DZS Inc (DZSI) 2002 Q3 法說會逐字稿

Good afternoon everyone and welcome to the Tellium's third quarter conference call for 2002. Today's call is being recorded. At this time, I would like to turn the call over to Jenniffer Collins, Director of Investor Relations, for opening remarks and introductions. Ma'am, you may begin.

Thank you. Good afternoon everyone and welcome to Tellium's earnings conference call for its quarter ended September 30, 2002. I'm here today with Harry Carr, Chairman and Chief Executive Officer; Bill Proetta, President and Chief Operating Officer; and Michael Losch, Chief Financial Officer, Secretary, and Treasurer. Harry will review our business activities. Mike will take you through the financials. And Harry will wrap up, after which, we will all 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 has now 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. This call is being Webcast at the investor relations section of our website and the replay of this call will be available later there as well. The replay will also be available over the phone by dialing 800-568-5428. There's no pass code required.

Before we begin, I'd like to remind you that statements made during 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 deal with future 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 10K filed on April 1, 2002, and our quarterly reports. These documents can be accessed via the investor's relations section of our Tellium website.

Now, I'd like to introduce Harry Carr, Tellium's Chairman and Chief Executive Officer.

Thank you, Jenniffer. Welcome everyone and thank you for joining us today.

The September quarter is over, and while no one is more disappointed than we are by the decline in our revenue levels during the past two quarters, we believe the most difficult quarters for Tellium are behind us. As you recall, at the end of June, we downsized our company because of a significantly reduced market in the near term. In the current environment of limited capital spending by the entire telecommunications industry, we realize that we must continue to conserve cash to provide us the stability and the staying power to ride out the current environment.

We ended the quarter with approximately $183,000 million in cash, which was better than the guidance we provided. On the June quarter conference call, we indicated our target cash burn at zero revenues would be $15 to $17 million starting with the fourth quarter. We expect to continue to improve our burn rate to be no more than $15 million a quarter or better. We will do whatever it takes to aggressively manage the cost of our business.

On our last call, I talked about regaining stability in our business and concentrating on the financial resources to weather the telecomm storm so that we could focus on growth and ultimately, a return of profitability. I think we've done an excellent job of preserving the strength of our balance sheet and we continue to search for new revenue opportunities in this very challenging environment.

While we certainly do not expect our revenue levels in the near future to return to those of a year ago, there are some promising signs that our current customers, some potential major carriers, as well as some new small carrier customers, will start to invest in the networks again. We are making progress in the federal government market and we hope to establish new opportunities there as well.

While it is too early to predict when significant spending will resume, you will hear from Mike that we are able to give revenue guidance for the fourth quarter that supports my earlier comment that the most difficult quarters seem to be behind us.

For the long term, our technological leadership and optical switching and our healthy balance sheet continue to be, we believe, the critical ingredients to Tellium being one of the winners.

On a final note, before I turn the call over to Mike, I'd like to remind you that like many companies in our space, we've received a letter from the NASDAQ National Market informing us that Tellium had not met the $1.00 minimum bid price requirement for 30 consecutive trading days. The company has applied to move to the NASDAQ small cap market. Pending NASDAQ's approval, we would expect that move to take place on or about November 11, 2002. We will continue to trade under the trading symbol TELM.

I will now turn the call over to Mike for a detailed look at the financials.

Thank you, Harry, and good afternoon everyone. Given our current environment, although our current revenue levels disappoint all of us, I am proud of our team's conscious and careful cash management. As Harry mentioned, our balance sheet continues to be a significant strength and we understand using our cash wisely in this environment is critical to our ability to retain our leadership position in the industry.

I will take you through a detailed review of the third quarter financial results and provide you with some general guidance going forward before I turn the call back to Harry.

As I discuss our results, I will be describing them on a pro forma cash basis before non-cash charges related to equity issuances, stock-based compensation, depreciation and amortization, charges related to our business restructuring, and the impairment of long [life] assets, unless I indicate otherwise.

As we have done each quarter, we have included a break-out of the non-cash charges we exclude on our pro forma cash statements on the page identified as reported results. The detail break-out allows the reader to reconcile the reported to the pro forma cash results.

I will begin with top line revenues. For the third quarter, we reported revenues of $1.9 million compared to $3.1 million of revenue in the second quarter of this year, and $40.1 million of revenue in the same quarter last year. Gross margins for the third quarter were negative at $2.8 million compared to negative $19.8 million in the previous quarter, and positive gross margins of $17.6 million in the same quarter last year.

Cost of revenues during the quarter included approximately $2.1 million in net costs related to adjustments to our inventory reserves and increased material scrap during the quarter.

Operating expenses on a pro forma cash basis include research and development, sales and marketing, and general and administrative expenses. Operating expenses in the third quarter were $15.3 million compared to $23.1 million in the second quarter of this year, and $27.6 million of operating expenses in the same quarter last year. Due in large part to our restructuring announced in the June quarter, as well as other strict cost cutting measures, we reduced operating expenses $7.8 million compared to our second quarter.

