摩托羅拉 (MSI) 2006 Q3 法說會逐字稿

Good morning.

My name is Judy, and I will be your conference operator today.

At this time I would like to welcome everyone to the Tut Systems third quarter financial results conference call with Salvatore D'Auria, Chief Executive Officer and Scott Spangenberg, Chief Financial Officer. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Spangenberg, you may begin your conference.

Good morning, and thank you for joining our conference call to report our third quarter 2006 business and financial results.

My name is Scott Spangenberg, and I am the CFO for the Company.

Before I turn the call over to Sal D'Auria, our Chairman, President, and CEO, I would like to remind you that today's conversation will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Specifically, without limitation, our expectations about our revenues, cash flows, the introduction of new products, the performance of our various product lines, gross margin, total operating expenses, net interest expense, earnings per share and cash balances are forward-looking statements within the meaning of the Safe Harbor.

Forward-looking statements are based on management' current expectations and beliefs and are subject to risks and uncertainties.

Actual results may differ materially from the forward-looking statements contained herein.

Risks that relate to these forward-looking statements include the risk inherent in new and developing technology and markets, such as the IPTV market.

The risk that competitors will introduce rival technologies and products, and the risk that expected financial benefits of new technology deployments will not be achieved as a result of unforeseen costs or events.

Further detailed information about risk factors that may impact our business is set forth in our periodic filings with the Securities and Exchange Commission.

We expressly disclaim any obligation to update or alter our forward-looking statements whether as a result of new information, future events or otherwise.

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

Well, thank you, Scott.

And welcome to our morning conference call.

The downturn in our business that we experienced in Q2 began to improve in the mid-to latter part of Q3.

We saw modest growth in our business in Q3, and expect additional growth in Q4.

We believe that our revenue profile is back on a growth path.

Orders for our video products grew in the quarter.

Our revenue for the first three quarters of this year is ahead of the same period last year.

Our gross margins improved in the quarter.

Our OpEx is down consistent with the changes that we made early in the year.

This four to five-month pause in our business has put pressure on our cash reserves, but we expect to see an increase our cash position in Q4 as we reduce our inventory levels and receivables come back in line.

We also believe that we are successfully navigating our opportunities with our potential partners and customers, both large and small.

Our sales opportunity funnels grew to a record number in the quarter.

The funnel now tracks over $300 million in video opportunities.

Now back to Scott for the financial details.

Thank you, Sal.

First of all I would like to review our third quarter and year to date operating results.

Our total revenue for the third quarter and nine months ended September 30, 2006, was 8.2 million and 27.8 million respectively, compared with 10 million and 26.8 million for the same periods ended September 30th, 2005.

Our Q2-- Q3 revenue represents a sequential quarter increase of 1.5% from last quarter, and a year-over-year decrease of 18.1% from Q3, 2005.

Our revenue for the first nine months of 2006 increased by 4%, when compared with the first nine months of 2005.

Our revenue from video processing systems products of 6.9 million, increased by 0.1 million or 1.6% from last quarter's revenue of 6.8 million.

Compared with the third quarter of 2005, revenue of 8.1 million, our revenue from video processing systems products, decreased by 1.2 million or 14.5%.

On a year to date basis, sales of our video processing systems products increased by 15.8% to 24.2 million from 20.9 million for the nine months ended September 30, 2005.

Revenue from our private broadband network products in the third quarter of 2006 was 1.1 million.

This was a 0.1 million decrease from both last quarter revenue and Q3, 2005 revenue of 1.2 million.

Revenue from private broadband network products decreased by 0.4 million from 3.6 million in the nine months ended September 30, 2005 to 3.2 million during the nine months ended September 30th, 2006.

Revenue related to legacy Copper Mountain product sales was 0.2 million, and 0.7 million for the three months ended September 30th, 2006, and 2005 respectively.

Year to date, revenue related to these products was 0.4 million and 2.2 million for 2006 and 2005 respectively.

International revenue was 1.1 million or 13% of our total revenue for the third quarter of 2006, compared with 2.7 million or 27% in the third quarter of 2005.

On a year to date basis, international revenue was 4.1 million or 14.8% this year, compared with 5.5 million or 20.5% last year.

