Viavi Solutions Inc (VIAV) 2003 Q2 法說會逐字稿

Good morning, everyone. I'd like to thank you for holding. Welcome to today's conference call. Thank you for holding and welcome to Acterna earnings conference call. I will turn the call over to Jim Monroe, Director of Corporate Communications. Thank you for using Sprint conference.

Good morning. Welcome to Acterna second quarter 2003 fiscal year earnings conference call. Participating on the call today are Ned Lautenbach, chairman and CEO, John Peeler, our President, and John Ratliff, our CFO. We're joined by Mike Ryan, --the new Director of Relations. Before we get started I'd like to remind those listening of a few items. This call is being webcast and is also available for replay by telephone and through Acterna's website. Acterna.com. Certain comments made during the call may be characterized as forward-looking statements under the Private Securities Litigation Reform Act of 1995. As such, these statements involve a number of factors that can cause actual results to differ materially. They're in the 10-Q and 10-K filings with the SEC which are available on the company's website. Now for comments on the quarter, I'd like to turn it over to Ned Lautenbach, our Chairman and CEO.

Good morning and thank you for joining our call today, so early as it is. I'd like to share with you a brief overview of our quarter. John Peeler and Jon Ratliff will provide a more detailed report on revenue and operating results and our guidance for the next quarter. Our second quarter revenue came in at 164 million dollar within the guidance of 155 million dollars to 165 million dollars we provided in our last call. Our reported loss for the quarter was $284 million, or $1.48 per share. This includes $281 million of special gains and charges an a $49 million tax benefit on the loss of continuing operations that John Ratliff will detail for you. Exclude those items, our loss per share was 28 cents in line with our previous guidance.

Our Acterna communications test business continues to face significant challenges raised by a continuing and prolonged industry downturn. Many of our customers have announced new capital expenditure cuts suggesting that the industry recession will continue, and may not improve in the coming year. Given these circumstances, we are working to reside our business by reducing our work force and cost restructure. Both John Peeler and Jon Ratliff will detail the latest steps to take and update you on our cost-cutting progress. Our last call, we shared with you our plans to reduce the debt structure, with proceeds of the Airshow sale reduced our debt by $234 million. This represents a reduction of $128 million of bank term debt and reduction of $106 million of our bonds. This will reduce our annualized interest payments by $17 million. We ended the quarter with liquidity of $94 million.

We continue to focus on three areas. First, our goal with sales and marketing organizations are working hard to maximize all revenue opportunities and to meet our revenue goals. Second, we continue to execute cost-cutting initiatives to reduce expenses, given the market outlook in our communications test business. And third, we're working to improve our balance sheet by reducing debt and preserving liquidity. I now turn it over to John Peeler for a more detailed review of the quarter's results.

