For those who missed the conference call, I thought I'd post a printed synopsis
from a tape I made. I'm going to pick it up from the point after the financials
were discussed.
Ken:
* Ended the quarter with $2M in cash and cash equivalents
* Expect to close the private placement of $8.5M to $11.0M today.
* Series C convertible preferred stock - market price to be calculated at time of
conversion, subject to a maximum conversion price to be determined over the
next 30 days, (range btw $9 and $13) - pleased to have the series C shares
exclusively in the hands of patient investors, who purchased the series B shares
and have not converted any of their holdings.
Cals comments on products and marketing issues:
* In our Q3 cc, I described how we are refining our sales, marketing and product
development efforts to focus on target segments within the high performance
LAN and SAN markets.
* Continue to work the LAN market through resellers focused on vertical markets
with unique strength to (garbled) benefit fibre channel, are drawing customers to the
technology as the best solution.
* These markets include CAD/CAM, geoseismic, defense, and military and data storage
back-up. Hucom has nearly completed the installation of a high performance LAN,
supporting the customer's design and engineering group. There are more opportunities
of this nature in Japan. We will be working with Hucom to capture as many of these
opportunities as we can.
* In the defense, military and govt. markets, we announced an agreement to work with
Litton's data systems division to deliver high performance fibre channel solutions to
the broad range of customers Litton serves in these segments. This is a very promising
partnership, with a company that has a strong presence in these key markets, and
excellent market knowledge and acknowledged systems integration expertise. The initial
order is for gig-works switches, to be used to upgrade a mobil command and control
system for the US Marine corps. This is similar to the AWACS application we are
working on with Boeing, and plays to fibre channel's strength in moving massive
amounts of data quickly and reliably.
* In the data storage back-up market segment, the press release that we're issuing
This morning about our installation at IBM's research Triangle Park campus, highlights
some of the reasons why fibre channel is an excellent solution for mission critical
networking. IBM needed to move hundreds of terabytes of data between buildings
every evening with maximum reliability and minimal total cost of ownership. ANCR's
Fibre channel technology was chosen over ATM and gig-ethernet.
* Overall the industry analyst and trade media commentary on fibre channel is encouraging
and indicative, that in high performance applications, fibre channel is becoming much
more popular.
* Turning now to the OEM storage area network markets, as Ken noted in the last
quarter cc, the selection and qualification cycles in this market segment are long.
Typically 6 to 9 months. Since we last talked to you we've moved from early discussions
with several potential OEM customers, to placing our new Gig-works Mark II switch
with most of them for evaluation. We are shipping production units as we promised
in our Q3 cc.
* We're very encouraged with the reception our switch is getting. It's operating
reliably with a mean-time between failure exceeding 200,000 hours. It's the most
scalable fibre channel switch currently available, it is demonstrating excellent inter-
operabilty with other vendor's hubs, and to the best of our knowledge, it is the only
Fibre channel switch shipping today with arbitrated loop, which is a must-have
capability for most fibre channel storage applications.
* Overall, we believe the initial market response to the MarkII validates the architectural
approach we are taking with this product, and bolsters our confidence in this product
as a technological building block, and foundation of our future fibre channel switches.
* As Ken alluded to in his remarks, we realize that customers in the storage OEM
market, are going to expect us to have the technical support and service infrastructure
necessary to serve their requirements. We continue to build a service team that can
fulfil these requirements, and make it easy to install and maintain networks built around
our products.
Ken's concluding remarks:
* I just want to reaffirm our optimism about the coming year. We believe our sharper
focus on specific opportunities in the high performance LAN market is the way to
get the best return on investment in this area, without over-extending ourselves, or
diluting our efforts. We have good reseller partners in the markets we have targeted,
and we're encouraged by the increasing acceptance of fibre channel in these segments.
* The charges we have taken in the 3rd and 4th quarter, bring our accounting into alignment
with the approach we are taking to our markets, and reflect our improved understanding
of our opportunities.
* In the SAN market, we now have a very compelling product to offer in our MarkII
switch. You heard Cal enumerate the strengths that differentiate it from competitive
offerings. As we cautioned you earlier, the sales cycle for storage OEM is long, but
we are where we expected to be at this time. With products in evaluation at several
potential customers, the ability to ship production units in place, and the potential
for meaningful results on the horizon in the second half of the year.
