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Executives

Ted Chung - VP, Business Development

Ali Khatibzadeh - President and CEO

Bob Bosi - CFO

Analysts

Kevin Cassidy - Stifel Nicolaus

Richard Shannon - Northland Capital Markets

Quinn Bolton - Needham & Company

Blake Harper - Signal Hill

Walter Schenker - MAZ Partners

Michael Caravaglio - Joseph Gunnar

TranSwitch Corporation (TXCC) Q1 2011 Earnings Call May 4, 2011 5:30 PM ET

Operator

Good day, everyone, and welcome to the TranSwitch first quarter 2010 earnings release call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Ted Chung, Vice President of Business Development.

Ted Chung

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

Before we 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 the company's filings with the Securities and Exchange Commission and I encourage all listeners to look to that at that their convenience. With that out of the way, I will give some highlights for the quarter and hand it over to Ali for some further details.

For the fiscal first quarter of 2011, net revenues for the quarter were approximately $8.2 million within the guidance range provided on our last earnings call in February. Gross margins remained strong at 64% in the quarter, unchanged from the December quarter.

Our non-GAAP operating loss for the quarter was roughly $2.1 million. Bob will provide some more details in his segment a little later on. I will now hand it over to Ali, so that he can share with you our progress during the quarter and some of his thoughts.

Ali Khatibzadeh

Thank you, Ted, and good afternoon ladies and gentlemen. As we projected in our last earnings call, we saw a continued softness in demand for our current telecom product, due to inventory correction at our key customers. We also experienced some loss to current business in Japan due to the tragic events there.

Setting aside the current business, from the perspective of our strategic efforts to create new growth drivers for the company, we are making great progress and are very pleased to report our progress there.

As you all know, we introduced our first-generation HDplay products in March. The target markets for these products include televisions, video monitors, projectors, audio/visual equipment, digital signage and video switching equipment. The addressable market for these applications is roughly $600 million in 2014.

Our HDplay products, which are based on our patented HDP technology, are truly leadership products in terms of performance and feature set. First of all, they are world's first video interconnect receivers to operate those with HDMI and DisplayPort signals.

This is becoming very important as DisplayPort adoption is rapidly increasing, driven by industry leaders such as Apple, Intel, Hewlett-Packard, Dell, Cannon and many others who are incorporating DisplayPort products across their product lines.

We expect HDMI to remain the dominant video interface for the consumer electronics market, and DisplayPort will rapidly become the dominant standard for the PC market. With the increasing proliferation of mobile devices such as tablets and smart internet-connected TVs, it is clear that the world of consumer electronics and personal computing are rapidly converging. And we feel we're very uniquely positioned with our HDplay products to gain share as both the consumer electronics and PC company.

Second, we are the only company offering a solution that drives over a 3-gigabit-per-second link. That's 3 billion bits-per-second link, which is a full rate of the HDMI 1.4a standard. None of our competitors today has yet introduced such a product.

And if you talk to key OEMs in the television industry, they will tell you that this level of speed is a critical requirement for new high-resolution TVs as well as a Blu-ray 3D TVs. So we feel very good that we have the first product meeting the full speed requirement of next-generation TVs.

Third, the HDplay products incorporate Ethernet connectivity function, which is necessary for TVs to connect to the internet, and this is a key selling feature for TVs to connect to the internet. And there is a fast growing segment of the TV market also referred to as Smart TVs, which offer content from service providers such as Netflix, Google TV, Amazon, Hoover, YouTube and the like.

According to iSuppli, a market research firm, one in four TVs sold by 2014 will be internet-connected. Our competitors' products today require a separate IC, a separate chip to perform this function. And we have it integrated into our product.

Lastly, our AnyCable technology allows full high-definition quality video to be delivered over low-cost HDMI cables, which is very important to customers. One of the major headaches that television manufacturers have is that their customers use their TVs with low-cost HDMI cables and cannot get a good quality picture.

Well, this usually results in unnecessary product returns and added service cost for them. So having a very robust HDMI receiver is extremely important to them. And our solution is by far the most robust receiver in the industry.

So now, there is demonstrating and sampling of HDplay products to our potential customers as well as reference design partners. All of the key differentiators that I talked about are resonating well with customers that we're engaged with, and we expect to see a significant progress as we move through the balance of this year.

