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Executives

Mary Lombardo – IR Manager

Dr. Ali Khatibzadeh – President and CEO

Robert Bosi – CFO

Analysts

Richard Shannon – Craig-Hallum Capital

Ryan MacDonald – Northland Capital Markets

Quinn Bolton – Needham & Company

Orin Hirschman – AIGH Investment Partners

Frank Barresi – Ameriprise

[R.W. Dickson] – Private Investor

[Michael Morris] – Private Investor

TranSwitch Corporation (TXCC) Q4 2012 Earnings Call February 12, 2013 5:30 PM ET

Operator

Good day, everyone, and welcome to the TranSwitch fourth quarter 2012 earnings release conference. Today's call is being recorded.

At this time, for opening remarks and introductions, I will turn the call over to Mary Lombardo, Investor Relations Manager. Please go ahead, Ms. Lombardo.

Mary Lombardo

Thank you and good afternoon, everyone. With me today are Dr. Ali Khatibzadeh, our President and CEO, and Mr. Robert Bosi, our CFO.

This call will include forward-looking statements that involve risks and uncertainties that could cause TranSwitch’s results to differ materially from management’s current expectations. We encourage you to review the Safe Harbor statements contained in the earnings release published today as well as TranSwitch’s most recent SEC filings for a more complete description.

At this time, I would like to hand it over to Dr. Khatibzadeh for his remarks.

Dr. Ali Khatibzadeh

Thank you, Mary, and good afternoon, ladies and gentlemen. Thank you for joining us.

Our overreaching goal at TranSwitch is to return and sustain profitability and growth based on becoming a leading provider of media connectivity chips. I'm pleased to report that during the fourth quarter of 2012 we made important progress toward our goal.

First, I want to give you a brief overview of our results for the quarter. Bob Bosi will have more details later in the call.

Our revenue came in at $5.6 million, an 18% sequential increase from the prior quarter and 11% decline from a year ago. Gross margin came in at 75%, principally due to the mix of licensing and IP revenue in the quarter. We continue to see a significant number of telecom and high-speed interface IT opportunity and expect to maximize licensing revenue from it.

Non-GAAP operating expenses came in at around $5.6 million, reflecting the restructuring and cost-cutting actions we have taken throughout 2012. This figure compares to $5.7 million in the previous quarter and $7.9 million in the year ago. As a result, we were able to narrow our non-GAAP loss to $1.4 million for the fourth quarter.

We also managed cash very well in the quarter. We ended the quarter with about $2.2 million of cash and equivalents compared to $1.6 million in the previous quarter. We used about $1 million of cash in the quarter to fund operations, which is a significant improvement over prior quarters.

Looking forward, we estimate the quarterly revenue necessary to achieve breakeven at the non-GAAP income line to be about $8 million to $8.5 million, and we anticipate getting there in the second half of this year. Between here and there, we expect to need about $5 million to $6 million in external financing. Management remains very sensitive to shareholder dilution issues and our goal is to raise these funds as prudently and as opportunistically as possible.

On our last conference call I indicated that an important approach to bridge the financing gap was the sale of legacy telecom patents. I can report that we have reached an agreement for the sale of one set of telecom patents and we expect to collect on this contract in the current quarter. We continue to market the balance of our telecom patent portfolio and we'll report financial information relating to patent transactions only after the contracts are concluded and closed.

We also recognize the need to have a supplemental source for patent sales to ensure sufficient capital to get us to the breakeven later this year. To that end, we also continue to have an agreement in place with Aspire Capital to raise cash as required through the sale of common stocks from our shelf registration. We're also considering further options should that be necessary or desirable. Our expectation is that over the next three to six months, using one or a combination of options, we'll finally be able to put these funding issues behind us and focus on the exciting growth of our new business as we move into the second half of 2013.

Now I would like to turn to our HDplay customer traction and new product introductions, both of which we're very excited about. On our last conference call I noted that we had over 50 known customer opportunities for our HDplay product. That number has grown to over 70 specific opportunities, with a combined revenue opportunity well above our target revenue of roughly $20 million in 2013. I believe that the total level of our video business in 2013 is more a function of the timing of customer production plans and opportunity size. While we cannot guarantee that 100% of these opportunities will translate to revenue, we are bullish about the growth of our HDplay business.

Some of these opportunities are entering production as we speak, and we expect many more will be in production by midyear. If you recall, we started shipment for our first customer at the end of third quarter 2012. By the end of 2012, we started the shipment of HDplay products for four customers. Based on customer activities we see at the moment, we expect this list to grow to seven customers by the end of first quarter 2013. We do have multiple projects with most of these customers. In fact, if these seven customers execute on their plans as described to us, we expect that they will have 12 models in production using TranSwitch HDplay ICs by the end of first quarter 2013. Based on our sales funnel, we see possibility of an additional six to seven customers in production by midyear, increasing the total list of our active customers to 14.

To share with you some of our progress we made, at least the temporary practice of announcing some of our customer wins. During the quarter we announced a design win with Digital Zone for an HDMI extender. We announced a design win with Playvision, a Chinese company for high-definition video switches. We also announced a design win with [HRMD], a Korean firm for high-definition interactive whiteboard for the education market. Just recently we also announced design win with Acto, the leading supplier of projectors in China, for two high-definition projectors, and design wins at [Premier Electronics] for video distribution amplifiers and switches.

