MACOM Technology Solutions Holdings Inc (MTSI) 2005 Q2 法說會逐字稿

Excuse me, everyone. Thank you for holding. 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 Simon Biddiscombe. Sir, you may begin.

Thank you, Adam. I would like to welcome everyone to our conference call discussing the results of our second quarter of fiscal 2005, which ended on April 1, 2005. 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 second 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 - excuse me - will include statements relating to our future results, including the financial outlook for our fiscal 2005 third quarter, our timeframe to pro forma operating breakeven 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 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 and special charges. We use the pro forma information to evaluate our operating performance and believe this presentation provides investors with additional insight into 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 that 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 website at www.mindspeed.com.

Turning now to our financial results for the second fiscal quarter of 2005. Today, we announced second quarter revenues of $26.6 million, up 1% from the prior quarter and in line with the flat-to-up 5% sequential revenue growth we expected at the beginning of the quarter. For the first time, our family of multiservice access voice-over-IP processors was the largest contributor to our quarterly revenues. VoIP products grew 35% sequentially to contribute 33% of total second quarter revenues. Our high-performance analog product family was the second largest revenue contributor, growing 11% sequentially to 26% of total revenues.

Our T/E carrier transmission products declined 27% from the prior quarter, contributing 23% of total second quarter revenues, primarily as a result of a slowdown in shipments of our legacy T1/E1 transmission devices. ATM/MPLS network processor products declined 6% to contribute the remaining 18% of quarterly revenues. Raouf will discuss the near-term dynamics for these products in his remarks and their impact on our timeframe to pro forma update in breakeven.

In terms of revenue contribution by geography, the Asia Pacific region contributed 51%, the Americas 38% and Europe contributed 11%. Cisco Systems was our only greater than 10% end customer this past quarter, including both direct sales and indirect sales through third parties. Gross margin was $18.3 million or 69% of revenues, in line with our expectations at the beginning of the quarter. This included a 13 percentage point benefit from the sale of products written off in fiscal 2001.

The underlying gross margin for the business, excluding the effect of the written-off inventory, was 56%. However, as in prior quarters, the underlying gross margin was distorted by six percentage points from product written off in 2001, which was sold significantly less than its historic cost.

For a direct apples-to-apples comparison to prior quarters, the underlying gross margin was 61%. This was lower than the normal 65%, which we expect to return to this quarter, as a result of the negative impact of under absorbed manufacturing overhead rolling forward from the December quarter. Pro forma operating expenses were $29 million, down 4% from the prior quarter, as we continued to benefit from our previously announced restructuring actions. As a result, our pro forma operating loss was $10.7 million, an improvement of 10% over the prior quarter's pro forma operating loss of $11.9 million.

Other income and expenses and the provision for income taxes, in the aggregate, resulted in a net charge of approximately $200,000. As a result, our pro forma net loss improved 12% over the prior quarter to $10.9 million or $0.11 per share, based on approximately 102.1 million average shares outstanding for the quarter. The total number of shares outstanding at the end of the quarter was approximately 102.8 million.

Turning now to the balance sheet. Cash, cash equivalents and marketable securities decreased $6.8 million from the prior quarter and totaled $72.1 million at the end of March, including $1.7 million reflected in other assets. We reduced our cash consumption, which we define as the net decrease in cash and cash equivalents, excluding cash flows from the offering of our convertible senior notes and the purchases of marketable securities by 20% to $6.7 million from last quarter's $8.4 million, exceeding our expectations at the beginning of the quarter.

Capital expenditures were approximately $1.7 million and depreciation was $2.4 million. We continued to make good progress on improving our working capital. Receivables were $13.5 million, resulting in net DSOs of 46 days, 10 days lower than the prior quarter. Inventories were $10 million, up from $9.3 million at the end of the prior quarter. Inventory turns were relatively consistent with the prior quarter at 3.3 turns.

Gross inventory, including amounts previously written off totaled approximately $59.8 million at the end of the quarter. Total current liabilities were $29.1 million, up approximately $500,000 from the prior quarter, principally driven by a $3.7 million increase in accounts payable, offset by a $2.1 million decrease in payroll accruals.

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

Thank you, Simon. We met our revenue expectations for our second fiscal quarter, achieving a modest sequential increase, despite a significant slowdown, primarily in shipments of our legacy T1/E1 transmission products, which I will discuss later in my comments. That said, I'm very pleased with the continued strong growth of our voice-over-IP and high-performance analog product families as well as our improved financial performance on a number of key metrics, including a reduction of cash consumption by 20% and a further reduction of our pro forma operating loss by 10%.

