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Foundry Networks Q4 2006 Earnings Call Transcript

posted on: January 31, 2007 | about stocks: FDRY

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Foundry Networks, Inc. (FDRY)
Q4 2006 Earnings Call
January 31, 2007 5:00 pm ET

Executives

Jason Golz - IR, Financial Dynamics
Bobby Johnson - President and CEO
Dan Fairfax - Chief Financial Officer

Analysts

Erik Suppiger - Pacific Growth Equities
Matt Robison - Ferris, Baker Watts
Cobb Sadler - Deutsche Bank
Mark Sue - RBC Capital Markets
Samuel Wilson - JMP Securities
Tim Long - Banc of America Securities
Matt Shimao - Bear Stearns
Long Jiang - UBS
Troy Jensen - Piper Jaffray
Ken Muth - Robert Baird
Ryan Hutchinson - WR Hambrecht
Manny Recarey - Kaufman Brothers

Presentation

Operator

Good day ladies and gentlemen, and welcome to today's teleconference. At this time, all participants are in a listen-only mode. Later there'll be an opportunity to ask questions during our Q&A session. Please note, this call maybe recorded. I'll now turn the program over to Mr. Jason Golz. Go ahead please.

Jason Golz

Thank you, Victor, and good afternoon everyone. Thank you for joining us for the Foundry Networks' Fourth Quarter 2006 Revenue Results Conference Call. I am joined today by Bobby Johnson, President and Chief Executive Officer and Dan Fairfax, Chief Financial Officer of Foundry Networks.

Earlier this afternoon, the Company issued a release reporting its fourth quarter revenue results. This release can be accessed from the Investor Relations section of Foundry's website at foundrynetworks.com. For reference, we've arranged for a taped replay of this call which may be accessed by phone. This replay will take effect approximately one hour after the call's conclusion today and will be available for seven days. The dial-in access number for this replay is 402-220-1388. This call is also being webcast live with a web replay also available. These may both the accessed from the Investor Relation's section of Foundry's website.

Before we begin, I'd like to make a brief statement regarding forward-looking remarks. The call today contains forward-looking information regarding future events and the future financial performance of the Company. We wish to caution you that such statements are just predictions and actual results may differ materially as a result of risks and uncertainties that pertain to our business.

We refer you to the documents the Company files periodically with the SEC, specifically the Company's recent quarterly report on Form 10-Q and annual report on Form 10-K for the year ended December 31, 2005, as well as the Safe Harbor statement in the press release the Company issued today. These documents contain important risk factors that could cause actual results to differ materially from those contained in the Company's projections or forward-looking statements. Foundry assumes no obligation to revise any forward-looking information contained in today's call.

Now I'd like to turn the call over to Bobby Johnson, President and CEO of Foundry Networks. Bobby.

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Bobby Johnson

Thank you Jason and good afternoon everyone. Foundry posted record quarterly revenue of $132.7 million for the fourth quarter, an increase of 14.3% over last year's $116.1 million. In addition to our record quarter, we had record second-half revenue of $251.5 million. We're also pleased t have posted record full year results with $474 million in revenue. This represents a 17.4% increase over last year.

Looking back at last quarter, all the key financial successes that I would like to highlight include, number one, our book-to-bill ratio continued to be greater than one. Number two, overall our North American commercial business continues to perform well growing 28% sequentially and 27% over Q4 '05. Our European and Middle East business also posted record results and continues to experience good momentum, gaining 10% over the third quarter and 28% over Q4 '05. Then fifth, our annualized revenue per employee has increased to $650,000 based upon the fourth quarter's revenue run rate.

I would now like to review key products and operational successes that helped drive the quarter. The first highlight is that I'm pleased to announce The Gartner Group recognized us as a visionary in the Campus LAN category during the quarter. Second, for our enterprise market, our wireless revenue quadrupled sequentially over Q3 with acceptance of our new IronPoint Mobility Series. Additionally, our Gig over copper ports shipments hit an all-time high with 17% sequential growth, and 18% year-over-year growth.

Our FastIron stackable family had 10% sequential growth and our new SuperX family had 25% sequential growth.

Third key operational highlight is in the services provider market where we had major wins utilizing all of our major Layer 2/3, Layer 4-7 traffic management and the MPLS Router platforms. Specifically for our MPLS routers, the NetIron XMR and MLX [series] continue to gain market share with nearly double the revenue sequentially over Q3 '06. Overall, we had customer wins in the wired, wireless cable and content delivery sectors.

Applications included metro build outs, WiMAX build outs, hosting data centers, and internet routing expansions. Our product trials and initial POs in Tier 1 providers continue to progress well. We sold approximately 850 large IP and MPLS routers into service providers during 2006.

Fourth operational highlight I'd like to focus on is in our Layer 4-7 application traffic management market, whereby we began volume shipments to the new entry level traffic management platform, the ServerIron 4G, which targets the mid-sized enterprise customer. This product was previewed on the third quarter earnings call. Overall for the year, approximately 600 of our 1400 new customers are based upon our traffic management products.