Thank you, Ned. Let me begin with the details of our revenue and results for the quarter. Total Acterna Corporation sales were $164 million. Down 45% year over year and down 4% from the last quarter on an as-reported basis. For the total company we're $189 with a book to bill ratio of 1.15. Our communications test sales were $125 million, down 49% on a comparable basis over last year's second quarter and down 8% sequentially. Communications test orders were $112 million, down from $119 last quarter and down 27% versus our second quarter last year. Our communications test book to bill ratio was .89. This includes the impact of $8 million of de-bookings. Comparing the quarter's net bookings to the net bookings in the first quarter, by network area, optical transport orders were lower by 20%, access was up 15%, cable bookings were off 24% and data wireless and other communications test orders were up 5%. Looking at revenue by communications test area, areas on a sequential basis, optical transport was down 23%, access was up 24%, cable was down 4%, and data wireless and other was off 5%. All communications test units were down versus the prior year on both bookings and revenue, except access where our bookings were up slightly on a year over year basis. And our communications test business, our fife largest customers for the quarter were AT&T, the U.S. government, Verizon, BellSouth, and Deutsche Telecom. Among or other business, Da Vinci's revenue was roughly flat. Sequentially and was down 19% versus last year. Itronix recorded revenue at $33 million up from 28 million from last quarter and down slightly from revenue of $34 million in last years second quarter. Itronix's bookings were significantly higher at $73 million this quarter, up from $33 million last quarter and up from $14 million in same period last year. Itronix's second quarter bookings were bolstered by a large contract signed during the quarter with Sears Roebuck and company. On the last call, we said conditions in the communications test market will be extremely challenging. This appears to be the case for the balance of the year, and into 2003. Since our last call, a number of larger customers have announced additional capital expenditure cuts in their 2003 budgets. Given this outlook, we are taking further steps to reduce our cost structure and size our business to expected lower revenue levels in the communications test market. Today, we announced additional head count reductions of approximately 350 positions or 12% of our communications test business work force. These are clearly difficult decisions to make given the reductions we have already taken. However, at this point the outlook in our market is too uncertain to predict the extent of the market down turn or the timing of a market recovery. And we're working aggressively to restore our company to profitability. Let me shift the focus to some business highlights. We continue to work hard to demonstrate the value of Acterna's products and services, to our service provider, equipment manufacturer, and government customers. And in many cases, we can provide compelling return on investment scenarios. Take, for example A solution that we have developed for sprint's local phone business. Built from our instrument, software and services, Acterna has delivered the local phone unit on automated workflow solution. By further automating business processes the solution has enabled Sprint to realize the nearly 10% reduction in repeated service calls and in almost 17% reduction in troubles reported within the first five days of a new installation. In doing so, Sprint has reduced costs through fewer truck rolls, they have improved customer satisfaction and created a better system for evaluating and developing the skills of its technical staff.

We continue to make progress in our transition from an instruments company to a solutions company, and the second quarter our systems software and services businesses accounted for 30% of our revenue. Developing and delivering automated work flow solutions like the one delivered to Sprint represents a considerable new market opportunity for Acterna in both the Telecom and the cable markets. And, in fact, during the quarter we were selected by another major U.S. carrier to develop an automated work- flow solution to reduce operations costs and improve network reliability. Our approach is to offer an integrated mix of instrument, software systems and services to help our customers reduce costs, improve quality and accelerate revenue. Some other marketing highlights during the quarter included provided a major equipment manufacturer with the industry's first 2.7 gig optical network test solution with forward air correction. Acterna delivered the solution to support the development of metro optical transport equipment and networks. The introduction of the DTS 200 MPEG 2 a field test instrument that facilitate the reliable ability of media content to cable network operators. This new product enables cable network operators to deploy MPEG testing tools deeper into the networks and allows for remote analysis of digitally compressed signal, reducing the need to deploy technicians to remote sites.

Our telecommunications field service unit, we started shipping RFST 2802, our new gigabit Ethernet tester. This allows service providers to accelerate time to revenue by enabling technicians to install and turn up high-speed Ethernet links. We have been pleased with the market's response to new product introduced in May. And finally, Acterna recorded some impressive optical network management system wins during the quarter. For example, we completed the installation of a system that enables the operators of the Euro tunnel to remotely test the performance of 3 hundred miles of optical cable across the English channel. It enables reduced cost throughout the network while ensuring that Euro tunnel's customers benefit from a significant improvement in the level of quality and service. Now, I'll turn the call over to do our CFO, Jon Ratliff, for a more detailed review of the financial results.

Thanks, John. Since John already reported the revenue figures, let me share details of our operating results, our progress on cost cutting and liquidity as well as our outlook for the third quarter. Gross margin for the second quarter was 42%. The reported gross margin includes the impact of a 14.5 million dollar inventory charge which is compromised of 9.5 million of inventory reserves and purchase commitments of 5 million related to suppliers. The inventory charge is primarily related to our optical transport business. Excluding this charge, our gross margin was 51%. This compares to 57% a year ago, and 50% in first quarter on a comparable basis. Our loss for the quarter on an as-reported basis was 284 million which included a number of unusual items.