While our first customers are building products such as projectors, video switches, audio/visual receivers and monitors, we have opportunities with tier 1 digital TV OEMs and other high-volume products targeting production in the second half of this year. Needless to say, not every customer will agree to have their name disclosed nor do we want to make a habit of announcing every customer win due to the competitive landscape, however, given the timing and the nature of our company's transformation, I feel it is important to announce customer wins periodically.

Now for some time, I've been telling you about our opportunity list and that we have a plan throughout this business to our target revenue and see payback for our efforts. Our plan includes detailed bottoms-up forecast by customer, by product, by quarter which we're driving our sales team with. We track our execution to this plan very closely, and I'm happy to say that the new customers who have signed up for HDplay product are consistent with our forecast and we're feeling very good that we are on track with our plans for the new business.

Now let me turn to our new product introductions which we announced the recent Consumer Electronics Show in early January. We believe we have great revenue opportunities with both new products which are built on the current commercial HDplay platform. These new products are based on our patented technology which combine both HDMI and DisplayPort capability into a single chip, but they also support the up-and-coming MHL standard. MHL stands for mobile high-definition link and is the rapidly growing video interface standard that is optimized for smartphones, tablets and other mobile devices. As I've said before, mobile video connectivity is one of the most exciting growth areas and we're seeing significant demand from OEMs and ODMs for products such as TVs, monitors, projectors that support mobile video transfer.

In 2012, MHL emerged as an increasingly important standard for mobile video interconnection. According to the MHL Consortium, there is now an installed base of more than 220 million MHL products and close to 180 million global adapters. Now contrast that with just a year ago when the installed base was just 50 million and there were fewer than half the number of adapters. So, expectations are that the installed base will reach 1 billion units within two years. It's a very exciting market for us and one that we are focused on as part of our core strategy.

Now the new products that we introduced are very significant in that they are the first transceivers on the market that support all three of the dominant video standards, MHL, HDMI and DisplayPort, and we're seeing significant interest in this new product for high-volume digital TVs and Pico projectors. On the digital TV front, MHL is becoming a requirement for many high-volume mid to high-end TVs. What's also important is that we're beginning to see adoption of DisplayPort by tier 1 TV OEMs for new-generation TV.

Now this is a market dynamic that we have been predicting and is driven by two trends. First, the proliferation of new mobile devices such as the Microsoft tablet and the Google Nexus smartphone using MyDP which is a mobile version of the DisplayPort standard. Second, introduction of ultra-definition TVs in 2013. As you may know, that HDMI 1.4b standard is limited to about 10 billion bits per second of video data, meaning it can only support ultra-high-definition TVs at up to 30 hertz refresh rate. On the other hand, DisplayPort's 1.2 standard can support ultra-high-definition TVs at 60 hertz refresh rate.

We've seen requests from a number of leading TV OEMs for transceivers incorporating both HDMI and DisplayPort targeted for new-generation TVs. The HDMI forum is currently working on a new standard, HDMI 2.0, to address the higher refresh rate requirements of ultra-definition TVs. And we're participating in the standards body and we feel we are technically competent and well-positioned to take advantage of the HDMI 2.0 [when the specs are issued]. Now this we anticipate will create a new wave of opportunities for us as the standards are released.

The same trends that I mentioned driving demand for our latest HDplay products in the digital TV market are also equally present in the projector space, especially the fast-growing Pico projector market. According to Pacific Media Associates, this emerging market is set for exponential growth through 2016 and beyond and will be an important new product class. Now in this market, multi-standard interface using HDMI, MHL and DisplayPort are becoming a de facto requirement. I'm very pleased with our progress in Pico projector market where we're making solid progress working with tier 1 Pico projector solutions providers. We anticipate our Pico projector opportunities to go into production starting in the fourth quarter of this year, with meaningful revenue potential in the fourth quarter and over $10 million in sales opportunity in 2014 for this segment alone.

Overall if you look at how the market trends over the past two, three years have transpired, it really validates our strategy of focusing on multi-standard connectivity. To give you a sense of how rapidly things are changing in this industry, let's go back in time to early 2010 when there was only one prevalent video interface standard, HDMI. It was found mainly in consumer electronics devices such as DVDs and TVs. And at that time, HDMI was fairly low-established, with installed base of about 1 billion ports and an annual run rate of about 500 million ports. The DisplayPort standard on the other hand was just getting started. In fact, if you went into a store looking for a DisplayPort device in February of 2010, you probably wouldn't be able to find it. And as for mobile video interfaces, they weren't even on the horizon yet. Smartphones were just beginning to become ubiquitous and the first tablet was yet to be introduced.

Now let's fast-forward to today. For 2013, [Inset] estimates 950 million port shipments of HDMI, and at the yearend, installed base will grow to almost 4 billion units. As for DisplayPort, its adoption has increased from just 80 million ports in 2010 to 225 million ports in 2012. And this figure is projected to grow up to 300 million ports in 2013, for more than 30% growth.

While HDMI, DisplayPort and MHL are all in a sense designed to do the same thing, which is transport video signals from one device to another. But the video industry is so large that the range of -- and the range of applications is so wide that multiple standards have emerged and proliferated. What has become clear over the past year or two is that each of these standards, regardless of their similarities or differences, is now an established technology unto itself. Each one of these standards is optimized in its own way for different applications or end-users and it's pretty clear that all three are going to coexist side by side for the foreseeable future.

