MACOM Technology Solutions Holdings Inc (MTSI) 2008 Q3 法說會逐字稿

Good afternoon, and thank you all parties for standing by. Your lines will be on listen-only until the question-and-answer session of the conference. The call is being recorded. If you have any objections, please disconnect.

I would now like to introduce Tom Stites, Senior Vice President of Corporate Communications, who will chair this afternoon's conference call. Thank you; sir, you may begin.

I would like to welcome everyone to our conference call discussing the results of our third quarter of fiscal 2008, which ended on June 27, 2008.

On the call today is Raouf Halim, our Chief Executive Officer, and Bret Johnsen, our new Chief Financial Officer. Bret will begin with a review of our third-quarter financial results, Raouf will then provide his perspectives on our third quarter and the outlook for our current quarter, and 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 anticipated future results, including the financial outlook and expectations for our fiscal 2008 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 may include 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 in our industry; growth prospects in various markets and for various products; design wins and their impact on future performance; our expectations for fourth-quarter revenues, gross margin, operating expenses, operating income and cash flow; seasonality, backlog and order trends 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-Q for the quarter ended March 28, 2008, and other filings with the SEC.

During our call today, we will be making reference to non-GAAP 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 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 Bret for a review of our financial results for the third fiscal quarter of 2008.

Today, we announced record revenues for the third fiscal quarter of $38 million, up 5% compared to the prior quarter and up 15% from a year ago. Our results were towards the high end of the revenue guidance range of up 2% to 6% we provided at the beginning of the quarter without the benefit of any patent sales. Revenues from our family of multi-service access voice over IP processors increased 16% sequentially, contributing 36% of total third-quarter revenues. Revenues from our high-performance analog products increased 8% sequentially, representing 29% of the total. WAN communications product revenues were down 6% sequentially, contributing the remaining 35% of total revenues.

In terms of revenue contribution by geography, the Asia-Pacific region contributed 66%, the Americas 23%, and Europe contributed 11%. Huawei was our only 10% end customer this past quarter, including both direct and indirect sales through third parties.

Non-GAAP gross margin was $25.8 million or 68% of revenues, consistent with our guidance. Included in this number is a 50 basis point benefit from the sale of products written off in fiscal 2001. We had no patent sales this past quarter.

Total non-GAAP operating expenses were $24.1 million, comprised of research and development expenses of $13.6 million and selling, general and administrative expenses of $10.5 million. This is consistent with our guidance and resulted in non-GAAP operating income of $1.6 million.

Other income and expenses and the provision for income taxes in the aggregate totaled net expenses of approximately $0.5 million.

We delivered non-GAAP net income of $1.1 million, resulting in earnings per share of $0.05 based on approximately 23.1 million average shares outstanding for the quarter. The number of outstanding shares reflects the one-for five reversed stock split, which occurred on June 30 of this year.

Turning now to the balance sheet, our cash and cash equivalents totaled $29.9 million at the end of June. As anticipated, we delivered our third consecutive quarter of positive cash flow, generating $1.2 million in cash, driven by positive cash flow from operations of $3.4 million. Accounts receivable were $17.2 million, resulting in net days sales outstanding of 41 days compared to 44 days in the prior quarter.

Inventory increased $900,000 to $10.6 million, resulting in inventory turns of 4.7%, down slightly from 4.8% in the prior quarter.

Lastly, this morning, we announced the sale of several non-core patents earlier in the current fourth fiscal quarter, for a total of $10 million.

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

Mindspeed delivered excellent financial performance this past quarter, with strong growth from both our multi-service access processor and high-performance analog product portfolios. Among the highlights of our third fiscal quarter, we achieved record revenues towards the high end of our guidance range.

We reported non-GAAP net income of more than $1 million, and our third consecutive quarter of positive cash flow, ending the quarter with almost $30 million of cash.