Our design win traction was particularly strong this past quarter with total design wins more than doubling sequentially in what is a seasonally slow quarter for the industry. We also continued to diversify outside our traditional wireline markets across our broad product portfolio. For example, this past quarter, we tripled our design wins in wireless applications at top-tier focus customers compared to the same period last year.

I would now like discuss each of our four key product families in more detail. Starting with our multiservice access voice-over-IP products, our intense focus on this market for the past several years continued to produce strong results during the quarter as we grew revenues in this strategic segment by 35% sequentially, after growing 30% in the prior quarter. Revenues from our enterprise compared to voice-over-IP processors grew more than 150% as we ramped shipments of these devices to key customers including Nokia, Panasonic, Intertel and others.

Over the past four quarters, revenues from our voice-over-IP product family have grown in access of 80% compared to the prior four quarters. In fact, our voice-over-IP product portfolio now represents our largest revenue contributor. We more than tripled total voice-over-IP design wins compared to the prior quarter, capturing sockets in a diverse mix of carrier and enterprise equipments, demonstrating the unique competitive differentiation of our software-intensive system-on-a-chip voice-over-IP solutions and our continued share capture in this exciting market.

Specifically this past quarter, we captured carrier design wins at Lucent, at Alcatel, at Huawei, UTStarcom, ZTE, Paradyne, Atran, FiberHome and others, particularly, for next generation broadband network edge platforms. Enterprise design wins included Ericsson, Samsung, Siemens as well as many others, for a variety of IP PBX and converged voice-over-IP enterprise routers. During the quarter, we announced that Harbour Networks is shipping our Comcerto processors across Harbour's entire family of access as well as trunking gateways, including its Softco Series and IONE Series systems.

Harbour is a leading provider of next-generation voice and data networking equipment throughout the Asia Pacific region and is deploying Comcerto voice-over-IP processor based gateways at large service providers in China, including China Telecom and China Netcom, as well as in Japan and other countries.

Mindspeed's Comcerto voice-over-IP processors combine high performance, digital signal processing, or DSP cores and an embedded packet-processing engine with industry streaming packet interfaces to provide a high density, voice-over-IP system-on-a-chip. Comcerto processors offer communication equipment manufacturers, a software-based and feature-rich solution for designing systems capable of transporting carrier-class packetized voice across wireless, wireline and enterprise networks.

Three weeks ago, we announced a suite of voice-over-IP over cable software which, combined with the Comcerto Series processors offers the industry's most highly optimized family of semiconductor and software solutions for implementing cable labs, packet cable initiative for advanced real time digital and multimedia services over the two-way cable plant.

Built on the industry's cable modem infrastructure, packet cable and packet cable multimedia networks use IP technology to enable a wide range of multimedia services such as IP telephony, multimedia conferencing, interactive gaming and general multimedia applications. Mindspeed is an active member of the CableLabs PacketCable Initiative and our Comcerto processor family offers fully-optimized solutions that cable MSOs can use to deploy high quality, low latency, voice-over-IP services within their cable plants.

According to the market research company, Infonetics Research, the number of cable voice-over-IP subscribers in North America jumped 900% between 2003 and 2004, with cable companies nearly doubling their spending on voice-over-IP equipment to keep up with surging subscriber growth. For example, Comcast, Cox, Charter, Time Warner and Adelphia have all announced aggressive voice-over-IP rollout plans. In total, the number of cable voice-over-IP subscribers in North America is expected to reach between 2 and 3 million by the end of this year. And by 2007, 80% of North American households will have access to voice-over-IP services from a cable MSO.

Cablevision already has more than 400,000 subscribers for its voice-over-IP service today and Time Warner reports adding 12,000 voice-over-IP subscribers per week. Based upon our leading market position today, we expect systems based on our Comcerto voice processors to capture the majority of new voice-over-IP over cable deployments. In fact, our Comcerto voice-over-IP over cable customers are an early equipment deployments with leading MSOs including Cablevision and Comcast in North America as well as several others.

Now turning to our high-performance analog portfolio. Revenues were up 11% sequentially after growing 15% over the prior quarter, primarily driven by shipments of optical PMDs or PON-based fiber-to-the-premise deployments as well as SerDes transceivers for metro optical deployments and initial shipments of our broadcast video solutions for high-definition TV infrastructure. Fiber-to-the-premise networks continue to expand worldwide, particularly in Japan, where we believe that our share of optical PMDs in that rapidly growing market is now in access of 70%.

Additionally, we believe Mindspeed is well positioned to benefit as carriers in North America move beyond current field trials into full-scale deployment to satisfy consumer demand for triple-play data, voice and video services. In our broadcast video products, we doubled revenue over the prior quarter as we began initial shipment ramps to key customers. During the quarter, we captured 25 new design wins with our video infrastructure solutions in standard as well as high-definition TV in studio, broadcast and distribution video applications, including a number of key top-tier OEMs worldwide.

