Strategic Review Results in Greater Focus on Service Assurance Solutions
-- Focus on Telecom Growth -- Key Management Appointments Part of Strategy
-- Board Authorizes $15 Million Stock Repurchase
PITTSBURGH, Oct. 22 /PRNewswire-FirstCall/ -- Tollgrade Communications,
Inc. (Nasdaq: TLGD), a leading supplier of network service assurance test
products and solutions, today reported revenue of $15.2 million and GAAP
earnings per share of $0.07 for the third quarter ended September 27, 2008.
These results include the effects of non-cash charges for stock-based
compensation and restructuring expenses, which amounted to $0.01 per share.
Excluding these charges, non-GAAP earnings per share for the third quarter
2008 was $0.08. In comparison, revenue and GAAP earnings per share for the
third quarter ended September 29, 2007 were $20.6 million and $0.11,
respectively, while earnings per share on a non-GAAP basis for the third
quarter ended September 29, 2007, was $0.13.
(Logo: http://www.newscom.com/cgi-bin/prnh/20050603/CLF046LOGO )
"Operating results for the third quarter exceeded revenue expectations
and, for the first time this year, we achieved profitability," said
Tollgrade President and CEO Joseph Ferrara. "Contributions from our service
application software solutions continue to be a growing source of our
overall revenue. We also had our first domestic sale of DigiTest(R) ICE(TM)
to a new customer during the quarter. In addition, we continue to have a
debt-free balance sheet with cash and short term investments growing to
more than $62 million," added Ferrara.
Strategic Initiatives
The Company has recently completed a comprehensive strategic review of
its business that began in April, 2008. With the assistance of Needham &
Company, LLC, an investment banking firm, Tollgrade evaluated a range of
strategic alternatives to enhance shareholder value, including a possible
sale of the Company, an assessment of each business unit, a reformulated
organic strategy, acquisition and merger alternatives, and stock buy-back
and dividend options. Upon conclusion of its review and in light of current
economic conditions and the Company's strong balance sheet, the Board of
Directors determined that the appropriate strategy at the current time is
to seek to enhance shareholder value through a refocusing of the Company's
core business by emphasizing its service assurance offerings to the telecom
market.
"Following our strategic review process, we concluded that the strength
of Tollgrade's software testing solutions represents the best opportunity
to further expand our addressable market and revenue growth potential. We
believe there is an opportunity for an integrated software platform to
serve multiple applications and products, specifically for the telecom
industry in the IP service assurance market. According to industry
analysts, this nearly one billion dollar market is expected to experience
annual growth rates of twenty percent in the next four years. Our strategy,
which will involve the creation of new software products and partnerships,
should allow us to leverage our incumbent position with customers, and
enhance the value of our long term relationships and services agreements.
With the goal of improving shareholder value, our Board of Directors and
management believes that expanding the focus of our core business strength
at this time is in the best interests of shareholders, customers and
employees," stated Ferrara.
An equally important part of the refocused strategy includes enhancing
the management capability to support it. Effectively immediately, the
Company has appointed three new executives to serve on its management team:
Gary W. Bogatay, Jr. has been named Chief Financial Officer and Treasurer;
David L. Blakeney has been named Vice President, Research and Development;
and Kenneth J. Shebek has been named Vice President, Operations. (A
separate, more detailed release on these management appointments has been
issued.)
As a result of the strategic review process, and consistent with the
Board of Director's view of the Company's short- and long-term business
opportunities, Tollgrade's Board of Directors has authorized the repurchase
of up to $15.0 million of its common stock. The repurchase method may be in
the form of open market repurchases and privately negotiated transactions
or a Dutch auction tender offer, the details of which will be announced at
a later date. As of September 27, 2008, the Company had approximately 13.2
million shares of common stock outstanding.
Third Quarter 2008 Revenue Results
Sales from services, which include software maintenance, project
management fees and repairs, were $6.0 million in the third quarter 2008
compared to $5.0 million in the third quarter 2007. The third quarter 2008
includes three months of services revenue from international customers of
the Broadband Test Division (BTD), while the third quarter of 2007 included
only two months as the acquisition of BTD was completed in August 2007.
Sales of Tollgrade's system test products, which include DigiTest,
LDU(TM) and N(x)Test(TM) hardware products as well as custom software
applications and licenses, were $4.1 million in the third quarter 2008,
compared to $9.2 million in the third quarter 2007. Third quarter 2008
sales were lower as a result of the completion of a significant
international project in 2007, but partially offset by our first domestic
sale of our DigiTest ICE product and higher sales of custom software
applications.
