MACOM Technology Solutions Holdings Inc (MTSI) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Mindspeed Q2 2013 earnings conference call. At this time, all lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host, Kevin Trosian, Vice President, Corporate Development and Investor Relations. Please go ahead.

Thank you and good afternoon to all of you who have joined us for today's call to discuss Mindspeed's fiscal second quarter of 2013 financial results. Our press release issued this afternoon detailing these results may be accessed in the Investors section of our website at www.mindspeed.com.

Today, our CEO, Raouf Halim, will describe some key milestones for the business, our progress in the wireless small cell market and the strategic focus of the Company going forward. Following Mr. Halim, Stephen Ananias, our CFO, will review fiscal second-quarter 2013 financial results and provide financial guidance for our fiscal third quarter of 2013.

Before we begin, I want to remind you that our comments today will include forward-looking statements within the meaning of federal securities laws. Forward-looking statements include, among others, statements regarding our expectations, goals or intentions, including, but not limited to, our current assessment of the demand environment and trends in our target markets, including the anticipated environment and trends in fiscal 2013, our assessment of growth opportunities in specific product markets such as 4G LTE and the small cell wireless market generally and our current expectations for fiscal third-quarter net product revenue, non-GAAP gross margin, non-GAAP operating expenses, non-GAAP other income and expense and the provision for income taxes and weighted average diluted shares outstanding.

These forward-looking statements are based on management's current expectations, estimates, forecasts and projections and are subject to risks and uncertainties that could cause actual results and events to differ materially from those stated in the forward-looking statements.

Our business is and any financial projections provided today are subject to numerous risks and uncertainties, including our ability to grow and maintain our revenues from various product markets, our ability to manage operating expenses, the impact of any failure to realize anticipated revenue growth or operating expense savings, fluctuations in our operating results and the potential for future operating losses and negative cash flows, loss of or diminished demand from one or more key customers or distributors, our ability to successfully develop and introduce new products, pricing pressures and the potential for intellectual property and other litigation.

In addition, the financial statements released as part of our press release and earnings conference call are preliminary and include an estimated goodwill and asset impairment charge of approximately $33.5 million relating to our wireless infrastructure reporting unit. These estimates constitute forward-looking statements under applicable securities laws. We have not completed testing related to these impairment charges and they are subject to change.

The final impairment charges reported in our Form 10-Q for the fiscal second quarter of 2013 could differ materially from the preliminary estimate that we announced today. Any increase in the amount of the impairment charge would have the effect of increasing our net loss for the fiscal second quarter of 2013.

Additional risks and uncertainties that could cause our actual results to differ from those set forth in any forward-looking statements are discussed in more detail under the caption Risk Factors in our annual report on Form 10-K for the fiscal year ended September 28, 2012 and our quarterly report on Form 10-Q for the fiscal first quarter of 2013. They will also be included in our soon-to-be-filed quarterly report on Form 10-Q for the fiscal second quarter of 2013 and in our future filings with the SEC.

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.

During our call today, we will be making reference to non-GAAP financial measures, which exclude our preliminary estimates of impairment charges, as well as stock-based compensation expense and the related payroll costs, restructuring charges, nonrecurring legal and settlement costs and amortization of acquired intangible assets, among other items.

For a reconciliation of non-GAAP to GAAP financial measures, please refer to the Investors section of our website at www.mindspeed.com and our earnings press release and our Form 8-K furnished to the SEC today. We do not provide a reconciliation of the forward-looking non-GAAP measures to GAAP measures because of our inability to project restructuring charges, employee separation costs and stock-based compensation-related expenses. With that, I will now turn the call over to Raouf Halim, our Chief Executive Officer.

Thank you, Kevin. Good afternoon, everyone. Let me start by saying that, like many of you, I was disappointed with our performance this past quarter, which was driven primarily by weakness in the 3G wireless market. That said, our productline for high-performance analog and communications processors performed consistently with our expectations and 4G LTE met our goal of doubling in the quarter.

To provide a quick overview of our performance in the quarter, Q2 product revenue was $35.4 million, down 8% sequentially versus the prior quarter's product revenue. Further, we posted a modest non-GAAP operating loss of approximately $541,000 versus a $1.4 million non-GAAP profit the prior quarter after excluding the positive benefits of the $6 million non-core IP sale.

