MACOM Technology Solutions Holdings Inc (MTSI) 2005 Q4 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.

[Operator Instructions].

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

Thank you, Katina. I would like to welcome everyone to our conference call discussing the results of our fourth quarter of fiscal 2005, which ended on September 30, 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 fourth quarter results and the outlook for our 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 the financial outlook for our fiscal 2006 first 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 pro forma operating break even performance, market conditions and traction, ability to maintain market position, demand, growth prospects for our product families, development efforts, revenue drivers, backlog, competition, network deployments, and our ability to benefit from them, particularly growth in the voice-over IP deployments, our ability to increase penetration of the cable infrastructure market, the quantity, quality, and diversity of design-wins, and expectations for fiscal 2006, our current first fiscal quarter and the first half of calendar 2006.

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 for fiscal 2004 and other SEC filings.

Consistent with prior quarters, I would like also to remind everyone that certain of the operating results, we will discuss today are from the pro forma income statement before amortization of intangible assets and special charges. We us the pro forma information to evaluate our operating performance and believe this presentation provides investors with additional insight into underlying operating results, (indiscernible) 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 than 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 fourth fiscal quarter of 2005.

Today, we announced fourth quarter revenues of $31.1 million, up 12% from the prior quarter, achieving the high end of our revised 8 to 12% sequential revenue growth outlook we announced on September 13, compared to the 5 to 10% increase that we anticipated when we released our third quarter financial results on July 25, 2005. Revenues from our family of multi-service access voice-over IP processes were down 1% sequentially, contributing 28% of total fourth quarter revenues.

Revenues from our high performance analog product family were up 3%, representing 23% of the total. As we indicated on our earnings call last quarter, we have combined the GE carrier transmission devices and ATM/MPLS network processor products for reporting purposes into what we call our WAN communications products. Revenue from those products increased 27% sequentially, to contribute the remaining 49% of revenues in the fourth quarter.

In terms of revenue contribution by geography, the Asia Pacific region contributed 43%, the Americas 41%, and Europe contributed 16%. Cisco and Nortel were our only greater than 10% end customers this past quarter, including both direct sales and indirect sales through third parties. Gross margin was $21.9 million, or 70% of revenues, up consistent with our third quarter and slightly ahead of our expectation. This included a 5-percentage point benefit from the sale of products written off in fiscal 2001. Gross margin, excluding the effect of the written off inventory was 65%.

Operating expenses were $26.4 million, down 4% sequentially, and roughly in line with our expectations. As a result, our pro forma operating loss was $4.5 million, an improvement of 44% over the prior quarter's pro forma operating loss of $8 million. Other income and expenses and the provision for income taxes in the aggregate resulted in a net credit of approximately $340,000. As a result, our pro forma net loss improved 53% over the prior quarter from $8.8 million down to $4.1 million, or $.04 per share based on approximately 103.2 million average shares outstanding for the quarter. The total number of shares outstanding at the end of the quarter was approximately 103.9 million.

Turning now to the balance sheet, cash, cash equivalents, and marketable securities deceased $7.9 million from the prior quarter and totaled $56.3 million at the end of September, including approximately $800,000 reflected in other assets. Our cash consumption in the quarter was somewhat negatively impacted by approximately $1.6 million in insurance payments for the full year, and restructuring payments of approximately $1 million. Capital expenditures were approximately $750,000, and depreciation was $2.1 million.

Turning now to working capital, receivables were $16.4 million, resulting in net DSOs of 48 days, consistent with the prior quarter. Inventories were $10.7 million, and inventory turns improved to 3.4. Gross inventory, including amounts previously written off, totaled approximately $55.5 million at the end of the quarter. Total current liabilities were $26.6 million, down approximately $3.6 million from the prior quarter, principally driven by a $2.6 million decrease in accounts payable, the biggest driver of which was the insurance premiums that I mentioned earlier.

We exit fiscal 2005 with our lowest pro forma operating losses since becoming a public company. We believe we are on track to achieve pro forma operating breakeven performance of $37 million in quarterly revenues in the first half of calendar 2006. I would now like to turn the call over to Raouf for his comments on the quarter.

