Notes: 2Q98 Newbridge Network Conference Call:
Nov 25,1997
Financial Results:
2Q sales 432 million, net earnings 58 million consistent with Nov 3 estimates.
earnings 33 cents CND per share under Canadian accounting
or 23 cents US under U.S. GAP(general accounting principles.)
Order back log at record levels, orders exceeded shipments in the quarter
Positive book to bill in packet based and TDM Products.
Orders for packet based products grew 20 percent compared to last quarter and double
those of 1 year ago.
2Q98 quarter revenues down 1% from 1Q98 but up 36 % from 2Q97
Split of revenues by business region:
Americas(Canada, USA, Latiin America): 51 % of sales
Europe, Middle East, Africa: 31 % of sales
Asia Pacific: 18 % of sales
45% of sales were packet products for WAN,
These products were primarily frame relay and ATM and grew 14% from 1Q98 and 85%
over 2Q97.
Sales of packet products now reperesent a greater portion of sales than NN's traditional
TDM business. This is their fastest growing sector.
Strong growth of this sector due to demand for NN MainStreet Express 36170 product multi-
services switch. Sales of product up 50% over last quarter and about 500 percent over 2Q97.
Sales of frame relay and circuit emulation capabilities on the product led to the robust growth.
TDM products represent 44% of sales. were down 2% over 1Q98 but order intake was up 3 %
over the same period. 80% of TDM sales were for markets outside the US.
LAN packet products including VIVID products and products from fromer UB Networks
division represent 10 % of sales. Revenues were down 24 million from 1Q98 as
detailed in pre-announcement.
Sales of VIVID MLS 500 switching hub were below expectations due to delay of implementation
of key features and functionality. In addition sales of shared media hubs continue to decline
as is consistent with decline in the industry for this product.
Gross margins were 63.0% of sales for the quarter , the same as last quarter.
Shift in product mix did not make any changes to the margin.
Operating expense of 190 million dollars wer composed of 124 million in SGA expenses
and 66 million in RD expenses. This was consistent with managments planning for the Q.
Head count 6,587 for the Q up 125 from last Q.
RD expense: gross spending of 77.5 million,tax credits 8.4 million,funding and grants 1.4 million
and deferred software 1.3 million for a net of 66.2 million dollars
Effective tax 29.5 % down from 1Q97 due to world wide tax planning strategies.
This represent the 6 th Q where the tax rate declined.
Net earning of 58 million represent a decrease of 8 % from 1Q98 and represents
return on sales of 13 %.
Earning per share with associated share count:
Canadian: 33 cent ........174,733,000.......33 cent.........190,516,000 full diluted
US...........23 cent..........182,728,000.......both primary and diluted
Cash balance decreased in Q by 36 miilion to 318 million in cash and cash equivalents.
Expenditures on capital additions: 77 million include Kanata expansion and manufacturing
equipment.
Depreciation of Capital Expenditures: 28 mil.
Discussion with Peter Charbonnay(?):
Shortfall in earnings due to Enterprise business.
TDM still very profitable.
WAN packet had record results due to Mainstreet Express product line.
NN is prominently positioned in the core WAN business as carriers migrate to a
unified broadband ATM infrastructure. NN has the leading market share for worldwide
ATM WAN equipment acording to analysts.
Alliance with Seimens still very successful. Seimens is one of the leading telcomm
equipment suppliers. Credits relationship with giving NN leading market share in
ATM WAN.
Since shipment of Mainstreet 36170 frame relay shippments continue to grow via sales
for this platform. Annual growth rates in frame relay of 180% annually.
Strategy to provide a comprehensive and ever green product line to allow customers
to evolve and expand thier service offering.
Enterprise business dissappointing. Acquired UB Networks was characterized as
a turn around situation and they acknowledge that the turn around has been a dissappointment.
They are preparing a plan of action for this enterprise and will be announcing these
plans at a later date. Plan to finalize majority of items in action plan by end of January.
Traditionally 1/3 of business for NN has come from Fortune 1000 customers. This was the case
before UB Networks acquisition. NN remains committed to enterprise network market and to
servicing corporate customers in this space. Carrier sale inter-networking announcement in
October with Seimens and 3Com was a key part of this strategy to offerring end to end scalable
full managed networks to the enterprise customers.
Terry Matthews Comments:
TDM market not growing as much in the past due to the maturing of the market. T1, T3, E3
TDM markets are about 1.3 to 1.4 billion US dollars per year. NN has about 50% market
share. This is nearly twice the market share of their nearest competitor. WAN Packet sales
including frame relay and ATM achieved record sales, order intake ,backlog and network design
wins this Q.
