MACOM Technology Solutions Holdings Inc (MTSI) 2004 Q3 法說會逐字稿

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

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

Thank you, Brandon. I would like to welcome everyone to our conference call discussing the results of our third 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 a product and market overview, and our outlook for the current quarter.

We will then open the call for your questions. Before we begin, I want to remind you that our comments today will include statements relating to our future results, including our financial outlook for our fiscal 2004 fourth quarter, and fiscal 2005 first quarter, and other business and product trends that are forward-looking statements within the meaning of section 21E of the Securities Exchange Act of 1934.

The company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events, or otherwise. Actual results may differ materially from those projected in any forward looking statement, as a result of certain risks and uncertainties including but not limited to those noted in our earnings release and our Form 10-K and other filings with the SEC.

Consistent with prior quarters, I'd also like to remind everyone that the operating results we will discuss today are from the pro forma income statement before amortization of intangible assets, special charges, employee separation costs 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 review our GAAP financial results, and the reconciliation of the pro forma financial information, the comparable GAAP information, included in our earnings press release and our Form 8-K furnished for the SEC today. Copies of both documents are available in the investor relations section of our website at www.mindspeed.com.

Turning now to our financial results for the third fiscal quarter of 2004. Mindspeed again delivered significantly improved financial performance over the prior quarter, meeting or exceeding our expectations.

Today we announced third quarter revenues of $35.4 million, up 15% sequentially from the prior quarter, achieving the guidance we provided one quarter ago. Three of our four product families grew sequentially with particularly strong demand for our voice over IP processors and our high performance analog products, for fiber to the premise and enterprise storage applications.

New products launched in fiscal 2001 and thereafter contributed more than 75% of sequential revenue growth. The Asia Pacific region contributed 51%, the Americas 32%, and Europe contributed 17% of revenues. In terms of our quarterly revenue breakdown by product family, multi service access voice over IP solutions contributed 27%. Carrier and high performance analog devices contributed approximately 32%, and 26% respectively, with ATM MPLS process solutions contributing the balance of revenues.

Our top ten customer this past quarter in order of revenue contribution were Cisco Systems, Huawei, Siemens, McData, Alcatel, Nortel, NEC Telecom, Kalex (ph), ZTE and Nokia. Cisco and Huawei were greater than 10% end customers, including both direct and indirect sales through third parties. Gross margin was $25.2 million, or 71% of revenues, exceeding our guidance of 68% provided a quarter ago.

This performance improvement included a seven percentage point benefit from the sale of products written off in fiscal 2001. The underlying gross margin for the business excluding the effect of written off inventory was 64%. Pro forma operating expenses were $31.2 million, consistent with our expectations.

As a result, our pro forma operating loss was $6 million, an improvement of 27% over the prior quarter's operating loss of $8.2 million, and again, significantly exceeding our expectations at the beginning of the quarter of a sequential improvement of at least 10%. Other expenses and a provision for income taxes in the aggregate resulted in a net charge of approximately $900,000.

We expect these items to result in a net quarterly charge of approximately $600,000 for the foreseeable future, primarily driven by incremental taxes in overseas locations. As a result, our pro forma net loss improved 17% over the prior quarter to $6.9 million, or 7 cents per share based on approximately 99.5 million average shares outstanding for the quarter.

The total number of shares outstanding at the end of the quarter was approximately 99.8 million. Compared with the same quarter of fiscal 2003, our third quarter pro forma net loss improved 72% from $24.5 million to $6.9 million.

Turning now to the balance sheet. We reduced our total cash consumption for the June quarter, which we define as the net decrease in cash and cash equivalents by 31% to $4.9 million from last quarter's cash consumption of $7.1 million, meeting the expectation at the beginning of the quarter. Cash burn from operations, which we define as net cash used in operating and investing activities, was $5.8 million, an improvement of 58% over the prior quarter.

Capital expenditures were approximately $800,000, and depreciation was $2.7 million. We expect the quarterly capital expenditures will average $1 to $2 million going forward. Net cash generated by financing activities was approximately $900,000, compared to $6.7 million in the prior quarter, principally consisting of proceeds from the exercise of stock options. Our cash and cash equivalents at the end of the quarter totaled $54.8 million.

Turning now to working capital, receivables were $18.4 million, resulting in DSOs of 47 days, one day higher than the prior quarter. Net inventories were $11.9 million, and inventory turns were 3.4, an improvement over the prior quarter's 3.2 turns.

Gross inventory including amounts previously written off totaled approximately $68 million at the end of the quarter. The majority of the increase in net inventory was attributable to our multi service access business to support the continuing growth of voice over IP roll rates (ph) on a global basis.

Total current liabilities were $30.5 million, up $2.8 million from the prior quarter, principally driven by an increase in accounts payable, predominantly for our annual insurance renewals, and an increase in the crude compensation of benefits due to our customer payroll timing. I would now like to turn the call over to Raouf for his comments on the quarter.

