Review of DMIC Q3 Conference Call.
Well, I missed the call itself but I listened carefully
to the replay. Below I provide a summary review.
Rob
+++++++++++++++++++++++++++++++++++++++++++++++++++
Carl Thompson:
All results are restated to reflect the completed
merger with Innova Corporation.
New Orders
Q3FY99 Q2FY99
Americas 19.5M 28.4M
Europe 26.6M 23.4M
Asia/Pacific 12.1M 5.9M
--
Narrowband 47.6M 43.9M
Broadband 1.1M 2.3M
LongHaul 9.5M 11.5M
_____ _____
Total 58.2M 57.7M
Revenues
Q3FY99 Q2FY99
Americas 19.0M 24.6M
Europe 22.6M 24.3M
Asia/Pacific 16.7M 6.4M
--
Narrowband 48.7M 47.3M
Broadband 0.7M 0.0M
LongHaul 8.9M 8.0M
_____ _____
Total 58.3M 55.3M
Gross Margins 20.2% 17.7%
GM improvement due to lower factory costs
associated with efforts to reduce fixed
costs which were started in Q2 and have
continued in Q3 with the reductions in
personnel and space.
Operating Expenses are down and are expected to
continue to decline in Q4 as they realize the
full cost benefits of the personnel reductions
that were completed during Q3.
Cash position at end of Q3: $28M. In addition,
they have in-place a $40M credit facility that
they have not needed to draw upon during Q3.
Chuck Kissner:
Merger & Restructuring
+ Launched aggressive plan to complete the merger
with Innova and to restructure the company by
the end of Q3FY99. Goal was to enter Q4FY99
with the company about set up as they expected
to run it over the next fiscal year.
+ Restructured the company into three divisions,
each with separate profit & loss responsibility:
- Narrowband Division: Includes the discontinued
M-series products, the Spectrum I & II
products, and the Innova products (XP4 and
XP2)... Note: the XP2 is now called DART.
- Broadband Division: Includes the new Altium
product which just started volume shipments.
- Long Haul Division: Includes the discontinued
Quantum products and the MAS products...
including the new DXR700 radio.
+ Lowered headcount and fixed facility costs.
+ Expanded the product lines significantly.
+ Discontinued/curtailed old business not meeting
financial expectations.
+ Global headcount reduced 35%, headcount at their
San Jose headquarters reduced 55%, space at their
headquarters in San Jose was reduced 42% (they
were out by the end of December).
+ Generally, while this was risky, they managed it
quite well and they're very pleased with the results.
New Products
+ Curtailed volume manufacturing of the Quantum and M-series
product lines... service of these older product lines is
being supported out of Scotland and Taiwan.
+ Quantum is being replaced by the new DXR-700 series from
the Long Haul Division.
+ M-series is being replaced by the XP4 and Spectrum products
as well as the new DART (aka XP2) product.
+ DART began shipping in September and has now shipped more
than 200 radios in the North American T1 configuration,
all for the U.S. market. The international version will
begin shipping in Q4. Applications include the microcellular
interconnect, single T1/E1 customer data access, rural
wireless cell-site connections, route diversity, backup
systems, and low-cost temporary radio installations.
+ Began production of the new DXR-700 series (adding to their
existing DXR-100 and DXR-200 series products). They provide
a particularly efficient use of spectrum.
+ Altium is now in volume production. This is a significant
milestone. They now have 7 GHz and 8 GHz versions in volume
production and expect to introduce 2 or 3 more operating
frequencies in each quarter (18 GHz, 15 GHz, and 23 GHz next).
Most of current backlog for Altium is at 7, 8, & 18 GHz but
the major opportunities are at higher frequencies. While
there is significant commonality at different frequencies,
each new frequency represents a different challenge... these
challenges have been addressed technically and mostly they
only face volume manufacturing issues for each new frequency.
Now that they've passed this milestone, they expect to see
significant demand develop... this has been somewhat constrained
until now due to their inability to predict ship dates (they
did not want to accept orders and become overcommitted before
they had clear visibility about their ability to meet these
delivery committments).
Market Position
+ Demand is okay in Europe in Asia (the latter being something of
a pleasant surprise) but somewhat sluggish in the Americas.
They are cautiously optimistic about a rebound in the Americas
but they're not counting on a rebound due to the uncertainties.
+ Expect demand to stay at current levels (and higher) in Europe
and Asia... but quarter-to-quarter, orders are always lumpy.
+ They have good prospects in the pipeline for the U.S. and
Mexico... their exposure to Brazil is minimal. They're shipping
a reasonable amount of equipment for the U.S. access market and
the LMDS bands; they're hopeful that the need to deliver service
in these bands and the eventual advent of point-to-multipoint
systems will drive increases in demand.