On the call today, I will provide an overview of the performance of our three productlines during the quarter and I will touch a bit on our announcement that we are working with Morgan Stanley.

Starting with HPA. HPA accounted for 44% of our revenues in Q2, down sequentially after a rapid pace of growth in the last four quarters as we had anticipated. Overall strength was driven by a number of new products, which we demonstrated at both the National Association of Broadcasters Conference or NAB, as well as the Optical Fiber Conference or OFC.

At NAB we were showcasing our 3 gigabit, 6 gigabit and 12 gigabit products, which we believe are at the forefront of the industry's shift to 4K ultra-high definition TV. At OFC, our new products received a lot of customer interest, including our low-power 28 gigabit per second CDRs, which enable high density networking within data centers, our broad crosspoint switch productline, as well as our broad PMD portfolio for fiber-to-the-home deployments worldwide.

In the broadcast video segment, we continue to record share gains where we lead the industry with state-of-the-art crosspoint switched and SDI components. We expect the 4K ultra-high definition TV to drive an infrastructure upgrade cycle, which supports this new truly incredible viewing experience. Mindspeed is leading the interface in switching upgrade with this inflection point by offering highly integrated low-power 4K SDI and Crosspoint silicon.

Another factor driving our success in HPA is our broad portfolio of PMDs targeting FTTx infrastructure worldwide. We continue to see strong PON demand primarily from Asia and see significant traction for our next generation devices targeting GPON, GEPON, XG-PON and 10G-EPON.

Lastly, the HPA team is making significant strides in the 100 gig space with traction of multiple Tier 1 customers. Enterprise networking companies require density improvements for 100 gig networking relative to current form factors. Mindspeed's portfolio of CDRs and PMDs enables this improved density by offering the industry's lowest power consumption. We believe we are very well-positioned with our high-performance analog products and look forward to keeping you updated on our continued progress in growing revenue and marketshare within HPA.

Moving onto our communications processors. Revenue (sic) represented 49% of our Q2 revenues and reached $17 million in our fiscal second quarter, up 17% sequentially. We continue to focus on increasing marketshare in our core service provider provision broadband home router or BHR market with a number of new initiatives, including a focus on consumer [NAV], Deep Packet Inspection, as well as mobile broadband routers. We believe we can leverage our ARM-based processor platform into adjacent markets with low incremental R&D expense, providing earnings leverage to our model in FY 2014. In the quarter, we closed five key design wins, including Tier 1 wins in Japan and Europe.

And finally, let me update you on our wireless infrastructure business, which accounted for $2.6 million, or 7%, of Q2 revenues. We expected the seasonal slowdown in 3G would be largely offset by some new 3G rollouts. We had originally expected these orders to turn on late in the quarter as they typically do post the Lunar New Year in Asia. Late in the quarter, however, we determined these anticipated ramps were pushing out due to operator delays in deployments. That said, the overall small cell market has appeared to push out, which I will discuss momentarily.

Turning to the 4G LTE market, we are pleased that we met our target for 4G LTE rollouts, which doubled versus last quarter, to approximately $1 million in our fiscal Q2. We expect the 4G LTE small cell market to be a long-term grower; though it may be lumpy as new deployments later on. We expect rollouts in both Japan and the US to follow the existing rollouts occurring in Korea at the moment; although these deployments are rolling out at a slower pace than we had originally anticipated.

From numerous recent meetings with carriers, as well as third-party research, we believe operators are committed to small cells and although there are some delays, carriers are expecting to continue with their deployment plans. Further, while we have provided forecasts in the past on specific rollouts and the expected size of these rollouts, we are not going to comment on the magnitude and specific timing at this time.

We remain focused on the small cell wireless market, which we believe has a number of growth opportunities, which we are well-positioned to capitalize on. Although, at the same time, we forecast this revenue stream will be lumpy in the early stages of deployments.

First, as published by a number of third-party research firms, we hold the number one position for small cell SOCs and we will continue to focus on maintaining this marketshare position and our technology and design win lead against our competitors.

