Exhibit 99.1
[TOLLGRADE LOGO] TOLLGRADE COMMUNICATIONS, INC.
Network Assurance Simplified 493 Nixon Road / Cheswick, PA 15024
www.tollgrade.com
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C O R P O R A T E C O M M U N I C A T I O N S
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CONTACT: Chris Allison
412-820-1407
callison@tollgrade.com
CHEETAH ACQUISITION CONTRIBUTES TO 17.5% RISE IN TOLLGRADE SALES
PITTSBURGH, PA - July 17, 2003 - Tollgrade Communications, Inc. (NASDAQ: TLGD)
today reported revenue of $17,133,547 and earnings of 6 cents per share for the
second quarter ended June 28, 2003. Revenue and earnings per share for the
second quarter of 2002 were $14,583,910 and 8 cents per share, respectively. The
results reported for the second quarter of 2003 include for the first time an
entire quarter's results of the Company's Cheetah(TM) status and performance
monitoring business which was acquired during the first quarter of 2003. On a
year to date basis, the Company recorded revenues of $31,676,970 and earnings of
9 cents per share for the period ended June 28, 2003; revenues were $32,106,184
and earnings were 19 cents per share in the corresponding period of the prior
year.
Second quarter 2003 revenues of $17,133,547 exceeded the Company's previous
revenue guidance of $13.0 million to $16.0 million while slightly higher product
development, bad debts and consulting expenses kept actual earnings at the upper
end of the guidance range of break-even to six cents.
"Capital expenditures among our RBOC customers continue to be lean," said Chris
Allison, Tollgrade's chairman and chief executive officer. "Although we had a
strong MCU(R) quarter with sales to BellSouth and Qwest, lower Digital Loop
Carrier (DLC) deployments particularly impacted our MCU business. Our
LoopCare(TM) business was solid, but down in comparison to the first quarter of
this year. As we expected, longer soak times for software products can make this
business lumpy. In addition, looming labor negotiations involving an RBOC
customer could add to the difficult environment. We are, however, happy to
report that all of our LoopCare maintenance agreements are signed, including
multi-year agreements with Verizon and SBC. In the cable sector, our
CheetahNet(TM) and CheetahLight(TM) business had a solid quarter. Our cable team
did a great job."
The company's 2001 acquisition of the LoopCare test system business from Lucent
Technologies continued to make a positive contribution to the business, although
separate right-to-use licenses fees were lower in the current quarter than in
the comparable period of 2002. Sales of LoopCare software products separate and
unrelated to the DigiTest(R) system products, which tend to be lumpy, were
$929,000 in the second quarter of 2003 compared to $2,322,000 in the second
quarter of 2002. Total LoopCare revenues, including software
and services, were $3,225,000 in the second quarter of 2003 compared to
$4,212,000 in the second quarter of 2002.
Overall sales of the Company's core MCU products, which extend testability into
the POTS network, were $6,387,000 in the second quarter of 2003, compared to
$7,588,000 in the second quarter of 2002. RBOC customers are generally
continuing to restrain capital spending in traditional POTS line areas such as
Digital Loop Carrier deployment due to continuing line losses.
Sales of Tollgrade's DigiTest system products were $1,230,000 in the second
quarter of 2003 compared with $1,016,000 in the same period of 2002. The 2003
quarter included sales to both RBOC and CLEC accounts for LTS modernization
programs and initial DigiTest system sales, respectively.
Overall sales of cable hardware and software products were solid for the 2003
quarter at $5,345,000, of which $3,731,000 were contributed by Cheetah and
CheetahNet (formerly NetMentor(TM)), and $1,614,000 were attributable to
CheetahLight (formerly LIGHTHOUSE(TM)). CheetahLight product sales increased
during the 2003 quarter from $996,000 in the year earlier period due to the
strength of shipments to a new customer, Bright House Networks.
Second quarter 2003 revenue from Services, which includes installation oversight
and project management services provided to RBOCs and fees for software
maintenance, increased to $3,243,000 from $2,566,000 in the prior year quarter.
Contributing to the increase was an approximately 12% increase in Tollgrade's
traditional service offerings in addition to the inclusion of CheetahNet
maintenance fees.
SECOND QUARTER 2003 FINANCIAL AND OPERATING DATA
Second quarter gross profit increased 11.4% to $9,414,572 from the second
quarter of 2002 primarily as a result of the additional sales volumes related to
the Cheetah products. As a percentage of sales, gross profit was 54.9% versus
57.9% a year ago. This decrease was primarily attributable both to lower
LoopCare software right-to-use fees in the second quarter of 2003 as well as the
impact of the Cheetah business that produces lower margins due to the highly
competitive CATV markets. Amortization expense related to the LoopCare and
Cheetah operations was $510,306 for the second quarter of 2003, while
amortization that related to the LoopCare acquisition was $365,429 in the second
quarter of 2002.
