MACOM Technology Solutions Holdings Inc (MTSI) 2006 Q1 法說會逐字稿

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

Please be aware that each of your lines is in a listen-only mode.

At the conclusion of Mr. Biddiscombe's presentation we will open the floor for questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question.

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

Thank you, [Murl]. I would like to welcome everyone to our conference call discussing the results of our first quarter of fiscal 2006, which ended December 31, 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 first quarter results and the outlook for the current quarter. We will then open the call for your questions.

Before we begin, I want to remind you that our comments today will include statements relating to our future results including the financial outlook and expectations for our fiscal 2006 second quarter and other market, business, and product trends that are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

These include our statements about productions ramps, supply constraints, stock based compensation expenses, growth of markets, profitability, increases in product shipments, deployments and our ability to benefit from them, market traction, industry and capital spending reports and research, inventory replenishments, revenue growth, backlog, operating expenses, and operating loss.

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 2005 and for other filings with the SEC.

Consistent with prior quarters, I would also like to remind everyone that certain of the operating results we will discuss today are from the Pro Forma income statement before stock-based compensation expense, amortization of intangible assets, and special items. 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 press release and our Form 8-K furnished to the SEC today.

Copies of both documents are available in the investor section of our web site at www.mindspeed.com.

Turning now to our financial results for the first fiscal quarter of 2006.

Today we announced first quarter revenues of $33.2 million, up 7% from the prior quarter and towards the high end of the 5 to 8% sequential revenue growth we expected at the beginning of the quarter.

Revenues from our family of multiservice access Voice-over-IP processors were up 32% sequentially, contributing 35% of total fourth quarter revenues.

Revenues from our high-performance analog product family were up 24%, representing 26% of the total.

Revenues from WAN communication products declined 16% sequentially to contribute the remaining 39% of revenues in the first quarter.

In terms of revenue contribution by geography, Asia-Pacific region contributed 56%, the Americas 34%, and Europe contributed 10%. Cisco and ZTE were our only greater than 10% end customers this past quarter, including both direct sales and indirect sales through third parties.

Pro Forma gross margin was $22.8 million, or 69% of revenues consistent with our expectations. This included a 6-percentage point benefit from the sale of products written off in fiscal 2001.

Pro Forma gross margin, excluding the effect of the written off inventory, was 63%.

Operating expenses were $26.3 million, at sequentially and in line with our expectations. As a result, our Pro Forma operating loss was $3.5 million, an improvement of 20% over the prior quarter's Pro Forma operating loss of $4.4 million.

Other income and expenses and the provision for income taxes in the aggregate resulted in the net expense of approximately $700,000. As a result, our Pro Forma net loss was $4.2 million, or $0.04 per share based on approximately 103.7 million average shares outstanding for the quarter.

Turning now to the balance sheet. Cash consumption was $5.4 million in the first quarter. This represents a significant improvement over cash consumption in the September quarter of $7.9 million, especially considering interest payments of $800,000 and restructuring payments of $1.8 million in the first quarter.

Cash, cash equivalents, and marketable securities totaled $50.9 million at the end of December.

Capital expenditures were approximately $500,000 and depreciation was $1.9 million.

Receivables were $13.9 million resulting in net DSOs of 38 days, a significant improvement over the prior quarter's 48 days.

Inventories were $15.6 million and inventory turns decreased to 2.7 turns as we consciously built inventories primarily of our Voice-over-IP products in anticipation of customer production ramps and also to mitigate supply constraints across our product portfolio.

Gross inventory include in amounts previously written off totaled approximately $59 million at the end of the quarter.

Total current liabilities were $25.4 million down approximately $1.1 million from the prior quarter, principally driven by lower accounts payable and restructuring reserves offset by greater deferred revenues.

As I said in my earlier comments, our Pro Forma income statement excludes the effect of stock-based compensation charges and we expect to continue to exclude these items from our Pro Forma operating results in the future.

We expect that on a GAAP basis, the Company will have incremental costs in the range of $1.8 to $2.2 million per quarter associated with stock-based compensation for the remainder of fiscal 2006.

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

Thank you, Simon.

I am very pleased with the execution of our business on all fronts in our first fiscal quarter of 2006.

Our strategic focus on some of the fastest growing segments of the network infrastructure market continues to drive our growth trajectory towards profitability.

