MACOM Technology Solutions Holdings Inc (MTSI) 2009 Q1 法說會逐字稿

Welcome and thank you for joining the Mindspeed Technologies first quarter fiscal year 2009 conference call. At this time, all parties are on a listen-only mode status until the question-and-answer portion of today's call. (Operator Instructions). Also, as a reminder, today's call is being recorded. If you have any objections you may disconnect at this time. I would like to introduce Bret Johnsen, Chief Financial Officer, who will chair this afternoon's conference call.

Thank you, Roy and good afternoon to all of you who have joined us for today's call to discuss Mindspeed's fiscal year 2009 first quarter financial results. Our press release issued this afternoon detailing these results may be accessed on our website at www.mindspeed.com under the investor section. Our CEO, Raouf Halim, will begin the call with a few comments on some of the industry trends and data points we are seeing in our business. I will then discuss our financial results in more detail, followed by additional quarterly highlights and second quarter financial guidance by Raouf.

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 2009 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 may include statements about trends and expected performance of our business units, deployments and our ability to benefit from them, our inventory turns and levels.

Product features and their benefits, future sales of intellectual property, the value of our intellectual property portfolio, market share, demand for our products, channel inventory levels, customer relationships, equipment tender wins and production ramps. Industry and economic trends, customer orders, telecommunications capital expenditures, the impact of technological developments in our industry growth prospects in various markets and for various products. Research and Development expenditure levels, the source and amount of savings from and timing of cost reduction measures and the implications thereof.

Efficiencies and effectiveness, design win traction and design wins and their impact on future performance, China Telecom's testing status and our customer status in that process. Our balance sheet strength and liquidity position, availability of our line of credit, breakeven revenue levels, the flexibility of our business model and our ability to rapidly respond to market opportunities and challenges. Our expectations for second quarter revenues, gross margin, operating expenses and cash consumption and special charges, backlog and order trends and other expected operating results.

Forward-looking statements made during this call are made only as of the date hereof and 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 those noted in our earnings release and our Form 10-K for the fiscal year ended October 3, 2008 and other filings with the SEC.

During our call today, we'll 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, special charges and gain on debt extinguishment. 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.

With that, I would now like to turn the call over to Raouf.

Thank you, Bret and once again thank you to all of you joining us on the call today. Turning to our first quarter of fiscal 2009.

We all know that the December quarter was one of the most challenging periods that the semiconductor industry has seen in years. Credit markets remain tight and companies across the supply chain turned inward, focusing on depleting their inventories and managing their cash flow very tightly in an environment of slowing demand. Mindspeed was not immune to these conditions as evidenced by our lowered revenue guidance in December.

Generally speaking, our Q1 fiscal year 2009 results followed the trends we discussed with you in November with the exception of our WAN business. Despite the dismal economic climate, high performance analog revenues grew sequentially over Q4 fiscal year 2008 as we expected, driven by the ramp of our signal conditioner products in the blade server market, and continued sequential revenue growth of our broadcast video portfolio. Multi service access revenues declined sequentially, primarily due to the continued delays in the next round of fiber based access network deployments in China. That said, we continue to enjoy strong year-over-year growth driven by the demand for Voice-over-IP, with Q1 MSA revenues up more than 20% from the year earlier period. However, we experienced a significant deterioration in Q1 demand from key WAN customers, such as Nortel and others, as compared to the prior quarter.

We have spent a lot of time evaluating inventory levels across all of or markets including our distributors, contract manufacturers and our customers. Generally speaking, unlike the downturn of 2001, our checks do not currently show significant aberrations in the form of high inventory levels across the supply chain. However, companies definitely remain focused on exhausting inventories and ordering with very short lead times, which has impacted our backlog and hence our visibility. We believe that at this time, our shipments are below the end shipments of our OEM customers.

The initial indications from our customers suggests that we may be approaching a point across a number of our product families where it seems that channel inventory is being depleted. We are not prepared to make any calls at this time, but directionally we are becoming comfortable with inventory levels in the channel. Unlike the downturn of 2001, this time around large service providers have healthy balance sheets and have the capacity for investments in selective areas. While analysts are forecasting declines 2009, global service provider capital expenditures in the range of 5% to 15%. the good news is that there is continued and maybe even growing investment in specific technologies where Mindspeed should be a direct beneficiary.

