Notes from the conference call. All errors mine:
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Fitel conference call, 1/14/99
[I missed the first few minutes.]
Continuing demand for high channel count in WDM. Several deploying 16/32.
Fiber amplifiers --- program on track. Qualified by several customers and establishing equipment base to move forward. Also for optical switches and cross-connects --- in infancy but demand is growing. "We're pleased and look forward with optimism to the next 6 to 18 months."
We continue to evaluate several candidates for partners or acquisitions. Several opportunities on the table at any given time that will strengthn business.
Will demo products in San Diego Feb. 21 - 26. [I'll definitely attend.]
Zita:
Not wanting to use superlatives, she opened by saying they'd had a "pretty darn good quarter." She then said it appeared their numbers were in reverse proportion to Ottawa weather which was minus 40 or something similarly subhuman.
[I'll skip numbers --- available online.]
Interconnect which was flat is not strategically important. Around 8% of sales.
SGA has lagged sales b/c of strong growth. Will normalize below the current range.
R&D --- ramping in areas of opportunity. As a percentage of manufacturing sales they're 9%. Would like it down one or 1 pts. Income outpacing sales. DSOs in normal range. $28 million cash used in quarter in closing acquisition and in construction. Moving into Phase 1 and beginning Phase 2. One half million quarter feet are either complete or in progress. This is in response to growth. Back log trending upward and at an all time.
Q&A
Salomon Smith Barney:
Q: What product mix was strongest?
A: Good growth in all areas. WDM, switching, modules --- becoming important part of business.
Merrill Lynch:
Q: You don't list modules separately, but in an accounting sense, are they material?
A: In Q2 they're well on their way to being important.
Q: How about WDM sales in Europe?
A: Multinationals reach many regions, many countries. There's incremental demand in Europe on carrier base applications.
Q: SG&A?
A: In absolute dollars doing exactly as we said. In percentage b/c we're growing so rapidly, they're lower. Exchange rate was not a factor.
Q: What about market in alternative technologies?
A: Time to market is paramount. Someone recently bought a start-up [NT/Cambrian]. Multinationals are thinking along the same lines.
Nesbitt Burns:
Q: Is there a capacity crunch?
A: Seems like we have one every day. On the whole, situation is better at end of Q2 than Q1. Normal when you're growing this quickly.
Q: Are you finding new people?
A: In high technology you have to find people. We recruit --- go to colleges --- sponsor competitions and give awards, meet new grads, meet management, look for specific talents. It's some times difficult. We have a facility in New Jersey --- this is important. We will open facilities where there are people. [For those who don't fancy sub-zero Ottawa weather.]
Q: How do you see competition? Gaining market share?
A: Very strong in some segments. Market is healthy for everyone. We have strategy of right products at right time. We are growing the same or more.
First Marathon:
Q: Backlog up sequentially?
A: Yes
Q: Lead times?
A: It gets better. Turn-around times get shorter. Customers need to give leads if they want product faster. In passive components market, they're giving us more lead.
Q: Are you privy to long term plans?
A: Yes. . . this is important for growth. Each customer has product line. To meet those targets, they need to work with us on application and product needs.
Q: What about Corning partnership?
A: The joint venture made good sense. We both use huge numbers of isolators. We give them what they need. Together we can move down cost curve.
Q: Long term sustainable growth? --- Outside 35%?
A: Yes --- there are pockets of time we will expand beyond this. For fiscal 99 we're still in that pocket --- and growing higher.
Smith Barney:
Q: What about instruments group?
A: Not surprised it's flat. We buy and resell. Less strategic. Some are commoditized. Giving attention to those we manufacture. Instruments are a lumpy group. Coming along nicely.
Q: Discontinue resale of anything?
A: We have to work with customers. No point in time do we discontinue.
Q: Wet or dry plant qualifying for submarine?
A: Both.
Warburg Dillon Read:
Q: Customer concentration. Last Q you had 5 over 10%.
A: Whole hasn't changed. Top 10 are about the same. 4 customers over 10% and of those around 2 are around 10% and 2 around 15% (each).
