MACOM Technology Solutions Holdings Inc (MTSI) 2006 Q2 法說會逐字稿

Good afternoon, 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 Simon Biddiscombe. Sir, you may begin.

Thank you, Cynthia. I would like to welcome everyone to our conference call discussing the results of our second quarter of fiscal 2006, which ended on March 31, 2006. 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 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 and expectations for our fiscal 2006 third quarter, profitability 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 supply constraints, growth of markets, profitability, increases in product shipments, voice-over-IP revenue growth, deployments and our ability to benefit from them, new product features and their benefits, market share, industry and capital spending reports and research, inventory levels, revenue growth, gross margins, operating expenses, expense reduction measures and their future impact, and cash consumption trends.

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 other filings with the SEC.

During our call today, we will be making reference for the first time to non-GAAP financial measures as opposed to our historical use of pro forma financial measures. There are no differences in the basis for calculating non-GAAP versus our historical pro forma measures. For a complete reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings 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 second fiscal quarter of 2006. Today, we announced second quarter revenues of $34.6 million, up 4% from the prior quarter, and at the midpoint of the 2% to 6% sequential guidance revenue growth we expected at the beginning of the quarter. We achieved this growth despite ongoing supply constraints. Revenues from our high-performance analog products increased 29% sequentially, contributing 32% of total second quarter revenues. WAN communications product revenues grew 19% sequentially, representing 44% of the total.

Revenues from our family of multiservice access voice-over-IP processes declined 30% sequentially to contribute the remaining 24% of second quarter revenues. We believe this decline in our voice-over-IP revenues is temporary and primarily resulted from an inventory buildup of a specific voice-over-IP device at one key customer in North America. We expect strong revenue growth from our voice-over-IP products in the current third fiscal quarter.

In terms of revenue contribution by geography, the Asia-Pacific region contributed 52%, the Americas 39% and Europe contributed 9%. Cisco was our only greater than 10% end customer this past quarter, including both direct sales and indirect sales through third parties.

Non-GAAP gross margin was $24.5 million or 71% of revenues, slightly ahead of our expectations. This included a 3 percentage point benefit from the sale of products written-off in fiscal 2001. Non-GAAP gross margin, excluding the effect of the written-off inventory, was 68%.

Research and development expenses were $16.4 million, and selling, general and administrative expenses were $11.5 million for total non-GAAP operating expenses of $27.9 million, approximately 6% higher than our expectations. This was primarily as a result of a significant onetime non-insured medical expense, increased spending on research and development activities associated with new voice-over-IP product initiatives and incremental incentives and commissions in our sales organization. As a result, our non-GAAP operating loss was $3.4 million, a 2% improvement over the prior quarter.

Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $850,000. As a result, our non-GAAP net loss was $4.3 million or $0.04 per share based on approximately 105 million average shares outstanding for the quarter.

Turning now to the balance sheet. Cash, cash equivalents and marketable securities totaled $47.4 million at the end of March. Non-GAAP cash consumption was $3.5 million in the second quarter, a reduction of 36% over non-GAAP cash consumption in the December quarter of $5.4 million. The improvement in cash consumption was principally due to higher cash receipts from the exercise of employee stock options.

Capital expenditures were approximately $1.1 million and depreciation was $1.8 million. Receivables were $12.8 million resulting in net DSOs of 34 days, an improvement of 4 days over the prior quarter's 38 days.

Inventories were $18.8 million and inventory turns decreased to 2.2. Gross inventory, including amounts previously written-off, totaled approximately $59.1 million at the end of the quarter. Total current liabilities were $25.1 million, essentially flat compared to the prior quarter.

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 our results in our second fiscal quarter of 2006. The Mindspeed team made significant progress on a number of fronts. We delivered 4% sequential revenue growth despite ongoing supply constraints with significant strength from our high-performance analog and WAN communications product families.

Revenues from our high-performance analog products were up almost 30% sequentially. Revenues from our WAN product portfolio were up almost 20% sequentially. We combined our transmission and ATM network processor product organizations into a single WAN communications business unit for better customer focus as well as efficiency.

We continued to make excellent progress in reducing our non-GAAP cash consumption this past quarter by 36% sequentially, and our total design wins were up more than 30% sequentially over the prior quarter. Most importantly, we believe that we will achieve operating profitability on a non-GAAP basis in our current third fiscal quarter. This is based on expected strong revenue growth from our voice-over-IP products, combined with operating expense reductions.