As Harry mentioned, we are extremely focused on reducing our net cash burn in light of our current revenue levels and we will continue to find ways to drive costs out of our business.

In the third quarter, our operating loss on a pro forma cash basis was $18.1 million compared to the operating loss of $9.9 million in the same quarter last year. Our net loss on a pro forma cash basis was $17.4 million compared to the net loss of $7.4 million in the same quarter last year.

On a pro forma cash basis, our net loss was 18 cents per share as compared to 7 cents per share in the same quarter last year. Our [technical difficulty] shares outstanding as reported for the quarter ended September 30, 2002, excludes approximately 10.7 million shares of vested restricted stock held by members of management which were transferred to treasury stock for accounting purposes only on July 26 pursuant to EITF issue number 00-23.

Our net loss per share for the quarter was 16 cents, excluding this accounting transaction for restricted shares, which does not impact our shares issued and legally outstanding of 114 million shares at the end of the quarter.

Now let me turn to the GAAP basis results. As I mentioned, top-line revenues were $1.9 million compared to $3.1 million of revenue in the second quarter of this year, and $40.1 million of revenue in the same quarter last year. On a 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.

On a GAAP basis, operating losses were $114.7 million in the third quarter as compared to operating losses of $50.7 million in the same quarter last year. Net losses on a GAAP basis were $114 million in the third quarter as compared to net losses of $48.2 million in the same quarter last year. Our book loss on a GAAP basis was $1.15 per share as compared to 47 cents per share in the same quarter last year.

Again, excluding the accounting transaction related to our restricted stock I discussed previously, our net loss per share for the quarter ended September 30th was $1.05. At the end of September, inventories were $15 million as compared to $20.5 million at the end of June. This represents a decline of $5.5 million or 27 percent from the end of June.

As you may recall, in connection with the asset valuation analysis we completed in the June quarter, we took significant charges to clean up the balance sheet. All of our goodwill in the amount of $58.4 million was written off in the June quarter. Our intangible assets relate to both the acquisition of Astarte Fiber Networks and our licensing of intellectual property from AT&T. Intangible assets totaled $1.6 million at the end of September. We will continue to review and amortize intangible assets consistent with [SFAS] 142.

In addition, our equity issuances include deferred warrant costs related to warrants issued to Dynegy and Qwest. Remaining deferred warrant costs on our balance sheet totaled $29.1 million at the end of September. As we recognize future revenues from Dynegy and Qwest, we will continue to amortize these deferred warrant costs.

As hopefully you read in our press release, we completed our offer period for our option exchange program on September 4, 2002. As a result of the program, we accepted and cancelled options to purchase 13,479,441 shares of common stock, or approximately 91 percent of the options that were eligible to be tendered in the offer. Subject to the conditions of the offer, we granted 1,347,962 shares of common stock to participating employees on September 5, 2002. And subject to the terms of the offer, we will grant options to purchase up to 12,131,479 shares of common stock on or after March 6, 2003, at the then fair market value.

This cancellation of the 13.5 million options to purchase common stock resulted in a reduction of deferred compensation of approximately $55 million, which is included in the amortization of deferred employee compensation on our GAAP financial statements.

Stock-based compensation expense for the quarter ended September 30 also included $27 million in non-cash charges related to the write-down of existing notes receivable. These notes relate to management loans originated in the calendar year 2000. These charges are in accordance with the guidance set forth by EITF issue number 00-23. Issues related to accounting for stock compensation under APB opinion number 25 and FASB interpretation number 44. And they are consistent with our subsequent events disclosure in our second quarter form 10Q. These charges again are for accounting purposes only as a result of the EITF 00-23. The existing loan agreements remain in full force and effect.

On September 30, 2002, we had cash in equivalence totaling $183.2 million compared to $206.1 million at the end of June. The net decline in cash during the quarter was $22.9 million, which compares favorably to the guidance we provided at the end of the June quarter, which indicated we expected a net decline in cash of $25 to $30 million.

In the third quarter, cash outlays of approximately $5 million related to our restructuring costs. As of September 30, there were approximately $5 million of restructuring cost which had not yet been paid. Our total shares issued and legally outstanding were approximately 114 million shares as of September 30, 2002. As you will note on our income statement, our as reported weighted average shares were 99.3 shares, which exclude the 10.7 million shares of vested restricted stock I discussed earlier. On a pro forma cash basis, the weighted average of total shares amounted to 113.5 million during the quarter.

Before I turn the call back to Harry, I would like to discuss some general financial guidance for the fourth quarter of 2002.

We anticipate revenues to be up sequentially in the fourth quarter to be approximately $3 million. In the fourth quarter, we expect gross margins on a pro forma cash basis to be reflective of the revenues we achieve in the December quarter. We expect all of our operating expense line items to be consistent with the third quarter results. In total, we expect operating expenses to be approximately $15 million in the December quarter. We expect interest income net to remain relatively flat in the December quarter, as compared to the September quarter, absent any significant transactions and assuming a flat interest rate environment.

