MACOM Technology Solutions Holdings Inc (MTSI) 2005 Q1 法說會逐字稿

Excuse me, everyone. I would like to introduce Simon Biddiscombe, Chief Financial Officer of Mindspeed who will chair this afternoon's conference call.

Please be aware that each of your lines is in a listen-only mode. At the conclusion of Mr. Biddiscombe's presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question.

I would now like to turn the conference over to Mr. Biddiscombe. You may begin.

Thank you, Adam. I would like to welcome everyone to our conference call discussing the results of our first quarter of fiscal 2005, which ended on December 31, 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 his perspectives on our first quarter results and the 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 2005 second quarter and other market, business, and product trends that are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

These include our statements about customer inventory levels, market conditions, demand, expected charges and reserves, competition, bookings, and design wins.

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 would 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, and employee separation costs. We use the Pro Forma information to evaluate our operating performance and believe this presentation provides investors with additional insight into the underlying operating results by excluding amortization of intangible assets and the effects of restructuring charges, asset impairments, and other significant discrete items that may not be indicative of our core operating results.

These measures provide an operating perspective not immediately apparent from GAAP operating loss or net loss.

In addition, we have historically reported similar financial measures and believe the inclusion of comparative numbers provides consistency in our financial reporting.

These measures of earnings are not in accordance with or an alternative for GAAP and may be different from Pro Forma measures used by other companies.

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 first fiscal quarter of 2005, Mindspeed delivered improved financial performance in a number of areas over the prior quarter. Today we announced first quarter revenues of $26.3 million achieved in the approximately flat revenues we expected at the beginning of the quarter.

Three of our four product families grew sequentially with our multi-service access voice-over-IP products up 30% over the prior quarter. And our ATM/MPLS network processor solutions declining consistently with our expectations.

The Asia-Pacific region contributed 44%, the Americas 43%, and Europe contributed 13% of revenues.

In terms of our quarterly revenue breakdown by product family, multi service access voice-over-IP solutions were 25% of the total. High performance analog devices were 24%. T/E carrier transmission products were 32%. And ATM/MPLS processor solutions contributed the remaining 19% of revenues.

Cisco Systems was our only greater than 10% end customer this past quarter including both direct sales and indirect sales to third parties.

Revenue linearity during the first fiscal quarter improved compared to the September quarter, which you will recall, was significantly backend loaded. In fact, revenue linearity in the first quarter returned to a level more consistent with the June quarter.

Gross margin was $18.3 million or 70% of revenues exceeding our guidance of 68% provided a quarter ago. This performance improvement included an 8-percentage point benefit from the sale of products written off in fiscal 2001.

The underlying gross margin for the business excluding the effects of the written off inventory, was 62%. However, at last quarter the underlying margin was distorted by three percentage points from product written off in fiscal 2001, which was sold for significantly less than its historic cost.

For a direct apples-to-apples comparison to prior quarters, the underlying gross margin was 65%.

Pro Forma operating expenses were $30.3 million, gaining 3% from the prior quarter, as we begin to see the benefit of our previously announced cost restructuring actions.

As a result, our Pro Forma operating loss was $11.9 million, an improvement of 12% over the prior quarter's Pro Forma operating loss of $13.6 million and ahead of our expectations of approximately $12.5 million at the beginning of the quarter.

Other income and expenses and the provision for income taxes in the aggregate resulted in a net charge of approximately $398 thousand. As a result, our Pro Forma net loss improved 5% over the prior quarter to $12.3 million or 12 cents per share based on approximately 100.8 million average shares outstanding for the quarter.

The total number of shares outstanding at the end of the quarter was approximately 101.9 million.

Special charges and asset impairments associated with our previously announced cost reduction activities were $5.5 million. We expect to incur approximately $700 thousand of further special charges over the next two quarters as we execute these activities.

Turning now to the balance sheet.

Cash and cash equivalents totaled $75.6 million at the end of December, an increase of $32 million from the prior quarter. We also had an additional $3.3 million of marketable securities reflected in other current assets and other assets on the balance sheet for a total of $78.9 million.

Cash generated from our convertible debt offering, completed on December 8, 2004, was $46 million gross and $43.9 million net of initial purchaser discounts.

The five-year convertible notes carry an interest rate of 3.75% and are due in 2009 with 16.4 million Mindspeed shares underlying the notes.

In connection with the closing of our convertible notes offering, we terminated our credit facility with the Conexant Systems. We had previously issued Conexant a warrant to purchase up to 8.3 million shares of our common stock in connection with the credit facility. No portion of this warrant will be exercisable by Conexant since we have not borrowed on the credit facility at the time of its termination.

We refer you to our earlier press releases and SEC filings on Form 8-K for detailed information on the convertible debt offering.

Excluding the effects of our convertible debt offering, we reduced our total cash consumption, which we defined as the net decrease in cash and cash equivalents, by 24% to $8.4 million from last quarter's $11.1 million, exceeding our expectations at the beginning of the quarter.

Capital expenditures were approximately $762 thousand and depreciation was $2.6 million.

We continued to make good progress on improving our working capital. Receivables were $16.1 million, resulting in net DSOs of 56 days, 10 days lower than the prior quarter. Inventories were $9.3 million, down from $12 million at the end of the prior quarter.

Inventory turns were 3.4, an improvement over the prior quarter's 3 turns.

Gross inventory including amounts previously written off totaled approximately $62.2 million at the end of the quarter compared to $67.2 million in the prior quarter.

Total current liabilities were $28.6 million, down $3.7 million from the prior quarter, principally driven by a $6 million reduction in accounts payable offset by a net increase in our restructuring reserves.

Total restructuring reserves, including amounts classified in other liabilities on the balance sheet, were $7.8 million at the end of the quarter.

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

Thank you, Simon.

