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Mindspeed Technologies, Inc. (NASDAQ:MSPD)
B. Riley Conference
March 13, 2007 4:05 pm ET
Simon Biddiscombe - CFO
I'd like to introduce from Mindspeed, Simon Biddiscombe and Tom Stites. Thanks for being here.
Thank you and thank you for attending our session this afternoon.
First of all, the comments that we make today are obviously subject to our Safe Harbor that you can see here on the screen.
A quick overview of Mindspeed. We are a fabless semiconductor company focused primarily on communications infrastructure. The last 12 months revenues were about $133 million. And as you can see, we are fairly diverse from a geographic perspective, and we're fairly diverse from a business perspective as well.
Our business is organized around three essential technology platforms. The first one, MSA voice over IP solutions, is primarily a gateway solution that we sell into the market.
The second is our high-performance analog products, circuit to switching market, and also the passive optical networking market with PMD solutions that sit in optical modules.
And then finally, we have our WAN communications business. It's very traditional telecom line card type functionality, framers, mappers, line interface units and so on.
Our top ten customers there for 2006 are actually in order. And the key takeaway that we always try to leave people with is that that's really the who’s who of telecom infrastructure manufacturers that you have to have if you're going to be successful as a fabulous infrastructure provider.
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So, why do we think Mindspeed is a very valid and worthwhile investment consideration?
We think that we've chosen some of the highest growth telecommunications markets that exist at this point in time. And we are supporting those markets with solutions that we had in the market, in many instances, for an extended period of time.
The solutions we deploy to infrastructure manufacturers are almost exclusively organized around enabling them as they go through the infrastructure upgrades at the carrier level to be able to deploy Quad-Play solutions.
So, whether it's our leading voice over IP processor solutions that sit in gateway applications or whether it's our PMD solutions that sit in fiber, as more and more fiber is laid within the telecommunications infrastructure, ultimately all the way to your door step. We provide solutions to all of those applications and markets since they exist today.
The WAN communications product portfolio that I touched on is very much the funding vehicle for the investments that we continue to make in both our voice over IP and our analog businesses. And the business is probably through a more extensive offshoring efforts than had previously been the case. And once we complete that offshoring effort, which is essentially done at this point in time, we will deliver a breakeven model in the June quarter that’s predicated on roughly $33 million worth of total revenue.
So, we are on track for breakeven next quarter. The business did breakeven in the June quarter of 2005, and we expected it to breakeven again in the June quarter of 2006.
To give you a perspective on the market opportunity that we have in front of us at this point in time; on the left hand side of this chart you will see, all of the applications that have came from about 80% of our total revenues. So, those are the types of platforms that Mindspeed ships silicon into at this point in time.
And the total semiconductor content associated with those is somewhere around $1.1 billion going back to 2005, expected to grow to about $2.2 billion in 2009. And the critical takeaway here is that the WAN business that we serve is essentially a flat to slightly single-digit declining business.
The two growth drivers for the business, the analog business and the voice over IP business, both are able to deliver growth characteristics of somewhere in the 35% plus kind of range, which gives us an overall breakthrough of growth rate for the company of roughly 20%.
But to give you a little context on that, if you go back to 2006, which for us was a September year-end, the business grew by 22% over fiscal 2005. The growth was a little different than that. Actually the WAN business grew last year by about 10%, the HPA business actually grew by about 58% last year, and the voice over IP business grew in single digit. So, we saw some mix shift, but the thesis held true for 2006 at least when we delivered about 22% growth.
I want to characterize the Voice-over-IP opportunity for you a little because what we spend a lot of time doing is trying to help people understand what you see from Skype and Vonage is very disconnected from the reality of what Mindspeed does on a day-to-day basis.
So even though Skype may talk about 7.5 million users at any point in time and even though Vonage has got very aggressive growth numbers, what we do is deploy solutions in the carriers' networks and carriers don't spend money very quickly at any point in time. So, what we have is a very steady, long life cycle business in the carrier network.
And essentially what our solution does is provide that gateway functionality that takes you from an old TDM network to an IP network. So, to the extent that a carrier wants to move all of his traffic on to an IP network, so he can deliver you more and more services far more efficiently. He needs to get the voice of his existing TDM network on to that IP network.