At the same time, the industry is moving to give consumers that seamless plug-and-play video experience so consumers don’t -- the consumer doesn’t need to worry about whether this device is uploading a signal in HDMI, DisplayPort or MHL. The way I look at this, this is analogous to the cell phone industry where different radio standards like GSM, CDMA or LTE, they took hold in different market segments and today your smartphone contains multi-standard radios that can seamlessly operate on different networks and you don't even need to know which radio protocol is being used at any time. Now it's been our vision at TranSwitch that this multi-protocol world is coming to video connectivity, and I'm happy to say that this vision is starting to take hold in the industry, and TranSwitch is prepared to take full advantage of it.

Now I'll hand it over to Bob Bosi who will discuss the financials in great detail, and I'll come back with the summary.

Robert Bosi

Okay, Ali. Thank you. And good evening and good afternoon to everyone in the call.

Our Q4 revenue was $5.6 million as compared to our Q3 2012 revenue of $4.8 million and our Q4 2011 revenue of $6.3 million. Quarter over quarter, revenue growth was 18%, driven by telecom software licensing revenue and increased telecom products revenue. Product revenue in the quarter was approximately $3.1 million compared to product revenue of Q3 2012 of $1.6 million and $5 million in Q4 2011.

Intellectual property and service revenue for the quarter was $2.5 million as compared to service revenue in Q3 of 2012 of $3.1 million and $1.3 million in Q4 2011. Intellectual property and service revenue includes revenue related to intellectual property licensing of our HDMI, DisplayPort and HDP technologies and our telecom voice processing software as well as associated royalty revenue.

By product line, our CPE revenue for the quarter was $0.9 million compared to CPE revenue in Q3 2012 of $1.3 million and $1.2 million in Q4 2011. Our infrastructure revenue for the quarter was $4.7 million compared to infrastructure revenue in Q3 2012 of $3.5 million and $5.1 million in Q4 2011.

Our gross margin was 75% for the fourth quarter as compared to 64% last quarter and 58% for the fourth quarter of 2011. On a non-GAAP basis, operating expenses were $5.6 million compared to prior quarter's operating expenses of $5.7 million and the prior year's operating expenses of $7.7 million.

To reiterate, we effectuated a restructuring in Q3 which should save us about $2 million per quarter as we move forward. All product and software development programs related to our telecom product lines were canceled and we've redeployed all of our remaining research and development resources to our connectivity solutions for consumer product -- consumer electronics market. During the quarter we recognized an additional restructuring reserves of $400,000 and a charge of $600,000 for the impairment of intangibles associated with our telecom business.

Non-GAAP operating results for Q4 was a loss of $1.4 million. On a comparable basis, the prior quarter's operating loss was $2.7 million. We had a non-GAAP operating loss of $4.1 million in Q4 of 2011. Non-GAAP net loss for Q4 was a loss of $1.5 million or $0.04 per share on a basic and diluted basis as compared to a net loss of $2.7 million in Q3 2012 and $4.2 million loss in Q4 of 2011. Q4 2012 GAAP diluted net loss per share was $0.09 as compared to a net loss per share of $0.09 in Q3 2012 and net loss of $0.39 per share in Q4 of 2011.

The comparable GAAP measures for gross margin, operating expenses, operating income and net income are reconciled to related non-GAAP amounts and a reconciliation of GAAP to non-GAAP measure is included on our press release today. The reconciling items for Q4 are as follows. Expense of $0.7 million in stock-based compensation, expense of $0.4 million in restructuring charges, expense of $0.6 million in impairments of intangibles, and a benefit of $0.2 million for the reversal of accrued royalties. These items are described in our press release.

Moving to the balance sheet, cash and marketable securities ended the quarter at approximately $2.2 million versus $1.6 million at September 30, 2012. At quarter-end, the company had $2.4 million balance on our working capital line of credit versus a $0.9 million balance at the end of the previous quarter.

With regard to our capital-raising activity during the quarter, we raised $120,000 with our equity line arrangement with Aspire Capital. Reiterating Ali's comments, our goal is to become a leading provider of video connectivity solutions that will drive sustainable profitable growth to the company. We continue to make important progress towards these objectives, and we thank you for your support. And I will now open the floor up for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions].

We will first take Richard Shannon with Craig-Hallum.

Richard Shannon – Craig-Hallum Capital

Hi, guys. How are you?

Dr. Ali Khatibzadeh

Good afternoon, Richard.

Richard Shannon – Craig-Hallum Capital

Hi. Let's see here. I had to jump off for a second, I might have missed a couple of comments here late in the prepared remarks here, but did you have any guidance for the first quarter in terms of revenues?

Robert Bosi

Currently we're not providing guidance until new HD video connectivity business becomes sort of the dominant part of our revenue going forward. We still expect that in the short term, in the next couple of quarters, we'll have significant IP licensing and telecommunications, of course IT revenues, being a significant part of our total revenues. So we expect to provide guidance as we get into the second half of the year and our video connectivity becomes the sort of the dominant part of our overall revenue picture.

Richard Shannon – Craig-Hallum Capital

Okay. I remember last quarter you talked about expecting some level of growth which is what you achieved. Without any sort of comments there, can we expect that it might be in line with fourth quarter or even down slightly, or just anything directional you can help us out with?

Robert Bosi

Yeah, I think right now we expect Q1 to be similar to Q4 where we have significant opportunities for IP licensing and telecom. Our HDplay business is ramping up very nicely. We expect the revenue to be very meaningful in the first quarter, starting in the first quarter and building up throughout the year. And in terms of quantification of it, I would say we expect our video connectivity to exceed the 10% share of our total product sales.

