EXHIBIT 99.1
Transcript of Conference Call
August 4, 2003
3:30 p.m. CDT
Coordinator Good afternoon, and thank you for standing by. Welcome to the
Avanex fourth fiscal quarter earnings call. All participants
will be able to listen only until the question and answer
session of today's call. This conference is being recorded.
If anyone has any objections, you may disconnect at this
time.
On today's call we have Mr. Walter Alessandrini, Chairman,
President and CEO and Mr. Bruce Pollock, CFO. Now let me turn
the call over to Mr. Mark Weinswig. Sir, you may begin.
M. Weinswig Thank you. We would first like to clearly note that during
this conference call participants from Avanex may make
forward-looking statements, including forward-looking
statements regarding anticipated revenue and cash burn rates,
cost reduction and integration measures, new product and
technology initiatives, our competitive position, new project
designs, our expected results for our fourth fiscal quarter,
prevailing anticipated market conditions, and our ability to
successfully introduce new products. Actual results could
differ materially from those projected in or contemplated by
the forward-looking statements.
Several of the factors that could cause actual results to
differ are discussed in the risk factors contained in the
company's SEC filings, including the company's quarterly
report on form 10-Q filed with the SEC on May 9, 2003, and
the company's proxy statement filed with the SEC on June 20,
2003. These forward-looking statements should not be relied
upon as representing the company's view as of any subsequent
date, and Avanex undertakes no obligation to update these
forward-looking statements to reflect events or circumstances
after the date they were made.
During today's call we will be discussing both pro forma
financial information as well as GAAP financial information.
Pro forma financial information excludes the effects of stock
compensation expense, amortization of intangibles,
restructuring charges, inventory adjustments, reduction in
long-lived assets, merger-related expenses, accounting change
related to SFAS 142, acquired in-process R&D, and settlement
of noncancelable purchase commitment.
We have included the reconciliation between GAAP and pro
forma financial statements in today's release, which can be
viewed on the company's Web site for 12 months from today at
www.avanex.com, under financial news releases.
Now let me turn it over to Walter Alessandrini, Chairman,
President, and CEO of Avanex.
W. Alessandrini Good afternoon, ladies and gentlemen, and thank you for
attending our call. Today we are at an important juncture in
the life of our company. A new Avanex emerges from the
integration of Alcatel Optronics, Corning Photonics, and the
old Avanex as you knew it. This new Avanex has the potential,
the talent, the wherewithal, and the determination to become
a leading force in the photonic industry.
I'm going to spend a good part of this call talking to you
about the future we're shaping up for the new Avanex, but
first let me cover the progress made by the old Avanex in its
final stretch of the quarter ended last June.
Our revenues showed a slight increase in the June quarter
compared to the March quarter, $5.5 million versus $5.4
million. This is the third consecutive quarter of slight
increases in revenues, which means that we have stabilized
our business despite unfavorable market conditions. More than
75% of our revenues continue to be generated from Metro
applications, mostly by our integrated subsystems product
line, with two customers each accounting for over 10% of
revenues.
Operating expenses decreased by $1 million or 13% during the
June quarter, as we benefited from the restructuring
initiatives we previously executed. As a result, in the June
quarter, we were able to reduce our loss to $0.10 per share
compared to $0.15 in the March quarter.
Our usage of cash, excluding our position-related expenses,
went from over $8 million in the March quarter to under $6
million in the June quarter.
Let me now ask our CFO, Bruce Pollock, to give you some
details about our numbers for the quarter.
B. Pollock Thank you, Walter. Let me start by saying that the quarterly
comparisons I will provide will compare fourth quarter
results to the immediately preceding quarter, because we
believe that this comparison is more relevant. Year-over-year
or 12-month statement comparisons are shown in the financial
statements included with the press release. These results do
not include results from any of the operations we just
acquired from Corning and Alcatel because those acquisitions
did not close until after the end of our fourth quarter.
In the fourth quarter of fiscal 2003 we reported revenues of
$5.5 million. Gross margins were negative 10% in the fourth
quarter, compared to negative 24% in the third quarter. Gross
margin in each of those quarters benefited from the use of
approximately $1 million of previously written-off inventory.
Total expenses declined significantly in the fourth quarter.
