MACOM Technology Solutions Holdings Inc (MTSI) 2007 Q4 法說會逐字稿

Excuse me, everyone, I would like to introduce Simon Biddiscombie, Chief Financial Officer of Mindspeed, who will chair this afternoon's conference call. Please be aware each of your lines is in a listen-only mode. At the conclusion of Mr. Simon Biddiscombie's presentation, we will open the floor for questions. At that time instructions will be given as the procedure to follow if you would like to ask a question. I would now like to turn the conference over to Mr. Simon Biddiscombie. Sir, you may begin.

Thank you, Karen, and good afternoon. I would like to welcome everyone to our conference call discussing the results of our fourth quarter fiscal 2007, which ended on September 30th, 2007. Joining me on the call is Raouf Halim, our Chief Executive Officer. I will begin the call with a review of our quarterly income statement and balance sheet and a brief recap of our full fiscal 2007 year. Raouf will then provide his perspectives on our fourth quarter results before providing the outlook for our current quarter. We will then open the call for your questions.

Before we begin, I want to remind you our comments today will include statements relating to our future results, including the financial outlook and expectations for our fiscal 2008 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 and expected performance of our business units, deployments and our ability to benefit from them, new product features and benefits, market share, demand for our products, customer relationships, the impact of technological developments in our industry, growth prospects in various markets, design wins and their impact on future performance, the impact of consolidation in the industry, market fundamentals, inventory levels, the impact of acquisitions and the expansion of our product portfolio, our ability to maintain or improve non-GAAP operating income and deliver positive non-GAAP cash flow, future revenues, backlog, order trends, gross margin, 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 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, employee taxes on stock-based compensation, acquisition costs 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 fourth fiscal quarter, today we announced fourth quarter revenues of $33.7 million, up 1.4% compared to the prior quarter and consistent with the revenue growth guidance range of flat to up 5% we provided at the beginning of the quarter. Revenues from our high performance analog products increased $0.08 sequentially contributing 30% of total fourth quarter revenues. Revenues from our family of WAN communications products increased 1%, representing 44% of total. Multi-service access voice-over IP processor revenues declined 5%, contributing the remaining 26% of fourth quarter revenues. In terms of revenue contribution by geography, the Asia Pacific region contributed 53%, the Americas 36% and Europe contributed 11%. Cisco was our only 10% end customer this past quarter, including both direct sales and indirect sales through third parties.

Over the past year, we have been reviewing our portfolio of intellectual property with a view to license some of our key patents. In addition, we've been considering the sale of certain patents that are no longer core to the business. During the quarter we enjoyed our first revenues from these efforts. Non-GAAP gross margin was $23.4 million or 70% of revenues, 1 percentage point better than our expectations, and includes a 2.8% benefit from the sale of products written off in fiscal 2001. Non-GAAP research and development expenses were $12.6 million non-GAAP selling, general and administrative expenses were $9.8 million for total non-GAAP operating expenses of $22.4 million, consistent with our expectations. As a result, we delivered non-GAAP operating income of $1.1 million. Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $80,000, provision for taxes was a credit of $344,000, primarily resulting from the completion of a tax study at one of our international companies. We achieved a key milestone for the Company with non-GAAP net profit of $989,000 resulting in our first positive non-GAAP earnings per share of $0.01 based on approximately 112.5 million average shares outstanding for the quarter.

For our full fiscal year of 2007, we delivered revenues of $128 million. We cut our non-GAAP operating loss by 30% from $11.5 million to $8 million, and we cut our non-GAAP net loss by 33% from $14.7 million to $9.8 million. Excluding the effect of the acquisition of the assets of Ample Communications, we also reduced our cash consumption by approximately 30%. Turning now to the balance sheet, with comparative data again being to June the 30th, cash, cash equivalents and marketable securities totaled $25.8 million at the end of September. Non-GAAP cash consumption was $5.9 million, including the impact of the $4.9 million in cash associated with our acquisition of the assets of Ample Communications and $1 million from all other activities. Capital expenditures were $1.6 million and depreciation was $1.3 million. Receivables were $13.6 million resulting in net DSOs of 36 days, down from 42 days in the prior quarter.

We're also pleased with our continued progress on reducing inventories which were down another $1.2 million sequentially to $15 million. Inventory turns were 2.7, up from 2.6 in the prior quarter. Gross inventory, including amounts previously written off, totaled approximately $43.9 million at the end of the quarter. Total current liabilities were $22.4 million, down $2.9 million from the prior quarter, primarily attributable to the payment of $1.6 million of accrued income taxes and also to lower accounts payable. I would now like to turn the call over to Raouf for his comments on our fourth quarter results.