I am pleased that we achieved the financial expectations we set at the beginning of the quarter, maintaining flat revenue sequentially, despite an ongoing industry-wide inventory correction.

We also made excellent progress in our restructuring plan, cut our cash consumption by 24%, and cut our Pro Forma operating loss by 12%.

In addition, we significantly improved our liquidity with our recent convertible debt offering, increasing our combined cash and marketable securities to $78.9 million exiting the quarter.

We experienced excellent market traction this past quarter. In fact, design wins achieved a top tier focused customers were up more than 45% compared to the first quarter of fiscal 2004. In total, our design wins this quarter were up almost 70% over the same quarter last year, further strengthening our competitive position in our key addressed markets.

We also continued to gain share and diversify outside of our traditional wireline markets, driven by our new broadcast video, Comcerto enterprise voice-over-IP processors, and optical PMDs for five-bit of the premise applications.

This past quarter, nearly 70% of our design wins at top tier focused customers were outside the traditional wireline carrier market in a diverse mix of enterprise, wireless, and fiber-based applications. Compared to just 30% in the same quarter last year and just 10% in the same period 2 years ago.

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 30% over the fourth fiscal quarter of 2004. Driven by increased shipments across our entire voice-over-IP portfolio to tier one equipment manufacturers such as Cisco Systems, Siemens Corporation, Samsung, Intertel, Hauwei Technologies, as well as Harbor Networks in China.

Growth was particularly strong this past quarter for our Comcerto carrier, voice-over-IP processors.

We continued to expand our excellent competitive position in the voice-over-IP market this past quarter, capturing design wins with tier one customers including Samsung, Siemens, Harbor Networks and many others for a variety of IP PBX and converged enterprise routers as well as next generation carrier gateways.

The adoption of voice-over-IP technology and broadband access networks such as cable and DSL, as well as within core networks, continues to gain momentum worldwide and we believe that we are very well positioned in this market with our leadership family of integrated Comcerto voice processors.

Market research firm Yankee Group estimates that there were approximately one million voice-over-IP subscribers in the U.S. alone by the end of 2004 and that this number will grow to more than 17 million subscribers over the next four years.

We believe that service providers will begin building scale in their voice-over-IP networks this year as they overcome the initial technical challenges encountered during earlier deployment and field trials.

Cable MSOs including Cablevision and Cox have announced aggressive plans for rollouts of voice-over-IP services over their networks. And we are particularly encouraged by the recent announcement by Comcast, which now plans to make voice-over-IP available to all of its 21 million subscribers by the end of 2006.

Three of our top tier voice-over-IP customers are amongst the preferred vendors by these cable MSOs for rollout of voice-over-IP services.

Three out of four RBOX in the U.S. have now announced voice-over-IP rollout plans including Qwest, Verizon, and most recently SBC with its Project Lightstpeed tied to the premise network.

We again expect to be direct beneficiaries of these deployments as our customers begin shipping the equipment enabled by Mindspeed voice-over-IP processors into these networks.

The recent market forecast by research firm IDC projects the voice-over-IP carrier media gateway segment will grow from $84 million last year to $470 million of semi-conductor demand in 2008, the compounded annual growth rate of 37%.

IDC also projects that the enterprise segment will grow from 92 million in 2003 to 252 million in 2008, the compounded annual growth rate of 22%, for a total market size of over $650 million by 2008.

We are well positioned in both of these high growth segments with our integrated Comcerto carrier as well as enterprise voice-over-IP processor solutions.

Now turning to our high performance analog product portfolio.

Revenues were up nearly 15%, primarily driven by shipments of both cost point switch products for storage and telecommunications applications, as well as optical PMDs for palm based, fiber to the premise deployments, to a number of key customers including McDATA, Agilent, Fugitzu, Mitsubishi, Trulight, Delta, Stratus Lightweight, as well as many others.

Fiber to the premise networks are expanding worldwide, with Japan continuing to add 100 thousand broadband subscribers per month, bringing their total to an estimated 2 million subscribers by the end of 2004.

We believe Mindspeed is well positioned to benefit as carries and service providers worldwide move beyond current field trials in its full-scale deployment to satisfy growing consumer demand for triple plate data voice and video services.

We won high performance analog design wins this past quarter across multiple markets including fiber to the premise, telecom, and datacom with customers such as Nortel, Fiberdon (ph), Hitachi, WTD, GigaCom, multiple wins at FLOWCOM and UTStarcom as well as a second enterprise storage switch design win with CNT.

In addition, we captured multiple new design wins with our video infrastructure solutions, optimized for both standard and high definition TV with studio, broadcast, and distribution video applications including leach technologies ProBell (ph) and Stratos Nightwave.

Now turning to our T/E carrier portfolio. Revenues were up 9% sequentially, driven by demand across a broad range of transmission solutions to tier one customers including Cisco Systems, Nortel, Alcatel, Siemens, Nokia, ADC, UTStarcom, Hauwei, ZTE, and Ambet Foxcon (ph) for a variety of wireless and wireline infrastructure applications.

We also won several key designs with our family of T/E transmission and SONET solutions. With leading customers including Alcatel, Nortel, NEC, ZTE, Intertel, and multiple wins of Samsung, Ericsson, and Lucent for use in applications such as multi service transport platforms, routers, and wireless base stations.

During the quarter, we extended our DS3/E3 line card-on-a-chip family with the introduction of 2 ultra low power devices optimized for low port density and power sensitive datacom applications such as wireless uplinks, routers, and digital loop carrier equipment.

Our highly integrated 1 and 2-port devices provide a complete physical layer solution for flexible, high bandwidth, DS3/E3 services in an extremely small package size, aggressively reducing design costs to print circuit board real estates.

Our broad family of line card-on-a-chip devices now ranges from 1 to 12 ports, supporting both datacom and telecom applications.