Specifically this past quarter, we achieved a number of very significant milestones.

Revenues from our Voice-over-IP products grew more than 30% sequentially and were up 80% over the same period a year ago. This was the highest revenue quarter for Voice-over-IP in our history, contributing a record 35% of our total revenues.

Revenues from our high-performance analog products were up almost 25% sequentially and were up 40% over the same period a year ago.

For the first time the combined revenues from our Voice-over-IP and high-performance analog growth platforms accounted for more than 60% of the total.

We also reduced our Pro Forma operating loss this past quarter by 20% to $3.5 million, our lowest since becoming a public company, and down 70% from the same period a year ago.

Finally, we made excellent progress in reducing our cash consumption by over 30% sequentially.

We are especially pleased to have delivered towards the high end of our revenue guidance despite ongoing supply constraints, predominantly in backend assembly and tests. We are working closely with our suppliers in an effort to mitigate the impact over the course of the next several quarters.

Significantly, design wins were up more than 50% over the same quarter last year. And in particular, design wins at top tier focused customers grew nearly 30% over the same period.

We are particularly pleased that for the fourth quarter in a row our shippable backlog for the current quarter is stronger than at the same point in the prior quarter.

Bookings trends remain healthy in this traditionally slow period and our visibility is gradually improving.

I would now like to discuss each of our 3 key product families in more detail, starting with our multiservice access Voice-over-IP product portfolio.

Revenues were up 32% as key customers including Siemens, Huawei, ZTE, and many others, continued deployments of our Comcerto product family with service providers worldwide.

We believe that shipments of our Voice-over-IP products will benefit as top tier equipment vendors continue to expand their deployments in next generation networks.

For example, this past quarter China's largest fixed line operator, China Telecom, went live with a first phase of a new core network. Using ZTE's Voice-over-IP gateways, which are based on our Comcerto processors.

We believe this next generation network will ultimately span all provinces and major cities within China.

We are also seeing increased Voice-over-IP deployments by cable MSOs in North America. Time Warner has signed up an estimated 1 million subscribers with Cablevision close behind. We believe we are in a very good position to benefit with our Comcerto Voice-over-IP processors and voice-over cable software, which has achieved packet cable certification in customer platforms at CableLabs.

On a worldwide basis in its most recent December 2005 report, the research firm IDC estimates a compounded annual growth rate of 37% for our addressable carrier Voice-over-IP market exceeding half a billion dollars by 2009.

From a market traction perspective, this past quarter we won a number of key Voice-over-IP designs in both carrier and enterprise infrastructure with tier one customers including Siemens, Alcatel, Ericsson, as well as multiple wins at the LGE Nortel joint venture.

Further expanding our diversification beyond traditional wireline voice infrastructure, we also scored 2 significant wideband CDMA wireless infrastructure design wins.

And now turning to our high-performance analog product portfolio, revenues were up 24% sequentially driven by growth in both our cross point switch products as well as shipments of our optical PMDs.

Key customers for our high-performance analog family this past quarter included McData, Infinera, Nortel, Mitsubishi, Agilent, WTD, [Foton], [Bookem], and others.

Shipments of our optical PMD products to modular manufacturers serving fiber-to-the-premise deployments by NTT in Japan remained quite strong this past quarter.

According to a recent PON market share report issued by Infonetics Research, the number of PON subscribers worldwide will grow from 1.5 million in 2004 to over 20.5 million by 2008.

The report noted that PON is growing rapidly in Asia-Pacific, especially Japan, where we believe over 3 million subscribers are already optically connected.

Additionally, PON is just beginning early deployments in North America, primarily led by Verizon.

In our broadcast video products we captured more than 30 new design wins with our video infrastructure solutions in standard and high definition TV in studio broadcast and distribution video applications including a number of key top tier OEMs worldwide such as multiple wins of Panasonic at NEC as well as many others.

We won additional high-performance analog design wins this past quarter across multiple market segments including optical modules, storage area networking, and other wireline communications equipment with Tellabs, Nortel, IBM, GigaCom, and [Fibracon], as well as multiple wins at NEC, Foton, and Sumitomo.

Now turning to our WAN communications portfolio. Revenues were down 16% partially resulting from supply constraints as well as the impact of customers having completed the inventory replenishments we experienced over the prior 2 quarters.