* Finally, with the financing we expect to complete this week, we have the financial
resources in place to continue our product and market development efforts. Our
independent accountants have completed their audits and will give us a clean opinion
in our 1997 financial statements, when our 10K is filed in March.
* This concludes our prepared remarks, lets open it up for questions.
First question from Mike Ladamare with JG Kinnard:
On the financing, why did you chose that particular route, and what other types of financing
were you looking at?
Ken: We examined a lot of options Mike, and concluded this particular offering, which quite
frankly I view as quite a bit more attractive than last year's offering, was our best option. In
this offering there are only 3 investors. They were all investors in the last deal, and they're
all long term, they haven't converted any of their stock from the last deal.
Mike: What would be the potential new shares outstanding under this financing?
Ken: Well that depends on the conversion price and where we end up with the size of the
financing. The financing will end up between $8.5M and $11M, and the conversion price, uh
it's a little bit dangerous for me to get into the details of the offering because its quite involved,
but let me give you some examples. If the price were to stay at $8 a share for ever and ever,
then to get the number of shares you would divide the amount of money, lets assume its $11M,
by the $8 share price, which would be the conversion price, and you would get approximately
1.2 million shares. If the price were to be flat-lined at $5.00, shares would convert at $5.00
and you would get 2.1 million. Now its a little more complex, if the company performs
like we're hoping and expecting it to, then the conversion price would be between $9 and $13,
and you would have to divide the amount of money by that.
Mike: OK, great, um...in terms of the high performance networking market, are you targeting
any particular growth rate for the next year in that segment?
Ken: We don't have a number that specifically springs to mind. We believe it's a growing
market, but I don't want to speculate on what it will grow to. At least I don't want to share that
kind of a number.
Mike: OK, what about the Litton Deal, do you see an order coming up here in the second
quarter here or uh,
Ken: We expect one to, obviously there are some things in the defense industry that may
be causing some delays.
Mike: OK, um, how about IBM. Any revenues attached to that, in the press release this
morning?
Cal: Yes, there are definitely revenues attached to it, and we hope that the revenues
that we've seen out of it are just the first of many.
Mike: OK, any amounts involved there?
Cal: I don't think we want to break that out at this point.
Mike: What about, you say that your work on the MKII switch on SAN is tracking
expectations. Any sort of tangible information there in terms of why you feel it's tracking
expectations, and what your original expectations were at this point.
Cal: Yea, its a little difficult to discuss that, because with all of these large storage OEM's
we do have NDA's in place, but as I mentioned we do have our switches at all of the major
labs, and they typically don't spend time on something if they don't have something pretty
interesting to look at, and I really can't go any further than that without giving away
(garbled) which is covered under NDA.
Mike: OK, thanks a lot you guys..
Next Question if from John Tilson(sp?):
John: John Tilson, private investor, I'm interested in the Sequent contract that was
canceled last year because of architectural incompatibilities. I was wondering, has this
been resolved, and can you consider getting Sequent back on board, and is that type of
architectural incompatibility going to affect other OEM's.
Cal: As far as the architectural incompatibility, it was at a relatively, we would have had
to re-architect our old product pretty significantly to get rid of this problem, in the way
that SQNT used the product, so we were not able to go into our old product an redesign
it, but in our new MarkII has addressed that, and there's no interoperability problem
there at all. And uh, as far as going back to SQNT and trying to re-open a door there,
again we've got a non-disclosure in place. As we've talked in the past though, some
of our large switching capabilities were of some interest to them in the past, and we
do have a little bit of a door there, but that's all I can say.
John: Thank you.
Next question is from Dale ??, for Paine Webber.
Dale: Good morning gentlemen. A couple of questions on the international (garbled),
and I haven't seen the numbers this morning because I've been out of the office, but I
assume that a lot of the revenues came from overseas international marketplace last year,
and so if we look at what's going on in the Asian countries again, like Japan, you
mentioned that Hucom is working hard at placing some units over there, but what about
the other Asian countries, do you have potential over there. And also what about Australia,
and Europe. What's going on with Groupe Bull?
Ken: We have a contract with Bull, and we're proceeding as we would normally proceed
with Bull. The Hucom activities, as you probably realize, Japan is, in my opinion anyway,
is the country that things happen in first in the Pac Rim, and I expect that will continue
throughout next year. We have activities in all major Pac Rim countries, including
Austrailia, and we're optimistic about our prospects internationally.
