MACOM Technology Solutions Holdings Inc (MTSI) 2007 Q1 法說會逐字稿

Excuse me, everyone. I would now 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, Matthew. I would like to welcome everyone to our conference call discussing the results of our first quarter of fiscal 2007, which ended on December 31st, 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 first 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 2007 second quarter and other market, business, and product trends that are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. These include our statements about trends in our business units, product supply, 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, account levels, inventory levels, the implementation, status, and impact of restructuring activities, our ability to return to non-GAAP profitability and the timing thereof, 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 2006 and other SEC filings.

During our call today, we will be making reference to non-GAAP financial measures, which exclude stock-based compensation expense 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 website at www.mindspeed.com.

Turning now to our financial results for the first fiscal quarter of 2007. Today we announced first quarter revenues of $30.2 million, down 6% compared to the prior quarter. These results are consistent with our January 4th announcement that we expected lower than anticipated revenues, primarily as a result of quarter-end product shipment delays associated with an earthquake-related communications disruption at a key assembly supplier's Philippines facility. Revenues from our family of multiservice access Voice over IP processes were up 4% sequentially, contributing 30% of total first quarter revenues. Revenues from our high-performance analog products declined 9% sequentially, representing 32% of the total. WAN communications product revenues declined 11%, contributing the remaining 38% of first quarter revenues.

In terms of revenue contribution by geography, the Asia-Pacific region contributed 57%, the Americas 33%, and Europe contributed 10%. 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 $19.6 million or 65% of revenues, consistent with our expectations, and includes a 4 percentage point benefit from the sale of product written off in fiscal 2001. Research and development expenses were $15 million, and selling, general and administrative expenses were $10 million, for total non-GAAP operating expenses of $25 million, consistent with our expectations as we begin to benefit from the restructuring actions we announced in October last year. As a result, our non-GAAP operating loss was $5.5 million. Other income and expenses and a provision for income taxes in the aggregate resulted in a net expense of approximately $800,000. Our non-GAAP net loss was $6.3 million or $0.06 per share based on approximately 108 million average shares outstanding for the quarter.

Turning now to the balance sheet. Cash, cash equivalents, and marketable securities totalled $37.8 million at the end of December. Non-GAAP cash consumption was $3.5 million in the first quarter compared to $2.9 million in the September quarter. During the quarter, we made our semiannual interest payment on our convertible debt of approximately $900,000. Capital expenditures were approximately $1.1 million and depreciation was $1.3 million. Receivables were $13.1 million, resulting in net DSOs of 39 days compared to the prior quarter's 42 days. Inventories were up slightly to $19.9 million and inventory turns were 2.2. Gross inventory, including amounts previously written off, totalled approximately $51.5 million at the end of the quarter. Total current liabilities were $31.2 million, up $3.4 million from the prior quarter, primarily attributable to liabilities incurred as a result of our restructuring activities. I would now like to turn the call over to Raouf for his comments on our first quarter results.

Thank you, Simon. I am pleased with our market traction this past quarter in a mixed environment where we benefited from growth in IP-centric segments, offset by weakness in older, TDM-based products. We attribute this weakness primarily to capital expenditure and ordering uncertainty resulting from ongoing OEM and service provider consolidations. We delivered record shipments of our Comcerto Voice over IP processors, while concurrently staffing up our offshore design centers in support of our international tier one customers. In fact, we now have more than 100 software engineers in Europe and Asia dedicated to our Voice over IP products, complementing our architectural and advanced development teams in the U.S. We believe that building a larger, more cost effective worldwide development organization will create increased leverage for our Voice over IP business, while providing superior, local customer support. We believe that we are on track to complete the cost reductions we announced last quarter, and we now anticipate returning to non-GAAP operating profitability in our third quarter of fiscal 2007.

I will now cover a few specific highlights from our first fiscal quarter. Starting with our multiservice access Voice over IP product portfolio, revenues were up 4% sequentially. We had record shipments of our Comcerto family of integrated Voice over IP processors this past quarter, including a record number of Comcerto Enterprise solutions. We scored multiple design wins for our Voice over IP product portfolio this past quarter in both carrier wireline, as well as wireless applications, and in enterprise segments with key customers such as Huawei, Ericsson, Tellabs, Calix, Panasonic, and many others. We continue to believe that we will benefit significantly in fiscal 2007 from the growth of Next Generation Voice over IP network deployments in both the carrier and enterprise markets we serve, coupled with the pipeline of design wins already secured with tier one OEMs over the past several of years.