Thank you, Simon. We are very pleased to have achieved the high end of our revenue expectations in the fourth fiscal quarter of 2005. Most important, we made significant progress on our path to profitability, reducing our pro forma operating loss by 44% to $4.5 million. Our book to bill ratio improved over the prior quarter, and conditions continued to strengthen worldwide for the end markets we serve.

As we exit fiscal year 2005, revenues from our WAN communications products have recovered to a level comparable to the end of fiscal 2004, while revenues from our voice-over IP products grew almost 80% and revenues from our high performance analog products grew 30%, compared to the fourth quarter of fiscal 2004. Looking ahead to our current first quarter of fiscal 2006, we believe that our voice-over IP and high performance analog businesses are both poised to drive our growth this quarter. In fact, our current backlog for these businesses is significantly higher than it was at this point last quarter.

During this past quarter, we significantly strengthened our leadership team. We added a new seat to our Board of Directors with the election of Michael Hayashi, who is Senior Vice President of Advanced Engineering and Subscriber Technologies at Time Warner Cable. Mike brings to Mindspeed more than 25 years of cable industry technical and marketing expertise. His knowledge will be invaluable to our Board of Directors and management team as we strive to increase our penetration of the cable infrastructure market.

We also announced the appointment of Jay Cormier as Senior Vice President and General Manager of our high performance analog business unit. Jay is a 20-year veteran of analog devices and will lead product strategy, engineering, and marketing for our optical and switching solutions, targeting fibre-to-the-premise, telecommunications infrastructure, and broadcast video markets.

We are particularly encouraged by market traction (stopped auditing minute 10:55) this past quarter. Our design-wins are of a much higher quality with a significantly richer mix of Tier 1 customers. In fact, while our total design-wins this past quarter grew more than 10% over the prior quarter, design-wins of (ph) the focused Tier 1 accounts were up almost 45% over the third quarter. Our design-win success this past year was particularly pronounced in the North American region and especially for our voice-over IP and high performance analog product families. We are convinced that we are winning in the right markets with the right customers.

I would now like to discuss each of our three key product families in more detail. Starting with our multi-service access voice-over IP product portfolio, revenues were essentially flat sequentially. After ramping very strongly in the first half of this past fiscal year, for the past two quarters, the majority of our Tier 1 equipment customers have been in a mode of expanded voice-over IP trials and early rollouts in Next Generation networks. We believe many of these key customers are now shifting into a mode of broader deployments, including Alcatel, Siemens, Huawei, ZTE, and others.

We believe that our voice-over IP business is strategically poised to grow significantly with top tier equipment vendors, who have selected us for their flagship voice-over IP gateway platforms. Most carriers worldwide are either deploying or are planning to deploy voice-over IP in various segments of their long distance, as well as local networks.

Today, Mindspeed customers are serving more than 75 service providers, across more than 40 countries worldwide, including Cablevision, Comcast, Qwest, Verizon, Vonage, SBC, Time Warner, British Telecom, Deutsche Telecom, France Telecom, Telecom Italia, Telefonica, China Telecom, China Unicom, NTT, and Softbank Broadband. Industry estimates are that voice-over IP traffic and subscriber growth increased by more than 10% sequentially every quarter during the past year.

In addition to traditional wireline networks, we believe that cable is a strong growth market for voice-over IP, and that the wireless sector is also poised for growth. Currently, voice-over IP represents just over 10% of long distance voice traffic and less than 5% of local voice traffic, indicating that we are at the forefront of a long upswing in voice-over IP spending.

During the past quarter, we announced a third-party developer's program called OpenMind, which we have created for our Comcerto family of voice-over IP processors. Our OpenMind program enables voice-over IP system designers to gain a competitive advantage by combining our Comcerto processors with open source applications and other products and design services, from our growing network of third-party companies. They include software developers, complementary semiconductor suppliers, board and module manufacturers, as well as contract and original design manufacturers, or ODMs.

OpenMind provides our customers with a broad range of development choices to increase design flexibility and accelerate their time to market. This is the first developer program of its kind that lets equipment designers take full advantage of the increasing array of open source voice-over IP and data routing applications now entering the market. Customers can tap into our expanding ecosystem of resources to combine our Comcerto processors with open-source applications, and then add customized features and capabilities.