Due to net operating loss carry-forwards and tax credits, we currently expect our provision for income tax to be nominal in 2002. Our cash position at the end of the December quarter is obviously contingent upon our top line results and collections. Based on our current revenue guidance, our net cash burn should be approximately $15 million in the December quarter. This net cash burn excludes any payments related to our restructuring that we discussed earlier.

Thank you and I will now turn the call back to Harry.

Thanks, Mike. Since we went public in May of 2001, and particularly over the past couple of quarters, hopefully we've shown our shareholders, our customers, and our employees that we are a management team that knows how to run a business in good times and difficult ones. There was a significant change in the level of revenue opportunities for the business, we took immediate action to restructure our business. In an environment where cash continues to be king, our burn rate was again better than our own projections. We will continue to prudently manage our spending and aggressively monitor all areas of our business. We have the technology, the management team, and the financial wherewithal, to outlast the current capital spending drought.

However, let me also be clear that we're not just sitting on the sidelines. We continue to market and test our products with potential customers. We continue to expand and enhance our product line to meet the demands of our customers and we continue to explore complimentary product areas. Throughout it all and despite the environment and the challenges, we have not lost our focused or changed our mission to be the leading provider of optical switches and technologies for the carrier marketplace.

Thank you for joining us today. Jordan, I'd like to open up the call for questions.

Thank you. At this time, we are ready to begin the question and answer session. If you would like to ask a question, please press star 1. You'll be announced prior to asking your question. If you would like to withdraw your question, press star 2. Once again, to ask a question, please press star 1 on your touchtone phone.

Our first question comes from Rick Schaefer of CIBC.

Hi, Rick. Rick, we can't hear you.

One moment. Rick Schaefer, you may ask your question.

Jordan, we still can't hear him.

Mr. Schaefer?

Yes. Can you hear me?

We can hear you now, Rick.

Oh, great. Sorry about that guys. I don't know what's going on.

No problem.

A couple quick questions. I guess the first one's probably for you, Harry. This may come as a surprise to some people on the call, but, you know, we're hearing some rumblings of life out here in Denver with regard to Qwest and the Q3 rollout. I mean, nothing big yet, but we are hearing there is some life there. Have you guys seen any improvement in visibility there? I mean, you know, what are they telling you? And then, sort of, I guess, broader-based, what are other customers saying to you guys right now?

Okay. I think, Rick, what I'd like to do is kind of answer it more broadly than customer specific.

Okay.

You know, as I alluded to in my remarks. I mean, there's clearly some glimmers of hope in the sense that there seem to be, you know, both in our existing customers for revenue, some new potential major customers, as well as some smaller ones, some indications that people are getting serious about investing in their networks again. Is it to the level of where we were a year ago? Clearly not. But, you know, there's clearly both, you know, here and certainly in Europe, there's still -- you know, kind of too early in Asia to tell you specifically -- but at least here in Europe, there's a number of signs from a number of carriers that there are clearly opportunities for us.

Okay. Now, is that translated into increased [indiscernible] activity yet or is that -- I mean, is just more conversations you guys have had or --

Well, we were already in a significant number of trials and evaluations.

Yes.

So it's just really just kind of making real, you know, some real progress we think with some of those carrier customers.

Okay. Thanks. I've got a quick follow up for Mike, probably. You guys have done a pretty good job, I think, of managing your burn over the last couple of quarters. You've been pretty aggressive there. And I know you're talking -- your targeting sort of an operating burn of 15 million, at least in the near term. How much flexibility, if you assume revenues aren't probably going to improve a lot in the next couple quarters, or next several quarters -- how much flexibility do you have to improve that burn kind of looking out? I guess, you know, so what is maybe: A. what's your longer term kind of burn goal assuming revenues don't bounce back; and then secondly, how much of your current burn is sort of success based of related to trial activity? That's it. Thanks.

Okay. I'd like to actually start with that, if you don't mind.

Okay.

And then Mike can add comments if he wants. When we did the restructuring back in the June quarter, basically what we decided was we needed to take the company to a position where, if we're going to burn, whatever we're going to burn, we need to have at least three years of runway. So at a $15 million run rate, we had that three years of runway.

In terms of the flexibility, we clearly have all the flexibility that we need. There's lots of things we can do to reduce the burn. And we have been aggressively managing that. You know, Bill and Mike on a day-to-day basis, are really trying to clamp down on every penny that we spend in the company and are looking at every program that we're doing.

What we're trying to balance, in all honesty, is we really do believe that there are things we need to continue to invest in from a grow the business perspective for the long term with managing the cash burn for the short term. I think if a couple of quarters from now, it becomes clear that things aren't going to change for the long term, we'll have to figure out what to do then. But we clearly have all the flexibility that we need. What we're determined to do is we're determined to be here for the long term. Right now we believe that that three year window is clearly more than sufficient, but we look at this every single day, as you might imagine.

