摩托羅拉 (MSI) 2002 Q2 法說會逐字稿

Please standby, we're about to begin. Welcome to the Next Level Communications second quarter 2002 financial results conference call. At this time all participants are in a listen-only mode. On the call today are J. Michael Norris, Next Level's Chairman and Chief Executive Officer, James Ide, the company's Chief Financial Officer and William Weeks, the Chief Technical Officer. At the conclusion of the company's formal remarks we will conduct a question and answer session, at that time I will provide instructions on how to ask the question. Additionally, an audio replay of this call will be available by accessing the Next Level Communications' website and www.nlc.com. You may also dial in to 1-888-203-1112 with the confirmation code 269019 and listen to the replay beginning today at 8:30 pm eastern, until Monday July 29th at 8:00 pm eastern.

Before the executives of Next Level begin, I need to remind you that Next Level's comments today will contain forward-looking statements. Investors are cautioned that all forward-looking statements made during this call involve risks and uncertainties that could cause actual results to differ materially from current expectations.

that realistically could cause results to differ materially from these projected and the forward-looking statements are set forth in the risk factor section of Next Level's form 10K for the year ending December 31st, 2001 and other company filings with the Securities and Exchange Commission. At this time I'd like to introduce J. Micheal Norris, Chairman and Chief Executive Officer of Next Level Communications. Please go ahead sir.

Good afternoon and thanks for joining us today. During the first quarter conference call in April I reported that Next Level was in the best shape it had been in since I joined the company in November of 2000. I'm very pleased to report that the second quarter has continued that trend in all areas of our business, from quarterly financial performance to liquidity to product design and execution and to customer development. There is no doubt that the global economy in the telecommunication's market in particular is in turmoil, but despite these factors I think we had an outstanding quarter. On the financial side Jim will give you a complete rundown in a minute, but let me just review the highlights.

We again had sequential revenue growth. We shipped to 83 customers and we saw the full affect of the cost cutting initiative we took earlier in the year. All of this resulted in the best operating performance since 1996. Our balance sheet continues to strengthen and we have adequate cash resources to take us into 2003. There is no one on this call that doesn't fully understand the unstable state of telecom today and the related constraints on capital spending. In addition to the economic turmoil in this sector, we've also seen major changes in the senior management of two or our largest customers, Quest and Bell Canada. The positive news is that we have seen no change in direction from either, other than continued restraints on capital spending.

Specifically, let's review key account status, including development in our tier one accounts and new business prospects. I define tier one accounts to include the IOC market segment, Quest, Bell Canada, Manitoba Telecom, Telenor and China. I'll start with the IOCs. In general the independent operating companies continue to show strong interest in Next Level's platform and products. 82 percent of the existing customer base made repeat purchases in the second quarter, with four existing DLC only customers converting to video deployment. This brings video penetration slowly -- excuse me, solely in our IOC market segment to 43 out of 88 or almost 50 percent. Faced with less direct competition from cable operators, IOC has continued to deploy or products because of the strong financial returns that our platform has enabled.

Several of our IOC customers have advised us that in less than two years since initial deployment they have realized the pay back on their investment and have reached positive operating cash flow by offering the triple play to the market. Often these results have been realized in a much shorter time period than their business plan's it called for. We are also encouraged by the growing trend towards head insuring, which accelerate further video penetration of our customer base. Building upon the example demonstrated by the broadband vision consortium in Minnesota where a single head in now serves 10 Next Level deployment around the state. Other similar consortia are being created, often driven by existing Next Level customers in the Dakotas, Iowa, Kentucky, Wisconsin and the Southeast. These existence of these consortia greatly simplify the difficulties and lower the cost hurdles related to content acquisition, improving the value proposition and making video strategies more accessible to new prospects.

There's also been an expanded interest across the IOC base looking to leverage a Next Level platform to provide bundled services to customers formally outside the reach of media self serviceable area. With our new ADSL Plus product line we have more than doubled the reach of our platform. Our first commercial ADSL Plus deployment in rural Kentucky has grown to over 500 subscribers in the last three months with 1,200 planned by the end of the summer. ADSL Plus makes our solution feasible for some reach constrained new customers and opens new expansion capabilities to many existing customers. We view ADSL Plus as a terrific compliment to our existing core three stream media sell product line.

