MACOM Technology Solutions Holdings Inc (MTSI) 2009 Q4 法說會逐字稿

Welcome, and thank you for joining the Mindspeed Technologies fourth quarter fiscal year 2009 conference call. Today's call is going to be on a listen-only until the question-and-answer session.

Today's call is also being recorded. I would like to introduce Andrea Williams, Mindspeed's Vice President of Corporate Communications, who will chair this afternoon's conference call.

Thank you, and good afternoon to all of you who have joined as for today's call to discuss Mindspeed's fiscal fourth quarter of 2009 financial results. Our press release, issued this afternoon detailing these results, may be accessed at our Investor website at www.mindspeed.com.

Today our CFO, Bret Johnsen, will begin the call with a review of the fourth quarter and our financial results. Our CEO, Raouf Halim, will follow Bret with some perspectives on the quarter and will end by providing first quarter financial guidance.

Safe Harbor statement. Before we begin, I want to remind you that our comments today will include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Forward-looking statements include among others statements regarding our expectations and financial guidance for our fiscal first quarter 2010, industry, business and product trends and cycles, domestic and foreign economies and markets for our products, our financial and liquidity position and performance, business drivers, design wins, customers and competition, monetization of our intellectual property, cost saving measures and other anticipated future events and 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 included, but not limited to, those noted in our earnings release and our Form 10-Q for the fiscal quarter ended July 3, 2009 and other filings with the SEC.

Non-GAAP statement. 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, asset impairments, amortization of intangible assets, employee separation and employee option exchange and reverse stock split costs, special charges and gain on debt extinguishment.

For a 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 those documents are available in the Investor section of our website at www.mindspeed.com.

We do not provide a reconciliation of the forward looking non-GAAP measures to GAAP measures because of our inability to project special charges, asset impairments, employee separation costs and stock-based compensation related expenses. With that, I'd like now to turn the call over to Bret Johnsen, our Chief Financial Officer.

Thank you, Andrea. We are pleased with the continued improvements in our financial performance for our fiscal fourth quarter of 2009. Specifically, we believe that we've reached an inflection point in the business from a financial milestone perspective as we not only returned to non-GAAP operating income and positive cash generation, but also significantly improved our liquidity position.

As a brief summary of the highlights of the quarter, Q4 closed with $34.7 million in revenue or 7% sequential growth and with an improved non-GAAP gross margin performance of approximately 62.4%, exceeding our guidance of 61% to 62%. This resulted in positive non-GAAP operating income and positive cash generation.

We remain committed to rigorously controlling our operating expenses at the new lower levels achieved over the last two quarters while growing revenue to achieve an improving profitability model as we progress through fiscal year 2010. Finally, the fourth quarter was especially constructive from a balance sheet perspective.

During August, we were able to raise approximately $8.9 million in net proceeds from an underwritten equity financing which allowed us to finish the quarter with approximately $20.9 million in cash and cash equivalents in addition to our untapped line of credit of up to $15 million. Now turning to a more detailed review of the financial results for our fiscal fourth quarter of 2009. Revenue for the fourth quarter was $34.7 million, up 7% sequentially from the prior quarter.

Revenue for the first quarter did not include any patent sales and for the full fiscal year of 2009, we had revenues of $126.6 million. We are pleased to report that all three of our businesses grew sequentially in the fourth quarter.

Revenue from our Multiservice Access, or MSA, Voice-over-IP processor solutions contributed 41% of total fourth quarter product revenue and increased 4% sequentially due to the continued demand for our Comcerto voice processing solutions in the optical access space, as well as initial meaningful revenue contribution from our service provider customer premises equipment, or CPE products. For the full fiscal year 2009, MSA had revenue growth of 2% and most importantly did not decline despite the industry down cycle.

Revenue from High Performance Analog, or HPA, represented 30% of total fourth quarter product revenue and also increased 4% sequentially. HPA revenue increased in the fourth quarter due to a pickup in demand for broadcast video solutions as well as demand for optical module PMD solutions.

For the full fiscal year 2009, HPA had a revenue decline of only 7%. Lastly, our Wide Area Networking, or WAN, revenue contributed the remaining 29% of fourth quarter product revenue and grew 13% sequentially driven primarily by improved end demand in North America. For the full fiscal year 2009, WAN had a revenue decline of 39%.