I would now like to discuss each of our three key product families in more detail. Starting with our multiservice access voice-over-IP product portfolio, revenues were down 30% sequentially. We believe, however, that this is a temporary decline, primarily in our traditional core wireline trunking market, resulting from an inventory buildup of a specific voice-over-IP device at one key North American customer. At the same time, this customer is transitioning its inventory management system to a tighter supply chain model. We expect this excess inventory to be essentially consumed by the end of this current third fiscal quarter.

Despite this specific inventory issue this past quarter, we believe that the overall Voice-over-IP market is healthy and that deployments are expanding worldwide. Research firm IDC estimates a compounded annual growth rate of 37% for our addressable carrier voice-over-IP market exceeding $0.5 billion by 2009.

We also continued to experience adoption of voice-over-IP in emerging applications such as access and wireless infrastructure. In fact, in our key voice-over-IP expansion markets, we experienced significant sequential growth this past quarter. Specifically, while still relatively small, our revenues from enterprise deployments were up approximately 45%, while revenues from network access and wireless carrier deployments combined increased by almost 50%.

Most importantly, we believe we continued to increase our market share position in these key growth segments this past quarter. Specifically we scored more than 30 voice-over-IP design wins in our second fiscal quarter, which is the second highest number in our history. It included a number of significant design wins in carrier trunking and access and enterprise infrastructure equipment with tier 1 customers worldwide. For example, in our traditional core wireline markets, we scored our first design win with Ericsson, one of the worldwide carrier market leaders.

In the access segment, we won designs in class fiber placement equipment including multi-service access nodes in IP-DSLAMs at Alcatel, Huawei, Siemens and ZTE. In the enterprise segment, we captured key design wins at Nortel, Ericsson, UTStarcom and ZyXEL as well as multiple wins at Samsung for enterprise edge router and gateway equipment.

Over the past several quarters, we believe that the number of service provider supplied by our voice-over-IP equipment customers has increased from 75 to more than 100, with the addition of companies such as Cingular, China Mobile, Korea Telecom and Telmex.

This past quarte,r we announced that Cedar Point Communications, a leader in packet-based voice switching for the cable industry, selected our integrated Comcerto Series Voice-over-IP processors and packet-cable software suite for its SAFARI C3 Multimedia Switching System deployed with North American cable MSOs such as Comcast. Our voice-over-IP over cable software combined with Comcerto Series processors offers a highly optimized solution for implementing cable labs, packet cable initiative for advanced real time digital multimedia services.

At the Spring Voice on the Net or VON conference last month, we demonstrated a reference platform jointly developed with Legerity, which offers complete voice-over-IP processing for 48 standard telephone lines focused on Multi-Service Access Platforms and fiber-to-the-curb infrastructure equipment. This reference design is built around our Comcerto 500 voice-over-IP processors and Legerity's Voice Edge family of narrowband copper loop termination devices.

We believe this platform will accelerate product design for access equipment vendors developing carrier grade voice capacities on Ethernet and IP-based access networks. Finally, we believe that revenues from our voice-over-IP products will experience double-digit growth in our current third fiscal quarter, as top tier equipment vendors continue to expand the deployments in next generation networks worldwide.

Now, turning to our high performance analog product portfolio. Revenues were up 29% sequentially, driven by growth in cross point switch products, broadcast video infrastructure devices and in optical PMDs. In fact, we shipped a record number of optical PMDs to module manufacturers serving fiber-to-the-premise deployments. Key customers for our high performance analog product family this past quarter included McData, Alcatel, Infinera, Nortel, Mitsubishi, Agilent, WTD, Photon, Bookham, FiberZone, TrueLight, Stratus and many, many others.

According to a recent Infonetics Research report, the number of PON subscribers worldwide more than doubled between 2004 and 2005 to 3.4 million. Infonetics' forecast of PON subscriber growth will surge to 31 million worldwide in 2009. This demand for PON fiber-to-the-premise is being driven by deployment of video, IPTV and other high-bandwidth applications.

This past quarter, we introduced a highly integrated optical PMD solution that integrates a burst-mode laser driver with a limiting amplifier to deliver data rates of up to 2.5 gigabits per second and optical network units or ONUs and terminals used in fiber-to-the-premise PON networks. This solution incorporates our proprietary Eye-Minder dual digital closed-loop technology, designed to optimize performance at the lowest possible cost by compensating for laser aging and temperature effects in fiber-to-the-premise applications. It is designed to support BPON, GEPON and GPON applications with a single, versatile solution to facilitate fiber-to-the-premise networks deployment.