We won additional high-performance analog designs this past quarter across multiple markets, including fiber-to-the-premise, telecom and datacom, with customers such as Lucent, Infineon, Fujitsu, Fiberjon (ph), WTD, Opnix and others as well as scoring multiple wins at each of Alcatel, Nortel, NEC, Hitachi, Delta and Photon.

On April 4, we further expanded our family of high-performance crosspoint switches with the introduction of two low-power, high-performance, 8.2 gigabit per second devices with integrated input equalization and built-in system test features that help simplify system design. These 34 by 34 and 17 by 17 crosspoint switches are targeted for applications ranging from redundancy and backplane switching in telecom, datacom, storage and networking equipment as well as switching for broadcast video applications.

Now turning to our T/E carrier portfolio. Revenues declined 27% sequentially, driven by a significant slowdown in our legacy T1/E1 transmission products more than offset growth in both our T3/E3 and SONET product lines.

We believe this revenue of decline is temporary in nature and not a fundamental weakening of our serve markets or reflective of share loss. We continued to win new designs this past quarter, across a broad range of TE, transmission and SONET solutions, including new wins at Lucent, Nokia, Samsung, UTStarcom, Tellabs and LGE, as well as multiple wins at Siemens, Huawei and Juniper Networks for use in applications such as multiservice, optical transport platforms, routers and wireless base stations.

We also won numerous designs for our highly integrated next generation family of T3/E3 Line Card on a Chip solutions with Nortel, with Lucent and Huawei. We are particularly pleased to have achieved multiple design wins with Alcatel for a variety of our transmission products for deployment in SBC's Project Lightspeed fiber-to-the-curb network rollout.

Finally, in our ATM/MPLS network process portfolio, revenues declined 6%. However, we are pleased with the continued market traction of our family of next generation TSP3 traffic management solutions. A key growth market for our highly programmable network processors beyond traditional ATM processing is channel aggregation and traffic management and voice-over packet networks. We are increasingly focusing our network processors from delivering complete voice-over packet line card solutions, combining both our TSP3 and Comcerto voice-over-IP processors.

In addition, we are continuing to capture network processor designs in systems bridging legacy ATM and next generation IP networks. Particularly in access edge applications such as routers, DSLAMs and wireless uplinks. This past quarter, we won designs for wireline and wireless applications with Cisco, Marconi, Alcatel and the Huawei 3Com joint venture in China.

In conclusion, while we are disappointed by the weak trends we experienced in certain of our legacy communication products this past quarter, we are pleased overall with the continued strong growth of our voice-over-IP and high-performance analog product families and their excellent positions in the markets they serve as well as our continued progress in reducing our operating loss and our cash consumption.

We remain confident in the long-term growth of network infrastructure market and, in particular, our ability to gain a disproportionate share in specific high-growth segments. However, as a result of continued poor visibility coupled with an overall weaker near-term outlook primarily for certain of our legacy communication products, we now anticipate reaching our pro forma operating breakeven performance of $37 million in quarterly revenues in the first half of calendar 2006. This perspective is predicated primarily upon continued growth of our voice-over-IP and high-performance analog product families.

And now turning to our expectations for our current third fiscal quarter. We expect our third quarter revenues to be approximately 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 $27.5 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 15%.

That concludes our formal comments today.

Operator, let's please open the lines for questions.

Certainly.

(Operator Instructions)

Our first comes from Jeremy Bunting.

Hi. Thank you very much. Could you just tell us on what you - what visibility that you had into the, kind of your TE business? Is that something that just happened (ph) suddenly? And the third part of the question is - is it geographic specific? And I'd like to also ask, with your new set expectations for breakeven, what are your - what is your anticipated net cash balance at that time? Thank you.

Certainly. Jeremy, this is Raouf. Okay. The weakness in our T1/E1 product line came late in the quarter. It was somewhat surprising and it particularly was somewhat lumpy. While it's very difficult to say with certainty, we really don't believe there's any fundamental weakening in the end markets that our transmission products are serving. And we are quite sure it was not reflective of share loss.

We think, frankly, towards the end of the quarter, certain of our customers decided to engage in even tighter inventory management, trying to move to more of what I would call a just-in-time ordering process. And that compounded the typical first quarter seasonality.

But again, I guess I would say that, to the best of our understanding right now, there's no fundamental weakening. It's a combination of typical seasonality, aggravated, if you will, or compounded by much tighter inventory management by specific customers. I would also note that, within the same product category, namely our transmission solutions, T3/E3 and SONET both grew sequentially at a double-digit rate. And so, this was largely confined to T1/E1, specifically, and was late in the quarter.

