Chung Theodore – VP, Business Development
Robert Bosi – VP and CFO
Transwitch Corporation (TXCC) The Wall Street Analyst Forum Call Transcript November 18, 2008 10:30 AM ET
Hey, good morning, ladies and gentlemen. In our ongoing attempt to adhere to the published schedule I'd like to introduce the next company in this morning's technology program, TranSwitch Corporation. Symbol is TXCC. They trade on NASDAQ. They are a leading innovator of high-speed VLSI solutions, microchip switch as key components in telecommunications and data communications equipment enables throughout the world to communicate more readily, affordably and reliably. They have voice, fax, e-mail and multimedia.
TranSwitch's customers are the original equipment manufacturers who supply systems for three communication ends markets; the Public Network Infrastructure, the Internet Infrastructure and the corporate Wide Area Networks.
Without any further introduction, I'd like to introduce Robert Bosi, Chief Financial Officer of the company and Chung Ted, Vice President of Business Development.
Hi, welcome. Without any further hesitation, I'll just go through the slide presentation at the end. Feel free to ask whatever questions you have. Just to start, just some forward-looking statement disclaimer here on the first couple of pages. For your information, this presentation in its entirety is on our Web site as well, www.transwitch.com under the investor tab. You can download it and print it at your convenience.
By way of introduction, our business is today and has been since the company was founded in 1988, to supply semiconductor products to network equipment OEMs that in turn sell system level products to the worldwide telecommunications carriers. All of the communications equipment that we are designed into gets sold in a carrier environment. So we do not sell any equipment that can be bought by consumers, it's all consumed by the worldwide carrier network, if you will.
Our mission statement has always been to develop and supply innovative VLSI solutions, very large scale integrated circuit solutions to telecom and datacom OEMs worldwide. The word innovative is highlighted because since the beginning of the Company's history we have really focused on making devices that are really not only are they not pin-for-pin compatible with anybody else in the industry, they are also functionally unique. So there is no TranSwitch shift that is sold today that has the exact same functionality as any other device from any other designer out there.
In terms of a quick snapshot of the Company today, if you look at the first bullet, our 2008 revenue trend, we are growing at a pretty good clip quarter-on-quarter this year. Our Q4 revenue guidance includes two months of revenue contributed by Centillium Communications, an acquisition that we closed on the 24th of October. Prior to that, we grew the last two quarters roughly 18% quarter-on-quarter in terms of top line. In terms of our total revenue for 2008, we are estimating roughly $42.2 million that is a 30% increase over 2007.
Gross margin across all of our products and services is currently 57%. There is a mislabeling there. That is for the third quarter of 2008. Standard communications IC margin is roughly 75%.
We have strong intellectual property, more than 125 active customers as of the end of September; each quarter buying various products from us.
In terms of key balance sheet items, we ended again, mislabeling there, September 30, 2008 with cash and investments of $22.1 million, total assets of $54.4 million. There is an after-risk [ph] because this is all prior to the Centillium acquisition which added net $7 million in cash to our balance sheet.
Some select highlights from our last conference call, which was on November 10th. The company is extremely committed to turning profitability as soon as possible. We have announced some major restructurings, both in the last earnings call and got into some of the specifics on the conference call as to how we will reach our objective of being profitable in the first quarter of 2009.
For 2009, total OpEx, we are expecting less than $36 million for the year or roughly $9 million per quarter, which calls for profitability at roughly $15.8 million in quarterly sales at that 57% gross margin figure. Despite what's going on in the overall economy, we are still anticipating growth in both our telecom and video transport business in 2009, largely because of where many of our design wins are in terms of ramping, as well as just the early stage nature of where we are in video transport.
We are focusing on really just a handful of strategic areas going forward, broadband access, which is sort of the last mile, if you will, communications between the central office of the carrier and customer premises. That includes both DSL, as well as Passive Optical Networking. For those of you who aren't familiar with PON, Verizon's FiOS is an example of PON services being deployed here in North America.
Carrier Ethernet, which is Ethernet protocol being deployed in the wide area network as opposed to the local area network. Optical Transport, which is our -- probably our longest most traditional business, and here we've developed some proprietary products that overlay Ethernet protocol on top of the SONET/SDH infrastructure that has been deployed worldwide.
And lastly, I mentioned briefly, we've made a foray in recent years into high definition video transport. Towards this end we recently signed a large technology deal with one of the world's leading semiconductor manufacturers.
The last, really hear in terms of our strategic objectives, we will continue to focus on growth through acquisition. We believe that the current market situation has really created some unique opportunities out there for possible future growth through some additional mergers and acquisitions.
A little bit about our business model. TranSwitch's initial business model as I discussed previously was developing standard -- specific standard solutions for the communications business and specifically, the wide area network communications business. I've mentioned the three areas previously
Carrier Ethernet, Wireless Backhaul and Broadband Access.
In 2006, we acquired a company base in Israel called Mysticom. It is through Mysticom that we acquired the base technology to get into serial networking, which also includes HDMI and DisplayPort transmission.
