TranSwitch Corporation's CEO Discusses Q1 2012 Results - Earnings Call Transcript

| About: TranSwitch Corp. (TXCCQ)

TranSwitch Corporation (TXCC) Q1 2012 Earnings Call May 8, 2012 5:30 PM ET


M. Ali Khatibzadeh – President and Chief Executive Officer

Robert A. Bosi – Vice President and Chief Financial Officer


Richard Shannon – Craig-Hallum

Kevin Cassidy - Stifel Nicolaus

Drew Burke - Gameplan Financial Advisors

Paul Berghaus - Cornerstone Asset Management

Good day everyone and welcome to the TranSwitch first quarter 2012 earnings release conference. [Operator instructions.] At this time, for opening remarks and introductions, I will turn the call over to TranSwitch Chief Financial Officer Robert Bosi. Please go ahead Mr. Bosi.

Robert Bosi

Thank you and good afternoon. With me today is Dr. Ali Khatibzadeh, our president and CEO. This call will include forward-looking statements that involve risks and uncertainties that could cause TranSwitch's results to differ materially from management's current expectations. We encourage you to review our Safe Harbor statement contained in the earnings release published today, as well as TranSwitch's most recent SEC filings, for more complete descriptions.

With that said, I'll turn this over to Ali for his thoughts on the quarter, and I'll come back and discuss our financial results. Ali?

M. Ali Khatibzadeh

Thank you and good afternoon. It was quite a difficult revenue quarter. I do have a lot of good news to report today, but let’s start with the disappointing Q1 results.

Revenues for the quarter were just $3.7 million, a significant decrease both on a sequential and a year over year basis. Product revenues declined from $5 million in the fourth quarter to $3.2 million in Q1, as sales of legacy telecom infrastructure products continued to decline.

Let me go into it just a little bit more. Our legacy telecom business has two parts to it. The first part is the original TranSwitch business, targeting older circuit switch networks. Some of these products are deployed in mobile networks, and are expected to continue deployment, although at a declining rate, which we cannot predict.

The second part is our voice over IP, or VOIP, business, which includes our infrastructure VOIP product line. Today we’re announcing that we are seeking a potential buyer for some of our telecom assets. In the event that divestiture of these assets does not materialize, we will continue to sell these products and support our customers, but we will not be adding new infrastructure products, and we will not be targeting new customers. Either way, this will allow us to reduce costs significantly, which I will discuss later.

What these two parts have in common is that they both sell into the core carrier infrastructure market. In the best of times, this was a small but consistent and high-margin business. By divesting or harvesting these assets, we are taking a big weight off of our shoulders.

Over the past two years, the steady decline in this business has led me to the conclusion that the economics of infrastructure telecom will not work for us. The time to money is too long, the level of uncertainty too high, and perhaps more importantly, we have much better investment opportunities elsewhere.

Service revenues declined as well, from $1.3 million in Q4 to $0.5 million in Q1. But this is not so much demand-related. What we call service revenues are really technology licensing sales. In the past, we have sold our IP to major industry players, and this has given us a very good reputation in the industry.

During the quarter, we turned down two licensing opportunities because the work would have required porting our IP to processes that were not aligned with our internal product roadmap. While this would have generated some one-time revenue, it would have delayed getting new products to market. Having said that, service will continue to be part of our business mix, and we will continue to sell IP licenses which do not involve significant customization and have an off the shelf aspect to them.

The steeper than anticipated decline of our legacy telecom business just as we are gearing up to bring our new video products to market has increased our burn rate and pressured our balance sheet. In response to that, we’re also announcing that we have raised $2.8 million in additional equity financing. These shares were sold in a direct placement and not pursuant to our aftermarket facility.

We are particularly pleased that virtually all of the purchasers of the deal are long-time shareholders including two directors and management, including myself. We’re delighted to have their continued support.

The primary objective of this raise is to maximize the probability of success for the sale of assets and to strengthen our balance sheet. I will discuss more about our balance sheet, cash flow, and potential financing plans later. Now let’s turn to the good news on the business front.

Earlier I discussed the two parts of our legacy telecom division. We have a third part to our telecom division, and this one is decidedly forward-looking. Unlike our legacy products, this one is aimed not at the telecom infrastructure market, but at the consumer market. Here time to money is much shorter, and potential volumes are much larger. You’ll find these sorts of products at your local Best Buy, right next to products from Netgear or Cisco.

In September of last year, we introduced our wireless LTE router and gateway reference design, which couples our Atlanta processor with our comprehensive voice over LTE software suite, enabling manufacturers to quickly bring a proven, carrier-tested product to market. Our reference design is one of the first LTE router solutions capable of providing voice as well as data services, enabling the consumer to make a landline-quality phone call while simultaneously streaming high-definition video.

This is an important distinction because LTE is currently deployed as a data-only technology. But over the past year, it’s become clear that combined voice and data capability, or voice over LTE, is what carriers really want. Many of the major carriers, including Verizon and AT&T, have publicly announced that they intend to deploy voice over LTE starting in 2013. This is a large market where we have an advantage in both technology and time to market.

