Filed by Tektronix, Inc.
Pursuant to Rule 165 and Rule 425
under the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12
under the Securities Exchange Act of 1934
Subject Company: Inet Technologies, Inc.
Commission File No. 000-24707
This filing relates to the proposed acquisition by Tektronix, Inc. ("Tektronix")
of Inet Technologies, Inc. ("Inet") pursuant to the terms of an Agreement and
Plan of Merger, dated June 29, 2004, by and among Tektronix, Inet, Impala Merger
Corp. and Impala Acquisition Co. LLC (the "Merger Agreement"). Tektronix has
filed the Merger Agreement with the Securities and Exchange Commission ("SEC")
as an exhibit to the Current Report on Form 8-K filed by Tektronix on June 30,
2004, which report is incorporated by reference into this filing.
Statements and information in this filing that relate to future events or
results (including the combined companies' expectations as to sales, earnings
per share, cost structure, market position, market growth opportunities and new
products) are based on Tektronix' and Inet's current expectations. They
constitute forward-looking statements subject to a number of risk factors, which
could cause actual results to differ materially from those currently expected or
desired. Those factors include: worldwide geopolitical and economic conditions;
business conditions in the electronics, communications, computer and advanced
technologies industries; the satisfaction of the acquisition transaction closing
conditions, the development and successful implementation of acquisition
integration plans, the achievement of acquisition based synergy projections
(both cost and revenue based), the retention of key Inet employees and
customers, and other risks associated with the acquisition. Further information
on factors that could cause actual results to differ from those anticipated is
included in filings made by Tektronix and Inet from time to time with the
Securities and Exchange Commission, including but not limited to, annual reports
on Form 10-K and the quarterly reports on Form 10-Q.
The following is a transcript of a conference call held by Tektronix on June 30,
2004 and made available on its web site at www.tektronix.com/ir.
SPEAKER 1: John Gardner, Tektronix, Inc.
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SPEAKER 1: Thank you for joining us today on the call to
discuss the plan acquisition of I Net. To comply with SCC Rule 165, I
must read the listeners the following information:
Tektronix and Inet intend to file with a security and exchange
commission a registration statement on form S4, which will contain a
proxy statement prospectus, with respect to the acquisition and other
relevant materials. We urge Inet stockholders and investors to read the
proxy statement prospectus when it becomes available because it will
contain important information about Tektronix, Inet and the acquisition.
The proxy statement and prospectus, including the annexes
attached to and the report incorporated by reference and the proxy
statement and prospectus and any other reports and documents filed by
Tektronix or Inet with the SCC may be obtained free of charge at the
SCC's website at WWW.SCC.gov.
Investors and security holders may obtain copies of all
documents filed with the SCC relating to the acquisition free of charge
at the SCC's website. Investors and security holders may also obtain
these documents free of charge from Tektronix at the investor relations
link at on Tektronix' website at WWW.Tektronix.Com or by contacting
Tektronix' investor relations at 503-627-5614.
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Documents will also be available at the link entitled, "SCC filings"in
it's investor relation section of Inet's website, WWW.Inet.Com or by
contacting Inet's investor relations at, 469-330-4171.
Tech and Inet and its respective directors and executive
officers may be deemed participants in the solicitation of proxies from
security holders in connection with this transaction. Information about
the directors and executive officers of Tektronix and Inet and
information about other persons who may be deemed participants in this
transaction will be included in the proxy statements and prospectus.
You can find information about Tektronix's executive officers
and directors in the proxy statements filed with the SCCon August 21st
2003 you can find information about Inet's officers and directors and
their proxy statements filed with theSCCon April 9th, 2004 you can
obtain 3 copies of these documents from theSCCor from Tektronix and Inet
using the contact information previously stated.
In addition, directors and executive officers of Inet may have
direct or indirect interest in the acquisition due to security holdings
preexisting or future indemnification arrangements options or rights to
severance payment, if their employment is terminated following it's
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acquisition additional information regarding Tektronix, Inet and
interest of their respective executive officers and directors in the
merger is contained in the proxy statement and prospectus.
We urge Inet's stockholders to read the proxy statement
prospectus, including the annex attached to and report incorporated by
reference and the proxy statement prospectus and any future reports and
documents filed by the SCC, by Tektronix and Inet before making any
voting or investment decision, with respect to the acquisition.
Before we begin, let me caution listeners that the statements we
make this morning regarding future results or events are forward-looking
and based on the company's current expectations. There are many risk
factors that affects the company's business and it's operational result
that may cause the actual result in future periods to differ materially
from those currently expected or desired. Please look at our company's
filings for the Security & Exchange Commission, including the most
recent form 8K, 10K and 10Qfor discussion of these and other factors.
In accordance with our disclosure policy today's conference call
will include. We will continue to who would on one-on-one telephone and
face-to-face meetings with the analysts and throughout rest of the
quarters however in these meetings we will limit our discussion to the
financial
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estimate to the information covered in today he's conference call and
any subsequent publically released information.
Now, I'd like to turn the meeting over to Rick Wills,
Tektronix's President and CEO.
