TranSwitch Corporation CEO discusses Q2 2011 Results - Earnings Call Transcript

Aug. 8.11 | About: TranSwitch Corp. (TXCCQ)

TranSwitch Corporation (TXCC) Q2 2011 Earnings Call August 8, 2011 5:30 PM ET


Ted Chung, VP of Business Development

Ali Khatibzadeh – President and CEO

Robert Bosi – CFO


Dean Broyles – Stifel Nicolaus

Quinn Bolton – Needham & Company

Richard Shannon - Northland Capital Markets

Drew Burke – Game Plan Advisors

Quinn Bolton – Needham & Company


Good day, everyone, and welcome to the TranSwitch second quarter 2011 Earnings Release Conference. As a reminder 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. Please go ahead sir.

Ted Chung

Great. Thank you. With me here today are Dr. Ali Khatibzadeh, our President and CEO and Mr. Robert 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 the TranSwitch’s filings with the Securities and Exchange Commission. With that out of the way, I will give some highlights for the quarter and hand it over to Ali for some more details.

For the fiscal second quarter of 2011, net revenues for the quarter were approximately $7.1 million within the guidance range provided on our last earnings call in February. Gross margins in the quarter improved to 67% up from the 64% reported in the March quarter. We also successfully completed the secondary offering and raise the net proceeds of $16.1 million. Bob will provide some more details on that later. Our largest customers in the quarter were Samsung Electronics and Alcatel-Lucent of greater than 10% of our revenue.

Well, Alcatel-Lucent has longer than 10% customer, Samsung use either of these range and this will selectively increasing importance of our video interconnect business.

At this time, 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, the softness in our telecom business continued in to the second quarter and we expect this trend to continue in to the third quarter. However, we’re seeing indications of stabilization in Q3 and recovering this business as we move into the fourth quarter. As specifically our backlog for fourth quarter is pacing ahead of Q3, had the same point in the quarter.

I’ll discuss our telecom and overall business in details later. And of course let me saw with an update on our strategic growth and video connectivity products. As we have said on the number of occasions recently, by leveraging our differentiate technologies who are positioning ourselves to address three fast growing segments relating to high definition video connectivity market starting in 2012. One, the first one is the external HDMI DisplayPort IT Markets are by originally announced HDplay products, this market segment, we estimate to be about $600 million in addressable market by 2014. Second, there is a mobile smartphone and tablet market, video interconnect market, which is about $300 million in size.

And third, the high speed interface inside the flat screen TV and monitors, which is about another $200 million addressable market for us. So, roughly $1.1 billion new addressable market for TranSwitch, which we would be able to address, starting in 2012 with our new product. I’m happy to say that we’ve made significant progress on all three new initiatives in the quarter and I look for this progress to continue to accelerate as we move forward.

First with regard to the external HDMI and DisplayPort market in our HD play products, which are currently in this sampling phase, we have continuing the engagements with the number of customers around the world, many customers have indicated enthusiasm for our products, as a reminder the target market HD play includes televisions, video monitors, projectors, audio, video, receivers, digital signage and video switching equipment.

We see good reception for the four differentiators that HD play offers to our customers. One products offer dual HDMI and display modes, two greater than 10gigabit per second overall link speed, supporting new generation of high resolution 2k, 4k TVs, and full resolution 3D TVs at 60 hertz. Three internet connectivity feature which is now being required for a large percentage of new TVs, and four patented AnyCable technology delivering superior image quality over a low cost and long cables.

In addition to end customer engagements, we are also working with reference design partners that have strong channels into the end customers to accelerate the design-win process. These opportunities should contribute meaningfully to our revenue in 2012 and we expect the customer evaluation and designing process will continue throughout the rest of 2011 and beyond.

Second, on the mobile front we under development phase of our first video connectivity product with smartphones and tablets, while this would be a standard non-proprietary product, we have been collaborating closely with the top-tier OEM, who is helping to drive specifications and requirements for our products.

A solution has certain unique and differentiated features that make it attracted for a wide range of mobile applications. This product is targeted for second half 2012 launch, we will update you on the progress as we move forward.

Third, we have been working under development of a novel video interface technology for use inside the television to replace the traditional cables between the panel and the video processor.

As the size and resolution of flat screen TVs continue to increase, the current interface technology which is referred to as LVDS, cannot scale and performance without significant increase in cost. We’ve been collaborating with the OEM to develop a very compiling solution that offers significant cost and performance advantage and we expect this to be production ready 2012.