Now let's move to Quest. Despite Quest making one of the most reductions in capital spending, out of all the

Next Level's revenue grew quarter of quarter with Quest. Most of their purchases leveraged the strong ELC capabilities of our platform. Personally, I'm encouraged by this as it continues to demonstrate the strength and scalability of our full service platform. I believe their purchases of DSL today will see future Next Level video equipment sales as the external environment improves. The technical and product development teams at Next Level and Quest continue to work closely together. We recently completed an RFQ for business in 2003. Looking forward, the key variables in expanded Quest deployment remain the same, regulatory environment and capital markets.

Bell Canada, we continue to move forward with Bell Canada as it deploys VDSL on a targeted competitive access basis and will provision a multi building community in Toronto, this summer. In addition to our existing commercial MDU deployments we have received our first purchase orders for our new high density

and RG2200 products. Manitoba Telephone Canada, MTS values Next Level's platform as it provides them with the ability to proactively offer a bundle of services superior to local cable service offerings. They already have a hundred trial customers turned up to date, in Winnipeg and will receive general availability

and RG2200 equipment to further expand their trial within the next few weeks.

Telenor Norway, we're in the middle of contract negotiations with Telenor, which we will believe will be completed by September. This should be closely followed by commercial shipments in the fourth quarter of international standards compliant

and RG2200 products. Additionally, 700 -- the 750 users, which are now part of the

trial, will be converted from trial users to paying customers. China, in January of this year we completed lab qualification testing for one of the key provinces. We now have users up and running in phase one of the field trial. Providing the trial is completed successfully an expanded phase two trial, which is up to a 1,000 lines, will begin in October timeframe. After successful completion of phase two negotiations should begin on an initial order deployment.

Now let me move to new business development. There are a number of potential new customers in the U.S., including

and large IOCs who are in contact with us at this time. We expect that some will actually move forward with our platform before year end, however we are not in a position to discuss specifics until these deals have been fully concluded. As for the international arena, we continue to talk to a number of potential customers; of these we believe

represent the most significant medium-term opportunity for Next Level. Over the past two years we have worked with

to build a successful business model, which has demonstrated to them the value of our product offering. In fact, just this past quarter we had a full day visit in

from a very senior group of DT executives. However, as you probably know, Dutch Telecom has recently undergone an organizational realignment, which included the resignation of

, their CEO. While these organizational changes may slightly delay the process it doesn't change the fact that

recognized the compelling value proposition we offer. I believe that

represents a significant opportunity for Next Level in 2003 and beyond. Now I'd like to ask Jim to fill in the blanks on some of the financial details.

Thanks Michael. Since liquidity and improving Next Level's financial viability have been an overriding focus for the last year, I'd like to first review our progress in that area. As announced earlier today, our cash flow from operations was negative $3,000,000 during the second quarter. This is the best performance on the cash flow line Next Level has posted in many years and roughly equates to the difference between our beginning cash balance of $27.4 million on March 31st and the $24.6 million we had on hand as we exited the second quarter. The $3,000,000 operational cash burn in the second quarter compares to $74.1 million in the year earlier quarter and $19.9 million sequentially. On a year to date basis our operational cash burn of $22.9 million compares to $114.2 million at this time last year, when reported on a comparable basis representing an 80 percent reduction.

I am happy to report that we have stabilized our cash flow situation and I'll quickly take you through the specific liquidity initiative that we've been updating you on for each of the last three quarters. First, the cost reductions we have been executing are now fully manifested in our financial results. Over the last six quarters we have systematically cut our operating expenses in half from $28,000,000 in the fourth quarter of 2001 to $14,000,000 in the second quarter of 2002, which represents an annual savings of $56,000,000. Secondly, a significant portion of our funding is being generated internally from aggressive working capital management. Our inventory balance decreased by $7.3 million in the second quarter, reflecting intense supply chain discipline and our day sales and accounts receivable decreased from 87 to 64, reflecting the financial stability of our diversified IOC customer base during these difficult times in our sector.