In February of this year, we announced that our wireless router solution had successfully undergone testing at the Verizon LTE Innovation Center in Waltham, Massachusetts, and we believe that we are ahead of the competition.

We are currently engaged with a number of OEMs who are interested in developing products based on our LTE reference design. The first products are targeted at deploying in North America, but we believe there are many other such opportunities around the globe. So despite harvesting the infrastructure side of our telecom business, we intend to continue to support and grow the consumer side, which is our voice over LTE business.

Now let’s talk about our largest growth driver going forward, which is our video connectivity business. Let’s start with an update on HDplay. Our HDplay products are on target for their production release by the end of June. I’m happy to report that we have received our first commercial HDplay orders for shipment starting early in the third quarter. This will be an important milestone for our new business.

As we head toward production, we’ve been able to significantly broaden and intensify our marketing efforts, and I’m pleased to be able to report that our initial customer reception has been very strong and our future [set] is clearly resonating with the industry. We are currently engaged with over 35 potential customers who have expressed some degree of interest or commitment to our product.

While I don’t plan to give a quarterly update of our design win metrics, I will say that a good number of these opportunities are already at the design-in or design win stage, and the rest are at what we call the technical evaluation stage. While we may not win every opportunity, we expect to win a good share, and our opportunity funnel continues to grow.

We are also making good progress toward our first design win in the TV market. Today, many brand name TVs are actually designed by ODMs, or original design manufacturers. We’ve been selected by a large Asian ODM that is developing a TV for a major tier one manufacturer. While this opportunity has not yet reached the design win stage, we believe it could yield significant volume of about 2 million units in 2013. These ODMs and OEMs are among the largest companies in the world’s consumer electronics supply chain, and we view this as important progress.

In another important achievement, our HDplay products have been selected by Texas Instruments, the largest supplier of projection solutions based on DLP technology, for use in their next-generation platform. DLP, or digital light processing, is a proprietary projector technology of TI, and right now is the dominant technology, accounting for over 55% of the total front projector market.

According to Pacific Media Associates, the standalone front projector market is expected to grow 30% in 2012, reaching 12.4 million units this year, and this is expected to increase to 14 million next year. Of those, about 6.8 million will be based upon DLP technology, a figure which we expect will grow to 8 million by next year.

Inclusion in TI’s reference design will give us access to this very significant share of the global projector market. Of course, our HDplay products are also compatible with other projection technologies, and we also have customer opportunities based on competing platforms. So we can address the entire market with our product portfolio.

In fact, I was particularly excited about the projector market, and I’d like to talk a little bit more about that today. More so than other applications, projectors have to work with a wide variety of media sources. If you look at the back of the projectors today, you’ll see HDMI and VGA inputs on almost all of them.

VGA has been around since 1987, but is going to be replaced by DisplayPort very soon. With industry support for VGA ending by 2015, I expect that the uptake of DisplayPort in applications such as this will be dramatic. Soon, both HDMI and DisplayPort capabilities will be a must-have for projectors, and our dual-mode chip is ideally positioned for this market shift. Already we have seen significant early interest from a number of projector manufacturers where the value of our dual-mode capabilities and extended cable technology is clearly recognized.

Beyond 2013, the global projector market is on course for dramatic growth, driven by a new class of ultra-small, form factor projectors known as pico projectors. According to Pacific Media, 2015 front projector volumes are projected to hit 39 million units as pico projector shipments ramp.

Recently, we announced two new additions to our HDplay family of products. These are derivative products optimized for specific applications. The first chip, called 44152, features two inputs, each capable of supporting HDMI, DisplayPort, or mini-DisplayPort, and is ideal for the pico projector market. The second ship, the 44154, features four inputs, and is ideal for midrange TVs and the monitor market.

Moving now to mobile devices, yesterday we announced HDmobile, a low-power transceiver tailored to the smartphone and tablet market. We think this has the potential to be a very important product, not just for TranSwitch, but for the industry as a whole. Multimedia applications and smartphones, tablets, and other mobile devices will see explosive growth over the next few years. High definition video connectivity is only beginning to become a requirement, and the field here is wide open.

According to market reports, in 2014, about 330 million smartphones and tablets will have some sort of high definition video connectivity, and that number increases to 470 million by 2015. On that basis, we’ve sized the 2014 market at about $400 million. These estimates assume an attach rate of about 33% in 2014 - that is, 33% of the smartphones would have video connectivity - increasing to 40% in 2015.

Now, I personally believe these attach rate estimates are conservative, and that just as with wifi, the attach rate to smartphones and tablets would rapidly go up to 70-80%. This means the market size could be significantly higher.

HDmobile brings several key new features to the market. First, it employs TranSwitch’s patented HDP technology, meaning it supports the latest versions of both HDMI and DisplayPort. That’s going to be a tremendous advantage as both HDMI and DisplayPort are going to be pervasive, but neither one will be truly dominant. So interoperability between the two standards will be very important.

