2 Q ANDW Conference Call Notes:
Sorry everyone, I have been short on time the last little while. I have not proof read
these notes. Hopefully the bulk of the information is clear despite any spelling and syntax errors.
Overall, a so-so conference call. There is not to much to push this stock up in price near term. Earnings Q to Q remain erratic due to the short lead times on orders. On the positive side, order are just delayed not cancelled. The demand for wireless is still there. Economic conditions will delay much of the build out though. ANDW is stil profitable though sales and EPS growth have slowed.
Harry
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Review of Operating Results:
Order in Q 191 million ,down 12 % year over year
Sales in Q 197 million ,down 3 % year over year
Earning per share 27 cents, down 7%
For first half of year:
orders 428 million down 3 %
sales 428 million, flat
earnings at 59 cent were up 3 %
Earlier in Q they announced they would miss analysts
estimates due to slower wireless infrastructure
spending in USA and delays in Asia and South America..
After announcement, orders and sales improved in comparison
to the first two months of the Q. Most of improvement
was primarily in the USA. This allowed for a better Q than
the pre-announcement. This Q is still below last years 2 Q but
not as much. Recent resumption of B band licensing in Brazil
is encouraging. Some on business concerns in March noted in
pre-announcement remain. We are still concerned about
ANDW visibility. Orders are still delivered on short
notice (ie... within a few weeks of order being placed).
They are still concerned about the timing of orders in Brazil
and other markets due to short term visibility. Business can change
very quickly.
2 Q results were lower than previous year due to lower wireless
infrastructure construction activity and tough order and sales
comparison due to strong 2 Q last year. Orders were down 12 percent.
Last year in March they have 3 large order for cellular and broadcast
systems with a combined value of 30 million, Sales down 3%.
Last year they had 13 million in revenues in March Q as they finished
work on the Hong King Metro project. If this is one time gain is excluded
sales were up 4 %. Income from continuing operation were down 9 %
in Q. EPS from continuing operation down 7%. EPS down less than income
due to 3% less average shares outstanding.
For first 6 months of year:
-order down 3%
-sales flat
- income up 1%
- EPS up 4%
In global wireless infrastructure market, strong international growth especially
Europe and Latin America was offset by weakness in USA PCS and cellular
markets. Excluding effect of Hong Kong Metro project Asia Pacific was up solidly in Q and year to date. Common Carrier and Microwave projects were down compared to the 2 Q last year, but Wireless Accessories, Broadcast and Government markets were all up.
World wide wireless penetration rates of below 5% and deregulation should provide growth opportunities for ANDW. ANDW is making new investments in Brazil, China and India to try to capitalize on this growth by being close to the customer so they can grow market share. Management is commenting on the fact that the Q to Q and Year to Year comparisons may not be consistent due to market conditions. They like the long term growth opportunities.
Operations:
Orders down 12 % from 217 million versus 197 million.
In USA both PCS and Cellular markets were down. Total USA orders down for the Q.
PCS orders 24 million in March Q versus 26 million last year.
Europe and Canada orders were up primarily due to wireless infrastructure. Asia-Pacific and Latin America orders were down compared to last year. Last year in March Q, Latin America had an order of 12 million dollars. Excluding that order, orders from Latin America were up strongly.
Sales in Q were down 3% to 197 million. PCS down were down 10% to 26 million versus 29 million last year. Strength in all international cellular markets offset the decline and resulted in only slight decline in total PCS and cellular sales. Excluding effect of Hong Kong, PCS and cellular were up, Land mobile radio was up. Wireless accessories was down in Europe, but very strongly in the USA. Due to weakness in Europe and USA, common carrier and private microwave were down. Broadcast and government were up with strength in all geographic areas.
Terrestrial microwave and coaxial cable were up slightly with strength coming from Asia and Latin America. Earth stations antennas were up very strongly especially in the USA. Special antennae and other products were down strongly due to weakness in towers and services and distributed communications equipment.
