TranSwitch Corporation Q2 2009 Earnings Call Transcript

Jul.30.09 | About: TranSwitch Corp. (TXCCQ)

TranSwitch Corporation (TXCC) Q2 2009 Earnings Call Transcript July 30, 2009 5:30 PM ET

Executives

Ted Chung – VP, Business Development

Santanu Das – President and CEO

Bob Bosi – VP and CFO

Analysts

Quinn Bolton – Needham & Company

Richard Shannon – Northland Securities

Clive [ph] – Bennadrove [ph]

Rich Shanfeld [ph] – Shanfeld Group [ph]

Walter Schenker [ph] – Titan Capital [ph]

Operator

Good day everyone and welcome to the TranSwitch second quarter 2009 earnings release conference. Today's call is being recorded. At this time for, opening remarks and introduction, I would like to turn the call over to TranSwitch Vice President of Business Development, Mr. Ted Chung. Mr. Chung, please go-ahead.

Ted Chung

Thank you. With me today are Dr. Santanu Das, our President and Chief Executive Officer and Mr. Bob Bosi our CFO.

Before I begin I need to remind listeners that forward-looking statements made during this call, including statements regarding management's expectations for future financial results and the markets for TranSwitch’s products are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Investors are cautioned that these forward-looking statements regarding TranSwitch, its operations, and its financial results involve risks and uncertainties, including risks associated with TranSwitch's businesses, including without limitation, risks associate with downturns in economic conditions generally, and in our markets specifically.

Risks in product development, risks in market acceptance and demand for TranSwitch's products, as well as product developed by TranSwitch customers; risks relating to TranSwitch's indebtedness; risks of failing to attract and retain key managerial and technical personnel; risks associated with foreign sales and high customer concentration; risks associated with competition and competitive pricing pressures; risks associated with investing in new businesses; risks of dependence on third-party VLSI fabrication facilities; risks associated with acquiring new businesses; risks related to intellectual property rights and litigation; risks in technology development and commercialization; and other risks detailed in TranSwitch's filings with the Securities and Exchange Commission.

With that out of the way, I will hand it over to Dr. Das for some initial comments.

Santanu Das

Good afternoon everybody. The highlights of the second quarter are as follows. On a non-GAAP basis TranSwitch achieved profitability from its operations in the second quarter of 2009, while passing the guidance we provided in May, which called for a breakeven.

Our non-GAAP operating profit was $0.5 million, this compares to a non-GAAP operating loss of $1.4 million in the first quarter of 2009. The net revenues for the quarter were approximately $14.5 million.

Non-GAAP gross margin was 59%. Our non-GAAP operating expenses for the quarter were roughly $8.1m, which was lower than our guidance. Going forward, we expect operating expenses to continue to be below $8.4 million per quarter. Bob will provide additional details on the expense guidance later.

Our strategy is to hold our expenses roughly at current levels and as a result as our revenues grow, incremental profit should fall to the bottom line. Our goal is to have improved operating income in the second half on a non-GAAP basis and deliver positive net income on a GAAP basis by the fourth quarter.

On the design win front, we secured 15 new design wins. The design wins were one across all of our business and product lines, including our transport, access, ASIC, and consumer (inaudible) businesses. In the new product area, we have started sampling our Atlanta 2000 device and so far the response has been very positive. The Atlanta 2000 has a gateway router at a significantly better cost performance than anything on the market. In addition, we have a powerful DSP engine embedded in the Atlanta 2000 differentiating all products from other solutions.

The advantage is that our product is a true presidential gateway enabling voice data and video services over DSL and phone connections. A number of our customers are respected to design in this product during the second half of this year, a new release that you can see meaningful revenue as early as the second half of 2010.

Our backlog position for the September quarter is strong. We currently anticipate the third quarter to be at low quarter percentage based on our stronger bookings. I want to remind you that as we enter 2009, our goal was to create a liner, more efficient, growing, and more profitable company, which we call the new TranSwitch.