On the telecom side, we have the number of voice-over IP customers for an Entropia and Atlanta products especially in the enterprise segment that are moving towards deployments with carriers. These deployments were initially forecasted to commence in the first half of this year but due to carrier requirements and necessary software updates, they’ve been pushed back. One potential area for growth in the telecom sector we see is the emerging 4G LTE fixed wireless radar or gateway market.

This is the new market whereby telecom operators who have 4G LTE licenses plan to offer broadband services to customers, who either don’t have broadband wire line access or those who are using older generation DSL services. We are actively developing a complete 4G LTE records design including our Atlanta 2000 processor and software, in partnership with LTE modem providers for this market. We’re engaged with a number of OEMs participating in this market and hope to announce the solution soon.

Moving to the business in the second quarter of 2011, the second quarter played out as we had anticipated with continuing weakness in our telecom business, while we see more, one more quarter of slow telecom sales, we do see some reasons for optimism as we get beyond third quarter. As I mentioned our fourth quarter backlog today is pacing ahead of Q3 and we have some short term lead time demand that will be shipped in the fourth quarter instead of third quarter due to the supplier lead times.

So we do see some pickup activity in terms of the demand on the telecom side. Additionally, our major customers have indicated to us, renewed demand by the fourth quarter.

And lastly, we should begin to see some contribution from our latest voice-over IP products that we introduced last year. On the customer premises side we should continue to see a high degree of licensing of our video IP course, as we discuss last time one of our key licensee, who is the amongst largest semi-conductor companies in the world, went to production in the first quarter and we received the first quarterly royalties. The second quarter royalties were more than 50% greater than what we saw in the first quarter and we believe this is just the beginning.

In terms of our overall CP business, CP revenue for Q2 came in at roughly $3 million in the quarter, which was slightly larger than the Q1 revenue. We are waiting for the ramp up of our new customers in enterprise VoIP.

On the infrastructure side, revenue for the second quarter came in at roughly $4.1 million, again we have strong indication that this business should improve in the fourth quarter. All and all, while the telecom business environment remains challenging, I believe we have seen trough in the business and we should see stabilization and improvement through the balance of this year.

More importantly, we are on track with our strategic initiatives that are creating a new growth engine and video connectivity market in optimistic and confident that our progress will be approved as we move into 2012.

I’ll now hand it over to Bob to present our second quarter financials and provide our guidance for the third quarter. Bob?

Bob Bosi

Thanks Ali, and good evening to everyone. Our Q2 revenue of $7.1 million was down from our Q1 2011 revenue of $8.2 million, but in line with our expectations of $7 million to $9 million.

Net product revenue in the quarter was approximately $4 million compared to product revenue in Q1 of $5.8 million and a $11.9 million in Q2 2010. Net service revenue for the quarter was $3 million compared to service revenue in Q1 of 2010 of $2.4 million and $2.2 million in Q2 2010.

Our service revenue includes revenue related to intellectual property licensing of our HDMI Display Port and HDP technologies and their associated royalty income, as well as software for our telecom customers.

Slicing our revenue by product line, our CPE revenue for the quarter was $3 million compared to CPE revenue in Q1 2011 of $2.8 million and $5.3 million in Q2 2010. Our infrastructure revenue for the quarter was $4.1 million compared to infrastructure revenue in Q1 2011 of $5.5 million and $8.8 million in Q2 2010.

The geographic breakdown of our second quarter total revenue was as follows: Asia-Pacific 34%; Americas 34%, and Europe 33%.

In Q2, as Ted mentioned, we had two customers that each represented 10% of our revenue.

On a positive note, our gross margins for the second quarter were 67%, was 3 point higher than our expectations and 11% higher than our gross margins in 2010 of 56%. This increase was attributable to higher royalty revenue, higher margin infrastructure products, and at the operating improvements that we have discussed.

On a non-GAAP basis, operating expenses were $7.5 million compared to our guidance of $7.1 million. Q1 2010 non-GAAP operating expenses were $7.4 million and Q2 2010 non-GAAP operating expenses were $6.6 million.

Non-GAAP operating results for Q2 was a loss of approximately $2.7 million compared to our guidance of a loss of $1.3 million and $2.6million.

For Q1 2011, we had non-GAAP operating loss of $2.1 million and had we had non-GAAP operating income of $0.9 million for Q2 2010.

Non-GAAP net loss for Q2 was a loss of $2.8 million or $0.10 per share on a basic and diluted basis as compared to non-GAAP net loss of $2.4 million in Q1 2010 and $1.5 million net non-GAAP net income up in Q2 of 2010.

