MACOM Technology Solutions Holdings Inc (MTSI) 2004 Q4 法說會逐字稿

Excuse me, everyone. I would now 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 are in a listen-only mode.

At the conclusion of Mr. Biddiscombe's presentation we'll open the floor for questions with instructions given at that time. I would now like to turn the conference over to Simon Biddiscombe. Sir, you may begin.

Thank you, Kenny. I would like to welcome everyone to our conference call discussing the results of our fourth 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 statements and balance sheet. I will then discuss our revised financial model and restructuring actions that we are implementing to achieve our new pro forma break even operating performance goal. Raouf will then provide his perspectives on our fourth quarter results and the outlook for our first quarter of fiscal 2005.

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 2005 fiscal and interim periods, other business and product trends and plans for achieving expense reduction that are forward-looking statements within the meaning of Section 21-E 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 furnished to the SEC today on our form 8-K as well as though contained in our Form 10-K and other filings with the SEC. Consistent with prior quarters, I would also like to remind everyone that the operating results we'll discuss today are from the pro forma income statement before amortization of intangible assets, special charges, employee separation costs and certain other nonoperating 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 to the comparable GAAP information included in our earnings press release and our Form 8-K furnished to the SEC 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 fourth quarter of fiscal 2004.

Fourth quarter revenues were $26.6 million, down 25% sequentially from the prior quarter and consistent with the expectations we communicated in our revised outlook on September the 28th. As we noted in our revised outlook, the revenue decline this past quarter was particularly pronounced in China coupled with what we believe is a temporary worldwide inventory buildup at key customers.

As a result, revenues from the Asia Pacific region declined 38% to 42% of total quarterly revenues. China contributed approximately 13% of the total. The Americas contributed 45% of total revenues and Europe contributed the remaining 13%. As we noted in our revised outlook, weakness was fairly broad based across our product lines. Our multi service access voice-over-IP solutions declined $4.5 million to 19% of total revenues.

High performance analog devices declined $3.9 million to 20% of total revenues. T/E carrier transmission products declined $3.6 million to 29% of total revenues. After declining significantly last quarter, ATM network processors were up $3.2 million this quarter to 32% of total revenues as key North American customers worked down excess inventories and began ordering to meet end consumption levels.

Fiscal systems was our only greater then 10% customers this past quarter, including both direct and indirect sales through third parties. Gross margin was $17.6 million or 66% of revenues, down 3% from the expectations at the beginning of the quarter.

The reduction in gross margin was primarily the result of incremental inventory reserves for the recorded in light of the reduced demand outlook relative to expectations at the beginning of the fourth quarter. The underlying gross margin, excluding the effect of products written off in fiscal 2001 was 56%. However, the underlying margin was significantly distorted by a nonrecurring transaction in which product written off in 2001 was sold for significantly less than its historic cost.

For a direct apples to apples comparison to prior quarters the underlying gross margin was 61%. Pro forma operating expenses were $31.2 million, consistent with our expectations. As a result, our pro forma operating loss was $13.6 million compared to our third quarter operating loss of $6 million.

Other expenses under provisions of income taxes in the aggregate resulted in a net credit of approximately $600,000.00. As a result, our pro forma net loss was $12.9 million or 13 cents per share based on approximately 100.2 million average shares outstanding for the quarter. The total number of shares outstanding at the end of the quarter was approximately 100.6 million. This compares to a pro forma net loss of $6.9 million or seven cents per share in the third fiscal quarter.

Turning now to the balance sheet. Cash consumption, which we define as the net decrease in cash and cash equivalents for the September quarter was $11.1 million. Cash burn from operations, which we define as net cash used in operating and investing activities was $11.8 million. Capital expenditures were approximately $1.9 million and depreciation was $2.7 million.

Net cash generated by financing activities was approximately $700,000.00, principally consisting of proceeds from the exercise of stock options. Both cash and cash equivalents at the end of the quarter total $43.6 million.

Turning now to working capital, receivables were $19.6 million resulting in DOS's of 67 days, higher than the prior quarters, as a result of the severe back-end loaded nature of revenues during the quarter. Net inventories were $12 million, relatively flat to the third fiscal quarter. Inventory turns were three.

Gross inventory, including amounts previously written off, totaled approximately $67.2 million at the end of the quarter. Total current liabilities were $32.3 million, up $1.8 million from the prior quarter, principally driven by an increase in accounts payable offset by lower accrued compensation of benefits.

