MACOM Technology Solutions Holdings Inc (MTSI) 2006 Q3 法說會逐字稿

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

[0PERATOR INSTRUCTIONS]

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

Thank you, Michelle. I would like to welcome everyone to our conference call discussing the results of our third quarter of fiscal 2006 which ended on June the 30th, 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 third 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 included in the financial outlook and expectations for our fiscal 2006 fourth 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 trends in our business units, increases and decreases in product shipments, deployments and our ability to benefit from them, new product features and their benefits, market share, demand for our products, industry reports and research, customer relationships, the impact of technological developments in our industry, design wins and their impact on future performance, inventory levels, future revenues, backlog, backlog coverage, order trends, gross margins, operating expenses and other expected operating results.

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 to non-GAAP financial measures, which excludes stock-based compensation, amortization of intangible assets, and special charges. For a complete reconciliation of the 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 website at www.mindspeed.com.

Turning now to our financial results for the third fiscal quarter of 2005, today we announced the third quarter revenues of $35.9 million, up 4% from the prior quarter and in line with the 2 to 5% sequential revenue growth we expected at the beginning of the quarter. Revenues from our family of multi-service access voice-over-IP processors increased 9% sequentially contributing 25% total third quarter revenues.

Revenues from our high performance analog products increased 6% sequentially representing 33% of the total. WAN communications product revenues were essentially flat contributing the remaining 42% of the third quarter revenues. In terms of revenue contribution by geography the Asia-Pacific region contributed 51%, the Americas 32% and Europe contributed 17%. Cisco Systems was our only greater than 10% end customer this past customer including both direct sales and indirect sales through third parties.

Non-GAAP gross margin was $24.8 million or 69% of revenues. 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 66% consistent with prior quarters.

Research and development expenses were $14.2 million and selling, general, and administrative expenses were $10.5 million for total non-GAAP operating expenses of $24.7 million slightly better than our expectations. Operating expenses in the third quarter benefited by approximately $1.2 million from several non-recurring cost saving measures that were discussed last quarter.

We are very pleased to have delivered a third fiscal quarter non-GAAP operating profit of $73,000 achieving our key corporate objective this past quarter. Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $1.3 ml. This was principally associated with international taxes.

As a result our non-GAAP net loss was $1.3 ml or $0.01 per share based on approximately 107 million average shares outstanding for the quarter. Turning now to the balance sheet, cash, cash equivalents, and marketable securities totaled $44.1 million at the end of June. Non-GAAP cash consumption was $3.4 million in the third quarter compared to $3.5 million in the March quarter.

Capital expenditures were approximately $1.5 million and depreciation was also $1.5 million. Receivables were $17.5 million resulting in net DSOs of 44 days compared to the prior quarter's 34 days.

Inventories were $20.3 million and inventory turns were flat at 2.2. Gross inventory including amounts previously written off totaled $57.4 million at the end of the quarter. Total current liabilities were $28.2 million, up approximately $3.1 million compared to the prior quarter principally driven by increased accounts payable.

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

Thank you, Simon. I'm very pleased with our results in our third fiscal quarter of 2006. First and foremost, we achieved our primary corporate objective of reaching operating profitability on a non-GAAP basis in our third fiscal quarter as expected. I'm very proud of the efforts of the Mindspeed organization in reaching this key milestone.

We also delivered 4% sequential revenue growth with higher shipments of our multi-service access voice-over-IP processors and high performance analog products and consistent performance from our WAN communications business. Revenues from shipment of our broadcast video product into this new market segment exceeded $1 million.

And finally design wins for our broadcast video and fiber-to-the-home products were up significantly over the same period last year. I would now like to discuss each of our three key product families in more detail. Starting with our multi-service access voice-over-IP product portfolio revenues were up 9% sequentially with strong shipments of our Comcerto Carrier voice-over-IP processors as key customers including Huawei, ZTE, Alcatel, Siemens, and many others continue to deploy next generation equipment with our Comcerto Series processors and service provider networks worldwide.

According to the latest report from the market research firm Dittberner, Huawei and ZTE continue to lead global voice-over-IP gateway port shipments and have the number one and number two market share positions worldwide respectively. We enjoy excellent relationships with both of those key customers with a long history of joint voice-over-IP deployments.