And our solution does precisely that. It converts voice from an old telecom network to an IP network for translation, and back and forth with multiple hops across the entire network.
Carriers are updating their networks. It's broadly understood at this point in time. You can look here in North America at Verizon's FiOS efforts; you look in the Europe at British Telecom's 21CN efforts; look in China at the efforts of China Telecom, China Netcom, and so on. There's tremendous amount of network upgrade going on from carriers as they fight the competitive dynamics that they face from the cable MSOs here in North America, that they face from wireless substitutions, and that they face from the new wave of CLECs such as the Vonage's and Skype's and so on.
It's about a 20-year upgrade cycle, we believe, to get from the existing TDM network to an IP network. What this gives you is a perspective of where we play, where we don’t play, how much you are going to -- since it's not being webcast, let's point to it.
Substantially, all of the IP that exists in the telecom network today is actually for central office-to-central office communication of voice. Okay, it's just transporting voice from central office-to-central office, and that’s very important for the carriers because there is tremendous amount of voice that they can move very efficiently. Okay.
What's happening today is that Voice-over-IP capability is moving closer and closer to us as consumers. So, whether it's us as consumers in our homes, or in [enhanced prices], or with some kind of handset that we use for mobility purposes and Voice-over-IP capability and the translation from one network to another network is moving closer and closer to the actual consumers.
So, today versus a year ago substantially a lot of our revenues came from here. Today, in addition to the revenues we enjoyed here, we are enjoying revenues from where we characterize as access gateway type platforms. So, these are carriers' platforms much closer to the consumer, but still in their network.
We're enjoying revenues from mobile applications where in order to provide much greater efficiency in delivering us to date what we want on these things. We move it over an IP backhaul instead of an ATM backhaul.
And today we provide exactly the same solutions. We are just taking [points] from one form to another form, and that also, (inaudible). We have IP-PBX type voice-over-IP systems as well.
The key takeaway here is this is just beginning. Only over the last couple of years, have carriers began to scratch the surface of the amount of actual conversion that needs to occur. This is a new chart that we haven’t used previously. Essentially what we are trying to characterize is, by 2009 (inaudible) expectations of only 3% of telephone calls will be over IP networks. Everything else will still be over the old network. And we are seeing more and more gateway activity as we move forward as carriers continue that conversion to the IP network.
Second opportunity to talk about here is the fiber-to-the-premise market opportunity. To date this is being primarily about Japan and primarily about entity in Japan. So, entity will give you a piece of fiber all the way to your house that can deliver you all of the video, all of the broadband data, all of the voice capability that you could possibly need that will actually run up to about 100 megabits per second of data related to multiple HD channels in your house, all of it in this single piece of fiber.
As I said today, all of the activity has essentially been about Japan. Within the context of this screen, which is Asia, it's all Japan and it has all been about entity. This allows the carriers again to compete more effectively with others. We are able to deliver you the bundle of packages that you require.
And what we do is actually provide a series of solutions that sit in multiple different places within the fiber network, but primarily not to a networking unit, actual home or moving the optical line termination unit at a central office location.
Now, to date the value that we’ve provided has primarily been in what’s call the PMD solutions. So, these are the electronics that sit in the module. It’s got a laser on the receive side that are each end of the piece of fiber.
Okay, so there is tremendous activity associated with that, but there is only a certain amount of size of the market that we can participate in that.
About a week ago, we announced a partnership with an OEM box manufacturer by the name of Terawave. We are actually going to introduce taking Terawave’s GPON media access controller and embed into single piece of silicon, which is what that represents. That also has our PMD optics associated with it, and also it currently has our process capabilities and our voice capabilities.
So, we’ll be able to deliver a single-chip solution for GPON, which is primarily in North American and European markets that will sit on the other side of your house and be able to deliver all of the capabilities necessary for that fiber.
So, why are we different? What is Mindspeed’s competitive advantage? Simply put, what we deliver to our customers is a complete solution that includes all of the software that’s necessary to bring our OEM customers to market. So, there is really two ways you can build a gateway solution to-date. Either it will be based on a TI DSP and have somebody write the software for you or you can write the software yourself or you can use our solution.
