Avici Q4 2007 Earnings Call Transcript

Feb.28.08 | About: Avici (AVCI)

Avici (AVCI) Q4 2007 Earnings Call February 28, 2008 8:00 AM ET

30 am ET

Executives

Bill Leighton – President, Chief Executive Officer

Bill Stuart – Chief Financial Officer

TS Ramesh - VP Finance

Inna Vyadro - IR

Analysts

Pete Enderlein

Mike Sheehan

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter and Year End 2007 Earnings Results Conference 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. Should you require assistance during he call please press star then zero. As a reminder this conference is being recorded and I will now like to turn the call over to our host Mrs. Inna Vyadro. Go ahead ma'am.

Inna Vyadro

Thank you and good morning. Joining me today are Bill Leighton our CEO, Bill Stuart our CFO, TS Ramesh our Vice President of Finance. This morning Avici issued a press release that was distributed by market wire and first call. A copy of the announcement and conference call are available on our website at www.AVICI.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 product delivery, customer activity, and financial performance and our exploration of operating and strategical alternatives. These forward looking statements are neither promises nor guarantees, but are subject to risks and uncertainties that could cause actual results that could differ materially from those contained in the forward looking statements. Those risks are further described in our press release and presented in detail in our Form 10K and 10Q 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 as long with the financial tables in our press release which is previously mentioned and available on our website. This press release was also furnished to the SEC on Form 8K this morning.

I would now like to turn the call over to Bill Latent.

Bill Leighton

Thanks Inna. Good morning everyone and thank you for joining us. I am pleased to announce that effective March 19, 2008 Avici will officially change its name to Soapstone Networks and begin to trade under the new ticker symbol SOAP. In fact, this will be the last quarter that we report earnings under Avici systems.

This morning we reported fourth quarter year end revenue of $44.9 million and $124.3 million respectively, which was at the high end of our previous revenue guidance. We reported GAAP net income of $29.2 million or $1.90 per share for the fourth quarter ended December 31, 2007 compared to GAAP net income of $3 million or $.21 per share in the prior year's fourth quarter. We ended the year with $103 million in cash and cash equivalents up from $75 million as of September 30th. The

company generated $28 million in cash during the quarter. In the fourth quarter we delivered our final router product shipments to AT&T. The efficiency and precision with which we executed the transition out of the router product business is indicated but our product gross margin percentages of 81% for the fourth quarter and 76% for the full year. And as a result we are carrying zero product inventory on our balance sheet. At this point I would like to give an update on our progress with of Soapstone provider network controller PNC and discuss our ongoing strategy for 2008.

In the Q3 call we laid out two major near term objectives. Getting the product to beta and the announcement of other equipment provider partners. I'm happy to report that we continue to make progress on the development of our PNC as evidenced this week by the announcement of our first beta site Net One systems. Net one is one of Japan's leading networking and systems integration providers. Net one is utilizing the PNC platform to dynamically provision services across a multi vendor DTE switch network at its integration center in Tokyo. This lab serves as a showcase for advance engine and reference architectures for Net one's carrier and enterprise customers. The Soapstone PNC is providing a highly scalable reliable external control plane that works across a variety of vendors. We are also actively working with other partners who are leveraging PNC as part of their overall carrier Ethernet solution. We expect announcements from Soapstone's partners with customer betas in the coming month as well as additional partner announcements by Soapstone.

As we've been saying since the inception if Soapstone Networks, one of the key advantages of the Soapstone PNC solution is its multi vendor capability. We've been working with network equipment partners interoperability and certifications of their network equipment with our PNC software. The reference topology in our certification lab today includes 49 switches from 10 different vendors and our beta release includes support for 5 switch vendors with several more in active development at this time.

