Aviat Networks Inc (AVNW) 2003 Q4 法說會逐字稿

Good afternoon. My name is Lynn and I will be your conference facilitator. At this time I would like to welcome everyone to the Stratex Networks fourth quarter and fiscal year-end 2003 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. If you would like to ask a question during this time press star and the number 1 on the telephone keypad. If you would like to withdraw your question press star and the number 2. Thank you. I would now like to turn the call over to Miss Laura Graves, Director of Investor Relations. Please go ahead.

Thank you, everyone, for joining Stratex Networks today to discuss financial results for the fourth quarter and total results for fiscal year 2003. Carl Thomsen, Chief Financial Officer, and Charles Kissner, Chairman and Chief Executive Officer, will review the results for the most recent quarter and fiscal year and the current business outlook, followed by a question-and-answer session.

During this conference call, we may make forward-looking statements regarding our business and the wireless industry in general, including statements relating to our market share, improvements in operating efficiency, future revenues, margins, net income or loss, anticipated decreases in operating expenses, balance sheet improvements, DSOs and inventory turns, results of manufacturing outsourcing, backlog, 2004 foreign taxes, claims alleging preference payments, anticipated introduction performance and market acceptance of new products, revenue stabilization or growth, efforts to reduce expenses, profitability and future results of operation.

It is important to note that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those results stated in such forward-looking statements. These risks include the risk of increased competition, continuation or further tightening of global capital markets for telecommunications and local cellular projects, economic and political instability in the Middle East and other markets in which we compete or in which our products are manufactured. For a further discussion of these risks, as well as risks relating to our business in general, we refer you to the disclosure under the heading "Factors That May Affect Future Financial Results" in our quarterly report on form 10-Q for the fiscal quarter ended December 31, 2002 filed with the Securities and Exchange Commission on February 14, 2003, as well as disclosure contained in our other SEC filings. The date of this conference call is Tuesday April 29, 2003.

With the formalities out of the way, I'd now like to turn the call over to Carl Thomsen, Chief Financial Officer.

Thank you, Laura, and welcome to those listening to the fourth quarter and fiscal year 2003 conference call.

In summary, revenue for the quarter at $46.6 million is right in the middle of the range of $45-48 million we forecast at the beginning of quarter. More importantly, excluding the restructuring and other special charges of $8.4 million, we achieved our first break even in many quarters. This is a significant accomplishment in a declining overall market..

Balance sheet metrics also continue to be positive, with over $90 million in cash, DSOs at 60 days and inventory turns at 7. New orders for the quarter at 40 million were disappointing and we'll comment on that later in the call. Backlog at the end of the quarter was $50 million. Given the continued weakness in the overall telecom market, we decided it was prudent to remove a number of items from backlog that did not have a firm ship date as of the end of the fiscal year. Some of the items that were removed may turn into current year business and be placed back in the backlog at that time.

Let me view some of the specific financial results for the quarter. First, on the order side by geographic area, North America was 2.9 million in orders; South America 3.7 million; Europe, Middle East and Africa regions 27.8 million; Asia Pacific was 5.8 million, for a total of 40.2 million in total current orders. By product line, mid-capacity XP 4 product family was 17.1 million, high capacity Altium family was 10.4 million and DXR family was 4.5 million, services total 8.2 for a total of 40.2 million.

Overall order activity was will be line with our expectations, but actual become bookings were lower than expected due to a few large orders being delayed with anticipate receipt of some of these orders in Q1 of fiscal year '04. The Europe, Middle East, and Africa region continued to be strong. However, Asia Pacific declined from the prior quarter end of the last fiscal year due to completion of certain projects and a lack of new orders from China.

The revenue side, revenue at 46.6 million in fiscal Q4, as I mentioned, is right in line with expectations. . It is slightly better than the 46.1 million in revenue reported in Q4 of last fiscal year, but is a 5.5% decrease sequentially. Given the overall decline in telecom equipment business over the past 12 months, we believe that reporting essentially the same revenue as a year ago is quite an accomplishment.