Another important product developing initiative we have is on the mobile side. That's mobile high-definition video. We are diligently working on an exciting new product targeted specifically at the rapidly growing smartphone and tablet, which we hope to announce later this year.

And if you look at that market, assuming even a modest 30% penetration rate of high-definition video interconnect with smartphones by 2014, we see an addressable market of roughly $300 million. And if you add tablets on top of that, this becomes a significant new opportunity for our company.

So far I have been talking about what's external in terms of connecting TVs to other devices such as mobile devices. Now let me take you inside the TV.

In addition to the increasing demand for video-interconnects among electronic products such as DVD players and TVs, there is also a growing demand inside the television of high-speed multigigabit-per-second interface technology.

What's happening is that the size and resolutions of digital TVs have been increasing. The complexity of the interface between a video processor, which is typically sitting on the motherboard inside the television, and the LCD panel itself, that connection has been getting longer and more challenging.

This physical distance basically makes it very challenging to achieve high-quality image and color depth. And the industry that's been facing this problem is trying to solve this through different solutions.

The DisplayPort consortium in fact has a standard for this application, which is referred to as iDP or Internal DisplayPort. So you have signals traveling inside the TV at rates of 20-gigabit-per-second and you need a good-quality solution to achieve that great-quality picture that you see on the TV.

Since last year, utilizing our high-speed interface technology know-how and in collaboration with one of the largest OEMs in this business, we've been developing a solution that would dramatically enhance the connection between the video processor and the panel.

This will allow the customer to increase resolution, color depths and screen size at the same time it reduces the cost of the cable inside the TV. We expect this technology to go through additional technical and manufacturing milestones this year and be ready for production in 2012.

Of course, this will further enhance the addressable market for TranSwitch products by an additional roughly $200 million as the technology is applied to both televisions and monitors.

So we're very excited about it. And if you look at the areas that I talked about, since last year we are leveraging our differented technologies and positioning ourselves to address three new fast growing markets relating to high-definition video connectivity.

One is the external HDMI and DisplayPort IC market, which is roughly $600 million by 2014. Two, we are addressing the mobile smartphone and tablet video interconnect market, which is over $300 million in that same timeframe. And third is the high-speed interface inside the flat-screen TVs and monitors which is roughly another $200 million.

All in all, if you add these up, it's roughly $1.1 billion of new addressable market for TranSwitch, which we did not have access to over a year ago and in which we plan to gain share with very differentiated products. So overall, I am very pleased with our progress on positioning ourselves to have growth engine in the consumer market, and we are executing to our plans.

So let me switch to the business in the first quarter of 2011. The first quarter played out as we had anticipated with some continuing weakness due to the excess inventory situation we had mentioned on our last call. We see this softness continuing through to the second quarter.

I want to reiterate that this is not due to the loss of share by us or our customers. It is purely an inventory correction. And all indications from our customers are that the demand will increase as we get into the second half of this year. So we are expecting a rebound as we get into Q3, and we will see a normalization of our telecom business.

Also, last time we talked about our Entropia product ramping in Japan with KDDI and Softbank, two of the major operators there. Unfortunately due to the tragic events there, we are looking at maybe a quarter or two pushup of this deployment. Of course, we view this as a temporary situation, and we believe in time the earthquake there will actually stimulate a rebuilding effort in Japan and we expect to benefit as the network operators rebuild their infrastructure.

On the customer premises side, we continue to see a high degree of licensing of our video IP course. As we discussed last time, one of our key licensees who is among the largest semiconductor companies in the world went to production in the first quarter and we received the first quarterly royalties as expected. We expect these royalties to continue going forward.

In terms of our overall TV business, TV revenue for Q1 came in at $2.8 million in the quarter, down from $3 million in the previous quarter. We are expecting and waiting for the ramp-up of our new customers and enterprise Voice-over-IP and Voice-over-IP-enabled WiFi routers by Q3.

Also, in terms of future growth drivers for our CP business, we see significant opportunities for wireless 4G/LTE home gateways as well as fixed wireless broadband access. We see great opportunities looking ahead.