We won high-performance analog design wins this past quarter across multiple market segments, including optical modules, storage area networking and other wireline communications equipment with Leitch, Stratus, Tellabs and WTD, as well as multiple wins at FiberZone, Photon and ZTE.

We also continued to capture multiple new design wins with our video infrastructure solutions in standard and high definition TV in studio broadcast and distribution video applications, including Ikegami, Miranda, NEC, Pro-Bel and others.

Now turning to our WAN communications portfolio, revenues were up 19% as a result of strong shipments of our SONET solutions, our HDLC controllers as well as ATM/MPLS network processors. Key customers this past quarter included Nortel, Lucent, Cisco, Alcatel, Juniper, Huawei, ADC and many others.

During the quarter, we expanded our highly integrated DS3/E3 line card on a chip family with products that support generic framing protocol or GFP encapsulation for emerging Ethernet-over-DS3 applications in data networks. Available in configurations of one to six ports, our new Ethernet-over-DS3 solutions are the first in the industry to include integrated line interface units or LIUs. By adding GFP functionality to multi-service switching equipment, carriers can connect Ethernet traffic over their installed networks to make the most efficient use of their existing infrastructure.

On the design win front, this past quarter, we score numerous design wins for our WAN communications products including Cisco, Ericsson and Alcatel, as well as, multiple wins with Huawei, Harbor Networks, UTStarcom and ZTE.

Overall, we believe that the carrier and enterprise markets we serve are experiencing continued strong growth. In fact, the most recent report from market research firm, iSuppli, forecasts that carrier capital expenditures will jump by 13% this calendar year, based on deployments announced from the world's major telephone companies. In particular, we believe that Mindspeed is poised to benefit from capital expenditures in next generation networks as well as legacy infrastructure.

In conclusion, we are pleased to have delivered 4% sequential revenue growth in our second fiscal quarter. Most importantly, we believe that we will achieve operating profitability on a non-GAAP basis in our current third fiscal quarter. This is based on expected strong revenue growth from our voice-over-IP products, combined with expected sequential operating expense reductions totaling approximately $2.9 million in our current third fiscal quarter. These expense reductions include a modest restructuring, primarily, in our SG&A support functions and from efficiencies achieved in our WAN communications business unit, as well as several nonrecurring measures totaling approximately $1 million, such as mandatory employee vacation time.

Reaching operating profitability on a non-GAAP basis in our current third fiscal quarter is based on the following expectations; that we will deliver third fiscal quarter revenue growth in the range of 2% to 5% sequentially, that our non-GAAP gross margin will be approximately 70%, and that our non-GAAP operating expenses will be approximately $25 million. That concludes our formal comments today.

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

[Operator Instructions]

Your first question comes from Arnab Chanda with Lehman Brothers.

Hi, guys. This is Ken for Arnab. I just wanted to see if you guys could go a little bit more detail in terms of what you're seeing for the inventory build at that the customer. And how confident you are in terms of that being alleviated this quarter, as well as just kind of the guidance, in terms of, how you guys are putting that together?

Okay. This is Raouf and I'd be happy to take that question. It appears that our key North American customer built this inventory sometime the first fiscal quarter, meaning the December quarter with some spillover effect into the second quarter, meaning this March quarter.

We became aware of this excess, if you will, inventory build at, sort of, roughly halfway through our second quarter. And as I mentioned in our prepared comments, this came at the same time as the customer is trying to transition to a tighter supply chain model, if you will. So it' sort of accumulated, it was a cumulous of two effects at the same time.

Up to that point we had continued to receive strong forecasts from the customer and the customer, you know, came to realize as they were transitioning to this tighter supply chain model that they had excess inventory of this one key device. So we have at this point, what I would characterize as relatively good visibility to the issue. This particular customer is using a -- an offshore contract manufacturer that's also working with us. And so between the three parties, ourselves, the contract manufacturers and the OEM, we're trying to obviously triangulate the amount of inventory, excess inventory, I should say. And we're pretty comfortable that by the end of this current third quarter will absolutely have completely depleted.

Thank you.

Your next question comes from Jeff Loff with Credit Suisse.

Hi. So it sounds like you're still on track to achieve operating profitability, but the target numbers are little bit different in terms of revenue at 37 million and the operating expenses. Can you just talk about, because even despite the fact that you reported revenue, sort of, inline with your guidance this quarter, why the target has changed for the September quarter given the expected growth in VoIP and the fact that you met the target this quarter?

Jeff, this is Simon. The model really hasn't changed with regard to the September quarter, we haven't laid anything out. With regard to the June quarter, obviously, there has been something of a tweak here.

