DZS Inc (DZSI) 2002 Q4 法說會逐字稿

Good afternoon, and thank you for standing by. All participants will be able to listen only until the question and answer session of the call. This call is being recorded at the request of Tellium. If anyone has any objections, you may disconnect at this time. I would like to introduce your host for today's call, Mr. Mike Deshaies, Director of Corporate Communications. Sir, you may begin.

Thank you. Good afternoon everyone, and welcome to Tellium's earnings conference call for its quarter and year ended December 31, 2002. I'm sitting in today for Jennifer Collins, our Director of Investor Relations, who is out on maternity leave. I'm here with Harry Carr, Chairman and Chief Executive Officer; Bill Proetta, President and Chief Operating Officer; Krishna Bala, Chief Technology Officer; and Michael Losch, Chief Financial Officer, Secretary and Treasurer. Harry will review our business activities, Mike will take you through the financials, and then Harry will wrap up, after which we will be available to answer questions.

We issued a press release this afternoon after the market closed, concerning our results for the fourth quarter and all of 2002. The release was distributed over Business Wire, and for your convenience, it has been posted on our Website at tellium.com. Also, the replay of this conference call will be available on our Website this evening. The replay will also be available over the phone by dialing 888-566-0586. There is no pass code required.

Before we begin, I'd like to remind you that statements made during the course of this call that are not purely historical are forward-looking statements. These include 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 risk factors sections of the company's annual report on Form 10K, filed on April 1, 2002, and in our quarterly reports. These documents can be accessed via the investor relations' section of Tellium's Website. Now I would like to introduce Harry Carr, Tellium's Chairman and Chief Executive Officer.

Thanks Mike. Welcome everyone, and thank you for joining us today. 2002 was an extremely difficult year for Tellium, as well as the entire telecommunications industry. While the year started out strong for us, with over $54m of revenue in the first quarter, and profitability on a pro forma cash basis, the remainder of the year brought significantly less revenue. The year was filled with hurdles and challenges we had not faced before in our young life as a public company. We began 2002 with over 540 employees, and after two painful, but necessary business restructurings, the first in June, and most recently earlier this month, we begin 2003 with about 1/3 of the workforce we had at our peak. Despite the disappointments and difficulties, we believe that we have repositioned Tellium appropriately for the state of the industry and our expectations for the business.

Over the last few quarters we have reduced our operating expenses tremendously and significantly reduced our cash spending. In 2002 we fundamentally resized and reshaped our business, managed our balance sheet, and recorded significant write-downs involving goodwill and non-performing assets.

At the same time, we continue to remain virtually debt free. In the fourth quarter we reduced our cash spend again, burning less cash than expected. We will continue to prudently manage our cash during 2003.

As I have been saying since our second quarter 2002 conference call, our strategy has three phases. First, achieve stability for our business; second, focus on a return to growth; and third, a return of profitability. Through our continuous careful management and assessment of our business, I believe that we have actually achieved that stability, and as we begin 2003 we are focused on attaining growth, and ultimately profitability.

Obviously the changes in our business in 2002 were difficult for all of us at Tellium. But we believe that in making these changes we have realigned our cost structure to fit the reality of today's market place. We believe that we have the necessary resources, including research and development, sales and marketing, operations and customer support, to meet our existing customers and potential new customers' needs. Going forward we also believe that we have the right team in place to maintain our technology leadership.

Let me talk about the fourth quarter. We achieved revenues of $2.9m during the quarter. This was consistent with our guidance of approximately $3m and is up sequentially from the previous quarter. We carefully managed our expenses in all areas, allowing us to achieve a lower than expected loss, and less cash burn than anticipated.

More importantly, we laid the foundation for a successful 2003 and beyond. First, as we announced during the quarter, we agreed to and amendment of the Cable and Wireless contract. Under that amendment, Cable and Wireless has agreed to make purchases during the first and second quarters of 2003. After they meet their commitments, the amendment releases them from the balance of the original minimum purchase commitment amount. As we said at the time of the release, we believe this is a win/win for both parties. We recognize that our original contract had become an impediment in our relationship with Cable and Wireless, and that we needed to find a way that would enable them to begin deploying Tellium equipment. Given the changes in the industry, and in their business since the signing of the original contract and our continued desire for a long-term relationship with Cable and Wireless, we believe that this amendment is clearly in Tellium's best interest.

