Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Ted Chung - Vice President of Business Development

Ali Khatibzadeh - President and CEO

Bob Bosi - CFO

Analysts

Richard Shannon - Northland Capital

Lilly Wu – TGRA Capital

Presentation

TranSwitch Corporation, (TXCC) Q4 2010 Earnings Call February 8, 2011 5:30 PM ET

Operator

Thanks so much for holding, everyone. Welcome to today's TranSwitch fourth quarter 2010 earnings release conference call. Just a quick reminder, today's call is being recorded. And now for opening remarks and introductions, I would like to turn things over to Mr. Ted Chung, Vice President of Business Development. Mr. Chung, please go ahead, sir.

Ted Chung

Great. Thank you. With me today are Dr. Ali Khatibzadeh, our president and CEO and Mr. Bob Bosi, our CFO.

Before I begin, I want 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 give some highlights for the quarter and then hand it over to Ali for more details.

For the fiscal fourth quarter of 2010, net revenues for the quarter were approximately $10.1 million within the guidance range provided on our last earnings call in October. Gross margins improved to 64% in the quarter, up from 56% in the September quarter due to operational improvements and a change from legacy products to newer products.

Our non-GAAP operating expenses for the quarter were 7.3 million, and we announced a restructuring today to further streamline the company toward our strategic focus. Bob will provide additional details later. Our non-GAAP operating loss for the quarter was $900,000, which was in the range of our previous guidance. I will now at this time hand it over to Ali, so that he can share with you our progress on strategic realignment as well as his thoughts on the fourth quarter.

Ali Khatibzadeh

Thank you Ted and good afternoon ladies and gentlemen I'd like to start by giving you an update on where are relative to our strategic repositioning of the company, which is consuming a lot of energy internally and may not be as visible to those outside the company. I will then discuss the fourth quarter and the status of our current business.

In 2010 soon after I joined the company, we completed the strategic to evaluate both the company's core competencies as well as our target markets. Our research concluded that TranSwitch has leading-edge technologies in high-speed video, high-definition video interconnect, as well as voice-over IP. Since last year, we've speared our internal R&D development focus to the high-growth markets of high-definition video and voice, driven in large by mobile multimedia. We all recognize the major trends in the industry that our fundamentally changing the nature of our business, and which we've fully captured in our business strategy.

First, the advent of 3G and 4G mobile technologies combined with the proliferation of smart phones and tablets are driving the explosion of multimedia streaming. This in turn is driving increasing capacity requirements for networks that can seamlessly handle voice and video over IP. Second, increasing demand for high-definition video content, including 3D video among many categories of consumer products and applications. In 2010, it is estimated that about 500 million ports of HDMI were shipped in products such as digital TVs, monitors, and other audiovisual equipment. And that is practically before HDMI showed up in smart phones.

Now with the application of high-definition video on smart phones and tablets, it is estimated that the growth of these devices with HD interconnect will accelerate, and by 2014, it is estimated that over 1 billion devices will have high-speed, high-definition video capabilities. TranSwitch has key core technologies and differentiators to participate in gain share from these growth drivers starting in 2011. In terms of our technology differentiation, our high-definition video interconnect technology is second to none. Our HDP technology, which is our patented technology, enables seamless integration of 3D-capable HDMI and display and DisplayPort interconnect. While 3D is one of the key drivers for this industry, other trends include demand for larger screen sizes, more color resolution and faster refresh rates. All of these necessitate faster interconnect speeds, meaning more 10 gigabyte per second over copper, and today we offer an unparalleled technology in terms of not only meeting the market needs of today's products, but also driving the requirements of tomorrow's.

Similarly on the voice-over IP side, the performance edge we have in DSP technology enables our customers to efficiently process large volumes of video and voice packets per second, which is critical for network capacity expansion to meet mobile multimedia explosion. In fact, Cisco Systems reported on February 1 that mobile date traffic will increase 26-fold over the next five years, driven by smart phones and tablets. This requires commiserate expansion of network bandwidth, and our Entropia family of processors are designed to meet this challenge.

So last year we kicked off new product development efforts as part of this new strategic focus to take advantage of our key differentiators and we are now on track to introduce the first generation of HD video IP products in the second quarter of 2011. These products will feature our patented HDP technology, which means 3D HDTV requirements at full-refresh rate and compatible with low-cost HDMI cables. We anticipate revenue contribution from these products starting in fourth quarter of 2011. There are other products in development that we will introduce as we move into the second half of 2011 and beyond, again, targeting the fast-growth segments of high-definition video and voice markets.