Finally in our ATM/MPLS network processor portfolio, revenues declined to more normalized levels and represented approximately 19% of fiscal first quarter revenues, down from 32% of total revenues in the prior quarter.

We are continuing to invest in developing new applications beyond traditional ATM processing for our current family of very competitive TSP3 network processors.

For example, this past quarter we announced an enhanced version of our TSP3 firm order, which enables sophisticated quality of service and tiered service capabilities and cost effective Ethernet broadband access networks.

By leveraging our programmable TSP3 architecture, service providers can configure Ethernet traffic to support the dynamic bandwidth and multi cast acceleration necessary to deliver triple play voice, video, and data offerings to consumers over broadband access networks.

Our family of TSP3 traffic management solutions provides customers with a broad range of performance options and design flexibility.

This past quarter we won network-processing designs for wireline and wireless applications with Cicso Systems, Lucent, and Ericsson. In fact last month, the respected engineering design magazine, EDN, selected the innovative TSP3 family as one of the best 100 products of 2004.

In conclusion, we are pleased with our performance in the first quarter of fiscal 2005 as we strengthened our position in key markets and significantly improved our balance sheet.

As we look forward to 2005, we anticipate that global carrier capital expenditures will be comparable to spending levels this past year. More importantly, we believe there will be a shift in capital budgets this year in favor of next generation packet network technologies, specifically voice-over-IP and fiber based access technologies, which we expect to significantly benefit Mindspeed as we continue to focus on these high growth markets.

In China, we believe fundamental demand for communications infrastructure products remains mixed in both wireline and wireless networks due to excess deployments over the past year as well as government intervention. However, we are increasingly encouraged by the export growth prospects of our equipment OEM customers such as Hauwei Technologies, such as ZTE and others based on the numerous tender awards they have recently won in markets outside of China.

We believe the channel inventories and the aggregates are burning off roughly consistent with our expectations.

In China, market conditions remain sluggish and inventories appear to be burning off more slowly than anticipated. However, we believe this delay is being offset by faster than expected inventory burn rates in other markets.

For example, we believe that worldwide inventories of our DSLAM (ph) related products stabilized this past quarter. And in fact there are indications that demand will begin to recover in the current quarter consistent with our expectations of continued global DSL subscriber growth in 2005.

Now turning to our expectations for our current, second fiscal quarter.

We are encouraged by a pickup in bookings we have experienced this month relative to the same period last quarter across a broad range of our product lines. While visibility remains limited, we expect to benefit as customers continue to work down their inventories and revenues from design wins continue to ramp in key markets. However, we expect this to be partially offset by traditionally weak capital spending in the March quarter.

As a result, we expect our second quarter revenues to be flat to up 5% sequentially and our overall gross margin to be approximately 69%.

We also expect to lower Pro Forma operating expenses to approximately $29 million as we continue to execute on our previously announced restructuring activities this quarter.

As a result, we expect to improve our Pro Forma operating loss by approximately 13%.

We also expect a further reduction in our cash consumption.

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

Certainly.

[OPERATOR INSTRUCTIONS]

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

Great. Thank you.

Just a follow up on the inventory, so at what point during the year would you expect the inventory would be depleted and your demand would be roughly equal in consumption?

So, Mark, this is Raouf. As I mentioned in our prepared comments, we believe that the guidance we provided previously of inventories taking roughly one to two quarters to return to normalized levels continues to be roughly what we expect and what we are seeing at this point in time.

There are certain markets, for example, China where perhaps the timeframe to stabilization of inventory levels is going to take a little longer than we thought. But as we said we believe this is offset by better inventory consumption in other markets.

So to get to your question we believe that by the end of this current quarter we would roughly be in the state of balance between supply and demand and inventory levels in aggregate. Not for every single device, but in aggregate, would return to normal levels. And therefore next quarter, our third fiscal quarter, is roughly when we would expect to experience demand that's consistent with the underlying demand for our products.

Okay. Great. And just a word on the video business, what's your expectations in terms of how quickly that could become a pretty significant part of revenue?

Where would you think you could be a year from now in terms of percentage of revenue?

So, Mark, we actually already have some revenue contribution from video products. We had some last quarter. We expected to increase significantly in this current quarter and continue to ramp every quarter of calendar year 2005.

We have significant market traction with these products. These are the most highly integrated as well as highest performance of video infrastructure products in the industry. And we expect that probably by next year those products will contribute, I would say, on the order of 10% of our revenues or so.

Okay, great, and the last one, just on the voice-over-IP. Can you differentiate a little bit between voice-over cable and voice-over telephony? And which segment do you think are going to grow faster for you over the next year?

Certainly. Well, the way this market is playing out right now, there continues to be growth in what we call core networking or sometimes known as trunking applications. Trunking over packetized networks really takes hold on a global basis.

A couple of years ago that started happening in China. It is now very clearly taking hold in both the Europe region, the MEA region, as well as in North America.

We believe by far the highest growth segment, however, is going to be the adoption of voice-over-IP and access networks. And that's comprised of voice-over cable as well as voice-over DSL.

So get to your question specifically, we are seeing the beginnings of adoption of voice-over cable of packetized voice-over cable right now in North America. As I mentioned in our prepared comments earlier, there are at least 3 service providers who are utilizing equipment that might be silicon today.

And we expect that in fact voice-over cable is going to start ramping quite materially this calendar year of 2005 and we expect voice-over DSL to be not very far behind it, behind it but not terribly far behind it at this point in the game.

Okay, great. Thanks a lot.

You're welcome.

Okay. Our next question comes from Charlie Glavin with Needham and Company.

Thanks, guys. Simon, if you could help me. I'm probably being a little dunce here. But when you said apples-to-apples on the gross margin, could you elaborate a little bit more?

If we're taking like an 8 percentage points, what would, can you give the apples-to-apples comparison of what organic would be smoothed down maybe over the last 2 or 3 quarters so we can get a comparison, and then a follow up to that, please?