Overall operating expenses increased $1,266,115 or 18.4%, to $8,155,611 from
$6,889,496 in the second quarter of 2002.
Selling and marketing expenses in the quarter were $2,420,786, an increase of
8.8% percent from the same period in 2002, due primarily to the inclusion of the
Cheetah business, as well as higher consulting and
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incentive compensation expense, offset by fewer employees and lower commissions,
travel and discretionary expenses in other parts of the business.
General and administrative expenses increased 44.1% to $1,828,262 from the year
earlier quarter due largely to the inclusion of the Cheetah business as well as
increased provisions for bad debts related to CATV customers, higher business
insurance costs and higher incentive compensation and professional service
costs.
Research and development expenses were $3,906,563, an increase of 15.0% from the
second quarter of 2002. This increase was due primarily to the inclusion of the
Cheetah business offset by a general reduction in work force at the end of the
third quarter of 2002.
As a result of the above, income from operations was $1,258,961 in the second
quarter of 2003, a 19.3% decrease from the same period of 2002.
The company's order backlog for firm customer purchase orders and signed
software maintenance contracts was $8,122,000 as of June 28, 2003, in comparison
to a backlog of $10,698,000 as of March 29, 2003 and $7,179,000 as of December
31, 2002. The backlog at June 28, 2003 included approximately $4,200,000 related
to software maintenance contracts, which will be earned and recognized as income
on a straight-line basis during the remaining terms of the underlying
agreements. Including these maintenance billings, Tollgrade expects
approximately 40% of the current backlog to be recognized as revenue in the
third quarter of 2003.
As of March 29, 2003, two of the Company's RBOC LoopCare annual maintenance
agreements were under negotiation and extension. One of those agreements was
signed during the recently completed second quarter. The second was signed just
subsequent to June 28, 2003 and thus is not included in the backlog as of June
28, 2003.
THIRD QUARTER OUTLOOK
Regarding the Company's third quarter outlook, Chris Allison reported that
"Although we have increased the diversification of our product offerings with
our Cheetah and LoopCare acquisitions, the capital expenditure and broadband
roll-out environment remains unclear. In addition, the third quarter has
historically been down for us due to typical seasonality issues. We, therefore,
are providing third quarter 2003 guidance with sales of $12.0 to $16.0 million
with per share results ranging from a loss of $(0.03) to earnings of $0.06.
However, if a labor disruption should occur at a significant RBOC customer, the
impact could be material resulting in revenues as low as $11.0 million and a
loss per share of $(0.07)."
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ABOUT TOLLGRADE
Tollgrade Communications, Inc. is a full-system provider of leading hardware and
software testing solutions for the global telecommunications and cable broadband
industries. Tollgrade designs, engineers, markets and supports test systems,
test access and status monitoring products. The Company, which is headquartered
in the Pittsburgh suburb of Cheswick, Pa., recorded 2002 revenues of $58.6
million. The Company's web address is www.tollgrade.com.