We have already joined forces with more than a dozen companies to give our customers freedom of choice across a broad range of hardware, software, support, and services, including Askey, Digium, LynuxWorks, Netbricks, Flextronics, Teleca, TelcoBridges, and Viking InterWorks.

From a market traction perspective, this past quarter, we won a large number of significant design-wins across a diverse range of applications, including converged enterprise voice and data routing platforms, as well as Next Generation broadband network edge platforms. These included design-wins at such tier one customers as Alcatel, Ericsson, Huawei, LGE, Motorola, NEC, Panasonic, Samsung, Siemens, and ZTE, as well as multiple design-wins at UTStarcom.

Now turning to our high performance analog product portfolio, revenues were up 3% sequentially and were constrained by supply shortages late in the quarter. Key customers for our high performance analog product family this past quarter included McDATA, Mitsubishi, Agilent, Opnext, WTD, Photon, True Light (ph), and others. Fiber-to-the-premise networks are continuing to expand worldwide, particularly GE-PON deployments in Japan.

NTT is now serving more than 3,000,000 optical broadband subscribers and is adding approximately 150,000 new subscribers per month. Over the next five years, NTT's objective is to optically connect 30,000,000 subscribers. We also experienced a pickup in demand for our optical P&B devices, targeting fibre-to-the-premise deployments in North America, via regional Bell operating companies, as they also focus on increasing subscriber bandwidth for triple play data, voice, and video services.

In our broadcast video products, revenues grew once again this quarter, as we continue to ramp shipments to key customers. For the second quarter in a row, we captured more than 20 new design-wins with our video infrastructure solutions and standard and high definition TV and studio broadcast and distribution video applications, including a number of key top tier OEMs worldwide.

We won additional high-performance analog design-wins this past quarter across multiple market segments, including storage area networking, telecomm, and datacomm with multiple wins with customers, such as McDATA, Fibergon (ph), Photon, WTD, and others. And now turning to our WAN communications portfolio, revenues were up 27% from key customers, including Alcatel, Cisco, Huawei, Lucent, Nortel, Marconi, and ZTE.

This was the second quarter in a row that our WAN communications portfolio benefited from an inventory-based recovery, which we believe is now complete, as well as a broad-based increase in demand. Virtually, all of our WAN product families were up sequentially, including ATM/MPLS network processors, SONET solutions, and DS3/E3 transmission devices. For example, our DS3/E3 product line grew 23% sequentially this past quarter alone.

In fact, this past quarter, we reaffirmed our leading position in the DS3/E3 transmission market by exceeding the 2,000,000 port shipments milestone since first entering the market in 2000, a significant milestone for this product line. Our broad offering of DS3/E3 products includes discrete line interface units, or LIUs, framers, and mappers, as well as integrated LIU framer/mapper, line cards on the chip solutions used in a wide variety of infrastructure transmission equipment.

In our network processor products, we are focusing our development efforts on delivering complete voice-over packets line card solutions, combining both our TSP3 network processors and Comcerto voice-over IP processors. Two weeks ago, we announced a high-density voice-over IP aggregation solution, combining a new customized TSP3 network processor and complementary firmware called VoiceMaker. When combined with our Comcerto processors, these new products offer a complete voice-over IP media gateway, capable of handling up to 9,000 voice channels.

In addition, we expect to maintain our leading market position in systems bridging legacy ATM and Next Generation IP Networks, particularly in access edge applications, such as routers, DSLAMs, and wireless uplinks. We believe that ATM will remain a critical network transmission technology, in edge and core routing equipment through the end of the decade, and that we are positioned to remain a leader in this market with our family of TSP3 network processors.

This past quarter, we scored design-wins for our WAN communication products at Nortel, Samsung, Siemens, and Tecelec (ph), as well as multiple wins with Alcatel, Cisco, and the Huawei-3Com joint venture in a variety of equipment, such as wireless routers, metro optical platforms, DSLAMs, and digital loop carrier equipment. In conclusion, we are pleased to have achieved the high end of our revised revenue guidance in our fourth fiscal quarter, and to have continued building strong market traction in both our voice-over IP and high performance analog focus product lines.

As we exit our fiscal year of 2005, revenues from our WAN communication products have recovered to a level comparable to the end of fiscal 2004, while revenues from our voice-over IP products grew almost 80%, and revenues from our high performance analog products grew 30%, compared to the fourth quarter of fiscal 2004.