A substantial portion of the improvement is attributable to
the cost reduction programs and the restructuring plans we
have been implementing throughout the fiscal year. On a pro
forma basis, operating expenses were $6.4 million in the
fourth quarter versus $7.4 million in the third quarter,
representing a $1 million or 13% improvement quarter to
quarter. Our total operating expenses declined each quarter
during the fiscal year as a result of our focus on cost
cutting and restructuring throughout the year.
Research and development expenses totaled $3 million for the
fourth quarter, which was the same as in the third quarter.
Compared to the prior quarter, our fourth quarter SG&A
expenses decreased by approximately $1 million.
In the fourth quarter of fiscal 2003 we reported a loss per
share of $0.10 on a basic and diluted share basis, compared
to a loss of $0.15 per share in the third quarter. On a pro
forma basis, the loss per share was $0.11 in the fourth
quarter, compared to $0.13 in the third quarter.
Now let me turn to the balance sheet. Our cash and
investments balance was $135 million at the end of June,
compared to $144 million at the end of March. This does not
include the cash infusion from Alcatel and Corning, which
came after the close of the quarter. However, approximately
$3 million of the cash used in the fourth quarter was related
to that acquisition.
Our days sales outstanding were 43 days and inventory turns
were 7.7 times in the fourth quarter.
Now I'll turn you back to Walter, who will discuss the
company's outlook.
W. Alessandrini Thank you, Bruce. Looking back at the fiscal year just
completed, I can comfortably say that it has been a very
productive year in extremely difficult market conditions. The
key results we achieved are: we stabilized revenues over the
last four quarters; on a pro forma basis, we cut our
operating expenses by over 40% from the last quarter of
fiscal year 2002 to the last quarter of fiscal year 2003; on
a pro forma basis, we improved our results by almost 40% over
the same period; we greatly reduced our cash burn rate to
preserve our precious financial resources.
More importantly, we have taken a strong lead in the emerging
market of integrated subsystems. This winning strategy has
repositioned Avanex at a completely different level in the
industry.
Obviously our success did not go unnoticed by some of our
competitors, who have been recently scrambling to acquire
subsystems capabilities through acquisitions or partnerships.
Fortunately for us, pursuing the subsystems business requires
the classic 10% inspiration and 90% perspiration. We got to
where we are by investing, for the past two years, in
building the talent internally to provide solutions that
fully integrate optics, electronics, and software. It takes
much more than a couple of announcements to build subsystems
that pass osmine qualification, as our products were able to
do, as part of our customers' photonic systems.
The strategy inspired us to spread our wings and seek a full
line of technology that could add additional power to our
intelligent photonic solutions. This pursuit culminated in
what is the most important result emanating from our last
fiscal year: the acquisition of Alcatel Optronics and certain
assets of Corning's photonics division, which we closed just
last Thursday.
Besides the relevance and magnitude of this expansion, these
transactions clearly demonstrate the unique capabilities
Avanex has in terms of speed of action and precise execution.
We started talks with Alcatel and Corning in mid-March. We
signed a definitive agreement two months later. We closed the
transactions after only two and a half months. By Friday our
employees worldwide began work as a combined company,
spanning four countries and five locations. Our employees
immediately felt part of the new Avanex team.
We have a unique opportunity in front of us. We can build
together on the foundation of three leading companies and
make Avanex the best possible enterprise to win in our
industry. The integration plan has been developed over the
past weeks and it is now ready for final review and
implementation by the new Avanex executive team. Integration
has a special meaning to us. It means building one team out
of three extremely talented optical-business-focused and
determined teams.
We have clearly stated our integration objectives to all of
our employees. We will build, together, the best possible
company, totally dedicated to helping our customers to pursue
their success by offering them the best intelligent photonic
solutions that meet their performance and cost-effectiveness
needs. We are dedicated to completing our integration without
losing one customer, one business opportunity, or one key
employee.
I obviously do not underestimate the challenge at hand.
However, we have the plan,
the management talent, and the commitment by our employees to
lead Avanex through an effective integration. In addition, we
have our customers' extremely positive response and desire to
partner with a supplier that is strong in capabilities,
customer focus, speed, innovation, and financial means.
