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Technology Stocks : Orckit (ORCT) -- Ignore unavailable to you. Want to Upgrade?

To: John F. Dowd who wrote (1379)	8/2/1998 3:01:00 PM
From: savolainen	Read Replies (1) \| Respond to of 1998

[margins] hi jfd, have been out of town, but managed to catch the last conference call.. from what i can tell the orctf story is still intact.. but until orctf can turn a profit we still have a story stock on our hands... and the volitility associated with hope/fear without the stabilizing influence of an earnings base.. don't know if you ever got a hold of a prospectus for the secondary, but the current "pricing pressures" (negative margins/forward pricing) for adsl are described there (p7).. don't believe orctf/fujitsu is unique in this regard... believe all the current players are facing the same issues... and are pricing their products accordingly (below current manufacturing costs)... in their most recent annual report, westell noted that they are in the same situation (forward pricing)... imagine how they must feel having (probably) submitted a bid (gte) below cost and still... losing... from what i can tell it seems like the current dsl game is to build volume by winning tenders with forward pricing... as volume builds, product costs come down ...if technical issues can be addressed in parallel... a point is reached where the red ink turns black.. still think the critical item will be adsl silicon... the good news and bad news for orctf/fujitsu is that they are doing their own.. if it's primo and on schedule they are positioned well, if not, well.... the resulting scenario may not be as pleasant.. unfortunately they have slipped a quarter... now due q1 99 (as noted by somo)... but on the other hand others seem to be delayed as well... on a brighter note, orctf feels that they are one big win or several small wins away from being positioned to meet their 99 numbers: .67 for 99 (zacks) .. if they can make these ... this story might be on its way what follows is my rough transcription of those portions of the last conference call which relate to margins (which was much of the discussion) thought you and others might find it interesting/useful best wishes s --- ...the growth of the adsl revenues caused a reduction in the gross margins of the company...where the hdsl margins remain almost stable.. the adsl gross margins are low... and in some cases where we have a long term commitment from a customer we actually sell at prices that are below current manufacturing costs... the advantage is that in the longer term we are not going to be exposed to price erosion because we know the price for this customer for the long term.. but the short term impact on the financials is a reduction of the gross margin of the company .. certainly the main effort of orckit today is cost reduction of the adsl product , to increase the gross margin of adsl and to get into profitability ... a major portion of the r&d engineer ...(missed section) ... cost reduction is going very very well... we are sure that we will meet our milestone for q3... we have other milestone for q4 and q1 99... confident in our cost reduction efforts... that we are going to be where we want.. in addition to these milestones which i will call technology milestones that are reducing the price by technology improvements ... we also have a standard learning curve that will reduce price of product based on quantities and this is also going very very well... two wins with gte and telia caused a big reduction in our components and a big improvement in the cost of the product... ?'s bt alex brown: you talk about meeting your milestones on the cost reduction for gte... does that mean if you are still at a negative level and you ship more, it will be more pressure on the bottom or does that mean you are moving up positively..? gte is one of the customers for which we see forward pricing... if gte increase quantities certainly it will increase the top line... and if it increase in the next quarter it will will have a negative effect on the bottom.. all in all we look at it as a positive because the impact on the bottom line will be temporary at this stage... cibc oppenheimmer: where do you see the challenge in looking forward to make your numbers? more in winning more bids or getting the cost down... in terms of your level of confidence? which one will be tougher? to win business or to get the cost down? if you have to rate it now.. we always said and everybody knows and also our competitors admit... in technology we are very good.. so altho the cost reduction seems very challenging we don't see it as a problem. we are good in r&d... and we will meet our milestones and we will do it... the risk is always getting the customers.. we did a big achievement in the last year in getting more and more customers.. in the adsl we are in a good position with gte and telia...i think that if we win one more big account we will make ... are guaranteed to meet our numbers in 99... even if we don't win a big account and we win some smaller accounts ...few smaller accounts we will still can meet our numbers.. all in all we are in a very good position after these two wins in gte and telia... when you say win another big account i assume that your best bet is germany..what about the usa?.. you had trials in other accounts? could you say where is the best bet.. or can you give a list of two or three that are the best... to get another usa major account? when i talk about major accounts it is not only dt.. it could be dt, ft, telecom italia...or one of the rboc in the usa or mci ... these are accounts that i call big accounts... when i talk about some other medium accounts... i talk about ptt telecom in netherlands and smaller european accounts.. if we win a big account we meet our numbers. if we win few medium accounts we also will meet our numbers... furmen sels: in terms of meeting your milestones, in terms of cost reductions, if we were to assume that you know the pricing from gte over the next couple of years.. about what timeframe would you look at on a gross line in terms of when you would turn profitable? and maybe an operating line as well? how long out do we have to go? we have four or five technology milestones.. the last one is in q1 99... we believe that these five milestones will bring us to the situation that we are making a nice margin on adsl product.. Is that nice on a gross or operating margin? Is nice like hdsl or still lower than hdsl? i don't want to get into specific numbers.. but nice .. its a nice gross margin.. if you look at our results in q3 and q4.. you see that we had about 35% gross margin on hdsl and we had about 100 or 80 engineers working on adsl and we were profitable.. certainly if the gross margin on the adsl were to improve then we would be profitable for the whole company.. because the problem right now is the huge accounts that has large shipments, so we are losing money for a short period of time.. once we get into the positive gross margins there, we can be profitable. oscar grua: can you give some guidance for q3.. in terms of revenues? do you anticipate the same level of revenues? more or less? don't expect the hdsl revenues to grow at 67% relative to q2...this is very unusual and unexpected.. usually we ship within 30 days so its too early to say how the revenues will be split. we have a very good feeling about the top line both for the hdsl and adsl for the quarter improvement in gross margins is only anticipated in the beginning of 99? answer is definitely not.. the cost reduction of adsl is an ongoing process.. we have a few milestones as i mentioned in the call.. we are confident we are going to meet all our milestones in q3... its true that the major milestone is a new chipset that will be ready in q1 99 .. .. but until then there are other milestones that will reduce costs also