In Q foreign currency translation had a negative 2% impact on sales. Same as seen in Q1 and first 6 months. Income affected negatively by 4%. EPS affected negatively by 1 cent in Q.
Gross margins down 7 points at 39.2%. Lower volumes and stronger sales of lower margin products impacted the gross margins (lower margin products includes earth station antennas, wireless accessories and value line terrestrial antennas).
Forward guidance could be 1% lower than the gross margins of last year.
R&D down 3.7% or 3.7 million in the Q due to timing of outreach research project funding and eliminate of global message and fiber optic sensor divisions they sold or eliminated..
SG&A up 3% or 2.0 million. Up a point to 17.7 percent of sales. All of increase was in administration due to the upgrade of their information systems. This is an attempt to get more timely data on their business.
With reduced R&D spending total operating expenses were down to 20.9 percent of sales from 21.7 percent last year.
Drop in gross margins was partially offset by reduced R&D, but operating profits were still down 7%. Profit margin declined for 19.2 to 18.3 percent.
They had net interest income this Q of 274,000 due to higher earnings on invested cash balances , higher cash balances and the collection of interest on loans to their Russian joint venture partners.
Foreign exchange gains were 250,000 in Q versus 1.9 million last year.
Tax rate is lower at 34 percent due to higher anticipated foreign tax credits this year. Income from continuing operation down 9 percent as a result.
EPS were down 7 % to 27 cents versus 29 cents last years for basic and filly diluted EPS.
EPS benefited from the stock buyback program start in May of 1997.
No shares were purchased through the stock buy back program in the March Q.
Cash from operations were up 15 percent.
Due to timing of expenses for manufacturing facility in China and India, capital expenditures were up 41% to 15 million. For the full year this should level up. Capital expenditures for the total year should be same as last year.
Entered the Q with 118 million in cash up from 94 million at the beginning of the year.
Question: Comment on margins on the cable business in the Q. Any pricing pressure due to competition?
Answer: No new pressure that we have not seen for the last 2 Q's. Margins continue to be under pressure due to the competitive nature of the business. No change in margin because there has been no change in volumes. There was some cost increased and pricing pressures from a year ago level, but these were offset with productivity improvements.
Question: Has CostCo(?) becomes a stronger competitor? Are they more visible in the bidding process? [ I will have to check up on this other company.]
Answer: They have been active for a few quarters now. There is no significant changes as far as management can tell in the competitive landscape.
Question: Will ANDW be up on a year over year revenue basis? Can you give an overview of the regions and products where you see weakness and strength?
Answer: We are optimistic about the second half, but the visibility is very low. We are entering a period where the seasonal construction period will be more favorably to infrastructure build out. We anticipate that sales in the second half of this year will be up from sales of the second half of last year. There is the 2 gigahertz re-location in the USA. We are seeing some construction in the D, E, and F bands. Nextel continues to operate. We are seeing some of the vertical real estate companies emerge as a viable alternative to capital spending by some of the operators. Digital TV will be starting in the USA. Overseas we have some bright spots. France, Germany and the UK are expanding their cellular infrastructure. India, Saudi Arabia are bright spots. We are more satisfied that China will continue strong. We are not expecting anything out of Korea. Thailand and Indonesia we cautious about. Overall, we think that they are still positive. Brazil and Latin America are still strong, especially Brazil. We are cautious optimistic we will be up for the year and will have a positive second half.
Question: Will the accessories market be up year over year?
Answer: For this segment we have been doing well in the USA. Europe have been weak due to change in business strategy in Europe. In the second half of the year, Europe will be less of a problem. We are seeing strong growth in the USA. Growth in 2 Q in USA offset softness in 1Q so that year to date we are see a small level of growth. The 2Q for wireless accessories in the USA was strong.
Question: Were any markets up in double digits?
Answer: Europe, Canada, Asia-Pacific (excluding Hong Kong order from last year), and Latin America were all up double digits for Q and year to date on cellular and PCS combined for shipments and orders. Land mobile radio is a mixed bag. Some markets are up fairly strongly, but they are small markets for LMR to begin with. No LMR market have a negative impact in the Q.