Let me walk you through the one-time gains and charges. The gain of 75 million dollars, net of tax, of 50 million on the sale of Airshow to Collins on August 9th, a gain of $50 million net of tax of $28 million on our successful tender of $106 million of 9.75% bond. These $125 million in net gains are offset by 524 million in charges. These are, first, a 388 million dollars charge for goodwill and other asset impairment. Compromised of a $374 million charge for impairment of goodwill related to the communications test business. A $14 million charge related to the write-off of SAP asset and other charges of $1 million. Second, a loss from discontinued operations of 2.6 million, net of tax of 2.2 million. Third, an excess inventory charge of 14.5 million and fourth, a restructuring charge of 19 million comprised of $16 million of severance and outplacement costs associated with Acterna's previously announced cost cutting initiatives and $3 million of charges associated with facilities the company has previously said it would close. The second quarter restructuring charge came in higher than the previous guidance for the quarter, primarily due to service related -- severance related charges from the September 4th announced head count reductions, as well as higher than expected charge for the closure of facilities.

Our loss per share in the second quarter was $1.48 per share. Excluding one-time items just discussed, with the exception of the restructuring items, our EPS was a loss of 2 cents per share. Excluding a tax benefit from continuing operations of 49 million, our EPS was a loss of 28 cents, which as Ned said is in line with the range of guidance we provided last quarter of a loss of 26 to 28 cents per share. We had approximately 192 million shares outstanding at the end of the quarter. The pro forma loss from operations, defined as earnings before interest, taxes, amortization and restructuring, was a loss of 26 million for the quarter. This compares to a pro forma profit of 14 million a year ago on a comparable basis. Excluding the 14.5 million of inventory charges, EBITDA was negative 11 million, which exceeded the EBITDA projections explicit in our guidance for the quarter. Our EBITDA performance allowed us to achieve our EPS guidance for the quarter despite the additional restructuring expense we recorded as a result of the cost cutting initiatives. EBITDA for the quarter was negative 19 million for the quarter, including the 14.5 million inventory charge. In terms of cost-cutting initiatives, operating expenses in the quarter were 95 million. On a comparable basis for the second quarter last year, our operating expense was 147 million and 109 million in the first quarter. With the head count reduction we announced in the September and the one we announced today, we expect to reduce quarterly operating expenses to approximately 78 to 80 million by the fourth quarter of fiscal 2003. Our present head count is 3590, down from 4,460 in the previous quarter, and 5900 in the year-ago quarter. The head count reduction of 870 versus the previous quarter is compromised of a 460 employee reduction resulted from divested businesses, plus an additional reduction of 410 employees from severance and attrition. When the work force reductions are complete, our head count for the company will be under 3,000 employees. We expect to incur $20 million in restructuring charges over the next two quarters. We announced in September and the one we announced today. We expect to record 15 million of this charge in third quarter with a remainder in fourth quarter of this fiscal year. The timing of the actual restructuring charge could vary depending on the execution of the restructuring actions, and the international markets. During the quarter we reduced our term -- total term debt by $234 million with $128 million pay down of bank term debt and retirement of 106 million of bond. We ended the quarter with 893 million of total debt, compromised of 613 million of bank debt. 169 million of bonds of which approximately 94 are owned by CDNR. And approximately 111 million of other debt approximately 81 million which is owned by CDNR. Our PNL interest expense for the quarter was 19 million and we expect the interest expense in the third quarter to be approximately 18 million. We ended the quarter with 94 million of liquidity, compromised of 32 million of cash and unused borrowing capacity of 62 million under our 175 million revolving credit facility. This is down 35 million from the 129 million of liquidity at the end of the prior quarter. The principal components of change and total liquidity are a negative EBITDA of 19 million of which 14.5 million is the inventory charge, therefore, cash EBITDA is approximately a negative 4.5 million. Our letters of credit increased by 3 million, which reduces our borrowing capacity under our revolver. We paid cash interest of 12 million. We paid out 14 million of restructuring accrued vacation primarily related to the employee severance, and we had capital expenditures of 9 million. Deferred revenue and changes in other assets and liabilities were a cash use of 8 and 5 million respectively. Finally, we generated 21 million from working capital improvements, including the 9.5 million of inventory reserves. As I mentioned, our working capital for the quarter improved by approximately $30 million. This was driven by 2 million use on payables offset by a 15 million source of cash from receivables, and an 18 million improvement on inventory compromised of the 9.5 million of inventory reserves, 3 million in the sale of wireless assets and 6 million of operational reductions. Our DSO was 45 days, which compares to 53 from last quarter on a like to like basis. We are in compliance with both our EBITDA and liquidity covernance for the quarter. In this quarter we recorded a net tax expense of approximately 27 million. Compromised of four components. Tax expense of 50 million on the gain from the sale of Airshow, tax expense of 28 million on the gain from our successful tender of 106 million of our 9.75% bonds. A tax benefit of 3 million associated with the loss from discops and a tax benefit of 49 million from the loss from continuing operations. Year to date tax expenses, 10 million, which includes a 1 million tax benefit from the loss from continuing operations in first quarter. We expect to report a small tax benefit in the third and fourth quarter from losses from continuing operations, and expect net tax expense for the fiscal year to be approximately 6 to 8 million. Looking ahead to the next quarter, we expect our revenue to be in the 175 to 185 million range. We believe that with continued weakness in the communications test market will be offset by several large orders we expect to convert to revenue in the quarter. Gross margins are expected to be approximately 45%, and will be impacted by below average gross margins on the large orders just mentioned. Our guidance for EPS for the third quarter is an EPS of minus 21 to minus 23 cents per share. This includes a projection of approximately 15 million of restructuring charges and 4 million of amortization. The revised EBITDA break-even point for the company when all the cost reductions are complete by the first half of fiscal 2004 is quarterly revenue of approximately 150 million. In summary, we're working hard to execute on the initiatives to maximize revenue in a very difficult market environment. Cut costs and strengthen our balance sheet. Thank you. We will now take your questions.