And the fifth highlight is, across the board, Foundry's 10-Gigabit Ethernet port shipments were up 26% sequentially and 79% year-over-year.

Before I turn the call over to our new CFO Dan, I'd like to elaborate on some of the internal management and Board level changes that have recently been announced. The first change that I would like to discuss is Tim's new role. As many of you know Tim Heffner has elected to take a role as our new Vice President of Corporate Development. Tim has been with the company as a CFO for over ten years and has extensive background in financial modeling and corporate finances. In Tim's new role, he will be helping our sales force to leverage our strategic reseller partners and to work with our business unit leaders and myself on key strategic planning and partnering decisions.

The second change that I'd like to discuss is the election of a new Chairman. As you are aware, many public companies in recent years have begun separating the roles of CEO and Chairman. Foundry has considered for sometime the separation of the roles of CEO and Chairman of the Board for improved corporate governance compliance. This has now happened with the election of independent Board member, Fred Amoroso as the new Chairman.

Fred has served as the member of the Board of Directors of Foundry since October of 2000, and he has a wide variety of expertise in the research, software and public accounting industries. I have held the CEO and Chairman titles for the last ten and half years. With Fred in the Chairman role, it allow me to spend more time focusing on corporate and product strategy, as well as increased customer interaction. This will allow me greater time to focus on the ongoing execution of our strategies.

The third and last change that I'd like to review is the appointment of Dan Fairfax, previously Foundry's Corporate Controller and Principle Accounting Officer to the position of Chief Financial Officer. Previously, he served as a Senior Vice President of Finance and Chief Financial Officer of Go Remote Internet Communications. Dan is recognized for his financial and business leadership, and his technical accounting skills, and we look forward to his contributions in this new role.

In summary, we've taken several steps to strengthen the company. First, the addition of our new corporate development position with Chairman this role, aiding our executives in more extensive outreached and partnering activities. Second, the addition of more senior accounting expertise within the company with the promotion of Dan to CFO. And third, the increased strategy in customer time I get by the election of Fred to Chairman, which freeze-up my time to run the business as President and CEO. I welcome all to their new roles and I am very happy to have a stronger Foundry team.

I'll now turn the call over to Dan Fairfax, our CFO, Dan?

Dan Fairfax

Thank you, Bobby, and good afternoon everyone. As I begin my comments today, I want to bring your attention to the information we highlighted in today's press release. That is due to the forth coming re-statement of our historical financial statements, Foundry will not be discussing in any detail our current income statement, balance sheet or other GAAP financials, including stock-based compensation expense.

As previously announced in June 2006, the audit committee of the company's Board of Directors appointed a special committee of the Board to conduct an independent investigation of the Company's stock-option practices. The special committee has now completed this investigation. Based on this special committee's findings and subsequent review and analysis, Foundry has determined that from fiscal year 1999 to fiscal year 2005, the company had unrecorded non-cash equity-based compensation charges associated with its equity incentive plans.

These charges are material to Foundry's financial statements for these periods. Accordingly, the company currently expects to record a pretax charge of approximately $185 million to $205 million for fiscal years 1999 through 2005. The tax benefit associated with this charge is expected to be approximately $65 million to $75 million, for a total net charge of approximately $120 million to $135 million. Because our re-statement is not yet complete, we are not able to announce full financial results at this time. However, consistent with last quarter's announcement, we will be presenting select financial results for the fourth quarter, as well as for the full year ended December 31, 2006.

Now, I'd like to take a minute to update you on our NASDAQ listing status. Two days ago, we announced that Foundry had received a letter from NASDAQ staying their delisting decision and calling for a review, the filing deadline given to the Company. As previously disclosed, the Company's continued listing on the NASDAQ stock market was conditioned on the Company becoming current in its delinquent financial reports, and filing any required restated financial statements by February 12, 2007.

The Company has been given until March 2nd to provide the NASDAQ with additional information for their consideration. While there can be no assurance that the Company will become compliant by filing its periodic reports, and restatement before the Listing Council takes any action listing the stay, the company has made substantial progress towards completing its restatement. And we are continuing to work diligently to commit to compliance as soon as possible.

During the stay, the company shares will remain listed on the NASDAQ Stock Market. We are not going to be taking questions on this topic today during today's question-and-answer session.

Now, we will turn to the results of the fourth quarter and the full year 2006. Foundry posted quarterly revenue for the fourth quarter of 2006 of $132.7 million as compared to $116.1 million in the fourth quarter of 2005, and $118.8 million in the third quarter of 2006. This is an increase of 12% sequentially and an increase of 14% over the prior year. We are obviously very pleased with achieving a second consecutive quarter of record revenues.

For the full year of 2006, the company posted revenue of $474 million compared to revenue of $403.9 million in 2005. This represents a year-over-year growth of 17% and is the highest level of annual revenue ever achieved by the company.