I am happy to report that we have the purchase orders in hand for Cable and Wireless for both the first and the second quarter shipments. This gives us significant visibility for the first and second quarter of 2003. The equipment is being shipped to, and is scheduled to be installed in, central office sites in the Cable and Wireless network in both the U.S. and Europe.

While there will no longer be minimum purchase commitments beyond these purchase orders in hand, again assuming that Cable and Wireless meets the terms of the amendment, we believe that Cable and Wireless will make additional purchases once they experience the cost and operational benefits of our technology as part of their network. We believe that our product and value proposition will speak for itself.

In order to insure the best possible results in 2003 and beyond, we have also refocused our sales and marketing efforts on those domestic and overseas carriers that we believe represent the best revenue opportunities in the near term. We continue to make progress with key accounts, however it is difficult in this environment to know exactly when we will be able to close them.

From a product perspective, we continue to be the only company in the world with true shared mesh switching capabilities in an optical switch, and the only one whose restoration times can rival existing Sonnet speeds. We have been careful in our resizing of the business to make sure that we have all the necessary R&D talent to continue to innovate our current product platforms and to invest in additional complimentary optical networking product developments, which will expand the target markets for the company and position us for additional success. We've deliberately not spoken publicly about our new product developments because of competitive reasons, but have sought significant potential customer input under appropriate confidentiality terms to insure that our product strategy and our roadmap are sound.

From a financial perspective, the company continues to have a very strong balance sheet that provides our customers the confidence that Tellium is here for the long term. We understand how important this is to our ongoing success. We also finalized the resizing of our business that we implemented earlier this month. Our focus since I joined Tellium is to maximize long-term shareholder value. Nothing has changed as we continue to move the business forward. I hope that's clear from what I've just described.

I'd now like to turn the call over to Mike Losch for a detailed look at the financials. Mike.

Thank you Harry, and good afternoon everyone. As Harry mentioned, our balance sheet continues to be a significant strength, and we absolutely comprehend that cash is king in this environment. I will take you through a detailed review of the fourth quarter financial results, as well as a brief summary of the year, 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, deprecation, amortization, charges related to our business restructuring, and the impairment of long lived assets unless I indicate otherwise. I would remind everyone that we have not changed this definition in our reporting as a public company. Consistent with guidelines to be adopted in 2003, we have added to our press release a reconciliation of our GAAP basis results to our pro forma cash basis results. This reconciliation is on page six of our release.

I begin with top line revenues. For the fourth quarter we reported revenues of $2.9m compared to $1.9m in the third quarter of this year. Gross margins for the fourth quarter were $324,000 compared to a negative $2.8m in the pervious 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 fourth quarter were $12.7m compared to $15.3m in the third quarter. As a result of continued strict cost management, we reduced operating expenses over $2.6m or 17%, as compared to our third quarter of 2002.

In the fourth quarter our operating loss on a pro forma cash basis was $12.4m compared to the operating loss of $18.1m in the third quarter. Our net loss on a pro forma cash basis was $11.5m compared to $17.4m net loss in the third quarter. On a pro forma cash basis, our net loss for the quarter was 12 cents per share, as compared to a net loss of 18 cents per share in the third quarter.

Now let me turn to the GAAP basis results. As I mentioned, top line revenues for this quarter were $2.9m, a slight improvement over the $1.9m in the third quarter. On a GAAP basis, operating expenses include research and development, sales and marketing, general and administrative, deprecation, amortization, stock based compensation expense, charges related to our business restructuring and the impairment of long lived assets. Detailed figures for each of these is provided in today's press releases.

On a GAAP basis, operating losses were $57.4m in the fourth quarter as compared to operating losses of $114.7m in the third quarter of 2002, and operating losses of $63.1m in the same quarter last year. Net losses on a GAAP basis were $56.5m in the fourth quarter, as compared to $114m in the third quarter 2002 and net losses of $61.5m in the same quarter last year. Our book loss for the quarter on a GAAP basis was 57 cents per share, as compared to $1.15 per share in the third quarter 2002 and 58 cents per share in the same quarter last year.

The difference between our pro forma cash and our GAAP results in the fourth quarter is primarily attributable to our write-off of non-cash assets, consistent with accounting literature. As we review the current value of our assets as of December 31 2002, we determined it was appropriate to write-down the carrying value of non-performing assets. These include $29.1m in deferred warrant costs, approximately $5.6m in fixed assets, and approximately $1.4m in intangible assets. After these write-downs we no longer have any deferred warrant costs, intangible assets, or goodwill recorded on our balance sheet for the year-end.

