Here’s the entire text of the prepared remarks from Agere Systems’ (ticker: AGR) Q4 2005 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.
Sujal Shah, Director of Investor Relations
Rick Clemmer, President and Chief Executive Officer
Peter Kelly, EVP and Chief Financial Officer
Srini Pajjuri, Merrill Lynch
Bill Lewis, JP Morgan
Allan Mishan, CIBC
Mark Edelstone, Morgan Stanley
Charlie Glavin, Needham and Company
Arnab Chanda, Lehman Brothers
Seogju Lee, Goldman Sachs
Ross Seymore, Deutsche Bank
Aalok Shah, DA Davidson & Co.
Raj Venkatraman, Colden
Jeremy Bunting, Thomas Weisel
Suji DeSilva, Fulcrum
Ambrish Srivastava, Harris Nesbitt
Ladies and gentlemen, thank you for standing by. Welcome to the Agere Systems Investor Relations Conference Call.
As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sujal Shah, Director of Investor Relations at Agere Systems. Please go ahead.
Sujal Shah, Director of Investor Relations
Good morning and thank you for joining us. Earlier this morning in addition to our earnings, Agere announced that Rick Clemmer, a member of Agere's Board of Directors for the past 3 years has been named President and CEO. Mr. Clemmer is here with me today as is Peter Kelly, our Executive Vice President and Chief Financial Officer.
Rick will make a few introductory remarks on today's call and Peter will then discuss the highlights of Agere's results for the fourth quarter and full fiscal year 2005. We will then open up the call for your questions. Copies of our press release and other supporting financial data are available on our website.
Please note that we will be mentioning pro forma results on the call. Today's earnings release describes the differences between our pro forma and GAAP reporting. On this call, we will be mentioning additional pro forma financial measures and you can find corresponding GAAP measures and re conciliations on our website at www.agere.com/webcast.
A replay of today's call will be available on the company's website. I also want to remind you that today's remarks will include forward- looking statements. Our actual results could differ materially from those suggested by the statements made today and we undertake no obligations to revise or update publicly any forward-looking statements. Additional information about factors that could affect future results are addressed in our annual report on Form 10-K for the fiscal year ended September 30, 2004, and our Form 10-Q for the quarter ended June 30, 2005.
Now I would like to turn the call over to Rick Clemmer.
Rick Clemmer, President and Chief Executive Officer
Thank you. Good morning and welcome. I would like to begin by saying how pleased I am to be stepping into this new role. I have been a Board member of Agere's since 2002. The last couple of years I have been focused on emerging technologies in start-up companies, playing an active role and helping them through the growth. I also spent 5 years at the disk drive manufacturer Quantum as well as more than 20 years at Texas Instruments.
As a result, I understand our technology well and intimately familiar with the dynamics of the industry and the needs of our customers. However, I am sure that you will understand that I will take a little time to fully come up to speed on the opportunities and challenges facing our company. Therefore, today, the majority of the call will be handled by Peter Kelly, our CFO.
Before I turn the call over to Peter, I want to say that it is obvious to all of us that significant progress has been made in bringing this company to a strong financial position. While the fourth quarter revenue was disappointing, we have demonstrated a very strong capability in managing our costs, driving profitability and generating cash. Our balance sheet is healthy and our gross margins are excellent.
I would like to take this opportunity to acknowledge and thank John for his leadership and contribution in getting the company to the current position of financial strength. Moving forward, the challenge that we clearly face is driving profitable revenue growth, and that's what I am here to address.
I will now turn the call over to Peter.
Peter Kelly, EVP & CFO
Thank you, Rick. This morning we reported quarterly pro forma net income of $38 million or $0.21 per share, essentially exceeding our guidance range of $0.06 to $0.12 per share. Our revenues were $416 million, below the lower limit of our guidance range of 420 to $445 million, and down $17 million from the previous quarter.
Our revenue shortfall was driven largely by lower than expected demand from key storage customers, and in enterprise and networking, our satellite radio business was impacted by supply constraints from our assembly subcontractor. For the fourth quarter of fiscal 2005, we have three 10% customers, Samsung, Seagate and Maxtor. Storage revenues of $158 million were less than expected, were up by $12 million over the third quarter.
We were, however, extremely pleased with the growth in our pre-empt business, which was driven by the ramp of our low cost silicon germanium products. We continue to gain traction with the major disk drivers OEMs, helping our pre-empt revenue to grow more than 50% quarter on quarter with continued growth expected in 2006.
Mobility revenues of $92 million decreased $8 million sequentially with the expected reduction in inventory levels by our key customers. Enterprise and networking revenues decreased by $17 million sequentially to $101 million due primarily to declines in shipments for satellite radio chipsets. Telecom revenues were $65 million as expected, and the $4 million reduction from the third quarter was driven by decreases in shipments of products for wireless infrastructure.