This first quarter of fiscal year 2004 will be a transition
quarter, as we start verification and implementation of our
integration plan. Since we only closed the transaction four
days ago, I will be more specific with you in terms of
measurable goals when we will meet again in October.
For now, I can tell you that I feel confident that we will be
able to improve on the financial model we put together to
verify the feasibility of our acquisitions. Beginning in our
second fiscal quarter, this model conservatively called for
$25 million in revenues per quarter and $25 million in
operating cash burn projected over the next two fiscal years,
excluding restructuring and one-time charges.
I believe revenues can improve above the $25 million level,
in time, by virtue of the consolidation and the consequence
of opening new channels with existing customers for our
global product offering. I also believe that the $25 million
per quarter operating cash burn can be reduced, in time, by
virtue of production rationalization opportunities and
operating synergies.
During the next call in October I will be able to quantify
our goals to you in more specific terms. For the time being,
I just stand on the unquestionable ground that we have
positioned Avanex to become one of the most significant
players in our industry. We have the ability to execute our
plans, the opportunity to improve our results, and the means
to carry us through the market downturn and emerge as a
strong industry leader.
Now the proof is in the pudding, i.e., execution. I am
looking forward to reporting our progress to you three months
from now. Until then, thank you once again for your
continuing interest in our company.
Operator, I am now ready to answer questions.
Coordinator Ron Harmon with Needham, you may ask your question.
R. Harmon I'll probably have some follow-ups, but first of all, can you
tell us what the revenues of the two pieces that you got were
in the June quarter with the Corning business that you'll
take - what kind of revenues they did, and the Alcatel
business as well?
B. Pollock We don't have that information available for release, and
it's a little more complicated because the Corning business,
we didn't take the entire business; we took pieces of it. So
they couldn't even report it to us as a total busine So
we're not releasing that information at this time.
R. Harmon Okay. I guess we'll have to use the March results as a frame
of reference. It sounded like you didn't give any revenue
guidance for your fiscal first quarter either, but for your
second fiscal quarter at $25 million?
W. Alessandrini You see, this is obviously a transition quarter because we
put together a financial model in order to evaluate the
feasibility of the transactions, and then, basically, we
could not do any more work on this because we were still
three separate companies. So as now we are one company since
four days, we will be working, during this first quarter, to
really finalize our plan and see how can we perform compared
to the financial model that we put together. As I said, the
financial model was eight quarters
straight, starting the second quarter of this fiscal year at
$25 million in revenue and $25 million of operating cash burn
rate.
B. Pollock Also keep in mind that this first quarter is a short quarter
because the acquisition just closed, so it will only have two
months in it then. Revenues will be lower, as a result.
R. Harmon Okay. I'll ask one quick one and let other people ask. Can
you remind us what -- Alcatel is undergoing a restructuring
in their components business - what is left there, and how
much cash that could burn?
W. Alessandrini In the transaction there were about $50 million that are
coming to us to go against restructuring costs. The
restructuring already started and, as a matter of fact,
Optronics went down from 900 people to about 600 in the last
couple of months, and it will go down further in the next
month. But these monies have been set aside, that have been
paid to us by Alcatel, in order to finance this
restructuring.
Coordinator Todd Kaufman with Raymond James, you may ask your question.
T. Kaufman Just a clarification on that $25 million in revenue per
quarter starting in your second quarter. Is that the total
revenue or is that the revenue of the two acquired
operations?
W. Alessandrini No. This would be the total revenue, so just simply adding up
the revenues of Alcatel Optronics, the part of Corning
Photonics that we acquired, and our own.
T. Kaufman On the last call - and I may be wrong on this - did you
indicate that the two businesses that you were taking
ownership of had combined annual revenue of about $100
million?
B. Pollock No. I think if we said anything that we would have been
talking about the model for the combined company with all of
the operations together.
T. Kaufman Okay, very good. What is the cash balance after you've got
the cash in from the acquired operations?
B. Pollock We start with in excess of $250 million.
W. Alessandrini But once again, if you look at the model, what I said was
that the company would have had cash in the bank to cover at
least two years at $25 million per quarter, which means $200
million, and the $250 million because $50 million are going
against to finance basically the restructuring, and the other
$200 million will be the cash to continue operation.