Overall sales of the Company's MCU(R) products, which extend
testability into the POTS network, were $3.2 million in the third quarter
2008, compared to $3.6 million in the third quarter 2007. The $0.4 million
decline was attributable to lower demand for OEM versions of the MCU
product.
Overall sales of cable hardware and software products were $1.9 million
in the third quarter 2008 compared to $2.8 million in the third quarter
2007. The year over year decline was a result of reduced market demand from
both direct and indirect sales channels.
Third Quarter 2008 Financial and Operating Data
Gross profit for the third quarter 2008 was $8.2 million, compared to
$10.9 million in the third quarter 2007. As a percentage of sales, gross
profit was 53.9% in the third quarter 2008, compared to 53.2% in the third
quarter 2007.
The Company lowered operating expenses to $7.3 million for the third
quarter 2008, compared to $9.5 million in the third quarter 2007. Excluding
restructuring and stock compensation expenses from both periods, operating
expenses on a non-GAAP basis were $7.1 million and $9.0 million in the
third quarter 2008 and 2007, respectively.
Selling and marketing expenses in the third quarter 2008 were lowered
to $2.0 million compared to $2.9 million in the third quarter 2007. The
decrease in selling and marketing expense was primarily due to our cost
reduction initiatives initiated during the first quarter 2008. Compared to
the second quarter 2008, selling and marketing expenses for the third
quarter 2008 decreased by $0.2 million. In both the second and third
quarters, the cost reductions were offset, in part, by increases in selling
and marketing expenses resulting from the BTD acquisition.
General and administrative expenses were $2.2 million for the third
quarter 2008 compared to $2.7 million in the third quarter 2007. The
decrease was due primarily to charges for transitional services related to
the BTD acquisition in the third quarter 2007.
Research and development costs were $3.0 million for the third quarter
2008 compared to $3.7 million in the third quarter 2007. The decrease of
$0.7 million or 17.9% is attributable to the completion of the transitional
engineering program in early 2008 related to the BTD integration, as well
as the impact of our cost reduction program.
The provision for income taxes of approximately $0.3 million consists
primarily of taxes on income earned in certain foreign jurisdictions. Based
on a review of our tax position at September 27, 2008, management did not
record any tax provision on income pertaining to its U.S. operations or tax
benefit on losses in certain foreign operations.
The Company's order backlog for firm customer purchase orders and
signed software maintenance contracts was $18.4 million as of September 27,
2008, compared to a backlog of $19.2 million as of December 31, 2007. The
backlog at September 27, 2008 and December 31, 2007 included approximately
$14.4 million and $13.6 million, respectively, related to software
maintenance contracts, which is primarily earned and recognized as income
on a straight- line basis during the remaining terms of these agreements.
Management expects that approximately 40% of the current total backlog
will be recognized as revenue in the fourth quarter 2008.
Fourth Quarter 2008 Outlook
"Looking ahead, we expect fourth quarter 2008 revenue to range from $12
million to $15 million, the same revenue guidance range provided in the
third quarter, 2008. We remain cautious about the impact of general
economic conditions and the tight credit markets on our customer
purchases," said Joseph Ferrara. "This guidance sets full year 2008
revenues in the range of $55 million to $58 million."
"The repositioning of the Company as a result of the strategic review
process addresses the need to replace revenue from reduced demand for our
mature products with new sources of growth as we focus on delivering new
service assurance solutions to the telecom industry. While this initiative
will take time to implement, we are well-positioned to execute on our plans
as we continue on a path to develop a sustainable position in a market that
can support long term profitable growth," said Ferrara.
Conference Call and Webcast
A conference call to discuss earnings results for the third quarter
2008 will be held on Thursday, October 23, 2008 at 9:00 AM, Eastern Time.
The telephone number for U.S. participants is 1-800-860-2442
(international: 412- 858-4600). Please reference Tollgrade's Third Quarter
2008 Earnings Results Call. The conference call will also be broadcast live
over the Internet. To listen to this conference call via the Internet,
simply log on to the following URL address:
http://www.videonewswire.com/event.asp?id=52230
About Tollgrade
Tollgrade Communications, Inc. is a leading supplier of service
assurance products and solutions for centralized test systems around the
world. Tollgrade designs, engineers, markets and supports centralized test
systems, test access and status monitoring products, and next generation
network assurance technologies. Tollgrade's customers range from the top
telecom and cable providers, to numerous independent telecom, cable and
broadband providers around the world. Tollgrade's network testing,
measurement and monitoring solutions support the infrastructure of cable
and telecom companies offering current and emerging triple play services,
as well as for power distribution companies. For more information, visit
Tollgrade's web site at http://www.tollgrade.com.
