Mindspeed Technologies Management Presents at Morgan Stanley Technology, Media & Telecom Conference - Transcript

Feb.28.13 | About: Mindspeed Technologies, (MSPD)

Mindspeed Technologies, Inc. (NASDAQ:MSPD)

Morgan Stanley Technology, Media & Telecom Conference

February 28, 2013 02:25 PM ET

Executives

Steve Ananias - SVP and CFO

Analysts

Dan Fuss - Morgan Stanley

Question-and-Answer Session

Dan Fuss - Morgan Stanley

As we begin, let me just quickly read our disclosures. Please note that our important disclosures including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website or are available at the registration desk. And for those of you how don’t know me, my name is Dan Fuss and I work with Joseph Moore, the lead U.S. semi-connector here at Morgan Stanley and with me here is Steve Ananias, CFO of Mindspeed for about year and half now and prior this role you were working over at Broadcom as controller in the Broadband Communications Group.

Great, thanks for being here.

Steve Ananias

Well, thanks for having me.

Dan Fuss - Morgan Stanley

For those who aren’t familiar with the Mindspeed story, could you provide kind of quick overview of the company, the product portfolio and your general and market exposure of what’s your focus on?

Steve Ananias

Sure. So, we are publically traded on NASDAQ under the ticker MSPD. We focus on communications, semiconductors superficially infrastructure equipment. Our prior portfolio spans several different market segments. The largest today is our high-performance analog business. It represents approximately 50% of our revenue. The second is communications processors, represents approximately 38% of revenue and then last but certainly not least is our emerging wireless infrastructure business which represents 12% of our revenue.

Dan Fuss - Morgan Stanley

And I was actually hoping that we could start there. Obviously you’ve got an exciting story in small cell infrastructure. If we could kind of dig into that business, provide an overview, obviously its 12% revenues now but you got it to 150% growth this year. Provide a kind of a high level of overview of that business.

Steve Ananias

Yes. That business clearly has the ability to completely transform the company. We’ve been investing in the small cell space now for about 5 years. Our initial investment is in a product line that we refer to its Transcede and that is a 4G, the initial implementation was a 4G LTE implementation and that prior plan actually started shipping in production to first in the world production employment in Korea in the December quarter, last quarter.

We took a big step forward last year about this time and we acquired private company out of the UK by the name of Picochip. This company had a tremendous amount of experience and a leadership position in the 3G version of small cells, not only the FD or WCDMA version but also TD-SCDMA for China. And that acquisition certainly strengthened our position in the small cell space and immediately gave us the incumbent position and just about every single operator around the globe. That product line has been deployed in over 50 operators and is a very strong business for us.

With a combination of the Picochip technology, the 3G technology that it brought and our own organically developed Transcede or 4G LTE gave us the broadest portfolio in the industry and actually as I just mentioned I just returned back from Mobile World Congress where we were actually demonstrating our dual mode SOC. So in a single chip we support the 3G WCDMA and 4G LTE interface standards.

Dan Fuss - Morgan Stanley

And did that development really start with the acquisition of Picochip or were you working on that beforehand?

Steve Ananias

Yes, the development for our dual-mode solution was really accelerated by the acquisition of Picochip. So we had the 4G technology but Picochip brought the 3G technology.

Dan Fuss - Morgan Stanley

And before we get too into the weeds here, I was hoping that taking a step back; describe the excitement about the small cell opportunity. How the small cell fits into kind of a carrier's network strategy, why they need them going forward?

Steve Ananias

So today the architecture of the cellular infrastructure, you have the macro base station and it's pretty much just that, it's what they refer to as a homogenous network. So you have the macro base station and the 3G standard, which is really the lion's share of the volumes today, it was defined a decade ago and when they define that, the primary factor was quality efficiencies in the voice network and so on, and so at the time we didn't have the adoption of smartphones, didn't have the tablet PCs and other data devices, and so what's happened now, fast forward to today, the amount of data flowing through the mobile network has really created issues for the operators. So anything from capacity, the macro base stations, can’t handle all capacity, the performance is very low relatively speaking, and coverage has also suffered as a result of this.

