MACOM Technology Solutions Holdings Inc (MTSI) 2006 Q4 法說會逐字稿

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

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, Gerald.

I would like to welcome everyone to our conference call discussing the results of our fourth quarter of fiscal 2006, which ended on September 30, 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 fourth 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 2007 first quarter and other market, business, and product trends that are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934.

These include our statements about trends in our business units, product supply, manufacturing yields, 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, customer relationships, the impact of technological developments in our industry, design wins and their impact on future performance, headcount levels, inventory levels, the implementation impact of restructuring activities, future revenues, backlog and 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 make reference to non-GAAP financial measures, which exclude stock-based compensation expense, amortization of intangible assets, and special charges.

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 fourth fiscal quarter of 2006.

Today we announced fourth quarter revenues of $32.2 million down 10% from the prior quarter and at the low end of the 5 to 10% sequential revenue decline we expected at the beginning of the quarter.

Revenues from our family of multiservice access voice-over-IP processors were down 3% sequentially, contributing 27% of total fourth quarter revenues.

Revenues from our high-performance analog products decreased 9% sequentially, representing 33% of the total.

WAN communication product revenues declined 16%, contributing the remaining 40% of fourth quarter revenues.

In terms of revenue contribution by geography, the Asia-Pacific region contributed 58%, the Americas 29%, and Europe contributed 13%.

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 $20.6 million or 64% of revenues including a 5-percentage point benefit from the sale of products written off in fiscal 2001.

Our non-GAAP gross margin was approximately 5% lower than our expectations, principally resulting from a manufacturing yield issue associated with one of our products, which we believe that we have subsequently resolved.

Research and development expenses were $14.8 million and selling, general, and administrative expenses were $10.7 million for total non-GAAP operating expenses of $25.5 million, approximately $500,000 better than our expectations.

As a result, our non-GAAP operating loss was $4.9 million.

Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $381,000.

Our non-GAAP net loss was $5.3 million or $0.05 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 $41.2 million at the end of September. Non-GAAP cash consumption was $2.9 million in the fourth quarter compared to $3.4 million in the June quarter.

Capital expenditures were approximately $1.5 million and depreciation was $1.2 million.

Receivables were $14.8 million resulting in net DSOs of 42 days compared to the prior quarter's 44 days.

Inventories were $19 million, a decrease of 6% from the prior quarter. And inventory turns improved to $2.5. Gross inventory, including amounts previously written off, totaled approximately $53.1 million at the end of the quarter.

Total current liabilities were $27.8 million, down slightly compared to the prior quarter.

I would now like to turn the call over the Raouf for his comments on the fourth quarter and full 2006 fiscal year.

Thank you, Simon.

We are pleased to have achieved our fourth fiscal quarter revenue expectations, despite weak market conditions. We believe our revenues were impacted by shipments, catching up with excess demand in our prior quarter, primarily resulting from supply constraints earlier in the year combined with excess inventory of a few of our products in the supply chain.

Exiting fiscal 2006 we remain encouraged by the growth of next generation, IP based network deployments in both V carrier and enterprise markets we serve. For example, this past year we witnessed the initial ramp of next generation voice-over-IP deployments especially in the Asia-Pacific region and China in particular as well as the rapid rollout of broadband, fiber-to-the-home in Japan.

Going forward we expect to continue benefiting from the adoption of these and other exciting technologies as deployments extend worldwide.

For our full fiscal year of 2006 we delivered revenues of $136 million, an increase of 22% over the $112 million we recorded in fiscal 2005.

We also reduced our non-GAAP operating loss by 66% to $12 million from $35 million last year. And we lowered our cash consumption by more than 50% to $15 million compared to $31 million in the prior fiscal year.

I will now cover a few specific highlights from our fourth fiscal quarter.

In our multiservice access voice-over-IP product portfolio, we had record revenues from Comcerto voice-over-IP processor shipments into enterprise applications worldwide as well as the first Comcerto deployments into a next generation, IP based, 3G W-CDMA network in Japan by a top tier equipment OEM.

Our Comcerto processors and wireless software suite provide a complete IP multimedia subsystem or IMS solution, while adding advanced voice signal processing and high quality echo cancellation and are available in GSM, CDMA, and W-CDMA versions.

We also scored almost 30 new design wins for our multiservice access voice-over-IP product portfolio this past quarter in carrier wireline as well as wireless applications and in the enterprise segments with key customers such as Siemens, Nortel, Huawei, ZTE, and many others.

