Telefonaktiebolaget LM Ericsson (ERIC) 2006 Q4 法說會逐字稿

Good morning, good afternoon, good evening, ladies and gentlemen and thank you for joining us on our call today. We're approximately five minutes away from the start of our Q4 '06 Financial Results, brought to you by TANDBERG Television. We'll be back with you in approximately five minutes. Again, thanks for joining us today.

[OPERATOR INSTRUCTIONS]

Good morning, good afternoon, good evening, ladies and gentlemen, again, thank you for time out of your day to join us on our call today. Q4 '06 Financial Results, brought to you by TANDBERG Television.

[OPERATOR INSTRUCTIONS]

At this point, I would like now to introduce to you your speaker today, Mr. Eric Cooney, CEO. Sir, the floor is yours.

Thank you, Jeff, and good afternoon, ladies and gentlemen. As the moderator mentioned, I'm Eric Cooney, President and Chief Executive Officer, with TANDBERG Television.

I'm here this afternoon with Fraser Park, our Chief Financial Officer to present the company's fourth quarter 2006 financial results. And with that, lets move through the agenda.

I'm going to, first of all, go through business highlights, give a quick summary of the quarterly financial results and then spend a few minutes hitting some of the highlights, if you will, for fiscal year 2006.

So, initially the financials for the quarter, as you can see, I think we delivered solid financial results for fourth quarter 2006. The headline is revenue of $85.3 million in the quarter. That's up 6% quarter on quarter. Delivering a full year of just over $350 million, that's up a little over 20% from fiscal year 2005.

Gross margin, also a very healthy gross margin, down a bit quarter on quarter, but still healthy yet, just over 57% in the quarter.

Operating expenses, I think demonstrating solid operational efficiency or operating cost controls. We actually drove OpEx down in the quarter from just over $33 million to $31.5 million.

And of course, that flows through to the profitability levels. I won't read them all, but as you can see EBITDA, $15 million and EPS $0.15 per share, full year $0.69 per share.

So at the end of the day, delivering continued profitable growth.

DSOs were essentially flat and cash flow from operations, Fraser will come on in a moment and elaborate on that, but cash flow from operations, just under $5 million in the quarter, down significantly from third quarter, more due to timing in receipt or orders and a back end loading to the quarter than any particular operational effects. And again, Fraser will come back and elaborate on that in a few minutes.

Moving on, spend a few minutes talking, if you will, about some of the highlights for fiscal year 2006.

In this slide, the sales slide, I think the take home message here is we're demonstrating sales across all of the company's key target markets and really with the marquis customers in those target markets. You can see IPTV operators, satellite operators, terrestrial programmers, cable operators, et cetera.

Again, essentially delivering on TANDBERG Television's vision to be a digital media infrastructure supplier across all of these distribution platforms and content providers.

From a marketing perspective, TANDBERG Television's go to market strategy is of course developed on best in class technologies and it's always nice to see that recognized in the marketplace with some key industry awards and you'll see a number of these across our core technologies, professional received solutions with cable and satellite international award for our professional receiver. Best content on-demand solution with Z-band. Some awards for our professional HDM type four encoding solutions. Both in stand alone form as well as in newsgathering applications. And then at the bottom of the page you can see a reference to one of the industry analysts identifying TANDBERG Television as the world's leading encoding supplier.

So, at the end of the day it's nice to see, again, some market recognition for TANDBERG Television's delivering best in class technology.

And of course, throughout the year we also launched several new products, again, keeping us on that cutting edge of new technology and you'll see new products across all of our core areas. So, professional encoders, second generation HD and SDM type four encoders. First MPEG 4 professional receiver, the TT1290 or RX1290 solution. Next generation software products are ad points, advertising insertion software package. You'll see on-demand and interactive applications we launched mid year and finally our open works distributor for open cable product. So a wide range of new products, new technologies. Again, keeping TANDBERG Television on the cutting edge of technology distribution.

Of course, the topic that everybody has probably heard about by this time is the announcement that Arris has made a public offer to acquire all the outstanding shares of TANDBERG Television. I'm, on this slide, simply restating what was in the previously announced press releases in terms of the summary of that transaction. And I won't read through it all here, but the headlines are of course, Arris has made an announcement or is about to make a public tender offer for all the outstanding shares of TANDBERG Television. The valuation is 96 knock made up of mixture of 80 knock in cash and 16 knock in Arris shares at the exchange rates on January 12th. That values TANDBERG Television at approximately $1.2 billion.