Turning now to our upcoming restructuring activities. As we indicated in our revised outlook for the quarter on September the 28th, we have undertaken a thorough review of our market strategy and business model. Our objective is to achieve pro forma breakeven operating performance by the end of the current fiscal year while at the same time increases research and development activities in our key high growth focus markets of voice-over-IP and high performance analog applications.

Accordingly, we are undertaking restructuring activities to reduce our quarterly pro forma operating expenses to a run rate of approximately $26 million in the fourth quarter of fiscal 2005. A reduction of roughly 17% from our current $31 million run rate.

The timing of the cost reductions is highly dependent upon current customer commitments as we complete programs and transition resources. We expect pro forma operating expenses to be approximately $30.5 million in the first fiscal quarter of 2005; decline to $29 million in the second fiscal quarter; then to $27.5 million in third fiscal quarter; and to reach $26 million in the fourth fiscal quarter.

Once completed, we expect that our restructuring activities will result in annualized savings of approximately $20 million. We expect the restructuring plans resulting charges in the range of $5 to $7 million in fiscal 2005 and that the majority of cash payments associated with the plan will occur in fiscal 2005.

We expect to achieve approximately 80% of the expense reductions by terminating R&D programs with a longer return on investment time frame and slower growth markets. Primarily within our ATM network processor and our T/E carrier transmission portfolio. The remaining approximately 20% of the cost reductions will come from our SG&A functions.

Combined with an expected gross margin of approximately 70% going forward, our pro forma breakeven operating model is now predicated on quarterly revenues of approximately $37 million, which we expect to achieve by the end of fiscal 2005.

I would now like turn the call over to Raouf for his comments.

Thank you, Simon. While the restructuring actions Simon just outlined are difficult, they are absolutely necessary for us to achieve our goal of breakeven pro forma operating performance by the end of this fiscal year.

Concurrent with this restructuring, we are also increasing R&D in our strategic high growth market opportunities such as voice-over-IP and high performance analogue applications. Mindspeed continued to execute very well in ramping key new products into production this past quarter and in capturing market share across our product portfolio.

I would like to briefly highlight several of these achievements. First, adoption of our Comcerto voice-over-IP products remained strong during the quarter, particularly in high growth markets such as enterprise and wireless applications.

Just this past week at "The Voice on the Net" or "VON Show" in Boston we showcased Panasonic's hybrid IPPBX system based on Mindspeed's Comcerto 500 series of devices. In addition, this past quarter we announced that LGE is shipping our high density Comcerto series 600 carrier voice-over-IP processor in its new Generex- 2000 wideband CDMA media gateway.

Secondly, we recorded our first revenues from the initial volume shipments of our integrated T3/E3 line cards on a chip to our two leading customers, Cisco Systems and Alcatel. Third, our design one traction remains very strong across our product line at key customers worldwide. Let me highlight just a few of the significant wins this past quarter by product family.

Starting with our multi service access voice-over-IP products we scored key design wins for a variety of enterprise voice-over-IP platforms at tier one customers, including Erikson, Intertel, Samsung and Harbor Networks. In carrier voice-over-IP applications we captured our first strategic design win at Lucid Technologies for key next generation voice-over-IP enabled network access platform.

In addition, we scored significant new voice-over-IP wins with Alcatel, Siemans, WaWay (ph), LGE and NET for voice-over-IP gateways as well as for wireless equipment. In our high performance analogue product portfolio we won multiple designs this past quarter in applications including fiber to the premise, storage and optical edge aggregation with customers such as Agilant, Fujitsu, Hitachi, Fulton (ph), NEC, Samsung, Sumitomo and DTE amongst many others.

Significantly, we continue to gain traction in a new market for Mindspeed: scoring multiple new design wins with key broadcast video infrastructure equipment manufacturers. In our T/E carrier portfolio we continue to score numerous design wins with our family of transmission solutions at leading customers including Alcatel, Nortel, Siemans, Fiber Home, WaWay and ZTE for use in next generation metro optical systems, fibers to the premise and other applications.

In addition, we won multiple designs at UT Starcom for its 3G wireless net ring multi service optical transport platform. We are also particularly pleased to have secured our first signfiicant high value T3/E3 LIU design win at Dell Labs for the next generation digital cross connect system.

And finally, in our ATM and peerless network processor family we scored design wins for applications such as switching, core and edge routing with Fiber Home, Harbor Networks, Hitachi, Samsung, DTE, WaWay as well as the WaWay Three.com joint venture.