At this time, we'll open for questions. If anyone should have a question at this time, please press star one. If you find that your question has been asked, you can press pound to remove yourself from queue. Please press star one at this time if you have a question. First question is from Barry Leibovitz from Morgan Stanley.

Hi, John Ratliff, question for you, can you talk about where you expect that liquidity trend the next couple of quarters? Does the 15 million restructuring charge, does that impact cash and liquidity and what are some of your thoughts as to what that 94 million number could look like next quarter? Is there anything you can talk about, that you're working on, to give us more visibility as to the liquidity picture? Thanks.

Sure. And thanks for waking up early out there in California, Barry. From the standpoint of liquidity, obviously, we will have a cash burn in terms of the next quarter. It is going to be primarily geared based on the restructuring that you mentioned. The $15 million charge, as it plays out within the quarter and these are projections based on the international component, will actually be around $20 million in cash in the next quarter. We expect -- we don't give out the cash projections, you know in the quarter as you've been involved with all of our calls in the past. But what I can tell you is at least trend lines. The working capital we expect to still give you progress in terms of primarily on the inventory side. We still know that we need to have operational progress there. The DSO at 45 days, we need to be consistent with that. So with the actual inventory increase, we'll actually see a little bit of a hit in terms of AOR. From the vantage point then of other areas in terms of the interest payments, be comparable but with the actual bond payment that's actually due in November a little bit of an up tick in terms of the cash side there, and then from the vantage point of the cap ex, a little bit of the reduction in terms of that area. So we will have a cash burn next quarter and the liquidity though, as you know, in terms of the actual covenants, et cetera, that we have, you know, we will be in an attempt to maintain, you know, our cash at a very high level.