As we look into fiscal 2006, we believe that our voice-over IP and high performance analog businesses are both poised to drive our top line growth, and we expect continued solid performance from our WAN communications product family. We believe that we are on track to achieve pro forma operating breakeven performance in the first half of calendar 2006.

Now, turning to our expectations for our current first fiscal quarter. Our overall backlog is higher now than it was at this point last quarter. In particular, backlog for our voice-over IP and high performance analog businesses is significantly higher, and we expect both of these businesses to drive our growth sequentially.

As a result, we expect to deliver first fiscal quarter revenue growth of 5 to 8% sequentially. We expect our overall gross margin to be approximately 69% and our pro forma operating expenses to be approximately $26 million. As a result, we expect our first quarter pro forma operating loss to be approximately $3 million, an improvement of 30% sequentially and to reduce our cash consumption.

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

[Operator Instructions].

Your first question comes from Charlie Glavin.

Thanks guys. A couple of housekeeping if I could. First of all, Simon, in terms of the OpEx, it looked like there was a bit of a shift, R&D, SG&A still finished up a little bit higher than the target by a couple hundred thousand. Anything in particular there, or is that more accounting-based?

No, nothing in particular, Charlie. That's pretty much just the way we expected things to finalize, and they're going to bounce around between those two lines just a little over the course of the next year obviously, as business progresses, but, no, we are essentially at that $26 million number that we expected to be at - a point (ph) within just a percent or so, so nothing of any significance to talk about.

And the headcount exiting the quarter?

Exiting the quarter was 520 heads.

Okay. Ending up target closer to 500?

No, I think we're back.

Okay, because it's a little bit lower than I think the 525 originally.

No, 535 is the number we gave originally, Charlie. So if you go back a full year to when we began the cost reduction exercises that we have completed over the course of the last 3 months or so, we expected to be at roughly 535 heads when we were done and we are just below that at 520. There's no plan to take it down to 500 or anything like that.

Okay. Well, hitting to kind of the meat of the quartering going forward, can you give a little bit more clarity? I wasn't quite clear in terms of the comments in terms of the voice-over IP. It almost made it sound like there was a pause or is this actual transition from more the pilot line to the full volume? And second of all, and maybe it's a separate question, in terms of the geographic breakdown, for the first time, since last September, Asia was down significantly. And I don't know whether or not that's so much consumption, as opposed to direct shipments. But could you clarify that and what makes you think that there would be a bit of a reversal as we head into fiscal '06?

So, Charlie, this is Raouf, okay. Let's see, taking the first question first, namely voice-over IP business and whether there was any kind of a pause per se, there wasn't really not in our mind any kind of a pause. As I mentioned in our prepared comments, in the first half of FY '05, this business grew extremely strongly, extremely robustly, in fact grew about 65% over the course of two quarters.

In the subsequent two quarters, i.e., the second half of fiscal '05, a large number of our customers were expanding their footprint and particularly expanding their deployment by service providers. At this point in the game, their solutions, as well as ours, are very robust. As I mentioned, we are in a mode of transitioning towards what I would call broader deployments right now. We are seeing that, we are experiencing that with our customers, and clearly, our backlog is a strong testimony to that, particularly in voice-over IP.

Now, to your second question about trends in Asia Pacific and particularly what drove our revenue contribution from APAC down in this past quarter. It did decline, but it didn't decline all that much, Charlie, and we do, in fact, expect that very likely, it will grow again, in this current quarter, although it's hard to say for sure. As you know, order patterns in Asia Pacific, particularly in China, tend to be rather lumpy.

Those customers will tend to make what I guess I would call a buy (inaudible) that are relatively large relative to their requirements, negotiate pretty hard, pick the product, and then sometimes they go away for a couple of quarters before they come back and order more, so order patterns are I think generally understood to be quite lumpy, particularly in China and whatever decline we had was largely attributable to China. Again, our best guess right now is that revenues in APAC will be up in our first quarter over our fourth quarter.

Okay. The reason why I asked is that it looked like Asia was down about 16%. The Americas had great growth sequentially and I'm just trying to balance that, whether or not there was more shipment through the Americas out to consumption within Asia as opposed to just taking a look at the 16%.

