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Mindspeed Counting on VOIP

Light Reading
News Analysis
Light Reading
1/26/2005
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A refocused and repurposed Mindspeed Technologies Inc. (Nasdaq: MSPD) is putting its chips on a hopeful-looking 2005 VOIP equipment market, and at least two analysts like the company’s odds of finally landing on black.

Pacific Growth Equities Inc. analyst Sandy Harrison says in a brief released today the Newport Beach, Calif.-based chip maker is on “a path to reach break-even by the end of calendar year 2005.” Harrison’s brief is titled “MSPD 2005: A VOIP Odyssey; Armed with a Pocketful of Cash and a Roadmap for Growth” (pretty colorful language for an equities analyst, but not bad). Pacific Growth Equities sells Mindspeed stock.

Thomas Weisel Partners released a les floridly titled brief Monday, espousing a slightly more skeptical view that the company will reach operation break-even by March 2006. Mindspeed projects break-even by the fourth quarter of 2005.

A closer look at the numbers indicates that Mindspeed’s total revenues are down slightly, but that more of those revenues are coming from sales of chips for VOIP equipment. Revenues came in at $26.3 million, slightly below analysts’ expectations of $26.8 million. VOIP sales contributed a quarter of the revenue, a 30 percent increase over the year-ago quarter. (See Mindspeed Revenues Flatten in Q1.)

Both equities firms touted the company’s new VOIP focus, and both expect Mindspeed stock to outperform its component vendor peers over the next year.

“They are managing expenses more carefully now,” says Harrison. “They are leveraging their position and they have established a presence in the sector. They are one of the few guys that have a nice canned solution; they can just come in, install the chip, add the software, and it’s ready.”

Harrison is also encouraged by Mindspeed's strong relationships with equipment vendors serving cable operators Comcast Corp. (Nasdaq: CMCSA, CMCSK) and Cox Communications Inc. (NYSE: COX), which he believes will "make IP-based services more readily available to customers."

Mindspeed announced last November that its voice-over-IP (VOIP) processing technology had already been deployed in 43 million ports worldwide.

Mindspeed’s earnings for the quarter ended December 31 were mostly in line with Street estimates. It lost $11.9 million, or 12 cents per share, on a pro forma basis, compared with losses of $13.7 million, or 15 cents per share, in the year-ago quarter.

The other component of the analysts’ optimism is Mindspeed’s apparent progress in controlling expenses during the past year. Cash consumption was reduced 24 percent during the quarter, at least partially from workforce cuts.

The company announced a "restructuring" in October designed to cut costs and, more importantly, refocus resources on its VOIP products, says Mindspeed spokesperson Timea Parris. The company first tried to sell, then dramatically scaled back, its ATM products division, letting go 100 employees companywide, 80 of them R&D people (see Headcount: A Pox on Petaluma?). Mindspring now employs 580 people and will level off at 535 by June, Parris says.

Mindspeed has a long heritage in the semiconductor world. The company was once part of Rockwell Corp. (NYSE: ROK), which spun off its chip division as Conexant Systems Inc. (Nasdaq: CNXT). Conexant then spun off its Internet-related chips business as Mindspeed, but the new company has had some rocky times since then -- at least partially the result of a focus on ATM/wireline, which has seen flattening profits for the past few years.

Mindspeed’s outlook for next quarter predicts more of the same themes from the previous quarter -- continued decrease in operational expenditure and a gradual increase in revenues. The company is forecasting flat to up 5 percent revenue growth for the next quarter.

Mindspeed’s earnings, announced after market close Monday, had a neutral effect on its stock Tuesday, which closed down 2 cents at $2.25. The stock traded unchanged in early going Wednesday.

— Mark Sullivan, Reporter, Light Reading

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