Review of Q1FY00 Conference Call. 5:30P Wed 14 July 1999.
A replay of the call, available for 48 hours
starting 2 hours after the call's conclusion,
is accessed at (800)-633-8284 code "12675789".
Company Contacts:
Investor Relations
Jeanne Harper Condren 408-944-1817
jeanne_condren@dmcwave.com
Website
dmcwave.com
Address/Phone
170 Rose Orchard Way
San Jose, CA 95134
Voice: 408-943-0777
Fax: 408-944-1770
Chuck Kissner, Chairman and CEO
Carl Thompson, CFO
+++
Carl summarized the Q1 financial results:
All results are restated to reflect the completed merger with Innova Corporation.
New Orders
Q1FY00 Q4FY99 Q3FY99 Q2FY99 Q1FY99
Americas 19.5M 23.3M 19.5M 28.4M 17.0M
Europe 23.4M 25.8M 26.6M 23.4M 20.1M
Asia/Pacific 24.6M 16.1M 12.1M 5.9M 17.0M
--
Narrowband 47.3M 50.4M 47.6M 43.9M
Broadband 8.7M 4.2M 1.1M 2.3M
LongHaul 8.5M 7.3M 9.5M 11.5M
Services 3.3M 3.3M
_____ _____ _____ _____ _____
Total 67.8M 65.2M 58.2M 57.7M 54.3M
Revenues
Q1FY00 Q4FY99 Q3FY99 Q2FY99 Q1FY99
Americas 19.5M 19.2M 19.0M 24.6M
Europe 26.0M 27.1M 22.6M 24.3M
Asia/Pacific 20.5M 13.4M 16.7M 6.4M
--
Narrowband 46.5M 43.1M 48.7M 47.3M
Broadband 5.2M 3.6M 0.7M 0.0M
LongHaul 11.0M 9.6M 8.9M 8.0M
Services 3.3M 3.4M
_____ _____ _____ _____ _____
Total 66.0M 59.7M 58.3M 55.3M 63.2M
Gross Margins 27.5% 26.3% 20.2% 17.7% 21.7%
Improvement in GM due to [1] better overhead absorption (particularly in San Jose) due
to strong production levels, and [2] improved product mix (as the higher-margin Altium
and XP4 products make up a larger portion of the total revenue).
They are continuing to proactively monitor manufacturing personnel and spending levels
to keep expenses aligned with the current market demand levels for each product line.
Pricing continues to be very competitive; as a result, GM has not improved as much
as they had anticipated. Due to improved product designs and factory processes, the
amount of business they can book and ship in the same quarter has continued to increase;
while this is a definite benefit in the marketplace, it makes it more difficult to
estimate margins at the beginning of a quarter. E.g., in Q1FY00 about 25% of product
revenue was derived from orders booked during the quarter.
Net Income of $160K in Q1FY00. While not a huge profit, they're definitely proud of the progress
they've made and the rapid turnaround that has been accomplished in the last 9 months. This is a
substantial improvement from 3 quarters ago when they lost $11M in Q2FY99. These results are on
track with the direction they set during the restructuring and merger with Innova last Fall.
They continue to put emphasis on managing the balance sheet; particularly the cash position.
At the end of Q1FY00 their cash position was $23.4M vs $27.3M at the end of Q4FY99.
AR increased about $15M to $75.7M and DSO's increased to about 103 days vs 91 days at the end of Q4FY99.
Although a significant increase over Q4FY99, DSO's are about the same as the 104 days at the end of
Q1FY99. Nonetheless, DSO's are about 10 days higher than they projected at the beginning of Q1FY00;
there are two primary reasons for this: [1] there are two large LC's (totaling about $9M) which were
expected to clear the banks prior to the end of the quarter but (for a variety of banking reasons)
were delayed awaiting documentation... had these cleared, DSO's would have been about 90 days and
cash over $30M... a portion of these have subsequently cleared, and [2] revenues were not as linear
as has been true historically with a higher portion of revenue occuring at the end of the quarter.
Inventory levels continue to decline: $46.9M at the end of Q1FY00 representing a decline of $4M
during the quarter and just over $8M (or 15%) during the past 2 quarters. Consequently, inventory
turns increased to 3.9 times from 3.3 times in the prior quarter; tight controls over inventory
purchases continue and account for the decline in inventory. They're maintaining their focus on
utilizing existing inventory and minimizing inventory receipts; inventory declined in all major
manufacturing locations.
They continue to be essentially debt-free. Total debt (including capitalized leases) at the
end of Q1FY00 was $3.6M vs $3.8M at the end of Q4FY99.
They announced a $65M shelf registration in Q4FY99. The related S3 has been submitted to the SEC
and they're in the process of responding to their written comments. Due to the improved financial
results, the improved growth prospects of some new business plans, as well as the higher stock
price, they plan to increase the amount to $100M. This registration will be good for about 2 years
and they expect to issue securities from time-to-time in the future under this registration to
meet general corporate needs, for working capital, or for future acquisitions.