+ Are they gaining market share? Answer: “A cautious yes.”
Especially with the OEM's... the major infrastructure suppliers.
They're finding good reception from existing and potential OEM
customers (who like the products - particularly the Altium).
+ Altium is designed to serve a variety of markets. Its primary goal
is to provide high-capacity backbone and fiber interconnection with
Sonet/SDH/ATM networks.
+ Demand has matured (as expected) in the mobile, fixed, and broadband
point-to-multipoint wireless markets. Altiums shipped to date and
in current backlog are for fixed and mobile wireless applications.
They have signed agreements with 2 large infrastructure suppliers
(and a 3rd is in process now) to supply Altiums to provide OC3 and
backbone interconnections for their point-to-multipoint systems.
+ Looking forward, they have a dramatically broadened and potentially
more profitable product line. A reasonably strong balance sheet.
Company is prepared to turn profitable... and potentially very
profitable if liquidity improves in the world marketplace.
Q&A (Chuck and Carl)
+ Expect to see $40-100M in Altium sales during FY2000. Clearly,
Altium should account for over 10% of sales in FY2000.
+ Potential Altium customers include Teligent and Winstar for
applications like fixed point-to-point backhaul. So far,
100% of their DART products are going to such customers;
but this will expand to other types of customers (for
microcell applications) when they introduce the E1 version
of the DART product.
+ They had just one 10% customer during Q3... not an OEM.
+ Of the infrastructure suppliers with whom they have agreements
for Altium, 1 has their own high-capacity product, 1 has their
own medium capacity product, and 1 has no such products.
+ Main competitor for Altium today is NERA. Others who might
become competitors include NEC and Harris.
+ Break-even will occur around a revenue range of $55-60M/quarter
but 1 or 2 percentage points in margins can mean alot. They
expect to see about $2M lower expenses in Q4 over Q3 and
they expect new (higher margin) products will improve their
overall gross margins from the current 20% or so. They need
roughly 25% gross margins to reach break even at around $60M.
+ Book to bill ratio is greater than 1.
+ They consider a $5-10M order to be large. They did not bid on
the (very large) Sonet radio order (which was awarded to NEC)
as this would have required financing arrangements that they
couldn't provide... making it a low-probability win.
+ One of the infrastructure suppliers that was mentioned (Teligent
or Winstar) showed them a model whereby, for every $1 they spent
on point-to-multipoint access equipment, they would spend $0.33
on OC-3 radio backhaul equipment (like Altium)... but Altium
is designed to meet the requirements of other applications as
well, so the overall Altium market is larger than the market
for point-to-multipoint access equipment.
+ R&D is expected to stay around $5.4M/quarter going forward.
+ Altium can operate for backhaul in the same frequency band
as the point-to-multipoint access equipment without causing
interference because Altium has a focussed point-to-point
beam. Thus, the operators don't face competition for spectrum
usage between their access and backhaul radio equipment.
+ Tritan Networks & Helios are planning to have high-capacity
radios at 28 GHz in the 2nd and 3rd quarter of this year.
But DMIC has a highly-manufacturable radio so they can reach
higher-volume production... this has been the challenge for
them. Also, they are working on what they have to do next,
beyond Altium, to maintain their lead for several years to come.
+ Outlook for Spectrum and DART products is very good but we're
not returning to the days of yesteryear... the market has at
least stabilized and they're counting on no further deterioration.
There are reasons for optimism that it may do better than
what they're counting on.
+ They are counting on growth for the long-haul (DXR-700) market.
The sales force has climbed the learning curve and is now up
to speed on this product line.
+ They're introducing 3 new products now nearly simultaneously
(Altium/DXR-700/DART) and their new product development plans
run in parallel on these 3 product lines. This should add
robustness in the ability of the company to provide growth.
+ Asia business includes a steady background level, across many
countries, that is ongoing and not deteriorating further.
They have strong business in China which they believe to
be sustainable (assuming no further wild market problems);
their customers that serve these markets are under pressure
to build out the networks quickly. Also, their business in
the Phillippines has picked up and is strong.
+ Altium was shipped to 6 different customers in Q3 and is
expected to ship to 8 diffreent customers in Q4. One of these
6 customers has about 1/3 of the units shipped in Q3 while
the remaining unit shipped are spread about evenly across
the other five customers.
+ An Altium supply-constraint problem is possible if demand
exceeds their planned capacity. Much of the Altium production
is outsourced... so capacity constraints depend upon the
ability of their suppliers to ramp-up.
+ They have one completely integrated sales force that serves
the whole company (all three divisions & product lines). The
sales force reports to a single manager under Chuck Kissner
and not to the individual divisions. In general, they handle
the whole product line but there is some specialization to
different products within the sales force. |