For calendar year 2002, on a GAAP basis, net losses were $412.8m, based upon annual revenues of approximately $62m. As identified in our press release, on the reconciliation schedule, the loss was heavily impacted by approximately $344.7m of non-cash charges that will not reoccur in 2003. Excluding non-cash charges, our pro forma cash net loss for the year was approximately $68.1m. At the end of the year inventories were $13.7m as compared to $15m at the end of September. This represents a decline of $1.3m or 9%, from the end of September, and is reflective of normal business activity.

On December 31 2002, we had cash and equivalents totaling $171m compared to $183.2m at the end of September. The net decline in cash during the quarter was $12.2m, which compared favorably to the guidance we provided at the end of the September quarter, which indicated we expected a net decline in cash of approximately $15m. Our total shares legally outstanding were approximately 114m shares as of December 31, 2002. As you will note on our income statement, our as reported weighted average shares were 98.7m shares, which excludes the 10.7m shares of vested restricted stock which were reclassified as options for accounting purposes in the third quarter. On a pro forma basis the weighted average of total shares amounted to 114.6m during the quarter.

Before I turn the call back to Harry, I would like to discuss some general financial guidance for the first quarter of 2003. We anticipate revenues to increase sequentially in the first quarter, to be approximately $10m. We expect gross margins to be in the range of 48-50%. We expect all of our operating expense line items to be consistent with, or down slightly from our fourth quarter results. In total, we expect operating expenses on a pro forma cash basis, to be no more than $13m in the March quarter. We expect interest income net to be down slightly in the quarter, as compared to the December 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 2003. Our cash position at the end of the March quarter is obviously contingent on our top lien results and collections. Our cash spent in the March quarter should be no more than $15m. This is principally because payments of approximately $4-5 related to our restructuring will be made in the March quarter. Additionally, this does not include any payments from Cable and Wireless for their first quarter purchases, which we expect to receive payment early in the second quarter.

Finally, we expect to realize the full quarterly cost savings associated with our January 9 restructuring in the second quarter 2003. thank you, and I now turn the call back to Harry.

Thanks, Mike. I'll be brief. It's a pleasure to once again be able to give revenue and gross margin guidance that is meaningfully better than the prior quarter. As I have said publicly before, we believe that the worst quarters are behind us from a revenue perspective. However, we still have a lot of hard work ahead of us to make that a reality. Our operating list will also be significantly smaller, as we fight our way back to profitability.

We have taken the steps necessary to substantially reduce our breakeven point of the business, from approximately $50m in revenue to below $20m in revenue for this quarter going forward. We've accomplished this by reshaping all facets of the business. As we look at 2003, we also noted, from a cash perspective, our Cable and Wireless purchase orders will represent a significant cash addition, since we expect to fulfill them with minimal inventory purchases.

Thus, with all of the steps we have taken, we believe that we have significantly extended the liability of the company. The team has worked incredibly hard through very difficult circumstances in 2002, and January 2003. We have had to ask many people we care about to leave the business because of the changing environment and to better position the company for future success.

We have made the tough decisions. We have the teams, the products, the new product development and the financial wherewithal to be successful. The hard work to make that a reality is what our full attention is focused on. We remain a technology leader and we believe, sitting here today that we are the optical switching company closest to achieving breakeven and profitability again.

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

Thank you. At this time, we are ready to begin the question and answer session of the call. If you would like to ask a question, please press star-one. You will be announced prior to asking your question. To withdraw your question, you may press star-two.

Once again, to ask a question please press star-one.

Our first question comes from Hasan Immam, of Thomas Weisel Partners.

Hey guys, it's actually Mike DeMichele] for Hasan. Kind of a quick overall question, what are you guys seeing out there in terms of the outlook for switching upgrades? In the past we've talked about customers looking at it. First we thought there were going to be some deployments in '02. Then, we were talking about, you know, end of '03. What are you guys seeing out there from the customer base?

And then related to that, what are you seeing from the competition? I mean, you know, Nortel recently announced they finally got some traction with the HDX in China. Is that a change on the competitive front? And, do you expect more comments coming out of both competitors and yourself in the not too distant future? Thanks.

OK, thanks Mike. You know, I'd say kind of overall, as I alluded to in my script, there's clearly a lot of activity. There's a lot of focus on this space this year. But to predict the exact timing of specific customers and when they'll make decisions is very, very difficult.

