摩托羅拉 (MSI) 2003 Q1 法說會逐字稿

Good afternoon.

My name is [Deborah], and I will be your conference facilitator today.

At this time, I would like to welcome everyone to the Tut Systems First Quarter Financial Results Conference Call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press star, then the number two on your telephone keypad.

Thank you.

I will now turn the call over to Randy Gausman, CFO.

Good afternoon, everyone, and thank you for joining Tut Systems conference call to discuss our first quarter results.

A copy of today's first quarter press release is available through PR Newswire at www.tutsystems.com.

We will be following our usual format of giving you an operations overview, and then opening up the call to any questions that you may have.

Before I turn the call over to Sal, our CEO, I would like to remind you that, during the course of this conference call and question and answer period, Sal and I will make forward-looking statements including, without limitation, statements about the company's business, products and financial results.

These forward-looking statements are subject to many risks and uncertainties that may cause actual events and results to differ materially including, among other things, the market and demand for the company's products.

These risks and uncertainties are discussed in detail in the documents that the company files from time to time with the Securities and Exchange Commission, including, for example, the company's Annual Report on form 10K for the year ended December 31, 2001, filed on March 29, 2002.

To adhere to the SEC's guidance on fair and open disclosure, we have made this conference call publicly available via this conference call, and live and on-demand webcast available at www.tutsystems.com.

Now I'd like to turn the call over to Sal for his opening remarks.

Well, thank you, Randy, and welcome to the call.

Welcome to the first quarter of 2003, the first full quarter of operations after our strategic acquisition of VideoTele.com, and the first full quarter of the new Tut Systems.

The team has worked very hard to quickly integrate our companies together, and I am very proud of the team and pleased with the results.

These results demonstrate our progress in integrating the two companies, and our ability to execute on a business plan.

We exceeded many financial metrics this quarter.

It was our best financial performance in nine quarters.

Q1 revenue grew 180% from a year ago, 168% from Q4.

Gross margin increased to 51%.

Op-ex was reduced by 28%.

Cash burn was reduced by 34% from Q4.

We've added to our customer set, and our customer sales funnel has grown.

We are tracking on the development of new technology and a delivery of new products.

We believe that we have the right team and the right business plan to bring us to cash flow positive before the end of the year.

And even in these uncertain economic times, we believe that we will see a 5% increase in revenue growth in Q2.

But, before we discuss this quarter's business in more detail, I'd like to introduce Randy Gausman, the person who read our Safe Harbor language.

He's our new CFO, and he'll take us through the first quarter results.

Randy has recently joined the company and he replaces Doug Shafer.

Doug was instrumental in transitioning and integrating the two companies over the past six months.

We very much appreciate Doug's contributions, and wish him the best of luck in his next endeavor.

Randy, welcome to the team.

Please take us through some of the financial details.

Thank you, Sal.

Revenue for the quarter was $6.6 million, representing a 180% increase from Q1 '02, revenues of $2.4 million, and an increase of 168% from Q4 '02 revenues of $2.5 million.

This improvement in revenue is attributable to the first full quarter of operations following the November, 2002 acquisition of VideoTele.com.

Thirteen percent of the revenue for the quarter was from international customers, and 67% was from U.S. customers.

Two customers, Atlantic Telephone Membership Corporation, at 12%, and Home Telephone Company, at 11%, each contributed more than 10% of the quarter's revenues.

The first quarter gross margin was $3.3 million, or 50.6% of revenues compared with $0.8 million, or 35.4% in Q1 of 2002.

The increase was due to the higher gross margins attributable to the Astria and M2 product lines.

Operating expenses, including amortization of intangibles of $459,000, were approximately $5.7 million, a decrease of $2.2 million, or 28%, from Q1 2002.

This quarter-to-quarter decrease in operating expenses was due to our continued focus on cost saving measures and from prior year restructurings.

The net loss for the quarter was $2.2 million, or $0.11 per share, basic and diluted, compared with a net loss of $6.8 million, or $0.41 per share, basic and diluted, for the first quarter in 2002.

Cash and cash equivalents totaled $21 million at March 31, 2003, a decrease of $4.6 million, or 18%, from December 31, 2002.

