MACOM Technology Solutions Holdings Inc (MTSI) 2008 Q2 法說會逐字稿

Excuse me, everyone, I would like to introduce Tom Stites, Senior Vice President of Corporate Communications, 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. Stites' presentation, we will open the floor for questions. (OPERATOR INSTRUCTIONS).

I would now like to turn the conference over to Mr. Stites.

Thank you, Christian. I would like to welcome everyone to our conference call discussing the results of our second quarter of fiscal 2008, which ended on March 28, 2008.

On the call today is Raouf Halim, our Chief Executive Officer, and Raymond Cook, our interim Chief Financial Officer.

As most of you know, today is Simon Biddiscombe's last day with Mindspeed. He will participate in the Q&A session at the end of our call today. Raymond will begin with a review of our quarterly income statement and balance sheet. Raouf will then provide his perspectives on our second quarter results before providing the outlook for our current quarter. We will then open the call for your questions.

Before we begin, I wanted 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 third 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 and production ramps; the impact of technological developments on our industry; growth prospects in various markets; design wins and their impact on future performance; market fundamentals; expected trends and 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; seasonality; backlog; order trends; gross margins; operating expenses and other expected operating results; NASDAQ listing compliance; and changes in personnel.

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-Q for the quarter ended December 28, 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, amortization of intangible assets, employee separation costs, and special charges. For a complete reconciliation of non-GAAP to GAAP financial measures, please refer to our earnings release, our 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.

I will now turn the call over to Raymond for a review of our financial results for the second fiscal quarter of 2008.

Okay, thank you, Tom. As we previously announced, second quarter revenues were $36.2 million, up 3% compared to the prior quarter and toward the high end of our revenue guidance range of $34.2 million to $36.4 million we provided at the beginning of the quarter. Revenues from our family of multiservices assets, voice over IP processors, increased 19% sequentially, contributing 33% of total second quarter revenues. Revenues from our high performance analog products were down 4% sequentially, representing 28% of the total. WAN Communications product revenues were down 4% sequentially, contributing the remaining 39% of total revenues. In terms of revenue contribution by geography, the Asia-Pacific region contributed 50%; the Americas, 34%; and Europe contributed 16%.

Non-GAAP gross margin was $24.6 million or 68% of revenues; slightly below our expectations, and includes a 1.2 percentage point benefit from the sale of products written off in fiscal 2001, and a 1.6 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 65%.

Non-GAAP research and development expenses were $13.2 million, and non-GAAP's selling, general and administrative expenses were $10.9 million. Total non-GAAP operating expenses were $24 million. As a result, we delivered non-GAAP operating income of $560,000. Other income and expenses and the provision for income taxes in the aggregate resulted in a net expense of approximately $800,000. We delivered non-GAAP net loss of $255,000, resulting in breakeven earnings per share based on approximately 115.2 million average shares outstanding for the quarter.

Turning now to the balance sheet, with comparative data being from end of the first quarter. Cash, cash equivalents and marketable securities totaled [$28.7 million] at the end of March, and we delivered our second consecutive quarter of positive cash flow as anticipated, generating $1.2 million in cash. Capital expenditures were approximately $1 million and depreciation was $1.2 million. Receivables were $17.7 million, resulting in net DSO's of 44 days, closer to our historic average than the 32 days in the prior quarter, which was abnormally low.

We made further significant progress by reducing inventories, which were down another $3.1 million sequentially to $9.7 million. Inventory turns were up to 4.8 from 3.2 in the prior quarter. Total current liabilities where $20.3 million, up $1.5 million from the prior quarter, primarily attributable to higher accounts payable and other current liabilities, offset by lower accrued compensation and benefits.

At our April 7, 2008 annual meeting, Mindspeed stockholders approved a proposal authorizing our Board of Directors to implement a reverse stock split of the Company's common stock at a ratio of between 1-for-3 and 1-for-8 shares. At its discretion, our Board can choose the timing for a split and select a specific ratio within the range. We have until August 27, 2008 to regain NASDAQ compliance, which requires that the closing bid price of our common stock meets or exceeds $1 per share for at least 10 consecutive trading days.