Now, you question about whether it was geographical. The short answer to that is no. There was weakness, both in North America and Asia – and APAC, or Asia Pacific. Not much of this was Europe or EMEA-based. It was largely North America and APAC. And I'm sorry, you had one more question here at the end.

Yes, the other question, it was related specifically to cash and I'll take that, please. This is Simon. So, at the end of the most recent quarter, we had just over 72 million of total cash available and last quarter's cash boom was about $6.7 million.

Clearly, we expect to see growth from the business over the next handful of quarters and we expect the cash consumption to be reduced on a quarter-to-quarter basis. There will obviously be some puts and takes around financing items such as paying the interest on the convert and so on. But it's our expectation we're going to continue to reduce the cash consumption as we move forward, except for those items that are going to occur every couple of quarters.

Okay. Thank you very much, gentlemen.

Okay. Our next question comes from Arnab Chanda with Lehman Brothers.

Hi, guys. This is Ken (ph) for Arnab. I had a question on your voice-over-IP business in terms of geography. Did you guys see any kind of irregularity in growth in terms of geography?

Okay. So, the short answer to your question is no. Our customers, globally, are shipping into networks that are, we believe, just starting the deployment or significant deployment of voice-over-IP across multiple geographies. We clearly see adoption of voice-over-IP over cable networks in North America ramping and ramping very strongly.

In addition, there's gradual acceptance of voice-over-IP in Europe. But perhaps some of the most exciting and high-growth geographies or countries, if you will, are in Asia. And in particular, that includes Japan and then China, to a lesser extent. So, we see that there's a global phenomena. We didn't really experience any "irregularities" during the quarter. We're very excited by the global acceptance of this technology at this point.

Okay. And just kind of a housekeeping question for Simon. Can you explain the gross margin thing about the written-off inventory and how you get to the 61%?

Sure. So, the reported margin, Ken, is 69%. We enjoy a benefit from product that we wrote off in 2001. And that's actually fully broken out in the press release at the bottom of the pro forma statement of operations - all of the detail for all of the quarters is there.

So, it's, actually, it shows you that we enjoyed a benefit for the cost line of approximately $3.4 million in the March quarter. If you add that 3.4 million back to the cost, you would have ended up with a margin of 56%. But there's a piece of that that we continue to sell for below its historic cost. If you exclude both the revenue and the cost associated with that transaction, you end up at the 61% I talked about.

Okay. Thank you very much.

Okay. Next, we have Charlie Glavin with Needham & Company.

Thanks, Simon. I think you answered the written down. But if you can give a little more clarity and if you were to take a look at what the organic gross margins would be. So, it sounds as if you've had the benefit of some previously written off, but some of it was selling below historical ...

Yes.

... what would be more of an ongoing rate?

I think if you look at that 65% number, Charlie, that we've communicated for the last couple of years in reality, we would expect to be at that number in the June quarter. So, as we sit here today, the expectation is that the adjusted underlying gross margin's going to be right around the 65% number again. But then, obviously, the guidance for the actually gross margin is 69% again.

It would be, but in terms of when you get to the, sort of, 37 million level, how should we look at that organic gross margins, given that, I would imagine some of this would be a little bit of a rebound in the legacy T1/E1s, which would suppress the margins somewhat. Counteracted by some of the voice-over-IP, can you give a little more update as far as what that margin may be?

We're not changing any of the margin perspectives that we've offered in the past, Charlie. So, the expectation is that, at the time we achieved that $37 million of revenue that results in pro forma operating breakeven, that the gross margin is going to be right at that 70%, 69-70% number, 70% is specifically what we've communicated in the past.

But there's no change to the expectation of that and A) we think that the phenomena that we saw in T1/E1, which is typically a lower margin business anyway, is not fundamental and we'll come back and B) the positions and the growth that we expect to see in the voice-over-IP business were well understood when we gave the $37 million guidance originally. So, we don't have any fundamental change to our expectation around gross margin as a result of what we're seeing today.

Simon, just to be clear, I wanted to make sure that 69, 70 did include that you would still have the benefit of ...

Absolutely. It does include a benefit, Charlie, yes.

But the organics itself, even right now you don't see any fundamental difference in that organic.

We see essentially flat gross margins across the product (inaudible).

Okay. And then, in terms of kind of the pushback on the breakeven, but you mentioned in terms of some of the opportunities. Japan first versus China. That's a little bit of a different - the last few times we've seen large increases in worldwide fuel costs, China, in particular, has slowed down. It's been - do you attribute any of this? Are you seeing, not so much cancellations, but just kind of lackluster reorders coming out of China, even though it's a large, long-term growth? And is that the biggest reason for the pushback?