Mike, did you want to add to that?

No, thank you.

Okay. Thanks guys.

Sure. Thank you, Rick.

The next question comes from Hasan Imam of Thomas Weisel.

Hi, Hasan.

Hey guys. It's actually Mike [Imashel] for Hasan.

Hey, Mike. Hi.

Just two quick housekeeping things from Mike first. Did you say that the cash restructuring payments of 5 million will most likely flow through next quarter, or will they be spread out over a couple quarters. And then secondly, just on a similar topic, I think you said 15 million op ex next quarter and that's versus 18 this quarter. So just kind of wondering if you any more color on where the additional savings are coming from. You alluded to various levers that you can pull, but has head count come down a little more? Is there a little more to come? And then I just have a follow up.

The 5 million payment related to restructuring, it will be spread over a few different quarters. Okay. So that will take some time as we go there. The operating expenses in the fourth quarter compared to the third quarter. The third quarter had a few one-time events in it that obviously we don't expect to reoccur in the fourth quarter. And we do see head count trending down slightly as the quarter and the business progresses.

Just so we're clear on the head count piece, that's kind of what I would call normal running the business, as well as, you know, frankly, we did lose some people who left voluntarily after our involuntary actions in June.

Okay. Gotcha. Where is the head count now?

321 as of the end of the quarter.

Okay. And one last question. I was wondering, you know, sounds like there is, like you said, some glimmers of hope out there. So I was just wondering, of what you are still investing in on the R&D side, kind of where are you putting those dollars these days or is it just kind of to maintain the existing portfolio or some incremental enhancements there the customers are asking for in particular. Thanks.

Sure. On the -- so basically, what we're doing from an investment standpoint and an R&D perspective are two things. One is, we're continuing to invest in the current product line on a customer-driven basis, kind of very customer-driven, I would say. And then there's some additional product development that we're doing that we, frankly, haven't publicly disclosed for competitive reasons at this point. But it will be a very complimentary setup, you know, product capabilities to what we currently offer.

Okay. Great. Thanks guys.

Thank you, Mike.

The next question comes from David Jackson of Morgan Stanley.

Great. Thanks and good afternoon to both of you. Two quick questions. First, a housekeeping question for Mike. Mike, can you give us some sense of what your depreciation expectations for next quarter is. And then can you just quickly take us through the cash flows that we should be modeling for next quarter. I'm just putting together the comments that you've made about the charges, and also in line with your revenue guidance as well.

As it relates to depreciation, David, I would follow what we've put on the income statement for the third quarter. We don't think there will be significant changes from where you see that the $5.6 million. Okay. That should be in the neighborhood of where we should be in the fourth quarter as far as depreciation goes.

And then your second question was related to again --

Cash flow model.

Yeah. I think the guidance we've tried to provide on the call indicated that the change in the cash position is going to be approximately $15 million.

That's great.

And that's -- then what we're saying in terms of the operating expense piece, is each of the lines will approximate where we've been in the third quarter as well.

It will total actually a little bit less because we'll total about 15 was specifically what we said. And, David, just a follow up on the comment on, you know, there's like $5 million of restructuring potentially to be paid out over a few quarters. It's not an absolute that we'll actually spend all $5 million. I think that's the maximum that we would have to spend as we continue to negotiate a number of things related to the restructuring we did in June.

Okay. Great. And then, I mean, Harry, a quick question for you. I know that you guys have been talking recently about China and sales outlets in China. Is that in response to specific customer interest or is that just your sense that that's a potential market for you and then broadly you should have some presence there?

It's actually a combination of both, David. We've had, you know, before we had any Tellium people in China, we actually had a number of inquiries from the carriers in China. In addition, based on some kind of market research work we were doing, it became pretty clear that it seemed like the appropriate time for us to really put a focus on China. So we now actually have -- I think we just announced, we have our first Tellium employee in China and actually we're participating -- a contingent of folks over there this week participating in a pretty significant trade show and a number of meetings and events over there. So we really believe that it's a significant market opportunity. We believe that, while we might have been a couple of months late, we haven't significantly missed the window and the window is here now. And frankly, we're getting a pretty strong reception from the carriers there as well.

Okay. That's great. Thanks.

Thank you, David.

The next question comes from Nikos Theodosopoulos from UBS Warburg.

Yes. I had a couple of questions, some of them pretty straightforward. Could you give how many customers were in the quarter and in the guidance next quarter are you expecting the same number or more or less if you can give any color on that. Sure, I guess I'll just one at a time --

Go ahead. You can ask the next question.