Second, we are seeing a number of opportunities for rollouts in TD-SCDMA in China where we ship the only chip in commercial deployment at this time and have a core position with leading operators such as China Mobile.

Following our strong product showcase at Mobile World Congress, we have strong interest from customers to further evaluate and engage with our dual-mode 3G W-CDMA plus LTE Transcede-based solutions. We were also surprised with the strong interest in LTE advanced features such as carrier aggregation. We are engaged with Tier 1 OEM and service providers for Transcede-based evaluation of our carrier grade solution consisting of our award-winning SOC and internally developed advanced physical layer software, as well as robust integration with partners' commercial stacks.

Continued advanced features and real carrier deployments of our small cell solutions are positioning us well for continued deployments in Korea and follow-on deployments in Japan and in the US. Continued hardening of our carrier-grade software and significant improvements to our solution are putting more space between us and our competitors and maintaining or improving our marketshare.

Turning to our small cell wireless outlook for the rest of 2013, we are focused on guidance for the current quarter and will not be providing a forecast for the full year for wireless nor quarterly revenue forecasts for each of our productlines. However, it is fair to say that our wireless revenues will not quite reach the level of our prior forecasts of roughly $25 million in this fiscal year.

That said, we still believe the small cell market offers a great growth opportunity for us and we want to make sure the investment community understands our key differentiators and in particular why Mindspeed remains the leader in the small cell SOC market.

First, the market has become standardized on the system-on-a-chip approach versus discrete processors and FPGAs. Additionally, Mindspeed owns the industry's broadest range of wireless radio air interface standards and can therefore market in any region across the globe. And finally, we have carrier-proven technology for typically risk-averse service providers enabling a smoother testing cycle and faster deployment for our OEM customers. These, amongst many other factors, have given us the market-leading position for system-on-a-chip solutions in the growing small cell markets.

Finally, you probably saw that we issued a second press release today. We announced that we are working with Morgan Stanley to explore strategic alternatives. In the context of changing industry conditions, our financial profile, as well as approaches by third parties, we believe it is prudent to evaluate our alternatives thoroughly. Obviously we will keep you updated if there are material developments that come out of the process. That is all we are going to say on this subject on today's call. With that, I would now like to turn the call over to Stephen to provide more detail on last quarter's financials and our fiscal Q3 guidance. Stephen?

Thank you. I will now review the financial results for our fiscal second quarter of 2013 and provide the financial outlook for our fiscal third quarter. First, let's discuss our Q2 results. Total revenue for the fiscal second quarter was $35.4 million. Product revenue from the high-performance analog business represented 44% of total revenue and recorded $15.7 million, down 18% compared to the prior quarter. Product revenue from the communications processors business represented 49% of total revenue and recorded $17.1 million, up 17% compared to the prior quarter.

Product revenue from the wireless infrastructure business represented the remaining 7% of total revenue and recorded $2.6 million, down 44% versus the prior quarter. Product revenue for the fiscal second quarter was split by geographic region as follows -- Asia-Pacific at 72%, Americas at 19% and Europe at 9%. China specifically represented 33% of total fiscal second-quarter product revenue. No end customer represented product revenues of 10% or greater in the fiscal second quarter.

Now turning to gross margin, non-GAAP gross profit was $21.5 million or 60.7% of product revenue, consistent with our expectation of between 60% and 61%. This was down 80 basis points versus our prior fiscal quarter on a non-GAAP basis after excluding the positive benefits of the $6 million noncore IP sale in the prior quarter.

Margins declined compared to the prior quarter principally due to product mix. Total non-GAAP operating expenses were $22 million consistent with our original guidance to reduce operating expenses to the level prior to the Picochip acquisition. Non-GAAP operating expenses were comprised of research and development expenses of $14.9 million and selling, general and administrative expenses of $7.1 million. The resulting non-GAAP operating loss for the fiscal second quarter was approximately $541,000.

Now finishing the income statement for the fiscal second quarter. Non-GAAP other income and expenses totaled a net expense of approximately $283,000 composed primarily of net interest expense, partially offset by a reimbursable foreign research and development credit. The provision for income taxes was $154,000. Non-GAAP net loss for the fiscal second quarter was approximately $978,000 resulting in a non-GAAP loss per share of $0.02.