Key customers this past quarter included Nortel, Lucent, Cisco, Juniper, Huawei, ADC, and many others for a variety of our ATM/MPLS network processors, Sonet solutions, and DS3/E3 transmission devices.

While revenues from our WAN communications business were down overall, we experienced strong growth in our DS3/E3 discreet and line card on a chip products, which grew in excess of 50% driven by strength in metro access applications.

CapEx spending in North America increased by 6% in 2005, according to the most recent estimate by market research firm, iSuppli, with the Asia-Pacific region growing 3% and Europe 6%.

iSuppli also estimates U.S. carrier capital expenditure spending in the third quarter of calendar 2005 was 15% higher compared to the same quarter in 2004 across access, metro, and enterprise segments.

CapEx spending is projected to remain solid in 2006 as well, which will expect to benefit our WAN communications portfolio.

On the design win front this past quarter we scored numerous design wins for our WAN communications products including ATM/MPLS network processor wins at Ericsson and Nokia, for metro and wireless infrastructure equipment, as well as integrated line card on a chip design wins at Cisco and Harbor Networks for metro and enterprise routing switches.

We also scored Sonet and DSL transceiver wins at AFC, Nokia, and Huawei as well as multiple wins at Fujitsu in a variety of metro optical platforms, DSLAMs and DLCs.

In conclusion, we are pleased to have achieved the higher end of our revenue guidance in our first fiscal quarter of 2006 and to have reduced our Pro Forma operating loss to $3.5 million.

More important to our long-term success, we believe that our strategy is working well.

We delivered strong revenue growth from both our Voice-over-IP and high-performance analog strategic product lines. And the Mindspeed team is executing with a clear focus on achieving profitability on schedule.

Now turning to our expectations for our current, second fiscal quarter of 2006.

For the fourth quarter in a row, our current backlog is stronger than at the same point in the prior quarter. And bookings trends remain healthy.

In this traditionally slow quarter, we believe we are benefiting from a fundamental pickup in demand across key markets such as next generation packet based infrastructure, metro optical, and fiber based broadband access applications, coupled with the continued ramp of strategic designs with tier one customers.

As a result, we expect to deliver second fiscal quarter revenue growth of 2 to 6% sequentially and expect our Pro Forma gross margin to be approximately 70%. We also expect Pro Forma operating expenses to be approximately flat sequentially.

As a result, we expect our first quarter Pro Forma operating loss to be approximately $2.1 million and to further reduce our cash consumption.

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

[OPERATOR INSTRUCTIONS]

And your first question comes from the line of Sandy Harrison with Pacific Growth Equities.

Good afternoon, guys. How are you?

Very well.

Good.

Just a couple of questions on some of the supply constraints. It sounds like it was more on the WAN product side.

Is that starting to bleed over into some of your newer products or you think you've pretty much got those nailed down since they seem to be the growth areas for you guys?

I think a couple of points here, Sandy. Number one it was across the entire product portfolio and not focused in the WAN communications product portfolio necessarily.

As it relates to the newer products, we've made, as you can tell from the growth in the inventory number, some very specific ilks support expected customer ramps primarily in the Voice-over-IP arena.

So we have consciously added the Voice-over-IP inventory in order to be able to supply the expected growth that we're going to experience as we move forward through 2006.

There's no doubt that most of the supply constraints that we've been experiencing in late 2005 and to a lesser extent as we move here into 2006 have been backend related. It's not wafer supply that's causing us any concern at this point in time. It's almost exclusively associated with the availability of assembly and test services.

We're optimistic that that will improve a little as we move here into the first quarter of 2006. But frankly it's too early to tell for sure exactly how that's going to play out.

Sure. That's fair.

Also when you look to the fiber, the premises business that you guys have really benefited from in the last quarter through here, how's the progression in North America? You guys have talked in the past that you see that as sort of a late '06, early '07 event. Is that still tracking or has there been any changes to that outlook?

Yes, Sandy, this is Raouf. No, there really are no substantial changes to that perspective.

We remain very well entrenched in Japan with a very high market share with the top tier equipment providers to NTT and other service providers. We're not seeing a lot of what I would call semiconductor level growth in North America associated with PON. However, there's every indication that it's coming. It's probably a late '06 into '07 kind of a phenomenon. It's not here today.