Thank you, Simon. I am pleased with our performance in our fourth fiscal quarter of 2007, a few key highlights of which include achieving a key milestone in our Company history by delivering both non-GAAP operating and net income of approximately $1 million and positive non-GAAP earnings per share for the first time. We experienced a solid improvement in business fundamentals during the second half of our fiscal year, as the effects of OEM and service provider consolidation as well as excess channel inventories abated. In addition our non-telecommunications product lines, such as broadcast video, grew substantially in the second half. Revenues accelerated compared to the first half, and we delivered significantly improved operating results. Excluding the acquisition of Ample's assets we also reduced cash consumption in our fourth fiscal quarter to the lowest level since becoming a public company, and we expect to deliver positive non-GAAP cash flow in our current first fiscal quarter of 2008.

On September 25th we acquired the ethernet MAC product portfolio and intellectual property assets of Ample Communications, an innovative developer of products for carrier ethernet aggregation applications. With this strategic acquisition, Mindspeed immediately enters a growing segment of the carrier infrastructure market with a strong product portfolio in production and an existing base of tier-one customers. I will now cover a few specific business highlights from our fourth fiscal quarter. Starting with our multi-service access processor portfolio, revenues declined 5% in what has historically been our seasonally weak quarter for shipments of our Comcerto voice-over IP processors. We believe that our Comcerto processor family is very well-positioned to benefit from the adoption of voice-over IP in cable, wireless, enterprise, and particularly in access networks, as the replacement of class five switches accelerates.

Market research firm Dell Oro estimates that next generation IP port shipments will grow 50% in calendar 2008 and access gateway equipment such as multi-service provisioning platforms and MSAMs, triple play IPD slams with data, voice and IPTV capabilities. We expect our voice-over IP business to grow in fiscal 2008 as design wins ramp to production with key customers in these applications, such as Nortel, Huawei, Siemens, Alcaltel Lucent and others. Multiple families of next generation voice-over IP gateways enabled by our Comcerto processors have achieved general availability status, and we anticipate deployment by service providers worldwide in fiscal 2008. Additionally, we are encouraged by new applications for our multi-service access processors such as carrier-deployed broadband gateways for the customer premise segment. This past quarter we scored more than 20 design wins across our voice-over IP product portfolio with customers including Alcatel, Lucent, Fujitisu, Huawei, Nokia, Nortel, Panasonic, and Cedar Point, amongst others.

In our high performance analog product portfolio, revenues increased 8% sequentially with record shipments of switching and signal conditioning products. Specifically, we experienced strong demand across our portfolio of crosspoint switches and surge devices from top-tier customers such as Alcatel Lucent, Huawei and Infinera. Our broadcast video products experiences double-digit sequential growth in shipments to key video equipment suppliers, including Thompson, Everetts, Fjord and NEC. We also benefited from continued demand for our PMT devices in GE PON network deployments in Japan, as well as early shipments into new fiber-to-the-premise network buildouts in China. During the quarter we announced that Infinera, a leader in digital optical networks, selected our 144X144 crosspoint switch for use in their DTN optical system. Manufactured in low-power CMOS technology, our high-capacity crosspoint switch integrates signal conditioning circuits for driving and receiving high-speed signals across the most demanding signal back planes. Infinera's DTN is the first dense wavelength division multi-plexing or DWDM system, to combine the scalability of multi-wavelength optical transport with the flexibility of integrated digital switching. This system is currently in deployment by service providers in long haul as well as metro networks worldwide.

Design wins were particularly strong this past quarter in high performance analog applications including PON and Metro optical equipment with customers such as Mitsubishi, NEC, Thompson, M-Core, Neophotonics, Source Photonics and multiple wins at Tellabs and Huawei amongst many others. In addition, we won a continued stream of key design wins in broadcast video infrastructure, with customers including Pro-Bel, Ford, NEC, Network Electronics and Thompson. In our WAN communications portfolio, revenues increased 1% sequentially with strong shipments of our network processors and sonic devices into wireless backhaul and metro optical networking applications. During the quarter we acquired the ethernet MAC product portfolio and intellectual property assets of Ample Communications, an innovative developer of products for carrier ethernet aggregation applications. This strategic acquisition enables Mindspeed to immediately enter the growing carrier ethernet market segment with highly competitive products shipping to major OEM equipment customers today for installation metropolitan, access and enterprise networks including wireless, cellular backhaul and ethernet over SONET.

