I like the fact that SFA provides CC notes. Here they are for anyone missing the CC:
Good luck,
Eric
Q4/FY-00 Earnings Conference Call July 27, 2000
Good evening. Thanks for joining us.
1. Overview:
I am pleased to report outstanding results for our fiscal fourth quarter. It was
our seventh consecutive quarter of consistently strong results. Virtually every
critical measurement at Scientific-Atlanta reached record levels for the
quarter and for the year.
All of our businesses completed the year with strong results. Our subscriber
business turned in an excellent performance with shipments of 835,000 digital
interactive set-tops, vs. 512,000 in the prior quarter and 178,000 a year ago.
Transmission turned in exceptional results with increases in both bookings and
sales. Our opto-electronics business continues to shine.
Now let's take a look at the financials.
2. Financials
Our fourth quarter was outstanding in every respect. We had all-time record
bookings, sales and profit from operations as digital deployments by our
customers continue to gain momentum.
Net earnings for the quarter were $59 million, or $0.35 per share. Excluding
the one-time events in the prior year, net earnings for the fourth quarter of
fiscal year 2000 increased $33 million, or 123% over the prior year.
Looking at the quarter:
Quarter Comparison: a. Bookings Overall bookings for the quarter of $639
million were $44 million greater than our previous record, which occurred last
quarter. They were up $251 million or 64% y-y. Domestic bookings were $506
million, up $222 million or 78% y-y. International bookings increased $29
million, or 27% y-y, led by a 104% increase in Transmission bookings abroad.
Our Subscriber business had record bookings of $404 million, up $263 million or
188% y-y, driven by strong demand for digital set-tops, with more than 1
million units ordered for the second consecutive quarter.
Our Transmission business continued its strong performance. Transmission
bookings were $204 million in the quarter, up 5% over an extremely strong
fourth quarter last year, and up almost 11% sequentially. For the full year,
Transmission bookings were up 29% over the prior year. In the quarter, our
fastest growing Transmission business, opto-electronics, grew orders 119%
y-y. These products are essential elements of advanced broadband networks,
and demand for our product line continues to accelerate.
Bookings in our Broadband segment - including both Transmission and
Subscriber - grew by 81% y-y.
In our Satellite segment, total orders of $32 million were down $20 million y-y,
due to the sale of our Satellite Networks business to ViaSat, Inc., in April.
b. Sales
Sales for the quarter were $553 million, also a record for any quarter. Overall
sales increased $197 million or 56% y-y. Domestic sales were up $189 million
or 70% y-y. International sales increased 10% y-y, led by a 61% increase in
Transmission sales.
Our Transmission business again had a record performance, with sales of $202
million, an increase of $57 million, or 40% y/y. Our Subscriber sales grew to a
record $321 million, up 95% y-y.
In total, sales in our Broadband segment grew by 69% y-y.
Satellite segment sales were down $14 million y-y, also as a result of the sale
of our Satellite Networks business.
c. Backlog
Our backlog was $812 million at the end of Q4, a record for any quarter.
Backlog was up $282 million from last year and up $26 million from last
quarter, despite a reduction of $56.4 million as a result of the sale of our
Satellite Networks business.
d. Gross Margins, Operating Expenses and Earnings
Gross margins for the quarter were 29.6%, a decrease of two tenths of a
point y-y, and a one tenth of a point increase q-q. The results reflect
continuing benefits we receive from the efficiency of our manufacturing
operations in Juarez and negotiated reductions in component costs, despite
our move towards a heavier digital product mix. We also continue to realize
the economies of scale associated with increased manufacturing volumes.
The operating expense-to-sales ratio for Q4 decreased from 20.6% to 15.1%
y-y. Total operating expenses were up $10 million y-y, with increases in R&D
and SG&A expenses. R&D expenses were 6% of sales, consistent with
expectations. SG&A expenses increased as a result of higher sales volumes.
Among the most significant accomplishments in our financial results were our
quarterly operating margin of 14.5% and net income percentage of 10.7%.
Excluding one-time events, net earnings as percentage of sales was a record
for any quarter.
