Avangrid, Inc.
Q4 2005 Earnings Call Transcript

Published: 29 Nov 2005

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the Agere Systems Investor Relations Conference Call.

[Operator Instructions:]

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Sujal Shah, Director of Investor Relations at Agere Systems. Please go ahead.

[Sujal Shah:]

Good morning and thank you for joining us. Earlier this morning in addition to our earnings, Agere announced that Rick Clemmer, a member of Agere's Board of Directors for the past 3 years has been named President and CEO. Mr. Clemmer is here with me today as is Peter Kelly, our Executive Vice President and Chief Financial Officer. Rick will make a few introductory remarks on today's call and Peter will then discuss the highlights of Agere's results for the fourth quarter and full fiscal year 2005. We will then open up the call for your questions. Copies of our press release and other supporting financial data are available on our website. Please note that we will be mentioning pro forma results on the call. Today's earnings release describes the differences between our pro forma and GAAP reporting. On this call, we will be mentioning additional pro forma financial measures and you can find corresponding GAAP measures and re conciliations on our website at www.agere.com/webcast. A replay of today's call will be available on the company's website. I also want to remind you that today's remarks will include forward- looking statements. Our actual results could differ materially from those suggested by the statements made today and we undertake no obligations to revise or update publicly any forward-looking statements. Additional information about factors that could affect future results are addressed in our annual report on Form 10-K for the fiscal year ended September 30, 2004, and our Form 10-Q for the quarter ended June 30, 2005. Now I would like to turn the call over to Rick Clemmer.

[Rick Clemmer:]

Thank you. Good morning and welcome. I would like to begin by saying how pleased I am to be stepping into this new role. I have been a Board member of Agere's since 2002. The last couple of years I have been focused on emerging technologies in start-up companies, playing an active role and helping them through the growth. I also spent 5 years at the disk drive manufacturer Quantum as well as more than 20 years at Texas Instruments. As a result, I understand our technology well and intimately familiar with the dynamics of the industry and the needs of our customers. However, I am sure that you will understand that I will take a little time to fully come up to speed on the opportunities and challenges facing our company. Therefore, today, the majority of the call will be handled by Peter Kelly, our CFO. Before I turn the call over to Peter, I want to say that it is obvious to all of us that significant progress has been made in bringing this company to a strong financial position. While the fourth quarter revenue was disappointing, we have demonstrated a very strong capability in managing our costs, driving profitability and generating cash. Our balance sheet is healthy and our gross margins are excellent. I would like to take this opportunity to acknowledge and thank John for his leadership and contribution in getting the company to the current position of financial strength. Moving forward, the challenge that we clearly face is driving profitable revenue growth, and that's what I am here to address. I will now turn the call over to Peter.

[Peter Kelly:]