Strong growth in wireless data in developed markets, as well as wireless subscribers in emerging markets combined with the move to 3G technologies and early preparations for the move to 4G technologies is expected to keep capital spending levels high in this area. For example, the Chinese ministry of Information Industry, or MII, has announced that the Chinese government plans to invest about $60 billion over the next three years for 3G infrastructure build-out in China. According to the Chinese news site [Interfacts], in 2009 China Telecom's sector CapEx is expected to be $44 billion. Both Huawei and ZTE are forecasting higher revenues in 2009 than in 2008.

In fact, many of our WAN products will be shipping in systems serving the 3G roll-out in China. This includes 3G wireless equipment such as radio network controllers, base stations, media gateways and other platforms from leading vendors such as Ericsson, Nokia Siemens Networking, Huawei and ZTE. Additionally Telcos worldwide are continuing to or starting to deploy fiber based access architectures. Verizon for example is not cutting CapEx for files. In China the FTTX build-out is expected to start again in Q2, calendar 2009. We expect Huawei, ZTE, [Fiber Home] and other Chinese OEMs to ship Mindspeed Comcerto Voice-over-IP processors as well as analog products for these deployments.

Moving on, we understand the importance of continuing to be proactive in the face of continued demand weakness in some of our markets. As we previously announced, we took steps in October to reduce operational expenditures, based on our lower revenue expectations. And we are now implementing significant additional cost reductions.

Combined with the remaining impact of our Q1 fiscal 2009 restructuring efforts, these new cost savings initiatives are expected to reduce annual non-GAAP operating expenses by an estimated incremental $10 million from Q1 fiscal 2009 levels and an estimated incremental $12 million from the Q4 fiscal 2008 levels. These reductions are expected to reduce our quarterly non-GAAP operating expense from $23.6 million in Q1, fiscal 2009, to approximately $21 million in the third quarter of fiscal 2009. This operating expense level will represent an 11% reduction in our operating expenses, from the fiscal Q1 2009 levels we just reported and a 13% reduction from the fiscal Q4 2008 levels of $24.1 million.

This will also have the effect of significantly reducing the revenue level required for us to achieve non-GAAP operating income breakeven to just over $31 million in quarterly revenues, assuming a 67% gross margin level. These expense reductions are being implemented across the Company, with a few areas representing the majority of the savings. First, we have frozen all merit increases for fiscal 2009 for our North American workforce. Second, the majority of our cost reduction measures were in the areas of SG&A as well as WAN which included the closing of our Dubai facility. Of critical importance, we do not expect the expense reductions we are taking to impact our market leading positions, our key product development initiatives or our long-term strategic growth plan.

Additionally, these actions will bring on folks the lowest levels Mindspeed has had in its history as a stand-alone Company and are expected to provide significant future earnings leverage as Mindspeed emerges as a leaner and more efficient organization when the market recovers. We believe this is the prudent approach to take in this economic environment, to ensure we are operating with a flexible business model, to enable us to rapidly respond to the opportunities and challenges the market presents.

Moving on to some encouraging data. First, we believe that China Telecom, the country's largest wire line operator, has finished testing equipment for the second round of deployment of fiberoptic access. Our customers, which includes ZTE, Fiber Home and Huawei, have indicated that they did not encounter any significant issues in testing and they are all well-positioned to participate. We believe our customers have all submitted their response to the China Telecom tender and that the final awards including volumes and time lines for each supplier to China Telecom will be released this quarter. Under this scenario, our customers have indicated that they will resume ordering for the second round of China Telecom fiberoptic access deployments in the next few months, which we believe would benefit our third quarter of fiscal 2009.

As a reminder, the strong growth in our MSA business over the past year plus has been driven in large part by the adoption of our Comcerto processors into GEPON based optical access networks in China. We saw our MSA revenues grow significantly with the first roll-out by China Telecom and we believe the second deployment could be equal to or even larger than the first. Additionally, we expect the two other major service providers in China, China Unicom and eventually China Mobile to follow China Telecom's lead. Further supporting our belief that we are at the very beginning of a multi-year roll-out of GEPON access networks of a significant scale across China.