We are continuing our focus on emerging voice-over-IP in applications such as access, enterprise and wireless infrastructure. During the third quarter we announced our next generation Comcerto 900 voice-over-IP processor and a comprehensive wireless software suite optimized for emerging IP multi-media subsystems or IMS network applications. IMS equipment requires fast and highly efficient processes in support of a complex assortment of wireline and wireless applications, IP protocols, security standards and high quality voice technology. A combination of our Comcerto 900 processor and wireless software suite provides an integrated system-on-chip solution for implementing media gateway supporting IMS and fixed mobile convergence applications. The convergence of IP-based voice, video and data with mobile access as well as the increased adoption of 3G technology is expected to usher in a new generation of more cost-effective and compelling subscriber services.

We believe that our broad family of Comcerto hardware and software solutions will enable our customers to rapidly expand into these exciting new market opportunities. From a market share perspective we believe that we continue to improve our position in key voice-over-IP expansion markets this past quarter with more then 20 design wins in network access, wireless and enterprise segments including Nortel, Samsung, ZTE, [Decelectel Labs], Toshiba and others.

And now turning to our high-performance analog product portfolio. Revenues were up 6% sequentially, driven by record shipments of our optical PMDs, our SerDes devices and broadcast video infrastructure. In fact revenues from our broadcast video products exceeded $1 million in our third quarter.

Key customers for our high performance analog product family this past quarter included Alcatel, Infinera, [Fiberzone], GigaCom, McData, Mitsubishi, WTD, OpNext, Fulton, Meriton, Sumitomo, [TruLight] and many others. During the quarter we extended our family of broadcast video products with a family of standard definition-only devices. Our new cable driver, equalizer and re-clocker offer a high performance, low-cost replacement solution for competing legacy products giving our customers more choices in designing high definition or standard definition systems such as video routing switchers, distribution amplifiers and large production switchers.

We also introduced a new family of combined high definition and standard definition devices, delivering an overall foot power and footprint reduction of approximately 50% compared to competing solutions in the market today. This past quarter we scored high performance, analog design wins across multiple applications including fiber-to-the-home optical modules, metro optical multiplexers, storage area networking and other wireline communication equipment with Nokia and Siemens, as well as multiple wins at NEC, Photon, Sumitomo, Cisco and Huawei.

We also continued to capture multiple new design wins with our video infrastructure solutions in standard and high definition TVs, in studio, broadcast and distribution video applications including wins of Toshiba, Stratos, Pro-Bel and Quartz as well as multiple wins at Ikegami.

And now turning to our WAN communications portfolio, revenues were essentially flat sequentially with double-digit growth in our HDLC controllers and other physical layer transmission products. Key customers this past quarter included Cisco, Alcatel, Lucent, Siemens, the Huawei-3Com joint venture and many others.

On the design win front this past quarter we scored numerous design wins for our WAN communications products including Nokia, Sonus, Huawei and [Datong] as well as multiple wins at ZTE. In conclusion, we are very pleased to have delivered 4% sequential revenue growth in our third fiscal quarter and to have achieved third quarter operating profitability on a non-GAAP basis as expected.

Looking into our current fourth fiscal quarter, our backlog coverage is currently slightly below third quarter levels. We believe that in our third fiscal quarter we fulfilled demand that had been building as a result of earlier supply constraints and that some of our customers purchased ahead of their actual demand during the quarter.

Based on current backlog, expected order trends, and other relevant factors, we expect our fourth fiscal quarter revenues to decline approximately 5 to 10% sequentially and expect our non-GAAP gross margin to be approximately 69%. We also expect non-GAAP operating expenses to be approximately $26 million. As a result we expect our fourth quarter non-GAAP operating loss to be approximately $3.1 million.

Finally, we remain optimistic about the long-term growth prospects of our key voice-over-IP and high performance analog market segments including fiber-to-the-home and broadcast video infrastructure, as well as continued stability in our WAN communications product portfolio.

That concludes our formal comments today.

Operator let's open the line for questions.

At this time we will open the floor for questions.

[OPERATOR INSTRUCTIONS].

Our first question comes from Jeff Loff of Credit Suisse.

Yes, as you look back over the historical financials, you lost 3.5 million operating in December '05 quarter and now you're talking about losing a little over 3 million in cash. It just feels like there's been no progress despite being positioned in some of the key growth markets in telecom, and I'm just wondering as you step back and look at the bigger picture, how you think about what's been happening and why you're seeing that trend?

