ph), the IP, the XBox (ph), or is it similar?

Yes, it does, in the IPDX (ph) type of environment, the channel capacity is lower. There is also a fairly broad range there. It sort of starts at the eight channel kind of density for small and medium-sized businesses, all the way up to 120 channels, and anywhere in between. The product set that we offer for that market includes functionality well beyond the voice over IP, including the encryption, routing and other functionalities.

And therefore the ASP is not to first-order dependent on the channel count, but yes, you typically have typically anywhere from - at the very low end, might be $500 of content, high-end might be about $5,000.

Ok, great. And also could you please address just the competitive landscape and who do you think is sort of gaining or losing share, or who all do you see in the first place, and both on the carrier side as well as the enterprise side?

Sure. I mean, the predominant competitor we have is Texas Instruments. There is no doubt about that. Our customers typically have two choices. They can develop their own solution using a TIDSP and either code that they purchase or license from TI or other parties, or alternatively they can use a Mindspeed system on a trip solution that comes bundled with the software and the full feature set.

And so it's typically TI that we're competing with, either directly or indirectly. We do see a little bit of Centillium out there. I think that that's - that's about it. I mean, in the space we play in, which is the gateway space, it is once again primarily TI and just a smidgen of Centillium out there.

Ok, thanks.

You're welcome.

Mr. Biddiscombe, I have no further questions at this time.

Thank you. 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.

Goodbye.