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

TranSwitch Corporation (TXCC)

Q1 2012 Earnings Call

May 8, 2012 5:30 p.m. ET

Executives

M. Ali Khatibzadeh – President and Chief Executive Officer

Robert A. Bosi – Vice President and Chief Financial Officer

Analysts

Richard Shannon – Craig-Hallum

Kevin Cassidy - Stifel Nicolaus

Drew Burke - Gameplan Financial Advisors

Paul Berghaus - Cornerstone Asset Management

Presentation

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.

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