Common Microwave was a mix with some having double digit increases and some double digit declines. Some of the markets are fairly small so it does not take much to get a double digit increase or decrease. In general, the trend is the same as the 1Q. We are seeing strength in the Asia Pacific for private microwave. We are waiting for the 2 gigahertz re-location to get private microwave moving in the USA. Currently in the USA private microwave is in decline. Private microwave and common carrier micorwave is more project related. They are not month to month, Q to Q steady businesses. They are lumpy businesses.
Question: R&D is down, will it tick up going forward back to 7 or 8 million per Q.
Answer: R&D was a little lower than we expect .1/2 of the decrease was due to the elimination of the global messaging and fiber optic sensory divisions. We expect it to tick up. 1/4 decrease was due to timing of outreach projects. 1/4 was due to shift in engineering efforts. 3Q to 4Q last year we had a engineering effort on space station antennae. This year there was more effort on manufacturing issues in an attempt to increase productivity. It will several Q's before we are back to levels of a year ago in total dollars term.
Question: On the interest income line , will we see more interest income from the Russian joint venture or will ANDW by back up to the 1 million dollar level in the June Q.
Answer: We will pick up a little interest income in the June and September Q from the Russian Joint venture, but it will be small. This Q the interest income from the Russian Joint venture gave ANDW a small interest income gain versus a small interest income expenses. For the year it may add 1 million dollars in interest income.
Question: In Latin America, is ANDW see any activity from some of the winner of B-Band licenses?
Answer: We are in discussion with some of the providers and we should see some activity in the latter half of Q3. The delay in the auction in Brazil has affected the amount of sales we can expect from Brazil in fiscal 1998, but the good news is those sales will materialize in 1999.
Question: What effect do you think the Telebras privatization will have on business.
Answer : At this point we see it as a positive. The privatization will push the B-Band licenses to put in more infrastructure , more quickly in order to compete. The investors of the B-Band licenses have the resource and the desire to accelerate deployment to capture more of the market . It will be a positive for ANDW as both sides will be trying to capture market share putting the new infrastructure as quickly as possible..
Question: What percentage of sales came from OEM's? What percentage are new customers?
Answer: We don't break out those numbers. There has been no change in levels of OEM sales. It might be a little less because it has been one of the slowest areas. There has been no significant change.
Question: Is the growth coming from new customers or is it from the existing customer base?
Answer: It is a mixed. Our customer base is changing. We are seeing some activity for the vertical real estate companies. This is just being and it did not contribute in Q2. It may contribute in the 2'nd half of the year. We are getting new customers in India and in some of the other developing countries. These are not totally new customers as we have done business with them before. There are new in that they are now giving us significant orders. We have not really seen any companies we have not seen before . In India and China we have new customers.
Question: Since the lead time are very short, is it unlikely we will see an order the size of the Hong Kong Metro in the future?
Answer: That is correct. We should see orders in 7 to 8 million dollar lumps though as that is the typical size of a long haul terrestrial microwave installation. Last year we have orders from Thailand and Indonesia of that size. We may see order in the 7 to 12 million dollar rang, but not in the 50 to 60 million dollar range. That was the largest contract in ANDW history. There are contracts out there in the distributed communications market of the magnitude of the Hong Kong order, but it is unlikely it will be all in one order.
Question: Share count at end of the Q?
Answer: 88.5 million
Question: Where was the improvement in March? Brazil or other area?
Answer: Good improvement in the USA. China continued. Europe continued. Brazil continued.
Improvement was pretty much global. Most notable was the USA.
Question: Was that on the PCS or the cellular side.
Answer: The improvement was across the board.
Question: You stated improvement year over years on PCS. What did it look like on cellular look like.
Answer: We have not traditional broken out the cellular numbers. In general cellular has seen the same trend as PCS. Cellular is a little larger than PCS but the trend was comparable.