In our high performance analog product portfolio revenues declined 9% across our PMD and signal and switching product lines, primarily attributable to seasonally soft demand. Last month, the Japanese government announced that the number of GEPON fiber optic broadband Internet subscriptions reached 7 million in the third quarter of calendar 2006, an increase of almost 850,000 subscribers over the second quarter, and up almost 80% over the same period a year earlier. The rate of growth has surpassed ADSL subscriptions. In fact, the number of fiber-to-the-home subscribers in Japan today is equal to about half of the ADSL subscriber base. We belive that despite temporary seasonal year end weakness, fiber-to-the-home deployments in Japan will grow in 2007 over 2006. In addition, Korea Telecom has announced aggressive plans to add 800,000 GEPON subscribers in 2007. We believe we stand to directly benefit significantly from these deployments through our key optical module customers.

During the quarter, we demonstrated the advantages of our new Burst-Mode Laser Driver in combination with Sumitomo's optical laser in simplifying and cost reducing fiber-to-the-home deployments. With our integrated proprietary Eye-Minder technology, our laser driver reduces overall system costs by monitoring and compensating for laser aging and temperature effects in BPON, GEPON, and gigabit GPON applications. We scored design wins across our high performance analog portfolio during the first quarter, including fiber-to-the-home optical modules and metro optical equipment, as well as broadcast video infrastructure, with wins at Huawei, Fiberxon, NeoPhotonics, and Everetts, as well as many others. We remain confident in the multiple growth drivers for our high performance analog product portfolio.

In our WAN communications portfolio, revenues were down 11% with sluggish demand resulting from near-term effects of carrier and OEM consolidation, coupled with continuing pockets of inventory of our legacy products at several large customers. During the quarter, we announced that UTStarcom is shipping our highly integrated 12-port DS3/E3 Line card-on-a-chip solution in its next generation NetRing 10000 multiservice optical transport platform. Our Line card-on-a-chip solution provides the highest density and lowest power consumption required for next generation optical transport platforms. We also scored numerous design wins for our WAN communication products, including Huawei, UTStarcom, ZTE, Nortel, and Alcatel, as well as many others. In conclusion, we are making excellent progress in completing our offshoring transition, and our cost reduction activities are on track. Most important, our Voice over IP products are demonstrating healthy growth, and we expect to return to non-GAAP operating profitability in our third fiscal quarter of fiscal 2007.

And now turning to our outlook for our current second fiscal quarter of 2007. Based on our current backlog and anticipated order trends, we expect second fiscal quarter revenues to be up between 7% to 13% sequentially, including the delayed shipment orders we have already filled. We expect our non-GAAP gross margin to be approximately 67%. With non-GAAP operating expenses of approximately $24 million, we expect our second quarter non-GAAP operating loss to be approximately $1.8 million, and we expect to reduce our cash consumption. That concludes our formal comments today. Operator, let's open the lines for questions.

[OPERATOR INSTRUCTIONS] Charlie Glavin, Needham & Company.

I guess one of the questions, Raouf, you guys have been looking for the legacy business to essentially be flat, and yet it keeps hanging in there right now. As you take a look at this, both from the legacy business and also with any complements to the current fiber-to-the-home, are there any areas that you are actually looking to perpetuate a little bit more? And how should we look at the general WAN business over, say, the next year?

Sure, Charlie. In general, our expectations for the WAN business is that it's a flattish business year on year, with some quarterly fluctuations. So, on a particular quarter basis, you might see it either trending up or trending down. Right now, of course, we believe that the business has some near-term effects from consolidation, as well as some pockets of inventory. But if you would notice that in our fiscal year of 2006, this business delivered just under $56 million. It was actually slightly up from the $52 million or so in the prior fiscal year. So it's flattish, to maybe trending slightly upward on a year-over-year basis, absent the quarter to quarter fluctuations that I mentioned. There are a number of pockets of strength within the wide area networking space. For instance, wireless applications, particularly CDMA infrastructure, is a hot area. Wireless backhaul is another area. All kids of electronics to support data transport over wireless networks. Text messaging and similar applications are certainly driving demand for specific WAN solutions that address those capabilities. We are investing selectively in this business, meaning we are developing products and supporting customers in those particular high growth areas, as well as obviously enterprise applications. So in general, we feel quite good about this business and its long-term prospects. And we are by no means giving up on it.