For the total fiscal year 2003, revenue was 197.7 million compared to 228 million in fiscal year 2002, a decline of 14%. By product line, in the XP4 family was 16.9 million, Altium was 16.4, DXR was 5.1 and services were 8.2, for a total of 46.6 million. By geographic region, North America was 2.6, North America 4.1, Europe, Middle East and Africa was 31.4, Asia Pacific was 8.5 for a total of 46.6.

Gross margins were 29% in Q4 of fiscal year 2003 compared to 28.1% in the third quarter. Margins improved dramatically and steadily from the 15.8 percent reported in Q4 of last fiscal year. Improvements compared to last year are due in large part to a more favorable product mix, substantially lower manufacturing spending due to the successful manufacturing outsourcing effort, improved service margins and reduced product [INAUDIBLE] costs. Revenue linearity continued to be excellent with over 30% of quarterly revenue recognized in each month.

Although there was an increase in margins this past quarter based on current proposals and competitive pricing we are seeing in the marketplace, we do not expect further margin improvements in the coming quarter. In fact, we expect to see margins slightly up by 2 to 5 points over the next 6-12 months until our next product generation because of a significant portion of our revenue that's expected to occur at fiscal year 2005. With the potential price erosion, anticipated margins over the next few quarters are projected to be a vast improvement over what we achieved a year ago.

On the operating expense side, R&D expenses were $4 million compared to 3.4 million in the prior quarter. As I indicated in last quarter's conference call, we expected engineering expense to increase as we focused efforts on development in current commercial release of the new [INAUDIBLE] product platform. I should mention that Unity is the project name. The actual product name and some technical characteristics will be discussed by Chuck Kissner during his presentation.

Mostly, increases in R&D expense was mainly due to material for building prototype products and outside services and support for new product release. SG&A expenses were 11.2 million in fiscal Q4 compared to 12.4 million in the prior quarter and 14.1 million in Q4 of last fiscal year. This increase in both selling and admin expenses reflects the impact of sales facilities consolidation as well as ongoing company wide spending reductions.

During the quarter we reported 8.4 million in restructuring and other special charges. Of these costs, 900,000 related to additional restructuring primarily for severance pay, and 7.5 million related to legal claims by trustee attorneys for two former customers who declared bankruptcy in a prior year. Trustee attorneys are claiming that Stratex received preference payments in the 90 days prior to when they entered bankruptcy. We plan to vigorously defend the company against these claims when they are formally filed with the courts. We believe we have good defenses that these payments were received in the course of business. Nonetheless, based on a review of the situation by our attorneys, we concluded a reserve potential settlement is appropriate.

Interest and other income in the quarter was net income of $500,000 compared to $600,000 net expense in fiscal Q3. This favorable outcome in Q4 was due to lower foreign exchange currency costs due to increase decreased exposures in South American currencies as well as foreign exchange gains compared to losses in the prior quarter. In addition costs related to discounting letters of credit were lower due to the mix of customer receivables. I expect that at fiscal year 2004 we'll have net other expense of about $100-200 thousand per quarter.

In fiscal Q4, we reported net income tax credit of 1.4 million. During the fourth quarter we took a variety of actions based on consultation with tax advisors to reduce foreign taxes. These actions resulted in a reduction in our tax expense in certain foreign subsidiaries for fiscal year 2003. Next fiscal year, fiscal 2004, we'll have tax report income taxes in the range of $200-300,000 per quarter.

Net loss for the quarter was 8.1 million or 10 cents a share. Excluding the charges of 8.4 million related to restructuring and other costs, we had a slight profit in the quarter of approximately $200,000. First profit since the downturn began a couple years ago.

The balance sheet cash remains flat with the prior quarter of about $90 million at the end of March, compared to the end of fiscal year 2002 cash increased by $4.5 million. Accounts receivable decreased by 1.3 million in fiscal Q4 to 31.1 million, and DSOs were essentially unchanged at 60 days in Q4 compared to 59 days in Q3. We have had very significant improvements of DSOs in the past twelve months. Last year in Q4, DSOs were 84 days. [INAUDIBLE] linearity, customer mix, and excellent receivable collection efforts all contributed to a major improvement in the receivable results. I believe with the international business, going forward, DSOs will be in the 60-70 day range.