Thank you Simon. I'm very proud of our performance in the third quarter of fiscal 2004. We delivered a 15% sequential increase in revenue, up 75% over the same quarter last year. We cut our cash consumption more than 30% to less than $5 million, and we continued to make significant progress towards achieving pro forma operating break even.

Now let me share three key highlights of the quarter. First, revenues from three of our four product families grew sequentially. Revenue growth was particularly strong from our multi service access voice over IP processor solutions as well as our high performance analog products, which, in the aggregate, grew 38% sequentially.

Secondly, our overall design win momentum this past quarter was outstanding, as we achieved a number of significant wins at key customers worldwide. For the first nine months of fiscal 2004, total design wins were up overall, and in particular, wins with our top tier focused customers were up almost 60% over the first nine months of fiscal 2003.

Customer adoption of our voice over IP processors and high performance analog products was particularly strong and continues to accelerate. Approximately 60% of our design wins this past quarter were in a diverse mix of enterprise, wireless, and fiber based applications, with the remaining 40% in carrier wireline applications.

Lastly, we introduced multiple strategic new products this past month in our voice over IP and TE carrier families, the result of our focused R&D development in these key market segments. These products included our new Concerto enterprise voice and data convergence processor, as well as six new line (ph) cards on chip devices to round out our family of integrated T3, E3 and STS1 transmission products.

From an overall market perspective, we believe that carrier capital expenditure spending is more stable today than it has been in the past three years. The regulatory environment is favoring the deployment of next generation voice over IP and broadband access technologies, and we expect that equipment spending on these new segments will increase in total as well as increasing as a percentage of CapEx.

Mindspeed enjoys strong positions with leaders in these market segments. Our customers are optimistic about market growth, and we stand to benefit strongly going forward. I would now like to discuss each of our four key product families in more detail. Starting with our multi service access voice over IP products, revenues were up more than 11% over the second fiscal quarter of 2004, With volume shipments to tier one equipment manufacturers including Cisco Systems, Alcatel, Siemens, Huawei Technologies, ZTE in China, and others. Currently, our customers’ systems are entering deployment in North America with cable operators, including Cable Vision and Comcast, with service providers worldwide including MCI, Bellsouth, SBC and Vanash (ph), as well as in Japan with Yahoo! Broadband, at Singapore Telecom, at Chung Wa Telecom in Taiwan, and in China with all major carriers, including China Railcom, Telecom, Unicom, Netcom and Satcom.

Clearly, voice over IP is being adopted in all segments of networks worldwide, with many of the deployments enabled by Mindspeed voice over IP solutions. For example, this past quarter, British Telecom announced plans to migrate to a single IT based network infrastructure. BTE is starting voice over IP field trials later this year using the Siemens Surpass HI-G 1200 gateway, which is based on Mindspeed voice over packet processors.

On June 14th, we launched our Concerto Enterprise voice and data processor family. This is our second generation enterprise voice over IP processor, and the first in the industry to combine a voice over IP PBX with a complete data router on a single chip. In addition to offering carrier class voice, it provides a sophisticated quality of service of a WAN router, and it integrates an encryption processor for highly secure, virtual private networks or VPNs.

We are now sampling this device to tier one OEMs, enabling them to design a new class of highly integrated, low cost office-in-a-box equipment for small and medium sized businesses. Using one Concerto voice and data processor, a single small cost effective system can simultaneously process up to 32 channels of highly secure, voice over IP in the enterprise.

With the addition of our new enterprise voice and data devices to the Concerto convergence processor family, Mindspeed now offers the industry's most integrated and fully featured family of voice over IP and data networking processors. We are continuing to expand our excellent competitive position in this rapidly growing global market with our Concerto Enterprise as well as Carrier packet processors.

This past quarter, we captured significant designs with tier one customers, including Alcatel, Avaya, Huawei Technologies, Harbor Networks, LGE, Samsung, Siemens and others for a variety of enterprise IT PBXs and converged routers, as well as for next generation carrier gateways, digital loop carrier equipment and other broadband equipment. Typical dollar content captured with our highly integrated voice processors in these designs is at the high end of our product range.

And now turning to our high performance analog product portfolio. Revenues were up more than 80% over the prior quarter, and inventories burned off as expected. And we resumed volume shipments to customers including Alcatel, Delta, Fujitsu, Huawei, McData, Mitsubishi, TrueLight, WTD Fiberhome, and many others.

Passive Optical Network, or PON based, fiber to the premise deployments continue to expand worldwide, and there is an increasing focus on the deployment of fiber based network connections by carriers and service providers here in the U.S. At the Supercomm Conference in Chicago last month, SBC announced that it plans to spend $6 billion over the course of the next five years to build out fiber to the neighborhood, networks across its service territory to provide greater bandwidth and more applications to its customers, including high speed internet access, video, and voice over IP.

