Conference call notes:
Sorry guys, I don't have time to proof read this.
Harry
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ADCT 2Q conference call May 21,1998:
Summary of Results:
Mark Borman, Bob Switz, Bill Cadogan
Record Sales for the Q of 335 million which is an increase of
20 percent Year over Year and 17 percent sequentially
Broadband connectivity sales were 150 million up 21 percent year
over year and 27 percent seq. Broadband connectivity across
dense fibre and copper DSX product line has recovered from Q1
customer demand slow down due to industry consolidation. Very
clearly broadband connectivity back on track.
Solitra sales were down year over year but increased 8 percent
seq. We still feel the worst results for this unit has already
occurred during Q1. We are looking at the unit and we are
currently reducing the head count there. In Q3 we will further
look at getting the cost for the unit in line with anticipated
future revenue streams.
Transmission system sale were 149 million up 29 percent year
over year. This reflects the increased strength in sales of
Home Worx cable telephony, Sonoplex, and wireless systems.
Also the transmission group sales increased seq. as well due to
the same reasons.
Enterprise network sales were 36 million down 10 percent year
over year but up 11 percent seq. They are in the midst of
upgrading the functionality of their products in this area. They
need to re-build a strong competitive position in this area.
Their efforts are on time and on schedule. Still work to be
done. They are seeing some success in this area.
Gross margins 46.9 percent for Q. Up from 46.3 percent one
year ago and 46.6 percent in Q1. This reflects their efforts at
cost reduction and a favourable business mix throughout their
product lines. Looking at Divisions and P and L centres
throughout the company all but 3 increased their gross margins
during the Q. Forward guidance for gross margin should be 45 to
47 percent.
R and D expenses were 37 million or 11.1 percent of sales versus
10.9 one year ago and 10.8 percent for Q1. This is in line with
previous results. They continue to invest in upgrading their
product lines and this Q they invested a little more money in
pursuing future development projects and programs.
SG&A expenses were 64 million in Q or 19.2 percent of sales
compared to 18.9 percent one year ago and down from 21 percent
on a seq. basis.
Operating income was 53 million, This represent 20 percent
growth year over year (in line with sales growth) and 38 percent
seq.
Operating profit margin was 15.7 percent. This is even with the
results of one year ago and up seq. from 13.3.
Total operating expenses of 104.5 million increased 9.3 percent
over Q1 but decrease as a percentage of sales to 31.2 from 33.4.
Some on increase reflects addition product development and
program spending towards the end of the Q.
Net income was 34 million up 19 percent Year over year and 35
percent seq.
Net margin was 10.3 percent, flat from a year ago and up from
8.9 percent in Q 1.
EPS was 26 cent basic and 25 cent diluted versus 22 cent basic
and diluted from last year.
Things progressed as anticipated in the Q and the recovery in
the Q was at the upper end of their original estimates.
Bill Cadogan:
Pleased with recovery over the slow start in Q1.
Highlights from his point of view:
Broadband connectivitiy group snapped back with sales of 150
million in the Q up 21 percent year over year but more
importantly up 27 percent on a seq. basis.
Transmission systems group returned to strength as well. Sales
of 149 million was an increase of 29 percent year over year.
This was the kind of strength they had counted on at the start
of the Q.
Another strong area was their system integration group. Revenues
for the division was up 92 percent. Up over 70 percent if you
exclude the recent acquisition of WD ETech.
Looking forward ,he believes ADCT is strongly positioned for
further growth in their core voice, video and data systems as
well as in their next generation transmission systems which are
scheduled to deployment in the second half of 1998.
Prospects during Q2 and going forward:
During Q2 their HomeWorx cable telephony system began deployment
with Media One in Atlanta and Los Angeles. That deployment is
gong well, They also began a field trial with Kojico Cable in
Canada.
The Wireless system group was also strong with increase sales of
45 percent as a result of internal growth and the Oct 1997
acquisition of NewNet???a developer of intelligent network
software.
Since Q1 ADCT NewNet has signed agreement to supply its
software to Compaq, IBM, Glenayre, Qualicomm and Bay Networks.