Okay. All right. And the other question I had was in terms of the distribution strategy, you know, given the -- you know, if you look at the environment, we haven't seen a lot of companies drop out of the market yet. And I'm wondering given that you see a lot of relative opportunities in Europe, are you looking to partner more aggressively with some larger company that already has relationships or other business with some of the larger carriers, or are you still pursuing a direct model in Europe? Thank you.

Sure. Happy to answer them, Nikos. So in terms of the number of customers, it was revenue both from Dynegy and Qwest. In the fourth quarter, it will be revenue from both of those customers, as well as some additional revenue from our government related contract that we announced earlier this year. And [indiscernible] sitting here today, that's the basis of our revenue guidance of at least 3 million for the fourth quarter.

In terms of the distribution strategy, you know, it's been interesting. It clearly has changed, certainly in the time I've been at Tellium. More recently, I think it's been very clear that being able to partner has become more important again with some of the -- I'll call them more traditional carriers. And so what we're doing, frankly, is pursuing a very targeted distribution strategy. I don't believe that a kind of global OEM arrangement is the appropriate solution. What we're kind of hearing from specific carriers who want to do business with us, is a number of them are saying, here's my favorite kind of big partner that I'd like you to kind of work with and through, if you could. And there's also, fortunately for us, some additional carriers who are still very happy to work with Tellium directly.

So I think what you're going to see, Nikos, develop over the next few months and couple quarters, is you'll see us have a combination of both some direct, as well as some indirect business. But again, it won't be with a one single big partner. It will probably be with a number of partners on a targeted basis.

Okay. All right. Thank you.

You're welcome.

The next question comes from Jacob Kaldenbaugh of Instream Partner.

Good afternoon, gentlemen. Instream's a boutique investment bank located in San Francisco. Just wanted to identify the company in looking for negative enterprise comp value or companies treading below cash value. And as a result of that, I guess I'm going to need a little basic instruction from you guys regarding what is the basic investment thesis of the company that you guys are utilizing that allowed you to justify a $15 million operating expense level for year -- or excuse me -- per quarter?

Well, I think the investment thesis is really kind of simple. And that is, Jacob, that we believe that in order for us to be a significant player as this market returns, we've got to continue to have technological leadership perspective. And we have to have that both in terms of our current product, as well as, the products I alluded to that we haven't publicly talked about because of competitive reasons.

As a result of that, we believe that the real issue is from an enterprise value perspective in the long term, where do you need to be coming out of the other side of this drought that we're in. We believe that the three years is very clearly in that window and we believe the payback will be pretty significant on the far end. That's clearly what we believe as a management team. And that's why we've made the decisions that we've made and taken the burn rate down by about 40 percent from where it used to be. But we also believe there's kind of a minimum level that we need to be paying to be effective in the marketplace.

Can you share any evidence that you utilized in terms of the size of opportunity coming out the back end in terms of, you know, obviously you are investing heavily in certain technologies. But what evidence can you share kind of publicly in terms of your belief in this marketplace and its ability to rebound within three years?

Well, I can tell you that we're not relying on any "market research" per se. It's all based on direct customer dialog with some of the major carriers around the globe. And we're very focused on a specific set of customers. We know who they are. We're talking to them. We think we know what the opportunities are and frankly, we believe that we're in a very strong position as they start spending again to capture some of their business.

Okay. The last question I would have is how do you see your competitive positioning in terms of, you know, somebody spoke about the number of players not being reduced in the market. How do you position your guys -- yourselves going forward? I understand that technology investment is a key theme. But is there any additional detail that you would provide in terms of why you think that you'll be able to capture a significant amount of the rebound in technology spending?

Yeah, I mean, one of the principal reasons is that sitting here today, we're actually in probably a stronger position competitively than we were even 18 months ago. There literally is no other company in the world that has a wavelength switch that can do what we do. No one who can provide the provisioning and restoration capabilities that do what we do. And no one that can help a carrier achieve the kind of cost infrastructure that they can with our product.

Okay. Excellent. Thank you very much.

Thank you, Jacob.

Thank you. Again, to ask a question, please press star 1 on your phone.

Our next question comes from Brian [Spector] of [Bow Post] Group.

How are you?

Good. How are you?

Can you talk about any share buyback activity that you have contemplated?

Well, we haven't announced any such program. I think we're thinking of board to date has been that better use of the company's cash would be to continue to invest in the business, to create more value. We just don't see -- I mean, typically companies do share buybacks when they think that they're going to create more value that way than by investing in the business. We, to date, have not believed that to be the case. And clearly, in this environment, cash is a pretty important asset for us.

Great. I guess in reference to that, I mean, when we think about the business and the gentlemen before had asked a similar question, that you guys are burning $15 million a quarter. We're just trying to understand the MPV analysis given the discount rate that you should apply to it given -- with the state of the depressed telecomm market. And given the alternative of buying your own common stock that has an instant three times return. And we're trying to understand how -- what is the MPV that you can achieve through your business versus -- basically, selling or liquidating and giving back the shareholders the cash that's on the company's balance sheet?