We believe that the demand for triple play data voice and video services will compel the incumbent telecom providers to deploy fiber to the prem technology, and that Mindspeed is in a very strong position to benefit from this trend. We want multiple high performance analog design wins this past quarter in multiple markets, including fiber to the premise, telecom, datacom and enterprise storage, with customers such as JDS Uniphase, NEC, WTD Fiberhome (ph), Fujitsu, ZTE, Agilent, Infinion, IBM, Nortel and many others.

Mindspeed is also capturing increasing content in PON based systems with our comprehensive offering of voice over packet, network processors, and PMD module solutions. In addition, we continue to capture design wins with our new video infrastructure solutions targeting the broadcast market. Our video solutions are optimized for both standard and high definition TV, in studio broadcast and distribution video applications. As an example this past quarter, we added top tier equipment supplier Thompson Multimedia to our growing list of broadcast video design wins.

Now turning to our TE carrier portfolio, revenue increased modestly over the second quarter, primarily due to increased shipments to tier one customers such as Cisco Systems, Siemens, Nokia, Huawei, Ambit (ph) Foxconn and advanced fiber communications for a variety of wireless and wireline infrastructure applications.

We also had an excellent third quarter winning numerous designs with our family of TE transmission and Sonnet solutions, with leading customers including Alcatel, Huawei, Harbor Networks, LGE, Motorola, Kalex, ZTE and others for use in applications such as multi service transport platforms and wireless base stations.

In addition, we won a key TE design win with Ambit Foxconn for its next generation digital loop carrier, which is being deployed in Yahoo! Broadband's extensive voice over IP buildout in Japan.

We also won two very significant designs with our integrated line card on a chip. One was Samsung for their CDMA 2000 data uplink platform scheduled for deployment with Korea Telecom, and the other with UT Starcom for the next generation multi service platform.

During the quarter we announced six new line cards on a chip products, and now provide the most comprehensive family of T3/E3 STS-1 single chip solutions available in the market today. These new products include the industry's first device to support both datacom and telecom applications in wireline and wireless network, a testament to our integration capability.

Designed for traditional ATM, TDM, as well as packet processing networks, our new line card on a chip devices integrate LIUs, framers and mappers, along with ATM and HDLC processing for datacom applications, and SDS 12 framers for telecom applications.

Finally, in our ATM MPLS network processor portfolio, revenues declined for the first time in a year, primarily resulting from a temporary inventory build up at a few key customers. A key growth market for our highly programmable network processors beyond traditional ATM is channel aggregation and traffic management in voice over IP networks. Mindspeed is now driving the convergence of voice over IP and network processing to offer complete voice over packet line card solutions.

In fact, we demonstrated a complete systems solution of Supercomm last month, featuring our Concerto voice over IP and TSP3 network processors, which was received very enthusiastically by our customers. As evidence of our strong competitive advantage, this past quarter, we scored two top tier network processor wins for voice over IP aggregation.

In addition, we are continuing to capture network processor designsin systems bridging legacy ATM networks with next generation Internet protocol or IP networks for applications such as core and EDGE routing, as well as multi service switching. This past quarter, we won network processor designs at Cisco Systems, at Juniper, at Huawei and others. And we scored multiple design wins at Alcatel.

In conclusion, Mindspeed once again delivered significantly improved sequential performance in the third quarter of fiscal 2004, as we continue to execute on our roadmap back to profitability.

And now turning to current expectations for our fourth fiscal quarter. We expect our fourth quarter revenue to be flat to up 10% sequentially. We expect overall gross margin for the fourth quarter to be approximately 69%, and we expect total quarterly pro forma operating expenses to be roughly flat. As a result, we expect to improve our pro forma operating loss by approximately 10% and to further reduce our cash consumption sequentially.

While we are currently experiencing a slow down in order patents, due we believed on inventory build up of legacy products at a few key customers, coupled with the traditional summer slow down, we believe we will continue our revenue growth in the second half of this calendar year driven by three key factors.

First, continued growth of our voice over IP products. Second, continued growth of our high performance analog solutions. And thirdly, the volume ramp of tier one design wins with high ASP products such as our Enterprise voice over IP processors, line cards on a chip transmission solution, and T3 E3 LIU and Sonnet devices.

We remain committed to achieving our pro forma operating break even goal by the end of this calendar year. We believe that continued revenue growth in the first quarter of fiscal 2005, coupled with gross margins in the range of 70 to 72%, and the modest reduction in our pro forma operating expenses will enable us to deliver break even pro forma operating performance of approximately $42 to $43 million in quarterly revenue in the December quarter.