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per-share data)
Three Months Ended Six Months Ended
06/28/03 06/29/02 06/28/03 06/29/02
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REVENUES:
Products $ 13,916 $ 12,018 $ 25,487 $ 26,947
Services 3,218 2,566 6,190 5,159
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17,134 14,584 31,677 32,106
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COST OF SALES:
Products 6,233 4,870 11,524 10,932
Services 976 900 1,766 1,855
Amortization 510 365 1,403 730
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7,719 6,135 14,693 13,517
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GROSS PROFIT 9,415 8,449 16,984 18,589
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OPERATING EXPENSES:
Selling and marketing 2,421 2,225 4,391 4,642
General and administrative 1,828 1,268 3,565 2,795
Research and development 3,907 3,396 7,228 7,391
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Total operating expenses 8,156 6,889 15,184 14,828
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INCOME FROM OPERATIONS 1,259 1,560 1,800 3,761
OTHER INCOME 85 200 232 438
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INCOME BEFORE INCOME TAXES 1,344 1,760 2,032 4,199
PROVISION FOR INCOME TAXES 511 669 772 1,595
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Net income $ 833 $ 1,091 $ 1,260 $ 2,604
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DILUTED EARNINGS PER-SHARE
INFORMATION:
Weighted average shares of common
stock and equivalents: 13,335 13,339 13,276 13,386
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Net income per common and common
equivalent shares $ 0.06 $ 0.08 $ 0.09 $ 0.19
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 28, Dec. 31,
2003 2002
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 28,060 $ 33,799
Short-term investments 14,181 19,329
Accounts receivable:
Trade 10,838 7,946
Other 90 152
Inventories 13,763 14,093
Prepaid expenses 1,220 1,530
Deferred and refundable tax assets 1,934 2,041
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TOTAL CURRENT ASSETS 70,086 78,890
Property and equipment, net 8,626 7,439
Deferred tax assets 3,356 2,770
Capitalized software costs, net 8,607 5,539
Intangibles 44,500 38,500
Goodwill 20,240 16,162
Other assets 344 242
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TOTAL ASSETS $ 155,759 $ 149,542
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,195 $ 500
Accrued warranty 3,123 1,981
Accrued expenses 1,531 749
Accrued salaries and wages 684 543
Accrued royalties payable 412 322
Income taxes payable 1,368 1,141
Deferred income 1,349 466
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TOTAL CURRENT LIABILITIES 9,662 5,702
Deferred tax liabilities 2,228 1,484
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TOTAL LIABILITIES 11,890 7,186
Total shareholders' equity 143,869 142,356
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 155,759 $ 149,542
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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
JUNE 28, 2003 June 29, 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,260 $ 2,604
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 2,543 1,878
Tax benefit from exercise of stock options 55 113
Refund and utilization of income taxes paid 376 810
Deferred income taxes 130 214
Provisions for losses on inventory 181 1,296
Disposition of slow moving and obsolete inventory (278) (424)
Provision for allowance for doubtful accounts 343 -----
Changes in assets and liabilities:
Increase in accounts receivable-trade (3,235) (1,707)
Decrease in accounts receivable-other 62 182
Decrease in inventory 1,588 1,787
Decrease in prepaid expenses and other assets 291 82
Increase (decrease) in accounts payable 695 (537)
Increase in accrued warranty 525 207
Increase in accrued expenses and deferred income 875 459
Increase (decrease) in accrued royalties payable 90 (27)
Increase (decrease) in accrued salaries and wages 141 (104)
Increase in income taxes payable 226 153
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Net cash provided by operating activities 5,868 6,986
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Cheetah (15,109) -----
Purchase of investments (878) (4,557)
Redemption/maturity of investments 6,026 4,332
Capital expenditures (1,844) (1,405)
Investments in other assets ----- (52)
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Net cash used in investing activities (11,805) (1,682)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock ----- (1,626)
Proceeds from exercise of stock options 198 278
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Net cash provided by (used for) financing activities 198 (1,348)
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Net (decrease) increase in cash and cash equivalents (5,739) 3,956
Cash and cash equivalents at beginning of period 33,799 32,106
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Cash and cash equivalents at end of period $ 28,060 $ 36,062
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FORWARD-LOOKING STATEMENTS
The statements contained in this release which are not historical facts are
considered "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements, which may be expressed in a variety
of ways, including the use of forward-looking terminology and the use of future
or present tense language, relate to, among other things, expected revenue and
earnings results. The Company does not undertake any obligation to publicly
update any forward-looking statements.
These forward-looking statements and other forward-looking statements contained
in other public disclosures of the Company are based on assumptions that involve
risks and uncertainties and are subject to change based on the considerations
described below. These risks, uncertainties and other factors may cause actual
results, performance or achievements to differ materially from anticipated
future results, performance or achievements expressed or implied by such forward
looking statements. Therefore, the Company wishes to caution each reader of this
release to consider the following factors and certain other factors discussed
herein and in past reports including, but not limited to, prior year Annual
Reports and Form 10-K and Form 10-Q reports filed with the Securities and
Exchange Commission ("SEC"). The factors discussed herein may not be exhaustive.
Therefore, the factors discussed herein should be read together with other
reports and documents that are filed by the Company with the SEC from time to
time, which may supplement, modify, supersede or update the factors listed in
this document.
General economic conditions and the economic conditions of the
telecommunications and cable industries, including the effect of subscriber line
loss and competition for the Company's RBOC customers from wireless, cable
providers and other carriers entering the local telephone service market can and
has affected the capital budgets of the Company's customers. If such conditions
result in a further reduction of such budgets, the Company's revenues could be
adversely affected.
If the Company's customers find themselves unable to meet their established
purchase forecasts and their own growth projections, such customers may curtail
their purchase of the Company's products, which would adversely affect the
Company's revenues.