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

Thank you, Raymond. I would first like to take this opportunity to thank Simon for his many years of service to Mindspeed as our Chief Financial Officer. We will miss him, and wish him well in his future endeavors. We have a search already underway for a new Chief Financial Officer and a seasoned Finance Executive in Raymond, filling in as Interim CFO. Raymond has a 19 year history with Mindspeed and its predecessor companies, and has been second in command under Simon as our Vice President of Finance and Corporate Controller. I have complete confidence in Raymond's ability to fill Simon's shoes during this interim period.

Now, turning to our results for the second fiscal quarter of 2008. I am proud of our continued solid performance. Highlights of this pass quarter included achieving the highest quarterly revenues in our history as a public company and at the high end of our guidance range for the quarter; delivering our second consecutive quarter of double digit growth in our voice over IP business, which was up 19% sequentially to a record quarterly high; and delivering our fourth consecutive quarter of non-GAAP operating income and our second consecutive quarter of positive cash flow.

During the quarter, we also announced a strong addition to our senior management team with the appointment of Jing Cao as our new Senior Vice President of Operations. Jing is a seasoned industry executive with a 15 year track record of success in semiconductor manufacturing operations. We are pleased to add his knowledge and experience to our team.

I will now cover a few specific business highlights from our second fiscal quarter. Starting with our multiserver access processor portfolio, revenues increased 19% sequentially to the highest level in our history. We had another record quarter in enterprise voice over IP with double digit growth, driven by continued production ramps at key customers, including Nortel, ZTE, Samsung and LGE. Our carrier voice-over business also delivered strong double digit sequential growth, with higher shipments to Tier 1 customers such as Alcatel Lucent, Huawei, and ZTE in wireline, wireless and fixed mobile convergence applications worldwide.

We believe that we are starting to see the payoff from our diversified voice over IP market strategy with strong shipments of both our carrier access as well as enterprise networking processors. Multiple design wins we have scored and supported over the past few years are ramping to production with Top Tier customers worldwide. We experienced particularly robust growth this past quarter in shipments for converged wireless gateways worldwide, as well as in network access shipments for voice over IP processing and the emerging build-out of fiber-to-the-premise networking in the Asia-Pacific region.

This past month, Unified Communications Magazine named our Comcerto 100 series of broadband gateway processors as a 2007 product of the year in recognition of outstanding innovation. We introduced the Comcerto 100 series last summer, targeting CPE equipment manufacturers. This highly integrated system on a chip will enable service providers to cost effectively support sophisticated voice, video and data applications with high quality of service for broadband home and small and medium sized enterprise markets. We were honored to receive this award, and our Comcerto 100 devices are currently in pre-production, with several leading CPE manufacturers designing next generation broadband gateways.

Design win activity was also strong for our Comcerto processors for voice over IP this past quarter, with market leaders in both enterprise and carrier applications, including multiple wins with Nortel, Huawei, ZTE, as well as wins at Nokia Siemens networks, Alcatel Lucent, Samsung, and Calex, amongst others.

In our high performance analog product portfolio, revenues decreased 4% sequentially, primarily resulting from a seasonal slowdown in shipments of some of our legacy telecom-oriented devices. We again had record revenues from our broadcast video products this past quarter, shipping to Top Tier customers such as [Eritz], [Black Magic], Harris, Pro-Bell and many others. Shipments of our optical PME devices remain solid in what is typically our seasonally weak quarter as a result of the Chinese Lunar New Year.

In the U.S., service providers are currently marketing broadband fiber-to-the-home connections to more than 10 million households. Nearly 3 million homes are connected to fiber, and almost 800 of those, or 26%, were added in just the last six months, according to the latest report from RVA Market Research and Consulting. Verizon accounts for two-thirds of fiber subscribers, while AT&T and hundreds of others account for the remainder.