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per-share data)
Three Months Ended Nine Months Ended
September September September September
27, 2008 29, 2007 27, 2008 29, 2007
Revenues:
Products $9,240 $15,528 $24,869 $36,388
Services 5,966 5,050 18,118 11,413
15,206 20,578 42,987 47,801
Cost of sales:
Products 4,251 7,305 12,344 16,758
Services 1,916 1,424 5,826 3,234
Amortization 843 903 2,711 2,041
Impairment - - 3,291 -
Inventory writedown/
restructuring - - 759 -
7,010 9,632 24,931 22,033
Gross profit 8,196 10,946 18,056 25,768
Operating expenses:
Selling and marketing 1,999 2,853 6,596 7,363
General and
administrative 2,227 2,673 7,054 7,121
Research and development 3,034 3,694 9,880 9,639
Restructuring 5 233 510 827
Total operating
expenses 7,265 9,453 24,040 24,950
Income (loss) from
operations 931 1,493 (5,984) 818
Interest income 264 635 1,069 2,151
Income (loss) before
income taxes 1,195 2,128 (4,915) 2,969
Provision for income
taxes 277 702 926 982
Net income (loss) $918 $1,426 $(5,841) $1,987
Diluted earnings
per-share information:
Weighted average shares
of common stock and
equivalents: 13,187 13,440 13,170 13,467
Net income (loss) per
common and common
equivalent shares $0.07 $0.11 $(0.44) $0.15
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
September December
27, 2008 31, 2007
ASSETS
Current assets:
Cash and cash equivalents $61,241 $58,222
Short-term investments 989 632
Accounts receivable:
Trade 10,621 14,625
Other 2,535 2,255
Inventories 11,295 13,687
Prepaid expenses and deposits 825 1,120
Deferred and refundable tax assets 297 503
Assets held for sale - 272
Total current assets 87,803 91,316
Property and equipment, net 3,473 4,279
Intangibles 38,110 44,215
Other assets 339 333
Total assets $129,725 $140,143
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $670 $4,214
Accrued warranty 1,407 1,937
Accrued expenses 1,615 3,148
Accrued salaries and wages 413 891
Accrued royalties payable 210 707
Income taxes payable 1,161 572
Deferred revenue 4,183 2,767
Total current liabilities 9,659 14,236
Pension obligation 1,014 908
Deferred tax liabilities and other taxes 2,155 1,999
Total liabilities 12,828 17,143
Total shareholders' equity 116,897 123,000
Total liabilities and shareholders' equity $129,725 $140,143
Certain reclassifications have been made to prior year amounts to
conform to the current year presentation.
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September September
27, 2008 29, 2007
Cash flows from operating activities:
Net (loss) income $(5,841) $1,987
Adjustments to reconcile net (loss) income to
net cash provided by operating activities:
Impairment 3,291 -
Depreciation and amortization 4,046 3,258
Stock-based compensation expense 341 829
Valuation allowance 129 145
Deferred income taxes 190 1,402
Restructuring and write-down of inventory 775 313
Provisions for losses on inventory 375 333
Provision for allowance for doubtful accounts 28 96
Changes in assets and liabilities:
Accounts receivable-trade 6,634 525
Accounts receivable-other (498) 752
Inventories 1,277 (3,730)
Prepaid expense and other assets 352 163
Accounts payable (6,332) 215
Accrued warranty (527) (146)
Accrued expenses and deferred income (467) (1,998)
Accrued royalties payable (497) 318
Income taxes payable 612 -
Net cash provided by operating activities 3,888 4,462
Cash flows from investing activities:
Purchases of Broadband Test Division of
Teradyne - (11,952)
Purchase of short-term investments (2,279) (11,608)
Redemption/maturity of short-term investments 1,922 9,207
Capital expenditures, including capitalized
software (565) (1,220)
Sale of assets held for sale 263 892
Net cash used in investing activities (659) (14,681)
Cash flows from financing activities:
Repurchase of treasury shares - (1,109)
Proceeds from exercise of stock options - 89
Excess tax benefit from stock-based compensation - 10
Net cash used in financing activities - (1,010)