Our voice over IP business delivered record revenues again and a third consecutive quarter of double-digit sequential growth. For the first time in our history, this past quarter, our voice over IP business was the largest revenue contributor of our three product segments. We are especially proud of our results, given the supply constraints we struggled with throughout the quarter to meet strong demand for our voice over IP processors and other products. Our supply challenges were primarily associated with tight back -end assembly and test capacity. We were able to mitigate the vast majority of our supply shortages towards the end of the quarter.

I will now cover a few specific business highlights from our third fiscal quarter. Starting with our multi-service access processor portfolio, revenues increased 16% sequentially. This business has grown 55% over the past three quarters, and is now the largest of our three product segments. Revenues from both our carrier and enterprise voice over IP products grew by double digits this past quarter, with enterprise setting another record high.

Key voice over IP customers included Huawei, ZTE, Alcatel-Lucent, Nortel, Ericsson, Samsung and Acme packet, amongst others, for a variety of converged network applications. We are encouraged by the significant growth in shipments of our concerto processors into GEPON-based optical access networks in China this past quarter, enabling service providers to recognize the cost benefits of fiber-based access in high-density residential installations and office complexes.

China Telecom is currently ramping GEPON fiber-based networks. And we expect they will soon be joined by China Netcom, and eventually China Mobile. We believe that we are at the beginning of a multiyear rollout for GEPON access networks of a significant scale across China.

According to a recent market forecast provided by the research firm IDC, last year, China surpassed the US with the largest number of Internet users. And it estimates that China's online population will grow from 275 million users this year to 375 million in 2012. We believe that optical fiber will become the access technology of choice in other developing Asia Pacific and BRIC economies over the next several years and eventually extend worldwide.

Our Comcerto processor family is the result of our strategic investments over many years in developing the industry's leading system on a chip solution, specifically targeting the convergence of voice, data, and video over IP-based access networks.

Our Comcerto voice-over-IP processors are being broadly shipped by the majority of tier 1 OEMs worldwide. in a variety of carrier Edge and access equipment types. We expect Mindspeed will continue to benefit significantly from these deployments going forward.

During the quarter, we announced the addition of Wind River Systems to our OpenMind third-party developer program. Wind River will be porting its industry-leading Vx Works, real-time operating system and Linux solutions to our Comcerto 100 broadband gateway processor family. The combination will offer our customers a complete software-rich solution for designing a broad range of systems, including residential gateways, enterprise routers and media gateway equipment.

Design win activity was particularly strong this past quarter for our Comcerto voice over IP processors across both enterprise and carrier applications, including design wins at Nokia Siemens Networks, at Huawei, Ericsson, Panasonic Panacom, UTStarcom, Toshiba and Fiberhome, amongst others.

In our high-performance analog product portfolio, revenues grew 8% sequentially with another record quarter for shipments of our broadcast video products. Key customers for our switching, signal conditioning and video products included Alcatel-Lucent, Huawei, Infinera, [Evrits] and Harris, amongst others.

During the quarter, we continued to benefit from strength in PON deployments worldwide for both GEPON and GPON technologies. We experienced significant strength in shipments of our PMDs to key optical modular customers, including Sumitomo, Mitsubishi, NEC, Hitachi, Neophotonics, TrueLight and WTD.

We believe we're continuing to expand our global footprint with PON service providers worldwide.

We also broadened our family of 3 Gb/s broadcast video products this past quarter, with an enhanced single port multi-rate video reclocker and a 4X4 crosspoint switch, integrating clock channel, clock and data recovery. Our 3 GB video products support the double high-definition data rates required for next generation broadcast video routing and production switcher applications.

This was another strong quarter for design wins across our high-performance analog portfolio, with key customers such as Huawei, Nortel, Mitsubishi, Motorola, WTD, Sumitomo and Ikegami.

In our WAN communications portfolio, revenues declined 6%, primarily as a result of higher than expected decline in our legacy ATM products, as customers transition to IP-based solutions. We are encouraged, however, by the double-digit revenue growth from our ethernet MAC aggregation products this past quarter, which contributed more than 10% of our total WAN revenues. We had strong ethernet product shipments to customers, including Nortel, Force10, Siena, and Nokia Siemens Networks, amongst others.