And in 2007, we acquired a small ASIC Design Center, also in Israel. The difference between the ASIC division and our standard products division is that they make custom products for a variety of customers, both in the communications space, but also in defense as well as industrial control and automotive.
Lastly, on October 24th we closed our acquisition of Centillium Communications, which was focused in broadband access, both in Fiber-to-the-home and DSL. Additionally, they had a product of Voice-over-IP, gateway processors that we've also added to our portfolio, both having continuing revenue streams and we believe some growth going forward.
The next slide is really a picture of what we see as network conversions. As the public network moves to Internet protocol or Ethernet specifically, there is an opportunity for companies like TranSwitch, as well as our customers to take part in what we see as a new wave of deployment that is just getting started in the world to address the change from primarily voice traffic around the world to more data centric traffic, also including video transmission.
To summarize, our Communications business, as I mentioned earlier, we are focused only on a handful of what we feel are high growth areas, Broadband Access, Voice-over-IP through the Centillium acquisition, Carrier Ethernet, Wireless Backhaul. We believe that the public communications market today has some robust growth drivers. Carriers are considerably healthier around the world than they have been in some time.
And if you are to just look at requests for pricing or requests for code activity from these carriers, it's a lot stronger than it has been in a number of years. Spending specifically in North America and Europe, it is being driven by service provider competition, also competition by cable providers, whereas developing countries such as India, China and now Latin America, there is ongoing growth as these countries lay out new infrastructure to provide communications telephony services.
We think TranSwitch is uniquely positioned to benefit from some of these deployments. We do have strong design wins with companies such as Fujitsu, Alcatel, Tejas, Tellabs, OKI, et cetera. Those customers as well have been designed into many of the world's most notable carrier deployments including British Telecom, NTT, Korea Telecom, China Telecom, et cetera, et cetera.
Now the pace of carrier deployment characteristically tends to be slow. I'll give you an example, for instance, British Telecom's 21st century deployment has been delayed by a couple of years. Similarly, BSNL in India, which is one of the three largest wireless carriers, has been slow to actually start deploying.
And I can safely say that 2008 really was the first time for a couple of these carriers that we've seen some actual deployment dollars coming through in and hitting our income statement. What is encouraging from our standpoint is these carrier deployments do take many years, anywhere from five years to sometimes 10 years in terms of carrier deployments, so we believe that the next handful of years should be years of growth for TranSwitch.
One area that I have discussed briefly before is the high-definition video market. We were able to enter this market because of a technology acquisition that we had made in Israel in 2006. Basically, Mysticom had designed a very high signal integrity serializer, deserializer, which enables the very accurate transmission of data on a serial link at very high rates. We believe that this has given us some advantage vis-à-vis some of the incumbent players in the high-definition video space.
The next slide, slide 12 really just shows a pictograph of what HDMI actually is. It is very similar to RGB except that it's over a single cable and also has high-definition audio interspersed with the video link.
The next slide is showing DisplayPort, which is a competitive technology. It is a standard that was promoted by a consortium of PC industry suppliers led by Intel, Dell Computers, Hewlett-Packard and Apple Computer. Our technology not only supports HDMI, it also supports DisplayPort.
And the next slide really shows our value-added. Our device can actually handle both HDMI and DisplayPort on the same device. Why this is important is in the future if buy a 100 gigabyte iPod and you want to connect that to your television, your iPod most likely will have a DisplayPort on it, your high definition television most likely will not, so you will need some inner working technology to enable the two to communicate.
Little bit about the Centillium acquisition, some highlights and rationale. When we learned of this opportunity, we immediately felt that the two companies were really almost tailor-made for one another. We're both in growing markets, our technology and product lines are highly complementary. In fact in many of our customer cards, a TranSwitch device will be on the network facing side of that card where the Centillium device often will be on the customer facing side of that card. Our customer bases are overlapping to a limited extent, but also complementary due to some of the sell-through opportunity that this acquisition has presented.
But with just the right size, large enough to provide meaningful scale, their last published quarter, which was Q2, they did roughly $6.2 million in revenue. We -- our last quarter, we did $10.5 million. So you can see sort of the growth that this acquisition brings us both from the top line and as well as how quickly we can get to profitability.
The transaction was highly accretive. We were able to purchase this asset for a less than enterprise -- for a negative enterprise value and we also identified write off about $10.5 million and identified synergies, largely in GNA, public company cost, a big portion of that savings. And we think, just in summary, the combination creates a lot of significant advantages for the combined companies as we move forward.
Some other benefits for TranSwitch, we did get to add industry leading Voice-over-IP and Passive Optical Networking products to our portfolio. I mentioned the incremental revenue stream, significant growth we believe in 2009. In particular, Centillium traditionally has been very strong in Japan. NTT, which is the leading telecommunications carrier there, has announced a massive deployment of Passive Optical Networking to homes and businesses over the next five years. We believe as we exit 2009, we should have roughly 40% to 45% of that market going forward.