Richard Shannon – Craig-Hallum Capital

Okay. All right, great. Let's see here. Can you just talk about HDplay? You talked about having I think four customers exiting the fourth quarter and hope for seven customers in total shipping in the current quarter. Can you give us a sense of contribution coming from, and I'll leave the definition up to you, of kind of tier 1 OEMs? Any expectation of shipments there? Should we see that beyond the first quarter?

Dr. Ali Khatibzadeh

I think as I said in my prepared remarks, we expect our tier 1 high-volume opportunity in the sort of TV and Pico projectors to ramp in the second half of this year. So we expect possibly as early as Q3 production start with those opportunities, but certainly by Q4.

Richard Shannon – Craig-Hallum Capital

Okay. Maybe two other quick questions from me, and I'll jump out of line here, you announced the license agreements in December for about $4 million. Can you tell us what the revenue recognition and the cash collection was for that agreement?

Robert Bosi

We recognized about $1.6 million this quarter. We recognized some in Q3 and we'll recognize some in Q4. I can't comment further than that. And with regard to cash, we collected $2 million this quarter.

Richard Shannon – Craig-Hallum Capital

Okay. All right, perfect. And then last question, I'll jump out of line and come back a little bit later, what's, Bob, what's your expectation of cash burn in the quarter?

Robert Bosi

Well, this quarter was $1 million, and again we expect that to be, as Ali mentioned, similar in this quarter.

Richard Shannon – Craig-Hallum Capital

Okay, I apologize, I missed that comment.

Robert Bosi

Yeah.

Richard Shannon – Craig-Hallum Capital

Okay. I'll step out of line, let others ask questions, and then come back in. Thank you.

Operator

We'll move in to Mike Latimore with Northland Capital Markets.

Ryan MacDonald – Northland Capital Markets

Hi, this is Ryan MacDonald on for Mike Latimore. Of the HDplay deals that you've won so far, how many do you think can produce volumes in the, you know, 1 million per year range?

Dr. Ali Khatibzadeh

Yeah, you know, certainly the -- I don’t have a rule of thumb for average customer, but I think one way I look at it, I've said this before, that we have now over 70 customer opportunities. One way to look at it is if we -- if only half of them go to production as -- or their plans and at the kind of run rate they're talking about, we need about $700,000 contribution per customer to hit the target we have, $21 million of HDplay products. And the actual total sum of revenue opportunities for all these 70-plus customers exceeds, well exceeds our target revenue. So it's really coming down to the timing of the ramp-up of these customers and how many of them will go to production as planned.

Ryan MacDonald – Northland Capital Markets

Okay. And looking more into the pipeline, is there a way you can maybe break down how many of those would be in HDplay, how many Pico projector opportunities, TV opportunities?

Dr. Ali Khatibzadeh

Well, first of all, all of the 70-plus opportunities that I'm talking about are for HDplay. Now, HDplay serves different market segments, digital TV, monitors, projectors, including Pico projectors, audio/visual equipment and video switches and those types of [inaudible] and you name it, there is really -- video connectivity is planting itself into all kinds of gadgets as you know and HDplay is a transceiver for that application. That's one of the reasons we targeted this market. It's got multiyear growth, it's consumer electronics, it's -- the opportunity size we've said for this market is about $600 million, and we believe that still holds, and we are positioned well with the product and technology that have significant advantage in the market, and we are targeted to get to double-digit market share.

Ryan MacDonald – Northland Capital Markets

Okay. And then just one clarifying question from one of Richard's before. With the $4 million in telecom, the $4 million telecom deal, did you say that $1.6 million would be recognized for first quarter or that it was recognized during the fourth quarter?

Dr. Ali Khatibzadeh

Recognized in Q4, fourth quarter.

Ryan MacDonald – Northland Capital Markets

In fourth quarter, okay. Thank you very much.

Operator

Next we have Quinn Bolton with Needham & Company.

Quinn Bolton – Needham & Company

Hey, guys. A few questions. First, Ali, just wanted to come back to the patent sales because I know that's an important potential source of cash generation to bridge the gap to operating breakeven. It sounds like you've announced or you've got a contract in hand for the first set of patents. Can you give us any sense of expected timing on the close of that? I think you said within the quarter, but I just wanted to confirm that. And then, any update on the marketing with Drakes Bay on the second larger set of patents?

Dr. Ali Khatibzadeh

So, Quinn, you heard correctly, I think the first set of patents which is the smaller set of patents, we have signed a contract and we expect to close on that this quarter. On the balance of those, which is a larger portfolio, we are in the marketing phase. I do not want to comment on that given that, you know, it is sensitive with regard to opportunities out there, and we are looking at different possibilities there. But we'll comment once we have the definitive agreement -- when we have a definitive agreement and once we close that move, opportunity.

Quinn Bolton – Needham & Company

Okay. If it takes longer to close the second set of patents, then your two financing options, really the Aspire Capital agreement, and is there any further room under the working cap line to draw that down in Q1 or Q2 if you need to?

Dr. Ali Khatibzadeh

With regards to the working capital, obviously it's a function of our receivables. Currently the answer is no. But the -- as our receivables increase there, we can increase that also.

Quinn Bolton – Needham & Company

Okay. And then just sort of switching to the sort of first quarter -- or sorry, the fourth quarter, it looks like the telecom product jumped up nicely in the quarter. I think [total products] are actually about $3.1 million up, about 100% from Q3. Was that sort of a one-time surge? Do you think it can hold sort of steady in Q1? Or can you just talk about the various parts of the business? I know you said that you thought Q1 in aggregate would be about flattish from Q4. Just looking at the mix, do you expect a higher percentage of IP and licensing revenue or do you think the mix between IP and license and products is roughly in line with where you were in the first quarter?