We are very happy that despite the calamites [ph] economic conditions around the world we are fulfilling this promise. We have achieved non-GAAP operating profit at a revenue level of $14.5 million in the second quarter and we expect to continue this trend of top line and bottom line improvement as we move forward.

I will hand it back to Ted, so that he may provide some details for the second quarter.

Ted Chung

Thank you, Santanu. With respect to business trends by geography, our business resumed its growth in Asia bolstered by the following trends. In Japan, our market share of the gigabit EPON market has been growing, due to our primary customers increasing status in the carrier deployment of fiber to the premises.

In addition, to our EPON business we are supporting the carrier adoption of Voice-over-IP solutions driven by our Entropia products. We expect to see revenue contributions from the Voice-over-IP roll out in Japan as we move into next year.

In Korea, we have seen pick up in ordering relating to the ongoing build-out by SK Broadband that is taking advantage of the situation at Korea Telecom to gain market share. SK Broadband formerly Hanaro Telecom is the fastest growing broadband service provider in South Korea, serving approximately 4 million broadband subscribers and growing.

Our engineering team worked closely with our customer to bring this product in market on an accelerated time scale. We generated more than 2 million in revenue in the June quarter versus $1.5 million in the March quarter. Our customer’s indicated to us that they anticipate further growth over the next year and we are excited about this and other similar applications.

In China we continue to be encouraged by demand trends bolstered by government stimulus, the three major telecommunications carriers in China are sending money to install high-speed Internet access to both DSL and fiber-to-the-premises technologies. In addition to undertaking massive programs to extend 2 G infrastructure to rural areas, as well as rollout new 3G networks throughout the country.

These trends should greatly benefit TranSwitch customers such as ZTE, Datang, Fiberhome and Alcatel Shanghai Bell and ultimately TranSwitch. For instance we have seen the sales of Ethernet 3 product to China increase by over 50% in the most recent quarter after having increased 20% in the prior quarter, due to the increased level of infrastructure spending to deploy the aforementioned networks.

And while we are not anticipating this level of growth in the third quarter over the next several years, we believe that our business in China will show consistent year-over-year growth. In North America, we were able to exceed our revenue targets as our business continues to be bolstered by the ongoing deployment of 3G infrastructure by both AT&T and Sprint. The Entropia based platforms are being deployed not only by AT&T and Sprint, but also by Reliance Telecom in India, and we expect other carriers in Europe and Asia to fall soon.

All of this should lead to greater revenues as demand increases around the world for smart mobility devices such as Apple's iPhone, Hands free [ph], the Blackberry, and other appliances.

While we see continuing strength in Asia and North America, our sales in Europe were down sequentially in the second quarter, due to the continuing macroeconomic delays. However, we believe that this business should stabilize in the second half of the year.

We have design wins in the key platforms of companies such as KEYMILE, Acatel-Lucent, Nokia Siemens, Ericsson, and other ORM’s in Europe and we expect our revenue contribution from these design wins to improve as we move towards the end of the year.

Similar to Europe, the second quarter represented the low point for our Israel-based businesses with both the ASIC business at a near-term taught due to the working down of inventory at our major customers and our IP licensing business experiencing a low due to the lack of design wins during the fourth quarter of 2008 and the first quarter of 2009.

That said, the backdrop for both businesses are considerably strong for the third quarter and the activity level has strengthened. All of which bodes well for the future. Specifically, our ASIC customers have begun to order again with more frequency and our backlog for the third quarter for this business already materially exceeds our second-quarter revenue.

Our customer interface business, which includes our HDMI display forward Ethernet technology offering has also seen some renewed strength as we were able to close new contracts for the first time in a few quarters as the economic situation, particularly in the consumer electronics market seems to be stabilizing.

The funnel of potential licensees for our various technologies is increasing and we expect this business to contribute more meaningfully in future quarters. To summarize, we are very happy to have achieved operating profitability in the second quarter of 2009. Going forward, we see ongoing strength in Asia in the second half, with continued incremental improvement in our North American business.