We have publicly demonstrated multi vendor interoperability including the dynamic establishment of multiple services across a multi vendor PBT network consisting of Nortel, Extreme Networks, and BATM systems switch at a recent MPLS and Ethernet World Congress in Paris. We continue to work with our partners to accelerate the adoption of carrier Ethernet technology and we believe the Soapstone PNC is a major enabler for this adoption.

I would now like to turn to some of the trends we are seeing in the industry that are generating the interest we are seeing in the PNC.

It starts with a fundamental need by carriers to grow top line revenue while reducing operations costs. There has been universal recognition on part of carriers that they will require circuit like predictability as well as ease of management. Which is not offered by existing solutions but that could be offered by Ethernet. The network equipment vendors have done their part by focusing on the PBB-TE capabilities to turn Ethernet into a carrier grade solution. Soapstone is delivering the control plane as well as much needed automation for the complete service life cycle. We are also working with our equipment providers to complete the entire Ethernet services portfolio with a combined data plane and Soapstone external control plane solution including E-Line, E-Tree and E-LAN capabilities. With the availability of PNC Soapstone is creating a new market for the telecom industry by providing virtualization of network technology to accelerate innovation around services.

The PNC is the industry’s only multi vendor, multi technology dynamic control plane that supports the dynamic provisioning of services across a multi vendor carrier Ethernet network. The automation provided by the PNC of software functions such as provisioning, monitoring, repair, network fault, and service correlation, performance optimization, and planning is accelerating time to market for new services while reducing the operational impact of bringing on new customers. The PNC brings centralized control to transport by providing a comprehensive common control framework for various technologies including carrier Ethernet, MPLS, and logical networks.

Soapstone is the glue between the centralized business transaction model for services and a fully decentralized transport model. We do this by making it possible and in fact simple to decouple services from the underlying transport network technology. We are extremely please earlier this week to see that another major vendor made an announcement recognizing the need to develop a completely separate control plane product for its routers to meet this scaling needs of todays services.

This highlights the need to do what Soapstone set out to do last year and is delivering today; a separate control plane. More importantly, it highlights our unique abilities to delver the industries only multi vendor multi technology external control plane solution. Throughout the coming months we will continue to add both beta customers and new go to market partners including network equipment providers, system integrators as well as software partners.

With the products fund we are focused on extending carrier Ethernet capabilities, adding new products to include MPLS and optical networks, and providing the customer a complete solution for automating the entire service life cycle including state of the art product provisioning, monitoring the repair, network fault to service correlation, performance optimization and planning for carrier and enterprise customers. We expect the product to be deployed in the second half of the year, but until we have a better handle on the sales cycle, it is premature to provide revenue guidance. I will now turn the call over to Bill Stuart.

Bill Stuart

Thanks Bill and good morning everyone. This morning Avici systems reported gross revenues for its fourth quarter ended December 31, 2007 of $44.9 million as compared to $29.3 million in the preceding quarter ended September 30, 2007 and $15.9 million in the prior year's fourth quarter. Gross revenue for the full year ended December 31, 2007 were $124.3 million compared to $82.8 million for the year 2006. On a GAAP basis the company reported net income of $29.2 million or $1.90 per share in the fourth quarter of 2007 as compared to $15 million or $.97 per share in the preceding quarter and $3 million or $.21 per share in the prior year's fourth quarter.

GAAP net income and GAAP net earnings per share for the year ended December 31, 2007 was $62.3 million or $4.16 per share compared to $8.3 million or $.60 per share for 2006. In calculation GAAP earnings per share the number of shares used in the calculation for the 2007 and 2006 periods have been adjusted to include the dilutive effect of stock options, warrants and restricted stock grants. GAAP net income for the fourth quarter and 12 months ended December 31, 2007 and 2006 includes certain non cash equity based charges associated with FAS 123R, credits for certain inventory utilization and restructuring expenses related to the 2006 restructuring program and for the comparable twelve month 2006 period charges related to common stock warrant discount.