I think from a competitive landscape position, I think, you know, frankly Nortel's win in China notwithstanding, they have not been a meaningful competitor to us, in the places that we believe are near-term opportunities. In terms of other competition, we continue to be the only Wave-One Switch on the market, and the only switch that has true shared mesh with SONET speed restorations.

In fact, as we sit here, we're aware of a number of our competitors, at least one in particular, having significant problems with their customers and their equipment in other customer networks. So, we think that strengthens us from a financial perspective.

You know, we are being very aggressive about trying to get business closed. We're making offers to customers to try and get the ball moving. But the overall environment, I'd like to tell you that it's clearly better. There are signs that it might be, but I'm not going to sit here and tell you it is.

Thanks.

Thank you.

Alkesh Shah, of Morgan Stanley, you may ask your question.

Yes, thanks guys. First with a bookkeeping question, could you give me headcount at the end of the quarter? And then second, as your customer trials are progressing, especially internationally, are you getting any push from some of those potential customers for more partnerships in support and service?

OK, on the headcount, at the end of the quarter, well after the downsizing; let me put it that way. I think it's probably more relevant.

Yeah, that's what I'm looking for.

186, post the downsizing.

OK, great.

In terms of people pushing us for partners, I think it's very carrier specific. Clearly, I think the general trend is more that way. There are some carriers that we're still able to deal with directly. And, there are other carriers who are, in fact, asking us to work through a partner. But the solution here is not what I'll call a global OEM partner. It's very customer specific.

Every carrier seems to have their favorite big company that they'd like us to partner with. So I think what you'll see is, to the extent that that's required, we'll do it on a carrier-by-carrier basis.

Great. Thanks, Harry.

Thank you.

Rick Schafer, of CIBC, you may ask your question.

Hey guys. Yeah, I guess my first question, I don't know if it's for Harry or for Mike, but just a quick comment on the first quarter. If the first quarter--you guys are guiding up pretty significantly. If it's not dependent on Cable and Wireless revenues, can you give us any kind of flavor for where the strength's coming from? Is it existing customers, new customers?

And then just, on the back of that, I know, given your new leaner, meaner cost structure, I mean are gross margins sustainable, you guys think, up here in the high 40s, or close to the 50% range?

Sure. Let me take a shot at that and I'll let Mike add, if he wants to, Rick. Let me be clear. The first quarter guidance clearly includes Cable and Wireless revenue. I want to make sure that's clear.

You know, the amendment that we signed, in fact, as then making purchases in the first and second quarters of '03, that's part of the amendment. We have those purchase orders in hand. There is other customer activity, but clearly the way that we will get there is clearly including the Cable and Wireless revenue.

From a gross margin perspective, I think our view at this point is that it is clearly sustainable. We have, as we try to say, we've fundamentally reshaped the business. That includes what we look like from a COGS profile, both from kind of the internal cost to develop it as well as working components and supply and all those sorts of things.

So, I think clearly we believe that those are clearly sustainable margins.

OK, so now, given that, that Cable and Wireless is coming in the first quarter, should we think of them as being more backend loaded for the second half of the first half, or the second quarter? I'm just trying to get a kind of rough gauge on some of the ultimate size, or what it could represent in the first half.

And then, just, I'm also curious. Are they only buying--is this strictly for the 512? And, how loaded are those chassis' going out, on average?

OK. At the customer's request, we have not disclosed the size of the purchase that they'll be making in the first and second quarter of '03. But I think you ought to think about, and frankly, we don't want to get into second quarter guidance at this point, but, we're working towards obviously having a better second quarter than the first quarter.

So, I think that's kind of the reality of kind of where we sit at this point. Tell me the second part of your question again?

Yeah, and then I was just curious, you know a couple of bookkeeping issues, I guess. I was just curious how those--are they buying 512s only? Are they buying anything else?

I'm sorry; they're actually buying both, the 512s and the 128s.

OK, and how loaded are these chassis' going out? Or, can you guys give us an idea?

I don't think I'm comfortable giving that, again because of Cable and Wireless' request for confidentiality.

OK. Thanks, guys.

I'd say they're meaningfully-sized systems, Rick. I don't want to get specific, but they're meaningfully-sized systems.

Rick Schafer; OK, thanks.

Thank you.

Once again, to ask a question, please press star-one.

At this time, there are no further questions.

OK, well thank you for joining us today and we look forward to speaking to you on our next conference call, in April, about our first quarter results. Have a great afternoon.

Thank you, Tanya.

Thank you.