Our WAN communications team and our customers world-wide are excited about the potential of these new products. We are already closely engaged with the existing carrier ethernet customer base and are working to expand our design win opportunities with a number of our other WAN customers around the world. With our infrastructure expertise, strong customer support and global salesforce, we expect to build a strong position in the ethernet aggregation market with our current products and to develop additional products to further diversify our WAN portfolio over time. In our existing WAN portfolio, just after the close of the quarter, we announced the industry's first comprehensive solution for SS7 processing with HDLC protocol support for 3G wireless, voice-over IP, and other fixed mobile convergence applications. SS7 processing capabilities are critical for wireless applications such as personal communications services, wireless roaming and mobile subscriber authentication as well as local number portability and short messaging service or SMS applications. We collaborated with continuous computing to integrate a software convergence layer between our SS7 processor and its carrier class Trillium signaling software, trading a seamless system to simplify the application development process for our joint customers.

In the fourth quarter we scored a large number of design wins for our WAN portfolio at key customers including Ericksson, Alcatel Shanghai Bell, ZTE, Nokia Siemens, and multiple wins at Alcatel Lucent amongst many others. In conclusion, we are pleased with our performance this past fiscal year. Entering fiscal 2008 we are encouraged by healthy growth prospects in the infrastructure market. We believe that the current market environment is characterized by improving fundamentals, with the effects of OEM and service provider consolidation as well as excess channel inventories now behind us. Additionally, we are encouraged by our growth prospects in markets outside of traditional telecommunications applications such as in broadcast video infrastructure. Specifically, this fiscal year, we believe expansion of the total addressable market or TAM for our Comcerto voice-over IP processors will be driven by the increasing adoption of voice-over IP technology in cable, wireless, enterprise and access networks. Additionally, we're encouraged about growth opportunities in the emerging carrier deployed broadband gateway markets.

In our high performance portfolio we anticipate strong growth from our switching and signal conditioning products and metro optical networking equipment and from our broadcast video products in the ongoing conversion to high definition transmission. We believe we are also very well-positioned to benefit from the continuing ramp of broadband fiber-to-the-premise network deployments worldwide as well as early GPON deployments in Europe and North America. In WAN communications, we expect growth in selective markets such as carrier ethernet and other segments. Now turning to our outlook for our current first quarter of fiscal 2008, based on the sequential strength of our backlog and anticipated ordering trends, we expect first fiscal quarter revenues to be up 1 to 6% sequentially. We expect non-GAAP gross margin to be approximately 69% and non-GAAP operating expenses of approximately $22.8 million. We also expect to deliver positive non-GAAP cash flow for the first time. That concludes our formal comments today. Operator, let's open the lines for questions.

At this time, we will open the floor for questions. (OPERATOR INSTRUCTIONS) Our first question comes from Sandy Harrison.

In your prepared remarks, guys, you talked a little bit about the IP model and some of things you've done in that sector and how it is a relatively new avenue for you to generate revenues. Could you talk a little bit more about that, what sort of products were they involved in? Is this the first of a couple, and in doing so, is this incremental revenues or is there any chance that you're into some of the opportunities you otherwise might be selling chips into?

Sandy, it is Simon. We're going to be cautious as we tread our way through this because the specific transactions we entered into are subject to confidentiality agreements. But I think it is fair to say that, over the course of the last couple of decades in reality, Mindspeed in its various forms including parts of its predecessors, have invested an incredible amount in intellectual property generally and we today have a very large and strong patent portfolio for a company of our size. And many of those patents are in key communications technologies that are broadly applied today.

What we have been doing over the course of the last year, as our prepared remarks alluded to, was developing a strategy that was going to allow us to realize greater value than we have been able to from just chipset sales over the course of the recent years. And in many cases, that patent portfolio has primarily been used for precisely that, to defend our critical positions and to allow us to establish share in markets by licensing to our customers. Now what we're going to be as we move forward is more aggressive in licensing for royalties and obtaining cross licenses from other patent holders. We're going to be more aggressive about disposing parts of the IP portfolio that are non-core. So it is the start of a process, Sandy, that has been under the covers over the course of the last year, that we expect to see continue to benefit us as we move forward. But essentially what we want to make you aware of today is there is a process that is ongoing, that we have just started and that we expect to see us benefit as we move forward.

Got that. And then if I could have a quick follow-up, as far as Ample, is there any other color you can provide us as far as -- you had suggested somewhere between, I guess, $3 million plus or minus contribution in '08? Has that, as you've now rolled up your sleeves and brought it inhouse, is that still on track or did you find some positives or surprises or such and just any kind of other filler you can as far as how that's gone, how the reception by the customers have been and so forth?

It is Simon again, Sandy. I think at the high level, we haven't seen any significant change in our perspective about how great a contribution the Ample business is going to bring to Mindspeed over the course of fiscal 2008. I think the one thing that has caught us a little is that there are significant supply constraints associated with many of the products that Ample hadn't been able to procure for some time, so that's certainly impacting us in the very near term, obviously where we're not necessarily able to get product to satisfy all of the demand that exists in the market at this point in time. But I don't think our perspective has changed at the total level. I think probably that the shape of it has but, as we said in our original commentary, most of the activity from a revenue perspective is going to be in the second half of the year anyway.