First of all, we've taken the OpEx numbers down from roughly a run-rate in Q1 and Q2 of 26 million and change, it bumped up, sorry a run-rate in Q1 of 26 and change, bumped up in Q2 at 27.9, came back to an expectation for the current quarter of roughly$25 million and as Raouf said in the prepared remarks that includes a benefit of roughly $1 million that we wouldn't necessarily expect to enjoy in the September quarter, okay?

The expectations for revenue growth, I think, we clearly communicated in the prepared comments, suffice to say that we're looking for double-digit strong growth from our voice-over-IP product family in this quarter.

Okay. And on the high performed analog business, you've had two strong growth quarters there in a row. What's the risk that there inventory is starting to build there? Could you just talk about how -- where you're shipping? How broad that is? And what level of visibility you have?

Sure. Jeff, this is Raouf. Okay. So there is essentially three key products lines on this analog business, as mentioned earlier, our switches, our PMDs and our broadcast video products. In the broadcast video category, that business is continuing to ramp very strongly. We've been capturing designs wins now, for approximately a year and a half, maybe a little longer than that. And those designs are just starting to ramp, there is essentially no inventory that we can see in the channel.

In the optical PMD side of the house, if you will, shipments are very strong, that is really driven to first order by the Japan fiber-to-the-home market -- inherent market growth, subscriber growth is very strong in Japan, I threw out some numbers in our prepared comments. And we believe that our key customers in Japan who, as well in China and Taiwan, are serving the fiber-to-the-home space are actually significantly supply constrained with our products.

In fact, we know that they are supply constrained and some of them are not very happy about that. So we're very comfortable in saying that there is no inventory there either and the switch [inaudible] depends on trends in storage and trends in metro optical infrastructure. Again there we don't believe there is a any inventory that's built up but obviously, that's the one that perhaps, is more tied into macro trends than the other two where you've got very clear product cycles going on.

And then just to finish off, can you talk about supply constraint situation? What you're seeing, how long you think that persists and whether you can see any manufacturing constraints, whether that's holding you back from getting some revenue?

Jeff, this is Simon. There is no doubt that the constraints held us back at the end of the quarter. I think that to put it in context, we ended the March quarter with roughly the same amount of supply constraint as we'd had at the end of the December quarter.

So quarter-to-quarter there wasn't a net impact as result of the supply constraints but suffice to say, we continue to work through those issues at this point in time. The supply constraints continue to be primarily backend. We're not struggling with regard to wafer capacity at this point in time. The backend continues to be a source of frustration both on the assembly and test side of things.

Great. Thank you.

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

Hi. This is [Ed Macklin] calling for Charlie Glavin. Just one quick question, I noticed that your Asia Pacific revenue actually was down a little bit this quarter. Can you give some comments for that?

Yes. I think as we said or Raouf commented as we -- as he answered one of the earlier questions ,despite the fact, we talked about an inventory build at one of our North American OEMs. The contract manufacturer for that OEM is actually based in Asia. So based on the way we report the numbers within the context of the press release, that would have came to those Asia Pacific activity as opposed to North America activity.

So you're absolutely right. The Asia Pacific activity was down, but not to the same extent as the sufferance as a result of that one inventory issue. And then a lot of the strength we saw in the analog business was associated with North America as well. So there was growth in North America as a result of the strength we saw in analog.

I see. Great. Second question I have actually is regarding trends in terms of your each line of your business. You know given that WAN has been up and in your prepared comments you said that -- you cited one of the research firms by saying, you know, that they are looking for this year to grow. Are you still looking for that business to be flat year-to-year, which is what you guided the last quarter or are you looking for that business to actually go up this year?

We are not offering a changed perspective at this point in time, Ed. The -- as we've previously communicated, our expectation for the WAN communications product portfolio was that it would deliver essentially flat revenues fiscal 2006 over 2005, but that that would see some variation based on trends in carrier CapEx. So maybe there is a chance it could be up a little year-over-year at this point in time. But we still don't expect it to be significantly different than our original expectation.

I'll just say if that's the case then you're looking for that business to actually go down in the next two quarter, is that --?

We'll wait and see how the next six months play out. As I said, it's going to be flat to up a little or something in that kind of range.

Okay. Great. One more question, just housekeeping, on your prepared remarks you said -- you mentioned something about medical expense that impacted your SG&A?

Yes.

Can you clarify that just? I missed that comment when you --?

