DMC Stratex Networks Q2 FY01 Conference Call - Part I, Financial Review.
Tuesday 17 October 2000
Carl Thomson, Senior VP & CFO
Outstanding Quarter. Record Revenues, Orders, & Earnings.
Balance sheet improved with lower DSO’s.
Entered the quarter with numerous challenges (internal & external):
Supplies of certain subsystems and components were very tight.
Transition from XP4 and ramp-up of XP4-Plus was underway.
Altium 38 GHz was just starting volume production.
Recently implemented new Oracle financial management systems worldwide.
Employees grabbed the bull by the horns, addressed the issues
one-by-one, moved the company to new level of production output
(shipping in excess of 12,000 radios from our 3 manufacturing
locations), and as a result pushed the company to record bottom-
line and top-line results.
Record orders we received of $132.5 million also indicates the
confidence our customers have in DMC Stratex and the strength
of our product line around the world.
At the end of Q1 we indicated in our conference call that we
were working with certain key suppliers at the highest level
of management to improve material flow and we were adding
new experienced personnel in our manufacturing operations
areas to help ramp up production in this FY to help meet
the strong demand and backlog. I think the results for the
quarter reflect that these efforts have been successful.
Revenue for Q2 of $105 million is an all-time record,
up 54% from last year and 22% from last quarter.
Operating Earnings of $11.6 million and Net Income of $11.2 million
are also records, with Net Income up almost 9-fold from last year.
Orders of $132.5 million are up 86% and the book-to-bill ratio
is at 1.25.
Demand across all product lines is strong. DMC Stratex is clearly
seen as the market leader by our customers and those who follow
the industry.
I’ll now review some of the specifics of the financial results
for the quarter:
New Orders Q2 FY01: $132.5 million.
New Orders Q2 FY00: $ 72.1 million.
Backlog at end of Q2 FY01: $178 million.
Orders by Geographic Region:
Americas $ 61.6 million
Europe $ 37.3 million (includes Middle-East & Africa)
Asia $ 33.6 million (include Pacific)
=======================
Total $132.5 million
We are very pleased with the continued strong demand for DMC products
which exceeded our expectations at the beginning of the quarter. Even
with the large backlog and extended lead times, customers still prefer
the DMC Stratex suite of products to build out their wireless networks.
As we always say, orders tend to be lumpy and this effect is particularly
clear when looking at specific product categories and geographic areas on
a quarter-to-quarter basis. Thus for the overall product growth, you need
to look at the trend over several quarters... not just current quarter
compared to prior quarter. Similarly, while demand is strong for DMC
products, orders may not increase sequentially each quarter.
Orders by Product Line:
Mid-Capacity (XP4, Spectrum II, DART) $ 73.6 million
High-Capacity (Altium) $ 33.5 million
Long-Haul (DXR) $ 17.4 million
Services $ 8.0 million
=====================================================
Total $132.5 million
Revenue for Q2 FY01: $105.4 million
Revenue for Q2 FY00: $ 60.5 million
Revenue for Q1 FY01: $ 86.7 million
Unlike Q1 when most areas came up a bit short, in Q2 we had the
reverse and internal expectations were exceeded in most locations.
As discussed in the last quarter’s conference call, we’ve focussed
on improving the supply chain and increasing capacity, particularly
for the XP4 and Altium product lines. These efforts have been
successful. We are particularly pleased with the results in Seattle
operations as we increased XP4 and DART output and revenue by 70%
compared to the prior quarter. This dramatic improvement puts us
back on track for the year. In fact we now believe we’ll have total
revenue for FY01 of $415 to $425 million... 40% greater than FY00.
This is not to say that all issues have been 100% resolved. We continue
to closely monitor supply status and we have a major internal initiative
to improve yields and production capacity. At the beginning of October,
we increased factory space for Altium production in San Jose by 50%
by moving some of our sales management to a new leased facility.
During Q2 we also re-layed-out the factor floor in Seattle, installed
new multi-unit test equipment, and revised work schedules to increase
XP4 capacity. Linearity has also improved with less than 50% of product
shipping in the last month of Q2 compared to over 60% two quarters ago.
One of our internal focusses for the balance of the year is to continue
to improve linearity in all product lines.