While inventories increased to 20.3 million in the quarter, we had an overall decrease in inventory of 35% since the end of Q4 last year. Inventory turns have improved to 7 compared to 4.4 at the end of last fiscal year. The majority of improvements in inventory turns relate to process improvements in initiatives we began implementing twelve months ago which have now been realized. I expect inventory turns to remain at about 6.5 to 7 going forward. Full liabilities due to restructuring and legal reserves for Q4 increased by 8.8 million compared to the end of fiscal year Q3.

For a bit of an outlook, it's difficult to forecast Q1 fiscal year '04 sales but at this point we believe revenue will be in the range of 40-42 million based on Q4 orders level and Q4 order slippage into Q1. We're not seeing improvement in the overall world wide market situation, we are forecasting a 10-15% decline in our market of fiscal 2004 based on input from sales personnel as well as various industry analysts.

Over the past six quarters, we implemented a number of major changes which resulted in steady improvement in our bottom line, and we posted stable revenues. However we believe we'll see lower revenue levels in the first half of fiscal '04, based in part on Q4 order input. Operating expenses are expected to continue to decline in Q1, although not at the rate we experienced last year. As a result of lower revenues, I expect we will report a net loss for next quarter of about 2-5 cents a share, while a marked improvement for the first quarter of last year it's not a position we we've been in for some time with declining quarter to quarter net income.

Forecasting out of the current quarter is not realistic at this point in time. We significantly reduced our break-even point over the past 18 months through expense reductions and operating improvements. Our plan as we begin fiscal year 2004 is to focus on completion of the new Unity platform for introduction later in the calendar year. We're focused on improving market share through aggressive sales efforts and we'll continue our focus on asset management to maintain our balance sheet position.

We've made many changes in the company as detailed in prior conference calls. The market environment is still uncertain as many telecom operators continue to hold back capital spending.

I would now like to turn the call over to Chuck Kissner for an operations summary and comments on the company's plans going forward.

Thanks, Carl. As usual Carl gave a good overview of results for the quarter as well as year term outlook. I'd like to briefly give you flavor as to what Carl said and tell you what we are seeing in the market and finally tell you about a couple of significant new developments in the company.

As you can see from the fourth quarter results, we closed the year with another quarter of strengthening performance in all parameters. The balance sheet, the income statement showed results of a number of improvements accomplished by the entire team here at Stratex. Underneath those financials are a whole set of non-financial parameters that demonstrate our company just keeps working better and better. It hasn't been easy in this market, but so far we've done what we set out to do. Manufacturing linearity, cycle times, quality metrics, inventory turns, DSOs, a lot of other operational indicators are running at or near all-time best levels.

Obviously the market isn't getting better yet and we told you for a number of quarters we didn't expect it to. Not only is the market still slipping, although less than before and somewhat stabilizing, but the competition is still intense. Both of these factors have led to longer order cycles and intense price pressure.

Against this we are feeling confident. We had new orders slip out in Q4 so Q1 will be weaker than we'd like. This is a setback from the steady progression and we believe this is temporary. We are looking at stabilization and stabilization isn't that exciting. I think if you followed us, you know we tried realistic expectations, despite the downturns in the market we haven't had to warn about earnings for a long time.

Let me tell you why we are encouraged about the new fiscal year that we just entered. First of all, we have continuing cost improvements going forward. Some of this resulted in charges in Q4 as you saw. The full impact for reductions we've already implemented are going to be seen. One reason we expect to maintain gross margins at lower volume and why our operational expense will be dropping again.