The net decrease in cash was primarily due to our use of $4.4 million for operating activities, including a $1.85 million payment for a purchase commitment of raw material components, and $500,000 for restructuring activities previously reserved for.

A second and final installment payment of $1.85 million for the purchase commitment of raw material components was made this month, or in April of this year.

Accounts receivable were $2.2 million, compared with $2 million at December 31, 2002.

Day Sales Outstanding was 30 days at quarter end, compared with 72 days for Q4 '02.

At quarter end, current liabilities were $5.9 million, including $5.2 million for accounts payable and accrued liabilities.

That concludes the view of the quarter's financial results, and I'd now like to turn the meeting back over to Sal for some additional comments.

Well, thanks, Randy.

So, I'd like to talk about various parts of our business.

Let me start with the digital TV market, or our Astria product line, or Astria product family.

Over the last quarter, we expanded our product and technology family here, our partnerships and our customer base.

Let me take you through a few of these items I think are of some interest.

Our Astria RCP, or Remote Content Processor, is now shipping, and we had our first customer with a commercial deployment in Q1.

Our Astria VSS, Video Services Switch, which we announced last quarter, shipped out for our first customer trial recently, and a number of additional customer trials are slated for Q2.

We have recently introduced the Astria Mini.

It comes in two versions: the Astria Mini Content Processor and the Astria Mini Remote Content Processor.

They're both smaller, form-factored products designed to enable new configurations, such as remote off-air feeds into central head-ins.

They also enable smaller regional IOCs to more economically attach the centrally hosted head-ins.

The Astria Mini became available in Q1, and we recently shipped the first product to a customer.

I should point out that this product was delivered almost four months ahead of schedule by the R&D team.

We're very excited about that and very proud of that.

In our lab, we've recently successfully completed interoperability testing of the Astria VSS with a number of popular access platforms, including the AXC/UMC 1000, and the Alcatel 7300, some of the, again, more popular access platforms out there.

Another important technology item is that our MPEG-4 transcoding solution was introduced this quarter.

In fact in April we demonstrated the full rate, real-time transcoding of MPEG-2 to MPEG-4--that's MPEG-4 ASP--and we expect to ship this technology for revenue in the second half of 2003.

MPEG-4 enables service providers to lower the bit rate requirements for delivering high-quality digital entertainment, such as broadcast TV and VoD, Video on Demand, over a variety of transmission types.

MPEG-4 will offer service providers the flexibility to transcode, or convert, MPEG-2 streams into lower bit rate MPEG-4 format, enabling a deeper penetration of high quality broadcast services into bit rate-constrained networks.

We also had a number of important partner relationships develop in Q1.

We've added Concurrent Computer Corporation as a solution partner for our Video on Demand solutions.

Concurrent is the leading VoD provider for cable companies in North America, and services DSL and fiber to the home deployments in Europe and Asia.

Concurrent's VoD solution seamlessly integrates with our Astria video delivery platform, and we expect to jointly address many customer solution needs moving forward.

Another partner to mention is we are engaged in a technology partnership with a company called iVast for MPEG-4 ASP technology.

We have selected iVast's MPEG-4 ASP encoder for inclusion in our QualView application framework.

We're also very excited about that.

On the customer front, we announced four new digital head customer wins in Q4, so the last conference call that we had.

Three of those have been recently identified by name, as they have progressed with their rollout.

There's a couple of other press releases out today about Cap Rock, Home and Atlantic.

Cap Rock is a service provider in Texas utilizing our Astria over DSL plant;

Home is in South Carolina, also using our Astria platform in a DSL rollout; and Atlantic is our first cable customer deployment, and they're in North Carolina.

In Q1, we had four new digital head end wins.

We will share further details of these customers and their applications as they complete their deployment.

An event coming up.

At SuperCom in June, we will be demonstrating the Astria CP, the Astria Mini-CP, as well as our MPEG-2 to MPEG-4 transcoding, something we're very excited about.

On the video trunking side of our business, this is what we call our M2 product line, we announced the M2-400 last quarter and, in April, we shipped this product to our first customer, and have customers waiting for additional shipments over Q2.

The M2-400 is purpose-built for DVD quality video processing and transport.

