COOLEY GODWARD KRONISH LLP PALO ALTO 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 737699 v1/PA DECL. OF R. NORTH ISO DEFENDANTS’ REQ. FOR JUDICIAL NOTICE ISO MTD SAC C 05 02406 COOLEY GODWARD KRONISH LLP WILLIAM S. FREEMAN (82002) ([email protected]) RICHARD D. NORTH (225617) ([email protected]) JEFFERY M. KABAN (235743) ([email protected]) Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Telephone: (650) 843-5000 Facsimile: (650) 849-7400 Attorneys for Defendants DITECH NETWORKS, INC., TIMOTHY K. MONTGOMERY and WILLIAM J. TAMBLYN UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION In re DITECH COMMUNICATIONS CORP. SECURITIES LITIGATION. Master File No. C 05 02406 JSW CLASS ACTION DECLARATION OF RICHARD D. NORTH IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS SECOND AMENDED CLASS ACTION COMPLAINT This Document Relates To: ALL ACTIONS Hearing Date: December 15, 2006 Time: 9:00 a.m. Courtroom: 17 Judge: Hon. Jeffrey S. White Trial Date: Not yet set Case 3:05-cv-02406-JSW Document 60 Filed 10/03/2006 Page 1 of 3
Transcript
COOLEY GODWARD KRONISH LLP
PALO ALTO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
737699 v1/PA DECL. OF R. NORTH ISO DEFENDANTS’ REQ.
FOR JUDICIAL NOTICE ISO MTD SACC 05 02406
COOLEY GODWARD KRONISH LLP WILLIAM S. FREEMAN (82002) ([email protected]) RICHARD D. NORTH (225617) ([email protected]) JEFFERY M. KABAN (235743) ([email protected]) Five Palo Alto Square 3000 El Camino Real Palo Alto, CA 94306-2155 Telephone: (650) 843-5000 Facsimile: (650) 849-7400
Attorneys for Defendants DITECH NETWORKS, INC., TIMOTHY K. MONTGOMERY and WILLIAM J. TAMBLYN
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION
In re DITECH COMMUNICATIONS CORP. SECURITIES LITIGATION.
Master File No. C 05 02406 JSW
CLASS ACTION
DECLARATION OF RICHARD D. NORTH IN SUPPORT OF DEFENDANTS’ REQUEST FOR JUDICIAL NOTICE IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS SECOND AMENDED CLASS ACTION COMPLAINT
This Document Relates To: ALL ACTIONS
Hearing Date: December 15, 2006 Time: 9:00 a.m. Courtroom: 17 Judge: Hon. Jeffrey S. White Trial Date: Not yet set
Case 3:05-cv-02406-JSW Document 60 Filed 10/03/2006 Page 1 of 3
COOLEY GODWARD KRONISH LLP
PALO ALTO
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
737699 v1/PA 1 DECL. OF R. NORTH ISO DEFENDANTS’ REQ.
FOR JUDICIAL NOTICE ISO MTD SACC 05 02406
I, Richard D. North, hereby declare:
1 I am an attorney licensed to practice law in the State of California and the
Northern District of California, and am an associate with the firm of Cooley Godward Kronish
LLP, attorneys of record for Defendants Ditech Networks, Inc. (formerly known as Ditech
Communications Corporation) (“Ditech”), Timothy K. Montgomery and William J. Tamblyn. I
state facts in this declaration of my own knowledge, and could and would testify competently to
the same if called as a witness.
2 Attached hereto as Exhibit A is a true and correct copy of relevant portions of
Transcript of Proceedings, In re Ditech Communications Corporation Securities Litigation, No.
C-05-2406, July 9, 2006
3 Attached hereto as Exhibit B is a true and correct copy of a transcript of Ditech’s
August 24, 2004 Q1 Fiscal Year 2005 Earnings Release Conference Call.
4 Attached hereto as Exhibit C is a true and correct copy of a transcript of Ditech’s
November 3, 2004 Q2 Preliminary Results Conference Call.
5 Attached hereto as Exhibit D is a true and correct copy of a transcript of Ditech’s
November 18, 2004 Q2 Fiscal Year 2005 Earnings Release Conference Call.
6 Attached hereto as Exhibit E is a true and correct copy of a transcript of Ditech’s
February 17, 2005 Q3 Fiscal Year 2005 Earnings Release Conference Call.
7 Attached hereto as Exhibit F is a true and correct copy of Ditech’s August 24,
14 MISS ROGERS : GOOD MORNING, YOUR HONOR . KAREN ROGERS
15 WITH MILBERG WEISS, ON BEHALF OF PLAINTIFFS .
16 MR. FREEMAN : GOOD MORNING, YOUR HONOR . WILLIAM
17 FREEMAN, ON BEHALF OF COOLEY GODWARD, FOR THE DEFENDANTS .
18 THE COURT : GOOD MORNING .
19 ALL RIGHT, HAS COUNSEL SEEN THE COURT'S TENTATIVE
20 RULING?
21 MISS ROGERS : YES, YOUR HONOR .
22 MR. FREEMAN : YES, WE HAVE . MAY I ASK A PRELIMINARY
23 QUESTION ABOUT THE TENTATIVE? I NOTICE THAT IT IS STATED THAT :
24 THE COURT TENTATIVEY DENIED DEFENDANTS' MOTION TO
25 CERTIFY FOR INTERLOCUTORY APPEAL .
CATHERINE L . EDWARDS, CSR(510) 886-242 7
0
3
EL uJt JJ ti<. E
2 SUCH A MOTION ON THE RECORD .
3 THE COURT: ALL RIGHT . WELL , I APOLOGIZE FOR THAT,
4 T}- . . `^v ',' S~".AKE .Pane Z,
Ex. A, Pg . 2
0
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
DITECH COM C-05-2406JSW JUNE 9 2006 .txtAND SO, IF YOU MANIPULATE THOSE NUMBERS, THEN YOU COME
OUT WITH WHAT DEFENDANTS CLAIM .
IF YOU ACTUALLY COMPARE MR . MONTGOMERY'S HIGHEST SALE
WITH THE HIGHEST CLOSING PRICE IN THE SUBSEQUENT TWO WEEKS, THEN
HE WAS ONLY LOWER THAN THE TWO HIGHS, SLIGHTLY MORE THAN HALF
THE TIME .
ANOTHER ISSUE I WANTED TO POINT OUT IS THAT DEFENDANTS
STATE THAT THEY COLLECTIVELY RETAINED OVER NINETY PERCENT OF
THEIR HOLDINGS .
THAT PERCENTAGE IS HIGHLY MISLEADING .
THE MAJORITY OF THEIR QUOTE, UNQUOTE RETAINED SHARES
ARE UNEXERCISED OPTIONS, WHICH COST THEM ABSOLUTELY NOTHING
UNTIL THEY WERE EXERCISED .
SO, AS A RESULT, THEY DIDN'T LOSE THIRTY MILLION
DOLLARS ; THEY ACTUALLY DIDN'T LOSE ANY MONEY ON THE EXERCISED
OPTIONS FOLLOWING THE DROP OF MAY 26 .
SO, EXCLUDING THE UNEXERCISED OPTIONS WOULD LITERALLY
INVERT THE RETAINED PERCENTAGES, AS FOLLOWS .
MONTGOMERY ONLY RETAINED 175,571 SHARES, OR 9 .9 PER
CENT INSTEAD OF THE 1 .5 MILLION, OR 87 PER CENT THAT DEFENDANTS
SUGGEST .
SIMILARLY, TAMBLYN ONLY RETAINED 67,042 SHARES, OR
8 .21 PER CENT, INSTEAD OF THE 791-PLUS-THOUSAND SHARES, OR 96 . 9
CATHERINE L . EDWARDS, CSR(510) 886-2427
3 5
1
2
3
4
5
ti T I
THIS WAS ','ORE TO THE (HIF (B) ) TRADING PLAN .
THE COURT : ALL RIGHT . SO, YOU HAVE GIVEN ME THE
INFORMATION WITH RESPECT TO QUESTION NUMBER {5) .
°aqe S 1
Ex. A, Pg. 3
DITECH COM C-05-2406JSW JUNE 9 2006 .txtWAY?
MISS ROGERS : ON DEFENSE COUNSEL'S COMMENT THAT THE
PROOF THAT THE STATEMENT ABOUT THE ASIAN ORDERS WAS FORWARD
LOOKING IS BECAUSE, IF YOU LOOK THAT THEY WERE NOT CONSUMMATED A
YEAR LATER, REALLY TWISTS THE FACTS .
AND WE SUBMIT AND WE WILL ALLEGE, IN MORE DETAIL, WHY
THOSE ORDERS WERE NOT COMPLETED BECAUSE THEY WERE NEVER SECURED
IN THE FIRST PLACE .
AND SO, THAT REALLY IS CONFUSING THE TWO ARGUMENTS .
LASTLY, ON THE SAFE HARBOUR PRONG, I WOULD JUST
SUBMIT, WITH ALL DUE RESPECT, MY READING OF AMERICA WEST SAYS
THE NINTH CIRCUIT DOESN'T AGREE WITH HIS INTERPRETATION .
BUT I WILL LEAVE IT AT THAT .
THE COURT : ALL RIGHT . THANK YOU, COUNSEL . THE
MATTER IS SUBMITTED .
MR . FREEMAN : THANK YOU, YOUR HONOR .
(WHEREUPON COURT STANDS IN RECESS . )
< - < - < - 0 0 0 - > - > - >
CATHERINE L . EDWARDS, CSR(510) 886-242 7
D
57
CERTIFICATE OF REPORTER
I, CATHh_RINE L . EDWARDS, A CE: ~TIFIED SHORTHAND
r°Y ~rt#ai- I'l l
CASE NO . C -05-2406
DITECH COMMUNICATIONS
Pane 51
Ex. A,Pg.4
DITECH COM C-05-2406JSW JUNE 9 2006 .txtV .
NEXTEL-SPRINT
WERE REPORTED BY ME, AND WERE THEREAFTER TRANSCRIBED
UNDER MY DIRECTION INTO TYPEWRITING ; THAT THE FOREGOING IS A
TRUE RECORD OF SAID PROCEEDINGS AS BOUND BY ME AT THE TIME OF
FILING .
THE VALIDITY OF THE REPORTER 'S CERTIFICATION OF SAI D
TRANSCRIPT MAY BE VOID UPON DISASSEMBLY AND/OR REMOVAL FROM TH E
COURT FILE .
CATHERINE L . EDWARDS, CS R
SEPTEMBER 3, 200 6
CATHERINE L . EDWARDS, CSR(510) 886-242 7
p aae 52
Ex. A, Pg. 5
Ditech Communications I DITC Q1 2005 Earnings Call Aug . 24, 2004CompanvA I TickerA Event Tvoe A Date A
MANAGEMENT DISCUSSION SECTION
Operator : Ladies and gentlemen, thank you for standing by and welcome to the Q1 Fiscal Year2005 Earnings Release Conference . At this time all lines are in a listen-only mode . Later, there willbe an opportunity for questions . If you would like to ask a question at that time, please press " ',then "1" on your touchtone phone. If you require any other assistance, please press "*" then "0" andas a reminder, this conference is being recorded .
I would now like to turn the conference over to Bill Tamblyn, Chief Financial Officer. Please goahead, sir .
William Tamblyn, CFO
Thank you very much . Good afternoon, everyone . This is Bill Tamblyn, the Chief Financial Officerof Ditech Communications . Thank you for joining us for this conference call, which will cover DitechCommunications announcement of results for its fiscal 2005 first quarter ended July 31, 2004 . We'llalso provide our estimates and outlook for the next quarter . Tim Montgomery, Ditech's Presidentand CEO will provide the business and strategic analysis and I will provide a more detailed analysison the financials . Following those comments, we'll open up the call for Q&A.
Before we begin, let me state that this conference call is being held on August 24, 2004 . Any soundrecording or republishing of contents of this conference call is expressly forbidden without thewritten approval of Ditech Communications . Also, we must point out with similar presentations, thefollowing discussion contains forward-looking statements that involve risks and uncertainties . Ouractual results may differ materially from those discussed here. We will attempt to identify suchforward-looking statements with qualifying words such as we intend, plan, believe, estimate, orpredict or we may, could, or will, or other comparable language . Factors that could cause results tobe different include factors discussed today in this conference call and in our press releases todayas well as those detailed in the section entitled "Future Growth And Operating Results Subject ToRisks" section of Ditech's Form 10-K for the year ended April 30, 2004, which was filed July 14,2004, with the Securities & Exchange Commission .
Today's announcement was released over the wire this afternoon and you may also read it onDitech's website by going to the investor section of the Ditech website at www .ditechcom .com. Withthat I'd like to turn over the call to Tim to comment on the announcement and our strategic strategymoving forward . Tim.
Timothy Montgomery , President and CEO
Thanks, Bill . Good afternoon, everyone . I'm very pleased to be speaking with you today to reportDihe1 's fisca~ .JS Imt quarter results and to share with you our view of the coming quarter, ou r
e ;
air . .:a .i YT,sachievement was very gratifying and demonstrates our ability to execute c onts of toebusiness . Managing expenses, leveraging our contract manufacturing moaei, and taking fulladvantage of economies of purchasing and operations has resulted in this new level of profitability .Gross margins increased from 68G0 to 75° . a tremendous increase in a single quarter . We believegross era-gins of ,%eli over 70`~ are sustainable overthe next few quarters . I say this even as we
Ditech Communications DITC Q1 2005 Earnings Call Aug. 24, 2004Com an A TickerA Event TypeA Date
expect to generate a greater proportion of international business , where our indirect model impactsgross margins somewhat. We added $15 million in cash to an already strong balance sheet,resulting in a quarter ending balance of $146 million in cash and investments and zero debt .
We announced our second voice quality assurance customer, tele .ring , a leading Austrian wirelessoperator in June and today announced the largest international order for voice products in Ditech'shistory. Additionally during the quarter, we introduced a significant new product platform , the new
MINNOWbroadband voice processor, Flex 600 , which we believe is the most powerful and flexible voiceprocessing system available, echo cancellation and voice quality assurance on a single high-capacity platform .
In summa ry , our first quarter of fiscal 2005 was outstanding and clearly ahead of plan . Revenuegrowth, stellar profitability , robust gross margins . Superior quality of revenues as evidenced bystrong deferred revenues and DSOs of 30 days . Continued market share gains and momentumresulting from initiatives that target larger market opportunities , which are now available to us .
As we enter the second quarter of fiscal 2005, it's clear that from our strategic investments in thevoice business over the last 18 months , we're now realizing dividends and we believe thesedividends will continue in the coming quarter . In terms of revenue in the second quarter, we expect8% to 10% growth over the extraordinary 11 % growth in Q1 we reported today . We now possess alean yet scaleable business model poised to continue to generate profits and cash .
Now, let's move into a more detailed discussion of our business, that of voice processing . I'mpleased to report continued progress in our core Echo cancellation market, a market that continuesto be robust for us, as evidenced by these earnings . Based upon today's announcements and ourresults over the past several quarters, we believe we continue to gain market share . Greater focus,greater investment, better execution . All these factors continue to favor our momentum within themarkets we serve . These factors are the result of rapid innovation and more powerful processingplatforms. We introduced the broadband voice processor or BVP Flex platform last fiscal year and itnow accounts for 68% of our 25 .5 million in revenue . Migration of our customer base to the BV P
■ ; ~_ Flex platform has enabled Ditech to drive costs out of our model . We've been able to takeadvantage of economies of scale, become more efficient in our support services, and reduceoperations expense .
Our first quarter results demonstrate our strength in the North American Echo cancellation marketwhere we generated the vast majority of our revenues . The primary driver in the North Americanmarket has been the build out of the wireless network . And our major customers are the nation'sleading wireless operators . We believe our momentum in the North American market will beenhanced by our new BVP Flex 600 platform . With this platform we've found a new way to competein the broader Echo cancellation market. We can now offer our powerful external system levelalternative across the market by providing significant improvements in performance and scalabilityat competitive price points .
Ancher market segment opportunity we see emerging is in the VOIP (voice-over inte rnet protocol)a a. We've seen concrete , but nc t yet substantial, evidence of o .,r current Echo cancellatio n
min heca ,o, ~c C~ ._- ai~~ o ~inl,^allv .OnL~ ;o
.,,,- et . --, to ciscuss ice nternat _ -3 : ro cu . i e qua`it j assurance ,
or VQA, activity . Our international efforts continue to be focused on supporting our VQA businessinitiatives and trials . In the first quarter , we announced our second VQA customer ; tele .ring, aleading Austrian GSM operator. VQA enables tele .ring's half rate implementation and improvestheir spectrum utilization as well as their voice quality . Our VQA momentum continues in Q2 . as
www .Ca!IStreet .com • 212 .931 .6515 et 2
Ex. B, Pg. 2
U)
.~ I
Ditch Communications I DITC Q1 2005 Earnings CallI
Aug . 24, 2004Companvl TickerA Event Tvi)e A DateA
today I announced that we have secured initial orders this month in excess of $5 million for theAsian market. You can see the press release on the wire and our website .
A few words for perspective on VQA . VQA is an exciting new initiative and a new market for Ditech .As we've said, we face entrenched competitors in the large voice switch vendors who want tocontinue to dominate existing customer relationships . The stakes are also quite high for theinternational carriers as the deployment decisions they make today have significantly long lives .The testing and evaluation processes are resultantly complex and lengthy, because the stakes areso high . In terms of VQA visibility, estimating the timing of orders is challenging .
For these reasons, we've said VQA revenues will probably appear lumpy, and that is true today .We generated $1 .6 million in Q4 and $600,000 in Q1 . Although we don't know yet precisely whereQ2 VQA revenues will be, given our Q4 revenues and orders in excess of $5 million already in Q2,you can see the beginning of a trend line that gives us real confidence in our VQA business . Iwould have you consider that our investment in VQA sales and support personnel in Asia is payingoff as evidenced by these new orders . We've now expanded our trial activity to Eastern Europe andthe Middle East and overall we continue to see opportunities on all continents including NorthAmerica . In fact, we have more VQA trials planned or in process than we spoke of a few quartersago . We don't expect to win them all . But based on results to date, at this point we're exceeding ourbusiness plan .
During the last conference call, I commented briefly on our investment in packet voice products,and you can evidence this by our deliberate increase in R&D spending . It's not appropriate toelaborate much more today, other than to reiterate that this is an area of continued focus to growour business over the long-term . As packet voice networks becomes mainstream, we believe therewill be demand for the type of carrier class, voice quality solutions which Ditech provides and thisclearly validates today's development investment . At risk of stating the obvious, this development issupported within Ditech's expense envelope of superior profitability .
As I close with you today, I can say that we're clearly seeing the results of having invested in theright areas . We started investment in the BVP Flex platform 18 months ago . In the last fewquarters, that investment paid off in market momentum, gross margins, worldwide customer wins,and a platform supporting both Echo cancellation and VQA. We invested in building a leaner, morescaleable manufacturing operation . That has paid off in lowered costs and higher profitability . Weinvested in VQA and in our Asian sales and support effort . Now we have a growing businesssegment . In sum, where we invest, we've produced returns . We move into the coming quarter andthe remainder of the year with this same strategy and perspective because it works .
Now I'd like to turn the call back over to Bill Tamblyn, our Chief Financial Officer, to comment onour financials in greater detail . Bill .
William Tamblvn, CFO
Tharks , Tim. d -e to no,, . s ', nre v. rll yoa.. me esu , : s of n , r -st c _ art€ race 1 Ky5 as .~ . ; as our
oss a~:i ,,-5 4 .~ . - =
ner sr'a°e tram canunu ng operations 51 _ . snare.
Overall, we are very pleased with our performance in the quarter. Revenues showed continuedgrowth . and were up 138% over the prior year and 11% over the prior quarter exceeding our 8% to10%i% projection . This increase was, again ; based on key account deployments . We improved ouroverall gross margin significantly based on product and customer mix and as projected previously,
Ditech Communications I DITC Q1 2005 Earnings Call ( Aug . 24, 2004Company♦ TickerA Event Type A Date
we modestly increased operating expenses to support our current levels of business and to fundour future growth. The balance sheet continues to be very robust . Cash in short and long-terminvestments increased approximately $15 million during the quarter to 146 million and again, withno long-term debt at the quarter end . Receivables at 30 days outstanding remain low compared tothe industry.
Further first quarter details are as follows . Total revenue for the quarter was $25.5 million, up 138%from the $10 .7 million for the same quarter in fiscal 2004, and up 11% from the prior quarter to$23.1 million . International revenues decreased to approximately 1 .1 million in Q1 or 4% ofrevenues, from 2 .6 million in Q4 or 11% of revenues . This was directly related to the timing of largetransactions on both Echo and VQA products . Our two largest customers comprise 84% ofrevenues.
Gross profit for the quarter was $19 .1 million, or approximately 75% of revenues . This was 7 pointshigher than the 68% reported in the prior quarter . The margin was 10 points higher than the prioryear and higher than our prior projection . This amply exceeds our medium to long-term target ofmid-60s gross margins . This margin improvement is based on product mix and the movement toour new products such as BVP Flex as well as operational efficiencies .
Total operating expenses were approximately 36% of revenues or $9 .2 million for the quarter .Operating expenses as a percentage of revenues were lower then our medium to long-term model .Spending levels, however, were consistent with our projections. The details of the operatingexpenses are as follows. Sales and marketing expenses were $3 .9 million, in line withexpectations . This was a 2% increase in the prior quarter and a 31 % increase from the samequarter last year. This spending level supports our existing products as well as investments inexpanding sales channels for international opportunities . R&D expenses were $3 .5 million. Thislevel was a 23% increase from the prior quarter of 2 .9 million and a 38% increase from the samequarter last year . The increase from the prior period was expected based on the maturity of ourcurrent product offerings and the ongoing development efforts in new areas . G&A expenses wereapproximately $1 .7 million, this was slightly higher than our expectations, and a 30% increase inthe same quarter last year . The increase is in part tied to international expansion and in partSarbanes-Oxley 404 compliance preparation .
Operating income was approximately 39% of revenues, or $10 million, which exceeds the high endof our medium to long-term model . Total other income was $369,000, all of which is related tointerest income . The effective tax rate is approximately 1 % of revenues and/or 2% of income . Ourprofit from continuing operations was $10 .1 million or $0 .28 per share compared to a profit of 8 .5million or $0 .24 per share in the prior quarter and a loss of $500,000, or $0 .02 per share, from thesame quarter last year based on a comparative GAAP presentation .
Some additional information, share count has increased slightly to 35.6 million shares on a fullydiluted basis . This was a 500,000 share increase from the prior quarter and equal to 500,000 wehad projected in our prior call .
Consistent with our prior quarter, in every way, fror- revenue growt h o our continued commitment
<, _ _~~ .at a. Icae iease~ execu; o7 ae_ r a~ e
pprCXi .a . C m111!0
c .. ..ter . h s was greater than e _pec .v: . The source cash), . as primarily related to profits .increased deferred revenues , and their related cash collections , inventory and depreciationamortization , which were offset by decreased payables , accrued expenses and higher receivables .Please note as stated previously this quarter, and on a go-forward basis , we'll be referring to cashas inc :ding cash . cash equivalents and short, and long-term investments . Cash at quarter end
www .CallStreet .com * 212 .931 .6515 i 4
Ex. B, Pg. 4
Now
Ditech Communications I DITC Q1 2005 Earnings Call I Aug. 24, 2004CompanvA Tickers Event Type A Date A
totaled $146 million, an increase of approximately $15 million from the prior quarter. This level wasenhanced by the cash flow from operations and the exercise of options .
At quarter end, accounts receivables were approximately $8.3 million . This was a $1 .8 millionincrease from the prior quarter . We collected in the quarter on a reasonable percentage of ourshipments in the quarter, including $5 .1 million of product shipped that is in deferred revenue .Revenues that are deferred and uncollected are netted against receivables . This is consistent withour prior financial treatment and is GAAP - is a GAAP presentation . DSOs were significantly betterthan our long-term expectations and was approximately 30 days compared to 26 days in the lastquarter . As we stated last quarter, we would expect our long-term target to be between 45 to 55days, and over the next few quarters expect to return to this range . Our long-term target is basedon increased revenues generated through the reseller channel and international customers, whichhistorically pay on extended terms as I had mentioned previously. Let me emphasize that DSOnumbers are subject to change . The timing of sales and shipments in any given quarter is alwayssubject to fluctuations .
Net inventory was $5 .5 million at quarter end, down from the prior quarter of $6 million . The changein inventory was expected, and the level is supportive of our turns based business, and inclusion ofinventory for deferred revenues . Inventory turns were an annualized 4 .6 . This was essentially thesame as the prior quarter's annualized 4 .5 turns . We ended the quarter with 153 employees asplanned, up from 148 in the prior quarter . The increases are primarily sales support, andengineering .
Now let me review our projections for Q2 of fiscal 2005 . Please note in this regard the cautionarystatements regarding these forward-looking statements that we gave at the beginning of the call . AsI discuss our projections for Q2, the numbers I will provide are on a GAAP basis . This is consistentwith my initial comments today and indicating that all such numbers will be GAAP unless specifieddifferently .
We have very good visibility into expected revenues for Q2 . Our continued revenue growth is basedon key customer deployments and increases in international revenue . Our visibility is supported byexisting backlog, deferred revenues of $7 .4 million and our bookings forecast . An example whichTim spoke of early today is our announcement of orders in Asia of our VQA product, approximately$5.2 million expected as revenue over the next two quarters . Our projection is for Q2 revenues toexceed Q1 revenues by approximately 8% to 10% .
As I have consistently stated, given the uncertainties in our business, we do not project beyond onequarter at a time . Gross margins, we believe they will remain within 1 % to 2% of the Q1 levels, wellin excess of 70% based on the mix of products, market pricing and overall revenue levels .Increases in international revenues may have an impact on margins over time based on ourmethods of distribution . This potential reduction in gross margins may be offset by our loweroperating expenses .
Regarding overall operating a cpenses for Q2 , we expect them to be in the range of 35% ofrevenues , approximating o i' nid to ' Fng-term m7ioiel of 350)' to 40% of revenues . The increase i n
add a
C ur tax rate , :.ula still approximate 2°, over the corporate alternative minimum tax ratebased on the usage of our NOLs . If we continue near or at current levels of profitability , we willeventually see a change in our rate , or our tax rate . At some point our evaluation reser'.,e ordeferred tax assets will be released, and we would return to a more typical corporate tax rate ofapproximately 30°i to 35° . Additionally . based on tax regulations a change in our tax rate may
www .Callstreet . com • 212 .931 .6515 • = t 5
Ex. B, Pg . 5
C)
C)
Ustaigmaa~AMEMPAV &A
Ditech Communications DlT CCompanyA TickerA
Q1 2005 Earnings CallEvent Type
Aug. 24, 2004Date A
occur sooner if we experience a greater than 50% cumulative change of shareholder ownership .Currently based on our shareholder activity over the past three years, we are above the 40%cumulative change level . We will update you quarterly on this issue .
Weighted average shares may increase by 500,000 shares in the second quarter . This is based onthe effective profitability and the share price on the calculation reflecting a fully diluted presentationat approximately current fair market value of the stock and the exercise of options by current andformer employees .
Moving onto the balance sheet for Q2 fiscal '05, outlook is as follows . Cash at the end of Q2 will behighly dependent on our profitability, receivables and inventory levels as well as the exercise ofoptions . Cash at quarter end may exceed $155 million . Capital spending will be primarily related totest equipment, software tools and development platforms . Capital spending delays in the firstquarter resulted in lower than expected capital spending . However, Q2 spending will be up atapproximately $2 .8 million . The aggregate of the first half of the year spending is consistent withour plan .
In terms of inventory, currently levels include deferred revenues, which may vary as we movethrough the remainder of the fiscal year . In the near term, inventories should be flat, consistent withQ1 . As the media continues to put the question of accounting treatment in the forefront ofdiscussion, we would like to provide the following . Related to our business and balance sheet, wecurrently have no long-term debt . We have no off balance sheet entities or associations . We haveconservative revenue recognition, reserves and other policies. We are providing GAAP informationonly . We believe we have, to the best of our knowledge, disclosed all obligations and related partytransactions as are required . We comply with all effective SEC and NASDAQ requirements relatedto audit committee compliance and independents . We will provide required certifications with ournext SEC filing and will be compliant with all effective Sarbanes-Oxley requirements . We arefocused on section 404 requirements as well . Additionally our auditors arePricewaterhouseCoopers . They do not perform consulting services for us such as system reviews,IT reviews or other forms of consulting services . They currently only provide audit, some taxcompliance, and M&A accounting support as applicable .
Some final bullets on a stellar quarter . 138% growth in revenue over the prior year, and 4consecutive quarters of profitability. Significant cash position, cash flows from operations of $10million . DSOs at a low level of 30 days . Positive visibility into Q2 '05 in revenues, expenses,margins and profitability . We have been focused on our business model, and the results areobvious as we've achieved multiple quarters of profitability . This model is based on business, wherewe have historic strength, market momentum and increasing core competencies based upon ourongoing investment in new technologies and product designs .
In a qua rter that I completed my 7th year as CFO with Ditech , I couldn't be more proud of ourresults , including the clean nature of the balance sheet, and the robustness of our business model .We're on a solid foundation to continue our positive move forward for all shareholders . With thosecomments , back to Tim.
of~y Mortyorn ery P: esia ent a, ,a
William Tamblvn, CFO
Thanks .
www . CaliStreet . com t 212 . 931 .6515 • y, l t, 2004 °'}
Ex. B, Pg. 6
www .Ca"Street .com • 212 .93 1 .6515 * ^O. e4
Ex. B,Pg.7
a)
U-)Noun=
AmmeVV4AV %
It
Ditech Communications I DITCCompanv♦ Ticker♦
QUESTION AND ANSWER SECTION
Q1 2005 Earnings CallEvent Type
Aug. 24, 2004Date
Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press "*"then "1" on your touchtone phone . You will hear a tone indicating you have been placed in queue .You may remove yourself from queue at anytime by pressing the "#" key. If you're using aspeakerphone, please pick up your handset before dialing .
And our first question is from Dave Kang from Roth Capital .
<Q - David Kang>: Good afternoon, nice quarter, guys . First question is I was wondering if youcan give us an update on f600 trial activities, especially any CDMA customer trials, any revenuecontribution . And secondly, I guess you guys are beefing up sales channel internationally, just giveus an update and plans going forward? Thank you .
<A - Timothy Montgome ry>: Sure, Dave . Hi, it's Tim . I'm not at a point where I can talk about thef600 trials because I'd have to really name names, and I'm not comfortable doing that but initiallythey will be CDMA in North America, as you can well imagine that's the biggest concentration of ourcurrent customer base . So revenues from that product as well were not recognized in the currentquarter . We think it's a pretty neat platform, so we wanted to make sure we spoke of it today . Interms of international channels, obviously, we're approaching each opportunity directly in many ofthese countries . However, it's incumbent upon us to have a channel player to support the activity .I'm very pleased with the process and the progress that we're making . It's a lot easier to get achannel player, when they see the likelihood of being able to be successful in the sales processbecause of the nature of the product . So, securing those channels is actually quite easy and we'reable to then focus our energies on the actual customer activity itself .
<Q - David Kang>: Okay . Regarding customers - regarding your two large customers thatrepresented over 80% in the July quarter, are they the same customers that represented over 80%or close to 80% in the fiscal third quarter of last year? And regarding Cingular, I don't know werethey up above 10% in the first fiscal quarter? And is Cingular still sort of in a holding pattern at thispoint?
<A - William Tamblyn> : Dave, this is Bill Tamblyn. Normally we don't - we wouldn't comment onwho the 10% customers are, so I can't give you that detail of information . That's for competitivepurposes . We'll just say it's two customers who we've been dealing with for a long period of time .And Cingular, we've dealt with them in the past .
<A - Timothy Montgome ry>: They weren't one of the 10% customers, Dave . And in terms ofcommenting on their business, I wouldn't be comfortable doing that . But I would suggest to youthat, as you know, with their activities, their M&A activities, we've characterized that historically asnot really being a business or revenue stream that we've enjoyed . So, therefore we look at that asupside, not as a potential downside scenario . So, we're real positive about that.
<0 - David Kang> : I hear you . Just couple more , regarding today's announcement , I just brieflygac : ;ed at it . I' ❑ st waned to - larif .f that I t . cu ;ht EIII sa c t n 'ng ;^.is 5 ~ I~~a orders v ould bee~ - -TC
<A . 'r ; nothy Montgon,iery>
: .~-rter, Du. . . ; V-
basea on just deployment cycles . In terms of Qwest, our understanding is that Qwest bought the -Verizon bought the U .S . West piece of Qwest, their wireless network and obviously we've got someG2 that vve're in the process of confirming at our end . So I don' t really have a comment for you . Butobviously that's certainly topical this week .
www .CaiiStreetocom • 292 .931 .6515 Veli Sf 8
Ex. B,Pg.8
Ditech Communications DITC Q1 2005 Earnings Call Aug. 24, 2004Com an A TickerA Event Type A Date
<Q - David Kang> : Thank you . Congratulations, once again .
<A - Timothy Montgome ry>: Thanks, Dave . Nice talking to you .
Operator : Is that all Mr. Kang ?
NOON= <Q - David Kang>: Yes .INUMMAnaw
Operator : Okay. Thank you then we'll go to the line of Wes Cummins with B . Riley & Company .Please go ahead .
<Q - Wesley Cummins>: Hi Tim, hi, Bill . Great quarter .
<A> : Thank you .
<Q - Wesley Cummins > : The question here , can I get a little more clarification on the grossmargins and what really drove that this quarter . I see the BVP-Flex is a much higher percentage ofrevenue, did you guys cost reduced that platform or have to redesign that really helped the marginsor is it just as that ramps up you ' re getting a better scale on the materials?
<A - Timothy Montgome ry>: Good question . First of all, you know, there's the mix issue ofdomestic versus international that favored the qua rter . As you know our international business issold through channels and those margins aren't quite as robust as North America as a result theultimate profitability of those channels , however, may approximate those of North America becausewe defer some of the operating expenses . But we indicated to you last qua rter that we had gonethrough a rather radical cost reduction exercise that surrounded the development of andannouncement of the BVP Flex platform and the QVP and we're just really hi tting stride with all ofthose initiatives . So, it's really a combination of mixed domestic international, as well as a numberof things . we've done inside the building to really drive some real efficiencies and we ' re excitedabout it .