Turning now to the balance sheet for the fiscal second quarter, cash and cash equivalents were $46.6 million at the end of the fiscal second quarter of 2013, down $4.6 million versus the prior quarter. Accounts receivable at the end of the quarter were $19.3 million, resulting in net days sales outstanding of 48 days, up from 38 days in the prior quarter. Inventories at the end of the quarter were $11 million resulting in non-GAAP inventory turns of 5.1 versus 6.4 turns in the prior quarter.

As we first discussed during our fiscal Q3 2012 earnings call, we committed to return our non-GAAP operating expenses back to the pre-Picochip acquisition level of $22 million per quarter. We have achieved this goal and expect to modestly lower operating expenses in the fiscal third quarter of 2013. Further, we expect to narrow our cash burn in this current fiscal quarter.

As you likely saw in our press release, and as we mentioned at the beginning of the call, the GAAP financial results we presented today are preliminary based on an estimated goodwill and asset impairment charge. We will be writing down the value of goodwill definite lived intangibles and indefinite lived intangibles in the fiscal second quarter associated with the wireless infrastructure reporting unit.

This lower than expected deployment of 3G small cell base stations triggered an impairment evaluation. We are currently estimating the goodwill and asset impairment charge to be approximately $33.5 million. We will be finalizing our work on the goodwill and asset impairment analysis between now and the filing of our Form 10-Q. The final goodwill and asset impairment charge could vary materially from our current estimate. Changes in the goodwill and asset impairment charges will result in corresponding changes in the GAAP net loss for the fiscal second quarter.

Revenue, non-GAAP metrics, including the non-GAAP results we disclosed in our earnings release and financial tables, and our cash and cash equivalents balance will not change as the result of any change in the Company's current estimate of goodwill and asset impairment charges.

Further, I have an update on the earnout and net asset adjustment related to the Picochip acquisition. On April 26, 2013, we entered into a settlement agreement with a representative of the Picochip shareholders closing out all outstanding obligations under the acquisition agreement. This included escrow claims, earnout payments and the net asset adjustments on the purchase price.

As part of this settlement, Mindspeed will receive net payment of approximately $1 million in cash and was relieved of approximately $5.4 million in amounts payable to the Picochip shareholders. We will record this $6.4 million settlement to GAAP other income in the fiscal third quarter. Had this settlement occurred within 12 months from the date of the Picochip acquisition, the $6.4 million would have resulted in a reduction of goodwill and reduced the estimated impairment charge in the fiscal second quarter.

Now I would like to provide our outlook for the fiscal third quarter of 2013. Given recent market volatility, we anticipate Q3 product revenue will be approximately flat compared to fiscal Q2. We expect non-GAAP gross margin to be approximately 60% and non-GAAP operating expenses to be approximately $21.5 million. Finally, we expect non-GAAP other income and expense and the provision for income taxes to be approximately $1.1 million and weighted average shares outstanding to range between 40.4 million and 40.9 million shares. Operator, we are now ready to open the lines for questions.

(Operator Instructions). Kevin Cassidy, Stifel Nicolaus.

Hello, this is Dean Grumlose calling in for Kevin. Thank you very much for taking my call. I was wondering if you could characterize the push-outs of the small cell deployments a little bit more? Are these related to CapEx decisions by carriers or is it related to the status of field trials or what can we learn about when this ramp may continue?

Yes, Dean, this is Raouf. I would say that the push-outs of small cell deployments are primarily associated with the technical implications and some of the interactions between small cells and macro cells. As you know, there are a lot of standards that are developing in this area, such as heterogeneous networks or HetNet, a lot of interference mitigation implementations and standards that are developing. And I think there is a tremendous amount of real-world learning that carriers are going through right now as they finalize their exact deployments of small cells and as they figure out how to make them coexistent and successful in the presence of existing macrocell-based networks.

So it doesn't really have much to do with CapEx. It has a lot to do with learnings from field trials and how those are getting incorporated into the base technology. We are very pleased in fact to be in the forefront of these deployments, as you may know. We are deploying 4G LTE small cells in Korea and we are learning alongside our customers and carriers such as SK Telecom and Korea Telecom. These are very valuable learnings and as I commented in my prepared script earlier, we are certainly benefiting from that learning experience and hardening our software implementation and achieving interop with a variety of user equipment or UEs and also wringing out these coexistence issues that I mentioned. So again, it doesn't have anything to do with CapEx; it has a lot more to do with the learning cycles from field trials.