CEO, RICK WILLS: Good morning and thank you for joining
us on the call. We are excited about the intended acquisition with Inet
and are pleased to have the opportunity to discuss the implications in
more detail. With me on a call are Elie Akilian, Inet's President and
Chief Executive, David Churchill, who has executive responsibility for
tech's communications and video business and Colin Slade, our Chief
Financial Officer who will discuss the financial implications of the
transaction
We will take your questions at the end fortunate call.
We are very excited about this transaction. We have taken a
disciplined approach to acquisitions testing potential companies against
3 criteria:
The strategic fit the executability. What I mean by that is can
we fit it with our company from a logistics cultural and operational
standpoint. And is it a financially sound transaction, that will add to
our objective of profitable growth.
This acquisition made it through a rigorous filter. Filter and
is a vibrant and growing technology
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company that is strategic, it is executable and is financially strong.
To help you understand how this acquisition supports our
profitable growth strategy I will start by giving you an overview of
Inet, a refresher on our monitoring and cortical test business, which is
where the synergy with Inet exists and talk about how this acquisition
fits with our strategy.
Inet technology is a leading global provider of communications
software solutions that enables network operators to more strategically
and profitably operate their business. Inet's products address
traditional networks and next generation networks including 2.5G and 3.G
mobile data and voice over packet also referred to as vice
overIPtechnology.
Inet was founded in 1989 and has been profitable every year
since 1990. Headquartered in Richardson Texas, Inet has approximately
500 employees worldwide. Inet has a strong customer relationship with
tier 1 network operators and is a market leader in monitor they also
have a line of diagnostic products. Target customers include current and
next generation tear one mobile and fixed line network operators as well
as communication network equipment manufacturers, primarily located
throughout Europe and North America. A partial list of network operators
includes:
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AT&T, British Telecom, Deutch Telecom, global Crossing, MCI, O2
Orange Communications quest Sprint, Swisscom fixed net; Telestra,
Tmobile; USA and Vodaphone.
Inet has 3 primary products: Giel Probe, Orion and Beamer, under
the unified assurances solutions banner They are used by network
operators to simultaneously manage voice and data services at the
network, service and customer layers, to detect network and service
problems in real-time.
Knees products enable proactive identification of specific
customer or subscriber groups impacted by network or service issues they
capture actual network traffic, analyze this traffic data to create and
display customer experience information, service quality metric in a
network wide or end to end view.
This information allows the operators to proactively manage the
quality of service delivered to its most valuable customers or select
subscriber groups.
These products also alert the operator to network products such
as congestion misrouted calls to service errors or service degradation.
Once alerted academies can be taken to quickly resolve the issue often
before it's customers are aware of the problem.
So that's a little bit about Inet. Now turning to Tektronix's
mobile protocol test products.
As you know, our mobile protocol test products are
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one of our 4 core focus areas in our strategy of winning a product
category at a time.
We secured a foothold in this market in 1997, with the
acquisition of Seemans protocol test business. In 1999 we acquired Nese,
a small company partially owned by Italia Telecom, making our entrance
into the monitoring sides of the business.
In these 2 product categories we had over 100 million I do know
dollar of sales in FY '04. Now, it's ver 300 employees strong. We have
engineering centers in Berlin Germany Potova, Italy and Shang Hei,
China. Our vision has been to offer solutions for equipment
manufacturers and network operators.
Although, our protocol base business is see strong the network
monitoring is a smaller, smaller unit lack critical mass.
Tektronix's mobile protocol test tools are used by network
equipment manufacturers and operators to test network elements of a
communication's network.
The requirements are constantly changing -- are changing
constantly -- due to the growing complexities, involving multiple
technologies and services in the latest generation mobile network
offering voice and data services Tektronix's offers test tools which
sport latest communication protocols and allows measurements with a wide
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variety of network interface using Tektronix's high performance analysis
hardware even it's most complex measurements can be conducted in
real-time a key feature to maximize an engineer's productivity.
Tektronix's customers include current and next generation
equipment manufacturers and mobile operators around the world.
Hopefully, you are starting to see -- you are starting to see
this combination creates a broad set of test solutions across the
network, wired and wireless, network monitoring and protocol tests, with
complimentary product offerings. Tektronix brings stronger diagnostic
capabilities to the customers relations. And Inet brings leadership in
monitoring an network managing and strong network operator
relationships.
Together, we become the most complete end-to0-end provider of
network monitoring and protocol analyst solutions.
By delving the 2, we increase our address believe market by
approximately 335,000,000 to over 7 hundred million when combined with
Tektronix's protocol test business revenues from the products will
exceed over 200 mill one monitoring and protocol test solutions.
Now we would like to summarize the key reasons for this deal:
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First, it fits within our strategy to develop leadership
positions in select and test measurement product categories that are
large and growing. This position as a market leader in network
monitoring and protocol test analysis. It increases our addressable
market by 335,000,000 to over 700 million. It's strategic synergy would
accelerate growth in network monitoring and protocol test business by
products technology customers and geographic coverage. The combination
will enable innovation accelerates development and implementation of
advanced technology such as, TPRS, UMTs or voiceover IP. The transaction
is consistent with our rigorous acquisition filter.
Consistent of strategy being execute believe and financially
sound.