Yes, the way we've always characterized the margin, Charlie, as you know is that we do continue to benefit from the sale of previously written off product. And the product was actually written off in fiscal 2001.

The reported margin this quarter was 70%. The effect, as you correctly pointed out, was about 8%. But there's a piece of that that is attributable to product that was selling at very significantly below its historic cost. Okay?

So we back that back out and give you 65% is what we're calling the underlying gross margin for the business. That's actually extraordinarily consistent with what the Mindspeed business has delivered for an extended period of time.

Last quarter was actually a little lower but if you look back into the June quarter and the March quarter, I believe we're right at that 65% number in those quarters.

And 64%, if I'm not mistaken, was kind of your organic growth or gross margin level in terms of your longer term model, correct, around there?

No, no, no. What we were looking for moving forward in terms of the long-term model was essentially a 68% gross margin. And the breakeven model is predicated on a 70% gross margin.

And --

But that --

The, yes, the benefit we've built into that for the sale of previously written off product obviously declines over time as those products become less relevant to the business as the newer products begin to contribute more of the revenue stream.

So we weren't counting on more than two or three points of benefit as you look out in the breakeven period and then beyond.

To the break even period --

Yes.

I think, cause I want to clarify that. To go to Raouf, in terms of the break even, has there been any shift given a slightly slower CapEx as to the breakeven being at the end of the fiscal year as opposed to the end of the calendar year? Assuming that if you do that 5% even in the March quarter you're going to have to do a good 12% growth for the last two quarters.

And, or is that what you're anticipating as far as the consumption from your end markets when the inventory levels do reach equilibrium?

Yes, Charlie, so we believe that nothing has changed in terms of fundamental drivers for our return to profitability at this point in the game. And we believe there are basically three very distinct factors that get us there.

The first one is the depletion of the inventory that currently persists in the channel, getting us to essentially an equilibrium between fundamental customer demand and our revenue levels. Okay? So that's one important component of our return to profitability.

The second one is continued growth of some of our high growth served markets, particularly the media gateway voice-over-IP segment, as well as high performance analog solutions for fiber based and storage type networking.

The third component is of course the ramp of some very exciting new products including our high performance video products for video infrastructure, line cards-on-a-chip, enterprise voice-over-IP, and a whole host of other products.

So again, there are three important components to that. The inventory-rebalancing, if you will. From everything we can tell based on our channel checks and our discussion with our customers, is burning, is happening pretty consistently, or roughly consistently with our expectations as we discussed earlier.

When we look to the served markets, which is the second major component of our return to profitability that continues to be at least as exciting and as positive as we have always believed it be.

And thirdly, demand for our products in those new markets such as video enterprise and so forth, is quite, is at least consistent and frankly quite positive in terms of the third and final contribution to our return to profitability.

So net of it, Charlie is we believe we're still on track.

Raouf, if I could, can I go down a little bit more? Rather than taking a look at Yankee or IDC or one of the third parties sort of a theoretical.

Assuming and given your throughput time through your boundaries even though it's a little bit shorter, it would seem that in order to feel secure about that, that you're actually seeing some orders for the second half of your fiscal year-end?

Or is there assumption? Again, what I'm trying get a gauge for is we are seeing some the North American deployments on the cable, which Mark referred to. But is the consumption even ex-China right now at a double-digit rate for the second half of this, of your fiscal year?

You're talking about the --?

Sequential.

Yes, sequential growth. You're not really talking consumption, you're really asking about demand.

Yes.

Demand, specifically, yes. Well first of all let me say in terms of actual backlog or orders on the books at this point in the game for the second half of the year. As you know, visibility is still very limited.

By and large our customers are operating with the fundamental assumption that there's plenty of supply in the channel. That they do not need to give us as well as many of our peers much of a lead-time in terms of placing orders.

And therefore we're still operating in a high turns environment and we're not basing our projections necessarily on hard backlog that's on the books right now. The environment is very much of a turn's environment. The visibility is still quite limited in the space.

But in terms of the basis for our assessment just to give you a little more color on that. It is very much tied into forecasts our customers are giving us, judged very heavily from both the perspective of what we think our customers are capable of ramping themselves and fundamentally they're not necessarily always in the position to meet their own customers requirements. Many of these markets are new.

You mentioned the voice-over cable market is one that appears very positive and certainly there's been a lot of excitement recently, for instance, announcements from Comcast, Cablevision, Shaw, Canon, and many others that might be participating.

And therefore we take a look at what our customers submit to us as their forecast for the next four quarters. Again, we judge it very heavily and both in terms of their ability to execute as well as the rate of adoption of some of these new technologies in the end markets.

And we come up with, if you will, our assessment of how quickly the technology can be absorbed and ramped within the marketplace. We feel quite comfortable with that, particularly when it's coupled with what we see in terms of inventory depletion.

And last question guys and I'll get out of your hair. But either for you or for Simon, in terms of the variability of the sequential growth, HPA last quarter. Granted, some of that was the bubble.

But if we take a look at cyber to the premise within HPA in the first half of your fiscal year last year that was a bit of a headache from the Japanese over ordering and getting a little too rambunctious.

How are you netting out to make sure there's not a double order or that there's not an excessive amount that's occurring there?

And did any of that in terms of an over order as far as deployments have anything to do with the ATM/MPLS sector as well?

So, Charlie, this is Raouf again, so just to take a shot at answering your question.

I mean basically we can never be 100% certain that there's no amount of over ordering by either optical module manufacturers or their customers, especially as they address markets that are ramping very aggressively, like fiber-based access in Japan and other markets.

However, we believe that there's very much of a mindset at this point in the game worldwide, a mindset of managing inventory extremely carefully. What we see in our customers' organizations that their purchasing folks, their contract manufacturers, their distributors and so forth, they're heavily incented to keep inventory levels down to a bare minimum. Which again, is what's driving this, what I would call a very turns based environment that we're all experiencing at this point in the game.