To summarize, we believe that Mindspeed continued to capture significant market share throughout fiscal 2004. In fact, total design wins in our tier one accounts this past year were up almost 30% over fiscal 2003. Driven by significant gains in voice-over-IP, fiber to the premise and broadcast video applications.

As we enter fiscal 2005 we are highly encouraged by our pipeline of open design win opportunities at tier one accounts which are up almost 50% compared to the same time last year. We believe that this clearly demonstrates the health of our end markets as well as our revenue growth prospects in fiscal 2005.

In conclusion, we believe that the worst is behind us. We believe end market fundamentals remain solid with the exception of China, which remains difficult to predict. We expect demand for our products to return to end consumption levels as the worldwide customer inventory situation re-balances in the next one to two quarters.

We are encouraged by the strength of our current backlog and we are confident that we will achieve pro forma breakeven operating performance by the end of the current fiscal year at the latest. As a result of the following three drivers: first with the exception of China, carrier capital expenditures appear to be largely intact worldwide.

Second, we enjoy strong positions in high growth markets such as voice-over-IP as well as fiber to the premise applications, which we believe are at just the beginning of the growth curves. These markets are expected to grow significantly worldwide in fiscal 2005 as carriers focus an increasing portion of the capital expenditures to take advantage of the performance and cost efficiencies of these next generation networking technologies.

And third, we are continuing to ramp significant strategic new products into full production such as our Comcerto enterprise voice-over-IP processors; our T3/E3 integrated light cards on a chip solutions and our family of video broadcast infrastructure devices.

And now turning to our current expectations for first quarter of fiscal 2005. We expect our first quarter revenue to be approximately flat sequentially. We expect overall gross margin to be approximately 68% and we expect total quarterly pro forma operating expenses to be approximately $30.5 million.

As a result, we expect to reduce our pro forma operating loss to approximately $12.5 million and reduce our cash consumption to less than $10 million including restructuring payments we expect to make this quarter. That concludes our formal comments today. Operator, let's open the line for questions.

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

The first question comes from Mark Grossman with America's Growth Capital.

Great, thanks. Raouf, what's your sense for what end consumption rate is now? Or in other words, if there weren't excess inventory, what do you think your revenue levels would be?

So, Mark, on our pre-announcement at the end of September in indicated that we felt that approximately two-thirds of the 25% decline was directly attributable to the inventory that have been accumulated over the past few quarters.

So, to give you some numbers around that we declined approximately 9% sequentially from Q3 to Q4. And we expect that approximately two-thirds of that or so could be inventory.

So, Mark, this is Simon. Just to clarify what Raouf is saying there. So, it's $9 million is the decline. Twenty-five percent. And we're saying two-thirds of that is inventory related. One-third of it related in the fundamental deterioration in demand that we'd been experiencing in China.

So, if you want to start from the $35 million we delivered last quarter and back (inaudible) call it 6 million up to 9 million that puts you roughly at $29 million as a starting point.

Got it. OK. And then - I know it's only been a few weeks since the pre-announcement, but have you seen any changes in order patterns in the last few weeks?

You're right, it's only been essentially four weeks since the pre-announcement. I think the only comment we'd make, Mark, is that there's little doubt in our minds right now that things continue to move in the right direction.

Things bottomed out in August. That's very clear. And now that the backlog as we sit here today is better in absolute dollars than it was at the same point last quarter.

Last one just in terms of modeling the cash flow. What part of the restructuring charges of 5 to 7 million will be cash? And where do you think inventory levels will be middle of next year?

In terms of thinking about the cash impact of that, Mark, I would assume that somewhere around 5$5 to $6 million of it will be cash. It's going to be substantially all cash to put it into context. In terms of inventory levels, toward the middle of next year clearly our expectation is that we'll be able to work inventory down from this point in time.

We did manage to hold it flat this quarter. As I said in my prepared remarks, we did writeoff products during the quarter. We have hopes that we'll be able sell that over the course of the coming quarters. But my expectation is that we'll continue to work inventory down and not see it moving up.

OK. Great. Thanks a lot, guys.

Thank you. The next question comes from Jeremy Bunting with Thomas Weisel Partners.

Thank you. I have two questions. Just wanted to confirm with the discontinuation of the ATM product line and the T/E transmission line products. Is that a decision to close those businesses down? Or is there still an option to sell the assets to (inaudible) those assets? That's the first question. Perhaps you would want to answer that one first.

Jeremy, it's Raouf here OK, to be very clear, what we have not indicated is that we plan to shutdown or both of those product families. I think we've tried to be clear that we are undertaking restructuring to significantly reduce the R&D, but in particular, that's going to be in the network processor area more so than in the transmission business or our T/E product specifically.