The chassis is capable of holding multiple encoders, decoders and satellite interfaces while attached to an IP or ATM network.

It's designed for government, military agency, educator, broadcasters, telecommunications, and cable companies.

We had a number of new video trunking customers in Q1.

Some of the examples are customers in the Navy, the Army, the Air Force, used for surveillance applications;

INS for border patrol applications; and with the Independent Operating Company, the IOC, for video back-haul and distance learning applications.

And we continue to be very excited about the opportunities for the video trunking market, moving forward.

The PBN part of our business, the Private Broadband Network part of our business, the MTU section, also had a strong quarter.

The hotel business was especially strong.

With our Expresso product line, we have a very strong turnkey solution for broadband services for the hospitality market.

We'll look at some of the top customers in Q1.

They were very much hospitality market customers.

Some examples, Concorde Hospitality, which we had a press release on in recent weeks.

Concorde--I believe they have rolled out their 30th-plus hotel.

Some of the hotel names you might recognize, hotels like the Marriott, Radisson, Hilton, Fairfield, Residence Inn.

Concorde's doing a good job, and they're in multiple states, and I think that they are up to almost 4,000 guest rooms.

Another one of our customers is [Geptech], which we also had positive activity in the quarter on.

Stevens Portugal, which we mentioned as a distribution partner back in January, they are making progress in their trials, and they are now working with a large PTT for a trial in Portugal.

Interasys and the German Railway continue to roll out IntelliPOP to railway stations across Germany.

On the product side, looking forward to Q2, expect to see some major new developments from our Expresso product line, which will be highly complementary to the thousands of Expresso chassis already deployed at customer sites around the world.

The new product addition will allow our customers to offer more services, like broadcast TV, Video on Demand, etc.

We already have several customers interested in trialing these new products, and expect to help us to continue to succeed in the MTU marketplace.

You'll be hearing more about that in the near future.

Now, I'm going to hand it back to Randy and have Randy give you some of our guidance information.

Thanks, Sal.

Now, let me turn to our forward-looking guidance.

Remember that forward-looking statements that I'm about to make are subject to many risks and uncertainties, as described at the beginning of this call.

We estimate Q2 revenue will increase by 5% over Q1.

We estimate that the operating gross margin percentage will remain relatively consistent with Q1, or approximately 50%.

We estimate that operating expenses, excluding amortization of intangibles for Q2, will be approximately $5 million.

We generally anticipate a decrease in working capital expenditures on a quarter-to-quarter basis, primarily as a result of completing a substantial portion of our purchase commit payment, and a decrease in our operational costs due to prior restructurings and workforce reductions.

We are reiterating our Q1 guidance that we expect to be cash flow positive before the end of 2003.

We believe that our cash position as of March 31st will be sufficient to fund our operating activities and capital expenditure requirements for the next 12 months.

We expect the weighted average number of shares outstanding to be relatively unchanged at 19.8 million shares for Q2.

This now concludes my financial comments and guidance.

As a reminder, we will not be reviewing or commenting on financial models or providing additional details to our expectations after this call, or during the quarter.

We also wish to remind you that Tut's actual financial results may vary materially from our guidance due to factors that are unforeseen, or those results that are unpredictable at this time.

I now turn the call back over to Sal for some additional closing comments.

Well, thank you, Randy.

Q1 was a strong start for the year.

It was a lot of hard work, but we are beginning to see the results.

In Q2, expect to see a number of things.

Expect to see new customer wins and deployment announcements; expect to see continued quarterly increase to our revenue profile, even in these very uncertain economic times; expect to see technological leadership in the advanced content processing and video switching area for digital TV applications; and, most important, continue to expect to see execution of a business plan that will bring us to cash flow positive before the end of the year while retaining a strong cash position for the company.

With that, I'd like to open it up for questions.

At this time, I would like to remind everyone, if you would like to ask a question, please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from [Nick Lochi] with Brill Securities.

Hi, Sal.

Congratulations on the spectacular quarter.

Welcome aboard, Randy.

Thank you.

Sal, you know, there appear to be a number of really substantial new markets opening up for Tut Systems in surveillance and defense communications and traffic management.

You know, it's not really been addressed.