We also continue to experience encouraging data points on our high performance analog business. We believe that we are gaining market share in the optical access market, particularly in GPON and we are seeing excellent traction for the new signal conditioning devices we have launched in the enterprise server and storage space. HPA has been a solid performer for Mindspeed growing sequentially in the first quarter despite the overall economic environment. Based on the growth in demand for our WAN products from 3G network roll-outs in China as well as for our ethernet products, we believe we may begin to see an uptick in our WAN business towards the second half of this calendar year.

One last point I want to highlight relates to our continued efforts to monetize the value of our intellectual property. In the first quarter of fiscal 2009, we received $3 million in revenues from patent sales, and we continued to pursue various alternatives to monetize the years of industry leading innovation Mindspeed has in its IP portfolio. In fact, we have already received an additional $2 million in IP monetization this quarter to date and we believe we are close to securing additional material patent sales in this or the next quarter.

Bret will now briefly highlight some of our financial results. After which, I will close with some additional quarterly highlights and provide our financial guidance for the fiscal year 2009, second quarter. Bret?

Thank you, Raouf. Turning to our financial results for the fiscal first quarter of 2009.

Total revenues for the first fiscal quarter were $30.7 million, in line with our updated guidance provided in December 2008. Revenues for the first quarter of fiscal 2009 included $3 million of patent sales. Revenues from multi-service access Voice-over-IP processor solutions contributed 40% of total first quarter fiscal 2009 revenues.

While revenues from high performance analog products increased 3% sequentially from the prior quarter, and represented 34% of the total revenues. Wide area networking communications revenues contributed the remaining 26% of first quarter fiscal 2009 revenues. Our geographic revenue split for the quarter was Asia-Pacific 47%, Americas 40% and Europe 13%. Alcatel-Lucent was our only greater than 10% end customer for Q1.

Turning to gross margins, non-GAAP gross margin was $21.2 million, or 69% of revenues. Included in this amount is an approximate 3% net benefit from the sale of patents in the quarter. Also included in this number is an approximate 2% benefit from the sale of products written off in fiscal 2001. Total non-GAAP operating expenses were $23.6 million, down sequentially from the fourth quarter of fiscal 2008 level of $24.1 million. Reflecting some of the expense savings actions we took in October 2008.

Operating expenses were comprised of Research and Development expenses of $13 million, and selling, general and administrative expenses of $10.6 million. This is consistent with our guidance and resulted in a non-GAAP operating loss of $2.4 million. Other income and expenses and the provision for income taxes in the aggregate totaled a net expense of approximately $600,000. The result was a non-GAAP net loss of $3 million, resulting in a basic loss per share of $0.13, based on approximately 23.4 million average shares outstanding for the quarter.

The non-GAAP net loss excludes two significant offsetting one-time items during the quarter. First, we had a gain of $2.9 million related to the repurchase of $20.5 million of our November 2009 convertible notes. Second, we incurred $2.3 million in restructuring expense during the quarter, related to our October 2008 expense reduction actions.

Turning now to the balance sheet, cash and cash equivalents totaled $20 million at the end of first quarter of fiscal 2009. Net of the $17.3 million we used to repurchase our convertible notes, we consumed $5.7 million of net cash in the first quarter. This consumption consisted of three primary uses. $2.7 million paid for our increase in inventory. $900,000 for our restructuring activities at the beginning of the quarter. And $2.1 million in the cash consumed in the ongoing operations of the business. We remain comfortable with our liquidity position including our cash and unused credit facility.

Wrapping up some additional balance sheet items, accounts receivable were $8.6 million, resulting in net days sales outstanding of 25 days compared to 36 days in the prior quarter, due to strong collection efforts within the quarter. Inventory increased by $2.2 million to $18.4 million, resulting in inventory turns of 2.1, down from 3.1 in the prior quarter. This inventory growth was primarily driven by the weaker than expected demand in our WAN business. We do not expect -- or I'm sorry, we do expect to sell off this excess inventory and we are targeting to return to inventory turns of greater than 4.0 within the next few quarters.

I would now like to turn the call back to Raouf.

Thank you, Bret. I want to spend a little time covering some of the highlights from the quarter and then provide our financial guidance.

Turning to some quarterly highlights. We believe we continued to lay a strong foundation for future revenue growth with robust design wins across all of the markets and geographies we address. Q1 fiscal 2009 Asia-Pacific design wins more than doubled over Q1 fiscal year 2008, complimenting last quarter's 50% increase in America's wins. Importantly, we also experienced strong design win traction with Tier-1 flagship customers in all of our businesses.