This large decline in WAN supports our perspective that the majority of the impact of the down cycle on Mindspeed was experienced in our legacy WAN business while our growth businesses continued to perform. Product revenue for the fourth quarter was split by geographic region as follows; Asia, Pacific, 66%; Americas, 26%; and Europe at 8%.

China represented 39% of total fourth quarter revenue, down from 54% of product revenue in the prior quarter. We had one end customer in the quarter that represented revenues of 10% or greater and that customer was ZTE. Now turning to gross margins, non-GAAP gross margin was $21.7 million or 62.4% of revenue, exceeding our expectations. This compares to a non-GAAP gross margin of 61.3% in the prior quarter.

The sequential improvement in non-GAAP gross margin is primarily due to both the effect of product mix and the result of certain cost-reduction efforts in the quarter. Total non-GAAP operating expenses were $21.1 million, slightly better than our guidance of $21.2 million. This represents a decline of 13% on a year-over-year basis and a decline of approximately $92,000 sequentially from the fiscal third quarter of 2009.

Fourth quarter non-GAAP operating expenses were comprised of research and development expenses of $12 million and selling, general and administrative expenses of $9.1 million. This resulted in non-GAAP operating income of $575,000. As we've previously announced, we began taking significant steps one year ago in October 2008 to reduce operating expenses with the majority of these cost reduction efforts in the areas of SG&A and our WAN division.

As a result of these efforts, we have reduced quarterly non-GAAP operating expenses to their lowest level in the Company's history without impacting our ability to drive revenue growth. In addition to this achievement, we are announcing an additional restructuring effort today that consists of a facilities consolidation and targeted headcount reduction.

As a result of this restructuring, we expect to take a charge of approximately $900,000 to $1 million in the fiscal first quarter of 2010 with the majority of the cash outflow for this discharge occurring in the first half of FY 2010. These efforts are consistent with our stated strong focus on maintaining operating expenses at the new lower levels in order to continue achieving operating leverage in our business model while still adequately funding our two growth drivers, MSA and HPA.

We do not expect to see a further reduction in total operating expenses as a result of this restructuring. However, the resulting reduction in SG&A expense will enable us to shift additional funding into our R&D efforts while maintaining our current low cost structure. Non-GAAP operating income was $575,000 in Q4, significantly improved from a non-GAAP operating loss of $1.3 million in Q3.

Finishing the income statement for fourth quarter, other income and expenses and the provision of income taxes in the aggregate totaled a net expense of approximately $650,000. Included in this amount was approximately $440,000 in interest expense, approximately $120,000 in foreign exchange loss and other income and approximately $90,000 in income tax expense.

We expect that other income and expenses will stay relatively consistent with these fourth quarter levels throughout fiscal 2010. The non-GAAP net loss for Q4 was $77,000 and resulted in a basic non-GAAP net loss per share of approximately break-even or $0.00 based on approximately 26 million weighted average shares outstanding for the quarter.

We ended the quarter with approximately 28.4 million shares outstanding following the equity raise in August. Turning now to the balance sheet. We continue to execute well on the accounts receivable front. Our accounts receivable balance at the end of the quarter was $7.7 million resulting in net days sales outstanding of 20 days, which is down three days compared to the prior quarter.

Inventory decreased from the prior quarter by approximately $600,000 to $10.9 million resulting in inventory turns of 4.8, up from 4.4 in the prior quarter. We continue to be pleased with our progress in increasing our inventory turns.

On to cash and liquidity. In the fourth quarter, we made significant improvements in our liquidity position. We generated approximately $100,000 in cash excluding the $8.9 million in net proceeds from the Company's common stock offering, which closed on August 19, 2009, and ended the quarter with cash and cash equivalents totaling $20.9 million.

Additionally, our liquidity position includes our $15 million line of credit currently undrawn with Silicon Valley Bank. With sufficient cash on hand to address the $10.5 million of convertible notes coming due next month, we plan to pay off those notes in November at maturity.