Our pro forma gross margin as a percent of sales was 52%. We're extremely pleased with our progress to our satellite models and as we have made this transition, our gross margins have improved substantially. The closure of the Orlando FAB marks the final phase of this transition.
Moving now to operating expenses, our SG&A and R&D expenses were $165 million in the September quarter. That is in our guidance range of 175 million to $180 million. Of this improvement, 8 million was the result of reduced management and executive bonuses in line with our fairly efficient expected revenue levels. Without this, our expenses would still have been better than the low end of our guidance range we provided in July, and we continue to believe that a strong link between compensation and performance is fundamental to driving value.
Our pro forma operating profits were 12%, and at $50 million is our ninth consecutive quarter of positive pro forma operating profit. In the quarter, taxes were $7 million, other income was $2 million, and interest expense was $7 million. On a GAAP basis, we have net income of $7 million or $0.4 per share bettering by far, our guidance of loss between $0.21 and $0.27 per share. Approximately $0.06 of this improvement was a result of the reduction in performance based bonuses.
$0.10 from the sale of equipment from our Orlando FAB and $0.06 was from lower restructuring charges and related cost. The remaining $0.06 resulted from gross margin improvement and expense reductions. For fiscal 2005, revenues were 1.68 billion, compared to 1.91 billion in fiscal 2004. Pro-forma earnings per share was $0.41 in fiscal year 2005, a 46% improvement from the $0.28 recorded in fiscal 2004.
Turning now to the balance sheet. Inventory was $130 million, with inventory turns at 7. Our management of inventory continues to be excellent and the September inventory included $28 million of pre-bills to help manage the closure of the Orlando FAB. The majority of this inventory will be shipped to customers in the coming fiscal year. Receivables were $251 million, with DSOs on a 2-point calculation of 52 days. Accounts payable were $200 million.
I am very pleased with our cash position and this quarter we increased our cash balance by $72 million to $698 million. The change in cash includes $32 million in voluntary pension contributions, $38 million for capital expenditure, and the receipt of $85 million for the sale of our Orlando equipment. Our total debt was $372 million, down $4 million from the previous quarter. This amount represents our convertible notes due in 2009.
Depreciation and amortization expense for the September quarter was $59 million. Of this amount, $41 million was depreciation and amortization from ongoing operations and $18 million was additional depreciation primarily related to our Orlando FAB closure. Total restructuring charges and related costs, which we exclude from our pro forma results, were $31 million. The majority of this was Orlando related with $18 million for accelerated depreciation, which was $19 million better than expected due to higher sale proceeds.
In addition, approximately $8 million in nonrecurring costs were recorded, primarily related to contract terminations. There was also $1 million for amortization of acquired intangible assets and $1 million gain on the sale of operating assets.
In the first quarter of fiscal 2006, Agere will adopt FAS 123(NYSE:R). You should assume quarterly expense related to equity compensation of approximately $10 million in each quarter of fiscal 2006. We will exclude this from our pro forma results. You should also note that our stock-based employee compensation expense will not be tax effective due to the recording of a full valuation allowance against US and net deferred tax assets.
I'd now like to turn our guidance to the December quarter. Our total revenue is expected to be in the range of 390 to 410 million. We expect storage to grow by $5 million to $12 million with continued traction in our preamp business and sustained strength in our SoC business
I'm pleased with the recent progress we've made in the diversification of our storage business, and in the September quarter we had meaningful revenues at 4 of the world's 7 largest OEMs. In the first quarter, we will have revenues of 5.
Enterprise and networking will show single-digit revenue growth from increases in our satellite radio business, but this will be offset by a similar level of reduction in telecom as our legacy business show some declines.
The mobility business will decline by approximately $20 million largely due to the slower than expected ramp of EDGE products. However, we are seeing strong substitution of GPRS products, and our overall volume should be approximately flat quarter-over-quarter. Total IP licensing revenues are expected to be approximately $30 million to $35 million.
Turning to gross margin, we expect pro forma gross margins to be approximately 48% to 50%. Pro forma R&D and SG&A expenses for the quarter are expected to be no higher than $175 million in contrast to the September quarter that was lower due to the impact of reduced performance-based bonuses. We expect to post pro forma net income in the range of $0.03 to $0.09 per share.
Including net restructuring charges and related costs, our GAAP results are expected to be a loss in the range of $0.13 to $0.19 per share. Restructuring charges and related costs not included in pro forma are expected to be approximately $25 million to $30 million, of which about one-third is due to cost associated with the decommissioning of the Orlando FAB and a majority of the remainder is associated with our plans to further reduce expenses.