So when the operators have stepped down and others have stepped down to define the 4G standard LTE, they definitely had data in mind. And so they developed a completely new architecture that is referred to as HETNET or heterogeneous network and this is so the combination of macro base stations and small cells. And to be quite honest, it will require small cells in order to deliver the types of performance and coverage that 4G promises. So, we are excited about small cells. It’s a true paradigm shift in wireless communications and we are certainly in the leadership position.

Dan Fuss - Morgan Stanley

Great and what do you think this market could grow into longer term, in terms of market size?

Steve Ananias

Well if you read through third party research, it suggests that this market could develop into being a billion dollar industry over the next five years.

Dan Fuss - Morgan Stanley

Great. And when we kind of look at that, look at the industry and look at kind of the difference, the different product types, you’re going to have kind of the really small cell, you might be able to host up eight users, you are going to have kind of enterprise class, it will be kind of 32 users and then you could have some public access offload. Could you just talk about the segments and where do you see Mindspeed playing?

Steve Ananias

I would start by saying that Mindspeed actually has the broadest portfolio in the entire industry. So we actually have prior set address each one of those segments. So residential, enterprise and metro; but we have that not only for 4G but also for 3G and dual mode and not only for FD but also for TD. So we have an extremely broad portfolio. So to answer your question I guess we are playing in each one of those segments. The market today is primarily in WCDMA, so 3G residential. That’s where that the majority of the market is today.

However, as I mentioned earlier we started to ramp our 4G LTE solution in Korea in the December quarter and that’s solely an enterprise deployment today. We do expect the residential segment to start ramping towards the end of the year in Korea but for the market today is primarily residential in 3G and enterprise in 4G but that’s just getting started.

Dan Fuss - Morgan Stanley

Got it. I know that you guys have talked about the first wave of these deployments, really here in 2013 beginning what we saw in Korea. Could you just walk us through that first way, may be tell us how your position, which carriers you expect would be deploying?

Steve Ananias

Sure. So we haven’t disclosed all of that but I will provide you some color. So Korea is ramping up right now and it’s Korea Telecom and SK Telecom in Korea and we expect that obviously to continue ramping throughout the year and as I mentioned the initial deployment is in enterprise but we do expect them to begin ramping of residential in the back half of the year.

Japan is the next region that we believe will deploy and that’s likely to happen sometime in the middle of the calendar year and that will also be a 4G deployment. Largely Korea and Japan will be 4G only deployments because they have a very strong 3G infrastructure. So there is really no need for the dual mode in those regions.

However the third region to deploy here in this Wave1 will be North America where it’s most certainly going to be a dual mode implementation. In fact, AT&T for instance, they are absolutely going forward with dual mode, and again we expect that to happen at either the end of our fiscal year or into the December quarter.

Dan Fuss - Morgan Stanley

Great, and I guess, how should we think about kind of the ASP or the amount of content that’s really in a dual mode versus single mode. What’s kind of the benefit for you guys?

Steve Ananias

Well I think the largest and the most significant benefit that we have is just product maturity. So in terms of 4G, we introduced our first product at MWC a couple of years ago and then like I mentioned in the most recent MWC, just wrapping up, today I believe we actually demonstrated our dual mode product. Obviously to have the dual mode product you need not only the hardware capability to offer that but you also need the software, and we are the only company in the world right now to actually have a fully functioning 3G and 4G dual mode product in a single SOC. And in one of the more significant pieces of IP that we had gotten through the Picochip acquisition was the hardened 3G software solution. And so you take the gold standard of 3G, combine that with our Transcede product which is now also field-hardened, because it is deployed in Korea, we have a very stable, very mature solution for dual mode.

Dan Fuss - Morgan Stanley

And can you just talk about some of the challenges between getting the hardware and the software to work together and we just talked about what allowed you guys to do that but why it might take some time for your competitors to come up with such a solution?