And again, I'm trying to understand the question on the voice-over IP. Are you implying that the carriers right now are knocking more of the internal software as opposed to the software packages at this point, which would be natural on it, but, again, the type of packages, or the type of boxes that would be shipped out in terms of the visibility, I'm still not quite clear in terms of what's going out as opposed to some of the supply constraints. It sounds like HPA is a little constrained. I'm just trying to get a better gauge on the inventory since it was only down I think about 5 or 6 days.

Right. So, several questions, there, Charlie, that you're posing to me. Let me see if I can take them in order. I think, first and foremost, I would comment that the transaction in Asia demand trends and technology of adoption trends are very, very strong. In fact, the overall economy particularly in China continues to grow at a very strong rate, and voice-over IP is booming, in China specifically. As the ILECs realize that voice-over IP is here, it's real, you have to adopt it.

Additionally, we're seeing strong adoption of DSL. As you know, that drives a lot of our products. More specifically, we think that in this year, we have not experienced any inventory build whatsoever, and I would expect that there's certainly not going to be any drag on our near term revenue dynamics from inventory. The supply issues impacted us in the latter part of the September quarter. They were reasonably broad-based. We were able to handle most of them.

The majority of the impact from supply shortage was in the high performance analog business, which ended up having materially stronger turns than we had expected at the beginning of the September quarter, so in the month of September, we were playing a game of catch up, trying to scrounge and deliver product on short notice to key customers worldwide and clearly, we could have delivered much more substantial growth in the analog business had we not been impacted by supply shortages in September.

How much are you leaving on the table?

We're not going to answer that, Charlie.

But I take it that by Raouf's comments, it was material.

Yes.

Thanks, guys.

[Operator Instructions].

The next question comes form Arnab Chanda.

Just had a question on your voice-over IP in terms of what you guys were seeing in this quarter and going forward in terms of your wireless voice-over IP infrastructure growth, and in the trunking market as well?

Okay. So, Arnab, this is Raouf, I would comment that we're seeing some extraordinarily healthy adoption trends right now for voice-over IP in the carrier universe. As you know, this phase started with initially, trunking requirements for trunking in long distance networks. Increasingly, as trunking continues to grow and voice-over IP technology becomes more stable, adoption is becoming widespread.

It includes access networks, where voice-over IP is now getting integrated into a whole slew of access platforms like DSLAMs, BLCs, and also into wireless, where obviously, mobile conversions with voice-over IP is a very strong trend at this point in the game. We have a significant footprint in the wireless infrastructure state, but we're not at liberty right now to disclose our design-wins with those top tier customers, but you can expect that this is going to be a very strong driver for our business, particularly in 2006.

Now, with the wireless, would you say this is more towards the next couple of quarters, or is this more towards the back half with wireless growing?

Well, it's hard to say exactly how much will be there. Again, visibility is not great. It has improved a little bit, but it's not great. Those design-wins are in, I guess what I would say, full development swing at this point in the game. Our first win is one that we have been able to talk about publicly. That was with LGE in Korea. LGE's platforms are actually commercially available now, and we understand that they have significant carrier wins with LG Telecom and other service providers.

But beyond LGE, we have a large number of other design-wins that we believe are going to be very fruitful for us within fiscal year 2006. It's hard to say exactly which quarter. It's probably not this current quarter, but there will be contribution from wireless will be more material for us in the second half of fiscal '06.

Great, thanks.

You're welcome.

Your next question comes from Sandy Harrison.

Good afternoon, guys.

Hi Sandy.

You guys have talked about a lot of the FTT to the premise over in Asia. What's sort of your view of when it's going to kind of ramp up here in earnest (ph) in North America and driven by, you can see the fibre being planted and trenched these days, when do you guys expect to see material contribution from that area?

So, Sandy, this is Raouf. I think we will -- well, first of all, let me say we did experience some contribution from, specifically fibre-to-the-prem rollouts in North America in Q4, so we did get some amount of contribution, but in terms -- I think your question is more specifically in terms of material contributions, we would expect to see those lay in probably the second half of FY '06.