I mean, I'm not going to give you a specific MPV number because that would require me to give you some guidance beyond what we're prepared to do at this point in time. So, I mean, obviously to date, we believe that it's an appropriate level of investment. If that changes, we'll take appropriate action to change that. And obviously, we've reviewed all of this with the board as well.

Right. But, in your saying that, you're basically saying that your MPV, you're using a discount rate that's higher than three times because right now, you could go and buy your stock back and just have a three times return. Your stock is trading for a market cap of -- I don't know what it is today -- but, around $50, $55 million. And you have $183 million in cash. Now granted, there's some shutdown costs, but that sounds like, you know, you could return three times the current share price to shareholders. Yeah.

And the question is, if you don't believe that you're -- you know, if you continue to burn $15 million a quarter and two years from now, you realize, hey, guess what, telecomm spending is not coming back for three more years at that point. Then where do we stand? And how comfortable are you with the leads that you have that this is a very, you know, within a relatively short period of time, you'll know whether the business makes sense or does not make sense?

I think I would say we're pretty comfortable that within a relatively short period of time, we'll know. I would say the other piece is that the -- your comment about the three times number. I mean, I think the realities of the process that you're alluding to wouldn't allow you to get to those kind of numbers from a return perspective. I mean, if you wanted to shut down the company tomorrow, it's not simple as, take the cash, divide it by the number of shares and write a check.

And, clearly, I think the real question for us as an enterprise, which obviously, all kinds of companies who are in space are asking themselves is, what are the opportunities in front of you, what do you think you can achieve, what's the level of investment it's going to take to get there and is there a return that you see on the far end? We still believe that that's the case. If we come to a different conclusion, obviously, we'll take the appropriate steps at that point in time to deal with that.

I guess the next question is, what is the timeline that you're going to demonstrate to shareholders that if you don't get X by this date, that you can then say, we need to review and once again, either further cut costs, which I think you've done quite a good job of cutting costs. The question is, does the business model make sense in the current environment --

Well, I mean, clearly --

-- compared to the alternatives?

We do that publicly at least once every 90 days. So I think, clearly, the next time we have this call will be another public point for us to have that discussion. But what I can tell you as a management team and from the board's perspective, is it something we continue to look at on a regular basis. I mean, as you might imagine, this is something we think about and look at and try and access on almost a daily basis.

] Okay.

So, I mean, I'd like to -- and clearly, one of the issues [technical difficulty] on this environment, if someone's got the crystal ball -- that no one in the industry seems to have at the moment -- we'd love to hear from that person. But, you know, clearly, we feel pretty confident at this point that we're still headed in the right direction.

Okay.

The next question comes from Steve [Volman] of [Parvis] Asset Management.

Good afternoon.

Good afternoon.

First of all, I'd just like to congratulate you on making, what in my view, is the correct decision to move to the small cap instead of doing the reserve stock split, which would destroy value even more, in my opinion. So thanks for that.

Second of all, I wonder if you can talk about kind of the apportionment of operating expenses. You guys have obviously taken a lot of operating expenses out. I'm surprised that general and administrative is still as high as it is, especially compared to R&D.

I'm going to let Mike kind of give you some details on that. I think one of the things you'll hear from him though is, in general, there's some things we just categorize in R&D -- excuse me -- in G&A, just kind of for more simplicity sake that we could probably allocate to some other lines, but we just don't think it makes a lot of sense and adds no value to the business. And so I'll let Mike kind of explain some of the etails of that.

How are you? Listen, with three lines to an income statement, as Harry points out, sometimes things get lumped into categories that are not necessarily in the traditional place. As we see the fourth quarter unfolding, we would expect to continue to invest in research and development. And if there's a line that will come in significantly below the third quarter activity, and alluding to what I mentioned before where there were some one-time items in the third quarter, it will be in the G&A line.

So discretionary spending at Tellium, I think the employees would agree with me, has been taken very seriously and there's items -- nothing gets spent at Tellium that isn't directly related to our business mission and meeting the customer requirements.

Okay. I think you've disclosed in the past kind of what your split of engineers is as a percentage of head count. Is that still running about two-thirds engineers?

It's about -- it's a little under two-thirds. It's slightly -- it's 62, 63 percent, somewhere in that range.

Okay. And just so I'm clear, Mike, the general administrative, the one-time items are, I assume, related to things like legal fees and stuff of that nature?

Absolutely.

Okay. And then finally, I'm not sure if it's appropriate to discuss it in this form or possible discuss it in this form, but I wonder if you can talk a little bit more about the $27 million charge and some of your disclosures in the 10K regarding the stock return program, I guess, for lack of a better tern.

