DZS Inc (DZSI) 2003 Q1 法說會逐字稿

Good afternoon everybody and welcome to Tellium's First Quarter Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Jennifer Collins, Director of Investor Relations for opening remarks and introductions. Please go ahead madam.

Thank you. Good afternoon everyone and welcome to Tellium's earnings conference call first quarter ended March 31, 2003. I am here with Harry J. Carr, Chairman and Chief Executive Officer; Bill Proetta, President and Chief Operating Officer; Krishna Bala, Chief Technical Officer and Michael J. Losch, Chief Financial Officer, Secretary and Treasurer. Harry will review our business activities, Michael will take you through the financials and than Harry will wrap up, after which we will available to answer questions.

We issued a press release this afternoon after the market closed concerning our results for the first quarter. The press release includes certain non-GAAP information, which we will refer to in this call. The release was distributed over business wire and for you continence, it has been posted to our web site at Tellium.com. Also, the replay of this conference call will be available on our web site this evening. The replay will also be available over the phone by dialing 888-203-1112 and there is no pass code required. Before we began, I would like to remind you that statement made during the course of this call that are not purely historical are forward-looking statements. These includes statement regarding the company's and managements 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 may 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 section of the company's annual report on Form 10-K filed on March 31, 2003. This document can also be accessed via the investor relations section of Tellium's web site. Now I would like to introduce Harry J. Carr, Tellium's Chairman and Chief Executive Officer.

Thank you Jennifer. Welcome everyone and thank you for joining us today. We entered 2003 with a solid financial foundation and we expect to build on that foundation quarter-by-quarter in 2003. Our strategy remains unchanged; first, stabilize our business; second, focus on return to growth and third, return to profitability. I believe we have successfully achieved the first phase of our strategy, stability. We are now focused on the next phases, attaining growth and ultimately profitability. In order to accomplish our strategy, we will rely on our two most important assets our financial strength and the talented group of individuals who make up the Tellium team. The core of our team that created the industries leading optical switch is poised to address the challenges of our industry, is committed to the long road ahead and is dedicated to Tellium's success.

Our financial results in the first quarter were in-line with or better than the guidance that we have provided on our conference call in January. We achieved $10.1m in revenues, 48% gross margin on a pro forma basis, and we spent less then $14m in cash which included our restructuring cost paid during the quarter. We continue to prudently manage our control expenses. Our revenues for the quarter were significantly greater than the December quarter. As I have said before, we believe that from the revenue perspective all the number of RFI and RFPs for carriers' networks. As carriers realize that they need to return to prudent investments in their networks in order to achieve their business objectives. We cannot in the current environment predict the timing of buying decision by customers, but we can continue to strengthen our relationships with potential and existing customers domestically and offshore to properly position Tellium over the long term. Our first quarter revenues included the first quarter committed purchases from Cable & Wireless based on the amended contract Cable & Wireless and Tellium agreed to last December. Our Aurora switches have been shipped to Cable & Wireless and are in the process of being installed in central office sites in the Cable & Wireless network in both the US and Europe. Having our Aurora switches installed in one of the world's largest global networks is a validation of our technology and the entire Tellium team. We remain confident that our product performance and value proposition will result in an active long-term partnership between Tellium and Cable & Wireless. In March, Dynegy announced the sale of its high-capacity broadband network spanning 16,000 route miles and 44 US cities to 360 Networks. We are exited that 360 Networks chose the world's largest optically switched mesh network [aided] by the Aurora switches to compliment its existing network. Dynegy has been a great partner to us over the past couple of years and despite the fact that the industry was struggling and telecommunications was not managing its primary business, they have been growing traffic and the number of customers on their network. With 360 networks, we will be working with the company whose sole business and focus was telecommunication services. They have the expertise and the team in place to grow the customer base and take advantage of the economic benefits of the network both on Tellium or Aurora switches. We are working closely with 360 networks to make the transition seamless to the customers that currently utilize the network. Our team is looking forward to partnering with 360 networks to help them continue to expand and enhance their business. Our ability to treat customers as partners is critical to our success. We will continue to work closely with our customers to provide high speed, high capacity, intelligent optical solutions that will enable them to get the most out of the networks while minimizing their operating costs. At the same time, we will continue our efforts to add complimentary products to enhance Tellium's product suite and value proposition. We will do this through our own research and development efforts and/or through merger and acquisition activities. You can be assured that our strategy for expanding the product line does not distract us from prudently managing our cash. We will continue to focus on minimizing our cash burn into the foreseeable future.