Yes Jeff, it's Raouf Halim here. So there's no doubt that in a number of our key markets there's a great deal of dependency on the specific timing of the tenders being awarded to service providers. For example, in the voice-over-IP market I think it's no secret that a very high percentage of, and possibly all service providers worldwide, are at some phase or the other of adopting voice-over-IP technology.

However, the state at which and the specific phase that they -- at which they are when they're defining their plans and rolling out their plans and finally awarding tenders, selecting equipment and installing equipment has a great deal to do with the shape of our revenue curve. So for example, you would see that in some of these less material markets where there's still -- where the deployments are still in the early phase, you would see some fluctuation, quarter-to-quarter fluctuations in the shape of our revenue curve as the technology moves from the lab to a point of presence and ultimately from there into broad deployment. And I think in some ways what you're seeing here in our non-GAAP operating performance and so forth, is a reflection of the timing and in some cases the lumpiness of these order patterns as they start gearing up worldwide.

Yes I mean I guess it just felt like that was the case in 2004 and you started to see some legitimate momentum in '05 so the natural question is when you feel like you can start to see sustainable momentum from the voice-over-IP market, is that 2007 that we have to wait for?

Yes you know, Jeff, I think what we've got right now, as you mentioned our prepared comments, is we have a number of customers who, for a number of reasons including concerns about supply constraints and so forth, may have over-ordered a little bit in our third fiscal quarter, the June quarter, which will likely drag on us a little bit in the current quarter, our fourth fiscal quarter.

And we also benefited in our third quarter from a catch up with unsatisfied or previously unsatisfied supply or demands. So the supply catch up helped us in Q3 and also we think certain customers may have slightly over ordered. We believe looking forward into the second half of this year, that things will clear up later in the year. So in other words, in the fourth calendar quarter and into '07 as you've suggested. But clearly, the summer quarter is the slowest quarter of the year, and that's no secret, and we're expecting things to improve once we get past this current quarter.

Got it. And then just the last question is when do you expect to get back to operating profitability again then?

Jeff, this is Simon. We're not offering a specific timeframe in which we expect to see that. The desire is to give the one quarter's worth of guidance at this point in time and to move on from that point. So we're not committing to a period of profitability in the December quarter by way of example at this point in time. We'll deal with that issue on the earnings call in October.

Okay, thank you.

Our next question comes from Allan Mishan at CIBC World Markets.

Hey guys, a couple of questions. First, last quarter, you had a major drawdown at one large voice-over-IP customer. Can you give us an update whether that customer has started to order again, whether their business in that product line now was up quarter over quarter and what it looks like going forward?

Yes Allan. Again, it's Raouf here. You know, that one customer has not actually returned yet to what we will refer to as a supply/demand balance, so they're still in a situation of over-inventory. We're hopeful that by the end of the current quarter their inventory will have returned to levels that they consider to be appropriate. Yes, that has dragged out with us probably about a quarter longer than we would have liked.

Okay, and then when you talk about the backlog weakness, is that in some of the areas which have been sort of the hotter runners, where you have over shipped, or is that in some of the legacy product?

Actually Alan, this is Simon. It's actually across the board at this point in time, when we look at every product family, every product family's at the level we report them externally at least. And across all of the geographies we're seeing some form of weakness at this point in time. It is not specific to one product family or one geography at this point in time. It's more general than that which Raouf was characterizing in his answer to one of Jeff's questions earlier gives us an incremental degree of confidence in the end markets themselves. We're not seeing anything as fundamentally changed in the end market. We think we're going through some near-term demand/supply equilibrium channel-type issues at this point.

Okay and then one final question, if we went out another quarter or another two quarters, and things haven't picked up for whatever reason would you, at that point, look at again taking costs out or do you think you've kind of cut whatever's going to come out?

I think - I mean the principal reason to want to cut cost at that point in time, Allan, would be driven by liquidity concerns but in the business we don't have any liquidity concerns as we sit here today given what we're seeing in the current - given our expectations for the business subsequent to that. As we've said on previous calls the issue with taking more cost out of the business is that it would require a fundamental change in strategy, and under no circumstances do we think that's the right thing to do at this point in time. We think that any restructuring obviously would have an impact on execution internally. And as I said we think that the fundamental thesis around the business and the markets we serve remains intact, and that this is principally as a result of temporary demand/supply type issues. So no plans to make significant change in the cost structure of the business at this point.