Overall, we believe that infrastructure market fundamentals are healthy, and our customers continue to be optimistic about business strengths. Mindspeed enjoys strong positions with incumbent leaders in key growth markets, and we are confident about our future. That concludes our formal comments today. Operator, let's open the lines for questions.

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

Our first question comes from Sandy Harrison, Pacific Group Equities.

Hi, good afternoon guys.

Hi Sandy.

Couple finer points here. As far as your outlook of the flat to 10% for growth for the September quarter, what are sort of the pivot points which would have you come in at the high end or the low end or the middle of the range?

Sandy, it's Simon. There's a couple of things really. Number one, actually, is inventory that's in the channel at this point in time, OK? We have pretty clear expectations around how customers are going to consume the product that it's widely understood is out there at this point in time, and whether or not it plays out quite the way our customers expect it to and actually, our discounted scenario, if you will, believes it's one of the factors. The second factor then is the traditionally strange order patterns you get around this time of the summer season and exactly how we would expect those to play out over the remainder of the quarter. So those are the two predominant things that have resulted in us giving the flat to 10% range at this point in time.

Sandy, I would add to that, this is Raouf, I would add to that that's it's also a function of the continued roll out of voice over IP services on a global basis. Clearly a number of service providers worldwide are moving from the trial phase to actual deployment phase. The shape of the curve, if you will, of the actual adoption, deployment of the voice over IP services will certainly have an influence on our performance in the summer quarter.

Got you, and then a quick follow on. It sounds like you guys feel a little bit more comfortable about your margins, given sort of your view of the December quarter a little lower than the 45 million you've been talking about for a break even.

Sure Sandy, it's Simon again. I think there's a couple of things there to point out, OK. Number one is the degree to which we remain committed to achieving that break even in that time period. It's obviously unwavering and hasn't changed at any point.

But two points. Number one is, as you correctly said, from a margin perspective, we have incremental confidence (ph) at this point in time. Number one around the continued ramp of higher margin product. Number two around the continued benefit that we enjoy from the fully written off product, OK? So both of those factors come into us being able to give the 70 to 72% range for the December quarter.

But don't forget, there's also, as we pointed out, a modest cost reduction that we're contemplating here as well. And to put that in context, what we're talking about in our OpEx that we’d previously provided guidance on of $31 million, now being somewhere in the $30.5 million kind of number. So that's the other change that is part of our continuing commitment to get this business to break even.

Great, I'll yield the floor and take a follow on later, thanks.

OK.

Our next question comes from Carter Driscoll of IRG Research.

Hi guys.

Hi Carter.

Yes, if we could just drill down a little bit more into the inventory side, if we could get a little bit more specific on whether that was confined mostly to ATM or did it carry over to the TE carrier side, or if you seeing greater than expected pricing pressure in the transmission business? Could we talk a little bit about where specifically and maybe a customer or two, if you can give that type of granularity?

Sure Carter, this is Raouf. We started to experience the effect of this inventory buildup if you will in the month of June. It was a little more exacerbated than the second half of June. We believe that the inventory is mostly concentrated at a few tier one customers, which we'd rather not disclose because we generally don't like to refer to our customers very specifically in terms of where the problems really are.

But another way to think about it is by market segment. And we think that where the inventory is most pronounced right now is in the broadband market, primarily in the DSLAM space. Certainly, vendors selling into North America, but also frankly in China to some extent.

Clearly, DSL subscriber growth continues unabated, and there's been a strong ramp of the DSL market in China. And I think to some extent the large vendors, both exporters into many of these markets, as well as the local guys themselves over anticipated the shape of the demand curve, and as a result, overbought in the March quarter, maybe a little bit in the June quarter as well early on, and then had to slam the brakes on to compensate when the demand didn't quite ramp as strongly as they had anticipated. So that's one market where we certainly see a little bit of an overbuild. Again, that's probably the most pronounced of all of them.

We also see a little bit of an inventory build here in North America, primarily the multi service area, and some of the legacy equipment categories. And all of the traditional vendors there would include people like the Lucents, the Nortels of this world. And so that's sort of where we see it right now.

We don't believe it's anything like the phenomena of coming out of calendar year 2000. We believe this is, at most, just a few months before it bleeds off completely. So that's about what I can tell you at this point in time. I will speak to your point, by the way, I forgot to answer your second question regarding pricing, whether we're seeing anything aberative (ph) in pricing trends and the short answer to that is absolutely not.

OK. In terms of margin guidance provided for December, does that include some type of range of zero cost inventory being flowed through?

That's not included in there, Carter, and obviously it's entirely mix dependent. But you would assume that there's kind of a two to three points that was embedded in.

OK. And you do at least contemplate possibly taking some additional cost out of the business to get to that break even target in December?