Q2 2011 GAAP diluted net loss per share was $0.11 versus a net per share of $0.13 in Q1 2011 and a net income of $0.2 for Q2 of 2010.

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 in Q2 were always follows, expenses of $0.4 million in the amortization of purchased intangible, expenses of $0.7 million in stock-based compensation, and a benefit of $0.8 million from the reversal of accrued royalties as described in our press release.

Turning to the balance sheet, in May, we successfully completed on secondary offering and raised net proceeds of $16.1 million and by selling $6.2 million shares pursuant to our shelf registration.

We ended the quarter with $16.4 million in cash, cash equivalents, restricted cash and short-term investments. In addition, we had long term investments of $0.5 million. Our accounts receivable at the end of the quarter was $7.5 million, inventory at the end of the quarter was $1.9 million.

During the quarter, we made our scheduled convertible note payments of $1.2 million. Our convertible balance is now, convertible note balance is now just $1.3 million and a scheduled completely been paid by September 30th.

Now I’ll provide you with our Q3 outlook. As Ali discussed, we continue to see soft demand in our telecom products in the near term and indication or we see indications of improvement going forward. Considering levels of demand, our expectation of booking rates through the balance of the quarter, we estimate our potential revenue for TranSwitch in Q3 of 2011 is roughly flat to this quarter around of $7.1 million.

We expect our overall gross margin percentage in Q3 to remain about 65%. Non-GAAP operating expenses in Q3 are expected to be $7.4 million, which includes about $900,000 cost for massive pickup. In Q3, we expect our non-GAAP operating loss to be around $2.8 million with about $900,000 caused by non recurring costs.

In summary, while the slowdown in telecommunications equipment spending has continued to adverse the affect growth, top line in the short-term, we have and we will take steps to align our spending through our business condition.

In addition as Ali stated, we are continuing to focus our R&D investment on the high growth markets of video and voice-over IP products. I would also like to reiterate that we are very, very excited about our new HDplay products, as well as our new product initiatives for a mobile and internal display interconnect markets.

We continue to believe that these new product will provide a meaningful contribution to our top line in 2012.

With that said, we would to take an opportunity to take your questions.

Question-and-Answer Session


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

Dean Broyles – Stifel Nicolaus

Hello, this is Dean Brumlos calling in for Kevin Cassidy. Thank you very much for taking my call. In the last conference call, you estimated a breakeven cash flow of about $10.9 million a quarter. Is this estimate still current, or do you have an updated view based on your improved efficiencies.

Bob Bosi

Well, we’d like it to get with the guidance and the gross margin; we like to achieve a breakeven of $10 million.

Dean Broyles – Stifel Nicolaus

Thank you very much.


(Operator Instructions) We’ll go next to Quinn Bolton with Needham & Company.

Quinn Bolton – Needham & Company

Good evening guys. I just wanted to follow up HDplay products. Sounds like you guys had some encouraging development through the quarter. I was just wondering if you could provide some more details about sort of where you are in the engagement process with customers. When do you think you could see first design wins, and I guess most importantly, when do you think that you'd be in a position to announce those designs? And then I've got a couple of follow-ons.

Ali Khatibzadeh

Sure, Quinn, so basically we are on the plan that we announce earlier, we are in the sampling phase of, you know customers are basically evaluating our products. We expect this process to take a good bit of Q3 and at least part of Q4 to complete, so we cab concern ourselves to be what we called design in phase and we expect that we could see design wins as early as a late Q4, and who is certainly announced those as they materialized. We see good traction over as I said earlier into a number of different segments of this market, the projector market we see good traction with high end display markets, as well as video distribution and signage areas. So, we see good over traction, while anticipate we will have the, some design as we move into 2012.

Quinn Bolton – Needham & Company

Ali, are you seeing any traction in the traditional AV receiver flat panel TV space, or is it more you think the first wins will be in some of the segments, the projector video distribution and signage areas that you just mentioned?

Ali Khatibzadeh

At this point I think it’s too early to comment on it, but we do see certainly a broad acceptances from different segments, the digital TV market certainly that’s the more competitive market, and I anticipate that will take, I would say a little longer in terms of evaluation and obviously working with customers to actually turn that into design wins that would actually go to production.


(Operator instructions) We will go next to Richard Shannon with Northland Capital Markets.

Richard Shannon - Northland Capital Markets

Hi, guys. Couple questions from me, and I apologize, I jumped on the call a little bit late. I think you were talking a little bit about some of your initiatives and expectations for growth coming I guess late this year earlier next year in voiceover IP specifically. I wonder if you can characterize from high-level, both if you can split up between infrastructure and CPE, where you're seeing some of that excitement. Any way you can characterize it from a geographical or OEM perspective would be great.