Comparative quarterly GAAP consolidated statements of operations along with comparative non GAAP consolidated statements of operations excluding these charges and credits and direct consolation between them of companies are press released 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 charged and credits. Such information should not be considered superior to, and isolation from, or a substitute for GAAP results. Rather we believe we these non GAAP measures provide useful information to investors and analysts in assessing the core operating results of our business.

On a non GAAP basis the company reported net income of $29.8 million or $1.93 per share in the fourth quarter of 2007 compared to net income of $15.6 million or $1.01 per share in the preceding quarter ended September 30, 2007 and $4 million or $.28 per share in the prior year's fourth quarter. Non GAAP net income and non GAAP earnings per share for the year ended December 31, 2007 was $64.7 million or $4.61 per share compared to $20.1 million or $1.47 per share for the year 2006. In calculating non GAAP earnings per share the number of shares used in the calculations for the 2007 and 2006 periods has been adjusted to include the dilutative effect of stock options, warrants and restricted stock grants.

Gross revenue for the quarter was $44.9 million and includes product revenue of $42.1 million and service revenue of $2.8 million. Gross revenue for the prior year's fourth quarter was $15.9 million and included product revenue of $14 million and service Yerevan of $4.9 million. AT&T accounted for the predominate share of the revenues.

Our overall gross margin for the quarter was 81.5% compared with 77.9% in the preceding quarter and 72.8% in the prior year's fourth quarter. The higher gross margin percentage in 2007 is due to a favorable product mix and lower material costs. Total operating expenses for the quarter, excluding certain non cash equity based charges, were $7.5 million compared to $7.8 million in the third quarter and $8.3 million in the prior year's fourth quarter, excluding certain restructuring expenses in that quarter.

Total operating expenses for the year 2007, excluding certain non cash equity based charges and restructuring expenses were $33.5 million down from $39.8 million in 2006, excluding non cash depreciation charges of $.9 million in the fourth quarter, $1.1 million in the third quarter and $1.3 million in the prior year's fourth quarter. Cash based operating expenses were $6.6 million for the fourth quarter compared to $6.7 million in the third quarter and $7 million in the prior year's fourth quarter. The comparable cash based operating expenses for the year 2007 were $29.2 million down from $33.8 million in 2006. We expect our operating expenses, excluding depreciation and certain non cash equity based charges, for 2008 to be approximately $30 - $35 million and spending reductions with the transition from our router operations are offset by increased investment in Soapstone.

Total ongoing head count in both on and off shore contract labor at December 31, 2007 was 108.

Interest income in the quarter was $1.0 million on an average invested cash and investment balances of approximately $92.5 million. Interest income continues to fluctuate in line with average quarterly cash balances and current interest rates. The provision for alternative minimum income tax was $.5 million.

At December 31 our cash, cash equivalents, and short and long term marketable securities were approximately $103 million, an increase of $28 million from the previous quarter. The increase was primarily as result of cash generated during the quarter from operations and the exercise of employee stock options net of capital expenditures.

Quarterly cash flow has varied from quarter to quarter depending on the level and timing of product shipments, margins resulting from product mix and cost structure as well as other working capital and capital equipment needs. With the transition from the router business to Soapstone, we expect that 2008 will be an investment year and we will use cash this year. However, we've made sure that our total combined transition is sufficiently strong to support expected operations for the foreseeable future.

Our DSO, day sales outstanding, accounts receivable is a function of the distribution of product shipment throughout a given quarter coupled with specific customer payment terms. Our receivable balance December 31, was approximately $11.8 million. Our DSO was approximately 28 days reflecting a relatively higher proportion of shipments made in the fist half of the current quarter.

Consistent with our transition away from router product sales we had zero inventory as of December 31. This did not include any material write downs of inventory, just real solid management of the wind down of the router business.

Accounts payable and accrued expenses totaled $9 million at December 31.