Got you. I will go back into queue. Thanks.

Your next question comes from the line of Allan Mishan.

This is Sam Dubinsky calling for Allen Mishan. I had a few quick questions. Can you just run through the inventory levels in each of your end businesses?

Do you mean our product families.

Yes, product families at key customers, maybe just talk about inventory in the channel, where you see that going next quarter, and I have a couple follow-ups.

This is Simon and I will comment on that well. We update our key customer inventory positions on a monthly basis. I have seen the numbers for the end of September, and there isn't anything out there that causes me any concern at this point in time, Sam. There is always a pocket here, a pocket there of inventory at specific customers that didn't quite get things perfect, but frankly I think our perspective is that inventory in the channel is about as clean as it has been in an extended period of time, and there isn't anything that causes us any consternation at this point in time.

Okay. Great. Thank you. A follow-up regarding HPA. You didn't mention anything regarding enterprise storage. Can you give an update on that market and what you're seeing there post consolidation of your customers and also just the general demand environment for enterprise storage, and I have one last question.

Certainly, Sam, this is Raouf here. I think in general what we would say is we're not necessarily a great proxy for the storage industry. I think it is generally well known that we have enjoyed a business with one particular very large customer, namely McData that is now part of Brocade, and I think it is fair to say that that organization is still going through its integration phases and, as such, demand trends in the near term are suffering from the effects of consolidation and integration of those two businesses. Beyond that, I really don't want to say very much because it is specific to that particular business, and obviously covered by confidentiality agreements and so forth, so I think overall we're not a great proxy. It is fair to say our business is somewhat lumpy in that space, and obviously influenced by consolidation.

Okay. My last question is regarding broadcast video, how big a portion of your business is that on a quarterly run rate now?

We actually haven't broken it out, Sam. But I think it is fair to offer a perspective that says it is somewhere between 5 and 10% of the total at this point in time.

Okay. Great. Thank you.

(OPERATOR INSTRUCTIONS) Your next question is from the line of Mike Easson.

Good afternoon, gentlemen.

Good afternoon, Michael.

Just a quick question on the GPON front, with the recent development of Occam acquiring Terawave's development efforts, will that affect your joint effort -- joint project in a GPON processor?

So obviously the GPON space is quite interesting to us, and without disclosing any more about insight we have into Terawave and Occam's merger, that's really all I can say at this point again.

So could you comment on any new GPON oriented products in the near future or is that a focus of your development efforts at this point?

As you know, we have announced that we're proceeding with the development of a GPON product that would integrate essentially all the elements of a system onto one device that would include a GPON MAC, voice-over IP processor, packet processor, (inaudible) and other functionality. We disclosed that had previously, and I think it is fair to say it is a very attractive market, very attractive space for us, so I guess I would say that beyond that, we are obviously very active in the GPON space already with our family of optical module products. We have enjoyed a significant market success with our PMDs in the GPON market in North America, as well as outside North America quite frankly. We have gone from essentially having no share a couple of years ago to being positioned to hopefully become the number one player, worst case number two, but very likely the number one PMD provider in GPON worldwide.

Great. I will leave it there. Thank you.

Thanks, Michael.

You have a follow-up question from the line of Sandy Harrison.

Thanks. Simon, just to follow on some of the last comments on PMD and your positioning in that market, how are you guys seeing the ASPs in that market and what's a good way to try to track your leadership role in that and that and try to model it out from a dollar potential perspective?

Sandy, let me take the question. This is Raouf here. Obviously this is as close to the consumer market as Mindspeed gets, and as you might expect, that's where we have the highest degree of competitiveness and price erosion. We see nothing unusual in the PMD space. We compete with companies like Maxum, occasionally we see Vitesse and a couple other much smaller players in Taiwan and so forth, so price erosion is something we live with every day of the week. I would say that it is not accelerating in any way. Regarding blended ASP,s which I think was your question, they're generally headed one-way which is usually downward, but as we refresh the portfolio with higher performance products that support new flavors of GPON for instance or new flavors of GEPON with a long-term focus on 10 gig, clearly our newer products bring to the market greater value and higher ASPs, so we continue to blend up our ASPs and try to offset the declines in the more mature product lines. I think to be more specific, ASPs are sort of for a complete chipset, transceiver type chipset, you're looking anywhere between $3.00 to $5.00 for complete chip sets.

Thanks.

Mr. Biddiscombie, this ends the question-and-answer portion of the 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. Thanks again and goodbye.

This concludes today's conference call. You may now disconnect.