I mentioned the balance sheet add of the $7 million. And obviously, at the end of the day, for our businesses, it comes down to talented designers, sales people. We have really made an attempt to take the best of both companies as we restructure going forward.
The next slide 17, really just a picture of our overlapping customer basis, you see there in the center of the Venn diagram where we have some customer overlap, there are some strong traditional customers of TranSwitch that we believe we should be able to get some design wins with the Centillium products and vice versa. One of the areas again, where Centillium was stronger was in Japan. We are looking forward to designing more of our products into those customers.
Next slide is just a snapshot of the growth rates of the five product areas that I discussed before.
Next, just a little more specificity with respect to the Japanese opportunity. It is an NTT announced upgrade. Roughly, the equipment portion of that upgrade should be $47 billion. They are targeting over 20 million fiber-to-the-home subscribers by 2010.
Our Mustang chip is now the heart of the OKI platforms that are being deployed. OKI is one of the three qualified vendors for that deployment. Centillium has already shipped several million dollars of product. They just started shipping in the fourth quarter of 2007. We have also been designed into the second of the three vendors' platforms. We do expect deployment overall to accelerate as we move forward, and I mentioned the 40% share in the second half of 2009.
To summarize, we've been a provider in the communications business since the founding in 1988. Over time, we have tried to address, in our opinion, the growing segments of our business. We do have traditionally high gross margins and we feel that those gross margins should continue going forward.
The other thing the Company has done successfully; we have been able to diversify to a degree over the last couple of years. We now have an ASIC Design Center business that is yielding some positive results. We are now taking a step into high-definition video.
Specifically, the Centillium acquisition for us is a transformative opportunity. It's allowing us to grow our top line at a pretty good step function as we've closed that acquisition. It also really accelerates because of the large scale restructuring we have done to get us the profitability. I mean one way to look at TranSwitch, if you take a look at our 2007 results we had revenue of $33 million and a total OpEx of $38 million in 2009. We expect our OpEx to actually go down from 2007 levels while our revenue is increasing at a pretty healthy clip.
Lastly, our entire Company is committed to profitability and the objective is to be profitable starting in the first quarter of 2009 and to grow that profit thereafter.
That concludes my slide presentation. Bob, our CFO and myself are available for any questions.
When I talk about profitability, I guess I'm really talking about operating profitability, although Bob, I don't know if you can comment about that?
On a GAAP [ph] basis, excluding stock option expense and amortization of acquisition intangibles.
The DisplayPort technology, I think it was mentioned on the call -- conference call, you're looking to ship in 2009?
Well, what I'll say is this, we did recently sign a DisplayPort licensing agreement with one of the world's largest semiconductor companies. That's basically all we have been permitted to say about that. We did reference that it should be at least a million dollars per year starting in 2009. That agreement has already been signed. In addition, in 2009, we do expect to start shipping discrete product that is able to transmit both HDMI and DisplayPort.
Our traditional gross margins have always been for our telecommunications products, and I need to segment the market a little bit. As you get further into the network, your gross margins will be higher. So our products that are closer to the core of the telecommunications network and average gross margin is closer to 80%, where a gross margin for products closer to the home or at the home, for instance, by way of example, the Centillium PON products that actually go into the box that's in customers basements. Gross margin for that kind of chip is closer to 50%. But overall, we are targeting blended gross margins in roughly the 60% level, which is what we stated on our call and we believe those should be sustainable and good gross margins going forward for our business.
Well, our business today is bigger than they are -- well, I'll put it to you this way. Not all of our products are core products as well. So if you were to look at sort of trends which are traditional business, it is in the sort of 70%, low 70% range. You blend that with the 50%. You can get into a margin that is roughly 60%. As -- really, all of our products are in a growth phase. That is going to change a little bit quarter-to-quarter depending on what grows faster over the short-term.
Your relationship with Fujitsu and also with BT's 21st Century network
Sure. John's [ph] question relates to Fujitsu Telecom in the U.K., which is a prominent customer of TranSwitch. Fujitsu Telecom is one of two access vendors for British Telecom that have been selected for their 21st Century deployment initiative. That deployment initiative was announced really towards the second half of 2005 and to-date has been largely disappointing both to us and many of those that follow us. The reasons for that, there have been some amendments to that program regularly. If you go to British Telecom's Web site, they even list the deployment schedule for 21st Century, and that deployment schedule was most recently amended in September of this year. 2008, I'll say was another disappointing year from our standpoint as far as that British Telecom deployment. And as a consequence, our business from Fujitsu Telecom was not what we were certainly hoping for or that we had anticipated. The good news is that in our recent dealings with that particular customer, the rolling forecast has been increasing and we do expect 2009 to be a better year in terms of U.K. business. I can't provide any more specifics on that unfortunately, but we are looking forward to better business in 2009 from the U.K.
Any other questions? Okay. Well, thank you very much for attending and listening. I guess we'll be available in a breakout room for those that want to sit and ask additional questions. Thank you.
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