Got it. I have follow-up. I just want to be clear, Simon. In terms of the shortages, can you indicate where that occurred? In which product groups?

Charlie, we're not going to indicate specifically which product groups were affected by the product that didn't ship at the end of December.

Okay. Then let me phrase it a different way. Was there anything from a demand side that would have caused HPA to have gone down sequentially?

Not necessarily from a demand side, Charlie. I think there are certain HPA products that we sell into WAN-type applications where we saw some weakness, some pocket of inventory to a certain extent. And we saw a similar decline in both of the businesses, both on the PMD side of the business, and on the more traditional switching products, we saw similar declines. But nothing that's causing us any fundamental concern at this point in time.

Got it. And then Raouf, in terms of the follow-up question. I mean, the fiber-to-the-home seems to at least be strong within Japan, at least from your perspective. But the question that I have is, as you start tapping into more of the multidomain units, and particularly as you get outside of Japan, is there any complement? We've already heard Verizon looking to more VDSL2 complement so they don't have to pay landlords outrageous passage fees for going through. Are there any partnerships, if not actual direct investments you're looking to make, so as to have that more complete solution that you've brought to other areas?

Yes, I think you're correct, Charlie, in that to date, our offering for fiber-to-the-home has been very focused on providing the industry's best optical module solutions. We obviously are looking beyond the optical module at the rest of the electronics that comprises broadband access, particularly with a PON flavor. We're not really broadening -- or looking at broadening, necessarily, into the VDSL arena that you mentioned. But we are, of course, looking at how we can expand our footprint within PON, and looking at all flavors of PON in that regard. We have many areas to expand beyond just the optical modules. We are already designed into, I think, virtually the who's who of PON equipment providers for Voice over IP. So our processors for both the ONU, the ONT, and the OLT are already well entrenched with a variety of optical vendors today. So we have not just the optical PMD components that we're benefiting from, but I think as those Voice over IP designs start to ramp, triple play and NGN is adopted in Japan as well as in Korea and other parts of the world, we'll see significant benefit to the Voice over IP business from PON. And beyond that, of course, we're looking at the rest of the solutions in all flavors of PON, and we hope to be announcing investments in that area.

Okay. Thanks, guys.

Allan Mishan, CIBC World Markets.

Can you give us an idea of what OpEx looks like in that fiscal third quarter? Is that one of the things that contributes to you getting profitable? Or are we thinking really just about revenue growth here?

Oh, no, Allan. This is Simon. If you go back to the announcement we made last October, there's an expectation that operating expenses will be reduced by approximately another $1.5 million from the $24 million level that we have them at in the current second quarter. So we expect third quarter operating expenses to be about $22.5 million. And then with a 68% gross margin, you break even at $33 million worth of revenues, which is essentially where we are. So there's an important part of how we get from where we are today to break even that is about operating expense reductions.

Okay. And your gross margins are guided up, I guess, around 200 basis points. Does that imply that Voice over IP will not be the fastest growing business in the coming quarter?

The reason -- let me answer the question slightly differently than you asked it, Allan. The gross margin at 65% was consistent with our expectation, but it's not principally driven by mix. When I say that, I mean in terms of being at 65 instead of our more traditional 68, 69 kinds of numbers. That's principally because, A, we had the final element of the spillover of the manufacturing yield we'd experienced last quarter that impacted us, first and foremost. Secondly, we had a little less benefit than we typically see from the sale of product that was written off back in 2001. And then thirdly, there was a little bit of a mix disadvantage, if you will, caused we the fact that the analog business was a little weaker than it had been in previous quarters. So there really are three different components as to why the margin was a little lower than it historically has been.

Okay. I see what you're saying. Thanks very much, guys.