Second, between certain awards that we received from customers and some channel improvements, we expect positive momentum in a ares that you are currently reached geographically, and that's mostly western Europe and China. As an example we've been officially notified we were selected by one of the largest carriers in Europe as one of only three microwave suppliers for the next three years. This not only helps us secure our position in certain countries but opens new opportunities in other countries. Over the course of the year we expect to see the volume improve from that agreement.

Third, later this year we'll be introducing one of the most significate new product programs that we've ever offered in this market. In fact, it's something that in the past we've referred to as Unity and we referred to that in the past couple of earnings calls.

Let me tell you why Unity is important. This isn't just about introducing a new product. We see the market is going through a fundamental shift now from what it was in the past. The product and services that Stratex offered and other suppliers have offered successfully in the past simply will not fit as well in the future communications marketplace over the next few years. First of all the economics is different and the characteristics of network traffic are different going forward.

The complexity of the telecommunication systems serving this traffic is greater and the flexibility of the solutions that suppliers offer has to be an order of magnitude greater than it has been in the past. Against this back drop, we decided well over a year ago to embark on a new concept for high speed wireless transition systems. As of now we'll stop referring to the name Unity. This is an internal development name. The new product platform is called Eclipse.

Once in a while somebody something emerges that surpasses everything that came before it. We introduced in the past the first high frequency digital radio, the first narrow bandwidth high capacity radio, and now we've gone further. This new offering eclipses all previous efforts and leaves other competing solutions in the dark.

Eclipse will combine all current obligations and others into a single software driven platform that includes high and low capacities, long and short hull, traditional time division multiplexing, ethernet transport and three different kinds of radio systems. With Eclipse, our customers will not need to accept a partial solution. Eclipse is going to change the way customers plan, deploy and operate networks and leaves dramatic reductions in the cost of microwave transmissions. Each Eclipse intelligent network unit is a complete network mode able to support multiradio paths. Customers can choose capacity, modulation or coding options with software with no or minimal hardware changes. It adds up to ability to adapt to changing conditions, a fact of life in today's market, and a minimum of cost and disruption.

For both our customers and for us, Eclipse is going to offer a reduction in the number of physical pieces of hardware that need to be handled, restricting technology to a more software driven platform, lowering the manufacturing cost so that the solution is profitable both for our customer and for us.

Customer reaction so far to Eclipse is great. When markets are slow, it sometimes isn't the best time to introduce new products, but right now it's clear that the compelling value proposition that is offered by Eclipse is what the market needs right now. Customer field trials are said to take place this summer and we expect to see product revenue in this fiscal year we entered. The official roll-out will take place in the next few months.

This summer there are a number of technical seminars for customers and in conjunction with that, we are planning our annual shareholder meeting during the summer so we'll hold an open house as part of our annual shareholder meeting where in addition to the normal business of an annual meeting, we'll be demonstrating this revolutionary approach for those of you in the past.

Let me wrap up and then we can go to questions. Obviously new products aren't the only answer to rebuilding the value of our company. We've been working hard on Eclipse during the entire time we've been improving Stratex to deal with the new realities of the market. With Q4 achieving profitability, we expect further reductions based on actions we've already taken and focus on return to revenue stabilization and growth to get back on track later in the year to sustainable profitability even in a down market. Our plan isn't just a short-term plan but one that establishes a stable enterprise and a launching pad for some great new plans in the future. Our future is fact approaching, and we're ready for it. At this point, we'll open it up to questions.

At this time, I would like to remind everyone, if you would like to ask a question press star and the number 1 on the telephone keypad. We'll pause for a moment to compile the Q&A roster. Our first question comes from David Spouse of CIBC World Markets.

Good afternoon, gentlemen. A couple of quick house keeping questions. Carl, you mentioned you took a reserve for some of these trustee type proceedings. I missed what the amount was and what would be the cash portion of that.

We reserved $7.5 million. Essentially all be cash but it will be a while before cash payment if any are made.

Okay and that didn't show up. That wasn't part of the restructuring charges?

That was part. That the most of it.

That was it. Sorry, I missed that. The full comment. You expecting any additional restructuring charges of Q1, Chuck?

Not right now.