With all that said, I want to make sure and make the point that
we are -- we are complementing our global protocol test business with a
winner, a growing profitable market leader in an area that we are
strategically interested in. We are betting on something -- we aren't
betting on something we need to fix to realized the value of our
investment Inet is a very strong company that shares our vision to the
future and dedication to the customer and is financially disciplined.
With that, I'd like to turn it over to Elie -- give Elie an opportunity
to say a few words.
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INET'S PRESIDENT: Thanks, Rick. I want to echo Rick's
enthusiasm and excitement about this opportunity synergies between our 2
companies, in terms of products, sales channels, customer care and
strategic focus are substantial. This transaction provides Inet the
scale we need to successfully capital lies on the significant growth
opportunities today's mobile data and voiceover IT market.
Our stockholders should be pleased with the resulting
combination. The global market leader offering a broad portfolio of
products that address the entire technology life cycle to the world's
leading network operators and equipment manufacturers. This also
provides a great growth opportunity for our employees to become part of
a billion dollar company, with significant worldwide resources and
footprints. Back to you, Rick.
CEO: Thanks, Elie. We're looking forward to your support
and insight as we proceed through the process.
INET'S PRESIDENT: I'm ready and available.
CEO: All right. Now, we'll turn it over to Colin to talk
about the financial impact of this transaction.
CFO: Well, thanks. Today, I'll talk briefly about the
financial impact of the transaction from 2 perspectives.
First, I'll discuss the form of the transaction.
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And second, I'll provide some guidance on the impact of the transaction
on Tektronix' earnings.
Other than this information, I will not be providing any updated
financial guidance for Tektronix.
In addition, we will not be discussing, nor would it be
appropriate for us to discuss any update to guidance previously provided
by Inet management on Inet's future financial performance.
However, I wouldn't refer to guidance provided by Tektronix and
Inet in their most recent earnings' releases and on the related
conference calls.
Beginning with the form of the transaction, Tektronix will
acquire all of Inet's outstanding stock for approximately $12.50 per
share, consisting of $6.25 per share in cash and approximately $6.25 per
share in Tektronix' stock.
After adjusting for Inet's $172,000,000 cash balance as of March
31, 2004, the net purchase price is approximately $325,000,000.
The net purchase price will be satisfied with net consideration
of approximately $250,000,000 in Techtronic stock and approximately
$75,000,000 in cash.
The stock portion of the consideration is subject to a 10% call
up. This means if Techtronic's stock goes up we will need to give
commensurately fewer shares to satisfy
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the terms of the deal. And conversely, if Techtronic's stock goes down,
we will need to give commensurately more shares to satisfy the terms of
the deal. In both cases, 10% is a maximum change, for which there will
be an adjustment in the shares given.
The transaction is expected to be break even to slightly diluted
to fiscal year 2005 earnings per share, on an adjusted earnings per
share basis. That excludes amortization of acquisition related
intangibles and other one-time acquisition-related charges but includes
the impact of the right of deferred revenue.
In the following fiscal year, we expect transaction to be
created on an adjusted earnings per year basis. We expect this
transaction to close around September 30th, after completing customer
and closing conditions including Inet shareholder approval and certain
regulatory approval.
We'll provide updated guidance on the financial impact of
transaction immediately thereafter.
And with that I'll hand it back over to Rick.
CEO: Thanks, Colin. Operator, we would now like to open
the line for questions.
OPERATOR: Thank you. Ladies and gentlemen, if you wish
to ask a question, please press Star then 1 on your touch-tone phone.
You will hear a tone indicating that
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you've been placed in queue. You may remove yourself from queue at any
time by pressing the pound. If you're using a speaker phone, please
pickup the hand set before pressing the numbers.
Once again, if you have a question, please press Star 1 at this
time. One moment for the first question.
Our first question comes from Richard Cue, with S.Z. Cowen. Go
ahead.
CROWD: Yes. Good morning I'm wondering first of all
could you comments on whether they are any overlaps in product offerings
with your existing businesses and then second, can you touch on the
proposed management structure?
CEO: Sure, Richard. Rick here. And one of the beauties
of this is that there is very little overlap between the 2 businesses.
We -- our strength has always been on the engineering side, with
the equipment manufacturers, using our mobile protocol test products to
either test network elements or simulate network elements over the last
few years we've been migrating more into the operator sides of the
business and we're strong in the operator sides where they're trying to
bring up new technologies or test new technologies we had the vision to
be more on the monitoring sides which is sort of the farther end of what
I would call
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the food chain. And we do have a small monitoring business in Europe.
On the other hand,Inet is -- is somewhat opposite they are very,
very strong on monitoring -- monitoring and then moving in toward other
way, they do have a small diagnostic units that could be sold to new
equipment manufacturing. So I'm just going -- this isn't exact but it's
directionally. We might be 90% diagnostic and they're 10% monitoring.
There might be somewhere just the opposite of that.
So when you look at the whole network and this is what we're
excited about we can see it from end-to-end.
For example, within the equipment manufacturings, we see 2 or 3
years in advance what's being developed like voiceover IP and other
things that eventually get deployed and then need to be monitored and
our vision had been '94 a while how cab we capture that full food chain
and share technology and share information? And this acts like a major
accelerator for that. So the short answer is, that there is very little
overlap. Your second question of how it would be managed?
