TranSwitch Corp. Q1 2010 Earnings Call Transcript

May. 1.10 | About: TranSwitch Corp. (TXCCQ)

Wright Express Corporation (TXCC) Q4 2009 Earnings Call January 21, 2010 5:00 AM ET

Executives

Ted Chung - Vice President of Business Development

Ali Khatibzadeh - President and CEO

Bob Bosi - CFO

Analysts

Richard Shannon - Northland Securities Kevin Cassidy - Thomas Weisel Partners

Quinn Bolton - Needham & Company

Kevin Cassidy - Thomas Weisel Partners

Operator

Good day everyone, thank you very much for holding and welcome to the TranSwitch First Quarter 2010 Earnings Release Conference. Today’s call is being recorded. And at this time, for opening remarks and introductions, I would like to turn the call over to TranSwitch Vice President of Business Development, Mr. Ted Chung, please go ahead.

Ted Chung

Thank you. With me today are Dr. Ali Khatibzadeh, 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. These risks are detailed in TranSwitch’s filings with the Securities and Exchange Commission.

With that out of the way, I will talk briefly about the first quarter of 2010. For the fiscal first quarter of 2010, net revenues for the quarter were approximately $12.8 million within the range provided on February 11. Our non-GAAP operating expenses for the quarter were roughly $6.9 million, lower than our previous guidance.

Going forward, we expect operating expenses to remain roughly at $7 million per quarter. Bob will provide additional details on the expense guidance later.

As a result of the higher revenue and lower operating expense, the company lost roughly $100,000 on a non-GAAP basis again, somewhat better than the guidance provided. Based on the lowered operating expense level as well as continued growth as we move forward, we believe TranSwitch should be profitable on a non-GAAP basis in the second quarter.

The company was also able to make improvements to the balance sheet in the first quarter. We sold our interest in a non-public company in the quarter for $2.7 million in cash; we are able to also procure a line of credit from Bridge Bank which we announced last month. Finally, we raised roughly $900,000 to the sales stock from our existing shelf registration statements.

In addition, the OpEx reduction programs announced in the first quarter had some impact as well and we expect these savings to continue going forward.

Lastly, a few weeks ago, we announced an anticipated rights offering. Preliminary details have been filed with the Securities and Exchange Commission and are available through our website. I will now hand it over to Ali, so that he can share with you his thoughts on the first quarter and opportunities going forward.

Ali Khatibzadeh

Thank you, Ted and good afternoon ladies and gentlemen. As Ted mentioned, our revenue grew sequentially as expected and business in most of our geographic markets appeared to be healthy. Additionally, most of the expense reduction measures that we discussed in February are now in place and the roughly $4 million of annualized savings that we mentioned is being realized according to our plan.

We still expect that based on the actions taken we should achieve non-GAAP operating profitability at a quarterly revenue level of roughly $13 million depending on product mix. With respect to the business in the quarter, infrastructure product revenue for the first quarter was roughly flat with the fourth quarter of 2009 at $8.4 million.

Moving forward in 2010, we see growth opportunities in our infrastructure business based on increased telecom spending in Asia as well as North America. Specifically North America, the increased CapEx spending by AT&T and other carriers to bolster their wireless capacity should benefit our Entropia product sales. We also expect to see additional growth from China later this year based on renewed investment in wireless infrastructure as well as wireline access in metro transport systems.

In my recent visit to Asia, I met a number of leading OEMs and ODMs that are interested in our products for mid to high density voice over IP infrastructure applications. Our Entropia (inaudible) three Compaq offers a best combination of power, performance and cost within applications. We expect these opportunities to contribute to our revenue in the second half of 2010. We also see a recovery in demand for legacy TDM framers and mappers for operator deployments in India and China.

On the CPE side, product revenue for the first quarter of 2010 was roughly $4.4 million. This was an improvement over the fourth quarter and largely attributable to the business relating to NTT deployments in Japan. NTT (continues to deploy fiber based access equipment and plans to install an additional 2 million units this fiscal year which has started. In Korea, the carrier voice over IP deployment that we have been servicing remained soft.

As a result, we have lowered our expectations for their demand. However, this decline has been offset by growth and CPE customers in Asia. Our latest CPE processor, the Atlanta 2000 stands out in terms of superior voice quality, voice over IP channel density, power consumption and data throughput. In fact customers tell us that we have by far the lowest power consumption in the industry and this is a key selection factor for telecom operators.