No. There was a one-time event that occurred during the quarter that related to a non-insured medical claim. It's not something that we ever expect to see again within the context of the Company. And I won't go into any more detail on that.

Okay. Great. Thanks for clarifying that.

Your next question comes from Allan Mishan with CIBC World Markets.

Hey, guys. Can you please share with us what your original expectation even in a ballpark was for the VoIP business? And then what were the products that sort of rose to meet the gap there.

Okay, Allan, this is Raouf here. Yes, initially at the beginning of our second fiscal quarter, which is as you know the March quarter, traditionally the slowest quarter in communications infrastructure, our expectations for the VoIP business were that it would be roughly flattish, give or take. But I think as we worked away through the quarter and the issue with this key North American customer became clear, we also happened to experience very, I guess I'd say, above plan upside from other segments of our business that very comfortably that filled that gap.

And those included certainly the fiber-to-the-home business or with our optical PMDs shipping as I mentioned earlier primarily to Japan Taiwan and China, and then also in our WAN business, which was a little firmer, a little stronger than we had anticipated at the beginning of the quarter, again showing that the virtue of a broad and very well designed end portfolio that we continue to enjoy.

Okay. Great. And I guess comprehending the, I guess, order flow that must have accompanied the inventory collection. What was linearity for orders during the quarter month-to-month, and then how is -- how does April look so far?

Okay. Allan, this is Simon. The older linearity was actually very consistent, actually it was very linear with the exception of the period around lunar New Year and that always causes some [permutations] in the numbers, but as I look at the trends that we saw right across of the quarter,it was all pretty linear in reality.

We've given consideration to all of those factors in building the current quarter's guidance and as you know, we don't provide book-to-bill information. We don't provide absolute backlog dollars information and so on. So suffice to say, we've built everything that we need to have into the guidance that we've provided today.

Okay. Great. And if I could, what do you think your market share is specifically in the fiber-to-the-home, PMD business. And is it different at all in the EPON market, which would be heavily Japan versus say BPON and GEPON?

Okay sir, Allan this is Raouf again. We continue to believe our market share in the EPON space specifically, is at least 70%, that's 70, with our PMD products shipping into all geographies that deploy EPON technology today. If anything our share has picked-up not ticked down in that space.

As far as North American, particularly at the GEPON flavor that you're referring to, our analysis indicates that a fairly substantial percentage of that market is still captive, meaning optical module manufacturers, who designed their own ASICs to go inside their own optical modules shipping it to GEPON networks.

So of the merchant portion, we believe that we will enjoy ultimately a market share that's similar to what we have in the EPON space. But overall, the portion that's available to be outsourced is smaller. Hard to give you exact percentages, but I think on a blend we may be closer to 30%, 40% at least initially.

Okay. That's helpful. And if I can just do one final question. If you guys could, maybe break down the high performance analog business, in terms of say application, say you know, storage, fiber, video and then I guess other communications that will be helpful since there's been in quiet a lot of changes in that business recently.

Allen, this is Simon. They vary from quarter-to-quarter and we don't them break them down quite that way when we communicate with you guys, analyst community at large. Suffice to say that at this point in time, the switching business is a little larger than the PMD business and included in that switching business, I would throw the video products as well. So combination of the video products and the switching products is just over half of the total revenues at this point in time.

I see, so did the ramp-up of the video products, sort of help tip that scale a bit.

Yes, it did.

Okay. Great. Thanks very much.

Appreciate it.

You next question comes from Sandy Harrison with Pacific Growth Equities.

Hi. This is Kerry Rice for Sandy. Just most of questions have been answered, but I wanted to try to get a better comfort level for the guidance for the June quarter. If I look back historically, guidance has a been a little bit stronger for the June quarter, and I was wondering if the 2% to 5% sequential growth is somewhat limited or make sure I understand that that's limited from the supply constraints on the backend where if maybe that was eliminated, you would see a little bit bigger boost in that quarter?

Gary, it's Simon. That's entirely possible. We don't expect all of the supply constraints to have been eliminated at the end of this quarter. It's difficult to say precisely, how many dollars will remain unsupplied come to the end of June. But it's not our expectation that we work our way through all of the supply constraints that exist at this point in time.

Do you have some, sort of kind of timeframe to when you think that will occur the total, kind of, the clearing of this supply constraint issue?

The internal expectation is that we'll continue to work through the issues through the June quarter and through the September quarter. However, we're also very cognizant of the fact, that it was the September quarter of '05, when the supply constraints started to reveal themselves. So to a certain extent, we are at the whim of the assembly and test houses, when it gets toward that seasonal build of consumer type products in the September quarter, and then, the December quarter.