Our effective tax rate for the quarter was 30%.
e. Balance Sheet
Our balance sheet remains very strong with record cash and short-term
investments of $523 million at the end of the quarter. This represents an
increase of $220 million, or 73% over the prior year and an increase of $122
million, or 30% from last quarter's record balance. The company also has a
strategic equity investment portfolio valued in excess of $500 million.
Accounts Receivable increased $43 million from June of last year due to our
significant sales growth. DSOs for the fourth quarter were 53 days, a
twenty-one day improvement from last year's fourth quarter. Inventory
increased $21 million from last year as we ramped up raw materials inventories
to meet increased production demand. Inventory turns improved to 6.9 in the
fourth quarter, from 5.4 in last year's fourth quarter. The company continues
to have no significant debt.
FY'00 Results:
Turning to the fiscal year, bookings were $2.1 billion, a record for any fiscal
year. Total company bookings were up 61%, with domestic bookings up 67%
and international bookings up 41%.
Sales were up 38% to $1.7 billion, also an all-time record, again reflecting an
impressive 41% y-y increase in the United States. Sales outside the U.S.
increased 29% y-y.
Net earnings for the year were $156 million, or $0.94 per share, a record for
any fiscal year, and 52% greater than a year ago. Excluding one-time events,
net earnings for the year increased 150% to $152 million, or $0.92 per share.
Gross margins for the year were 29.3%, up from 28.6% last year. We
achieved double digit operating margins of 11.8% for the fiscal year.
Operating expenses increased by 7% y-y, driven primarily by an increase in
SG&A expenses. SG&A expenses increased as a result of higher sales volumes.
f. Financial Conclusion
The key point I would like to leave with you is that we exit the fiscal year
with quarterly and annual financial performance at record levels. We feel very
good about our position entering fiscal year 2001.
Next, I'd like to review some of the significant trends and events underlying
our success.
3. Commentary
a. Transmission
Our Transmission business continues to exceed expectations. We believe that
there are a number of reasons for our continuing success. First, we provide
end-to-end systems to a far greater degree than our competitors. As the
technology of transmission networks has progressed in its sophistication, our
customers increasingly have come to value the broad architecture-based
perspective that we bring.
Second, we invest heavily in our own technology, and in select emerging
technologies from innovative companies. For example, our inventions in the
field of baseband digital reverse technology have fundamentally changed the
architecture of the return path. Scientific-Atlanta's bdr™ products enable
network operators to replace conventional analog upstream transport with
higher performance digital systems. The result is overall network cost savings
and improved reliability, reach, and performance.
Seven of our customers have deployed over 2000 reverse path links that use
bdr products in more than 30 markets, serving more than three million
subscribers. We strengthened our lead in the technology this quarter through
our introduction of second-generation bdr products. These products include a
four-channel time division multiplexing product, a high-performance
two-channel TDM product, and an optical node single-channel transmitter.
Our leadership also is demonstrated by the introduction of our Prisma® II
platform, the cable industry's first "carrier class" optical network for
interactive services, including voice. This family of products provides a broad
range of benefits to operators, including increased forward and reverse
bandwidth per subscriber, improved network reliability, and reduction of real
estate and construction costs. In conjunction with this product introduction,
we announced a 50% increase in channel capacity for our DWDM optic
transmission technology.
Our investments in key emerging technologies continued in the fourth quarter.
We recently announced an equity investment of $6.9 million in Broadband
Innovations, Inc. Broadband Innovations' patented technologies recently have
been incorporated in Scientific-Atlanta's new universal up-converter. This
investment follows similar investments in Bookham Technologies and Luminous
Networks, which were announced in previous quarters.
A third reason for our success is the linkage between our Transmission and
Subscriber businesses. Our knowledge of interactive applications and their
performance on the Explorer® set-top provides us with an understanding of
the trends that will continue to drive demand for transmission infrastructure.
We use this understanding to better deliver on our customers' requirements.
