Soapstone Networks, Inc. Q1 2009 Earnings Call Transcript

Soapstone Networks, Inc. (SOAP)

Q1 2009 Earnings Call

April 30, 2009 8:30 am ET

Executives

Bill Leighton - CEO

Bill Stuart - CFO

Inna Vyadro - Director of IR

Analysts

Eric Capella - Reservoir Capital

Walter Schenker - Titan Capital

Presentation

Operator

Ladies and gentlemen, welcome to the Q1 '09 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Director of Investor Relations, Inna Vyadro. Please go ahead.

Inna Vyadro

Thanks, Gregg. Thank you and good morning. Joining me today are Bill Leighton, Soapstone’s CEO; Bill Stuart, our CFO; and T. S. Ramesh, our Vice President of Finance. This morning, Soapstone issued a press release that was distributed by MarketWire. A copy of the announcement and the conference call are available on our website, at www.soapstonenetworks.com.

I would like to remind you that during this call we may be making forward-looking statements, including our plans and objectives for future operations, as well as our expectations for extensive product delivery, customer activity and financial performance, as well as our acceleration strategic alternatives. These forward-looking statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Those risks and uncertainties are further described in our press release and presented in detail in our Form 10-Q as filed with the SEC.

Additionally, during the call, we will also discuss various non-GAAP financial measures. A reconciliation of non-GAAP financial measures is provided along with the financial tables in our earnings press release, which, as previously mentioned, is available on our website. Our press release was also furnished to the SEC on Form 8-K this morning.

At this point, I would like to turn the call over to Bill Leighton.

Bill Leighton

Thanks, Inna. Good morning, everyone, and thank you for joining us. In the first quarter and again in the current quarter, we have taken cost reduction initiatives aimed at significantly reducing our cash expenditures, while preserving our ability to continue with our PNC development and sales effort.

The company incurred approximately $300,000 for severance and related costs in the first quarter of fiscal 2009, and expect to incur approximately $500,000 in connection with those actions during the second quarter of 2009. As a result of these reductions, we anticipate overall cash savings of approximately $8 million during 2009 as compared to the expense run rate at the end of fiscal 2008.

The restructuring has curtailed discretionary spending, eliminated contract labor and reduced our total head count by approximately 58%. We do, however, expect to continue to add to the sales organization as we convert our pipeline into sales.

Now turning to the financial results, on a non-GAAP basis, we reported first quarter loss of $7.6 million or $0.51 per share compared to a non-GAAP loss from continuing operations of $5 million or $0.34 per share in the first quarter of 2008. As we have previously announced, the company has completely exited from the manufacturing and sale of router products, making its last shipments in December 2007 and providing related support only through the end of December 2008. We ended the quarter with $82.3 million in cash and cash equivalents, down from $89.2 million at December 31, 2008.

In the first quarter, we continued to execute on our development roadmap and delivered the beta version of the PNC supporting Q-in-Q and PBB functionality. These new modules, in addition to our PBT solution, expand our ability to address the Carrier Ethernet market opportunity. I’m also pleased to report that we have successfully installed the PNC in a second Tier 1 carrier lab in addition to the one I mentioned on the last call.

We are working with our partners on increasing our funnel of opportunities. During the quarter, Soapstone started working with several new global sales channels as well as a North American system integrator which require a Soapstone solution to address emerging RFI and RFP requirements for major carriers. We continue to grow our customer pipelines and have added several new sales opportunities this quarter.

We continue to invest prudently in our business to deliver a range of supported platforms, features and functions to achieve our vision of a multi-technology, multi-vendor resource and service control plane, and we continue to be enthusiastic about the opportunities that we see ahead. At the same time, we continue to work with Morgan Stanley, our financial adviser as we aggressively explore strategic alternatives.

I will now turn the call over to Bill Stuart.

Bill Stuart

Thanks, Bill, and good morning, everyone. This morning we reported our results for the first quarter of 2009. As previously announced, the company has exited the manufacture, sale and support of router products, making its last shipments in December 2007 and providing related support only through the end of December 2008. Accordingly, the company has disclosed its historical activities associated with its legacy router products and services as discontinued operations, as reflected in the consolidated statements of operations.

GAAP net loss from continuing operations for the first quarter ended March 31, 2009 was $8.1 million or a loss of $0.55 per share compared to a GAAP net loss from continuing operations of $5.5 million or $0.37 per share in the prior year’s first quarter. Including income from discontinued operations, GAAP net loss for the first quarter ended March 31, 2008 was $3.7 million or $0.25 per share.

Because there is no income from discontinued operations after December 31, 2008, GAAP net loss for the quarter ended March 31, 2009 was the same as GAAP loss from continuing operations for the same period. Additionally, GAAP net loss and income for the first quarter ended March 31, 2009 and 2008 includes certain non-cash equity-based charges associated with Financial Accounting Standards Board number 123R.

Comparative quarterly GAAP consolidated statements of operations along with comparative non-GAAP consolidated statements of operations excluding these charges and direct conciliation between them accompanies our press release and can also be found in the Investor Relations section of our website.