High performance analog design wins also continued to be strong, with Q1 fiscal 2009 wins outpacing each of the prior two years quarterly periods. Also encouraging to us is our design win traction in the GPON fiber to the home markets, which we believe indicates we are gaining market share in the optical, infrastructure markets we address. Specifically, we believe we are growing market share within Verizon's GPON ecosystem, the largest GPON Service Provider.

In our multi-service access business, shipments of our Voice-over-IP processors were down sequentially, largely due to the pause in PON roll-outs in China. However, if we look at the Q1 fiscal 2009, over Q1 fiscal 2008 comparison, Voice-over-IP revenues were up by more than 20%. Our Comcerto 300 series of Voice-over-IP access processors was named by Internet Telephony Magazine as a recipient of its 2008 product of the year award. This award is an excellent complement to the introductory year of this product, which helped drive rapid growth for us in the access Voice-over-IP market in fiscal year 2008.

While we were disappointed in the contribution from our WAN business, there were some positive signals from this segment as well. During the first quarter, our design win traction picked up and the number of opportunities we are currently competing for increased significantly, reflecting solid growth in the number of new WAN design starts. We also had multiple design wins for security platforms on the ethernet side of the business. Finally, we are looking forward to participating in the roll-out of 3G wireless networks in China.

Given the economic environment we believe it is more important than ever to maximize the Company's ability to adapt to whatever market conditions we may face. We need to be as efficient and effective as prudently possible with an eye towards driving stockholder value. As I covered earlier, we have implemented a number of additional cost saving measures to meaningfully reduce operating expenses.

As a result of these effort, combined with our Q1 fiscal year 2009 restructuring initiatives, we expect to achieve annual savings of approximately $10 million from our Q1 fiscal year 2009 operating expense levels. We expect to reduce quarterly OpEx to approximately $21 million, in our fiscal 2009 third quarter, reduction of approximately 11% from the Q1 fiscal 2009 levels we just reported. We anticipate incurring additional special charges during the second quarter of fiscal 2009, in the range of $0.7 million to $1 million, primarily related to severance costs for affected employees.

Turning to our guidance for our second fiscal quarter. Our guidance takes into account several factors such as backlog, booking trends, expected turns, customer forecasts, and other factors. Based on these factors, we expect second fiscal quarter revenues to be between $24 million and $27 million. Quarter to date, turns orders for product shipments this quarter are up 20%, compared to the same period last quarter. However, achievement of our guidance only requires us to attain similar turns levels as last quarter.

This revenue guidance does not include any benefits from potential IP monetization within the quarter, of which we already have secured $2 million quarter to date. We expect non-GAAP gross margin to be approximately 65%, with the sequential decline in margin percentage being primarily driven by the exclusion of any benefit from patent sales. We expect non-GAAP operating expenses to be down sequentially by approximately 5%, to $22.4 million, reflecting benefits from the cost reduction measures taken in the first quarter of fiscal 2009, and a portion of the benefits from the cost reduction measures we are taking this quarter. We anticipate that we will again consume cash in the current quarter, although at reduced levels from last quarter. We do not expect to have to build as much product as we have in recent quarters, due to the higher inventory levels we are carrying.

While we are faced with uncertainty in near term market conditions, we are encouraged by the opportunities we have in our markets as well as our ability to strategically focus on share capture, in select growth segments, as our industry leading technology directly addresses the world's demand for bandwidth. This is particularly true as the convergence of IT, media, Internet and telecom services over packet networks becomes prolific throughout the world.

Operator, we are ready to open the lines for questions.

(Operator Instructions). Our first question comes from Sandy Harrison with Signal Hill.

Thanks, good afternoon, everyone.

Hi, Sandy.

Hi.

You guys have had some real success with the HPA products, Raouf, typically in this market if somebody is doing well it usually attracts the competitors. How is the competitive landscape in the HPA? While we're doing that, why don't we hit some of the others. Because you had made some comments about some design wins, so if you could just touch base on that for me?

Certainly, Sandy. In the HPA segment particularly our products are quite differentiated compared to our competitors. And in certain of the product families, for instance, video and signal conditioning products, our analog products are very system and application specific, making them rather difficult for competitors to displace. We have enjoyed tremendous market traction with our HPA portfolio across the three major segments, the optical products, the signal conditional switching products and the video product. And again I attribute some our market share gains to the differentiated high performance unique nature of these products.