No, not really, Charlie. I mean, I think - let me answer your first question first, which was around China, very specifically. I'll give you our prospectus around China at this time. First of all, our revenues from China this past quarter were roughly flat, with the prior quarter meaning Q1. And it is our belief that our revenues from China will be roughly flattish, with no significant uptick at this point in time. And that was our expectation at the beginning of this quarter. And pretty much, that's the way it played out.

What we are seeing in China right now is somewhat of a mixed situation. We are seeing an acceleration of DSLAM-related demand. We experienced that, in fact, in the March quarter. That was an upside to our expectations as well as broader voice-over-IP adoption within China and, obviously, in Japan, as well. As well as some, to a lesser extent, some renewed SONET demand, particularly at OC3, OC12 types of rates. Added to that is a hope, I guess I would say, though unsubstantiated at this point of the game that 3G could actually start happening in China sometime the second half of this year, although we haven't seen official confirmation of any licenses being issued yet.

So, as far as China, specifically, is concerned, again, it's a mix of things going well and things - and a bunch of other things that are not necessarily going that well. The weakness we experienced was really more product-line related and as we commented earlier, was largely in T1/E1 very specifically. And we think that that was very aggressive inventory management by certain of our customers who were working in turn with their contract manufacturers to really try to work down very aggressively, the level of product carried throughout the channel. So, that's really - it's not fundamental. It's primarily aggressive inventory management.

Raouf, could you go into a little more detail on that because, historically, T1/E1, if I'm not mistaken, within China, has not been a standalone deployment use, particularly in some of the greenfields, but rather used as more of an integrated, which kind of leads to a second question. It seems as if Comcerto has gotten a lot of good designs, but it's actually fueling a lot of the, peripherally, some of the other product lines as well. Could you comment on both of those?

Yes, I mean, we've - T1/E1 is a technology that is widely adopted in a very broad range of both enterprise and carrier platforms, worldwide, including China. And we've had, as you know, we've had a very diverse presence across the world with our carrier transmission products for a long, long time. In China, specifically, yes, we're seeing a lot of voice-over-IP fuel a lot of growth for other components.

Frankly, we see more the OC3, OC12 and, in some cases, our T3/E3 Line Cards on a Chip as being kitted (ph), if you will, in some cases, or combined as reference designs with our Comcerto voice-over-IP processors. So clearly, we're leading with our strength, as we alluded to, in the voice-over-IP area, specifically to pull through a lot of our other communication products, such as the ones I mentioned and, in fact, also, some of our network processors, as I mentioned in my prepared comments.

So, T1/E1 - the weakness of T1/E1 is really more in the legacy type applications where, again, customers have been - it's a combination of seasonality and customers basically working down inventory. We don't believe it's fundamental and we certainly don't believe it's reflective of any share loss.

And last question, in regards to - actually, let me pass it on and I'll come back, Raouf. I'm sorry I've taken up too much time.

No problem.

Okay. Our next question comes from Jim Liang with CG Cowen.

Yes, thank you. Raouf, can you give us a little more color on - within voice-over-IP, what kind of relative size that you currently have between enterprise carrier and cable applications?

Okay. That's an excellent question, Jim. I don't actually have the breakout right now between cable and traditional ILEC or wireline. I would tell you, first of all, that the enterprise is still a fairly small segment. So, on the order of some hundreds of thousands of dollars a quarter, as I mentioned in my prepared comments earlier, the enterprise voice-over-IP business grew more than 150% sequentially in the March quarter over the December quarter. But we're still talking about absolute numbers that are relatively small compared to our carrier business. Those products, of course, have been around for much longer than the enterprise products have been and are very widely adopted and continue to ramp and carry the networks worldwide.

As relates to your question around cable, specifically, versus the balance of our carrier voice-over-IP deployments. It is predominantly non-cable, at this point in the game, although we are experiencing some very, very healthy growth and rates of adoption of our voice-over-IP product within the cable universe. Particularly last quarter, that was very encouraging for us. Unfortunately, I don't have the exact percentage breakdown for you. I would say it's still a small fraction. We expect very good things to come from that particular segment of voice-over-IP universe.

So, by the end of this year, what is your sense of the relative split between the three segments?

Okay. I think what's going to play out is going to be, roughly speaking, predominantly traditional - ILEC, PTT, voice-over-IP deployments. That's going to be, probably, the largest - continue to be the larger segment. That would include people like SBC, Bell South, Qwest, in the U.S., as well as the next gen - second wave CLECs people like Vonage and so forth. British Telecom in Europe, China Unicom telecom and so forth.