No single customer accounted for greater than 10% of our revenue for either the three months or the nine months ended September 30, 2006.

Last year during the third quarter, Cavalier Telephone accounted for 17% and [Wileway] Technologies Company Limited accounted for 10% of our revenue.

During the nine months ended September 30, 2005, one customer, FTC Management Inc., accounted for 11% of the Company's revenue.revenue.

For the quarter ended September 30, 2006, our cost of goods sold was 5.6 million, compared with 7.9 million for the third quarter of 2005.

Cost of goods sold in the second quarter of 2006 was 5.7 million.

The year-over-year decrease in third quarter cost of goods sold of 2.3 million included decreased material costs of 1.1 million, and a decrease of 0.2 million in personnel costs.

Included in Q3, 2005 cost of goods sold was an impairment charge of 0.2 million, as well as an inventory reserve charge of 0.8 million.

Amortization of intangibles of 0.4 million was included in cost of goods sold during the third quarters of both 2006 and 2005.

Our gross profit for the third quarter of 2006 was 2.6 million, compared with 2.2 million for the third quarter of 2005, and 2.4 million for the second quarter of 2006.

Our gross margin was 32% for the quarter ended September 30, 2006, compared with 21.7% for the same period in 2005.

When compared with our second quarter 2006 gross margin of 29.6%, our third quarter 2006 gross margin increased by 2.4 percentage points.

The sequential quarterly increase was primarily the result of our fixed cost and overhead representing our lower percentage of cost of goods sold.

Our operating expenses decreased again this quarter.

During the third quarter of 2006, we reduced our operating expenses by 0.7 million to 6.0 million from 6.7 million last quarter.

The sequential decrease in operating expenses included decreases of 0.6 million in personnel costs and 0.1 million in travel expenses.

When compared with Q3, 2005, our operating expenses are down by $1.8 million.

The year to year decrease in operating expenses include reductions in personnel costs of 1.4 million, contractors and outside services of 0.2 million, supplies and equipment cost of 0.2 million, and travel expenses of 0.2 million.

Partially offsetting these decreases was a 0.2 million expense of stock compensation associated with the adoption of SFAS 123R.

As a reminder we began expensing the cost associated with share-based compensation at the beginning of this year.

Previously these non-cash expenses were not charged to operation but were footnoted in our financial statements.

The net loss for the quarter was 1.3 million.

This net loss includes a non-cash charge of 0.2 million for the amortization of debt discount and a non-cash gain related to the change in value on the convertible note derivatives of 2.5 million, associated with convertible notes issued in August of 2006.

Our net loss for the third quarter 2005 was 5.6 million.

On a basic and diluted per share basis, our loss was $0.04 and $0.17 in Q3 of 2006 and 2005 respectively.

The effect of the amortization of debt discount and the non-cash gain related to the change in value on the convertible note derivatives reduced our net loss by $0.07 per share on a basic and diluted basis.

EBITDA for the quarter was a negative 2.3 million, an improvement of 1.1 million from last quarter.

Our year to date net loss was 9.1 million and $0.27 per share, compared with 13.4 million and $0.48 per share for the same period in 2005.

Now regarding our balance sheet and cash flows, cash and cash equivalents totaled 4.6 million at September 30th, 2006, a decrease of 13 million from September 30, 2005.

Accounts receivable and unbilled revenue increased by 0.4 million, from 14.5 million at September 30th, 2005, to 14.9 million at September 30th, 2006.

Excluding unbilled revenue, DSOs, or days sales outstanding, were 113 at quarter end, compared with 104 last quarter and 94 days at September 30, 2005.

Inventories were 12 million at September 30, 2006, compared with 6.4 million a year ago.

Inventories increased due to purchase commitments made in prior quarters for long-lead items ordered to support higher anticipated revenue.

Our line of credit was 4.3 million at the end of the quarter, and 7 million at September 30, 2005.

Accounts payable and accrued liabilities were 9.9 million at September 30, 2006, and 9.7 million at September 30, 2005.

Increase in accounts payable and accrued liabilities was primarily due to increased inventory purchases.

During Q3 we issued $7 million of convertible notes, and warrants to purchase approximately 2.8 million shares of common stock.