In our high-performance analog product portfolio, we announced the industry's lowest power for outcast video driver, supporting the emerging 3-gigabit, high-definition TV transmission standards.

We also continued capturing share with our new integrated burst mode laser driver and limiting amplifier in multiple passive optical network, or PON applications, including BPON, GEPON, and GPON.

Using proprietary Mindspeed technology, our new laser driver offers significant system cost savings to optical module manufacturers by compensating for laser aging and temperature effects.

We scored design wins across our high-performance analog portfolio including fiber-to-the-home optical modules and metro optical equipment, as well as broadcast video infrastructure with multiple wins at NEC, Tellabs, Huawei, Photon, ZTE, and many others.

In our WAN communications portfolio we announced that the Huawei-3Com joint venture is deploying multiple Mindspeed transmission devices in its network router series.

We introduced an IP based back haul transport solution for wireless service providers deploying third generation W-CDMA, UMTS, and WiMAX services. Based upon our TSP3 family of network processors and PortMaker III software suite with Pseudowire Emulation Edge to Edge or PWE3.

We also scored numerous design wins for our WAN communications products including wins at Cisco, Nokia, Ericsson, Siemens, Huawei, and ZTE as well as multiple wins at Alcatel.

Now turning to the restructuring actions we are commencing today. Our goals in this restructuring are to position Mindspeed to achieve non-GAAP operating profitability at roughly current revenue levels as well as to drive increased earnings leverage as our revenues grow in the future.

We expect to reduce our non-GAAP operating expenses by approximately 13% from our prior $26 million quarterly target as we complete a Company wide restructuring over the next 2 quarters.

This will include our sales, general and administrative functions, in combination with the continued transition of selected U.S. based engineering resources to our offshore design centers in the Ukraine and China as well as our newest centers in Dubai and India.

We believe that this shift of engineering resources will result in a more cost effective worldwide development organization as well as more efficient localized support for our international customers.

In fact, we expect to increase our total worldwide headcount by almost 10% from 500 employees today to more than 560. Essentially all of this headcount growth will be in the research and development staff, focused on our growth initiatives as we tap into talented labor pools overseas.

I would now like to turn the call back over to Simon to review the financial details of our restructuring plan and the outlook for our current first fiscal quarter of 2007. We will then open the call for your questions.

Thank you, Raouf.

When we complete the restructuring actions we announce today, we expect to achieve annualized savings of approximately $14 million.

We expect to lower our non-GAAP quarterly operating expenses over the next 2 quarters to a new target of $22.5 million in the third fiscal quarter, a reduction of approximately 13% from our prior non-GAAP operating expense target of $26 million.

When we reach this new target, we expect our quarterly non-GAAP research and development expenses to be approximately $13 million. And our non-GAAP SG&A expenses to be approximately $9.5 million.

We anticipate incurring special charges of approximately $4.2 million over the next 2 quarters, primarily associated with severance costs for affected employees and the impairment of certain excess space at our Newport Beach headquarters, which we have begun actively marketing through our real estate broker.

We expect that the cash impact of the restructuring will approximate in special charges and payments will extend through June of 2008.

Now our current first fiscal quarter, we expect to lower non-GAAP quarterly operating expenses to approximately $25 million. We anticipate further reducing operating expenses to $24 million in our second fiscal quarter and reaching our new target of $22.5 million in our third fiscal quarter of 2007.

Now turning to our outlook for our current first fiscal quarter of 2007.

Based on current backlog, expected order trends, and other relevant factors, we expect first fiscal quarter revenues to be approximately flat sequentially. And expect our non-GAAP gross margin to be approximately 65%. With non-GAAP operating expenses of approximately $25 million, we expect our first quarter non-GAAP operating loss to be approximately $4 million.

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

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Allan Mishan from CIBC.

Hey, guys.

Could you comment at all on the voice-over-IP business at Cisco? Have you seen ordering again after that part was drained? Has is been drained? What's the outlook there? And could we see a snapback at some point in the future?

Yes, hello Allan. It's Raouf Halim here.

Okay, generally speaking we prefer not to comment about specific devices and specific customers.

In this case, though, I'll give you some general commentary. That yes, we believe that the inventory you're referring to has completely burned off at this point in the game. And we are starting to re-approach equilibrium, if you will, from a supply demand perspective.

Okay, that's helpful.

And sort of a broader question, with the fact that you're going to have to take some headcount reductions and you really have a couple of really good growth drivers that are still a little uncertain when they're going to ramp. Do you think it's maybe time to sort of more aggressively pursue an M&A maybe with a larger player, maybe with someone with a stronger balance sheet?