Additionally, we continue to believe one of the best ways to further enhance our liquidity position is through our IP monetization efforts. We are actively pursuing additional patent sales and are in discussions with multiple interested parties. However, as we mentioned last quarter, we are unable to predict the timing or amounts we could receive at this point. I would now like to turn the call over to Raouf for his perspectives on the quarter and our first quarter outlook.

Thank you, Bret. Q4 was a great close to the fiscal year of 2009 continuing our trajectory of improving financial performance with continued revenue growth and non-GAAP gross margin improvement. We achieved both non-GAAP operating profitability as well as positive cash flow and exceed our expectations by delivering a non-GAAP net loss per share of approximately break even, or $0.00.

We believe we have emerged from one of the worst down cycles I've ever seen as a stronger, leaner and more competitive Company. From the revenue perspective, both the Americas and the EMEA geographic regions grew in Q4 as well as all three of our business units.

I am pleased with the increasing geographical diversity in our business and I believe that the multiplicity of growth drivers evident in our Q4 bodes well for our progress in the current fiscal year. The revenue growth drivers for the quarter included, as Bret mentioned, our Voice-over-IP or MSA business with a broad product offering of wireline, wireless and FTTx solutions that sell into an equally diverse set of service provider deployments such as China Telecom, China Unicom, NTT in Japan, BSNL in India and Clearwire in the U.S.

Our analog business also continues to execute well with continued traction of the crosspoint switch and signal integrity markets shipping to a highly diversified set of telecommunications, enterprise compute and broadcast video OEMs such as Huawei, ZTE, Motorola, Alcatel-Lucent, Infinera, WTE, Mitsubishi, Ericsson and others.

Finally, our WAN portfolio continued its recovery with a third quarter of growth driven by demand particularly in North America for traditional transmission technologies with customers such as Cisco, Alcatel-Lucent, Nokia Siemens Networking, Calex, RadiSys, Ericsson and others. Just as significant as the turnaround in financial performance was the strength in top tier design wins in Q4 on a sequential as well as a year-over-year basis across all three businesses.

Within MSA, year-over-year wins increased approximately 70% driven primarily by strong traction from our Comcerto line of CPE processors as well as fiber-to-the-home voice-over-IP solutions. Within HPA, crosspoint switch and signal conditioning technology led the design win growth in Q4 with signal conditioners registering a record number of wins in the period.

Overall HPA wins more than doubled quarter-over-quarter and in total registered a record quarter for the last two years. We believe this strength in design wins is a critical indicator of continued revenue growth in 2010 and in the future. With that, let's talk briefly about each of our three product areas starting with multiservice access or MSA. As we spoke of last quarter, two of the most significant long-term growth drivers for Mindspeed are in our MSA division, namely access voice-over-IP and service provider customer premises equipment or CPE solutions.

MSA overall grew 4% sequentially in Q4 2009, coming off a 27% sequential growth quarter in Q3 2009 as we began springing out of the downturn. Within access voice-over-IP, we are continuing to see favorable deployment plans by the major service providers for fiber-to-the-building, or FTTB metro buildouts in China.

As we mentioned last quarter, we saw China Unicom come out with its first large FTTB tender in July which was in addition to the two China Telecom tenders already announced. While we believe that the long-term deployment for this technology remains largely on track, the scale of the China Unicom deployment has been small to date and not enough to offset the seasonal second half slowdown in deployments by China Telecom.

Consequently, we are currently encountering some seasonal moderation in access orders from our major customers in China. However, we have every indication from both service providers as well as OEMs in China that optical access deployments will pick back up in early calendar 2010 as both China Telecom and China Unicom continue to roll out previously announced deployments following the pattern we experienced in early 2009.

That said, our growth opportunity in voice-over-IP is a much more diverse story than just the China FTTB market. In Q4, we saw growth in enterprise voice-over-IP with customers such as LG and Samsung. We also saw growth in our wireline core trunking voice-over-IP portfolio driven by ZTE, who is supplying the BSNL core network buildout in India.

In wireless voice-over-IP, we continued to see strong demand from customers such as GenBand and Alcatel-Lucent for wireless media gateways for deployments with carriers such as T-Mobile, China Telecom, China Mobile, BSNL and others. Importantly, we are quite excited by the ramp of our MSA voice-over-IP portfolio into CPE applications.