Right. So your growth is obviously coming from other areas in that. And hopefully you'll layer that in as you exit the year?

Yes. So we expect to see continued growth in Japan. And we expect actually the next layers to come in from Korea, eventually China and other parts of Asia-Pacific.

And then, as I mentioned earlier, moving into '07 we expect to see North America kick in.

Got you. And then the last question, I'll yield the floor. Just what sort of your look for the WAN business this quarter after being down 16% last quarter? And probably is it at a level you think here that's sustainable or do you expect to see it pick back up? What sort of your thought on that going forward?

Sandy, we're not going to provide segment-by-segment guidance at this point in time. I think the way we've communicated this in the past is that on a year-over-year basis we expect it to be a roughly flat kind of business. And it'll have puts and takes around that flat line.

In the fourth fiscal quarter clearly we were way ahead of that flat line. In the first quarter that just ended clearly we were below that flat line.

Sure.

So, as I said, we're not going to give segment-by-segment guidance, but on a year-over-year basis it's still our expectation that that's essentially a flat business.

Okay. Thanks, guys. Appreciate it.

Thanks.

Your next question comes from the line of Arnab Chanda with Pacific -- I'm sorry -- with Lehman Brothers.

Thanks. And I'm still here.

Three questions actually, a couple for Raouf, maybe, and one for Simon.

First question, Raouf, if you could talk a little bit about your Voice-over-IP business, historically it's been more trunking related. Are you starting to see the other segments kick in? And what qualitatively are you seeing? And is that business really starting to mature like so right now?

So Arnab, the first thing in terms of drivers for our Voice-over-IP business is that the trunking universe continues to expand quite dramatically. And in fact we expect continued growth from the class 4 IP replacement space to continue growing for the foreseeable for many years.

For example, we believe that less than 10% of voice traffic today is carried on the IP backbone. And 90% or so is still on ATM. And, therefore, really barely past the inflection point, if even there, in the traditional class 4 trunking universe.

What we are seeing, however, to your question in terms of adoption of Voice-over-IP in other applications and other segments of the network universe is in fact a very rapid adoption of integrated voice and data solutions at the edge of a network.

We're seeing that in DSLAMs, DLCs, next generation access platforms. We are obviously designed into a large number of those, one of the most prominent ones being the Huawei applications of British Telecom, many other boxes of exactly the same ilk as that Huawei.

And so, yes, we are seeing a great deal of Voice-over-IP adoption. Passed the design phase I guess I would say, Arnab, in early deployments. Again, much like the British Telecom tender just starting to roll out, virtually in all geographies across the world.

In North America we're seeing adoption of Voice-over-IP in cable networks ahead of DSL based access. And in Europe we're seeing it actually the other way around. DSL based as opposed to obviously cable based.

And then in Asia it's in all aspects of the network, a strong adoption in China certainly in trunking but also in access networks. And in Japan we expect in '06 to see an increasing penetration of triple play by NTT and other service providers on the back of the fiber optic surface structure.

Thank you, Raouf, for that detail.

One question about your WAN communications business, you're obviously seeing a very strong growth in your maybe what you call the core or sort of the high-end growth businesses that you have. But it's getting offset by when this quarter it was weak, maybe you're saying flattish.

What kind of timeframe do you think that the growth businesses will start to reflect on your overall Company growth? Is it a year from now? Is it in second half? How do you think about that?

So, Arnab, one of the key milestones that we just passed in this first quarter that we just reported is the fact that the combination of our Voice-over-IP and analog businesses, which are the growth engines for the Company, are now over 60%, 6, 0 of our revenues, okay. It's a pretty significant milestone for us. That's the highest mix we've ever had of sort of new growth business if you will and the WAN space being about, just under 40%, about 39% or so.

So we think increasingly going forward that the overall tone of the business and its profitability and earnings performance will come predominantly from those growth engines.

So I think we may not be exactly there but we're very close at this point in the game.

Thank you.

And then one question for Simon. Generally your expense control has been pretty good, but it seems like you actually had a little bit of an up tick in SG&A, which was down tick last quarter. Are we going to be - how do we think about SG&A from here on out?

I know you talk about overall expenses being flat, but do we assume both of those line items flat or should we assume growth or decline in one set or the other in the future? Thank you.