<Q - Wesley Cummins > : Okay . Great and the announcement that you had today with the VQAproduct , can you comment on what you think those 2 customers , what the ultimate potential is intheir networks, kind of the size of those customers ?
<A - Timothy Montgome ry> : Let me do it to the extent that I'm comfortable, because I know Ihave competitors on the line . I will tell you that one of the orders was for $5 million or more and onewas about 0 .25 million dollars . And I think you can get a sense of the variability of each of thetransactions. Each of these are initial orders and we have hopes that they scale at somemultiplicative identity that's fairly close over some period of time . But it gives you an idea of the sizeand again , the variability of each of these transactions depending on the size of the count ry or thesize of the company that we're addressing . So it should hopefu ll y give you a sense for the kind offooting that we feel we're on with VQA . We're very excited about them. Over time we'll talk aboutwho they are but, traditionally we've only spoken about customers on a specific name basis, youkr . ., long after eve -, an< ;,ed the deployment process and are very comfortable that we are not
<A - Timothy Montgomery> : .' . N, nice e again. I think we've spoken about thisas being something next year , I think somewhat nebulously, whether it was next calendar or nextfiscal year, but I think in terms of revenue contribution, it's next fiscal year. We're real pleasedthough with the process ; we're doing a lot of work inside, you can see the R&D line going up . Andweve also been able to do some real good work in validating the concept and validating the actual
www . Ca!fStreet . com • 2 1 2 .931 . 6515 • ~- ° r 2004 :<t:.ftc;et 9
Ex. B, Pg. 9
C)
C)
Ditech Communications I DITCComoanvA Ticker♦
Q1 2005 Earnings Call Aug . 24, 2004Event Type A Date
product direction that we're taking under nondisclosure with certain players and we're pretty excitedabout it, to be frank with you, and every day we get more information that suggests we're onto theright track .
<tQ - Wesley Cummins > : Okay, great. Thanks .
<A>: Thank you, Wes .
Operator : Thank you, our next question is from Frank Marsala with First Albany . Go ahead, please .
<Q - Frank Marsala>: Hi, guys . How are you doing today ?
<A>: Very good.
<Q - Frank Marsala>: Questions, Bill, could you repeat the percentage of revenue frominternational again? I missed that .
<A - William Tamblyn> : It was 4% from international .
<Q - Frank Marsala>: And then could you also provide us with what your NOL balance is rightnow?
<A - William Tamblyn> : We have NOLs currently from what we generated as Ditech of about 70million . We have, also we have some NOLs that have some limitations from a company weacquired about 4 years ago that were 27 million, but they are limited, so that's the current NOLsand sort of alluded to the fact that if there's a change in control of the company based onshareholder activity over the last three years, there could potentially be a limitation to those NOLs .However, at the moment that limitation is based on our market capitalization and NOLs would beprobably pretty substantial .
<Q - Frank Marsala>: Okay . With respect to the $5 million orders that you announced today, isthis something, to your understanding, that would get deployed when you ship it? Is your customerbuilding some inventory for later deployment? How do you think that's playing out ?
<A - Timothy Montgomery> : Good question . I'm not really comfortable getting too detailed herebut I believe that the majority of the product will actually be deployed over the next quarter . I don'tthink the majority of players actually build inventory . We're interested in doing that for them, to befrank with you. We're getting so little return on our cash that given that we have all new products inour mix, we're not concerned about excess and obsolete issues . So, we're comfortable goingahead and building product in anticipation of orders, so we're really more of a, when we ship it, weexpect it to be installed right away. I think the issue of digestion over a period of time given themagnitude of the order, you know, you can see that it could take some number of months simply todeploy it properly.
<0 - Frank Marsala >: Okay. All right. With respect to the voice over IP applications that you talkednho~`ad s, .o ?`e evidece -o*: s :nsta-tia de,~io' nec± ,;ss :s e
<A- Timothy Montgomery> .e esoic over the years, either a wire line or wireless just different avenues within opportunitiesor within those accounts that are cha rtered with new modalities . I can't get any more granular than
that, with all due respect , Frank .
www .CaiiStreei . com • 212 .931.6515 10
Ex. B, Pg. 10
a)Ilk,
WAIUMUMmemo=
i3't
Ditech Communications I DITC I Q1 2005 Earnings Call Aug . 24, 2004Company!. Ticker! Event Type A Date
<Q - Frank Marsala> : And you've not gone after OEM opportunities in the past, but would this bean area where OEM might work for you, or are you just not thinking that way?
<A - Timothy Montgomery> : Well, to be candid with you, it's not a favored channel for me . I find itlimiting, I find it somewhat constraining and I don't really like the gross margins . I think the reasonone goes after an OEM channel is if they are unable to - predominant reason is that they areunable to manage their own brand and secure opportunities on their own . I think often that's doneat the entry level of a company, the early stages of a company where they are trying to drive somecreditability in the marketplace . We did - we went through a period for a couple of years where wedabbled in that, and we learned an awful lot about it . But I'm not terribly enamored with it . So Iwouldn't suggest to you that any predominant revenue stream will come from the company in theforeseeable future from the OEM channel .
<Q - Frank Marsala>: Great . Just one last question, Tim, and maybe you can brag a little bit here,but why do you think you're gaining share? What do you think is one or two or may be three thingsthere that are really driving that? You talked about gaining share, but what do you think i shappening there?
<A - Timothy Montgomery> : Well, you know, at the risk of bravado, I don't think this is anappropriate venue for that, if there is one . To be frank with you, this is our only business . And wehave focused all of our resources, all of our energy and all of our talent on this business for yearsand we invested in this business even when we were defocused in the optical arena -- we actuallyinvested more during that era than we did prior -- and since we jettisoned that business, this hasbeen our only focus . I believe as a result we hired the right people, we gave them the rightresources, they built the right hardware platforms, the scale, and obviously drive great grossmargins and improved cost basis and the cost of ownership for our customers . We've developedsoftware platforms that have true value for the customer that are competitive, highly competitive .And the combination of the two is extraordinary. I also believe that we don't take anything forgranted . We don't take our customers for granted ; we don't take our supplier relationships forgranted . And we've got some great people doing some great things .
<( - Frank Marsala>: Thanks, guys . Very very good quarter.
<A - Timothy Montgomery > : Thanks, Frank .
Operator : Thank you. We have a question now from Andy Schopick with Nutmeg Securities . Goahead please .
<Q - Andy Schopick> : Thank you and good afternoon . Several questions , Tim I want to start withyou to what extent is there an homologation process for you with the new platforms and newproducts , VQA, etc in the international markets?
<A - Timothy Montgome ry>: There absolutely is . I think that's one of the things that a partner can
assist you with . They speak the language , they can do translates for you, and they typically know
:nee divide s that one has to deal with in oraor to get :-e process dc ,c . I fc .j"J the :,rocess to be3 .. o
<~t - Ac dy Schopick > : And :s mere a sib oar undergo--g
the process right now?
<A - Timothy M ontgomery>: I'd say the answer to that is yes .
<C - Andy Schopick > : Okay . You don't care to be any more specific i n that regard?
Ditch Communications DITC Q1 2005 Earnings Call Aug. 24, 2004Com an A TickerA Event Type A Date
C)
<A - Timothy Montgome ry>: I don't , I'm sorry .
<(,Q - Andy Schopick> : That ' s okay. In terms of the percentage breakout between the 2customers, can I ask customer A, customer B percent of revenue in terms of how that 84% wascomprised?
<A - William Tamblyn> : I didn't want to go there . We break it out ultimately in the 10-Q .
<A - Timothy Montgomery > : You just don 't want wait for the Q .
<A - William Tamblyn>: 36 and 48ish .
<tQ - Andy Schopick> : Okay. Thanks . And with respect to taxes , Bill, did I understand you to saythat there could be conditions under which the tax rate would become more normalized in terms ofreleasing the valuation reserve in this fiscal year , or are we reasonably assured that the loweffective rate will pertain for the full year ?
<A - William Tamblyn > : I didn't quite say it the way you asked it, but effectively if we continueprofitability , at some point we will have to assess the reserve , and that could happen in this fiscalyear.
<Q - Andy Schopick>: It could ?
<A - William Tamblyn > : It could . Because we have currently had now 4 profitable qua rters . Wehad a $10 million profit in this qua rter . If we continue at that rate, at some point it becomes, youknow , basically in accounting terms , more likely than not you'll consume the rest of the NOLs .
<Q - Andy Schopick > : I understand .
<A - William Tamblyn > : And so that could happen at some point, there ' s no magic date, but atsome point you'd have to deal with it , and then you'd annualize your tax impact and you would havean adjustment.
<q - Andy Schopick > : Going forward we should be thinking normalized effective rate at somepoint being a 30% , 35% rate, then ?
<A - William Tamblyn>: That's correct .
<Q - Andy Schopick > : OK. Operating margins . Tim, I'm one of the guys that goes back to thelPO and remembering what happened in 1990 . This company achieved phenomenal profitability . Iremember operating margins actually approaching or exceeding 50% during a b rief timeframe andthen of course when things slowed down and revenues turned lower , those margins collapsed andthink that while you all must be feeling very, very good about how the business is going right now,is there anything you can do or care to tell us about ho .v you hope to ma :raja the business in term s
a JC t !rsD7 a. :mn , toe Current opera~i ;<A - Timothy Montgomery > . see c
margins are phenomenal .
<Q - Andy Schopick> : They are .
www .Ca l iStreet .com • 212.931 .6515• 12
Ex. B, Pg. 12
a)
C)
Ditech Communications DITC Q1 2005 Earnings Call Aug. 24, 2004Company, TickerA Event Type A Date A
<A - Timothy Montgomery>: In the climate that we're in . I think the margins that we enjoyedhistorically were pretty astronomical and I appreciate the fact you stayed with us through all this -
<( - Andy Schopick> : Been quite a ride .
<A - Timothy Montgome ry>: It has. It has . This whole industry was in a nuclear winter for quitesometime . And I think it's been an interesting ride for all of us . Probably the best way to answer thequestion for you is we acknowledge the customer concentration issues and have developedproducts and sales channels and hired worldwide to defer or to defray, if you will, some of thedependence we may have on individual customers . So we're doing a yeoman's job in that regard .Unfortunately all of the detail of that I can't really disclose in the conference call, so you are seeingwhat you see . We're managing the business I think very, very well . The things we can control, we'redoing . I've got just a fabulous team of people who know far more about their individual disciplinesthan I ever could . And I think you can see that in the metrics we have here . You can see that inBill's tenure, the cleanliness of the balance sheet, the straightforward nature of our financials andthis huge improvement in gross margins above a number of that's probably more than most playersin the industry anyway .
So in terms of reducing volatility, it's, you know create as many customer opportunities as we can,drive new business opportunities . VQA certainly does that . VQA assists us in selling our Echocancellation products . Echo cancellation assists us in selling VQA. And the rest of the world, whichif you go back to the year you're speaking of, the rest of the world, I didn't invest in internationalbusiness during that time and probably wish that I had, to be frank with you . But I've done so overthe last couple of years, and I'm really pleased with the results and I think that's the theme that wetried to present to you today in today's script, that where we invest, we see return . I think youshould also look at this, the sea change that will occur over the next several years as we move intovoice over packet and we have products that we're not talking about in detail . We're trying to giveyou as an investor enough information to have a sense that we are focused and to give you arational for why we're spending in the R&D area all that we're spending . But it's not yet time to talkabout that product, that product set or the market it addresses with any more specificity than wehave already. But trust me, we've been here for a long time, and being - learning animals that weare, we're focused on all the things we did right and we're also focused on the things we could havedone better.
<Q - Andy Schopick> : Great . Thanks .
<A - Timothy Montgome ry> : I hope that was a decent response .
<Q - Andy Schopick > : Yeah I think the best you can do at this time .
<A - Timothy Montgome ry> : Thanks, Andy .
Operator : OK thank you . Our next question is with Dave Kang with Roth Capital . Go ahead , please.
<Q - David Kang> : Yes. Jus` a cot .. mo e `c' ~ -ups . Rega : Jing ..c Asian ~ s . A-,; both
<A -- Timothy Montgomery >iid sad vVnat country tnev'v%ere tro '. . 'Dave . althcudn n a i ~ a ; a a i y vvu T h . . urs i i .
can tell you we do have customers beyond what we've spoken of today . We've received ordersfrom customers beyond what we've spoken of today . Our reasons or rationale for announcingvarious customer orders or wins or you know customers by name . There's just a lot of differentvariables in there . I'd say the majority of which have competitive issues associated with them .
Some of them have issues with our desire to make sure that the products are deployed . deoioye d
www .CaiiStreet . com * 212 ,931 .6515 1 3
Ex. B, pg. 13
a)
UNNOW
Ditech Communications DITCCompa» A Tickers
well . And we have real solid results from that deployment and agreement on all fronts that it's theright thing to talk about, not just from our perspective because we want to, but also from theperspective of the customer because they are delighted to . So there's a lot of issues there .Hopefully I answered your question somewhat .
<Q - David Kang> : Yes, somewhat . Just lastly, going back to those two large customers, I guesswe'll just call them customer A and customer B, if you look at their CapEx plans, looks like secondhalf will be flat versus first half, and yet you say the visibility for you guys is pretty good at least forthis current quarter . So could this sort of catch up with you guys maybe in the next two or three-quarters that was it. Thank you .
<A - Timothy Montgomery >: I'm not sure I understood the question, Dave .
<Q - David Kang> : Well, if you look at customer A and customer B's CapEx, since they are PublicCompanies ; you can sort of expect what they are going to spend in second half versus first half .And they are going to be flat -
<A - Timothy Montgomery>: Oh, I see your question .
<(Q - David Kang> : Seems like you're growing faster than their CapEx, so could this sort of catchup with you guys in the next two or three quarters? Maybe not this quarter -
<A - Timothy Montgomery>: We're pretty small potatoes compared to the overall capital budgetsthat these players have . And I think you can still grow your business even with them being flat . A lotof our growth, however, as we look at perhaps even going back to Andy's question, we're looking atmultiple points of light. We just closed the largest international order in the history of the companyfor a product that wasn't even shippable, you know, in terms of revenue, if you will, three-quartersago. So I'm real, real excited about what VQA represents . I'm real excited that there's nothing butupside for us internationally as we go from single digit international contribution on our revenues tosomething greater than that . I think in some of our individual meetings and I think even perhaps inconference calls people have asked me well what would I like international revenues to contributeover time and clearly I'd like international revenues, as long as everything else grows, I'd likeinternational revenues to be half of my business, because I think that's a healthy percentage for aU.S. company . So clearly I've got some great plans and great designs on diversifying revenues andmy growth doesn't need to come from specific customers who, as you say, may have flat CapExbudgets for the year .
<tQ - David Kang> : And lastly, sounds like if you look at the mix between wireline versus wireless,I would say the significant portion of that is wireless . So is there any activities from the wirelinecustomers at this point?
<A - Timothy Montgomery> : There is . It's not a great deal of activity, you know, from a revenueperspective I think we have activities going on within each of the customers where we talk aboutconsolidation and replacement of equipment , and various things . But clearly the majority ofre . en .jes is a function of the wireless build out . I think if you look at any of the key wireline players,
3D1'c' ^-ac - _ nec sir e o ee~ . 3t se, because that's
< Q - David Kany> -
<A>: Youre welcome .
Operator: Thank you. That concludes the Q&A portion of our call for today . Please go ahead withyour closing remarks.
www .CailStreet . com • 212 , 931 .6515 • ht ° 14
Q1 2005 Earnings Call Aug. 24, 2004Event Type A Date A
Ex. B, Pg. 14
Ditech Communications DITC Q1 2005 Earnings Call Aug . 24, 2004.~ CompanyA TickerA Event Type A Date A
Timothy Montgomery, President and CEO
Well I'd just like to thank everyone for their time today and Andy, for all the years, perhaps, that}..._3 you've been involved with the company . We're really excited about the results today . Hopefully you
are as well . We look forward to seeing any of you who wish to stop by and view what we have herein the building, meet some of the executives, and look at the operation that we have . Again, thank
NUNN= you very much and have a good day .
MatOperator : Thank you. And ladies and gentlemen, that does conclude our conference for today .Thank you for your participation and for using AT&T Executive Teleconference . You may nowdisconnect .
p A .
Ex. B, pg. 15
Ditech CommunicationsDITC
Companvi TickerA
Preliminary Q2 2005Results Nov. 3, 2004
Event TvDeA Date
MANAGEMENT DISCUSSION SECTIO N
Operator: Ladies and gentlemen, thank you very much for your patience in standing by andwelcome to the Ditech Communications Q2 preliminary results conference call . At this time, alllines are in a listen-only mode . Later, we will conduct a question-and-answer session . Instructionswill be given at that time .
If you should require assistance during today's conference call, please press "*" and then "0" . Anoperator will assist you offline . As a reminder, today's conference is being recorded . I would nowlike to turn the conference over to your opening speaker, Mr . Bill Tamblyn . Please go ahead .
William Tamblyn, Chief Financial Officer, Executive Vice Presiden t
Thank you . Good afternoon, everyone . This is Bill Tamblyn, Chief Financial Officer of DitechCommunications . Thank you for being patient with us to - on - to start the call and also thank youfor joining us with this conference call which will cover Ditech Communications' announcement ofpreliminary financial results for its fiscal 2005 second quarter for the period ended October 31st,2004 .
These results are based on preliminary data from the quarter, and Ditech will announce its finalizedresults on November 18th, at which time we'll hold our usual conference call .
Today, again based on preliminary financial data, we'll provide a summary outlook for the nextquarter . Tim Montgomery, Ditech's President and CEO, will provide the business and strategicanalysis . After Tim's comments, we'll open up the call for Q&A .
Before we begin , let me state that this conference call is being held on November 3rd, 2004 . Anysound recording or republishing of the contents of this conference call is expressly forbiddenwithout the wri tten approval of Ditech Communications .
Also, we must point out that with similar presentations, the following discussion contains forward-looking statements that involve risks and uncertainties . Our actual results may differ materiallyfrom those discussed here. We will attempt to identify such forward-looking statements withqualifying words such as "we intend, plan, believe, estimate, or predict" or "we may, could, or will"or other comparable language . Factors that could cause results to be different include factorsdiscussed today in this conference call and in our press releases today. As well as those detailedin a section entitled "Future Growth And Operating Results Subject To Risk" section of Ditech's 10-Q for the quarter ended July 31st, 2004 filed September 7th, 2004, with the Securities andExchange Commission .
Today's announcement was released over the wire this afternoon , and you may also read it onDitech's website by going to the investors section for the Ditech website at www .ditechcom.com.With that, I'd like to turn the call over to Tim to comment on the announcement.
Timothy Montgomery ?resident and CEO
Thanks Bill . Good afternoon everyone . As Bill indicated, were announcing resuits based uponpreliminary financial data from our second quarter of fiscal 2005, which ended October 31st. We'llshare with you the second quarter financials in detail during our November 1 8th conference call .Today, I will keep my comments brief, and then we'll move into Q&A .
Based on prelimina ry financial data, we expect revenue for the second quarter of fiscal 2004 to beapproximately $24 million . This is 67% higher than the same quarter last year, yet we did no tachieve our revenue goal this qua rter. Our pre-tax income from continuing operations, however, isexpected to be 28 or 29 cents per share for the second quarter .
Our overall execution was very good this quarter . Our level of profitability , gross margins , and cashgeneration were outstanding . Our major product platform, the broadband voice processor, or BVPFlex , continues to be in demand by our customers, and manufacturing and shipping of this producthas proceeded smoothly. As a result, we expect our gross margins to approach 80%, an doperating profits to be approximately 40% .
Our lean , yet scalable , operations model is running efficiently and we continue to generatesignificant levels of cash, adding $10 million in the quarter to our already strong reserves .
Clearly, we're disappointed with our top line performance this quarter . There are two primaryreasons for this shortfall . First, we experienced a delay in shipping a major voice quality assuranceor VQA order to an Asian customer. In August, we announced that we'd secured VQA orders inexcess of $5 million from customers in Asia . During the Q1 conference call, we indicated that wethought we would ship 2 to $3 million in VQA in the second quarter. Due to management changeswithin the largest of these firms, subsequent to our booking the order, the delivery schedulechanged. The customer has now reconfirmed the new shipping schedule and we're taking steps toensure smooth delivery of these orders in the second half of this fiscal year . The second reason forlower revenue numbers is an apparent softening of demand in the North American wirelessmarketplace, as evidenced by a decline in shipments in the quarter .
Moving forward, as Bill and I have noted earlier, we will be holding our usual conference call onNovember 18th . At that time, we'll give you all the detailed financial data for the second quarter .Today, let me just briefly comment on the outlook on our markets, those that we serve .
We continue to have confidence in our VQA initiative, and that confidence is that it will paysignificant dividends . At the same time, we're aware we're competing in a new market against verypowerful competitors . We maintain a high level of trial activity, and overall we continue to pursueopportunities on all continents, including North America . Within the echo cancellation market, wemaintain our competitive lead in technology, product platforms, and focus . From a companyperspective, North American echo sales continue to provide us a stable revenue base . Our majorcustomers continue to expand their wireless networks, and we believe we have the right focus andstrategy to broaden their customer - this customer base and win more than our share of theseopportunities .
Guidance - let me comment on our outlook on the market and our expectations for the thirdquarter . In providing our guidance each quarter, we factor in several elements including backlog,deferred revenue, sales forecasts, and of course macro trend data affecting our business . Movinginto Q3, our backlog and deferred revenue levels are lower than they were in the previous twoquarters . In addition, our outlook is obviously tempered by a difficult Q2 . Therefore, given all thesefacto's, wee=oect our tn'%; qua-ter revenues to h,e at t ;e sa'ra level as the sec o"d quarter .
oo peTutor ,ti it s o e's no a :ore:ate toe of our -rocuC'.S a", : ou 7eveio e :
teams to grow our international business and exu~nd ocr domestic customer base . Finally, we'~ ~ibuilt a lean operations and manufacturing model that has helped us deliver the kinds of grossmargins that you've seen from us and five straight quarters of profitability .
';'Vith that I'd like to open up to Q&A please .
St :eet .cum - _1 2 .931 .6515 2
Ex. C, Pg. 2
a)
gym.
%ad
mss : __,
.{T
Ditech Communications
QUESTION AND ANSWER SECTION
Preliminary Q2 200 5DITC Results Nov. 3, 2004
TickerA Event TypeA DateA
Operator : And very well . [Operator instructions] . We'll go first to the line of Frank Marsala withFirst Albany. Please go ahead .
<Q - Frank Marsala >: Hey, guys . Just want to follow up on - on the - you know, what impactedthe quarter, and just get a little more color here . When you said that the VQA delay - does thatmean there's no VQA shipments in the quarter or there isn't going to be any revenue because itwas all coming from that - you know, from those couple of customers that you mentioned? So didthe entire thing drop out and get pushed to future quarters ?
<A - Timothy Montgome ry>: Well, VQA is - is flat quarter-over-quarter at about a half a milliondollars, Frank.
<Q - Frank Marsala>: Uh huh .
<A - Timothy Montgome ry>: But the Asian order we've referenced, you know, a portion of thatshipped but it's not recognized . And that's - that probably sums up the VQA for the current periodfor you .
<Q - Frank Marsala>: Uh huh. And then so in the North America market, where you're saying asoftening of demand, obviously then you're - you're - you know, you're not too far down . I mean,you're down a little bit sequentially . And then you're sort of flattening out for the next quarter .Should - is that because the core business remains good and there's not a lot of VQA in there, orshould we be thinking VQA in this range again for the next quarter? I'm just trying to get a sense ofwhat we're looking at when we look forward one quarter ?
<A - Timothy Montgomery> : Well, I think that's a good question . Obviously, you know, we'reearly into the process of forecasting here for the current quarter. We've got a couple of weeks herebefore our normal conference call, so we're giving you the best visibility we - we can . We believethat the sequential growth in the current quarter for echo - I think we declined about 5% . I thinkwe're assuming something similar to that, maybe a - somewhere around that range in the thirdquarter. Not trying to be too granular here, but the - the issue of VQA is not a matter of losingtransactions . It's a matter of delays . Delays associated with the magnitude of the opportunities andthe - shall we say the - the magnitude of the competitive landscape . So we're - we continue to bereally optimistic about VQA, but the time it's taking to close these transactions and move to realrevenue is taking longer, If you - if you look at the activity level and the success on a day-to-daybasis in the trial activity, it - it - it compares beautifully with what you're seeing in terms ofrevenues . There's quite a difference between the two .
<0 - Frank Marsala>: And closing these deals, Tim, you're thinking - are you thinking competitorsare having a big impact on that? Like the - the large incumbent equipment guys? Is that whatwe're talking about when we say "competitors" ?
<A -Timothy Montgome ry>: Yea": . I _r -.really think tha`-cu :-a fitly, I dor . -en~ , t t" ' s
arge s'mtCr man : .u :acc. re` 0ecau,se .'e :e _ ce ages, cu - C . 2XDO^Se Imes '-a!. L
ace , s s ,o ouic move faster limn I t s moving . oo io I k e to s gest that G no,Vi ve continue Fo Dv~Yc
that this - this segment of our business , VQA, can represent as much as 20%,Q of our go forwardrevenues and we think we'll achieve that run rate in the fourth quarter .
<{ - Frank Marsala>: Okay. Thanks very much, guys .
ww :v .^_A- .1Street .co m a 212.931 .6 515 _ 31 11
Ex. C, Pg. 3
<Q - Marcus Kupferschmidt>: Uh huh .
<A - Timothy Montgome ry>: We don't really talk about backlog and bookings . Mostly because of
competitive issues , Marcus, to be candid with you .
<( - Marcus Kupferschmidt>: Oh, sure. No, I . . .
A - ' ;rnoth v. Montgomery> P e a line of questioning tl - it to go through, I'll b e
<Q - Marcus Kupferschmidt >
Ditech CommunicationsA
<A - Timothy Montgomery>: Thanks, Frank.
Preliminary Q2 200 5DITC Results Nov. 3; 2004
Ticker♦ Event Type A Date A
Operator : Thank you . Next, representing Lehman Brothers, a question from the line of MarcKupferschmidt . Please go ahead .
<Q - Marcus Kupferschmidt>: Hi . Thanks, guys . A couple of questions, I guess . First thing,could you talk about the linearity of the quarter, especially on the echo canceller business? Andthen I have a couple of follow-ups after that .
<A - Timothy Montgome ry>: Yeah . I think DSOs would probably be the best indicator of that,Marcus, and DSOs are going to be around 30 days, so quite linear.
<(Q - Marcus Kupferschmidt > : And that was across - this was actually within the two keycustomers, would have been the biggest piece of the business ?
<A - Timothy Montgome ry>: Well, it would have to be, given the - the 30 days DSO .
<Q - Marcus Kupferschmidt>: Sure. I guess one of the things I want to - did you see anyfluctuation, anything surprising within the contribution from those two key customers that have beena very big piece of the revenues in the last couple quarters ?
<A - Timothy Montgomery> : No, I think if you - if you take our comments about a bit of asoftening in North American wireless, you know, business for us, you'd have to figure that those twokey customers were a significant piece of that . I think there was a - a - a plan in place thatsuggested we would do greater revenues with one or the other of them in the period, which, if yousat in my chair, you'd say that would offset any issue associated with, say, this VQA transactionthat - that was delayed . This was a quarter where not only was the VQA transaction delayed, but Ididn't have the opportunity to - to enjoy an additional 3 or $4 million from those players .
<Q - Marcus Kupferschmidt>: Sure . And then another question in terms of just kind of the - the- describing the quarter, could you talk about the - were there any new bookings for new orders forthe VQA product at all ?
<A - Timothy Montgomery>: Well, as we talked about in the announcement in August, the twoAsian orders represented over $5 million . I don't think today is the right time to get, you know,further into that because we don't really talk about bookings . We probably did so in Augustbecause we felt it was really important and it was quite substantial in terms of the signal that it sent .
iim Nr ovIng JI.tH sales n uugil , . ., ytti y . . .C .li - _. y ., . ._ .uca . . .. -
talked about in the fourth quarter maybe 20°io of total re . e--J s could be \ and I'm wondering,you know, do you think those revenues would come from some of the orders you have in already,or are you also assuming you get some additional orders beyond, you know, the two big 5 million
and some other - you know , those customers you've already talked about ?
www>Caiistreet coy„ * 212 . 931 .6515 4
Ex. C, Pg. 4
C)
Ann&
i
Ditech CommunicationsA
Preliminary Q2 2005DITC Results Nov.3.2004
Ticker♦ Event TypeA Date A
<A - Timothy Montgome ry>: Oh, okay. I understand. Yes . First of all, I absolutely expectadditional opportunities to unfold in that six month period beyond those that we currently have,,either on backlog or - or in deferred . I think it will be robust for us in the second half . But if youlook at absolute revenue dollars and you look at the order that we've already spoken of, being inexcess of $5 million, none of which was, you know, recognized as revenue in the second quarter,you enter the second half of the year ostensibly with at least a $5 million order that you know about .And we've indicated in the script here that we have plans in place to - to ship, you know, all, if notthe majority of that, in the second half of this fiscal year .
<Q - Marcus Kupferschmidt >: Okay. Great and if I could just ask one other quick thing . If youguys could just give us a little color for the strong gross margin performance in the quarter and kindof what you think really drove that .
<A - Timothy Montgomery> : Sure . It's - on the one level, it's pretty obvious . Our - our - ournew product, the - the BVP Flex, has dramatic gross margins because we've - we've developedthe product, we've designed it to lower cost and I think we've - we've done a real good job there .Also, the mix of revenues between domestic and international . You can look here and see veryclearly that approximately 3 to $4 million of international revenue that we anticipated would ship inthe current period did not . We've also indicated historically that international business is at a lowergross margin and would slight dilute those gross margins . Absent that revenue, the dilution didn'toccur, and, hence, you have some pretty dramatic gross margin improvement .
<Q - Marcus Kupferschmidt>: Great. Thanks very much .
<A - Timothy Montgomery>: Sure .
<A>: Uh huh.
Operator: And thank you . Our next question comes from the line of Wes Cummins with B . Riley &Co. Please go ahead .
<Q - Wes Cummins >: Hi, Tim . One question I have really on the - the domestic guys, do youguys - the insight you get into that, do you think that they are returning more to a normal level ofspending, both - both of the key customers there, from, you know, an above average spend overthe last couple of quarters or last year that really drove a lot of revenue growth? And the nsecondly, can you talk about additional opportunities domestically? I know you've - you'veprobably done some business with Cingular in the past and with the combination there, if there'sany potential there with any other wireless customers domestically?
<A - Timothy Montgomery> : Good questions , both of them . In terms of - of the existingcustomers' normalcy versus not, you know , I have my own somewhat personal opinion of that . I -have to really look at the facts , however, and the facts are that they are espousing , and a lot ofinformation on the Net suggests, that their actual capital expenditures will be up marginally in thesecond half of their year versus the first half, and, you know , I could perhaps be the recipient ofsome of that . But based on the visibility that we have today, we're seeing a fairly normal run rate as
CseC Ic `.`le it 7 'ate "'at we sash S': -^ a" +',a- c evidence D , ; I- a` S ocest'rT
ar "s G` acaitio a~ ppo Jn'.Ities Na ,e Co:'e k a eat :y`Coc CL o' any '.ne
__cun s beyona the :'o or three majors ,nat r. . . :ocai ;y Done business ^~ar, C ie
everyone ' s talking about how nice it is that the - -',-.'&T, Cingular merger is completed . I'm surefor people who had revenue streams associated with those accounts , that's probably very goodnews for them . For us , we find it to be a very clear opportunity to deal with the one customer thatwe have, in fact, installed equipment with historically to the tune of 3 to $5 million worth , and that'sCingular , and - and we have account management and systems engineering talent applied to that
account . The other thing I would suggest to you that I think is probably key is that we've spent agreat deal of time, energy, and money pursuing the GSM marketplace internationally. And ourVQA initiative, both for quality as well as capacity, is very key to the GSM marketplace . And as youknow, the combined company, AT&T Wireless and Cingular has a GSM component that I think willbe very interesting for us.
<Q - Wes Cummins>: Okay . All right . Great. And then as far as the VQA, the new shipmentschedule, do you expect it to be similar to the last one, only pushed out one quarter? I guess bythat, do you mean - I mean do you expect a reasonable amount of VQA to ship during the thirdquarter?
<A - Timothy Montgomery> : Yeah . I'm - I'm being real conservative here, Wes . You know,we're still somewhat gun-shy here, kind of beat up this quarter . This is the first time in a long timewe've felt this way, so I'm - I would suggest that, you know, it's not going to be terribly robust in thethird quarter . If it were, I probably wouldn't be guiding to - to flat revenues .
<Q - Wes Cummins>: Okay.
<A - Timothy Montgome ry>: But I - you know, I do believe that the - the funnel is quite full and -in terms of opportunity, and that the products themselves, the VQA suite, has matured incrediblyover the last six months and portends to do well for us .
<Q - Wes Cummins >: Okay. Last couple of questions here . Anything on the - the packet productthat you guys can speak of, as far as, you know, trialing or interest in that product following theshow that you demonstrated it at recently ?
<A - Timothy Montgome ry>: Well, this is probably a good time to clarify . What we were - whatwe were demonstrating at the show was - was VQA, and VQA running on our existing platforms,and running on our existing platforms with - with an interface to both packet and circuit networks .So we were demonstrating that we can clean up certain packet calls as they enter the circuitnetwork . We weren't pre-announcing the product because frankly we would probably do that in thisforum in some fashion before we would necessarily do it in a - in a commercial forum . I think it'simportant that the investor gets a heads up on that.
To be candid, I'd love to talk to you about it because I'm really excited about it, but I think it'spremature. I will tell you that the interest that we've had from - from more than one account in whatwe've presented to them suggests that we're doing the right things and we're arguably doing themin pretty much the right timeframe . I tend to be a pretty impatient guy, so I'd like to have it today,and instead of as we've told you, you know, next year, but I - I've had good validation that we'rebuilding the right products and doing the right thing, so with that, I probably should defer .
<Q - Wes Cummins> : Okay. Last question is : What percent of your echo canceller revenue wasthe BVP Flex platform this quarter?