Steve Ananias

Well I believe the development is extremely difficult but that leads to more of a time to market issue, where once you have the hardware -hardware is somewhere between a 12 to 18 months development cycle. Once you have the hardware, you’re developing, maybe the software in parallel, but just because you have the hardware, you have probably another 12 to 18 months to develop the software for that solution. And then beyond that the model, to provide, really the layer one software which is the physical layer, but then once you have that, then you partner with third parties to provide the layer two and upper layer stack and that takes more. And so they have a fully baked solution like we have, it’s a multiyear development and again we're there and a lot of the competition is progressing but they are quite a bit behind us.

Dan Fuss - Morgan Stanley

Great thanks and in thinking about this year and how the trajectory of that business, you guided it up 150%. Could we just talk about, on the LTE side, we're starting off a lower base kind of that half a million and we expect that it is going to be kind of a lumpy design win driven step-up. How should we expect to see that play out throughout the year?

Steve Ananias

I think it will be lumpy within a particular operator. So an operator would begin deployments and then they may digest the initial deployment and then start back up and the advantage we have is we’re going to be deploying in Korea and in Japan and in North America. So hopefully that stabilizes that ramp to some degree but yes it is going to ultimately be a function of the market development and then the slope of those developments in terms of the final number that we see for the year.

Dan Fuss - Morgan Stanley

Got it and when we think about who you’re selling into, are you the basically only supplier or are any of your competitors also selling similar solutions into the same equipment maker?

Steve Ananias

So in Korea specifically, and two operators that are deploying right now, there are six OEM's that are selling into those operators. We have design engagements with four of the six operators and then one of our competitors has an engagement with the other two. And then when you look towards Japan, we will be deploying in Japan and that competitor who is in Korea is not in Japan. And then when you finally then move into North America, again we will be deploying in North America and I think North America being a much larger market opportunity, I think you will have a handful of suppliers in that market but again the one constant in every region is Mindspeed.

Dan Fuss - Morgan Stanley

Great and we can touch more on this later but I was hoping that shift gears and talk little bit about the rest of the business? High performance analogs; it’s the biggest part of your business at about 50%. Can you just provide kind of a quick overview of this business, what markets do you focus on and then kind of lastly your quite optimistic on growth this year in that business. What drives that?

Steve Ananias

Yes, the High Performance Analog business is a great business for the company. Like you said it represents about half of our quarterly revenues and there are really two major macro factors driving that business today. So, the first is optical access or Olton and in that business to be sell the optical PMD. So, in the optic network, you have the optics that then get converted into the electronics and when that conversion happens the signal needs to be conditioned, and we saw many of the components that provide that conditioning.

And so there is a global deployment right now of PON and we are essentially in every one of those deployments. So, it’s a very, very strong business for us and we believe a portion of that business is sold into China and I think was announced early in this week. They’ve met margin and stated that they’re going to continue their build out of their access network which will translate into a very strong year for that business.

So that’s the first kind of major driver in that business. The second is continued expansion in the broadcast video business, or again we sell our Crosspoint Switch products and signal conditioners among other products and again in that product line there is a little bit of a shared mix going on where we’re capturing some share from the competition. But at the same time we’re introducing new product categories that represent new revenue streams for our business.

So again, very, very excited about the future of that business and we guided earlier this year that that business would grow approximately 10% year-over-year and very confident in achieving that.

Dan Fuss - Morgan Stanley

Great, and then briefly or switching gears towards the comms processor side; can you give us kind of the overview of that business? Obviously it’s been struggling a bit over the last year and you expect it to kind of underperform and look at the analog. Could you just give us the overview of that business and why you think it’s playing out that way?

Steve Ananias

Sure. So, our Communication Processors business comprises of three major product categories. So the first thing WAN which is a legacy business for the company, it declining. It’s a business that will eventually go away but they have very long product cycles and so that business will just continue to decline. That’s no longer strategic to the company. About 12% of the overall business were sort of communications processors.