Yes, absolutely, I think as I’ve just said in answer to the previous question, if you choose the midpoint of the $42 to $43 million revenue range, if you choose the midpoint of the guidance range of 71 for that quarter, what you end with is a spending structure of roughly, less than $30.5 million, but right around that kind of number. And as you know, today we're at $31, so that would require us to take out a couple of percent of total spend at this point in time. Now, we have been very clear, we're not talking about program cancellations and at this point in time, there's absolutely no anticipation around further headcount reductions within the organization. This is really about a tightening of our belts, yet further than we've tightened it over the course of the last three years.

OK. And then just lastly before I pass it on, you had previously mentioned, at least you had, Raouf, you had tried to put a parameter around your share,whether it was on the MSA, worldwide, or, in more specifically, in say, Asia Pacific, could you kind of give parameters on how much share you think you have or have not taken, however you want to define it?

Yes, let me take a shot at that. I think, Carter, we're quite encouraged by two things. First of all, the overall level of activity in our industry continues to improve, which I think is good and it's all around frankly. Our customers continue to kick off more programs, they're better staffed and have a higher quality to them than we have experienced any time in the past three years.

And our opportunity pipeline which we loosely characterize as sort of the total dollar weighted value of the design wins that we're constantly or continuously competing for continues actually to grow. So the activity level is absolutely positive and very encouraging. Within that, our share capture, meaning the percentage of designs that we are winning, dollar weighted, versus the ones that we are losing, actually continues to improve.

So, the statistics and the data behind it continue to give us confidence not just in the health of the market but actually continue to capture share,particularly within our focus franchises -- the voice over IP markets, as you mentioned briefly, also some of our transmission product, T3/E3, and Sonnet solutions, in particular, and then over time also we’re seeing very, very good traction in the PON fiber-to-the-prem space as well. It's hard for me to give you an exact number and say just for example we've gone from 50% share in voice over IP to 57% hypothetically.

Sure.

But I think it is fair to say that the vector is very much in the right direction.

Thank you, gentlemen.

Thanks.

Our next question comes from Mark Grossman of American Growth Capital.

Great thanks. Given the relatively wide range of revenue guidance for the September quarter, zero to 10%, can you talk a little bit about what gives you the confidence about reaching the $42 to $43 million level in December?

I think we did that pretty explicitly in the prepared remarks, Mark. I think we remain very confident around the three factors that we have been reiterating with our investor community for the best part of nine months at this point in time in reality. So first of all, just the continued growth of the voice over IP product portfolio, both on the end price side, where we haven't seen production shipments at this point in time, but also on the carrier side where we continue to see growth on a quarter to quarter basis.

The second thing would be the continued growth of the high performance analog product portfolio (indiscernible), predominately continue to be driven by fiber-to-the-home deployments, principally in Japan, but then also rolling into other parts of Asia as well. And then finally, we've got the beginnings of the first production ramps, our line card on a chip product, as well as continued traction with LIUs and Sonnet products that we’ve captured design wins for over an extensive period of time. So that's what we expect to continue to live with the growth in the December quarter, off the September quarter if you will.

OK, great. And then, if there's been some talk about a slowdown in CapEx in China, have you seen anything especially from the Chinese OEMs in terms of the slowdown of watering patterns?

Yes Mark, this is Raouf here. Well, I think from a macro perspective, the short answer is the only place where we've seen a slowdown from customers in Asia has been in the DSLAM segment as I mentioned earlier. We think there's been a little bit of over ordering by customers in Asia in anticipation of continued ramp in DSL deployments, which have been quite strong, particularly in China over the course of the past three or four quarters. There may have been a little bit of an overestimation of port shipment and subscriber growth in China, and as a result an over ordering of components that go inside DSLAMs and other broadband equipment in Asia. But outside of the DSLAM segment specifically, we don't really see any significant slowdown in CapEx in Asia. However, we do anticipate that over the course of the next couple of years, while CapEx may not slow down, the capital intensity, meaning the percentage of revenues that's spent on capital may come down as some of these carriers go public. And then furthermore, I think they are spending what is probably an unsustainable percentage of the CapEx on equipment as they deploy significant and rather large Greenfield networks in certain parts of APAC. So we think a combination of factors will abate it a little bit, but we don't really expect any contraction per se.

OK, great, and last one. The voice over IP business; can you give a sense for how much of that now is coming from the new products, Miro and Chagall, or is that still really something to come in the future?

Sorry Raouf, say, Mark, this is Simon. So as it relates to the way we think about products internally, on the enterprise side of things, we're still experiencing what I would best describe as sample level revenues. We haven't seen full scale production revenues at this point in time. So substantially everything that’s shipping today is carrier wireline products that are Miro and its various predecessors essentially.

I would add to that, Mark, that Miro is a very significant contributor at this point in the game to our carrier revenues. There's no doubt that it's a substantial portion. But there's also older products that have been in the market now for several years that are also contributing.