On the infrastructure side, revenue for the first quarter came in roughly at $5.5 million, down from $7.2 million in the prior quarter. Most of this weakness was due to the low orders from our largest North American customer, which is still dealing with inventory issues. We've been told that this situation will begin to normalize as we go into the third quarter.

Finally, from an operational standpoint, we announced a partnership with eSilicon to improve our supply chain management and prepare ourselves operationally for the ramp of high-volume consumer products. The agreement with eSilicon also guarantees a multiyear cost reduction for existing products and allows us to focus on resources to work jointly with them to reduce the cost of new products all the way from the design phase to production.

While we feel this is a very good business model, it's one that's going to help us continuously reduce our cost of goods sold and improve our margins.

So with that, I'd like to turn it over to Bob to present our first quarter financials and guidance for the next quarter.

Bob Bosi

Thanks, Ali, and good evening to everyone. Q1 revenue of $8.2 million was down from our Q4 2010 revenue of $10.1 million, but in line with our expectations of $8 million to $10 million.

Net product revenues in the quarter were approximately $5.8 million compared to product revenues in Q4 of $6.9 million and $11.9 million in Q1 2010.

Net service revenue for the quarter was $2.4 million compared to service revenue in Q4 of 2010 of $3.2 million and $0.9 million in Q1 2010. Our service revenue includes revenue related to intellectual property licensing of our HDMI technology, software for our telecom customers as well as royalty revenue.

Slicing our revenue by product line, our CPE revenue for the quarter was $2.8 million compared to CPE revenue in Q4 of 2010 of $3 million and $4.4 million in Q1 2010. Our infrastructure revenue for the quarter was $5.5 million compared to infrastructure revenue in Q4 of 2010 of $7.2 million and $8.4 million in Q1 2010.

The geographic breakdown of our first quarter full revenue was as follows: Asia Pacific, 46%; Europe, 33%; and the Americas, 21%. In Q1, we had two end customers that had represented each greater than 10% of our revenue.

On a positive note, gross margin for the first quarter was 64%, in line with our expectations, and 8% higher than our gross margin in 2010 or 56%. This increase was attributable to sales of higher-margin infrastructure products and the operational improvements at all the ventures.

On a non-GAAP basis, operating expenses were $7.4 million compared to our guidance of $7.1 million. Q4 2010 non-GAAP operating expenses were $7.3 million and Q1 2010 non-GAAP operating expenses were $6.9 million.

Non-GAAP operating results for Q1 was a loss of approximately $2.1 million as compared to our guidance of a loss of between $0.7 million and $2 million. For Q4 2010, we had non-GAAP operating loss of $0.9 million and had a loss of $0.1 million for Q1 2010.

Non-GAAP net loss for Q1 was a loss of $2.4 million or $0.10 per share on a basic and diluted basis as compared to non-GAAP net loss of $1.1 million in Q4 2010 and $0.3 million loss in Q1 of 2010. Q1 2011 GAAP diluted net loss per share was $0.13 versus a net loss of $0.08 in Q4 2010 and a loss of $0.07 per share in Q1 of 2010.

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

The reconciling items for Q1 are as follows: expenses of $0.4 million in the amortization of purchased intangible assets, expenses of $0.7 million in stock-based compensation, a benefit of $0.8 million from the reversal of accrued royalties and a restructuring charge of $0.4 million as described in our press release.

Turning to the balance sheet, we ended the quarter with $4.9 million of cash, cash equivalents, restricted cash and short-term investments. Our accounts receivable at the end of quarter was $7.2 million. Our inventory was $2.1 million.

During the quarter, we made our scheduled convertible note payments of $1.2 million. Our convertible note balance is now just $2.5 million and is scheduled to be completely paid in the next six months.

I'll now provide information about our Q2 outlook. As Ali discussed, we have see indications of improving in the second half. We continue to see a soft demand for our telecom products in the second quarter. Considering levels of demand, our expectations for booking rates throughout the balance of the quarter, we estimate our potential revenue for TranSwitch in Q2 2011 to be in the range of $7 million to $9 million.

We expect our overall gross margin percentage in Q2 to be around 64%. Non-GAAP operating expenses in Q2 are expected to be $7.1 million, down from $7.4 million in Q1 2011. In Q2, we expect non-GAAP operating loss to be between $1.3 million and $2.6 million.

