MACOM Technology Solutions Holdings Inc (MTSI) 2007 Q3 法說會逐字稿

Excuse me, everyone. I would like to introduce Mr. Simon Biddiscombe, Chief Financial Officer of Mindspeed. He will chair this afternoon's conference call. Please be aware that each of your lines are in a listen only mode. At the conclusion of Mr. Biddiscombe's presentation we will open the floor for questions. (OPERATOR INSTRUCTIONS)

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

Thank you, [Laney]. I would like to welcome everyone to our conference call discussing the results of our third-quarter fiscal 2007 which ended on June 30, 2007. 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 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 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; deployments and our ability to benefit from them; new product features and their benefits; marketshare; demand for our products; customer relationships; the impact of technological developments in our industry; design wins and their impact on future performance; the impact of consolidation in the industry; market fundamentals; inventory levels; our ability to maintain or improve non-GAAP operating profitability; future results; future revenues; backlog; order trends; gross margins; operating expenses; cash consumption; 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 filings with the SEC.

During our call today, we will be making reference to non-GAAP financial measures which exclude stock-based compensation expense, employer taxes on stock-based compensation, 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 investment section of our web site at www.Mindspeed.com.

Turning now to our financial results for the third fiscal quarter of 2007, today, we announced third-quarter revenues of $33.2 million, up 8% compared to the prior quarter and at the midpoint of the 6 to 10% revenue growth guidance range we provided at beginning of the quarter. Revenues from our high-performance analog products increased 15% sequentially, contributing 28% of total third-quarter revenues.

Revenues from our family of multiservice access VoIP processors were approximately flat sequentially, representing 28% of the total. WAN Communications product revenues increased 10%, contributing the remaining 44% of third-quarter revenues.

In terms of revenue contribution by geography, Asia-Pacific region contributed 50%, the Americas 38%, and Europe contributed 12%. No single-end customer generated greater than 10% of our revenues this past quarter.

Non-GAAP gross margin was $22.8 million or 68.7% of revenues and includes a 3.2 percentage point benefit from the sale of products written off in fiscal 2001. Non-GAAP research and development expenses were $13 million and non-GAAP selling, general, and administrative expenses were $9.5 million for total non-GAAP operating expenses of $22.5 million, consistent with our expectations. We set this quarterly non-GAAP operating expense target when we announced our restructuring actions last October and are pleased to have achieved it on schedule.

As a result we delivered non-GAAP operating profit of approximately $300,000.

Other income and expenses and provisions for income taxes in the aggregate resulted in a net expense of approximately $600,000. Our non-GAAP net loss was $300,000, resulting in breakeven earnings per share, based on approximately 112 million average shares outstanding for the quarter.

Turning now to the balance sheet. Cash, cash equivalents and marketable securities totaled $31.7 million at the end of June. Non-GAAP cash consumption was $2.7 million, compared to $3.4 million in the second quarter. During the quarter we paid $800,000 in interest associated with our convertible debt as well as restructuring payments of approximately $1 million.

Capital expenditures were approximately $1.9 million, depreciation was $1.3 million. Receivables were $15.4 million, resulting in net DSOs of 42 days.

We are pleased with our continued progress on reducing inventories which were down 12% to $16.3 million. Inventory turns were 2.6, up from 2.3 in the prior quarter. Gross inventory including amounts previously written off totaled approximately $46.4 million at the end of the quarter.

Total current liabilities were $25.3 million down $1.4 million from the prior quarter, primarily attributable to lower restructuring reserves and lower income taxes payable, partially offset by higher accrued compensation and benefits.

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

Thank you, Simon.

I am very pleased with our results in our third fiscal quarter of 2007. First and foremost, we achieved our return to non-GAAP operating profitability on schedule. I'm very proud of the efforts of the entire Mindspeed organization in reaching this key milestone.

Secondly we delivered 8% sequential revenue growth at the midpoint of our guidance range, driven by strong demand from key customers in China such as Huawei and ZTE as well as from customers completing consolidation such as Brocade and Alcatel-Lucent.