As evidence of our clear focus on this critical area, early in the quarter we implemented a downsizing because it was clear that the industry was still in uncertain waters and our cost structure needed to be further reduced. In less than 7 months, this team reduced our headcount and spending by more than two thirds and at the same time not leaving focus on the organic development efforts or other strategic alternatives. I am proud of the way the entire team has reacted and remained focused on our future success. While it's extremely painful to again have to ask people that we care about and contributed greatly to Tellium to leave the business, it was necessary for our long-term success.

Before I turn the call over to Mike, I would like to formally welcome our new members to Tellium's Board of Directors. As I am sure you are aware on April 1, 2003, Kathy Perone, Gerry Gorman, and Bart Shigemura joined Tellium's board of directors. We are already benefiting from their insights and counsel in 2003 and beyond. These directors replaced Bill Bunting, Ed Glassmeyer, Jeff Feldman, Bill Roper, and Richard Smith who resigned from the board. These individuals represented early investors in Tellium and were great contributors to our company over the years and we thank them for their past guidance and expertise. Mike Connors and I will also continue to serve on Tellium's Board. I will now turn the call over to Mike for a detailed look at the financials. Mike.

Thank you, Harry and good afternoon everyone. As Harry mentioned, our financial base remains strong. I will take you through a detailed review of the first quarter financials 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 basis before non-cash charges related to equity issuances, stock base compensation, amortization, charges related to our business restructuring, and the impairment of long-lived assets, unless I indicate otherwise. I would like to point out in the prior quarters, we have not included depreciation in our pro forma results. To be consistent with our peers, we now include depreciation in our pro forma results and have adjusted the prior year statements to reflect this change. Consistent with recent guidelines and as we have done for earlier quarters, we have added to our press release a reconciliation of our GAAP basis results to our pro forma results and this reconciliation is on page 8 of our release. I begin with top line revenues. For the first quarter, we reported revenues of $10.1m compared to $2.9m in the December quarter. Gross margins for the first quarter were $4.9m compared to negative $2m in the December quarter. Gross margins in the first quarter were 48% of revenues on a pro forma basis. Operating expenses on a pro forma basis include research and development, sales and marketing, general and administrative, and depreciation expenses. Operating expenses in the first quarter were $14m compared to $16m in the December quarter as adjusted to include depreciation. Operating expenses on a pro forma basis in the March quarter excluding depreciation were $11.2m, which is well below the $13m we guided to in January. Going forward, our guidance for operating expenses will include depreciation as well. In the first quarter, our operating loss on a pro forma basis was $9.1m compared to the operating loss of $18m in the fourth quarter of last year as adjusted to include depreciation. Our net loss on a pro forma basis was $8.6m compared to a $17.2m net loss including depreciation in the December quarter. On a pro forma basis, our net loss for the quarter was 9 cents per share as compared to a net loss of 17 cents per share as adjusted in the fourth quarter of 2002.

Now, let me turn to the GAAP results; as I mentioned, topline revenues for this quarter were $10.1m, a significant improvement over the $2.9m in the December quarter. Revenues were $54.1m in the same quarter last year. On a GAAP basis, operating expenses include research and development, sales and marketing, general and administrative, depreciation, amortization, stock-based compensation expense, charges related to our business restructuring, and the impairment of long lived assets. A detailed figure for each of these is provided in today's press release. I would like to point out our operating costs include $7.4m of charges related to our restructuring on January 9, 2003 and the impairment of other assets. Of the $7.4m, $6.7m resulted from the severance costs and facilities' write-offs due to the restructuring, and $700,000 resulted from the impairment of fixed assets. On a GAAP basis, operating loss were $37.9m in the first quarter as compared to operating losses of $57.4m in the fourth quarter 2002 and operating losses of $29.3m in the same quarter last year. Net losses on GAAP basis were $37.4m in the first quarter as compared to $56.5m in the fourth quarter of 2002 and net losses of $28.5m in the same quarter last year.