The other second piece of communications processors is our Voice over IP product line and this is the business as you’ve mentioned that struggled over the course of last year. So, there is a global slowdown in telecom CapEx and that affected our business directly. On positive side, that business has strongly stabilized. So, we’re not seeing that business decline anymore but where you see the WAN business declining, the VoIP business now stable, that leads me to the third element of that business which we refer to as communications processors and this is a very exciting piece of that business.

Today we ship primarily into what's referred to as the Broadband home router and it’s deployed in many of the fiber deployments and that product line has grown at a CAGR of more than 60% over the last three years. So it’s a very strong piece of our portfolio but it's somewhat masked by the fact that WAN and VoIP have been declining over the last couple of years.

But we recently announced the second generation of our communications processors product line, which is referred to as Comcerto 2000 or C2K. It's a second generation C1K. But in that next generation we have stepped up the performance of that product line.

So it's a dual core ARM9 processor, has deep packet inspection, support for DDR3 and other features, and what that has done is it obviously provides a replacement to the C1K in the Broadband home router segment, but it has also now opened up many other verticals for that category of product.

And so we announced on our last earnings call that we actually have scored design wins in Consumer NAS and the service optical platform segment or vertical as well as some other verticals. So I'm very excited about, with this new product that really opens up the addressable market for that product line and I think where that communications processor business with WAN, VoIP and Comms processors has been essentially flat and we guided this year for it to be flat to down 5%, I think once that communications processors business really starts to hit its stride, we can actually even perhaps see that business get back on the growth path.

Dan Fuss - Morgan Stanley

Great, and just lastly taking the analog and the comms processors business together; 2012 was obviously a difficult year for the semiconductor industry and just looking at those two businesses, how would you characterize your customer environment in terms of where were inventory levels, where is distribution. In terms of the cycle, a lot of companies here thought that we're seeing a bottoming process. Do you generally see the same thing when you look at those two groups overall?

Steve Ananias

I think that's a fair statement. I think that Mindspeed, we benefit from very strong product cycles though. So again for the size of the company we have a very targeted product portfolio and so whether it being communications processor selling into VHR or within our high performance analog business selling optical PMDs, both of those segments benefit from a growing optical access business or global PON deployment and it represents a pretty big portion of our business and so we have benefited more than others because of that deployment.

And so we haven’t really seen the inventory issues, maybe some others have because that business has been strong. In the VoIP business, where we did see a bit of slow down last year, really was it so much of function of inventory and the challenges, just global slowdown in telecom CapEx.

Dan Fuss - Morgan Stanley

Got it. And when we think about, to the first quarter, you guided roughly kind of flat but actually analog, the business has been relatively strong and you expect to be strong year. Taking a bit of a breather, could you just talk about the driver there?

Steve Ananias

Sure so as you mentioned, the high performance analog has had four quarters of record revenue consecutively and this quarter is a seasonally soft quarter for that business and so again yes, we guided to be soft through this quarter but we do expect it to resume its growth in the next quarter and for the balance of the year. Again, very confident on achieving the 10% year-over-year growth. What was your second question on communication processors?

Dan Fuss - Morgan Stanley

Yes, I mean that business, you basically, I believe it was flattish over, you expected it flat to kind of grow this quarter? Are you generally seeing an uplift off of the kind of weakness that you saw last year?

Steve Ananias

I think again, the combination of the VoIP business being more stable and then the growth in the communications processor business is really what’s driving that.

Dan Fuss - Morgan Stanley

Great. And at this point I’d like just to open it up to see if there are any questions in the audience? If not, I’ll keep firing away. Anyone? All right, I’ll keep firing away. Kind of longer term, when you guys think about the business, what’s the kind of your goal on the gross margin side and recently you returned to profitability, what’s kind of your goal in terms of leveraging the OpEx and driving operating margins going forward?

Steve Ananias

We are very, very focused on getting back to cash flow generation. We have said that we expect to get back to cash flow breakeven or generation by the end of the fiscal year. As you mentioned, we did back to operating and net profitability last quarter but we are very focused on now driving the top line and then delivering that leverage through to the earnings.