We also achieved our non-GAAP operating expense target of $22.5 million this quarter, a goal we established at the beginning of fiscal 2007; and we are pleased with the return of our non-GAAP gross margins to historical levels this past quarter. And most important, based on the sequential strength of our backlog as well as anticipated ordering trends, we expect to improve our non-GAAP operating profitability in the current fourth fiscal quarter.

I will now cover a few specific highlights from our third fiscal quarter. Starting with a multi service access voice [for] IP product portfolio, revenues were approximately flat with strong shipments of our integrated, Comcerto VoIP processor family to top tier customers such as ZTE and Huawei. We believe that the total addressable market or TAM for our Comcerto VoIP processors is expanding driven by the increasing adoption of VoIP technology as convergence takes hold in cable, wireless and access networks. As well as the new applications such as carrier deployed broadband gateways for the customer premise segments.

We believe that we are very well positioned to benefit from these new VoIP market opportunities and expect our VoIP business to grow as design wins with key customers in these applications ramped production.

Continuing our leadership in the multiservice space, during the quarter we announced a new family of packet processors, targeted at the emerging triple play, broadband home, and small- to medium-size enterprise markets. Our Comcerto 100 series of dual core processors is designed to enable service providers to cost-effectively support the multiple applications and quality of service required for delivering converged multimedia content to their subscribers.

Based on the carrier class system on chip architecture of our Comcerto VoIP processor family, the Concerto 100 series provides unprecedented price performance in a range of thin compatible devices that would allow customer premise equipment manufacturers to design a family of advanced gateway solutions, using the same software architecture to support broadband home routers, enterprise service routers, and high-end integrated access devices.

It is extremely flexible and programmable architecture allows equipment manufacturers to offer multiple equipment solutions tailored for specific deployments, and enables service providers to download software updates as new media content and features are introduced. We are pleased with the early market reception to this product.

This past quarter, we scored multiple top tier design wins for our VoIP product portfolio in both carrier and enterprise applications with customers including Huawei, ZTE, NEC, Alcatel-Lucent, Nortel and Ericsson.

In our high-performance analog product portfolio, revenues increased 15% sequentially with strong shipments of our switching products in another record quarter for our family of broadcast video devices. In fact, revenues from broadcast video products reached $2 million and were up 60% compared to the third quarter of last year as we continued to gain market share in this important high-margin segment.

In the fiber to the home market our PMD product revenues are sampling in Korean, GE Pond networks. Our key optical subassembly customers include TrueLight, [Fibergen] and HG, serving OEMs in Korea such as [Daison] and [Dongwon].

We are also continuing to benefit from our strong GE position in Japan and we are experiencing the early ramp of G-PON deployments in North America.

During the quarter we scored multiple key design wins across a high-performance analog portfolio in PON applications and Metro Optical equipment as well as broadcast video infrastructure. These included wins with key customers such as Alcatel-Lucent, Huawei, Samsung, Tellabs, Sumitomo, Lumenis, NEC, (inaudible) as well as many others.

In our WAN communications portfolio, revenues increased 10% sequentially, consistent with the continued depletion of WAN inventories in the supply chain. We also benefited this past quarter from the continued expansion of wireless backhaul and Metro optical networks with particularly strong shipments of our T3 E3 devices.

During the quarter we announced that [Datton] Mobile is shipping our Opti Fi ATM packet-over-SONET devices in its 3G wireless space stations. Datton Mobile is a leading Chinese communications equipment company focusing on 3G networks, based on the TD SCDMA mobile communication to standards. China is currently building large-scale trial networks based on the standard in 10 cities including Beijing.

We scored numerous design wins for our WAN communications products in the third quarter including Alcatel-Lucent, Fujitsu and many others. We were also very pleased to have Ron [Cates] rejoin Mindspeed as general manager of our strategic WAN Communications business units. Ron brings 28 years of communications semiconductor, industry sales, and marketing management experience including eight years previously with our own Company.

In conclusion we are very pleased with our performance this past quarter and our return to operating profitability on a non-GAAP basis.