Question: Size of sales in the international market? How fast doe you expect B-Band sales to accelerate?
Answer: International sales up from the traditional 48 percent of the last 2 years. We expect international sales to grow faster going forward. International sale were roughly 50 percent of the first 6 months. We expect this level for the year.
For the roll out of the B-Band, the delay in the awarding the licenses will shift most of the business from 1998 to 1999. Region 1 is moving forward. We are seeing business from that region and we will continue to. We will not see much roll out in the remaining 5 months of this year. They need to do their network planning. We expect to see the business in 1999 now. We will see some in 1998.
Question: China is not a big portion of current revenues. Do you expect it to be a big portion going forward?
Answer: Yes, China is not a big portion of the our revenues. We expect to see a large portion of our growth come from China and India going forward. That is why we are investing in those regions.
Question: Are you more optimistic today versus when you made the pre-announcement.
Answer: Yes. We are seeing active in the USA. We saw the licensing issues in Brazil resolved. We continue to see growth in China.
Question: What was the 12 month back log? How much is shippable in the next 12 months or is it all shippable in the next 12 months.
Answer: The total 12 month backlog is 120.3 million for the next 12 months. The total backlog is 132.7 million. We have about 12 million of backlog scheduled to ship more than 121 months out.
Question: Are you making shipments of antennas and other product for digital TV? Do you have master purchase agreement with FOX and it affiliates? They have a fairly large network and it could be a big opportunity over a number of years.
Answer: We are just starting to ship products for digital TV. We have agreements with FOX. Their affiliates can buy under these agreements. FOX is a good opportunity, but so are the other networks. We don't have specific agreement with the affiliates. The same type of agreement with FOX and it affiliates would probably apply to the other networks. The parent network tries to get consistent pricing for its affiliates that is the reason for the master agreement. This business is tied to specific projects and programs within the networks though .Some of these digital TV opportunities could be worth 200 to 300 million over the next 5 to 7 years.
Question: What level of activities are you seeing the in digital cellular overlays on top of analog infrastructure market? Can you contrast the cable to antennas areas.
Answer: ANDW is not participating in the overlay business in a significant way. This business is not the same as an infrastructure build program. The business is significant less. We have some opportunities in the jumper cable area and for cables within the shelter, but most operators are not replacing base station antennas and feeder lines. They also don't need new towers. There may eventually be some advantages to changing the base station antennas and feed lines. Ultimately, there could be some business, but initially this will be a small business opportunity.
Question: They has been a shift away from carrier owned stores for wireless accessories. How does this change you business.?
Answer: We have done well with stores owned by the operators. This has been our focused market. We market to them under their private label brands. We provide the service and quality of product that makes sense to them They can then concentrate on talk time.
As that market shifts we are picking up new customers. That is the source of the optimism for us in this market.
Question: In the PCS market, have the operator worked through their inventory issues? Is there any inventory left in the hands of carriers?
Answer: We don't see any inventory problems. Most of that inventory should have been worked through by now.
Question: North America PCS order trends?
Answer: Orders for PCS in Q were 24 million versus 26 million March 1997. Cellular orders are a large number but the trend is comparable.
Question: Trend year to date for both.
Answer: PCS was 30 million in Q1 versus 31 million in fiscal 1997. Year to date 54 million versus 57 year ago. Cellular was comparable.
Question; Order trend in China year to date?
Answer: up strongly in double digits.
Question: Why did you not purchase any shares in the Q?
Answer: We know it was a great opportunity, but because of the pre-announcement and the uncertainty we did not. Normally we do not buy shares from the 15 day of the third month till 3 days after earnings. The quiet period and the insider trading windows are closed during this time.
There were 45 days from after the last Q results till the pre-announcement. The stock price reacted well so we did not purchase any share at that time.
Question: In terms of growth in the USA market for PCS and cellular, what are you expecting for 1998 versus 1997?