We're expecting that tender offer to come out sometime later in the month of February and we're expecting the transaction ultimately to close in the second quarter of 2007.

Market reaction to this announcement has actually been extremely positive thus far. I'm highlighting here just a number of the headlines from various analyst reports that have picked up the transaction. But you can see the take home message, I think best characterized in the first line, this merger creates the standout cable video company by size and breadth behind Motorola and Cisco. And I'll come on here in a minute and talk a little bit more. But again, the take home message here, I think the market has and is reacting positively to the transaction and understands the basic rationale behind a combination of Arris and TANDBERG Television.

This slide is an excerpt from the investor presentation that Arris gave to their shareholders and I think it characterizes well the -- at least the financial implications for this potential combination. And really, what we're talking about, is total addressable markets here. As you can see in 2006 the total addressable market for the combined companies, something over $3.6 billion, with Arris and TANDBERG Television probably representing m ore than 25, perhaps 30% market share in 2006. And of course spanning the core technologies of digital video, voice, and data.

So, clearly a strong player in high growth markets and you can see the forecasted growth rates over to the right, the combined entity will have -- will be pursuing markets with a kager of just over 20% over the next several years, growing to something in excess of $6 billion.

So, bottom line, the combination creates a company who is, at the outset, a market leader in the spaces in which it competes and is competing on a global basis and is competing in high growth markets. So not a bad place to start.

And, with that, I think I'll turn over to Fraser to give some financial highlights and then I'll be back for a summary.

Thank you, Eric. Moving forward onto the profit and loss okay.

Our revenue, as Eric has already noted in the quarter was up $85.3, almost $5 million up from the previous quarter enlightened with a guidance built into enhancement of the combination with Arris.

Our gross margins, at 57.3% were slightly down on the prior quarter, however we did have some revenue deferrals in the quarter which took approximately 1.5% off our gross margin, so the underlying gross margin rates is very much in line with recent past performance and the target range in which we are operating.

Our operating expenses fell to $31.5 from 33.1, in part, as Eric has said, to continued strenuous cost control. Also in part due to reversal of some shear option expense accruals that had been built up through the year and given that the company did not meet it's financial performance targets for the share option, share options did not vest and the expect was therefore reduced in quarter four.

So taking all of that together, EBITDA came in at 15.3, which was almost 30% up from the prior quarter. Our EBIT came in at approximately 11.2, and you'll see that there has been a little bit of a jump in our amortization expense in the quarter. We took the opportunity to review the underlying allocation of excess consideration on our sky stream acquisition that was made in early Q2, end of Q1 and consequently have increased the amount of amortization is going to be applied to that particular acquisition. So you can see that our amortization expense has jumped from a run rate of around about 2.5 up to 4.1 in the quarter as we caught up with the revised basis for allocation of assets.

Net financial items at roughly half a million dollars, and then further income from disposal of an investment that we held in our very own demand server business called end tone delivered a profit in the quarter of $2.7 million.

So taking all of that together, our profit before tax was $14.5 million, up close to 60% on the same period on quarter 3. And our profit before tax after associates was also $14.5 million, given that we have either disposed of or written down the value of our associates.

Moving on to our backlog analysis. You can see that our backlog has come down somewhat from the end of quarter 3, however an overall annual growth terms, we are up almost a third versus where we started at the end of '05. A good solid performance.

Our geographical revenue analysis, there has been a recovery this quarter in the European business which grew from $32.2 million in Q3 up to $37.1 million. That the U.S. business came down somewhat, predominantly that consequence of some revenue deferrals. It came down from around about $40 million to around about $37 million and the Asia pacific business grew from $8 million to $11.3 million.

Our gross margin trend, as I've already mentioned, there has been a slight decrease quarter on quarter. That said, we're still slot buying in the middle of our target range and when we adjust the stated gross margin for the effect of these revenue deferrals, we're actually would have reported a 58.5% gross margin.

Our quarterly profitability trends, you can see that there has been a recovery in our EBITDA percentage in the quarter, going from 14.7% to 18% quarter on quarter. I'm still, I think a solid performance for the business.

And then moving, as Eric has mentioned earlier on to working capital movements. As many of you are aware, our revenues are order intake, sort of back end loaded in the quarter. This quarter was no different, as a consequence given the relatively lower level of back end sales in Q3, versus the relatively higher level of backend sales in Q4. Our receivables grew by almost 10 million and we did experience a slight increase in our revenue shares as well as we continued to build an inventory of our new MPEG 4 high definition in quarter, but we managed to offset that with an increase in our current liabilities of about $3.6 million.