Yes and Allan, Raouf here. I'll just add one more comment to the clarification Simon gave you. When we talk about backlog being slightly weaker I want to clarify that really is slightly below third quarter levels in terms of backlog coverage. So we're not seeing anything massive here. It's just backlog coverage being slightly off.

Okay. Thanks very much.

Thanks.

Our next question comes from Charlie Glavin at Needham & Company.

Thanks. I know you guys don't normally give a breakdown by sector but one of the areas that has historically given you pains has been the T/E business. It actually seems as if that held up. Can we infer then that most of this weakness from the backlog is in those areas as Simon or Raouf said. You would have a little bit more since the T/E business tends to be - have fairly high turns. Is this coming more off of the other two groups?

Charlie, this is Simon. I think I understand your point. We are not as we said going to break down where the weakness came from in terms of is a percentage here versus a percentage there. Suffice to say it's pretty much across the product families at this point in time and we'll stop at that point.

Okay. If not -- if we take a look maybe within some of the geographies, Raouf, if you can - it looked as if the Americas in particular were down. And you've already gone that one particular customer in terms of the hit there. Europe surprisingly seemed to rebound despite all the concerns about World Cup. Maybe if by geography, did you -- could you explain some of the order patterns given that DSOs were up? That seems a little incongruent on it. We see a lot of advance orders in Europe and then shut down. How was America? Could you get into a little more detail on that? Thanks.

Okay, Charlie. Let me try to answer that question the best I can. In North America I think we saw pretty good strength across almost the entire portfolio. The reason the mix changed a little bit in fact was, as you alluded to, the one large North America customer. And as the question had been posed previously, as I answered that question, of course we saw the continuation of inventory drag from that one customer. And we expect it to continue probably into the current quarter. So the mix really didn't surprise us in anyway. APAC is strong and Europe was quite strong for us.

As you know we have customers like Siemens and Alcatel that have adopted really the broad range of our product portfolio into a number of their key platforms. That includes voice-over-IP but also the rest of the portfolio. And they're doing quite well in, particularly the export side of their business. So that's part of the reason why we experienced strength in EMEA in the quarter. Those customers did very well and Asia was quite strong with us as we mentioned in our prepared comments both Huawei and ZTE had a very good quarter with us.

They would seem to have been year over year but actually if I'm not mistaken Asia was only up 3% on a sequential basis. America was down about 15, 14 and then Europe seemed strong. Coming back to the second half of that question can you at least describe the linearity of the quarter? We've heard from some guys such as Broadcom who started off the quarter well and then they've really started to see the weaknesses within May. Europe particularly we've seen some disruption off of the World Cup with some of the deployments. I'm not saying that that's the only reason but it seems to have been fairly consistent that the things dropped off yet your DSOs spiked.

Yes. Let me answer that Charlie. So two forms of linearity. First of all, let's talk about what we saw in revenues in the quarter and there's no doubt that the June month was a greater contributor to total revenues than the last month of the previous quarters have been. Okay so we had less linear revenues through Q3 than we had through Q2 and Q1 and that's the reason that the DSOs spiked to the extent that it did. So that's part number 1. Part number 2 is when you look at the order linearity as opposed to the specific revenue linearity the order linearity was not radically different than we've seen in previous quarters.

I wouldn't characterize there as being a slowdown at the end of the quarter. By no means did we see that being the case in terms of the order patterns in June. April and May were softer, but June was pretty much in line with our expectations and to the extent that we're able to offer a prospective on July at this point in time it has a reasonable trend. So from an order perspective April/May a little weaker than we would have liked to have seen. June was pretty much in line with what we would have expected to see. And July is continuing at a reasonable pace.

I mean if I could, first of all I'm not sure I heard it. As far as I think you mentioned the amount of previously written off inventory, could you repeat that one more time?

I didn't mention the specific dollars, Charlie, but in the press release it's in one - [I'm turning up with that].

Not the amount that was in the quarter but as far as the remaining amount. Maybe I misheard you after you mentioned --.

The remaining amount of fully written off inventory is $14 million and so if when we go back to that stuff that was written off in fiscal 2001 I think that's specifically what's you're driving towards. We've got about $14 million of that product left.