Interest rate on the notes is 8% per year and is payable quarterly in cash or stock.

The notes are convertible into approximately 5.6 million shares of common stock at a conversion rate of about $1.24 per.

The warrants are exercisable at approximately $1.36 per share.

The notes contain certain features that are considered embedded derivatives.

The initial value assigned to these derivatives was $5.1 million and was recorded as a current liability in an offset to debt discount.

In addition, these features also affected previously issued warrants issued in 2005.

The change in the fair value of the embedded derivatives was 2.5 million during the third quarter of 2006 and was recorded as a non-cash gain on convertible note derivatives.

Regarding cash flow, cash use and operating activities reduced to 12.9 million for the nine months ended September 30, 2006, compared with 16 million for the same period in 2005.

Sources of cash from operating activities for the nine months ended September 30, 2006, include accounts payable and accrued liabilities of $1.1 million, and net non-cash expenses, such as depreciation, amortization, fair value adjustments to the derivatives, accretion related to amortization of debt discount, and non-cash compensation of 0.8 million.

Uses of cash in operating activities for the same period include inventories of 5.3 million and prepaid expenses of 0.6 million.

Cash provided by investing activities was 0.8 million for the nine months ended September 30, 2006, compared with cash used of 0.1 million for the same period in 2005.

During the nine months ended September 30, 2006, cash provided by investing activities included proceeds of 1.7 million from short-term investments.

Partially offsetting this, were additions to property and equipment of 0.9 million.

Cash from financing activities was 4.5 million for the nine months ended September 30, 2006, compared with 21.3 million for the nine months ended September 30, 2005.

The cash from financing activities in 2006 included proceeds from our convertible debt financing of $7 million, and net proceeds from the issuance of common stock of $0.4 million.

Offset by the repayment of our line of credit of $2.8 million.

During the third quarter of 2006, our cash balance decreased by 2.8 million from the end of last quarter.

The sources of cash during the quarter included proceeds from our convertible note of $7 million, while uses of cash included a net loss of $1.3 million, net non-cash gain included in the net loss of $1.3 million, repayment of our line of credit of $3.5 million, cash used by operating assets and liabilities of $3.4 million, and purchases of fixed assets of $0.3 million.

Let me now turn to our forward-looking guidance.

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

Further, because of the high cost per unit of our head-in systems, if we were to sell even one less system than our forecasted number of head-in sales for the quarter, such a decrease in sales volume would have a material and adverse effect on our revenue for that quarter.

We're providing the following guidance for the fourth quarter of 2006.

We expect fourth quarter revenue to be approximately 8.2 million to $8.5 million.

This forecast does not include any revenue from Tier 1 opportunities we are pursuing.

We estimate that our gross margin percentage, including amortization of intangibles of 0.4 million, will be approximately 33% for the fourth quarter.

We estimate our fourth quarter operating expenses at approximately $6 million.

We expect net interest expense for the fourth quarter to be approximately $0.3 million, and we expect weighed average number of shares outstanding to be approximately $33.8 million shares for the fourth quarter.

This concludes my financial comments and guidance.

I would like to remind everyone that 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 our actual financial results may very materially from our guidance due to factors that are unforeseen or whose results are unpredictable at this time.

At this time I would like to return turn the call back over to Sal.

Well, thank you, Scott.

As you may remember, we track four distinct opportunity areas.

I would like to give you a brief update of each of these areas.

Let me start with the first one, the new IOC and PTT customers.

The set-top box, middleware, conditional access ecosystem has improved in the quarter.

In Q3 we finally had some set-top boxes to demonstrate our MPEG-4, SD and HD solutions and we didn't have those set-top boxes in Q2.

We expect that Q4 will have improved availability of these set-top boxes, but we believe that it will be Q1 of '07 when the availability of the popular configurations become more readily available.

Or major [head-end] in the Middle East region is scheduled to go commercially deployment in the near future, and we believe that this commercial deployment will result in an increase in sales activities in the region over the next couple of quarters.

We saw one new IOC master head-end win in the quarter, and actually recently after that early in this quarter saw a second.

The other area that I think is quite interesting is our existing customer upgrade cycle.