And then, I think the second largest segment, just based on the rate of adoption and grant of our products and what we're seeing in terms of active deployments today, is going to be the cable MSO space. And that would be carriers, as I mentioned earlier, MSO is like Comcast, CableVision, Shaw Communications in Canada, a whole bunch of other guys as well.

And thirdly would be the enterprise. The enterprise is growing very rapidly for us, but you have to understand that, even in the enterprise, our customers do go through some level of qualifications cycled by their customers. Before they can get their next gen, voice-enabled-routers and IP PBXes and so forth into full production. So, we are very encouraged by the rate of growth. But even, by the end of this year, even then I think enterprise will still be the third largest of the three segments that you asked about.

So, when do you expect those, sort of the cable infrastructure deployment to, let's say, accelerate, and when do you see that potentially peak out?

Well, it is accelerating and we expect it to become quite material for us, a buyer before the end of this calendar year. In '06, we are particularly excited about this segment in '06. A number of segments, frankly, of the voice-over-IP market, that are very exciting to us. And generally speaking, we view that as the broadband network edge that includes, certainly, first and foremost, adoption of voice-over-IP and cable networks. It also includes converged DSLAMs and DOCs - visual loop carrier equipment. That clearly will be deployed quite aggressively by ILECs and PTTs as well as people like British Telecom worldwide. So, those are the two particularly exciting segments.

And then thirdly, traditional voice trunking. So, when do we expect this to gear up? I mean, it is ramping right now. I gave a couple of data points in my prepared comments about Time Warner and the ramp that they're experiencing. They're adding - they've announced over 12,000 subscribers per week right now. But I think it really gets - it starts to accelerate more strongly in the second half of this year and we think next year is going to be a big year for the broadband edge. Okay?

Great. And also, a question regarding the outlook for the June quarter. Is it correct to assume the slowdown in Q1 in E1, was more of a temporary Q1 - or the March quarter phenomena. As such, the TE business could sort of recover somewhat into the June quarter. And within - in that respect, there's a reflect (ph) up 5%. How should we kind of locate the individual business segments, how they will grow in that context?

So, Jim, this is Simon.

Yes.

I think it's - we don't, as you know, give guidance by product family. But specifically, as it related to the T1/E1 piece of the equation that we experienced, both in the March quarter and as we look forward, as well, to be fair, clearly what we said was that what we saw was, we believe, very tight inventory management, some seasonality and, frankly, we do expect the TE business to deliver growth this quarter over what it was last quarter. So, without wishing to give you all the pieces for each of the business units, I will tell you we do expect the TE business to grow this quarter.

Great. Thank you very much.

Okay.

Thank you. Next, we have Daniel Amir with WR Hambrecht.

Thanks a lot. Firstly, just a housekeeping question. Did you say the breakeven in calendar - first half calendar year ’06 or first year fiscal year ’06.

We said first half calendar '06, Daniel.

Okay. Calendar. Now, at that time, what do you expect or what do you think that your voice-over-IP will be as part of your revenues, considering your strong quarter this quarter, but that part of it is due to the T&E slowdown? What is your outlook, if we look at year from now?

So, once again, as I answered to Jim. We're not going to provide guidance by product family. Suffice it to say that, in our minds, there's absolutely no doubt that the principal parts of the growth that we expect to see from the business are going to come from both the voice-over-IP and the high-performance analog product segments. And beyond the ongoing ramps that we're experiencing in both of those markets, there are new products that continue to come to market and design wins that have been secured over the course of the last year that will continue to contribute as we look later into 2005 and then into 2006.

So, beyond the overall market expansion that we're seeing, for example, within voice-over-IP, you would point to the continued growth of the enterprise products. Within the analog product family, obviously, we've got video infrastructure, which today is contributing very little, but expect it to continue to grow to very meaningful dollars as we move through 2005 and 2006. So clearly, we expect the principal drivers for the growth to be the high-growth product families we've been talking about for an extended period.

All right. I have a follow-up question. Can you comment a bit about - you mentioned a bit about your laser drives and preempts for the ATTV (ph) market. Can you comment kind of where it is now? You start shipping, what is kind of your - the market traction that you're getting currently with those products?

Yes, Daniel. This is Raouf. Let me take that question. These broadcast video infrastructure products are products that are just starting to ramp as we speak. I noted in my comments that the revenue from those products doubled this prior quarter over the quarter before, as we started initial ramps with key customers. We have announced in the past that we have scored wins with players like Thompson Multimedia, Leech Technologies (ph) and others.