So I'd like to be able to tell you that we expect to be through substantially all of these issues by the end of the September quarter. And again, it remains to be seen based on how consumer type devices suck up capacity at that point in time.

Okay. And then related to the voice-over-IP inventory issue, you said that, you expected all the excess inventory to be sold through or burned off by the end of Q3, the June quarter. So I guess I'm trying to reconcile, if you expect double-digit revenue growth is that because you'll be replenishing that inventory, or how should I think about reconciling those two?

We don't think that inventory is going to be replenished as such Kerry, if you think about it within the context of -- that customer also move into a more constrained supply chain than they have historically operated at, we don't think we'll get -- we're going to get an inventory replenishment benefit as such.

We think we're going to work through the inventory that exists over the course of the June quarter. And then, from that point onwards we'll be supplying at something much closer to actual consumption.

So I would assume then that the double-digit growth is coming from somewhere other than this one North American customer?

Yes. That's not a an unreasonable assumption at all.

Okay. Thank you.

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

Hi, good afternoon. A couple of questions. First with regard to the business breakout, I want to -- I know you hit this, but I want to back over again, because I didn't quite understand it. You did indicate that a fair bit of the strength in North America came out of the high-performance analog business. But also in discussing anecdotally that business, indicated that most of the fiber-to-the-prem strength came out of Asia, though Asia overall was down sequentially.

"Wonder if you could, sort of, step back through that and should we then conclude that it was really North American storage that was the key driver here in driving the business, or if you have any other comments about North American fiber-to-the-prem business that you might be involved in?

Tim, let me make sure, I clarify the various data points, okay. So, it's broadly understood that most of our switching business and to a lesser extent much of our video business is actually very North American centric, okay? So the North American growth that we experienced was partly attributable to the performance of the switching and video side of the analog product portfolio, okay.

We did experience fairly significant growth in the PMD product family as well and as we said, we shipped record volume of PMDs last quarter. That is obviously very Asia centric at this point in time. The offsetting effect is clearly the voice-over-IP inventory situation that occurred and that resulted in a decrease in our overall Asia activity.

And as you can tell from the numbers that we have talked about throughout the course of the day, the absolute decrease in the Asian activity is nothing like the absolute decreases that we saw as a result of the decrease in voice-over-IP. Okay, so clearly there is an offset in the Asian numbers associated with the growth of the PMD business.

Okay. Fine. And then on the operating expense line, obviously you're guiding to profitability here in next quarter, and that's spectacular. Looking forward, obviously there's those of us who would like to see that OpEx number stay close to 25, you're obviously seeing it tick backup here, I wonder if you could talk about trajectory, of operating expenses past the next quarter and also whether you expect to stay profitable?

I think the fundamental premise behind everything thatwe are driving toward at this point in time is that we become a profitable company in the June quarter, and remain a profitable company from that point onwards. And clearly it's not in anybody's best interest for us to become profitable in the June quarter, and then to regress in the September quarter, that we should not allow to happen Tim.

So regardless of whether the revenues play out the way people expect them to, as we move through the June and September quarters, it's our strong desire to remain a profitable company from that point onwards. And what we said, on the call is that we expect a benefit this quarter of approximately $1 million from items that we would characterize as non-recurring. So if you think about those just naturally rolling back as we get into the September quarter, that would imply that the operating expense number is somewhere around $26 million instead of $25 million.

Clearly, if the revenues don't play out the way that we would expect them to, we wouldn't allow them to grow back to the $26 million level from the $25 million level.

Very good. And as a closing question, have you discussed how you feel about the potential for a reverse share split for Mindspeed?

Tim this is Simon, we have not discussed the potential for a reverse share split. It comes up periodically in talking to investors, and the principal reason it comes up, is within the context of being able to demonstrate earnings growth, as we move forward with 105 million shares outstanding.

It's something that we as a Company scratch our heads on periodically. We think there are negative commutations associated with a reverse share split that -- certainly used to be, there are many people who think there are still negative commutations. So we continue to scratch our heads on it periodically, but with absolutely no commitment at this point in time and by way of example it's not something that we discussed with our board, no near term plans.

Okay. Thank you very much.

Your next question comes from Tim Kellis with Stanford Financial Group.

Yes. Good afternoon. Just a clarification. With the voice-over-IP business forecasted to be up double-digits in the June quarter, where do you say there is going to be weakness to net out to 2% to 5% sequential growth rate?