Dr. Ali Khatibzadeh

So in terms of our telecom product revenue, Q4, as you pointed out, we shipped significantly more than Q3. Part of that was due to the timing of shipments. I think the customer requests in Q3, so Q3 came in lower than we expected than Q4. So, really the run rate is probably somewhere between Q3 and Q4. That's what I would look at in terms of a run rate, if you will. And we expect that to stay stable in 2013.

The second part of your question with regard to IP licensing, we do have similar IP licensing opportunities in the first quarter that we are pursuing. And I think in terms of the individual contracts, it may not be the size of the contracts that we announced in Q4, but we have more opportunities and we expect the total level to be similar.

Quinn Bolton – Needham & Company

Okay. And to the extent that you do close on the patent sale in Q1, I assume that that is, you know, that gets recorded as revenue. So, would that be part of your sort of expectation for revenue to be at similar levels or would that be additive and your comment is really that your IP and your product revenues will be roughly [inaudible] and any patent sales would be additive?

Dr. Ali Khatibzadeh

Yeah. At this point, you know, I'm not prepared to give specific guidance on that. Obviously patent things are one-time events and we properly disclose those. But at this point I'm not willing to give a guidance for revenue in terms of Q1. I mean we view our patent sales as a one-time, one-off thing and we're talking -- when we talk about revenue trends and things, we like to think of patent sales being separate.

Quinn Bolton – Needham & Company

Okay. Okay, that's helpful. And then just switching over to the new products, obviously the addition of the MHL capability at CES I think really built out the functionality of that receiver. In your HDplay design win for Pico projectors and digital TVs that you talked about ramping in the second half of 2013, is that on sort of what I'll call the first generation of HDplay that doesn’t have MHL, or might we see the MHL functionality included in those DTV and Pico projector designs that you see hitting potentially Q3 or Q4 this year?

Dr. Ali Khatibzadeh

We have some opportunities with the existing products that are in production today for digital TV applications in the second half. We see also larger opportunities with the new products we announced because a number of the TV OEMs are now requiring MHL to be part of the transceiver. And of course, we delivered this product and we responded to market by announcing this product to address that market trend.

For Pico projectors, I think MHL is becoming a requirement as well because one of the most I guess prevalent applications Pico projector is the interface with smartphones and tablets and many of these new smartphones have MHL connectivity built into them, or DisplayPort in the case of some of the new ones, from Microsoft or Google.

Quinn Bolton – Needham & Company

Okay. So it sounds like, if I'm hearing you correctly, that some of the bigger tier 1 Pico projector, DTV design wins for late 2013 may include that MHL functionality.

Dr. Ali Khatibzadeh

Yes. I think, you know, once the -- the two dynamics in the market that we see driving demand for this product, one is the adoption of MHL, and because of MHL is not currently available in the video processors on the market, so you do need a separate standalone chip to support MHL. But also the other dynamic is the adoption of DisplayPort, and now MyDP, which is really a DisplayPort standard proliferating in tablets and smartphones. So the fact that our transceiver can support both, it really gives the customer an advantage because it does not have to worry about whether its TV can work only with one set of smartphones [and not the others].

Quinn Bolton – Needham & Company

Okay, great. And then just any sort of update or thoughts on the HD mobile product? Is that still something you see potentially ramping late this year, Ali?

Dr. Ali Khatibzadeh

Yeah, certainly that's -- I was going to come back to that in my summary, but we are on track to release that product to the market second half of this year.

Quinn Bolton – Needham & Company

Great. Okay, thank you.

Dr. Ali Khatibzadeh

Thank you.

Operator

[Operator Instructions].

We'll move next to Orin Hirschman with AIGH Investment Partners.

Orin Hirschman – AIGH Investment Partners

Hi. How are you?

Dr. Ali Khatibzadeh

Well. Thank you.

Orin Hirschman – AIGH Investment Partners

Good. Just in terms of, you're not giving exact guidance in Q1, but just in terms of the revenue that you saw in Q4 on HDplay products and also just whether there should be a sequential increase on the product side from that part of the business. Can you, in Q1, can comment on that?

Dr. Ali Khatibzadeh

Yeah, I guess what I said is that I expect that our HDplay sales in Q1 to exceed 10% of our product sales. I can also say in terms of growth relative to Q4, we expect that to be over 200%. Of course you expect at this stage of the ramp-up to have significant increase. So we do expect significant growth into Q1 and Q2.

Orin Hirschman – AIGH Investment Partners

Based on that type of growth, so let's say hundreds of thousands of dollars, can you see a path based on the designs that you have today that takes you to, you know, millions of dollars per quarter to do what you need?

Dr. Ali Khatibzadeh

Yes, we do. Obviously, the second half, many of our customers try to go into production second half, so the hard volume opportunities we have and many of the opportunities we have are just, I think on the call I said we have over 70-plus customer opportunities and we expect by middle of the year we will have 14 customers potentially in production. The balance of those opportunities, really targeting second half production. We think things will really turn up as we get into the second half, driven by higher-volume customers and higher-volume opportunities.

Orin Hirschman – AIGH Investment Partners

So those are actually design wins already, not where you're just sampling and kind of decide what to do with that?

Dr. Ali Khatibzadeh

We call them design-ins. We use the term design win when we get orders from the customers.

