MACOM Technology Solutions Holdings Inc (MTSI) 2008 Q1 法說會逐字稿

I would like to introduce Simon Biddiscombe, Chief Financial Officer of Mindspeed, who will chair this afternoon's conference call. 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, Car. I would like to welcome everyone to our conference call discussing the results of our first quarter of fiscal 2008 which ended on December 31, 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 first 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 that our comments today will include statements relating to our future results, including the financial outlook and expectations for our fiscal 2008 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 and expected performance of our business units, deployments and our ability to benefit from them, product features and their 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 status of service provider consolidation, market fundamentals, expected trends in capital expenditures by carriers and general economic conditions, 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 noted in our earnings release and our Form 10-K for fiscal 2007 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 expense, amortization of intangibles, employee separation 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 first fiscal quarter of 2008, today we announced first quarter revenues of $35.3 million, up 5% compared to the prior quarter, which was toward the high end of our revenue guidance range we provided at the beginning of the quarter, of up 1% to 6%. Revenues from our family of multiservice access voice-over IP processes increased 13% sequentially, contributing 28% of total first quarter revenues.

Revenues from our high performance analog products increased 4% sequentially, representing 30% of the total. WAN communications product revenues were flat sequentially, contributing the remaining 42% of revenues.

In terms of revenue contribution by geography, the Asia-Pacific region contributed 50%, the Americas, 39%, and Europe contributed 11%. Cisco was our only 10% end customer this past quarter, including both direct sales and indirect sales through third parties.

Non-GAAP gross margin was $25.2 million, or 71.4% of revenues, 2 percentage points better than our expectations, and includes a 1.3-percentage-point benefit from the sale of products written off in fiscal 2001 and a 2.3-percentage-point benefit from the sale of certain patents that are no longer core to our business. Excluding the impact of these items, the underlying gross margin was approximately 68%. Non-GAAP research and development expenses were $12.9 million, and non-GAAP selling, general and administrative expenses were $10.4 million.

Total non-GAAP operating expenses were $23.2 million, slightly higher than our expectations, attributable to a variety of items, including incremental sales and channel partner commissions, as well as marketing costs associated with the launch of several key new products. As a result, we delivered record non-GAAP operating income of $2 million. Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $500,000.

We delivered record non-GAAP net income of $1.5 million and our second consecutive quarter of non-GAAP earnings per share of $0.01 based on approximately 113.8 million average shares outstanding for the quarter.

Turning now to the balance sheet, with a comparative data being from the September 30th date, cash, cash equivalents and marketable securities totaled $27.5 million at the end of December. As we had anticipated, we achieved another key milestone for the Company this past quarter by generating $1.7 million in cash, even after approximately $1.2 million in payments associated with our acquisition of the assets of Ample Communications.

Capital expenditures were approximately $1.3 million and depreciation was $1.2 million. Receivables were $12.5 million, resulting in net DSOs of 32 days, down from 36 days in the prior quarter. We made further significant progress on reducing inventories, which were down another $2.2 million sequentially to $12.8 million. Inventory turns were 3.2, up from 2.7 in the prior quarter.

Total current liabilities were $18.8 million, down $3.5 million from the prior quarter, primarily attributable to lower accounts payable and payments associated with our acquisition of the assets of Ample Communications, offset by higher accrued compensation and benefits. I would now like to turn the call over to Raouf for his comments on our first quarter results.

Thank you, Simon. I am quite proud of our business performance in our first fiscal quarter of 2008. Highlights of this past quarter included achieving revenue of more than $35 million, near the high end of our guidance range for the quarter, driven by double-digit growth in our voice-over IP business, delivering record non-GAAP operating income, marking our third consecutive quarter of improving non-GAAP operating profitability, generating positive cash flow for the first time.

We believe that our performance this past quarter clearly demonstrates our improving operational strength and strong competitive positions across multiple key market segments. I will now cover a few specific business highlights from our first fiscal quarter. Starting with our multiservice access processor portfolio, revenues increased 13% sequentially to their second highest level in our history.

We had a record quarter in enterprise voice-over IP, driven by ramps at key customers, including Nortel, Panasonic, Ericsson and others. We also experienced sequential growth in our carrier voice-over IP business, as multiple design wins scored over the last few years began ramping to production with key customers, such as Nokia Siemens Networks, Alcatel Lucent and LGE, and wireline, wireless and fixed mobile convergence applications worldwide.

We recently announced a strategic addition to our Comcerto family of voice-over IP processors, focused on the emerging class 5 switch replacement market in access networks. Our new Comcerto 300 series of highly integrated single-chip voice-over IP processors is designed to enable the migration of copper loop voice access networks from traditional class 5 TDM to next-generation voice-over IP.

Demonstrating the competitiveness of our Comcerto 300 series, two market leading equipment manufacturers are already designing it into their next-generation IP access platforms, and it is currently under evaluation by many others. Based on our multicore voice-over IP architecture, we believe the Comcerto 300 series will enable our customers to bring service convergence to access networks with voice-over IP to Ethernet line cards for next-generation equipment including IP-DSLAMs, IP-DLCs and MSANs.

We expect the next major wave of voice-over IP adoption will occur in the replacement of traditional class 5 TDM switches with this new generation of cost effective multiservice access equipment. We believe this is an emerging high growth market opportunity for Mindspeed, as service providers deploy IP-based access networks to offer subscribers converged triple-play voice, video and data services.

This past quarter, we scored numerous design wins across our voice-over IP product portfolio, with market leaders including Alcatel Lucent, Nokia Siemens Networks, ZTE, Huawei and Kalex amongst many others. In our high performance analog product portfolio revenues increased 4% sequentially. We had another record revenue quarter in this business for our switching and signal conditioning products to top tier customers such as Alcatel Lucent, Infinera, Huawei and Hitachi.

We also benefited from continued strong demand for our optical PMD devices in GEPON network deployments worldwide with key optimal module manufacturers including Mitsubishi, Sumitomo, Trulite Photon, WTD and NEC amongst many others.

Over the past two years, we have been highly focused on the GPON market to duplicate what we believe is our number one PMD market position in GEPON. We have made tremendous progress over the past year, establishing a strong position for our optical PMD devices in the emerging GPON fiber-to-the-home market in Europe and in North America.

We expect our PMDs to be shipping in systems supplied by Alcatel Lucent, Motorola, Intel Labs into Verizon's FiOS network rollout. Design wins were strong again this past quarter, with over 60 wins across our high performance analog portfolio, with customers such as Tellabs, Huawei, Enterasys, Emcore, Merge Optics, and Askey, amongst many others.

In our WAN communications portfolio, revenues remained approximately flat. We continued to engage on design opportunities around the world for our new Ethernet MAC product portfolio, which we recently acquired from Ample Communications. In a recent report, the research firm, Infonetics, estimated that the market for 10-Gb Ethernet will grow at a compounded annual rate of nearly 80% over the next few years, from 300,000 ports in 2006 to 3 million ports in 2010.

We are working to expand design win opportunities for our new Ethernet products with a number of our other WAN customers. In the first quarter, we scored design wins for our WAN portfolio at key customers including Nortel, Huawei, ETI and RAD Data, amongst others. In conclusion, I'm quite proud of our business performance this past quarter.

Looking into 2008, we are watching closely for indications that macroeconomic concerns may lead carriers to reduce their telecom capital expenditures this year. However, we believe that service provider spending for next-generation infrastructure equipment is a revenue growth imperative and that it will continue to increase at a significantly higher rate than their overall capital expenditures.

We also believe that service provider consolidation has largely run its course and that capital intensity has now been rationalized to long-term sustainable levels of approximately 15%. As a result, we believe that the impact of a CapEx slowdown on Mindspeed, if any, will be tempered by our established presence in next-generation telecom applications, such as voice-over IP, fixed mobile convergence, IP-based access, and broadband fiber-to-the-home networks. It should also be mitigated by our increasing revenue diversification, outside of traditional carrier applications and segments, such as enterprise and broadcast video.

Now, turning to our outlook for our current second quarter of fiscal 2008, based on seasonality, our backlog, and anticipated ordering trends, we expect second fiscal quarter revenues to be in the range of $34.2 million to $36.4 million, flat at the mid-point of the range. We expect non-GAAP gross margin to be approximately 70%.

We expect non-GAAP operating expenses to increase to approximately $23.7 million, largely as a result of costs associated with our annual proxy process and shareholders meeting, as well as annual merit increases. We also expect to deliver continued positive non-GAAP operating income, and positive non-GAAP cash flow.

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.

Hi, guys, Signal Hill. How are you?

Good, Sandy, yourself?

Not bad, not bad.. Nice job on making some money here. Glad to see you in that club now. Just kind of wanted to drill down a little bit on some of the products.

Raouf, you did a nice job highlighting from a 60,000-foot view, but if you could talk a little bit about maybe some particular applications, what it is that's driving some of the enterprises, that one customer, is this sort of when the lead time from when some of these new products have come out and can we expect to see continued growth from those, and just some other things that might help us to model growth throughout 2008?