So, basically, what we're planning to undertake is the determination of some of the more expensive longer term product developments in the network processor portfolio. And specifically within that portfolio I'm referring to plans we had underway to develop an OC-48 multi service, multiprotocol network processor and all the requisite software implementation that goes around that. So, we are going to discontinue development of that particular platform as well as rationalize other spending within our network processor portfolio.

Within the transmission business, however, it's simply a pruning. And again, I emphasize a pruning, of our projects underway. There's no - by no means any significant de-commitment or termination of our transmission business whatsoever.

As you know, that business is very strong. We have very rich positions in next generation metro equipment as well as in Sonet infrastructure and fiber to the premise with T1/E1, T3/E3 and Sonet Solutions. We have absolutely no intention of winding down that business whatsoever.

In terms of potential sale of some of these assets. You know, that's also something that is always in our mind. That's always a consideration and it's not something that we would necessarily rule out at this pont.

OK. Thank you. Could you also comment to the extent that you're able, what is your exposure to the ongoing and proposed FTTP builds at both Verizon and SPC? Thank you.

Yes, so Jeremy, this is Raouf again. You know, we have been believers in triple play services and the adoption and increasing rollout of fiber - either fiber to the node, fiber to the prem or fiber to the curb type services.

Our positions in the marketplace are quite broad. Certainly starting with the earliest appointments within Japan. And as you have recently seen here in North America with the recent positive rulings by the FCC. There have been a number of announcements in this area. I mean, particularly the big Alcatel win at SBC is one that we're very much exposed to.

You may be aware that Alcatel has always been a top 10 customers of ours and of significance across all our product families. You may be aware we have very strong positions with Alcatel, specifically in their voice-over-IP gateways, in routers, switching with both our transmission ATM and voice-over-IP products. And it will certainly benefit our business significantly going forward.

So, I'll leave it at that. I'll simply say that we are quite enthused by the increasingly positive role out of these services. And we do expect to be beneficiaries.

OK. Thanks very much, Raouf.

You're welcome.

Thank you. The next question comes from Charlie Glavin with Needham & Company.

Thanks, guys. Simon, by the way, get rid of that music beforehand. Nothing like a dirge right before your earnings.

I didn't mean for it to sound like a funeral.

It may explain why your stock trade is off a little bit in the half market. In terms of taking a look at the organic growth gross margins, if I understood you correctly, you were saying 70% going forward. Now, granted, you got - I'm going to estimate $45 to $50 million of inventory you could still tap into as far as the breakdown.

But given your pruning right now from the R&D standpoint, are you actually going to a richer mix that the organic, which for this quarter I believe was in the 64 to 65 range, are you actually indicating that the organic growth that's the written off inventory is going to improve?

Charlie, it's Simon. No, I think our expectation relative to where we've historically guided gross margins in a long term model is always around that 68% number. In terms of the expectation for the current quarter, because the revenue is at a slightly lower level than we've historically built the model around - the breakeven model particularly - we obviously don't manage to absorb all of the fixed costs associated with manufacturing overhead.

So, to the extent that you're looking for a significant mix shift between written off inventory and product that we're selling from inventory that has value today, that isn't there. That's point number one. Point number two is that if you're looking for a more long term mix shift associated with some of the restructuring activities that we've announced at this point in time, we don't expect to see anything fundamentally change over the course of at least the next year around the margin structure as a result of the announcements that we'll make around the ATM business and to a far lesser extent around the transmission businesses.

As you know, those are products that enjoy life cycles that are multi year. And to the extent that anything's shipping today we don't expect it to stop shipping at any point in the near term such that it would impact the margin certainly over the course of the next year.

Simon, when you said 70% going forward, you meant until a break even?

Yes.

OK. In terms of the near term shift between the R&D being slightly higher, it looks like you took a pretty big cut in the SG&A. Can you explain a little bit about that shift and what programs, Raouf, as to why you're keeping the R&D high for this last quarter plus the December quarter?

It looks like there were a couple there that were fairly vital because it certainly looks like you've got a hockey stick coming in with the revenue. And I imagine that some of the R&D had to do with development that's going to kick in more in the March to June time period.

Charlie, it's Simon. I think you actually have to - you have to go back a little further. Last quarter I think we communicated were the abnormal numbers, right?

Yes.