Orin Hirschman – AIGH Investment Partners

Okay. So they're design-ins.

Dr. Ali Khatibzadeh

Yes, we have customers who are developing products, designing products and based on HDplay, and they're planning to go into production second half of this year.

Orin Hirschman – AIGH Investment Partners

Okay. And just in terms of order of preference in terms of money raised, is it safe to say that pulling on the equity side is the last of the options?

Dr. Ali Khatibzadeh

That's correct. I mean we've been very clear about this. Our first approach is monetizing our [inaudible] assets, specifically patents. And second, beyond that, is of course equity, as a way of raising.

We do have -- we are looking at some other options, but I'm not prepared to talk about them at this point.

Orin Hirschman – AIGH Investment Partners

Okay. Thanks so much.

Dr. Ali Khatibzadeh

Thank you.

Operator

Next we'll move to Frank Barresi with Ameriprise.

Frank Barresi – Ameriprise

Yeah. I was a little confused. You talked, said you collected $2 million this quarter from -- was that from the patent sale of $4 million you were referring to or were those -- was I right in that and you expect to collect 1.6 -- or I guess you expect it to -- you booked $1.6 million this quarter from that $4 million sale, is that right or?

Robert Bosi

Yeah. The question was in the context of the announcements that we made in the fourth quarter regarding telecom software licensing totaling about $4 million. The question was how much of that we collected in the fourth quarter. And the answer was about $2 million we collected in the fourth quarter.

In terms of revenue recognition, I think $1.6 million got recorded in the fourth quarter. So, of the $5.6 million revenue that we announced today, $1.6 million was tied to that IP licensing agreement that we announced.

Dr. Ali Khatibzadeh

It's not a patent sale, it's IP license sale.

Robert Bosi

Yeah, software telecom licensing.

Frank Barresi – Ameriprise

Okay. So that's licensing. And so this -- okay, $4 million of licensing. But then the patent, that was a $4 million patent sale, wasn't there as well?

Robert Bosi

No, no. There was two contracts, licensing telecommunication software through our customers, totaling to $4 million for the contracts.

Frank Barresi – Ameriprise

Okay.

Robert Bosi

And which we collected $2 million in the fourth quarter, and recorded $1.6 million of revenue. The revenue is tied to deliverables, set of deliverables, and our contract we had to deliver the documentation training and the software, so it gets recorded when we deliver on the milestones.

Frank Barresi – Ameriprise

So when you're talking about the licensing, you're expecting I guess similar product in licensing revenues this quarter. The patent sales would be over and above that?

Robert Bosi

That's correct.

Frank Barresi – Ameriprise

Okay. And you're not giving any indication of what the potential, you know, amounts of money involved are?

Dr. Ali Khatibzadeh

No. The nature of these licensing deals, they come in increments and timing, so it's, you know, we don't want to, at this point, comment on it until obviously we have confirmed contracts in place, then we'll announce them in due time.

Frank Barresi – Ameriprise

Okay. And these video, did you say that some of these parts, you know, they're selling separate chips, but you talked about some of these functions being absorbed on the video processor, some of the MHL, or did I misunderstand what you said there?

Dr. Ali Khatibzadeh

What I said was if you look at many of the low-end TVs that have HDMI only, for example, the HDMI functionality is integrated into the video processor. Now what's happening, because of the MHL requirements, the new-generation TVs need a separate IC like -- separate chip like the HDplay chip that has MHL functionality built into it. And that's created another wave of demand for new-generation ICs like HDplay for that market.

Frank Barresi – Ameriprise

And these will be around permanently or -- when I say -- several years before they're absorbed in the video processor, or they won't?

Dr. Ali Khatibzadeh

What's happening in the market, of course the requirements continue to change. You're now going to ultra-definition TVs, which is a new-generation TV, and those require a new generation of ICs that can support that kind of performance and high refresh rate. Today, HDMI can only support ultra-definition TVs at 30 hertz refresh rate, which is really not acceptable if you look at these. These are large-screen TVs with exceptional resolution, four times the size of a 1080p TV. If you do not refresh those pictures, you really see the artifacts of the video processing in it.

And so the OEMs are really pulling strongly to move to the higher [stage], and so you need a new-generation HDMI standard which will be up this year. And based on that, you need a new-generation IC on the market. So this trend will continue. You know, obviously every two years or so there's a new standard that comes out and we need a new generation of ICs to support that.

Frank Barresi – Ameriprise

Okay. And so who, one last question, who would be your main competitors and what state are they in compared to you in terms of product offering?

Dr. Ali Khatibzadeh

Well, obviously in the HDMI world and MHL, Silicon Image has been the leader in that space and they have a solution on the market and they have reported significant growth in their MHL business, which is really a validation that this standard is taking hold in the market. And there are other companies that provide either DisplayPort or HDMI. When we come in into this market, it's really we offer multi-standard connectivity, ICs that can do three different connectivities in one. That's really our differentiation.

And I'll use the analogy of cell phones, it's really we see the same thing happening on the video side. On the antenna side, in your phone, you can have one of three or four different radio in your cell phone, one of three or four different radio standards and operate, and you won't -- you may not even notice it. The same thing is happening on the connector side, at the bottom [inaudible] we believe you will see multi-standard connectivity, and because they're touching large installed base of these different standards, you know, we're talking to wireless carries, wireless operators who have this dilemma now where some other devices operate on MHL, some other devices operate on MyDP or DisplayPort standard. And the consumer doesn’t need to know if it's MHL or -- they want to connect video.