How do you think about that? I mean is there something happening at the Board level at all in terms of discussing this? Because there has definitely been some increased M&A in the semiconductor business and in common fees.

Allan, this is Simon. I think I'll answer that one for you.

First of all we are always giving careful consideration to all M&A opportunities that exist. I mean that's absolutely part of our fiduciary responsibility. And the Board thinks the same way as the executive management team here thinks.

I think one important point to make within the context of the restructuring that we announced today, is that whilst it is broad and whilst it does have an effect here in North America, the absolute headcount associated with the investment that we're making in the voice-over-IP market actually is going to increase.

The total headcount across the Company is going to increase as a result of these actions. And the total headcount associated with voice is also going to increase as a result of these actions as well.

So we don't think that we are taking away from the voice and analog businesses in any significant way as we go through the restructuring actions that we've announced today.

Okay, thanks very much.

Your next question comes from Arnab Chanda of Lehman Brothers.

Thank you, a couple of questions either for Raouf or for Simon.

First of all, if you look at your mix it seems like, by my calculations maybe give or take, the WAN carrier business has sort of come back to where it was in sort of your December quarter last year.

And if I look at year-over-year, your HVA business actually had the biggest growth while the WAN carrier as well as the multiservice access is sort of not that far from each other.

I'm curious as to if you could - it's kind of a long-winded question. But if you just look at the WAN carrier business for a second, is that business likely to decline as we go through year-over-year? I mean clearly it's declining more during the inventory correction.

How much of that is the ADM? And how much do you think that any of that comes back? And are you investing there at all?

And I have a couple of follow-ups.

Yes, Arnab. This is Raouf.

Okay, so let me start specifically with your question regarding the WAN business. Our expectations are that year-on-year the WAN business is going to be essentially flat.

That disguises a mix shift away from ADM and into IP based technologies and optical in particular. About a third of our WAN business, maybe slightly less than that, is ADM based.

And within the ADM segment we're clearly seeing a shift away from ADM and DSLAM and other broadband applications. But that's somewhat offset by pickup in ADM and wireless backhaul applications, WiMAX and other ADM centric backhaul.

So overall the ADM picture is somewhat mixed to probably somewhat declining over the medium term type of horizon.

However, even within the WAN portfolio we have Sonet's products. We have Linklear products and other IP centric solutions LAN clear products and other IP centric solutions that offset this decline in ADM, giving us an overall slant picture, if you will.

So to step up one level and answer your bigger question, we think that our growth looking forward into fiscal year 2007 will be primarily driven by the combination of our high-performance analog and our voice-over-IP businesses.

We expect this to be a really good year for voice-over-IP. With a large number of our design wins that we have been capturing over the course of 2 years finally starting to go to production.

We've been reporting design wins for a long time, as you know, in this space. We believe we've captured somewhere between 40% and 50% market share in carrier voice-over-IP. And a significant percentage of those designs will finally start to ramp in our fiscal year of 2007.

There's always some upside to that and always some disappointments when customers don't execute as well as you had hoped.

But net, net we expect a good year for voice-over-IP. We also expect another good year for our high-performance analog business.

Thank you, Raouf.

One question to follow-up on voice-over-IP, historically I think - and please correct me if I'm wrong - most of that came from trunking versus you. And you had design wins in wireless and some of the access of these DSLs with cable applications.

And the one area that you did not have much growth but it sounds like you're starting to see the beginnings of that is the enterprise voice-over-IP market.

So if you would delve in a little bit more in detail and tell us of all these cases where the growth's going to come from and are we going to, or should we expect an acceleration? Because in '05 to '06 there wasn't a lot of growth, but '04 to '05 there was. I was just, yes, if you could describe that that would be great.

Thank you.

Sure, Arnab. And when I look forward into '07 I'm hopeful that we'll see the same sort of acceleration that we had from '04 to '05 that you refer to.

More specifically, I think the wireline trunking voice-over-IP segment will be roughly flattish maybe slightly up. The majority of the growth in our voice-over-IP segment will come from adoption of voice-over-IP.

And the design wins we have scored in enterprise, applications, PBX routers, and so forth but also in access applications with some of the world's leading broadband infrastructure OEMs as voice-over-IP moves to the edge of the network.

So again, it's going to be a combination of access applications and enterprise applications. Wireless is probably going to be a second half '07 phenomena for us. We've clearly started to ship wireless products, as I mentioned in our prepared comments earlier. Last quarter, fourth quarter we started shipping into Japan W-CDMA network for the first time.