So I think from an OpEx prospective, we have completed our restructuring we announced a few quarters ago and we have brought our OpEx back down to a level of where it was before we acquired Picochip. There was just a pretty big shift from the resource prospective or from an investment prospective, from wireline to wireless.

So the $22 million a quarter of OpEx is just a very different make up of that $22 million. But at that level I believe we can scale the topline quite a bit. certainly through this year and then even into next year, I think there will be some investment or additional OpEx, but we are going to continue to see a significant amount at that topline fall to the earnings.

Dan Fuss - Morgan Stanley

And thinking about in the operating expenses, where is that investment going? Is it within R&D, what areas are you really targeting, is it all small cell, or are you continuing to kind of increase investment in the other businesses.

Steve Ananias

Certainly we have an investment or a pretty significant investment in wireless infrastructure and from that business, or for that business; I think what you will see is more of the app engineering investment. So as we ramp new customers, new business, new regions, you need to have engineers out in the field that can support that business. We are fully invested in high-performance analogs. We see that as a very important piece of the business, of the portfolio. And again this year we stated that we expect that business to grow 10% and I believe that going forward that should be achievable.

And then within the communications processor side of the business, again we’re into the legacy business. So no investment going in there. The Voice over IP product line is a stable business but really the bulk of the investment now is going into communications processors, as again we developed the C2K product line and again as that product begins to ramp, we need to have more app support at wrapping and supporting those customers.

Dan Fuss - Morgan Stanley

And where on the gross margin side do you think you can drive margins longer term, especially considering the fact that and maybe talk about how the small cell is going to be increasing as a percentage of revenues and how that will be impacting margins.

Steve Ananias

We are not changing any of our longer term miles at this point. You are right, the small cell business has a slightly lower margin profile from the corporate average but we do expect the high performance analog business to continue growing at the same time, which has a richer margin profile than the rest of our business. So there will certainly be a mix to our margin profile going forward. But again I’m optimistic that we can manage that.

Dan Fuss - Morgan Stanley

Great, and then kind of lastly, just seeing that you were out at Mobile World Congress this week, were there any kind of general takeaways that you saw from your space, adding or falling?

Steve Ananias

So, just, still a tremendous amount of excitement about the opportunity, just more broadly and then when you look at the competitive landscape, there were maybe a handful of announcements that were interesting but I think the thing to really focus on is the breadth of our portfolio is unmatched. Having a dual mode, 3G, 4G solution in a single SoC is unmatched.

And then very, very important is having the next standard, the next wave of deployment will be China and in Europe. Well for China you need to have the TD flavor of 4G. We are actually demonstrating a TD-LTE product in our booth at MWC and we are shipping TD-SCDMA today. And so we are very well-positioned for either 4G or dual mode going forward into China and again given that deployment is set to launch in 2014, those design engagements are going down right now, again we are very well positioned for that.

Dan Fuss - Morgan Stanley

And then just touching upon that is that really kind of the year that you see the small cell opportunity taking off in 2014? Just thinking long term about that?

Steve Ananias

Yes, I think it will certainly correlate with the subscribers, the global subscribers. So China being the largest subscriber base, I think that will be an inflection point in the marketplace but before that you have North America starting the ramp as well. So I think the combination of North America and China, both getting into full production, I think that will represent an inflection point.

Dan Fuss - Morgan Stanley

And just thinking about this initial deployments from the career perspective, are these really just kind of test deployments now and then once they see how they can manage them on the network, then they’ll kind of deploy in SA or how do you kind of look at that?

Steve Ananias

It’s certainly full production deployment. It’s just the regions that are deploying right now, they don’t have the subscriber base and therefore the same demand for small cells that you’ll have in North America or in China.

Dan Fuss - Morgan Stanley

Got it and with that, if there are no questions from the crowd, I think we can wrap it up as we’re out of time.

Steve Ananias

All right thank you.

Dan Fuss - Morgan Stanley

Steve thanks.

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