HDmobile will also feature USB 3.0 data capability for up to 10 times faster data transfer. And you can also charge your phone, of course, through this connection as well. Today, USB, which by the way stands for universal serial bus - USB 2.0 is still the standard data protocol for smartphones, but the first USB 3.0 models should be coming later this year. By 2014, USB 3.0 should be the standard connector on smartphones and tablets.

Now, this is going to be an important feature, since the memory capacity of smartphones and tablets is rapidly increasing, and the need to transfer large amounts of data to a host computer, or to the cloud, requires a much faster connection than the current USB 2.0.

Currently, the industry is grappling with alternative standards for mobile connectivity, but each falls short in some important way. For example, some smartphones use a micro-HDMI connector - you’ve seen that on your smartphones today - to take advantage of the enormous installed base of HDMI ports out there.

The problem here is that HDMI itself was never designed for the mobile market, so it doesn’t permit simultaneous charging while you’re streaming or playing back the video. This is a critical feature.

Mobility DisplayPort, or MYDP as it’s referred to, on the other hand, was designed from the beginning as a mobile version of DisplayPort, but there simply aren’t that many DisplayPort-enabled TVs and monitors out there yet. USB 3.0 is great for data transfer, but it was never designed for video.

Another solution on the market is MHL. It solves the issue of simultaneous charging, but is not backwardly compatible with HDMI, and requires the use of either a special MHL port on your TV, or an active cable to convert MHL to HDMI. And so far there are very few televisions or monitors who have these special MHL ports, so consumers are forced to add another bulky, expensive cable to their collection.

Now, while MHL is a solution for today’s mobile requirements, the next generation of smartphones and tablets demand more performance and features. For example, the current version of MHL only really supports video up to 720p resolution. The next version is expected to do 1080p, which is just 8 bits of color. Our HDmobile product, on the other hand, will be able to support 1080p with 10- and 12-bit color [depth], full 3D, and it can even support the newest 4,000 by 2,000 resolution screens.

We believe that with HDmobile, we have really leapfrogged over what’s out there today. It’s truly a next-generation solution, and will be able to support consumers’ mobile video needs for the next few years.

Perhaps even more important than its feature set is HDmobile’s potential to unify a fragmented industry. MHL and mobility display port are designed to do the same thing, but they do it in different ways using different technologies and different connectors, and they’re not compatible with each other, so the result is a confusing array of choices for OEMs. By offering all of these video and data standards in one chip, HDmobile offers customers the best choice and accelerates adoption of our technology.

So far we’ve been working with a number of tier one manufacturers to understand the specific customer requirements, and we’ve gotten favorable feedback. Our goal is to catch the 2013 design cycle for revenue in the second half of that year.

I hope you can now see why we’re so excited about this. We believe this will be a meaningful contributor to our growth as we get into the second half of 2013.

Now I would like to discuss our business modeling going forward. Previously, I’ve indicated that our base offering expense level, exclusive of take-outs and other unusual items, was about $6.6 million quarterly. Through our strategic actions relating to legacy telecom assets, I expect to be able to save about $1 million per quarter, bringing our recurring operating expenses down to $5.6 million.

Q2 will be a transitional quarter for this expense level, but I expect the third quarter will reflect the full amount of savings. Remember that take-outs of products and other one-time items will be on top of this.

Now I would like to talk about our revenue outlook going forward. We’re still not in the position of being comfortable giving quarterly guidance for 2012. The mix of our business is still heavy in terms of our legacy telecom business, and ordering trends in our legacy telecom business remain erratic. And the amount of service business that we can support is also not predictable.

For HDplay, we see a number of companies targeting third and fourth quarter production dates for their HDplay-based products. This is the first time we are going through production with these customers, so we would rather err on the side of caution. As we gain more experience with our new customers and our new distribution channels, I’m sure we will develop the confidence to give forward guidance again.

As things stand now, we see the first revenue for HDplay starting early in the third quarter, with a continued ramp from there.

I would now like to give you a broad sense of how we see 2013 playing out. I hope you’ll understand that these numbers represent our best estimate at this time, and are fully subject to the risks outlined in our Safe Harbor statement at the beginning of this presentation.

First, we believe our telecom business in total can contribute about $16 million in 2013. This number includes new revenue based on our LTE solution, and can change depending on timing of carrier deployments and our design win success. It also assumes that we retain the telecom businesses that we are currently seeking a buyer for. So in the event of divestiture, this number will, of course, be lower.

We believe our HDplay family of products can generate revenues of $21 million on the low side. We view this as a conservative figure for two reasons. First, the majority of this amount is based on analysis of individual customer opportunities, where we already feel we have a fairly good probability of success.

Second, as I said earlier, we expect 2013 projector volumes to be close to 14 million units, with about 8 million attached to the TI DLP solution. Being qualified as their vendor, we now have a shot at competing for all those buckets, and in cases where DisplayPort is a requirement, we believe HDplay will be the most attractive choice.