We also see strength across our Israel-based business. While Europe continues to be a weaker territory for us, this weakness should be more than offset by growth elsewhere in the second half.

Overall, we are optimistic about our prospects in the second half of 2009. On a comparative basis TranSwitch’s revenue has been fairly steady during this period of economic uncertainty. For instance, our revenue increased between the third quarter and fourth quarter of 2008, while most of our peers saw a material decline in their business.

Our revenue in the first quarter of 2009 declined only modestly in the fourth quarter of 2008, while our peers saw another dramatic reduction in business. In the most recent quarter, our revenue has essentially recovered to pre-recession levels well in the case of our competitors, they remain below year ago levels.

Now that I have discussed the second quarter in detail, I will address our third-quarter outlook. As mentioned earlier, the overall demand picture has improved for TranSwitch, as well as for our industry over the past few months. Having said that we need to point out that the current capacity of the supply chain is becoming an issue as demand returns to prerecession levels.

This is because a number of our manufacturing partners have been forced to cut back in capacity and it will take some time for this capacity to be replenished. We are experiencing capacity issues today particularly in the areas of package assembly and testing.

While we were actively working to mitigate these supply chain issues based on our backlog bookings to date and the effect of supply-chain capacity constraints, we currently expect TranSwitch revenues in the third quarter of 2009 to be around $15 million. We currently have over $10 million in building backlog for the quarter, which is higher than what we had this time last quarter.

Although third quarter is traditionally a weaker one for telecommunication’s equipment spending, particularly in Europe, we expect that the strength in our Israeli business and the strength of our telecom business both in Asia and North America should offset the traditional seasonality, as well as the general weakness in our European orders.

I will now hand you over to Bob Bosi for the financial details of the third quarter and he will provide our complete guidance going forward.

Bob Bosi

Thank you, Ted, and good afternoon to everyone on the call. I will review the second-quarter results and provide guidance for the third quarter of 2009. Net revenues for the second quarter of 2009 were approximately $14.5 million, as compared to the net revenues $14.2 million in the first quarter of 2009 and $8.9 million in the second quarter of 2008.

The GAAP net-loss for the second quarter of 2009 was $1.3 million or $0.01 per basic and diluted common share as compared to the net income of $4 million or $0.03 per basic and diluted common share during the first quarter of 2009 and a net loss of $4.3 million or $0.03 per basic and diluted common share during the second quarter of 2008.

Net product revenues for the quarter were approximately $13.7 million. Net service revenue in the third quarter was $0.8 million, which includes contract engineering activities for some telecom customers, as well as revenue related to royalties and intellectual property licensing. In the second quarter, our top customers continue to be Alcatel-Lucent, Nokia in Japan, and (inaudible) in South Korea.

The geographic mix of our net revenues for the quarter were approximately 28% domestic and 72% foreign. The non-GAAP gross margin for the second quarter was $8.6 million of 59.2%. This compares to the Company’s non-GAAP gross margin of 60% for the first quarter of 2009 and 60.3% for the second quarter of 2008.

Presented on a GAAP basis, the second quarter of 2009 GAAP gross margin was 59%. This was compared to the companies GAAP gross margin 58% for the first quarter of 2009 and 60% for the second quarter of 2008. Research and development expenses were $4.3 million for the quarter, which included approximately 190,000 related to stock-based compensation expense and 113,000 of amortization of purchased intangibles, $4 million on a non-GAAP basis.

Sales general and administrative expenses were approximately $4.6 million of which – including $122,000 of stock-based compensation expense and $340,000 of amortization of purchased intangibles, $1.4 million on a non-GAAP basis. $4.1 million, sorry.

Total GAAP operating expenses for the second quarter were $8.9 million. This includes stock-based compensation expense of $312,000 and $453,000 for the amortization of purchased intangibles. Excluding these charges, non-GAAP operating expenses in Q2 2009 were $8.1 million compared to our guidance for the quarter of $8.3 million, $10.10 million for Q1 2009 and $8.8 million for Q2 2008.