During the quarter we had our fifth annual user group meeting, and it was our best yet.

Our customers clearly have interest in continuing the growth in their IPTV initiatives.

We heard very specific interest in MPEG-4 SD and HD upgrades and also ad insertion and splicing application interest.

We believe that HD is a must-have feature for virtually all of our customers.

The set-top box, middleware, conditional access environment has slowed the process down but the customers are anxious to move forward and we believe that we have the right solution and the relationships to upgrade virtually all of our customers to some channels of high definition.

The PBN group has been very active this quarter.

Our mT2 product is receiving good interest from a number of hotel service providers and hotel chains in the U.S. and in Europe.

We are in the process of completing our eighth property with a major hotel service provider.

It is our largest installation to date with over 1400 rooms going online and its going quite well.

We believe this product is the best next generation hotel broadband solution on the market, and we believe that we'll be entering a hotel room upgrade cycle that will begin over the next year.

We believe that this cycle could include over 400,000 rooms per year entering the next generation of broadband upgrade.

Beginning in Q4, we're migrating our manufacturing of our mT2 product to China.

This will give us additional scale capabilities and possible gross margin improvements.

Our new XLP long-reach power over ethernet products were in beta trial mode this quarter, and will move into general availability production in Q4.

Today we have over 10 field trials in progress in Japan, Europe, and the U.S.

The major applications include WiFi network extension and video security and surveillance.

We're also working with the largest IP video camera manufacturers and large security system integrators around the world.

We are very encouraged by the progress in this PBN group this quarter.

Now to Tier 1 opportunities.

Progress with various Tier 1s increased in the quarter, and this progress has increased our confidence in adding a Tier 1 to our customer mix.

We saw a higher level of activity on some of the largest opportunities.

In recent weeks we have had more meetings and discussions about project and process status, specifications, the timing of decisions and the timing of role outs.

We believe that we're getting closer to success and the list of competitors is getting smaller.

We had at least one new Tier 1 opportunity surface this quarter.

This opportunity is currently in progress with a Tier 1 lab shoot-out underway against a small group of competitors.

Potential customers are taking notice of the quality and economic value over MPEG-4 transcode solution.

By the way, we are demonstrating our MPEG-4 SD and HD transcode solution at the Telco TV Trade Show this week in Dallas.

Now I would like to have some closing comments and sort of summarize our view of our business.

We believe that all four of our opportunity areas are on track for growth.

We believe that we have invested in products that are superior to the competition in satisfying the customer needs.

We believe we have the right team to support the business.

We believe that we are well positioned in the video marketplace, and it is the right time to be in that market.

We believe we can carefully manage our working capital to provide the resources we need to grow our business.

We are frustrated that we cannot demonstrate or communicate our progress in more detail, especially our progress with Tier 1 opportunities, but we believe that we have the potential for significant growth in the coming quarters.

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

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Tim Savageaux with Merriman.

Hi, good morning.

Excuse me, can you hear me?

Good morning, Tim.

Okay.

Couple of questions.

First, I wonder if you can address the size of your HD upgrade potential opportunity within your core installed base of independent carriers?

You had talked about that on past calls.

It seems to be coming a bit later than expected, but I just wanted to see if you can size that overall opportunity for us?

And then I have a follow-up.

Thanks.

Let me start with the answer to that.

Yes, we were very encouraged by our user group meeting.

As I said in the call that we think that virtually every one of our customers is going to need some number of channels of HD.

The simple calculation that-- that we are-- that we do that we actually are very confident in, is if you imagine that we have at least 100 customers, and each of these customers takes 10 channels of HD, and imagine HD is about $30,000 a channel, roughly speaking.

There is a $30 million opportunity with those first 100 customers, and actually we have upwards of 160-plus customers.

So we see that being at least a $30 million upgrade.

The other thing is relative to the timing, we are a bit disappointed that high-def, set-top boxes not as available as we would like and as our customers would like.

And also it's not just the set-top boxes, but it's the set-top box with a combination of middleware and conditional access.

But we do believe that we will actually see some upgrades in Q4 begin, and the upgrade cycle, really, getting into-- really in earnest in the Q1 time frame, and I think that by the middle of the year, we should expect it to be a significant part of our business.