Maybe if I could pressing a little bit on Jeff's prior point or Allan's, I know you guys aren't going to reset the specific clock as far as when to get back to operating profitability. But at this point given supply constraints and balance you still have plenty within that but given your guidance it would seem to imply that you're not going to be quite as aggressive in terms of the sell down of previously written inventory. Is that a fair assumption?

No not necessarily. I think we still have an expectation that product will continue to ship for many quarters to come. The benefit we enjoyed in the most recent quarter was a little lower than it had been in previous quarters but there's still an expectation that we'll enjoy a benefit for many quarters to come.

Got it. Let me pass then. Thanks guys.

Thanks.

Our next question comes from Jeremy Bunting of Thomas Weisel Partners.

Thanks very much. A couple of questions, one for Raouf and one for Simon. Raouf, what was the traction during the quarter on the enterprise voice over IP? Does that continue to be something which is clicking along at kind of a steady but very quite low revenue run rate?

Yes, let me make sure I heard your question correctly, Jeremy. You're saying what was the traction, in other words how is the business tracking?

Yes.

On the enterprise segment? Okay yes it's actually doing quite well. The enterprise segment is growing for us. The way we see the enterprise voice-over-IP TAM at this point is probably a little bit smaller than what we initially sized it up to be. And as you know it's quite concentrated. We have experienced excellent traction in the enterprise voice-over-IP segment in terms of design wins.

Those design wins are continuing to ramp. The only disappointment is that they're taking a little longer to ramp and that the space overall is not quite as big as we had earlier sized it up to be contrary to some of the market research out there. However, the business is doing quite well for us and we've had a number of customers start ramping into production in the past quarter so we're looking for it to continue growth in that segment and we are continuing to develop new products in enterprise voice-over-IP specifically.

Okay thank you. Simon, I'm not sure -- I think I may have missed it but did you give specific guidance to OpEx in fiscal Q4?

We did. We said it would be back to the $26 million level, Jeremy, which is essentially where it had historically been in the December and September quarters of last year. If you remember last quarter it spiked up, last quarter being Q2 for purposes of this part of the conversation. So in the Q2 period it spiked up and then in the most recent quarter we enjoyed about 1.2 million's worth of benefits from one-time items that will not recur in the September quarter so the OpEx number goes back to 26 million in the September quarter.

Okay Simon, thank you.

Thank you.

Our next question comes from Daniel Amir at WR Hambrecht.

Thank a lot. Maybe can you give maybe a little more clarity about what I guess in the second quarter -- excuse me, in your fiscal third quarter it looks like revenues came in within your expectations, but was there areas that were more positively or negative surprise I guess in your business when you look back on it?

So, this is Raouf. No really the quarter came in very consistent with the expectations we laid out when we provided guidance in April. If you go back and look at our expectations at that time, we indicated that we expected the voice-over-IP business to rebound quite strongly, which it did, up 9% sequentially and that we expected continued growth from the analog business which it delivered at about 6% growth sequentially. And also that we expected the WAN business to be roughly flattish which it was and so there were really no surprises in that regard.

Okay and can you expand a bit the dynamics on the, I guess, in your high-performance analog segments? I guess you highlighted in your prepared comments about some design wins and what the essentially the fiber-to-the-home side and what you're seeing there/here for the remainder of the year?

Sure I'd be happy to do that. As you know there are three major segments in the high-performance analog business. There are cross-point switches that address a multitude of applications. Our PMD product line which is basically an optical module product line with a key emphasis on fiber-to-the home and then the video products which I alluded to as well in our prepared comments.

So taking them one at a time, the trends in the cross-point business are very good. As you know a key segment for us is storage area networking or SAN that continues to grow and do quite well for us. We scored a large number of designs with our cross-point switches in SAN but also in other telecommunications and video applications. And the second product line namely our optical module PMD components, that space is very strong for us and we continued not only to grow our fiber-to-the-home business but also win new designs in that space.

We sell disproportionately into the ONU which is, if you will, the CPE segment compared to the OLT which is the CO segment. We are experiencing strength in both of those and even though service providers like NTT expect over time to shift to a richer mix of ONU compared to OLT, we don't think that's going to influence our business in almost any way at all because we have very comparable ASPs on either end of the optical fiber where as, perhaps for systems solutions and so forth ASPs on the CO side or OLT side are much higher than ASPs on the ONU side.