I mean, there was an article in the [Pleasanton Times], for example, about the systems that you sold to the military, which were being utilized in Iraq for encrypted/non-encrypted information being transmitted.

Could you comment on the size of these markets and how you're addressing the new markets, and what percentage of your total sales you see going forward?

Sure.

It's difficult to break all the segments down, but I think that, you know, as we've talked about things--even today we talked about our digital TV segments, the video trunking segment and our private broadband segment.

Those are really the three major groupings of things that we go after.

Certainly, there's lots of sub-segmentation that you see there, particularly in the video trunking area.

You mentioned that.

Video trunking, again, it spans the sub-segments of traditional video back-haul with the service providers and those folks, to the surveillance of things, including things like border crossings and all those things.

And by the way, you referenced the article in the [Pleasanton Times] relative to some of the military things.

By the way, military applications are not a substantial part of our business.

You add up all the things in all of the segments, you probably get to the sort of 10% range of our business.

So, we are not heavily skewed to that.

But, I think the key thing is that video applications are very important applications.

When you've got a best-in-class product, you will find them ending up in a wide variety of segments and sub-segments, and we believe that segments that are good growth segments.

You've got--starting with the digital TV, the video trunking, and even in the PBN area, a lot of those MTU applications are becoming more and more video-centric.

So I think people will get to know us more and more about--surrounding our video expertise.

That make some sense?

Yes, it makes total sense.

You had a great quarter, by the way.

Congratulations.

Now, let me just, if I could, ask about the Homeland Security applications.

I mean, the fellow who's the Director of Procurement said that he was going to put the initial monies into border security.

Are you going to be able to get some of that?

Well, we're already involved in some of those arrangements.

Currently, we're involved in activities along the US-Mexican border, and we'll see over time how that successful application applies itself to other border surveillance applications.

That's great, Sal.

Keep up the good work.

Thanks.

I would like to remind everyone once again to press star, one, in order to ask a question.

Your next question comes from [Bill Morrison] with [Ryan Beck & Company].

Hi.

Congratulations, Sal, and welcome, Randy.

Thank you.

Hi, Bill.

Hi.

You know, two questions.

You're at the third level of MPEG-4 with advanced video coding.

How far along is the rest of the market, and do you think they're gonna have to come that far along for that to be adopted?

And number two, for the signature switch in the Atria product line, I mean, do you think that--I mean, when is that gonna be incorporated in that product line?

That's all.

Thanks.

Sure.

Well, let me answer the second one first.

You know, as I mentioned the end of the call, we believe that we will continue to show technological leadership in the advanced content processing area, which is certainly the area of the signature switch.

Signature switch, we continue to invest in that, and we believe that it is a leading technology, but we--you know, don't expect to see anything on that until probably sometime next year.

But, we believe it's a core technology that will fit in quite nicely with the whole Astria product line and beyond.

So, we're very excited about that, and we'll keep you informed on developments in that area.

Your first question was about the MPEG-4, and MPEG-4 is a very complicated thing, and you'll--we're very proud of this--of the MPEG-2/MPEG-4 transcoding that we talked about.

That is not an easy task.

Just to be clear, there are various types of MPEG-4.

The--what I mentioned today the ASP, but there's SP, ASP, and then there's also ABC.

I think all of them will have their place.

ABC is certainly the hardest of the areas, but it's the area that you'll see the most bit rate compression, and also some of the most interesting HDTV kind of applications in there.

You know, we expect to maintain a leadership position in all of the MPEG-4 parts and pieces, and we think they all have their place.

And again, we're proud to have that breadth of core competency to handle all of that.

Okay, a follow-on.

So, you don't have to have all three levels for MPEG-4 for adoptions?

Just gonna have it in different segments?

Yeah.

It would be different segments but, of course, the company that--the companies that have the broadest will have the best opportunity across all the segments, and I think we'll be viewed as a significant technology leader.

Good.

Okay, thanks.

Thanks, [Bill].

At this time, there are no further questions.

There are no further questions at this time, sir.

Okay.

Okay, fine, that's great.

So, we thank you very much for the call--for tuning into our call, and we look forward to future calls.

Thank you very much.

This concludes today's conference call.

You may now disconnect.