We have David Churchill who is on the call. He is in Texas
rights now. We're in Oregon. He runs the communication and video product
line today. That is our operation in -- in -- in Europe, our development
centers in
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Europe, our video business in the US. He is. He has some other
responsibilities but those are his main responsibilities and he will be
responsible for though operation.
CROWD: If I can just can you comment too, on who the
principal competitors are today?
CEO: Elie, could you comment on that?
INET'S PRESIDENT: Sure. We've always competed against
Ajelan. Ajelan is our number 1 competitor.
There are a couple of others that we compete against but those
are more on a regional basis and they are less of a competitor. So
common competitor that us and Tektronix, I believe have is Ajelan. And
so together against Ajelan we'll be very strong.
CROWD: Thank you very much.
OPERATOR: Thank you. Our next question comes from
Richard Eastman from Robert W. Beard. Please go ahead.
CROWD: Hi. Just being less familiar with Inet, could you
just walk us through the revenue model for Inet? I mean, how much of the
business is, you know, product sales, software sales, I guess maybe off
the shelf, what kind of recurring revenue? What does a typical service
contract look like?
INET'S PRESIDENT: Well, if -- if you look at
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our earnings in the past quarter, you will see that on a -- on a
hundred-million based revenue, if you take 100%, roughly, 30% of that is
service revenue.
But our service revenue is characterized as upgrades,
maintenance. It's post-contract support mainly.
There's not -- it's not a -- the kind of service that you see
other types of software companies do, where they go in and they provide
consulting and that service. That's not what we call service.
CROWD: Okay.
INET'S PRESIDENT: So the rest of it, 70% of it is
product revenue. And a good substantial portion of that actually is the
network monitoring business and as you know our diagnostics business is
a small portion.
When you take our revenue model or profile of our products and
match it over to Tektronix, where they have a lot of diagnostics
business, very little network monitoring and we have a lot of network
monitoring and very little diagnostic. I think it's very, very
complimentary in that regard.
CROWD: What was the reference in the press release to
writing off deferred revenue?
CEO: Colin, would you take that one?
CFO: Okay. Rick, Inet maintains a balance of deferred
revenue or reliability which represents their
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obligation to customers for products and services that have already been
paid for. And in purchase accounting, we're required to value assets and
liabilities. And the impact, the practical impact of deferred revenue is
to reduce this balance by a portion of the balance. And the result is
less than marketing realized following the close of the transaction.
It's kind of a complicated part of purchase accounting that is described
in an emerging issue is task force bullet.
CROWD: Okay and then the last question is I don't know I
think it's been more in the down cycle here. But there's been some
pricing pressure on and off in this service monitoring business and I'm
just curious, how should we view that? Is that sick call? Is that an
emerging issue to deal with?
CFO: Let me just make a comments on that and -- if both
if I look at Inet's business and in looking at our own protocol test
business, these -- both of these areas have above average gross margins
of what we have as a company. As you know, those of you who are
following Tektronix, our gross margins have been creeping up
deliberately quite a bit, into the upper 50% gross margin both our
global. Both our protocol test units and the Inet unit are quite a bit
above that, above our company average.
But it wouldn't be uncommon in some of the
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monitoring business, that it's a little bit more competitive that the
initial sale. But there's some annuity streams that lends itself to it,
once you're into the company But I think the best proxy for that is
looking at the gross margins of both units and seeing how strong those
are
CROWD: Okay. Thank you.
OPERATOR: Thank you. Our next question comes from Ajeet
Pai, with Thomas Lipol Partners. Please go ahead.
CROWD: Good morning, gentlemen. And congratulations in
the proposed transaction.
CFO: Thank you.
CROWD: 2 quick questions. The first is we are going back
to the first revenue question. Would it be fair to assume that
approximately $20,000,000 that Inet has on its balance sheet in deferred
revenues would be completely taken care of? And that would be the level
accretion that occurred, if that deferred revenue was not there?
And the second question is, why when you have such a generous
cash balance, did you find so much of the transaction using equity?
CFO: Okay. Thanks, Ajeet. So as it relates to the
deferred revenues, again it's a little bit complicated.
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But the practical impact of that, is that that deferred revenue
has in it an embedded gross margin. A gross margin that would be
realized when the -- when the revenue is realized.
We are required to write down a portion of that deferred revenue
so that the gross margin is smaller.
It will still be profitable but we have to write down a portion.
So the dilution impact is certainly a lot smaller than the complete
write-off all of that deferred revenue.
I think that's the -- the answer to the first question.
In terms of the second question, really there's 2 reasons why we
use stock. And one is so that the acquirers could participate in the
upside that we feel will result from that combination. And second it
provides -- it may provided certain tax advantages to the acquirer.
CROWD: And okay. And just one bit of follow-up.
Could you tell us the tax rate of the company, is it going to
substantially change, from approximately 30% or lower than it could be
trending to?
Also, on the same note, as to the revenues with Tektronix, what
are the services of the revenues? And is there any sort of potential
with the service side of your
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business with Inet's service side of the business?