Significantly, Q4 was the first quarter of meaningful revenue for Mindspeed in this segment and we expect 2010 to be a continuing growth story for CPE. Today we announced by press release that are Comcerto 100 CPE processor has been selected by Hitachi to create an ultra-low-power broadband home gateway that features 2Gbps routing performance with concurrent WiFi and carrier grade voice-over-IP capabilities.

Hitachi's fiber-to-the-home gateways are being deployed by Japan's largest service provider, namely NTT, in its rapidly growing fiber-to-the-home access network which is expected to grow by 2.5 million subscribers this year. We are delighted to have this validation of our technology by one of the world's most sophisticated carriers. The qualification process for NTT is one of the most rigorous in all of the telecommunications industry and a strong validation of our technology leadership.

This solid demonstration of Mindspeed technology leadership has also been repeated at several other several leading communications providers such as Clearwire, Telefonica, and BSNL. Mindspeed's technology leadership began in 2002 when we were the first to offer carrier-class convergence processors with multicore ARM-based solutions and continued with our first ARM-based triple play home gateway solutions beginning in 2007.

Mindspeed's Comcerto 1000 is the latest product to benefit from the Company's longtime collaboration with ARM. This dual ARM core processor maximizes packet throughput and leverages our widely deployed carrier-class voice-over-IP technology so that manufacturers can offer multiple systems solutions for various types of deployments. These deployments range from best-in-class CPE voice-over-IP platforms to gigabit home gateways to 3G, 4G routers to WiMax integrated access devices, or IADs.

MSA design wins were highlighted in Q4 by a record 18 total wins for CPE specifically. We are particularly pleased that we scored one of these CPE wins with a major North American networking OEM.

Moving on to high-performance analog, HPA revenue grew 4% sequentially in Q4 2009. We saw continued demand for crosspoint switch solutions in the telecommunications segment, particularly for the DWDM transport solutions selling to China, India and Europe through customers such as Huawei, Infinera and others. HPA also experienced strong revenue growth in its broadcast video solutions in Q4 2009 as well as improved demand for optical modules and PON deployments for Asia and the U.S.

As we mentioned last quarter, we have silicon that addresses both GPON and GEPON rollouts worldwide through key customers such as Mitsubishi, Motorola, Hitachi and others. As I mentioned in my opening comments, design win activity was also particularly robust for HPA in Q4. The end markets for these design wins are significant at the high level.

HPA doubled its design wins quarter-over-quarter with a record number of wins within the data center application space for server and storage technologies as well as a record number of total wins in the broadcast video segment reflecting strong market acceptance of our analog products in both the enterprise segment and in the video segment. These are markets that we have been working hard to gain share in and we look forward to furthering our progress in the coming quarters.

Design wins in the optical segment also grew in Q4 with BMD wins as we continued to see positive momentum for the PON market in Korea and Japan as well as in China. Moving on to WAN. Our WAN division grew sequentially by 13% in Q4. This was the third quarter in a row that WAN has grown by double digits after the significant slowdown we encountered in Q1 of fiscal 2009.

Our WAN division is specifically benefiting from a pickup in demand in North America as well as continuing to benefit from the 3G wireless backhaul deployments in China. Large orders for network processors with customers such as Cisco, Nokia Siemens and Ericsson resumed during Q4 2009.

As you may recall, Nortel was historically a large customer for Mindspeed and the Metro Ethernet segment. As Nortel's business is absorbed by Sienna, we believe this may result in growth in this revenue stream moving forward.

Now turning to our guidance for the fiscal first quarter of 2010. As we look to our fiscal first quarter, there are several considerations that I will summarize for you. The revenue growth drivers in fiscal Q1 of 2010 for our three businesses are as follows. First and foremost, the continued ramp of our triple play voice, video and data CPE solutions within MSA.

Secondly, the strength in our enterprise high-definition video and optical access products within HPA and, finally, the continued recovery of our traditional transmission technologies within WAN. Importantly, we are currently experiencing stronger backlog levels for this fiscal first quarter than we did at the same point in the previous quarter. This marks the third quarter in a row that we have experienced sequentially stronger backlog.