Now, we think there are three very compelling advantages to using our solution, which are listed along the bottom right. Number one is our solution is being deployed across multiple OEMs and many carriers around the globe. It's proven. And we know our solution works in just about any carriers' network on a global basis. To do that itself is extraordinary, complex, and time consuming and expensive. So, there is a very clear accelerated time to market from using our solution.
Now, the second benefit is there is a reduced cost of ownership. You don’t have to have that code of software engineers writing code for you. And the third advantage is clearly that you have lower systems, bill of materials, driver solutions versus [banks] of Texas Instruments' DSPs and so on.
A quick perspective on the three product families as I said and where we do play versus where do our competitors play.
In Voice-over-IP, as I said, we provide a single-chip solution that is all of the software that is necessary to bring your gateway solution to market. Your gateway maybe a wireline gateway, maybe a wireless gateway, it maybe a cable MSO gateway, but we're going to give a single piece of silicon with all of the software necessary to build that gateway.
This is a represented example of the customers who use our solutions at this point in time. It's complete, if you will, with two exceptions. The only people who don’t use our silicon today are Nortel and Sonus.
Sonus doesn’t primarily because it has built its model around having a gateway solution. And to use our solution effectively would take out any value that they would add to the gateway. All of these others today use our solutions in gateways that ship on a global basis.
The competition is really just the first two. It's Texas Instruments, primarily their DSP solution, and then it’s Centillium who have a couple of good sockets as well in the Voice-over-IP space.
And this is just a sampling of carriers around the globe who use our technology. I won’t spend any time on that, but well proven as I said.
In terms of our high-performance analog products; in addition to the solutions that we have serving the PON market, we want fiber that exists at fiber-to-the-home. There’s obviously a tremendous amount of fiber still being deployed within telecom infrastructure generally. And then there is fiber being deployed within data center applications as well.
So, that fiber market that we serve with our module solutions is actually fairly broad beyond just passive optical networking and fiber-to-the-home.
We also have a series of crosspoint switches that you see there at the top. These are very high-speed, low-latency switching devices that move incredible amounts of data very quickly from channel-to-channel and port-to-port.
And we also have a series of HD and SD video products that are aimed at the upgrade cycle that’s going on. As people like Fox, ESPN, CNN and other content producers move from a standard-definition mode to high-definition mode from an analog world to a digital world to a certain extent, as well. And that’s obviously helped by government mandate here in North America and by the fact that it's far most efficient to move high-def content over digital network.
Again, a representative sample of the applications and the customers that we have in this area. Storage area networking is actually Brocade. I need to change that one, so that it actually says Brocade instead of a [Pavement]. Then you can see a whole series of telecom and video applications. And then at the bottom, there are the representative samples of fiber-to-the-home, fiber-optic module or customs.
Then finally, in terms of WAN communications products, this is a very broad product portfolio as I said, very traditional telecom T1/E1, T3/E3, low-end SONET, some SDSL stuff and so on. Some of this is growing, some is declining. So, pretty much at single-digit growth and decline rates.
HDLC controllers are growing, IMA processors are growing, T3/E3 products are growing, and low-end SONET products are growing. T1/E1 has a declining market, as is some of SDSL and ATM technology products that we shipped. So, we've really got a mixed bag that on a year-over-year basis last year grew by about 10% as I said, and this year we expect to be relatively flattish.
And again who's who of customers and product applications as well that we ship into at this point in time. Couple of different ones to point out here, Juniper; I haven’t seen Juniper on any of our other slides and they use our products almost exclusively for backhaul [devices].
Competition here is PMC, Exar, the Maxim-Dallas business, so a very traditional telecom type applications again.
A quick overview of the financials. The business had grown quite nicely through late 2005 into early 2006, delivered $35.5 million in the June quarter, which is Q3 as you see there. And then in September quarter took a step back as many other companies did.
It is actually a kind of anomaly in that $30.2 million in Q1 that you see there. There was about $2 million buck worth of stuff that didn’t ship as a result of the earthquake that occurred just before New Year there off Taiwan. So, had it not been for that, the revenues would have been flat quarter-over-quarter, and then you would see a slight decline in the current quarter essentially. So, the business is in that $32 million range essentially for three quarters.
And then last quarter, we saw a most significant loss than we had previously seen primarily based on the step down in the revenues and the gross margin associated with that. And clearly we have much greater expectations for performance in the current quarter.