Okay. So Tim this is Raouf. We expect that on balance that the rest of our business will be flattish. It's possible that that there could be one segment for instance that declines a little bit or softens a little bit in the June quarter. We expect our voice-over-IP business to makeup for any of that kind of weakness that could happen, as well as secondarily grow the business by 2% to 5% that we expect to get to pro forma breakeven or non-GAAP breakeven I should say.

So that's where we expect it, so if you do the math that would indicate north of 10% sequential growth, maybe quite a bit higher than the 10% sequential growth for the voice-over-IP business in the June quarter.

I would think that would beg the question that the VoIP business was obviously weak this quarter and it's returning to growth, but the growth in the WAN business notwithstanding, at least the assumption was that the market dynamics for the HPA business was quite strong and I was just wondering why you thought that would be flat going for the June quarter instead of growing?

Well it's a mix, as you know each one of these product families has a mix of product lines. And we'd expect that certain of these product lines will continue to ramp. But not everything goes up sequentially every single quarter. So there could be certainly product lines that take a pause or so during a particular quarter and then resume growth later on.

Tim, don't forget that business actually delivered 29% sequential growth right. So those things aren't always sustainable on a product family by product family basis.

Okay. Fair enough. And then I was just wondering if you could maybe discuss the dynamics that led to the WAN business growing maybe in a little more color?

Sure, sure I'd be happy to do that Tim. As we mentioned in our prepared remarks, first of all we believe that the carrier communications space is actually quite healthy. We believe carrier CapEx grew at almost 10% in 2005 and we gave one data point from iSuppli where their expectations are the CapEx will grow about 13%, double-digits for the first time in five years, in 2006 as compared to 2005.

And so clearly what happened to us in the latter part of '04 and very early '05 was that we had experienced some amount of inventory build of some of these WAN devices at Tier one customers. That inventory was completely bled out the channel sort of in the later part of 2005, and now we are experiencing a combination of the WAN business coming back to its natural run rate, if you will, combined with continued health in the communications infrastructure space, which we actually expect to continue to improve in '06 over '05.

Plus, of course, we've captured some very important design wins that we have been reporting on publicly now for almost three years in the WAN space. And those are really very strong positions with SONET products that have high ASPs, HDLC controllers that likewise have high ASPs as well as ATM network -- DS3/E3 line cards on a chip and so forth.

Our WAN portfolio is one of the broadest WAN portfolios in the industry, it enjoys very significant ASPs and now has actually much better market share, market positions than was the case three years ago. And so we are seeing the benefit of those design wins also starting to ramp at the same time as we are experiencing much better health in the underlying communications infrastructure space. So we are not particularly surprised that the business grew nicely and has grown nicely for a little while.

Okay. Thanks and just one more point of clarification, when you are talking supply constraints you're talking across the board right?

We're talking across the board Tim, but the reality is that most of them are in the backend assembly and test at this point in time.

I mean from a product line perspective, all through your product line?

Absolutely. Yes.

Okay. Thank you very much.

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

Thanks. Some of them are relative, if I can go into a little bit more detail in terms of this snapback under voice-over-IP in the North American person, as we understand it there this -- that particular customer is implementing a new inventory system that's allowing vendors to have a live link into their forecast via vendor website providing more up-to-date information.

How much of this air pocket was due to essentially over order as opposed to the transition into the system, which would necessitate a flushing out of anything within the food chain, not just at your side but also DMS guys and few others, as well as their own internal inventory.

Yes. Charlie, this is Raouf. That is an excellent question, and honestly it's one that we find hard to answer. We do get good -- a good feed from that Tier one customer indicating their current quarter, as well as next quarter's forecasted demand. We do get a good feed from the contract manufacturer, which is suppose to net out the WIP at all different levels. And frankly at times we find it very difficult to reconcile the two.

And so we continue to work to try to get clarity throughout the supply chain. It's challenging, but it's hard to say whether the disconnect was because of their transition to their own internal system to manage this tighter supply chain that you refer to or whether it's a inner work is between them and the CM or some other factor. They were clearly somewhat surprised by it themselves. We helped them understand it actually. And they've been trying to reconcile it now.

Charlie, I want to add something within the context of your question, I think, you used the words snapback, and I want to make sure you understand that neither Raouf nor I are expecting any snapback in the current quarter with regards to that customer, okay.

Okay. But -- so the strong growth, the certainly well above 10% type of growth is going to be more broadband, now you much depended on that one, correct?

Absolutely right Charlie.

Okay.

Absolutely right and that one customer is obviously only one of very many that we have in production today, plus of course the desirable pipeline of customers that continue to go to production on an ongoing basis.