In summary, while the slowdown in telecommunications equipment spending has continued to adversely affect our topline in the short-term, we have taken steps to reduce our spending and improve our operations. In addition, as Ali stated, we are continuing to focus our R&D investment on high growth markets of video and voice-over IP products.

I would also like to reiterate that we are very excited about our new HDplay products as well as our new product initiatives for the mobile and internal display interconnect markets. We believe these new product will be a meaningful contribution to our topline in 2012.

With that said, we thank you for your support and we'll now take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go first to Kevin Cassidy with Stifel Nicolaus.

Kevin Cassidy - Stifel Nicolaus

First just on the Q2 outlook, some of the give and takes between the $7 million and $9 million, maybe if you could just say, how is your backlog coverage and what needs to happen to go to the high-end?

Ali Khatibzadeh

Sure, I think the reason for that range is that we're expecting some turns business relating to licensing of our HDMI cores as well as our software licenses that basically could come in and bring us to the high-end on that range. So that's why you see that.

Kevin Cassidy - Stifel Nicolaus

And maybe just as a follow-up. How many companies are you involved with on the licensing? Can you say?

Ted Chung

We've seen since we've entered the business of licensing in particular for display technologies or HDMI and DisplayPort. Really the number consistently of interested customers has increased every year and by quite a bit. So the funnel today of potential licensees is the largest that's ever been.

I think another thing I'll say is some of our current as well as interested licensees are among some of the leaders, both in the consumer electronics field as well as in the computing industry. So we feel pretty good about our technology differentiators and frankly our technology advantages over the competition.

Operator

We will be on with a question from Richard Shannon of Northland Capital Markets.

Richard Shannon - Northland Capital Markets

I think I have a couple of questions from your prepared comments. You talked about some products that were related to mobile high-definition interconnection. I'm kind of curious if you can describe that a little bit more. Is that based on your own standard or is this something similar to what one of your competitors (inaudible)? If you could just give us any details on that, that'd be great.

Ali Khatibzadeh

At this point, it's to early for me to comment on the specific features for the products because of the competitive nature, but hopefully as we get into the second half where we're in a position to talk more about the specifics of the product. But we fully understand what MHL is and what it does, and what is does not do, that has a position in the market.

But we believe that the market is asking for more. So there is more functionality and features that have to be delivered. And we have a very good, I would say, customer driver point and we feel very good about understanding the requirements for that market.

Richard Shannon - Northland Capital Markets

And maybe a follow on question, that encompasses your introductions of mobile HD as well as internal DisplayPort. I got two questions one both for those products or those initiatives. What's the timeframe by which you expect products to be sampling and actually generate revenues? And do you expect it to be more or mostly product revenues or could see a fairly strong element of IP licensing as well?

Ali Khatibzadeh

So in terms for the mobile product we hope to have a product announcement by end of this year. I mean, usually by then they are in the sampling mode or close to sampling stage. So that would be a product for 2012 basically ramp up.

In terms of the inside television connectivity that's a technology we started developing last year in earnest. And we are now in sort of, I would say, a productization phase of it. And there is some milestones as I mentioned and we are expecting to go through getting it ready for full production in 2012. So that product could start production by first half of 2012.

Ted Chung

I didn't answer the second part of your question, whether it's an IC or mix of IC. On the mobile side our approach as an IC play, selling actually IC that could be inside the mobile product in terms of the inside television connectivity that's going to be a mix of IP and potential IC.

Richard Shannon - Northland Capital Markets

Just one last question on this, general in video interconnect, obviously your HDplay announcement a few weeks sounds very interesting. I've covered you guys for a number of year and you're start to talking about the general technology just a couple of years ago. Can you remind us how many companies for maybe a range or the number of licenses you have for your HDP, IP technology, and how long it's been either (inaudible) been working with it or actually have products in the market.

Ted Chung

We started licensing for that technology some time in 2008. The technology itself obviously from a development standpoint has roots going back to further back to. And a company we acquired Mistacom really was developing high-speed interconnect for communications. But since 2008, we've been extremely successful.

I think as Ali mentioned in his prepared remarks, one of our licenses is one of the most successful chip companies in the world. And they recently went into production this year and we got our first royalty from that arrangement, and we look forward to seeing more.