Arnab Chanda, Lehman Brothers.

First question for Simon. Maybe following up a little bit on the margin question. So next quarter, obviously, you're guiding gross margins are higher, quite -- back to your old range. Could you describe what's causing that? And I have a couple of follow-ups, please.

I think what I was trying to say in my answer to Allan's question, Arnab, was that in the quarter that just ended, we had a 65% gross margin that suffered from three different things. First and foremost, the manufacturing yield that was very clearly communicated at the end of Q4 that spilled over into Q1, as well. But that was a small impact. Secondly, that we had a little less impact, positively, from the sale of product we wrote off in 2001. And thirdly, there was a little bit of a mix issue. So the way I would characterize it for you, is that Q1 was a little lower than it historically has been, and we expect to return to the more historic levels as we move forward, Q2 and Q3.

Thank you. Maybe a question for either you, Simon, or Raouf. It seems like complement is probably a little bit easier to look at a year-over-year to sort of see the changes, but just sort of moving towards higher than the 60% in their non-WAN carrier business, so therefore the growth businesses are kind of starting to be bigger. Do you think that given where we are today, you could get a two-third, one-third split by the end of the year? And what would drive that? Or maybe, if you could talk a little bit about what wouldn't drive that? I have maybe one more follow-up.

So, Arnab, this is Raouf. I assume when you talk about two-thirds, one-third, you're implying the ratio of the growth businesses to the WAN business? Would that be correct?

That is correct.

Yes. Yes, I think we definitely do see that. If you're looking towards the second half of this year, let's say maybe even calendar Q4, yes, I think we would definitely see that in the cards, at least two-thirds of our business coming from the growth platforms, namely Voice over IP and high performance analog. So yes, we do see that. We do expect continued growth from Voice over IP. In fact, specifically, we expect it in this current second fiscal quarter, as well as continuing in the year, as we have commented, driven not just by Voice over IP market expansion, but also the ramp of our design wins in Voice over IP. Likewise, we're quite comfortable with the high performance analog business. There were seasonal issues in the December quarter, why fiber-to-the-home subscriber growth was somewhat muted compared to other quarters. And we see evidence that is a thing of the past, and this market is humming right along. So we're very comfortable with fiber-to-the-home, video, and other prospects -- growth prospects for the high performance analog business. We think in aggregate those two would certainly be two-thirds or more of our business by the latter part of 2007.

And then maybe just a little bit -- delving a little bit more in detail here. If you look at the [inaudible] business, you've talked about multiple areas. There's the video infrastructure upgrade, there's PMDs and optical module, as well as there are sort of things that are tied to the WAN carrier -- the WAN market, in general. Where were you with that with the multiple upgrades? And if you look at last year, your video business -- I'm sorry, your [HPA] business was, I think, grew close to 60% fiscal year-over-year, and while the Voice over IP business actually only grew a little more than 10%. So how do you think about that? Even qualitatively, would one be much faster growth this year? Or is it kind of getting more towards the normalized scenario? If you could describe that a little bit?

Yes, so I think if we were to take our best shot at how the two growth platforms would complement each other in 2007, Arnab, I think we'd say to your point, they're more likely to be comparable, than for one to be disproportionately stronger than the other. The analog business has got a lot of good stuff going for it, a number of new markets we're penetrating. You mentioned video, you mentioned the PMDs. Within each one of these categories, there are new segments that are opening, where we have pretty exciting new products. For instance in video, there is a transition from 1.5 to 3 gigabit per second solutions. PMD space, 4X and 8X fiber channel storage are new applications, as well as 10 gig Ethernet. There are some products in the analog portfolio that are exposed to the WAN segment. But they're a minority, not a majority of that business. We expect the analog business to continue to grow, though not quite at the blistering 60% rate that we experienced last year. The VoIP business will grow, we believe, more rapidly than last year. And that is driven not just by market expansion, but also the ramp of design wins that we've been capturing for many years. Those design wins are carrier focused. And therefore, as you know, the time period it takes to develop, harden, and get the solution qualified by carriers is many years. We have been capturing those designs now for over four years, and we're just now starting to see them turn on. We expect to be benefiting from those ramps into those networks in calendar 2007, as I said, at the rate that should be higher than what we experienced in '06.