Sure. Let me -- I think the only thing we're prepared to say at this point is kind of two things. I think we've made a pretty clear disclosure of what's been going on with respect to that. The thing that -- the $27 million is really an accounting transaction which only kind of the accounting experts could figure out. And what we were advised by Deloitte and Touche is because of the activity that's taken place to date, even though nothing has changed and the loan agreements are still in full force and effect, we were advised that it was appropriate for us to make the adjustment in the loans in the third quarter. That's why we disclosed it in the second quarter queue that said we would be taking a write-down related to that. And I think it came out to be like 27 million instead of the approximately 30 that we had projected. And so we believe that it was the appropriate time to do it, and we did.

Okay. In the queue you have a line that says that the resolution of the items may have a material adverse effect on the company. Is the materiality of that effect limited to the $27 million?

No. Those are two separate and distinct things. I think, what I would tell you is that this is something that the board is actively working on and we hope to have it completely resolved very shortly.

Okay. Well, I'll look forward to that. Thank you.

If I could just interject and provide, perhaps, the next layer down of the map. If you were to look at our balance sheet, you would see that the notes receivables line at the end of September is at zero and previously, it had been $33 million. The reason the charge is $27 million is that represents the difference in the amount of the loan and a fair market value, the shares on the line of the loan at a point in time in the quarter. Again, this is very consistent and it's spelled out in the EITF we referenced in my comments.

Okay. Well --

It does not -- okay, it does not impact legally the status of the loans. But given the activity we're doing during the quarter, this is -- it's an evolving area. But we think this is consistent with our conservative financial statements going forward.

Okay. Thanks very much. I'll take a look at the EITF. Thanks.

Thank you.

The next question comes from [Anapam Vakenya] of [Inves] Partners.

Good evening. I have a quick question about the [indiscernible]. I was looking at your [indiscernible] and I'm very confused about this 27 million write-off. I know you just talked about it. But [indiscernible] within the company or where is this light down coming from?

There are notes [indiscernible] with the executive team with members of management of the company.

Are you forgiving those loans that were made to the executive committee?

No, that has not -- absolutely not. As I said, the loans are still in full force and effect.

But you're taking a write-down?

That's correct.

I see. Okay. And the second point. I know that the previous callers have touched upon it. But I just wanted to get a little clearer idea as to the investment pieces. I'm looking at your balance sheet and I look at it and say look, you know, you guys have over -- just under $2.00 a share and a liquidation value probably is $1.50. I mean, at what point exactly, because I have gone through the same exercise with [indiscernible] Communication that liquidated [indiscernible] and I see that the more you delay, [indiscernible] solution to the stockholder from going down every day you are in business. At what point do you say, okay guys, it's enough. We gave it our best shot. Now, let's return the money to the shareholders. [indiscernible] delayed indefinitely at some point you're going to say, you know, enough is enough.

Well, I think one of the fundamental differences between AFC and Tellium and other folks out there is we've shipped more than $200 million worth of equipment to customers that's been accepted by customers and there's no issues about performance of the products. And in addition, we're not a commodity product kind of company. When people decide to sign up with Tellium as a customer, as you may recall, if you heard us when we went public as a company, that's a long-term decision. And the fundamental premise is that we're going to be around to support those products for a very, very long period of time.

So I know the math that you're referring to and as I said earlier, that process is just simply not that simple. And really it relates to the earlier question that the gentlemen asked about the investment pieces. I think a significant part of the reason that we believe that we're going to be successful in the long term is the fact that unlike a lot of other companies out there, we have shipped over $200 million worth of products. We have the world's largest optically switched mess network out there today in Dynegy's network. And we know what the switches are capable of doing for carriers. We've been certified for network deployment in other carriers, major brand name carriers around the globe even though we have yet to get orders from those folks.

I mean, those are just some of the examples of the things that we think are very different than like, an ASC, which I happen to be pretty familiar with, as well as other kinds of companies who are kind of looking at this, you know, this telecomm storm and trying to figure out what to do.

Well, maybe another suggestion I might have is to, if you could liquidate part of the company. For example, you have 185 million. Why not distribute, let's say, you know, 90 million to the shareholders or 100 million, and then you can play with the $90 million left. If you do something, great. If not, return that money as well.

So that you don't have a [indiscernible] of 180 million, instead you have, you know, just 80 million to turn the business around.

So [Anapam], the answer is really very simple. It's for the same reason we went public as a company. And that is, if you want to be competitive and ask a major carrier to sign up with you when you're selling a product that goes to the core of the network and they expect to be there for ten or more years, they want to know that you're here and viable for the long term. Doing a partial cash distribution right now, you know, would impact their assessment of us competitively. And so that's why I believe from an investment thesis perspective, it makes absolutely no sense to do that.

Okay. Thank you. [indiscernible]

Thank you very much.

If you do have a question, please press star 1 on your touchtone phone.

Our next question comes from John Abrams, a private investor.

Yes. Thank you. Just listening to all of this, I'm just trying to understand what -- well, I understand -- what is, Mr. Carr, your personal number of shares in the company? I mean, what do you have at stake here?

5.7 million [indiscernible] shares right now.

That's what you have?

Yes, sir.