T. Kaufman I think someone asked about the acquired businesses' June
quarter revenue, which you made no comment. Are those
businesses in the current quarter tracking to generally where
your second quarter indications were?
W. Alessandrini This quarter is going to be anomalous, if you want, in terms
of reporting our revenues, for a couple of reasons. The one
is because we basically have only two months, August and
September, because July is already gone. So as we will report
the fiscal quarter, we will be reporting basically two months
out of three for Alcatel Optronics and Corning Photonics and
three months for Avanex.
The other thing is that normally, seasonally, because of the
vacation times in Europe, this is normally a slower quarter
for Alcatel Optronics.
J. Kaufman Just one more follow-up question: Do you envision, and during
what time period after
you get a handle on these businesses, might you go through
some sort of pruning or
reorganization/restructuring/downsizing?
W. Alessandrini This is part of the plan that we are working on right now.
Once again, you've got to understand that we could not really
talk much in the last month, until we closed the deal,
because we were three separate companies and, as you well
understand, in order to come up with these kinds of plans
you've got to go through a lot of details of how the company
operates and assess experience and weakness and so on. But
that's what we're going to do now in the next few weeks, as
quickly as possible, with the usual speed, so that we can
have a plan that we can act upon.
J. Kaufman So is it fair to say we will get your final updated plan in
conjunction with your fiscal second quarter results?
W. Alessandrini Exactly right.
Coordinator Sam Kingston with Washington Asset Management, you can ask
your question.
S. Kingston I was wondering if you could comment a little bit about -
obviously you were pretty busy with the acquisitions during
the quarter, and in terms of the revenue number that you
reported, is it possible to maybe conclude that obviously the
company was a little bit distracted by the transaction and
that revenues could have been a different level and don't
necessarily reflect the business pattern at this point?
W. Alessandrini Well, frankly, quite the opposite, because we entered the
quarter feeling that this quarter could have been a little
weaker than what it turned out to be. So we really focused a
lot on bringing in the orders and getting the revenues out
and continuing to work on our work plans to reduce expenses
and manufacturing costs and so and so, and that's another
thing that, in my opinion, demonstrated the strength of
Avanex. Even if we had this big distracting event, the rest
of the organization that was not directly involved in the
major event has been able to continue to focus on the results
and bring them in.
So this quarter, actually, we haven't seen anything different
in the marketplace compared to other quarters. As a matter of
fact, maybe a little more weakness because, as you know, some
of the systems companies, they had a tough time this quarter.
S. Kingston You mentioned two 10% customers. Can you tell us who they
were?
W. Alessandrini Yes. Cisco continued to be one of them and the other one, as
you know, we have a policy of naming the 10% after a number
of quarters that have been 10%, because sometimes there are
fluctuations up and down.
S. Kingston What do you expect the revenue target for the company to be
in terms of international revenues, once the acquisitions are
jelled together?
W. Alessandrini I think we will go into that when we talk at the next call,
because obviously there is a significant part of
international, it's already within Avanex because we supply
products. We already supply products to Actatel Optical
Network Division, Marconi and Cisco Italy. So we have a
significant part of our business in Europe, and recently,
again, our business with Japan has started to increase again.
Corning has also had a good portion of their revenues
internationally, and by internationally I'm saying outside
North America, because, of course, you've got Nortel in
Canada. And at Alcatel, most of the revenues were generated
by Alcatel
OND in Europe, but also Atva and some other companies in
Asia. So we'll have to sort all of these out, but we did
mention that the company would be very well balanced in terms
of both North American and European and Asian customer base.
S. Kingston One last thing; can you just tell us where you are in terms
of the - excuse my French - the Lannion closure, which I
believe you're closing that facility? And then there was one
other facility that I believe you were supposed to be closing
as well. Can you just let us know where you are with that and
when we should expect to see those facilities closed?
W. Alessandrini This is actually part of the Alcatel restructuring plan. It's
not our plan. In other words, part of the agreement was that
we would acquire an already restructured business, and if the
business was not entirely restructured because of timing,
obviously Alcatel would have given us the money to pay for
the restructuring. So the social plan, as it is called in
France, has been launched already as a result of that.