Non-GAAP operating income for the second quarter of fiscal 2009 was $0.5 million compared to our guidance of breakeven and a non-GAAP operating loss of $1.4 million for the first quarter of 2009, and a non-GAAP operating loss of $3.5 billion for the second quarter of 2008.

On a GAAP basis, the operating loss for the second quarter of fiscal 2009 was $300,000 compared to operating income of $3.8 million in the first quarter of fiscal 2009 and an operating loss of $3.7 million for the second quarter of 2008. The operating income for the first quarter of 2009 included a restructuring benefit of $6.2 million.

The GAAP gross – the GAAP net loss of $1.3 million for the second quarter of 2009 yielded a basic and diluted loss per share of $0.01, excluding the items I mentioned, which are detailed in the last page of our press release, non-GAAP net loss was $0.5 million, which rounds to zero or breakeven on a per-share basis, which was in line with our guidance.

It was approximately 159 million basic and diluted average shares outstanding for the quarter. Our balance sheet shows the cash and cash equivalents, restricted cash and short-term investments position of $8.6 million, which was down from our expectations of $10 million.

This was principally due to a panorama [ph] shipments being more heavily weighted in the last month of the quarter and collections anticipated in June, which we received in July. Our accounts receivable at June 30 grew to $14 million compared to $12.5 million at March 31 and $12.9 million at December 31, 2008.

Inventory was approximately $4.1 million at the end of the quarter compared to $4 million at March 31 and $4.5 million at December 31, 2008.

Now I'd like to discuss the third quarter of 2009. As we stated previously, along with the completion of the Centillium acquisition we effectuated a very significant companywide restructuring plan that and then achieving sustained and growing profitability. All the expense reduction initiatives that we've planned reported to motion in the fourth quarter of 2008.

And as planned, we achieved profitability on a non-Basis in the second quarter of 2009. For our news release, we are guiding third quarter net revenues to be around $15 million, a 3% increase from the second quarter. As of the end of June, our backlog for Q3 was around $8.8 million.

Through today our current build and backlog is roughly $10 million. Based on our current revenue outlook and product mix our blended gross margin guidance is approximately $8.6 million or 58%. Our third-quarter guidance is for non-GAAP R&D expenses to be roughly $4.3 million, which is consistent with our guidance for Q2 and a 19% reduction from non-GAAP R&D incurred in the first quarter of 2009.

Our third-quarter guidance is for the non-GAAP sales general and administrative expenses to be roughly $4.1 million, which is consistent with our guidance for Q2 and an 8% reduction for expenses incurred in Q1. In the third quarter, we expect our non-GAAP operating loss to be approximately – operating income to be approximately $200,000 and the bottom line GAAP loss to be $900,000 or $0.01 per share.

With respect to our cash and liquidity, we are entering Q3 with approximately $8.6 million of cash and marketable securities. We expect our cash and marketable securities balance to be roughly between $7 million and $8 million at the end of Q3, assuming no further repurchases.

There have been some interesting questions concerning our strategy to deal with our $10 million of convertible notes coming due in September 2010. We believe this is not an issue for the following reasons. A, starting later this year, we should be in a positive cash flow from operations – we should achieve positive cash flow from operations.

B, most of our cash requirements related to the restructuring charges should be behind this by the end of the year further improving our cash flow. And C, we are currently pursuing a bank line of credit with a very major bank and respect to have that in place very shortly. The combination of these factors should give us sufficient liquidity.

I would like to again conclude by saying now that the integrations of Centillium is behind us, we are all focused on achieving our goal of profitability on the bottom line and to sustain profitable growth as we move forward. We thank you for your support and we will now take your questions.

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Quinn Bolton with Needham & Company.

Quinn Bolton – Needham & Company

Hi guys. First of all great job on the OpEx reduction, and then second I was jumping between a couple of conference calls, so if you (inaudible) I believe you mentioned 15 design wins secured in the quarter, can you provide a little bit more color on sort of where or what kind of applications, I think you had mentioned some transport in actions when – can you be more specific with some of the details?