Is that mostly from options or --

No, those are restricted shares that I own today.

Okay. And I've talked to people at the company before. I'm a little bit bewildered why you see absolutely no insight or buying from people at Tellium, especially at these cheap prices. I've invested in other companies, you know, Williams Communication. I've talked to the CEO there many times. He's not around any more. He resigned, you know, after the company filed for bankruptcy. And that's what I'm worried about here. You know, this is what you say today, but, you know, six months from now or a year from now, just listening to these other callers. You know, nobody knows what's going to happen. But, I mean, if things don't work out, we'll never hear from you again. You'll just be gone. That's what I'm concerned about there. And this partial distribution that the last caller mentioned is not such a bad idea. I mean, I can't understand why, you know, you have 80 million or 180 million in the bank why that would make a difference to a client of yours.

Well, let me explain sir, if I may. And let me kind of address all of your comments. I would point out to you that you've also seen no insider selling, not just no insider buying.

Okay.

So that should hopefully be another signal to you as well. I think one of the things you need to understand about a management team is, most of the folks on the management team don't have these huge significant financial resources. They've already got a very significant stake in the company and a lot of their families' financial future is riding on Tellium being successful. So it's not like these folks are folks who are multi-millionaires already coming into the company.

Okay.

So it's not like, you know, so from that perspective, their financial future is completely tied to the success of Tellium.

Okay.

The other thing I'd tell you is the reason that we wouldn't be as competitive with 80 million in cash as 180 million in cash, is for the same reason that every start-up company out there in my personal opinion, has almost no chance of making it. And that is when a major carrier believes that you have 12 to 18 months worth of cash left and that's it, they're not willing to bet on you as a company. And most of those companies really aren't core infrastructure products like we are. The bar is actually raised. I mean, frankly, it's the same exact reason why we decided to go public in the markets even though the markets were choppy, even though they looked a lot better in hindsight, they were a lot better than we are overall in the market right now.

But the bottom line is, that's a very important factor for our carrier customers. If it wasn't a factor, then we'd probably seriously consider a partial distribution. But it is a factor that's critical to our success for the long term.

Well, let me ask you this then. Then if you don't want to distribute money to shareholders, what about trying to merge then with another company. Let's say, you have $1.70, $1.80 in cash, I mean for a $1.00, $1.25 that type of thing. And that way, at least you still can go about your business and try to make this thing work. But at the same time, you can unlock some of the shareholder value here, at least for the shareholders who have taken a big hit here. Has that been thought of or are you pursuing any type of merger or talking to any people possibly some sort of partnerships, things like that?

We're very actively talking to lots of people about different kinds of potential partnerships. It's something we've been very focused on for some time. And I think I've alluded to it in earlier conference calls, you shouldn't be surprised if some time over the next some number of quarters, you would see Tellium engage in some sort of partnership transaction and I probably shouldn't comment more detail than that.

But what I'm saying is, I mean, what you said earlier that you have a product that nobody else has and you have all this money in the bank, why wouldn't -- I'm not going to mention any names of companies in your area because you probably know them all -- but wouldn't a larger company or, just let's say a larger company just buy you for a $1.25 or $1.50 in cash. You know, a discount to what you have. And that way, at least you guys still could stay there and run the company and hopefully, make it work and you probably would make it work because you are now part of a larger company. Why wouldn't you go that route to try to take some of the risk out of going forward, which nobody really knows what's going to happen?

Well, I guess the way I'd answer that, sir, is that I'd just refer you back to my comments earlier. I said, we're not standing still and we are exploring a number of different strategic partnership kinds of opportunities. They don't necessarily -- all the possibilities aren't specifically the ones you're alluding to. And what I would tell you is, don't be surprised if you see something happen on that front.

Well, I'm not talking about -- I'm talking more of a full merger, not just a partnership with somebody else. But something that would take some of the risk -- you know, you were talking about. I mean, nobody has a crystal ball. But take some of the three-year timeframe you're talking about here. But then you would have zero cash left and [indiscernible] work. But, you know, if you merge [technical difficulty] in three months or half a year or whatever. At least, shareholders would get back something and you guys would still be able to run the business. But, it would be a larger corporation and everybody would be happy type of thing. You know, I mean, something like that.

I understand your point.

Is that something that you guys are at least aware of or trying to pursue in some manner? Or are you just trying to -- you know, are you going to try to do this by yourselves and just kind of roll the dice with it?

Well, I'm sorry. I've tried to be clear that we're not standing still. We're looking at all kinds of things on that line. It's just, I think -- I just can't say more publicly at this point. I think I can't say the kind of detail you'd like me to say. But what I can tell you is, we're very aware and I don't think you'll see us standing still.

Thank you. At this time, we have no further questions.

Okay. Well, thank you very much everyone. We appreciate your time this afternoon and we look forward to speaking with you on our next quarterly conference call in January. Thanks very much, Jordan, for your help. That concludes today's call.