From where we are today, Arnab, the best way to think about them is essentially flat from this point, okay. So clearly the objective we have at for ourselves is $26 million.

Yes, we're very close at $26.3 million but in terms of the specific mix I would expect the SG&A to be 10 and maybe slightly above million dollars, the R&D to be 16 and maybe slightly below million dollars. And there will be puts and takes on a quarter-to-quarter basis as we deal with the fact that the business, like any business, isn't perfectly linear in the way it spends money.

Thank you.

Your next question comes from the line of Charlie Glavin with Needham and Company.

Thanks.

Kind of following up on Arnab's, Simon, in terms of confidence level about hitting breakeven. It sounds like internally you guys are feeling fairly strong.

The 2 questions are, is this really coming from exceeding your breakeven based on the revenue growth that Raouf you mentioned better visibility. But it doesn't seem as if it's going to come from just sketching by on the OpEx at the 27, but rather you're going to have a pretty strong revenue during the summer, the traditionally seasonally stronger June and September quarters. Is that the correct way of looking at this?

Yes that is the correct way to look at it, Charlie. We have never said that we wanted total operating expenses to be less than $26 million, okay. What we've always said is that if the revenues didn't or don't play the way we expect them to. We haven't been shy about taking costs out of the business when we've thought it's the right thing to do.

And that continues to be the case as we sit here today.

However, based on what we are seeing both in terms of the near-term dynamics and in terms of our medium term expectation for the business, clearly we expect to get to breakeven based on revenue growth as opposed to taking a further cost reduction program into account.

Okay. If I do take a look at that though and you've made the general assumption that T business should be flattish overall. In terms of the Voice-over-IP, just to be clear on this, it sounds as if you're not really counting on the whole enterprise really kicking in in North America really from the fiber to the home market. Given that Asia has bitten you guys in the back, is it right now Raouf the fact that you've got British Telecom, you've Deutsche, you've got China Telecom? Is it that one of those could pause but the other 2 are too strong in terms of the order through your equipment customers to not hit that and exceed that breakeven target?

So, Charlie, first of all let me get back to your first question.

I mean I think our breakeven expectations are really predicated upon continued revenue growth. We believe our OpEx is where it needs to be. And we believe we're in the sort of the final rounds of getting to the revenue breakeven level required.

So that's what we're counting on. And obviously we have confidence that that will happen in the June quarter based on the visibility we have today.

And we're seeing backlog strength. I mentioned that in my prepared comments earlier. We're seeing sequential backlog strength for the fourth quarter in a row. So this clearly sort of arising tide in the spaces that we serve. That's global. It certainly includes China but it's also in North America and Japan and to a less extent in Europe. So there's sort of a general strengthening across the various geographies.

But perhaps the most promising to us is the continued ramp of a new product that has been announced over the past few years with top tier customers.

And certainly you mentioned the Voice-over-IP space. That's a very important factor here. And that continues to be very healthy in multiple geographies, certainly in China as we just discussed was a very strong quarter for us in Q1. But we're seeing continued strength in adoption of Voice-over-IP globally.

We're seeing it in North America, cable MSOs. We're seeing it with Ilex. We're seeing it in EMEA with a number of PTTs including British Telecom and obviously again finally in Asia-Pacific.

Furthermore, we expect in '06 the start of a strong Voice-over-IP adoption curve in Japan where today you have a very large installed based of fiber to the home subscribers that have a, in many cases, 155 megabit pipe to the home or even faster providing a perfect technology base, if you will, for triple play penetration.

So it's a combination of all of the above. It's not one thing.

But to get back to China very specifically, Charlie, to answer your question, what we're seeing right now in China is really a fundamentally very strong marketplace. Obviously the macro economy is quite strong in China.

But more importantly our tier one customers, the Huawei, ZTEs, Alcatel, Shanghai Bell and so forth are continuing to ship locally but growing their export business quite dramatically.

And so we report that revenue, our China based revenue or APAC revenue on a ship to basis. The fact of the matter is, a lot of that product now is finding its way in markets completely outside of China.

So it is a good thing. It's a very good trend for us right now and one that we're quite enthused about.

Well, what I was getting at more in the enterprise is if I take a look at that same study, while the Voice-over-IP is supposed to up 37 is if I actually take a look at more of the infrastructure, which is where you guys are more closely tied. I believe it's more a 50, 60% sort of growth. And is that really what you're counting on as the enterprise or the U.S. PON comes in, as Sandy referred to, that's more gravy that's really from the carrier side.