So all in all, our working capital grew from $49.5 million to $57.6 million in the quarter.

And with that, I will hand back to Eric.

Thanks, Fraser. So, in summary, we feel we delivered solid results for the fourth quarter of 2006. They were in line with the guidance we had previously given. You will remember September of 2006 we guided $84 to 88 million for the fourth quarter of 2006 and obviously delivering revenues in that range here today.

The company is clearly positioned in a market with some compelling long-term growth drivers. We've talked about that many times, high definition television, IPTV, video on-demand, advertising et cetera. And nothing has changed in terms of the long-term outlook for those drivers. What we have seen change perhaps over the past several quarters is a trend towards larger companies with a broader scale and scope of supply, i.e. some industry consolidation and that's obviously led us to where we are today in the strategic rationale for a combination with Arris. Clearly positioning - or we feel clearly positioning the company to better compete in those high growth segments over the coming years.

So obviously we have an outlook here with an Arris offer document on the table. An expectation that we'll see that offer document here before the end of February. And, as I mentioned before, we expect that transaction to close in the second quarter of 2007.

So with that, I think we'll open up for questions. Moderator?

Yes, thank you.

[OPERATOR INSTRUCTIONS]

Your first question comes from the line of Alan Bezoza of Oppenheimer. Please proceed.

Yes, hey. Good morning I guess for me in California. Question on the satellite business in the U.S. You said the U.S. did take down a little bit. What do you think the timing is when either Direct TV or Echo Star starts to roll out, in a more meaningful way, their HD mobile channels? And I have a follow up after that.

Direct TV has been, perhaps, the most public in terms of its statements for aggressive high definition roll out. And as far as I'm aware, they haven't changed their statement that in 2007 they expect to be on air with 1500 local channels and 150 national channels. Now, we can ask Direct TV if they're expecting to stand behind that schedule. But as far as I'm aware, their public statements are in fact, that's the schedule they're keeping to.

Echo Star has not been public in terms of exact number of channels and exact time frames, but I think really the question boils down to what the competitive dynamic is in the North American market and I think it's clear to the casual observer, that whether it's HDTV or video on-demand, with the emergence of AT&T and Verizon into the video service provider space, there's plenty of competitive pressure for Direct TV and Echo Star to invest in high definition as one of their best means to differentiate themselves.

No, that's all fair. One question on the merger, or the potential acquisition. With the shares trading above the offer price, although slightly. Have you had the time to go out to some of your larger shareholders and discuss the Arris deal with them and what was the response of sale?

We had, immediately following the announcements of the Arris TANDBERG Television transaction, we reached out to our - many of our larger shareholders to just give them the initial story in terms of strategic rationale for the transaction.

Since that point, we haven't had any significant communication with our larger shareholders and the expectation would be and our intention is to go back to those shareholders again once the offer documents are published and again, we can have a more fruitful conversation at that point.

What was the initial response for the ones you did go to already?

I think, again, I think they understood the rationale for the transaction.

Yes, Okay. Thank you so much. Good job.

Your next question comes from Mark Sue of RBC Capital Markets. Please proceed.

Thank you. Eric, can you just give us a sense of the pipeline for Telco IPTV projects? Do you feel it's any better or any slower as we start 2007? And I ask since the cable operators have started to increase their CapEx plans.

I'm not going to talk specifically about pipeline, but I'll speak in general terms about the IPTV segment. We well documented when we came out with our profit warning in the third quarter, in large part that was attributable to a slow down in the IPTV segment really around the world. And, I think it's fair to say that it has -- the IPTV segment from our perspective hasn't returned to perhaps the vigor that we saw early in 2006, but I would suggest that nothing has changed fundamentally about the expectation that those IPTV operators are and will invest in deployment of video compression technology, on-demand technology. For the telco operators in general, it's a business imperative to offer video services. They're losing their voice subscribers today so it's a market protection, they need to do it.

In terms of '07 versus '06. Honestly, I'd say it's early to call whether IPTV will be bigger in '07 than it was in '06.

Okay. That's helpful. And Eric, separately, it seems like the bigger you are, the better it gets in terms of the fill solution sets for the operators. With that in mind, does the Arris TANDBERG combination actually even get bigger from her on forward? Have you started to look at other things initially?