Ali Khatibzadeh

Sure, I think, we have opportunities and enterprise VoIP. Which are primarily in Asia, but not limited to Asia, there are opportunities we have also in Europe and also Japan, Korea and China we have opportunities with enterprise VoIP, also have opportunities in the plan MDU market which – those are multi dwelling unit, optical access network specifically in China. We see opportunities there that could translate into revenue as we go forward. Also opportunities certainly in the LTE area, as I mentioned earlier, that’s obviously a new market, emerging market for fixed wireless access and we believe we are well positioned with our products to compete in that market. But that would take a bit longer, I would say that something that could translate revenue in 2012.

Richard Shannon – Northland Securities

Okay, great. Fair enough. I guess, my second question, following up your comments about IP, and specifically you mentioned one of your larger customers in this video area, started production in the first quarter and you had your first royalties in the second quarter. In terms of the specific customer, have they enabled your or gotten you into other accounts or at least the knowledge of them working with you, helped you to get into other customers, open doors and if so can you help us, can you give us give us any flavor for how those progressed so far?

Bob Bosi

Yeah, that particular customer that we’ve mentioned Richard is a large semi-conductor company, unfortunately we are not allowed to disclose their name but they have acted as a reference for us with other opportunities and given the breadth of the projects that they are working on and also gives us advantage in seeing how OEMs in the consumer space are really moving forward with some of this interconnect technology. So, we’ve been very fortunate to work with a customer partner like that one.

Ali Khatibzadeh

I think, at the moment, for the second they have two customers in production, with the number of products and we expect that to grow as we go forward.


We’ll go next to Drew Burke with Game Plan Advisors.

Drew Burke – Game Plan Advisors

Hi, yes, Ali. My question also is on the video interconnect business. And just as far as the royalties this quarter, was any of that relating to the video business going forward, or is that – are these royalties mostly in your traditional telecom business?

Ali Khatibzadeh

Those areas were specific to the high speed interconnect business we have and the video interconnect business that we have.

Drew Burke – Game Plan Financial Advisors

So, that is the meaningful jump in numbers. Are those royalties coming from just from the one customer or do you have more than one royalty opportunity at this time?

Ali Khatibzadeh

Since today it's coming from one customer, but we do have opportunities going forward from other customers.


(Operator Instructions) We’ll take our follow up from Quinn Bolton with Needham & Company

Quinn Bolton – Needham & Company

Hi. Just wanted to follow-up, you mentioned Samsung became a 10% customer in the second quarter. It looks like that might have been on the licensing front. Can you talk about the sustainability, perhaps, of revenue from that customer going forward? And then more broadly, any sense of the licensing pipeline as you look into the second half of the year? Thanks.

Ali Khatibzadeh

Sure, I think, certainly at this point we can not say much about our details or our business relationship with Samsung, but it’s fair to say that we see growth opportunities ahead as we go forward on different firms, and please with our progress and we hope to have as we go forward more detail to share with you obviously that would require approval by customer.

Quinn Bolton – Needham & Company

And just, Ali, more broadly how does the pipeline look for the licensing business?

Ali Khatibzadeh

It’s looking good. We expect the growth in that area as we go into the second half, but in Q4 we expect already based on the contract that we have signed and we expect to have higher revenue in Q4 than Q3.

Quinn Bolton – Needham & Company

And is Q3 rough flattish from Q2?

Ali Khatibzadeh

Yeah, correct.

Quinn Bolton – Needham & Company



(Operator Instructions) And gentlemen at this time it occurs we have no additional question.

Ali Khatibzadeh

So, in the summary I would like to thank everyone for joining us on the call, certainly on the day like this, it’s hard to come up with the optimistic view, but having said that I feel, a hope I can share with you. Our optimistic view of how TranSwitch is transitioning into a new business that are going forward, we do you have some obviously near term demand issues with the respect to our telecom products, having said that our strategy has been since last year, to create a new growth engine for the consumer video connectivity market which we were very excited about. And we are making as fair good progress in that regard with a new product developments that our customers hands with new products that we have started developing for the mobile market and also with engagements that we have had since last year but we expect to go to production in 2012. So, I expect 2012 will be a turning point for our company in terms of growth opportunities and just in terms of generating significant growths for the company and our shareholders. Thank you.


And once again that does conclude today’s call. We do appreciate everyone’s participation.

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 All other use is prohibited.


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