Also in the CPE space, we have new and significant opportunities with tier one OEMs, related to our high speed interface business that should contribute to our growth in 2011. Our HDMI 1.4 compliant IP is industry leading in terms of performance and has been well received by customers worldwide. Now let me just get to our strategic planning process that I have mentioned on prior calls. We have made significant progress in identifying the market segments that the company will focus on and in determining our expense in (inaudible) relative to the competition.

We will be building our differentiators in our next generation products in collaboration with market leading equipment manufacturers and eco system partners. We have also identified areas of improvement in our processes and product roadmaps and we are working diligently to address those.

In summary, we saw stabilization of our business in the first quarter, and expect growth both in the CPE and infrastructure components of our business going forward.

Given our current backlog and visibility we are projecting our revenue in the second quarter to be between $13 million and $14 million. We have currently booked about 90% of the low end of that guidance. And based on our current expense forecast and product mix assumptions we expect to reach non-GAAP profitability in the second quarter. Also I want to emphasize the improvements made to our working capital during the first quarter. We are exiting Q1 with $7.7 million in cash up from $5 million at the end of December.

I would now hand it over to Bob who will shed more light on this and the rest of our financials will provide our complete guidance for the second quarter.

Robert Bosi

Thank you Ali, I’ll review the first quarter result to provide guidance for the second quarter of 2010. And some of the achievements we recently made improving our financial position. Net revenue for first quarter of 2010 was approximately 12.8 million as compared to net revenue of 12.1 million in the fourth quarter of 2009 and 14.2 million for the first quarter of 2009.

The GAAP net loss for the first quarter of 2010 was 1.5 million or $0.07 per basic and diluted comp shares as compared to a GAAP net loss of 12.7 million or $0.64 per basic and diluted common share during the fourth quarter of 2009 and a GAAP net income of $4 million or $0.19 per diluted common share during the first quarter of 2009.

Net product revenue in the quarter was approximately 11.9 million as compared to product revenue in the fourth quarter of 2009 of 10.7 million and 12.8 million in the first quarter of 2009. As service revenue was 49 million compared to service revenue in Q4, 2009 of 1.5 million and 1.4 million in Q1 2009. Net service revenue includes NRE relating to activities of some Telecom customers as well as revenue related to royalties and intellectual property licensing or HTMI technology.

The geographic breakdown although first quarter net total revenue was as follows: Asia-Pacific 65%, Americas 19% and Europe 13%, the top countries in our first quarter revenue were Japan, China and the United States. Alcatel-Lucent and OKI Japan continues to be our largest customers. The GAAP gross margin in the first quarter was 53% compared to company’s GAAP gross margin of 54% in the fourth quarter of 2009 and 58% in the first quarter 2009.

Non-GAAP gross margin for the first quarter was not materially different, recession development expenses were 4.1 million for the quarter excluding stock based compensation expenses and amortization of purchase intangibles, R&D expenses. On non-GAAP basis were 3.8 million. General and administrative expenses were roughly 3.6 million, excluding stock based compensation expense and amortization purchase intangibles SG&A on a non-GAAP basis was 3.1 million.

Total GAAP operating expenses for the first quarter were 8.1 million. The non-GAAP operating expenses for the first quarter were 6.9 million, $600,000 less than guidance for the quarter of 7.5 million and less than and 8.6 million in the fourth quarter of 2009 and 10 million in Q1 of 2009. Non-GAAP operating results for the first quarter 2010 was a loss of approximately $100,000 compared to our guidance of a loss $700,000 to $1 million.

For the fourth quarter of 2009 our non-GAAP operating loss was 2.1 million and the first quarter of 2009 our non-GAAP operating lose was, 1.4 million. On a GAAP basis the operating loss for the first quarter of 2010 was 1.4 million, compared to an operating loss of 12.6 million for the fourth quarter of 2009 and an operating income of 3.8 million for the first quarter of 2009. Excluding the items I mentioned which are detailed on last page of our press release, the first quarter of 2010 had non-GAAP operating roughly approximately $0.2 million or $0.01 per share to a roughly $20.3 million basic and diluted common shares outstanding for the quarter.

And now to our balance sheet, we made significant progress in the first quarter. We ended the quarter with cash, cash equivalents and restricted cash, inscription investments of $7.7 million at March 31, compared to $5.1 million at the end of the year. Our accounts receivable at March 31, was $8.5 million which is 27% down from December 31 of cash receivable balance of $11.7 million. We made a significant progress in this area in last few months.

Inventory at March 31 was $4 million which was down from our December 31 inventory of $4.2 million. Also during the quarter we saw invested we had in the non-public companies were $2.7 million which was our carrying value. Quarterly, no gain or loss as reported on the transaction. During the quarter, we paid down $1.2 million of our debt and we raise $900,000 in equity capital.

