Third Quarter Results Within Guidance Range
PITTSBURGH, Oct. 24 /PRNewswire-FirstCall/ -- Tollgrade Communications,
Inc. (Nasdaq: TLGD) today reported revenues of $20.6 million and earnings
per share of $0.11 on a GAAP basis and $0.13 on a non-GAAP basis for the
third quarter ended September 29, 2007. These results include a two-month
contribution from the Broadband Test Division acquired on August 1, 2007
from Teradyne, Inc., which added approximately $4.2 million in revenue for
the third quarter. Excluding the acquisition, revenues and earnings per
share for the third quarter of 2007 were within the range of estimates the
Company provided on July 18, 2007, which indicated revenues could range
from $15 million to $19 million and GAAP earnings per share could range
from $0.06 to $0.20.
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In comparison, for the third quarter of 2006, revenues were $14.9
million with a per share loss of $(0.25) on a GAAP basis and earnings per
share of $0.05 on a non-GAAP basis. On a year-to-date basis, for the
nine-month period ended September 29, 2007, revenues were $47.8 million and
earnings per share were $0.15 on a GAAP basis and $0.23 on a non-GAAP
basis, compared with revenues of $48.8 million and a per share loss of
$(0.26) on a GAAP basis and earnings per share of $0.05 on a non-GAAP basis
in the corresponding prior year period.
"We are pleased with the initial integration and contribution of the
Broadband Test Division that we acquired from Teradyne during the third
quarter," said Mark B. Peterson, Tollgrade's President and CEO. "This
addition to Tollgrade's portfolio helps to significantly enhance our
international footprint. Separately, we made significant progress during
the third quarter in receiving site acceptances for one of our large
international projects, but our customer's time frame for trial and
acceptance of our newer technologies has been extended beyond what was
expected. As a result, this phase of the project will continue into 2008,"
Peterson added. "Regarding our core markets and customers, we remain
patient and cautiously optimistic as most have yet to finalize their
transitions and approach to upgrading network service assurance solutions.
As our markets and business evolve, we remain focused on customers and new
product trials in process, and we will continue to seek opportunities for
operational effectiveness," concluded Peterson.
Third Quarter 2007 Revenue Results
Sales of Tollgrade's DigiTest(R) system products were $6.8 million in
the third quarter of 2007, compared to $4.3 million in the same period of
2006. These results include significant revenues from DigiTest HUB(TM)
products. These revenues increased as a result of progress on ongoing
international projects which involve DigiTest, offset by lower sales of
N(x)Test(TM) product offerings.
Overall sales of cable hardware and software products remained
relatively flat at $2.8 million in the third quarter of 2007 compared to
$2.9 million in the third quarter of the prior year.
Sales of LoopCare(TM) software products, separate from and unrelated to
the Company's DigiTest system products, were $0.2 million in the third
quarter of 2007 compared to $0.7 million for the third quarter of 2006.
Service providers continue to carefully evaluate expenditures in this area
which has constrained purchases and substantially lengthened selling
cycles. Overall LoopCare software license fees and services revenues,
including the separate software products previously discussed, were $2.3
million in the third quarter of 2007 and $2.9 in the third quarter of 2006.
Overall sales of the Company's MCU(R) products, which extend
testability into the POTS network, were $3.6 million in the third quarter
of 2007, compared to $4.1 million in the corresponding prior year quarter.
Periodic demand for this product continues to be driven by emphasis on DSL
rollouts at remote terminal sites by certain RBOC customers.
Third quarter 2007 sales from Services, which includes installation
oversight and project management services and software maintenance fees,
were relatively flat at $3.0 million compared to $2.9 million in the third
quarter of the prior year.
Sales of products from the newly acquired Broadband Test Division were
$4.2 million for the quarter. These sales were comprised of hardware,
software and services, including software maintenance.
Third Quarter 2007 Financial and Operating Data
Gross profit for the third quarter of 2007 was $10.9 million, compared
to $3.2 million in the third quarter of 2006, which includes a charge of
$4.3 million associated with the write down of certain inventory. Exclusive
of the charge, gross profit on a non-GAAP basis was $7.6 million in the
prior year quarter. As a percentage of sales, gross profit for the third
quarter of 2007 was 53.2% on a GAAP basis. For the prior year quarter,
gross profit as a percentage of sales was 21.4% on a GAAP basis, and 50.5%
on a non-GAAP basis. The increase in gross profit as a percentage of sales
between years is due primarily to a more favorable product mix.
Including restructuring charges, the Company's operating expenses were
$9.5 million for the third quarter of 2007, compared to $8.9 million in the
prior year quarter. Excluding restructuring charges for both periods,
operating expenses were $9.2 million and $7.4 million in the third quarter
of 2007 and 2006, respectively.