We were low on R&D last quarter. We were higher on SG&A. When I say last quarter I mean the June quarter, right? We're back to what looked like more normalized numbers in the September quarter relative to where we were in March by way of example. So, June was the aberrant quarter and not September is an important starting point.

Beyond that the shift that we saw in the dollars was kind of driven by two things. Number one, the SG&A was down principally because of the revenue decline and the fact that we weren't paying internal incentives or commissions to reps - third party representatives - at the same levels as we had been in the prior quarter.

So, that accounts for the decrease in the SG&A line or principally accounts for the decrease. And then in terms of the R&D dollars, that was almost exclusively associated with a handful of programs that just saw incremental costs this quarter relative to prior quarters.

Any of that related to what Jeremy was referring to in terms of the FTP? And if so, is there any sort of hangover from the old moth balled project Pronto that could delay some of the revenue? Even if it wasn't - it would seem the revenue wouldn't hit until the second half of next year, but is there anything you're picking up from that old program? And was any of this R&D related to that?

Well, Charlie, not really. I mean, I think Project Lightspeed is one that we're very excited about going forward, but we don't really see much of a meaningful overhang from the old project Pronto, if you will.

I think to your question about the restructuring activities and particularly what programs will be impacted. Basically, there is very little in the transmission business. It's just a streamlining within our transmission portfolio, which we remain very committed to. Again, NT, E3 both LIU's framers, Sonet and T1/E1 are all strong markets for us.

The predominate R&D reductions are going to come from our network processor portfolio. And there, as I mentioned briefly earlier, we had underway significant - a significant R&D program to develop the next gen OC-48 class network processor. It was intended to be a multi service, multiprotocol. A very critical platform.

The time frame to production for that was fiscal year '08. So, when you think about any revenue related or growth related implications those would be sort of in the FY '8 maybe even FY '09 type of time frame. So, significant near term R&D and very little revenue or margin contribution for probably four maybe even five years going forward.

And so, we felt it was prudent given the uncertainty in the end marks that we're serving and the current revenue dynamic as well as our goal to achieve breakeven that we eliminate that particular program. So, that's really where the bulk of it is as well as other associated spending reductions in our network processor portfolio.

Thanks. And last question. Raouf, you mentioned China both at the pre-announcement as well as now in terms of an area of weakness. But actually, Europe was down more so on a sequential basis.

Does that have to do more with OEM's that you ship to Europe that was actually for re-exportation into the Asian market? Or was the national consumption pattern within Europe that also decline within the quarter?

So, two things regarding Europe specifically. I would say that, you know, within Europe you always expect that the summer season is slow. And the slowness in Europe is more pronounced typically - the seasonal slowness is typically more pronounced than any other part of the world.

And it was actually a little more pronounced this year than is normally the case. And we think that had to do somewhat with the inventory issue. Again, speaking of Alcatel. As you know, Alcatel is a very big customer of ours. And they export heavily to all parts of the world including China.

So, clearly, the DSL slowdown in China had a secondary effect on our revenues that were reported coming out of EMEA, since it's on a ship to basis. So, that had something to do with it. But what we are seeing now, frankly, in Europe is actually quite positive. The revenue trends are good and our European customers are actually quite optimistic. And that includes not just Alcatel but also Siemans even Marconi and a number of other - Erikson - a number of other customers as well.

And design activity is quite strong in Europe right now. Virtually every major OEM in Europe feels good about the future and is developing voice-over-IP next generation platforms, many with Mindspeed silicon today. As well as, obviously, high performance analogue fiber to the prem application. So, actually, the environment in Europe is actually quite healthy.

OK. Thanks, guys.

You're welcome.

Thank you. The next question comes from Sandy Harrison with Pacific Growth Equities.

Thanks. Simon, I just wanted to - you gave us a little teaser earlier there when you were talking about backlog. Can you maybe give us a little bit of clarification on, you know, some of the numbers of the backlog last quarter at this time versus the backlog this time? And sort of some relative comparisons?

Sandy, you know, we historically have - we don't do that. We don't give backlog information. We don't give book to bills and that kind of thing. We don't think they're necessarily meaningful. What we do each quarter is provide you with color around where we sit relative to the guidance, essentially.

And all we will reiterate at this point in time is that, you know, we do have absolute - in absolute dollar terms more backlog today than we did at the same point last quarter. And in looking at the inventory burning off throughout the course of the quarter as opposed to last quarter where we believe we were still seeing some degree of build.