So if you look at the direction we're heading, going into 2012, compared to our transfer which was 2010, and prior to that, our addressable market is increasing several fold to over $1 billion in 2012 and forecasted to grow to over $2 billion by 2014. Equally important, our competitive position in these markets is substantially better than the legacy TranSwitch products. So I feel very strong and confident about the direction we're heading, and about the breadth and depth of our product portfolio that we're bringing to the market.

Moving on to the business in the fourth quarter of 2010, the fourth quarter pretty much played out as we had anticipated. And while the customers are working through the excess inventory that had been built up during 2010, we expect the situation to continue through the first quarter of 2011. We've seen indications from some of our customers that demand could increase as we move into the second quarter. On the Customer Premises side in 2010, we had the highest level of licensing of our video IP course validating our best-in-class technology. Moreover, in the area of high-speed interconnect, one of our chief licensees, among the largest semiconductor companies in the world, has recently gone to production with their processor, incorporating our video IP, and we should begin to see royalty contributions perhaps as early as this quarter.

In terms of our overall CPE business, CPE revenue came for the fourth quarter in roughly around $3 million. We're awaiting the ramp-up of our new customer products this year. During the quarter, our engineering team spent a great deal of effort working with our customers to bring up platforms including our Atlanta 1000 and 2000 products for Enterprise and consumer voice-over IP applications. Qualification of customer products with carriers, which were planned for December, are now expected in the first quarter, and we anticipate production ramp soon thereafter.

On the infrastructure side, revenue for the fourth quarter came in roughly at $7.2 million. We have been told by our customers, that while the inventory is still being worked out, the overall demand for our infrastructure products should normalize as we get beyond Q1. In Japan, we are beginning shipment of our Entropia products to OEM, as KKDI and SoftBank have begun deployments of voice-over IP. We continue to await NTT's decision regarding VOIP deployments and their migration plans for legacy PSTN network, which would be a meaningful driver for our business.

During the last year, there were some uncertainty relating to the NTT plans as there were talks of further deregulation and perhaps even a breakup of the Japanese carrier. At the present time, it looks as though NTT will remain intact, and we're hopeful that this news stability will lead to greater visibility for our Japan business. We also saw contained deployment of Entropia in Latin America due to voice-over IP infrastructure build outs in Brazil and other countries. Notwithstanding the current inventory situation, we believe the long term prospects of broadband infrastructure equipment supporting voice and video remains sound. I'd like to hand it over to Bob now to present our fourth quarter financials and provide guidance for the next quarter.

Bob Bosi

Thank you, Ali, and good evening to everyone. TranSwitch's fourth quarter revenue of $10.1 million was a disappointment compared to Q3 revenue of $12.8 million, but in line with our expectations of $10-11 million. That product revenue for the quarter was approximately $6.9 million compared to product revenue in Q3 of $11 million and $10.7 million in Q4 of 2009.

Net service revenue for the quarter was $3.2 million, compared to service revenue in Q3 of $1.8 million and $1.5 million in Q4 of 2009. Our service revenue includes revenue related to intellectual property licensing our HDMI technology, NRE related to activities of some telecom customers as well as royalty revenue. Slicing our revenue by product line, our CPE revenue for the quarter was $2.9 million compared to CPE revenue in Q3 of $5.1 million and $3.6 million in Q4 of 2009. Our infrastructure revenue for the quarter was $7.2 million compared to infrastructure revenue in Q3 of $7.7 million and $8.5 million in Q4 of 2009. Our geographic breakdown for the fourth quarter revenue was as follows: Asia Pacific 44%, Americas 36%, and Europe 20%. In Q4 we had four customers including one distributor that represented a greater than 10% of our revenue.

On a positive note, gross margin in the third quarter was 8 points higher than our margin in the last four quarters and four points higher than the guidance that we provided. This increases the (inaudible) of sales of higher margin infrastructure products and higher IP sales and operating improvements. On a non-GAAP basis, operating expenses were $7.3 million compared to $7.1 million of our guidance that we provided for the quarter. Q3 non-GAAP operating expenses were $6.6 million but included an accrual reversal of $400,000 for a sales tax issue. Q4 2009 non-GAAP operating expenses were $8.6 million.

Non-GAAP operating results for Q4 was a loss of approximately $900,000 which was in line with our guidance of a loss between $600,000 and $1.1 million. For Q3, we had non-GAAP operating income of $0.6 million and we had a loss of $2.1 million for Q4 of 2009. Non-GAAP net loss for Q4 was a loss of $1.1 million, or $0.05 per share on a basic and diluted basis as compared to non-GAAP net loss of $800,000 in Q3 and $2.2 million loss in Q4 of 2009. Q4 2010 diluted net loss per share was $0.08 versus a net loss per share of $.08 in Q3 and a loss of $0.64 in Q4 of 2009 which included a goodwill impairment charge. The comparable GAAP measures for gross margin, operating expenses, operating income, and net income are reconciled to our related non-GAAP amounts in reconciliation of GAAP to non-GAAP measures included in the press release today.