Our customers are a number of important fibre-to-the-prem and fibre-to-the-curb deployments in North America; Verizon, Qwest, and others, and we think we are now increasingly well-positioned for that rollout here in North America. But I think to be honest with you in 2006, the vast majority of the demand will remain in Japan, given that Japan has at least a 3-year head start over North America and subscriber growth is unabated at the rate, as I mentioned earlier of about 150,000 subscribers per month, so it's huge.

Got you. And is there any threat here in North America that competing technologies may come in and challenge fibre-to-the-premise? I mean, is wireless a real threat at this point, or is that just more technology talk that's endemic of this industry?

There's a lot of technology talk to your point, WiMAX, WiFi, there's a whole host of technology. I wouldn't even try to rattle them off. There's no doubt that wireless broadband access will get adopted in certain geographies where demographics are favorable, so there's no doubt there's going to be some of that access technology deployed. But I think all things being equal, I think a fibre-based access is going to remain ahead of wireless technology, for at least the next 3 years.

Got you. And then, lastly, you had talked about supply constraints and the HPA stuff. Do you pretty much have that under control or, was there really -- the only issue was you just couldn't turn it fast enough from dye bank to finished goods or how is that situation, and have you guys pretty much remedied it?

Sandy, it's Simon. I wouldn't characterize this as completely remedied at this point in time. We've certainly built into the guidance for the current quarter some perspective on the shortages that we expect to experience over the course of the quarter and there's still a piece of the business that continues to be turns driven even though the backlog is significantly better, as we said, than it was last quarter.

There will still be turns, and that introduces some supply risk. There's no doubt about it. So, we'll see how the quarter progresses in terms of how those supply issues correct themselves. And I think some of our more consumer-oriented competitors will bear weight through the Christmas build, let's say. We'll expect to see some capacity (inaudible) as this quarter progresses. We've tried to build it into the guidance the best we can at this point, but there is an expectation that come the end of the quarter, we'll still have some supply constraint or end catalog business.

Got you. And just kind of a quick clarification on Simon's last comments. When you look at your backlog saying, it's much further ahead at this point in the quarter than it was last quarter. If you look at it on an apples to apples basis, what percentage of that or, what's the amount of turns percentage this quarter versus next? I guess to ask another way of that HPA supply constraint, how much of the orders or the backlog are for basically, the March quarter versus December, and has that changed the profile from last quarter?

Oh, substantially, everything that would be supply constrained at this point is for the current quarter.

Okay.

And I'll stop at that.

Sandy Harrison. Okay. Perfect. Thanks, guys.

The next question comes from Jim Laing.

Thank you. First question, can you just give us an update on your significant customers in the FTTX for the high performance analog products, and specifically which ones are the ones that are benefiting from the U.S. deployment?

Jim, this is Raouf Halim here. To answer your first question first, significant fibre-to-the-prem customers for us this past quarter included some big guys like Mitsubishi in Japan, Opnext, which was affiliated with Hitachi, Photon, True Light, and WTD. Also, Agilent was a big player for us last quarter.

In terms of our customers who would benefit directly from North American fibre-to-the-prem deployment, unfortunately, we're not at liberty to disclose them right now, but I think even a cursory look at the equipment vendors that have been selected in North America, and their preferred optical providers would pretty much tell you right away who is positioned with.

Right. Secondly, can you just give us an update on your design-wins at Huawei? What key segments are you designing into? There was a press release of a design-win of the Comcerto voice-over IP processor in the quarter, but I wanted to get more color on that. Also, do you anticipate that Huawei could potentially become a 10% plus customer, let's say over the next 12 to 18 months?

Okay. So, Jim, we have made, I guess what I would call, remarkable progress with Huawei Technologies in terms of adoption of our Comcerto voice-over IP product across a very broad range of the platforms. Huawei has been a customer of our voice-over IP products for many years, but I would say that our most recent Comcerto processors have made, again, what I would call remarkable progress in adoption at Huawei.

This includes certainly traditional integrated voice-over IP routers, includes so-called multi-service access nodes, such as Huawei scored with at British Telecom. It also includes a number of Next Generation platforms that I cannot mention specifically because we are under NDA with Huawei. But let's put it this way, we do not know of any significant voice-over IP related platform at Huawei, that we have not won over the past 12 months.