Bob Bosi

We don't have, we don't generally provide a lot of detail on specific design wins, but I can tell you Quinn that they were pretty much across our product line. So, we had a design win for instance with an Entropia, with our Entropia product in a platform of a tier 1 customer. Additionally, we have seen some design wins with our diplomat as well as our Atlanta products. So, it was really across the board, we also had a couple of design wins in the IP licensing arena of HDMI, so all around I think a pretty solid quarter from that standpoint.

Quinn Bolton – Needham & Company

Okay. Second question you had mentioned some of the supply constraints, is there a way to quantify sort of what financial impact that might have had either in the second quarter or the third-quarter guidance?

Santanu Das

This supply constraint does not just affect TranSwitch, it is an industry phenomenon and I am sure it has affected all our peers. Only thing I can say that our guidance most probably would have been higher if the supply constraint were not there. Right now, we are in the beginning of the quarter, we are working very diligently to circumvent with constraint and we feel that if not this quarter by the beginning of the next quarter these industry-wide supply constraints will be behind us.

Quinn Bolton – Needham & Company

And it sounded like you were saying that this is mostly on the (inaudible) somebody sighted it, is it simply that the utilization rates at the subcontractors is sort of matched out for the third-quarter or is it something else?

Santanu Das

We need to be careful. These guys are very loyal partners. And only way I can comment is that as the recession hit our industry most of them affecting partner just like all of our customers and including us had to go through reducing workflow, making sure the client utilization is commensurate with the revenue level.

So, with all those adjustments, the industry has now entered a capacity branch and as you know it takes sometime to replace the capacity. We are working very well with our manufacturing partners very closely and we believe that this will be taken care of within, I don’t know two to three months and as I said before this is not affecting just us, it is an industry-wide phenomenon.

Quinn Bolton – Needham & Company

Okay great and then just lastly, looks like on operating or non-operating – an operating basis on a non-GAAP calculation you will be profitable, so just wondering could you help reconcile sort of that comment with the comment that it looks like you will burn about 1 million to 1.5 million of cash in the quarter is that just some of the activities with the restructuring or are there other uses of cash planned in the quarter.

Bob Bosi

Well, there is – after non-GAAP operating income obviously we have interest expense we have tax expense, but also we have incurred restructuring charges that we have some liabilities on the restructuring line that have – we will consumer some cash.

Quinn Bolton – Needham & Company

Okay, great, thank you.

Bob Bosi

Thank you.

Operator

Thank you very much. Next, we will hear from Richard Shannon with Northland Securities.

Richard Shannon – Northland Securities

Hi everybody, how are you?

Ted Chung

Good, good how are you, Richard?

Richard Shannon – Northland Securities

Doing fine, thank you. And my first question will be – upon specifically in Japan Santanu I think you made a comment about your manufacturing partner looks like you are gaining some share, can you give us a sense of from what share they are going from and going to and over what kind of period of times of something that share gain will happen over two quarters or six quarters or what is the time period with the –?

Santanu Das

I did not say our manufacturing partner, I said our customer is gaining share. Our customer has been gaining share steadily and I cannot exactly quantify what is the exact market share of our customer, but only thing I can tell you is that they are now in second. And while they were in third before. And we are working very closely with them to make sure that they can gain further market share and I believe with the next two quarters even if they remain second, the gap with the first will close even further.

Richard Shannon – Northland Securities

Okay, great. And maybe on the subject of PON still, just want to get your thoughts Santanu on your ability to generate design wins in revenues outside of Japan that is one specific build out, whether in other places in Asia else – what is – any design wins or any other activity in which you feel particularly confident about?

Santanu Das

We believe that starting next year, the requirement in the marketplace will be, even for EPON to integrate Voice-over-IP capability inside the product. And from that point of view we believe where we are in a very strong position because we have access to Voice-over-IP engine and we have access to better improvement software in the Voice-over-IP from our Atlanta product line, as well as our Entropia product line.