Last quarter we included DS3 revenue in total broadband revenue to
better reflect total revenue in this key market area. This caused
some confusion with investors so this quarter I’ll report the
mid-capacity product line (which includes the Spectrum II, XP4,
and Dart), Altium product line, and in addition I’ll indicate how
much DS3 product shipped on Spectrum II and XP4... thus by adding
these two groups together you can calculate total broadband revenue.
Revenue by product line:
Narrowband/mid-capacity $ 65.5 million (includes $15.0 million for DS3)
Altium/high-capacity $ 23.1 million
Long-haul $ 8.8 million
Services $ 8.0 million
======================================
Total $105.4 million
==> Broadband Q2 FY01: $ 38.1 million (= $23.1 + $15.0)
==> Broadband Q1 FY01: $ 31.2 million
Revenue by Geographic Region:
Americas $ 57.3 million
Europe $ 29.7 million (includes Middle-East & Africa)
Asia $ 18.4 million (includes Pacific)
=======================
Total $105.4 million
Gross Margins Q2 FY01: 31.6%
Gross Margins Q2 FY00: 30.1%
Gross Margins Q1 FY01: 35.2%
We expected margins to decline from the previous quarter due to product mix,
customer mix, and factory costs we’d incur as we focussed on ramping production.
I’d expected about a 1-2% decrease, however Spectrum II revenues were higher
than anticipated as we shipped additional product to satisfy critical customer
needs. In addition, we incurred additional costs in San Jose and Seattle to
increase production levels and expand capacity. Also margin on service revenue
was lower his quarter as we expanded staffing and increased some of the base
costs in anticipation of a growing service business going forward. I do expect
to see an increase in margins for Q3 of about 1% to 32-33% an another increase
in Q4 to 33.5-34.5%. Although somewhat lower than prior estimates for this
year, we believe our long-term financial model with margins of 36-38% is still
appropriate as the manufacturing process, supply chain, and yield improvement
programs we’re currently working on produce results over the next 12 months.
R&D expense Q2 FY01: $5.7 million
R&D expense Q2 FY00: $6.3 million
R&D expense Q1 FY01: $6.3 million
While overall R&D expense is down, total headcount is the same in engineering
departments around the world as compared to a year ago. However, other expenses
(primarily material expenses to test prototypes) which declined during the
quarter. Last FY, there were also some 3rd party design contracts that have
been completed late last year. There is also some benefit to lower expenses
from the decline in foreign exchange rates in New Zealand.
With the completion of the roll-out of Altium and the XP4-Plus, our major
focus has been on the millenium project for super-high-capacity product
using the velocity chip-set. I expect R&D expenses to increase $200-400K
in both Q3 and Q4.
SG&A expense Q2 FY01: $ 16.0 million
SG&A expense Q2 FY00: $ 12.2 million
SG&A expense Q1 FY01: $ 14.6 million
Increase over last year is due to increases in sales expenses to increase the
growing market opportunities, higher administrative expenses due to increased
systems costs for the I2 systems we’ve installed worldwide, additional staff
to support the growing business, and bonus & profit sharing accruals based on
higher profits during the year. On a percentage basis, this increase is
substantially lower than the increase in revenue during the same period.
I anticipate SG&A expenses to increase sequentially over the next two
quarters, although at a lower quarter-to-quarter dollar increase than we
experienced from Q1 to Q2.
Interest & Other Income Q2 FY01: $ 1.6 million
Interest & Other Income Q1 FY01: $ 1.0 million
The increase is attributable to lower foreign exchange cover costs and
foreign currency losses in the current quarter. As I mentioned last
quarter we had a currency loss in New Zealand due to some mis-coverage
early in Q1. We took steps to correct this problem and in Q2 our
currency coverage was more complete.
Tax Rate Q2 FY01: 15%
Tax Rate Q1 FY01: 15%
We expect to maintain this tax rate for the entire FY.
Net Income Q2 FY01: $ 11.2 million
Net Income Q2 FY00: $ 1.3 million
We’re certainly pleased with the continued improvement in bottom-line
results, which exceeded our expectations. While we cannot predict the
future, strong orders in the quarter and improved production capability
in Seattle continues to increase our confidence in the outlook for 2001
and the demand for our product offerings is strong throughout the world.