Now, do we expect them to become a top ten customer for us over the next 4 quarters? You know, it's entirely possible. Jim, it's going to rely very much on the degree of success that Huawei continues to experience in overseas markets. In other words, in their export business and the timing of the ramp of those design-wins that we have with them, but I would say it's entirely possible. It's hard to be sure 100%, but I think it's entirely possible.

Thank you, Raouf.

Your next question comes from Daniel Amir.

Thanks a lot. A couple of quick questions. One is on the voice-over IP, can you give us maybe a general quantification, kind of where we stand from the number of design-wins you have compared to how many are in production currently or shipping currently?

Sure, Daniel. This is Raouf here. Okay. We don't actually disclose the raw count of design-wins generally speaking, but let's put it this way, we have many hundreds of design-wins with top tier customers across a very broad range of both wireline access and wireless infrastructure. I think, generally speaking, every time we look at the percentage of our design-win pipeline, that's actually in production today, it comes out with high single digits or at most 15%, just to give you a sense for it.

But even the ones that are in production today are in relatively limited volume because the service provider deployments themselves are still somewhat limited, and we expect that we have, if you will, at least two legs up on the strategy, meaning those customers are already in production, ramping, and then the other 85% plus of our design-wins starting to go to production, coupled with, of course, a much broader acceptance of voice-over IP as the premier voice technology.

So to follow up on that, do you believe that in the next 12 to 18 months, a majority of those would go into production or, is it farther out than that?

So, Daniel, we continue to win designs every single quarter. We mentioned in our prepared comments that our design-wins in our focus businesses, meaning voice-over IP and analog, were up very strongly this past quarter. In fact, top tier customer design-wins were up 45% in September over the June quarter, but we expect to continue winning designs. So at any given point in time, if you take a snapshot, there's going to be a certain percentage that are in production, a certain percentage that are on their way to production, and a certain percentage that you just scored. That continues, and our pipeline continues. It's not stopping by any means.

So, it's hard for me to say that we're going to go from, let's say, 10 to 15% of our design-wins in production to 50%, let's say by the end of next year, some such number because there's no doubt there are going to be a lot more designs as our Comcerto platform becomes the architecture of choice for a large number of customers. So, it's really difficult to say how the pipeline will change and exactly how our customer is going to (inaudible) and go into production. But no doubt, there will be a higher percentage than 10 to 15, let's say, that will be in production by this time next year.

Okay. A follow-up question. Can you comment a bit about the competitive market in the TNE (ph) space right now? You talked about a bit it had a good quarter there, comment what you're seeing in the market there, both on the demand side and the competitive environment.

Sure. So starting with the competitive environment, Daniel, really nothing has changed. Our traditional competitors in this space include Exar for DS3/E3 LIUs, PMCCR (ph) at the framer level. And we see a little bit of a gear, very little bit, in SONET framers and so forth. Nothing has changed in that regard of any substantial nature.

And then to your second question about trends that we're experiencing in the WAN communications business. Trends are actually quite positive. As we commented in our prepared comments, this business grew very strongly sequentially. Certainly, a chunk of that was associated with the inventory based recovery, but also there was a broad-based decrease in demand that we also mentioned, and we thing that that fundamentally has to do with a number of things.

First and foremost, cap expenditure, CapEx, is actually growing in this year over '04 by at least 5%, and there are some estimates of as high as 10% growth in CapEx year on year. And that's actually quite significant when you think about the actual capital dollars involved. But more importantly, we have focused our WAN product family on what we believe are some of the most important carrier infrastructure segments that are growing disproportionately.

And we believe that that strategic positioning, which we have been undertaking for many years, is working for us. And of course, we have captured a very large number of strategic design-wins with customers the ilk of Cisco, Nortel, Lucent, Alcatel, and many other very important customers worldwide, and that's contributing quite a bit to our revenue growth.

Thanks a lot.

You're welcome.

The next question comes from Tim Savageaux.

Hi. Good Afternoon. Nice quarter, guys.

Thank you.

A couple of questions. First, on the fibre-to-the-prem side, is this really the first quarter in which you've seen activity on the North American front, in terms of fibre-to-the-prem? And, if you could discuss your positioning going forward in sort of alternative technology standards, like GPON? Thanks.