Our Transmission strategy can be summarized simply: we make investments in
architectures, technologies, and products that give our customers a
competitive advantage in the markets they serve. Our customers continue to
respond favorably to this strategy.
b. Subscriber - Digital
i. Explorer
Turning now to Subscriber:
In our fourth quarter, more than 1 million Explorer set-tops were ordered, and
835,000 units were shipped, versus 512,000 in Q3. As in previous quarters,
we shipped virtually all the set-tops we built in the quarter. Our backlog at
the end of the quarter was 1.5 million units. Consistent with our bookings
policy, all of these units are scheduled for shipment in the next two quarters.
In the quarter, we shipped digital interactive systems to an additional 17
cities. The sites committed to the Scientific-Atlanta architecture now
represent over 34 million homes passed.
Demand for the Explorer platform broadened considerably in the quarter, as
two large customers supplemented their prior orders with new multi-year
commitments. In May, Charter ordered 1.3 million Explorer 3000 set-tops for
delivery over the next 30 months. In June, Adelphia ordered 1.6 million
Explorer 3000 set-tops for delivery over the next 18 months. Significantly,
both customers have shifted all of their demand for Scientific-Atlanta product
to the Explorer 3000 set-top, which provides enhanced graphics, memory,
and processor speed.
We are delighted with the interest in the Explorer 3000 set-top, which began
shipping in the first quarter of this calendar year. Based on the contracts
discussed previously, we expect that the 3000 will represent between 30%
and 40% of our set-top shipments in calendar year 2001.
Units from our first production of the Explorer 6000 set-top have been
shipped to developers and testing facilities. Porting of the PowerTV operating
system and the Scientific-Atlanta Resident Navigator has been completed.
The Explorer 6000 and the associated software elements at the headend
currently are in our System Verification Test, with a schedule for completion
by the end of the quarter.
We believe that the Explorer 6000 set-top will become the home gateway --
the hub for entertainment, information, and communications activity in the
home. It will offer high-speed interactive connectivity with the outside world
and wireless integration with the growing range of home-based IP appliances.
We expect that the Explorer 6000 set-top, equipped with both DOCSIS and
DAVIC cable modems and a wireless interface, will be able to communicate at
high speeds with both the TVs and the PCs in the home.
At the National Cable Show in May, we demonstrated how phone calls can be
routed via an Explorer set-top to an IP network. We also showed how the
set-top could be a wireless base station for "dual mode" cell phones, which
act like standard cordless phones when used in the home and cell phones
when away. We expect that integration of the growing variety of consumer
appliances in the home will become the next frontier of opportunity.
ii. Interactive Applications
We continue to be enthusiastic about the progress our customers are making
with deployment of interactive services. To date, our customers have
launched six applications, including Video on Demand, e-mail, Internet access,
Wink, WorldGate, and t-commerce in 30 systems. Interactive applications are
now utilized by 150,000 households and are available to 6.9 million
subscribers.
We believe that Video on Demand is poised to take off. The early launches,
such as Time Warner's Oceanic, Austin, and Tampa systems, have been very
popular with consumers. Based on our discussions with Time Warner, Cox,
Charter, and others, we expect to see VOD launched in at least 30 - 40 major
markets in the next 12 months. We believe that this is a significant point of
leverage for us, because every digital set-top we have shipped is capable of
two-way services like VOD.
iii. The Value of the SA Footprint
Although the typical Explorer system has been launched for less than 12
months, initial results are exceeding expectations on a number of fronts. Our
customers are reporting that revenue per subscriber is increasing, and
penetration rates are going up.
One of the earliest and largest systems we launched now has an average of
1.6 Explorer set-tops per digital home. Across all of the systems that have
launched to date, the average number of set-tops per digital home now
stands at 1.33, which already is higher than the 1.2 set-tops per home that
was common in the analog era.
One of our large customers described the introduction of their interactive
digital offering, saying that they received the "most positive customer
satisfaction results they have ever had with a product launch". We believe
that such enthusiastic consumer acceptance will, over time, reduce churn
rates.
Through examples such as these, we have come to believe that we have
established a base for tremendous growth potential. It appears that
penetration of digital set-tops may far exceed the 20-30% that had been
forecasted until recently. Penetrations of 50% and beyond are now being
projected. Our addressable market is further broadened by the encouraging
trend toward multiple set-tops per digital home.
iv. Cable Modem
In the fourth quarter, we announced our stand-alone DOCSIS cable modem.