We don't have anything built into our plan that is of great significance as it relates to the China activity this quarter. So, I think the best way to characterize where we are, Sandy, is just, you know, we feel fundamentally better about where we stand today than we have in an extended period of time related to delivering the guidance that we have for the quarter.

Got you. That's helpful. And then Raouf, earlier in your comments you were talking about pruning versus exterminating. If you maybe you could kind of give us some sort of relative scale of the programs that you guys are moving away from versus the programs you're pruning? You know, the percentage of that - is it a 60/40? A 70/30? 50/50? Just an idea of where a lot of the cost cutting is going to come from.

So, Sandy, it's Simon. I think the starting point is 80% of the cost reduction is going to come out of research and development. Twenty percent of the cost reductions are going to come out of the sales, general and administrative functions.

So, if you want to put that in absolute dollar terms if you go from today's $31 million and you're going down to $26 million you're looking at roughly $4 million coming out of R&D and roughly $1 million coming out of SG&A. I think it's fair to say that the bulk of the reduction in the R&D line is associated with the ATM network processor business and not with the transmission business.

Right. Thanks, Simon.

Thank you. The next question comes from Jim Liang with SG Cowen.

Thank you. A couple questions. First of all, on the voice-over-IP market in North America. Raouf, can you talk about what you expect to see or when you expect to see an inflection point in terms of adoption both maybe in the enterprise market and also in the telecom markets?

Yes, certainly, Jim. I mean, clearly the voice-over-IP market is just starting what we would refer to as a very significant growth cycle. We have, we believe, very, very good visibility into the end market dynamics since our share is quite strong, particularly in the carrier space and increasing - as I mentioned in my prepared comments - in the enterprise space.

So, starting with the carrier voice-over-IP market quite specifically, what we believe is going on here, Jim, is literally every major service provider in North America - and I think the same is true as well overseas. Either it is already starting the early phase of deployment of voice-over-IP services or has on the drawing board significant and well funded plans to packetized the networks completely.

So, when we look at what's going on we believe that the inflection point on the carrier side is really counted in year 2005. We believe 2004 was the beginning. If you will, the technology stabilized earlier in '04. Quality metrics such as echo cancellation, speech quality, et cetera finally came into place to where voice-over-IP because very comparable from a subscriber or consumer perspective to traditional TVM voice.

Also, the cost came down dramatically to the point where, you know, the value proposition from a service and service provider perspective is very compelling. As we looking into '05 we think the growth will come from actually virtually every major segment.

You mentioned briefly the enterprise and we see significant activities in IP PBX's, next generation of P systems, you know, lower density, lower subscriber count. IP based T systems.

And then within the carrier space we see clearly a shift to the edge of the network. The trunking segment remains quite strong, but increasingly next generation broadband platforms such as DSLAMs, DLC's as well as voice-over-cable is where we're going to see significant new penetration and rollout of voice-over-IP enabled broadband infrastructure.

We feel quite positive about both the carrier space and the enterprise space. And I mentioned earlier the fact that we have very, very good traction in both the carrier and the enterprise. I rattled off some customers. I won't go over them again, but clearly our traction to market is superb, I would say, and we're looking forward to some very exciting things from this business in 2005.

Great. My next question - can you give us an update Raouf, on the competitive landscape in voice-over-IP and also in fiber to the premise? How do you see yourself enhance your competitive positioning during this industry slowdown?

Sure. Well, I mean, to your question we are in fact leveraging our position at this point in the game during the slowdown. We believe that it's a very attractive space that will no doubt attract more competitors over time. I'm referring to the voice-over-IP here specifically.

At this point in the game, however, we believe we have a very strong competitive lead. Although we do see new competitors, for instance, like a Freescale, the Motorola spinoff. Potentially over time some more, smaller competitors - particular communications players who are very late to the game but are attracted to it obviously because it is a very critical segment now. Arguably one of the highest growth segments if not the highest growth.

So, we see a number of smaller players obviously attracted to this market just because it is compelling. But frankly, based on experience we know that it takes between three to five years to develop and harden a carrier class capable voice-over-IP solution before you can actually really ramp those products.

So, we think we have at least a three year lead if not a five year lead or somewhere in that range over virtually every major competitor with the exception of certainly our primary competitor who is Texas Instruments. And secondarily, perhaps over time, Motorola Freescale.

We believe that the landscape, although it's going to clearly get more cluttered, we believe that here in this particular business it's all about the quality of the product, how hardened your software is, your electro-property position and your existing deployments, which obviously give you credibility. We believe we standout in all of these attributes.