Ultimately, our 2013 HDplay revenues will be a function of not just the opportunities we have today, but of the opportunities that we’re able to mine over the next year. As a whole, it’s hard to put a value on those future opportunities, but they are certainly significant and could easily be as significant as the opportunities that we have already identified. Remember, our HDplay products are just entering production, and we have only recently started to broaden and intensify their selling efforts.

On the high side, we feel HDplay can potentially generate about $30 million of revenue in 2013. We’re seeing lots of new opportunities in the switch and projector market, and the time to revenue for these products is fairly short compared to telecom. For example, we originally announced a design win with Grandbeing, a company in China. This type of opportunity can move from design-in, to design win, to revenue in nine months or less, and can provide meaningful revenues as well.

In the TV market, although the time to revenue is longer, each opportunity can generate several million units or more in demand. As I said earlier, we’re making progress at a tier one ODS.

For HDmobile, we do not expect revenues before mid-2013 at the earliest, but if we’re successful, then second half revenue could be quite meaningful, and 2014 revenues even more so. We are forecasting about $5-7 million for the second half of 2013. So $5 million on the low side, $7 million on the high side.

Obviously there is some upside potential here, and we’re quite excited about our prospects in this market. By virtue of its size and product cycle dynamics, this is a market that can ramp fast and hard. We believe our IP licensing business can contribute about $5 million for 2013, including some initial licensing revenue from HDwire.

Remember, HDwire is both an IP licensing opportunity and a chip sale opportunity. We have not yet introduced our HDwire chips yet, so we have not factored in anything for product revenues here yet. Currently we are in discussions with a number of companies who have expressed interest in this technology.

For example, one of the emerging trends in 2012 is the proliferation of next-generation OLED - that’s organic light emitting diode - TVs. They are the next big thing in video screen technology. As it turns out, HDwire, with some modifications, can be ideal for these applications.

So adding up these numbers, for 2013 we think we can target about $47 million in revenue, with potential for upside. The largest variable here is the ramp of the HDplay products, but as I said earlier, there’s also upside potential for HDmobile. I remind you again that this includes revenue from all of our telecom assets, some of which we may divest. We think our blended gross margin can be about 55% to 65%, depending on the mix.

Overall, we expect our growth drivers to kick in starting with HDplay in the second half of 2012, and with HDwire and HDmobile in 2013. While 2012 will be a transitional year, we anticipate significant growth in 2013.

Normally, we don’t give forward guidance that far in advance, and I’m not planning on making a habit of it, but given the substantial transformation the company’s going through in its core business, I believe it’s appropriate to give investors at least some sense of what we anticipate for 2013.

I would now like to address our cash position and future financing needs. We began the first quarter with $7.5 million of cash, and ended the quarter with about $5.1 million, of which $1.35 million was a draw against our credit line. If you add to that the proceeds of our just-announced direct placement, our effective quarter end cash position would have been about $7.9 million at the end of Q1.

As we look to Q3 and beyond, my assumption is that we will need a limited amount of additional capital, mostly for working capital and the maintenance of an appropriate balance sheet. Now, this cash can come either through sale of assets or capital raise, or both. We monitor our financial position very closely, and our goal is to balance our commercial opportunities against our cost of capital.

At TranSwitch, we take very seriously matters of shareholder value. One of the reasons is that insiders own about 15% of the company. In raising additional funds, we intend to be both opportunistic and sensitive to the shareholder dilution. Our goal is to raise what we need and no more than what we need, particularly when it comes to assuming equity.

Before I had it off back to Bob, I would like to make a few concluding remarks. Mainly, TranSwitch is a development stage company that happens to be public by virtue of our legacy business, and we need to be judged as such.

Since I joined the company in December 2009, the company has been through much more of a revolution than evolution. We aggressively refocused our investment from telecom, where the economics were poor, to video, where we believe the economics will be good. It has been painful at times, but I believe that 2012 will be the year when we begin to see the first fruits of this labor.

It may not be evident yet in our results until we get into the second half of this year, but I can see the progress internally, and I’m anxious to be able to share the positive results I expect. One of my goals for 2012 is to significantly increase our institutional ownership and to create a better, more liquid market for our shares.

With this conference call, we have now introduced our three major product lines for video, and given investors a concrete set of expectations for 2013. We’re now ready to go out and engage with potential new investors. We’ll be appearing at the Craig Hallum conference in Minneapolis on May 30, and at the East Coast Ideas conference in Boston on June 5.

We also recently engaged Three Part Advisors as our investor relations firm, and we will be on the road with them periodically throughout the year, starting with Dallas and Chicago this month. If you’re interested in meeting with us, please give them a call.

In summary, we find ourselves at an exciting and pivotal moment in the company’s transformation. The strategic actions we took starting in 2010 are beginning to bear fruit, and are setting the stage for significant growth in 2013 and beyond.

I’ll now turn it over to Bob for a discussion of our financial results, which will be brief, because I’ve taken up so much of your time. We want to have ample time and opportunity for question and answer. Bob?