Thank you.

Jeff Loff, Credit Suisse.

Just following on the commentary from that last answer, you said a couple of times, continued growth in VoIP. But as I look over the last eight quarters, it looks like it's been kind of flattish at around $9 million. So wondering what it is going to take to see real growth there. If you could elaborate on what's different this year relative to the past. And maybe why it didn't grow so much in the past?

Yes, Jeff, this is Raouf. So the VoIP business is clearly starting to show signs of growth. We see that in both the carrier and the enterprise segments. We see the ramp of customer demands from quarter to quarter as they start shipping their own products into both new tenders, as well as enterprise converged applications. You have to remember that, as I was just commenting, we have been capturing a large number of design wins, and that pipeline of wins is just starting to turn on now. You had a little bit of growth in the quarter that we just reported. And we mentioned, of course, in our prepared comments, that we had record Comcerto Voice over IP shipments. Comcerto is the family name for our Voice over IP processors. And we also had record enterprise revenues from those products, as well. And again, they're ramping. It's not just the carrier products, but also the enterprise products that are ramping. So we have pretty good visibility into customer's demands going forward in the VoIP segment, specifically, in 2007. And even with significant judgment applied, this should be a pretty good year for our Voice over IP business.

How would you characterize the visibility today relative in the past? Because it feels like you thought there could be growth there before?

Well we have enjoyed some growth. If you go back in time and you look at the Voice over IP business, it has grown actually quite nicely over the period of a few years. But I think the issue in the Voice over IP business, like many of these carrier-oriented businesses, is the unpredictability of the timing of the ramp of new products into carriers. And I think as this market has started to move from its infancy to, if you will, the leading edge of the S curve, I think we're starting to approach a higher degree of visibility in terms of carrier deployments around the world, not just North America, but many parts of Asia. And the visibility that I commented on is not necessarily visibility in terms of actual backlog, but it's really in terms of tenders that are being awarded by service providers to our customers, from which we work backward into the timing of the ramp of demand for our products. Obviously, it's complemented by what our customers are telling us. But at the end of the day, we validate that, and based on what we can see from the tenders themselves. That gives us a higher degree of visibility than has traditionally been the case. In '06, though, this business did grow 13%, I would remind you, and 25% in '05. So the business, while it hasn't grown as wildly as we would have liked, has continued to grow.

Got it. And then just one last one. In terms of the spending, that $24 million OpEx target, what's the composition between R&D and SG&A?

It's going to be right around 14 in R&D and 10 in SG&A.

Got it. Thank you.

Sandy Harrison, Signal Hill.

Simon, just looking quickly at the balance sheet, you guys showed the inventory at 19.9 for the end of the quarter. Would it be fair that if you guys had hit the numbers you were hoping for the quarter, that inventories would have been fairly significantly lower than what you ended the quarter on?

No, I wouldn't suggest they would be significantly lower, Sandy. But suffice to say, there's a -- substantially all of the increase was attributable to the fact that the product didn't ship.

And where do you guys see your inventory demands going forward? And sort of some comments on some of your view of your, given the fact you address Cisco, many of their businesses do contract manufacturing, what are you hearing through those channels? On the inventory side, sorry.

So, Sandy, is your question about our inventory level, or what we're hearing about the channel?

Both. Yours in relation to the rest of the market. That seems to be a big concern today for a lot of the communications channels, specifically, and be interested in your view.

So from our inventory perspective, Sandy, we expect our inventory at the end of this quarter to be right around $18 million. So you're going to see roughly a $2 million, 10% decrease quarter over quarter.

Okay.

Sandy, this is Raouf. In terms of channel inventory, can I give you some commentary on that. In general, we believe that the inventory that exists in the channel is primarily at distributors. In some cases, it exists at contract manufacturers. In a very few isolated cases, at the OEMs. But it's predominantly in that dis-d/CM segment of the channel. The concentration of inventory is in more traditional legacy wide area networking or WAN type of product lines, and that inventory is burning off. We think by and large, the top tier customers, the [inaudible] Nortels and the Lucents, will have burned off most, if not all of the inventory by the end of June. There's also a little bit of inventory at second and third tier customers. And I think in aggregate, we would expect it all to burn off in this coming quarter, the June quarter, if not sooner.