Also we entered into a new product facility agreement with Bridge Bank. The facility is up to $5 million with availability to determine based on our expected outstanding accounts receivable. We have not gone down on this line and we have no plan to do so in the near-term.

I believe everyone on the call is aware that we recently announced to our plans to raise up to $10 million in equity capital in a rightful offering. We filed the registration statement on Form S-1 on April 13 and amended such registration statement on April 20.

Today, April 29 happens to be the record date to the offering. As disclosed in the registration statement, each share of stock will have the right to purchase point two shares of stock or one share for every five that you own.

The purchase price will be $2.40 per share. Each shareholder will have the ability to over subscribe that is to the extent that shareholders do not exercise their subscription rights, other shareholders made part of additional shares.

The registration statement on Form S-1 related to these securities has been filed with the Securities and Exchange Commission has not become effective. These securities may not be sold nor may offer to buy the accepted prior to the time of the registration statement becomes effective. This statement shall not constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sales of these securities in any state in which such an offer, solicitation or sale would be unlawful prior to the registration or qualification under the securities laws of such state.

Copies of a prospectus with respect to this offering may be obtained from the company and at the TranSwitch Corporation, Three Enterprise Drive, Shelton, Connecticut and to my attention.

I would now like to discuss the second quarter of 2010; we are guiding second quarter net revenues to be between $13 million and $14 million. Today, our unbilled, our current billed and backlog is roughly $11.7 million. As you recall, in 2009, we achieved our goal of profitability on non-GAAP basis in Q2 and Q3. We had a setback in Q4 in January of this year and in January of this year we took further corrective actions to lower operating expenses.

Based on our current revenue outlook and product mix our plenty gross margin guidance is approximately 53% and will range from $6.9 million to $7.4 million. Our second quarter guidance is for non-GAAP operating expenses to be approximately $7 million which is composed of $3.9 million of R&D and $3.1 million of SG&A.

Therefore, we expect our second quarter non-GAAP operating income to be roughly breakeven to $400,000. In summary, we’re pleased we made significant progress this quarter, our revenue was well within guidance. We exceeded our guidance with respect to our bottom line. We have made significant working capital improvements and we established our facility to bridge things. And we initially have the right to offer. With that said, I would like to conclude by saying that we, the management team, our board of directors and all of our employees worldwide are focused to achieve the same profitability growth.

We thank you for your support and we will now take your questions.

Question-and-Answer Session

(Operator Instructions). First up in the roster is Richard Shannon at Northland Securities.

Richard Shannon - Northland Securities

I guess I jumped on the call just a little bit late. I just want to make sure I got some of the comments regarding the guidance specifically I think you mentioned about you expect both infrastructure and your CPU revenues to grow to some extend within that guidance somewhere is that correct?

Bob Bosi

That’s correct.

Richard Shannon - Northland Securities

Okay. Anyone that you’re expecting better than the other, especially given the width of the guidance here?

Bob Bosi

We haven’t commented on that and we’re not prepared at this time to do any between the two.

Richard Shannon - Northland Securities

Fair enough then. Ali, you talked a little bit about some excitements you have in your CPE business. Just wondered if you can talk a little bit about the design activity and how far (inaudible) and there’s some timeframes you’re expecting to maybe ramp some of those out, particularly as you mentioned in places like China and India?

Ali Khatibzadeh

certainly we have a number of engagements with customers in Asia on the CPE side both the Atlanta products as well as high speed interface IP and we expect these engagements materialize in terms of revenue in second half of this year. We’ll certainly make an announcement to the (inaudible) I promised not to talk about design wins and I want to stick to my promise. So, we will talk about those engagements that actually materials into production revenue and we hope to have to announce those in the near future as they materialize.

Richard Shannon - Northland Securities

Okay. I mean in terms of the number of opportunities that you’re looking at, is this number like five to 10 or is this well into a dozen or two dozen or any way you can quantify that?

Ali Khatibzadeh

Yes. I think sort of (inaudible) I would say it’s in the dozen range in the CPE side. It may be more, we have a number of opportunities with different customers and there are various stages from evaluating designing of the product to sort of the finalization of the product that could turn into production orders. So, I would say they are in the dozen.

Richard Shannon - Northland Securities

Okay, fair enough. Question on your infrastructure business, I think you talked about some improved bookings in your legacy products. I’ll be curious to understand the extent to which you’re seeing that and how much longevity might be associated with those legacy products.