Certainly, Sandy. As far as our voice-over IP business is concerned, just to give you a little more of a drill down on that, as you know, we've been focused on expanding that portfolio for quite a few years. The first leg of expansion has been into converged enterprise applications, particularly SME, SMB, or small and medium-size business segment.

We have made huge headway with our portfolio in the enterprise space, but, frankly, time to revenue of these design wins has been a little bit disappointing in that they have taken longer to come to production than we had initially anticipated. However, those wins were scored, in some cases, three years ago. You know, sort of the two to three-year time frame, and they are just now starting to go to production.

We're quite, I guess, quite pleased to see Tier 1 customers, some of whom I mentioned in our prepared comments, like Nortel, for instance, Panasonic, Ericsson and other Tier 1 customers finally starting to ramp. We expect that to continue throughout 2008 and we expect it also to be complemented by other expansion products within our Comcerto voice-over IP portfolio.

Those would include, for instance, our Comcerto 100 processor, which moves to the edge of the carrier network all the way to the customer [prem] or CPE. It also includes the Comcerto 300 family, which I mentioned in our prepared comments, which extends the edge of the carrier network into IP applications, or sometimes known as MSANs, multiservice access nodes.

So we see a mix of things continuing to drive this business in 2008; a) the design wins that we've scored in the core carrier business continuing to ramp, complemented by the enterprise and the CPE space, all kicking in in 2008.

Got it. Now, Simon, if we could talk a little bit about backlog, kind of where you were this quarter versus last, what's your profile of turns looks like for last quarter and going forward, and, if you could just kind of maybe fill in for modeling purposes why you would come in at the $34.2 million versus why you would come in at $30.6 million.

I realize it's only $200,000, but just trying to understand on a relative basis what would take it to the higher or lower end?

So as we stand here today, Sandy, the backlog is a little lighter than otherwise might have been the case. Hey, Sandy, go back, tell me the last line of your statement again? You think the range is what?

$34.2 million to $36.4 million.

So it's $2.2 million.

I'm sorry, yes.

Okay. Fine. We had a $2.2 million range as we sit here right now. As we look at where we are from a backlog perspective, it's a little lighter than it was at the same point last quarter.

We're also very cognizant of the fact that we're going to see lunar New Year which usually has some, causes some perturbations in demand, let's say, although typically just changes the timing as opposed to cause them to permanently disappear. So we're a little less backlog than we had at the same point last quarter.

We've got the perturbations around lunar New Year that drive us really from, call it from flat to down 3% if you want to think about it that way, right, so that's kind of the downside. I think the other point I would make out is that turns is actually a little better. Turns activity in January has actually been a little better than it was in January of last year. So, there's some points of optimism here, as well.

And Sandy, this is Raouf again. Just to add to that, we're also quite encouraged by the backlog for our voice-over IP business this quarter, which is really quite strong.

So mix is sort of the favorable point here?

Yes.

Okay, great. I'll pop into the queue and catch up later on some others.

All right.

Mr. Biddiscombe, that ends the question-and-answer portion of the conference call.

Why don't we let Sandy ask his follow-on questions.

Sandy, your line is open.

Sure, thanks. So I guess we'll continue. Couple other points on some of the WAN business, with the Ample and kind of tucked away into it now, sounds like you sold some of your patent portfolio, or licensed it maybe. If you could provide some more detail on sort of some other areas you're looking for, any areas that you had taken advantage of your patent portfolio. And when we might start to hear about some opportunities with the Ample products, and as I recall, you talked a little bit about hiring some of those guys, getting them back in and so forth. How has that been going? So just kind of a general update on that area?

Yes, certainly, Sandy. It's Raouf again. Yes, we were quite pleased with the progress of the Ethernet MAC aggregation portfolio that we acquired from Ample. We have, in fact, hired a number of the key players who used to be with Ample Communications, some in the U.S. and some in India.

To date, what we have been focused on is stabilizing the products, the supply chain, and the customers, in many cases customers who are starting to get a little perturbed with the stability of the supply of these products prior to the deal being consummated. So our focus has been to address customers' concerns, make sure that they have a stable supply chain and to serve their needs as quickly as possible.

And we still have quite a bit of pent-up demand for these products from prior quarters that we've been struggling to fulfill. So that's been the order of the day, stabilizing the marketplace and stabilizing the product flow.

We're just now starting to get into Phase II, if you will, which is to start scoring new designs with these products with customers that are new to the products who to date have been somewhat reluctant to evaluate those devices, particularly given the supply chain issues. And they are now very much open, given that these products under Mindspeed to evaluating those products, designing them into next-generation Ethernet aggregation platforms. So we're, we're out there quite busily scoring new designs with these products with customers who are very comfortable with Mindspeed as a supplier.