<A-Timothy Montgomery>: Oh, probes` L
<Q-'VVes Cumm ns> v
<A- Timothy Montgomery >
Operator : Thank you . Our next question comes from the line of Dave Kang representing RothCapital . Please go ahead .
<Q - Dave Kang > : Thank you . Good afternoon . First , a couple of quick questions aboutinternational revenues . How much was that? And customer concentration, was it similar to theprevious qua rter?
{ <A - Timothy Montgomery> : Yeah, international revenues obviously were quite down relative toour expectation , Dave . They were probably 5% of our total revenues. And customer concentration
WAIN" ve ry much the same as it has been . Clearly we were hoping to, you know , dilute that a bit with theshipment of 3 to $4 million of VQA internationally . But that, as we've told you, didn't occur .
<Q - Dave Kang > : So as far as revenue shortfall is concerned, is it just more those two topcustomers slowing down at the same time, or is it just one customer slowing down even more thanthe other fellow ?
<A - Timothy Montgomery > : Well, to be candid with you, Dave , if you - if you take our guidancepreviously and you do the - kind of the simple math , the VQA opportunity in Asia alone would haveus not having this call today . We would be having a call on the 18th . And we would have met or -or exceeded the guidance that we provided . So I can easily a ttribute, you know , the current qua rterand the visibility that we had and what we presented clearly to that oppo rtunity. Normally, I wouldhave additional revenues that I could draw upon and - and make up for things like that in a currentperiod , and unfo rtunately I was unable to do that in this period .
<Q - Dave Kang> : Okay. Just going forward, what about the wireline customers? Anyopportunities there? Seems like we're all focused on the wireless vendors , but - or wirelessoperators , but what about wireline customers ? Any opportunities there ? Especially on cableMSOs , as they sta rt to provide voice services ? And lastly, can you give us an update on VQA trialsby CDMA operators , especially in domestic , guys? Thanks .
<A - Timothy Montgome ry> : Sure . In terms of wireline , I don't want to get too specific herebecause of competitive issues , but it' s a very small piece of what - of what's being spent out there,and therefore a fairly small piece of what we're focused on . Clearly we're focused on some folksthat we 've done business with historically , and making sure that we stay visible, and if there areways we can improve their central office designs with - with the flexibility of the BVP Flex, we'relooking at that . A number of things we ' re - we ' re - we ' re doing, but, you know, it's really the barndoor versus the barn, and as a small company , we should really focus on the barn .
In terms of VQA trials , I think they are more robust now than they've ever been . I'm happy to saythat I don't have a loss repo rt associated with VQA . I have a - a delay repo rt or a report thatsuggests there are other things that we need to do to win the business . It's been ve ry gratifyingfrom that standpoint, in that these aren 't win/losses . These are , okay, come back , we'll trial it againin three months when we have either more time, energy , or resources to apply to it, et cetera, e t
_-: cetera. And - and the majority of these clearly are GSM or GSM related - either capacity orquality. CDMA, I think it's probably appropriate to talk technically about CDMA on the 18th, and Iwill either t ry to do that myself or I'll have my - my marketing vice president or engineering vicepresident spend a few minutes in this forum on that subject . I do believe there 's an oppo rt unity forus there, and I think it may be appropriate to sta rt talking about that .
<Q - Dave Kang .>
<A - Timothy Montgomery> : - a ,~ . . .
Operator : And thank you . Next, represent nw ','organ Stanley, we have a question from the line ofGa ry Jacoby. Please go ahead .
<Q - Ga ry Jacoby>: Thank you . Good afternoon . On the weakness in ',vireless, I'm kind of a littleconfused given the strong growth in subscribers and traffic that all of the North American ,vireless
7
Ex. C, Pg. 7
Ditech CommunicationsA
DITCTicked
Preliminary Q2 2005Results
Event TvoeANov. 3, 2004
Date A
carriers have spoken of in their conference calls the last two weeks . Are you losing market shareor what is your sense as to why you're seeing a slowdown in demand ?
<A - Timothy Montgomery> : Good question . Well, first of all, we articulated as a weakness inwireless as evidenced by our shipments . We're not necessarily casting aspersions at the wirelessmarket . I must admit, however, that three months ago, we were asked by the - many of the variousconstituencies on the phone here if we'd experienced any of that because I think they wereexperiencing it or had been told that others were experiencing it at the time . Clearly we weren't atthe time . So I don't know if this is a - you know, for want of a two or three month period, just atiming issue, or the like, but just to make sure it's real clear that we're characterizing it as aweakness as evidenced by our own revenues, not necessarily their business .
I'm actually heartened, on a go-forward basis, by the success of their business and a number of thethings that are happening there, but if you get beat up as we did in this current quarter, it's verydifficult to - to turn around and be real bullish on a subsequent period . In terms of losing marketshare, I don't believe we have at all . Have we failed to - to gain market share in some new areas?Yeah . I think it's been delayed here in VQA, and I - I - I don't think that, you know, we haverevenues to talk about from five or six of the other major players in the world in which we havesales initiatives . But I don't believe we've lost market share at all within the - the areas that weaddress, to be frank .
<Q - Gary Jacoby> : Well, if you haven't lost market share, and given that most of the carriers aregoing to be ramping up CapEx approaching the end of the year, why are you then still very cautiouson your outlook for the next quarter ?
<A - Timothy Montgomery>: That's a good question. I - I think, you know, first of all, it's, youknow, the difficulties of Q2 certainly temper our comments . The other is that, you know, when -when things materialize, then you can - can, you know, be robust and - and positive about them . Ifthey haven't yet materialized and they're in the form of a forecast, a forecast that didn't materializein a - in the current period, you have to be somewhat conservative .
<Q - Gary Jacoby> : Okay . And then last question kind of along the same vein, mostmanufacturers ask the carriers to give them rolling forecasts . You know, 30, 60, 90 days. Andmake some commitments and then depending on the commitments, they'll offer some pricingdiscounts or pricing alternatives . (a), do you guys get rolling forecasts, and, (b), do you offer anytype of pricing for companies that give you commitments?
<A - Timothy Montgomery> : We're getting into a couple of areas where I start becoming a littlesensitive to the competitors that are on the line, of which I have two, based on the sheet that I justsaw. Some customers will certainly give you a - a forecast . It is not a prescribed rolling forecastwith the level of product that the Ditech echo canceller represents . It may, in fact, be at the switchlevel, where the lead times are significant and the ASPs quite high . You get visibility but you don'tget what I would call a rolling forecast.
I 7 terms of pricing and : F* . ' concessions , we think :re gave absolutely the :pest product at ini
],I's give S One ~l ecK . n aa`✓ an age there 4a a',n ❑ .vhe`! c_ K^Ow here o oe
3S n 3f K e
~o ;L Sat i Nouidn't art tciIsc,ose ~i ; FIc .n:g pr _ nr N .
competitors that are on the l e .
<Q - Gary Jacoby>: Okay . Thank you .
Operator : And thank you . Next question comes from the line of David Smith with Smith C,- :,,ital .
v., w`N . C ai .J ., .,,, . .cu :F I • 2 12 .9331 .65'5 • 8
Ex. C, Pg . 8
a)
C)
ulbosomWUNNOW
-mo w
Alm
Ditech Communications I Prelimina ry Q2 200 5DITC Results Nov. 3, 2004
Comoanvl TickerA Event Types Date A
<Q - David Smith >: Hi, guys .
<A - Timothy Montgomery>: Hi, David .
<Q - David Smith> : Hi . I have a few questions . The first one is : can you talk about what the bookto bill was for the quarter for the entire business? And then I dialed in late . It sounds like the VQAis flattish sequentially . I just wanted to confirm that . And then the second part of it is, I'm still a bitconfused on the North American slowdown . I understand that the operators' business is strong,and you talked about that in terms of subscriber metrics, but in terms of their CapEx, you know,was there some front end loaded spending in the first half of '04, or are there upgrades at certain ofyour customers that are slowing down? What's driving the dynamics of the CapEx there is myquestion . And then the third of part of it is - and this is probably reflecting my newness to the story,but - I understand there's been sort of an academic debate over the last few years regardingimbedded versus external echo cancellers . And maybe this is something we need to take off line,but could you just talk through that? You know, how your thinking has changed versus 12 monthsago and, you know, how the VQA plays into that? I appreciate the time . Thanks .
<A - Timothy Montgomery>: Sure, David . I - I hope I can get all that out for you . In terms ofbook to bill, we do not provide backlog information . We have not in the time that Bill and I havebeen with the company, which is seven years, and I guess we've been public for almost six . So Iwon't comment there . Clearly, VQA was flat at about a half a million dollars quarter-to-quarter .
In terms of the North America slowdown, you know, I just - I just provided some information that webelieve that that is a reflection in our own business. We're not trying to cast aspersions at ourprincipal players or principal customers or at the market, but it was a comment that was made to usabout three months ago, which was not relevant at the time, and became relevant during thequarter, and as a result, you know, I - I need to make - I need to make mention of that in this - inthis call . I don't believe that it's a function of losing share within those accounts . I can't commentabout the timing of - of the orders or the timing of the orders associated with our principalcompetitors because I'm under non-disclosure with them .
In terms of their strong CapEx, I'm heartened by that . And you should note that our third quartercovers the last two months of this fiscal year, or calendar year, which is also the fiscal year for mostof our key players, and contains a month of a new fiscal year and a - obviously a new budget year.And so there - there can be some - some pleasant surprises in there . I, however, you know, haveto temper all of my comments with the facts as I see them and the results as we're presenting them,and it's difficult for me to be anything other than reasonably modest in this approach .
In terms of the academic debate on internal versus external , it's far from academic here . Webelieve that we have created the - the world ' s finest voice processing platform . That sounds like a
platitude , but let me assure you that if you simply look at the MIPs , the flexibility, and the inte rfaces,
and the amount of heat, power , and air conditioning required to cool that box and the amount ofreal estate that it takes in the computer room, it is an extraordina ry box. We've told you previously
that it re p laces the need certain DAX equ' :3r-ent at certain times . One of our customers did that
ualnv assu anCe .tr r i sqmfjcan' D eves - i _ e C snlc- S pie otne
:ne a: acir a fi e a5 CV€ ~'
single piatfnrr- as . . . . s svutcr Manutactarer, not another enno ca` _ompan ;one .
Arid we believe that eventually with the efforts that we've put in and the investments that we'vemade, that this will become obvious . And it will become obvious to enough players where then thereference selling model will become very powerful and as a result . people will say . 'Well, it doesn't
9
Ex. C,Pg.9
U)
C)
Man=
j
Ditech Communications[ITC
TickerA
Preliminary Q2 2005Results
Event Noe ANov. 3, 2004
Date
really matter whether this is internal to my switch or external to my switch . What really matters arethe results to the listeners in my network ." And that is - that is what we've spent millions of dollars- perhaps even tens of millions of dollars - in developing, marketing, and are in the process of - ofcontinuing to do - to do both .
<Q - David Smith>: Okay . Thanks. I appreciate the time .
<A - Timothy Montgomery>: Sure .
Operator : And thank you . Our final question then today comes from the line of Ash Shah withMerrill Lynch . Please go ahead .
<Q - Ash Shah> : Hey, Tim it's Ash, how are you?
<A - Timothy Montgome ry>: Good, Ash .
<Q - Ash Shah>: On the - I just want to follow-up a little bit more on the CapEx with the carriers . Imean it looks like the cell site deployments are going well and I'm just curious about inventory ofyour product at the carriers, if you think they forward bought product from you guys and now areinstalling it, and if you - if you believe there's inventory, how long do you think it takes to absorbthat?
<A - Timothy Montgomery>: Well, I can't even comment on that . I don't know necessarily if thereis inventory . I don't think they - that it's prudent for them to manage their business that way . I thinkthere was a time years ago when people were deploying infrastructure at such a rate that they wereconcerned about being able to get enough of the components and I think there were times that theywould - they would inventory . But that's been four years ago , back during the bubble . I don't knowthat it's even a relevant issue today, to be candid . And we don't have, you know, stockin gdistributors in North America of any sort that would be carrying product and therefore that's - that'spretty much a non-issue, Ash .
<Q - Ash Shah>: I mean, if you're not losing market share and the carriers that you sell to arebuilding out their cell sites and, you know, CapEx is pretty strong, it's hard to imagine why yourrevenues would be down, unless there's some inventory or something extraneous going on wedon't see, so I'm just trying to figure out what that might be if you have any color to give us ?
<A - Timothy Montgome ry>: You know, I really don't . I don't know, Bill, if you want to offer acomment .
<A - Bill Tamblyn> : No. At this point, it's - it is - part of it is we look at the major customers we'redealing with, and we're trying to expand into some other customers we haven't dealt with for awhile, so it's - it's - the market share we have in the accounts that we have is solid, but we'recontinuing to address opportunities to expand into the accounts we haven't, but . . .
<A - Timothy Montgomery>: You knc,r, hinds '_; 'It is 20/20, Ash . ',^!e ma ; look bacand see that,
sib :na'. .vouic sugges ,na''s ~ u ; ^, g
<Q - A h Shah> : Ckcay . Ti,>aok yuu, guys . Apprecia'e it .
<A - Timothy Montgome ry>: Yeah . Thanks for - for your questions .
2 9 3 1 . 6 5 15 €0
Ex. C, Pg . 10
a
Ditech Communications I I Preliminary Q2 2005DITC Results Nov. 3, 2004
Companvl Ticker) Event TvpeA Date A
Timothy Montgomery, President and CE O
That was the last question, ladies and gentlemen . This has been a difficult quarter . I would like tothank you for your - for your attention here. I'd also like to draw your attention to the other metricsthat we spoke about in the business, and the one - many of which we're proud of. Thank you,again, for taking the time today and as always, we're open to - to some discussion here in thebuilding or visits or the like, and we're happy to entertain you to - to do that . We will be at aconference, AeA conference, on Monday and Tuesday of next week in Monterey, and we are at aB . Riley conference tomorrow in San Francisco, on Thursday as well . Thank you .
Operator : And ladies and gentlemen, that does conclude your conference call for today . We thankyou for your participation and for using AT&T executive teleconference . You may now disconnect .
DisctainterThe information herein is based on s ,. tes web -- --. ve to be reliable but is not 1_ aran . ad :. . is and does not purport to be a com or error -free ement or s-- emery ni isava iH., , , o,,.,_ : ro-h ,we _. -9 f cornptwwwse w-- t.a gyn. I ;ity, or fi+vte , ors ~.,j .'. ~s
E1 11 ,EME^. T - T ',4lv. . J, .~ ERTE , r ER!s TTE- BY A' PL :, ABLE JEIT _B ..A--S S C C -RS. k1~P^cscRS -TCR- P - FI EFr -A~FLATES , EUSiNESS ASSDC B ES I E N SCRS OR SPP_ LRS ',ILL BE LIABLE FOR ANA IN~IR _CT iti„IDEN'r.L S~ _CINL JiN.SEQ-ENTIAL -R P~ ^: .T!>E
D:,MAGES , 14CLOCING IvIT HJ-T L,1ITA-ION DA.AAGES FOR LOST PRONTS OR RL , ENLES . ;GCD .', ILL ',ORK STC I PAG,E SECCRITY BRE :C^ _ .. _C061PJTER FAILB CzR MAL~J N JTI ON „S" DAT., Crt CTF*E R NT,- IBLE LOSSES OR CC M , 1 :RC IAL DA"rACBS E El. ;~ SSC, : B 4 I I
E PGSSI BILITY C , SJCB L~aSES : , R - , % - - = - R T:R IV J_ . .O JT , C :'v .III PRG.I D cRStN - - ^,Y ,. _ S_Ej .,
r" :,her
1 1
Ex. C, Pg. 11
Ditech Communications DITCCompanvA I TickerA
- MANAGEMENT DISCUSSION SECTION
Q2 2005 Earnings CallEvent Tvoe
Nov. 18, 2004Date A
Operator : Ladies and gentlemen, thank you for standing by. Welcome to the Q2 Fiscal Year 2005Earnings Release for Ditech Communications Corporation . [Operator Instructions] . As a reminderthis conference is being recorded . I would now like to turn the conference over to Mr . Bill Tamblyn,Chief Financial Officer for Ditech Communications . Please go ahead, sir .
William Tamblyn , Chief Financial Officer, Executive Vice Presiden t
may different materially from those discussed here . We will attempt to identify suchresults may different materially from those discussed here. We will attempt to identify suchforward -looking statements with qualifying words such as : we intend, plan, believe , estimate orpredict or we may , could or will or other comparable language. Factors that could cause results tobe different include factors discussed today in this conference call and in our press release todayas well as those detailed in the section entitled , future growth and operating results subject to risksection of Ditech 's Form 10-Q for the quarter ended July 31, 2004 filed September 7, 2004 with theSecurities and Exchange Commission .
Today's announcement was released over the wire this afternoon . And you may also read it onDitech's well by going to the investor section of the Ditech website at www .ditechcom .com .With that, I would like to turn the call over to Tim to comment on the announcement and ourstrategy moving forward .
Tim Montgomery , President and Chief Executive Office r
Thanks, Bill. Good afternoon , everyone . Thank you for joining us today as we report Ditech's fiscal5 sec- ~ quar ! re: . . i; - to sha-3 . th you our view of the coming quarter, our outlook fo r
Thank you . Good afternoon everyone . This is Bill Tamblyn, Chief Financial Officer of Ditechit . Communications . Thank you for joining us for this conference call which will cover Ditec h
Communications' announcement of results for its fiscal 2005, second quarter ended October 31,4 - 2004. Let me note that we held a conference call on November 3 to discuss our second quarter
results based upon preliminary financial data .
Today's conference call will cover our complete financial data for the quarter. We will also provideoutlook for Q3. Tim Montgomery, Ditech's President and CEO, will provide the business andstrategic analysis and I will provide a more detailed analysis of the financials . Following thosecomments, we will open up the call for Q&A.
Before we begin, let me state that this conference call is being held on November 18, 2004 . Anysound recording or republishing of the content of this conference call is expressly forbidden withoutthe written approval of Ditech Communications . Also, we must point out that as with similarpresentations, the following discussion contains forward-looking statements and, in particular, ourprojections of our third quarter financial results that involve risks and uncertainties . Our actua l
et ds. qua ~~!or ,r asp ~ ~~ _ - . -
-achieving operating prof ~, 4u . . . e continue ;o manage expenses, ie erage our contractmanufacturing model and take full advantage of economies of purchasing and operations, resultingin this high level of profitability . Gross margins increased from 75% to 78'i,o in the quarter . We
3 t believe gross margins of over 75% are sustainable over the next few quarters . I say this even asY > i
www . ali3treet . oorn = 212 .931 .6 ., .5
Ex. D, Pg . 1
atelama#viaqftj
}
AN=
Ditech Communications I DITCCompanvA TickerA
Q2 2005 Earnings Cal lEvent Type
Nov. 18, 200 4Date A,
we expect to generate a greater proportion of international business where our indirect modelpressures gross margins somewhat .
We continued to enjoy superior quality of the revenues as evidenced by DSOs at 28 days . Weadded $11 million in cash to an already strong Balance Sheet resulting in a quarter ending balanceof $157 million in cash and investments and zero debt .
Although we delivered a number of outstanding metrics in the second quarter, we did not achieveour revenue goal . As we stated in our November 3 conference call, the revenue shortfall was theresult of two factors . First, we experienced a delay in shipping a major Voice Quality Assuranceorder in the quarter to an Asian customer. The order, however, remains valid and we are takingsteps to facilitate the smooth delivery of this order in the second half of the fiscal year . The secondreason for lower revenue numbers was an apparent softening of demand by our major NorthAmerican customers as evidenced by our decline in shipments in the quarter .
Having said this, we believe our core North American business is solid and holds potential forgrowth . We expect to benefit over time from our continual expansion of sales talent and customerspecific marketing programs . The long-term expansion of North American wireless infrastructurefavors our business and we have introduced new products and new resources intent uponexpanding this domestic customer base .
Now let me comment on our expectations for the third quarter . In providing our guidance eachquarter, we factor in several elements including: backlog, deferred revenue, sales forecasts and, ofcourse, trends within our previous two quarters . Additionally, a number of factors have come intoplay which suggests some seasonality this year . We expect to experience an impact in order flowas our customers minimize deployment during the end of their holiday season . Having said this, weremain confident about the robustness of our pipeline in the second half of our fiscal year. Thecritical issue is the timing of customer orders whether they will fall in Q3 or our Q4. Based uponthese factors, including the timing issues discussed, we expect our third quarter revenues to be 20to $21 million . The Company expects, however, fourth quarter revenues to approximate thoseachieved in the second quarter .
Now let's move into a more detailed discussion of our business ; data voice processing. Our coreNorth American echo cancellation business was strong this quarter accounting for nearly all of ourCompany revenues. The overwhelming proportion of this revenue came from orders of ou rBroadband Voice Processor . Our customers continue to see the benefits of superior voice quality,lower capital expenditures and greater network flexibility . This platform actually represented 90%of our echo cancellation business in the quarter and supported our improved gross margins . Webelieve that the BVP Flex platform will be the foundation of our market share momentum in thecoming 12 months as our customers continue their network build outs .
We have for sometime engaged in an aggressive marketing and sales program targeted at theother major No rth American carriers who are not yet Ditech customers . We have addedexperienced sales people familiar with these targeted accounts . And we have several testing andtrialing initiatives well underway . Customers are evaluating our powerful broadband echocanceifat o),, ola'form ~s' ll a-':'rice G_;a',tj Ass . .r rice, _~r VQA solu?. -)n . fcr -,e e char e ,-n t
a er , . ov ces -T be :an te!~, OA a : . ._ ,7 sca~a -i e
`,' . :' in the echo cancellation market , we maintain our competitive lead in technology, productplatforms and focus . From a Company perspective , North American echo sales continue to provideus a revenue base on which to grow . Our major customers continue to expand their wireles s
CaHS :reet . ,,,, 212 .931 .6515 2
Ex. D, Pg . 2
a)
f)loan"AMINO
Ditech Communications I DIT OComDanvA TickerA
Q2 2005 Earnings Call Nov . 18, 2004Event Type A Date
networks and we believe we have the right focus and strategy to broaden this customer base andcontinue to win more than our share of these opportunities .
Now, I will take a few moments to discuss the international market and our VQA, or Voice QualityAssurance, initiatives . Our international efforts continue to be primarily focused on supporting ourVoice Quality Assurance business initiatives and trials . We have completely - excuse we havecompleted approximately half of the VQA trials we have initiated and we have announced fourcustomers . We have opportunities now in the hands of our customers' Boards or CapitalCommittees, to make final judgment and to enable or not 2005 budgets to support our rollouts .Looking out, we have launched many new VQA trials that we expect to complete this fiscal year .
As we have discussed, VQA is an initiative in a new market for Ditech . VQA delivers two networkwide benefits ; enhanced voice quality and better spectrum utilization . In terms of voice quality,VQA automatically detects and then eliminates degradations in the voice network such asbackground noise or high or low voice levels and thereby delivers superior voice quality andintelligibility . VQA's voice .enhancement capability is the basis of Ditech's ability to deliver betterradio spectrum utilization .
Within GSM [global system for mobile communications] networks, carriers can save CapEx bydeploying the Half Rate compression standard, a capability which most already possess . Half Rateprovides an economical means of network build-out and expansion, but its use is often limitedbecause Half Rate is associated with degraded voice quality . VQA's sophisticated voiceenhancement capabilities improve the call quality of Half Rate networks and, therefore, removesthis barrier to deployment for carriers interested in this solution .
Subsequent to our trialing of VQA within GSM networks , we have found that VQA can also offerce rtain spectrum savings to CDMA [code division multiple access ] carriers . We are now exploringinterest in this solution among our domestic accounts as pa rt of our drive to expand our No rt hAmerican business . - Deployment of VQA then has network wide implications and that's the reasonwhy the competitive landscape is more difficult .
With echo cancellers, we compete with the internal solutions of the voice switch vendors on asingle dimension , echo cancellation . With VQA, however, we are competing on a broader front asvoice quality and spectrum utilization potentially affect every call throughout the voice network . Webelieve we offer carriers decided advantages in these new areas yet acknowledge directcompetition with the switch vendors . Given the impo rtance of these issues , the testing andevaluation process is long and complex .
For these reasons, we have said VQA revenues will probably appear lumpy and that's certainly truetoday. We generated $1 .6 million in Q4 and $600,000 in Q1 and $500,000 in Q2 . As we've noted,Q2 VQA revenues did not materialize because of the delay associated with the $5 million orderfrom an Asian customer . Given our expectation that we'll ship most of the $5 million order in thesecond half of the year and the addition of new VQA orders we expect, we think VQA revenues willbe 20% of Company revenues by the fourth quarter .
During the last `e . . con~,,rar :Ils . I commented briefly on our invest-r ont in packet voi :a
'lore aetai acoui :: u( e'dv ,~dt . _ /OICc . s ur riy e Guru i' on _ ,nce :ah 3 :'ale say this Dur ceieionmen- -- s of k a'ic' ve n iaVe ecei°v ~l. :nai J€-
eecca ;K r . `laic-' ::ame s .. . . -3~ - 7es,g a w"0a : r ,- , e 3,-e :ont ;c _ mar v :e ai „ u1 :cl r
right product for this emerging opportunity and we II be able to deliver it in the right timefram(7 .
In closing, just a few general comments on the Company before I turn the call back over to Bill .Ditech is a strong competitor with customers who truly appreciate the quality of our products andour development direction . We are targeting larger market opportunities with our VQA initiative ,
v .CaiiStreet ._c 212 .931 .6515
Ex. D, Pg. 3
C)
Ditech Communications I DITCCompanv ♦ TickerA
Q2 2005 Earnings CallEvent Tvrae
Nov. 18, 2004Date A
while simultaneously investing in these future packet-based voice products . We have alsoexpanded our sales and support teams to grow our international business and expand our domesticcustomer base . Lastly, we built a lean operations and manufacturing model that's helped us deliverfive straight quarters of profitability and will enable us to scale the business .
With that, I will turn the call over to Bill for more detail .
William Tamblyn, Chief Financial Officer, Executive Vice President
Thanks, Tim . I would like to now share with you the final results of our second quarter of fiscal2005 as well as our outlook for the third quarter . We provided preliminary numbers in our pressrelease of November 3, 2004 . The key points of the second quarter results are as follows .Revenues, $24 .3 million, an increase of 67% from our prior year quarter . Gross margin, 78% .Income from operations, 40% of revenues or $9 .8 million . Income from continuing operations,42.7% of revenue, or $10 .3 million . Diluted pre-tax income per share from continuing operations,$0.29 per share .
Overall, our final results are in line with our preliminary results discussed in our November 3, 2004release . We are pleased with the performance of all of our metrics in the quarter except revenuewhere we fell short of our August projections . However, even with the shortfall of revenues, weshowed a 67% increase over the prior year's quarter . We did improve our overall gross marginsbased on product and customer mix and maintain our operating expenses to support our currentlevel of business and to fund our future growth .
The Balance Sheet continues to be very robust . Cash and short-term investments increasedapproximately $11 million during the quarter to $157 million and again with no long-term debt atquarter end . Receivables at 28 days outstanding remain low compared to the industry . Totalrevenue for the quarter was $24 . 3 million , up 67% from 14 . 5 million for the same quarter in fiscal2004 and down 5% from our prior quarter of 25 .5 million. International revenues remained flat fromthe prior quarter at approximately 1 .1 million, in Q2, or 4% of revenues . This is directly related tothe timing of transactions in both echo and VQA products . The delay in our shipment of VQAproduct impacted the international mix. Our two largest customers comprised approximately 90%of revenues .
Gross profit for the quarter was $19 million or approximately 78% of revenues . This was threepoints higher than the 75% reported in the prior quarter and the margin was 12 points higher thanthe prior year and higher than our prior projections . This substantially exceeded our medium tolong-term targets mid 60s gross margin . This margin improvement is based on product mixincluding the movement in our products such as BVP Flex and QVP [Quad Voice Processor]comprising over 82% of our revenue and operational efficiencies .
Total operating expenses were approximately 38% of revenues or $9 .2 million for the qua rter .Operating expenses as a percentage of revenues were in line with our medium to long -term model .Spending levels were con sistent with our projections . The details of the operating expenses are asf_I c . ;s . Soles and marketing expenses were S3 .6 million in line with expectations . T` is was a 7 %
R&D expenses were S4 million . This level was a 121,v increase from the prior quarter of 3 .5 millionand a 53°/ increase from the same quarter last year . The increase from the prior period wasexpected based on the maturity of our current product offering and the ongoing development effortsin new areas .
ww ::r Ca!!Street .co .m + 212 .931 .6515 4
Ex. D, Pg. 4
a)
UMUM
0 AA%ad
a
r i
Ditech Communications I DITCComoanv ♦ TickerA
Q2 2005 Earnings CallEvent Tvtpe A
Nov. 18, 2004Date A
G&A expenses were approximately $ 1 .6 million . This was slightly higher than our expectations anda 22% increase from the same quarter last year . The increase is in pa rt tied to internationalexpansion and in large part is due to Sarbanes -Oxley 404 compliance preparation .
Operating income was approximately 40% of revenues or $9 .8 million which exceeds the high-endof our medium to long-term model . Total other income was 569,000 all of which is related tointerest income. There is a large benefit from income taxes in the Income Statement at this time .During the quarter, we assessed the requirements under Financial Accounting Standards 109 onincome taxes and determined that it was more likely than not that we would consume all netoperating losses and as required, released the majority of our valuation allowance on our deferredtax assets . This benefited income from continuing operations with a $35 .7 million tax benefit .
Our pre-tax income was $10.3 million or $0 .29 per share compared to a profit of 10 .3 million or$0.29 per share in the prior quarter and profit of 2 .9 million or $0 .09 per share in the same quarterlast year based on comparative GAAP presentations .
Some additional information . Share count has increased slightly to 36 .2 million shares on a fullydiluted basis . This is a 540,000 share increase from the prior quarter and equal the approximate500,000 shares we had projected in our prior call .
We consider our financial metrics to be well above industry averages and in conjunction with ouryear-over-year growth, we are pleased with our performance in these areas .
Moving on to the Balance Sheet and cash flows . Cash flows from operations were approximately$9 million for the quarter. This was as expected . The source of cash was primarily related toprofits, decreased receivables, inventory and depreciation and amortization which were offset bydecreased deferred revenue and accrued expenses . Cash at quarter end totaled 156 .7 million, anincrease of approximately 10 .7 million from the prior quarter . This level was enhanced by the cashflow from operation and the exercise of options .
At quarter end, the accounts receivable were approximately $7 .5 million. This was a $800,000decrease from the prior quarter. We collected in the quarter a reasonable percentage of ourshipments in the quarter including 400,000 of products shipped that is in deferred revenue .Revenues that are deferred and uncollected are netted against receivables. This is consistent withour prior fiscal year treatment and is GAAP . DSOs were significantly better than our long-termexpectations and were approximately 28 days compared to the 30 days in the prior quarter . As westated last quarter, we would expect our long-term target to be between 45 and 55 days . And overthe next few quarters, expect to return to this range . Our long-term target is based on increasedrevenues generated through the reseller channel and international customers which historically payon extended terms as I have mentioned previously . Let me emphasize that our DSO numbers aresubject to change . The timing of sales and shipments in a given quarter is always subject tofluctuations .
Net inventory was $4 . 3 million at quarter end down from the prior quarter of $5 .5 million . Thechange in inventory was expected and the levels supported of our turns based business andir :cu.s 'n of it . - ory ford revenues . Inventory turns were an annualized 4 .9 . This wa s
. _ e~ .-_ ne ,carte . . ,am c gees as c _ .. ~~ . e ~c„r: --. . .
Now, let me review c,.r ~ roject :ns for Ct~ sc 1 ~~_ ?, ease note in this regard , the cautionarystatements regarding these forward - looking statements that we gave at the beginning of the call .As I discuss our projection for Q3, the numbers I will be providing you are GAAP numbers . Ouroutlook for Q3 is tied to timing . This outlook is supported by existing backlog, deferred revenues of
C a}t S ♦4 C= r e.. t .c 0 rr~ f.
e~ 1 2- . 923 1:6L
51
1} 5 4 C~ V~rZ7r. . ca ~ ! C_ _ ., . . .J
Ex. D, Pg. 5
Ditech Communications DITC Q2 2005 Earnings Call Nov . 18, 2004- --~ Cam an ♦ TickerA Event Type A Date A
$2.2 million and our bookings forecast. As Tim spoke to earlier, year-end and budget timing wil limpact the third qua rter. We believe our pipeline is strong . Our projection is for Q3 revenues to bein the range of 20 to $21 million . Additionally, we expect Q4 revenues to approximate Q2 revenuelevels . Gross margins , we believe they will approximate 75% and will be based on the mix ofproducts, market pricing and overall revenue levels . Increases in international revenues may havean impact on margins over time based on our methods of distribution . This potential reduction ingross margins may be offset by lower operating expenses .
Regarding overall operating expenses for Q3, we expect they may be up approximately 5% higherthan the Q2 levels of $9 .2 million . The increase in absolute dollars from Q2 levels are primarilybased on investments in engineering , including supporting of the development of our unannouncedpacket product , and support for sales and marketing . Interest on cash, will come from short andlong-term investments . Additionally , interest income is expected to be increasing from prior levelsbased on interest rate changes and our increased cash balance .
Based on our implementation of the FAS 109 in the quarter, our tax rate for Q3 should be less than1 % based on the usage of valuation allowances releases under GAAP . This will continue for theremainder of our fiscal year . Fiscal '06 will see a return to a more normalized tax rate ofapproximately 35% with some tax strategies activity underway .
Weighted average shares may increase in the third quarter . This is based on the effect ofprofitability and share price on the calculation, reflecting a fully diluted presentation ofapproximately current fair market value of the stock and the exercise of options by currentemployees .
Moving on . The Balance Sheet for Q3, '05 outlook is as follows . Cash at the end - Q3'05 will behighly dependent on our profitability, receivable and inventory levels as well as the exercise ofoptions . We expect to generate 6 to $7 million from operations . Capital spending will be primarilyrelated to test equipment, software tools and development platforms . Q3's spending willapproximate $800,000 . In terms of inventory, current levels, including deferred revenues whichmay vary as we move through the remainder of the fiscal year, shall remain at the same level asQ2 .