If the Company is unable to establish customer or sales distribution or original
equipment manufacturer ("OEM") relationships relating to the Cheetah cable
status and performance monitoring product line, it could affect the rate of
incoming orders, which would adversely affect the Company's sales and revenues.
If the financial strength of certain of the Company's major customers should
deteriorate or such customers should encounter difficulties in accessing
capital, the ability of such customers to purchase and pay for the Company's
products could be impaired, with a corresponding adverse effect on the Company's
revenues.
If third parties with whom the Company has entered into sales and marketing
partnerships should fail to meet their own performance objectives, customer
demand for the Company's products could be adversely affected, which would have
an adverse effect on the Company's revenues.
Seasonal fluctuations in customer demand for the Company's products can create
corresponding fluctuations in period-to-period revenues, and any increases in
the rate of order cancellation by customers could adversely affect future
revenues.
The carrying value of certain intangible assets, including goodwill, acquired by
the Company from Lucent Technologies, Inc. ("Lucent") and Acterna, LLC could be
impaired if changing market conditions indicate that lower than anticipated cash
flows will be produced by such intangible assets.
If the Company were to encounter a shortage of key manufacturing components from
limited sources of supply, or to experience manufacturing delays caused by
reduced manufacturing capacity or integration issues related to the acquisition
of the Cheetah product line, the loss of key assembly subcontractors or
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other factors, the Company's ability to produce and ship its manufactured
products could be adversely affected, with an adverse effect upon revenues.
Disputes between the Company's customers and their organized labor groups could
cause those customers to reduce or curtail their purchase of the Company's
products until resolution of such disputes, which would adversely affect
revenues.
The introduction of improved products or services or reduced prices by the
Company's competitors could reduce the demand for the Company's products and
services and adversely affect revenues.
If the Company proves unable to respond effectively to technological change in
its industry, such as an evolution of the telephone network from circuit to
packet-based, by developing new products and services and obtaining customer
approval and acceptance of its products and services, demand for the Company's
products and services could be adversely affected, which would adversely affect
revenues.
The Company is dependent on a relatively narrow range of products and a small
number of large customers. As a result, the failure of one or a small number of
the Company's products to gain or maintain acceptance in the marketplace, or the
decision by one or a few of the Company's customers to curtail their purchases
of the Company's products could have an adverse effect on revenues.
If one or more of a small number of key employees of the Company were to cease
to be associated with the Company, the Company's future results could be
adversely affected.
If the Company is unable to successfully assert and defend its proprietary
rights in the technology utilized in its products, its future results could be
adversely affected. If third parties were able to successfully assert that the
Company's use of technology infringed upon the proprietary rights of others, the
future results of the Company could be adversely affected.
If one or more of the Company's products were proven to be defective, the
Company's relationships with its customers could be jeopardized and the Company
could be subject to potential liability, adversely affecting the Company's
future results.
If for any reason demand for the Company's products should decrease, including
the successful development of a secondary market for the Company's products by a
third party, the Company could continue to find itself with excess inventory and
obsolete parts on hand, which could adversely affect future results.
Changes in government regulation, such as modification or repeal of The
Telecommunications Act of 1996, increasing the costs of doing business by the
Company or its customers, or preventing the Company or its customers from
engaging in business activities they may wish to conduct could adversely affect
the Company's future results.
The Company has recently completed certain acquisitions and expects to pursue
additional acquisitions and new business opportunities in the future as part of
its business strategy. If the Company fails to integrate successfully the
operations and products of acquired businesses, or if such acquisitions subject
the Company to unexpected liabilities and claims, the Company's future results
could be adversely affected.
The Company's future sales in international markets are subject to numerous
risks and uncertainties, including local economic and labor conditions,
political instability including terrorism and other acts of war or hostility,
unexpected changes in the regulatory environment, trade protection measures, tax
laws, the ability of the Company to market current or develop new products
suitable for international markets, obtaining and maintaining successful
distribution and resale channels and foreign currency exchange rates. Reductions
in the demand for or the sales of the Company's products in international
markets could adversely affect future results.
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(TM)LoopCare is a trademark of Tollgrade Communications, Inc.
(TM)Cheetah is a trademark of Tollgrade Communications, Inc.
(TM)CheetahNet is a trademark of Tollgrade Communications, Inc.
(TM)CheetahLight is a trademark of Tollgrade Communications, Inc.
(TM)NetMentor is a trademark of Tollgrade Communications, Inc.
(R) DigiTest is a registered trademark of Tollgrade Communications, Inc.
(R) MCU is a registered trademark of Tollgrade Communications, Inc.
(R) LIGHTHOUSE is a registered trademark of Tollgrade Communications, Inc.
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