This past quarter was actually a very big quarter for us in terms of design wins in that space. Without naming all the different customers, we did mention that we have captured 25 new design wins with that particular product family in both standard and HDTV, including a number of very big name players worldwide. So, that product family is continuing to ramp for us. It's very consistent with our business model. High complexity, high performance, mixed signal products that deliver a gross margin also very consistent with our long-term business model. So, we're actually very excited about these products as they start to go to production with key players.

All right. Thanks.

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

Thanks. Good afternoon, guys.

Hi.

Just on a couple last minute kind of items here. When you look at sort of your push in the '06 or push into '06 to breakeven, maybe if you could swag for us kind of what of that is maybe a change in the markets or market dynamics slowing or changes in flavor and then whether that would be coming from some of your product offerings. Just kind of handicapping where you guys, where the change and sort of the growth view came from.

So, let me just make sure I understand your question, Sandy. You're trying to - you're asking us to kind of handicap how much of this push is related to fundamental - market fundamentals versus specific product push and pull drivers?

Exactly. Just trying to get your view, get your guys’ 60,000-foot view of how you see the market right now.

Right. So, I'll tell you how we see the market right now. Frankly, we don't really see this as being a fundamental type of issue. We don't really see anything that concerns us from, let's say, a capital expenditure perspective, globally, that would cause us to believe that the fundamentals are, in any way, deteriorating. For example, we feel that there's, essentially, the CapEx within Asia is roughly flattish. And in fact, within Asia, we think that there is very - there are very healthy trends, in Japan, specifically. We think China, while it's somewhat mixed, as I commented earlier, there are still some particular segments that are actually quite exciting, like DSL and, again, voice-over-IP.

But we don't see much change in Europe and we, based on our prior expectations. And North America is overall flattish, I guess I would say. There is certainly some tightening of the belt, we believe, around legacy communication markets. But we also think that there is significant increase in CapEx being allocated towards next gen technologies, like voice, obviously, packetized voice, metro optical and fiber-to-the-node and so forth. So, in a nutshell, Sandy, we don't really see any particular fundamental weakness in the markets that we serve, whether it's by technology, by product line or by geography.

What we are seeing, however, is increased - I'm searching for the right word here, but sort of - much more aggressive inventory management by certain of our customers, which, obviously, we wish they had exercised much earlier, that is causing certain weakness in some of our legacy product lines, as we commented. So, it's unfortunate that it comes right now when we are a couple of quarters, within a couple of quarters of our target breakeven timeframe. So, it does not come at a good time. But that's basically what we see here. And as the question was asked earlier, do we expect the T1/E1 products, particularly transmission, to come back? The short answer is absolutely yes. But that particular phenomena has dug a hole in our roadmap, if you will, which will push out our time to breakeven and that's all it is, really.

And just to kind of build on that explanation, when you guys look at the second - could you then, based upon that, could you guys then expect to see an acceleration in revenue growth in the September - realizing you guys don't give guidance outside of the forward quarter, but could you expect then or would it be reasonable to expect that you could see an acceleration in growth rates in the September and December quarter? If customers start to see some tightening or see an accelerating in business and they're not going to manage their inventories as tightly?

Yes, absolutely, Sandy. That would be entirely possible. As you said, it's hard to predict two quarters out, particularly given the poor visibility the space is experiencing. But yes, I mean, certainly. We have models internally that would predict that being a possibility, a distinct possibility, I would say. But it's awfully hard to say. Part of it's going to be the inventory flush, which we - from everything we can tell is now complete. So, part of it's going to be associated with that. Part of it's going to be - if you have an over correction associated with particular customers over tightening their supply chain.

Another part of it will be continued growth as we expect in certain of our focus platforms, again VoIP and analog. And then, obviously, adding to that would be continued ramp of new products. So, things like video, as I mentioned earlier, enterprise voice-over-IP and so forth. So, yes, there are certainly scenarios that have a distinct probability of that happening in the fourth fiscal quarter.

And then just to kind of close on that, the guidance of flat to up 5% in recognizing you guys, your relatively conservative nature and sort of the way you give an outlook. But what could we watch, from a macro perspective, or what would we be watching, from a macro perspective, to understand whether you'd come into a flat or an up 5%. Would it be an increase in overall turns? Would it be a project you guys are expecting to see ramped that could go either way? Just kind of some data points we can be looking at, from a macro view, as to what might drive either the low end or the high end.

So, as - this is Simon, Sandy - so, as last quarter, the total magnitude of the dollars we would be talking about here is somewhere in the $1.5 million range between delivering a flat scenario and delivering an up 5% scenario.

Sure.