Okay.

Great.

And to follow up, you mentioned a $300 million total opportunity, does that refer to the Tier 1 opportunity, and is that-- maybe that number has got a little bit bigger than you thought in the recent past?

Or does that include kind of your total addressable opportunity in the-- in the funnel that you see in front of you?

And finally I'll ask you to opine, if you would, on any update on potential timing on Tier 1 decision making?

Yes, sure.

You are right, Tim in noticing that that number is a larger number than we have talked about before, and it's because the funnel has gotten larger.

That funnel includes, not only IOC PTT upgrade opportunities, but it also does include the Tier 1 opportunities.

Again, to be clear, that number isn't-- is in excess of $300 million.

And like I said, it does include the-- some of the Tier 1 opportunities that we have seen get added to our funnel, and I should be clear that the-- very few if any, have fallen out of our funnel.

Though decision-making process out there, the decisions that are still being made, particularly on the Tier 1 side would probably astound people.

They just basically have not made some of the decisions that you would have expected them to have made.

And your last part of your question is about the timing.

We have been disappointed in the timing.

We have communicated certain timings with the public in the past, and as we have been communicated to from these potential customers and have been disappointed.

But I can tell you that we are getting very close on a number of these opportunities.

Very close means that we're within one to two quarters of seeing significant decisions being made out there relative to some of these Tier 1 opportunities.

And we believe it is very natural for it to happen, given the overall role outs that have been projected by these Tier 1s.

Did you have a further question on that?

No, that's great.

I'll stop there for now and pass it on.

Thank you.

Our next question comes from the line of Anton Wahlman with [Sound Quality].

Hi, this Anton Wahlman, can you hear me?

I can hear you.

Is that Antoine from ThinkEquity?

That is correct.

Okay.

First of all you mentioned the 400,000 rooms per year upgrade cycle.

Yes.

And is there a dollar amount you can put on that, meaning, how should we think about the cost per room?

And-- I mean you mentioned, for example, you had most recently a-- one particular hotel property with 1400 rooms.

I mean, what--is there like a price per line?

Or is that something equivalent that we should think about in terms of trying to figure out what they could mean total dollar wise?

Sure. -- first of all this is a very interesting area.

If you recall, Tut was the leader in hotel high-speed access equipment.

In fact, if you travel the hotels today, you'll still find quite a few instances of the Tut equipment out there.

That equipment has been out there since about 2000 when high-speed internet access became an amenity that was important in the hotel space.

The advent of high definition television and higher-- other higher bandwidth requirements and also voice-over-IP kind of things, has caused, what we believe, is an eminent upgrade cycle.

And the estimates that we have from various industry groups is that this could be 400,000 rooms a year plus.

Of that 400,000 rooms, we think that some of those rooms will be rewired with things like CAT 5 wiring and some of them will have some wireless solutions, but there will be a percentage of that that we think will be very appropriate for our mT2 product.

In terms of price per line or per room, if you think about it very roughly speaking, if you think about $100, or a bit more per room, you get the sense for the magnitude of the opportunity.

And you're right, we are just about finishing up what will be our largest installation in a hotel, 1400 room installation, and as I said it's going very well, and this one service provider-- and-- and the hotel chain-- this is their seventh or eighth installation, and they are very pleased with this.

And just one last comment on that and that if you understand our strategy on the PBN side has been over the last couple of quarters to get into as many fundamental trials as possible, and to really focus on getting out there with an array of service providers and the hotel chains, so that we can be best positioned for the possible upgrade cycle that, again we think is going to begin in 2007.

So the 400,000 rooms has lead to your take-- that's like the market in your opinion?

Yes, we think that that's the market that will be upgraded for high-speed access solutions, and we believe that we can take a good part of that because of the ease of installation and the performance of the product we have.

I think we really developed a nice product for that space.

Okay.

Now in terms of the overall funnel of the $300 million that you mentioned, any chance you can break that down in to, at least ballpark, approximately, between your Tier 1 opportunities and what part of the 300 there do you account as being the hotel PBN business?

Right.

The last part of that question is pretty simple.

That funnel I talk about is only the video part of the business.

It does not include any PBN business in that funnel.