Now turning to our outlook for our current fourth fiscal quarter of 2007. We believe that the current infrastructure market environment is characterized by improving fundamentals, coupled with a depletion of excess inventories in the channel. We also believe that the effects of customer consolidation are largely behind us.

Based on the sequential strength of our backlog and anticipated ordering trends, we expect fourth fiscal quarter revenues to be flat to up 5% sequentially. We expect our non-GAAP gross margin to be consistent with the prior quarter and our non-GAAP operating expenses to be roughly flat sequentially.

As a result, we expect to improve our non-GAAP operating profitability this quarter. We also expect to reduce our cash consumption.

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

(OPERATOR INSTRUCTIONS). Sandy Harrison.

Good afternoon and congratulations for reaching your milestone.

Couple questions. As far as some of the things that you guys are seeing in the WAN, your comments about the inventory bleeding off and some of the opportunities in TDS/CDMA, sort of what's been on Ron's plate here since he's come back? And I think that some of your expectations associated with him would be his ability to help introduce a couple of ideas and drive that product.

Any preliminary thoughts we can have out of that? Or what's sort of the report card there?

I will share with you that we are increasingly enthusiastic about the prospect for the WAN infrastructure space, particularly driven by the ramp of 3G network infrastructure particularly in China, as well as other parts of the world. We believe that Ron will bring a particular focus on let's call it pockets of growth within the WAN infrastructure universe, beyond 3G of the structure.

There are obviously products and product lines and market segments that are not as promising but there are others that we believe with more focus can reap good rewards for us. I think believe it at that for now.

Great and then spend a quick second on the HPA segment that did well this quarter. If you look at the broadcast video what is really driving that? What are you seeing that is behind that and driving the 60% year-over-year growth?

Fundamentally what we are seeing there is that there is a so-called forklift upgrade within the video broadcast infrastructure space. It is being brought on by the increasing penetration of digital video particularly high definition digital video content.

What we are bringing to the space is a sense of superior products, far superior to any other electronics that you can use today to implement high definition video switching, multiplexing and transmission equipment; and we believe that we are meeting with very significant market success. These products are cutting a fairly broad swatch in the market today. Many customers are quite enthusiastic and rapidly adopting them for new platform designs going forward.

We believe we are just at the if you will the tip of the iceberg for this business. Our share right now is not very big, barely double digits. But we believe that, over time, we can grow that quite substantially and thereby grow the revenues in the HPA portfolio as well quite substantially.

One more question if I could and I will yield the floor. Just -- you made comments about ramping G-PON in North America markets. How is that going? At what point or do you think G-PON and E-PON will the sort of equivalent or do you expect one market to be a little better than the other?

Right now the vast majority of our fiber to the home revenues are still from the GE PON technology with particularly the emphasis on Japan. As I commented in our prepared comments earlier GE PON is also being adopted in Korea, but that is in its early ramp, early stage of ramping if you will.

In North America G-PON is active. Deployments are quite evident by service providers like Verizon and to a much lesser extent by AT&T. We believe we have very good position there but it may be a couple of years if not longer before the revenues are anywhere near balanced for us between G-PON and GE PON.

Again we think Asia was the place where fiber to the home took off first where we have a dominant position and we think that the number of subscribers in Asia will continue to be far greater than subscribers in the rest of the world for the foreseeable future.

Edwin Mok.

Congratulations for the numbers and good guidance.

Thank you, Edwin.

Questioned on VoIP. So let's say you guys have flattish revenue this quarter. Is that any makeshift in there? Is that because we see more or less enterprise businesses this quarter or carrier business? (inaudible)

There is a little bit of a mixed shift indeed within the VoIP business. Is not necessarily between carrier and enterprise as much as it is within the carrier universe.

As we commented in our prepared script earlier, we are seeing the beginnings of broad-based VoIP adoption outside the traditional Class 4 trunking space. Still within carrier minute that in access applications so in other words triple-play edge equipment like DSLAMs and multiservice access nodes and so forth, as well as within cable infrastructure and, increasingly, within the so-called fixed mobile convergence FMC space.