CFO: Okay. As it relates to the tax rate, do not expect
any significant change to our tax rate as a result of this transaction
although you know the tax rate is subject to lots of other things that
could change but certainly we don't see this transaction having an
impact.
On the services sides I can't give you an exact number of how
much our protocol business. We have been in the last year generating I'd
say in the 10% category of revenue from services in software
subscriptions as an example.
But our hope is we have a lot, Inet has a lot they can teach our
business. And we think that, you know, we don't know for sure. But our
belief is we are going to learn a lot from them. And that longer term,
we think that could be a bigger piece of our protocol.
So I think you hit on something that's important is we do have
the numbers. But we believe they know a lot more about that than we do.
CROWD: Inet has margins the high 70s in the product side
of things and in the 50s on the services side of things.
Is that -- are those margins that you think the rest of your
business and protocol side or service side could also maintain or has
right now?
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CEO: It's roughly comparable.
CFO: It's roughly comparable to our mobile protocol.
CEO: Overall margins.
CFO: Their overall margins.
CROWD: Okay. Thank you so much.
OPERATOR: Thank you. Our next question comes from Alan
David, with McAdams, Wright & Reagan.
Please, go ahead, sir.
CROWD: Yeah. Just a couple bookkeeping questions and I
have a follow-up.
Why don't you tell us who the bankers or advisors were on both
sides? If there is an a breakup fee and what it is?
And then, Colin, I'm not sure at this point, if you havean
estimate on what the one-time charges may be and ongoing position of
intangibles might be as well?
CFO: Let me take it in reverse order. I'll start with
the -- with the impact of one-time charges and so forth.
Really at this time we are not going to comment on that. Because
we're working with early estimates and a lot of things could change in
it's next '90 days.
I want to though, go back and emphasize on a proforma basis,
including the deferred revenue right now.
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We do expect this to be only slightly diluted to breakthrough in
the first year and accreted thereafter.
I don't think at this point as it relates to any breakup fee at
this point. We are not prepared at this point to comment on any other
details of the contract And -- and -- and then in terms of the bankers,
our advise terse were Goldman Sachs.
CROWD: Okay. And then in regard to the breakup fee?
CFO: Like I said, at this point, we're not commenting on
any other details of the contract.
CROWD: Okay. Fair enough. And Elie, just a couple for
you. I want to share the most recent guidance, you called for about 10%
revenue growth this year and 25% to 30% net income growth? Is that a
fair characterization?
INET'S PRESIDENT: Yes.
CROWD: Okay. And do you have any 10% percent customers?
INET'S PRESIDENT: We do. But I can't, off the top of my
head, tell you what those are.
JEFF COBB: Yeah. This is Jeff Cobb. We typically have
anywhere from 0 to 3, 10% customers in a quarter. And that's been our
regular kind of happening over the last several quarters.
On an annual basis, we have sometimes 1 or 2, 10%
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customers and those are typically named in the form 10K.
CEO: This is Rick Wills. To comment from our side this
is not in like our protocol test business, where we have -- we'll have a
number of 10% customers throughout the year in most cases and I don't
have a side-by-side comparison. David can correct me if I'm wrong.
In most cases and this just goes with the story of this. There
are different 10% customers than Inet's 10% customers. So either on the
operator's side or the equipment manufacturing side, it allows us to
address more customers with these transactions.
JEFF COBB: And Alan, one other point.
When -- so although, Inet and our mobile protocol test business
has some of these larger customers, when combined with Tektronix', in
terms of overall exposure, their largest customer would be no more than
around 2% of Techtronic's total sales.
So when combined with Tektronix, the profile is not very
different than our own company where we're very broadly diversified.
CROWD: Okay, great. Thanks gentlemen
OPERATOR: Thank you. And our next question comes from
Arendum Basu with Morgan Stanley. Please go ahead.
CROWD: Hi. Good morning. Congratulations.
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Quick question on what process you have, in terms of determining the
make versus buy decision here?
And if you could talk a little bit about distribution? If
there's some synergies or you have to modify distribution structure or
strategy to accommodate Inet product?
CEO: The make versus buy decision is an easy one.
We -- we've our protocol test business we've had since 1997,
when we purchased from Siemens but that unit in Siemens had decades of
experience in network business and we've kept that unit pretty much in
tact in Berlin so we have a very very experienced group of people. In
the spring is on equipment manufacturers but recently on the operator
side also and in fact, the group in Berlin has the largest, we have the
largest library of protocol from any other vendor out there anywhere.
Now, since we are so strong in the equipment manufacturers and
we are on some standards committees, we could see where the networks are
going, the next generation networks. From 2G to 2 1/2G, 2.75G. And
eventually looking at the allIPorIPbased network both on the fixed side
and on the mobile side. So we do have a unit in Europe a small unit that
makes -- does have some monitoring product. But quite frankly we don't
have the years of experience thatInet
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had on the monitoring side and you know, we -- we looked atInet and felt
you know, they are really the number one quality product or company out
there with the experience there and we felt that with the market
changing so quickly that this was a very good match for us and we could
not match the experience they had on the monitoring side. So we're very
pleased to be able to put these together.