Deferred revenue at December 31 was $2.3 million, the balance remaining in deferred revenue primarily represents the deffered and unearned portion of customer maintenance and port revenue which will be organized into revenue over the term of the related contractual service periods. We continue to have no debt.

In summary for the benefit of all share holders and investors and for the avoidance of any doubt or uncertainty I would like to reinforce that we shipped the final orders of our router products in the fourth quarter of 2007. While we expect our router business to provide continued service and support revenue in 2008, we do not expect, nor are we planning or resource for our product revenue for the router business in 2008 or there after. Other than providing service to our existing customers we are out of the router business. Our future is Soapstone, which as Bill noted earlier, has been well received in the market place. That has been affirmed by the change in our name to Soapstone Networks and a new ticker symbol, SOAP effective March 19. This concludes my prepared remarks, we will now open up the call to your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, if you'd like to ask a question please press star and then one on your touchstone phone. You'll hear a tone indicating you've been placed in queue, you may remove yourself from queue at anytime by pressing the pound key. If you're using a speaker phone, please pick up the handset before pressing the number. Once again if you have a question, please press star one at this time.

Our first question comes from the line of Pete Enderlein, please go ahead sir.

Pete Enderlein

Good morning, thank you. On the beta side in Japan, could you just elaborate a little on how that is going to work, you know the timing, what they've committed to, how you picked them, and I guess also whether there are some others that are waiting in the wings to come along fairly quickly here?

Bill Stuart

Yes, we're working with beta, as you know its always a balance between keeping it well managed and achieving the results you want, so we've been working for quite some time with Net one and they are setting up a lab, an integrated PBT network in their demonstrative facility in Tokyo. That seems like a natural place to start with, but we do have others that we're working with and getting very close to. The Net one, as I mentioned, their system integration lab, where they're showcasing multi vendor PBT network and they've had quite a lot of interest from their customer base in that capability, so that's why we selected that one first.

Pete Enderlein

On the accounts receivable, Bill, obviously the money good, but what’s the timing of the conversion of those to cash?

Bill Stuart

Almost all of those receivables were converted to cash by the end of January.

Pete Enderlein

Okay.

Bill Stuart

All that's outstanding now is about 1100 to put it in perspective.

Pete Enderlein

I figured they were good for it. The comment was that you expect deploying of the PNC in the second half of the year.

Bill Stuart

Yes

Pete Enderlein

Would that likely be in Japan or the United States?

Bill Stuart

Don't know at this point. It could be in Japan, in the United States in Europe, we've had a lot of interest in this from almost all geographies. Hopefully it will be in all three in the second half of the year.

Pete Enderlein

Thanks a lot.

Bill Stuart

Thank you.

Operator

Our next question comes from the line of Mike Sheehan. Please go ahead.

Mike Sheehan

Hi gentlemen. Can you give an indication or some kind of a ballpark for expectations of where we should be at for the end of calendar '08?

Bill Stuart

We're not forecasting the cash, but basically what I did, in effect all the ingredients that we had talked about the operating expenses for our total operation, sales and marketing, GAM total spending an estimated area of $30-$35 million for the year. Also, I should add, that we expect to invest between $4 and $5 million in capital expenditures for Soapstone and the router service businesses will contribute between $4 and $5 million income after our costs and that on revenue of about $8-$9 million.

Mike Sheehan

8-9 million per quarter?

Bill Stuart

For the year, service revenue associated with our principal customer.

Mike Sheehan

OK. How long will that last, is that a multi year service contract?

Bill Stuart

The current contract goes through to the year 2010.

Mike Sheehan

OK great. Thank you very much.

Operator

There are no additional questions. Ladies and gentlemen this conference will be made available for replay after 10:15 am today until March 1 at midnight. You may access the AT&T executive play back service at anytime by dialing 18004756701 and entering the access code 909097. International participants may dial 13203653844. That does conclude our conference for today. Thank you for your participation and for using AT&T executive call conference service. You may now disconnect.

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