TranSwitch Corporation (TXCC)

Q2 2012 Earnings Conference Call

August 08, 2012, 17:30 p.m. ET


Mary Lombardo - IR

Ali Khatibzadeh - President and CEO

Robert Bosi - VP and CFO


Quinn Bolton - Needham & Company

Richard Shannon - Craig-Hallum Capital

Walter Schenker - MAZ Partners

Paul Berghaus - Cornerstone Asset Management



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Good day everyone and welcome to the TranSwitch Second Quarter 2012 Earnings Release Conference. As a reminder today’s presentation is being recorded. At this time for opening remarks and introduction I will turn the call over to Mary Lombardo, Investor Relations. Please go ahead.

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Mary Lombardo

Thank you. Good afternoon. With me today is Dr. Ali Khatibzadeh, our President and CEO; and Robert Bosi, our CFO.

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 expectation. We encourage you to review the Safe Harbor statements contained in the earnings release published today as well as TranSwitch’s most recent SEC filings for a more complete discussion.

With that said, I will turn it over to Ali for his thoughts on the quarter and Bob will discuss our financial results. Thank you.

Ali Khatibzadeh

Thank you, Mary, and good afternoon ladies and gentlemen. Over the last three months we continue to make significant progress in expanding customer opportunities for our HDplay product while at the same time we have taken a number of important strategic actions to better position us for growth in our video connectivity business.

Before I talk about our strategic actions and our progress on the new revenue, let me give you a brief top line overview as I currently see it. Then Bob will cover second quarter results in more detail shortly.

Revenue came in at $3.8 million flat with the first quarter while gross margin improved to 67%. This revenue results primarily from our legacy product and we have no expectation that this level is going to grow in any significant way. However, we do see signs of stabilization in our legacy business through the remainder of this year. Additionally, we have greater IP licensing opportunities in the third and fourth quarter of this year. We also anticipate our first HDplay customers to start production in this quarter with a few more customers launching products in the fourth quarter. I will give you more color on the new business later.

While the strategically direction of the company remains on-track, the key challenge for the company has been to maintain an effective balance sheet, in spite of the unexpected rapid decline in our legacy telecom business. This has been a source of investors concern and during the quarter we spent a great of time addressing this matter.

We ended the quarter with about $3.2 million of cash down from [$5.0] million at the end of Q1. Borrowing on our receivable base credit facility which is our only debt we are about $713,000 down about $630,000 from the previous quarter.

During the quarter we raised about $2.7 million through direct placement of shares. On an all-in basis we used about $3.6 million cash during the quarter which essentially went to fund operations. Now clearly this level of cash burn was unacceptable. To address this we have taken three important strategic actions.

First, we reduced our operating expenses by approximately $8 million annually and we expect the full impact of the savings to be again to be reflected in our financials for the third quarter. The bulk of reductions are coming in our telecom business on both R&D and SG&A. As a result of this restructuring, we estimate the average total quarterly operating expenses to be in the range of 5 to $5.5 million including one-time charges.

Based on this level of operating expenses and the anticipated gross margin level, the quarterly revenue for non-GAAP income breakeven is now reduced to about $8 million per quarter. We will continue to look for and take actions on further expense reduction opportunities to further include this breakeven point.

Second, we have been pursuing the sale of non-strategic assets in particularly our legacy telecom patents. TranSwitch had a rich history of innovation in telecom and as a consequence has evolved to strong and valuable patent portfolio. As the company shifts its focus to high definition video market these patents no longer serve our long-term business strategy. Yet they are very valuable and they are very marketable asset.

Patents are very popular subject today and in patent market it's quite strong making a good sign to be (inaudible). And last week we announced that we have retained Drakes Bay, LLC, a leading patent broker to help sell selected telecom patent family in the near future. Drakes Bay has an extensive track record in multi-million dollar patent transaction and has done a detailed study on the potential value of our legacy patent portfolio and determined that we have both strong priority date and a large number of forward citations.

This means that many later patents have cited on ours, and is the marker of the second launch [irrelevance] of our patents. While I do not want to disclose the valuation of this patents so as to not compromise a bidding process, I can say that their estimated value is very meaningful and significant to us. I’d also like to point out that while we are pursuing the sale of our legacy telecom patents we continue to hold a strong portfolio of intellectual property related to our strategic video connectivity business. In fact, we believe these are most valuable IPs. We expect that this portfolio will continue to grow and put us in an excellent position relative to our competitors in our new business.

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