The Chagall product is the IP PBX device, and we have a large number of tier one designs that we have won over the course of what is now about five quarters or so. And those are contributing sort of on the range of a few hundred thousand dollars a quarter in revenues, and we expect substantial, say, material revenues in the second half of this year.

OK, great thanks.

Thanks.

Our next question comes from Aalok Shah, Pacific Crest.

Hi guys, a couple quick questions for you. SG&A went up $1 million this quarter, any particular reason for that?

Actually Aalok, the correct -- this is Simon, it's at what we would expect it to normally trend at actually. It went down last quarter to an unusually low level, and now it's back to where we expected it to be. So the $12 million kind of number is where it should be.

OK, so going forward, probably keep SG&A in roughly the same?

Yes, that kind of number.

OK, and then R&D went down a million. So I would assume then what you're saying, we could probably see some more cuts in the R&D level or is it going to be in SG&A?

It's going to be a combination of the two in reality. The R&D line went down this quarter a little further than we expected it to, actually driven by some variable costs in just one of the business units, so that it's very isolated in terms of where it is. It will come back next quarter.

OK, and just walking through some of your guidance,if I use the midpoint of the range of guidance you used for September, 25% growth, and then for December, I'd need to have 15% sequential revenue growth there?

Yes, I think you need just under 15, yes.

OK, so if I do that, and then gross margins using the 72% range --

Yes.

A couple points of benefit from the previously writtenoff material, so , if we exclude that, it would be around 68, 69%?

Yes, that's a reasonable assumption, yes.

OK, where, I know you said on the margin you'd be cutting expenses to break even at that point. Could you outline some of that stuff for us, as to where, without reducing your headcount, it seems like you've already tightened your belt quite a bit.

You're absolutely right, we've cut our -- tightened our belt quite a bit over the course of the last few years. Really, what I'm trying to characterize is what I'll call final cleanup and roll out of all of the previous cost reductions actions. OK, think about it, when we ultimately completed the activities at the turn of the year, and enjoyed the first full quarters benefit from all of those cost reduction actions in March, what we found is that we've continued to see some benefit from those previous actions that wasn’t fully contemplated in the $31 million. So, it really isn't anything other than the continued benefit of everything we've done in the past, and as we said, a little bit of belt tightening. And if you think about the absolute dollars we're talking about here, we're talking about, if you choose this quarter’s number, moving down from $31.2 million to somewhere around $30.5 million, it actually isn't that significant.

OK, and so, not to beat up a dead point here, but then you're basically thinking of visibility then for December is much better than it is for September. Is there some kind of a backlog number of something you could share with us as to why you feel that confident? I know you've outlined the trends, but there must be something beyond what you're giving us that really gives you that confidence that you're going to end up $42 to $43 million.

Absolutely, it's the same thing that we use every quarter as the principal indicator for our expectations for the business. And that's what we are talking to our customers about by way of their expectations for demand. OK, so, we know that there's inventory out there right now, we know that that is causing something of an overhang on the business this quarter, and hopefully it's fully resolved by the end of this quarter. So, you know that the number is somewhat lower than would naturally be had there not been inventory in the channel. As I said, we think most of that is going to burn off, and then by the time we get to the December quarter, we're going to be shipping at essentially run rate, with -- there may be a couple of isolated examples of where that's not the case. But once again, it comes back to our expectations, our significantly discounted expectations, what our customers have done at this point in time.

OK, and one last question for you. On the net interest income line, it went negative this quarter. What would you expect that to go, now, going forward, and how do you feel about the cash position going forward?

So, a couple of things, first of all, on the net interest line, it did go negative this quarter, it will go back the correct way next quarter. So our plan for modeling purposes will look on putting around $100,000 in the interest income line, and then around $700,000 on the tax line. And what I said in my prepared comments was that the net of those two would be roughly $600,000, and that's the kind of number to include for the foreseeable future, OK?

OK.

That's the first point. What was your second point?

The cash position right now.

The cash position actually is incrementally more comfortable on a day to day basis. If we look at where we are relative to the various expectations we had for the cash performance of the business, we have continued to over-deliver. And I was actually extraordinarily pleased with the very significant improvement we saw in the operating cash performance,

OK? So if you separate out the fact that last quarter we had $6.7 million worth of option exercises, the last quarter being the March quarter for purposes of this conversation, and you consider that we only received $900,000 worth of option exercises this quarter, and yet we still manage to reduce our overall cash consumption in excess of $7 million to less than $4 million,and at the operating and investing level for more than $13 million to $5 million, $5.8 million then, we're very pleased with the way cash is progressing at this point in time; and if things play out the way we expect them to, I hope never to have a reported cash balance of less than $50 million.

OK, great, thank you so much.

Our next question comes from Jeff Loft (ph) of Credit Suisse First Boston Corporation.