Thank you, Rick. This morning we reported quarterly pro forma net income of $38 million or $0.21 per share, essentially exceeding our guidance range of $0.06 to $0.12 per share. Our revenues were $416 million, below the lower limit of our guidance range of 420 to $445 million, and down $17 million from the previous quarter. Our revenue shortfall was driven largely by lower than expected demand from key storage customers, and in enterprise and networking, our satellite radio business was impacted by supply constraints from our assembly subcontractor. For the fourth quarter of fiscal 2005, we have three 10% customers, Samsung, Seagate and Maxtor. Storage revenues of $158 million were less than expected, were up by $12 million over the third quarter. We were, however, extremely pleased with the growth in our pre-empt business, which was driven by the ramp of our low cost silicon germanium products. We continue to gain traction with the major disk drivers OEMs, helping our pre-empt revenue to grow more than 50% quarter on quarter with continued growth expected in 2006. Mobility revenues of $92 million decreased $8 million sequentially with the expected reduction in inventory levels by our key customers. Enterprise and networking revenues decreased by $17 million sequentially to $101 million due primarily to declines in shipments for satellite radio chipsets. Telecom revenues were $65 million as expected, and the $4 million reduction from the third quarter was driven by decreases in shipments of products for wireless infrastructure. Our pro forma gross margin as a percent of sales was 52%. We're extremely pleased with our progress to our satellite models and as we have made this transition, our gross margins have improved substantially. The closure of the Orlando FAB marks the final phase of this transition. Moving now to operating expenses, our SG&A and R&D expenses were $165 million in the September quarter. That is in our guidance range of 175 million to $180 million. Of this improvement, 8 million was the result of reduced management and executive bonuses in line with our fairly efficient expected revenue levels. Without this, our expenses would still have been better than the low end of our guidance range we provided in July, and we continue to believe that a strong link between compensation and performance is fundamental to driving value. Our pro forma operating profits were 12%, and at $50 million is our ninth consecutive quarter of positive pro forma operating profit. In the quarter, taxes were $7 million, other income was $2 million, and interest expense was $7 million. On a GAAP basis, we have net income of $7 million or $0.4 per share bettering by far, our guidance of loss between $0.21 and $0.27 per share. Approximately $0.06 of this improvement was a result of the reduction in performance based bonuses. $0.10 from the sale of equipment from our Orlando FAB and $0.06 was from lower restructuring charges and related cost. The remaining $0.06 resulted from gross margin improvement and expense reductions. For fiscal 2005, revenues were 1.68 billion, compared to 1.91 billion in fiscal 2004. Pro-forma earnings per share was $0.41 in fiscal year 2005, a 46% improvement from the $0.28 recorded in fiscal 2004. Turning now to the balance sheet. Inventory was $130 million, with inventory turns at 7. Our management of inventory continues to be excellent and the September inventory included $28 million of pre-bills to help manage the closure of the Orlando FAB. The majority of this inventory will be shipped to customers in the coming fiscal year. Receivables were $251 million, with DSOs on a 2-point calculation of 52 days. Accounts payable were $200 million. I am very pleased with our cash position and this quarter we increased our cash balance by $72 million to $698 million. The change in cash includes $32 million in voluntary pension contributions, $38 million for capital expenditure, and the receipt of $85 million for the sale of our Orlando equipment. Our total debt was $372 million, down $4 million from the previous quarter. This amount represents our convertible notes due in 2009. Depreciation and amortization expense for the September quarter was $59 million. Of this amount, $41 million was depreciation and amortization from ongoing operations and $18 million was additional depreciation primarily related to our Orlando FAB closure. Total restructuring charges and related costs, which we exclude from our pro forma results, were $31 million. The majority of this was Orlando related with $18 million for accelerated depreciation, which was $19 million better than expected due to higher sale proceeds. In addition, approximately $8 million in nonrecurring costs were recorded, primarily related to contract terminations. There was also $1 million for amortization of acquired intangible assets and $1 million gain on the sale of operating assets. In the first quarter of fiscal 2006, Agere will adopt FAS 123(NYSE

[Rick Clemmer President and CEO:]

Thank you, Peter. As I said earlier, we are absolutely committed to doing what it takes over the coming months to drive consistent revenue growth and enhance shareholder value. Recognizing the importance of revenue growth, the company continues to tie compensation closely to revenue performance. The management team is committed to reducing our pro forma operating expenses to a level no higher than $165 million by the fourth quarter of fiscal 2006. Finally, we believe that our stock is undervalued. The Board of Directors has authorized the repurchase of up to $200 million of common stock. Based on yesterday's closing price, $200 million dollars represents approximately 12% of our total shares outstanding. I believe these initiatives will help significantly strengthen our market position and deliver enhanced shareholder value. Clearly, as I mentioned before, I need to take little time to assess the adequacy of these actions, but I believe they move the company in the right direction. Over the next weeks and months, my immediate priority will be to understand the opportunities and challenges that we face. I expect by the next earnings call to be in a position to better articulate Agere's plans forward. I'd like to conclude my remarks by saying once again how I am excited to be taking the reins of Agere at such an important juncture in the company's evolution. And I look forward to meeting with many of you in person. Now let me turn the call back to Sujal.

[Sujal Shah:]

Thank you, Rick. At this point, we'll being the Q&A portion of the call. Bridget, will you please give the instructions for the Q&A session.