TransSwitch Corp. Q2 2010 Earnings Call Transcript

Jul.31.10 | About: TranSwitch Corp. (TXCCQ)

TransSwitch Corp. (TXCC) Q2 2010 Earnings Call July 29, 2010 4:15 PM ET


Ted Chung - Vice President of Business Development

Ali Khatibzadeh - President and CEO

Bob Bosi - CFO


Richard Shannon – Northland Securities

Todd Brady – Oppenheimer

Kevin Cassidy - Thomas Weisel Partners

Quinn Bolton - Needham & Company

Kevin Cassidy - Thomas Weisel Partners


Good day, everyone. And welcome to the TransSwitch Second Quarter 2010 Earnings Release Conference. Today’s conference call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to TransSwitch Vice President of Business Development, Ted Chung. Please go ahead, sir.

Ted Chung

Great, thank you. With me here today are Dr. Ali Khatibzadeh our President and CEO; 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 TransSwitch’s products are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These risks are detailed in TransSwitch’s filings with the Securities and Exchange Commission. With that out of the way, I will give the highlights for the second quarter of 2010.

For the fiscal second quarter of 2010, net revenues for the quarter were approximately $14.1 million. We had previously guided to a range between 13 and 14 million.

Our non-GAAP operating expenses for the quarter were roughly 6.6 million, lower than our previous guidance. As a result of the higher revenue and lower operating expenses, the company achieved operating income of roughly 0.9 million on a non-GAAP basis.

Bob will provide additional details later.

The company also made the following announcements during the quarter.

We announced the successful completion of our rights offering, raising $5.1 million by selling stock to existing shareholders at $2.40 per share.

We also, based on the success on the rights offering, terminated our equity sale agreement with Seaside 88.

We commenced production shipments of our Atlanta 80 to a large Chinese OEM for WiMax deployment in Europe and Asia.

We also introduced the Atlanta 1,000, our latest product for customer premises applications, such as Wi-Fi routers and gateways.

Global Unichip, which is the largest semi-conductor design services company in the world, and 36% owned by Taiwan Semiconductor, licensed our HDMI technology. This further highlights our leadership in HDMI.

I will now hand it over to Ali, so that he can share with you his thoughts on the second quarter and some of our opportunities going forward.

Ali Khatibzadeh

Thank you, Ted. And good afternoon, Ladies and Gentlemen. I am pleased to report that in the second quarter, we made significant progress in financial performance, customer attraction and new product introduction.

In terms of financial performance that Ted mentioned, our revenue grew by roughly 10% quarter over quarter. And we were able to record both operating income and positive EBS. In fact, since 2001, it is the highest operating income achieved by the company.

While the gross margin was flat sequentially, we project gross margin improvement as we move into the fourth quarter due to operational improvements, as well as a ramp down in lower-margined products, and an anticipate a ramp up of newer, higher-margin products.

In addition, we successfully raised about $5 million through the rights offering, with overwhelming participation and over subscription by our directors, officers, and major shareholders.

Moving to the progress made in our businesses; infrastructure, products revenues in the second quarter came in at $8.8 million, slightly higher than the prior quarter, as there were increased shipments of access and voice-over IP products, primarily due to ongoing rollouts in China.

Our China business has, in fact, increased 19% sequentially. We expect areas in China to continue to deploy fiber and copper-base broadband services, including Voice-over IP.

We also saw strength in North America based on the previously-mentioned increasing CapEx spending by AT&T and other operators, which benefited our Entropia sales.

With the continued strong demand for 3G and 4G mobile phones, we expect this trend to continue. We are also seeing adoption of voice-over IP solutions based on Entropia in Asia-Pacific.

For the second half of 2010, we see continuing progress in our infrastructure business based on increased telecom spending on voice-over IP services around the world.

Another area of progress is in the enterprise and access/voice-over IP market, where our latest Entropia Compact is gaining good traction with anticipated ramp up in the fourth quarter.