Robert Bosi

Thank you Ali. Our Q1 revenue of $3.7 million was substantially down from our Q4 2011 revenue of $6.3 million, and our Q1 2011 revenue of $8.2 million. Net product revenue for the quarter was approximately $3.2 million, compared to product revenue for Q4 of 2011 of $5 million and $5.8 million in Q1 of 2011.

Net service revenue for the quarter was $0.5 million compared to service revenue in Q4 of 2011 of $1.3 million, and $2.4 million in Q1 2011. Our service revenue includes revenue related to intellectual property licensing of our HDMI, DisplayPort, and HDP technologies and the associated royalty revenue.

By product line, our CPE revenue for the quarter was $0.7 million compared to CPE revenue in Q4 2011 of $1.2 million and $2.7 million in Q1 of 2011. Our infrastructure revenue for the quarter was $3 million compared to our infrastructure revenue in Q4 of 2011 of $5.1 million and $5.5 million in Q1 2011.

The geographic breakdown of our first quarter revenue was as follows: Asia-Pacific, 37%; Europe, the Middle East, and Africa, 48%; and the Americas, 15%.

Our gross margin was 59% in the first quarter of 2012 compared to 58% in the last quarter, and 64% for the first quarter of 2011.

On a non-GAAP basis, operating expenses were $7.5 million. On a comparable basis, prior quarter operating expenses were $7.7 million and prior year operating expenses were $7.4 million. As Ali stated, by eliminating further investments in our telecom infrastructure business, we expect to get our operating expenses down to the $5.6 million level.

Non-GAAP operating results for Q1 was a loss of $5.3 million. On a comparable basis, prior quarter operating loss was $4.1 million, and we had a non-GAAP operating loss of $2.1 million in Q1 of 2011.

On a non-GAAP basis, the loss for Q1 was a loss of $5.5 million, or $0.18 per share on a basic and diluted basis, as compared to a net loss of $4.2 million in Q4 2011 and a $2.4 million net loss in Q1 of 2011.

Q1 2012 GAAP diluted net loss per share was $0.20 versus as compared to our net loss per share of $0.39 in Q4 2011 and a net loss of $0.13 a share in Q1 of 2011.

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

The reconciling items for Q1 are as follows: expenses of $0.1 million in the amortization of purchased intangible assets, expenses of $0.5 million in stock based compensation, and a benefit of $0.1 million from a reversal of approved royalties. These items will be described in the press release, and as Ali has discussed our balance sheet, we’ll turn it over to questions. Operator?

Question-and-Answer Session


Thank you Mr. Bosi. [Operator instructions.] And our first question comes from Richard Shannon with Craig Hallum.

Richard Shannon – Craig-Hallum

I just want to make sure I got all the numbers, Ali, in your breakdown of revenues that you think is possible for 2013. I think I might have missed one or more of them. Telecom at $16 million, IP at $5 million, HDmobile $5-7 million. Would that make HDplay at $20 million to get to $47 million? Is that right?

M. Ali Khatibzadeh

We had $21 million. To clarify, for the $47 million we’re using the low number, the $5 million, for HDmobile.

Richard Shannon – Craig-Hallum

Okay. I guess a couple questions inside of those numbers. Let’s first go with HDplay, of I think you said your baseline number of $20 million and then maybe an upside number of $30 million. If we look at that $20 million number, is there any expectation built in for TV customers? Or is that primarily, or mostly, driven by projectors?

M. Ali Khatibzadeh

There is some built in there. We built a conservative investment. But we believe we have upside opportunities as our first opportunity goes to a design win phase and into production. We expect that that will generate additional opportunities, and that could result in upside.

Richard Shannon – Craig-Hallum

And then on HDmobile, the customers that you’re targeting here, are there any of those - or at least in the revenues that you’re talking about for the second half of ’13 - specifically MHL users today or not? Or is it unclear what their position will be, or where they’re sitting today?

M. Ali Khatibzadeh

Obviously I cannot comment on the customers’ plans for the future, but we have talked to tier one OEMs who plan to use MHL, and tier one OEMs who have not made a decision. But I think again, just to go back, we believe MHL is the solution for today’s requirements, and the next evolution of it requires more features. And what we are targeting with our product is to address that next-generation requirement.

Richard Shannon – Craig-Hallum

On the telecom side, I think you said $16 million. Can you suggest how much of that might be legacy? And then also as a follow-on to that, assuming that the assets you were planning to sell actually happens, where could opex go? If this number you mentioned was before divestiture, what could that go down to if you do make that happen?

M. Ali Khatibzadeh

In terms of the revenue, the telecom, that includes our legacy telecom, voice over IP business, and we have estimates for LTE next year in the single-digit millions that add up to $16 million. Now, the legacy part of it, I would say, is on the order of about $10-11 million, in that range.

And we view that as a conservative estimate because that number is significantly down from what we did last year or we believe we can do this year. So we’re trying to build some conservatism, given the track record of the past two years, with the market, to make sure that we’re not setting… And again, those numbers could go up and down depending on carrier plans, and as you know the market is going through some tough times right now.