Look for new announcements as a result of their alliance with Seimens.
Mainstreet Express 36170 is the leading WAN ATM multiservices switch. It delivers native cell
relay services, frame relay services, circuit emulation services, high speed LAN inter-
connection, broadcast quality video services, broadband wireless connectiviity, and CSI (carrier
scale internetworking) giving premium IP(internet protocol) networking.
Pleased with design wins in 2Q . Some of wins will be announced this week and throughout
3Q.
Comments of affliates:
Cambridge(?) products allow cost effective distribution of ATM switches through the network.
-An example is the Vienna product which with carrier scale inter-networking provides a voice
networking solution over the IP.
-Another example is Time Step, a network layer security system, for the creation of a virtual
private managed and secured network. This is the industry's leading system at this time.
CrossKeys has a big suite of network management and services management software relating
to service level agreements, and network performance.
Installed base of 200,000 network nodes.
Competition is intense.
Business in Q was strong in his opinion.
Responses to questions:
Q: Asking about level of RD spending and guidance going forward?
A: RD spending was according to plan. Plan to bring cost structure back to level of 1 yr
ago for RD and SGA as a percentage of sales. Cost of RD about 15%. They expect it to
go down ,but not to ight away. They are hoping for 13% eventually. Plan is to reach these levels
over the next few Q's.
Most of new spending did not go into LAN/Vivid but into the growing areas such as the CSI,
and Mainstreet 36170 management software, frame relay, and circuit emulation for 36170
platform.
Q:Asked if the addition of frame relay and circuit emulation capabilites to 36170
is convincing the carrier to consolidate mutiple overlay networks using this product?
A: Yes, As examples: British Telecom, Swiss Telecom, MCI, Korean Tele, New Zealand
Telecom, Bell Canada, Stentor, Portugal Telecom, Telecom Denmark, Tele Norway. Some they
can't discuss yet.
Q: Asked whether IP on SONET would be an alternative to ATM as overhead of ATM is avoided?
A: Problem with IP over SONET is it is vunerable to hackers. Once a hacker has access he can
break in multiple time to bring down the network synchronization once they have the numbers.
Q:Comment on Asia Pacific business and progress of 36190 (trials or sales).
A: Limited exposure to Korea, Thailand etc ... No problems this Q. Little exposure in 3Q.
Trials of 36190 next month. 3 or 4 carriers are waiting for overhauls to deploy new product for
test. They have taken order but they are not public.
Q: Comment of consensus earnings estimat?. WiIl we see large announcement such as the MCI
broadband ATM orders next Q?
A: There are many tenders outstanding from some of the worlds largest carriers right now. Very
little BT/MCI business recognized yet. Will probably see this 4Q98 to 1Q99.
Guidance of earnings are the same as Nov 4,1997.
Q: What do they tell customers that are interested in IP over SONET over ATM besides the
security issue? Can their enterprise needs be satisfied by a partner rather than direct
participation?
A: Classes of service is the advantage. Business customers want low delay, scalable guaranteed
performance and classes of service. ATM is connection oriented and guarantees delivery of
packet data unlike IP. Scalability, better managability and security unlike IP over SONET.
IP services can not guarantee delivery of data and this is critical to the carriers customers of T1,
T3, E3 data lines.
No specific comment of partners for the enterprise space. General comment that they have used
partners before and will use them again. A partner may figure in the action plan for their
enterprise business.
Q: 44% of revenues from TDM, NN appears to be gaining market share against
NET(?)?Comment on why NN is gaining market share?
A: Market is maturing. Once there were 35 vendors. Eventually customer gravitate to the market
leaders. NN software managability offers an advantage. Most of growth is in carrier space and
NN has a dominant position.
Q: Breakout LAN business further?
A: 1/2 of LAN sales were share media and switching hubs. Vivid MLS 500 and GLS 100
represent 1/2 of revenue in LAN sales. Balance is switch routing and routing.
Q: Will NN introduce gigabit ethernet products to it Vivid line? Will the enterprise division re-sell
3COM products as part of re-structuring?
A: Gigabit business is not a priority. There is currently not much business there. No comment on
the 3Com question.
Q: Is there a problem with component procurement that is slowing 36170 shipments?
Is there a manufacturing bottleneck?