Entropia Compact is optimally designed to handle voice processing configurations from 16 to several-hundred ports.

Switching gears to the customer premises side, revenue from the second quarter came in at $5.3 million, roughly a million dollar increase over the first quarter.

As Ted mentioned, we began production shipments of Atlanta products to a large Chinese OEM for WiMax deployments to two carriers in Spain and Pakistan.

In addition, there are several other active WiMax vendors around the globe. For example, as you may have heard, India recently auctioned licenses for 4G WiMax deployments. We believe our customers should be well positioned to gain share in the growing 4G market.

Our newest product, the Atlanta 1,000, expands our addressable market beyond home gateways to Wi-Fi 802.11 and router business by delivering industry-leading performance in terms of wire-speed data throughput.

Atlanta 1,000 also offers the lowest power consumption in the industry. In fact, it is one of the few processors on the market today that is capable of being powered over the Ethernet, which is a major requirement for carriers going forward. So we’re very excited about that.

Moving to our high-speed interface products, which is a new strategic focus for the company, we’re making exciting progress.

We licensed to Global Unichip our HDMI 1.4 technology. This is the first commercial offering to be fully compliant with full-rate 3D HDTV requirements.

As GUC’s customers develop products incorporating HDMI interfaces, we anticipate additional license revenue streams.

We also signed additional video interface contracts in the quarter, which impacted Q2 revenue and should also contribute in the third and fourth quarters.

As part of our new strategic direction, we’re developing new video interface IP products that leverage our differentiated technology in collaboration with leading manufacturers. These products are planned for introduction in 2011 with potential revenue impact later next year.

In summary, I’m pleased with our progress and our financial performance, customer traction and new product executions during the second quarter.

We’re making considerable progress toward winning new customers with already introduced infrastructure and CPE products.

The new business growth is somewhat offset by the natural decline of our legacy business. We have taken steps to realign our market and development focus over the last six months on products that serve the delivery of voice and video over wireless and wireline networks.

As a result of this, our addressable market has significantly increased from less then a billion to over $2 billion. And we project the five year aggregate annual growth rate of our new-served market to be over 20%.

Our new product development projects are well aligned with these high-growth market segments, where we offer highly differentiated solutions. We believe this strategy will create new growth engines for the company as our new products will reach market starting 2011.

I remain optimistic about the long-term prospects for the company – the long-term prospects of the company.

I’ll now hand it over to Bob, who will shed light on our financials and provide our complete guidance for the second quarter.

Bob Bosi

Thanks Ali. And as Ali and Ted mentioned, we had a strong second quarter. We reported our second consecutive quarter of sequential revenue growth.

Q2 revenue of $14.1 million exceeded the high end of our guidance for the fourth quarter and reflects and increase of $1.3, or 10% over Q1.

The geographic breakdown of our second quarter total revenue is as follows. Asia-Pacific, 57%; Americas, 30%; and Europe, 13%.

The top countries for our second quarter revenues were Japan, China and the United States.

In Q2, we had four customers, including one distributor, that represented greater-than 10% of all revenue.

Gross margin from the second quarter of 53% was in line with our guidance and consistent with the 52.7% gross margin in Q1 this year.

On a non-GAAP basis, operating expenses decreased from 6.9 million in Q1 to 6.6 million in Q2, and is 0.4 million less than our outlook on expenses that was provided in our last quarterly conference call.

Non-GAAP operating results for Q2 was income of approximately $900,000 compared to our guidance of between break even and 0.4 million.

For Q1, we had non-GAAP operating loss of 0.1 million, and we had income of 0.5 million for Q2 2009.

Non-GAAP net income for Q2 was 1.5 million or point-7 cents per share on a dilute basis, as compared to 2.2 million loss in Q1 and 0.5 million loss in Q2, 2009.