We have very significant design wins with almost all the players who matter in these relative markets and what we have experienced over the past couple quarters is the typical start and stop of the early phase of deployment of a new technology in emerging applications. So for example if you go back a quarter we had customers in both wireless as well as cable infrastructure who ramped strongly and then paused, if you will, in this last third fiscal quarter as they absorbed product and got ready for larger deployments going forward.

So it is a big of a mixed shift within the carrier universe. And it is quite difficult to start and stop phenomena you see in an early market phase.

That was great color. Going back to the fiber to your home business, if you look at how much revenue you guys declined from in the quarter before last year lost for the last quarter and then a rebound on this particular quarter, it seems to me that not all the storage fiber to the home was that you guys saw before have came back. Are we expecting more upside in the coming quarter from the storage side or how shall I look at that?

I'm not sure I quite understand your question, but I believe you are inquiring as to the health of the storage segment for us and whether there is more upside going forward. Is that correct?

Right. Because what happened is, in the second quarter basically you guys had to preannounce because there was a delay on your customer (inaudible) right? And then in this quarter your fiber has came back but it looks like it didn't came back as much as what you guys had preannounced, I guess.

So my question is this. Are we expecting more upside on that side or how shall I look at that?

We are seeing strength across the board. We are certainly seeing it in storage without a doubt, in enterprise, and also continuing in fiber to the home. I would not call out any one particular segment as swamping the others if you will. There is strength across the board.

Thanks for clarifying that. Lastly you said backlog has gone up. Are you referring to your backlog coverage has increased or just the overall backlog level?

Yes. Backlog coverage has increased so we need less turns to deliver the guidance this quarter than we did last quarter.

Sounds great. That was very helpful. Thanks.

Daniel Amir.

Couple of questions here. First of all on the VoIP just to clarify that on the voice side. So I mean it looks like the revenues are kind of flattish this quarter. What type of -- as we exit the fiscal year and into fiscal year '08, what type of percentage of review should we look at the voice side? It looks like seems like it is now about 28%. It went as high as 30 or, even in the past, 35%.

So should we see it staying at these levels or is it increasing?

So obviously the percentage of the revenue that is going to be VOiP will depend not only on the size of the VOiP business but also how the other businesses are doing. As I commented to the previous question, we are seeing broad-based strength across the portfolio, not just in VOiP but we're seeing strength in analog, we are seeing strength in the WAN business, quite obviously.

So, we think a lot of things are going in the right direction at this point in the game. We believe as I mentioned earlier that VoIP is being adopted quite broadly in the carrier network but also now into service provider-based customer premise applications. We believe that VoIP will grow, but it is tough to say that as a percentage it will increase or decrease.

It is just very hard to tell. It is really going to depend on how well the other businesses do.

The other question is, can you a bit give some commentary what the situation is currently on the wireless backhaul market? I mean that is clearly an important area for you guys. What are you seeing there? Has anything changed since the previous quarter?

The wireless backhaul market is if anything strengthening even further. With the adoption of new wireless standards coupled with the growth and data traffic over wireless networks, wireless backhaul is an area of continued innovation.

We have a lot of products that address that space today and it's clearly one of the areas that is quite attractive to us going forward. So when we think about the WAN portfolio, clearly wireless backhaul is somewhere at the top of the list of exciting TAM expansion opportunities.

So it is pretty good. And it applies to a lot of our products -- G3, E3 certainly symmetric DSL, ATM, and other products.

My last question a bit related to the M&A activity obviously last year that's hurt you a lot with a different silicon M&A activity in the market. Where does it stand right now? Do feel that orders are coming back to more normal? Or are we still kind of waiting for some of these mergers to play out as the order patterns come back?

Certainly. As we mentioned in our prepared comments, we think that the effects of consolidation across the value chain certainly amongst our customers but also our customers' customers are starting to draw to a close. During this past quarter, we experienced quite a bit of revenue pickup from -- in particular customers who are undergoing consolidation where we had weak demand in prior quarters. A good example of being that being Alcatel-Lucent.