Hi guys, can you give us a sense of what the typical level of churns business is for a given quarter, and then how that would vary in the September quarter?

Jeff, as you know, we don't provide turns information, we don't provide book to bills or backlog information. What we give you is our very best perspective on how the business is going to perform based on every piece of data that we have within the business at any point in time. Turns activity is one of those pieces of data, but it's just one and not the only thing that goes into the consideration we give to the guidance. So there's no doubt as Raouf alluded to in his prepared comments that things are a little softer than we otherwise would be predominately driven by the inventory and predominately driven by the fact that we've got these unusual summer patterns that we're experiencing at this point in time. But we're just fine with where we are.

OK, what about order patterns throughout the quarter? Did you see any slow down in June and how is that following through this quarter?

Yes Jeff, Raouf here. Yes, we did experience a slow down in the order patterns in June. I mentioned that briefly earlier on the call, which accelerated somewhat in the second half of June. As I mentioned earlier, it was most pronounced right here in North America.

And we think it's a combination of inventory build and an overestimation of demand by our customers. Now looking at July, it certainly extended to July, however, based on all the information we're getting from our customers, we believe that the inventory that's in the channel is on it's way to burning off. And in fact we have started to experience orders, incremental orders from customers just in the first few weeks of this month. And so we think that the trends we're seeing, while somewhat exacerbated by the inventory issue are quite typical for the summer quarter.

And then additionally as I mentioned earlier, the combination of the ramp of voice over IP on a global basis, and our high performance analog products, plus the new design wins that we have garnered over the past few years will put us in good shape to achieve the guidance which we're comfortable with, and also get to break even by the end of the December quarter.

OK. And then lastly, at the end of your commentary, you talked about the network processor design wins at Cisco, Juniper Huawei and Alcatel. When do those start to generate revenue for you?

Well, Jeff, typically a design win in the communications space takes between a year and a half to two years before it rolls over into revenue if you will. So we don't expect that those particular designs that we scored in the June quarter, we don't expect that those designs would contribute materially to our revenues this year, in fact, maybe not even next year.

Those designs are very high value designs, significant dollar capture within routers, within switches, next generation voice over IP gateways as well that we scored with our ATM network processors. But again, those wouldn't be material this year. I think as the designs that we scored in fiscal year 2003, and particularly in some of the shorter time to revenue platforms, such as voice over IP and some of the fiber to the prem and so forth, as well as certain of our T3/E3 line card design wins that will contribute in fact and contribute probably materially to our business in the latter part of this year.

OK, thank you.

You’re welcome.

Thank you.

Our final question comes from Charlie Glavin of Needham & Company.

Hey guys. Simon, if you can go through just a little bit more as far as December, given the lead times that you have within the foundries as far wafer starts, and you had deferred revenue came down slightly with inventory being up, in terms of your visibility and again, after your response to Jeff not indicating turns or book to bill, but are you actually taking active steps including loading the wafers for the December quarter already?

The assets to loading the wafers at this point in time is no. It's not necessary to date to be loaded in the wafers. The lead time that we're experiencing for product at this point in time are pretty consistent with what we've previously experienced, Charlie, and we don't need to do anything right now.

As I said in the comments, we have built inventory, very consciously built inventory; and to give you a frame of reference, about 75% of the inventory growth actually came from voice over IP products before roll out. We've consciously done that with expectations for both this quarter and the December quarter, there’s action in that specific piece of the business.

So just being clear, to ask it a different way, can you satisfy most of your revenue expectations for the next two quarters off of what's been in inventory? And then along those lines, do you actually have a higher degree of confidence about the amount of previously written off inventory that you may recognize. I think this is the first time you've actually gone out two quarters and indicated that you would be tapping into that. And is this from direct responses from customers?

Absolutely. So, let's deal with the various pieces, OK? Is our acknowledgement of the incremental benefit that we enjoy from the fully written off product going out two quarters as a result of what we're getting from customers? Absolutely, OK, so we have incremental confidence.

One thing I would point out, Charlie, is that we've always said that we thought that benefit would be enjoyed for at least a year, OK, so we've always known that benefit can go on for an extended period of time. Can we support all of the growth that we expect to see in the business from inventory we have in hand today? Absolutely not, OK, that is not the case. We do have expectations for inventory. However, two critical points. Number one, we do expect inventory to go down this quarter, OK. We, like many others, saw inventory build this quarter as a result of not necessarily being able to turn the cap off quickly enough of product coming into the business when demand patents began to soften, OK, so that's number one.

Number two, as it relates to deferred revenues, as you correctly point out, it did go down a little during the course of the quarter. That actually was something that we thought might happen predominately because this is AvNet (ph) with our principal North American distributors’ year end; and in previous years, we've also seen them take very aggressive positions to reduce the amount of product that they're holding for their year end, and that's usually resulted in deferred revenues moving in the direction they moved this quarter. So we're not reading anything indicative into that beyond the fact that they were doing the right things for their shareholders.