We expect our total cash balance to decline by approximately $30 million, excluding any purchases of Agere stock in the quarter. Included in this reduction will be approximately $30 million from previously announced restructuring programs, primarily Orlando. We expect taxes to be approximately $7 million, interest expense should be about 6 million, and we expect other income to be approximately $6 million.
We expect capital spending in the December quarter to be approximately $40 million to $45 million, mostly in additional assembly and test capacity to support our storage and mobility customer base.
Most importantly, I would like to reassure you that sustainable profitable revenue growth is the number one priority for both me and the whole of the executive team. And in order to get the frame on revenue growth outlook for fiscal 2006, I believe it's important to convey that we expect to see revenue growth from the areas we have invested in during the last few years.
In portable consumer disk drives of 1.8-inch and below, we are in development with 5 major hard disk drive providers across multiple platforms. Our strength in desktop in small-form-factor SoCs, along with a strong preamplifier lineup will allow us to expand our footprints in the mobile base and capture share from our competitors. As a demonstration of our technology leadership, our lead customer was the first to begin shipping 160 gigabits of flash drive this quarter using Agere SoCs. Reporting our customers first-to-market entry is a clear proof point for our technology and execution.
Turning to mobility, we continue to strengthen our relationship with Samsung. Samsung has chosen Agere GPRS chipset, for its recently announced new family of high volume mass-market handsets. In addition, Samsung has launched its E860 V model with Vodafone based on our EDGE technology, as well as 2 new Symbian-based Smartphone designs, the D720 and the D730 using our Baseband chips.
The market is shifting rapidly to thinner profile mobile phones, and we are proud to be involved in bringing the world's thinnest handsets to market. Last month, NEC introduced its 949 model based on our GPRS chipsets. Our recently announced Vision handset platform enabling high-end phone features in mainstream handsets, has been selected by Amois, the second largest domestic handset supplier in China for new multimedia phones.
In 3G, our mobility division continues to advance our work with 2 wireless technology leaders, Samsung and Sony Ericsson, in developing 3G solutions for high volume applications. We're progressing well with our standard product wedge offerings. IOT is currently under way with calls successfully passing over 3G and EDGE networks. We're also working with NEC on the 3G platform using our standard product chipsets, and we are particularly excited to be winning 3G business for a major OEM who has an established relationship with a Tier-1 handset provider.
Moving to telecom, we continue to see strength in the multi-service EDGE and access markets and major OEMs. We have won new business with our network processor solutions at ZTE higher expense zone technology. Lastly, in our enterprise and networking business, we are in volume production with our four gigabit fiber channel ASIC with industry leader QLogic, and we are partnering with them to move to higher-speed solutions.
We are currently in production with five different gigabit Ethernet products, our single and octal PHY, our fully and lightly managed 48-port switches and our PHY controller. Our Ethernet business has now started generating revenue. We have secured wins at 3Com, SMC Network, and other enterprise system vendors for our 48-port gigabit Ethernet switch and octal PHY for use across multiple product platforms including SMC's TigerSwitch 1000. In the PC and consumer markets, Agere own design the gigabit another for our single chip PHY solutions. All of these businesses will be key drivers in our results for 2006.
Now let me turn the call back to Rick.
Rick Clemmer President and CEO
Thank you, Peter. As I said earlier, we are absolutely committed to doing what it takes over the coming months to drive consistent revenue growth and enhance shareholder value. Recognizing the importance of revenue growth, the company continues to tie compensation closely to revenue performance. The management team is committed to reducing our pro forma operating expenses to a level no higher than $165 million by the fourth quarter of fiscal 2006.
Finally, we believe that our stock is undervalued. The Board of Directors has authorized the repurchase of up to $200 million of common stock. Based on yesterday's closing price, $200 million dollars represents approximately 12% of our total shares outstanding. I believe these initiatives will help significantly strengthen our market position and deliver enhanced shareholder value.
Clearly, as I mentioned before, I need to take little time to assess the adequacy of these actions, but I believe they move the company in the right direction. Over the next weeks and months, my immediate priority will be to understand the opportunities and challenges that we face. I expect by the next earnings call to be in a position to better articulate Agere's plans forward.
I'd like to conclude my remarks by saying once again how I am excited to be taking the reins of Agere at such an important juncture in the company's evolution. And I look forward to meeting with many of you in person.
Now let me turn the call back to Sujal.
Sujal Shah, Director of Investor Relations
Thank you, Rick. At this point, we'll being the Q&A portion of the call. Bridget, will you please give the instructions for the Q&A session.
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