Third-quarter design wins for our WAN communications portfolio included key customers, such as Alcatel-Lucent, Fujitsu, Calyx, Ericsson, and Juniper Networks. In conclusion, I am proud of our excellent business performance this past quarter.

Now turning to the outlook for our fourth quarter of fiscal 2008. Our backlog is currently stronger than it was at this point during the prior quarter, and we are encouraged by the continued strength of our voice over IP business, which we expect to more than offset traditional fourth-quarter summer seasonality and anticipated ordering trends. As a result, we expect fourth fiscal quarter revenues to be up 2% to 5% sequentially. We expect non-GAAP gross margin to be approximately 67% and non-GAAP operating expenses to remain approximately flat sequentially. We anticipate delivering continued positive non-GAAP operating income and positive non-GAAP cash flow. Our fourth-quarter guidance is net the benefit of the $10 million patent sale we announced today.

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

(Operator Instructions). Sandy Harrison, Signal Hill.

Thanks, good afternoon. Just a couple questions on some of the results you had here. I guess the one question is -- sounds like Comcerto is really starting to come into its own, and the fact that your prepared remarks that the design wins are picking up and gathering momentum. What are some of the thoughts behind that? Is there a particular event? Is the converged platform starting to really pick up momentum, and is that an industry event? Just would appreciate anything else you could offer us on this.

I think what we're witnessing is the increasing adoption of IP based technologies at all levels of the network, not just in the core of the network or traditional so-called Class 4 applications, but increasingly in fixed mobile convergence, where we're seeing a significant uptick in demand and have reported that previously. And more recently in the pickup of next generation networking, or NGN for short. That is the phenomena of packetization services all the way to the subscriber. We're quite happy with the uptake of our Comcerto processors that are specifically optimized for these next gen applications, worldwide.

And in particular the one event I would point to over the past quarter, maybe couple of quarters, is the advent of GEPON and the uptick of GEPON, particularly in China, at a very rapid clip. We're very well positioned to benefit from that trend of packetization over fiber-optic networks. And we expect in fact the deployment model will pick up dramatically outside of China as well into other parts of Asia, BRIC countries eventually into Western Europe.

I would only add to that that the benefit we're seeing in terms of production revenue ramp today is with products and design wins we have scored several years ago that are just now going into production. We've continued to win designs -- significant designs with the top tier of equipment manufacturers over the course of the last two years. And we are in fact experiencing yet another acceleration of design wins at this time, as I reported on the call, which bodes well for the future of this business.

I guess asking the question sort of a different way, if you look at it, we have all been expecting this transition to IT, and talking about it not only you, but the industry in general. It just seems like people are being caught by surprise as we've started that transition. So just trying to figure out what may be causing the reacceleration out there across the board.

In our mind it's really the advent of next generation broadband technologies, particularly PON, that is precipitating or catalyzing this growth in packetization.

I think if you go back in time and look at prior broadband technologies, be it DSL, be it cable, be it wireless, they were really first-generation broadband technologies. The next gen, which is all optical, is really optimized from the ground up for convergence. And the cost points have just now finally gotten to the point where you're seeing GEPON fiber-optic access become deployed quite broadly, not only in Japan but also in China, increasingly in other parts of the world. So I think it's really the combination of the next gen broadband access technology and the cost economics associated with it.

My last question is sort of the tale of two cities, that's the new. And you had made comments that ATM fell off, and so is this something that just as the ramping of the next generation networks comes up, that this is the last gasp of ATM, or is this just one specific customers or two specific customers or is this just more of the general trend on the older technologies?

If I remember correctly last quarter, I think it was associated with just one or two specific customers. We continue to believe that the WAN business over the long-term will be sort of flattish for us, and what will bring that about is clearly growth in ethernet-based carrier technologies. As of course you remember, we acquired the assets of Ample Communications late last year.