Selling and marketing expenses in the third quarter of 2007 were $2.9
million, an increase of $0.4 million from the same period in 2006. The
increase is primarily associated with additional costs related to the
Broadband Test Division acquisition.
General and administrative expenses were $2.7 million for the third
quarter 2007 compared to $1.8 million in the third quarter of 2006. The
increase is related to additional professional expenses from the
acquisition of the Broadband Test Division, as well as other incremental
recruiting and consultation costs.
Research and development costs were $3.7 million for the third quarter
2007 compared to $3.2 million in the third quarter 2006. The increase is
primarily associated with additional costs related to the aforementioned
acquisition.
Overall, the Company's operating expenses in the third quarter of 2007
included costs related to the acquisition, which are not expected to
reoccur. These costs amounted to $0.8 million and are comprised of legal,
rental and consultation costs necessary to establish and create
organizational and operating structure for the Broadband Test Division.
The effective tax rate for the third quarter of 2007 was approximately
33%, compared to approximately 35% in the prior year quarter. The decrease
is associated with the proportional impact of certain permanent items
relative to pre-tax income.
The Company's order backlog for firm customer purchase orders and
signed software maintenance contracts was $20.7 million as of September 29,
2007, compared to a backlog of $10 million as of December 31, 2006. The
current order backlog includes approximately $9.6 million of the newly
acquired Broadband Test Division's products and services. Further, the
backlog at September 29, 2007 and December 31, 2006 included approximately
$8.1 million and $5.7 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 43% of the current total backlog
will be recognized as revenue in the fourth quarter of 2007.
Fourth Quarter 2007 Outlook
"Regarding our fourth quarter 2007 outlook, we expect revenues to range
from $17 million to $21 million, of which we expect an estimated $5.0
million contribution from the newly acquired Broadband Test Division," said
Peterson. "We expect fourth quarter earnings per share to range from $0.04
to $0.13 on a GAAP basis," added Peterson.
Commenting on earnings for the full year, Peterson said, "This year, we
had hoped to reach $0.50 earnings per share. While we have made progress,
there are a number of factors and circumstances that we expect will prevent
us from meeting this goal. Those factors include: delays in one of our
large international projects, general domestic market delays caused by
customers not yet finalizing their transitions and approach to upgrading
their access network service assurance solutions, extended schedules for
general availability and customer adoption of new complex products,
including those sourced for a large international market, and a challenging
market for selling LoopCare features to RBOCs," he added.
"We will continue to refine our business strategy in the coming months.
In the Letter to Shareholders in our 2006 annual report, we noted one
element of this strategy was to explore opportunities to expand centralized
network assurance to the power utility industry. We have now developed
prototypes aimed at "Smart Grid" applications, in particular, applications
for the purpose of isolating faults and improving the overall reliability
of the Distribution Grid, and detecting and preventing pending equipment
failures. Most recently, we have been selected by one of the nation's
largest power utilities for a trial of our new technology. Although we
still have additional research, development and marketing work yet to do
before we see the benefits of this effort, we are excited at the prospect
of entering this sector with our solutions," concluded Peterson.
Conference Call and Webcast
A conference call to discuss earnings results for the third quarter of
2007 will be held on October 25, 2007 at 9:00 a.m., Eastern Time. The
telephone number for U.S. participants is 1-800-860-2442 (international:
412- 858-4600). Please reference Tollgrade's Third Quarter 2007 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=43143
About Tollgrade
Tollgrade Communications, Inc. is a leading provider of network service
assurance products and services 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 for the broadband marketplace. Tollgrade's
customers range from the top RBOCs (Regional Bell Operating Companies) 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. Tollgrade,
headquartered near Pittsburgh in Cheswick, Pa., and its products and
customer reach span over 300 million embedded access lines, more than any
other test and measurement supplier. 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
29, 2007 30, 2006 29, 2007 30, 2006
Revenues:
Products $14,994 $12,053 $36,443 $38,828
Services 5,584 2,896 11,358 9,982
20,578 14,949 47,801 48,810
Cost of sales:
Products 7,305 5,454 16,758 19,238
Services 1,424 982 3,234 3,601