So our game plan key is to introduce additional product in that area in perpetrating Voice-over-IP features and with that we believe that we should definitely see design wins in other markets beyond Japan where we believe we have a strong position right now.

Richard Shannon – Northland Securities

Okay, I guess next from me in Voice-over-IP is a segue from your comments Santanu, you have mentioned in this call, as well as previous quarters about your successes within North American and Japanese equipment vendors and carriers, any other geographies in which you are seeing – might see some success and maybe if you can dough tell that into the design win that you mentioned you had in Entropia that was the current vendor you had the most success with or a new one or –

Santanu Das

In North America, quarter-over-quarter we have seen a growth of more than 20%. And even though we are shipping to North America, sounds of platform of our customers are being outside the country – operating in that (inaudible) mentioned Reliance in India. And we see this trend becoming more prevalent.

So, even the design win is in North America, the platform from North America being received almost all over the world. We believe this is a very strong platform and there is lot of room for growth. In addition to that design win as Ted mentioned, we are very pleased to announce that we have a tier 1 design win in our Entropia product line in China and we have additional design wins in Japan.

With all that, we are very bullish about the prospects of our Entropia product line going forward.

Richard Shannon – Northland Securities

Okay, great. And ,then I guess last question and I’ll jump on the line. You have mentioned you know China as very attractive (inaudible) for you and a lot of wireless activity that is driving that and we referred from other companies over the last three months. There appears to be something in the parts of equipment spending in the second half of China.

Your comments seem to be a little more bullish, are you expecting to buffet those trends and actually grow overall. And if so if you can help us understand what might be driving that?

Santanu Das

In Q1 to Q2, our growth in China has been more than 20%. It is very difficult at this moment to quantify what will be our revenue in Q2 from China. But the trend for last few quarters has been positive and we failed, while quarter-to-quarter there maybe variation. Overall this growth trend will continue in China. So, year overall very bullish about China. And the reason for this is, you know as Ted pointed out, it is the fact that with the stimulus package the Chinese government is encouraging the carriers to rollout 2G in rural areas than China is also transforming in urban areas its network from 2 G to 2.5 G., to 2.5 G. to 3 G and with all of those the backhaul infrastructure requirement in China is growing and we along with our peers are beneficiary effect growth.

Bob Bosi

Richard, I will add another comment to that, a lot of our ASIC product is actually being shipped to China as an end market and I made the comment earlier in our prepared remarks that our backlog for those Chinese deployed products is actually stronger for Q3 then was our revenue in Q2 of Q1. So for certain of our products we see that China started – the China demand is actually growing as we get into the second half of the year.

Santanu Das

I was only mentioning about our Telecom Core business including Centillium.

Richard Shannon – Northland Securities

Okay, great. I thank you for the detail and I will jump on line.

Operator

Thank you. We will move on now to Clive [ph] with Bennadrove [ph].

Clive – Bennadrove

Good afternoon, gentlemen. Question I have, two questions that where is the company with its consideration of the share buy back program and despite a number of assurances that we were going to say in side the buying from the managements and the Board of Directors, what is the reason that we are seeing nothing today?

Bob Bosi

Okay, Clive. With respect to the share purchase program, we did buy some shares in 2008 and we do have an approved program. Our board does regularly look at the pros and cons of share repurchase at the board meetings and they will continue to look at future repurchases and you know, if they feel they are warranted will pull the triggers.

With respect to insider buying, there was some insider buying over the last couple of quarters. So, there are findings that show that a couple of the members of our management, as well as Board of Directors did actually go and buy some stock. You know, I can't really comment on what will happen going forward, but we certainly all are optimistic that things will improve.

Clive – Bennadrove

Well, as you know, it is been appointed would be nice for I think all the investing community to see the management team making the same commitments that your investors are doing and there have been has been a little bit of buying, but I would certainly expect that if you have got the confidence in the company that we believe that you do that you would put your money where you map is.

Bob Bosi

We understand, Clive, your point is duly noted.

Clive – Bennadrove

Thank you.

Bob Bosi

Thank you.