Related to our business and Balance Sheet, we currently have no long-term debt . We have no off-Balance Sheet entities or associations . We have conservative revenue recognition, reserves andother policies . We are providing GAAP information only. We believe we have to the best of ourknowledge disclosed all obligations and related party transactions as required . We comply with alleffective SEC and NASDAQ requirements related to audit committee compliance andindependence . We will provide required certifications with our next SEC filings and we'll becompliant with all effective Sarbanes-Oxley requirements . We are focused on Section 404requirements as well . Our auditors do not perform consulting services for us such as systemsreviews, IT reviews or other forms of consulting services . They currently only provide audit, sometax compliance and M&A accounting support as applicable .
Some final thoughts on the quarter . We had 67% growth in revenue over the prior year and haved consecutive quarters of profitability . We have had significant positive cash Flows =ro !
ng irjers s ;Cev -or J .:r KJ 'IsGa -0 ~c cciluns ~Vf e oech s'-
~~sinesS an :~ ' e .are
.[v s my ]el s as . a dos ne s .d' ere ,e ..0o8 ~stcri~ strength, . :marke t
momentum and increasing core competencies D : : s : .d on our ongoing investment and newtechnologies and product designs . Again, our pii;eiine looks positive in both echo and VQAactivities. However , timing is the critical driver for the fiscal Q3, '05 revenue outlook .
With those comments, I'd like turn i t back to Tim .
-w W . C a d S tl eot .co n, 0 2 i 2 . 9 J i .651 5 6
Ex. D, Pg. 6
xwn . . .ei!Siree . .com * 212 .93, .55 :5 7
Ex. D, Pg. 7
C)
U)
now
Ditech Communications I DITC I Q2 2005 Earnings Call I Nov. 18, 2004ComoanvA Ticker♦ Event Tvoe A Date A
QUESTION-AND-ANSWER SECTION
Operator : Very good and thank you, Mr . Montgomery. [Operator Instructions] And representing B .Riley & Company, our first question comes from the line of Wes Cummins .
<Q - Wesley Cummins> : Hey Tim and Bill .
<A - Tim Montgome ry>: Hi Wes .
<Q - Wesley Cummins >: A couple of questions here. One just to clarify on the guidance, if youhad a higher Q3, if the orders came in earlier, would then you expect a corresponding decrease inthe Q4?
<A - Tim Montgome ry> : Not necessarily . I am not sure I understood the question Wes . Iapologize .
<Q - Wesley Cummins >: You basically said that your Q3 was dependent on when orders fell infrom certain customers .
<A - Tim Montgomery>: Correct.
<Q - Wesley Cummins > : I guess I was taking that to mean that it could be higher if orders camein earlier or does that mean it could be lower if orders don't come in as you expect ?
<A - Tim Montgomery> : I think we have given you a range that we believe is defensible, Wes . Tospeculate beyond what we have given you, I don't think would be productive . This quarter hasbeen difficult . Disappointing the investor base was not at all pleasant for any of us includingobviously the investor on the third . We have a process that we go through every quarter where inthe first few weeks we look at production demand on a unit basis and revenue production on anaccount basis worldwide . We also happen to have, in the last couple of weeks, a significant salesmeeting opportunity that coincided with the AeA conference and I've gotten a lot of informationwhich has assisted us in really looking at the risk profile of timing associated with business in thethird quarter. You may recollect we straddle, our third quarter straddles two fiscal years of ourcustomers . And this is just the best information that we can provide you . And we did, and I willtake a moment here, we did break precedent in this call . Not necessarily planning to do so in thefuture but we broke precedent in that we provided you some information on the fourth quarterbecause we feel we have a robust pipeline . And the issues that we are experiencing here are bothtemporary, perhaps seasonal . But certainly we are suggesting a return to growth in the fourthquarter . Is that a helpful in answering your question ?
<Q - Wesley Cummins >: Yes. That's pretty helpful . I guess that I was just understanding thatmaybe there was some orders that you thought would fall into the fourth quarter instead of comingin, in Q3 otherwise, Q3 might be higher . But if it turned out that Q3 was in fact higher, did youbasically pull revenue out of Q4? So would Q4 be lower than what you're -
<A-Tim Montgomery> : dc - -in,( that would ne th €
- .stonica!' -a,-e c : f.'_ an ac3o,. -~ ozac r, .d . .: S3'GS ai a c . J
ur ~evenju masc . ✓ e also ,,-, .-. ~ethora , d < 5 inn T r, aact ; ✓ :y :hat nas prooa o
increased and its both volume and it s in our ability to actually address those opportunities hasimproved a ton . So I look at the pipeline . I look at the balance of opportunities on a go-forwardbasis . And although I have to temper it with the current position that we find ourselves in, we arevery bullish about the long-term value of the Company and our ability to ingratiate VQA in themarketplace and to grow the North American echo revenues .
8www .CaiiStr eet .com * 212 .013-1 .65,15
Ex. D, Pg. 8
C)
C)
'AMINO
Ditech CommunicationsI
DITCComoanvA TickerA
Q2 2005 Earnings CallEvent Tvt3e A
Nov. 18, 2004Date A
<tQ - Wesley Cummins >: Okay . Going on to those two customers, with the decline sequentiallyinto Q3, is there one of those that's particularly weak or have you seen a downtick with businesswith both of those customers ?
<A - Tim Montgomery>: I probably wouldn't comment because I'd hate to disparage onecustomer's capital budget versus another and often I am under a non-disclosure anyway . But I seeit as fairly balanced .
<Q - Wesley Cummins >: Okay . Okay. And can you breakout, Bill, the gross margin on yourinternational revenue versus gross margin on the domestic revenue?
<A - William Tamblyn > : We don't typically do that at this point .
<A - Tim Montgomery>: We could but I don't want to do that, Wes, because I think that some ofthe more astute folks out there would then determine our pricing policies on a worldwide basis .And that becomes kind of competitive . Now, if Bill wants to give you a different answer I will let himdo it.
<A - William Tamblyn >: Well, it's kind of difficult in the fact that our international is a very smallnumber in the quarter. And if it was direct versus the VAR [value added reseller] channel couldhave a great significant difference on a very small number . So I would say at this point it isprobably pretty close to the average that we did in the quarter and it wasn't that distinctly differentthan the gross margin that we reported overall . Obviously, the North America had a significantdriver in it, but I would say the number for international was only $1 .1 million of the 24. So, itprobably wasn't a huge difference in gross margin .
<Q - Wesley Cummins > : Okay.
<A - Tim Montgome ry>: Contribution to profit, for the international business as it's layered ontoNorth American business, is pretty significant because if you look at it that the North Americanbusiness is paying the light bill and most of the operating expenses could be attributed to that . Youare looking at those incremental dollars being pretty robust in terms of profitability .
<Q - Wesley Cummins>: Okay . All right. I will let someone else ask a few and then get back on .Thanks .
<A - Tim Montgome ry>: Thank you .
Operator: Okay . Well, thank you very much Mr . Cummins . [Operator Instructions). We have aquestion from the line of Dave Kang now representing Roth Capital . Please go ahead .
<Q - David Kang >: Thank you . First question is regarding your third quarter revenue guidance .When you pre-announced a couple of weeks ago, you said third quarter would be flat . Now it'sgoing to be down sequentially . Can you just give us some more color on what caused that delta?Thank vou .
<A - Tim Montgome ry>: , ei! a . a . . . . _~ oe„ng spec c u . ..ANC .- -
"eoresentea toe e e`l nF ua e 4,_ : rocav al' - -
er p3ccgave : us a a "!y %,:i "es c~ se rca: .vas ii cur ve - a
three weeks of a quarter based on our forecast process and unit forecast process and in this cap ;the sales meeting that coincided . And I think what we are trying to do is give you the benefit of ta'.atinformation . Please note that as well that in a situation with a pre -announcement, it is incumbentupon us to provide you the information on the current quarter at the very first opportunity we can,which is why we announced on the 3rd of November , even knowing that we were providing you
wCaiiStreet .com = 212.931 .651 , 9
Ex. D, Pg. 9
Ditech Communications DITC Q2 2005 Earnings Call Nov. 18, 2004.. Com an A Tickers Event T e A Date A
preliminary guidance on the current period . We certainly expected to be able to repo rt today tha tthose would be flat and live up to that . However, in the final analysis , it comes down to t rying ourvery best to give you the very best information we have at the time and that ' s essentially what wehave done today .
<Q - David Kang>: All right . Regarding that 5 million order from your Asian customers , first of all,2NUUM will you eventually release those Asian customers ' name? And then are you still comfo rtable withImams=
that maybe half of that will be shipped this quarter and the other - the balance will be shipped in theAxt V 1W fourth quarter? And also regarding your first two customers , Bharti and Austrian carrier are they0 4% still in a buying mode or what's their status ?
<A - Tim Montgomery> : All good questions . First of all, we will release the name of the Asiancustomer when we really believe that it is the right thing to do from a competitive perspective . Ithink we tried to highlight in the script that we compete head to head with the largest players in thetelecom industry with respect to VQA . And I liken announcing things to waving a red flag in front ofmultiple large bulls' faces . So I am a li ttle uncomfortable about doing that . But at the appropriatetime, we certainly will . Clearly , we would like to and it is only really competitive reasons that wewould suggest we won't .
In terms of that order flow, we have - we have committed to you and the majority of that revenuewould flow through the second half of the fiscal year . We certainly have le tters of credit in placethat support greater than half of that number . And as a result , have high confidence in being ableto do it or we wouldn't have spoken about it or we ce rtainly would have recalibrated with you today .
In terms of business , we have ongoing business with both Bharti as well tele . ring . As we have toldyou before , we deployed the vast majority of the tele . ring network in the first few significant orders .It was a small network and ubiquity was very important to them . We do have follow-on orders butthey are not substantive there . With respect Bharti, or our other India opportunities, we areoptimistic about new revenue flow from them .
<Q - David Kang> : Okay. Just lastly , I know you don't like to talk about specific customers but Iguess I have to in this case . On Cingular, which was a 10% customer in the past, but they haven'tbeen doing much business with you guys recently , obviously , with AT&T merger. Now AT&T,obviously , they use somebody else since you haven't done much business with them . So will thecombined company use your product or somebody else's ?
-WAN <A - Tim Montgomery> : That's a great question . First of all, we are delighted that and I am sureanyone who is attempting to market to either Cingular or AT&T Wireless, are all ve ry pleased thatthis merger has been approved and are hopeful that business will move on into more of a normalrealm here going forward . And you will know who to speak with and who to call on instead ofhaving two constituencies for a single transaction . We are optimistic in that we have a substantial,shall we say , reference base within Cingular in multiple millions of dollars that we sold them inconjunction with an OEM transaction that we've highlighted for you in the past . I believe thoseproducts are performing beautifully . Therefore , we have an internal reference ability scenario with
them. I think the real essence of the answer that I am comfortable giving you is that I believeCingular feels they ar the Ia ;est v.s N h V-ne,' .a. A,-- ; .,ould
_._ -. ._ -n; ei-C .
✓ t'IC JG ~ . _., _. - " -~J .'JIII .>eCI. ~L IJV C ;cV aJ tilc . : : cI~C i" _ . : v
a .e ar ~o o , . _ Ties rto ~e -. .No sots o-: : -_rerD~E e
I am very pleased with the team cf r acple we have applied to that account to sell and market thesolutions we have . I would also suggest that just, my own sense of optimism is that - and maybethis is more of a realistic comment . I look at it and I see that this Company has invested in voicequality solutions where none of our competitors have . As a result . we know we have the highest
wj%,vv .CaiiSt eet . corn • 212 .931 .65 1 5 = 10
Ex. D, Pg. 10
Ditech Communications DITC Q2 2005 Earnings Call Nov. 18, 2004Com an ♦ TickerA Event Type ♦ Date A
capacity. Most competitive platforms, both software and hardware, to address this problem of voicequality . We are confident that tail delays are extending in these networks as their complexity
NI increases . The advent of Voice over Packet emerges and we support the longest tail delay in the} industry. So as a result, I have confidence that the combined nature of what we have invested in
historically will bode well for us going forward . I suggested in my script that I felt that we would gainnew customers and new share in North America and I stand by that .
<Q - David Kang> : Thank you .
<A - Tim Montgome ry>: Thank you .
Operator: Thank you, very much, Mr . Kang . Well next in queue is Frank Marsala with First Albany .
<Q - Frank Marsala> : Hey guys . How are you doing?
<A - Tim Montgome ry>: Okay Frank . How are you ?
<Q - Frank Marsala> : All right . Just a question . With respect to the January qua rter , with respectto the top line in the Janua ry quarter, are you expecting any VQA in that 20 to 21 million ?
<A - Tim Montgomery> : Yes. I think maybe I was too obtuse in my answer for Dave . But we arecertainly expecting dramatic growth over the $0 . 5 million or so in the second period . I haven ' t givenyou a specific number but we have suggested that in the fourth quarter, it should represent asmuch as 20% of revenues . So I think if you just extrapolate a li ttle bit including a big piece of the $5million order , you can come to a 2 to 3 .5 or $4 million number fairly easily .
<Q - Frank Marsala > : So in the fou rth quarter then , it is 20% of the 24 or so million that you are -that you think you can do in that quarter then ?
<A - Tim Montgomery> : Yes, sir .
<Q - Frank Marsala> : So that being the case, so you are suggesting that for the fourth qua rter,that there is more than what you currently have in orders in that 24 million?
<A - Tim Montgomery> : Yes. I think we suggested , maybe I wasn't as explicit in my script as Icould have been, but we suggested that VQA revenues would be bolstered not only by the existingbacklog but by new opportunities that would materialize .
<Q - Frank Marsala > : Okay -
<A - Tim Montgome ry> : We've got a very robust pipeline there . The nature of the testing andqualification process , although it was ve ry long and protracted , we have been in that long andprotracted mode with some players for a ve ry long and protracted time . And unfortunately some ofthose decisions are now in the hands of the people who spend the money in those accounts asopposed to make judgments as to whether the technology is valid or not . We're through a majorknot hole in that'' :;s #h3':re exister ce proofs d:es %%or'I . It saes char -; t . . 3 pec h o
o.e F . .
omrnelciai :m,Ptl ji,vt Oz) l ai luLU ra~, ."e viya',Ld lH 'i_ : ; ,(
ango e `or the iresto: anc that s :reen es for the _ .hmoar,
<Q .- Frank Marsala >: Ana so when you taiK about your pipeline eing strong, you really aretalking about the VQA pipeline?
<A-Tim Montgomery>: I was actually talking about both . Both VQA as well as echocancellation .
Ex. D, Pg. 11
Ditech Communications DITC Q2 2005 Earnings Call Nov. 18, 2004--t CompanyA Tickers Event Type A Date A
C-)
<Q - Frank Marsala> : Okay . All right . Thanks very much guys . I appreciate that .
<A - Tim Montgomery> : You're welcome . Thank you .
Operator: And thank you very much, sir . Next we go to the line of Marcus Kupferschmidt withLehman Brothers .
<Q - Marcus Kupferschmidt>: Hey Tim. Just a couple of questions I want to ask . In terms of theVQA product, you've talked about having four announced wins . Should we assume you have otherorders in from other customers outside of those four announced ones ?
<A - Timothy Montgomery> : Yes .
<Q - Marcus Kupferschmidt> : Okay . And in terms of thinking about these new orders that couldhelp out the revenues in the April quarter , should we assume that you are assuming new orderscoming from existing customers or from new customers that you have not converted yet to fullcustomers from the trial process ?
<A - Tim Montgomery>: Both .
<A - William Tamblyn > : Definitely . Both .
<Q - Marcus Kupferschmidt> : Okay. And -
<A - Tim Montgomery> : Can we do the investing just to maybe give you a fuller answer , Marcus?I now have 60% more sales and systems engineering suppo rt resources involved in the salesprocess than I had a litt le over two quarters ago . And if you look at the amount of time that it takes,and again, we sta rted becoming profitable two to three quarters ago in a big way . And it wasimportant at that point to recognize it and then start investing in the future growth of the business .The time it takes a sales professional to become , shall we say, conversant with the products andcapable of being really effective , varies from one to six months . You then have to consider thesales cycle and the process of selling to a large carrier . Which candidly, I think it probably rangesfrom six months to two years . One of the largest customers we have today , generating significantrevenues with great outlook for the future, probably took us two years to really crack . And once wecracked it, however , the revenues became ve ry interesting and ve ry meaningful almostimmediately . So there is a process here . I think we are starting to see the benefit of new salespeople addressing new opportunities . We are also looking at some new technical oppo rtunitieswithin some existing accounts that are also fairly interesting that we ' ll talk about over time .
<Q - Marcus Kupferschmidt> : All right . Great . And then just to clarify, did you say the grossdeferred revenues are now about $2.2 million ?
<A - Tim Montgome ry> : 2 3 I believe .
<0 - Marcus Kupferschmidt>: All right . And then one fir :'~ uestion, if you think about the April
;ua ss arg c U d uo~r . :nr~ : as -even ce;ued .,, Ki,'e» a!~ c 12, .T
w .'v d f~ as, .
is anything changing :n the business dynamic that couic help to offset that gross margin pressurefor the total Company ?
<A - Tim Montgome ry> : I think what you ' ve heard us say in the script, without being specificabout what change there may be from Q3 to Q4 because we are really guiding to about 75 % in Q3
rr :^rrr . ai v 212.931 .65 15 .
Ex. D, Pg. 12
U)
-Allm
3 -y- a
Ditech Communications I DITC Q2 2005 Earnings Call Nov. 18, 2004CompanyA TickerA Event TypeA Date
and that that's sustainable for a few quarters . And that's really what we are saying to you . And youshould presume in that there should be some economies of either scale or operations ormanufacturing that we enjoy inside the building to soften what could be the implication or impact toa higher percentage of international revenues .
<Q - Marcus Kupferschmidt >: And should we assume that that's going to start to translate intoyour operating expense? Or do you think you need to continue to spend to invest in both thepacket products and as well as supporting the international trials?
<A - Timothy Montgomery> : Well, I think in terms of the international trials of existing products,as well as the development engineering staff and the like, I think we are - we could easily sayrelatively flat in terms of operating expenses . In terms of what we need to do to prepare for andposition properly the new packet opportunity, I am not really comfortable getting into a detaileddiscussion of that. We really have given you some guidance and we have, of course, an operatingplan for the current fiscal year . The majority of the expenses associated with marketing, selling andsupporting the packet-based space product are really more of a next fiscal year increase . And untilwe get to the point in February, March, April when we approve those plans with the Board ofDirectors, I'd be uncomfortable speaking for them or for our plans . Clearly, we'll need to invest inthe packet initiative for other than for development engineering . And, obviously, what we havesaid, I shouldn't say obviously, but what we've said historically is that we believe we can do thatwithin an envelope of profitability for the Company . And with the exception of what we think is abump in the road, we still stand by that . Which would equate, I would think in your mind, to ourbelief that our revenues will resume growth in the periods we've suggested and grow adequately toallow us to actually ramp that, the expense line of that business, within a highly profitable company .Bill and I are intent upon running a highly profitable company because we think that's our job .
<Q - Marcus Kupferschmidt >: Okay . Great. Thank you .
<A - Tim Montgome ry>: Thanks Marcus .
Operator : And thank you very much, sir . And next, we go to line of Andy Schopick with NutmegSecurities . Please go ahead.
<t - Andrew Schopick> : Thank you and good afternoon . Tim, can you comment a little moreabout the prospect for new customer acquisition in the remainder of this fiscal year ?
<A - Timothy Montgomery>: I'm happy to. I need to do it in an obtuse way .
<t - Andrew Schopick> : That's okay .
<A - Timothy Montgomery>: I have at least three competitors on the line today .
<Q - Andrew Schopick>: You don't have to be specific but I'm trying to get a sense of what youfeel the potential is in this respect .
<A-Timothy Montgomery >: ." .' ell, l think t9 pote f i s unlfisant. Arc lets start er'-ationally.a: e, ea c -
'at~r :,nternationaii. markelo~ace ' e tna, actv :ry was ceen oast o 't t nx we t,I a area,-hrae ec y ud . ;, _ ..a :~ . -e ~ c, .,~ .'e ~ea 6!s ago t tt r e
some real technical results and some real existence proofs in the ability to actually generaterevenue from VQA albeit not at the levels wed like . But we are prognosticating for you that thoselevels are going to increase and become a meaningful percentage of the Company 's business .And the vast majority of that revenue will be tied to, in this early period . to existing customers. Buta significant number of new customers we believe will emerge during that time .
Now back to echo and North America . I suggested that I believe that we would grow our businessfrom our existing customers and I've also indicated that I've hired, I wasn't specific about NorthAmerica, but North America I think the percentage is almost 50% increase in sales and systemsengineering talent . And they are focused exclusively on customers that have not representedrevenues for this Company either ever or in many quarters or in the case of one, many years . Andas a result, I have confidence that we will have a nice and robust conversion rate to new customersjust based on the talent and the engineering - or excuse me the talent and the sales managementthat we are applying to it .
<Q - Andrew Schopick>: Okay. Two other quick questions, if I will? The Asian order, will therevenue be recognized all in one quarter upon shipment of that order or will it be spread out overmore than a quarter?
<A - William Tamblyn >: Based on revenue recognition and the way it would go and probably theshipping trends, it would probably be, as we talked about it, it would be over the second half of theyear . It will be over both quarters .
<(Q - Andrew Schopick >: Okay . And the last -
<A - Tim Montgome ry>: The likelihood, just to help you again, Andy, the likelihood of revenuerecognition for that order being simultaneous with shipments is quite high because it is a letter ofcredit coverage that we have in place for that .
<Q - Andrew Schopick >: Okay .
<A - Tim Montgomery>: So there wouldn't be some risk of loss or risk of receivable that wouldprompt us to reserve against that revenue .
<(Q - Andrew Schopick >: But if I hear you correctly, a part of that order might ship toward the endof the third quarter and then the remainder of it into the fourth quarter .
<A - Tim Montgomery>: Well, certainly within the third and the fourth quarter . Yes.
<Q - Andrew Schopick>: Okay . And my last question, Bill, on the tax allowance, you madereference to having released the majority of the valuation allowance . What is the total amount ofthat allowance that is on your books ?
<A - William Tamblyn> : The total amount on the Balance Sheet is approximately $50 million indeferred tax . There is a $50 million deferred tax asset . Some of it has gone through the IncomeStatement and some of it has gone through additional paid in capital . Some of the allowance wouldstill be treated in Q3 and Q4 . That's why you will end up with a zero tax rate, or a nominal 1 % taxrate in Q3 and Q4 .
<(Q - Andrew Schopick> : Yes . I wasn't sure but I did understand that. The additional deferred tax
asset, it we -s ._ be released or under at conditions could it be rcieased? And if it were to be
<A - William Tambiyn> : ; e+,? after the :ai vear sc; ne u reef '!sca! 'ear ,vi ; ; De ~-eleaseaax
benefit . So you li have less than 1 % tax .
<Q - Andrew Schopick > : In this fiscal year?
<A - William Tamblyn> : In this fiscal year .
. _ A flf ; C`AC 14un, Ex
. D, Pg. 14
a)
Ditech CommunicationsI
DITCComoanv♦ TickerA
02 2005 Earnings CallEvent Tvoe A
Nov. 18, 2004Date A
<Q - Andrew Schopick> : Yes .
<A - William Tamblyn> : Then, in the subsequent fiscal year, you will get back to a normalized tax
rate . We are doing some strategy tax planning things to get our effective tax rate down for fiscal'06. But you will be back to more of a 35% type range in the next fiscal year .
<Q - Andrew Schopick>: But if I understand, you have about 15 million of deferred tax assets thathave not yet been recovered? Or reversed .
<A - William Tamblyn> : Right. And that's because of the current fiscal year and our projectionsfor profitability and that type of thing in the remainder of the fiscal year .
<Q - Andrew Schopick>: Okay .
<A - Tim Montgomery> : Thank you .
Operator : Thank you very much Mr . Schopick. With that, Mr. Montgomery and our host panel, I'llturn the call back to you.
Tim Montgomery, President and Chief Executive Office r
Any further questions, we would be happy to answer them . There must not be some. So I willmove on here and just thank everybody for their patience with us this quarter . And we would like tojust make sure you reflect back on the optimism that we've shared with you for the fourth quarter .Anyone has any additional questions, are welcome to give us a call and we try to make ourselvesas open as possible . Thank you again for your attention today .
Operator : And ladies and gentlemen, that does conclude our earnings release for this secondquarter 2005. Thank you very much for your participation as well as for using AT&T's ExecutiveTeleConference service. You may now disconnect .
DisclaimerThe information herein is base,-, on sources we be" is to be r, a _ In .. . not guaranteed by us and do n ..'. G. . port to be a con,- ete or error-free statement or summary of theav+a :-ladle data. As such, we do not endor^A or ouara ee the cot . :teness, accuracy, integrity. or firm mess of the - :.. mat,cn . You must eve e, and b- .ir alp risksassce ated wah, tha a~a of r - . ., . .-. - . ._ .~ .. z on it. accura . . as. Safi . .. o h to ~:,~st~on i s
?AFFILIATES, BUSINESS ASSOCIATES, L CENSCKS 7, ILL BE L AEL _
D. ; MSHGES INCLUDING ;rIT,S LIMITATION S :;_= . . . . FF STOPPAGE
'O I° .:TLP FA'L .,RE ~R '.1A~ -,ESN „o DATA 3 GL_ O SSE 5 4 . . .:!.1 .1 RC; :,L ., :SES =-\1 TN 1 := AN SAC H 4`t HS .. L . ISF
T-iEFCSEI 1LITY „r SUCH LOSS S AF ._ .. , . _ . . C CN ',IT,- T . ._ . .. VT .1 .4T ., . PRC' _Tr.E~7EtNORANY C _ . EUn-C ..T'IAUE . _ . _~ .
3 r%?
YL~YN 1.̂ ! .*.s d!!~!! CCL .$'„ U!! : L ! L .? L, ! J a . . ... :- 15
Ex. D, Pg. 15
Ditech Communicaions DITC Q3 2005 Earnings Call Feb. 17, 2005Com an A TickerA Event T eA. DateA
MANAGEMENT DISCUSSION SECTIO N
Operator : Ladies and gentlemen, thank you for standing by and welcome to the Q3 Fiscal Yea r$ 2005 Earnings Release Conference Call . At this time, all participant lines are in a listen-only mode .
Later there will be an opportunity for questions . Instructions will be given that . [OperatorInstructions] . Today's conference is being recorded . I would now like to turn the conference over toyour host, Chief Financial Officer, Bill Tamblyn .
William Tamblyn, Executive Vice President and Chief Financial Officer
Good afternoon, everyone. Thank you for joining us for this conference call which will cover DitechCommunications announcement of results for its fiscal 2005 third quarter ended January 31, 2005 .Today's conference call will cover our complete financial data for the quarter. We'll also provide ouroutlook for Q4. Tim Montgomery, Ditech's President and Chief Executive Officer, will provide thebusiness and strategic analysis and I will provide a more detailed analysis on the financials .Following those comments we'll open the call for Q&A.
Before we begin let me state this conference call is being held on February 17, 2005 . Any soundrecording or republishing of the contents of this conference call is expressly forbidden without thewritten approval of Ditech Communications . Also we must point out that as with simila rpresentations the following discussion contains forward-looking statements and in particular ourprojections of our fourth quarter financial results which involve risks and uncertainties . Our actualresults may differ materially from those discussed here . We will attempt to identify such forward-looking statements with qualifying words such as we intend, plan, believe, estimate, or predict, orwe may, could, or will, or other comparable language. Factors that could cause results to bedifferent include factors discussed today in this conference call and in our press release today aswell as those detailed in the section entitled future growth and operating results subject to riskssection of Ditech's Form 10-Q for the quarter ended October 31, 2004, filed December 10, 2004with the Securities and Exchange Commission . Today's announcement was released over the wirethis afternoon . And you may also read it on Ditech's website by going to the investor section of theDitech website at www .ditechcorp.com. With that, I'd like to turn the call over to Tim to comment onthe announcement and our strategy moving forward . Tim .
Timothy Montgomery, Chairman, President, Chief Executive Office r
Thanks , Bill . Good afternoon , everyone . Thanks for joining us today as we report Ditech's fiscal2005 third quarter results and share with you our view of the coming qua rter , our outlook for thecompany, and the markets we address . First let me review a few of the key milestones of the pastquarter . Third qua rter's revenues were 21 .3 million exceeding some what the estimate's weprovided in our last conference call in November . Profitability was outstanding even at the lowerrevenue levels reported for the qua rter achieving an operating profit of 27% . We continue tomanage e> penses, r . e-17 ge c _ir cant :-3ct r r -, :factur ig mods and take full advar" ige of
iart~i!-~ a~lilcJv flai .
Another highlight of this qua rter was the company's execution of its stock repurchase plan . OnDecember 15, 2304, Ditech's Board of Directors announced approval to repurchase up to $35million of the company' s common stock . From the December 15 announcement through the end of
w Y--- . a!! St oet .com - 212 .931 .6515
Ex. E, Pg. 1
C)
MMMMMMlow*
swre~
0,0 Awk
4 1riL.
Ditech Communications ( DITCComtanv♦ TickerA
Q3 2005 Earnings CallEvent Tvpe A
Feb . 17, 2005Date A
the third quarter, Ditech repurchased over $21 .5 million of its common stock . And as of this call wehave completed the plan and repurchased approximately 2 .5 million shares of Ditech stock for atotal of $35 million . This repurchase program reflects the board and management's confidence inour market position and strategy for future growth as well as our commitment to enhancingshareholder value . As a result of the cash we used for our stock repurchase program, we ended thequarter with $134 million in cash and investments and, again, zero debt . Additionally, due to therepurchase program, we reduced our calculated share count nominally to 35 .5 million shares on afully diluted basis for the third quarter. The full effect on share count will be realized in the fourthquarter .
Now let me comment on our expectations for the fourth quarter . We continue to expect to return togrowth in the quarter. Our expectations have been tempered and our guidance today modestlyadjusted, however, for a degree of uncertainty introduced by the M&A activity of one of our majorcustomers which was announced subsequent to our last earnings call . With the anticipatedsignificant rise in VQA revenues in Q4 solid performance from our key accounts in North America,we expect our fourth quarter company revenues to grow 8% to 10% over the third quarter levelswhich we reported today . Now let's move into a more detailed discussion of our business, datavoice-processing .
Our core North American Echo cancellation business has accounted for 945 of the company'srevenues. The overwhelming proportion of this revenue came from orders of our broadband voiceprocessor, or BVP platform. This platform represented approximately 90% of our echo cancellationbusiness in the quarter and supports our strong gross margins . We believe that the BVP-Flexplatform will support our continued market share momentum in the coming year as our customerscontinue their network buildouts. As we noted in our last call our latest evolution of the BVP-Flexplatform, the Flex 400 and 600, incorporates Echo cancellation and voice quality assurancecapability in a single highly scalable platform . Our expanded North American sales team istargeting the major accounts, major carriers which are not currently Ditech customers and we havetesting and trialing initiatives well underway .
We see many additional opportunities to diversify our customer base, which is our number onecompany priority, as carriers reengineer and upgrade their networks . This is an area where Ditechhas outperformed the competition . From a product perspective customers see the benefits of ourproducts superior voice quality, greater network flexibility, and a more sophisticated networkmonitoring and management system. We're continuing to invest in this area, and we believe it willcontinue to pay dividends . Now let's take a few moments to discuss the international market andour VQA, or voice quality assurance activity .
Our international effo rts continue to be primarily focused on suppo rt ing our voice quality assurancebusiness initiatives and trials . I'm very pleased to report that we're making good progress . As we'venoted in prior discussions of VQA, the trialing and sales process is longer and more complex thanthat of our echo products . Therefore , we continue to describe the VQA revenue trend line as lumpy.With VQA we ' re competing on a broader front as voice quality and spectrum utilization potentiallyaffect every call throughout the voice network . Having said this, I'm pleased to report that we'verefined our trialing and testing process considerably and we 're now able to move through a trial withgreater speed and a greate - understanding of the customer's requirements .
ur ~h eie ,t.es ,, e e 5u .: e e r,.S
e . _H t7 .~ .6 3
approach S5 million . As importantiy, this revenue is expectec to come from disparage kph ;Customers on at least three different continents . Overall were pleased with this progress In DL. .'VQA initiative. We've developed new channel customers to reach our targeted internationalcustomer base . We've deployed an expanded group of experienced sales and support engineers t o
vi v 'in; . Vi e ! i C ' _ e , , _ _ . . . a 2 1 2 . 931 1 .G _ 1 15-
Ex. E, Pg. 2
VJill
C
R5
Ditech Communications I DITCCompanyA TickerA
Q3 2005 Earnings CallEvent Tvpe A
Feb. 17, 2005Date A
assist our channel partners in managing these new trials . Finally, as I noted earlier, we've benefitedfrom the learning curve and we're moving through these trials with greater speed and precision .
During the last few conference calls I've commented briefly on our investment in the area of packetvoice and you've seen evidence of this investment by our R&D spending levels . I'm happy to saythat we're now in the pre launch phase of this project and today we're simply alerting you to thatfact . We will be announcing our new packet voice product offering in conjunction with VON, thevoice over packet trade show in San Jose, California, which is planned for March 7th to the 9th . Ashow in which Ditech, is a major sponsor . We won't be speaking in detail about the packet producttoday. We believe it best for our business to announce and position the product to our customersand to the market in general before we discuss the strategic and revenue implications to you andour investors .
Also, please understand that revenues from this new product are planned for late this year . Werealize you'll want a full strategic briefing once we announce so we're also letting you know we willhold an investor conference call shortly after our product announcement to discuss the issues ofmarket sizing, competitive positioning and revenue potential . So in regard to our packet voiceproduct please stay tuned . And we'll look forward to discussing this with you in detail in March .
Just a few comments on the company before I turn the call over to Bill . We're pleased to haveexecuted in the quarter consistent with our prior guidance and equally pleased to reiterate ourreturn to growth in the fourth quarter . Moreover, I'm confident in our company's long term growthtrajectory . This confidence is founded on our investments, our core competencies, our historicaland financial and market performance and our soon to be announced next generation products . Weat Ditech know how to build, deploy and service leading edge voice processing products . Ourgrowth in market momentum in the last 18 months has been built around the successfulintroduction of the best voice processing platform in the industry, the BVP flex . We're now seeingsignificantly increased activity in international markets as our VQA initiative gains traction . And aswill you soon see our new packet announcement addresses an entirely new voice market for Ditechin the coming years . With that I'll turn the call over to Bill Tamblyn, our chief financial officer toprovide you more detail .