Frank Barresi – Ameriprise

Right.

Dr. Ali Khatibzadeh

They want to simplify things. You connect it and you get to a video transfer.

Frank Barresi – Ameriprise

So they could be in a smartphone, one of these three functions, chips that you guys are supplying, and have three different interfaces.

Dr. Ali Khatibzadeh

Today, yes. They're using an MHL standard, they're using likely a Silicon Image chip, DisplayPort they're using a DisplayPort chip from a company like Analogix or --

Frank Barresi – Ameriprise

Okay. And you could reduce or lower their -- provide all of the standards and lower their costs basically?

Dr. Ali Khatibzadeh

That's correct. And more importantly, I think -- and as importantly I should say, the seamless connectivity, because you don’t know what -- I mean if you have a Pico projector, you want to be able to connect it to a phone that uses DisplayPort or a phone that uses MHL or HDMI, so you don't have to worry about the different protocols.

Frank Barresi – Ameriprise

Okay. Well, thank you.

Dr. Ali Khatibzadeh

Thank you.

Operator

We'll move next to [R.W. Dickson], a private investor.

[R.W. Dickson] – Private Investor

Hey, guys, appreciate the info. Good call. Forty-seven million was kind of projected back in Q1 of '12. Do you kind of see that as a good number still to run with?

Robert Bosi

So the way we have broken that out, if you recall, we had $30 million targeted for video connectivity business, and that consisted of about $20 million for HDplay products and $10 million for IP licensing, etc. We still hold that number. That number stands the same.

With regard to the telecom, I wouldn't -- I don’t want to necessarily target -- I mean, when you look at it, we really don't have a target. It's a business that we're harvesting. The business, we're not going after new design wins in the telecom space. Our sales team is primarily focused -- 100% focused on the video connectivity business. So the business that we will deliver on the telecom side is a business that our customers will give us, and this is existing business and so I don’t want to really get too much into the -- because in reality we don't have a -- we have a forecast but we really don't have a target to reach in that space.

I think at the moment I see about $12 million to $13 million of telecom business, in addition to the $30 million video connectivity business that we are targeting.

[R.W. Dickson] – Private Investor

And I heard the word HDwire mentioned, any -- on this call. What's the latest on that product line?

Robert Bosi

So that's part of our IP portfolio high-speed video connectivity portfolio that we have, that we are marketing. And the $10 million that I mentioned targets all of our IP video connectivity IP business, including HDwire. That's included in there.

[R.W. Dickson] – Private Investor

You kind of indicated that next -- second half tier 1 Pico projector television, I recall earlier that Texas Instruments was -- should have been adding to our revenue at this point, and that seems to have been -- is that one of those companies that you're looking at for second half of the year?

Dr. Ali Khatibzadeh

Some of the Pico -- some of the projector opportunities that we see today coming online in production are -- two on relationship with the Texas Instruments, our partnership with Texas Instruments under DLP platform. Obviously that relationship we expect to extend to Pico projectors. I don’t want to comment on -- beyond that at this point, but we are very, you know, we're very excited about our working relationship and opportunity with Texas Instruments. And they're the leader in the space. I think on the Pico projector front, their market share is even higher then on projectors.

So we work with them continuously closely and we expect to -- some of the things we bring to the table in terms of HDplay multi-connectivity, multi-standard connectivity is even more important for Pico projectors, as you can imagine they are very small, they fit in the palm of your hand, so there's not a lot of room for multiple connectors on the back of these Pico projectors. So, having an IC that can deliver MHL, HDMI or DisplayPort is very important to them. So we're building on that and we believe we will have a very significant play in the Pico projector market. And I kind of quantified it as potentially $10 million opportunity for us in 2014.

[R.W. Dickson] – Private Investor

Is Samsung the only tier 1 at this point that we have any indication of going with the HDplay or is there other tier 1's that might be going onboard with this?

Dr. Ali Khatibzadeh

I'm not prepared to name any particular customer there, but we have several tier 1 opportunities for HDplay products.

[R.W. Dickson] – Private Investor

In the television area?

Dr. Ali Khatibzadeh

That's correct.

[R.W. Dickson] – Private Investor

How much longer do you think that the HDMI 2.0 is going to be resolved? It's been an issue that's kind of been out there. Is there a target date for this?

Dr. Ali Khatibzadeh

Yeah, I cannot -- we had a confidentiality agreement with HDMI Port that prevents us from commenting on -- I think that's directed to the HDMI Port. I think they have announced -- they've said that they will be in -- coming out this year, so we're expecting that to happen this year.

[R.W. Dickson] – Private Investor

Very good. I think that answers most of my questions. I appreciate your time, guys. Thank you.

Dr. Ali Khatibzadeh

Thank you.

Operator

[Operator Instructions].

We'll move next to [Michael Morris], a private investor.

[Michael Morris] – Private Investor

Yes, good evening. I just had a couple of simple ones. The first one is share count at the end of Q4. And the second is more of a [feel] question for Dr. Ali. When you made the decision to change the strategic direction of TranSwitch to video connectivity consumer electronics, did you think it was going to be this hard, especially from a cash flow standpoint? Thank you.

Robert Bosi

[Michael], the answer to the first question is $36.1 million. I'll give the easy question to Ali.

[Michael Morris] – Private Investor

Okay.