If I can, without getting into specific customers, you did have a couple of customers who we haven't seen in your top ten list for a while, (indiscernible), a lot of shift except at the very top. Can you give a little clarity Raouf in terms of do we expect to see similar sort of volatility, some people come in, some people go off over the next couple of quarters?

Yes, I think Charlie, you will in fact see some movement, particularly in sort of the bottom of the top ten list. When you get to the bottom of the top ten, you've got actually quite a large number of customers who are roughly the same size. A customer having an incremental order over a different customer could get him into the top ten and could get somebody out of there.

So I wouldn't draw too many conclusions out of that list. Certainly the ones I would take away is that clearly our business, for instance, with players like Nortel, like Alcatel and Siemens remains very strong. They've consistently been in the top five and remain in the top five.Huawei, for the second quarter in a row was our second largest customer right behind Cisco Systems.

But we've also seen an interesting pickup in next generation digital loop carrier type equipment. Last quarter, Advanced Fiber Communications, AFC was a top ten. This quarter you would notice Kalex, which is a private company in the Bay Area, came in at number eight, for us, a lot of activity with Kalex; they're partnered with a number of very prominent top tier OEMs in addressing some of the next generation network deployments. And we're designed-in quite broadly at Kalex, we saw the benefit of that.

And then at Nokia, Nokia sometimes at the bottom of the top ten, and sometimes not in the top ten, so you’ve seen them come in and out. At times, you'll see NEC, at other times you'll see Fujitsu come into that slot as well.

So I think going forward, based on our expectations of continued growth, in particular for some of these next generation broadband access, and voice over IP customers, focus customers, you will see some movement in that customer list. I don't expect much in terms of next generation storage or enterprise players to change in that regard, but I think you will see a lot more of the voice over IP focused and EDGE type or broadband access players move into that top ten.

Lastly, if I could, in terms of some of the geographic consumption growth, before when you were closer to say 40, 45% shipments over in Asia Pacific, the actual consumption from OEMs in North America, Europe, and Asia was probably closer to 55, 60%. I found it interesting that within in your HBA (ph), you actually had some of the ODMs adopting it. Have you actually started to see the consumption versus the shipments start to weigh out, even though that may not be a direct correlation. Are you actually seeing the disproportionate consumption within Asia Pacific start to stabilize?

Yes, overall consumption of our silicon in the Asia Pacific market is clearly disproportionate compared to either EMEA or North America. We think that is still the case. As Simon mentioned in his prepared comments, a little over 50% of our ship to revenues were to Asia.

But again, consistent with prior quarters, we think that the actual net consumption, when you factor it all in, is ahead of 50%. It remains exactly in that range of 55 to 60% in total. Remember that a number of our key customers in Europe such as Siemens and Alcatel are very focused on next generation voice over IP. And most of that market today is concentrated in Asia Pacific.

And therefore, even though we report revenues, shipped to Siemens and Alcatel as being EMEA, we actually end up in Asia Pacific, shipped to many of the carriers, the China netcoms, telecoms, Chung Wa Telecoms, et cetera that I mentioned earlier on the call. So we think it hasn't changed frankly one way or another. It is still disproportionate compared to the rest of the world.

We are encouraged by trends in North America, particularly the regulatory environment I think is more positive now than it's been in four years and is providing a very encouraging platform, particularly for RBOCs to continue to deploy next generation technology such as voice over IP right here right at home. And so, we think over the course of the next year to two years, the needle is going to move back a little bit towards a more balanced situation between Asia Pacific and North America.

So Raouf, given that that consumption is the same, can you give any sort of color in terms of the OEMs that may have over shipped into the DSL, do you believe those were more local Asia manufacturers, or were they actual American, European manufacturers who may have over shipped into the Asia market, particularly for the DSLAM market?

Charlie, as I think you're aware, our exporters to the DSLAM market is not that huge. Obviously we sell transmission products, fize (ph) framers, and also ATM traffic management and ATM SAR products into the DSLAMs, but that's pretty much where we play in the DSLAM market. We're not a provider of DSLAM, or ADSL, or ADSL2 transceivers.

And therefore, we're perhaps not the best proxy in that regard. But we think, to answer your question, we think that frankly it's a mix of both. The local OEMs that have their operations in Asia Pacific Proper, as well as exporters, European, and others, who export to Asia Pacific.

And again, we think that most of this has to do with China and overblown expectations of subscriber growth, particularly for ATM DSLAMs shipping into carriers in China. That's not to say that DSL subscribergrowth has slowed down. We think it continues to be quite strong. It's simply an overshoot as opposed to an undershoot.

Thanks guys.

This ends the Q&A portion of the call, Mr. Biddiscombe.

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. Bye bye.