That's helpful. Thank you very much.

(Operator Instructions). Phil Dumas, Geode Capital.

Yes, this question is for Steve. Hi, Steve, how are you?

Good, how are you?

Good. So just a couple of quick questions on cash flow. So CapEx for the year without payments under license agreements, you are still looking at $4 million or so?

Per quarter? Yes, it is likely to come down a bit from there, but that is certainly where it has been in the past.

I'm sorry, for 2013, fiscal 2013? So it is $1 million a quarter and $4 million for the year, correct?

You are talking about just CapEx specifically?

Specifically without payments under license agreement.

Yes, that is correct.

Okay. And in terms of the license agreement payments, with lower revenues, does that number get reduced or do you still expect it around the $12 million to $13 million?

At this point, I think assuming the $12 million to $13 million is still appropriate. Obviously, this is one of the things that we are evaluating and hoping to prioritize the investments and bring our cash expenses down.

Okay, because I mean through the first six months, it looks to be $2.7 million, so it is mostly back-end-loaded, is that fair?

Yes, that is correct.

Okay. So then, of course, you have the convert, which is $15 million, which is the bulk of your cash burn for the year. Does part of -- I don't know if you can comment on this -- but part of your strategic priorities here has to be, if you raise another $15 million, you are somewhat not totally in the clear, but somewhat in the clear here and obviously that leaves a lot of value on the table for everyone potentially. So is that one of the $15 million to $20 million capital raise, is that one of the alternatives you are considering here?

Well, we are evaluating all strategic alternatives, but I will say that we are very mindful of shareholder dilution in that process.

Okay. Thank you.

(Operator Instructions). Elizabeth Howell, Raymond James.

Hi, thanks so much. So could you give us a sense for how we should think about TCP and HPA for the remainder of the year? And maybe, Steve, if you comment a little bit on what you're seeing in China and the contract awards, how they materialized in the quarter?

Yes, definitely. Yes, Elizabeth, this is Raouf. So starting with your first question first, the (inaudible) convergence business or CP for short, as well as HPA, performed very consistently with our expectations in the first half of the year and as we look to the second half, of course, we are not going to guide beyond the current quarter, but I would say that they are very much on track with our expectations and we are very pleased with how those two platforms are playing out for us. And also very pleased frankly with the design wins we have that are broadening the platforms in both [comcrossing] and HPA. So we are not going to guide beyond the current quarter, but I would simply say that they are performing right on track with our expectations at the beginning of this fiscal year.

Then your second question was about China and we certainly experienced a good comeback after the Chinese New Year ended February of last quarter and we saw order patterns start to pick up in the month of March. They were a little later to pick up than we had expected, but they certainly started coming back and we are looking forward to a pretty decent year in China this year. Expectations are for significant growth in the fiber-to-the-home market. Numbers out there are anywhere from 30% to much higher numbers for annual subscriber growth fiber-to-the-home in China specifically and as you know, we have a very strong position there with our HPA business. So we are generally, I would say, positive on trends in China.

Great, thanks. And then just one quick one. Did I hear you right? Did you say that you do have an engagement now for your dual-mode small cell solution?

Yes, we do. We are making very good progress with our dual-mode 3G/4G small cells and yes, we do expect to have a good play in dual-mode small cell deployments eventually. Those are pushing out. Dual-mode, you will see that in North America. Primary carriers are going to be people like AT&T certainly, but outside of North America as well, carriers like Vodafone. And then in China, you are going to see dual-mode of a different kind, TD-LTE and TD-SCDMA in China specifically. And so dual-mode takes on different flavors in different parts of the world. And we think we're very well-positioned across the board.

Great. Thanks very much.

You are welcome.

I am not showing any other questions in the queue. I would like to turn it back over to Raouf for closing comments.

Okay, well, thank you all very much for joining our fiscal second-quarter call. We look forward to talking to you in roughly three months. Thank you and have a good day.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the conference. You may now disconnect. Good day.