Reconciling items for Q4 are as follows: expense of $400,000 in the amortization of purchase and tangibles, expense of $700,000 in stock-based compensation expense. A benefit of $0.4 million of a reversal of accrued royalties as described in the press release.

Turning to the balance sheet, we ended the quarter with $7.8 million in cash, cash equivalents, restricted cash, and short-term investments compared to $12.3 million at the end of last quarter, and $5.1 million at the beginning of the year. Our accounts receivable at the end of Q4 was $7.9 million, up from $7.8 million, which we reported last quarter. Inventory at the end of Q4 was $2.6 million compared to $2.7 million, which we reported last quarter and substantially lower than the previous year-end balance of $4.2 million. During the quarter, we made scheduled convertible note payments of $1.2 million. Our convertible note balance is now $3.7 million and is scheduled to be paid within the next 3 months.

Now I'll provide information about out Q1 outlook. As Ali discussed, we have continued to experience a broad-based slowdown in demand for our telecom products in Q4 coupled with the expected ramp-down of our lower-margin legacy products as we mentioned in the earnings call last quarter. Considering levels of demand and expectation of book rates through the balance of the quarter, we estimate our potential revenue for TranSwitch in Q1 of 2011 is in the range of $8-10 million.

On a positive note, we expect our overall gross margin percentage in Q1 to remain around 64% as we achieved in Q4 in 2010, up from the 56% we saw in Q3 of 2010. This increase, again, is due to mix change in operational improvements. Non-GAAP operating expenses in Q1 are expected to be $7.1 million, down from $7.3 million in Q4 in 2010 and up from the lowest quarter of non-GAAP operating income that we achieved in Q2 and Q3 of 2010 of $6.6 million. This increase is due to increased R&D investment in our high-speed interface product line. In Q1, we expect our non-GAAP operating loss to be between $0.7 million and $2 million. In addition, as we announced in form 10 form 8K that we filed today, we also plan to take a restructuring action in Q1 to reduce our operating expenses by $2 million on an annualized basis. Accordingly, we plan to record a restructuring charge in Q1 of $0.5 million, principally for severance costs.

In summary, while the slowdown in telecom communications spending has adversely affected our top-line in the short-term, we have taken steps to reduce our spending and improve our operations. In addition, as Ali stated, we are continuing on our path of repositioning the company towards higher-growth markets of video and voice-over IP products. I would like to also reiterate that we remain very excited about our new product initiatives that should position the company for sustained profitable growth for the future. With that said, we thank you for your support and we will now take your questions.

Operator

Thank you very much Mr. Bosi. (Operator Instructions) We ask that you please limit yourself to one question and one follow-up question. (Operator Instructions)

Question-and-Answer Session

Operator

And ladies and gentlemen, we'll take our first question this afternoon from Mr. Richard Shannon at Northland Capital Markets. Please go ahead, sir.

Richard Shannon - Northland Capital

Hi, gentlemen, how are you today?

Unidentified Executives

Good, good, how are you Richard? Hi, Richard.

Richard Shannon – Northland Capital

Hi, fine, thanks. Good to talk to you guys. I guess since we're limited to a couple of questions, I'll throw a couple of bigger-level questions out there first. In terms of the guidance for the first quarter, I'm kind of curious of how your early expectations of product versus licensing revenues and whether that licensing anticipates any sort of upfronts or is that more of a royalty-based stream there?

Ted Chung

Well let me answer your first question first. I guess we would expect the mix between product and service to be roughly the same as what you saw in the fourth quarter. We've seen a pickup in some of that service revenue, and to answer your second question, really it's been in the form of upfront licensing fees, although there is the potential, as Ali mentioned in his portion of the prepared remarks, that we could start to see some meaningful royalty start to kick in here pretty soon.

Richard Shannon – Northland Capital

Okay, Ted, and that's a perfect lead-in to my second question, which is regards to this large semiconductor licensee that you've mentioned. It's my understanding that this was a licensee originally signed up a number of quarters ago. I'm kind of curious to the magnitude of which we could see from this licensee over time, like maybe towards the end of this year. Is this something that could be on the order of a million dollars, a couple of million dollars a quarter? And also, just understanding the applications they're expecting to roll into.