And what's the competitive landscape here look like here? Who else is focused? You don't hear a whole lot of people talking about that these days. Who do you see in the competitive landscape?

Well, there are two competitors. We do see Vitesse out there and we see a private company by name of Cortina as well in the marketplace. They are the two key competitors that we see.

Okay, and then a couple of the products that you've talked about in the past are associated with, like BT21C and some other large infrastructure programs. If you could give sort of some updates on where that's gone?

We've heard some comments from other players that are involved in those, that they are starting to see early signs of life, although nothing that gives them any sustainability, and then secondly, we've talked in the past about fiber-to-the-[prem], fiber-to-the-home in China. How are you guys seeing that play out throughout 2008?

Certainly, again, this is Raouf. Let me address your question, Sandy. I think the networks, if you will, that we're most optimistic about, where we see a transformation well under way, are predominantly in Asia. They are not in Europe for sure, and in Asia, I would focus primarily on NTT in Japan. That seems to be the most intent. And in fact is in full tilt [packetization] of the network.

Obviously, the GEPON, fiber-to-the-home rollout, which is well understood, but there's also IPTV and other triple-play services coming online over the course of the next couple of years at NTT. Closely behind them is certainly Korea and other parts of the Pacific Rim, and finally, I would put China sort of in a third category behind them. It's probably, the Chinese version or CEPON, as it's known sometimes, is probably a year to two years out in terms of early deployments.

So that's where we're most excited. You know, the BT21CN network has been, I guess I would say, a difficult story, all right? It's been talked up quite a bit. They have certainly been very aggressive in their proclamations of the [packetization] of the British Telecom network and so forth. But the reality to date has been quite short of that.

You know, we're a little more optimistic in 2008, but we'll believe it when we see it, I guess I would say. So beyond Asia, we think that the next big network is Verizon's FiOS rollout and we're quite enthused about that.

As I mentioned in our prepared comments, we have worked very hard, in fact, have established what we think is an excellent position in the GPON space, in North America, particularly. And we expect to be capturing quite a bit of market share and deploying in high volumes into Verizon's FiOS network over the course of '08.

Got it. And just one point for clarification there, Simon, you guys had said that you have seen a pretty good amount of turns business as we've headed into the March quarter. And so, the sort of flat to down [4-ish%] is more on expectations or any concerns versus anything you're necessarily seeing at this point, is that a fair characterization?

That is a fair characterization, Sandy, yes.

Okay. That's all I got for now. Thanks, guys.

Your next question comes from the line of Michael Easson with Merriman Curhan Ford.

Good afternoon, gentlemen. Congratulations on a good quarter.

Thank you, Michael.

Just one quick question on the broadcast video you touched on in your comments. In the last quarter, you mentioned you experienced double-digit growth, and I think you alluded to 5% to 10% of total revenue. Can you provide any more detail for this quarter and how that's looking?

Yes, certainly. It's looking very good. This was not a record quarter for that business this quarter, but it was a very strong quarter.

You know, clearly our customers are continuing to ramp with their products in the high-definition TV space, and we've continued to capture new designs as well. So the fact that it was not a record quarter doesn't cause us any concern. Business is very, very strong, and we see it continuing to ramp and really being a bright spot for us in 2008.

And who do you see on the competitive bids for that business?

Predominantly we see Gennum Corporation, which is a Canadian semiconductor company, and then to a lesser extent, we see a little bit of Maxim out there, and occasionally a little bit of National Semiconductor as well. But it's really, for all intents and purposes, its and Gennum.

If I could turn to the Comcerto line. I saw at the CES show the Comcerto 100 product on display, obviously, targeting the CP applications, which has been getting a lot of attention recently for residential gateways. Who do you -- what's -- you alluded to two design wins there as well. Could you give more detail on those wins, what kind of applications they are going into and who do you see as the main competitors in that space?

Sure. So just a point of clarification, the two top tier design wins that I mentioned in our prepared comments were with the Comcerto 300 processor, which is an access, a carrier access product, and those are two design wins that we're extremely proud of. They are basically with the Who's Who in the access universe.

The Comcerto 100 product that you're asking about has been out in the marketplace for a few quarters and has scored a lot more than just two sockets out there. Unfortunately, we're not at liberty to disclose those customers at this point. They are, however, marquee names in the broadband residential gateway space. There are design wins in North America, design wins in Asia as well, that we're quite proud of and we expect that product to be contributing to the second half of 2008 revenues.

Very good. Thanks a lot, guys.

Thanks, Michael.

There are no further questions, sir.

Thank you, [Cara]. 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 good-bye.

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