Cal: Something else I'd like to add there Dale. In discussions with our major customers
in the Pac Rim, the whole Asian flu thing does not seem to be a big enough deal to them,
for them to stall their purchases of our type of equipment. That's not to mean it couldn't
happen in the future, but at least as of this point in time, the programs that we're working
on seem to have the funding required.
Dale: That's good to see. We all know that Brocade is your major competitor here in the
US. Is there anyone else coming up that poses a threat to, what seems to be (garbled) with
this MarkII switch?
Ken: At the moment, the only main-line competitor at the center of the market is Brocade.
We've heard rumors in the past of other companies planning to come out with a switch,
but we haven't seen anything, or heard of anything that's hit the market yet.
Dale: One question for you Ken, and I'm going to put you on the spot. Do you have a
vision for where fibre channel's going?
Ken: Oh yes, I think it's going to be the major large storage uh, basic building block for
large storage networks, and companies will first of all build UNIX based large storage n
etworks, and then later on we'll see NT based large storage networks. So on the SAN
side, I think there's a great future, this year with UNIX, next year with NT, the second
half of the year in both cases. I also think your going to pick up more and more high
bandwith....(garbled), and Cal's more qualified to talk about this than I am, but in the
networking side we're picking up more and more (garbled) types of applications.
Dale: Just one more thing. Cal, did you say we were already shipping production units
to someone, or is that my misunderstanding?
Cal: We are definitely shipping production.
Dale: To OEM's?
Cal: YES.
Dale: Oh!! OK. So that's good news. Thank you gentlemen.
Next caller, your question please:
Craig Stevenson, private investor, but you probably know me from SI. Question regarding
your web site. Are these new hires, or are they needed because of attrition?
Ken: Let me address that because I thought that question would come up. We have, in
looking at our direction, just as we have looked at our (garbled) that we're using, we've
also looked at our skills mix, as you probably know Craig, we're moving away from the
adapter business, and concentrating more and more on the switch business, and we've
examined our skills mix in light of that and decided that we need to do some very specific
hiring. We've also eliminated some positions. So on balance (missing a bit of tape here)
....we have an opportunity to get a very qualified key skill, and we've also eliminated a
few positions as (garbled) ...direction.
Cal: I'd like to further add Craig that our attrition rate has been way, way below industry
averages.
Craig: OK, that's good to hear. The Litton deal, is that the same thing as what was
referred to as the joint armed forces deal probably a year ago.
Cal: I believe so. I don't remember the exact press release, but I believe it is.
Craig: OK, now there were some potential revenue projections at that time. Has anything
changed to make you guys think that deal has more or less potential than it did at that
time?
Cal: I'd really have to go back to exactly what document or piece of information you're
Craig: OK, can you throw out a number of what you think the potential might be on that
contract?
Cal: Uh, we're not doing that kind of forward looking statements.
Craig: OK, I didn't think so, but just curious.
Cal: Don't blame you for asking, ha ha.
Craig: Well, I gotta try.
Cal: No problem.
Craig: A company called Gigalabs has recently introduced a Jigsaw SCSI switch, which is
a really interesting technology, especially for people with a large installed base of legacy
hardware, but it's got a really high price per port. Do you see a device like that as being
competition to you, or do you think because of the price, they're going to price
themselves out of the market?
Cal: I don't see it as direct competition at all, but I do see it as fringe competition. There's
a lot of SCSI stuff out there, like you say, and there's certain places where people have
themselves painted into a corner where a switch like that could be of some value. But you
hit the nail right on the head, with that price point, that's not mainstream.
Craig: OK, that's kinda what I thought. Um, you talked a little bit about product
development. Can you speak at all to that, what are we likely to see, and when?
Ken: I really anticipated that question too, and I gotta tell you we don't normally don't
announce new products at quarterly conference call. That's typically done at the interops,
and the comdexes.
Cal: We try not to give our business plan to our competitors too early in the game.
Craig: Ha, ha, well that's understandable. Can you elaborate a little bit on the IBM deal.
Is that MarkII equipment yet?
Cal: That is not.
Craig: Can you tell us who has been getting the MKII?
Cal: We have been focusing mainly on the large OEM storage environment with the MKII.
Our current gigabit switch, for the high performance LAN area is just fine.
Craig: Uh huh, and that's what IBM is, it's full gigabit, not quarter gig?
Cal: The bulk of what we've shipped out is actually quarter gig. I can't tell you for sure,
100%, but the bulk of it's quarter.