So while we can't be 100% certain that there's no excess inventory in the channel, we believe if there's any it's minimal at this point in the game.

At the risk of a return to the phenomena that you alluded to in prior quarters is low. It's not zero. But it's quite low at this point in the game.

Okay. Thanks, guys.

Okay. Our next question comes from Noel Ryan with Pacific Growth Equities.

Mr. Ryan, are you with us?

Actually, this is Sandy Harrison.

Hey, guys, how are you?

Hi, Sandy.

Looking at your outlook for the quarter going forward, flat to up 5%. What sort of is the bigger swing factors? Is it more from a mix shift? Is it more from inventory depleting?

In other words, as we kind of scratch out our models what should we be thinking of in mindset as to why it might be flat versus up 5%?

Good question, Sandy. I think the absolute dollars that you're talking about in terms of the variability of the range there are not enormous, to be fair. I mean you're looking at just over a million dollars in reality between the two points.

So there's no doubt that the inventory consuming a little faster than we would currently expect would push us toward the upper end of that range.

I think it's fair to say there's probably less built into the incremental guidance, if you will, from zero to 5% that is strictly about anything other than that at this point in time.

Got you. And if you looked at kind of one of the questions later that or, excuse me, one of the questions earlier about the steepness of the mountain to climb to get to where you guys want to be.

It sounds as though most of you, and Raouf, you went out and talked a bit about this on this on the last answer. You guys can still see that path pretty clearly and it's just a matter of continuing to execute. Is that pretty much a fair assumption?

That's absolutely a fair assumption. Yes.

And when you look at sort of the longer term and the rollout of voice-over-IP and some of the other things you highlighted in your prepared comments, what do you think are some catalysts, some bigger picture catalysts, that we should be looking for? The regulatory issues, are there carrier CapEx issues? Or is just the continuing deployment and demand by these new carriers bringing up the technology?

Yes, so Sandy, I would say to that there's a fundamentally a lot of good things going on in a number of these end markets that we serve. And if I think of network packetization very specifically, we see that multi service type access in particular integration of triple play services in broadband networks is picking up materially.

What we're seeing is that the voice is the first and perhaps the most lucrative of those services. That carriers are focusing on deploying at this point in the game.

And what we see and many third parties, IDC and others have supported this as well, is a growth in the semi-conductor addressed market for network packetization, particularly voice in '05 of approaching 40% '05 over '04.

What could add to that, in fact further accelerate it, is the item that was brought up in one of the questions earlier, which is packetization within cable networks specifically.

And what we're seeing is that cable MSOs who traditionally have been a lot more aggressive than ILEX are continuing to operate in the same fashion. And in fact have jumped on that bandwagon quite aggressively.

We're seeing a number of our customers. We mentioned in our prepared comments at least 3 top tier OEMs who are using Mindspeed technology today get on that bandwagon very aggressively and capture significant share of tenders by MSOs, particularly Comcast, Cablevision, Shaw, and a whole bunch more that are going to be announced probably in the next few months.

And so it's clearly the case that our view of the fundamental drivers for the business going forward is consistent if not more positive than it was a quarter ago. And it is in fact supported by some of the trends that we are seeing.

As we mentioned, our voice-over-IP business grew 30% in Q1 over Q4. Thirty percent is obviously quite meaningful.

And as we mentioned in our prepared comments as well, bookings trend this quarter to date have also been very strong and much stronger than they were in the month of October for the same period.

And so it looks like both fundamental market drivers as well as our execution are lining up at this point in the game for '05.

All right. Great. Thanks, guys.

You're welcome.

Okay. Next we have Aalok Shah with Pacific Trust.

Hi, guys, a couple of quick questions for you.

Simon, can you give us a sense of what kind of levels of turns your saw last quarter and maybe what you need this quarter to make that the low end of the guidance range?

So, look, as you know, we actually don't break out turns, book to bill, and those kinds of numbers. I think the only qualitative point I would make is that the backlog today is certainly ahead of where it was at the same point last quarter.

And that therefore the degree of turns that we are reliant upon to deliver the guidance that we've laid out for you today is a little less than we would have needed last quarter.

So that's the only color we ever give around the specifics of where the backlog is today relative to the quarter.

Can you quantify or maybe just give us a qualitative view on just how cancellation and maybe new orders are coming in? Are they, are you seeing cancellations? Did you see any major cancellations last quarter that you were surprised by?

I think the answer is no, Aalok. I'm trying to think back into what we saw in the December quarter. And I don't think there were any major cancellations that surprised us. Raouf, would you --?

Yes. I cannot think of any cancellations. I mean there were probably some few minor ones. But there were certainly no major ones that I can remember at this point in the game, Aalok.

Okay.

In fact there's been some pullings and accelerations. As we mentioned earlier this quarter, meaning this month, bookings have certainly picked up quite nicely.

Is there a geography that you're, is China coming back for you now? Is that something that maybe you were expecting last quarter and now maybe it's starting to happen now?

No, not really. In fact, China was up for us a little bit in Q1 over Q4. We believe that that particularly had to do with certain of our customers starting to build up their export business out of China, Aalok.

As I mentioned in the prepared comments earlier, demand, fundamental demand within China is probably going to be remain somewhat weak. But the positive that we're starting to experience is that a number of our Chinese customers are actually starting to export a lot more.

So their export business is really picking up steam here.

And that was part of, well actually it was most of the reason why our business in China grew sequentially last quarter.

But frankly going forward our perspective is that it's not really China that is going to drive the growth of our business. It's primarily from a geographical perspective, actually North America and then secondarily the EMEA region.

Okay, one last question for you guys. And, Simon, I know we've talked about this before. It's the previously written off material. Should we expect this kind of level of 2 million maybe 2 to $3 million of revenue per quarter from the written off material?