We were supply limited in the ethernet product line, and were unable to satisfy all our customers' demand for WAN ethernet products last year. And hence we were not able to offset that incremental ATM decline. I wouldn't call that a very significant event. Simply say that ATM is on a long-term secular decline. And ethernet is clearly on a long-term secular growth within carrier and enterprise networks. We're positioned to benefit from that very nicely going forward.

Great; I'll drop into the queue.

Allan Mishan, Oppenheimer.

Nice job. Quick housekeeping item, would you expect to include the $10 million in your pro forma results next quarter? Or would they be excluded?

We will include them in our pro forma results, but we will call them out specifically so that you'll easily be able to separate them from the ongoing business.

Great. And then Raouf, you talked a lot about the China Telecom gigabit EPON business. How is voice over IP tied to that? Are there voice-over-IP products directly in that PON equipment, or is it simply a case where when they put the PON equipment, they have to put voice-over-IP equipment together at the same time?

So to answer your question specifically, the GEPON style deployments today in China as well as in many other parts of the world are not necessarily fiber to the home; meaning a GEPON device, sometimes known as an ONT or an ONU at the customer prem, but it's really GEPON optical access to the basement or to the floor of a very high-density multi-tenant or multi-dwelling unit, or for short, MTU and MDU. So basically fiber is strong, straight to that installation.

And then distribution from the endpoint, which once again could be in the basement or let's say in the closet on a particular floor in a high-density apartment building, the interconnect from there to the actual subscriber prem is done either over a DSL, let's say VDSL, connection, or very simply ethernet -- 10/100, in a few cases gigabit ethernet straight to the prem.

So packetization of all the data and the voice traffic is done in that box. It's a single box that contains Mindspeed silicon as well as possibly another vendor's GEPON type of technology.

The types of equipment that I would call your attention to would be things like known as IP DSLAMs, IP pizza boxes, or ethernet pizza boxes, integrated access devices and the like. So it's a broad range of types of equipment that basically terminate an optical fiber and packetize all the services within that one box.

Your silicon then would be found next to a PON MAC or something of that nature in the ONU within the building or on the floor?

Yes, in many cases, it would be. In other cases, it might be embedded in IP DSLAM, where there is only one PON MAC in that line card; then the distribution is done over DSL to the customer prem.

Okay. But the short answer to my question is that you would be included directly when that deploys; it's not some sort of secondary benefit that you're receiving?

No, it's a one for one.

Great. Thank you very much.

Quinn Bolton, Needham & Company.

Just wanted to sort of follow up on Sandy's question about the legacy WAN communications. It sounds like the aggregate ethernet aggregation business or the ample business is ramping pretty nicely. But if I recall, most of that business is legacy ATM or SONET. If we look forward a few quarters or years, is it best just to kind of model that flat as the ethernet business grows, and that should be strong enough over that time period to sort of offset the decline in the legacy business?

Yes. So the percentage of our WAN business that's really ATM is far less than half. I don't have the number in front of me, but I think it's definitely less than 30% of that business at this point. And it continues to gradually ramp down.

The ethernet business had a record quarter last quarter. In fact it was over 10% of total WAN revenues. So you got a crossover affect where ethernet continues to grow and ATM continues to decline. I think it's probably quite a fair assumption, looking out year-on-year to model the WAN business as flattish. It may have some fluctuations quarter-to-quarter, either up or down, but on an average let's say year-over-year, it should be flattish.

Is the rest of the WAN com just sort of more traditional SONET T-carrier type devices, and if so, what would your outlook for that other 60% roughly be?

The balance of the WAN portfolio has a mix of TE carrier, T1/E1 products, but also T3/E3, where there is real market growth driving it, and we have a very strong position in T3, E3. Also, HDLC controllers that are found at the core of the network, primarily packetizing wireless data traffic. As I'm sure you know, that is an explosive marketplace with a degree of traffic increase -- data traffic increase over mobile networks. And also of course next gen network processor and other type of products that we are rolling out as we speak. So we have growth within the product lines within WAN, and we also have products that are declining.

Most of all, most markedly, I guess I would say the ethernet products are growing very rapidly. And we're quite excited about the growth prospects for that marketplace.