Amortization 903 962 2,041 2,853
Inventory write-down --- 4,346 --- 4,346
9,632 11,744 22,033 30,038
Gross profit 10,946 3,205 25,768 18,772
Operating expenses:
Selling and marketing 2,853 2,459 7,363 8,081
General and
administrative 2,673 1,751 7,121 5,935
Research and
development 3,694 3,233 9,639 10,484
Restructuring expense 233 1,500 827 1,500
Total operating
expenses 9,453 8,943 24,950 26,000
Income (loss) from
operations 1,493 (5,738) 818 (7,228)
Other income 635 729 2,151 1,984
Income (loss) before
income taxes 2,128 (5,009) 2,969 (5,244)
Provision (benefit) for
income taxes 702 (1,759) 982 (1,826)
Net income (loss) $1,426 $(3,250) $1,987 $(3,418)
Diluted earnings per-
share information:
Weighted average shares
of common stock and
equivalents: 13,440 13,247 13,467 13,236
Net income (loss) per
common and common
equivalent shares $0.11 $(0.25) $0.15 $(0.26)
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
September December
29, 2007 31, 2006
ASSETS
Current assets:
Cash and cash equivalents $46,116 $57,378
Short-term investments 7,724 5,323
Accounts receivable:
Trade 18,313 15,149
Other 1,970 1,918
Inventories 13,170 8,556
Prepaid expenses 813 776
Receivable from officer --- 148
Deferred and refundable tax assets 2,027 2,939
Assets held for sale 272 1,190
Total current assets 90,405 93,377
Property and equipment, net 3,674 3,301
Intangibles and capitalized software costs, net 47,775 41,487
Goodwill 24,665 23,836
Other assets 332 351
Total assets $166,851 $162,352
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,265 $1,580
Accrued warranty 1,989 2,135
Accrued expenses 2,755 2,590
Accrued salaries and wages 388 658
Accrued royalties payable 525 200
Deferred revenue 3,226 2,783
Total current liabilities 11,148 9,946
Pension obligation 787 ---
Deferred tax liabilities and other taxes 3,600 2,962
Total liabilities 15,535 12,908
Total shareholders' equity 151,316 149,444
Total liabilities and shareholders' equity $166,851 $162,352
TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
September September
29, 2007 30, 2006
Cash flows from operating activities:
Net income (loss) $1,987 $(3,418)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 3,258 4,483
Compensation expense related to stock plans 829 378
Deferred income taxes 1,547 (1,635)
Excess tax benefits from share-based compensation (10) ---
Restructuring charges 827 5,338
Provisions for losses on inventories 333 (44)
Provision for allowance for doubtful accounts 96 19
Changes in assets and liabilities:
Accounts receivable-trade 525 (3,770)
Accounts receivable-other (49) 48
Inventories (3,730) (4,208)
Prepaid expenses and other assets 112 570
Accounts payable 215 (425)
Accrued warranty (146) (87)
Accrued expenses and other liabilities (1,651) 587
Accrued royalties payable 318 (421)
Income taxes payable --- (428)
Net cash provided by (used in) operating
activities 4,461 (3,013)
Cash flows from investing activities:
Purchase of Emerson test division --- (5,501)
Purchase of Broadband Test Division of Teradyne (11,927) ---
Purchase of short-term investments (11,608) (7,589)
Redemption/maturity of short-term investments 9,207 18,354
Capital expenditures, including capitalized
software (1,220) (1,003)
Sale of assets held for sale 892 ---
Net cash (used in) provided by investing
activities (14,656) 4,261
Cash flows from financing activities:
Repurchase of treasury shares (1,109) ---
Excess tax benefits from share-based compensation 10 94
Proceeds from exercise of stock options 89 406
Net cash (used in) provided by financing
activities (1,010) 500
Net (decrease) increase in cash and cash equivalents (11,205) 1,748
Effect of exchange rate changes on cash and
cash equivalents (57) ---
Cash and cash equivalents at beginning of period 57,378 49,421
Cash and cash equivalents at end of period $46,116 $51,169
Explanation of Non-GAAP Measures
During the third quarter of 2007, we continued the restructuring
program that we announced on July 27, 2006, 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 non-recurring charges
associated with the continuation of the restructuring initiatives, as well
as the related income tax effects of such items. Our non-GAAP financial
measures also exclude share-based compensation expense. These expenses
consist of expenses for employee stock options and restricted stock grants.
These non-GAAP financial measures are provided to enhance the user's
overall understanding of our 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 29, 2007 and September 30,
2006, 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 29, 2007 and September 30, 2006, we have excluded the effect
of the restructuring program from our GAAP gross profit, operating
expense, operating income, net income and diluted EPS. The
restructuring program included charges primarily associated with write-
down of inventory, 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 29, 2007 and September 30, 2006, we have excluded the
effect of employee stock-based compensation expense on operating
expenses, operating income, net income 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.