For the remainder of the call, all references to our results will relate to financial measures excluding these previously mentioned charges. Such information should not be considered superior to, in isolation from, or as a substitute for GAAP results. Rather we believe these non-GAAP measures provide useful information to investors and analysts in assessing the core operating results of our business.

Non-GAAP net loss from continuing operations for the first quarter ended March 31, 2009 was $7.6 million or a loss of $0.51 per share compared to non-GAAP net loss from continuing operations of $5 million or $0.34 per share in the first quarter of 2008. Including income from discontinued operations, non-GAAP net loss, that is GAAP net loss or income excluding charges for certain stock-based compensation, for the first quarter ended March 31, 2008 was $3.2 million or a loss of $0.22 per share.

Total operating expenses associated with continuing operations for the quarter were $7.8 million compared to $6 million in the prior year first quarter. The increase in operating expenses was primarily due to higher development, sales and marketing costs associated with increases in our cost structure made over the course of 2008, partially offset by a decrease in costs resulting from our reduction in workforce in February 2009. Depreciation expenses recorded in operating expenses during the three-month period in 2009 were $0.5 million compared to $0.2 million in the prior year first quarter.

We announced in February 2009 that we had reduced our permanent head count by 10% and our contracted workforce by approximately 75% in an initiative to realign our cost structure and reduce our labor and labor-related cost. In furtherance of this initiative and in order to reduce expenses and conserve cash in the current economic environment without diminishing the overall value of the company, we had a further reduction in our total head count by approximately 40% in April 2009.

As a result of these initiatives, we have reduced our cash operating and capital expense rate significantly to approximately $4 million per quarter. We expect the full benefit of the cost reductions to be realized commencing in the third quarter of 2009.

In February 2009 we announced that we have engaged an investment banker to assist the company in exploring strategic alternatives available to the company for enhancing shareholder value. There can be no assurance that the exploration of strategic alternatives will result in any agreements or transactions or that, if completed, any agreements or transactions will be successful or on attractive terms.

Total head count, including both on and offshore contract labor at March 31, 2009, was 106, including 12 contractors before our April 20, 2009 reductions. After our reductions in April 2009, our total head count was 64, including one contractor.

Interest income in the quarter was $0.2 million on an average invested cash and investment balance of approximately $85.7 million. Interest income continues to fluctuate in line with average quarterly cash balances and current interest rates.

At March 31, our cash, cash equivalents and short term marketable securities were approximately $82.3 million, a decrease of $6.9 million from the previous quarter. The decrease was primarily due to the current quarter loss. Accounts payable and accrued expenses totaled $3.1 million at March 31. We continue to have no debt.

In summary, we have articulated our strategy to develop and market our Provider Network Controller for the carrier market, which we believe represents a very attractive market and leverages our core technologies and engineering talent. As we continue to make good progress on the development and rollout of the PNC, we are in tandem exploring strategic alternatives available to the company for enhancing shareholder value as described earlier.

This concludes my prepared remarks, and we will now open up the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of [Eric Capella from Reservoir Capital]. Please go ahead.

Eric Capella - Reservoir Capital

As an analyst for 20 years, I don’t know that I’ve seen the term aggressively explore strategic alternatives in a press release. I was wondering what the message was that you were trying to send with that.

Bill Stuart

Really no message other than the fact that that’s a focus for the company along with the day-to-day running of the business.

Eric Capella - Reservoir Capital

Okay. So, that was it. I just hadn’t seen it, so I was curious what it meant. Thanks.

Operator

Your next question comes from the line of [Walter Schenker] from Titan Capital. Please go ahead.

Walter Schenker - Titan Capital

I know in the past there’s been some discussion of where we thought we were on a road to commercialization of the products. Obviously, there were some changes in technology interest in the market, which caused the company to change direction a little bit. At what point now without making a formal forecast do we anticipate starting to have something that one could define as material sales of our products?

Bill Leighton

In terms of a development roadmap, I think you’re correct. We developed the PBT product, and then shifted the resources to the PB and PBB products, which we believe are having greater acceptance in the marketplace. We now have a beta version of that version of the product that was recently, as I said, installed in the lab of a major carrier. So we’re still looking at revenue in the second half of this year.

Walter Schenker - Titan Capital

I realize there’s such a breadth of clients, this is a hard answer, but you maybe can give in a range, a client is likely, a PBB client, the person who’s doing (inaudible) who I have no idea who it is, if they were to accept, the technology would likely generate annual revenue of $0.5 million, $100,000, $2 million, just some sense of magnitude of what a client means?

Bill Stuart

It would really be hard to put a number on any of that. I appreciate, obviously, your interest in trying to get that size, but it does range quite a bit. All of what you described in terms of the possibilities for any one of those opportunities running into customers.

Operator

(Operator Instructions). And seeing that there are no further questions, ladies and gentlemen, this conference will be available for replay after 10 am Eastern Time today through May 2. You may access the AT&T Teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 997574. Those numbers once again are 1-800-475-6701 with the access code 997574.

That does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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