TransSwitch Corp. (TXCC)

Q2 2010 Earnings Call

July 29, 2010 4:15 pm ET

Executives

Ted Chung - Vice President of Business Development

Ali Khatibzadeh - President and CEO

Bob Bosi - CFO

Analysts

Richard Shannon – Northland Securities

Todd Brady – Oppenheimer

Kevin Cassidy - Thomas Weisel Partners

Quinn Bolton - Needham & Company

Kevin Cassidy - Thomas Weisel Partners

Presentation

Operator

Good day, everyone. And welcome to the TransSwitch Second Quarter 2010 Earnings Release Conference. Today’s conference call is being recorded. At this time, for opening remarks and introductions, I will turn the call over to TransSwitch Vice President of Business Development, 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. Bob 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 TransSwitch’s products are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

These risks are detailed in TransSwitch’s filings with the Securities and Exchange Commission. With that out of the way, I will give the highlights for the second quarter of 2010.

For the fiscal second quarter of 2010, net revenues for the quarter were approximately $14.1 million. We had previously guided to a range between 13 and 14 million.

Our non-GAAP operating expenses for the quarter were roughly 6.6 million, lower than our previous guidance. As a result of the higher revenue and lower operating expenses, the company achieved operating income of roughly 0.9 million on a non-GAAP basis.

Bob will provide additional details later.

The company also made the following announcements during the quarter.

We announced the successful completion of our rights offering, raising $5.1 million by selling stock to existing shareholders at $2.40 per share.

We also, based on the success on the rights offering, terminated our equity sale agreement with Seaside 88.

We commenced production shipments of our Atlanta 80 to a large Chinese OEM for WiMax deployment in Europe and Asia.

We also introduced the Atlanta 1,000, our latest product for customer premises applications, such as Wi-Fi routers and gateways.

Global Unichip, which is the largest semi-conductor design services company in the world, and 36% owned by Taiwan Semiconductor, licensed our HDMI technology. This further highlights our leadership in HDMI.

I will now hand it over to Ali, so that he can share with you his thoughts on the second quarter and some of our opportunities going forward.

Ali Khatibzadeh

Thank you, Ted. And good afternoon, Ladies and Gentlemen. I am pleased to report that in the second quarter, we made significant progress in financial performance, customer attraction and new product introduction.

In terms of financial performance that Ted mentioned, our revenue grew by roughly 10% quarter over quarter. And we were able to record both operating income and positive EBS. In fact, since 2001, it is the highest operating income achieved by the company.

While the gross margin was flat sequentially, we project gross margin improvement as we move into the fourth quarter due to operational improvements, as well as a ramp down in lower-margined products, and an anticipate a ramp up of newer, higher-margin products.

In addition, we successfully raised about $5 million through the rights offering, with overwhelming participation and over subscription by our directors, officers, and major shareholders.

Moving to the progress made in our businesses; infrastructure, products revenues in the second quarter came in at $8.8 million, slightly higher than the prior quarter, as there were increased shipments of access and voice-over IP products, primarily due to ongoing rollouts in China.

Our China business has, in fact, increased 19% sequentially. We expect areas in China to continue to deploy fiber and copper-base broadband services, including Voice-over IP.

We also saw strength in North America based on the previously-mentioned increasing CapEx spending by AT&T and other operators, which benefited our Entropia sales.

With the continued strong demand for 3G and 4G mobile phones, we expect this trend to continue. We are also seeing adoption of voice-over IP solutions based on Entropia in Asia-Pacific.

For the second half of 2010, we see continuing progress in our infrastructure business based on increased telecom spending on voice-over IP services around the world.

Another area of progress is in the enterprise and access/voice-over IP market, where our latest Entropia Compact is gaining good traction with anticipated ramp up in the fourth quarter.

Entropia Compact is optimally designed to handle voice processing configurations from 16 to several-hundred ports.

Switching gears to the customer premises side, revenue from the second quarter came in at $5.3 million, roughly a million dollar increase over the first quarter.

As Ted mentioned, we began production shipments of Atlanta products to a large Chinese OEM for WiMax deployments to two carriers in Spain and Pakistan.

In addition, there are several other active WiMax vendors around the globe. For example, as you may have heard, India recently auctioned licenses for 4G WiMax deployments. We believe our customers should be well positioned to gain share in the growing 4G market.

Our newest product, the Atlanta 1,000, expands our addressable market beyond home gateways to Wi-Fi 802.11 and router business by delivering industry-leading performance in terms of wire-speed data throughput.

Atlanta 1,000 also offers the lowest power consumption in the industry. In fact, it is one of the few processors on the market today that is capable of being powered over the Ethernet, which is a major requirement for carriers going forward. So we’re very excited about that.

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