Operator

(Operator instructions) We will move on now to Rich Shanfeld [ph] with Shanfeld Group [ph].

Rich Shanfeld – Shanfeld Group

Hi, guys one question, all my others were answered. But backlog, you said that your confidence in guidance and your confidence in 2010 had to do with the growth in your backlog, can you give us some numbers to go along with that of some sense of the order of magnitude that has increased?

Bob Bosi

Sure. In the prepared remarks we mentioned that the backlog for Q3 is around $10 million that is higher than it was as this time last quarter and significantly higher than it was at this time in the first quarter.

Rich Shanfeld – Shanfeld Group

How much was it last quarter?

Bob Bosi

Last quarter, at this time, it was certainly under 10, I don't have the exact number, but probably closer to 8.5 and the quarter before that was even lower, our book-to-bill continues to strengthen, I don't think we gave a number for book-to-bill in our prepared remarks, but it was well over one. So, all of those are positive trends that we continue to see and numbers at the end of the day don't lie.

Rich Shanfeld – Shanfeld Group

Okay. And just give a sense, how much of that backlog increase do you think was orders you weren’t able to fill because of the supplies chain constrained?

Ted Chung

It is difficult to quantify because, as Santanu mentioned, we are still working with our partners very closely to try to resolve resolves some of those supply constraints and up until the time that we have some degree of certainty, we won't really know what the magnitude of any short fall or for even upside might really be.

Rich Shanfeld – Shanfeld Group

Okay. Thank you.

Operator

(Operator instructions) We will move on now to Walter Schenker [ph] with Titan Capital [ph].

Walter Schenker – Titan Capital

Good, thank you. Two questions and then I will – I won’t have any trouble remembering them, could you just – since I used to be (inaudible) may or may not be happening with British Telecom as you look forward? And secondly, we continue to spend large amounts of money on R&D, we have gone through – since I have been investor well over $100 billion in what has been R&D, could you sort of review your degree of confidence as we spend $16 million to $18 million in R&D a year, we are actually going to see that at some point turned into revenues since that is not in the case over the last few years? Thank you.

Ted Chung

Walter, with respect to your question about British Telecom, you know unfortunately it is not a well guarded secret that the UK carrier is or really has been and continues to be behind their published deployment schedules. Our latest checks do indicate that the Broadband rollout is continuing and the voice migration from which we should and our customers should really benefit. We believe should commence still in 2010. So, while that is not currently reflected in any of our numbers, nor our near-term projects we are hopeful and optimistic that starting in 2010 we could see some benefit from the UK.

With respect to your second question about research and development spending, a couple of the design wins that we have talked about specifically in Voice-over-IP, as well as our next generation access platforms, you know many of those design wins are a result of the research and development spending over the last number of years. Today, we have the most concentrated Voice-over-IP and in the market we have an EPON solution that has been qualified by NGT, which really is known for having the most stringent requirements in the industry.

And I think that bodes well for our ability to translate some of that R&D spending into real success with other carriers as we go forward. I guess the other way I will address that question is recently in and you have seen this now tied out in our numbers. We have taken care to bring our expenses to a level that is more commensurate with our near-term operating results. Obviously that process is still ongoing to an extent, but I think you will see that by the time we get to the end of the year that will really play out as you look at our financial results.

Walter Schenker – Titan Capital

Okay, thanks, guys.

Ted Chung

Sure, Walter.

Operator

And we have no further questions at this time, I will turn the call back over to our speakers for any additional or closing remarks.

Ted Chung

In conclusion, we are very happy that not only we achieved a positive operating income in the second quarter, but we're also able to contain our expenses below our prior guidance. We believe the new TranSwitch is a strong platform to build-on and we can grow our business both organically, as well as through additional executive acquisitions as we move forward.

Our focus, of course, is Q3 and we anticipate the third quarter to be a growth quarter for TranSwitch. Thank you all for joining our call today and we will visit with you again in a few months.

Operator

Thank you this does conclude our conference. We appreciate your participation.

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