Our book loss for the quarter on a GAAP basis was 38 cents per share as compared to 57 cents per share in the fourth quarter 2002 and 27 cents per share in the same quarter last year. At the end of the quarter, inventories were $13.7m consistent with the inventory levels at the end of December 2002. On March 31, 2003, we had cash and equivalents totaling $157.2m compared to $171m at the end of December. The net decline in cash during the quarter was $13.8m, which compares favorably to the guidance we provided at the end of the December quarter, which indicated we expected a net decline in cash of approximately $15m.

Our total shares legally outstanding were approximately 114.4m shares as of March 31, 2003. As you will note on our income statement, our as reported weighted average shares were 98.7m shares, which exclude the 10.7m shares of vested restricted stock, which were reclassified as options for accounting purposes in the third quarter of 2002. We have also adopted SFAS 123 Accounting for Stock-Based Compensation. This change is effective as of January 1, 2003. While we have always been conservative in our accounting treatment related to options; and in 2002 alone, we recognized charges related to stock-based compensation in the amount of approximately $120m. We feel it is appropriate to make the change at this time. We selected the prospective method of adoption described in SFAS No. 148 Accounting for Stock-Based Compensation Transition Disclosure. This method applies fair value accounting to all new grants and modification or settlement of old grants after the beginning of the year of adoption. All other old grants will continue to be accounted for under the intrinsic value proposition of APB No. 25. The application of SFAS 123 resulted in an $18.4m non-cash charge included in stock-based compensation on our financial statements for the quarter ended March 31, 2003.

Before I turn the call back to Harry, I would like to discuss some general financial guidance for the second quarter of 2003. We anticipate revenues in the second quarter to be at least $10m. We expect gross margins to continue to be in range of 45-50% on a pro forma basis. We expect all of our operating expense lines to be consistent with or down slightly from our first quarter results. In total, we expect operating expenses on a pro forma basis to be no more than $13m in the June quarter. We expect interest income net to be down slightly in the June quarter as compared to the March 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 June quarter is obviously contingent on our topline results and collections. Since the close of the March quarter, we have already collected all of our accounts receivables that were outstanding as of March 31. Our cash spending in the June quarter related to normal business activities should be no more than $10m. In addition, in the June quarter, we expect to pay out approximately $5m related to the management restricted stock loan repurchase program completed in April and described more fully in our Form 10-K. As a result, our net change in cash position will be approximately $5m. Finally, we expect to realize only nominal costs in the second quarter associated with our January 9th restructuring. Thank you; and I now turn the call back to Harry.

Thanks, Mike. As our results indicate, we remained financially stable with an extremely strong balance sheet over $157m in cash and virtually no debt. We look forward to expanding our relationships with both Cable & Wireless and 360 Networks, and our sales team continues to strengthen relationships with existing and prospective carrier and government customers. We realize that the industry will not change overnight, but it is important to remember we remain a leading innovator in the optical switching space. We have the talent to expand and enhance our overall product line, and we believe that we will be ready for success when the industry turns around. Clearly results demonstrate the cost restructurings that we have successfully implemented. I would only point out that we were able to achieve pro forma gross margins [inaudible] [New Jersey]. We look forward to greeting those stockholders who will attend the meeting; however, if you are not able to attend, please mail one of your proxy cards as it is important that your shares be represented to ensure the presence of a quorum. We are committed to maximizing our shareholder value over the longer term, and we thank you for your patience and your support. Thanks for joining us today. Now I'd like to open up the call for questions.

Thank you, we will now begin the question-and-answer portion of today's conference call. To ask a question, simply press "*" "1" on your touchtone telephone. We will take as many as question as time permits and we will proceed in the order that you do signal in. Again, please press "*" "1" for any question and we will go first today to Hassan Imam of Thomas Weisel Partners.

Yes, thank you, good evening guys. Couple of questions; first on the mix of revenues; Mike, could you give us an indication of how many customers you had in March and what's they have been to your June guidance?

Hassan, thank you for the comment and could you just repeat the question please?

Yes, the question was -- what was the mix of customers in March, I mean how many customers were in March reps and what's the expected number in your June guidance?

Well, Hassan, we had 110% customer in the first quarter and in the second quarter we really don't get into customer breakdown going forward.

Okay and then an up date, if you would, on the product strategy in terms of your product portfolio essentially, you know, I see three areas where you could expand and may be you could give us -- what kind of progress you made in each of those, so one would be a modular switch in terms of size that could be may be deployed closer to the edge and another one would be a more granular switch, which could groom down lower and may be the third would be an integrated switch transport and switching combine, so may be that's a question for Harry or Krishna?