Do you have an estimate for what you think that liquidity number could look like next quarter and maybe the quarter after that?

No, we don't give that out, Barry, on the calls. Try to give guidance on the individual elements, but don't give out a total liquidity number.

And are there things that you can talk about that you're working on to improve the liquidity number?

Well, the biggest thing that, you know, we're attempting to do is to stabilize the company. In terms of with this latest round of reduction, obviously, in terms of the EBITDA that we have within the company, we have around 19 million dollar negative EBITDA, but when you pull out the inventory charge, it's around a negative 4.5 million. And so we would look to on the revenue stream projected to have that in a break-even to a plus sign, and so the biggest thing is get through the restructuring, stabilize the business at a positive EBITDA, and then from the standpoint of improve the working capital and then that mitigates your cash burn in those future quarters.

Okay. Thank you.

Thank you.

The next question comes from Tim Slevin with Parker Hunter. Your line is open.

Good morning.

Good morning.

Just a couple of questions here relating to cash flow. Just as a follow-up. In terms of cash flow from operations in the second quarter what was that approximately?

If you're looking it from more of a gap side, the cash flow would be around a negative 23 million. And that would include then your net income, your restructuring, then the changes in terms of operating assets and liabilities.

Okay. That does not include cap ex then which was --

That's correct.

-- 10 million in the quarter?

Capex would be a negative 9 million.

Okay. Great. In terms of inventory turns, what were those approximately in the quarter? I haven't calculated that yet.

Yeah, on a net basis, it's around 3.9. Operationally though, that, you know, that obviously includes though the reserves of pure 9 1/2. That's within the inventory number. So it's still maintaining in and around the three to 3.2 kind of level. But, you know, when you look at the net inventory, you know, in terms of net inventory, it's going to be right around the 3.9 -- actually my guy -- is shoving it in front of my face that it's calculated to be up to and it rounds out to 4.1.

So still in pretty good shape from that standpoint considering the business?

That's correct.

And the characteristics of the business?

. Right

The EBITDA covenants, could you refresh me in terms of the second quarter and third quarter covenants, and how they match up and whether the restructuring charges are included or excluded from that.

Restructuring charges would be excluded from the standpoint of the second quarter EBITDA test is a minus $40 million. The third quarter is a minus 17 million dollars.

And that was for the prior -- for the second quarter is a minus 40 for the six months?

That's correct. Then the minus 17 would be then for the nine month period of time.

Okay. And for the six months where were you all in terms of that six-month number? Approximately.

Well, pure in terms of just adding up the area, we would be at a minus 35 million, but that obviously included the inventory reserves that are within that, and from the standpoint of we would obviously go and you look at the banks and the banking agreement and the definition, we would attempt to get an exception for that and believe based on past history that that would be actually accomplished.

Okay.

So that would mean that you're approximately in about the minus 16 million EBITDA area. Approximately when you look at it through the first half.

Okay. You're expecting to be positive EBITDA in the third quarter I guess from the guidance you all gave?

That's -- that is our projection. Obviously based on the top line revenues coming through and our execution on the cost side.

Great. In terms of the large orders you all talked about, is that Itronix related or -- or are those contest orders?

One obviously is the Sears order for Itronix, and then the other large order we have not referenced, but that would be in the com test area and that's, you know, in essence we have had bookings in the past, and from that vantage point now seeing the revenue recognition in this quarter, at least expect to see that this quarter.

Okay. And the -- are the com tests related to some of the larger solution sales that you had referenced and this John had referenced in his remarks?

They are actually more so referenced to prior calls where we talked about total systems and wireless systems where we had some larger sales with some of our international communities. So not necessarily the ones that John just referenced. It's more so what we have briefly mentioned in calls prior to this.

Okay. In terms of your trend with respect to Itronix, how fast has backlog typically been relieved in terms of large contracts and large orders and bookings with Itronix? Just for -- so we can get an idea of how quickly that kind of flows through.