But we mentioned that we're on over 100 carrier deployments already, you can imagine as I am sure you aware we have very strong market share in Asia, in Europe, and we just added some really excellent customers in this past quarter. So yes, it's going to be outside of that one North American customer that you refer to.

In regards to your question, I am sure you've gotten as far as this was all due to a sales person on leave and causing a $5 million over order, you never put a stop on it --?

Charlie, we obviously would not provide that level of detail on an earnings call. We don't talk about who the customer is. We don't talk about the specific product.

Okay. One question though in regards to the fiber-to-the-home, back in the -- at the end of '03, certainly there was a bit of the Japanese over order and that is always been a fairly lumpy business, but can you compare and contrast some of the steps that we've seen over last few quarters.

Verizon willing to go -- abandon some of the fiber-only, and yet at the same time EMCORE starting to ship out fiber modules or transceivers at this point, it would seem as we may finally start to see a bit more of an uptick, can you give some sort of commentary as far as the flatness right now in the HPA business relative to the fiber not being a repeat of '03?

And secondly how much within your forward guidance are you assuming any sort of North America or European, such as with Deutsche Telecom sort of deployment in the '06 type of guidance?

Charlie, this is Raouf again. Okay, so to answer your question,s I'll try to answer all of them, if I forget one of them, please remind me. As related to, specifically with your last question around North American deployments and how much of a factor those may or may not be, they're frankly not very much of the factor in our HPA business at this point in the game. Those deployments in North America have yet to take on a scale, that I would call material from a semiconductor perspective.

We expect the deployments by Verizon and others to be large enough to be material in the late 2006, maybe even '07 kind of timeframe, okay. So that's the first thing I would say, and the same pretty much applies to deployments at Deutsche Telecom, France Telecom and other European PTTs who have announced that they are also going to deploy fiber-to-the-home.

I would say North America; we expect it to be very much biased towards fiber-to-the-curb or fiber-to-the-node, and then distribution frankly to be over a variety of xDSL flavors as opposed to fiber put all the way to the subscriber. And therefore the size of the TAM or fiber-to-the-home TAM in North America is always going to be a fraction of what it is going to be in Asia Pacific. The potential is there for Europe to be more material actually than North America just because of the demographics that are more favorable in Europe for fiber-to-the-home deployments than they necessarily are in North America.

But I would say this for the balance of this year, our fiber-to-the-home revenues are going to be very much driven by continued adoption, which is pretty consistent. I would say pretty linear adoption of fiber-to-the-home in Japan specifically and increasingly in Korea, and perhaps a couple of other major countries in Asia.

And Simon is that confidence coming from the fact that you have got more 70% shipment to -- directly to the OEMs as opposed to '03? Where two more distributors?

Yes, that is absolutely the case. And we have talked about that in the past Charlie. We have cleaned up that supply chain over the course of the last couple of years, most of it was done in late 2004 and 2005. We've cleaned up the supply chain significantly in terms of the number of participants there. And we have got much better line of sight to actual consumption rates at this point in time, through NTT's deployments and so on. So when you go back that far, we didn't have as good a line of sight to the NTT deployment numbers, what was being deployed as we do today.

Simon if I could just make sure I am clear on it and I may have a follow up question, but SG&A less the medical expense, less this stock comp, on a pro forma basis would have been what last quarter?

SG&A -- we didn't give the dollars associated with the medical expense Charlie?

It was -- the reason why I am asking that is if you just take out this stock comp that would be 11.5 and in order to really get down to that 25 million amount you have to take pretty good whack up either your R&D or your SG&A.

Fact is -- okay so, so it's primarily SG&A centric Charlie. And what, what didn't get discussed is that beyond the -- included in the reduction that gets us from $27.9 million in the March quarter to $25 million in the June quarter, is beyond the one-time medical expense, an expectation that the costs associated with our annual proxy process, shareholder meeting, those kinds of things that are actually extraordinarily high, do not recur. Okay, so we didn't give you all the pieces of how you get from $27.9 million to $25 million, but suffice to say that our expectation is that the $25 million numbers looks something like R&D at 15 million or so and SG&A at approximately $10 million.

Got it. And certainly if you did a reverse split that would have been anywhere from 2 million to 4 million, correct? Got it. Based on what [Agir] and other guys who have done reverse split would've been.

Who knows Charlie?

Yes. Okay. Thanks guys.

Appreciate it.

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

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.

Ladies and gentlemen, thank you for participating in today's call. You may now disconnect.