As I commented in our prepared comments earlier we have very significant market traction with our HPA products. We're quite gratified with the fact that we in fact grew sequentially in this last quarter which as I'm sure you realized was a very difficult quarter for a lot of analog vendors. We're experiencing strong continued traction with this business. I can't tell you it's going to grow every single quarter sequentially, but certainly a very strong flagship portfolio for our Company.

I think you also had a question about competitive landscape in general. It really has not changed very much, Sandy. In the analog space we continue to see a little bit of Maxim, certainly in the digital video space we compete directly with [Genum], Canadian Company that we've competed with for many years in the segment. There's nothing changing -- nothing of any significant nature changing in the competitive environment.

And I guess I would say for any new entrants, it typically takes two to three years to understand the market, to understand the technical requirements, to deliver the level of performance and sophistication that customers require in these various segments that we address. Again, these are some of the most unique non-commodity areas within the high performance analog space.

As far as the rest of the business is concern, again, no changes to the competitive landscape. We view it as a really good time for us to continue to capture market share and if you will really build a stronghold in specific markets that are critical to us.

Great and then just a quick follow-up. So, when I kind of go through your balance sheet and your comments, it sounds like you burned about 2.1 from the business in the December quarter and you think that you're going to get that down to -- down a bit in the March quarter from that perspective?

Well, what we said was we were going to decrease our cash burn, the 5.7, which is -- if you take out the cash we consumed to buy back the debt, we would decrease that this quarter.

Okay. And then just lastly, it sounds like with already having $2 million in IP revs booked, your guidance of the 65% margins is probably a little conservative at this point?

That's a fair statement because we did not contemplate the impact of that in the numbers that we gave you.

Okay. I'll go back in the queue. Thanks

ANd our next question comes from Dan Morris with Oppenheimer.

Hi, guys, it's [Colin Lastrange] on Dan's behalf. Just a couple of quick questions. On the turns, what is implied on the turns side of things what percentage is implied there, to get to the midpoint of the guidance?

Sure. So quarter to date, turns orders for product shipments this quarter were actually up 20%, compared to the same period last quarter. However, achievement of our guidance only requires us to attain similar levels to last quarter.

Okay. Fair enough. And then on backlog, any sequential details you can provide there versus where you were at the start of last quarter?

Well, as you know, we did not provide that level of information generally. But I will say that our backlog is below that level, the level we had last quarter. Quarter to date, as I mentioned, though, the turns orders for product shipments this quarter are actually up 20% from last period.

Got it. Okay. And then you guys have done a very nice job with the converts. What are your thoughts on the remaining amount going forward?

So on the convert side we actually don't have any additional repurchases on the plate at this time.

Okay. And then one last one from me, kind of a more general question, just on your expectations for the pricing environment across the board, inventories have ticked up a little bit and you're going to be working those down. Do you expect to see big pricing declines in the back half of calendar '09? I know it's hard to say at this point but your thoughts on where that pricing environment's headed.

Colin, this is Raouf. Just so I'm clear on your question, you're talking about pricing of our products or you're talking about -- ?

Yes.

Okay. You're not talking about wafer pricing. Okay We're not seeing anything [abbertive] in any way in terms of product pricing, Colin. Again somewhat in line with the question Sandy had asked earlier. Our products are highly differentiated. There is almost no second sourcing whatsoever across our product portfolio, which obviously is critical to our ability to keep up gross margins. As you can see, our gross margins remain consistently in the mid-60s, amongst the highest in the industry.

You're right about inventories. Inventories have built up in the latter part of 2008. It looks like inventories are coming back in line very, very nicely. As I mentioned in my prepared comments earlier. It now looks like inventories are down sort of to pretty much normal levels, I would say even less than 30 days in the channel. So I don't think that inventory in itself is going to drive any pricing concessions by ourselves or any of our peers in this particular communications space. So we feel pretty good that pricing will remain quite firm at this point.

Okay. Great. Thanks, guys.

Very well.

Thank you.

Mr. Halim, we have no further questions showing at this time.

Very good. Thank you for that. And thank you again for joining us for our call and we look forward to speaking with each of you throughout the quarter. Thank you.

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