Oh, certainly, yes. This is by no means the first quarter that we've experienced demand trends in fibre-to-the-prem in North America. In the past though, in prior quarters, they've been quite a bit smaller, so we were quite enthused by the sequential growth in the North American based fibre-to-the-prem product. You have to understand that we have both North American customers who are serving the space, as well as optical modular manufacturers in Asia Pacific, particularly in Taiwan, and to a lesser extent, China, who are serving the North American space as well.

Those customers have been working with us for many years, frankly, and have many of our products, if not the entire raft of optical communication products in volume production today. So, they've been waiting for the market in North America to actually start some meaningful deployment, and every indication we have is that in the past quarter, the September quarter, things started to happen.

Okay. And then, if you could address the question about the standards of North America going forward in GPON, and I assume that wouldn't really change your opportunity necessarily that you're--

Well, we have worked for many years to make sure that our product portfolio is quite diverse and addresses all flavors of xPON. We started out maybe 3 years ago with point-to-point fibre optic communications, exclusively in Japan. Over time, we have broadened our chip sets to cover and completely comply with GEPON, obviously in Japan, GPON in North America, and, of course, BPON, which is the technology of choice, at least today, with the expectations that in North American BPON will transition to GPON long term.

So, our products span essentially all the xPON standards. We're positioned in all the major geographies that either are, or soon will be, deploying PON, so it doesn't matter to us, frankly, what flavor PON it is, we are there.

Okay. And just a couple more. I thought you mentioned Ericsson when you were kind of ticking through voice-over IP design-wins. They've obviously picked up some business both in the UK and the continent recently. Can you discuss whether you see Ericsson as sort of a significant opportunity or, whether I heard that wrong or, what your overall situation is with Ericsson? And maybe expand that to whether you're seeing any activity begin at BT, yet given by my account, you were kind of designed into everybody who's supplying voice-over IP in another account?

Yes. So, you did not hear incorrectly. Ericsson is a key customer that we scored with this past quarter. I reported that in our prepared comments. We have high expectations for our position with Ericsson. These are new design-wins, therefore, they will take many quarters before they go to production. You are correct that Ericsson have, themselves, picked up some important tender awards of recent, and we think that they will continue to do very well. So, we're actually quite enthusiastic about the position we have with Ericsson.

Beyond that, I'm afraid I can't comment as to the specific platform or the service providers that have adopted that platform or, expect to develop that platform, because the information is under NDA today with Ericsson. So, we are expecting some exciting things with Ericsson, no doubt.

Regarding your second question about British Telecom, yes, we are very well-positioned to benefit tremendously from British Telecom as they start their full rollout of the 21st Century Network, or 21CN as it is known. We are designed into that network with virtually every major equipment vendor. Today, BT is typical of those service providers that are transitioning from, let's call it lab testing to very limited field trials with an expectation to go to much broader - much larger deployments in 2006.

Exactly when that happens in '06 is a difficult thing to say. I don't think BT themselves really know exactly when it's going to be, but our best guesstimate right now would be some time in the middle of '06.

Okay. And one final question. I don't know if you've already addressed this, but have you talked with any specificity about exactly what the supply chain issue was on the HPA side?

Well, we had supply issues across the portfolio that we were able to manage in different ways. The product line that was impacted by the end of the quarter, when all is said and done, by supply issues was the high performance analog product line or business unit. You only had issues in both front end and back end, but they were most exacerbated in the back end, or assembly and test side of the equation. Beyond that, I'd really rather not go into a lot more detail, because we would be disclosing details that relate to specifics of our suppliers. I'd rather not do that.

Okay. Thanks very much. I'll pass it on.

Your next question comes from Tim Kellis.

I'm sorry if you've already addressed this, but I was wondering if you guys had any updates on any VoIP business with Nortel or Sonus?

Tim, this is Raouf Halim. We are not prepared right now to give comments about either one of those.

Okay. Thank you.

Mr. Biddiscombe, at this time, there are no further questions.

Thank you. That concludes our conference call for today. On behalf of all of us at Mindspeed, thank you for participating this afternoon. We look forward to updating you on our performance next quarter. Thank you, and bye-bye.

This concludes today's conference. You may now disconnect.