Got you. Okay. And then you had mentioned in your prepared remarks about the Korean Telecom, [KTT], and the fact that they're looking for 800,000 new subs to enter that. Do you guys have any sort of view of what you think the timing of that would be? And then what's your participation level, if you could kind of get us for a feel of what would 800,000 subs be meaningful to you guys on a revenue basis, or something that we could help model what the opportunity might look like.

Certainly, Sandy. I think KT's announcements are actually significantly higher than 800,000 subscribers. That tends to be sort of a more judged number. Whether they achieve that 800,000 subscriber number -- subscriber target this year or not, is quite difficult to say. The first year of significant deployments is always somewhat unpredictable. But we have a very, very good position. Certainly with the key players that believe that they have been awarded a high percentage of the tenders by Korea Telecom, that includes DASAN, includes Samsung, and includes a handful of other players. We expect to have the number one position in the Korea Telecom fiber-to-the-home deployment as far as optical modules are concerned. 800,000 subscribers would correlate roughly to somewhere in the $4 million, $5 million type of range in terms of revenues, rough. Maybe a little higher, maybe a little lower. But it's not all going to happen at once. Obviously, it's going to be spread over a few quarters.

Sure. Just trying to get some sort of way to frame what this opportunity means to the individual companies.

Sure.

All right. Thanks for that.

Tim Kellis, Stanford Group.

Just a follow-up on the WAN outlook. In light of the commentary on the inventory still burning through, does that mean the outlook is more negative than the other two businesses for the March quarter, and possibly even declining from the current quarter's results?

Tim, this is Simon. We try to steer clear of guiding on our product family by product family basis, so I'm going to decline to answer that one.

Okay. Well, would it be possibly just to maybe elaborate on the outlook for the WAN business? Obviously, the reason for the concern is because of commentary from other com IC vendors on the inventory issue, just trying to get a little more color on what's going on in the WAN business.

I think Raouf provided a fair answer as to where we're seeing the inventory. There are a couple of large North American vendors where we're seeing inventory. There's inventory in some of the segment third tier customers, as well. I don't think I would characterize it as being a different set of issues than we communicated three months ago. Nor do I think I would suggest that our expectation for how that inventory is going to burn off has deteriorated at any point over the course of the last few months. When we sat here three months ago, we thought that the inventory would burn off over the course of the March and June quarters. That continues to be our expectation as we sit here today. We're not really aware of any significant new pockets of WAN inventory causing us any consternation at this point in time. So I think things are progressing at least consistently, and perhaps a little better than we had expected them to.

Is the issue then more within the wireline market, with the wireless market maybe stronger?

It's -- the inventory issues are a combination of both the wireline and the wireless markets that we serve. I think what we're trying to characterize is essentially a bottoming out of the WAN business, if you will, over the course of the prior quarter and the current quarter, with no expectation that we would see deterioration of such in the WAN business as we look forward.

Okay, thank you.

Jeremy Bunting, Thomas Weisel Partners.

There's been at least anecdotal discussion over the last six months that IPTV and video on demand in telecom infrastructure is really being held back from a deployment standpoint, because of ongoing issues with the video server technology. So with specific reference to your fiber-to-the-home products, do you think that has been an issue for deployments over the last six months? And if you believe such issues do exist, what is your visibility to them being fixed? And I have one other question.

Jeremy, this is Raouf. If I understand your question correctly, I think the best way to answer it is really geographically. So if you think of the major geographical markets worldwide, I'll characterize them for you briefly. In Asia, we don't believe that fiber-to-the-home deployments are in any way held up, as you said, by video content being available or otherwise. In fact, we believe that the fiber-to-the-home service is initially being deployed as a yet higher speed data connectivity than XDSL in general. So it's initially a data only service. We believe the next service to be deployed will be Voice over IP. In fact, we believe that in 2007, at least in Japan, NTT is planning to move to a true NGN and layer voice services on top of their existing fiber-to-the-home platform. We're starting to see the beginnings of that same architecture developing in Korea by Korea Telecom, certainly. And we believe that initially the driver will again be data, and over time, voice.