For us it's sort of a moot point and we're experiencing continued strength in the fiber-to-the-home business. We're quite proud in fact of our traction in the EPON or GEPON space, if you will, as well as increasing the GEPON space in North America. So that business is doing very well for us.

We're also looking at other parts of the world like Korea and Taiwan and a number of other Asian countries that have a large number of field trials ongoing right now with an expectation that there will be material deployments in calendar year 2007. So without going into a whole lot more detail, I would say that that's a space we're quite positive on and it's doing very well for us.

The third product line is video, which is video infrastructure specifically and as I mentioned in our prepared comments, we have announced not just the high- definition chip set but also an SD or standard definition chip set, so we offer HD, SD, dual-mode HDSD and we have won a very large number of tier one designs because of the superiority of the product offering we have and the tiering of the product offering in the video space. In this last quarter as I mentioned we reported over a million dollars of revenue in that video segment and we expect continued growth from that product line. So we feel pretty good about the HPA business, the selection of the markets we've entered, the markets that we are planning to enter, and the revenue traction there.

Okay, thanks a lot.

You're welcome.

Our next question comes from Tim Kellis at Stanford Group.

Yes, I'd like to maybe look at the voice-over-IP business from a different cut. Since the March of 2005 quarter it looks like you guys, except for the December '05 quarter, have been ranging between 8 and 9 million in revenue. Now what I'm trying to get my hands around is you sell video gateway platform into the two largest voice-over-IP video gateway vendors ZTE and Huawei and that market should be growing. I was wondering if you could just maybe give us some color on why it's still sort of flat-lining? Is it because of maybe ASP declines are not making up for unit growth or I mean is that what you were referring to when you said that your TAM in this market isn't as big as expected?

Okay, perhaps to reply to that, when I mentioned that the TAM wasn't as big as expected I was alluding very specifically to the enterprise voice-over-IP segment which is really focused on the small- and medium-sized enterprise, small- and medium-sized business not the carrier space. The vast predominance of our revenues, voice-over-IP revenues today come from the carrier segment not the enterprise segment and within the carrier voice-over-IP market, as you correctly pointed out, the two biggest players namely Huawei and ZTE are shipping Mindspeed voice-over-IP solutions in a number of their key platforms. So to get to your first question first.

The issue with the revenue growth is very simply the timing of voice-over-IP tenders and rollouts by our customer's customers. So for instance, if you go back a couple of quarters you would see that we had a very strong quarter with ZTE shipping voice-over-IP into China's telecom network. China Telecom decided that they had adopted ZTE's equipment and that they were going to rollout in, if I remember correctly five major provinces in China.

It's a big rollout for us. We benefited from that quite strongly that particular quarter. And then, it's taken about a couple of quarters to fully absorb the equipment and get it installed and rolled out, and learn the initial lessons from it before they broadened the deployment. All that means to us net-net is that the deployments are, in fact, quite successful and we expect them to expand dramatically, but it takes a few quarters for those service providers, like China Telecom and others to work out the bugs, to get their OMA, operation management administrative infrastructure, all worked out before they broaden the deployments and start purchasing in a bigger way once again.

China Telecom is just one of very many service providers deploying our voice-over-IP solutions. So it really has to do more with the choppiness that's associated with the timing of these tenders and the shape of the deployment curve. And specifically, our customers today are serving more than 100 service providers worldwide in over 40 countries. And so, you'd expect that as these service providers get their plans fully firmed up, get the technology fully hardened, and moving to mass deployments that in fact the shape of the curve over time will be a lot smoother.

Okay, fair enough. And then just an inventory question, over the last three quarters it looks like inventories have doubled, I was just wondering if maybe you could go through that, Simon?

Yes it actually comes back down in the current quarter assuming that we're able to deliver on our expectations for revenue in the current quarter, Tim. It actually comes back down to a point where it's below the previous quarter. So this is essentially the final quarter where we see the trickling in of the last pieces of inventory that were ordered during the supply constraint timeframe that we've experienced over the course of the last six months essentially. So this is the quarter where inventory returns to what I perceive to be more acceptable levels.

Okay, thank you very much.

Thanks.

Mr. Biddiscombe that ends the question-and-answer portion of the 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. Thanks and good-bye.

Thank you ladies and gentlemen, that concludes today's conference call. You may now disconnect.