William Tamblyn, Executive Vice President and Chief Financial Office r
Thank you, Tim . I'd like to now share with you the final results for our third quarter of fiscal 2005 aswell as our outlook for the fourth quarter . The key points for the third quarter results are as follows .Revenues, $21 .3 million, gross margins of 77 .5%, income from operations it was 27% of revenuesor $5.8 million . Income from continuing operations was 30 .9% of revenue or $6 .6 million. Dilutedpre-tax income per share from continuing operations was $0 .19 per share . Additionally we'l lcomment on our stock repurchase program during the quarter and we'll provide details later in thecall .
The third quarter details are as follows . Total revenues for the quarter $21 .3 million . Flat from the$21 .3 million for the same quarter in fiscal 2004 and was down 8 .8% from the prior quarter of 24 .3million Q3 revenues exceeded the projer ~ ns we provided at our November all , internationa"
re .-e es: seo d crcx r a -_ s~S
-~5 ,enJcs I s ap x' 'area the J,~ a"c Ji . e d :c d _ ,tie'e
nigher than the prior year and higher than our projections in the November call . Q3 margins a-r_substantially higher than our medium to long term targets, both high to mid 60s, mid to high 6us ingross margins . This margin is based on the near complete migration of our customer base to ourBVP flex and QVP product lines and operational efficiencies . Total operating expenses wereapproximately 50% of revenues or $10 .7 million for the quarter . Operating expenses as a
com
Ex. E, Pg. 3
woma n
U)
}
i I
Ditech Communications I DITCComoanv` TickerA
Q3 2005 Earnings CallEvent Tvoe A
Feb . 17, 2005DateA
percentage of revenues were higher than our medium to long term targets due to investments insales and marketing and prototyping expenses in R&D .
The details of the operating expenses are as follows . Sales and marketing expenses were $4 .2million . This was a 16% increase from the prior quarter and a 26% increase from the same quarterlast year . This level of spending supports three key areas . Expanding sales opportunities, bothinternationally and domestically, new product development, including new Echo projects and ournew packet product, and lastly, additional investment in support of our packet product launch totake place this quarter . R&D expenses were $4 .5 million in the quarter . This level was a 12%increase from the prior quarter of $4 million, and a 68% increase in the same quarter last year. Theincrease from the prior period was expected based on the maturity of our current product offeringand more directly the ongoing development efforts in new areas such as packet products . G&Aexpenses were approximately $2 million . This was a slightly higher than our expectations and a43% increase from the same quarter last year . The increase is in part tied to internationalexpansion, although primarily due to Sarbanes Oxley 404 compliance preparation . Operatingincome was approximately 27% of revenues or $5 .8 million, which was our medium to long termmodel and is consistent with our projections . Total other income was $747,000 all of which isrelated to interest income .
We did have a benefit from income taxes primarily related to some foreign income taxes and sometrue ups of prior quarter's evaluation allowance release . Our pre-tax income was $6 .6 million or$0.19 per share, compared to a profit of $10 .3 million or $0 .29 per share, in the prior quarter and aprofit of 7 million or $0 .20 per share, from the same quarter last year, based on a comparativebasis . We are pleased with many aspects of our performance in the quarter .
Moving on to the balance sheet and cash flows . Cash flows used in operation were approximately$2 million for the quarter . This is primarily tied to higher accounts receivables and inventory .Together, they increased approximately $12 million over the prior quarter, which was more thanexpected. Cash at quarter end totaled 134 million, a decrease of approximately 23 million from theprior quarter . This reduction in cash is largely due to the stock repurchase program which wasannounced in December. During the quarter, we purchased 21 .5 million or approximately 1 .5million shares at an average price of $14.04 per share . As of this call, we have completed the entirebuyback of $35 million for approximately 2 .5 million shares at an average price of $13 .91 per share .At quarter end, accounts receivable were approximately $17 .2 million, this was a $9.7 millionincrease from the prior quarter .
We did project timing of shipments to be an issue coming into the qua rter and it was . Timing oforders and our shipping hiatus due to the December holidays added direct effect on linearity . Ibelieve we have collected approximately $8 million of the quarter end balance as of today's call .However, DSOs at quarter end were significantly higher than our long-term expectations as a resultand were approximately 72 days compared to 28 days in the last qua rter. As we stated last quarter,we would expect our long -term targets to be between 45 to 55 days and expect to return to thisrange in Q4 . Our long-term target is based on increased revenues generated through the resellerchannel and international customers which historically pay on extended terms as I have mentionedpreviously. Let me emphasize that our DSOs numbers are subject to change . The timing of salesand shipments has ays i r a give , _tarter is ai . :ays subject to H at in .
~ . . or, 'gasJ 1 a,
more nrento on a a at aoer c~ . . ., . er a o u it ,, _, ent ms ;ere ora,Ize .~ 4
quarter with 180 embioyees as pianned . up frump 173 in the prior quarter . The increases areprimarily in safe support , marketing, and engineering . Now let me review our projections for 04 c`fiscal 2005 .
www,(talICtragt ,r^nm • )17, Q~1 FF 1 c 4
Ex. E, Pg. 4
Ditech Communications DITC Q3 2005 Earnings Call Feb. 17, 2005--¢-• CompanyA TickerA Event Type A Date A
Please note in this regard the cautiona ry statements regarding these forward-looking statementsthat we gave at that time beginning of the call . Our Q4 outlook is supported by existing backlog ,
Nl deferred revenues of $1 .9 million , and our bookings forecast . Our projection is for revenues to grow,,, „_} approximately 8% to 10% from the Q3 level . We believe gross margins will approximate 75% and
will be based, or derived by the mix of products and market pricing and a channel dist ribution and,of course , overall revenue levels . The slight decrease in Q3 margins is primarily based on - fromwMasmQ3 margins is based on the increased international sales of VQA product. We expect overallVAMM"Moperating expenses for Q4 to increase slightly in absolute dollars from Q3 levels . This is primarilybased on continued investments in engineering including support of the developments of our soonto be announced packet product and support for sales and marketing in this area and in VQA .%Wd
Interest on cash will come from sho rt- term and long-term investments . Additional interest income isexpected to be at approximate levels as they were in this quarter . Our tax rate for Q4 should beapproximately 1 % based on the usage of valuation allowance releases under GAAP . In fiscal '06we will see a return to a more normalized tax rate of approximately 35% to 40% with a dependencyon implementing some tax strategy activities that are currently underway . Weighted average sharesshould approximate 33 .5 million in the fourth quarter based on the stock repurchase program andthe current stock level .
Moving on to the balance sheet , the balance sheet for Q4 ' 05 outlook is as follows . Cash at the endof Q4'05 will approximate $135 million as we previously stated . Capital spending will primarily berelated to test equipment , software tools and development platforms . It will approximate $500,000in the quarter. In terms of invento ry, current levels , including deferred revenues , should decline inthe fourth quarter . Related to our business and balance sheet, we currently have no long-term debt .We have no off-balance-sheet entities or associations , we have conservative revenue recognition,reserves, and other policies , we are providing GAAP information only, we believe we have, to thebest of our knowledge , disclosed all obligations and related pa rty transactions as required . Wecomply with all effective SEC and NASDAQ requirements related to Audit Committee complianceand independence . We will provide required certifications with our next SEC filings and we will becompliant with all effective Sarbanes -Oxley requirements . We are focused on section 404requirements as well . Our auditors do not perform consulting services for us such as systemreviews , IT reviews , or other forms of consulting services . They are - they currently only provideaudit , some tax compliance and M&A accounting support as applicable .
Some final points . Q3 represented our sixth consecutive qua rter of profitability . We exceeded ourQ3 revenue guidance . We continued to have impressive gross margins based on our operationalefficiencies . Our expected cash flows from operation over the combined Q3 and Q4 periods willapproximate $ 11 million to $13 million and provide us with cash at the end of our fiscal year ofapproximately $135 million . Approximately $8 million were accounts receivable balance at the endof the third quarter has been collected as of today 's call . And as of today we had completed ourstock repurchase program totaling $35 million . We continue to focus on balancing our investment s
Q
in the business with our strong sense of profitability . We move forward focused on growingrevenues from a more diversified customer base , expanding echo opportunities in North America,closing transactions in VQA throughout the world , and lastly, the introduction of our new packetinitiative in the coming quarter . With those comments, I'd like to turn it back over to Tim .
CT .motny Montgomery Chairman, President Chief Executive Officer
. . . . . . .Ca !Street .,,o,,, • 212 .93' 6515
Ex. E, Pg. 5
4-1C)
C)
)J0 ^Caw~
4-1
Ditech Communications DITCCompanvi Ticked
iiiiiiiii QUESTION AND ANSWER SECTION
Q3 2005 Earnings CallEvent Type
Feb . 17, 2005Date A
Operator : Absolutely . [Operator Instructions] . Our first question comes from the line of MarcusKupferschmidt with Lehman Brothers . Please go ahead .
<Q - Marcus Kupferschmidt>: Hi, Good afternoon, guys . Couple different questions . You talkedabout how the VQA outlook could be lumpy going forward, we talked about outlook could be lumpygoing forward, we talked about around 5 million in the April quarter . Is that still thinking aboutrelatively, you know, a 20% reception what you are thinking relative on where VAQ and trend,relative to the total revenues, forward?
<A>: Well good question Marcus is that VQA. The VQA in the fourth qua rter will be the first reallysubstantive , you know, contribution , if you will, it really culminates a 12 to 18 month sales cycle anddevelopment cycle . The product is mature , the platforms are mature, it's just really good timing fromthat standpoint. I'm hesitant to suggest that VQA will be a consistent X percent crib you tore to thequarterly revenues but we 're ramping to approximately 20% based on today ' s guidance in thefou rth quarter. I expect it to be a significant contributor throughout the rest of the calendar year andthe fiscal year as well , the new fiscal year . Without being any more specific, the lumpy nature just tomaybe share a litt le insight here, these transactions are ve ry large . We're at the beginning stageswith some of them or these are the initial deployments . There's kind of fits and sta rts associatedwith those deployments based on the customer' s ability to digest the product, our ability to assistthem in installing it . So the lumpiness really has to do with that as opposed to a - our belief in theproduct area . We've actually made a pretty substantial investment P in additional sales, marketing,and service talent to birth this product and support its growth and it's paying off nicely for us .
<Q - Marcus Kupferschmidt>: And in terms of kind of where you see the gross margins goingwe've talked about a long-term target that's below the levels today . The question I have is what doyou think gets you to those levels? We're talking about VQA being a significant percentage of yourrevenues here in the April quarter and yet we're still well above those long-term targets? .
<A>: Well, I think you're looking at a major price of the arsenal that we have as a company whenwe look at gross margins . We're very interested in doing everything we can to drive economies inour business . We've designed these platforms for cost, we're providing the highest performanceplatform in the marketplace for really less money than the competing products and still generatingthese kinds of margins . This is our plan . I want to make sure that we have the ability to priceproducts in the marketplace as needed in order to be competitive, in order to, perhaps, enjoyelasticity, should it exit in certain environments or certain countries, and I want to have theopportunity to utilize the appropriate channels of distribution on a country-by-country and accountbasis which gross margin essentially a allow us to do but we feel it's important to guide you longterm as we have as bill has happen given you in this mid to high 60s and then ideally continue todemonstrate that we can improve upon that.
<Q - Marcus Kupferschmidt>: [indiscernible] and then just kind of two housekeeping issuesbefore I turn it over . Can you highlight what were the sales of written down inventories during theJanuary quarter and what was the warranty accrual for the quarter? Thank you .
<A _ VY Hiarr Yamblyn >;-o^t nat -,as Dee' It:eJ ure emu" i , e ;u ua(ic d rya NruQUC ea .eer .
reserved Oased on excess na :ei-;a at c-e oc t t e ero1 `isoa so .na' .,eileve that 'vas
~K `~ -D f J 4i✓ he var'a _ to . an ~. .̂e 1'ual .e!
couple of hundred thousand .
<A>: Okay, return rates on our products, Marcus , are at company best levels . We've got anextraordinarily solid hardware and software platform and over 90% of the company ' s revenues wer e
www .Ca HCtreet .com r 212 .931 6515
Ex. E, Pg. 6
a)
Assam
ANUMP
r err
C
r g
~ ~rour
C
Ditech Communications I DITCCompanv♦ TickerA
Q3 2005 Earnings CallEvent Tvoe
Feb. 17, 2005Date
on this new platform so warranty reserves as a percentage have actually declined in the sevenyears that I've been with the firm .
<Q - Marcus Kupferschmidt>: All right and then we should assume that we can keep them atconsistent level going forward . Do you think that can continue to go down given that new productsare 90% of the revenues and if you're end of liking them sometime very soon you'll only be sellingthe new stuff going forward ?
<A> : Well, how far down they can go, really depends on just how conservative we want to be and Ithink we should be conservative but I think the long term trend continues to favor them, going downas a percentage of revenue .
<Q - Marcus Kupferschmidt>: Okay. Super . Thanks .
<A>: Thank you .
Operator : Thank you. Our next question comes from the line of David Kang with Roth Capital .Please go ahead .
<Q - David Kang> : Thank you . Good afternoon, guys .
<A>: Good afternoon.
<Q - David Kang> : Let's see. First of all, couple of numbers . What were depreciation, amortizationand the Sarbanes cost, please ?
<A>: Sarbanes cost, we haven't broken it out exactly, it has increased, probably, I don't have theexact magnitude but over $300,000 or $400,000 in the quarter as we've been getting farther andfarther into the 404 compliance it's - lots of consultants and a lot of internal folks . So, probably$300,000 or $400,000 in G&A in the quarter . What was your other question ?
<Q - David Kang>: Depreciation .
<A>: I think it was around $500,000 in the quarter .
<Q - David Kang >: All right . And should we expect Sarbanes to go up or kind of is it peaking orwhat do you think?
<A>: I think it's currently peaking . Although our intent is to hopefully pass the 404 compliance withthe closure of our audit in May-June time frame, but in this fourth quarter we are doing a lot of thetesting phases and we also have our auditors, Pricewaterhouse Cooper's in, going through theirprocess as well in the fourth quarter . So a lot of activity here in Q4, but I think the level should stayabout the same in the fourth quarter that it wasn't in the third .
<{Q - David Kang>: Got you . Let me just ask a litt le bit more on this VQA, how it's going to trendgong :orv .ard . So go ri_ ~r o third cia-t_>r I think a 55 rii't'm^, backlog of VQA mostl' .
.,ra s re case ne sro id ve exPeci A :.c . Ae G l it ua^a'
<A>: t : .c i i w- ; t-,-,e pipeline fcr : QA is a-:-,ally quite robust, Dave . .', e're at th ~ cn stages ofmany of the deployments and given some of our disclosures historically we' re trying to be a bitconservative in terms of what our expectations are, but I don't believe that, the magnitude of thedecline would be, in the offing here in the first quarter . Lumpy really just means that we can't contro l
www CaHHCtreet com • 212 .931 .6515 . 7
Ex. E, Pg. 7
a)
%saw
C
Ditech Communications I DITC 03 2005 Earnings Call I Feb. 17, 2005CompanyA TickerA Event Type A DateA
the timing of orders and obviously when the customer wants the product we need to ship it, therewill be times that internationally we'll ship the product and to have to defer the revenue justbasically because of either credit issues or first time customers or certain issues associated withthe requirement to actually have the product installed and accepted prior to acknowledgingrevenues . So the lumpiness really isn't a function of whether we believe that this is a long-termviable business for us but just the nature of the transactions and the parts of the world that we'll bedoing business with . Just because we're being aggressive in sales and marketing approach as wemove around the world doesn't mean we're going to change the conservative nature of how weaccount for the money .
<Q - David Kang>: Okay. Great. Regarding the customer you talked about that is going through amirage process . What is your assumption not just for this quarter but maybe over the next couple ofquarters, what are your assumptions ?
<A>: That's a good question . Let me suggest that we should probably just look at the facts as weunderstand them in the marketplace and look at some of the disclosures that have been made . Thedisclosures at the highest level is that it's business as usual for the next couple of years for thisparticular customer. They're growing, the network that we are tied to is one of the most profitablenetworks within their business and they're on record for suggesting it's business as usual . What Iwould suggest as well is I've seen something recently as a public announcement that thesubscriber growth that they've experienced or expect to experience in calendar 2005 is fairlydramatic . I think it was up 15% or 20% of their expectations for the year which I have to look at asvery positive for any of the suppliers to that network .
<Q - David Kang> : Well actually their CapEx guidance is about 11 % increase, I think it's going tobe around 2.6 billion . So that would imply about 11 % increase and 2 .6 billion actually does notinclude this 900 million of rebanding costs as they are going from 800 meg to 1 .9 gigahertz. Anyopportunity that you can get any piece of this 900 million cost of rebanding?
<A>: You know, Dave, I don't know the answer to that question, and I'd be - it would be wrong ofme to try to answer it .
<Q - David Kang> : Great . Let's see, just lastly on this channel partners . Can you give us a little bitmore color on that especially on the economics, as well as I know you're going to have a separateconference call for packet but at least tell us what economic impact will be .
<A>: Well, first of all, from a channel perspective , I think the key here is that there are ce rt aincountries , ce rtain accounts , within ce rtain countries , that will truly want to take title from ancountries , that will truly want to take title from an in-count ry source of our distributor, if will you willand as a result we will have to offer a margin opportunity to that player as well as suppo rt theiractivities, but we' ll offer a margin oppo rtunity which would have a somewhat compressing nature toour gross margins . However, the below the line costs , selling costs , would actually be less for thataccount, so the flip side of that is there will be ce rtain accounts and certain territories that will preferto actually act as an agent for us where the percentage that they take off the top of the transactionis dramatically less, but our requirements to suppo rt and sell and install and maintain the account isac°ual j higher. So in that case II hn re a higher gross margin and at the s -, :"te ,
s gate , e,.
~-I :vJJ y,J Job _ Jtlv .. vl Csbui`C J ;
bealthiesr gross --aro ns r na .:wa`e b siness _'-la,, v . e av a e
<Q- David Kang> . And regarding packet product any Kona of a preview ?
<A>: No, I was hoping to get out of that one. No, let me just suggest that, I would love to chat withyou about it very openly and we're going to do in that kind here in the next few weeks . We'reobviously encouraged by what we've done. We've spent about I months developing this product ,
r. .ali S., :r°.et 212 .931,6515 8
Ex. E, Pg. 8
UOANUXU"
Away&
0
C
t
Ditech Communications ( DITCCompanyA I Tickerl
Q3 2005 Earnings CallEvent Type A
Feb. 17, 2005Date A
we've got, you know, several more months to complete it and to move forward with the process ofgetting it ingratiated in the marketplace . I certainly don't want to get ahead of myself . I've learned alot through the VQA sales cycle experience and want to make sure that I'm appropriate i nsuggesting to you and everyone else the amount of time it will take us to be successful in gettingthe product sold . So we're suggesting revenues, late this calendar year, sometime in the thirdquarter which might move into the January timeframe . But we'll have a substantial bevy of activityover this next three quarters and try to report to you as much as we can . Clearly, we think that thiswill be a top-line support, and we like making money as a company . We know how to buildplatforms that generate great gross margins, as you can tell from the BVP Flex, and, you know,we're in the process of building a similarly adroit platform with this packet product . I urge everyonethat can to visit Vaughn and visit the booth and get as much information as you can at that time butobviously that's impractical for a lot of you on the call which is why we're going to have aconference call and have both our marketing and engineering VPs involved in that call and try toshare as much information with you as we can so that you will understand what it is we're building .
<Q - David Kang> : Got it . Just one more question . Any status as far as new domestic customeracquisitions?
<A>: No, I'm really happy with the teams that we've put together, and I think we're hired the rightfolks . They understand what goes on in these accounts . They've sold to them before with othercompanies . Some of them have been with a company for over a year . With - therefore, we havesome expectations budding with respect to their performance others, you know, half that period oftime. And I think I'm on record for suggesting that we marketed to one of the customers that wehave, I think Nextel, for as much as two years before we enjoyed the success that we have . So Idon't want to get ahead of myself here, either, but I really come back to having developed the rightplatforms, invested where no one else did . I look at the nature of the networks changing . There arecertain things that are being used as ring-backs and certain functions that are being expected fromcell phones today that are quite different than they were sometime ago, and I expect we'll seenetworks changing and some upgrades required in order to support those new technologies and Ihope and certainly expect that since we've been the one to invest most robustly in those areas thatwe will be the recipient of a majority of that up side .
<Q - David Kang >: Got it . Thank you very much
<A>: You bet . Thank you .
Operator : Thank you. Our next question comes from the line of Wes Cummins with B. Riley &Company .
<Q - Wesley Cummins >: Hey, good afternoon . Couple of questions left here . I think you'vebasically answered this one but on - Tim, on VQA you mentioned you expect to have revenue fromcustomers on three comp and since Q4 . Is one of those in North America ?
<A - Timothy Montgomery> : You're pushing now . Let us do this, Wes , and I know you want toknow the answer to that question, and it's not likely - let me just say that - but I think what we reallyv. --it ) 1- about ' : C \ _. Detail after thir-:s e - 'resit talk too much ;;n
-.io ~. . ✓ c uo.vi c .., u i jJG u C .J ❑ I V t7J IU t5. Cdi. a e 5CC
cJ .' as' o .' ~ orrr a he ie mat!ona, 7a Ker:iace neca -ecrese'ntec arcL a-:
,:CS a'
anything in North America . Clearly we're doing all ve can in North America, out the initiatives reaiiystarted internationally and that's where I expect the revenues to come .
rvvr'-v, C g ;i5treet, c1m 6 212 .9336 515
Ex. E, Pg. 9
NOON*
4-4C
00,
C
C6
Ditech Communications DITC I Q3 2005 Earnings Call I Feb. 17, 2005Company♦ TickerA Event Type A Date A
<Q - Wesley Cummins >: Okay . And the other thing, you had discussed in the past that there'scapacity expansion opportunity as well on CDMA similar to what you have with GSM on the VQAplatform . Any further progress on that as far as demonstrating that capability?
<A>: Well, we 've had progress technically and progress within ce rtain of the accounts , but notprogress that I can a rticulate to you, you know, as affecting our revenues or forward guidance atthis point. And I think it's probably appropriate for me to get pass the Petri dish environment before Italk about it any more in this context . We still believe there is a fairly significant , if not dramatic,improvement possible with CDMA , and we 're ge tting some real good data on that. But you really tohave put that into a business plan and the like , and get someone to agree to move forward with it .Something to note here , I mean , people probably saying , Gee, [ph] this is really a nice fou rthquarter potential here in VQA. If you note that pa rt of the process here has to do with budgeting onthe part of the carriers and no matter how successful you might have been over the last 12 monthsin ingratiating yourselves with them you still have to wait for a budget cycle in most cases to freemoney to allow them to buy things from you and I think we're experience a bit of that .
<Q - Wesley Cummins >: The last couple I have for Bill, is on the trend with G&A on the 404,should we see that start to fall off after Q4 ?
<A>: I sure hope so .
<Q - Wesley Cummins >: Okay .
<A>: We currently the compliance with 404 is pretty interesting . You have to do a lot . We've had todeal with additional people, consultants, documentation has been pretty dramatic, and that it'sdifficult . So the compliance with all these things for a smaller company are just as onerous as theyare for the Fortune 500 folks. So it's a pretty high bar to deal with . My hope is that we've gonethrough a lot of the stuff the first time, therefore in the second year it should start to trend down . Wedon't have to start from ground zero like we have here in this fiscal year . So the intent is hopefullythat the cost of the audit, to be frank - the cost of the audit to do 404 is probably 2 X the cost to doa financial audit, my year-end audit . So it's not cheap, but hopefully over time it will come down . Soour anticipation is there will be some decline in the cost in the next fiscal year .
<A>: Let me interject if I may, Wes this is an incredibly important area for a public company. All youhave to do is read the newspaper to see that . And compliance is critical in our mind, and supportingthis endeavor is absolutely a top priority for the company, which is why we started as early as wedid in the process . I don't think the architects of the program had any idea the - what the realimplications were going to be to smaller public companies who may not have the critical mass thatwe do, either in personnel or ability to pay for this, and I think there's - that's sad because I think it'sgoing to damage some smaller companies, but we're budgeting and planning for this to continue tobe a major piece of G&A expense going forward, and we think that's the prudent thing to do .
<Q - Wesley Cummins >: Okay . The second one on the OpEx, R&D, once the new packet productis introduced in the April quarter will we see that also tick down or do you have new programs thatyou're going to spend those R&D dollars on ?
<A> k X,. S SO C - _ - e 3eE
cieaz s so f' e , ,,Ie s pi KB a: a .b i. ~.
i ;- the, v,od oz racket voice and, that a `?umber v n teat ✓es v ne :,ndert - .1 o an DngoIFg oasi s
C del toe text 'es years . '-IS arena . o ,s s "iige ns s o yro Flu swell _ o i. o e
voice world, and we intend to be a player . a significant piayer in that arena . and I think that youshould anticipate that we will continue to have to invest and invest aggressively in the area and Ithink will you be happy that we do that over time .
<C - Wesley Cummins>: Okay. Thanks .
, . . . + . .CallStrect . . .em 212,93 6515 1 0
Ex. E, Pg. 10
a)
0
C
Ditech Communications DITC Q3 2005 Earnings Call Feb . 17, 2005Company A Tickers Event Type A Date A
Operator: Thank you . And our final question today comes from the line of Josh Goldberg withIntrepid Capital . Please go ahead .
<Q - Joshua Goldberg>: Hey, guys . How are you ?
<A>: Hi, Josh .
<Q - Joshua Goldberg> : Just a couple of things . One is , regarding gross margins , I guess yousaid it will tick down next quarter , obviously some of it is with these relationships you have on theVQA side, can you give us a sense as we look out to next fiscal year, the margins do they trend flatfrom where you think they will be in Q4 or will they be down ? Or give me some sense on that . Ihave kind of follow-up as well ?
<A>: Well, let me comment, because I think this is a real business issue more than it is a financialissue . I think there's a very delicate balance between the gas pedal and the brake, gross marginsversus the top-line revenues of the company, and in the seven and a half years that I've been withthe firm, I think we've managed that, excuse me, pretty well, such that we've gained market shareat the expense of our competitors and still maintain good gross margins . I want to reserve the rightto play the gross margin card whenever I need in to order to grow the business . I won't to be able todo that on a competitive basis and I won't to be able to do it from a, you know, from the standpointof if there is some form of what's the term I'm looking for? Excuse me, I just blanked on that . Butthe ability to see some elasticity in the marketplace, if you will . I'd like to think that we have someadditional economies that we can drive into the platforms . I'd like to think that when the hardwareplatform folks are finished with the current packet initiative that we might need to go back and lookat cost reducing, the platform that we're currently selling the echo and VQA products on . Weobviously do a lot of work with the suppliers and I think there's the potential to improve the costbasis of the product over the next 12 months in ways that we've certainly demonstrated over thelast 12 . I think our long term guidance, as I said earlier of mid to high 60s is really exemplary . I thinkthose are good numbers. I don't think we're going to be satisfied with those numbers and that's whywe continue to guide to those numbers and do better than that . But I want to be able to hold thetrump card, as I may need to .
<Q - Joshua Goldberg> : Got you . Okay great . Just on your customer concentration youdiscussed that because of one of your big customers going through a merger you're going to be alittle more conservative on their revenue, I guess in the near term . I guess if you can just give somecomfort for us to understand that the other big customer of yours is continuing to spend with youand your expectation there is that they will continue to grow as well .
<A>: Well, the best thing I can tell you, because I don't like to comment on a specific customer orby name if you will, because I think it 's inappropriate at times and I'm under nondisclosure withthem as well, but given that I've guided to a growth quarter, that we've guided to the combination ofthe third and the fourth qua rter being essentially what we guided to prior to the M&A transactionbeing announced , if you do the simple math and add the two, I'd like to you infer that we're still veryconfident in the business basis with that customer as well or we wouldn't be able to guide as weare . I would like to suggest that and I thought r .5out putting this i -to the call `D I d,-,-** -,%ar` be on
`hie ,hiro quanef we-e actuall'j greaser:nar an ~t rae of iW ua~-e d .E aa :ncu a w~urend ,n !"r me a- n _:iea 0 . e the nature ~, tre ra .: cusrc s rrati re c . . 35--: : Diu.
evenues ;r e carte; rat s _-rea_ .flare ;e 3 ure.
<Q - Joshua Goldberg> : I know and thin houg :'. sometimes you talk about how you enter aquarter with the same amount of backlog, notes on your Q . Would you be willing to tell us what thatnumber is at this point?
wwi: .ia ta?reet .cvni - 212 .93 .̀ .65 5 , 1 1
Ex. E, Pg. 11
a)
U)
4-4
0
Ditech Communications I DITC Q3 2005 Earnings Call I Feb . 17, 2005CompanyA TickerA Event Type A Date A
<A>: No, we never have. We've analyzed it historically and it's actually been as misleading at timesas it been elusatory. I don't think it's the appropriate thing to do, but we were certainly pleased withbookings in the quarter .
Operator : And thank you additional questions have queued up . We'll go next to the line of RokhiChoker [ph] with Hibernia . Please go ahead .
<Q>: Good afternoon . I'm going to try to ask you some questions where you don't have to answerthe names of the companies that are involved, so bear with me on this one . One of the big wirelesscompanies which has already merged, can you tell us what business is actually happening there? Ithink you've commented on that in the past . I just want to see if it's sort of picking up over there .That's the first question. Second question is, there's a company that used to have a commercialwhere they would drop a pin in front of the phone, and they have a wireless asset and I waswondering if they are a customer of yours . The third question is there's a slight looking, theguidance is similar to what you said as far as the second quarter for the fourth quarter, but it'slightly lower and I just wanted to know what has sort of changed over the last, three to four month . Iknow it's only a million dollars or so but it's down, but if you can just sort of comment on what'schanged in the landscape to make you sort of take it down just slightly .
<A>: Well . Let me answer the last one first . I think it the really comes down to a management teamthat is looking at issues of M&A, they are looking at some of the relative uncertainties in themarketplace and they are just trying to acknowledge them and factor that into our guidance . Youknow, a lot has happened between November 17th and today based on that announcement . If yourecollect, our guidance was November 17th and then the M&A transaction that you are alluding tohere was announced in December . So we 're just t ry to be prudent business managers and suggestthat we' re not , asleep at the wheel here we're taking this into consideration . Concerning, Iappreciate your reference to these accounts, so we don 't have to talk to them by name . There issome data that I can share with you . First of all, we have a historical relationship with the wirelineside of Sprint that goes back some years . They've not been a revenue producer for us for a coupleof years now , but we did a couple of transactions that were rather large with them historically, andwe learned what it was to do business with them . We've built some product that they wereenamored with and we worked on dealing with the element management system that wasassociated with installing in their account as well as the process of purchasing and the acquisitionand installation with them . So we ' re not neophytes there. The Nextel -Sprint merger is actually, wethink, quite good for us in that the key strategic people on the technical side are actually going to bethe Nextel players and this is what we ' ve seen publicly announced . So we think that's positive, butwe also have an account team calling on Sprint directly in Kansas City which we're hopeful the twopoints lead to the right end . In terms of your prior discussion , Cingular and AT&T . We have aninstalled base with Cingular of about $6 million, if I remember correctly that goes back to sometransactions about two years ago . So , again , we understand what it is to do business with them,what it is to, install and sell within that network . We also believe that they have a very positivesense for the quality of o .n~-products and we a sc.~refy address the issues that the., ha_ at the tim e
5E . 5. 3`c e SCG ea r:c e e :-,0 g e . - a, Sc r'~I~: "
c anc we `la'ne ,--c teamms acing dL 3u Nani go oOCK i ents earlle
anc t`ai s ",a-, these are eery tong sales „n_ vitr, pia .erS c this s?ze ..'t ^+, .hC t "v~ A
~crv ~%e e roar as ire go crs~a ,v^ y ,e re SugOCSt `~.ar ~u aK•a very long period of time to generate real revenues from them . i will tell you that as I look or plansfor the next fiscal year and forecasts and the like . I see entries from all of the major telephonecompanies in North America and many from around the world which is gratifying in that I believewe've hired the right people, we've given the right products to sell and market within the accounts
w . aiiStreet .c ~7~ 212 .931 .6515 1 2
Ex. E, Pg. 12
a)
a)
NANO=
AM"
ANN&
0
Ditech Communications I DITC Q3 2005 Earnings Call Feb. 17, 2005CompanyA TickerA Event Type A Date A
and we know how to build and provide these products with a level of quality that each of thesecompanies is looking for.
<Q>: All right . Let me just ask you a quick follow-up to something and I don't mean to push thepoint but I just want to try and get a better idea . You mentioned that basically from publicannouncements nothing has changed from the push to talk wireless company . But yet you are try tobe prudent and you're knocking down the number a little bit in the fourth quarter . So obviouslysomething is different from the public statements and what you're building into your model . Is thatfair?
<A>: Well, not really. I think if you add the third and the fourth quarter together, you've got,depending on how you do the math, you've got $44 .5 million, roughly and if you go back to ouroriginal guidance of 20 to 21, plus 24 in the fourth quarter you're within $300,000 or $400,000 ofthat . I look at this more as a function of timing as opposed to magnitude of transactions, but, again,we're trying to be mindful of what's going on and be as frank with you, the investor, as we can be .
<Q>: I appreciate it . Thank you
<A>: You bet. Thank you .
Operator: Thank you and time permits one more question that will be from the line of MarcusKupferschmidt with Lehman Brothers .
<Q - Marcus Kupferschmidt>: Just wanted to follow-up on a couple of clarifications . Could youtell us how many customers generated your VQA sales for this January quarter and then I have oneother follow-up?
<A>: Marcus, we don't usually break it down by how many customers generate the revenuespecifically . So that's not something we've done in the past. It's usually more than one, but wehaven't gotten into that clarification .
<Q - Marcus Kupferschmidt>: Because you talked about in the April quarter you'd have multiplecustomers .
<A>: That's correct.