Yes, that's the right way to think about it, Charlie. That would be gravy.

What we have provided in the comments, in our nprepared comments of 37% overall CAGR for the space is a blend, but we're primarily focused on the carrier universe, as I'm sure you know. And depending on whose research you look at can be as high in some cases as 60% growth in CapEx. We provided a blended number here. Our own performance clearly is higher than 37% on an annual basis. It's a combination of focusing on the best segments in Voice-over-IP but also secondarily continued market share capture combining to give us much better than overall market growth.

Great. Thanks, guys.

Thanks.

Your next question comes from the line of Tim Savageaux with Merriman, Curhan, Ford.

Hi. Good afternoon.

Okay, just sort of one quick question here. You mentioned in your commentary I thought some growth rates for your T3/E3 business. Was that 50% sequentially?

Yes, Tim, Raouf here. Yes, our T3/E3 business grew more than 50%, 5, 0 sequentially in Q1 over Q4.

Great. I mean is there, can you elaborate on that at all? I mean that's pretty extraordinary for what we would consider to be kind of a legacy technology. Is that sort of one customer specific? Or is that sort of inventory thing somewhere? Maybe you could just give us a little more color on that.

I would be happy to, Tim.

The overall, our overall WAN communications portfolio is comprised of a large number of product lines. It includes T1/E1, it includes legacy symmetric DSL, a [T.S], SH/DSL. Includes T3/E3 LIUs, T3/E3 line cards on a chip, other ATM products and so forth.

And the comment we provided was really intended to give a little more color on what we think are some of the brightest spots within that WAN communications portfolio. We have invested and continue to invest in some pretty exciting products in the WAN space where we think the time is actually expanding. And that specifically includes product lines like T3/E3 and line cards on a chip.

The line cards on a chip is a particularly important product line because that significantly expands the ASP by at least a factor of 3 per port. In other words, if you're just marketing a line interface unit you get a certain ASP per port. If it's a completely integrate framer and LIU you get roughly triple that as the ASP per port.

So that has a lot to do with the expansion of our revenues in T3/E3 in our first quarter that we reported.

A number of key customers, Cisco, Alcatel, and others are now going to production with our T3/E3 line cards on a chip. We have done extraordinarily well with those products and their ramping and providing us a lot of lift in that particular product line within the WAN communications portfolio.

Okay. Well that does explain it.

And just a follow up, if I could go on record as at least one who wouldn't mind to see you bring quarterly operating expenses below the $26 million level. Just to follow up on that. I mean even staying at current levels with revenue growth exiting this fiscal year, you'll still have an R&D to sales ratio that has a 4 in front of it or at least pretty close.

I wonder if you can give us some kind of timeframe to where you think you can get to more normalized R&D type of intensity. And by normalized I mean I know historically at the system level that's a mid teens thing, maybe it's low 20s thing for you guys given the gross margins that you have.

But can you talk about just sort of what your plans are for that? And why that 40% or so is acceptable, even near term?

Sure, Tim. It's Simon. I'll answer it in 2 ways.

First of all, within the context of the investment that we're making at this point in time, clearly the participation that we have in these high growth markets, Voice-over-IP and the analog markets that we're serving don't come without a cost.

They are high touch. They do require R&D investment to bring these customers to market in timeframes that are acceptable and generate revenue streams that, as you correctly point out, enjoy very significant gross margins associated with it.

There's no plan, as we said, to take the operating expenses down at this point. I'll say again it things don't play it the way we expect them to then we won't be shy about dealing with that issue at that point in time.

Now in terms of a timeframe within which you may expect R&D as a percentage of total revenues to come down something that you may perceive is more acceptable, we're not offering a timeframe for anything other than breakeven at this point in time. And when we get to that breakeven point we'll help people understand how we get from there to what I'll characterize as our intermediate model, which has us at $50 million of quarterly revenues.

So let's get to breakeven first and then we'll help you understand how we continue to grow beyond that point in time.

Okay. Thanks, guys. Nice quarter.

Your next question comes from Jeremy Bunting with Thomas Weisel Partners.