But all-in-all we've signed up over a dozen licensees. And as I mentioned, I think to Kevin's question earlier, the funnel today is frankly larger than what we've seen in the past. So we expect to continue.

Ali Khatibzadeh

And maybe if I could just add also just to clarify that we have been licensing HDMI separately and DisplayPort separately. We have not licensed the combined technology to many companies. So to some extent they are not too many companies out there that have license to combine HDP technology. But we've been licensing HDMI and our DisplayPorts separately.

Richard Shannon - Northland Capital Markets

Maybe one last question on the guidance for the second quarter. What are your general thoughts on the split between products and services revenue within that 7 million to 9 million bogey for the quarter?

Ali Khatibzadeh

I think there's similar percentage to the results we just discussed for Q1 and discussed similar profile. I think Bob broke those out, 25% to 30% licensing of IP software.

Operator

(Operator Instructions) And we'll go to (inaudible) with Stifel Nicolaus.

Unidentified Analyst

Just couple questions, more financial related. When you guys expect the cash breakeven? I think previously you guys had sort of guided to 2Q and just given the guidance today. I want to get an update on what that looks like going forward?

Bob Bosi

I think as we discussed in last quarter's earnings call, we took action to reduce our operating expenses and we took a restructuring charge last quarter. Based on that, our breakeven point on a non-GAAP basis is around $10.9 million. And we expect we'll get there in the second half of this year.

Unidentified Analyst

I just want to get a little bit more color on how is the OpEx for the quarter reported? It came a little bit higher than I think you guys had guided previously. And you mentioned the restructuring activities you guys are doing. And so how should we think about OpEx going forward? I think you guys were saying that you are about to move $2 million out of the annual OpEx if I'm not mistaken, right?

Ali Khatibzadeh

That's correct. Obviously, the operating expenses vary quarter-by-quarter depending on the specific activities that we have.

Bob Bosi

$7.1 million is what we guided to. We have some factors going on in the next ensuing quarters with the exchange rate going against us. And also, we have tape-outs that we are anticipating later in the year. But it will be in the $7.1 million to maybe $7.5 million range.

Unidentified Analyst

And just one final one, I just wanted to revisit the inventory and telecom markets. It seems like it's sort of getting pushed out quarter-by-quarter. I just to get your sense of what gives you guys confidence that it should return on in 3Q and sort of normalize in the second half of the year?

Ali Khatibzadeh

That's really I think based on the discussions with key customers and the forecast that they see and the indications we have. And again, we hope that by now we would be completely out of the inventory correction mode. I think in the last earnings call we cautioned that this could continue into Q2, and it is continuing into the second quarter.

But again as I said, I just want to reiterate that this is not due to a loss of share by our customer or loss of share offset on customers, it is purely an inventory correction and we anticipate this will normalize as soon as we get into the second half.

Operator

And we'll go to Quinn Bolton with Needham & Company.

Quinn Bolton - Needham & Company

I just wanted to sort of follow up on that last question. A number of your peers had said, sort of post the Japan earthquake that they have actually started to get longer term forecast from some of their OEMs so that the OEMs can plan and make sure that they have production.

I am just wondering if you see any increase in sort of the length of forecast you're receiving from your customers, and if some of the things that's happening, is that giving you better visibility into that third and fourth quarter ramp in the telecom business?

Ali Khatibzadeh

I think the answer is, yes; we are in discussions with our customers and they are sensitized to the impact of the Japan situation on the supply chain. So we buy some components from Japan. Most of our components are not directly purchased from Japan, but obviously Japan is in the supply chain for many of the electronics packaging, assembling products. So we are not immune to it.

And as a result of that we've had discussions with our customers about the lead time and we do see them sharing more of their visibility with us as we look into the second half.

Quinn Bolton - Needham & Company

Second question for Bob. Bob you mentioned that one of the reasons the gross margin remained strong at 64% was I think a makeshift towards infrastructure products. I guess as you look at the ramp and the snapback in the telecom business in the second half of the year, do you see the CPE business coming back more strongly than the infrastructure business or do you think you'll see a pretty steady mix between infrastructure and CPE on the product side?

Bob Bosi

Our current expectations are a steady mix and more of the infrastructure coming back. So we anticipate our margin to be in that mid-60% range.

Quinn Bolton - Needham & Company

Into the second half?