On the LTE, that depends on the timing of deployments, how fast the carriers deploy LTE, with voice over LTE. So right now we view that $16 million as a good target. It’s not one that I would feel comfortable building upside expectation on.

Richard Shannon – Craig-Hallum

So then if the legacy chunk of that, which you’re estimating at $10-11 million, if that is divested, what would be the expectation of continuing opex before takeoff?

M. Ali Khatibzadeh

As far as what parts of our telecom would be divested, I cannot comment on that. I think we are in the discussion phase, and I don’t have anything to add there. Again, with a divestiture, obviously some resources go with the business, and we estimate that, either in the case of divestiture or harvesting of those businesses, we would be able to get our operating expenses down, by, as we’ve said, by $1 million a quarter. The $5.6 million that you heard, that’s the recurring part of our operating expenses, in case we take on new products, but there will be all these one-time charges on top of that.


From Stifel Nicolaus, we’ll go next to Kevin Cassidy.

Kevin Cassidy - Stifel Nicolaus

I guess as long as we’re talking about the new product opportunities, what kind of gross margin and operating margin do you think it will come to?

M. Ali Khatibzadeh

The blended gross margin for our video connectivity business we believe will be around 55%. That includes, of course, a mix of IC and licensing IP revenue. The licensing part of that will be higher margin, and the IC will be between 50-55%. So the blended margin should be around 55% for that.

Kevin Cassidy - Stifel Nicolaus

And in your HDmobile, does that support any wireless? Or is it only for across the wire?

M. Ali Khatibzadeh

That is not a wireless solution. It’s meant to support video connectivity with a cable. We believe that wireless and wired are almost two different use cases. The wireless technologies that are being pursued will provide some level of HD video connectivity. They will not be able to offer you uncompressed video resolution. That takes a significant amount of bandwidth that is not available today in any of the wireless solutions that we hear about.

But that’s something that offers you, in the case of you just want to get a quick view of something that may not be the highest resolution, and may not be the highest quality picture. But the wired connection, which is what we support, you will be able to get, as I said, full resolution, 1080p, and the new resolution, 4k2k, which is coming down the horizon.

Kevin Cassidy - Stifel Nicolaus

And on the legacy product sale, are there patents involved in that? Could it be bundled with it? Or do you sell patents separately?

M. Ali Khatibzadeh

Yes, we do have some patent position in those businesses as well.


And we have a follow up from Richard Shannon with Craig Hallum.

Richard Shannon – Craig-Hallum

Ali, would you characterize the engagements that you’re having with TV customers with the HDplay products - would they be primarily or almost exclusively looking at it to work with 4k2k? Or are you also looking at more current generation screen resolutions?

M. Ali Khatibzadeh

Yes, the first opportunity we have is the current generation resolution TVs, and there’s interest in both DisplayPort and HDMI, and that’s why we have in our strategy to focus on that segment of the market. And that seems to be a growing segment of the market. We do have opportunities for the higher resolution TVs.

I talked about the OLED TVs, where we have opportunities. Those TVs are very thin. I think LG announced an OLED TV this year that’s about 4 mm thick, and hangs on a wall. With that kind of a thickness, there’s no room to put electronics inside, or even a video connector on it. So those kind of TVs have a very thin cable that comes down to a box that contains all the electronics and sits next to the set-top box or whatever else you have.

So that’s where HDwire has shown a lot of interest from customers for that technology. That’s one application. Of course, we also see for high resolution 4k2k TVs opportunities which we’re engaged with some customers on that front.

Richard Shannon – Craig-Hallum

Could you tell us a little bit about what you’re seeing over the last quarter with the HDMI Forum, obviously the extension of the HDMI Consortium? I think last time you mentioned a few competing proposals being debated, and I think TranSwitch was a proponent of one of those. What are your latest thoughts on what’s going on there? Will your proposal be accepted? And the general timeframe by which that might happen?

M. Ali Khatibzadeh

I cannot say much about it, obviously, because of the confidentiality we have with HDMI. All I would say is things are progressing, and I think the forum has publicly said that they’re going to introduce a new set of specifications by the second half of the year. So I think that’s as far as I can go with that, talking about the internal workings of the HDMI Forum.


And we’ll take our next question from Drew Burke with Gameplan Financial Advisors.

Drew Burke - Gameplan Financial Advisors

First, with regard to your relationship with Texas Instruments, who lends the sales support to this relationship? Is that significant in your HDplay revenue forecasts for next year?

M. Ali Khatibzadeh

I cannot comment in much detail about it, but I can say that we’re collaborating with TI. It gives us an opportunity to serve their customers with products. We have to compete for those products, obviously. We believe our HDplay product offers a great set of features that enable their customers to be able to get a more integrated, better solution that offers new features to their customers.

So I’d go back to the example of my previous life. I worked closely with Qualcomm in my previous life on reference design for mobile phones, and so that kind of enabled us to be able to go to end customers. But when you’re presenting a new product to the end customer at that point, that product has already been proven and tested on the platform with the entire software and everything that goes around it. So that accelerates the adoption by the end customer, so you’re not starting from ground zero trying to prove to the end customer that your product can work.