In the fourth quarter, sales to the US federal government represented 17% of total revenue, while sales to North American commercial customers represented 54% of total revenue. Sales to Europe, the Middle East and Africa or EMEA region represented 15% of total revenue during the period. North American commercial revenue, which includes enterprise and services provider customers, and EMEA revenues reached record high levels in the most recent quarter. Our sales in Japan this quarter represented 8% of total revenue, essentially flat compared to the prior quarter.

Our overall domestic revenue was 71% of our total business, and our international business represented 29% of total revenues. This compares to 67% for domestic revenue and 33% for international sales in the third quarter. Our enterprise business was again our primary source of revenue. Enterprise customers accounted for approximately 80% of our total revenue for the fourth quarter.

Revenue from our chassis-based products remained at a level consistent with the third quarter, representing 71% of revenue in the fourth quarter of 2006.

Reflecting back on our full year 2006 results, we are very pleased with the developing momentum we achieved over the course of the year. Now, I would like to make just a few comments relating to the balance sheet and a few other selected metrics.

Cash and investments at the end of Q4 totaled $886 million, which is an increase of $46 million in the fourth quarter of 2006 and an increase of $140 million for the full year.

Our book-to-bill ratio in the fourth quarter was again greater than one. Additionally, the Company added 34 employees during the fourth quarter and 97 for the full year 2006. These were mostly sales people and engineers. The total number of employees at year end was 816. Consistent with our practice, we will not be providing formal revenue or EPS guidance on today's call. However, we would like to provide a general and qualitative view of the current quarter's business.

Looking at the current period, we believe that our North American and European enterprise business will continue to be robust although offset somewhat by typical seasonal trends. Historically our business activity in these markets declines mostly in the first quarter compared to the fourth quarter and we are unsure of the momentum we saw in these markets coming out of Q4 will be enough to offset some of this normal seasonality.

Looking at the US Federal government vertical market, while there is always a greater level of uncertainty here as we evaluate our pipeline and our understanding of the available funding at this point, there isn't anything we see today that indicates a material short-term impact to our business opportunities within this market.

And before I turn the call back to Bobby, I need to say that we will not be able to comment regarding the independent investigation of our stock-option grant practices beyond the following information, which we've already announced previously in our January 22nd press release. Although the enquiry undertaken by the special committee is complete and an estimate of the compensation cost has been announced, additional time is required to fully document, review and audit the applicable accounting and tax treatments. Foundry plans to file its Forms 10-Q for the second and third quarters of fiscal 2006, which have been delayed due to pending the final outcome of the enquiry and file all re-stated of financial statements are affected as soon as practical. With that final note, I'll now turn the call back to Bobby.

Bobby Johnson

Thank you Dan, I am very pleased with the progress we have made today, our performance reflects the success in our investments and growing our worldwide presence through our increased spending and expand the sales organization, and the timing and execution of our product launches. We believe that the investments we have made in the business will drive improved performance, [growing] from the first-half of this year and for the long-term.

The year 2006, our record first-half record -- second-half and a record year. Mid-year in 2006, we marked our 10th anniversary also passing 10,000 customers. We released a record number of new products while substantially increasing cash and establishing a stronger sales footprint.

Foundry's success over the past ten and half years demonstrates the value of our long-term focus on building our business. As we continue to grow, we remain committed to our strategy of number one, continuing to achieve profitable growth. Number two, extending our product leadership, number three, maintaining a framework of high touch customer service, and number four, focusing investments to those specifically designed to create future opportunities.

As we look at our strategy in goals for 2007, we will continue the major themes of last year, including increased branding, increased sales headcount, increased service provider solution offerings and increased enterprise solutions and offerings.

Our increased revenue and cash were driven by our increased solution portfolios for both markets. Although we have specific products that address specifically the enterprise or the SP end-customer, our entire product portfolio maybe purchased by either the enterprise, or services provider end-user.

In 2007, in the service provider market we will continue to include more advanced MPLS functionality in our internet routers. While also expanding our internet routers to include SONET, wide area interfaces at OC-12, OC-48 and OC-192 speeds. We are already in [beta] with some of these LAN interfaces and I expect all will be available by mid-year. This allows our XMR and MLX products to expand beyond just LAN connectivity to include true high-speed SONET interfaces at industry leading price and performance levels. Additionally, we will be shipping an MPLS Metro Access Switch within the new few weeks to compliment and extend our reach into emerging Metro Environments.

Foundry offers the highest performing LAN switching and internet routing products in the industry. And then in the next few months we will again double our industry leading performance in port densities. This keeps us on the leading edge of absolute price and performance leadership for our target customers in all of our target markets.

As we have just completed a successful quarter, and a very successful year, I would like to thank all of our employees, partners, customers and stakeholders for their commitment to Foundry.

Now I would like to turn the call back to the operator and open up the question-and-answer period.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We'll take our first quarter from the side of Erik Suppiger with Pacific Growth Equities, go ahead please.