During Q2 we signed 2 major agreements for the sales and
marketing of it wireless GSM system to China and our
Micro-cellular product in Korea. Over the next 2 years these
agreement could be worth over 100 million dollars.
They will be at SuperComm in June. They will be releasing their
wireless broadband system, their ADSL product and their 32 way
split DWDM product.
Market performance: All of our markets domestically including
the telcos, cap and cable and wireless participated in our
re-bound. International sales were particularly strong with ADCT
international sales up 30 percent in Q2 . European sales were
especially strong with a 100 increase year over year. This shows
that our strategy to re-allocate incremental resource from Asia
to Europe is working.
In summary we see an abundance of opportunities to grow our
business and we anticipate a continued acceleration in revenue
growth over the second half of the year. We expect to exit the
year with results that will put us in the top quartile of our
peers in the industry in terms of revenue and earnings growth.
Questions: International sale as a percentage of sales? What
type of system are they selling in China for Topper Electric. What
products are making up most of the strong sales in Europe?
Answer: In China our agreement with Topper is for the sales and
marketing of GSM and repeater products. The GSM base station
product is OEM'ed from Interwave, but the repeater product is
manufactured by ADCT.
Most of the strength in Europe is the result of broadband
connectivitiy and video products. These are the 2 fastest
growing segements of our business internationally but
particularly in Europe. We expect this trend to continue over
the rest of the year.
Questions: Comment on the outlook for Solitra? Specially
comment on the filters and amplifiers? Did ADCT buy back any
shares? For the systems integration business 2 Q's ago you
mentioned that 5 customers accounted for 10 million in sales
each, is this still true?
Answers:
In Q2 we made modest progress with Solitra. Business was up in
the Q and we look for the that to continue and accelerate
throughout the year. We see that sales to our primary customer
continue to be soft. We are pickling up incremental business
from new OEM's including the domestic wireless and equipment
providers. We expect this to continue. For a long time we have
relied on one large customers in this unit. We are not see out
customer base broaden a bit. This is health for our business. It
lead us to be optimistic about the return to more normal growth
for the unit as we exit the year. Guidance is for a modest
recovery at Solitra for the balance of the year. We might need
to take some cost out of the business though going forward.
For the systems integration business , we are seeing strength
from our major customers. 5 and perhaps 6 customers will account
for sales of over 10 million dollars each. The prospects for
this are fairly secure. We are currently seeing the large
service providers accounting for much of the growth . If we go
back a few Q's, the GAP's and the CLEC's accounted for much of
the growth. Over the last 2 Q's we are seeing most of the growth
from the large service providers. We don't know if this is a
trend.
We did take a health position in ADCT stocks in the Q. We have a
synthetic position using an equity collar. [I don't know what
this means in particular. It sound like they bought calls or
sold puts.]
Question: You mentioned that Soltira's business should be
accelerating through out the year, but at the same time you
will be taking cost of the business (i.e..... down sizing). Can
you explain the contradiction?
What is the guidance for gross margin and operating margin for
the rest of the year.?
Answer: We are looking to align the cost of the Solitra business
unit in line with its anticipated revenues. We invested heavily
in Soltira's infrastructure in the expectation that significant
demand would appear from OEM's. That demand did not appear at
the level anticipated this year. We do see healthy growth for
the unit going forward , but we have too much capacity in people
and plants for the anticipated demand. We need to bring this in
line with the efficiency of the other broadband connectivity
facilities. We have a Solitra plant in Minnesota that is coming
up to standard. We have received some significant first orders
from OEM's in the domestic market. We feel this will be handled
by the Minnesota plant. Over the Q we will be trying to match
the plant location with the sources of anticipated customer
demand. We would like to bring all facilities up to the US
standard of the other divisions. We have any overall company
objective to increase the efficiency and therefore gross margins
of all our facilities.
The guidance for gross margins for the Q is 45 to 47 percent of
sales. We like to use that level because of the shift of the mix
of business from Q to Q. Right now we are targeting the 46
percent level. For the balance of the year we hope to keep it at
that level. We have had margin improvements in some divisions
and this has helped us in the first 2 Q's. This will hopefully
help us negate if not offset to a small degree the pricing
pressures we are seeing in some of the business units.