Net increase (decrease) in cash and cash
equivalents 3,229 (11,229)
Effect of exchange rate changes on cash & cash
equivalents (210) (33)
Cash and cash equivalents at beginning
of period 58,222 57,378
Cash and cash equivalents at end of period $61,241 $46,116
Explanation of Non-GAAP Measures
During the third quarter 2008, we continued the restructuring programs
that we announced on July 27, 2006 and January 30, 2008, aimed at reducing
the Company's existing cost structure. We have provided non-GAAP financial
measures (e.g., non-GAAP earnings per share) that exclude the charges
associated with the continuation of the restructuring initiatives, as well
as the related income tax effects of such items, stock-based compensation
expense, write-downs and impairments. These non-GAAP financial measures are
provided to enhance the user's overall understanding of our third quarter
and year to date financial performance. We believe that by excluding these
charges, as well as the related income tax effects, our non-GAAP measures
provide supplemental information to both management and investors that is
useful in assessing our core operating performance, in evaluating our
ongoing business operations and in comparing our results of operations on a
consistent basis from period to period. These non-GAAP financial measures
are also used by management to plan and forecast future periods and to
assist us in making operating and strategic decisions. The presentation of
this additional information is not prepared in accordance with GAAP. The
information may, therefore, not necessarily be comparable to that of other
companies and should be considered as a supplement to, and not a substitute
for, or superior to, the corresponding measures calculated in accordance
with GAAP.
To supplement the presentation of our non-GAAP financial measures for
the three and nine month periods ended September 27, 2008 and September 29,
2007, we have prepared the following tables that reconcile the differences
between the non-GAAP financial measures with the most comparable measures
prepared in accordance with GAAP. Our non-GAAP financial measures are not
meant to be used in isolation from or as a substitute for comparable GAAP
measures, and should be read only in conjunction with our consolidated
financial statements prepared in accordance with GAAP. Our non-GAAP
financial measures reflect adjustments based on the following items, as
well as the related income tax effect:
-- Restructuring expense: For the three and nine month periods ended
September 27, 2008 and September 29, 2007, we have excluded the effect of
restructuring programs from our GAAP operating expense, operating income,
net income and diluted EPS. The restructuring program included charges
primarily associated with employee severance, refinement of estimates
related to relocation, and lease termination costs. We believe it is useful
for
investors to understand the effect of these expenses on our operating
performance.
-- Stock-based compensation expense: For the three and nine month
periods ended September 27, 2008 and September 29, 2007, we have excluded
the effect of employee stock-based compensation expense on operating
expenses, operating income (loss), net income (loss) and diluted EPS. We
exclude employee stock- based compensation expense from our non-GAAP
measures primarily because they are non-cash expenses that we believe are
not reflective of our core operating performance.
-- Impairment charges: For the nine month period ended September 27,
2008, we have excluded the effect of certain intangible and inventory
impairment charges on gross profit, gross margin, operating loss, net loss
and diluted EPS. We believe it is useful for investors to understand the
effect of these charges on our operating performance. There were no
comparable charges in the three months ended September 27, 2008 and the
nine months ended September 29, 2007.