Okay. And you mentioned gross margin ticking down by, you know 2-5 full percentage points over the next few quarters. Is that all associated competitive pricing out there in the marketplace?

Yeah.

And as we look into the remainder of the year, we've got the soft June quarter coming up here. Is it possible we could rebound to, you know, the $46-50 million range we've been running for a while by the September time frame? Visibility into your order pad?

We're not projecting in that time frame right now. Even if we do have visibility, the general comment we would make is this is probably more seasonably a down quarter for us than subsequent quarters. I think I made a comment that generally we're encouraged there's a good chance that revenue could increase.

On the pricing pressure, are you seeing that strongest in the XP4 line?

Yes. In the lower capacities. Actually the margins at the higher capacity are doing well.

And the margin on DXR still holding?

Yeah.

And can you tell us a little bit about the trends and capacities out there that the spread here between the two is stable. Are you seeing any move toward the higher caps or seeing increasing demand for the midcapacity radios?

Yeah, the -- it's very bifurcated, Dale. In areas in Asia, we are seeing more demand for XP4 medium capacity, and some of the new networks in Europe and in Africa, we're seeing pretty strong demand for the higher capacity. In fact, the higher capacity has held up fairly well. Relative to the others.

And one last question on the competitive landscape, I presume that it's NEC causing the pricing pressure and with the exception of NEC, can you talk about the rest of the competitive landscape?

I think one supplier is leading in the price competition with the PDA products now and it's causing other suppliers to respond to whatever they can. Some cannot respond most likely because of their own cost structure. We happen to be in a position where we can respond but that obviously affects the margins. I'm not sure exactly what detail you need to go into here.

What I'm looking at is we have a few players in the microwave radio business that will be around forever. Are you seeing fewer of the guys on the fringe trying to play or just giving up and the guys who are left used to be they were more rational. Looks like we have a few rational out there.

I understand. That's clearly the trend. The people that are playing right now are basically the bigger players. We're just not seeing a lot at least from our point of view. Fringe sounds kind of subjective.

Right. Okay. Thanks, guys.

Next question from Sean [INAUDIBLE] of Bear Staker Watts.

Chuck, you talk about Eclipse from a value proposition standpoint h,ow that will alleviate or combat the pricing pressure you guys are undergoing?

Today when we put in a microwave, we have a set of equipment at the at each end of the link. If we configure Eclipse that way, which it can be configured, it's about a 30% lower cost structure; however, the real value is it can be configured in a network. I think I referred to the intelligent network unit with a mode that has multiple radio paths on it, multiple capacity and software. If the network is configured that way taking full advantage of the capabilities, then it's probably 40-50 percentage points lower in terms of cost. More importantly when it comes time to grow a network or reconfigure a network, the amount of equipment is dramatically less. The third area in terms of maintenance and inventory because there are common parts now rather than three kinds of products, the customer gains a lot in terms the sparing and in terms of maintenance costs.

Okay. Great. Appreciate it. Carl, house keeping, from the GM guidance that you gave, are we going to see a 2 percentage point reduction in the current quarter on a special basis?

Over the next 6-12 months, current quarter not expecting that kind of total.

Okay. Can you bracket a little bit Op Ex going forward. You said it's going to go down in the current quarter and maybe flatten out for the next several quarters. How should we understand that?

The restructuring in this last quarter, the fourth quarter continues to drive the costs down. Most of the cost reduction will be in place. It will be ongoing reduction. Fine-tuning costs in the last few quarters.

Okay. China, Chuck, can you give more color on China?

We've had weakness in China partly because of China itself and partly because of our -- we're making changes in the distribution of which we're in progress right now. We're feeling pretty optimistic now about China. We're going to a multiple distribution rather than the single distribution channel. Already seeing signs that our business will take a lift there.

Okay.

We're going to multiple channels basically because we were strong with one or two customers, end customers in China, and using multiple distribution we've got it now by customer type, so we should see a better solution of demand.

Okay. In the U.S., are you seeing pickup on the government side of things and are you adding bars in the U.S.?