As I said, FY '06 revenues grew by about 22%, and we actually reduced the non-GAAP loss of over 66% year-over-year or so. We left fiscal 2006 on a disappointing note, but there were still significant year-over-year improvement that had been characterized behind that.
There is a restructuring offshoring effort that’s ongoing at this point in time. Essentially, what it does is take OpEx, just say from $26 million to about $22.5 million, but actually increases the headcount from about 512 heads to about 560 at this point in time. And that’s primarily by moving resource from more expensive, primarily North American and French locations to cheaper offshore locations in places like China, India, Ukraine, and so on.
So, we reduced our OpEx by about 13%, but at the same point in time increased the R&D efficiency and the headcount by about 10%.
The models for the business, we have a $33 million breakeven model as I said that we expect to be able to achieve next quarter, and then business delivers about a 15% operating profit and about $45 million of total revenues.
In summary, I think we would hope to characterize for you that we are very much in the infancy of any of the growth markets we're serving at this point in time, be it the Voice-over-IP market or be it fiber-to-the-home market. These are in the first inning. I am not even sure that I was actually going to dug at them, I am not sure we are at the first inning yet. But they're markets that are going to grow over the course of many years to come, and we think we have dominant positions to certain extent in those markets, based on the customers that we took you through on a line by line basis.
The restructuring is on track, and we expect to return to non-GAAP profitability in the June quarter.
So that’s it. Thank you for listening. I think we have about five minutes for any questions.
Unidentified Audience Member
Unidentified Audience Member
Yeah I think your observations are absolutely fair. First of all, the industry has struggled across the board for about six years at this point in time. And the thing I think is different today specific to Mindspeed than it has been at any point in the past is that we for the first time don’t need to grow revenues to breakeven. Every time we've entered into a cost reduction process in the past and that’s been multiple of them across the last six years, there has still been a requirement for revenue growth in order to achieve breakeven and profitability beyond that.
So, for the first time as we stand here today, once we complete this operating expense change, revenues don’t need to grow from where they are today. I mean we're going to breakeven at $33 million. We're doing $32 million-$33 million. I think that’s from a Mindspeed perspective, a very different point that exists today versus as existed at any point over the course of last five or six years.
The second point I would make is, I think if you look at all of the telecom markets that are open for people to invest in, I think we feel we're one of the best. I don’t think I'd trade the positions we have in the fiber-to-the-home or the positions that we have in Voice-over-IP primarily within the carrier environment and also within the enterprise environment for any other telecom opportunities that exist today.
So, even though it's tremendous amount to develop the positions that we have today. As I said, I don't think we have even started to enjoy the full benefit that we're going to enjoy from those as carriers continue to upgrade the networks globally to deal with the competitive dynamics that they face. Now, the rub is carriers don’t like to spend money. And if I believe in one thing in six years I've been with this business when I joined just as the business imploded, if you will, is that it always takes longer when you expect it to in the carrier space.
And the thing about just here in North America, we have been talking about Verizon and FiOS and AT&T and Lightspeed for three years. And we still really haven’t seen a significant amount of electronics deployed associated with any of those, and same thing at British Telecom in their 21CN deployments and so on.
I think the carriers are going to spend increasing more dollars on next-generation technologies. They do have to start upgrading their networks to deal with competitive dynamics, but it will take longer than anybody expects to really see the benefit at the semiconductor level.
Unidentified Audience Member
I think it's just the continued development of the markets that we chose. I don’t think we believe that we need to add new technologies to the portfolio. We don’t believe that we need to go in an M&A strategy to aggressively grow revenues. I think we're waiting and fully expect the markets that we're serving to deliver the growth you are talking about.
Now, if you look at the characterization that I gave you, the semiconductor markets that we serve within these small telecom markets and these are small niches of telecom, are expected to grow by 35% plus in the case of PON and voice.
Last year, the analog business grew by 58%, as I said. So it delivered on some of the [contention] that we thought existed. The voice business didn’t grow at the same rate last year. So, I think you just need to get, the markets that we are serving are growing at the rate that we believe and others believe they should be growing at.
Excellent. Thanks for your time. I appreciate it. Thanks for listening.
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