Well, it flows pretty quickly. Tim Slevin Okay.

As mentioned in terms of prior calls, we have had a number of large orders and whether that's from Sears or Transco or, you know, even some of the telecom guys in terms of Verizon or BellSouth, it does flow in terms of those large orders pretty quickly. The Sears order specifically, you know, will flow in terms of primarily this year and, you know, from the standpoint of having some service component that will have some trickle in terms of '04, '05, '06, '07.

Basically, if we look at it -- I don't know whether the peak quarterly revenues for Itronix were around 45 million year, so we shouldn't be surprised to see something in that range with respect to Itronix over the next couple of quarter given the large bookings you have had?

That's correct.

And then I guess a final question is in terms of total backlog, you know, is that still a relatively large number and, you know, is -- you know, how does that kind of factor into everything into your outlook with respect to the business?

Any number in backlog these days is a big numbering but I think that, you know, our calculated backlog is around 205 million, and so actually went up from the last quarter. A lot of that based on that Sears order that we just referenced.

Okay. Great. Thank you.

Thank you.

The next question comes from Paul Knight with Thomas Weisel. Your line is open.

Good morning, This is Argit [inaudible] for Paul. A couple of questions about the Itronix business, and one of them is the gross margin in the business greater than your company average or lower? And second, excluding the large share orders were the overall orders up or down versus last quarter in year over year?

Hi, how are you?

Good. You?

From the standpoint of the gross margin is, you know, down, you know, in terms of way below our company average. And, you know, normally that --I think we've made public in the past in terms of being in or around the 35% and whether it's 28 to 30% now that's kind of the range. And then from the standpoint of the order rate went significantly up, as we referenced in the call, that, you know, the orders in terms of Itronix were up around 73 million. --. And so from that basis, you know that's up from 33 million last quarter. And 14 million from the last period last year.

Right. If you exclude that one large order from Sears, was the business sort of trending up significantly?

You know, we like those large orders, so it's tough for us to exclude those little Guys. It's comparable to last quarter.

Okay.

We'll take one more question.

The next question is -- the next question is from David Fibbs from J.P. Morgan. You have the floor.

Thank you. Can you give me the depreciation number for the quarter and could you talk about the cash component of the restructuring charge, the 20 million you're going to take? And then talk about the non-cash impact from the fact that CDR is up and some of your debt bearing securities?

All right. Let's see if I got them all, David. From the standpoint of the depreciation number is right around 7 million.

Okay.

The restructuring is I kind of referenced with Barry in terms of 15 million restructuring charge, that is within the third quarter with around a 20 million cash impact.

15 million restructuring charge in the December quarter and has 20 million cash impact?

That's right. As of the prior restructurings that we have done. And then the cash as it flows to the international. Obviously, David, those are projections. So it's highly dependent upon the international component.

Right.

And then on the CDNR component, was your question on the non-cash of the debt structure or was it more so on, you know, what piece of the bond payment comes back to me?

The piece that comes back to you, essentially. So what you reported in your expense will be lower because you'll be doing some picking interest and I'm not sure what the other aspect is for this CDNR pollings.

That's fair. I do haven't the exact number here, but, you know, we pay about 8 million dollars in terms of -- and for those on the call, there is provision where I pay to the bond holders around $8 million in terms of the -- in the November time frame. It's for a six-month period of time. CDNR has approximately $94 million of the, you know, the $160 million plus bonds that are out there. So approximately five of the eight goes to them, and then on an after-tax basis then comes back to me. You know, that piece, that $5 million will come back to me on an after-tax basis.

Okay. And then just to follow through on some of the cash restructuring charges, in the --do you have the March Q estimate for what the restructuring charges are?

We said that the charge within the P & L would be around $5 million.

And the cash component of that? Including all of the other pre-announced charges?

It doesn't pay to do a lot on top of each other, but it would be around the $10 million area.

Okay. Thank you.

Thank you for joining us this morning, and getting up so early.