If I look in aggregate, it sounds like the ATM is probably the business within WAN communications that may be under the most pressure from a secular perspective. T1, E1 may be under pressure but you're seeing growth in T3, E3 and HDLC, and then obviously the best growth in the ethernet aggregation business?

Yes, that's a very good characterization of it, Quinn.

Just sort of a similar question for the HPA business. Obviously, the broadcast video has been at record levels now for a few quarters. Looks like the PMD business is doing well. Any sense for sort of the more legacy crosspoint switch business; is that still something you think is a growth business? Or is HPA growth really going to be from the PMD and the broadcast video?

Actually, our crosspoint product line has been refreshed recently with 6.5 GB products. And also 4x Fibre Channel, 4.4 GB products. They're doing extraordinarily well for us at this point in the game. So we do not perceive that our crosspoint switch product line is legacy by any stretch of the imagination. It's doing very well for us.

The end markets that our crosspoint switches address certainly include telecom, but also enterprise switching, storage, blade servers, and even digital video systems. So there is a broad range of end markets for our crosspoint switches that we have addressed very efficiently with those products. And we experienced growth last quarter with the crosspoint switches. We expect that to continue to be the case going forward.

Bottom line is that there is really very little legacy in our high-performance analog, or HPA portfolio.

Okay. Just a last clarification that -- non-GAAP gross margin of 67% is net of or excludes any impact for the $10 million sale of the non-core IT patents?

That excludes any benefit from the patents.

Great, thank you.

Mike Easson, Merriman.

Congratulations on a very nice quarter. So one quick question on the Comcerto 100 opportunities; you allude to a partnership with Wind River Systems. Can you comment on some of the design win activity there in the residential gateway markets? And do you think we could see material revenue from that product line in the second half of '08?

To answer your question, the Comcerto 100 processor is a platform that is very exciting for us. We have actually quite a large number of design wins with that product, with customers serving the broadband home gateway market. Those design wins are both within Japan, addressing NTT's network, but also outside of Japan.

Based on the visibility we have right now from our customers for those design wins, we expect production to ramp with the Concerto 100 evenly late this year or early 2009. The end applications would be, once again, broadband home gateways, but also WiMAX access nodes, enterprise routers, DECT, which is Digital European Cordless telephone applications, and a whole host of other platforms of that ilk.

Could you discuss the margin profile for that product? Will it be a drag on overall gross margins?

I don't think we've broken out that product specifically in terms of its gross margin. I think what we have said historically is that the gross margin for the Comcerto 100 is of course a little less than the blended gross margin of the Company, which as you know is an underlying 65% at this time, a little bit better than that, last quarter.

But we also expect that we have other product families ramping at the same time as the Comcerto 100 ramps that enjoy a much higher gross margin profile. So at a Company level, we're not too concerned about that.

If I could jump over to China for a second, there has been some commentary or speculation that order patterns in the coming months may be a little lumpy going through the Olympics. Is there any evidence of that in what you're seeing?

So, clearly, the Olympics are very much factored into our guidance for this current quarter. We have thought about it quite a bit. We're very plugged into expectations for the China Olympics in our current fourth quarter. Basically, what we believe is happening right now is that there is a temporary pause in deployments, or let's call it installations, during the Olympics. However, the temporary pause is limited to the eight Olympics cities, and that the overall impact that will result is going to be very, very small.

We expect continued strong deployments of the GEPON based fiber access technology, as well as the broad range of our portfolio in China in this quarter, as well as of course elsewhere.

We have very strong backlog at this point in China, and we expect good business in China this quarter despite the Olympics. We do expect there to be quite a bit of pent-up demand once we get past August.

Allan Mishan, Oppenheimer.

Allan Mishan, your line is open. Please check your mute button.

Please stand by. Mr. Stites, we have no further questions at this time.

That concludes our conference call for today. On behalf of all of us at Mindspeed, thank you for participating this afternoon. Thanks again and good bye.

This concludes today's conference. You may disconnect at this time. Thank you.