And we expect that our wireless business will continue to grow in fiscal 2007.

However, we don't really expect it to be that material in '07. It's probably going to be more of a '08 driver and beyond.

So I think again in '07 we expect VoIP to be strong. And then we expect that to come from the combination of enterprise and access applications.

And then the last question perhaps for Simon.

Simon, you have given us targets in the past about what type of revenues you need and what the gross margin and operating income assumptions are for sort of your long-term model.

And now obviously you're reducing OpEx by quite a bit.

Could you re-update us on what do you think the long-term operating margin model would be for breakeven as well as for the type of operating margins you want to achieve and what revenue levels they require?

Sure. So the model that I essentially characterized for you in the prepared comments, Arnab, was as follows.

You have breakeven at $33 million of revenues with a 68% gross margin and $22.5 million worth of operating expenses.

And as I said, the split of those operating expenses is roughly $13 million to R&D and roughly $9.5 million to SG&A.

So let me do that again for you.

Breakeven $33 million of revenues, which is ahead of where we are today, 68% gross margin, $22.5 million of OpEx. Okay?

The next operating model that we're characterizing, Arnab, is roughly a 15% operating profit, which is achieved at $45 million of revenues with a 65% gross margin and approximately $23.2 million of OpEx. And when you get out that far, to 23.2, the split of OpEx is roughly 13.2 to R&D and 10 to SG&A.

So once again, just to make sure, a 15% operating model at approximately $45 million of revenues with 65% gross margin and roughly $23.2 million of OpEx.

So those are the 2 models that we will be communicating to the investor community as we move forward.

Sounds like you're well prepared, Simon. Thank you very much.

Thank you, Arnab.

Your next question comes from Charlie Glavin of Needham & Company.

Thanks. I guess picking up where Arnab left off.

Given that your target, Simon, in terms of the 22.5 and Raouf given some of the rollouts you were talking about, should we expect that breakeven to happen more mid fiscal year of next year?

Charlie, this is Simon. We're not offering anything more than a quarter's worth of guidance at this point in time. We do have pretty clear expectations that the business grows on a quarter-to-quarter basis as we move through 2007 from where we sit today.

But we're not offering a specific timeframe on when we would expect to be at that breakeven level.

I guess the bigger question, Simon and Raouf, is from a visibility standpoint. I mean normally every single year we've seen fourth quarter inventories go down in the communication structure. And this year it sounds like both from constraints as well as a lot of the OEMs asking that their components and EMS guys to prime the pipeline early. Left a bit of a bubble.

How much visibility do you guys feel you have right now? And certainly you're taking steps. But those steps I think have been built into place ever since you announced your first to buy effort.

But what sort of visibility do you have? I mean is some of your apprehension in terms of getting a little bit more guidance also just due to some limited visibility?

And then the overall industry, particularly the chips the buyers are having. Not just you but a kind of sedate PMC. You run down the list it sounds like everyone's got that same lack of visibility for the next quarter if not 2.

And think that's a challenge. This is Simon.

I think your observation is absolutely fair. As we have progressed through the last 4 months in reality.

If you go back to the last, the end of the June quarter through the earnings call late July and then all the way through today. Visibility has remained poor at best. And we are hesitant to characterize too much optimism in our commentary at this point in time.

It's fair to say, though, that when you look at the business unit by business unit dynamics at this point in time, we have absolutely no concern as to whether there's any inventory build with regard to either our analog products or our voice products at this point in time.

I think to the extent that we have any concerns around whether there has been a build in inventory in the channel or a pushback of any significant trend to the semiconductor level, that's principally associated with the WAN communications business.

So I think with all of that said, Charlie, and with a perspective on what we've seen by way of bookings trends, the lack of linearity last quarter. The most recent information we have this quarter and frankly a backlog number that as we sit here today is entirely consistent with what it was at the same point last quarter.

We get to where we are in terms of guidance and move forward from here.

And if I could, Raouf, you mentioned some comments in terms of voice-over-IP coming more from the enterprise as well as from the access side.

It's a little bit more competitive actually. But if I recall some of the breakdowns in terms of carrier enterprise and sort of the access side, that the enterprise has been kind of a bit more of a black hole.

Actually the slower growth of the 3 of them with Sonet's having a little bit better traction I guess at this point in terms of some of the carrier deployments. Is that a fair characterization right now?