I'm not quite sure I caught the question there. In terms of what's the expectation for further growth? Sort of strategic growth beyond the Arris TANDBERG combination?

Sure, and adding other products or other -- maybe other acquisitions, is that a thought or not for now, maybe down the road.

Well, I'll leave it to Arris to give their specific comments. But at least from our perspective, certainly the expectation is to continue to drive profitable growth. We wouldn't be putting the companies together if we didn't feel that together we could grow faster, more profitably than as a stand alone. And whether or not M&A is part of the near term or mid-term plan.

I think it's probably reasonable to expect that in the very near term the combined companies will be very focused on making this transaction successful and getting the return on this investment, and it will probably be a little down the road before we start seriously looking at further M&A used in any substantial sense.

Got it. Got it. Thank you and good luck gentlemen.

[OPERATOR INSTRUCTIONS].

And you next question comes from the line of James Crawshaw of Blue Oak. Please proceed.

Thanks very much. Congratulations on getting the deal done. I think expectations have been, perhaps, a little big higher for the fourth quarter so it's probably a good thing. Just perhaps you can give some color, again, on the IPTV market. Those being issues last year with availability with high definition MPEG 4 chips for set top boxes, there still appear to be some issues with getting the right drivers, the right software for those chips, that's causing some delay still. Do you have any recent market color on those of technology teething troubles that you can share with us?

I think only in what's been, truth be told, fairly well documented. And for better or worse, our friends at AT&T seem to be the poster child for the discussions around delays in the IPTV segment. And in general, and I think accurately, those delays get characterized to the complexity of rolling out the technology, which literally is a very much, a brand new suite of technologies. Not just the compression, but the network distribution. We're trying to put large band with video down relatively narrow DSL pipes at least in the case of ATC, and you've got brand new set top boxes and you're trying to not only come out with just a me too service offering, but in order to steal away customers and compete on anything other than price, of course you need something of a better value proposition. So it's not just a matter of offering basic digital video, you'd like to be able to offer video on-demand and perhaps interactivity. So when you roll all of those things together, its no small task for AT&T or anybody else for that matter to successfully deploy an IPTV system.

So undoubtedly those technology challenges have caused certain delays.

The good news, at least from our perspective again is the business imperative. There is no choice for the telcos to go down this path and we can look around the world at companies like PCTW in Hong Kong, we talk about them quite a lot, with something approaching 700,000 subscribers today. I would suggest they're beyond the point of a casual trial and that truly proves that IPTVK and in fact successfully be deployed as an IPTV or as a customer value proposition.

So, we're getting there, absolutely technology hurdles, ultimately I think they'll be sorted out and we'll see IPTV flourish.

Okay, well, great. Good luck with the merger, hope it all goes well.

Thanks, James.

Thank you again for your questions. [OPERATOR INSTRUCTIONS].

And your next question comes from the line of Jason Mauricio of Arete. Please proceed.

Yes, hi there. Just wondering if you could give us an update on the cable business and if some of your products like ad point, some of your VOD software et cetera. Are moving beyond the testing phase and into commercial rollouts. And also curious, you just launched a new platform for HD encoding and maybe you could discuss your thoughts on what the investment cycle is for successive generations of encoders, how long can you sweat the current hardware with software upgrades et cetera. before you have to move to a new platform? Is that a 12, 18, 24 months process et cetera. thanks.

The first question, in terms of the on-demand software or the ad insertion software. Certainly the VOD back office, the open stream product, which is selling very successfully in the North American cable market, and we've had a number of successes internationally, both in Europe and in Asia-Pacific. What we're expecting for that product in the near term is, in particular, the North American cable market going through a new VOD spend. You only have to listen to some of the analyst calls or presentations from folks like Comcast and look at what's happening in the North American market. It's clear that those operators are committed to using VOD as a differentiated solution in their value proposition.

So the expectation of a number of suppliers, ourselves included, is very significant investment in VOD over the next 12 to 18 months and we, of course, are looking to get our fair share of that investment. In terms of the ad point, ad insertion solution. I think you probably characterized it correctly, we're still in relatively early days both in terms of getting the business model worked out for who's going to pay who and what the revenue caring model is going to look like for dynamic ad insertion and on-demand content. But we have started deployment with North American cable operators for that ad solution.