Question: What are the expectation for Operating Expense levels
for Q3 and Q4. Particularly, will we see improvement year over
year. In the past you said you saw the opportunity to sell DSX
to AT&T, is this still an opportunity in the 2 nd half of the
year.
Answer: The goal has been and will continue to be to bring down
operating expenses as a percentage of sales. We hope to keep the
R&D expenses at the current levels as a percentage of sales. As
for the next Q, we expect to see lower Operating Expenses. As
we plan for 1999, we are setting aggressive operating expense
levels that we feel are achievable. Our objective is the gain
the leveraged position we have been talking about for the last
year. Sequentially we see it going down.
We saw a sharp pick up in shipments of DSX to AT&T in Q2. This
is just the start and we expect this to continue for many years.
Question: What was the outlook for SONOPLEX growth in Q2 and
for the rest of the year? It was mentioned that the Media One
Home Worx system deployment was on target, what are the
expectations for the rest of the year? Are any additional cities
planned besides LA.
Answer: Media One plans are for 5 to 6 more cities over the next
year. They have announced 3 so far. We see more opportunities
for this product going forward. If we look at HFC plans for
revenues for the next year we continue to be on target. In the
second half we see stronger Home Worx sales than the first half
of the year. For the full year we will be on target though.
[They seem rather cautious here. They don't see any surprises
despite the anticipated stronger second half.]
Sonoplex growth in the Q was 33 percent higher that last year.
For the 2 nd half of the year we expect to see growth in the 30
percent range. We are seeing some pricing pressure so that may
reduce the revenue growth rates, but growth rate of units
shipped are on track.
Question: Since you are beginning to release expenses again
this Q, are you more optimistic on the linearity on the
broadband side of the business?
Answer: We feel the 2 nd half will be better that the 1 st half.
We have released some development money, but it is going to the
business units that have shown that they have recovered and
demonstrated a sustained recovery.
Question: Capital spending for the RBOC's were up 13 percent in
the March Q lead by Bell South, US West and Ameritech which was
very strong. Do you expect the strength to continue for the
balance of the year? What is the effect of the PAC BELL/SBC
consolidation on ADCT? ( The analyst made a mistake on the
companies here.)
Highlight 1 or 2 product that will be coming out in the second
half of the year.
Answer:
Telco spending will stay the same in the second half in our
opinion. Looking at the overall collection of ADCT customers, we
have seen a sharp acceleration of sales in Q2 over Q1, but this
is due to the very weak Q1. Internally, we are seeing a return
to the optimism in the telco segment. Therefore we do not
anticipate a down turn in spending.
I think the question was about the Ameritech /SBC merger. IF we
go back to the South Western Bell/Pac Bell merge, historically
we saw not effect at all. This is opposed to the MCI/WCOM merge
that had a dramatic effect on sales. Looking forward we see no
effect from this new merge. We see it more like the South
Western Bell./ Pac Bell merger. It should be a non-event.
On new products, we have Cell Worxs is heading into field trials
next week. We expect that to generate revenues this year. We
caution analysts to use conservative estimates on Cell Worx
revenues in the 2 nd half of the year. In Q3 we expect the full
complement of ADSL products to be released for trials and
initial deployment. This includes ADSL and the ADSL lite
versions. We will be releasing a new broadband wireless system
which is an ATM based point to mulitpoint radio targeted at the
business segment. We are encouraged at the number of new
products that will be coming out in the second half of the year.
New products will be significant contributors.
Question: With the SBC/Ameritech merger, what is the amount of
business ADCT does with SBC and Ameritech in the copper cross
connect business? Will there be any effect due to the merger on
this segment.?
Answer: We don't see any impact that is positive or negative.
Ameritech is one of ADCT's largest customers especially in the
area of digital cross connects. We have not seen nor do we
anticipate seeing and backing off of purchases. On the other
side, we have seen some activity that could increase the sales
of digital cross connects to SBC by ADCT. They have had a RFP
out for 3 months that will be decide this month. ADCT could see
incremental business.