That's why I call it the video opportunity funnel, indicating that.

Again, the funnel does include a mix of essentially three of the four growth opportunities I talked about.

Right?

It has got new IOC upgrade cycle with our existing customer-- existing video customers, particularly for HD, and the Tier 1 opportunities that are there.

I would say that probably, roughly a third or so of that is the first two where Tier 1 opportunities are about two-thirds of that number.

And again I make it clear that our number that we track in our database is higher than the 300 million.

So outside of the 300 million, do you have that all a funnel number for the PBN business as well?

We have.

We haven't shared that as we are, we want to be more confident about the timing and the magnitude of that.

I think that we will soon be able to do that as we have now touched on virtually all of the large hotel chains, and virtually all of the service providers that service those hotel chains, and we we will be getting good feedback on that for us to give you good guidance about 2007.

So, basically, as we stand here today, how many properties or hotel rooms are actually in service with your PBN, the new solution at this point?

I think that the number is somewhere in the-- and I'm talking about not small installations, but meaningful installations, they are somewhere in the mid-teens, are up and running today, and those are not just in the U.S., but also in Europe and in Japan in particular.

And just to make sure that is the new product?

That is the new product.

Well, that is the mT2 product that is not the XLP product, the long reach power over ethernet product is called a XLP. mT2, multi-tenant second generation, that's where that comes from, mT2, is what I was referring to that is in the sort of mid-teens that we have installed today.

And I will say that we have been very careful to position those installations in areas that have, I would say significant upside as in-- we spread them out amongst many change in service providers.

That does not include other sort of trials, I'm talking about things installed, the commercial deployment.

Finally, you mentioned in terms of addressing your Tier 1 opportunities a little bit, that you thought that the competitive landscape had improved a little bit.

Could you give any insight into what might be the reasons for such an improving competitive landscape?

I think you said something like somebody had fallen off or something like that.

In terms of-- what kind of features or performance criteria would there have been that would have caused such an improvement in your competitive ability in these accounts?

Well, let me just give you one example, and this is one new opportunity that we began working on this last quarter.

This is, right now is-- I call it a shoot-out going on at Tier 1 facility lab, and we believe that of the handful of competitors that are there that we are-- we don't know for sure, but we believe that we are the one participant that is offering a transcode to high definition solution, as opposed to a two-box encode, re-encode of decode re-encode kind of solution.

And, again, that's an example of how we differentiate ourselves there, and therefore, sets us apart.

On some other opportunities, we're also lead to believe that as we are moving through the process, the field is getting smaller, not because the companies are going out of business, but because the companies have been eliminated for one reason or another.

So just to give you, again, a couple of those things.

I think you're at the Telco TV Trade Show, you should stop buy and see the MPEG-4 transcode solution.

It does provide quite a bit of efficiency, and we think that it will also improve the ultimate quality of the video that is provided.

And by the way, I keep calling it just simple transcode, but internally we talk about it as intelligent transcode because it does some special things relative to maintaining a perspective on the history of the stream that in a normal decode, encode solution is lost in the process, and we maintain that, and we think that makes for a better solution.

So do stop by, any of you that are at Telco TV to see why we're excited about the transcode approach.

All right.

Thank you very much.

Thank you.

Your next question comes from the line of Bill Morrison with Ryan Beck & Company.

Morning, guys.

Hi, Bill.

First question is you are carrying-- the inventory went up in the quarter instead of going down is there a reason you are carrying that much inventory?

It's really pretty straight forward, Bill.

We had expected to see higher revenues in the last couple of quarters, and there's long lead times on parts, and that, sort of number 1, caused us to have some buying of parts and finished goods.

And it's a [inaudible] of some higher revenue.

It takes, sort of, more than a quarter for that to settle out, which we believe it's settling out in Q4, and in fact we believe that we will be turning some of that inventory back into real cash during the quarter.

And I guess the other part of that that goes along with it is that, again, we keep working with our customers looking at this funnel, and the opportunities have not gone away, and some of our customers are sort of sitting there on the fence, or potential customers are sitting on the fence, and we wanted to make sure that we had at the end of the quarter equipment to ship to them.