Yes. I think the two. I wouldn't offer up the three a look as part of the answer. But certainly a couple of million dollars worth of benefit as we move forward essentially through at least the next four quarters.

Great. Thank you so much.

Okay. Our next question comes from Carter Driscoll with Independent Research Group.

Hi, guys, just a couple of very quick questions.

You mentioned that the ATM/MPLS division had kind of slipped to a more normalized growth rate. Could you highlight what you think it can grow longer term on a sequential basis? Excuse me, on an annual basis?

And whether that's a business that you are targeting for some of your de-investment?

I'll answer it backwards, Carter. In terms of de-investment here, we've been pretty clear over the course of the last couple of calls we've had about where we are focusing our restructuring actions. And the ATM/MPLS business was certainly one of the areas where we did curtail some of the investment.

However, I think the critical point is that what we curtailed was the next generation silicon and not the support of the customers who continue to work with our silicon nor are we curtailing efforts to win new sockets with what is state of the art silicon at this point in time and with a software team there to support that product looking into the future.

So, yes, it's an area we're taking cost off, but no means is a de-commitment from a customer support and next generation software perspective.

Can that business grow? Absolutely. That business can and is actually expected to grow for us in 2005. But obviously doesn't grow at anything like the rates of the voice-over-IP nor high performance analog product portfolios. But we do expect some growth from that product family as we move into 2005.

Could it be a double-digit growth for 2005 on a calendar basis?

Yes, I would say, Carter probably. This is Raouf Halim. I would say it's probably a low double-digits kind of growth.

Next question, could you help us understand at least more specifically about which customers you feel are going to participate most robustly in the FTTD or F5 or the node rollout domestically? Give a little bit more color.

I know it's an issue we've talked about both abroad and domestically. But if you could directly address more of the U.S. rollout and who specifically is going to benefit that's a current customer?

Well, a large number of our current customers are going to benefit from that one-way or another, Carter. What we're talking about here is a phenomena that involves significant architectural overhaul of both the access network or primarily the access network but also the switching, routing, and transport segment that sit behind that.

It's not as simple as putting in place a fiber based, let's call it a multi tenant or multi dwelling unit or a DLT of some kind and leaving everything else intact. It does involve significant change in routing, for instance, and requirements from new class of routers.

We'd expect some of our key routing customers to benefit from that.

Transport over time is going to need to get upgraded and overhauled. A number of our key transport customers obviously would benefit from both that as well as access including certainly vendors like Alcatel in that instance.

Other of our customers, Advance Fiber Communications, At Tran (ph), and others we expect to also benefit from that same phenomena.

So I think what you're going to see is a whole new generation of equipment types. Particularly at the edge of the network to deliver in some cases fiber directly to the premise, in other cases, fiber to the node and distribution over some form of DSL to the subscriber.

But also requiring a whole new generation of equipment for tarriffing, provisioning, and subscriber level services that sits behind, that acts as node if you will.

And we expect to benefit from all of the above. And in particular, the packetized voice opportunity that plays into triple play. So obviously with voice, video, and data, all those services are packetized and our voice-over-IP business will benefit quite directly.

I think there's no point in rattling off all the key customers there. But certainly again including Alcatel themselves, Siemens, many other vendors.

And then just lastly, kind of a top-level question, are you guys comfortable with the cash that you raised from the convert? Was there an amount that you would have liked to have gone beyond? Or do the markets kind of dictate what terms you could have gotten at that point?

No, no. We achieved exactly what we set out to achieve. And there was far more demand for the paper that we sold than we were willing to make available for supplies.

So, no, we were very comfortable with what we achieved. And believe we put ourselves in excellent position moving forward with just under $80 million worth of total liquidity.

Great. Thanks very much. I'll pass it along, gentlemen.

Okay. Next we have Jim Liang with SG Cowen.

Thank you, a couple of questions, the first one just to follow up on the FTTX market.

In terms of B pawn versus G pawn standards, Raouf, how do you see the market evolved both in Asia and going forward in the U.S.? And how do you see Mindspeed benefit in other case?

Sure. So let me take North American deployments first. Address your question. Then I talk about other deployments other parts of the world.

In North America it is quite clear that the bulk of the deployments over the course of the next let's call it 3 years or so are going to be pawn, are going to be B pawn in nature.

B pawn is an ATM centric access technology. So a significant opportunity for us in both the ATM traffic management, in the voice-over ATM portion of that B pawn deployment, and also, obviously for the analog electronics that sits inside those optical modules for B pawn deployment.

So we think essentially our entire portfolio including transmission ATM, voice-over-IP, and analog, are quite well positioned to benefit from the rollout of B pawn in the U.S. specifically.

Now we don't have every single building block that we need to address this marketplace today. And we continue to look to whether there's building blocks that we need to develop, license, or otherwise acquire to complete our offering there.

We're not looking to make any key acquisitions, if you will, in this area. But just looking to see how we can compliment our existing product lines.

We do expect to benefit quite directly from B pawn deployments. I think it's well known that Alcatel is one of our key customers, a top-10 customer for us. Advance Fiber Communications is certainly a top-10 customer for us as well next year and a number of other vendors, Marconi and others that are also users of Mindspeed technology today in a variety of their access platforms.

So we certainly see a significant participation in B pawn here in North America.

Longer term, we expect that carriers in the U.S. will start to shift from B pawn to G pawn. G pawn ultimately offers an access technology that's a lot simpler, a lot more scalable, and a lot more cost effective than B pawn.

However, it's significantly behind B pawn at this point in the game in its development and its maturity.

And so we think the first phase of deployment is going to be B pawn based and eventually followed by G pawn in North America. Okay?

So, Raouf, you don't see the U.S. carriers potentially delay at the point of decisions until the G pawn standard becomes much more mature?