Now that the operational elements of liquidity have stabilized we have begun to turn our attention towards restructuring our debt. As announced on June 26th, we converted $20,000,000 of notes payable to Motorola into shares of Next Level's convertible preferred stock. This reduces our total notes payable to Motorola from $83,000,000 to $63,000,000 and signals our major shareholders continuing support of the company. On May 17th we made a payment of $12.7 million to reduce our note payable to

, this payment when combined with the $2.9 million in principal that was paid off in the first quarter reduces that liability to $8.7 million, which is due on March 31st of next year. Our long-term debt is comprised of $29.3 million in tax sharing advances provided by Motorola, which mature in 2006 and $19.3 million of remaining principal on our 10-year building mortgage, maturing in 2011.

The restructuring actions we've initiated thus far this year have taken our gross debt balances, currently totaling $120.3 million, to their lowest level in four quarters. Finally, as previously announced in June we drew $13,000,000 against a $35,000,000 Motorola financing commitment and issued shares of Next Level's convertible preferred stock. We exited the quarter with $46.6 million in combined cash balances and financing commitments. Taking into account internal revenue projection scenarios and the stabilized quarterly operational cash burn, we believe this amount of available funds should take us well into the first quarter of 2003.

Now I'll go over our operating results for the quarter. Unless otherwise stated, all financial statement amounts in my discussion are presented according to generally accepted accounting principles. Revenue for the second quarter was $16.8 million, representing a 47 percent decline from the second quarter of last year and sequential increase of 19.2 percent. As Michael mentioned, we have made revenue shipments to 83 customers during the quarter. The IOC, another segment of our business, had $10.8 million in revenue, representing 65 percent and we made $5.9 million in sales to Quest, representing 35 percent. The IOC other segment was essentially flat with the previous quarter and sales to Quest are only 10 percent customer, increased to $5.9 million in the second quarter from $3.4 million in the previous quarter. In the second quarter we booked a half a million in orders for the high density

products from our Canadian customers, Bell Canada and MTS and we shipped over 1,000 of our two-stream ADSL plus gateways to south central rural telephone cooperatives.

Gross margin was $2.7 million or 15.9 percent this compares to 19.9 percent for the second quarter of 2001, stated before special items and 13 percent for the first quarter of 2002. The deterioration from the year earlier quarter is primarily due to the affect of spreading manufacturing overhead costs over reduced volumes. The sequential increase in gross margin reflects the combination of a volume increase and a reduction of manufacturing overhead by $400,000 from the previous quarter. However, these improvements were partially offset by a mix shift towards residential gateways. We have not yet begun to shift our high density, margin improved product platform in volume. R&D expenses were $5.3 million, which represents a decrease of seven and a half million from the $12.9 million in R&D expenses reported during the second quarter of 2001 and a $2.9 million sequential decrease from the prior quarter. The improvement on the R&D line is primarily attributable to a reduce in employee expenses as well as reduced materials and project expenses.

Selling, general and administrative expenses were $8.7 million, down $4.4 million from the $13.1 million reported during the second quarter of 2001, stated before the affect of $1.7 million in goodwill amortization in the year earlier quarter. On a sequential basis, the $8.7 million, and that's G&A, represented a half million decrease from the previous quarters amount of $9.2 million. These improvements in SG&A are primarily attributable to reductions in employee related costs, advertising and travel and are partially offset by increased insurance costs. Operating loss was $11.3 million, representing the best operating performance since 1996, in spite of the current challenging top line environment. Net loss for the quarter was $21.2 million or 26 cents per share, compared $102.1 million or a $1.20 per share for the year earlier quarter.

On a year to date basis net loss was $42.6 million or 51 cents per share, compared to $124.5 million or a $1.47 per share for the same period of the prior year. Net loss, excluding special items was $13.7 million or 16 cents per share, compared to $18.2 million or 21 cents per share for the second quarter of 2001. As outlined in our press release, special items during the second quarter of 2002 included $3.8 million in recurring non cash interest expense resulting from the amortization of the warrant discounts on certain debt facilities. Special items also included a one-time non cash interest charge of $3.6 million for the remaining unamortized warrant discount relating to the $20,000,000 of Motorola debt that was converted to preferred equity.