And would you agree that some of your best growth opportunities are unfortunately coming from areas that are going to be a little bit more competitive relative to just you and TI sort of slugging out within the carrier space.

You guys on the off the shelf, TI with more of the generic, or general DSP type of solutions?

So I think Charlie there's a lot of truth to a couple of things that you said. In particular that the majority of our voice-over-IP business remains carrier based today. And within that remains carrier core trunking applications.

However, the percentage of our voice-over-IP business that comes directly out of enterprise has grown quite steadily to where it's from nothing a couple of years ago to where it's well over 10% at this point in the game and continuing to grow much more rapidly than the core trunking business.

You are correct in that it's still the smaller of the 2 components. In other words, enterprise is definitely smaller than the carrier piece today.

But it is growing at a very rapid clip.

And as I commented earlier, we have a large number of design wins that we expect to transition to production. Many of them with tier one players that in our sort of marquee names throughout the industry in fiscal year 2007.

So we do, we absolutely do have some high expectations for the enterprise VoIP business going forward.

I think when we go beyond the infrastructure piece, meaning enterprise or carrier and you move into the CPE segment, that's where the competition tends to be a lot more fragmented or fractured, if you will, than the carrier space. Where, as you correctly pointed out, it's predominantly us and Texas Instruments.

So as you move into the CPE universe, of course there are a lot more competitors. I won't even bother to rattle off the names. You know them quite well.

I guess, Raouf, the question is on paper the ROI of going to VoIP for enterprise has always been very compelling or has been. What in particular right now, and not so much Comcerto because it's full, but what is your sense in terms of why would the enterprise guys do it now in terms of 2007 that they should have done 2005?

Yes, I think we all share the same frustration in that it's a very compelling value prop in the enterprise. We all ask ourselves why it hasn't happened already.

It is happening. And it continues to happen. But the pace at which many of the top tier players are executing is perhaps where the disappointment is.

In other words, they're all moving in that direction. They're all moving as fast as they know. Unfortunately, that's not as fast as any of us would like.

In other words, the big tier enterprise players are not executing in any particular way faster than the carrier counterparts.

So the rate of adoption is not any faster. But it is starting to accelerate, Charlie, finally. That's the good news.

All right. Let me pass it on. Thanks, guys.

Thanks, Charlie.

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

Thanks very much.

Raouf, if you could just carry on the discussion with regard to voice-over-IP. Do you think that your opportunity in [catacomb] will always be greater than the enterprise area?

Or do you think that the enterprise area could even get as much as half of the overall voice-over-IP total?

Yes, Jeremy. So we absolutely believe that over time the enterprise business will grow to be at least as big if not bigger than the carrier segment.

It may not happen fiscal year 2007, mind you. It may happen beyond FY 2007.

But it is certainly growing at a much more rapid clip than the carrier piece. And we have scored some very, very big designs in that area that we have talked about before including wins, for instance, at Nortel, at Samsung, at Inter-Tel, many other, Hitachi, Panasonic, Panacom and so forth.

I won't bother to rattle off all the names.

But we have captured very significant market share.

We believe ultimately our own share in the enterprise is going to be at least as big and very likely bigger than our share in the carrier universe.

And as that space finally accelerates, as I was commenting earlier, we do expect that the enterprise segment will eventually eclipse the carrier segment. But that might take more than a year.

Okay, thank you, and just more of a general comment on the fiber-to-the-home FETX space.

Do you have any sense that there's been some push back in the prelim so for the last quarter or 2 and sort of with expectations into '07, cause that appears to be indication of some OEMs and some carriers?

I was wondering what your overall take of the buoyancy and the strength of that market is?

Jeremy, this is Simon. Are you talking specifically to Japan or you're talking?

Well actually let's separate Japan because it's number 1. So what do you think the sort of the next 6 months dynamics are in Japan?

And then expand on that to Europe and U.S. markets.

Sure, be happy to do that, Jeremy.

So let's start with Japan specifically.

What we are seeing given our fairly dominant position in the Japan fiber-to-the-home market is that the overall subscriber base in Japan continues to grow, and grow quite strongly.

However, the rate of growth, meaning the number of incremental subscribers added per quarter or per month, however you want to look at it, is abating somewhat.

The numbers have come down from roughly 200,000 subscribers per month to somewhere around 150,000 subscribers per month at this point in the game.

So the good news is that there continues to be very strong growth. The overall fiber-to-the-home subscriber base continues to grow quite rapidly. However, the rate of growth is abating somewhat as we get past the initial deployment phase that was pretty heady in calendar year 2006 and clearly somewhat in '05 as well.