+++
Chuck gave a brief summary of the quarter with comments on some of the
major operating divisions and some comments on the outlook:
Overall they're very pleased with the progress the company has made as evidenced
by their return to profitability as well as the strong reception that this new
and expanded product line is receiving in the marketplace.
As they indicated last quarter (and it continues), overall demand has been improving.
The major restructing of the company that they completed a few months ago has very well
positioned them to take advantage of this increasing opportunity.
The new products that have been introduced or acquired over the last 9 months have been
doing very well. Together, new products accounted for over 45% of the orders in Q1FY00.
Revenues from new products grew about 30% over the prior quarter. They booked business
during the quarter from about 250 customers... about 15% greater than the prior quarter;
they believe this is a combination of general improvement in the markets, some new
customers that are interested in their new products, and some market share pickup.
Operational improvements that they've implemented are starting to pay off; this
is evidenced, e.g., by the increasing inventory turns. This will allow them to
ramp up the volume in a very efficient manner going forward; they have an excellent
capability in most areas of the business to book and ship very rapidly and not
have to buy alot of inventory... this is a substantial improvement over their
capability in the past.
Broadband Division sales increased to $5.2M (within range of their expectation) and
orders increased to $8.7M. Altium frequency rollouts are progressing very well and
this is beginning to build good momentum for the Altium platform. Additional frequencies
were rolled out in the quarter on schedule and they expect Altium to ramp as planned
as the level of orders is showing increasing demand and their ability to ship
product is on track. At the end of Q1FY00, there were 15 customers in current
backlog for 7 frequencies of Altium. There is a mixture of applications for both
mobile communications and broadband fixed access. The U.S. backlog in broadband
is about 40% of the total which is quite a bit higher than their traditional
geographic mix between U.S. and international. As a result of this (and some
associated product like XP4 which gets sold in combination with Altium), their
overall U.S. business is about 20% of their total business; this is dramatically
higher than it has been in the past. The U.S. business is representative of Altium's
suitability as a broadband fixed wireless access vehicle. They are extremely bullish
about the potential for the broadband business; the timing of this product line is
excellent given the current market needs and the reaction to Altium specifically
has been great.
The Narrowband Division business continues to be strong. They've released a number
of new XP4 products to complete this product line and to make it attractive to a
wider customer base. Business was up about 49% in Seattle due to strong XP4 and
DART sales. A number of Altium deals were packaged with XP4 as a complete solution.
The Spectrum II business is still resilient and they're happy in total with
the narrowband business and the popularity of its product line.
The orders for the Long-Haul Division have been light. However, they do expect that
(as the new DXR700 product rolls out in its various frequencies and configurations)
volume will begin to grow again. The Long-Haul Division's financial performance
has been quite strong.
The bottom line is that most parts of the company are running quite well right now.
For the most part, customer demand is strengthening; especially for the new products.
They're feeling pretty good about the progress to date.
Most key indicators, both external and internal, are encouraging right now. They
intend to continue the focus on planned new product introductions with continued
penetration into some new markets and further improvements to achieve operational
excellence. Given reasonable liquidity in the financial markets, they expect to
achieve continued top-line and bottom-line improvements.
In determining at what rate this emerging market is going to grow, they're
currently considering additional investments in this area of broadband wireless
fixed access. Due to their better-than-expected cash position, the shelf
registration (which is still in review and is not yet effective) has not
been a high priority; but (since the original submission) the business has
progressed, their outlook on the business is much more bullish, and they're
examining some additional opportunities in the wireless fixed access area.
But they have no specific plans for any financing at this point; they do
believe it would be prudent to have a vehicle for raising capital... so
they are close to resubmitting the shelf registration to the SEC. Because
of the growth that they're experiencing and the new business development
scenarios, the board yesterday authorized increasing the shelf registration
to $100M. Again, they have no specific financing plans in place at this time.
+++
Q&A
There were 10 analysts on the conference call who had questions and this went
on for a long time... I'm too tired of typing (and hungry) to provide a detailed
review just now... suffice to say that the analysts were congratulatory. But its
worth noting that the PaineWebber analyst (Walter Piecyk) [who, on 22 June 1999,
stupidly cut his EPS and revenue estimates for the company (because he thought
the microwave radio business was not going to turn around as early as he expected)
causing an unwarranted plunge in the stock price] was contrite as he said:
“Congratulations on the revenue. The next time we get together I'll have to
have my ears cleaned out because I could have sworn that you guys were
talking about flattish revenue for the quarter.”
I hope all of you took advantage of the buying opportunity Walter created. As soon
as I learned that his dimmed forecast was the reason for the plunge in stock price,
I tried to pick up some more shares cheaply... alas, I was too late. But no matter,
I built a sizable position in this stock last year and I'm pretty happy with that.
Rob |