And your question about the -- our launching the second generation of the encoder. That actually was a new hardware platform for us, so it's something less than 2 years we in fact did change out the hardware platform the HD encoder. And what you're seeing is, in the early days of technology deployment, i.e. MPEG 4 as a brand new technology, it's reasonable to expect that the hardware platform will actually change fairly quickly. So I wouldn't be surprised with a 24-month lifecycle on the hardware in the early days and yes, we'll be doing software upgrades throughout that 24-month period. But with processing power enhancements, not surprising to see that sort of turn around.

Is that something that could continue maybe through Gen 3 if you will?

I wouldn't be surprised, frankly. The hardware is moving quite dramatically.

On thing, perhaps, to clarify when we say hardware upgrade, it is a hardware module upgrade in the encoding platform. So form a customer's perspective that's purchased TANDBERG's first generation HD encoders. You can take those encoder -- leave the platform and insert a new hardware module or swap a hardware module within that encoding platform to achieve the benefits of the second generation technology. So it's not a complete forklift upgrade of technology and we would expect that to continue going forward.

Okay. Thanks.

Your next question comes from the line of Peter Knox of Cheuvreux . Please proceed.

Could you just quantify the actual amounts of the share option reversal and the sky stream adjustments evaluation.

The shear option, of course reversal was in the range of $1.5 to 2 million. The additional impact from additional sky stream accounted for all of the difference in the amortization. So again, and this is $1.5 to 2 million.

Okay, thank you.

And you have no further questions at this time.

Maybe we could take some questions from the room if Andy would like to ask those questions.

Hi, [Inaudible]. one year ago you stated you were going to take care of all the conferences box and integrate them together. If you look at the revenue, it looks like those companies hasn't contributed [Inaudible - microphone inaccessible] original TANDBERG as such, [Inaudible - microphone inaccessible] offset the revenue would be as level as , [Inaudible - microphone inaccessible]. And if you look at share price and compare it to one year ago. The level is slightly less than the property value was at the time. , [Inaudible - microphone inaccessible] any of the investors, it doesn't seem like its , [Inaudible - microphone inaccessible] somewhat it was disappointed and you got hit the same as July, September time frame on the stocks and value on the stocks.

Well, I guess first of all, in terms of the acquisitions I think it's fair to say, we can look at the arithmetic and see that the total top line performance isn't perhaps where we would have expected it to have been at the time we completed the acquisition. What I would suggest and we haven't actually broken it out so you don't have the benefit of complete visibility here, but I would just caution you about assuming that TANDBERG Television's stand alone trend continued, such as it was, prior to the acquisitions and that the short fall in revenue, if you will, is completely and totally attributable to the acquisitions that we've made. Obviously there is a bit of both going on. For example, the IPTV slow down. That short fall in revenues wasn't really anything to do with the acquisitions that we went through.

So, yes, I agree with the general assertion that the acquisitions in total haven't lived up to all of the expectations in terms of revenues but I would flip that around and also suggest that those acquisitions are in fact central to our strategy and vision for the company and we would not be where we are today in terms of compression sales without having in to broad band and gold pocket and sky stream as part of our mix. There've been very material contributions. Some of them not as tangible as direct revenue contributions, but in terms of relationships access to cable operators et cetera. that are in fact contributing to where the company is and where we're headed.

We have another question coming from the room, Jeff?

No more, I wonder what we - we do with the shares of price, [Inaudible - microphone inaccessible].

Well --

[Inaudible - microphone inaccessible] for us to have these shares.

Well, I guess a couple of comments. First of all, I hope you hold on to them and we'll look forward to a positive long future as a strong Arris shareholder and supporter. In terms of explicitly, will they be tradable? Absolutely. Shortly after closing - I don't know the exact dates, but the intention is those shares will be fully tradable so you can exercise--

[Inaudible - microphone inaccessible]

I think that level of detail will probably be covered in the offered out comment which we expect to come out before the end of February but the specific details we're not able to disclose at this point in time.

But given that they are a NASDAQ listed company, and therefore extremely liquid, given that, I'm sure, Arris will want to ensure continued support from their long-standing shareholders. Then one could perhaps safely assume that any issues relating to the tradability of those shares will be addressed in that offer document.

Well, if there are no other questions, we'll wrap up the call and the conference for today. So thank you all for your attention and have a good afternoon. Thank you.

Thank you. Thanks, Jeff.

Your welcome. Ladies and gentlemen, thank you again for your participation in today's call. You now may disconnect. Speakers please stay on line for a post call wrap up.