Now, as far as fiber to the premise is concerned - you asked about that briefly - clearly there's also increasing competition there. Again, another very attractive market. One that we have subscribed to for many years. There we see, of course, a number of players. People of various - various types of players. Certainly vendors of just simple mac layer functionality.

That maybe B-PON or G-PON type mac layer functionality. We compete with those types of players. We also compete with providers or vendors of analogue components for optical modules, typically OC-3, OC-12 deployments for fiber to the node and fiber to the premise.

And over time we expect to see consolidation. And we believe the consolidation will also favor us because increasingly these triple play platforms require systems on a trip solutions that integrate the voice-over-IP as well as the mac layer and work seamlessly with the optical module. And we have all three of those.

So, we're very strong in the fiber to the prem as well and it plays - as I mentioned briefly - to our voice-over-IP presence. So, we're also quite enthused about the fiber to the home market cycle.

So, last question on that subject: do you see given - assuming it's a fiber to the home or it's a fiber to the node, how do you see yourself benefit in the two different scenarios?

Well, clearly the fiber to the home would drive more silicon our way. Today fiber to the home deployments are particularly pronounced in Japan, as you may be aware. That's where the early deployments of fiber to the home started a couple of years ago. And as that market transitions from E-PON over to GE-PON and other flavors of PON, we have silicon that is embedded in the CPE class of solutions as well as the central office - the MTU, MVU - as well as central office solutions that incorporate voice, again the mac layer functionality, as well as all the analogue interface of electronics that goes around such a solution.

So, there's more content for us certainly when it's a fiber to the home type solution. And in fiber to the node we also have signfiicant participation. For example, with key vendors like Pocatello AFC and others and a number of their access gateways. This would include the ATM functionality where clearly those - whether it's B-PON or derivatives of B-PON it's all ATM centric.

But also, again, the traffic management, the voice-over-IP and other adjacent functionalities. So, we benefit both ways. We have content in both mac layer and traffic management content as well as analogue content in all of these networks.

Great. Thanks, Raouf.

You're welcome.

Thank you. The next question comes from Carter Driscoll with IRG.

Good afternoon, gentlemen. I hate to make you repeat this, but I hoping you could just very quickly go over the absolute dollar numbers for your four segments again - to start off with.

Revenue?

Yes, on the revenue side.

The revenue specifically we said for our monthly service access voice-over-IP business it declined $4.5 million or 19% of revenues, Carter.

Yes.

High performance analogue decline 3.9 million to 20% of total revenues. T/E carrier transmission products decline $3.6 million to 29% of total revenues. And then the ATM network processor business was up $3.2 million to 32% of total revenues.

OK, thanks. Could you give us a breakdown - I'm not sure if you brought up this before - between your different convergence processors? The Muro (ph), Chagall and the Comcerto. Could you give us a rough estimate of the breakdown for that?

You mean - Carter, this is Raouf. You mean between those different processors, or?

Yes, please.

We don't actually break those out individually. I mean between the devices you just rattled off, that was certainly the majority of our voice-over-IP revenues in the fourth quarter that we just reported. A significant chunk. And in terms of relative breakdown of those, you know, I actually don't have it off the top of my head.

Clearly, the enterprise processors such as Chigal are continuing to ramp, so relative to SammyRow (ph), the carrier product is still a small fraction of the carrier revenues.

OK. Could you just talk a little bit about your broadcast video solution? Seeing any increased competition there? Any other notable customer wins in the quarter?

Well, we did mention that we had several important design wins at Thompson Multimedia, which is, you know, sort of the leading vendor of equipment last quarter. Not this quarter, but our third fiscal quarter. Those are going very well.

And we have scored a number of new wins with Q1's that we're actually not at liberty to disclose at this point in our fourth quarter. What we're seeing in that space that customers typically have either built systems out of components provided by a Canadian company called Gennum or they have cobbled them together out of discreet solutions from a combination of vendors - Fairchild, National Semiconductor, occasionally Maxim as well.

Our products, frankly, bring a much higher level of integration to those customers as well as providing them Sonet level performance. Obviously, leveraging our telecom experience to provide superior reach type performance so we can provide a longer span, if you will. But also a better dynamic range and hence better video quality than the solutions that exist today.

From a competitive perspective - to get to your point - it really hasn't changed. It's all of the above. We suspect that over the course of the next few quarters we are going to see more competitors. Again, because this market is very attractive much like voice-over-IP and fiber to the prem. So, we do expect to see more competition.