On the -- on the distribution side, we -- we both -- we both
have strong distribution channels. And both companies have pretty good
distribution channels in Europe.
We have had some strength eastern Europe with some of our
monitoring products. In theUSpretty good distribution channels.
Where Tektronix can add value to this transaction. Is as you
know we've been investing as many of you know on the call we've been
investing quite a bit in Asia over the years.
And a significant part of Tektronix' overall business now comes
from Asia, in fact, Asia and Japan combined are much much larger for
Tektronix than Europe.
In China in particular we are very well entrenched with the
standards body. With the Chinese standard for mobile phone testing. We
are the only qualified vendor to do conformance testing.
Meaning, if you want to determine whether you meet
26
the Chinese standard or not today Tektronix is the only vendor that can
verify whether that is the case.
So we think there is a good opportunity with what we've done in
all throughout Asia. There's a lot of synergies there in the long term.
That's probably the biggest area for opportunity on the distribution
side
CROWD: Thank you.
OPERATOR: Thank you. And our next question comes from
Richard Kobbler, from Okovio Securities. Please go ahead.
CROWD: It's actually, Steven. I have a brother named
Richard though.
So I have a couple questions on sort of product position and
probably mostly for Elie. I have some peripheral knowledge of where Inet
plays.
And so first, it seems like you mostly on the monitoring side in
wireless networks, you've pretty much exclusively targeted the GSM world
heritage world with a lot of exposure to GRS but correct me if I'm
wrong.
My first question:
Who are your competitors in that part of cellular data world?
And second, who to your knowledge provides similar capability in the
CDMA world?
INET'S PRESIDENT: As far as competitors in the GSM, in
the mobile segment in general, I mentioned
27
earlier, that our main competitor is Ajelin.
In terms of CDMA, Inet did not focus on the CDMA market. We were
exclusively focusing on the GSM, GPRS and the 3G UMTS market.
Our competitor Ajelan has a product I believe in the CDMA area.
CROWD: Okay. And then, if you could help us understand a
little bit more. There's been some discussion of 3G.
The US market appears to be moving to UMTSa little faster than
people may have expected even 6 months ago.
Tell us a little more about your product there.
Do you see an on-ramp to be a much bigger presentation presence
potentially in the US, as a result of recent announcements? And you
know, what do you think the time frame is that test performance
monitoring in the UMTS in the US could be significant for you?
INET'S PRESIDENT: Let me start in Europe because that's
were the UMTS currently is being deployed.
And we do have a number of opportunities there that we had been
pursuing. And actually there was an opportunity just recently that we
were award for a UMTS monitoring contract in -- in the European arena,
from a large carrier in Europe.
So we have -- we have introduced the beginnings of
28
our UMTS product. There's opportunities there that we are working on.
When you take that into the North American market, where just recently
there's been news about acceleration on the UMTS by specifically one
particular carrier. I think that's going to play into our strength.
And we can take that also as Rick mentioned earlier that they're
very strong in the Asia Pacific region whereUMSSis also beginning to
take hold. So we can take our current capabilities and our potential in
North America and leverage that into their channels in the Asia/Pacific
region. And you see that there's a natural progression of penetrating
customers throughout the entire globe.
CROWD: What do you think is the reasonable time frame
that UMTS could be as big of contributor for you as say GPRS was in the
last 18 months?
INET'S PRESIDENT: I -- I would think over the next 12
months or so we'll begin to see -- because we're seeing the shift right
now in Europe, from pure GPRS networks to beginning of deployments of
UMTS.
There's a lot of opportunities there where we've started with
only GPRS. But towards end of the discussions with the customer, it
always included a component of the UMTS.
So I think if you take that to natural evolution, it will be
about 12 months before we see significant
29
revenues from the UMTS perspective.
CROWD: Okay, thanks.
CEO: Let me just kind of make a couple of other comments
to connect some of the dots that some of you are asking. Our protocol
test business where we're strong and equipment manufacturing. You're
bring ago network up and adding knew features and trying to test it and
make it operational. So particularly in Asia, we've had a lot of
opportunities on the monitoring side but we just don't have the critical
mass to go in and do anything about it.
And our sales force has been very good in Asia especially in
Asia and some of the central European countries. Because of the
relationship with operators with our test products have been exposed to
monitoring opportunities, both now and coming in the next year or 2 and
we just do not have the critical mass to be able to address that. So we
see this as another important opportunity for us going forward.
There there is one other thing that probably got lost in my
discussion.
Inet is also very strong on the wire line side of the business
but we have very little business there.
If you think about the future network what is wireless and what
is wire line will become somewhat blurred as we go in to more IP-based
network.
30
One of the areas that we felt Inet was more -- much more
advanced than we were, in an area we were having to looking at having to
invest in heavily over the next few years and we are already, is this
area of voiceover IP. So the voiceover IP voiceover IP or voiceover
packet will impact the mobile network and will impact fixed network.
So we saw that as another synergy and I just didn't want that to
go in said on the call.
So I'll take the next question, please.
OPERATOR: Thank you. Our next question comes John Harmon
with Veedem & Company. Go ahead.
CROWD: Hi. Good morning. I was wondering if there is any
plans or need to integrate the 2 types of instruments? I mean, the
protocol testers and network monitoring instruments?