With regard to guidance, given that we remain in a book and ship environment, we expect our IOC market segment to continue to be stable over the near term. Given the capex constraint and delays within the major carrier market, we are taking a more conservative posture on that segment of our business therefore we estimate our third quarter revenues to be between $12 and $17,000,000, consistent with our sales range during the last three quarters. I'll let Michael expand on this a bit after I turn the call back over to him. We estimate growth margin to come in around 15 percent, also in line with recent margins at the indicated sales volume. Given that our expenses and cash flow have stabilized, I'll provide a bit more operating statement guidance than we've been providing in the past.

We're projecting total operating expenses consisting of research and development and SG&A to come in around $15,000,000, which reflects approximately the same employee base as we have throughout the second quarter, but provides for some increases in engineering projects and materials related expenses for making the

platform generally available in the third quarter. Taking these factors into consideration, we estimate the third quarter gap net loss to be roughly $19,000,000 or 24 cents per share after the affect of preferred stock accretion, assuming approximately 86.5 million shares outstanding. Excluding non cash interest, we estimate that our net loss will be approximately $15,000,000 or 17 cents per share. We currently estimate cash flow from operation to be in the negative eight to $10,000,000 range for the third and fourth quarters. Now I'll turn the call back to over to Michael.

Thanks Jim. In summary, I believe we had an outstanding quarter in a very tumultuous market place. Revenue was up, costs were down, we burned very little cash and we continue to make great progress with our customer base. More and more they understand that we have the state of the art, full service platform with which they can deliver any combination of voice data and video. Without question, recent economic events have exacerbated the downward pressure that already existed on telecom capital spending, even more so than in previous quarters. This makes the near-term situation very difficult to predict. However, and as a follow up to Jim's comments, we have had several opportunities -- we have opportunities with major Telcos, which are in progress. Some could potentially close this quarter, however since we don't yet have firm orders for the new business it would not be prudent to forecast them, especially in this environment.

Additionally, I believe there are several industry trends which make Next Level's business value proposition more and more compelling and difficult for Telcos to ignore, even in this tough climate. Based on current market information cable operators or MSOs are providing voice services to now nearly 2,000,000 subscribers and high speed internet to over 8,000,000 subscribers today and penetration of both services by MSOs is growing. A back of the envelope calculation shows this equates to about four and a half billion per year of revenues that telephone companies are not getting and some percentage of which represents lost voice revenue that they once enjoyed. These statistics coupled with across the board declines in access lines are certainly beginning to stunt the growth of the telephone companies.

Another past inhibitor to deployment was lack of standards; this is no longer an issue. The long awaited

held specifications were published in June, 2002. Now the technical standards and operational ground rules for full service are in place. Next Level stands to directly benefit from this activity as our international standards compliant platform is already market proven. It's extremely frustrating for me to know that we have an access platform available today, which can be deployed at a lower cost per sub than an equivalent cable offering, which is an immediate solution to significant business needs. Yet, customers are unable to take advantage due to economic conditions and the state of the telecom market. I believe, however, that we are in the right place at the right time and with the right answer. This is certainly being told to me by many telecom executives who are operating in this space. I believe as the economy is strengthened telephone companies around the world will look to Next Level's full service platform as a solution of choice. Now Jim, Bill and I will happy to take any questions that you might have.

Thank you Mr. Norris. Today's question and answer session will be conducted electronically. To ask a question you may press star, one on your touchtone telephone. Again, that is star, one on your touchtone telephone. Please limit yourself to one question with a follow up question. We'll pause for just a moment to assemble today's question roster and our first question will come from Andrea Green, Lehman Brothers.

Hi, thank you. I believe you said you guys feel you're pretty comfortably funded through the first quarter of next year, just curious if you're thinking of what the plan's going to be, you know, as we get into the second quarter of 03?

Yes, Andrea. This is Jim, I'll take that question. We are working on -- you know, since over the last year about year and a half, we've got more runway now than we have in that period of time and we are working right now to -- as I mentioned earlier in the call, to address our -- you know, the debt that's on our balance sheet now as well as to provide more liquidity for the company going further into 2003.

I also add to that a little bit, we've had a number of conversations with Motorola and I think they are very pleased our performance, certainly over this quarter and have been taking an active role in or at least an interest -- an active interest in watching how we performed and I think there'll be a lot of options open to us as we go into next year.