This product was developed in conjunction with our Explorer 6000 set-top.
Both Charter and Adelphia have placed orders for the product, which is
expected to ship in the second half of fiscal year 2001.
c. Subscriber - Analog
Analog set-top shipments in the fourth quarter were 198,000 units compared
to 181,000 units in the previous quarter. A large portion of our analog set-top
sales now are international.
d. Services
Our SciCare™ Broadband Services business continued to perform well,
supporting our customers as they increase the rate of upgrades and
deployments.
During the fourth quarter, SciCare received commitments from Charter
Communications for headend consolidation and integration work for two of
their geographic regions, comprising 18 sites. Under a separate agreement,
we continue our support of Charter's outside plant construction and rebuild
efforts. In addition, we recently announced that we completed headend
installations that will provide more than 400,000 Cox Communications
subscribers in Louisiana and Ohio with expanded access to cable modem and
interactive services.
e. PowerTV
PowerTV continues to distinguish itself from its competitors. Its operating
system reached a milestone in the quarter, with cumulative deployment on
over 2.5 million digital interactive set-tops. This is more than any other
broadband digital interactive set-top operating system. To date, nearly 3
million licenses have been sold. In July, we completed the merger of PRASARA
Technologies of Orlando, FL into PowerTV. PRASARA brings some terrific
application and back-office technology to PowerTV. The combined entity will
be better positioned to meet customers' needs with broader and deeper
offerings.
f. Satellite
Our Satellite business underwent a fundamental change in the fourth quarter,
as we completed the sale of our Satellite Networks business to ViaSat, Inc.
The remaining satellite business, Media Networks, performed well in the
quarter as sales grew almost 20% y-y and 13% sequentially.
Program providers such as Discovery Channel and Cisneros, and service
providers such as GE Americom and PanAmSat, continued to buy PowerVu®
systems and receivers to deliver content to the growing population of digital
cable headends. For developing markets, the PowerVu Digital Satellite
Receiver (DSR) was introduced to give program providers a secure, reliable
satellite receiver at a price that makes digital program delivery a reality in
markets where receiver cost had been a constraint.
g. International
Internationally, our results continue to improve. Compared to the fourth
quarter of the prior year, Transmission bookings increased in each of our
international markets. Canada showed particular strength, with bookings
growth of $8.5 million y-y. In Asia, Transmission bookings increased by $5.9
million, driven by the strength of the Japanese market. In Europe, the Kabel
Plus and Kabel Net subsidiaries of UPC, one of the region's largest MSOs,
placed orders for transmission equipment to rebuild their 500,000 subscriber
network in Prague, Czech Republic.
Company bookings in Latin America were strong in the fourth quarter, with a
281% increase over last year. We were awarded a contract from Horizon
Telecom International to provide cable transmission equipment and SciCare™
support services for new cable TV systems in Brazil. In addition, we recently
announced an order to build cable television and data networks for Adelphia
Brazil in 13 Brazilian cities over the next four years.
h. Manufacturing
Update Our manufacturing staff turned in an outstanding performance this
quarter, expanding Explorer set-top shipments by 63% and commissioning the
next increment of capacity several weeks ahead of schedule. Due to the
continuing growth of demand for subscriber products, we announced in the
fourth quarter that we will again expand capacity at the Juarez facility by
January 2001. This next expansion will take production capacity to 1.3 million
units per quarter.
4. Conclusion
In summary, it was a great quarter and year for Scientific-Atlanta. Going
forward, we believe that our portfolio of businesses is strong and synergistic.
The tremendous investments our customers are making in building out modern
2-way cable plants continue to benefit our Transmission business, and they
are laying the groundwork for expansion of our Subscriber business. The rapid
deployment of set-tops provides a platform on which our customers can
deploy interactive applications, which benefits our software and applications
businesses, particularly PowerTV. Acceptance of interactive applications will
drive the need for continuing upgrades to the transmission plant here and
abroad. And, finally, our services business is engaged by our customers at
each step in the process to implement, launch, and support the network.
This cycle works and is sustainable in the long term because it contributes to the success of our customers through increased revenues and cash flow.
Now I would be pleased to take your questions. |