<Q - Marcus Kupferschmidt >: Generating this 5 million . So I'm assuming one - I guess morecustomers than what you generated here, right? That is about new customers coming in, asopposed to the same ones buying more next quarter ?
<A>: Well again there is so much of this area of questioning , Marcus, ends up being competitivebecause there are people on the line that know exactly which transactions we're talking about whenwe talk about them, and I don't really want to provide any more data to them than I absolutely haveto in order to provide my investors information . I think you should presume that it was more thanone customer in the current quarter, but given the discussion we've had on this Asian customer ,c the discussion :'ie ra` ~r . "ener_' r rs imp far :hat you Jerstand
e r ian ),,u Zvi iu ci ~~, v~ ye ~o ac J- tira ✓vC ,fie `
or the -oon ,) nary not ,us ac ~A itirna j csto ~e corcentratho r
<Q - Marcus Kupferschmidt >: Okay . Ana along those lines, just to confirm did you recognize theVQA revenues on part of that 5 million order from a Chinese carrier that you talked about in thepast?
.Ca ; Street .corrs 212 .9 " 1 .65 ' 5 1 3
Ex. E, Pg. 13
Q)
WNW"
4-1Avm%k
0
A Aft
C
c3
Ditech Communications E DITCCompanyA TickerA
Q3 2005 Earnings CallEvent Type A
Feb. 17, 2005Date
<A>: We didn't talk about it being Chinese in particular, Marcus it was an Asian customer . Yes, wedid .
<0 - Marcus Kupferschmidt>: Okay. And then just on a separate topic, the inventories went up alittle over $2 million sequentially. Could you talk about you know if you look at the January inventoryversus the October inventories? Is the growth related to your finished goods and specifically relatedto echo canceller shipments versus VQA versus prototype of your voice over packet product thatyou may be sending to customers ?
<A>: Well, to be frank, we don't put prototyping into our inventory . Prototyping would be anexpensed item. So just to clarify that . Most of the inventory at the end of the January quarter wasrelated to the hybrid echo, BVP Flex products and some other product applications in the hybridecho space. We bought some things into address some opportunities we had with customers butbased on timing they didn't occur at the time that we thought they would . So we have some extrainventory. As we've talked about previously in our calls, we're sort of a turns-based business, andso we want to have enough inventory on hand in the right flavors to address the opportunities so atthe end of this quarter we did have more on hand in finished goods than we did in the prior quarter .
<Q - Marcus Kupferschmidt>: Great . Thank you very much .
Operator: Thank you. And speakers, at this time I'll turn the conference back over to you for closingremarks .
<A>: Thank you. I believe we've covered pretty much every question, and in the like I want to thankeveryone for taking the time to listen to today's call and urge you to go to the Vaughn show, if youcan, in San Jose, and most of the executives of the company will be there, be a nice opportunity foryou to meet some of us personally . Thanks very much, everyone.
Operator : Ladies and gentlemen, today's conference is being made available for replay startingtoday at 500 p .m . Pacific Time and running through Thursday, May 26, 2005 . You may access theAT&T replay service anytime by dialing 1-800-475-6701, entering the access code of 770201 . Ifcalling from outside the U .S., dial 1-320-365-3844, again access code of 770201 . Those numbersagain, 800-475-6701 domestically, and outside the U .S. 1-320-365-3844, followed the access code770201 . That does conclude your conference for today . We thank you for your participation and forusing AT&T Executive Teleconference. You may now disconnect.
. . . . . C a 1 1 St 2S' 5., y'm i , ~•i 4 C Gm .. , __1 s_
Ex. E, Pg . 14
FK Newswire - Financial Channel Powered by FinancialContent, Inc . Page 1 of
Ditch Communications Wins Orders to Deploy Voice Quality Assurance (VQA(TM)) Solutions inAsian NetworksOrders Exceeding $5M Are Result of Company's Investment in New Geographies and Mark Carriers' Acceptance of Related StocksVoice Quality Assurance(TM) Solutions to Increase Network Capacity and Improve Voice Quality 4 DITCMOUNTAIN VIEW, Calif., Aug. 24 /PRNewswire-FirstCall/ -- Ditech Communications Corporation (DITC - news)today announced that it has secured orders to deploy its Voice Quality Assurance (VQA(TM)) solutions with two new customers inAsia . The orders, totaling in excess of five million dollars, represent Ditech's first large deployments of its VQA(TM) technology in thisregion and underscore these carriers' acceptance of Ditech Communications' powerful voice processing technology to improve callclarity and enhance the performance of mobile networks, especially during peak calling periods .
Ditech Communications VQA(TM) solutions address a broad scope of voice quality issues associated specifically with mobile networksand provide a superior listening experience by significantly improving the sound quality of voice calls in noisy environments . Inaddition, VQA(TM) enables carriers that can utilize lower bit rate vocoders such as GSM Half Rate, a low cost alternative to expensivenetwork build outs, to increase network capacity during peak calling periods without the substantial degradation of voice qualitygenerally associated with these lower bit rate vocoders .
"We are very pleased to announce these significant orders representing new customers for Ditech in this high growth geography . Ourfocused investment in VQA sales and support personnel in Asia is showing additional results as evidenced by these large new orders,"said Tim Montgomery, president and CEO of Ditech Communications . "We're seeing momentum for our VQA solutions as carriers seekto cost-effectively expand their mobile networks while maintaining superior voice quality . "About Ditech Communication s
Ditech Communications Corporation is a global telecommunications equipment supplier for voice networks . Ditech Communications'voice products are high-capacity echo canceller and voice enhancement products that utilize advanced software and digital signalprocessor (DSP) technology . This combination of software and hardware allows Ditech Communications to deliver Voice QualityAssurance (VQA(TM)), a robust and cost-effective solution for voice enhancement in mobile networks . Ditech Communications (DITC)is listed on the Nasdaq National Market and is headquartered in Mountain View, California (web site : http ://www .diLechcorri .cgmz } .Forward-Looking Statements
This news release contains forward-looking statements regarding the benefits that customers will experience from Ditech's VQA(TM)voice processing technology . These statements are subject to a number of risks and uncertainties, including the risk that VQA(TM)voice processing technology may not perform in customers' networks as anticipated due to unforeseen technical difficulties, Otherrisks relating to Ditech are detailed in the section entitled "Future Growth and Operating Results Subject to Risk" in Ditech's Form 10-K for the year ended April 30, 2004 (filed July 14, 2004 with the Securities and Exchange Commission) ,
CONTACT : Janine Fogal, +1-650-623-1469, or investors, Bill Tamblyn,+1-650-623-1309, both for Ditech Communications Corporatio n
Web site : http ://www,ditechcom .com/`-`
financial channel has been developed exclusively for PR Newswire.com .For private- label solutions, please direct all inquires to infoOfinancialcontent .com .
Ditech Communications Reports Preliminary Q2 FY2005 Result sCompany to Host Investor Conference Call at 5 :00 p .m . Eastern Time Related StocksMOUNTAIN VIEW, Calif., Nov. 3 /PRNewswire-FirstCall/ -- Ditech Communications Corporation ( PIT - news) DITCreported today that based on preliminary financial data, it expects revenue for its second quarter of fiscal 200 5ended October 31, 2004 to be approximately $24 million . Pre-tax income from continuing operations is expected to be $0 .28 or $0 .29per share for the second quarter .
Ditech will host an investor conference call at 5 :00 p .m. EST today to review its preliminary financial results for its second quarterand its revenue expectations for the third quarter . President and CEO Tim Montgomery and Chief Financial Officer Bill Tamblyn willconduct the briefing (see details of today's conference call below) . Actual results for the second quarter ended October 31, 2004 willbe reported on November 18, 2004, at which time Ditech will host a conference call .
"Although our revenues were 67 percent higher than the same quarter last year we did not achieve our revenue goal," said Mr .Montgomery . "The revenue shortfall was the result of two factors . First, we experienced a delay in shipping a major VQA order in thequarter to an Asian customer . We are taking steps to facilitate the smooth delivery of this order in the second half of this year . Thesecond reason for lower revenue numbers was an apparent softening of demand in the North American wireless marketplace, asevidenced by our decline in shipments in the quarter. "
Continued Montgomery, "Overall, our company performance remained quite strong. Preliminary data suggests exemplary grossmargins of approximately 78% with pre-tax income from continuing operations of $0 .28 or $0 .29 per share . Our operating profit willapproximate 40 percent of revenue, and we have added $10 million of cash to our balance sheet in the quarter . We continue toexpand our sales and support teams to grow our international and domestic customer base . We are also targeting larger marketopportunities with our VQA initiative while simultaneously investing in future packet-based voice products . Finally, we've built a leanoperations and manufacturing model that has helped us deliver five straight quarters of profitability . "
In addition, given Ditech Communications' continued profitability, the company is evaluating its deferred tax asset valuationallowance, and this evaluation may result in a one time benefit to earnings from the release of any valuation allowance .
Q3 Fiscal 2005 Outloo k
At this time, Ditech Communications expects revenues in the third quarter of fiscal 2005 to be at the same level as the secondquarter .
Today's Conference Cal l
Ditech Communications will host an investor conference call and webcast at 5 :00 p .m . EST today, to review its second quarter fiscal2005 performance based on preliminary financial data and its outlook for the coming quarter . Any member of the public can listen tothe conference call by calling the following number : 612-332-0228 . The conference call will also be broadcast live over the Internetand can be accessed by going to the "Investors" section of the Ditech Communications' web site home page :http ://www.ditechcom .com/ . A replay of the conference call will be available via Ditech Communications' web site or by calling thedigitized replay number at 320-365-3844 . The conference call ID is : 753996. The replay of the conference call will be available onDitech Communications' website at the same location until November 18, 2004 ,
Ditech Communications Corporation
Ditech Communications Corporation is a global telecommunications equipment supplier for voice networks . Ditech Commi-voice products are high-capacity echo canceller and voice enhancement products that utilize advanced software and digits.processor (DSP) technology . This combination of software and hardware allows Ditech Communications to deliver Voice CAssurance (VQA), a robust and cost-effective solution for voice enhancement (including noise reduction) and echo eancell _,~chCommunications (DITC) is listed on the Nasdaq National Market and is headquartered in Mountain View, California (web s :- ;htt =ch- -n.com
mer is
~ r;_., .-
http://studio .financialcontent.com/Engine?Account=prnewswire&PageN,ame=NE' Ex . G, Pg. 1 3/13/2006
PR Newswire - Financial Channel Pow---d by FinancialContent, Inc .
CONTACT : media , Janine Fogal, +1-650-623 -1469, or investors,Bill Tamblyn , +1-650 -623-1309 , both of Ditec h
Web site : http ://www . ditechcom .com/
This financial channel has been developed exclusively for PR Newswire .com .For private- label solutions, please direct all inquires to info@financialcontent .com .
powered b y
c- Fina ncialIx
1 www . financialcontent .com
Nasdaq quotes delayed at least 15 minutes, all others at least 20 minutes .By accessing this page you agree to the following Terms and Conditions .
Historical data supplied by Genesis Financial Data Service sConference calls info supplied by OpenCompany
Fundamental data supplied by Mergent, Inc .Stock Quote data supplied by Telekurs and DTN
New company will have superior growth profile, unmatched asset mix, strongmargins and highly valuable wireless customer base
Will have both national wireless and global IP networks ; be competitivelywell positioned to meet growing demand for bundled and integrate d
communications solutions
Unprecedented opportunity to deliver true IP-based wireless multi-mediaservices
Sprint's local telecommunications business expected to be spun off toshareholders of the new company
OVERLAND PARK, Kan., and RESTON , Va. - December 15, 2004 - Sprint (NYSE :FON) and Nextel Communications, Inc . (NASDAQ : NXTL) today announced that theirboards of directors have unanimously approved a definitive agreement for a merger ofequals . The combination will create America's premier communications company -- aleading wireless carrier augmented by a global IP network that will offer consumer,business and government customers compelling new broadband wireless andintegrated communications services . The new company, which will be called SprintNextel, also intends to spin off to its shareholders Sprint's local telecommunicationsbusiness following the merger .
Sprint and Nextel currently have a combined total equity value of approximately $70billion and serve more than 35 million wireless subscribers on their networks and 5million additional subscribers through affiliates and partners . The two companies,along with their affiliates and partners, operate networks that directly cover nearly262 million people, more of the U .S . population than any other carrier .
The new company will have a balanced mix of consumer, business and governmentcustomers, as well as a strong spectrum position . Sprint Nextel will be well positionedin the fastest-growing areas of the telecommunications industry, including mobile dataand push-to-talk services, where Sprint and Nextel are innovators in technology, WithSprint's global Internet network, the new company will be positioned to providedifferentiated communications sc :tuns through integrated applications for businessand government and new br - i . . id wireless services for consumers .
today, it is estimated that Nextel shareholders would receive about 1 .28 Sprint Nextelshares and about $0 .50 in cash for each Nextel share .
A highly experienced management team will lead the new company . Gary D . Forsee,currently chairman and chief executive officer of Sprint, will become president andchief executive officer of Sprint Nextel . Timothy M. Donahue, currently president andchief executive officer of Nextel, will become chairman of the new company . Togetherthey have a proven track record of leadership and nearly six decades of industryexperience . Len Lauer, currently president and chief operating officer of Sprint, willserve as chief operating officer of the new company, and Paul Saleh, currently Nextel'sexecutive vice president and chief financial officer, will serve as chief financial officerof Sprint Nextel . Tom Kelly, executive vice president and chief operating officer atNextel, will become the new company's chief strategy officer . Barry 3 . West, Nextel'sexecutive vice president and chief technology officer, will serve as its chief technologyofficer . Leading the transition teams and serving as co-chief transition officers will beSteve Nielsen, senior vice president - finance at Sprint, and Richard Orchard, Nextel'ssenior vice president and chief service officer .
The Sprint Nextel Board will consist of 12 directors, six from each company, includingtwo co-lead independent directors, one from Sprint and one from Nextel .
Sprint Nextel will have its executive headquarters in Reston, Va ., and its operationalheadquarters in Overland Park, Kan . The new company's common stock will be listedon the New York Stock Exchange . The merger is expected to close in the second halfof 2005 and is subject to shareholder and regulatory approvals, as well as othercustomary closing conditions.
"This merger positions Sprint Nextel for greater success than either company couldhave achieved alone," said Gary Forsee . "The combination of Sprint and Nextel buildsstrength on strength . It will be a dynamic next-generation communications company,the provider of choice for businesses, government and consumers, and the only U .S .primarily wireless investment opportunity . Nextel is recognized as a leader i nprofitability, customer loyalty, revenue per customer, push to talk and marketing tobusinesses and government . Sprint excels in the consumer business and in providingadvanced wireless data services and global IP voice and data networks . Together, wewill be positioned to provide the high-value, integrated communications solutionscustomers increasingly demand . "
"We are confident that Sprint Nextel will generate efficiencies that will benefitcustomers, shareholders and employees . The new company will capitalize on itsleadership position in key growth areas, unmatched asset mix, clear technologymigration path, brand strength, innovative products and services and talentedemployees," said Tim Donahue . "We share compatible cultures built on traditions ofinnovation and competitiveness . We will have the resources to develop and deploycompelling, differentiated services by unleashing the combined strengths of the twocompanies, each of which is recognized as a product and network innovator . This is apro-competitive combination that will provide customer choice and create exciting newopportunities for all of our constituencies . "
• Reducing combined sales and marketing costs .• Lowering overall general and administrative costs ,a Reducing network capital expense after the merger by building a true IP-based
multimedia network .
In addition to scale efficiencies, customers and shareholders are expected to benefitfrom revenue synergies derived from extending the scope of existing and futureservices to a larger customer base .
Robust Network Capabilities
Sprint Nextel will have a clear technology migration path and valuable and extensivenetwork and spectrum assets .. The new company will have robust wireless networkcapabilities, including Nextel's current nationwide 800MHz/iDEN network, Sprint'snational 1 .9GHz/CDMA network and Sprint's nationwide deployment of wireless EV-DO. Sprint Nextel's plans include migrating over time Nextel services, including pushto talk service, to Sprint's CDMA EV-DO network . Sprint Nextel will have the capabilityto deploy new services on the two companies' 2 .5GHz combined spectrum holdingsthat together cover 85 percent of the households in the top 100 markets, SprintNextel will also utilize Sprint's nationwide fiber optic wireline network which extends to60 metropolitan networks and 37 international fiber points of presence . Thesecombined capabilities are expected to make Sprint Nextel a key partner for the largestcontent providers, systems integrators, mobile virtual network operators and othernew telecommunications entrants to jointly offer the full portfolio of consumer services- voice, data, video, wireline, and wireless - and customized enterprise applicationsand integrated solutions for business .
Customer Benefits
Sprint Nextel's anticipated deployment of new innovative products will provideadditional choices for customers and enable the company to vigorously compete in themarketplace .
For customers, this combination will allow Sprint Nextel to :
• Offer digital wireless service in all 50 states, Puerto Rico and the U .S. VirginIslands . Sprint Nextel and its affiliates and partners cover a total domesticpopulation of 262 million .
• Provide consumers more choice through investments in wireless multi-media,web browsing, messaging, gaming and music on the go .
• Provide robust integrated wireless and IP-based wireline solutions to business .• Improve customer service and sales performance through joint capabilities .• Invest to deploy next-generation wireless data services, bringing new and
compelling products to market to benefit consumers and businesses .• Cost effectively invest to improve wireless network quality and coverage .
Affiliates and Partners
Through i ts r: ionshi a . i lr~depei'L t its
der 1i5 ;~ _ cry .uniCu~r~n sx a rant ,na me m n [ I - , ; an .
extend for a substantial period of time after completion of the merger .
Spin-Off of Local Telecommunications : A Stronger Future
Following the close of the merger, Sprint Nextel intends to separate Sprint's localtelecommunications business, including consumer, business and wholesale operationsfrom its other businesses and then spin this separated company off to the SprintNextel shareholders in a transaction that is expected to be tax free . The inclusion ofSprint's North Supply business in the spin-off will be determined at a later date .
The local telecommunications business will have its own management team and boardof directors, consisting of an equal number of designees from Sprint and Nextel . Thelocal telecommunications business, which has 7 .7 million local access lines in 18 statesand had revenues of more than $6 billion over the past four quarters, will be thelargest independent local telephone company in the United States . It will havecommercial operating relationships with Sprint Nextel for mobile and long-distancenetwork services and will receive certain transitional services, including corporatesupport functions . Its corporate headquarters will be in Kansas City . Completion of thespin-off is subject to certain conditions, including regulatory approvals . Following thespin-off, its common stock is expected to be listed on the New York Stock Exchange .
"Sprint's local telephone operation has a long history of strong financial performance,"Forsee said . "It operates in some of the fastest growing areas in the United States,and has been an innovative leader in the development and sale of bundled serviceofferings. With its strong management team and employee base, it is well positionedto meet the needs of its customers ."
Sprint expects to continue to pay dividends at current levels through the closing of themerger . The spun off local telecommunications business is expected to pay quarterlydividends consistent with its financial prospects . Following the completion of themerger and until completion of the spin-off, it is contemplated that Sprint Nextel willpay a reduced quarterly dividend to shareholders in amounts consistent with thedividends that the spun-off local telecommunications business expects to pay .Following completion of the spin-off, it is anticipated that Sprint Nextel will ceasepaying dividends .
Information about Today's Meeting and Conference Call for the InvestmentCommunity
A meeting and conference call to discuss the transaction will be held this morning at9 :00 a .m. EST/8 :00 a .m. CST. Gary Forsee and Tim Donahue will make a presentationand take questions at the St . Regis Hotel, 2 East 55 Street, New York . For dial-inaccess to the meeting call one of : 1-816-650-0895, 1-816-650-0900, 1-866-311-1391, or 1-866-262-9306 with the passcode 34018148 . The call will also be availabievia webcast, accessible at www .sprint .com or www .nextel .com .
Satellite information for transmission of today's meeting :
Sprint is a global integrated communications provider serving more than 26million customers in over 100 countries, With more than $26 billion in annualrevenues in 2003, Sprint is widely recognized for developing, engineering anddeploying state-of-the-art network technologies, including the United States' firstnationwide all-digital, fiber-optic network and an award-winning Tier 1 Internetbackbone, Sprint provides local communications services in 39 states and the Districtof Columbia and operates the largest 100-percent digital, nationwide PCS wirelessnetwork in the United States .
About Nexte f
Nextel, a FORTUNE 200 company based in Reston, Va ., is a leading provider of fullyintegrated wireless communications services and has built the largest guaranteed all-digital wireless network in the country covering thousands of communities across theUnited States . Today 95 percent of FORTUNE 500 companies are Nextel customers,Nextel and Nextel Partners Inc . currently serve 297 of the top 300 U .S. markets whereapproximately 259 million people live or work .
Advisors
Sprint's financial advisors for the transaction were Lehman Brothers Inc . and CitigroupGlobal Markets Inc . ; its principal legal advisors were Cravath, Swaine & Moore LLP andKing & Spalding LLP . Nextei's financial advisors were Goldman Sachs & Co ., LazardFreres & Co . and JP Morgan Securities Inc ., and its principal legal advisors were JonesDay and Paul, Weiss, Rifkind, Wharton & Garrison .
Contacts
For Sprint: For Nextet :Investors InvestorsKurt Fawkes Paul Blaloc k913-794-1126 703-433-430 0Investorre l ations . sprintcom @maii .sprint .com Paul .Blalock @nextel .co m
MediaNick Sweers913-794-3460Nicholas . Sweers@maii . sprint .co m
Bill White913-794-1099Bill .White@maii,sprint .com
Additional Information and Where to Find I tIn connection with the proposed transaction, a registration statement on Form S-4 will be filedwith the SEC . SPRINT AND NEXTEL SHAREHOLDERS ARE ENCOURAGED TO READ THE
REGISTRATION STATEMENT AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC,INCLUDING THE JOINT PROXY STATEMENT/ PROSPECTUS THAT WILL BE PART OF THEREGISTRATION STATEMENT, BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUTTHE MERGER . The final joint proxy statement/prospectus will be mailed to shareholders of
Sprint and shareholders of Nextel . Investors and security holders will be able to obtain the
documents free of charge at the SEC's web site, www .sec .gov, from Sprint Investor Relations at
Sprint Corporation - Investor Relations, 6200 Sprint Parkway, Overland Park, Kansas 66251 orcall 800-259-3755, Option 1 or from Nextel Investor Relations at Nextel Investor Relations2001 Edmund Halley Drive, Reston, Virginia 20191 or call 703-433-4300 .
Participants In SolicitationSprint, Nextel and their respective directors and executive officers and other members ofmanagement and employees may be deemed to be participants in the solicitation of proxies inrespect of the merger . Information concerning Sprint's participants is set forth in the proxystatement dated, March 16, 2004, for Sprint's 2004 annual meeting of shareholders as filedwith the SEC on Schedule 14A. Information concerning Nextel's participants is set forth in theproxy statement, dated April 2, 2004, for Nextel's 2004 annual meeting of shareholders as filedwith the SEC on Schedule 14A. Additional information regarding the interests of participants ofSprint and Nextel in the solicitation of proxies in respect of the merger will be included in theregistration statement and joint proxy statement/prospectus to be filed with the SEC .
This site is managed and maintained by Citigate yard Verbinnen on behalf of Sprint and Nextel,who continue to operate independently pending the completion of the merger .
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes OO No ❑
The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $298,431,909 as of October 31, 2003 based upon the closing price on the NasdaqNational Market reported for such date . Excludes an aggregate of 4,450,470 shares of common stock held by officers and directors and by each person known by the registrant to own 5% ormore of the outstanding common stock. Exclusion of shares held by any such person should not be construed to indicate that a determination has been made that such person possesses thepower, directly or indirectly, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the registrant .
The number of shares outstanding of the Registrants Common Stock as of July 1, 2004 was 33,702,556 shares .
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive proxy statement relating to the annualmeeting of stockholders to be held September 17, 2004, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the fiscal year towhich this Report relates .
As of April 30, 2004, we had cash and cash equivalents of $94 .8 million as compared to $94 .5 million at April 30, 2003 . Additionally, wehad $30.7 million of short-term investments and $5 .0 million of long-term investments as of April 30, 2004, compared to no short-term orlong-term investments as of April 30, 2003 .
We have no material commitments other than obligations under operating leases, particularly our facility leases and normal purchases ofinventory, capital equipment and operating expenses, such as materials for research and development and consulting . We currently occupyapproximately 61,000 square feet of space in the two buildings that form our Mountain View, California headquarters . This facility leaseexpires in June 2006 .
Our contractual commitments, by year in which they become due, are as follows :
In addition, as part of the optical sale agreement with JDSU, JDSU has the right to require us to indemnify JDSU for any purchased butunused inventory at June 30, 2004, up to $2 .0 million, and certain costs incurred by JDSU in connection with the performance of certainwarranty obligations relating to optical products that we sold prior to July 16, 2003 . As of April 30, 2004, we have recorded an estimated lossprovision of $500,000 associated with our indemnification of the purchased but unused inventory, which loss provision was included in the losson disposition of our discontinued operations .
We believe that we will be able to satisfy our cash requirements for at least the next twelve months from our existing cash and short-terminvestments, and receipt of the balance of the sale proceeds from the sale of our optical business, as described above . At this time, we areunsure whether we will renew our $2 million line of credit, which expires in July 2004, as we currently see no immediate need for the facility .The ability to fund our operations beyond the next twelve months will be dependent on the overall demand of telecommunications providers fornew capital equipment . Should our customers' capital spending patterns deteriorate from their current levels, we could need to find additionalsources of cash during fiscal 2006 or be forced to reduce our spending levels to protect our cash reserves .
Future Growth and Operating Results Subject to Ris k
Our business and the value of our stock are subject to a number of risks, which are set out below . If any of these risks actually occur, ourbusiness, financial condition or operating results could be materially adversely affected, which would likely have a corresponding impact onthe value of our common stock . These risk factors should be carefully reviewed.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS, THE LOSS OF ANY ONE OF WHICHCOULD CAUSE OUR REVENUE TO DECREASE .
Our re . enue L ' toricutT'-.-hj i ~ corne from a small number _~ ; custom . ,Our I`ve L : cst cy st : . r,~rs accour _ ar appr ~, __~ah 86°~ . 81°~~~
substantially discontinued purchasing our product due to the down tu rn in the telecommunications industry .
Due to continuing difficult economic conditions, many operators in the telecommunications industry have expe rienced financialdifficulties , which have dramatically reduced their capital expenditures and, in some c ases, resulted in their fi ling for bankruptcy or beingacquired by other operators . We expect this trend to continue , which may result in our dependence on an even smaller customer base .
WE ARE RELIANT SOLELY ON OUR VOICE QUALITY BUSINESS TO GENERATE REVENUE GROWTH ANDPROFITABILITY , WHICH COULD LIMIT OUR RATE OF FUTURE REVENUE GROWTH .
We expect that, at least through fiscal 2005, our sole business will be the design, development and marketing of voice processingproducts . However, the relatively small size of the overall echo cancellation po rtion of the voice market, which is where we have derived themajority of our revenues to date, could limit the rate of growth of our business .
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND WE ANTICIPATE THATTHEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY AFFECT OUR STOCK PRICE .
Our quarterly operating results have fluctuated signi ficantly in the past and may fluctuate in the future as a result of several factors, someof which are outside of our control. If revenue declines in a quarter, as we experienced in the second half of fiscal 2001 and again in the secondquarter of fiscal 2002 , our operating results will be adversely affected because many of our expenses are relatively fixed . In part icular, salesand marketing, research and development and general and administrative expenses do not change significantly with variations in revenue in aquarter. Adverse changes in our operating results could adversely affect our stock price.
OUR REVENUE MAY VARY FROM PERIOD TO PERIOD . Factors that could cause our revenue to fluctuate from period to periodinclude :
• changes in capital spending in the telecommunications industry and larger macroeconomic trends ;
• the timing or cancellation of orders from, or shipments to, existing and new customers ;
• delays outside of our control in obtaining necessa ry components from our suppliers ;
• delays outside of our control in the installation of products for our customers ;
• the timing of new product and service introductions by us, our customers , our partners or our competitors ;
• delays in timing of revenue recognition , due to new con tractual terms with customers ;
• competitive pricing pressures ;
• variations in the mix of products offered by us ; and
• variations in our sales or distribution channels .
1 :1 p ,!~ icC :, sales cFour,ho cancellation products t}picalk come from our n . .:'or custorne ort'kring large _ loy
Our customers may delay or rescind orders for our existing products in anticipation of the release of our or our competitors' new products .Further, if our or our competitors' new products substantially replace the functionality of our existing products, our existing products maybecome obsolete, which could result in inventory write-downs, and/or we could be forced to sell them at reduced prices or even at a loss .
In addition, the sales cycle for our products is typically lengthy . Before ordering our products, our customers perform significant technicalevaluations, which typically last up to 90 days or more . Once an order is placed, delivery times can vary depending on the product ordered . Asa result, revenue forecasted for a specific customer for a particular quarter may not occur in that quarter . Because of the potential large size ofour customers' orders, this would adversely affect our revenue for the quarter .
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD . Many of our expenses do not vary with our revenue . Factors that couldcause our expenses to fluctuate from period to period include :
• the extent of marketing and sales efforts necessary to promote and sell our products ;
• the timing and extent of our research and development efforts ;
• the availability and cost of key components for our products ; and
• the timing of personnel hiring .
If we incur such additional expenses in a quarter in which we do not experience increased revenue, our operating results would beadversely affected .
IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, OUR PRODUCTS MAY BECOMEOBSOLETE .
We operate in an industry that experiences rapid technological change, and if we do not successfully develop and introduce new productsand our existing products become obsolete due to product introductions by competitors, our revenues will decline . Even if we are successful indeveloping new products, we may not be able to successfully produce or market our new products in commercial quantities, or increase ouroverall sales levels . These risks are of particular concern when a new generation product is introduced . Although we believe we will achieveour product introduction dates, there is no guarantee that they will not be delayed . The current product introductions, which are of greatestsignificance, are our new voice quality features, which are being offered on our new BVP-Flex and QVP voice processing hardware platforms .We are currently experiencing numerous customer evaluations of these features around the world and realized our first modest levels ofrevenue from these new products in the fourth quarter of fiscal 2004, and we expect more significant levels of revenue from these new featuresbeginning in fiscal 2005. However, should the customer evaluation process become protracted or the product not meet the customers'expectations, the timing of our realization of any revenues from these new products could be delayed or not materialize at all .
We have in the past experienced, and in the future may experience, unforeseen delays in the development of our new products . Forexample, in fiscal 2002, sales of our fourth generation echo cancellers and our broadband system generated the majority of our echo revenuewhile sales of our fifth generation, OC-3 echo cancellation system fell short of our expectations due to a sudden decline in projected demand inthe third quarter of fiscal 2002 from our primary targeted customer for this product, Qwest . This unexpected drop in demand for the OC-3product led to the write down of $3 .5 million of excess inventory in the third quarter of fiscal 2002 . Although we were eventually able to sellthis product after having written it down, there can be no assurances that we will be able to sell additional written-down units in the future .
We must devote a substantial amount of resources in order to develop and achieve commercial acceptance of our new products ; mostrecently, our BVP Flex and QVP hardware platforms and our voice quality features . Our new and/or existing products may not be able toaddress evolving demands in the telecommunications market in a timely or effective way . Even if they do, customers in these markets maypurchase or otherwise implement competing products .
WE ANTICIPATE THAT AVERAGE SELLING PRICES FOR OUR PRODUCTS WILL DECLINE IN THE FUTURE,WHICH COULD ADVERSELY AFFECT OUR ABILITY TO BE PROFITABLE.
We expect that the price we can charge our customers for our products will decline as new technologies become available, as we expandthe distribution of products through OEMs, value-added resellers and distributors internationally and as competitors lower prices either as aresult of reduced manufacturing costs or a strategy of cutting margins to achieve or maintain market share . If this occurs, our operating resultswill be adversely affected . We expect price reductions to be more pronounced, at least in the near term, due to our planned expansioninternationally . While we intend to reduce our manufacturing costs in an attempt to maintain our margins and to introduce enhanced productswith higher selling prices, we may not execute these programs on schedule . In addition, our competitors may drive down prices faster or lowerthan our planned cost reduction programs . Even if we can reduce our manufacturing costs, many of our operating costs will not declineimmediately if revenue decreases due to price competition .
In order to respond to increasing competition and our anticipation that average-selling prices will decrease, we are attempting to reducemanufacturing costs of our new and existing products . If we do not reduce manufacturing costs and average selling prices decrease, ouroperating results will be adversely affected . Manufacturing is currently outsourced to a small number of contract manufacturers . We believethat our current contract manufacturing relationships provide us with competitive manufacturing costs for our products . However, if we orthese contract manufacturers terminate any of these relationships, or if we otherwise establish new relationships, we may encounter problems inthe transition of manufacturing to another contract manufacturer, which could temporarily increase our manufacturing costs and causeproduction delays .
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN ORINCREASE SALES OF OUR PRODUCTS.
The markets for our products are intensely competitive, continually evolving and subject to rapid technological change . We may not beable to compete successfully against current or future competitors, including our customers . Certain of our customers also have the ability tointernally produce the equipment that they currently purchase from us . In such cases, we also compete with their internal product developmentcapabilities . We expect that competition will increase in the future . We may not have the financial resources, technical expertise or marketing,manufacturing, distribution and support capabilities to compete successfully .
We face competition from two major direct manufacturers of stand-alone voice processing products, Tellabs and Natural Microsystems .The other competition in these markets comes from voice switch manufacturers . These manufacturers don't sell voice processing products orcompete in the stand-alone voice processing product market, but they integrate voice processing functionality within their switches, either ashardware modules or as software running on chips . A more widespread adoption of internal voice processing solutions would present anincreased competitive threat to us, if the net result was the elimination of demand for our voice processing system products . With the downturnin spending in the telecommunications industry, service providers appear to be exploring these alternative sources of voice processing morethoroughly, while they wait for more robust capital spending budgets to return . If our customers decide to design these alternative sources ofvoice processing functionality into their future network expansion, it could adversely impact the speed and duration of our sales recovery .
Most of our competitors and potential competitors have substantially greater name recognition and technical, financial and marketingresources than we do . Such competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies anddevote substantially more resources to developing new products than we will .