Q2 2010 GAAP diluted net income per share was $0.02 versus loss of $0.07 in Q1, and a loss of $0.07 in Q2 of 2009.

Comparable GAAP measures for gross margins, operating expenses, operating income and net income are reconciled to the related non-GAAP amounts in our reconciliation of GAAP to non-GAAP measures included in our press release today.

The reconciling items for Q2 are as follows; 0.4 million in amortization of purchase and tangible assets; and 0.6 million in stock-based compensation expense as described in the press release.

Turning to the balance sheet, we ended the quarter with 8.7 million in cash, cash equivalence, and restricted cash and short-term investments.

Our accounts receivable, at the end of Q2 was 12.6 million, which decreased of 4.1 million from the end of the Q1 balance of 8.5 million. Did I say decrease? Increase. Okay. This increase was due to the significant shipments in service revenue billings in June.

Inventory at the end Q2 was 2.7 million, which decreased 1.2 million from the ending Q1 balance of 3.9 million.

Our equity-raising activities in the quarter yielded net proceeds of 5.4 million, approximately 4.7 million from our rights offering and 0.7 million from our arrangement with Seaside. And as Ted mentioned, we canceled the Seaside arrangement after we closed our rights offering.

I’ll now provide information about our Q3 outlook.

Considering levels of demand and our expectation of booking rates throughout the balance of the quarter, we estimate the potential revenue for TransSwitch for Q3 is in the range of 13.5 million to 14.5 million.

Our shipped and shippable backlog as of today is approximately 12.2 million, which is approximately 90% of our low end of our guidance.

On a non-GAAP operating basis, we expect our overall gross margin percentage in Q3 to be still around, 53 million. As Ali mentioned, we expect 53%.

As Ali mentioned, we expect our gross margin to increase in Q4 as lower-margin legacy price are being replaced with higher-margin products. Net GAAP operating expenses in Q3 are expected to be about 7.1 million, increasing from the 6.6 million in Q2 due to increase R&D investments in our high-speed interface product line.

We expect non-GAAP operating income to be about 0.1 million to 0.6 million.

In summary, we believe we made progress since our last conference call. We are very happy with our relative performance and our current financial position, and we look forward to continued growth and profitability.

With that said, we thank you for your support and we’ll now open up the line for questions.

Question-and-Answer Session


Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions)

We’ll first go to Richard Shannon, Northland Securities.

Richard Shannon – Northland Securities

Gentlemen, how are you? Congratulations on a nice quarter. I guess first question, kind of maybe a set of questions here on your high-speed interface or HDMI products, a little bit more discussion than I’ve heard in the last several quarters, which is great.

I’m kind of curious how many new licensees you’ve had. I jumped on a little late on the call, so maybe I didn’t catch it all. But how many new licensees did you have in the quarter, and what’s the total number that you have now?

Ted Chung

We signed three new contracts, you know, sort of over the last 90 days, if you will. I can’t exactly remember if it ended, if the last one was signed right before the quarter or right after the quarter. But, I think in total, we now have customers that have actually licensed multiple different flavors. So I think in total, we’ve signed up about seven licenses since we introduced this technology in our first HDMI licensable technology about a year and a half ago. I actually see the funnel accelerating. So we’re pretty excited about the prospects for this business.

Richard Shannon – Northland Securities

Okay. What’s the total number, in that funnel in terms of number companies that you’re even looking at, or actually interested in and you are talking to? Is this a number that gets to like 20 or 50?

Ted Chung

You know, we generally don’t like to comment about the size of the funnel. But it’s certainly a lot more than the number of licenses we have today.

Richard Shannon – Northland Securities

Okay, fair enough. What’s the general expectation when you start to see meaningful ongoing royalties instead of these upfront payments? What’s that timeframe that we should be thinking about there?

Ted Chung

I think we’ll start to see some royalties in 2011. That is more based on the success of our customers. So I think we’ll start to see some of the ongoing royalty revenue in 2011. And also, we plan to introduce the IC products in 2011, which is another part of that growth story, if you will.