Cash Q2 FY01: $ 82.7 million
Cash Q1 FY01: $ 98.0 million
Reduction in cash is a result of working capital requirements, inventory,
and accounts receivable to support the higher revenue levels that we
attained in Q2. We’re also increasing somewhat our capital expenditures
and manufacturing to meet the increased production volumes and IT systems
to support our growing business.
Accounts Receivable Q2 FY01: $126.5 million
Accounts Receivable Q1 FY01: $117.5 million
DSO’s Q2 FY01: 108 days
DSO’s Q1 FY01: 122 days
This is a significant quarter-to-quarter improvement, particularly in
light of the higher revenue in Q2. While we’ve made good progress,
we certainly have some work to do yet. I’m confident that DSO’s will
continue to decline in Q3. I expect to see DSO’s under 105 days,
possibly as low as 100 days, by the end of Q3. I should note that this
improvement in DSO’s was not obtained by factoring or discounting receivables,
but by improved and focussed collection efforts during the quarter.
Inventory turns at 3.7 in Q2 were about the same as in Q1. Both finished
goods and work in process declined back to the levels we had at the end
of Q4; raw materials continued to increase in absolute dollars to support
the planned ramp-up in production based on the backlog level we have.
As we improve production yields and supply issues I expect to see these
inventory turns to increase... I certainly believe they will exceed 4.0,
and could approach 4.5, over the next 12 months. However, in the near-term
I expect to see them decline somewhat to 3.5 or 3.4 as we balance inventories
and improve our ability to respond to the large customer backlog. With revenue
growth back on track, inventory management is a renewed focus in each of our
operating divisions.
As you know we continue to operate without any debt. In summary, I’m proud
of the results DMC has achieved during Q2. We believe Q2 sets the stage for
a very positive FY. We have strong product demand, production ramping up,
and have market share leadership position. We’re leveraging the product and
infrastructure investments we made to dominate the markets that we serve.
Financial Outlook
Q3 Revenue: $110-115 million
Q4 Revenue: $115-120 million
Q3 Gross Margins: 32.0-32.5%
Q4 Gross Margins: 33.5-34.5%
Q3 Operating Expense: $23.0-23.5 million
Q4 Operating Expense: $24.0-25.0 million
Q3 Tax Rate: 15%
Q4 Tax Rate: 15%
Q3 EPS: $0.15-$0.16
Q4 EPS: $0.17-$0.18
FY01 EPS: $0.59-$0.62
The above ranges are not best/worst case but their current
view of the most likely results. Our current view is that
we’ll continue to see strong growth in product demand and
revenue in FY02. We expect to start to see some business from
3G deployments in the latter half of FY02, continued expansion
of existing cellular networks and growth in the broadband access
market which is starting to develop. Revenue should grow to
more than $500 million, probably in the range of $525 million,
with margins improving to the 35-36% range, operating income
13-15%, and EPS $0.70 - $0.80 for FY02. There has been some
concern about the ability of U.S. CLEC’s to fund their growth
plans and this business has certainly been an important part
of DMC revenue growth this last year and projected business
for next year... we continue to monitor this situation closely.
However, with the emergence of 3G, we believe overall demand
for DMC products will continue to be strong even if CLEC demand
begins to slow slightly.
Finally, I’d like to comment on the decline in the value of the Euro
and the effect this could have on DMC in the future. Let me start by
saying that we’ve been selling internationally since the company began
over 15 years ago. Historically in excess of 80% of the company’s
revenues were from outside the U.S. so we’ve been dealing successfully
with changes in currency valuations for quite some time. We implemented
a formal foreign currency hedge program and policy about 5 years ago
whereby we cover any sales or purchase orders that in a foreign currency,
as well as balance sheet exposures we may have; this effectively locks
in U.S. dollar profits at the time a sales order is signed. Less than
15% of our sales are in European countries that are part of the EEC and
while the euro has been declining since its introduction over 18 months
ago, throughout this period DMC has continued to win new business in
Europe and to improve margins through the introduction of new products
as well as product cost reductions that we’ve implemented. Our currency
hedge program is designed to minimize gains and losses due to changes in
currency valuations on a quarter-to-quarter basis.
I’d now like to turn the call over to Sam Smookler, President & CEO,
for an operational summary of the quarter and some comments on the
company’s plans going forward.
[That’s about 22 minutes into the 1 hour 15 minute call. Sam goes on
for about 7.5 minutes before turning the call over to Chuck Kissner.] |