Good afternoon, gentlemen. This is Jenny Hsu calling for Jeremy.

Just a quick question, in your prepared remarks you mentioned some CAGRs for your Voice-over-IP and HPA businesses. I was wondering just in terms of your own business how would you expect to see each segment to grow given that while you expect to be flattish for '06?

Okay. So, yes, in our prepared comments we provided some metrics for the underlying market that we are serving. For instance, in the Voice-over-IP business we referred to the IDC report where we have provided the blended CAGR based on segments that we serve of about 37%.

We would expect to grow faster than that clip. In fact already have grown faster than that clip just based on, focused on some of the highest growth segments and also frankly market share capture within the Voice-over-IP.

So that's one thing to think about, hard for me to give you an exact number. Again, if the underlying markets at 37% annual growth we would expect to run a little hotter or a little higher than that.

The high-performance analog business is a little more difficult to parse out and to give you the exact numbers that you're looking for.

But certainly one of the drivers, one of a handful of drivers in the high-performance analog universe is the fiber to the premise market that we're focused on in Japan. And again in our comments we mentioned the fact that these are very high growth markets. In particular the PON space in Japan is growing at very high market rates from about 1.5 million subscribers in '04 to over 20 million subscribers by '08.

I think if you do the math that's higher than - it's triple digits, much better than 100% annual growth.

And we have a significant amount of market share there already so I doubt that we can gain a whole lot more share in that space, which typically held about 60 to 70% market share of analog components going into the PON space in Japan.

So not much room for incremental share capture, but really working hard to preserve our current position and riding that market.

So these are just 2 data points for you to think about. Obviously the composite of those 2 businesses today accounts for about 60% of our revenues exiting the first quarter.

Okay. And just delving a bit more into Voice-over-IP, I was wondering if you could sort of delve into some of the market share capture that you've given. I actually I think what's more critical is in terms of the inventory build for Voice-over-IP, would you expect that to be fairly lumpy or spread out evenly over the rest of the year?

And how would you typify, or how can we think about this deployments over the next couple of quarters?

Okay. So your first question, you mentioned something about inventory and you're wondering if there's any inventory build in the channel. To be very clear, we do not believe there is any excess inventory being built in the channel. And in fact in some cases we're seeing customers building product essentially hand to mouth, if you will.

And we get reports from customers saying that if we don't keep up with our shipments in a few cases it could go lying down, which indicates to us that there is no inventory built anywhere in the supply chain at this point in the game that we can tell.

Having said that, the shape of our revenue curve will always depend on the shape of the deployments of our customers to service providers. And we do not have 100% certainty on exactly how the deployments shape up.

I'm sure you're aware in many cases service providers deploying a new technology starts and stops and starts and stops, right? I mean they get to the point they have some significant deployments, then they have some work to do to get their infrastructure tuned back up again, integrate the lessons learned from the earlier deployments and start deploying again.

So the more customers we have and the more networks that we're shipping in to, the smoother the shape of the revenue curve that we would expect.

But obviously VoIP as a whole is still in its early phases. And therefore there could be some lumpiness to the pattern.

But if there's any lumpiness it would not be associated with inventory. It would simply be associated with the traditional shape of the deployment curves, especially in a next generation network that you would expect.

Okay, thanks for that.

And then just one final clarification, in terms of the market share wins that you've gained over the past couple of quarters, could you sort of describe? Is it like maybe more specific in terms of geography if you can't speak to customer specific wins?

Yes, I can give you just a little more color on that.

We believe we've been capturing share literally in all 3 major geographies worldwide, meaning North America, EMEA, and Asia-Pacific. It's well knows that we have made significant inroads at players like Alcatel, like Siemens in Europe, and more recently Ericsson as I reported in my prepared comments earlier.

Here in North America we've made very significant inroads with the top tier players. We're not a liberty necessarily to disclose the names of every single OEM that we have captured significant design wins because in some cases we are under MDA. And in other cases the customers don't want us to disclose the platform until they have announced it publicly.

And then obviously in Asia-Pacific we have significant presence in Korea, in Japan, and obviously in China with customers like Huawei and ZTE who have allowed us to talk about that publicly.

So we've gained significant share we believe in all 3 geographies. And only a fraction of the design wins that we have scored are actually in production today.

So we expect that the best is still ahead of us between sort of native market growth and market share translating into revenue ramps. The VoIP should be a good, long story for us.