Sure let me talk about it Hassan and if Krishna want to add anything, he is free to do so; you know we deliberately have not gone public yet with exactly what kind of product we are building to complement the existing product line. Now what I can tell you well is this, I think we have been fairly clear that it's our intent to stay primarily focused on the switching space and we have program under development. I am happy to tell you that that program is if not - we had a schedule certainly on schedule as we sit here today and frankly we believe it will be both complimentary and once again industry leading in the number of different fashion as we unveil it to the industry. We have in fact already responded to some order of [Is and Ps] with the new product under non-disclosure with customers but we are still not prepared to go public with what that products looks like for competitive reasons.

Okay, one last question, Harry, could you talk about may be the switching up grade [or been] opportunities you see out there for calendar '03?

Yes, I think in the couple of areas, Hassan, its very difficult from this environment to know exactly when people going to make the ultimate buying decisions but this clearly certainly with at least -- one or more folks here in the U.S. that you will an [ISP], some serious work is going on to look at the kind of products that we deliver today. There is also some work continued on both in Europe, Indonesia and as we think, you know, we have expanded our focus in both Europe and Asia because we do see somewhat different environment and we believe that there is some very specific near term opportunities in some cases that we are waiting for decisions on as well. And probably the other big opportunity and I am almost reluctant because it seems like every optical company out there is trying to claim that I am going to be successful in the government market place. We already have been successful in the government market place as you know they were our first customer; we hade the [Lockheed-Mortein] contract that we had last year and there were additional opportunities that we are pursuing both in the classified world and in the non-classified world there as well.

Great thanks.

Sure.

And we will go next to Rich Schafer of CIBC.

Hi guys.

Hi Rich.

I got a couple of questions; one of that may be a sort of asking previous question in a different way but, Mike I think you have mentioned 110% customer; can you give us any more color there -- I mean actually I am most interested in cable and wireless and I know you have mentioned them by name in the release; so any more color on the number of boxes deployed there so far so where do you expect that number to go in the next quarter; I mean is it all for the 5-12; what is your visibility there, we are on 2Q, I guess is what I am really getting on?

Rich let me try and address that and Mike will join if he wants to.

Thanks Harry.

And let me just [inaudible] by your cable and wireless [inaudible] is not a disclosure to total amount of the amendment.

Okay.

So we are going to respect that. What I can tell you is that, it's a combination of both 128 and 512 that are going into their network, both here and in Europe. And in the guidance that we have given for Q2 and what I can say is that we have been conservative because, and frankly and some of the products they are going over to Europe. We have some custom's issues and we are just being conservative because we are not sure we are going to get everything done for all of the products to be accepted in the second quarter. So, you know, very specific amount committed to -- we -- you know we have been in turning up switches for them. I think so far we are very, very pleased with the work that's going on. Clearly they were -- the preponderance of our revenue in Q1 and there will be a very significant portion of Q2 as well.

Okay thanks. And another follow-up, I guess. Maybe this one is for Mike. Just talking about ongoing cash flow and I know you hit on a little bit for the next quarter and what we think other than normalized cash burn per quarter and where do you expect cash would be at the end of this year?

: Well Rich, for the quarter for the normal operating business were forecasting less than $10m cash burn.

Right.

We have the one-time payment that we mentioned in my remarks of $5m and I will reference the fact that we have collected money from within the door. Guidance beyond the second quarter is difficult for us to do so we have elected not to provide guidance beyond the quarter that's right in front of us.

So, Rick, if I could just comment on maybe a different way. You know, as we pointed out in the comments, we ended the quarter with a $157m in cash. We've fully collected a $10.1m that was in accounts receivable and basically our normal operating burn assuming no revenue would be less than $10m a quarter. So basically if you do the math on that, that's that we have, you know, zero dollars of revenue going forward. We would have at least four years with the cash for the company. Obviously we expect to have revenue.

Right. That's really great and so that definitely helps. Thanks, and then just one last cleanup question. You talked about the inventory, you know, are $13m; can you give a break up between raw finish goods and [inaudible]?

Think in terms of little more than half of its finished goods.

Alright thank you.

Thanks Rich.

And just as a reminder, for any questions, please press "*" "1" at this time. We will go next to John Marshety (ph.) of Morgan Stanley.