So we remain quite bullish on Japan. We just think it's going to be a little more rational. And the capital expenditure or CapEx intensity will start to normalize a little bit, as you would expect it to once technology starts to roll out to an even larger base.

Outside of Japan we are seeing within Asia some very good prognosis for fiber-to-the-home. And that is in particular in Korea number one and China number two.

We're in a number of large and actually very large field trials in Korea and a handful in China that are large enough to actually approach the scale of full deployments.

And then outside of these other parts of Asia, clearly in North America the star continues to be Verizon, far eclipsing Bell South and other service providers. And we think that Verizon will ultimately have a fairly large subscriber base that will be optically connected.

We expect that by the end of this year there'll be something north of half a million data customers that are actually optically connected in North America by Verizon. And as you know their expectations and their goals are very aggressive in this space in North America.

We have captured significant market share in North America now that while it's not quite as high a share as we enjoy in Japan and Asia, it's starting to approach that level of market share with our optical products for the fiber-to-the-home optical modules.

Okay. Thank you.

Thank you, Jeremy.

Your next question comes from Daniel Amir of WR Hambrecht & Company.

Thanks a lot.

A couple of questions, first of all can you a bit expand on how you see the competitive environment and also the opportunity in the high-performance analog broadband space? That's been an area that you've certainly done well.

And just trying to see what the growth drivers there are for the next fiscal year '07.

And then the follow-up question is also can you can see your growing exposure of course to China. Can you a bit comment a bit on what you see is going on there current, in the current market environment? And how you believe you'll - how you think you'll play out there in the next year?

Certainly, Daniel.

Danny, this Raouf. Let me just make sure I understand your first question.

In a high-performance analog broadband portfolio, are you referring to the fiber-to-the-home space specifically?

No. I mean more the stuff that you're doing with Thomson and stuff like that.

Okay, the high definition TV.

Yes, the high definition, yes.

Yes that continues to be a bright spot in our portfolio. Our chip sets are really the most integrated and the lowest power chip sets available today for HDTV I/O cards.

We have captured significant market share to your point with Thomson Multimedia, many others in North America as well as Japan.

There are a number of competitors. Certainly Maxim being one, Cyprus, there's a handful of competitors who have also identified the market opportunity and have introduced products.

But frankly we think it's, the field is essentially being played by 2 players, ourselves and Gennum, which is a Canadian company that happens to be the entrenched player today.

There's increased competition but in our experience so far those competitors are late to market and their products don't come close to our products.

So we feel pretty good. In fact I would say we feel very good about competitive position in the HDTV market. And we're continuing to capture share. And frankly also ramp revenues in that space quite nicely.

And the China question?

So in terms of China, our overall exposure to China, Daniel, is just a smidgen under 20% or so. What we're seeing in China right now is that, first of all as you know, it's a difficult market to analyze and to model very accurately.

And it's quite difficult to get reliable information from either the carriers or our customers.

But we do believe that there continues to be a normalization in carrier capital expenditures in China.

Carrier CapEx relative to revenues in China have been the highest of any geography in the world for a number of years. As carriers have worked diligently and spent a lot of money to build out, particularly the broadband infrastructure, and also a handful of metro networks within China.

At this point we think that service providers are starting to become more fiscally prudent and manage their CapEx more in line with normal rates outside of China.

So we do think that CapEx will abate somewhat going forward in China. And we think that that abatement will come predominantly in ADM infrastructure, in particular in ADM broadband or DSLAM infrastructure.

We have a little bit of exposure there, but frankly not very much. We obviously have a lot of ADM products. But the DSL space has not been a prime focus for us by any means.

So we think China continues to grow where we want to grow, which is in NGN specifically or next generation networking, another name for voice-over-IP at the current time. And that's where the predominance of carrier capital expenditures would probably grow in calendar year 2007.

And where we have frankly excellent positions with players like Huawei Technologies, ZTE, and others who are shipping locally into China as well as exporting outside of China.

So within China once again just to recap my answer, we think that carrier CapEx intensity will abate somewhat, slow down a little bit in 2007 as service providers rationalize their CapEx relative to expectations. But we think that the bright spot will be voice-over-IP and we're extraordinarily well positioned to benefit from that both within China as well as export by our Chinese customers to markets outside of China.

Does that answer your question, Daniel?

Yes, thank you very much.

You're welcome.

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.

Thank you and good-bye.

Ladies and gentlemen that concludes today's conference call. You may now all disconnect.