Reconciliation to GAAP - Quarter Ended September 27, 2008 (Unaudited)
(In thousands, except per share amount)
Gross
Gross Profit Operating Operating Net Diluted
Profit Percentage Expense Income Income EPS
GAAP Reported
Results $8,196 53.9% $7,265 $931 $918 $0.07
Restructuring - -% (5) 5 5 -
Stock-based
compensation - -% (184) 184 184 0.01
Non-GAAP Results,
Excluding
special items $8,196 53.9% $7,076 $1,120 $1,107 $0.08
Reconciliation to GAAP - Nine Months Ended September 27, 2008 (Unaudited)
(In thousands, except per share amount)
Gross
Gross Profit Operating Operating Net Diluted
Profit Percentage Expense Loss Loss EPS
GAAP Reported
Results $18,056 42.0% $24,040 $(5,984) $(5,841) $(0.44)
Impairment 3,291 7.6% - 3,291 3,291 0.25
Restructuring 759 1.8% - 759 759 0.06
Restructuring - -% (510) 510 510 0.03
Stock-based
compensation - -% (341) 341 341 0.03
Non-GAAP Results,
Excluding
special items $22,106 51.4% $23,189 $(1,083) $(940) $(0.07)
Reconciliation to GAAP - Quarter Ended September 29, 2007 (Unaudited)
(In thousands, except per share amount)
Gross
Gross Profit Operating Operating Net Diluted
Profit Percentage Expense Income Income EPS
GAAP Reported
Results $10,946 53.2% $9,453 $1,493 $1,426 $0.11
Restructuring - -% (233) 233 156 0.01
Stock-based
compensation - -% (200) 200 134 0.01
Non-GAAP Results,
Excluding
special items $10,946 53.2% $9,020 $1,926 $1,716 $0.13
Reconciliation to GAAP - Nine Months Ended September 29, 2007 (Unaudited)
(In thousands, except per share amount)
Gross
Gross Profit Operating Operating Net Diluted
Profit Percentage Expense Income Income EPS
GAAP Reported
Results $25,768 53.9% $24,950 $818 $1,987 $0.15
Restructuring - -% (827) 827 553 0.04
Stock-based
compensation - -% (828) 828 554 0.04
Non-GAAP Results,
Excluding
special items $25,768 53.9% $23,295 $2,473 $3,094 $0.23
Forward Looking Statements
The foregoing release contains "forward looking statements" regarding
future events or results within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, including statements concerning the
Company's current expectations regarding revenue for the fourth quarter
2008 and the expected revenue contribution from new products and solutions.
The Company cautions readers that such "forward looking statements" are, in
fact, predictions that are subject to risks and uncertainties and that
actual events or results may differ materially from those anticipated
events or results expressed or implied by such forward looking statements.
The Company disclaims any current intention to update its "forward looking
statements," and the estimates and assumptions within them, at any time or
for any reason.
In particular, the following factors, among others could cause actual
results to differ materially from those described in the "forward looking
statements": (a) inability of the management team to implement the
strategic repositioning of the Company to focus on its service assurance
offerings in the telecom markets; (b) inability to complete or possible
delays in completing certain research and development efforts required for
new products and solutions and delays in market acceptance of our new
network acceptance solutions beyond the timeframes anticipated or at all;
(c) general economic uncertainty and its impact on the capital budgets for
certain of our major customers; (d) the inability to make changes in
business strategy, development plans and product offerings to respond to
the needs of the significantly changing telecommunications markets and
network technologies; (e) the inability of the Company to realize the
benefits of the reduction in its cost structure due to changes in its
markets or other factors, and the risk that the reduction in costs will not
restore profitability in the timeframe anticipated by the Company; (f) the
risk that our cost-cutting initiatives may have impaired the Company's
ability to effectively develop and market products and remain competitive
in the telecom business; (g) possible delays in, or the inability to,
complete negotiation and execution of purchase and service agreements with
new or existing customers; (h) further declines in demand for our existing
cable testing products; (i) pricing pressures affecting our cable-related
products as a result of increased competition, consolidation within the
cable industry and the adoption of standards-based protocols; (j) our
dependence upon a limited number of third party subcontractors and
component suppliers to manufacture or supply certain aspects of the
products we sell; (k) the ability to manage the risks associated with and
to grow our business; (l) the uncertain economic and political climate in
certain parts of the world where we conduct business and the potential that
such climate may deteriorate; and (m) our ability to efficiently integrate
acquired businesses and achieve expected synergies. Other factors that
could cause actual events or results to differ materially from those
contained in the "forward looking statements" are included in the Company's
filings with the U.S. Securities and Exchange Commission (the "SEC")
including, but not limited to, the Company's Form 10-K for the year ended
December 31, 2007 and any subsequently filed reports. All documents are
also available through the SEC's Electronic Data Gathering Analysis and
Retrieval system at http://www.sec.gov or from the Company's website at
http://www.tollgrade.com.
(TM) ICE is a trademark of Tollgrade Communications, Inc.
(TM) N(x)Test is a trademark of Tollgrade Communications, Inc.
(TM) LDU is a trademark of Tollgrade Communications, Inc.
(R) DigiTest is a registered trademark of Tollgrade Communications, Inc.
(R) MCU is a registered trademark of Tollgrade Communications, Inc.
All other trademarks are the property of their respective owners.
SOURCE Tollgrade Communications, Inc.
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Related links:
http://www.tollgrade.com/
Photo Notes:
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PRN Photo Desk, photodesk@prnewswire.com
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CONTACT:
Bob Butter, Communications of Tollgrade
Communications, Inc., +1-412-820-1347, bbutter@tollgrade.com
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