Reconciliation to GAAP- Quarter Ended September 29, 2007 (Unaudited)
(In thousands, except Operating Operating Net Diluted
per share amount) Expense Income Income EPS
GAAP Reported Results $9,453 $1,493 $1,426 $0.11
Restructuring expense (233) 233 156 0.01
Stock-based compensation expense (200) 200 134 0.01
Non-GAAP Results, Excluding
special items $9,020 $1,926 $1,716 $0.13
Reconciliation to GAAP- Nine Months Ended September 29, 2007 (Unaudited)
(In thousands, except Operating Operating Net Diluted
per share amount) Expense Income Income EPS
GAAP Reported Results $24,950 $818 $1,987 $0.15
Restructuring expense (827) 827 553 0.04
Stock-based compensation expense (828) 828 554 0.04
Non-GAAP Results, Excluding
special items $23,295 $2,473 $3,094 $0.23
Reconciliation to GAAP- Quarter Ended September 30, 2006 (Unaudited)
Gross Operating Net
(In thousands, except Gross Profit Operating (Loss) (Loss) Diluted
per share amount) Profit Percentage Expense Income Income EPS
GAAP Reported Results $3,205 21.4% $8,943 $(5,738) $(3,250) ($0.25)
Inventory write-down 4,346 29.1% 4,346 2,868 0.22
Restructuring expense -- -- (1,500) 1,500 990 0.07
Stock-based
compensation expense -- -- (149) 149 97 0.01
Non-GAAP Results,
Excluding special
items $7,551 50.5% $7,294 $257 $705 $0.05
Reconciliation to GAAP- Nine Months Ended September 30, 2006 (Unaudited)
Gross Net
(In thousands, except Gross Profit Operating Operating (Loss) Diluted
per share amount) Profit Percentage Expense (Loss) Income EPS
GAAP Reported Results $18,772 38.5% $26,000 $(7,228) $(3,418) ($0.26)
Inventory write-down 4,346 8.9% 4,346 2,868 0.22
Restructuring expense -- -- (1,500) 1,500 990 0.07
Stock-based
compensation expense -- -- (378) 378 246 0.02
Non-GAAP Results,
Excluding special
items $23,118 47.4% $24,122 $(1,004) $686 $0.05
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 and earnings results for
the fourth quarter of 2007 and the full year 2007, its ability to resolve
timing and implementation issues in one of its large international
projects, new product initiatives, including the development schedules for
general availability of several new complex products, its participation in
the fundamental network migration currently underway in the
telecommunications industry, its ability to align its products more closely
with its customers' focus on new network and service platform development,
a challenging market for selling LoopCare features to the RBOCs and
competitive carriers, and its confidence in winning broadband customers.
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 to complete sales, or possible delays in
deployment, of products under international projects due possible delays in
completing the legal and commercial terms for such projects, including the
timely receipt of purchase orders for such projects, project delays or
cancellations, political instability, inability to obtain proper
acceptances or other unforeseen obstacles or delays; (b) inability to
complete or possible delays in completing certain research and development
efforts required for several new complex products, including without
limitation our DigiTest ICE(TM) product and our "Smart Grid" products
currently under development, and any failure of our customers to adopt new
products in the volumes and within the timeframes anticipated; (c) the
unanticipated further decline of the capital budgets allocated to legacy
network elements 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) possible delays in, or the inability
to, complete negotiation and execution of purchase and service agreements
with new or existing customers; (f) lower than expected demand for our
cable testing products and pricing pressures on those products as a result
of increased competition, consolidation within the cable industry and the
adoption of standards-based protocols; (g) lower than expected demand for
our telecom testing products in the competitive local exchange carrier
market; (h) our dependence upon a limited number of third party
subcontractors and component suppliers to manufacture or supply certain
aspects of the products we sell; (i) the ability to manage the risks
associated with and to grow our business; (j) the uncertain economic and
political climate in certain parts of the world where we conduct business
and the potential that such climate may deteriorate; (k) our ability to
efficiently integrate acquired businesses and achieve expected synergies,
in particular, the acquisition of the Broadband Testing Division of
Teradyne, Inc., and management distraction from other important strategic
initiatives which may be caused by such efforts; and (l) delays in the rate
of acceptance of our new product initiatives, including without limitation
our DigiTest ICE(TM) product and our "Smart Grid" products currently under
development, in the markets into which they will be sold, caused by
extended testing or acceptance periods, requests for custom or modified
engineering of such products, and customer budget cycles, among other
factors. 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, 2006 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)LoopCare is a trademark of Tollgrade Communications, Inc.
(TM)N(x)Test is a trademark of Tollgrade Communications, Inc.
(TM)HUB is a trademark of Tollgrade Communications, Inc.
(TM)ICE 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
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CONTACT:
Bob Butter, Corporate Communications of
Tollgrade Communications, Inc., +1-412-820-1347, Cell:
+1-412-736-6186, bbutter@tollgrade.com
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