Is there any way to combine them or are you just selling a
larger portfolio to the same customers?
CEO: I'll make a comment and I'll ask Elie to comment.
There's a lot of technology sharing that can take place between
the product. So I wouldn't necessarily call it a combining. But there's
certain protocols lack of the network and we have a very, very large
library of over 800 protocols. Many of these protocols are needed,
whether it's in it's monitoring side or test side or diagnostic side. So
31
we're excited about the technology synergies in that area.
INET'S PRESIDENT: Yes. Just, I want to add another point
here. Is that, what -- the combination of Tektronix' GPRS, UMTS and the
diagnostic solutions they sell to the carrier and our network
monitoring. What they do for us is, they give us a lead into the account
where they have, you know, almost a global footprint on the UMTS and the
GPRS test equipment that they have sold.
So what we have is immediate access into all of these accounts
that we have not been before.
And this -- if -- if I go back in the history of Inet, how at
one point we had the NDS test equipment and NDS7 monitoring
equipmentwhich worked very well for us in terms accellerating the
monitoring sales opportunities and I think this is going to do the same
thing for us.
CROWD: Okay. Thank you. And -- operator?
OPERATOR: I'm sorry. Mr. Harmon, were you still
speaking?
CROWD: Yeah. I wanted to ask a couple follow-ups --
OPERATOR: Okay. Go ahead, please.
CROWD: -- if I may? I'm back.
Regarding Tektronix' existing network monitoring products, is it
dominated by Inet? Or can it be integrated in some fashion? And one last
question for Colin:
32
Regarding this write down or deferred revenue you said it would
depress gross margins. Over what time frame and I'll ask you, you might
not have wanted to answer this question before. But how much of this
deferred revenue would be written off over what period of time? Thank
you.
CFO: Could you repeat the first question?
CEO: John, just so clarification:
Can tek's monitoring integrate with Inet's monitoring? Or --
CROWD: Right. You said you had a smaller product based
in Europe. That had a similar function did that product go away? Or is
it --
CFO: Our monitoring business is, let's just say it's
around 10% of our overall business out of that product line. We haven't,
you know we haven't determined -- we're going to be looking for
synergies there. We haven't determined exactly what will happen.
Certainly, Inet is -- is -- has a much larger footprint and is
much more advanced in some areas. We have certain accounts that we will
obviously be taking care of.
From a competitive standpoint, there's been a number of
questions. You're kind of alluding to that
Of course, Ajelin is a competitor. There is a company in Europe
called Met Test, which is also a competitor. There are some other
smaller companies also out there.
33
There was a comment about gross margin. Our gross margin between
the 2 product areas are actually quite high. They are higher than the
Techtronic fabric. So we don't seat gross margins going down.
CFO: Let me comment on that. That may have been a
misunderstanding and other people may have that also. Actually because
Inet gross margin are higher than our company average, the overall
impact of consolidatingInet will be to slightly move up Tektronix' gross
margins overall, okay?
As it relates to the deferred revenue, I don't know the you to
make too much of this. This is a few million dollars of reduction in
their deferred revenue will have a basically just in year one, an impact
primarily in year one, an impact on the accretive nature of this.
So put differently, on a proforma basis, if it weren't for the
deferred revenue, this would be slightly accretive. And because it was
deferred revenue write down, it will be slightly diluted to about
neutral.
Does that help clarify?
CROWD: No. Let me ask it this way:
Is the affect of writing down the deferred revenue, does it
happen before you make the acquisition or is it spread out during fiscal
year '05?
34
CFO: Okay. That's fine. It's spread out as the refenue
is recognized which would otherwise be recognized. The revenue is
referenced and recognized And that would be primarily during fiscal year
'05, over the course of 3 quarters.
CROWD: I get it now. Thank you very much.
OPERATOR: Thank you. Our next question comes from Rob
Crystal, from Grant Wayne Capital Management. Please go ahead.
CROWD: A couple quick questions.
When you talked about the fact that the deal would be accretive,
are you assuming synergies in that? And what synergies if so?
2, is there a lockup for the Inet insiders or large
shareholders?
And then third, what about increasing the share purchase
activity to offset the shared issued because I guess that kind of got
deal done? Thanks.
CFO: Let's start with the share repurchase program. We
will pursue our share repurchase program on the same base we have. The
past and that is we will be buying back our shares tune stickly and I
don't see this transaction will significantly change that. However
certainly we are committed to our share repurchase program.
In terms of a lockup, I'm not prepared to comment
35
on that at this time. In terms of this deal being accretive and how much
synergies it assumes, I think it's safe to say we wouldn't be doing this
deal if we didn't see some synergies and certainly we've modeled those
synergies
However, in the first year, in which we've talked about deal
being slightly diluted to neutral, we are not assuming lot of synergies,
indeed because it is the first year. Some synergies but not significant
synergies and those would build over the course of the ownership of the
entity.
CROWD: Right. And when -- and when you say, "some
synergies," that would mean 2 million dollars or something to offset the
lost deferreds?
And I guess what I was thinking about on the share repurchase
program Colin was, if you had just done this straight for cash,
obviously the accretion from the deal would be much more significant. So
why not just accelerate share repurchase program and effectively make it
a cash transaction?