The research report notes that the [take] rate for broadband fiber services is climbing steadily, and is at almost 30% in neighborhoods where fiber is an available option. We expect to benefit from Verizon's continued FiOS network deployment with our PMD portfolio.

During the quarter, we announced the first four devices in a new family of 6.5 gigabits per second, signal conditioned products including low power cable and back plane equalizers. Ranging from four to 12 channels, these new products support the latest high speed communications protocol for a variety of storage, server, and communications applications, including all newly grid-doubled versions of serial attached SCSI, PCI express, and InfiniBand.

Design wins were strong again this past quarter with more than 100 wins scored across our high performance analog portfolio of crosspoint switches, signal conditioners, and optical devices, with customers such as Huawei, Alcatel Lucent, Nortel, Hitachi, NEC, and Mitsubishi, amongst many others. We also scored additional broadcast video design wins with market leaders, including Ikegami and Thomson Multimedia.

In our WAN Communications portfolio, revenues declined 4%, primarily in our legacy product lines. We enjoyed our second consecutive quarter of growing revenues from our Ethernet Mac products, which we acquired from Ample Communications. We are continuing to pursue multiple design win opportunities for our carrier Ethernet aggravation portfolio with a number of Top Tier customers.

In the first quarter, we scored 18 design wins for our WAN portfolio at key customers including several for our carrier Ethernet aggregation products, as well as wins with the Huawei 3Com joint venture, Ciena, and Alcatel Lucent, amongst others. In conclusion, I am pleased with our solid business performance this past quarter.

Now turning to our outlet for our current third quarter fiscal 2008. Based on seasonality, the strength of our backlog and anticipated ordering trends, we expect third fiscal quarter revenues to be up 2% to 6% sequentially. We expect non-GAAP gross margin to be approximately 68%. We expect non-GAAP operating expenses to be approximately flat sequentially. 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.

(OPERATOR INSTRUCTIONS). Sandy Harrison.

Thanks. Signal Hill. Simon, best of luck and enjoyed working with you the last couple of years.

Thank you, Sandy, it's been a pleasure.

Just a couple questions. Just to kind of finish up with your last remarks there of talking a little bit about Ample, it sounds as though you guys have defined where you want to go with that and starting to have some success. So, is it a pretty fair assumption that you've gotten the folks nailed down? I think one of the challenges you had highlighted was getting everyone back together and getting the product. So it sounds like you've got that headed in a direction you want and feel pretty good. Is that a fair assumption?

Yes, that's a very fair assumption, Sandy. You know, the first order of business for us after we completed the acquisition of the Ample assets was to stabilize both the customers as well as the team that we're counting on to continue to both support those customers and execute new products going forward. It's been over six months now and I'm happy to report that things are really on even keel at this point. Customers are very stable. We have been able to open up the supply chain to customers who were lying down in some cases, and get them back in production mode. We have been able to support them with any and all field issues as well as support a spate of new customer design wins with those products.

Where we are today is really focused forward in completing the product roadmap they're finishing, starting execution of next year issuing Ethernet products. So we're quite pleased with the performance of the business, which frankly, has exceeded every expectation we had at the time that we acquired those assets.

And as I look at the environment today, carrier Ethernet continues to gain momentum and it seems like a natural progression of leveraging the carrier Ethernet assets from the Ample with the strength you guys are seeing in your voice over IP, which obviously are one of the more favorable applications that will travel over that. I mean, you guys starting to see benefits from that? Or could we see some further leverage by having the technology at some point in the future?

Yes, Sandy, you bring up a good point. Clearly, system level reference designs incorporate both Ethernet aggregation and other Ethernet functionality with our voice over IP is the next logical step in leveraging the combo portfolio. We have not quite gotten there yet, to be perfectly honest with you. That is amongst the clear priorities for us going forward with this portfolio. So that's a benefit yet to be enjoyed.