So, yes, we absolutely believe that we are nearing the end of the consolidation-related drag on our business.

Tim Savageaux.

Couple of questions. And I guess overall about growth. It seems as if your anecdotal commentary, with regard to the pace of your business might be a little bit ahead of your quantitative commentary with regard to the guidance to the extent that if, I guess if you modeled in normal terms, I suppose your guidance would be a little bit higher, right? In saying it takes less turns to achieve the guidance, so is there something that's giving you pause outside of what appears to be a nicely growing book of business to look at a flat 5% sequential guidance versus what's some pretty bullish commentary?

Sort of as a follow-on to that, even with that guidance, you will return to year-over-year growth here in the upcoming quarter for the first time in a while. And that is a good thing, but single digit growth -- which I gather is not your view of how quickly your markets are growing or how fast the Company could grow. So with that in mind, I wonder if you can give us an update on at least your view as to the growth rates in your various addressed market and what Mindspeed's growth rate ought to look like over time, adjusting for -- if we ever get to a period when we can adjust for the various ins and outs of inventories and consolidation and whatnot? Thank you.

Good question. I will take the first part and I will let Raouf take the second part.

So with regard to the current quarter perspective and the relative guidance compared to the current backlog coverage and so on, perhaps it's just me being a little conservative. We are always a little worried about August as we go into this time of the year. August traditionally is a little slower than just about any other month of the year. And because of that specific as it relates to European customers, we've guided at this level.

So hopefully I'm proven to be somewhat conservative in my perspective but we are moving into that slower summer period as it relates to some of our larger customers -- the likes of Alcatel-Lucent and Siemens obviously right. So -- .

That is what we are trying to build a perspective around. I'm going to let Raouf talk about the long-term growth trends that we are seeing in each of the

Certainly you are correct in that the near-term growth perspective is a little bit softer than what we would believe is the long-term potential of our Company. And to give you a little more color on that, we certainly believe that the collection of markets that the Company is addressing today should be able to drive at least 20% or more annual growth.

Remember that within that there's roughly a third or slightly more than a third that's in the WAN space which is let's call it flattish; and then the other call it 60% or so is growing at a CAGR -- compounded annual growth rate or CAGR -- of somewhere in the 30% a year range. So you blend that.

You would get an expected compounded annual growth rate of something better than 20% going forward, particularly as you become more and more exposed to growth in that other segment of your business.

In the near-term as you put it, there is a great deal of movement of inventory around. Obviously, the liftoff of some of the consolidation aftereffects from last year and so forth.

So if you get past the puts and takes I think you are looking at a business that grows certainly better than 20% on an annual basis. We still feel good about that. We're just working our way through some of these issues and, clearly, starting to emerge from those issues that drag on the business last year.

That's very helpful. Just maybe follow-up with a couple of customer specific questions to the extent that you can comment on them. Obviously Cisco did not make the 10% list here.

Just under 10. Simon here. I will stop you there. It was just under 10%.

Just under 10. Okay. So they may reemerge on that list at some point in the future?

Absolutely.

Just to close I think I heard you mentioned some VoIP design wins with Nortel. I'm not sure I've heard that in the past. Is that something new and interesting worth expanding on here? Or any cause for celebration or would you care to give any more color on that?

Certainly any top tier wins, Tim, are very positive, but particularly with Nortel Corporation. As you know Nortel has a very strong position in VoIP. These particular wins are more on the enterprise side as opposed to the carrier side. It turns out Nortel has very significant market share in the enterprise as well. They are frankly continuing a trend of winning in the enterprise business of Nortel. The trend that we have reported before by no means our first wins at Nortel.

Mr. Biddiscombe, this ends today's question-and-answer portion of our conference call.

That concludes our conference call today. On behalf of all of us at Mindspeed, thank you for participating this afternoon. We look forward to updating you on our performance next quarter. Thank you again and goodbye.

This concludes today's teleconference. You may now disconnect.