We have heard rumors about various vendors coming to this market, but we have seen nothing at this point. So, there's really no value to commenting on rumors. But I have no doubt there will be more competitors over some time.

OK. And then just lastly, in terms of getting back to your top line breakeven, how much of it is dependent upon, you know, China actually returning to a normal consumption pattern say by the end of the March quarter versus if that were to flat line or even continue to decline over the balance of fiscal '05?

Excellent question, Carter. Something we've spent a tremendous amount of time internally, obviously, trying to get our hands around. And the reality is that our expectations for China aren't dramatically different than the types of numbers that reported in our pre-announcement call.

We said that, and we commented today, we said that China was roughly 13% of total revenues. So, think about it being a $3 million kind of number. Our expectation is that it isn't going to be radically different from that kind of number at any point over the course coming quarter. On our way back to 37 million.

So, if you are using the $37 million in September quarter as the breakeven point, then our expectation to China is essentially where it is today.

Great. Thank you very much, gentlemen.

Thank you. The next question comes from Jeff Loft with Credit Suisse First Boston.

Hi, guys. You talked about it a little bit in terms of the fiber market. But I just wanted to get an update there because I know there was the inventory problem earlier in the year. I'm just curious what that market looks like in terms of slowdown in growth in Japan and there maybe a lull right now before it picks up more strongly next year for the U.S. and other markets.

Jeff, it's Simon. I'm going to comment on one part and then I'm going to let Raouf answer the second part. First of all, the decline in the high performance analogue business in the September quarter actually had very little to do with Japan and (inaudible) for the home deployments.

OK. There were two other factors that actually drove the vast majority of the decline. OK. So, don't look at a decline in our high performance analogue business as being indicative of a problem as it relates to Japan or an inventory build as it relates to Japan deployments. Now I'll let Raouf talk to you about what we're seeing in terms of deployment rates and so on.

Yes, just to add to that very briefly, Jeff. The decline in the high performance analogue business was actually primarily frankly due to softness in our business at McData here in the U.S. where we saw very little activity relative to prior quarters.

And then secondarily we saw some weakness at WaWay, which we attribute primarily to the broad based cap ex decline in China, mainly the metro area. So, the fiber to the prem business was actually quite strong for us in our fourth fiscal quarter that we just reported. We expect it to actually grow sequentially in this current quarter. The first quarter of FY '05.

So, what we're seeing in Japan - to get to your question specifically - is in fact continuous strength. Broadly speaking, the economy continues to recover in Japan and the business environment there, frankly, is the most positive than I have seen it in a number of years.

And in particular as it relates to fiber to the prem it is now very clear that not just NTT, but also Yahoo! broadband will continue to adopt and deploy fiber to the home services quite aggressively. And we expect to be, you know, primary beneficiaries of that in this quarter as well as in future quarters as well.

Our presence is quite broad in Japan. We believe our share is in excess of 70%, maybe even 80% share in analogue components for fiber to the prem modules. But also, we have significant content as far as transmission and ATM solutions are concerned in a number of these upcoming platforms.

So, we feel very good about that business and we don't really see any meaningful inventory buildup in that particular market whatsoever at this time.

OK. And then just a quick one on the balance sheet. Where do you expect the cash balance will trough?

Jeff, it's Simon. Based on the model that we've essentially laid out for you today based on the restructuring in cash, based on our expectations for changes in working capital it's somewhere in the $15 to $20 million range without any assumption for borrowing against the connects credit facility or any incremental financing activity, which is dramatically different than our expectation had been a quarter ago.

So, clearly a reset in our expectations to cash consumption based on predominately the revenue decline, but also the restructuring actions that we've announced, obviously, result in $20 million of annualized savings, which is clearly going to result in us needing less cash from an overall perspective.

Thank you. The next question comes from Aalok Shah with Pacific Crest Securities.

Hi, thanks for taking my call. This is David Yunerman (ph) for Aalok. Just wondering if you could me a little color as to your tax situation going forward?

Tax situation going forward. Actually, no change than what we've previously communicated. The number this quarter does look a little strange. We acknowledge that. We were able to recover some of the cash - I'm sorry. Some of the tax charge that we experienced last quarter.

Expectation is that the tax - I won't give you a rate. I'll give you absolute dollars.

Yes.

Because this is related to a very unusual situation in the U.K.. Basically we expect that tax line to have a charge of approximately $600,000.00 per quarter moving forward.

And that will hold for?

It holds for at least four quarters.

OK, great. Thanks.

Thank you. That does end the Q&A portion of the call. I turn it over to you, 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.

END