Still adding bars. Business is picking up but at some small levels now we don't really talk about it.

Okay. I want to ask one last question, just a head count now, flat going forward?

From end of the fourth quarter relatively flat.

Okay.

The average head count is down in Q1 versus Q4 and not talking about anything.

Okay. And what is it right now roughly?

Around 575.

I'll yield the floor, guys. Thanks. Appreciate it.

Next question comes from Todd Allen from McKinney Securities.

Good afternoon. I was hoping to clarify more on the discussion on the reserve for [INAUDIBLE] potential settlements.

We really can't comment any more.

Can you repeat what you said. Preferential payments or what was the issue?

Relates to preference payments received 90 days prior to the former customer declared bankruptcy. The way the U.S. laws work, if you receive payments 90 days prior to bankruptcy, there's an implied preference payment which the bankruptcy court can reclaim unless it's in the order of business so it's upon our side to prove payments were in the course of ordinary business.

Okay. Also what you anticipate happening in research and development [INAUDIBLE]. Should we model roughly flat in the quarter?

We saw an increase this last quarter, won't be ongoing increases.

Okay. And could you comment at all -- you said you had orders that you anticipated that had been delayed, and therefore it was ratching down your June expectations. Could you give us a feel, two things, as to when those might likely hit and is it affecting any particular group of customers or particular geography or single customer, could you flesh that out a bit?

Just to put it in perspective, there was about maybe $10 million, $15 million of orders processed from generally three customers. We never expected to achieve 100% success on everything, but we expected one of those at least to hit. We would expect those to hit in Q1. One of those to hit.

Okay.

I think right now because of the state of the market, we were hesitant about forecasting when things would close but a high possibility in the quarter.

Okay, great. Thanks very much. Good quarter.

Next question comes from Mike Walky of RBC Capital Markets.

Thanks. Nice job on the cost side. Both my questions have been answered. One more house keeping question, can you go over 10% customers you might have had in the quarter?

We may have had typical, we have, you know one or two customers over 10%. I won't mention any in particular. Most have been out of east Africa. This quarter two customers over 10%.

Great. And maybe going back to China one more time, you've been working through inventory levels there, still working through inventory and maybe you can quantify how much it may have changed for your China area?

I don't think it's been appreciably worked off and why we decided to start changing our distribution in China.

Okay. Thank you very much.

Okay.

Your next question comes from Tim Long of CSFB.

Hi, this is Jason [INAUDIBLE] calling in. Along the lines with China distribution channel, you recognized revenue on an end basis? Is that correct?

Yes.

Okay. And then that's for all products, correct?

That's correct.

Okay. And then you mentioned that there was a bit of a backlog writeoff to the $50 million number. How long has that backlog been on the books that was written off?

Most of it has been well over a year. The delivery date kept getting pushed out or clearance side at this point, we decided it wasn't appropriate to continue to carry those backlogs.

And what was the magnitude of that?

About $28 million.

And then a couple of questions on Eclipse, would you expect similar gross margin to your current platforms, and if so is it possible which, what what be a number there?

We're having trouble hearing you. In terms of margin, it's better margins than currently. It is a little bit different model because today when we sell radio it's a hardware sale, tomorrow when we sell the radio it will be a much lower hardware number and it will be a software license fee on top of that. That's one of the reasons why the gross margins are different.

Okay. So higher initially and then an ongoing license, is that correct?

Not an ongoing license. If the customer chooses to upgrade, then a license fee associated with the upgrade.

Okay. And then how many field trials do you expect this year? How many customers are looking to trial the product?

I would say 4-5 is what we term sufficient for a field trial.

Okay. Great. That's all I have. Thanks a lot. Nice quarter.

Thanks.

At this time no further questions. Mr. Kesner, any closing remarks?

Sure. This is obviously a critical time for our company and for our entire team of employees here is just as committed as ever to do what's right for the long-term and the short-term. We appreciate your interest and wish you all a good evening. Thank you.