CFO: Yeah. Certainly we'll be looking at our share
reparagraph program and that's about essentially all I have to say about
that.
CROWD: Okay.
CFO: In terms of the -- what was the other question?
36
CROWD: You said slight synergies were kind of assumed in
the -- in the beginning part of deal.
So I guess my question was, when you say slight was that
effectively to offset some of the deferred revenue. Not a large number
but call it a couple million dollars?
CFO: To begin with, I'm not going to size the any of the
synergies or size the level of dilution or accretion but let's just say
that Inet is a profitable company.
CROWD: Sure.
CFO: And the basis of the shares we issued and their
projected net profit, we would expect a deal to be just on that basis
neutral and then the deferred revenues cause it to be slightly diluted.
CROWD: Okay.
CFO: That's a pretty straightforward simple way to look
at it.
CROWD: Perfect thank you.
OPERATOR: Thank you. Our next question comes from
Everett Ergin with Lehman Brothers. Please go ahead.
CROWD: Hi there. I just wanted to get some clarity on
the terms of the transaction. If you could provide the caller points?
And also if you could tell us if the cash portion of the deal is fixed
per share. That you.
37
CFO: Okay. So I guess in terms of the caller and talking
a little bit about that, I'll try to explain this a little bit.
There's a 10% maximum, in terms of the number of shares that can
be adjusted. So if Tektronix' stock goes up it will give commensurately
fewer shares to satisfy the terms of the deal. And conversely, if Tech
stock goes down, it will give commensurately more shares. And in both
cases 10% is the maximum change for which there will been be an an
adjustment in the shares given.
So just to give you a quick idea how to works is we start with a
fixed number of shares we deliver, which is calculated by the roughly
250 million dollars, divided by the average price of Tech stock. And so
if that happened to be around $31.66, which I think it was on about
Monday or that's what the average would have been, this would mean we
would deliver around 7.9 million shares.
If our stock were to go up by 5% to $33.24, by the time
transaction closes, we'd deliver few shares or around 7.5 million
shares. A pretty straightforward calculation.
I hope that answers your question.
CROWD: Mostly. So essentially, you -- the 10% is
measured, with respect to that $31.66 price you mentioned?
CFO: Yes; that's correct.
38
CROWD: Okay. Thank you.
OPERATOR: Thank you. I --
CEO: We have time for one more question.
OPERATOR: Thank you. And that question will be from Jack
Winn, with Sandel Asset Management. Please go ahead.
CROWD: Hi. I want to -- again, for the caller. I
understand it's $31.66, plus or minus 5%, based on what you just told my
colleague.
The other question is:
In-between those 2 points, it is a fixed ratio deal for someone
who holds Inet stock; correct?
CFO: I don't think that is; correct. Let me try this a
different way:
If Techtronic stock moved between plus or minus 10% around this
number, the number of shares we would have to give to each Inet
shareholder will change, up to plus or minus 10%.
It will either give commensurately more shares or fewer shares
to, in effect, protect the $12.50 price. If it gets above 10% or below
10% --
CROWD: I see.
CFO: -- it will be frozen at that point.
CROWD: Okay. I -- I understand. That answers it. Thank
you.
39
CFO: You're welcome.
OPERATOR: Thank you. And with that, I'll turn it back
over to you.
CEO: Okay. I'd like to thank -- thatnk everyone for
joining the call and for your questions.
As I said, we are very very excited about this opportunity. It
is -- it is a great match between -- between 2 companies. If we look at
how a network is put together and from the start where it's designed by
an equipment manufacturer -- we have been very, very strong with our --
we have simulation products and test products. In seeing what the next
generation networks will look like and our view from equipment
manufacturers to how diagnostic products go into the network to test and
find issues in a network. And then Inet from the other side and their
monitoring products. We really cover the whole food chain from end to
end. From the concepts, where new technologies are being invented in
these manufacturers to all the way to the other end of this, where
services are being deployed to customers and are -- the ability to be
able to monitor and determine the quality of the seniors that are being
delivered to -- to the eventually to the end user.
So it's very exciting to us there's a lot of synergies in here
in the 2 companies.
Inet is a very quality company with great
40
technology, great people, a great brand. And we're very very happy that
we've been able to put this together. And we think it benefits our
belief that this benefits, will benefit shareholders. It will benefit,
definitely benefit our customers. And we also believe it will benefit
both sets of employees, as we'll be able to pool our resources together
and work on growing the business. With our access in Asia as an example,
Inet's abilities with voiceover, IP and other technologies that we don't
have.
We are just -- I guess I would just close by saying, we're very
happy and excited to be able to make this happen. Of course we'll be
spending the next '90 days working with a team on both sides to begin
developing integration plans. We still have filings that we have to go
through. Both companies have to go through. And looking forward to being
on the call of, hopefully when this closes approximately sometime at the
end of the September.
So thank you very much and I'll turn it back over to John.
JOHN GARDNER: Thanks, Rick. That concludes our call
today.
It will be available for replay on the investor relations
section of our website at www.Tektronix.com through the close of the
transaction. And operator, that does conclude our call.