So we believe these kinds of collaborations are win-win for both companies. It offers companies like TI the choices and products they can offer new features, and it enables us to be able to serve their customers better and faster.

Drew Burke - Gameplan Financial Advisors

But what I wasn’t understanding is - you already had [unintelligible] in the projector market before this, right? So of your HDplay revenues for next year, they’re not all relying on your reference design with TI necessarily. There’s some mixture. Is that fair to say?

M. Ali Khatibzadeh

That’s correct. We have customers who use competing technology and I guess the point of this is we can get better access to the larger size of that market, larger portion of that market. And I will go back to my previous life, because that’s public information, the work that I did before in mobile phones with Qualcomm. That type of relationship you do a lot of the upfront work ahead before you go to the customer, so the device is tested, fully proven, and that goes a long way to get the end customer - of course you have to compete on price, quality, and all the other metrics that you have to have as a supplier, but you really go a long way to be able to access that market.

But it is correct that some of our customers today we initiated on our own, and some of them use different technology for the projection system.

Drew Burke - Gameplan Financial Advisors

And you said your low-end HDplay number for next year is more predicated upon the opportunities that are closer in front of you. So it’s fair for us to assume that it’s more projectors than TVs?

M. Ali Khatibzadeh

That’s correct. Low projectors. There’s switch companies. We’ve announced a couple of those. And audiovisual equipment…

Drew Burke - Gameplan Financial Advisors

The TV mix is part of the upside to the revenue number then, not the low end.

M. Ali Khatibzadeh

Mostly the upside. That’s correct. It’s mostly on the upside. There is some TV based on the initial opportunity we have. We’ve baked in some, but not significantly.

Drew Burke - Gameplan Financial Advisors

Okay. And my last question is just with regard to HDmobile. I want to make sure I understand this right. So your transceiver would go into the connector that would be used for charging the smartphone or the tablet, and it would also be used for the transfer of video, either from the smartphone or tablet to a projection screen, or from something else back to the device? Am I thinking of it right?

M. Ali Khatibzadeh

That’s correct. If you think about it, these mobile devices, the next-generation mobile devices that will be coming soon to market will have a 13 megapixel camera. I think Nokia announced something even higher than that. So these devices are going to have capability of recording high-definition video and high-resolution images that take a tremendous amount of data.

And of course the memory capacity on these devices have also, because of that, gone up significantly. So you’re going to have your recorded video, a two-hour video. If you want to transfer that to a computer or to the cloud while using USB 2.0, it will take almost like a week to transfer one video file over USB 2.0. It’s a tremendous amount of time.

USB 3.0 allows you to do it in literally minutes. It’s much faster. So we think this is a use case that’s going to be required and we’re the first company announcing a product that can deliver that, plus the other video standards that are coming out there.


And we’ll go next to Paul Berghaus with Cornerstone Asset Management.

Paul Berghaus - Cornerstone Asset Management

Can you help me understand a little bit more in terms of talking about competing technologies. The MHL technology, and it seems like Silicon’s been announcing more and more design wins, or OEMs that are incorporating that. Is that a threat to you all in terms of what you’re trying to accomplish? And if those OEMs have already made some decisions adopting MHL, because of the cost and investment already made is that going to make it difficult to reverse that and gain market share?

M. Ali Khatibzadeh

Well, first of all, I congratulate Silicon Image. They were first to market with a solution for high-definition video connectivity - that’s the MHL - and I think they’re making good progress in that market. We view this market as very large, by the numbers that I outlined, 470 million smartphones and tablets by 2015.

We believe a single standard is not going to dominate this industry, because of the different requirements that I just talked about. We believe MHL offers some features. The main important one is that it allows you to charge. You know, if you’re playing back a video on a big screen TV through a cable, you don’t want your cellphone to lose charge. And the operators don’t want your phone to discharge while you’re playing back a video, because the less charge you have on your phone, the less phone calls you make, and the less money you pay the operator. So they don’t like that.

So MHL addresses that, and of course it allows you to play high resolution video. The point we made about some of the requirements that are coming, of course MHL is a connector to a TV. You have to use a [unintelligible] cable if you have one of the [unintelligible] TVs. Now, there will be TVs on the market that have MHL-capable ports, but they’re not on the market, and to my knowledge not all TV OEMs have adopted that.

So we believe this backward-compatibility, which HDmobile offers, is very important. With our solution, you can connect to an HDMI TV. And there are other features that I described, with data capability, that we believe are going to become very important. So yes, there will be competition. It’s a big market. With any market, we welcome competition. We think this means we’re all going in the right direction, working on things that can generate business, and I do not anticipate one standard to dominate that market.

There is also a competing, on the DisplayPort side, which is called MYDP, or My DisplayPort. And that’s a competing standard that’s being proposed on the market.

Paul Berghaus - Cornerstone Asset Management

So there’s plenty enough room in the pool, so to speak, for you all, as well as what Silicon might be doing, then?