Bob Bosi

Yes. Even the portion of the CPE business that we expect to ramp up as on the enterprise VoIP, the margins are healthy and in that range.

Quinn Bolton - Needham & Company

And then switching to the HDplay, if you walk through three different sort of end markets, the sort of core silicon for HDMI and DisplayPort monitors, TV's, the mobile opportunity of $300 million and then this more of this newer market for internal display port or internal video interface in reference to the aggregate TAM of $1.1 billion, do the products you have either today or on the roadmap target that entire $1.1 billion TAM or are you going after certain segments of that TAM with your product strategy?

Ali Khatibzadeh

The answer is, yes; we either have introduced products or we are in development of products that would address those three segments, which in our opinion and based on forecasts adds up to about $1.1 billion addressable market. And we feel our differentiation is very solid. We have Tier 1 customers who have tested our products, and we believe we have what it takes to gain a decent share in that market.

Quinn Bolton - Needham & Company

And then just the last one was a clarification on these breakeven run rates. You had mentioned $10.9 million revenue was breakeven. I wasn't sure, is that a cash flow breakeven or is that level you need to get to profitability and perhaps there it's the same. I just wasn't sure if that was cash flow or profitability that you are referencing at that $10.9 million per quarter level.

Bob Bosi

It's cash flow profitability with respect to our non-GAAP operating income.

Quinn Bolton - Needham & Company

Okay, non-GAAP profitability?

Bob Bosi

Yes. This is for cash. We will be paying off our debt as we said in six months. So after that effectively the two become close to each other.

Operator

We have a question in the queue now from Blake Harper with Signal Hill.

Blake Harper - Signal Hill

Ali, you had talked in your prepared remarks about some of the broadband access products. Could you expand a little more on that maybe probably what you are doing there and how some of the technology fits into the broader ecosystem and what we could look forward as far as any potential drivers there?

Ali Khatibzadeh

What we see with the advent of 4G, specifically LTE now, we see a growing demand for using this 4G technology as a fixed broadband access for rural areas or also emerging countries where there is not a significant wired broadband connection in the ground for the last mile specifically. As you know, last year in Q3 we announced a design win production with a top tier Chinese customer using our Atlanta products for WiMAX fixed wireless application.

Well, that type of technology, that type of application we see now with LTE having a lot more attractiveness around the world. And there are deployments planned in Europe and here in U.S and elsewhere in the world using LTE technology to offer high speed internet and voice services and even video services to homes. And we feel we have very good not just hardware but software differentiation in that market.

So we are very active in that and we hope we can translate some of those opportunities to revenue as we move forward.

Blake Harper - Signal Hill

And then just a kind of follow up on Quinn's question and we were talking about the size of some of the new markets for the HDplay stuff. Can you kind of layout what the competitive dynamics are in that environment and what do you realistically and optimistically I guess expect to have as far as market share, maybe like by the end of 2012 if we are able to offer that?

Ted Chung

Each of those three segments has its own competitive dynamics. Clearly, there are companies today that offer just HDMI receiver chips on the market, namely silicon image, analog devices. What they don't offer is the rate that we offer. So we are the first company to offer a 3 gigabit per second per link solution which is what in talking to some of the television manufacturers they are looking for.

We are also the only ones that offer the combined HDMI plus DisplayPort in a single receiver technology. So that's clearly resonating as we're going out, talking to customers both on the TV side as well as the AV receiver, projector. So we are getting very good feedback.

I think it's a little premature to gauge anytime the market share per se, but I think we feel pretty good that given our competitive advantages, we are going to do very well in that market.

Going inside the TV or monitor technology, there, we have actually collaborated with a major company. So again, we feel pretty good that if we can get through some of these technical hurdles that Ali mentioned we will have a pretty good market share right from the get-go.

Lastly, moving to the mobile side, again, we are talking to a number of customers and we hope to have a lot more encouraging specific news to share with you all in the not too distant future.

Operator

(Operator Instructions) And we have a question from Walter Schenker with MAZ Partners.

Walter Schenker - MAZ Partners

I am still trying to understand, I don't know if Ted or Ali wants to take it. Since Centillium, the revenues have declined, approaching 50%. This is a question on the inventory cycle. Normally when I think of an inventory reduction, it normally follows some sort of strong period of revenues or sales where the people in the field build inventory of the business.