Based on this and other factors, we expect fiscal first quarter revenues to grow between 4% and 8%, or to approximately $36.1 million to $37.5 million from the fiscal fourth quarter of 2009 excluding any potential patent sales. We expect Q1 non-GAAP gross margin to be in the range of 62.5% to 63%. Again, excluding any potential patent sales.

We expect non-GAAP operating expenses to be approximately $21.3 million reflecting continued strong cost-containment discipline by our teams that will continue to drive earnings leverage in Mindspeed's business model as we move throughout 2010. In summary, I want to thank the Mindspeed team for all their dedication and hard work during the past year. I believe we have emerged from one of the worst down cycles I have ever experienced as a stronger, leaner and more competitive Company.

Our growth in Q4 and the outlook for Q1 are driven by the diversity of product cycles in our key businesses. This revenue growth, combined with a stable cost structure, will enable us to deliver increasing levels of profitability and free cash flow moving forward. It is exciting to have reached what we believe is an inflection point in the business in the fourth quarter and for us to be poised to take advantage of the significantly improved operating leverage in fiscal year 2010. Operator, we are ready to open the lines for questions.

Thank you. (Operator Instructions). Just a moment while we wait for those to queue up. And I have a question from Dan Morris. Your line is open.

Hi, guys. Nice execution on the quarter. I just wanted to talk a little bit about the guidance.

It looks like you are guiding to a slightly narrower range this quarter than last and I was just wondering what are some of the factors there? Are you having any -- are lead times stretching at all, anything like that? Any color you could give would be helpful.

Thank you, Dan. It's Bret. I think, we are relying on a lower level of turns than we did in the previous quarter, and, as we mentioned, our backlog is higher than it was in the previous quarters as well. Se we didn't feel we needed to give as broad a range.

Okay. In terms of the [WAN's net] back there, you mentioned that orders in North America picking up again, how much that do you think is inventory restock and what do the inventory levels look like right now do you think ?

Yes, Dan, this is Raouf. To answer your question, I think at this point, inventories are back to normal, I would say. Any over inventory that existed in previous quarters is now, we believe, essentially fully corrected and we are now shipping very close to, if not exactly at, end consumption levels.

As I mentioned, the WAN business benefited from a couple of things, certainly inventory depletion, or correction, if you will, but also continued demand growth in North America, or I should say, outside of Asia with customers such as Cisco Systems which grew substantially for us last quarter. But also Nokia Siemens, Ericsson and a whole bunch of other North American and EMEA customers. So a very good quarter for WAN.

Okay, great. And then talking about the CPE win with Hitachi that started shipping this quarter, can you just talk a little bit about how big of an opportunity that is? As I understand it it is kind of a multi-source strategy with NTT and so I am just wondering if you could give a little more color on that?

Certainly, Dan. So just, maybe give you some numerics. First of all, NTT, as you know, has the largest fiber-to-the-home optical access network in the world today. We expect NTT to add approximately 2.5 million subscribers which is comprised of both NTT East and NTT West over the course of the next four quarters. It is a multi-vendor strategy, you're absolutely right. To date, there have two suppliers into NTT's network, namely NEC and Sumitomo.

It's our understanding that NEC uses a homebrew ASIC. It's also our understanding that Sumitomo uses a competitor's CPE processor. With this announcement, NTT is basically introducing a third supplier, namely Hitachi, using Mindspeed CPE solutions and is expected to garner or, if you will, to deliver to that vendor roughly a third of the space, or the demand.

We expect that this business to be ramping for us. As Bret mentioned earlier in our prepared comments, we had some -- we had the beginning of the ramp and enjoyed some revenue, material revenue last quarter, we are experiencing it continuing to grow in this current quarter and we expect it to continue to ramp throughout fiscal year 2010.

Perhaps just to wrap it up, give you some numerics around that, when you size it all up, meaning the number of subscribers that would be moving over to Hitachi, in other words, to our silicon over the course of 2010, it will range between maybe $1 million and $2 million of revenue a quarter as it ramps and eventually might exit at a higher rate.

Okay, great. And one last one for me. Bret, just looking at the OpEx, you have done a good job of keeping it pretty low during this downturn. Are there any type of salary adjustments or bonus [accrual] adjustments that might step up in the coming quarters that you we should be aware of?

No, Dan, we have factored in some of that into what we did related to this restructuring that we just announced. We expect to stay at these low levels throughout the year.