WE NOW LICENSE OUR ECHO CANCELLATION SOFTWARE FROM TI, AND IF WE DO NOT RECEIVE THE LEVELOF SUPPORT WE EXPECT FROM TI, IT COULD ADVERSELY AFFECT OUR ECHO CANCELLATION SYSTEMS BUSINESS .
In April 2002, we sold our echo cancellation software technology and future revenue streams from our licenses of technology acquiredfrom Telinnovation to TI, in return for cash and a long-term license of the echo cancellation software . Although the licensing agreement hasstrong guarantees of support for the software used in our products, if TI were to breach that agreement in some fashion, and not delivercomplete and timely support to us, our success in the echo cancellation systems business could be adversely affected .
IF TI LICENSES ITS ECHO CANCELLATION SOFTWARE TO OTHER ECHO CANCELLATION SYSTEMSCOMPANIES, THIS COULD INCREASE THE COMPETITIVE PRESSURES ON OUR ECHO CANCELLATION SYSTEMSBUSINESS.
Under the terms of the sale agreement of our echo cancellation software to TI, TI is precluded from licensing the software to other echocancellation systems companies for a period of two years from the date of the sale and to two specified competitors for a period of four yearsfrom the date of sale . If TI were to license its echo cancellation software to other echo cancellation systems companies after two years, thiscould increase the level of competition and adversely affect our success in our echo cancellation systems business .
WE OPERATE IN AN INDUSTRY EXPERIENCING RAPID TECHNOLOGICAL CHANGE, WHICH MAY MAKE OURPRODUCTS OBSOLETE .
Our future success will depend on our ability to develop, introduce and market enhancements to our existing products and to introducenew products in a timely manner to meet our customers' requirements . The markets we target are characterized by :
• rapid technological developments ;
• frequent enhancements to existing products and new product introductions ;
• changes in end user requirements ; and
• evolving industry standards .
WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID CHANGES . The emerging nature ofthese products and their rapid evolution will require us to continually improve the performance , features and reliability of our products,particularly in response to competitive product offerings . We may not be able to respond quickly and effectively to these developments . Theintroduction or market acceptance of products incorporating superior technologies or the emergence of alternative technologies and newindustry standards could render our existing products , as well as our products currently under development , obsolete and unmarketable . Inaddition , we may have only a limited amount of time to penetrate certain markets , and we may not be successful in achieving widespreadacceptance of our products before competitors offer products and services similar or superior to our products . We may fail to anticipate orrespond on a cost-effective and timely basis to technological developments , changes in industry standards or end user requirements . We mayalso ex- r: iiica : : ~'Javs r ,,j )_1u,-, development or introduction . In addition, we may fail to release nevN products or to upgrade or
WE MAY NEED TO MODIFY OUR PRODUCTS AS A RESULT OF CHANGES IN INDUSTRY STANDARDS . The emergence ofnew industry standards , whether through adoption by official standards committees or widespread use by service providers , could require us toredesign our products . If such standards become widespread , and our products are not in compliance , our current and potential customers maynot purchase our products . The rapid development of new standards increases the risk that our competitors could develop and introduce newproducts or enhancements directed at new industry standards before us .
IF INCUMBENT AND EMERGING COMPETITIVE SERVICE PROVIDERS AND THE TELECOMMUNICATIONSINDUSTRY AS A WHOLE EXPERIENCE ANOTHER DOWNTURN OR REDUCTION IN GROWTH RATE, THE DEMAND FOROUR PRODUCTS WILL DECREASE, WHICH WILL ADVERSELY AFFECT OUR BUSINESS .
We have experienced, and continue to experience, as have other companies in our sector, a slowdown in infrastructure spending by ourcustomers. This trend of lower capital spending in the telecommunications industry contributed to the decline in our revenues, beginning in thesecond half of fiscal 2001, and although we have experienced some level of recovery in sales to these customers, sales have not fully recoveredto the levels we saw prior to the decline in fiscal 2001 . Our success will depend in large part on development, expansion and/or upgrade ofvoice and communications networks. We are subject to risks of growth constraints due to our current and planned dependence on domestic andinternational telecommunications service providers . These potential customers may be constrained for a number of reasons, including theirlimited capital resources, economic conditions, changes in regulation and consolidation .
SOME OF THE KEY COMPONENTS USED IN OUR PRODUCTS ARE CURRENTLY AVAILABLE ONLY FROM SOLESOURCES, THE LOSS OF WHICH COULD DELAY PRODUCT SHIPMENTS .
We rely on certain vendors as the sole source of certain key components that we use in our products . For example, we rely on TI as thesole source vendor for the digital signal processors used in our echo cancellation and voice enhancement products . We have no guaranteedsupply arrangements with our vendors . Any extended interruption in the supply of these components would affect our ability to meet scheduleddeliveries of our products to customers . If we are unable to obtain a sufficient supply of these components, we could experience difficulties inobtaining alternative sources or in altering product designs to use alternative components . Resulting delays or reductions in product shipmentscould damage customer relationships, and we could lose customers and orders . Additionally, because these vendors are the sole source of thesecomponents, we are at risk that adverse changes in prices of these components could have negative impacts on the cost of our products orrequire us to alter product designs to use alternative, less expensive components .
SOME SUPPLIERS OF KEY COMPONENTS MAY REDUCE THEIR INVENTORY LEVELS WHICH COULD RESULT INLONGER LEAD TIMES FOR FUTURE COMPONENT PURCHASES AND ANY DELAYS IN FILLING OUR DEMAND MAYREDUCE OR DELAY OUR EXPECTED PRODUCT SHIPMENTS AND REVENUES.
Although we believe there are currently ample supplies of components for our products, it is possible that in the near-term componentmanufacturers may reduce their inventory levels and require firm orders before they manufacture components . This reduction in stocking levelscould lead to extended lead times in the future . If we are unable to procure our planned quantities of materials from all prospective suppliers,and if we cannot use alternative components, we could experience revenue delays or reductions and potential harm to customer relationships .An example of this risk occurred in the third quarter of fiscal 2001 as two vendors supplying us with components used in our OC-3 product didnot meet our total demand. As a result, the schedule shipment of our OC-3 product was delayed, which contributed to our revenue shortfall inthat quarter.
WE MAY EXPERIENCE UNFORESEEN PROBLEMS AS WE DIVERSIFY OUR INTERNATIONAL CUSTOMER BASE,WHICH WOULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS.
Historically, we have sold mostly to customers in North America . We are continuing to execute on our plans to expand our internationalpresence through the establishment of new relationships with established international OEMs, value-added resellers and distributors . However,we may still be required to hire additional personnel for the overseas market and incur other unforeseen expenditures . Our planned expansionoverseas may not be successful . As we expand our sales focus further into international markets, we will face new and complex issues that wemay not have faced before, such as expanded risk to currency fluctuations, longer payment cycles, manufacturing overseas, political o reconomic instability, potential adverse tax consequences and broadened import/export controls, which will put additional strain on ourmanagement personnel . In the past, the vast majority of our international sales have been denominated in U .S . dollars ; however, in the future,we may be forced to denominate a greater amount of international sales in foreign currencies. Additionally, the number of installations we willbe responsible for is likely to increase as a result of our continued international expansion . In the past, we have experienced difficultiesinstalling one of our echo cancellation products overseas . In addition, we may not be able to establish more relationships with internationalOEMs, value-added resellers and distributors . If we do not, our ability to increase sales could be materially impaired .
IF WE LOSE THE SERVICES OF ANY OF OUR KEY MANAGEMENT OR KEY TECHNICAL PERSONNEL, OR AREUNABLE TO RETAIN OR ATTRACT ADDITIONAL TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPANDOUR BUSINESS COULD BE IMPAIRED .
We depend heavily on Timothy K. Montgomery, our Chairman, President and Chief Executive Officer, and on other key management andtechnical personnel, for the conduct and development of our business and the development of our products . We have attempted to mitigatesome of this risk through some key hires over the past couple of years . However, there is no guarantee that if we lost the services of one ormore of these people for any reason, that it would not adversely affect our ability to conduct and expand our business and to develop newproducts . We believe that our future success will depend in large part upon our continued ability to attract, retain and motivate highly skilledemployees . However, we may not be able to do so.
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO PROTECT OURINTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT.
We may rely on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure agreements and other contractualprovisions and technical measures to protect our intellectual property rights . Nevertheless, such measures may not be adequate to safeguard thetechnology underlying our products . In addition, employees, consultants and others who participate in the development of our products maybreach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any such breach . In addition,we may not be able to effectively protect our intellectual property rights in certain countries . We may, for a variety of reasons, decide not to filefor patent, copyright or trademark protection outside of the United States . We also realize that our trade secrets may become known throughother means not currently foreseen by us . Notwithstanding our efforts to protect our intellectual property, our competitors may be able todevelop products that are equal or superior to our products without infringing on any of our intellectual property rights .
32
Ex. I, Pg. 9
http://wvwv.sec .gov/Archives/edgar/data/1080667/000104746904023288/a2 l 39985z 10-k .htm 3/13/2006
Page 38 of 83
OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRDPARTIES, WHICH MAY EXPOSE US TO LITIGATION.
Although we do not believe that our products infringe the proprietary rights of any third parties, third parties may still assert infringementor invalidity claims (or claims for indemnification resulting from infringement claims) against us. Such assertions could materially adverselyaffect our business, financial condition and results of operations . In addition, irrespective of the validity or the successful assertion of suchclaims, we could incur significant costs in defending against such claims .
ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
From time to time, we review acquisition and investment prospects that would complement our existing product offerings, augment ourmarket coverage, secure supplies of critical materials or enhance our technological capabilities . Acquisitions or investments could result in anumber of financial consequences, including :
• potentially dilutive issuances of equity securities ;
• large one-time write-offs ;
• reduced cash balances and related interest income ;
• higher fixed expenses which require a higher level of revenues to maintain gross margins ;
• the incurrence of debt and contingent liabilities ; and
• amortization expenses related to other acquisition related intangible assets and impairment of goodwill .
Furthermore, acquisitions involve numerous operational risks, including :
• difficulties in the integration of operations, personnel, technologies, products and the information systems of the acquiredcompanies ;
• diversion of management's attention from other business concerns ;
• diversion of resources from our existing businesses, products or technologies ;
• risks of entering geographic and business markets in which we have no or limited prior experience ; and
• potential loss of key employees of acquired organizations .
Item 7A-Quantitative and Qualitative Disclosures About Market Ris k
Our exposure to market risk due to changes in the general level of United States interest rates relates p rimarily to our cash equivalents andshort -term and long-term investment portfolios . Our cash, cash equivalents, and sho rt -term and long-term investments are primarily maintainedat three, ~ c : Financial institutioi iii the L- :-States . States. ~ of :April 30 . ?004 . u c did not hold am deri%ative instruments . he nrimar~
investment securities that ba e maturities of more than three months at the date of purchase but current maturities o : ;-s than one sear areconsidered short-term investments . Investment securities with remaining maturities of one %ear or snore are considered 1cn_-terns investments .Our short-term and long-term in estments consist primarily of U .S . Government securities and corporate bonds, as well , commercial paper,asset backed securities and certificates of deposit . Short-term and Jones-term
825 East Middlefield RoadMountain View, California 94043
(650) 623-130 0(Address, including zip code, and telephone number, including area code, of registrant's executive offices )
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities ExchangeAct of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subjectto the filing requirements for the past 90 days .
_ . 0
YES 9 NO 0
As of i\u ust : t, _Uu4_ 33,1Tb U~6 shares of 1 h : Rcoistrant,s common stock ~~crc outstanwn .
Page 22 Of 3 7
Payments due by perio dLess than 1 to 3 3 to 5 Over 5
Contractual Obliga tions Total 1 year years years years
We believe that we will be able to satisfy our cash requirements for at least the next twelve months from our existing cash and investmentbalances and receipt of additional sales proceeds from the sale of our optical business . The ability to fund our operations beyond the nexttwelve months will be dependent on the overall demand of telecommunications providers for new capital equipment . Should our customers'capital spending patterns deteriorate from their current levels, we could need to find additional sources of cash during the latter part of fiscal2006 or reduce our spending to protect our cash reserves .
Future Growth and Operating Results Subject to Risk
Our business and the value of our stock are subject to a number of risks, which are set out below . If any of these risks actually occur, ourbusiness, financial condition or operating results could be materially adversely affected, which would likely have a corresponding impact onthe value of our common stock . These risk factors should be carefully reviewed.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS, THE LOSS OF ANY ONE OF WHICHCOULD CAUSE OUR REVENUE TO DECREASE .
Our revenue historically has come from a small number of customers . Our five largest customers accounted for approximately 96% of ourrevenue in the first quarter of fiscal 2005 and 86% and 81% of our revenue in fiscal 2004 and 2003, respectively . Our two largest customersaccounted for 49% and 36% of our revenues in the first quarter of fiscal 2005 . A customer may stop buying our products or significantlyreduce its orders for our products for a number of reasons, including the acquisition of a customer by another company or a delay in ascheduled product introduction . If this happens, our revenue could be greatly reduced, which would materially and adversely affect ourbusiness . This occurred in fiscal 2001 when Qwest, then our largest customer, substantially discontinued purchasing our product due to thedown turn in the telecommunications industry .
Due to continuing difficult economic conditions, many operators in the telecommunications industry have experienced financial difficulties,which have dramatically reduced their capital expenditures and, in some cases, resulted in their filing for bankruptcy or being acquired by otheroperators . We expect this trend to continue, which may result in our dependence on an even smaller customer base .
Certain domestic carriers have recently announced the potential softening of their capital spending plans. Although we do not expect this tohave an immediate impact on the coming quarter's revenues, we can not predict the impact it may have on the third quarter and beyond due tothe relatively short order horizon given by our customers .
WE ARE RELIANT SOLELY ON OUR VOICE QUALITY BUSINESS TO GENERATE REVENUE GROWTH ANDPROFITABILITY , WHICH COULD LIMIT OUR RATE OF FUTURE REVENUE GROWTH .
We expect that, at least through fiscal 2005 , our sole business will be the design, development and marketing of voice processing products .However, the relatively small size of the overall echo cancellation portion of the voice market , which is where we have derived the majority ofour revenues to date, could limit the rate of growth of our business .
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST. AND WE ANTICIPATE THAT THEYJVIAY CO\TEN UE TO DO SO TN THE FUTURE. ',bHICFI COULD AIWERSELY .AFFECT OUR STOCK PRICE.
and marresearch ;ind deg elopmcnt and cenersl and administrative cxpcnses do not chaun "I' ;1111 icantiv ith ti uriatio- .- . res cnue in aquarter . Ad s erse changes in our operating results could adverseh affect our stock price .
OUR REV LM P N1AY VARY FROO1 PERIOD I O PERIOD . Factors that could cause our rev enue to t'luctuate from period to period include :
cnan e in capitai spending ;n the urnn.uric,it r.s it dtutr, ai i ;nr ,r.acr ?cc nomic trends ;
Ex. J, Pg. 2
http://www.sec.govi"Archives/edgar/data/ 1080667/000110465904026992/au4-10231_1 l Oq.htm 3/14/2006
• the timing or cancellation of orders from, or shipments to, existing and new customers ;
• delays outside of our control in obtaining necessary components from our suppliers ;
• delays outside of our control in the installation of products for our customers ;
• the timing of new product and service introductions by us, our customers, our partners or our competitors ;
• delays in timing of revenue recognition, due to new contractual terms with customers ;
• competitive pricing pressures ;
• variations in the mix of products offered by us ; and
• variations in our sales or distribution channels .
In particular , sales of our echo cancellation products typically come from our major customers ordering large quantities when they deploy aswitching center . Consequently , we may get one or more large orders in one quarter from a customer and then no orders in the next quarter. Asa result , our revenue may vary signific antly from quarter to quarter.
Our customers may delay or rescind orders for our existing products in anticipation of the release of our or our competitors ' new products .Further , if our or our competitors ' new products subst antially replace the functionality of our existing products, our existing products maybecome obsolete, which could result in inventory write-downs , and/or we could be forced to sell them at reduced prices or even at a loss .
In addition, the sales cycle for our products is typically lengthy . Before ordering our products, our customers perform significant technicalevaluations, which typically las t up to 90 days or more . Once an order is placed, delive ry times c an vary depending on the product ordered . Asa result, revenue forecasted for a specific customer for a pa rt icular qua rter may not occur in that qua rter. Because of the potential large size ofour customers ' orders, this would adversely affect our revenue for the qua rter .
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD . Many of our expenses do not vary with our revenue . Factors that could causeour expenses to fluctuate from period to period include :
• the extent of marketing and sales efforts necessary to promote and sell our products ;
• the timing and extent of our research and development efforts ;
• the availability and cost of key components for our products ; and
• the timing of personnel hiring .
If we incur such additional expenses in a quarter in which we do not experience increased revenue, our operating results would be adverselyaffected .
IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, OUR PRODUCTS MAY BECOMEOBSOLETE .
our p roduC :nT ;Oductiur dates, Ihere is no `~11arantee that tiger Aoiil not t - ..ciareLd . ~. . .e current product, sntroduct{on . ohIch ire of greates t
significance . are our new voice qualit} features . o hick are being offered ui! our new BI P-Flex and QVP voice processing hardware platthrms .'A 'c are currently experiencing numerous customer evaluations of these features around the world and realized our first modest levels ofrevenue from these ness products in the fourth quarter of fiscal 2001 . and o e expect more significant ley els of res enue from these Hess featuresduring fiscal 2005 . However . should the customer esaluation process become protracted or the product not meet the customers' expectations_the tuning a our realization of any revenucs from these rico products could be deter ed or not materialize at ail .
15 e :;as ll ; die _ . . _ _` .perlenceu . and in tai lulu e n13~ C\herIcnce ann)lcsec°n .7c;es iii the; Jesciopnic o All ilea t~YeJuCt~, 1-'Or c .A_f :l ;p e . :ltti s cel S ai - Ill cur ;putt gen raLun ecflo canceiicr , in .' , thar. :1 .stein venerated the maioritv of eur echo rc%irnur: 1~bile sates i .
ir . ._ri C :1 o C_~ . .,:i~ ., ,1iIv I
http ://www.sec.gov/Archives/edgar/data//080667/000110465904026992/a04 Ex . J, Pg. 4 3/14/2006
Page 25 of 3 7
quarter of fiscal 2002 from our primary targeted customer for this product, Qwest. This unexpected drop in demand for the OC-3 product ledto the write down of $3 .5 million of excess inventory in the third quarter of fiscal 2002 .
18
J. Pg . 5
http://www.see .gov/Archives/edgar/data/ 1080667/000110465904026992/a04-10231 _11 Oq .htm 3/14/2006
Page 26 of 3 7
Although we were eventually able to sell this product after having wri tten it down, there can be no assur ances that we will be able to selladditional written-down units in the future .
We must devote a substan tial amount of resources in order to develop and achieve commercial acceptance of our new products; most recently,our BVP Flex and QVP hardware platforms and our voice quality features . Our new and/or existing products may not be able to addressevolving demands in the telecommunications market in a timely or effective way. Even if they do, customers in these markets may purchase orotherwise implement competing products .
WE ANTICIPATE THAT AVERAGE SELLING PRICES FOR OUR PRODUCTS WILL DECLINE IN THE FUTURE, WHICHCOULD ADVERSELY AFFECT OUR ABILITY TO BE PROFITABLE .
We expect that the price we can charge our customers for our products will decline as new technologies become available, as we expand thedistribution of products through OEMs, value-added resellers and distributors internationally and as competitors lower prices either as a resultof reduced manufacturing costs or a strategy of cutting margins to achieve or maintain market share . If this occurs , our operating results will beadversely affected . We expect price reductions to be more pronounced , at le as t in the near term , due to our planned exp ansion internationally .While we intend to reduce our manufacturing costs in an attempt to maintain our margins and to introduce enh anced products with higherselling prices , we may not execute these programs on schedule . In addition, our competitors may drive down prices faster or lower th an ourplanned cost reduction programs . Even if we can reduce our m anufacturing costs, many of our operating costs will not decline immediately ifrevenue decreases due to price competition .
In order to respond to increasing competition and our anticipation that average-selling prices will decrease , we are attempting to reducemanufacturing costs of our new and existing products . If we do not reduce manufacturing costs and average selling prices decrease, ouroperating results will be adversely affected . Manufactu ring is currently outsourced to a small number of contract manufacturers . We believethat our current contract manufacturing relationships provide us with competitive m anufacturing costs for our products . However, if we orthese contract manufacturers terminate any of these relationships , or if we otherwise establish new relationships , we may encounter problems inthe transition of manufacturing to another contract manufacturer , which could temporarily increase our m anufacturing costs and causeproduction delays .
WE FACE INTENSE COMPETITION , WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR INCREASESALES OF OUR PRODUCTS .
The markets for our products are intensely competitive , continually evolving and subject to rapid technological change . We may not be able tocompete successfully against current or future competitors , including our customers . Ce rtain of our customers also have the ability to inte rnallyproduce the equipment that they currently purchase from us . In such cases, we also compete with their internal product developmen tcapabilities . We expect that competition will increase in the future . We may not have the financial resources, technical expe rtise or marketing,manufacturing, distribution and support capabilities to compete successfully .
We face competition from two major direct manufacturers of stand-alone voice processing products, Tellabs and Natural Microsystems . Theother competition in these markets comes from voice switch manufacturers . These manufacturers don't sell voice processing products orcompete in the stand-alone voice processing product market , but they integrate voice processing functionality within their switches, either ashardware modules or as software running on chips. A more widespread adoption of internal voice processing solutions would present anincreased competitive threat to us, if the net result was the elimination of dem and for our voice processing system products . With the downturnin spending in the telecommunications industry , service providers appear to be exploring these alternative sources of voice processing morethoroughly , while they wait for more robust capital spending budgets to return . If our customers decide to design these alternative sources ofvoice processing functionality into their future network exp ansion , it could adversely impact the speed and duration of our sales recovery .
Most of our competitors and potential competitors have substantially greater name recognition and technical, fi nancial and marketing resourcesi ti i ;,. we do. Such competitors ma• under -.,., .e more extensive marketing campaigns , adopt more aggressive pricing policies and devote
v3 E \O LICF\SF. OLR ECHO (- :A\CELL \T10\ SOhTWxRF FROyi Il . _ N1) F Do yOI RECEi\ F I HFF L_L\ EL OF~t: Pli R r tk t: FAPF( ! FROM 11 . 11 r_ () t LDS D\ !'R'S l t-1 aI-FE(I OU R I-: tit) \\( ELI v 1 (Oy 1 1 1, _y1~, lit ,I '
N In April 200, we sold our echo cancellation sottweare technology and future revenuc streams from our licenses of'technoio~_y acquired fro mTelinnovation to TI . in return for cash and a long-term license of the echo cancellation softvy are . Although the licensing agreement has strongguarantees of support for the softlw are used in our products, if TI v ere to breach that agreement in some fashion . and not deliver complete andtimek support to us, our success in the echo cancellation Sy stems business could be adsersel) affected .
IF TI LICENSES ITS ECHO CANCELLATION SOFTWARE TO OTHER ECHO CANCELLATION SYSTEMS COMPANIES,THIS COULD INCREASE THE COMPETITIVE PRESSURES ON OUR ECHO CANCELLATION SYSTEMS BUSINESS .
Under the terms of the sale agreement of our echo c ancellation software to TI, TI is precluded from licensing the software to other echocancellation systems companies for a period of two years from the date of the sale and to two specified competitors for a period of four yearsfrom the date of sale. If TI were to license its echo cancellation software to other echo c ancellation systems comp anies after two years, thiscould increase the level of competition and adversely affect our success in our echo cancellation systems business .
WE OPERATE IN AN INDUSTRY EXPERIENCING RAPID TECHNOLOGICAL CHANGE, WHICH MAY MAKE OURPRODUCTS OBSOLETE.
Our future success will depend on our ability to develop, introduce and market enhancements to our existing products and to introduce newproducts in a timely manner to meet our customers' requirements . The markets we target are characterized by :
• rapid technological developments ;
• frequent enhancements to existing products and new product introductions ;
• changes in end user requirements ; and
• evolving industry standards .
WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID CHANGES . The emerging nature of theseproducts and their rapid evolution will require us to continually improve the perform ance, features and reliability of our products, particularlyin response to competitive product offerings . We may not be able to respond quickly and effectively to these developments . The introduction ormarket acceptance of products incorporating superior technologies or the emergence of alte rnative technologies and new industry standardscould render our existing products, as well as our products currently under development , obsolete and unmarketable . In addition , we may haveonly a limited amount of time to penetrate certain markets , and we may not be successful in achieving widespread acceptance of our productsbefore competitors offer products and serv ices similar or superior to our products . We may fail to anticipate or respond on a cost-effective andtimely bas is to technological developments , changes in industry standards or end user requirements . We may also experience significant delaysin product development or introduction . In addition , we may fail to release new products or to upgrade or enhance existing products on a timelybasis .
WE MAY NEED TO MODIFY OUR PRODUCTS AS A RESULT OF CHANGES IN INDUSTRY STANDARDS . The emergence of new
industry standards , whether through adoption by official standards commi ttees or widespread use by serv ice providers, could require us toredesign our products . If such standards become widespread, and our products are not in compli ance, our current and potential customers maynot purchase our products . The rapid development of new st andards increases the risk that our competitors could develop and introduce newproducts or enhancements directed at new industry standards before us .
IF INCUMBENT AND EMERGING COMPETITIVE SERVICE PROVIDERS AND THE TELECOMMUNICATIONS INDUSTRYAS A WHOLE EXPERIENCE ANOTHER DOWNTURN OR REDUCTION IN GROWTH RATE, THE DEMAND FOR OURPRODUCTS WILL DECREASE, WHICH WILL ADVERSELY AFFECT OUR BUSINESS .
We have experienced, and continue to experience , as have other companies in our sector , a slowdown in in frastructure spending by ourcustomers . This trend of lower capital spending in the telecommunications industry contributed to the decline in our revenues , beginning in thesecond half of fiscal 2001 , and although we have experienced some level of recovery in sales to these customers, sales have not fully recoveredto tia levels we saw prior to the decline in fiscal 2001 Oi ;r success wi ll continue to depend in large part on devei,pmeiit, ('spa : : ion an d ,)r
SOME OH THE KEN ('O\IPO\E_ATS LSEI) 1\ OU R PROM CTS ARE CLRRE.ATL1 X\ AIL_ABLF O\L\ FROM SOLESOURCES, THE LOSS OF \N HICH COULD DELAN'PRODUC-1-SHIP-NIENTS .
We rely on certain ~ cndors as the sole source of certain key components that %s e use in our products . For example . v~ e rely on TI as the solesource Vendor For the digital signal processors used in our echo cancellation and voice enhancement products . Al e haye no guaranteed supply
al ai ec ;,=c.nts Stith Our vendors . _1m extendei int rruption n the snppl% of these compon nts ould Li ll fect our tb ;~it~ _ incc' scheduled~Ap~ A ii i
I y . .T, Pg. 7
http://www.sec. gov/Archives/edgar/data11080667/000110465904026992/aO4-10231 _ I I Oq .htm 3/14/2006
Resulting delays or reductions in product shipments could damage customer relationships, and we could lose customers and orders .Additionally, because these vendors are the sole source of these components, we are at risk that adverse increases in the price of thesecomponents could have negative impacts on the cost of our products or require us to find alternative, less expensive components, which wouldhave to be designed into our products in an effort to avoid erosion in our product margin .
SOME SUPPLIERS OF KEY COMPONENTS MAY REDUCE THEIR INVENTORY LEVELS WHICH COULD RESULT INLONGER LEAD TIMES FOR FUTURE COMPONENT PURCHASES AND ANY DELAYS IN FILLING OUR DEMAND MAYREDUCE OR DELAY OUR EXPECTED PRODUCT SHIPMENTS AND REVENUES .
Although we believe there are currently ample supplies of components for our products, it is possible that in the near-term componentmanufacturers may reduce their inventory levels and require firm orders before they manufacture components . This reduction in stocking levelcould lead to extended lead times in the future . If we are unable to procure our planned quantities of materials from all prospective suppliers,and if we cannot use alternative components, we could experience revenue delays or reductions and potential harm to customer relationships .An example of this risk occurred in the third quarter of fiscal 2001 as two vendors supplying us with components used in our OC-3 product dicnot meet our total demand. As a result, the schedule shipment of our OC-3 product was delayed, which contributed to our revenue shortfall inthat quarter.
WE MAY EXPERIENCE UNFORESEEN PROBLEMS AS WE DIVERSIFY OUR INTERNATIONAL CUSTOMER BASE,WHICH WOULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS .
Historically, we have sold mostly to customers in North America . We are continuing to execute on our plans to expand our internationalpresence through the establishment of new relationships with established international OEMs, value-added resellers and distributors . However,we may still be required to hire additional personnel for the overseas market, as we have seen over the last couple of quarters, and may incurother unforeseen expenditures related to our international expansion . Despite these efforts, our planned expansion overseas may not besuccessful. As we expand our sales focus further into international markets, we will face new and complex issues that we may not have facedbefore, such as expanded risk to currency fluctuations, longer payment cycles, manufacturing overseas, political or economic instability,potential adverse tax consequences and broadened importlexport controls, which will put additional strain on our management personnel . In thfpast, the vast majority of our international sales have been denominated in U .S . dollars ; however, in the future, we may be forced todenominate a greater amount of international sales in foreign currencies . Additionally, the number of installations we will be responsible for islikely to increase as a result of our continued international expansion . In the past, we have experienced difficulties installing one of our echocancellation products overseas . In addition, we may not be able to establish more relationships with international OEMs, value-added resellersand distributors . If we do not, our ability to increase sales could be materially impaired .
THERE IS NO GUARANTEE THAT OUR INDEPENDENT AUDITORS WILL CONCUR WITH OUR ASSERTIONS AS TO THEEFFECTIVENESS OF OUR CONTROLS UNDER SECTION 404 OF SARBANES-OXLEY, WHICH COULD ADVERSELYIMPACT OUR STOCK PRICE .
We are currently expending extensive internal and external resources to document and test our internal controls in preparation for issuing ourannual assessment of our internal controls as required by Section 404 of Sarbanes-Oxley and the associated audit of those controls by ourexternal auditors at the end of fiscal 2005 . Although we believe that we will be able to issue a positive assessment of our internal controls aspart of our fiscal 2005 Annual Report on Form 10-K, there is no guarantee that after our independent auditors have finished their audit ofinternal controls and our related assertions as to their effectiveness that they will concur with our assessment, which could require us to expendeven more resources to achieve the level of effectiveness deemed necessary by our auditors .
IF WE LOSE THE SERVICES OF ANY OF OUR KEY MANAGEMENT OR KEY TECHNICAL PERSONNEL, OR ARE UNABLETO RETAIN OR ATTRACT ADDITIONAL TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OURBUSINESS COULD BE IMPAIRED .
~, . moths K . \f - - .
iin .cam . .1 Pi_. Shl .iCd
cmpiovCeS . H o\\ CVer . e Ina\ 110 1
OUR ABILITY TO CO MPETE SUCCESSFULLY WILL DEPEND , IN PART , ON OUR ABILITY TO PROTECT OURINTELLECTUAL PROPERTY RIGHTS, V H1CH V, E NI A Y NOT BE ABLE TO PROTECT .
- ~ - - ,.iHO ici.ruui:di Lllc~1_"Uie'S O iroieC[ OLIN ilia h n '
itiCf]LUI~?~'\ , :II'.. ::I~ 7_ U pr l~1~ . Ili it . i.ilnlil ~,l;t liUll ; .fi .~ end t i}]C" `e hr
of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any suchbreach. In addition, we may not be able to effectively protect our intellectual property rights in certain countries . We may, for a variety ofreasons, decide not to file for patent, copyright or trademark protection outside of the United States . We also realize that our trade secrets maybecome known through other means not currently foreseen by us . Notwithstanding our efforts to protect our intellectual property, ourcompetitors may be able to develop products that are equal or superior to our products without infringing on any of our intellectual propertyrights .
OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD PARTIES,WHICH MAY EXPOSE US TO LITIGATION.
Although we do not believe that our products infringe the proprietary rights of any third parties, third parties may still assert infringement orinvalidity claims (or claims for indemnification resulting from infringement claims) against us . Such assertions could materially adverselyaffect our business, financial condition and results of operations . In addition, irrespective of the validity or the successful assertion of suchclaims, we could incur significant costs in defending against such claims .
ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS .
From time to time, we review acquisition and investment prospects that would complement our existing product offerings, augment our marketcoverage, secure supplies of critical materials or enhance our technological capabilities . Acquisitions or investments could result in a number offinancial consequences, including :
• potentially dilutive issuances of equity securities ;
• large one-time write-offs ;
• reduced cash balances and related interest income ;
• higher fixed expenses which require a higher level of revenues to maintain gross margins ;
• the incurrence of debt and contingent liabilities ; and
• amortization expenses related to other acquisition related intangible assets and impairment of goodwill .
Furthermore, acquisitions involve numerous operational risks, including :
• difficulties in the integration of operations, personnel, technologies, products and the information systems of the acquiredcompanies ;
• diversion of management's attention from other business concerns ;
• diversion of resources from our existing businesses, products or technologies ;
• risks of entering geographic and business markets in which we have no or limited prior experience ; and
• potential loss of key employees of acquired organizations .
'ern --~)ual1 T.7ta1j\~ a7ii- . r i~r . .f _ i~ . ~rl -- is ~~li ~r:i ~f Sti E•.%
`; _lii!-,- inslr,llncn] _. inc prlnlaI u L IC c
of our fns estmcnt actin itics is the presersation of principal ~ihile mayimizing ins estment income and minimizing risk ; and ~~e anempt toachiese this by diversifying our portfolio in a variety of highl} rated investment securities that have limited terms to maturit,, . AN e do not hcu'._iam instruments for trading purposes .
ins estment securities that 1as e maturities Ji more than three months at the i'i i ' ±:rchu~e be _ _ .rrcnt 1nalui' ~ C~ - - ., : ; Ong _~ ti4r dcceunsi~jerc~~ short-term iilAeSt iient~ . ills esimeni sc'elirines ~A Ith cc .]]~um i3ne ' l~itu t es of n ear J : mo e _ . . . ._t . ._ . . . . .- - . . . -.. _
lilt ~ntlrt-(c i n rin ;7 I ~r}•_Ic•Tl~: 1I.~r ~T=~ .~°nr - ~r . .,~r i .r I~ ,r I , ~'. . ., - ., .,, -. _ _
.'1 backed SC_ . . ~I ~ ~.no cer 0 c .~ ._ . O'. J .p+c'€ i
825 East Middlefield RoadMountain View, California 94043
(650) 623-1300(Address, including zip code, and telephone number, including area code, of registrant's executive offices )
Indicate by check mark whether the Registrant (1) has fi led all repo rts required to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the past 12 months (or for such shorter period that the registrant was required to fi le such reports), and (2) has been subjectto the filing requirements for the past 90 days .