Craig: OK, thanks you guys.
Tom Duxbury: In the last conference call, you talked about volume shipments in the last
half of 98, has anything changed that would affect that, and now that you have been
shipping production units to OEM's, do you see that staying on course as far as volume
shipments?
Ken: I think the best answer to that is we haven't changed our thinking. We still see that
as the way it's going to unroll.
Cal: Yea, that's something I should make real clear too. I think it was Dale who asked me
if we're actually shipping production. That doesn't mean the customer is taking it all the
way to end users yet. We talked many many times about long systems integration and
qualification time that the large OEM's take their products through.
Tom: Let me restate it this way, the question in the last conference call was we've seen
some postponement in fibre channel, and other fibre channel companies ala Emulex,
maybe Ciprico, have said they've delayed response in that. My question is, do we see any
further delays or are we right on track to where we were last conference call?
Cal: OK, got it. The slippage that we were talking about last conference call, we have not
seen that kind of slippage taking place again. I wouldn't say that there's zero slippage,
but it's certainly not large, anything that we've seen yet.
Ken: It's an interesting thing because in this case I think our technology is ready and
waiting for the market to develop, and we felt last quarter that the maket would develop
in the second half of this year, and we still feel the market will develop in the second half
of this year. It's interesting though, if there is any delays, it will be delays on the part of
the systems guys who use our switch, rather than our switch. Our switch is in
production. It's ready to go, and so when you see the roll out by the customers, it's going
to be determined by when they're ready. And I'm not speculating that there slipping, or
not slipping at all. I think there still as we saw them, but that's what's going to (garbled)
it.
Tom: OK, thanks guys.
Next question:
Steve Powell, Wedbush Morgan Securities: With respect to the private placement, I
understand that there's a floating rate conversion feature to this preferred.
Ken: That's right. Conversion is not allowed for the next 4 months, and the price will be
determined then through an algorithm that is determined by the current stock price at the
time of conversion, or by looking back, actually I've got to refer you to the SEC
documents because it's going to be too complicated to explain. There is also a feature
that determines a minimum conversion price, which will be determined over the next 30
days.
Steve: So there is in fact a minimum floor to this deal then.
Ken: Yes, between 9 and 13 dollars.
Steve: That sounds like that was the high side. But I mean, there's a floor that it can't be
converted below?
Ken: If the stock were to sit exactly at $8..
Steve: For what period of time?
Ken: Lets just say it stays at $8 forever, to make the example simple, then the minimum
would be something like $12, and the conversion price would be $8, because you would
be at the minimum.
Steve: OK, I'll look at the SEC documents. You know, there's been a number of these
preferred deals that have come into the market place, and there has been some interesting
action on some of the stocks that have gone and converted. As far as the high
performance LAN market, do you see measurable results also from that market place in
the second half. I know your comments were focused predominantly on the OEM market,
but is that LAN market something we're going to see emerge greater in the second half of
this year as well.
Cal: We see a nice continuing growth in the high performance LAN market. We don't see
that hockey stick kind of curve that we're anticipating to take place in the storage OEM
market.
Steve: OK, as far as the big Japanese customer. What percentage of that contract has
completed.
Cal: The contract that we had in place is completed, but they have options for expansion,
things of that nature.
Steve: That's all the questions I had.
Follow up by Craig Stevenson:
Craig: I thought of one more thing. For the last two or three quarters we've seen these
special charges. How much do you still have in the inventory and sales reserve, and how
long are we going to continue to see these special charges.
Ken: Hopefully we've go our accounting adjusted for our business prospects now and,
boy I would never say never, but I feel very good that we have now positioned ourselves
at where we need to be.
Craig: OK, that's good, thanks.
Follow up by Tom Duxberry:
Tom: This question is kinda aimed towards Cal since you've been there the longest. In
your tenure at ANCR, have you ever seen the company in a better position than it is
today. And I guess I know that's going to be a forward statement for you, but I would
appreciate an answer.
Cal: Well I give you my opinion. This doesn't have anything to do with the company's
position, ah, I'm happier than ever with where ANCR is right now. The market is finally
materializing right now, which helps us a lot, and I believe we have really strengthened
the company tremendously over the last two and a half years that I've been here, so yea
I'm feeling good.
Tom: Thanks Cal
Back to you Ken..
Ken: OK, we thank you for your questions, and good day. |