Okay. Great. Thank you very much.

(Operator Instructions) Next I do have Christian Schwab. Your line is open.

Great, thank you. Good quarter. I have a quick question regarding China. Do you guys expect China Telecom and Unicom revenues to be greater in your Q2 than Q1?

Yes, Christian, this is Raouf. Yes, we certainly do. What we are experiencing in this current first fiscal quarter, as I mentioned in our prepared comments, is some moderation of demand in China, as China Unicom's deployment, at least to date, has been a little bit smaller than expected. China Telecom is seasonally slower in the second half.

As we look to our second quarter, which is the January-February-March quarter of 2010, we do expect that we will have both China Telecom coming back in full force as well as Unicom starting to ramp in material subscribers in, as I said, in the first calendar quarter of next year. So, yes, we absolutely expect optical access to start picking up next quarter much as it did in this same calendar year of 2009. So essentially following the same kind of pattern as we have already experienced.

And then along those lines, is there a chance that you could layer in China Mobile sometime next calendar year as a customer as well?

Yes, so, the short answer to that question is, yes, absolutely. China Mobile's timing is a little bit more difficult to determine. We have certainly met with all three carriers, in fact, quite recently and China Mobile's plans, as you may be aware, is to start deploying sometime in 2010. They have not been specific as to exactly when.

They have been trialing two different flavors of technology, namely the GPON version as well as the GEPON version. And I believe they will be offering both to the various provinces that they serve in China. While they have been conducting their testing and validation of both technologies, I think that has caused them to kind of be somewhat delayed versus, say, Unicom or certainly Telecom. But we do expect them to kick in in 2010. It is just hard to predict exactly when.

And then regarding Nortel, should they come back as a customer, can you quantify the revenue potential there?

Well, we're not sure Nortel, quite frankly, will ever come back as a customer themselves, but the platforms that incorporate Mindspeed silicon, be it WAN silicon or voice-over-IP silicon, or even analog silicon, those businesses and those platforms are in the process of being sold to other companies. In some cases, in fact, those divestitures have already been completed. You may be referring to our prepared comments on the WAN front where we expect our carrier Ethernet products to start resuming high volumes shipments as those products that incorporated into Sienna for instance as well as Avaya.

We also voice-over-IP products in the former enterprise business of Nortel that are now going to be part of Avaya. So we do expect the aggregation of what used to be the Nortel revenue streams for Mindspeed to start recovering somewhat this quarter but probably more in 2010 across the board. Not just WAN, but voice-over-IP and other products.

So hard to quantify it for you. Nortel historically has been a top 10 customer for our Company, sort of single digits, I would say, certainly not over 10% but typically single digits as a makeup of our revenue stream and it has gone down substantially. Beyond that, it is hard to say how big it will be once it recovers.

Right. But at some point, I guess, if one wanted to be an optimist in 2010 there could be a material uptake in business as Avaya and Sienna certainly aren't going to redesign those platforms in the next 90 days.

Absolutely right. Yes, we would agree with that.

Okay. And then my last question, regarding the turns, given the stronger backlog, since it came up numerous times, you did not give exactly how much bigger or what your book-to-bill was, at the midpoint of your guidance this quarter, can you tell us the level of turns that are needed versus last quarter -- to get to the midpoint?

We do not provide that the specific number, Christian. All I can tell you is it is lower than it was last quarter.

Great, thank you.

Next I have Sandy Harrison, your line is open.

Yes, thanks, good afternoon, everyone.

Hi, Sandy.

Couple questions, you covered a lot of it in the prepared remarks, but if you look at the Unicom and what those guys have been doing and working on, what is it that you think is the softness is related to end when do you think based upon your knowledge it would turn back on and is that just a timing thing, a focus thing for them and how good is your visibility on that front?

Certainly, Sandy, this is Raouf. Yes, it's a very good question and one that we have certainly been probing intensely over the last few weeks to a couple of months or so.

Our understanding what's going on at China Unicom is the following, that they certainly have a number of initiatives underway. Some certainly in the wireline arena, but obviously a lot in wireless as they continue to deploy 3G, in particular the WCDMA, the global standard for 3G, somewhat in competition with the homebrew standard TD-SCDMA. So that they have, on the one hand, that, don't know what to call it, but the giant distraction for a lack of better term, in the rollout of the 3G wireless infrastructure ongoing at the same time as they're starting to deploy this fiber-to-the-building technology.