Undoubtedly over time, this may be a few years, triple play will come to fruition, where video will be added to it. And you have the three services over a seamless wideband network. That is not there today. But we do not believe that the lack of video is in any way an inhibitor for fiber-to-the-home deployments in Asia. Nor do we believe it's an inhibitor in Europe. Right now, those deployments are very, very small in Europe. There's just a bunch of field trials basically at some of the bigger service providers, like British Telecom, Deutsche Telecom, and France Telecom. In the U.S., however, I think the lack of a killer driver, like video or video on demand or IPTV, could be taking a little bit of a toll on the adoption curve. Whether those issues are going to be solved in '07 or not, is not clear. But the other -- that could be a factor here in North America.

Okay, thank you. One last question. Specifically with reference to ongoing telecom carrier consolidation, how might that impact you? And I'm specifically thinking of Voice over IP into Lucent-Alcatel.

Okay. So first of all we think that consolidation is a long-term healthy thing in the OEM and the carrier space. And we're glad to see it finally start to happen. There's significant redundant investments being made by service providers, and to a lesser extent, by OEMs that I think will get cleaned up as we go through this consolidation phase. We think we're -- it's hard to say exactly where we are in that consolidation, if we're halfway through or somewhere past the halfway mark. But we are seeing lots of evidence that at least the OEMs are very serious about getting their agendas together, prioritizing their investments, deciding which product lines and which sites will be responsible for which product lines. And we're seeing that certainly at sort of the three that we're closest to, Alcatel-Lucent, Siemens-Nokia, Marconi-Ericsson.

We're quite close to those three sets of mergers, if you will. Specifically, as it relates to Alcatel-Lucent, what I can tell you is that from our perspective, things are moving along quite well. If anything, better than we would have expected. We're seeing the teams make good, rational decisions. We're seeing the business side of the new company, in terms of certainly their commodity management, supply chain management, and so forth, come together very nicely. Working with us extremely well. You may be aware that we have [exent] positions at Alcatel in their access platforms, and at Lucent in their access platforms. And they're in the process of finalizing their decisions, so I won't comment on those. But we believe whichever mix of boxes comes out of that, we're certainly going to be benefiting from, because we have a very strong market share at both of them. So it's almost unavoidable that we would have very good market share coming out of it. The same is true on the trunking gateway side of Voice over IP. Again, we have strong positions with both of them.

Okay, Raouf. Thank you very much.

[OPERATOR INSTRUCTIONS] Daniel Amir, WR Hambrecht.

I have a couple questions here. The first question, can you comment a bit about what's going on the back end side, I mean on the foundry, the testing and packaging a bit? How it relates to your cost? Has anything changed in the past couple quarters there? And as you look at the outlook there, as well?

I guess I'll answer the question in two ways, Daniel, and this is Simon. From an availability perspective, all of the issues that we were experiencing throughout the early part of 2006 from a product availability perspective, have worked their way through the channel. And we haven't been in any supply constrained capacity issue for probably the best part of six months at this point in time. So both on the front end and the back end, things are as we would expect them to be from an availability perspective. In terms of pricing, it's inappropriate of me to comment in too much detail about the pricing environment as it exists today. But suffice it to say that we're not seeing anything abnormal at this point in time relative to what we would expect, especially given that many of our prices are set on an annual basis. We're not seeing us anything that causes us any consternation in terms of price trends out of the front end or back end.

Okay, thanks. And one other question. A bit on the fiber-to-the-home, and we spoke a lot here on the call. Can you just comment a bit on the competitive environment and whole optical modules area? I mean, is that -- I mean, are you seeing some more aggressive competition coming? Or are you really feeling that you're in the driver's seat here?

Sure, Daniel. This is Raouf. There's lots of competition in the optical module area. There has been and will continue to be lots of competition. The barriers to entry are probably a little bit lower than some of our more software-centric product portfolios. But there's nothing new to report here. It's the same old cast of characters that we're used to competing with day in and day out. There's nothing from a competitive perspective that will give us any rise for concern.

Okay, thanks a lot.

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 us at Mindspeed, thank you for participating this afternoon. We look forward to updating you on our performance next quarter. Once again, thanks, and bye-bye.

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