Q: You have module business and expanding to amplifiers, yet Corning is [buying] isolators --- is there a conflict?
A: Most companies make decisions based on business sense. We co-operate and compete. Market is moving so quickly, they need to find what they need.
Todd Copeland:
Q: In the US market there are a handful of customers taking up DWM. How long will this last and what is opportunity for those outside the handful?
A: How long? Internet and demand for growth will continue b/c carriers are creating new services. For a long time ahead [there will be] bandwidth demand. Different markets will grow their metro market. Many announcements --- NT/Cambrian means more demand. We're very excited, actually. How long will a handful dominate? There is consolidation --- we need to be friends with everybody. We are suppliers. As these companies strengthen, they will focus on delivering systems. More will outsource products like JDS [has]. Nortel's growth plan is in keeping with this.
Q: In submarine market --- can you detail opportunities?
A: Generally our products have been qualified. Now product families are being qualified. Tyco, i.e., to qualify takes incredible effort. You want to work with those who can qualify families of products. Leads to expanded scope --- very positive on this one.
Benoit (?)
Q: These "pockets of growth," will they continue? And are they globally on components?
A: From here we are 84% Q/Q, 75% Y/Y, looking at balance of year and into next year, we see good growth and don't think we'lls top. It will continue . . . will continue to be in those pockets of time. Josef (in background), "Speaking of all those pockets, do we want to call them bags now????"
Q: Can you say more about bottom line? --- Does $1.00 look likely?
A: I wouldn't challenge you on that number.
Nesbitt Burns:
Q: Re: customers, is buying shifting to optical functionality from just transport?
A: When you transmit between A and B, you want to divert – you want add-drops. [This] provides more flexibility in supplying bits. Marconi, for example, has announced add-drops for WDM. We see opportunities and potential.
Royal Banks (?)
Q: MCI/WCOM couldn't keep up with demand. What is demand?
A: Do I have to grow 200% to demonstrate this? [laughter] When MCI/WCOM says there's demand --- they are huge --- our products are well-positioned.
Q: What about turns?
A: Inventory lower turns --- 5X now --- we're comfortable.
McDermott Securities
Q: Current head count?
A: Approximately 2400. 1800 last Q.
Gundar Pahar (?)
Q: Will Corning affect margins?
A: No.
Q: You didn't challenge the $1.00, is 55% growth sustainable over the next few years? Market report says 65%.
A: I'm comfortable saying balance of year growth is outside the range --- very comfortable with market.
CSFirst Boston:
Q: What about "rest of world?"
A: Canada is very small, 3%, Asia and Australia also in there.
Q: Margins – when new facility is depreciated, will have impact?
A: No material impact on margins.
Q: Size of local market versus long haul?
A: Local market will be 10 to 1 eventually.
Warburg Dillon Read:
Q: Are modules well on way to being "material" the same as submarine?
A: We see it growing faster. Is it significant? Hard to say because we don't pull it out.
Q: With 600 incremental new people, where are they?
A: Vast majority in manufacturing. Ramping across company. Even in finance. (Joke about needing more next quarter.) Contract employees in manufacturing, addressing not just demand in absolute terms but also shortening lead times. Growth across all segments.
Q: Instruments, new product margins?
A: No material difference.
Duncan Stewart, Tera Capital:
Q: Linearity --- last quarter we saaw seasonal slackening.
A: Can't quote number but December is traditionally slower. Business is strong.
Q: NASDAQ listing?
A: Not any changes. Looking seriously at listing. It's a balancing act. We're still considering it.
Q: Is competition getting a chunk of Corning?
A: We're pleased with our position.
Q: HFC, need a partner?
A: We work with system manufacturers. We will work together. New applications are opening.
Kerns Capital
Q: Timing of metro market?
A: I maintain next 2 years --- it is coming and within 12 to 18 months. Cambrian [sale to NT] is indicative. Market is there. Question of right timing.
Q: Looking forward which will grow most, long, short, or submarine?
A: Strongest will be long haul. Gradient of growth, some other may grow more. Cable TV a little slower. Metro will take off. Submarine faster. [Correct answer: all. :))]
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