Dr. Ali Khatibzadeh

Very good question actually. I've learned [inaudible]. You know, we -- when I, you know, let me just try to answer your question. Certainly we've made the right move putting the company on a new path and it's been a long process to bring new products and new customers. The business is ramping up, I feel very good about it. We have lots of opportunities ahead. We are in a multi-growth -- multiyear growth market with very differentiated products where we're working with the top-tier brands, not just on the customer side but also on the partnership side. And these are companies that are world-leading players in these markets. And we are, you know, working with the partners, we're engaged with the customers.

Obviously from a cash point of view, you know, coming back to when I joined the company, the company did not have a lot of cash on the balance sheet, so it's been somewhat of a challenging struggle, perhaps more than I anticipated given the downturn in our telecom business, legacy business. Certainly it's been a challenging, I would say, almost two to three years to, you know, keep with the funding requirements.

Having said that, I think again 2012 was probably a tough and pivotal year for us and we've kind of -- we certainly survived and we're here on the other side of it with new products, new customers on a growth path. So I feel good about where we are, and I'm not sure what we could have done differently. I'm sure hindsight is 20/20, but we're definitely on the right path here.

[Michael Morris] – Private Investor

Thank you. And if I may, just one more. How does it -- how do you think the financial status of the company affects customer decisions to go with your products? In other words, if you're seeing problematical, how does that affect them?

Dr. Ali Khatibzadeh

Well, that's -- I mean, what I -- the reasons we put the, for example, the deal with Aspire in place was really to assure our customers that we have access to cash and capital as needed, and that was one of the reasons behind that deal. And as you can see from the number of customers we've announced and the ones I'm forecasting, it doesn’t seem to have slowed our -- obviously we need to put this issue behind us, we're working actively and I feel confident that we're going to be able to get a solution in place, as I said, in the next three to six months, put this behind us really to the exciting phase of ramp-up and growth in our business.

[Michael Morris] – Private Investor

I appreciate you all being so candid. And thank you.

Dr. Ali Khatibzadeh

Thank you for your questions.

Operator

And we'll move next with a follow-up from Richard Shannon with Craig-Hallum.

Richard Shannon – Craig-Hallum Capital

Hey, Ali. Just one last follow-up question from me. You talked about some higher volume opportunities in the Pico projector and TV markets in the second half of the year. When would you normally expect to receive, I don’t know what the phrase you want to use, your design win or design-in or something, but get pretty good indication that you've got one or more of those customers? I mean, could we hear some discussion on next quarter's conference call or they're more likely in two quarters from now?

Dr. Ali Khatibzadeh

Plug in, we'll give you the visibility we have as -- so, you know, we expect these opportunities to ramp up sometime in Q3 and really ramp up to decent volume in the fourth quarter. That's our -- that's what our forecast says at the moment. And as we go forward, we'll certainly give you as much visibility as we have and we can in terms of those opportunities.

Richard Shannon – Craig-Hallum Capital

Okay.

Dr. Ali Khatibzadeh

There are some things that we may be able to announce earlier and we will certainly, you know, err on the side of giving the -- our shareholders the visibility on those opportunities, and we do have significant opportunities as I said on the Pico projector side, as well as on the digital TV side.

Richard Shannon – Craig-Hallum Capital

Okay, perfect. Appreciate the thoughts again, Ali. I'll take it offline.

Dr. Ali Khatibzadeh

Thank you.

Operator

That does conclude our question-and-answer session at this time. I'll turn the call back over to our speakers for any final or additional comments.

Dr. Ali Khatibzadeh

Thank you again. I'd like to summarize a few things we said here which are very important and I really want to recap a number of things that we've put in place that are beginning to make significant impact, and I'd like to summarize those.

First of all, 2012 was a challenging year, but as I said, pivotal year for us. We introduced and shipped our first HDplay products. We stopped our telecom R&D and focused our resources on becoming a pure-play video connectivity company. This transformation has been very painful, but having said that, it is taking hold and it is positioning the company for significant growth in 2013 and beyond.

While we're not giving quarterly guidance yet, I do want to share with you some -- share with you my sense of what to expect for 2013. From product perspective, as I said, we expect legacy telecom IPs to remain stable through the year, all being at a lower level compared to prior years. In addition, we'll continue to target video IP and telecom IP sales, and this provides valuable cash flow for us. We expect sales of our HDplay devices to be meaningful starting in first quarter and to steadily ramp throughout the year as more customers enter production phase.

We remain on target to launch our mobile video product during the second half of this year and we'll announce further details as we got closer to the launch date. We're getting strong pull from tier 1 OEMs and smartphone, tablet market leaders, and we expect a significant revenue contribution from these products next year. One way to look at it is, in 2013 HDplay products are the single growth engine for the company; in 2014 we expect to have a second strong growth engine in HD mobile products.

We're experiencing significant customer interest in our multi-protocol video interface chips and sales in the market is beginning to validate our strategy with our new family of HDplay products, we are well-positioned to capture a significant chunk of the market, and we expect significant growth throughout the year, particularly in the second half.

Finally, as I've said, we anticipate to reach breakeven our external financing needs exclusive of patent sales within -- in the range of -- including the patent sales, will be in the range of $5 million to $6 million. Our goal is to finance those sales prudently and intelligently and with obviously due regard for dilution in shareholder value.

I feel very good about where TranSwitch is positioned in the video connectivity business and where we're heading. I expect that as the year progresses, the improvements and opportunities that we see at TranSwitch will become more generally visible to the wider audience including our shareholders.

Thank you very much for your participation.

Operator

Everyone, that does conclude our conference call for today. Thank you all for your participation.

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