X .~ .
A5 v i ivuvemot2 3v, 2W4, J-+A of tilt R JI~tC :1t1L ~(>I17 ;T on ~i~) h li c c UUI~ISI-i~1 ; ;1` .
Page 23 of 3 f
expires in June 2006. We believe that the 61,000 square feet in Mountain View is adequate to meet our needs for the next twelve months .
Payments due by periodLessthan i to3 3 to 5 Over 5
Contractual Obligations Total 1 year years years years
Operating leasesPurchase commitments
$ 3,399 $ 1,984 $ 1,404 $10,705 10,705 -
Total $ 14,104 $ 12,689 $ 1,404 $ 11 $ -
We believe that we will be able to satisfy our cash requirements for at least the next twelve months from our existing cash and investmentbalances and receipt of additional sales proceeds from the sale of our optical business . The ability to fund our operations beyond the nexttwelve months will be dependent on the overall demand of telecommunications providers for new capital equipment . Should our customers'capital spending patterns deteriorate from their current levels, we could need to find additional sources of cash during the early part of fiscal2007 or reduce our spending to protect our cash reserves .
Future Growth and Operating Results Subject to Ris k
Our business and the value of our stock are subject to a number of risks, which are set out below. If any of these risks actually occur, ourbusiness, financial condition or operating results could be materially adversely affected, which would likely have a corresponding impact onthe value of our common stock . These risk factors should be carefully reviewed .
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS, THE LOSS OF ANY ONE OF WHICHCOULD CAUSE OUR REVENUE TO DECREASE .
Our revenue historically has come from a small number of customers . Our five largest customers accounted for approximately 94% of ourrevenue in the first six months of fiscal 2005 and 86% and 81% of our revenue in fiscal 2004 and 2003, respectively . Our two largestcustomers accounted for 45% and 42%, respectively, of our revenues in the first six months of fiscal 2005 . A customer may stop buying ourproducts or significantly reduce its orders for our products for a number of reasons , including the acquisition of a customer by another companyor a delay in a scheduled product introduction . If this happens, our revenue could be greatly reduced, which would materially and adverselyaffect our business . This occurred in fiscal 2001 when Qwest, then our largest customer, substantially discontinued purchasing our product dueto the down tu rn in the telecommunications indust ry .
Due to continuing difficult economic conditions , many operators in the telecommunications industry have experienced financial difficulties,which have dramatically reduced their capital expenditures and, in some cases, resulted in their filing for bankruptcy or being acquired by otheroperators . We expect this trend to continue , which may result in our dependence on an even smaller customer base .
Certain domestic carriers have recently announced the potential softening of their capital spending pl ans, which we expect to have animmediate impact on this coming qua rter's revenues . In addition, we can not predict the impact it may have on the fourth quarter and beyonddue to our customers' relatively short order horizon.
WE ARE RELIANT SOLELY ON OUR VOICE QUALITY BUSINESS TO GENERATE REVENUE GROWTH ANDPROFITABILITY , WHICH COULD LIMIT OUR RATE OF FUTURE REVENUE GROWTH.
We expect that, at least through the remainder fiscal 2005, our sole business will be the design, development and marketing of vc'ee p; oes, i nt;:ts . Ffo~ v c% o, ;he relativel% small size of the ONerall echo cancellation portion ofthe seice market v~hief :s ~., .er, oc ho; _ ,_
Utk OPER y I ly(C RES( ITS HA\ F (=II CTt --xTIA) SI1F1t_~ 1Ll Iv THE P-kST k:\ D v1 L •k vTICIP N I F THAT THEYe1,a1 (U'v i (tif 1. 10 DO sO i' I Hr; Ft TIkE . \\ 11 1CH (0t,LI) _ADV ERSEL1 _AFFL(TO L R iOCK hk1CE .
Our quarterlo operating results have fluctuated significantly in the past and ma, fluctuate in the future as a result of several factor . some ofwhich are outside of our control . If revenue experiences a significant decline in a quarter, as ; e experienced in the second half of fiscal ?00Iand again in the second quarter of fiscal 2002 . our operating results will be adsersel% affected because man, of our expenses are relativ elvtired . In particular, sales and marketing research and de%elopment and ,2eneral and administrative expenses do not Chan t s 1~ nihcantlv vv ithar]a ion in re;cnue in a quarle°r . .Ad\er e Changes in our operating` res-1its ,u Id aj\er eo atftet Our stock price .
K K _~ t_ A1 .1 \ _AR I KkJAl 1't,l<1ui) i U t'}~ Rii )1) . i actor;, limit Cogiiu iuti lri ^ .uC riCA~llu c a e
http ://www.sec.gov/Archives/edgar/data/I 080667/000110465904039114/a04-14488_1 I Oq .htm 3/14/2006
Page 25 of 3 8
include :
• changes in capital spending in the telecommunications indust ry and larger macroeconomic trends ;
• the timing or cancellation of orders from, or shipments to, existing and new customers ;
• delays outside of our control in obtaining necessary components from our suppliers ;
• delays outside of our control in the installation of products for our customers ;
• the timing of new product and service introductions by us, our customers , our partners or our competitors ;
• delays in timing of revenue recognition , due to new contractual terms with customers ;
• competitive pricing pressures ;
• variations in the mix of products offered by us ; and
• variations in our sales or distribution channels .
In particular , sales of our echo cancellation products typically come from our major customers ordering large quantities when they deploy aswitching center . Consequently , we may get one or more large orders in one qua rter from a customer and then no orders in the next qua rter. Asa result, our revenue may vary significantly from quarter to quarter .
Our customers may delay or rescind orders for our existing products in anticipation of the release of our or our competitors ' new products, aswell as due to merger and acquisition activity as experienced by our new Asian customer in the second qua rter of fiscal 2005 . Fu rther, if our orour competitors ' new products substantially replace the functionality of our existing products, our existing products may become obsolete,which could result in invento ry write -downs, and/or we could be forced to sell them at reduced prices or even at a loss .
In addition, the sales cycle for our products is typically lengthy . Before ordering our products , our customers perform signi ficant technicalevaluations , which typically l ast up to 90 days or more for our base echo cancellation systems and up to 180 days or more for our newer VQAproduct offering. Once an order is placed , delivery times can vary depending on the product ordered. As a result , revenue forecasted for aspecific customer for a particular quarter may not occur in that quarter . Because of the potential large size of our customers ' orders, this wouldadversely affect our revenue for the quarter .
OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD . Many of our expenses do not vary with our revenue . Factors that could causeour expenses to fluctuate from pe riod to period include :
• the extent of marketing and sales efforts necessary to promote and sell our products ;
• the timing and extent of our research and development effo rts ;
• the availability and cost of key components for our products ; and
• the timing of personnel hiring.
T- ,ec incur such additional expenses in a1 ouartc r in which we do not C .x crienCe ;11Crelasci1 r
W) v()T1 (ICI:SSFFLL\ DFI' F Lt)1' xy1) 1vTRO1)t (F yiI MOD Cl S . OI .R 1'R()1)t C 1 ' X1 13ECC)v1LOBS()LFT I L .
'V, e operate in an industry that experiences rapid technological change, and if we do not suecessfulk dev elop and introduce neva products andour existing products become obsolete due to product introductions bv competitors . our revenues ww ill decline . E~ en if %i e are successful indeveloping nens products, wwe mav not be able to : .:cessfull~ produce or market our nevs products in commercial quantities . or increase ouroverall sales levels . These risks are of particular concern Then a neva aeneration product is introduced . Althouch vv e believ e v c a ill achie'our prriluCt introdll ilon dates, them 1~ no 2uarl111teL that the,, A\ ill not r2 Ue!a\cU . I hC CLirfent product 1 :1!"t`CI]Cili?Ilti . ~ a e :il'C a _'.C iteti ;
OFC Lire come It P' .:AncrIencIng DUnlercua c:u"tumer c'\ a!uat1011 ur these Id,italre - .'.Uanu tha 'til crld :1r!t . _ .iarcJ as :II St il~i~;C>1 La cI~ at
1-e mie Ira)nl illeSC net's products I I I the 1i111r1h ~iL1arter of 11 sctl1 LoUb_ .AIthcuc.li tne~e CsaIIt ,it ions _er than ~s .a hrtit anticlp '. .
http://www.see .gov/Archives/edgar/datall 08466'7/0001 .10465904039114/a04-14488_1 l Oq.htm 3/14/2006
Page 27 of 3 b0
features during the remainder of fiscal 2005 . However, should the customer evaluation process become further protracted or the product notmeet the customers' expectations, the timing of our realization of any revenues from these new products could be delayed or not materialize atall.
We have in the past experienced, and in the future may experience, unforeseen delays in the development of our new products . For example, infiscal 2002, sales of our fourth generation echo cancellers and our broadband system generated the majority of our echo revenue while sales ofour fifth generation, OC-3 echo cancellation system fell short of our expectations due to a sudden decline in projected demand in the thirdquarter of fiscal 2002 from our primary targeted customer for this product, Qwest . This unexpected drop in demand for the OC-3 product ledto the write down of $3 .5 million of excess inventory in the third quarter of fiscal 2002 . Although we were eventually able to sell this productafter having written it down, there can be no assurances that we will be able to sell additional written-down units in the future .
We must devote a substantial amount of resources in order to develop and achieve commercial acceptance of our new products ; most recently,our BVP Flex and QVP hardware platforms and our voice quality features . Our new and/or existing products may not be able to addressevolving demands in the telecommunications market in a timely or effective way . Even if they do, customers in these markets may purchase orotherwise implement competing products .
WE ANTICIPATE THAT AVERAGE SELLING PRICES FOR OUR PRODUCTS WILL DECLINE IN THE FUTURE, WHICHCOULD ADVERSELY AFFECT OUR ABILITY TO BE PROFITABLE .
We expect that the price we can charge our customers for our products will decline as new technologies become available, as we expand thedistribution of products through OEMs, value-added resellers and distributors internationally and as competitors lower prices either as a resultof reduced manufacturing costs or a strategy of cutting margins to achieve or maintain market share. If this occurs, our operating results will beadversely affected. We expect price reductions to be more pronounced, at least in the near term, due to our planned expansion internationally .While we intend to reduce our manufacturing costs in an attempt to maintain our margins and to introduce enhanced products with higherselling prices, we may not execute these programs on schedule . In addition, our competitors may drive down prices faster or lower than ourplanned cost reduction programs . Even if we can reduce our manufacturing costs, many of our operating costs will not decline immediately ifrevenue decreases due to price competition .
In order to respond to increasing competition and our anticipation that average-selling prices will decrease, we are attempting to reducemanufacturing costs of our new and existing products . If we do not reduce manufacturing costs and average selling prices decrease, ouroperating results will be adversely affected . Manufacturing is currently outsourced to a small number of contract manufacturers . We believethat our current contract manufacturing relationships provide us with competitive manufacturing costs for our products . However, if we orthese contract manufacturers terminate any of these relationships, or if we otherwise establish new relationships, we may encounter problems inthe transition of manufacturing to another contract manufacturer, which could temporarily increase our manufacturing costs and causeproduction delays .
WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO MAINTAIN OR INCREASESALES OF OUR PRODUCTS.
The markets for our products are intensely competitive, continually evolving and subject to rapid technological change. We may not be able tocompete successfully against current or future competitors, including our customers . Certain of our customers also have the ability to internallyproduce the equipment that they currently purchase from us . In such cases, we also compete with their internal product developmen tcapabilities . We expect that competition will increase in the future. We may not have the financial resources, technical expertise or marketing,manufacturing, distribution and support capabilities to compete successfully .
We face competition from two major direct manufacturers of stand-alone voice processing products , Tellabs and Natural Microsystems. Theother competition in these markets comes from voice switch manufacturers . These manufacturers don't sell voice processi r g products orcompete in the stand-alone voice processing product market, but they integrate voice processing func, onal'~y i, ithin their either ashardV\,m: mC~duJej ?r is soft,,~are rannin_)-A i77~)Pc' 14117E~Dle ; :u ido oI in .cin~.l . . .-
tccoll
Most of our competitors and potential competitors have suhstantially greater name recognition and technical, financial and marketing resourcesthan ~~e do . Such competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devotesubstantialh more resources to developing nevi products than ,~e is ill .
Ex. K, Pg . 6
http://wvwv.sec .gov/Archives/edgar/datall 080667/000110465904039l l4/aO4-1448$_1 l Oq .htm 3/14/2006
Page 28 of 3 F
WE NOW LICENSE OUR ECHO CANCELLATION SOFTWARE FROM TI , AND IF WE DO NOT RECEIVE THE LEVEL OFSUPPORT WE EXPECT FROM TI, IT COULD ADVERSELY AFFECT OUR ECHO CANCELLATION SYSTEMS BUSINESS .
In April 2002, we sold our echo cancellation software technology and future revenue streams from our licenses of technology acquired fromTelinnovation to TI, in retu rn for cash and a long-term license of the echo cancellation software . Although the licensing agreement has strongguarantees of suppo rt for the software used in our products , if TI were to breach that agreement in some fashion, and not deliver complete andtimely support to us, our success in the echo cancellation systems business could be adversely affected .
IF TI LICENSES ITS ECHO CANCELLATION SOFTWARE TO OTHER ECHO CANCELLATION SYSTEMS COMPANIES,THIS COULD INCREASE THE COMPETITIVE PRESSURES ON OUR ECHO CANCELLATION SYSTEMS BUSINESS .
Under the terms of the sale agreement of our echo c ancellation software to TI, TI is precluded from licensing the software to other echocancellation systems companies for a period of two years from the date of the sale and to two speci fied competitors for a period of four yearsfrom the date of sale . If TI were to license its echo cancellation software to o ther echo cancellation systems compan ies now that the two yearperiod has expired, it could incre ase the level of competition and adversely affect our success in our echo cancellation systems business .
WE OPERATE IN AN INDUSTRY EXPERIENCING RAPID TECHNOLOGICAL CHANGE , WHICH MAY MAKE OURPRODUCTS OBSOLETE .
Our future success will depend on our ability to develop, introduce and market enhancements to our existing products and to introduce newproducts in a timely manner to meet our customers ' requirements . The markets we target are characterized by :
• rapid technological developments ;
• frequent enhancements to existing products and new product introductions ;
• changes in end user requirements; an d
• evolving industry standards .
WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID CHANGES . The emerging nature of theseproducts and their rapid evolution will require us to continually improve the perform ance, features and reliability of our products , part icularlyin response to competitive product offerings . We may not be able to respond quickly and effectively to these developments . The introduction ormarket acceptance of products incorporating superior technologies or the emergence of alternative technologies and new indust ry standardscould render our existing products, as well as our products currently under development , obsolete and unmarketable . In addition , we may haveonly a limited amount of time to penetrate certain markets , and we may not be successful in achieving widespread acceptance of our productsbefore competitors offer products and services similar or superior to our products . We may fail to an ticipate or respond on a cost-effective andtimely basis to technological developments , changes in industry standards or end user requirements . We may also experience significant delaysin product development or introduction . In addition, we may fail to release new products or to upgrade or enh ance existing products on a timelybasis .
WE MAY NEED TO MODIFY OUR PRODUCTS AS A RESULT OF CHANGES IN INDUSTRY STANDARDS . The emergence of newindustry standards , whether through adoption by official standards commi ttees or widespread use by service providers, could require us toredesign our products . If such standards become widespread , and our products are not in compliance, our current and potential customers maynot purchase our products . The rapid development of new standards increases the risk that our competitors could develop and introduce newproducts or enhancements directed at new indust ry standards before us.
IF INCUMBFNT AND EM ERGING COMPETITIVE, SERVICE PROVIDERS AND THE TELECONIMUNTCATION'S INDUSTRYAS A \\HOLE I'XPERIENCE ANOTHER DO\L ;NTCRN OR REDUCTION Iy GRO"NTH R-1TE. THE DE\IAND :✓ ORO[ Rt f O O) ._a , + ;L i iJf .e kF -A .~r :kHol H iii- Ali'+t .tt~ti_ ; FFT 0 k B
( second nail o[ fiscal ?uu and althouCil see have experienced some les el of recos ery in sales to these cus :, , . . : . gales has e not full ,, recos erectto the levels sse saw prior to the decline in fiscal 2001 . We also belie%e that there is some minor stiffening in the domestic capital spendin gle els sshich could impact our third quarter revenue levels . Our success will continue to depend in large part on development, expansion and_orupgrade of soice and communications networks . %W e are subject to risks of -rossth constraints due to our current and planned dependence ondomestic and international telecommunications service pros iders . These potential customers mar be constrained fora number of reasons .1nciudinu th it limited caplt~ii resources . economic condltion> . chan'ce' in rec lotion and con old ltloi] .
1 " c' h P 7
http ://www.sec.gov/Archives/edgar/data/1080667/000110465904039114/a04-14488_1 I Oq.htm 3/14/2006
SOME OF THE KEY COMPONENTS USED IN OUR PRODUCTS ARE CURRENTLY AVAILABLE ONLY FROM SOLESOURCES, THE LOSS OF WHICH COULD DELAY PRODUCT SHIPMENTS .
We rely on certain vendors as the sole source of certain key components that we use in our products . For example, we rely on TI as the solesource vendor for the digital signal processors used in our echo cancellation and voice enhancement products . We have no guaranteed supplyarrangements with our vendors . Any extended interruption in the supply of these components would affect our ability to meet scheduleddeliveries of our products to customers. If we are unable to obtain a sufficient supply of these components, we could experience difficulties inobtaining alternative sources or in altering product designs to use alternative components .
Resulting delays or reductions in product shipments could damage customer relationships, and we could lose customers and orders.Additionally, because these vendors are the sole source of these components, we are at risk that adverse increases in the price of thesecomponents could have negative impacts on the cost of our products or require us to find alternative, less expensive components, which wouldhave to be designed into our products in an effort to avoid erosion in our product margin .
SOME SUPPLIERS OF KEY COMPONENTS MAY REDUCE THEIR INVENTORY LEVELS WHICH COULD RESULT INLONGER LEAD TIMES FOR FUTURE COMPONENT PURCHASES AND ANY DELAYS IN FILLING OUR DEMAND MAYREDUCE OR DELAY OUR EXPECTED PRODUCT SHIPMENTS AND REVENUES .
Although we believe there are currently ample supplies of components for our products , it is possible that in the near-term componentmanufacturers may reduce their inventory levels and require firm orders before they manufacture components . This reduction in stocking levelscould lead to extended lead times in the future . If we are unable to procure our planned quantities of materials from all prospective suppliers,and if we cannot use alternative components, we could experience revenue delays or reductions and potential harm to customer relationships .An example of this risk occurred in the third qua rter of fiscal 2001 as two vendors supplying us with components used in our OC-3 product didnot meet our total demand. As a result, the schedule shipment of our OC-3 product was delayed, which contributed to our revenue sho rtfall inthat quarter .
WE MAY EXPERIENCE UNFORESEEN PROBLEMS AS WE DIVERSIFY OUR INTERNATIONAL CUSTOMER BASE,WHICH WOULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS .
Historically, we have sold mostly to customers in North America . We are continuing to execute on our plans to expand our internationalpresence through the establishment of new relationships with established international OEMs, value-added resellers and distributors . However,we may still be required to hire additional personnel for the overseas market, as we have seen over the last couple of quarters, and may incurother unforeseen expenditures related to our international expansion . Despite these efforts, our planned expansion overseas may not besuccessful . As we expand our sales focus further into international markets, we will face new and complex issues that we may not have facedbefore, such as expanded risk to currency fluctuations, longer payment cycles, manufacturing overseas, political or economic instability,potential adverse tax consequences and broadened import/export controls, which will put additional strain on our management personnel . In thepast, the vast majority of our international sales have been denominated in U .S . dollars ; however, in the future, we may be forced todenominate a greater amount of international sales in foreign currencies . Additionally, the number of installations we will be responsible formay increase as a result of our continued international expansion . In the past, we have experienced difficulties installing one of our echocancellation products overseas . In addition, we may not be able to establish more relationships with international OEMs, value-added resellersand distributors. If we do not, our ability to increase sales could be materially impaired .
IF WE ARE UNABLE TO ASSERT THAT OUR INTERNAL CONTROLS ARE EFFECTIVE, OR IF OUR INDEPENDENTAUDITORS ARE UNABLE TO CONCUR WITH OUR ASSERTIONS AS TO THE EFFECTIVENESS OF OUR CONTROLS,UNDER SECTION 404 OF SARBANES-OXLEY, OUR STOCK PRICE WOULD BE ADVERSELY IMPACTED .
We are currently expending extensive internal and exte rnal resources to document and test our internal controls in preparation for issuing ouran :- ial .ssessment of our internal controls a re, .uire .' by S-,cti,vn 4~ of Sarbanes-Oxley and the associat : .i of those controls b'. c°.mi '
_ .,~ :i . ._ - .,; . .cam .,CC' ❑ ' .~ .,, . .;~; „i ,i . : u~~. t ._ ,. , .. ., . ., .,, .. . . i~( . ,i ia :~ ~~ua ii U OOiI iii : vvOu U flo Aupon our stock rice,. although u e ould expect it to be ads erne. due to potential stockholder lossp ~' of confidence in our abilit-, to report time] ;and accurate financial results .
IF WE LOSE THE SERVICES OF ANY OF OUR KEY MANAGEMENT OR KEY TECHNICAL PERSONNEL, OR ARE UNABLETO RETAIN OR ATTRACT ADDITIONAL TECHNICAL PERSONNEL, OUR ABILITY TO CONDUCT AND EXPAND OURBUSINESS COULD BE IMPAIRED .
We depend heavily on Timothy K . Montgomery, our Chairman, President and Chief Executive Officer, and on other key management andtechnical personnel, for the conduct and development of our business and the development of our products . We have attempted to mitigatesome of this risk through some key hires over the past couple of years . However, there is no guarantee that if we lost the services of one ormore of these people for any reason, that it would not adversely affect our ability to conduct and expand our business and to develop newproducts . We believe that our future success will depend in large part upon our continued ability to attract, retain and motivate highly skilledemployees . However, we may not be able to do so .
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO PROTECT OURINTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT.
We may rely on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure agreements and other contractualprovisions and technical measures to protect our intellectual property rights . Nevertheless, such measures may not be adequate to safeguard thetechnology underlying our products . In addition, employees, consultants and others who participate in the development of our products maybreach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any such breach. In addition,we may not be able to effectively protect our intellectual property rights in certain countries . We may, for a variety of reasons, decide not to filefor patent, copyright or trademark protection outside of the United States . We also realize that our trade secrets may become known throughother means not currently foreseen by us . Notwithstanding our efforts to protect our intellectual property, our competitors may be able todevelop products that are equal or superior to our products without infringing on any of our intellectual property rights .
OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF THIRD PARTIES,WHICH MAY EXPOSE US TO LITIGATION .
Although we do not believe that our products infringe the proprietary rights of any third parties, third parties may still assert infringement orinvalidity claims (or claims for indemnification resulting from infringement claims) against us . Such assertions could materially adverselyaffect our business, financial condition and results of operations . In addition, irrespective of the validity or the successful assertion of suchclaims, we could incur significant costs in defending against such claims .
ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.
From time to time, we review acquisition and investment prospects that would complement our existing product offerings, augment our marketcoverage, secure supplies of critical materials or enhance our technological capabilities . Acquisitions or investments could result in a number offinancial consequences, including :
potentially dilutive issuances of equity securities ;
• large one-time write-offs ;
• reduced cash balances and related interest income ;
• higher fixed expenses which require a higher level of revenues to maintain gross margins ;
the incurrence of debt and contingent liabilities ; and
J 111i~Ui[ ;C~ iii {nC 11-11L_ : IIoIi Sri opCrioion~ . person11Cf . teeht c o ie . prodnc?j 1 11 :.1 the Intorrn,oiolr 5A~iems of the 3Cyttircb ~un~~~; ;ile s
diversion of manaeer:b er is attention from other business concerns;
825 East Middlefield RoadMountain View, California 94043
(650) 623-130 0(Address, including zip code, and telephone number, including area code, of registrant's executive offices )
ndicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities:xchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and2) has been subject to the filing requirements for the past 90 days .
'ART I . FINANCIAL INFORM ATIONTEMI . Financial Statements (unaudited)
Condensed Consolidated Statements of Operations THREE AND NINE MONTHS ENDED JANUARY 31,2005 AND 2004Condensed Consolidated Balance Sh eets AS OF JANUAR Y 31, 2005 AND APRIL 30 2004Condensed Consolidated Statements of Cash Flows NINE MONTHS ENDED JANUARY 31, 2005 AND2004
-------
Notes to the Condensed Consolidated Finan cial StatementsTFM 2 .. Management's Discussion and Analys is of Financial Condition and Results of OperationsTEM 3 Qualitative and _.Quantitative Disclosures About Market RiskTEM 4 Controls and Procedures
'ART II . OTHER INFORMATIONTEM 1 . Legal ProceedinTEM 2 . Unregistered Sales of E ui Securities and Use of ProceedsTEM 3 . Defaults Upon Senior SecuritiesTEM4. Submission of Matters to a Vote of Security HoldersTEM 5 . Other Informatio nTEM b. Exhibitsiignatures
u,-, . I ., Pg. 2
ittp :i/w-w-v.sec.gov/Archives/edgar/data/1080667i000110465905010399/aO5-4784_1 I Oq .htm 9/21/2006
Page 18 of 42
kccounting for Income Taxes - We estimate our actual current tax exposure together with our temporary differences resulting fromliffering treatment of items, such as valuation allowances for bad debts and inventory, for tax and accounting purposes . Theseemporary differences along with net operating loss and tax credit carry forwards result in deferred tax assets and liabilities . At leastince per quarter, we must assess the likelihood that our net deferred tax assets will be recovered from future taxable income and to thextent we believe that recovery is no longer more likely than not, we must establish a valuation allowance . Significant managementudgment is required in determining our provision for income taxes, our deferred tax assets and the liabilities and any valuation.llowance recorded against our net deferred tax assets .
3eginning in fiscal 2002, we determined that a valuation allowance against our then existing deferred tax asset position was necessary .Ve based this decision on the fact that in the fourth quarter of 2002, we generated sufficient operating losses on a tax basis to fullyecover all taxes paid in prior years . In addition, our expectations of limited profitability, if any, due to the softness in theelecommunication industry during fiscal 2003, combined with the significant tax losses generated by the sale of our echo cancellationoftware technology led us to conclude that the recovery of our deferred tax assets was no longer more likely than not . In)ctober 2004, based on the level of historical taxable income and projections for future taxable income over the periods that ourleferred tax assets are deductible, we determined that it was more likely than not that certain of its deferred tax assets will be realizednd therefore released the majority of the valuation allowance .
2ecent Accounting Pronouncements . In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No .23R, "Share-Based Payment" (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-iased payments at fair value . SFAS 123R is effective for all interim periods beginning after June 15, 2005 and, thus, will be effectiveor us beginning in the second quarter of fiscal 2006 . Early adoption is encouraged and retroactive application of the provisions ofSFAS 123R to the beginning of the fiscal year that includes the effective date is permitted, but not required . We are currentlyvaluating the impact of SFAS 123R on our financial position and results of operations . See "Accounting for Stock-Basedfompensation" in Note 2 of the Condensed Consolidated Financial Statements for information related to the pro forma effects on oureported net loss and net loss per share of applying the fair value recognition provisions of the previous Statement of Financial\ccounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," to stock-based employee compensation .
n November 2004, the FASB issued Statement of Financial Accounting Standards (SFAS) No . 151, Inventory Costs, which clarifieshe accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material . SFAS No. 151 will beffective for inventory costs incurred during fiscal years beginning after June 15, 2005 . We do not believe the adoption of SFAS No .51 will have a material impact on our financial statements .
tESULTS OF OPERATIONS
he following table sets forth, for the periods indicated, the components of the results of operations, as reflected in our statement ofiperations, as a percentage of sales .
Three months ended Nine months ende dJanuary 31, January 31 ,
FHREE AND NINE MONTHS ENDED JANUARY 31 , 2005 AND 2004 .
?evenue .
tevenue
Three months endedJanuary 31 ,
2005 2004$ 21,310 $ 21,303
Nine months endedJanuary 3 1
2005 2004$ 71,103 $ 46,507
tevenue in the third quarter of fiscal 2005 was flat compared to the same quarter in the prior year as increased revenue from our twoargest domestic wireless customers was offset by lower sales to a third domestic customer . The third quarter of fiscal 2004 included abird domestic customer that comprised 42% of our revenue compared to none of our revenue in the third quarter of fiscal 2005 . Thencrease in revenue in the first nine months of fiscal 2005 was due to increased shipments to our two largest domestic wireles sustomers as they continued to expand and update their networks . These two customers accounted for 87% of our revenues in the firstine months of fiscal 2005 compared to 56% of the revenues in the first nine months of fiscal 2004 . The third domestic customerccounted for 28% of our revenue for the nine months ended January 31, 2004 compared to 3% of our revenue in the current year ninenonth period . The primary source of product revenue growth in the first nine months of fiscal 2005 has come from our Broadband/oice Processor Flex (`BVP-Flex") Echo Cancellation System, which was introduced in the third quarter of fiscal 2004 and has)ecome the primary system purchased by our domestic customers . Although we do expect that sales of our BVP-Flex systems to ourwo largest domestic customers will remain the majority of our revenue for the foreseeable future, we believe that our near-termevenue growth will be dependent on the acceptance of our VQA products running on both our BVP-Flex and QVP platforms . In thehird quarter of fiscal 2005, we shipped approximately $0 .9 million of VQA products, inclusive of $0 .5 million to an Asian customer .'e currently believe we will see significantly increased sales volumes of our VQA products on our QVP platforms in the fourt h
loaner of fiscal 2005 as additional amounts of the Asian customer order ship and as we see acceptance from other customers who haveteen evaluating this product . We currently expect fourth quarter revenue to increase approximately 8 to 10 percent from the thirdluarter as the sales volumes from our VQA products on our QVP platforms begin to increase . This increase in VQA product saleshould have the additional effect of reducing the percentage of revenue derived from our top two customers .
geographically, our third quarter fiscal 2005 revenue remained primarily domestic at 89% of total worldwide revenue, which is lowerhan the level of domestic sales of 93% realized in the third quarter last fiscal year . Domestic revenue in the first nine months of fiscal,005 was 93% of worldwide revenue compared to 92% in the first nine months of fiscal 2004 . While domestic sales continue to be theargest portion of our geographic revenue mix, we have begun to experience an increasing year-over-year trend in international revenuen terms of absolute dollar volume. The relatively flat trend in domestic geographic concentration is largely being driven by the rate of;rowth in demand from our major domestic customers, keeping pace with the growth in the smaller international portion of ou r)usiness . Although we have successfully added customers internationally, the size of their order levels does not compare with that ofur major domestic customers . We expect that in the coming quarters the international portion of our business will begin to grow as apercentage of overall sales as we begin to realize more sales of our VQA applications in the international marketplace . However, wexpect that our domestic customers will continue to represent the majority of our revenue for the foreseeable future .
i ost of Goods Sold.
ost of goods sold
Three months endedJanuary 31 ,
2005 2004
$ 4,788 $ 7,261
Nine months endedJanuary 3 1
2005 2004
$ 16,491 $ 15,952
,ost of goods sold consists of material costs , personnel costs for test , configuration and quality assurance, costs of licensed technologyncorporated into our products , provisions for inventory and warranty expenses and other indirect costs . The decrease in cost of goodsold for the third quarter was primarily driven by favorable customer and product mixes , as described below . The 3% increase in cos t
o'-: sold for the fit'~I }line OFisc J 2003 \- .. ; l7t'illlll'1', '"-kciI b inCI-C d 5 . 111 .' _ tli~la,:» il7`,;I?rte t~Uial_ it IIi C
Three months ended Nine months endedJanuary 31, January 31
nargin than shipments to our largest customer in fiscal 2005 . Margins were also favorably impacted by the limited levels of excessnd obsolete provisions in the third quarter and first nine months of fiscal 2005, as virtually all of the product inventory identified asnd of life near the end of fiscal 2004 was written down in fiscal 2004 leaving only minor levels of inventory other than our current?VP and BVP-Flex products. Minimal inventory adjustments in the third quarter and first nine months of fiscal 2005 as compared tofiscal 2004 further helped to improve gross margins . Finally, benefiting the third quarter of fiscal 2005 was lower warranty expense)ased on improved product reliability . Partially offsetting the
16
F \ . I ., Pg . 5
ittp :i/www.sec.gov/ArchitiTesIedgar/datall 080667/000110465905010399/aO5-4780_1 l Oq .htm 9/21/2006
~orm 8-K
-K I d8k.htm FORM 8-K
Page 1 of 4
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington , D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) : August 12, 2005 (August 12, 2005)
SPRINT NEXTEL CORPORATIO N(Exact name of registrant as specified in its charter)
Kansas 1-04721 48-0457967(State or other ju risdiction (Commission File Number) (IRS Employer
of incorporation ) Identification No. )
2001 Edmund Halley Drive, Reston, Virginia 20191(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code : (703) 433 - 4000
Sprint Corporation, 6200 Sprint Parkway, Overland Park, Kansas 66251(Former Name or Former Address, if Changed Since Last Report )
:heck the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant underny of the following provisions :
3 Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230 .425)
3 Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240 .14a-12 )
3 Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240 .14d-2 (b))
3 Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240 .13e-4 (c))
On August 12, 2005, Sprint Nextel Corporation issued a press release announcing the completion of the merger transaction)etween Sprint Corporation and Nextel Communications, Inc ., as more fully described in the press release filed as Exhibit 99 .1, whichs incorporated herein by reference .
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its)ehalf by the undersigned thereunto duly authorized .