So clearly, there are expectations around terms that could impact that. There are expectations around specific projects that can impact it, both positively, primarily. Very little negative impact associated with those. One thing that we continue to scratch our head on is North American carrier consolidation and whether there may be any negative impact as a result of that. We don't think that's the case, at this point in time. But clearly, we're talking about a total of $1.5 million of variation between the base case at flat and 5%.

Good point. Thanks, guys.

Our next question comes from Chris Dzurinko with American Technology Research.

Thanks, guys. Sorry if I missed this. Can you give any commentary on how this quarter, the first few weeks have tracked versus the way you exited the March quarter?

Sure. You - nobody else has asked that, Chris. First three weeks of April have been relatively strong. They certainly tracked, from a bookings perspective, better than we were seeing in the March month. So, the first three weeks of April have been pretty good.

Great. And then, you talked about inventory management and customers for the T1/E1 space. Can you talk at all or give any color about what you're seeing from inventory in the channel? In some of your other segments, obviously, VoIP is probably okay, but in some of the other, either T/E or SONET basis?

Yes, Chris, this is Simon again. We think that the inventory issue is essentially behind us. Okay? We don't think that, as of the end of March, there was really anything substantial left of the inventory that built up through the September quarter. And we clearly don't think there's been any significant build of inventory subsequent to that. So, our expectation, as we sit here today, is that most of the inventory problems that exist in the channel over the course of the last couple of quarters, have essentially resolved themselves.

Okay. Thanks, guys.

Okay. Next, we have Carter Driscoll with IRG Research.

Hey, guys. This is Jim for Carter. Just two quick questions. Most of my stuff has been answered. First, can you give us just some color - more update on the restructuring program. How much headcount has been terminated, what kind of projects have been cancelled, that kind of stuff?

Sure. So, in terms of where we are from a headcount perspective, where we are from the cost reduction, just to remind you the total project, essentially, took the operating expenses down from a little over $31 million in the September quarter and they will bottom out at $26 million in the September quarter of 2005. The expectation for this quarter is that we will be at $27.5 million worth of operating expenses. And most of the headcount activities have been completed. As we stand here today, we're at roughly 550 heads and the expectation was that we'd be at roughly 535, once we'd completed all of those restructuring activities.

And as you know, the activities that were - the restructuring activities, were principally targeted at the ATM/MPLS network processor business, where we essentially curtailed silicon development, but left in place a software development organization that would be able to support customers, based on the existing silicon moving forward. So, we are substantially done with the cost reductions at this point in time and we would expect to see the full benefit in the September quarter.

Great. Also, just - could you give us some color on just the overall enterprise environment? You talked a lot about carrier today. Can you just kind of give us a sense of where the slowdown in enterprise has been? Has it been T/E carrier, ATM, frame relay? Where has it been?

Yes, this is Raouf. I don't believe we characterized any softness that we have seen as being in the enterprise. We talked, obviously, about the T1/E1 product line in general. Some of that's enterprise, some of that's carrier. We are not seeing any particular softening within the enterprise universe at all. We see it as being largely up a little bit and, in particular, in our serve categories, some of the storage markets, but also particularly voice-over-IP will converge small office, branch office applications as well as IP PBXs. Those markets are actually quite hot and ramping very nicely. So, no, we don't really see any particular softness in the enterprise whatsoever.

Well, that's it. Thanks, guys.

Okay. I think we have time for one more question.

Thank you. Our next question will come from Lawrence Borgman with EKN.

Yes. Can you just separate out the T1 from the T3 in terms of what proportion of that segment each is and the - you mentioned that some of your customers were very aggressive in their inventory reduction. Can you characterize what those - who those customers were or where they were located?

Okay. This is Raouf. Let me take the first part of your question and have Simon also address it, if you like. But, I mean, first and foremost, I guess I would say, within the overall transmission segment, at this time, exiting the March quarter, our T3/E3 business is larger than our T1/E1 business at this time. And there may not - it may not remain that way, depending on, perhaps, how T1/E1 might rebound. But I would point to the fact that our T3/E3 product line very specifically grew sequentially in the double-digit range. And so did our SONET carrier transmission products. We don't actually break those out in specifics and give the exact dollars because they tend to move around a little bit, quarter to quarter.

That said, certainly, the T3 and the SONET categories have continued to grow sequentially very nicely for us. So, that's what we see in the transmission area. Now, as far as ...

As it related specifically to customers, we don't break out that information, Lawrence, principally because it gives us tremendous concern as it relates to customer communication. But really what we saw was the T1/E1 affect on a global basis.

On a global basis, not just China.

Not just China.

Okay.

Absolutely not just China.

Thank you.

Okay.

Mr. Borgman was our final question.

Thank you. 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.

Thank you.