Ali Khatibzadeh

So when we see a recovery in our legacy business approaching the level that we were back in Q2 or Q3 of last year. Some of those are related to new deployments that we see in India for example and that’s encouraging because we think that has a significant like to it. And some of it is the kind of inventory corrections that we saw last year is that the over inventory situation we saw last year we believe that over inventory situation is being corrected now and we are seeing a return to more normal level.

Richard Shannon - Northland Securities

Okay great. And then I guess last question from me on HDMI. Curious about the status of various products and IP initiatives there wondering (inaudible) in the year, new licensees in the previous quarter and in terms of V1.4, is this going to be primarily an IP effort for you or do you expect to be during products on that version of HDMI.

Ali Khatibzadeh

Yeah we expect to develop products as well as provide IP. We believe that’s the right business model for the high speed interface segment. And we are getting half contractions with the top gear OEMs in that phase that we believe could materialize in terms of IP revenue potentially this year and IC revenue next year.

Operator

And next up we have a question from Kevin Cassidy of Thomas Weisel Partners

Kevin Cassidy - Thomas Weisel Partners

Hi. Thanks for taking my question. I wonder on the Korea, you guys mentioned that they’re still soft. I wonder if your customers are giving you, is it inventory or is it demand or just if you could describe below more what the softness is.

Bob Bosi

Yes its related to the promotion of the voice-over-IP boxes by the operator in Korea. I think the feedback we are getting as the operator would like to have kind of a dial back in to the voice-over-IP only boxes and focus going forward on more triple play kinds of services, which is a business that we are also engaging. And we have products with that segment in the market. I think you know as we see around the, not just in Korea but other places, the voice-over-IP only business is obviously a price sensitive market and operators to the extent that they can get revenue from their subscribers that will promote that but I think there is a desire globally for them for operators who not only offer voice only services but also video IPTV as well as to mind triple play services.

Kevin Cassidy - Thomas Weisel Partners

Right understood and in Asia it seems like there’s been an increase in deployment? I think in China the government has put out a number of 80 million users by the end of next year. I guess how much exposure would you have to that?

Bob Bosi

We have good exposure to that. We think China is a great market opportunity for us I heard numbers that China government plans to deploy broadband access to over 100 million homes in the next three years. So your 80 million is not outlined with the numbers that I am hearing. I heard numbers that this year you know up to 40 million voice-over-IP ports could be offered to Chinese consumers. So that’s a great market and we’re very well engaged and we’ll continue to increase our presence in China as we go forward.

Kevin Cassidy - Thomas Weisel Partners

Okay and just one last question on the rights offering. What are the plans for the $10 million?

Ted Chung

It’s working capital improvement, we plan to use that for funding our operations and product development growth.

Operator

Moving on now to our next question, this is Quinn Bolton at Needham & Company.

Quinn Bolton - Needham & Company

First of all maybe for Bob just on the rights offering. Can you just sort of walk through the timing you had mentioned that I think tonight was the record date. Did the rights expire after a certain number of days, since all of the rights are exercised, how long does it take for you to receive that $10 million?

Ted Chung

Well, Quinn we are in a quiet period. Today is the record date with respect to the termination date, we have not announced that and we really cannot discuss anything that’s not in the testimony that’s filed. When the SEC makes it effective, then we can have that discussion.

So at this point we have announced that publicly. We cannot do that this evening.

Operator

Well, we’ll move on in and I’ll just remind everyone (Operator Instructions). And at this time we do not have any additional questions holding.

Ali Khatibzadeh

Okay. With that I’d like to thank the management team and the employees of TranSwitch [I think] we made progress in Q1, first quarter in terms of stabilizing the business and managing our operating expenses effectively. We have a number of opportunities going forward. I’m very excited about the prospects for our business in each of our product line and as we continue as we move forward. We hope to announce new significant addition to our customer space and we look forward to seeing our business growing in 2010 and beyond.

Operator

And gentlemen as you’ve said that, Mr. Bolton is back online. Do you have time to make sure his question was addressed?

Ali Khatibzadeh

Certainly.

Operator

Just a moment please.

Ali Khatibzadeh

And were you able to hear my comments there?

Operator

Mr. Bolton are you there? Quinn Bolton are you still on line? You might check your mute button. Mr. Bolton? Gentlemen I apparently that was not an accurate signal. So, with that we don’t have any other questions holding.

Ali Khatibzadeh

Thank you very much.

Operator

Ladies and gentlemen thanks again for joining us. That will conclude today’s call. Once again have a good day.

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