Richard Shannon – Northland Securities

Okay. And those products you’re going to introduce next year, are those going to be 1.4 or 1.3 or both, or what should we expect there?

Ali Khatibzadeh

We’re developing those products in concert with key customers. We really cannot give more details on that. But we hope to, as we go forward, as we make progress we’ll say more about that in the future.

Richard Shannon – Northland Securities

Okay, fair enough then. In terms of kind of falling on the very exciting product in the Atlanta area with this, specifically the WiMax CPE that I think you’re selling through one major OEM. You talked about a couple of different deployments. What’s your outlook on additional deployments coming through? And the also any other OEMs that are interest in that product for WiMax or very a similar flavored kind of device?

Ali Khatibzadeh

Well as you know, WiMax has been sort of – there’s has been certain areas such as the U.S. where there’s been early introduction of WiMax. In terms of fixed-wireless terminal, WiMax adoption, which is the particular announcement that we made, we believe that’s the beginning of deployment in many parts of the world. India, for example, until very recently, there was a lot of discussion, but it was very recently that they basically auctioned off the licenses for, and we believe that set the ball in motion for business in that area.

We hope our customers can capitalize on that opportunity. But, if you look at the plans for WiMax deployments around the world, there are many operators globally that are planning to deploy this technology. So we remain optimistic and hopeful that we will see the benefits from those rollouts.

Richard Shannon – Northland Securities

Okay, great. Just two last quick questions from me. A couple of quarters ago you had some reasonably good business with a Korean customer for voice-over IP gateway devices. It looks like there was a pause there in the first half of the year, is that a business you expect to come back here in any extent any time soon? Any kind of overall thoughts on that?

Ali Khatibzadeh

We’ve seen some recovery in the business with the particular customer you mentioned. I think in Q2 we had about a slight increase of 10% or so increase in business. And we expect that to continue, although not at the same run rates that we had last year. We expect the business to recover to somewhere around maybe 50%, in the next two quarters, of the level of business that we had before.

Richard Shannon – Northland Securities

Okay, great. Then a last quick question. I think Bob, in your comments, you mentioned that you had four customers that were large, or 10%, I’m not sure which one you said, one being the distributor. Can you identify those customers?

Bob Bosi

Richard, we’re not required to do so until the end of the year, and I think we’re adopting that policy.

Richard Shannon – Northland Securities

Okay, that’s fair enough. I’ll jump out of line and congratulations guys, thanks.

Bob Bosi

Thank you, Richard.


(Operator Instructions)

We do have a question from Todd Brady, Oppenheimer.

Todd Brady – Oppenheimer

Hi. A quick balance sheet question. Can you guys break down the revenue contributed past quarter that had been previously been done or written off? Thanks.

Ted Chung

Excuse me, could you repeat that question?

Todd Brady – Oppenheimer

Can you guys break down revenue that has been previously written down or off for the past quarter?

Ted Chung

Are you referring to our write offs on our cost-of-goods sell lines?

Todd Brady – Oppenheimer


Ted Chung

Okay. That was $269 million, $200,000. Just old legacy products from our TransSwitch business line

Todd Brady – Oppenheimer

As I say, I’ve not been on your call in a couple of quarters, so I’m just trying to pick up the pieces. It sounds like you guys have some interesting new products and you’re gaining some traction now. I appreciate it.

Would it be fair to say if you’re looking at a couple of quarters, you anticipate your Op Ex to remain flat. What do you see in the next couple of quarters on the Op Ex line? Thanks.

Ted Chung

I think that we have set our operating expenses about $7 million, plus or minus if you will, in that range. We’re guiding to 7.1 million for next quarter. And we remain it will be in that range for the balance of 2010. Of course, we’ll evaluate our 2011 plan. As we fill out those plans, we’ll communicate this.