Given the steady decline, it's hard to understand how you can be so confident you're not losing share despite the continued declines in sales.

Ali Khatibzadeh

Let me address that question and then Ted could add to it. First of all, the business that Transwitch acquired from Centillium, if that's your reference point, the starting point, part of that business was optical access, which, as a matter of strategy we are not pursuing; we are not in the optical access. The business, we are not developing products.

And last year we had one of our five running products there ramp down, as we said before in the previous earnings call. So that ramped down effectively by end of Q3 2010. So the revenue you look at is not just VoIP, it's a combination of access and VoIP.

Ted, you want to add to that?

Ted Chung

Yes, the other thing I'd mentioned in the prepared remarks, we did attribute a lot of that revenue decline to one particular customer. And I think it's really the degree of some of the revenue concentration that you're seeing reflected here. But I will say conversely, as that business starts to normalize, you should see a pretty rapid snapback as well.

So the positive flipside to this is, as that program gets back into gear, we should quickly get back to that breakeven level.

Walter Schenker - MAZ Partners

And that customer started this inventory reduction if I remember correctly in the third quarter or the fourth quarter?

Ted Chung

It's started in the fourth quarter of last year, Walter.

Operator

(Operator Instructions) And we'll go back to Quinn Bolton with Needham.

Quinn Bolton - Needham & Company

Just want a quick follow up; you'd mentioned in the prepared script that KDDI and SoftBank may have pushed out by approximately a quarter or two. Can you just give us an update on when you think that ramp happens? Is that now sort of part of this second half 2011 strength or any additional color you could provide would be helpful.

Ali Khatibzadeh

I think we're expecting that ramp to start sometime toward the end of Q3. At least we'd expect to see revenue in Q4 for that ramp. It could happen earlier than that but that's our current estimate.

Operator

We will now move on to Michael Caravaglio with Joseph Gunnar.

Michael Caravaglio - Joseph Gunnar

I am pretty pleased that you guys expect in the second half the legacy business to come on. But I'm way more interested in the three new growth drivers of the company. And with respect to the first HDMI product, you are expecting revenues when?

Ali Khatibzadeh

As we said last time on our earnings call, we expect to get initial pre-production as early as Q4 of this year.

Michael Caravaglio - Joseph Gunnar

So Q4; okay. I was also pleased to hear that you may have a mobile offering as early as the end of this year. Is that in the prepared remarks?

Ali Khatibzadeh

Yes, that's correct.

Michael Caravaglio - Joseph Gunnar

And when do you believe that would go into revenue?

Ali Khatibzadeh

That does in 2012. We expect to announce the product end of this year. And typically on the mobile side there is six months from the time you have the product samples to production.

Michael Caravaglio - Joseph Gunnar

Second half of 2012?

Ali Khatibzadeh

That's correct.

Michael Caravaglio - Joseph Gunnar

And this new internal on the TVs, that's also second half production, 2012?

Ali Khatibzadeh

That's further along. But obviously it depends on the customer plans and that could start production in the first half of 2012.

Michael Caravaglio - Joseph Gunnar

So this is something new and this will give you more content in a TV.

Ali Khatibzadeh

That's correct; absolutely.

Operator

There are no further questions at this time. I would like to turn the conference back over to the speakers for any additional or closing remarks.

Ali Khatibzadeh

Just in summary, notwithstanding the near term demand softness that we have with respect to our current telecom products, I do want to emphasize, and I think sometimes we run the risk of not really emphasizing. But I just wanted to make sure that our prospective shareholders and potential investors understand that we really are at the transition point in this company and we are making great strides in developing new products targeted at a fast growing video connectivity market that really expands our addressable market space beyond what this company has seen in the past history since its founding.

We are going to be putting in place a new growth engine that this company has never had on the consumer side. And couple that with the modest growth on the telecom side, in my opinion, we hope to have dramatic improvements in the company top-line as we get into 2012 and beyond.

So I am very hopeful and optimistic about our prospects and I encourage our investors to look at us in that light and look at us in terms of where we could be in 2012 until we get through the current telecom cycle and we will see a different company.

Operator

Ladies and gentlemen, that does conclude today's conference.

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