I did mention that we, it was early in this quarter, I think it was the first week of this quarter that we got an order for a master head-in that we expected last quarter, but it came in a week later.

Well guess what, we had the inventory, but obviously it showed up on our Q3 inventory list, and it made our inventory look a little bit higher.

So, again, bottom line is the slow down we saw for about four months or so you sort of have an inventory hang over relative to that.

But in Q4 we believe that we'll successfully turn some of that back into cash.

It's all been inventory.

Is there any inventory there slated for the Tier 1 opportunities?

There is some inventory that could be utilized for Tier 1 opportunities, but it's no different than inventory that some of our IOC and PTT customers wouldn't also be able to use.

Okay.

And-- and could you just-- you said something about the decisions Tier 1s are making would astound people, but not as we would have liked or not at the time, could you just expand on that?

Yes, it's pretty simple, Bill.

I think everybody-- I think it's fair to say that everyone is behind schedule, every Tier 1 is, well, I think every Tier 1 is behind on schedules that they have communicated earlier.

And I think that the-- there are some clear reasons for that back to the set-top box, middleware, conditional access eco-system, I don't think anyone expected that those pieces would have taken so long to become available.

And I think that that's had some impact on the overall schedules of deployments, including Tier 1 deployments.

Right.

But I mean what would astound us the delay or the --

The delay and, I think that the fact that they are getting close.

They are getting close.

They are just-- again, they are all behind, and they are-- well the other thing I would say is I think that a lot of people believe that all decisions have been made, and I think that's not the case.

There are decisions to be made that are coming up and some of those we will-- we believe that we are well positioned with and I would think that's a good thing.

Okay.

And on Antoine's question, the price per unit per room, I didn't get to that.

Yes,I was saying roughly speaking, if you think about it broadly speaking about $100 a room to a bit more than that.

Let's just say 100 to $150 for rough estimates.

Obviously, depending upon the type of commitments and type of configurations.

Okay.

Thanks.

Okay.

Thank you, Bill.

At this time there are no further questions. [OPERATOR INSTRUCTIONS] And your next question comes from the line of Gregory [Rogan] with [Slash] Imaging.

Good morning, gentlemen.

Good morning.

Good morning.

Any of the Tier 1 decisions that are going to be made-- I know you are expecting them you are saying within the next one to two quarters.

I'm just questioning whether your cash burn rate is-- falls in conjunction with that, or are we in jeopardy at this point?

That's a good question.

I would say two things.

One is that we are very carefully navigating our working capital, and as mentioned earlier, we're turning things like inventory back into cash over the next quarter and beyond.

But the second thing is that we have always made it clear that for certain Tier 1 opportunities, that we would have a partner to work with that Tier 1, and as I mentioned early in my comments today, we believe that we are successfully navigating those partner opportunities that would support the Tier 1 opportunities that are before us.

So it may alleviate some of the-- some potential worries about the possible financing and dilution going forward?

Yes, I think so, again, I want to make it very clear that we-- and particularly the largest of the Tier 1 opportunities, or the larger of the Tier 1 opportunities, there would be a partner involved that would help us make that a reality, and we continue to navigate that, I believe, successfully.

We, and again, we, just back to the working capital, we have today, from a cash perspective, backing out some of the non-cash things on the balance sheet, but we have about 1-- 1.8-- sorry-- roughly 18 million in working capital, and if you look at our EBITDA for the quarter, our EBITDA was about 2.3 million and that's kind of the-- EBITDA is my, sort of favorite gauge for looking at burn.

And so our challenge, and I think that we are up for the challenge is to navigate that working capital equation, and, again, with about 18 million in working capital, and with a EBITDA this quarter of 2.3, I think we can navigate that, we'll do it carefully, but we will navigate that equation to the next growth phase o our business, which we think is not far away.

Okay.

Thank you very much.

Thank you.

At this time we'll give a final opportunity for questions. [OPERATOR INSTRUCTIONS] There are no further questions at this time.

Well, I would like to thank everybody for joining our call, And we'll be looking forward to seeing some of you at Telco TV and communicating with you on our next conference call later-- late next year, I guess.

Thank you very much.

This concludes today's Tut Systems third quarter financial results conference call.

You may disconnect at this time.