From every indication we have, and I would caveat that by saying that there's, it's clearly a marketplace that is evolving and things can change in a short timeframe. When 8 tenders are in set and deployments are not quite in full gear yet, so things could change.

But, yes, to the best of our knowledge based on interviews that we have completed with CTOs, VP of network operators, interviews with third party research analysts and so forth, it appears to us that B pawn will deploy. Will not get bypassed by G pawn. In fact, will deploy. And G pawn will find favor in the next generation of deployments, particularly when ATM is not pervasive.

And so we're a carrier maybe deploying a Greenfield network. There's not a lot of legacy ATM infrastructure. We'd like to deliver, let's say triple play over VDSL. They may have a combination of G pawn, VDSL with a back haul, an optical back haul in a new neighborhood or a new development, if you will.

But those are going to be a lot more limited initially.

Longer term we expect that the fundamental attributes of G pawn are going to win out over B pawn. But that might be 3 years plus before it happens.

And so in a G pawn scenario, how do you view Mindspeed positions in terms of product portfolio going forward?

That gets into our longer term plans and I'd rather not get into those at this point in the game because they relate to plans that have not yet been publicly announced.

Understood.

But I think if you could look at our portfolio today and how we've positioned the business for metro, broadband access, and voice-over-IP type deployments you can see we're pretty well positioned as it is today.

And we'll absolutely benefit from either G pawn or B pawn.

Great. And just last question, I think you mentioned that some of the outside of China the inventory burn might be faster than expected as far as such the DSLAM business may start to recover in the March quarter.

Can you give us more color on that?

Yes, I'd be happy to. And that is in fact exactly what we said.

We said that in aggregate it appears inventories are burning off roughly with our expectations. And yes, what we see in China is that there was probably somewhat of an over deployment in calendar year 2004 in certain metro networks in DSL and in fact also in 2G wireless infrastructure.

And the market is in a mode of recovery from that over deployment and frankly the government has also inserted itself and there's some intervention that has put the brakes on in terms of infrastructure growth in China.

So the time to burn off of inventory in China may be slightly extended beyond what we thought.

However, elsewhere it looks like DSL inventory has pretty much played out from what we can tell at this point in the game. And it appears to us that in fact within this current quarter, the March ending quarter, that we would actually expect to see a pickup in orders for our DSLAM related products. Those include things like ATM solution, ATM sorry type products, OC3, OC12, segmentation reassembly processors. It would include some our ATM PHY, physical layer interface products, that again, are designed into some of the biggest DSLAM vendors worldwide.

And those products I think are quite representative of what's going on in the industry today.

Key customers for us in the DSLAM segment include Alcatel include Hauwei Technologies. We have product also at Siemens and other players that give us, and Lucent and others, that gives a pretty good perspective on what's going on there.

So do you see this deployment from an end-to-end consumption perspective, is that potentially driven by the U.S. RBOX? Or and also potentially the upgrade to ADSL2?

If you're talking about the DSL in particular, frankly we see continued growth in North America. It's probably not going to be quite the level of DSL subscriber growth we experienced at the beginning of the DSL cycle. But it will continue.

We're actually seeing that as continuing to be ATM based as opposed to IT DSLAM.

Okay.

So for the foreseeable future it's going to be ATM based.

Now, as you may be aware we're not a provider of ADSL transceivers. So I can't really comment as to whether ADSL1, 2, 2+ or any other flavor of DSL because we do not address that segment.

It's a mix, I believe, of all of the above from everything that we can tell. With plain old ADSL probably remaining the preponderance of port shipments.

But most importantly for us is that it's going to remain ATM based, ATM DSLAM based. We have a very strong presence in the traffic management and physical layer interface requirements or electronics for those DSLAMs.

We're seeing inventory burning off. We're seeing demand come back in North America as well as in fact in DSL specifically in other parts of the world beyond just North America.

Thanks, Raouf.

You're welcome.

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

Thank you.

Simon, could you just comment on ongoing plans for reductions in OpEx and where you see that floor from an out suit expense level and in what time frame please? And then I have one other question.

Yes. As it relates to that, Jeremy, absolutely no change from what we've previously communicated.

We hit the target OpEx number on a Pro Forma basis of $26 million in the September quarter. And it essentially steps down 29 million in the March quarter is the number we've given you today.

Right.

Twenty-seven and a half million in the June quarter, 26 million in the September quarter.

No changes there then, great.

No change to that plan, absolutely not.

Okay. Thank you.

Raouf, voice-over-IP, now that you're beginning to move on the enterprise voice-over-IP segments, would a longer-term projection of your opportunities in the overall voice-over-IP market, would you expect the bulk of your revenues, once things have become more normalized, to be in the service provider segment or in the enterprise segment? I mean, really asking kind of where do you think your biggest opportunity is from a revenue standpoint?

Certainly. I think generally the answer depends on whether you're looking at, let's say, the way the markets plays out over the course of the next 2 years or whether you go beyond that.

Certainly we would believe that over the course of the next 2 years, given our existing, very strong position with actual vendors who are deploying voice-over-IP in the carrier space specifically today, that we would in fact expect that the carrier segment over the course of the next 2 years will remain larger than the enterprise segment for Mindspeed specifically.

That just because we have such a very, very strong position and we have mentioned publicly and in fact have a press release indicating we believe our market share is approaching 50%, that's 5, 0. Fifty percent share in the carrier segment.

Carrier segment for us includes certainly PTTs in Europe, ILEX in North America and very importantly Cable MSOs as well whom we believe as was discussed earlier on this call, may in fact be more aggressive than the combination of PTT and ILEX worldwide in 2005 and 2006 specifically.

So just given what we are seeing in the carrier space at this time, as well as our continued market share capture within the carrier space specifically, we would expect that for at least the next 2 years, the carrier segment for us is going to be the larger of the 2 voice-over-IP segments.