We know that broadband and all its flavors of broadband, particularly [packetized] services, such as voice and other services, is a very high priority of China Unicom. The good thing here is that they have selected the same technology for fiber-to-the-building as China Telecom, meaning GEPON. So the technology is proven, it's deployed now in literally every major province in China. So they are not trying to reinvent the wheel, they're moving forward with technology, equipment, and solutions that already feel proven.

So there is no technological hurdle for them to jump over. It is just really teething pains associated with the early deployment model. Of the 11 million broadband subscribers they have announced, earlier this year, we believe that they will likely to ship no more than two million, possibly quite a bit less than that. But these numbers are sometimes very difficult to ascertain.

I think it is fair to say that probably no more than 20% of their deployment has actually happened so far, maybe considerably less than that. So we believe that the best is yet to come with Unicom and it is going to turn on in 2010. Again, we believe it will happen in conjunction with China Telecom in early 2010. We will have both of those firing in parallel.

You guys were acknowledged as far as seeing the recovery or seeing the pick-up in China earlier this year, when you started to see the early 3G deployments and you guys benefited from it. Yes, there (inaudible) have a lot of government intervention from the Chinese government to stimulate the economy, to stimulate CapEx and keep down or them to take advantage of the global downturn.

There has been concerns that if the government pulls off our backs off on the gas pedal that some of these carriers would, in fact, slow their deployments. What is sort of your view on that for the next quarter or two and how good is the visibility over there and what the government is going to do versus what they're telling you ?

Sandy, again, it's Raouf. Let me maybe break that down to two specific markets. There's a 3G wireless market, and then there's the optical access, or private-to-the-building market. Let me first remind you that Mindspeed has a lot less dependency and exposure to the 3G wireless market than, let's say, the optical access market. So maybe start by addressing the 3G wireless and give you my sense for it.

Clearly, there was some significant amount of stimulus by the government to bring about the deployment of 3G wireless in general in China and that has eased off a little bit. However, we have every indication that the balance of the $60 billion, six zero, $60 billion has been earmarked by the Chinese government for 3G wireless will indeed be spent over the course of the next two, maybe as long as three years, two to three years, I think, is fair to say.

But, again, that is a small fraction of our business in China and to the extent that it recovers in 2010 that will be an upside for us because right now it's weak and even with the current weakness that you've heard about and that you are referring to our WAN business grew substantially. And so as it comes back in 2010, it should be a nice filler for our WAN business in 2010.

More importantly, the fiber-to-the-building, or FTTB space where we have, as you know, very, very high market share and benefit directly from the broadband deployments, that looks to be an infrastructure market that is moving along very, very strongly where there has been, I think it's fair to say, very, very minimal, if any, subsidy by the Chinese government. The optical access model is extremely CapEx as well as OpEx efficient for deployment of broadband data and voice services.

So it really stands on its own merits, Sandy, and has not required very much, if any, government stimulus. So we see this continuing to grow and that growth to be basically unaffected by any abatement of stimulus if there is any in China.

Got you. And then just sort of a quick question, with your balance sheet shored up from your offering, I think on your last call you talked a little bit about some of the IP potential acquirers or buyers there may be leveraging you guys a little bit looking at your balance sheet. With the balance sheet shored up with the deals, is that going to allow you to close some of the IP sales or just kind of where you are in that whole process?

Sure, Sandy. I think that is exactly right. I think we were concerned about that and so now, as you pointed out, with the balance sheet being shored up, they can't hold that over our heads.

I would say that we are in active negotiations with a number of parties related to our IP monetization. We still have the same level of dedication as far as resources internally related to it. We continue to work the process. I would say at this point, though, it is still just as challenging to predict exactly how much and when.

Got you. Okay. Thanks for taking my questions, guys.

Mr. Halim, that will end the Q&A segment.

Okay. Thank you, and thank you all for joining our conference call and we look forward to speaking with you throughout the quarter. Thank you, and good-bye.

That does conclude today's call. You may now disconnect.