OK, that sounds pretty good and then just another question on the independents. I don't believe that any of the independents, individually, are 10 percent customers, but can you must give us a sense if it's consistently the same independents that are large customers each quarter or do they tend to be pretty lumpy.

Lumpy's probably not a good word, but I would say that 83 -- you know, when you have such a high percentage of them that are buying, obviously a great part of the base is buying. I think if you had to look at some of the bigger ones, there probably in the half a million to million dollar range per quarter, if that helps you out?

OK, thanks.

And our next question will come from

with CS First Boston.

. First question was on Quest, the sequential increase that you saw from last quarter, was that -- was there anything behind that? Any video deployments or are they still truly focusing on ELC solutions?

I'll take that first, Monica. Basically we measure the video aspect of our business, since we are an end to end platform the best way to measure it is to look at the residential gateways and video line cards as a percent of our total shipment and I think for both Quest and the IOCs, that averages between 20 and 30 percent, but it does fluctuate quarter to quarter. There was a little bit more video business in the $5.9 million that we shipped to Quest in the second quarter; it was actually 23 percent residential gateways and video line cards.

That's 23 percent for the overall company or for Quest?

For Quest.

For Quest, OK and then I'm curious if you've had any discussions with the new management team there or is it a little bit too early, you know, in terms of them taking a look at their businesses. Have they gotten to, you know, look at the video portion of it?

I have not yet. I'm anxiously looking forward to doing that. I have worked with

in the past when I was in Chicago and -- through another when I was working with Motorola and I had worked with some of his people before, so I -- you know, he's a very tough executive and I think he's going to be very focused on what's the right thing for the company, so I'm optimistic from at least my view point and secondly you might have -- when I gave you the script comments I said that we just completed an RFP. That RFP was an end to end solution, which was focused on video that we just completed, so there was an RFP that was out to a number of people and we just completed, I think, last week.

Did that or was that RFP released before the management change occurred?

No.

No, it was after. OK

Yes sir -- yes ma'am.

OK and last question, you made a comment about book and ship environment, I would guess that given that comment in you guidance that book to bill is below one this quarter?

We did have -- we went into the quarter with about $5.9 million in backlog and we came out with just over $3,000,000 in backlog, so it did go -- it dipped slightly below one.

I don't know if I'd read anything into that. I -- you know, the environment -- if I can get my two cents out on this, the environment right now is -- I know that we have a lot of opportunities here and were talking to a lot of customers, but internally -- as Jim said, you know we have a very -- pretty stable IOC business and we have a number of things in process with Telcos right now, including the ones that -- the incumbent ones that we've been dealing with, which we're getting regular orders on. But I just don't -- without the visibility of really looking at the third quarter with management changes and things like that it's just -- you know, we're being much more conservative this time than usual.

OK and if I could just go back to your comments on Telenor, you talked about you had some negations -- contract negotiations should be complete September, I think you said Q4 commercial shipments. Any sense of how large that could be relative to the number of subscribers they have currently?

Not really. Nothing that I would want to talk about, I think you would have to ask Telenor that and they would probably be the -- you know, I mean after we finish -- it's premature because we're still in the middle of contract negotiations. Those started in June, so we're still in the middle of that right now. I think we've been very pleased, you know, with the -- you know, with the performance of the business there. You know, we have about 750 subscribers in

and some in Oswald. Were also deploying BOD there, it's one of the first places we deployed BODs, so things are going quite well but, you know, until we finish the contract negotiations I don't think we should be talking about, you know, how big the rollout's going to be.

OK, but has the rollout been kind of similar to a BCS done in terms of an MDU by MDU deployment or is it different?

No, it's more of a residential, to tell you the truth.

OK

Yes.

But most of the users are concentrated in high density buildings, is that correct?

High density areas, yes.

High density areas, OK. That's it for me, thank you.

Yes.

And just a reminder, press star, one to ask a question at this time and we'll pause for a moment. And that concludes today's question and answer session. I would like to turn the call back over to Mr. Norris for any additional or closing remarks.

I have no additional remarks, but thank you very much for joining the call.

Thank you for joining us today, we always -- as always, we appreciate your interest. You may disconnect at this time.