M. Ali Khatibzadeh

You know, I’ve said this before on previous calls. I don’t like to get into the market unless I have confidence we can carve out 10% market share. Now, obviously we’re not saying 10% in 2013, on HDmobile, but we believe we have a shot at it. You know, when you look at that sized market, and it’s a totally wide-open field. It’s a greenfield. So MHL is there first. They have a good solution for today’s requirements.

And we think we can bring a competitive product to market, and not everybody’s going to have 100% of that market. We think we can get a decent market share there, and it’s a decent opportunity for us. It’s really a grand opportunity, I call it, in terms of transformation for this company. On top of HDplay, HDmobile will give us a significant acceleration as we get into the second half of 2013.

Paul Berghaus - Cornerstone Asset Management

Do you have any relationship with Intel, and Thunderbolt technical they’re using? And, say, with Apple? Can you comment?

M. Ali Khatibzadeh

I cannot comment on specific customers. I think we have permission from Intel to say that Intel is one of our customers. We have licensed IP to Intel on different occasions. And we do support their products. But that’s all I can say about that.


And from Gameplan Financial Advisors, we’ll go next to Drew Burke.

Drew Burke - Gameplan Financial Advisors

Hi, I’m sorry. I just want to come back on your Atlanta 2000 LTE product. I think in the legacy telecom business we skipped over this. Wasn’t there some accomplishments this quarter in that product?

M. Ali Khatibzadeh

Yes, as I said earlier, we announced in February that our LTE solution was tested successfully at Verizon LTE Development Network. And where we come in in this opportunity is if you go look at the Verizon webpage, they’re offering a service called Home Fusion, which is a fixed wireless technology that today gives you access to high speed internet. If you’re in areas where you’re not getting fast DSL, or you don’t have cable, and the only thing you can get is satellite at low speeds, their solution, LTE, home fusion solution gives you very fast access to their network. I think it goes up to 15 Mbps.

And this is the first generation box. Of course, it’s also public information that Verizon and LTE have announced that they want to move their voice traffic onto LTE. So they want to be able to offer voice service as well as high-speed internet on LTE devices. And what we bring to the market is a solution that can do not just data but also voice over LTE. And there are some challenges with that voice over LTE that we have solved. You need to be able to guarantee quality of service.

The voice over LTE application, the idea is you go from LTE to an all-IP network, so the cost of capital for the operator is significantly lower. By virtue of going on that IP network, you have now a lot of challenges to make sure your voice quality sounds like the landline that you’re used to. It doesn’t sound like a poor Skype connection.

So that has a lot of challenges, and we’ve addressed those challenges, and we believe we’re ahead of the competition. And we’re getting good traction with a number of OEMs. Obviously we announced one customer in the first quarter, a German company who’s planning to use this for some 3G and 4G applications. But we’re engaged with others, and we expect that this should generate revenue for us in 2013.

Drew Burke - Gameplan Financial Advisors

So this is not what you would include in your legacy telecom?

M. Ali Khatibzadeh

No, in fact this is an area where we would, in the absence of a divestiture, plan to continue investing.


And at this time, there are no further questions. Mr. Bosi, I’ll turn the call back over to you sir.

M. Ali Khatibzadeh

I just wanted to thank everyone for their support, and patience, to some extent. You know, this is really a unique moment for me to be in the company’s transformation. We said with the new strategy we put in place that we will introduce our new HDplay product last year, as we did. We said we would be able to announce our first customer by the end of last year. We did. We said we would go to production, be production ready, by the end of the second quarter, which we are. And we said that we expect to ramp up in the second half of 2012, which we see coming.

I see a lot of good things happening here, and at the same time, of course, our legacy telecom business has not performed to anyone’s satisfaction, including our management and the board. So I certainly know we have no excuses for that, and other than to say that we’ve really done our best to really steer the ship in a new direction. And had we not done that, I think we would, in my opinion, have lower sales than we have today, with not much to talk about for future opportunities.

Here it’s a unique situation where the opportunities that we’ve been after are in front of us. It’s happening. It’s coming. And I’m very optimistic about our growth prospects in 2013. Every time we do an analysis of what could happen in 2013 and beyond, we have to hold ourselves back, because now we’ve tapped into that big market we’ve been talking about for some time, over $1.2 million additional addressable market.

We’re now tapped into that. We’re plugged into this well. And we need to obviously execute and get the products into production. Get new products on the market. A lot of good things are happening, and I wish I had a better current quarter number to report to you, but the dynamics of telecom markets, I’m not sure what we could have done to change our course in the past two years to change the outcome of where we are. And you see that with the results of other companies in the telecom space that have just reported.

We hope that some of that business will come back, and somebody will benefit from it. But we’re not counting on it anymore, and our path is we’re 100% focused forward, and we’re going as fast as we can. And I think with some of the improvements we’re making to the balance sheet, hopefully with a successful outcome and the sale of assets, we can further improve our balance sheet and minimize any further dilution to our shareholders.

That’s all I have to say, and I look forward to our next call and the ones after that, to continue showing you the progress that we’re making. And 2013, hopefully, will be a much better year. Thank you.

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