Lannion, I believe it has been closed, but this is really
Alcatel business; it is not ours. Actually, the restructuring
has continued in Nozay, which is the location where we are,
and it's going on until, in the next few months, we will go
back to a totally restructured operation.
S. Kingston So it's your responsibility to close the Nozay facility?
W. Alessandrini No. Nozay is not going to close. Nozay is actually one of the
jewels that we have, but there was an excess of people there
that has been downsized in agreement with the unions, and so
what we are going to get is exactly the number of people that
we have agreed upon at the transaction time with Alcatel.
Coordinator We have a follow-up question with John Harmon from Needham
and Company. You may ask your question.
J. Harmon It might be a little early to answer this question, but I'm
wondering what your big-picture strategy is now that you've
got all the pieces in line - whether your strategy is to be
the number-two supplier versus JDS Uniphase or whether you
aim to take some share from JDS Uniphase, and then you could
be targeting being the leading supplier in Europe.
And secondly, how is your customer mix going to fall out now
that you have all the pieces under your umbrella?
W. Alessandrini John, actually, you might look at this event as a step in a
strategy that was started at Avanex about two years ago, when
we made a conscious decision that eventually the demand from
system manufacturers would be for subsystems, and actually
subsystems that would address the optical layer.
Now this is for a couple of reasons. One, because we saw the
need the customers have to focus on areas of their business
that are more important for the success of their systems:
network management, software network integration. So it has
been clear to many system houses that they couldn't do
everything. They had, really, to focus on the most important
aspect of their business.
And on the other side, because of the business downturn,
obviously the system houses have to downsize as well, and so
they didn't have the resources they had before in order to be
able to do everything.
So as we identified this opportunity, we started to move the
company quickly in this direction, and we built a different
Avanex, an Avanex that today is not only a passive
optics integrator, but today it has the capability of
integrating active/passive electronics, software, firmware,
and mechanical aspects, and deliver, really, a complete
subsystem. This strategy has been very effective for us, very
successful, and we believe that it will gain even more
momentum in the future, as more of the system houses are
moving that direction.
So for us the acquisition of Alcatel Optronics and Corning
Photonics was really a steppingstone in beefing up our
technological and product offering. So that one side, the
customers who still want to design themselves the optical
layer and buy modules and discreet, we obviously can satisfy
it on these. But on the other side, if the customers want to
delegate to us, the optical layer, we are ready to take it
and to take in an extremely powerful way because of the
technologies, the ability, and the experience that we have.
J. Harmon The second part of my question was on your customer mix
following the acquisitions.
W. Alessandrini Obviously we have some customers that are strong with the
separate companies, and will continue to be strong. Cisco has
always been a very strong customer for Avanex, and we want to
continue it that way and actually expand our opportunities
with Cisco and our partnership because of the new
technologies and products that we can bring to them. Alcatel
Systems, of course, has been the major customer of Alcatel
Optronics, and that will be a major customer for the new
Avanex. Corning has had a diversified base of customers, but
have been very strong with all of the other major system
houses: Nortel, Lucent, and others, Sienna. So we believe
that we have, now, a very diversified base of customers that
include, really, the best system companies worldwide.
J. Harmon One final one: I looked, but I didn't see any of the details
on the supply agreement with Alcatel. Is that public? Can you
tell us anything about that?
W. Alessandrini Yes. The supply agreement with Alcatel is public information,
and it is a three-year renewable contract in which Alcatel
commits to give, to Avanex, 70% of their needs for any
product that Avanex has or will have in the future. Obviously
they want to keep their second sourcing ability, and so it
is, in my opinion, an extremely fair contract. We haven't
asked Alcatel Systems to commit to us numbers or volumes that
would really be unpredictable and unwise to commit to in the
current market conditions.
On the other side, by working by percentage it means that if
the market will continue not to do well, Alcatel will not
feel the weight of this commitment to this supplier, Avanex.
On the other side, if the market would go well and Alcatel
would do well, we will be able to contribute to their success
and enjoy the results of it. It's a very fair approach, very
customer-oriented, as Avanex is.
Coordinator At this time we have no further questions.
M. Weinswig Thank you very much for participating in today's call. We
will be holding our next conference call after our September
results. Thank you.