Answer: We are expecting some growth in the 3rd and 4th Q for PCS and cellular. You can apply our forward guidance for PCS and apply it to cellular.
Question: Year over year capital expenditures look like they will be flat in PCS and cellular. How do you expect to grow? By gaining market share?
Answer: We are not sure how accurate the capital expenditures estimates are. With the vertical real estate companies ,we expect a shift in operators' capital expenditures budgets as they utilize their capital better. We have not see flat spending in capital budgets the last several months. We have seen declines. If this is true that capital spending is declining, we show see some acceleration by the end of the year. We do not know the effect of vertical real estate companies.
Question: What level of growth do you anticipate in PCS and cellular then?
Answer: Year over year we see double digit growth. Competition and deregulation is having a positive impact on infrastructure building and ANDW is increasing market share.
Question: Is China the primary reason for your growth?
Answer: Yes, China was the big growth factor in the Q. Before the economic problems, other regions also get strong growth numbers.
Question: What areas are you focusing your R&D spending on? What portion of sales is coming from new products?
Answer: We are working on better base station antennas, smart antennas and repeaters We have one repeater FCC approved and we are seeing sale activities there .New earth station antennae has been developed in the the last 6 months. WE just got certification on a new earth station antennae. We are developing better lower cost connectors for heliaxial cable , new heliaxial cable and new radiaxial cable for distributed communications. We are constantly, improving products and infrastructure. In the wireless accessories market we developing hands free kits for that market. We are developing new products for intelligence gathering systems.
When we talk about new product we need to include new markets. 3 years ago we had a program to get to the point where we were generating 1/3 of our revenues from new products. We managed to do that for 1 to 1.5 years. We are not doing that now. We are in the 15 to 20 percent range of sales from new products.
Question: Long term plans for the Russian joint venture. Will you exit it? Will you expand it?
Answer: We plan to aggressively expand the subscriber base and capabilities of that network. We are being encouraged by the Russian Ministry of Communications. We hope to make a sizable company out of that activity.
Question: The US cellular market is starting to slow, is that a result of the operator scaling back on their expansion in terms of geographic coverage or it because of the digital conversion?
Answer: I have a third possibility. The advent of the vertical real estate companies allow an alternative to the major operators to owning the infrastructure and leasing the space for antennas from an outside supplier. Vertical real estate companies go in and buy cells and lease the capacity to PCS and cellular operators. This is causing a change in strategy by the major operators. This kind of chance usually cause a hesitation or a delay. This is the impact we have seen in our Q2 in our opinion. The other alternative a possible, but I don't think this is the primary driver for the slow down in cellular. [He seem to emphasized that this was only a delay.]
Question: You talked about Nextel being strong and Brazil being strong, but what about Nextel in Brazil. Do you have any orders from Nextel in Brazil?
Answer: I don't know specifically, but I would be surprised if we don't.
Question: Margins on accessories business: How have they been? What are they relative to the corporate margins.
Answer: Margins on the accessories business is lower relative to the corporate margins .It is however improving. We have a program to improve it even more.
Question: Is wireless accessories a big part of the 1 point margin decline for the year?
Answer: It will have an impact, but volume and product mix overall are the reason for the 1 point decline in margin . We have seen strong increase in the sales of earth station and value line antennas. The margins on these are below the corporate margins. Similar wireless accessories are below the corporate margins and we expect them to remain so the next 1 year to 18 months.
Question: So the decline in margin in 1998 is not due to pricing pressure on individual products. It is due to strong sales in lower margin products.
Answer: Yes. There are factors other that price pressure.
Question: Is there difference in gross margin and pricing pressure in the accessories market in particular?
Answer: Margin have been under pressure and pricing pressure has been a major factor to this decline. It is the nature of that market that pricing pressure is high. The pricing pressure has been as strong if not stronger than the pricing pressure in our cable and antennas market. The division has done a good job of dealing with those pressure from a cost management and manufacturing efficient point of view. As volumes increase margins should improve so we will have more flexibility to deal with top line pressures.
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