And then just a quick item on the P&L. As you guys look at sort of your expenses, flattish in June, I mean, are you guys seeing or with looking at your product roadmap out there, do you expect to be able to maintain expenses at these levels? Do you expect to see some some pretty [for mass] or wafer starts -- well, not wafer starts, but mass sets or anything like that from new products? Or just how should we be thinking sort of on a little bit longer term as to modeling for the longer?

Well, clearly in the near-term, as we have guided to, planning to keep our operational expenditures flattish. There are probably some puts and takes around that. We have been working to reduce our SG&A costs. We frankly had a smallish restructuring of the SG&A area, taking out a little bit of costs and spilling over operation expenses to the R&D side, such that we could spend a little more on new product development as well as [two] point tape-outs and so forth.

But overall, we are trying to manage OpEx very prudently, so we continue to leverage the revenue growth we're enjoying. In the longer term, you can expect OpEx to continue to creep up, but not in the short term. The short term, once again, we are exercising all kinds of judgments around that and implementing puts and takes around the overall expenditure profile of the Company.

Okay, and I'll pop into the queue.

Allan Mishan, Oppenheimer and Company.

Simon, first of all, thank you very much and best of luck to you in the future.

I appreciate it. Thank you, Allan.

A quick question about the voice over IP business. How confident are you that this acceleration we're seeing can hold itself up? If I look at the voice over IP business over the last four or five years, a couple of times it sort of popped up and it had a setback. Do you think we're past that? Or do you think maybe there's a potential for that? And where do you think we're going with this business on a quarterly basis over the next year or two?

Sure. So, Allan, this is Raouf. I would say that we're in a very different place today with our voice over IP portfolio than we were two or three years ago. Just to compare and contrast, a few years ago, this business was built around one specific application space, which is the placement of traditional Class 4 TDM switches with next gen IP trunking.

The VoIP portfolio for Mindspeed has evolved in multiple different market segments with multiple different customers worldwide. It's moved to the carrier access network. It's gone beyond the carrier access network into fiber-to-the-prem, fiber-to-the-basement applications. And of course, as you are aware, we have moved into the enterprise with converged voice data networking. So the business for us is much more than a single product line addressing a single segment. It's really a highly diversified portfolio today that is in all aspects of carrier as well as enterprise infrastructure. So it's quite exposed to multiple growth cycles.

To add to that, just to give you a good sense for it, we currently have record backlog for our voice over IP business as we start our third fiscal quarter. So, the strength that we experienced in our first fiscal quarter, the December ending, that continued to exhibit itself in the second quarter that we just reported, is also playing into our third quarter as we sit here today. So, very strong backlog for our voice over IP portfolio. And that's exhibited not in one particular segment, but as we said in our prepared comments, once again, across the full range -- wireless, carrier access and enterprise.

So we are hopeful going forward that the strength will persist as many of these applications, market segments as well as customers continue to ramp to production.

Okay, so, that being said, what kind of year-over-year growth rate do you think we could see for the next one or two years, for voice over IP specifically?

Well, I think as we've guided before, Allan, our expectation for this market based on multiple different sources -- market research sources and so forth -- is for roughly a 40% -- that's four zero -- 40% year-on-year growth.

Okay, great. And if I can go along a different line, can you just remind us what your exposure is at Brocade? Are you in the 4 gigabit director switches as well as the 8 gigabit? And is there the potential for a hiccup? Just curious as to how that has played out, now that the merger is well past us for awhile.

Yes, so, a very good question, Allan. So basically, the switches that employ our crosspoint switch fabrics were those that were formerly so-called McDATA platforms. And from everything we've seen since the merger of McDATA and Brocade, those platforms have been less favored than the Brocade organic platforms. And we've seen our run rate with those products decline very, very significantly, to where there's very little revenue at this point coming from Brocade.

Those platforms have not, to our knowledge, been end-of-life'd yet. They may be at some point; we're not going to comment on our customers and their plans. But at this point in the game we have, I would say, minuscule revenue stream coming from Brocade.