Thanks, hi, this is John for Alkesh. Just a quick question Harry, you mentioned earlier that you saw customers or at least you thought that customers will be getting to realize that they needed to return to some prudent spending. I was just wondering if you give us a little more color there, you know, have you had discussions were they really going to indicate, they are looking to ramp that back up again or is it just sort of, you know, they recognized that their levels have been below where they need to be?

John, it's a frankly a combination of talking to both customers and some of the industry analyst who obviously spend a lot of time with the carrier customers. I think clearly they have been attempting to operate in a mode of spending as little CAPEX as possible. You know, primarily driven by, you know, their respect of investor concerns and there are lot of cases you know during the double years a lot of them -- lot of supplemental warehouse. And so they have the opportunity to, I call, 2003, the housecleaning year, we are cleaning out all the warehouses, you know, putting everything we have into network etc. But the fundamental thing that hasn't changed in fact if anything is almost how to do again, you know, in the data world their traffic demands continue to grow. Are they still have the same dilemma they had in fact double of how to make that really profitable business for them. But the bottom line is most of the carriers we talked to say that even with kind of cleaning out the warehouses before we get to the end of this year, they really can't keep up with the demand without making significant additional investments in their network. Now, I think we are going to return to the double days [inaudible] I think they are going to return to a very prudent investment model where they are trying to, you know, spend the money just in time to be able to get the revenue, but they don't have this [inaudible] warehouse to keep doing that for very much longer.

Okay, great, if I could just any kind of commitments or discussion that you've had 360 yet, you know, that may give an indication that you know there is a deal I guess in the [inaudible] around the way./

You know it's kind of premature across this point other than to say we've had a number of initial meetings with them. And I think, you know, it's been fairly clear from what they have told us that, you know, the Dynegy Network which is, I think, you know, is built around on our product permanently as a core of its architecture is what they were interested in making this acquisition and I think they see the capability to significantly expand their business both in terms of capacity and service offerings because they will have the Aurora product platforms as part of their network. So, I mean we haven't had these specific discussion about how much money they are going to spend with us this year but obviously we are supporting them very much so in terms of the transition planning and we will be working closely with them because we would like them to be a enormously successfully.

Great and, lastly, if I could just get the headcount at the end of the quarter?

183.

Okay. Thank you very much.

Okay. Thank you, John.

And we go next Carl Wiseman (ph.) of Early Bird Capital.

Good afternoon. I have a few questions. First off, in terms of the customer breakout, you said you didn't want to discuss what percentage Cable & Wireless was, but I thought you said earlier in the call that you really didn't have any 10% customers?

No I think, Mike said, we had one and its Cable & Wireless.

Okay. Did you have any 20% customers?

I prefer to just [lead]. I mean I think I tried to make it clear Carl that they were in the first quarter. They were the preponderance of our revenue.

Okay. I mean they were dominant force.

Yes, no question. I think they will be a dominant force in Q2 as well.

Okay. The infrastructure of 183 employees, what type of growth could you handle?

You mean from a revenue perspective?

From a revenue perspective?

Significantly higher numbers. We have got an outsource manufacturing model today. And we could clearly be doing multiples of the revenue numbers that we did this quarter without having to add headcount to the Tellium payroll. We continue to use an outsource manufacturing model that's how we got our strategy outlined and the biggest reason is that it gives us enormous flexibility to meet significant changes in demand one way or other.

And use multiples sources.

As much as possible.

Okay. So the next question is as of today your price is sitting somewhere between 163-167 in cash roughly?

Okay.

And that's based on the 10m coming in and figuring you burnt a few dollars, what is the reason for this work [inaudible]? Why wouldn't it be optimal for shareholders for you guys to do in large buyback of stock? Perhaps and that's your option?

Well, I think the -- there is number of reasons for that Carl. I mean we had this, not the exact language that you described but a different version of that question before. Clearly for a company like Tellium, one of the things that are very critical to be successful with customers is that they understand that we're going to be around for the long term and cash really is staying in this environment. If you talk to any company like us, that's really the case. And that goes in the biggest companies in the states like, the Lucent's and Nortel's who everyday struggle to make sure that they are still liquid going forward. To smaller companies like Tellium, if you try and talk to any small company out there whether they are public or private, one of the issues they face and try to close carrier business and that's what we really focused on is that they have to be credible and credible not just from a...

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