A: No, backlog is due to greater than anticipated demand. They are overstocking on
components to try to better anticipate the demand for shipments.
Q: Target for backlog for next quarter? What is the earnings impact of UB results?
A: NN wants to keep backlog in 8 to 10 week range. Currently in mid-point of range.
No comment on per share impact. Did say that UB was a break even to 10% of sales loss before
acquisition. Results have deteriorated since then.
Q: Is build up in inventory due to poor sales in enterprise division or is it due to build up in
inventory of WAN ATM products? Describe factors they are looking at to fix UB division?
A: Most of build up is due to poor sales in enterprise division, but some is due to more agressive
build up of ATM products. No further comment on plans for enterprise division.
Q: TDM growth is stated to be 10% outside North America, why is NN providing only 5% growth
guidance since 80% of NN's sales of TDM are outside North America?
A: Report is 2 years olds. New numbers are 5 to 6 percent. TDM includes TDM, frame relay and
X.25. It also allows for low speed ATM access.
Q: Enterprise business is 45 million this Q and continue to trend downwards, is this where it
stablizes are do you expect further declines?
A: NN will see continued pressure on shared media hubs. No shipments of MLS 500 this Q.
Should see a 5 million dollars compression in sales next Q.
Q:Comment of 3COM/Seimens/NN relationship?
A: Relationship is for NN and Seimen to provide premium IP services to carriers. 3COM will
provide businesses equipment to connect to premium IP services. Idea is to provide desktop to
desktop service.
Q: Is voice services a possiblity for the ATM network?
A: Voice services will be slow in coming as carriers tend to wait till all operational procedure are
tested. No large revenues anticipated in this area for 2 to 3 years.
Q: Seimen revenues and telecom revenues as a percentage of revenues? Impact of Asia on
TDM business?
A: Asia TDM business is less than 5% of sales. No impact in this Q. Siemens business was 18%,
same as last Q and all of last year. Telecom business was 70%.
Q: Growth rate of LAN packet market going forward for NN and overall market?
A: LAN frame relay will be in 30% to 40% range. ATM should be double the frame relay
numbers. ATM equipment is for other markets beside a replacement for frame relay though so
growth projection should be higher. In 98 many carrier will be replacing old equipment so that
should improve sales. Some of carrier equipment must be replaced due to Y2K problem.
Q: What are NN's plans for WDM?
A: NN has the Cambrian affiliate that is developing a city wide WDM product with 30 kilometer
range, 32 waves each way, 1/2 cost of SD 192 sonet, OC 192 about 10 gigabits, protocol
independent, protected rings. Product can run native ATM so a carrier could have one ATM
switch per region and peripheral shells(?) at each POP (point of presence) connected by WDM.
This reduces the cost of an ATM infrastructure installation by 50%.
Q: Comment on impact of IP on ATM.
A: Any carrier using just IP switching is a very narrowly focused carrier. IP switching is not
profittable for the carriers. Most money for the carriers are made on private services, frame relay
cell services and then premium IP. ATM supplies all of this.
Q:Head count of enterprise group now versus years end before UB Network acquisition.
A: 100 people have left from 850 from UB.
Q:Why does NN continue in the enterprise business?
A: Strategy in beginning was to sell equipment to businesses. Carrier space is part of this
strategy as it supplies the infrastructure for new services for the businesses. Being in hub routing
business allowed NN to help write some of the specifications for the space.
Q: DSO have edged up slightly, why? Increase in good will?
A: DSO is essentially flat from NN perspective. Thinking is that shift to LAN packet should have
improved DSO since that should have improved the back end loading of revenues. NN does not
think the DSO will be any different than previous quarters and that shift to LAN packets should
not affect back end loading. Over last 2 Q, UB had a lower DSO by 20 days, but amount of UB
revenues has been declining so effect is less. 90 day DSO is what has been reported for last few
years. There is an effect as August is a holiday month in Europe and that was the beginning of
the quarter. Increase in good will due to agreement to acquire a UB Networks subsiduary.
[This question caused some uneasiness for the panel.]
Q: TDM business was flat this Q does that mean that next Q will be stronger to reach 5%
growth? How much of 36170 is going into enterprise side and how much in carrier side?
A: All of 36170 is going into the carrier side and is the majority of WAN packet business. You
can't project a strong Q based on a weak Q. Growth rates are yearly and are not reviewed by Q.
Q: Who else are their competitors in the carrier space?
A: Cisco and Nortel are the most often seen competitors
[There was quite a pause before answering.]
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