That said, we have excellent, I underscore excellent, market traction in the enterprise marketplace for voice-over-IP and convergent networks. We have only been able to disclose a very select few of those customers.

We have discussed Avaya, we have mentioned Intertel, we've mentioned Samsung, Panasonic, Panacom, as just a few of the key customers that we're able to talk about who either have developed or are in the process of developing next generation low end key systems, converged voice-over-IP routers, as well as next gen IPBXs.

We've continued to gain, I guess I would say material market share in the enterprise segment with the Comcerto enterprise products.

I would expect longer term that we would see the enterprise voice-over-IP business of Mindspeed approach an equal size as the carrier business. But that would take more than 2 years just given the positive nature and the acceleration of the carrier business at this point in time.

Very good. Thank you very much.

You're welcome.

Okay. Our next question comes from Daniel Amir with WR Hambrecht.

Yes, thanks a lot guys. Most of my questions have been answered.

But I have a question on your T3/E3 line card business. I was just wondering about what the outlook you're seeing in that business and a bit about the competitive environment, considering this is one of your, I guess, newer products that is certainly gaining traction in the marketplace?

Yes, this is Raouf. I'd be happy to comment on that, Daniel.

So as we mentioned in our prepared comments, we have now completely filled out the full range of our line card-on-the-chip solutions, everything from single and dual ports at the low end all the way up to 12 port type solutions.

The product offering we have in this area we believe is pretty much unparalleled in the industry. We have, in fact, announced publicly that both Cisco Systems and Alcatel are at the point of deploying our line card-on-a-chip solutions in next generation metro infrastructure.

We have also captured a number of other design wins with those same products, some of which we're not at liberty to disclose at this point in the game.

To your question about the competitive dynamic, the competitive dynamic is, I guess I would say quite benign. We have key competitors include players, for instance, like XR Communications, TMTCR is obviously a top tier vendor of framers and there's several others as well.

But we believe our product offering is really, is unique, both in terms of performance integration, power dissipation, many other attributes.

Is real, is ramping today, and we're continuing to capture a lot of market share.

So we're quite pleased with the prospects for that line card-on-a-chip offering. And it's very much a component of our revenue ramp and our expectations of return to profitability within this fiscal year, in fact.

Okay. Thanks a lot.

Okay. You're welcome.

Okay. Our next question comes from Jeff Loff with Credit Suisse First Boston.

Just wanted to ask you guys about something you touched on earlier in terms of IP and ATM DSLAM.

They say that ATM is sticking around. I'm wondering what the current penetration is of IP DSLAM? Where you see that going? And then how your dollar content varies on those two types of technologies?

Certainly, Jeff. This is Raouf here.

Again, as you know, we're not a vendor of DSL transceivers. And therefore, we would not see that part of the content in the DSLAM.

But your first question first, the question about the penetration of IP DSLAMs over ATM DSLAMs. We believe IP DSLAMs are on their way. We are very familiar with the product development and the introduction plans of some of the top DSLAM vendors worldwide.

Again, we think IP DSLAMs are starting to become a reality.

But the preponderance of DSLAM deployments today on a global basis remains ATM based. Even in China where the ATM backbone is not as dominant as it is, let's say, in North America or parts of Europe.

Now we see IP in the long-term overtaking ATM.

But over the course of let's say calendar '05 and beyond it, the best view we have is that ATM based equipment will remain dominant.

Okay, and -

Go ahead.

On, no. You can finish.

I was going to get your second question. Your question was about our content in IP DSLAMs versus ATM based DSLAMs.

Basically our traffic managers address not just ATM functionality but also inter working with IP, as I mentioned in our prepared comments earlier today. So our network processors, our physical layer interface devices, and then obviously the integration of voice-over-IP and IP DSLAM are all very, very relevant to the IP space as well as the ATM space.

I can't comment beyond that and tell you exactly dollar content or specific design wins because we have not disclosed those publicly yet. But there's clearly an integration of triple play, voice, video, and data in broadband infrastructure. We address that very directly.

And clearly the traffic management problem also needs to be solved in the IP world as it does in the ATM world. And our network processors address IP as well ATM.

Great. On the line card-on-a-chip product, is that something where you took share from your customers or is it transitioning from a previous Mindspeed product?

In some cases it's a mix of both, Jeff, is the short answer. In some cases the customers were already using Mindspeed LIUs and had a different solution for the framer that got replaced with our integrated line card-on-a-chip. Multiplying our ASB on the line card by anywhere between 3X and 5X.

In other cases, customers were using somebody else's LIU and perhaps somebody else's yet a different vendor's framer that we were able to replace with a single line card-on-a- chip.

So we're very pleased with our share capture in that segment. And again, those products are proving to be very popular in getting widespread acceptance in the marketplace.

Great. And then just last question. Can you talk about whether you're seeing any changes in your customers' outlook or their behavior? Whether they're more cautious, more optimistic, the same?

Yes, I'll be happy to. I mean from the best of our perspectives at this point in the game from my interactions with the customers. Frankly, we're not seeing them turn negative or in any way more cautious than, say, they were last year.

They remain very focused on next generation technologies. As clearly there is a shift away from TDM infrastructure to IP based infrastructure.

So, for those vendors who have very large legacy business in the TDM space, they're applying and they're mastering virtually all of their resources and applying them to next generation IP based equipment so they can get on the bandwagon and help grow their business and defend the gains, the roll off of their TDM based legacy revenues.

In other cases where our customers are not big in TDM, frankly, they're in a very, very good spot to really benefit from those next generation rollouts.

So what we're finding is that our portfolio is well aligned with where our customers are going. And where their customers are also going at this point in the game.

Great. Thanks.

You're welcome.

At this time, we will conclude the question and answer portion of this conference. Mr. Biddiscombe, you may conclude.

Thank you, Adam.

That concludes our conference call 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.

Good-bye.