Ted Chung

Sure. The applications are certainly consumer oriented, for really computing and consumer electronics. In terms of what kind of royalties you could see on a per-licensee basis, it obviously will differ as each of our contractual arrangement differs with each licensee. But for that specific customer, I think you could see in the range of $1 million plus over a sort of year period and have that continue for some period of time. Hopefully that answers your question.

Richard Shannon – Northland Capital

That's very helpful, Ted. Thanks, I'll jump out of line.

Operator

And we'll take our next question now from Lilly Wu with TGRA Capital. Lilly, please go ahead.

Lilly Wu – TGRA Capital

Yes, thanks. I was wondering, the guidance for the first quarter '11. Would that include the prior announcements you've made about a design win with a major China telecom OEM, which I think on past calls you mentioned would start shipping in first quarter '11. Could we get some update whether that indeed will be contributing this quarter, or if there's any other relevant updates on that China front?

Ali Khatibzadeh

Yes, there is contribution from that announcement in our first quarter projections, and we anticipate as we move into 2011 that that contribution will increase in terms of the dollar.

Lilly Wu – TGRA Capital

Okay. So when we talked about a inventory overhang or slowdown in the telecom space, you're more referring to established, existing customer base in the Americas and Europe? Because we're really not seeing such kind of telecom slowdown with other major telecom equipment suppliers. So I was wondering if you could give more color on the kind of slowdown you're seeing?

Ali Khatibzadeh

Yes, it refers more to the core infrastructure products, which are a combination of our legacy business TranSwitch and some of the voice-over IP customers in North America.

Lilly Wu – TGRA Capital

Alright, thanks.

Ali Khatibzadeh

I'm sorry, go ahead.

Operator

I'm sorry, sir. Please go ahead.

Ted Chung

We'll take the next question.

Operator

Thank you, gentleman. We'll take a followup question now from Richard

Richard Shannon – Northland Capital

Hi guys. Maybe a couple of questions on your announcement on forthcoming products in the video interconnect areas for HDMI and DisplayPort. The first question is what's the time frame for sampling these products and then when do expect at the earliest point at which we can see some further material revenues?

Ali Khatibzadeh

Yeah, as I stated, we plan to introduce our first products in the second quarter and we expect revenue contribution sometime in the fourth quarter.

Richard Shannon – Northland Capital

Okay. And then in terms of portfolio strategies here, Ali, and I've seen the demos of your HDT product, which is fairly unique out there, I'm kind of curious to the extent and breadth of which you intend to have products in this general area. Will you have stand-alone HDMI and/or stand-alone DisplayPort products and any other sorts of new angles that you might be anticipating taking this product line going forward.

Ali Khatibzadeh

Certainly we want to build on our differentiated technology. We anticipate there will be derivative products from the platform we will announce in the second quarter. I can't say more about this, the follow on products, but we hope that time will give you more color and light on the next generation of products that will be introducing in the second half.

Richard Shannon – Northland Capital

Okay, and then one last one for me, and kind of a bigger-picture question again on the HDMI video interconnect products on the IP side. How does the pipeline look for signing up new licensees, and how many do you have currently signed up?

Ted Chung

In terms of contracts that we've done, it's approaching, or roughly at about 10 licensees. And really since we introduced our IP course a couple of years ago, we've only seen more demand for these products, and I think you're really seeing evidence of both HDMI and DisplayPort interface standards really being widely adopted across a number of different applications. We see evidence in that as our funnel continues to grow. So we're very pleased with the opportunities we see, and we think this piece of our business can continue to grow for the foreseeable future.

Richard Shannon – Northland Capital

Okay, great. I will jump out of line, guys. Thank you.

Operator

(Operator instructions) And ladies and gentlemen, it appears we have no further question this afternoon. Dr. Khatibzadeh, I would like to turn the conference back to you sir for any concluding remarks.

Ali Khatibzadeh

Thank you. I just want to summarize that while there are some near-term challenges with respect to our current telecom products, we are now well positioned to take advantage of the larger, higher-growth consumer markets as we move into the second half of 2011. I believe the steps we've taken to sharpen our R&D focus over the course of the last 12 months to broadband voice and video products with emphasis on consumer market should start creating significant value for our shareholders as we move into theater. So I'm very confident and optimistic about our potential business as we go forward. And I believe we are taking the necessary steps to navigate from where we are to the brighter future.

Operator

And again, ladies and gentlemen, that will conclude today's TranSwitch fourth quarter earnings results conference call. We would like to thank you all for joining us and wish you all a great afternoon. Goodbye.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: TranSwitch Corp. CEO Discusses Q4 2010 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts