DZS Inc (DZSI) 2002 Q2 法說會逐字稿

Goof afternoon everyone and welcome to Tellium's 2nd Quarter Conference Call for 2002. Today's call is being recorded. At this time, I would like to turn the call over to Ms. Jennifer Collins, Director of Investor Relations for opening remarks and introductions. Miss Collins, you may begin.

Thanks, David. Good afternoon everyone and welcome to Tellium's Earnings Conference Call for its quarter ended June 30, 2002. I am here today with Harry Carr, Chairman and Chief Executive Officer; Bill Peralta (phonetic), President and Chief Operating Officer; Chris Navarro (phonetic), Chief Technology Officer; and Michael Rose (phonetic), Chief Financial Officer, Secretary and Treasurer. Harry will review our business activities and Michael will take you through the financials and then Harry will wrap up, after which we will be available to answer questions. Hopefully by now, you have seen our press release that was distributed over business wire after the market closed this afternoon. For your convenience, the press release was also has been posted on our website at tellium.com. In addition, the replay of this conference call will be available on our website later this afternoon. The coliseum webcast of the investor relation section of our website and the replay of this call will be available later today. The replay will also be available over the phone by dialing 888-211-2648, there is no pass code required. Before we begin, I would like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements regarding the company's or management's intentions, estimates, projections, assumptions, beliefs, expectations and strategies for the future. Because such statements will be able to feature events they are subject to various risks and uncertainties. And actual results might differ materially from those projected in the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in the company's Annual Report on Form 10-K filed on April 1, 2002 and our Quarterly Report. These documents could be accessed through the Investor Relation Section of our Tellium website. Now, I would like to introduce Harry Carr, Tellium's Chairman and Chief Executive Officer.

Thank you, Jennifer. Welcome everyone and thank you for joining us today. The June quarter was a disappointing and painful quarter for Tellium. On our last earnings call on April, we said that Tellium was beginning to feel the effects on the downturn on the telecom sector in terms of visibility. As the quarter progressed, however, we continue to see an even more precipitous deterioration in the carrier marketplace, both here and overseas. We were not able to close that next global carrier customer that we hoped to have closed by this point. And our current carrier customers, like most carriers, are simply trying to not spend money. Accordingly, we took swift and decisive actions. On June 24th, we issued a press release announcing the steps we took regarding our business. We made a very difficult decision to eliminate approximately 200 positions within the company. Almost 40 percent of our team aligning on operating cost with industry conditions. We made this decision not because of a bad quarter. Instead, we have resized our business to support the appropriate level hood of capability for a cool and reduced market in the near term. Our strategy here is clear. First, we must have stability in our business. That is assuring that we have the financial resources to weather the telecom storm. The restructuring steps will give us that. Then, we can focus on growth and ultimately a return to profitability. At the same time, we wanted to be sure that Tellium maintain its technological leadership in optical switching. After conducting a programmatic review of every function in our business, we concluded that certain programs are underway or are ahead of the market and significantly reduce all efforts in selected areas. Our overall strategy has not changed. We remain focused on optical switching and on being the market leader in this phase. The product is rock solid. Our team remains one of the best in the industry. And our customers need for intelligent core switching is very real. We plan to continue to enhance the capabilities to be our royal product family and the storm at software suite in order to meet those needs. Before I turn the call over to Mike, let me remind you that we know that cash and the company's balance sheet are paramount in today's environment. We ended the 2nd quarter with $206 million in cash, which is just $2.7 million less in our cash position at the end of 1st quarter of $209 million. We have virtually no debt on our balance sheet and with the initiatives announced in June, Tellium will be in an even stronger position to focus again on growth and regain its path to profitability as the market improves. I will now turn the call over to Mike for a detailed look at the financials, Mike?

Thank you, Harry. Good afternoon everyone. As Harry indicated earlier, the 2nd quarter was an extremely difficult quarter for Tellium. However, I do believe we have taken the appropriate steps to position ourselves as industry leaders for when the telecom sector rebounds. I will take you to a detailed review of the 2nd quarter financial results and provide you with some general guidance going forward before I turn the call back to Harry. I would like to discuss our result. I will be describing them on a pro-forma cash basis before non-cash charges related to equity issuances, stock based compensation, depreciation, amortization, charges related to our business restructuring and the impairment of long-lived assets and less by indicate otherwise. We even include a break out of the non-cash charges we exclude on our pro-forma cash statement on the page identified as Reported Results. This detailed break out allows the reader to reconcile the reported GAAP results to the pro-forma cash results. I would like to begin with top line revenues. For the 2nd quarter, we reported revenues of $3.1 million compared to $30.4 million of revenue in the same quarter last year and $54.1 million of revenue in the 1st quarter of this year. We have recorded revenue from Quest, Dynegy and Lockheed Martin in the 2nd quarter. Gross margins for the 2nd quarter were negative at $19.1 million compared to positive gross margins of $12.8 million in the same quarter last year. The negative gross margins were primarily attributable to an approximately $17 million adjustment to the carrying value of our inventory and the low-level of revenue in the quarter. Operating expenses on a pro-forma cash basis included research and development, sales and marketing and general and administrative expenses. The restructuring charges related to the work force reduction and consolidation of corporate facilities is not included in the pro-forma cash statement. In the 2nd quarter, our operating loss on a pro-forma cash basis was $42.2 million compared to an operating loss of $15.3 million in the same quarter last year. Our net loss on a pro-forma cash basis was $41.4 million compared to a net loss of $13 million in the same quarter of last year. On a pro-forma cash basis our net loss was 36 cents per share as compared to 9 cents per share in the same quarter of last year. In the March quarter of this year, income on a pro-forma cash basis was a positive 2 cents per share. Absentee inventory related charges of approximately $17 million recorded in June of this year, our net loss on a pro-forma cash basis would have been 21 cents per share. Now, let me turn to the GAAP basis results. As I mentioned, top line revenues were $3.1 million compared to $30.4 million of revenue in the same quarter of last year. I would like to point out on our GAAP financial statement, as part of our impairment analysis, which I will discuss further in a minute, we recorded non-cash charges related to the write-off of deferred warrant costs amounting to $28.8 million. In accordance with a recent accounting pronouncement, EITF00-25, we have recorded this write-off of non-cash charges as contra revenue, which result in net negative revenue of $25.7 million on a GAAP basis. These charges relate solely to the impairment of the valuation of the deferred warrants we have recorded for Dynegy and Quest at the time their contracts were signed. And represent an acceleration of non-cash charges from future period to reflect the impairment. I would like to emphasis this write-off as well as the initial recording of the valuation of the warrants was non-cash transactions. They did not result from either the exchange of equipment or cash between Tellium and our customers. On the GAAP basis, operating expenses include research and development, sales and marketing, general and administrative expenses, depreciation and amortization and stock based compensation expenses. Detailed figures for each of these is provided in today's press release. Cost associated with the restructuring charges related to the work force reduction and consolidations of corporate facilities are included in operating expenses as part of restructuring and impairment of other long-lived asset charges. In total, we recorded approximately $13 million in costs related to the restructuring charges. We expect these costs to be non-recurrent. Going forward we expect operating costs upset the restructuring charges to decline approximately $5 to $7 million in future quarters as compared to the June quarter. On the GAAP basis, operating losses were $214.9 million in the 2nd quarter as compared to operating losses of $53.8 million in the same quarter of last year. Net losses on the GAAP basis were $213.8 million in the 2nd quarter as compared to net losses of $51.5 million in the same quarter last year. Our put loss on a GAAP basis was $1.98 per share as compared to 87 cents per share in the same quarter of last year. As we indicated in our press releases on June 24th and June 28th, we were conducting a review of the current carrying value of certain assets on our balance sheet including inventory in accordance with SFAS-142. The findings of an independent valuation analysis and our own in-depth analysis, resulted in write-offs of certain assets including goodwill, intangible assets, deferred warrant charges and inventory totaling $155.7 million. At the end of June, inventories were $20.5 million as compared to $40.4 million at the end of March. This represents a decline of $19.9 million or 49 percent from the end of March including a write-off related to the impairment analysis totaling $16.8 million. Our goodwill related entirely to our acquisition of the Start Tape Fiber Network, which occurred during the 2nd half of 2000. At the end of March, goodwill totaled $58.4 million. In connection with the asset valuation analysis all of the $58.4 million was written-off in the June quarter. Our intangible assets relate to both the acquisition of the Start Tape Fiber Network and our licensing of intellectual property from AT&T. Intangible assets totaled $56.2 million at the end of March. In accordance with the valuation analysis we recorded a $51.7 million write-down of intangible assets. These charges are included on our income statement in the $64.5 million of restructuring and impairment of other long-lived assets. Normal amortization of intangible assets during the period totaled approximately $2.8 million. The remaining intangible assets on our balance sheet at the end of June amount to $1.7 million. We will continue to review and amortize intangible assets insistent with SFAS-142. Finally, as I mentioned earlier, we recorded a write-down of $28.8 million of non-cash charges related to equity issuances. Our equity issuances include deferred warrant costs related to warrants issued to Dynegy and Quest. At the end of June, after this write-down, remaining deferred warrant cost on our balance sheet totaled $29.5 million. Going forward we will continue to amortize these deferred warrant cost against future Quest and Dynegy revenues. Our detailed review of the balance sheet this quarter and subsequent write-off of approximately $156 million in non-cash charges resulted in financial statements, which we believe more clearly reflect Tellium's actual business and should make it easier for investors to review our results going forward. On June 30th, we had cash in equivalents totaling $206.1 million compared to $208.8 million at the end of March. As Harry mentioned, we continued to prudently manage our cash, as our decrease in our cash position was only $2.7 million, overall. This compares favorably with the guidance we provided in April, which estimated our cash position we declined by $5 to $9 million. We will continue our careful spending pattern as it relates to all areas of our business in line with our business needs. We ended the quarter with $4.1 million in accounts receivable compared to $48.4 million at the end of March. As of today, we have collected substantially all of our outstanding accounts receivable. Our total shares outstanding were approximately 112.7 million shares as of June 30th. The weighted average of total shares amounted to $113.4 million during the quarter on a pro-forma basic and diluted basis. Now, before I turn the call back to Harry, I would like to discuss some general financial guidance for the 3rd quarter of 2002. Based on the current state of the industry and our continued lack of visibility, we think it is prudent to provide only limited near-term guidance. As a result, we are not providing a range of revenue guidance for the 3rd quarter at this time. In the 3rd quarter, we expect gross margins on a pro-forma cash basis to be reflective of the revenues we achieve in the September quarter. We expect all of our operating expense line items to decline as compared to the 2nd quarter results. In total, we expect operating expenses should decline approximately $5 to $7 million from the June quarter results excluding the restructuring charge of approximately $13 million. We expect interest income net to remain relatively flat in the 2nd quarter as compared to the June quarter. Absent any significant transactions and assuming a flat interest rate environment. Due to net operating loss carried forward and tax credits we currently expect our provision for income tax to be nominal in 2002. It is our intention to provide the investment community more specific guidance as the quarter progresses. Overall, our cash position at the end of the September quarter is contingent on our top line results. However independent of our top line results our cash position may decline no more than $25 to $30 million in the September quarter. This cash outlay includes anticipated payments related to our restructuring that we discussed earlier. Beyond the September quarter, we would expect that our cash outlay on a quarterly basis to be significantly less than that range. Thank you for your time today. And I will now turn the call back to Harry.

Thanks, Mike. Before we open the call to take some questions, I would just like to offer some brief prospective. For several quarters now, these have been very difficult times in our industry. I recall that as early as the end of the June quarter last year, right after Tellium's IPO, the equipment companies in our space, pre-announced disappointing results. With this subsequent quarter the parade got even longer. And yet, in each of those quarters prior to the current one, June, September, December and March, Tellium delivered. We met or exceeded top line and bottom line expectations with growing revenue levels and superior balance sheet performance. And in fact, achieved 2 successive quarters of profitability on a pro-forma cash basis. We did that despite the difficult challenges before the industry. Now, we too have been affected. As the management team reacted decisively and took the necessary steps to achieve this stability our business and customers deserve and our focus on our future growth and return to profitability. These decisions were particularly difficult given the efforts put forward by all of our employees over the past 5 years. We will miss our colleagues who will no longer be Tellium employees. And I want to publicly thank them for their contributions that have helped to make our company what it is today. For those employees who will continue to build Tellium during this challenging but exciting journey, we are grateful for their dedication and their fortitude. This is certainly a tough time for all of us. But, as for the company, we remained committed to our visions. We are the world's leading optical switch provider. We have always said, that we are here for the long-term. I think, we demonstrated that again during the June quarter. Thanks for joining us today for the formal part of the presentation. I would like to open the call up for questions, David.

Thank you and we will begin the question-and-answer session portion of the call. . One moment for questions. Ric Schaeffer (phonetic) of CIBC.

Thanks. My first question is talking about, I guess, your strategy. If you guys could kind of discuss your strategy over the next 12 months or so. I mean, you still have a strong balance sheet; you are still at the north of $200 million in cash. In this kind of environment, how do you view yourself, is it kind of a consolidate out there? And if so, where would you look? And I got a quick follow-up to that.

Sure, Ric. Let me say that at least I am willing to state publicly about that at this point. I thank you, you know, for pointing out that we still in fact have a very, very strong balance sheet as a business. I think, that is one that does us well in terms of what is going on in the industry today. We are looking at all of our options. We clearly have some product strategy that we think both, you know, organically and potentially otherwise will allow Tellium to participate in world battle in the telecom industry going forward on a long-term basis. I think, how we get there, were just as too many variables to kind of predict specifically how we will come out. But, let me say this, our focus remains in switching space. I think, I have said this publicly before since the very 1st day in the road show. You know, we have no intention on getting back in the WDM business. We have been there. And, I do not think that is a good place to be. In general, it is a commodity business. Highly competitive and not very profitable. Switching, we think is worthy. It is where we think we will bring significant value. So, whether we do something organically or by some form in a day activity, I think, you will see us play in the switching space. Obviously, with the intent of looking to additional markets and additional customers that we might be able to serve.

Okay. Thanks. And a quick follow-up for Mike. Talking about cash burn and you guys said probably to about $25 to $30 million in the 3rd quarter if I heard you right. Where do you think the cash burn, you said significantly, you know I am just trying to get a better flavor, going forward on operating basis, as to what assume top line does not, you know, see any big rebound in the next several quarters or next couple of quarters? What do think a normalize, rough idea anyway, would a normalize operating cash burn ought to be, once you get the charges through?

Thanks for the questions Ric. And, you know, in the $25 to $30 million we address the notions that will include payments that we need to make associated with the restructuring charges we have reflected this quarter. Once those were out of the way, we believe we will be below the $20 million range and that will certainly get us in that piece part. And we are targeting being in the 15 to 17 ranges going forward.

And Ric, if I could just add to that and so that there is no confusion.

Yes.

That is assuming, this case scenario and so in essence, if you are assume there was no revenue, think about that almost to as close as have been from a cash perspective.

Okay. Thanks, that was great.

Nicholas Piodesafas (phonetic) of UBS Wurber.

Hi, Nichols.

I guess, I wanted to ask about the ongoing bidding activity opportunities that you are all working with the products that have already been developed and are functioning or working, you know, in the last conference call there was discussion about some international prospects or at least opportunities. What was the lay of the land, let us say, over the next 6 to 9 months in terms of potential new contracts that are even going to be awarded to Tellium, has a chance of winning?

I think, the extremely short answer is foggy. There is a lot of activity that remains with customers today. There is a lot of equipment we still have out with customers doing testing. There are in fact some customers that we have completed testing on and passed that we have hoped to have decisions on, by this point, Nichols. But with the telecom market continuing to deteriorate it is very difficult to predict exactly when people are going to make decisions. There are customers, you know, who we could easily believe what they tell us, which is they will make decisions on the next 6 to 9 months. But frankly, we are in the mood right now, that until we actually get the decisions and see the POs, we are not going to completely believe it.

Okay. So, basically foggy, I guess, the general description. Just another follow-up then. What are your expectations on business with Quest and Dynegy for the rest of the year? If not dollar amounts, just, you know, what do you see them doing? Do you think they could extend the footprint? Do they have enough capacity? Any feedback from them?

Yes. I think, obviously, we are not in the position to give specific numbers on either customer. I think both of them are operating in a mode, like most carriers, where they are trying to spend as little money as possible. And of this is going to be driven by growth and their customer base and their customer demand. So, at this point, we are sort of tied to their success on the going forward basis in terms of additional equipment order. Nothing has changed about the fact that all of the systems that we have sold today tend to be less than half loaded and to some case even lighter than that. So, there is a lot of room for filler as the demand increases. We do expect to continue to have revenues from both customers. But, I just cannot tell you exactly when and exactly how much.

Okay. All right, thanks.

Sure.

Hassan Emmam of Thomas-Lyesel.

Just a couple of questions. First, on a clarification, Mike, beyond the $13 million in restructuring charges you took, how much remained in terms of cash charges in total? And, are you expensing all of that by September?

I am not clear on your questions? You are making reference to the $13 million in charges for the restructuring?

Right. Is that slowing through this quarter or next?

It is in the 2nd quarter where the charges are.

Okay.

As the cash outlays will come predominantly in the 3rd quarter.

In the 3rd quarter?

Correct.

Are there any cash components of restructuring charges left after that?

Not that we can foresee.

Okay. And then, Mike, could you run us through the basically, the large items in terms of cash usage and source this quarter. Is it mostly, on the source side mostly collection of receivables?

Well, yes. The accounts receivable going from the $42 million range down to $4 million helped our cash position. And again, as we pointed out, given the relationships with our customers we have always been very good about collecting our receivables in a short-time period.

Right. And on the burn front, are any of the restructuring benefits already flowing through in this quarter?

No, not to this point. We just announced this on June 24th, so we have not been able to have that impact or cash in this quarter.

Right. Okay, thank you.

David Jackson of Morgan Stanley.

Hi, David?

Hi, it is nice to see. How are you guys?

Good. How are you?

Just right. I have 2 questions, one for Harry and one for Mike. I will start with that question for Harry. Could you talk just exactly about the competitive landscape, how you differentiating yourself versus competitors? As well as, is there any update from the products or not?

Sure. From a competitive standpoint, a couple things had become clearer since the time Tellium went public. I think, carriers have clearly seen based on looking hands-on on other equipment and hands-on on other piece equipment, that there is a significant difference between, how I would call a wavelength switch and a sub-wavelength switch. All our SPS-1 switching capability. And I think the carriers do not even think about them as competing products at this point. What we actually tend to be competing against these days are other wavelength switches, I think, mostly the all-optical switches. Today, basically, what was standing about is to do some manual ladder and accounting switch. And frankly, we bring a lot more people ability because we have that too grooming; we have, you know, all the capability that having electro-switch brings you. And the management and the flexibility and less capability that simply you do not get in all the optical space. From the product road map perspective we are going to enhance the existing platforms that is going to be primarily customer driven in terms of what we will do going forward. We have some significant additional product development that we plan to do. Obviously, one of the things that we have done is with our full spectrum program, which was our all-optical switch. You know, we have done a couple of things there. The first is, well the significant part of our effort was actually based on building the men's fabric because we did not see a reliable source of supply, you know, rolled back 18 months ago. And so, we really have an effort going on internally. We have completely shut that down. And frankly, you know, we put kind of a hibernation most of the rest of the effort because the market demand, we do not see for where the tonic switching frankly for several more years. And, if and when the things are appropriate we will bring that back to a significant light. But that is not going to be the principal focus of our development firm. Other than that, I do not think I want to say more because I do not want to give more of the hint to our competitors as to what we will be doing with this great engineering team.

Okay, I understood. Are you seeing corves at all in any of your tower?

We have not.

Okay. Mike, what was the CAPEX going the quarter?

CAPEX?

CAPEX for the quarter, single digits.

Okay, thanks.

Dennis Gallegher (phonetic) of Sound View Technology.

Just a couple of follow-up questions because most of my other questions have been asked. What was cash burn from operations in this quarter?

The cash position that we think is more relevant to track is the company is changing the cash position that we have been talking about, which is the $2.7 million. And so, the expense you can look at our 10-Q when that comes out, you make the determinations relative to the operating activity.

Okay. And then, the revenues this quarter, would you characterize them mainly as being maintenance revenues from those customers, I mean, now that you have said that you have booked from all 3?

There is a deferred element for Dynegy and Quest relative to some software that was part of the components for their revenues.

And Lochkeed Martin, obviously, she was a new success.

Exactly right.

Okay. So, then you would not charge any anomalous laying card additions or follow-on stuff?

Not for Dynegy and Quest, no. Not on this quarter and not on the 2nd quarter.

That is it. Thanks.

Thank you.

Victor Weldeview (phonetic) of Hudson River.

Right, thank you. Could you just give us the head count at the end of the quarter? And also the break down in head counts between R&D and sales and marketing?

After the restructuring we will have 335 employees approximately. And we are very heavily weighted in the research and development engineering team. That is basically what we are. In terms of thinking somewhere along the line of just under two-thirds of our employees are in the research and development area.

All right, thanks. And then another question, regarding the Tellium-NEC transport switch. Is that still in track for GA in Q3?

Yes, it is.

And can we expect the other similar partnering agreements going forward?

That is certainly something that we continue to work on, Victor. But we will not announce them until we actually have a deal signed with someone else.

Can you tell us a little bit more how you are thinking in terms of partnering? What areas or what particular segments you may be more interested in looking for partners?

Sure. Well, I think I will describe in 2 different ways. One is, I think we would also be interested in doing something similar to what we did early see from a development prospective with other WDM providers, which is basically to take their 10-gig long-reach transponders and integrate them into our switch. And I am certain that you will eliminate all of the costs of this optics. And we have had discussions with other folks about doing something like that. In addition, and the fact is, we partnered we other equipment companies to build our product, to date, not on a formal OEM relationship but more on a teaming relationship on a customer-by-customer basis. So, in fact, today as we sit here we have proposals in front of customers. We have folks in addition to MECS partners for Tellium.

Great. Thank you.

You are welcome.

. Mark Vancour (phonetic) of Lower Creek.

I just wanted to clarify something. Assuming that your revenues were same for the next foreseeable future, what would your quarterly cash burn again, I was not quite clear?

Yes, what you said was assuming that revenues were zero our quarterly cash burn which should be in the range of $15 to $17 million a quarter. Post this next quarter because of the restructuring related charges.

So, that is, do you say that is at the rate of about close to $75 to $80 million a year then, right?

Well, that is $60 to $68 million a year.

Right.

Or just being $17 million a quarter.

Okay, thank you very much.

Mike Kelviny (phonetic) of Star & State Security.

I just wanted to clarify one quick thing. The company's debt obligations, if any at all.

Thank you for the question and we have a $9 million line of credit. And that is it.

We have no other debt, other than that today.

Right. So, basically, you are looking at $206 million, market GAAP of about $68 million then only $9 million in debt?

Those are the facts sitting here today.

Okay. And the other question was overseas market. Would the dollar being a little bit weaker against Euro? Does that help? Is there anymore, would say, visibility potential on that front.

Well, certainly it has helped in essence. We proposed to some customers in Euro and we proposed to price in dollars. And part of what we pitched to them was, other than the fact that we are not in the currency list business, that they were in a better position to deal with into the extent the Euro got stronger, affectingly they will get a greater discount on the products. So, to the extent that we are competing against non-U.S. company that is clearly helpful. To the extent we are competing against other U.S. equipment company it is probably a push.

Okay. Thank you.

You are welcome.

. I am sure there are no further questions at this time.

Okay, David. Well, thank you everyone for joining us today. We appreciate your support and interest and we look forward to updating about the quarter and speaking with you again in our earnings call on October. Have a great afternoon. Thanks, David.

Ladies and gentlemen, this concludes today's conference. Thank you for your participation and you may disconnect at this time. Good day.