Okay, so just one or two percentage points of revenue at most?

Yes, at the very most. Let's see -- Simon is looking it up right now. It's very small, really.

It's below that at this point in time. I can't actually find them on my list of customers, but I think it's below that. It's in the very small hundreds of thousands of dollars.

That's helpful. And last one for me. PMC-Sierra talked about a really big acceleration in the Asian EPON market. I know you have very high share. Are you guys seeing the same things, either in Japan or China or Korea at this point?

Yes, we certainly are. A good chunk of our 19% sequential growth in the multiservice access business was driven by fiber-to-the-prem -- the prem being, in some cases, a home or an apartment, if it's Japan; the basement or a business, if it's Korea or in China. We're clearly facing the same trend that you refer to. We're seeing it most strongly in Japan and in China. And we continue to see that, by the way, in the strong backlog I referred to earlier.

(OPERATOR INSTRUCTIONS). Michael Easson, Merriman Curhan Ford.

Hi, let me be the next to offer best wishes to Simon.

Thank you, Michael. Appreciate it.

A couple of quick questions here. First, 10% customers in the quarter -- were there any?

No, we had no 10% customers last quarter.

Cisco, I assume, probably came close? Is that a fair estimate?

Cisco is between 5% and 10%.

And also, in your 68% gross margin guidance for Q3, how much of that estimate of that guidance assumes benefit from both patents and inventory write-offs that you saw in the last couple of quarters?

So, in terms of patents, none whatsoever; no benefit is assumed within that 68% from sale of patents.

And then in terms of sales of excess [in off-suite] product, if any, it's minuscule; it's less than what it's been historically. It's very small.

And if I could tie that into another discussion, the Comcerto processor that you alluded to, design wins and CPEs, that should begin to ramp in the second half -- where could we possibly see those CPs being deployed and when do you think that could be material to revenues?

Yes. So, first of all, just so you have a sense for the ramp of that product, we already have backlog, what I would characterize as pre-production backlog for those CP processors for shipment in this current, third fiscal quarter. So it's already happening, is my point.

Where are you going to see it first? You'll see it in Japan, initially, in CPE manufactured by several very high profile CP suppliers into NTT. Since we have not disclosed as of yet the names of those particular customers, I'm going to have to beg off releasing the names, but we're hopeful to be in a position to announce them publicly during the next few months.

But you will initially see those platforms in Japan. Shortly thereafter, you'd expect to see them pop up here in North America -- different OEMs, different ODMs, mind you, but you see them in North America in deployment in Verizon FiOS networks, and eventually in Europe, Korea and other markets.

And given that it's more of a consumer product-oriented design, how do you see the ramp of Comcerto affecting gross margins through '08 and into '09?

Well, first of all I would make a distinction -- it's not really a consumer product, per se, so you'll never see a device at Fry's or Circuit City that would embed a Mindspeed Comcerto processor. This is a class of service provider CPE -- products that are specified and developed in tandem with service providers worldwide. They are installed, supported, serviced by service providers.

So, it's a very different class of CPE than traditional consumer -- call it WiFi axis points or other DSL types of home routers that you would indeed purchase at the retail store. That said, the blended gross margins of those products is a little less than our more traditional carrier class type products, but is not that much less.

We would expect to see continued sales of high end, high margin Comcerto processors, continued sales of growth from other parts of our portfolio like our analog products and our WAN products continue to offset any decline in those so-called CP products. So, at this point, we're not guiding to any long-term gross margin decline in our business.

Great, thank you. I'll get back in queue.

Mr. Stites, that ends the question-and-answer portion of the conference call. Do you have any concluding remark?

No, thank you. That concludes our conference call today. And on behalf of all of us at Mindspeed, we thank you for participating this afternoon. Thanks again and good bye.

Thank you, ladies and gentlemen, for participating in today's conference call. You may now disconnect.