Question: In the enterprise area you were looking to enhance and
broaden the products in the space, what is being done? Are any
acquisition activities in the works?
Answer: There are no acquisition activities in the works for
Kentrox at this point. In the last 2 or 3 months we have seen
that the he AAC family is light on 3 features. The first is
voice over ATM. The second is inverse multiplexing . The third
is MPEG in AAC3. We also need a new algorithm for traffic
shaping. This last one is not a requirement but would be a
significant differentiator and a key advantage offered by out
product. We recognise the first three are needed and we expect
these to be done by the end of the year.
Question: This is purely an internal development effort?
Answer : Yes.
Question: Comment on the linearity in the Q.
Answer: Q2 was not as linear as we would have liked, but it was
more linear than Q1. We hope for a better Q3. At the start of
the year we expected a difficult Q1, a slightly improved Q2 that
would be backend loaded and an improved Q3.
Question: Is this lack of linearity the result of working
through the Q1 issues?
Answer: Yes, pretty much.
Question: What was the cause for improvement in the Enterprise
business and what is the outlook?
Answer: We see a gradually improvement in the enterprise
business. AAC product sales will benefit significantly once we
have the new features in. Conversely we are not looking for
strong growth for AAC inQ3. We see growth but it will not strong
contributor. DSU growth was a strong contributor in the what we
saw this Q. By our accounts, the growth of Kentrox is still well
below the long term targets. We have seen a sequential growth,
but we are down year over year. This is well below what we want
to see. We should see a rebound once we get in the critical
features into the AAC product line.
SU and AAC contributed to the growth in this segment.
Question: Do you have any data on the subscriber growth rates
for the deployed Home Worx products and a break down by
geographic region.? Are there any specific trails underway or
anticipated that will result in increased business for the Home
Worx product.
Answer: We have very little data on subscriber growth rates. In
deployed system we think that subscriber numbers are in the
1000's to 10,000's. We have not specifics.
We anticipate that there will be 8 to 10 HFC contracts that will
be decided between now and the end of the year.
Question: You said the Media One roll out was going well. Is
there a way to qualify this?
A few months ago you said that you were gong to try to reduce
operational expenses by 25 million, how is that progressing?
Can you break out the revenues by voice and video related
products?
Answer: We will be giving a tour of the local Media One node at
Super Comm. You can ask the Media One management how it is going
directly then. The news from LA and Atlanta continue to be good.
Voice/data/video break out of revenue --- this segment was lost
from the recording.
Voice is 60 to 70 percent of revenues today. We expect 50
percent going forward.
Video revenues are growing quicker not unlike the market in
total.
On operational expenses, we have a target of deferring 25 to 50
million in expenses. Over the first half of the year, we have
achieved 20 million so far.
Question: What is the company's appetite for acquisitions? You
mentioned that you need work on voice over ATM. The company also
expressed an interest in digital carrier or broadband digital
carrier at one point. Are there any acquisitions being planned?
Answer: We will not be doing any significant acquisitions till
we see more normal pricing for our stock. We will not be
silent, but we will be cautious. We have some needs as you
mentioned. To add to the list, we want a presence in
international transmission. We want to strengthen our position
in video compression. We are always on the outlook for
businesses to enhance out software capabilities in our systems
integration and wireless business.
It is hard to find acquisitions that are reasonably priced. We
are not likely to set up and pay above market prices. This is
typically the situation of small and emerging companies today.
If an opportunity presents itself with a strong currency such as
our stock we will be interested. We will be making some moves
between now and the end of the years as the opportunities allows.
Question: Any acquisition related revenues for the year?
Answer: This is getting smaller and smaller. There was about 9
million if you go back over the last 12 months.
Question: Are they are change in the status of the MCI/WCOM
account? Is there more interest for ADSL or ADSL lite at this
point from your customers?
Answer: On theMCI/WCOM merger, it was hard to see how it could
have been any worst in Q1. We have seen a re-bound in business,
but not to historical levels. It is an improvement and we a
grateful for that.
Talking to the RBOC's and CLEC's there is a move towards ADSL
lite as it promises to be easier to install.
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