Todd Brady – Oppenheimer

One final question. Would it be fair to say that you feel more enthusiastic about North America in 2011 and the opportunities for your business than you did six months ago? Do you remain – help me get some better color on North America and the wireless market you guys are addressing and selling into, and what you’re seeing in 2011 because you guys are starting to see some color there. Thanks.

Ted Chung

Certainly we see North America as an area that will continue to contribute to our revenue and growth. That’s primarily driven by the early adoption of the 3G and Smartphone technology in the U.S. market that’s driving capacity expansion and deployment in U.S. by operators such as AT&T, Sprint, and other carriers.

We expect that to continue to contribute to our financials. In terms of the fastest growing market for us, is certainly China and other Asia-Pacific countries. China, we believe, will be a big contributor as we go forward.

Todd Brady – Oppenheimer

I appreciate that. Thanks.


There are no further questions at this time. (Operator Instructions)

We’ll now take a follow-up question from Richard Shannon, Northland Security.

Richard Shannon – Northland Securities

Hi, guys. Just one, or maybe two quick follow-up questions. Ali, on your Atlanta products, both the Atlanta 80 that’s out there in the market, and the one you just introduced, the 1,000, what does the competitive profile look like? Who are your main competitors, and what are the features that you think you’re beating them on that’s helping you sustain what looks like pretty nice momentum you’re starting out the gate.

Ali Khatibzadeh

Yes, the Atlanta 80 obviously is an older product that we introduced some time ago, and of course, we have continued to gain traction for that product. That product is really designed for what we call low-density home gateway solutions that have VOIP capability.

The Atlanta 1,000, our newest product, is designed to have very low power consumption, and that’s very important because as you know there’s a strong emphasis towards power consumption driven by Green Compliance. And operators are requiring almost now, that going forward, that some of these boxes need to have certain very strict power control, power-consumption ratings.

Our processor has low enough power, roughly about, I believe less than 1 watt of power consumption, which enables it to be powered over the Ethernet cable. And that obviously is very attractive to customers.

That product also opens a door to a new market that we have not been present, and that is the Wi-Fi router business. Our product is capable of delivering the full wire speed Wi-Fi N specification in terms of data throughput. We have good prospects for that product in the market.

In terms of competition with our product, we typically compete against companies such as Mindspeed or Iconas, or Broadcom, RealTek, those are the kind of companies we see out there.

Richard Shannon – Northland Securities

Okay, great. Then my second question, again, I think for you, Ali. Your Entropia product, the one going in the infrastructure business with AT&T and others, I know that’s not initially a new product, but judging from your comments again today, it still like it still continues to do quite well, kind of a steady growth pattern.

Are you seeing any emerging competition for that? And I guess on the opposite side, is that something you still see growing here to some extent over the next several quarters, even a couple of years.

Ali Khatibzadeh

Yes. I think a lot of our growth prospects in Asia is tied to the Entropia Compact product that we have introduced. That product addresses different segments of the market, specifically the PON MDU, which is Passive Optical Network Multi-Dwelling Unit market that we believe will be expanding for the next few years.

Also, it addresses enterprise applications where we see our performance actually is very valued by customers. That’s for applications such as IPBX, and also access as I mentioned. So we’re seeing good traction. Of course, we also have the high-density process of the Entropia 4, which is currently in deployment. And we expect to see ramp up in Japan starting about 2-4 timeframe with new operators.

Richard Shannon – Northland Securities

Okay, great Ali. I appreciate all that detail, and I will jump offline. Thanks a lot.

Ted Chung

Thank you.


There are no further questions at this time. I will go ahead and turn this conference over to Ali Khatibzadeh for any additional or closing remarks.

Ali Khatibzadeh

Thank you everyone. Thanks everyone for participating in our call. And we look forward to sharing with you our progress as we go forward in the next earnings call. Thank you.


And that does conclude today’s conference. Thank you all for your participation

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