All right, thank you very much, Raouf.

You're welcome.

Your next question comes from the line of Jeff Loff with Credit Suisse First Boston Corporation.

Now your commentary on the VoIP markets is really helpful. Just wanted to look at the high-performance analog market because growth there was strong as well.

Can you talk about the underlying trends there in the 3 areas, storage, video, and fiber to the prem? You've already talked about fiber a little bit.

Yes, certainly, Jeff. This is Raouf. Okay, so video is, our video business is focused on combo standard definition, high definition TV equipment applications. The class of equipment would include things like switchers and routers, multiplexers and so forth. That business is ramping for us. It's still very small as a percentage of overall high-performance analog revenues. It's quite small but ramping very nicely.

And we have been capturing a very significant number of design wins with the who's who in that space. Exactly the names you would expect and I think we mentioned a few of them as well in our prepared comments, people like Panasonic and others.

We have high expectations for that business in '06 and '07 as these design wins go to production. But again right now it's primarily a design win capture, market share capture gain for us.

The fundamental trends are very healthy as high definition content continues to broaden, become much more available. And obviously the FCC mandate for all HD gets a lot closer.

So it's a significant amount of design activity by all the major players in that space, North America, Japan, and a few players in Europe. And we're pretty excited by it because we've been capturing a significant percentage of those design wins that are going down.

In terms of the actual drivers for us, of the growth in Q1 in the analog portfolio, they came from 2 places, our cross point switch products that primarily serve the SAN space toward your networking and telecom space.

So again, storage was strong for us and also the metro or transmission space showed some real strength in our first quarter. The combination of those drove our cross point switch revenue up in Q1.

And then the other elements of revenue growth was our PMD portfolio, which serves fiber to the home. Again, primarily Japan as you heard me talk about earlier, but also a whole bunch of other metro and access applications across the world, but in other parts of Asia-Pacific most markedly.

Thanks. When you look at gross margin with VoIP business and the analog business becoming such a high portion of sales and your product mix changing like that? Are they implications for gross margin?

No, there are no implications, Jeff. As we've said previously the analog products actually run an overall higher gross margin than the corporate average. The Voice-over-IP products are just below the corporate average. Overall we don't expect to see any significant change to the gross margin model as we move forward.

Great. And then you talked about some of the success of line cards on a chip. Is that something that should show future growth or that might be confined to just these customers? And where do we stand on that transition?

Actually, Jeff, the line cards on a chip product offering is very successful for us, very, very successful.

We were the first supplier of successful line cards on a chip solutions. They've been adopted, as I mentioned earlier, by Cisco, by Alcatel. And as we mentioned in our prepared comments, we've had a large number of design wins with that particular product family. And most recently obviously again with Cisco Systems, Harbor Networks, we've had wins with the LOC solution across virtually every tier one worldwide.

So yes, we expect significant revenue growth from that particular product line coupled with growth in Sonet as well as T3/E3 LIU type components.

So again, within the WAN portfolio is going to be product lines that go up and product lines that go down as they age.

So I think we expect good things from that portfolio. We don't expect it to be the growth driver for the Company but we do expect good things from that portfolio.

Okay, thanks.

Your next question comes from the line of Daniel Amir with WR Hambrecht and Company.

Hi, actually this is Lena. I'm calling, dialing in for Daniel Amir.

Most of my questions have been answered, except the major growth drivers in the ATM and the T and E markets for '06.

Okay, so the major growth drivers in '06 are as follows.

First of all we think that there's an overall improvement in CapEx worldwide. And that's going to impact and help drive our T/E business and our ATM business together. And again, CapEx is recovering across all 3 major geographies, North America, Europe, and Asia-Pacific.

But in particular if you look into the details, the segment details of CapEx recovery, we're seeing that the most pronounced in 2 or 3 areas, metro optical being number one amongst those. But also we're seeing it in obviously in fiber based access, so fiber to the prem and fiber to the home. And also next generation xDSL type solutions.

So those I would say are the 3 biggest drivers for our WAN portfolio in '06.

Thank you.

Mr. Biddiscombe, that ends the question and answer portion of the conference call.

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.

Ladies and gentlemen, we do appreciate your joining us today for our conference call. This call is now concluded and you may now disconnect.