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Filed by SDL, Inc.
Pursuant to Rule 425 under
the Securities Act of 1933,
as amended, and deemed filed
pursuant to Rule 14a-12 of
the Securities and Exchange Act of 1934, as amended.
Commission File No.: 0-25688
Subject Company: SDL, Inc.
Q3 `00 EARNINGS RELEASE
SCRIPT FOR CONFERENCE CALL ON 10/19/00
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I. OPERATOR
Ladies and gentlemen, thank you for standing by. Welcome to the SDL,
Incorporated third quarter earnings release conference call. At this time, all
participants are in a listen-only mode. Later we will conduct a question and
answer session. At that time, if you have a question, you will need to press the
"1" followed by the "4" on your push button phone. And, as a reminder, this
conference is being recorded. I would now like to introduce your host for
today's conference, Ms. Stephanie Mishra of the Financial Relations Board.
Please go ahead, ma'am.
II. DISCLAIMER - HOST, STEPHANIE MISHRA
Good afternoon, and thank you for joining us to discuss SDL's third quarter
results. You should have received a copy of the earnings release already. If
not, please call us at the Financial Relations Board at (415) 986 1591 and we
will fax a copy of the release to you right away.
Before we begin, I'd like to point out that certain statements made in the
course of this conference call that state SDL's or management's intentions,
hopes, goals, beliefs, expectations, projections, plans, anticipation, outlook
or predictions of the future are forward looking statements. Such statements
include projected sequential quarterly revenue growth of 15% or better, future
operating margin, R&D expense and interest income growth, year-over-year revenue
growth of 100% to $1 billion or greater in 2001, an increased tax rate, the
growth potential and market size for new product lines including Raman and
erbium doped fiber amplifiers, transmitters, receivers, network monitors, AWGs,
modulators, and 980 and 1400 nm lasers, anticipated production and shipment
dates for several large new orders and new products, expansion of the company's
facilities, production level expansions by five times, anticipated growing
customer demand, the company's belief that several of its new products will be
qualified and meet customer specifications, the expected revenue from certain
customers, the expected close of key contracts, the order growth potential with
Huawei, and the anticipated completion date for its merger with JDS Uniphase.
All forward-looking statements are made as of today, and SDL disclaims any duty
to update such statements. It is important to note that the
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company's actual results could differ materially from those projected in such
forward-looking statements. For factors that could cause the anticipated results
not to occur please see the risk factors listed from time to time in the
company's SEC reports including but not limited to the annual report on Form
10-K for the year ended December 31, 1999 and Form 10-Q for the quarters ended
March 31 and June 30, 2000. Copies of these filings may be obtained by
contacting SDL or the SEC.
With us today are SDL's Chief Executive Officer, Don Scifres, Chief
Financial Officer, Mike Foster, and Greg Dougherty, our Chief Operating Officer.
I'd like to now turn the call over to Don Scifres to provide an overview of the
results of the business.
III. CEO INTRODUCTION
Thank you, Stephanie. Good afternoon ladies and gentlemen, and thank you
for joining us today for a discussion of our results for the third quarter of
2000.
It is great to be able to again report record revenues and earnings.
Frankly, I'm thrilled with our third quarter performance which easily exceeded
market expectations. Our record results are a tribute to the many employees in
our company who put out the extra effort to fulfill the continued ramping
customer demand. A highlight for the quarter is that our revenue per employee
advanced to over $300,000 per year, well above the average in our industry, and
a record for SDL. I would like to thank all of our employees personally for this
outstanding achievement.
In Q3, we achieved sequential revenue growth of 33% with proforma operating
income growing 52% sequentially. Our year over year results are also noteworthy
with total revenue growth of 208%, or over three times that of 12 months ago
while proforma EPS is up over four times, or 305%. We believe this financial
performance is likely the best in the industry.
Behind this performance is our continued ability to substantially grow
revenue from our fiber optics products. Specifically, our fiber optics revenue
was up 38% sequentially and up 332% versus one year ago. Our customer base
became more diverse as our acquisitions broadened our product lines and a number
of our recent design wins at newer customers started ramping production. I am
pleased to say that 90% of our revenue came from our commercial fiber optic
products. Our manufacturing teams produced record unit volumes in virtually
every
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division, helping our gross margin to improve by four points sequentially. Our
new acquisitions have performed well and helped to generate this improvement in
gross margin. At the bottom line, we had record results with proforma EPS up 36%
sequentially. In short, Q3 was an outstanding quarter in virtually all respects.
I will discuss our prospects for continued growth, including the status on
the ramp of some of our exciting new products, and the pending merger with JDS
Uniphase in a few minutes but first let me turn the call over to Mike to give
you more detail on the Q3 financials.
IV. CFO REVIEW OF THIRD QUARTER FINANCIAL PERFORMANCE
Thank you, Don, and good afternoon. As Don just said, SDL continued its
industry-leading financial performance in the third quarter. The company handily
exceeded consensus estimates for revenue, margins and earnings per share. Let me
now discuss the details behind this outstanding quarter.
Our earnings are again presented excluding non-cash charges for
acquisition-related expenses, amortization of intangible assets and stock
compensation. This quarter, in order to provide a clearer view of operations and
consistent with other leading technology companies such as Cisco and JDS
Uniphase, we have also excluded payroll taxes on stock option exercises from the
pro-forma earnings shown in our press release. Because this is different from
our methodology in prior periods, we will give you the results both with and
without the adjustment for stock option taxes.
Total revenue for the September quarter was a record $146.5 million. This
is a 208% increase compared to $47.5 million for the corresponding 1999 quarter.
Sequentially, total revenue increased 33% from the $110.5 million reported for
June. Sales of fiber optic communications products were up 38% sequentially, and
up by a factor of 4.3 or 332% over the prior year quarter. Fiber optic
communications products represented a record 90% of total revenue in the
quarter.
Sequential growth remained strong in both terrestrial and undersea sectors
of our DWDM business. Terrestrial revenue, driven by demand for equipment for
higher channel count and faster data rate systems, was up 42% sequentially and
up 433% over the prior year quarter.
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Undersea revenue was up 28% sequentially, and represented 25% of total SDL
revenue. Undersea revenue is up over three times that of the prior year quarter.
The overall base of large customers continued to broaden. In the third
quarter, we had five 10% customers, Alcatel, Lucent, Corning, JDS Uniphase and
our second undersea chip customer, still unnamed. This gave us five customers
with over $15 million of quarter revenue versus one last quarter and none last
year. We also had another customer with $11 million of revenue in the quarter.
Gross margin was a record 56.6% in the quarter, up four points from the
previous quarter, and up 13 points from one year ago. The gross margin was 55.8%
including stock option taxes. This sequential increase was due to continued mix,
yield and efficiency improvements in our base business and strong margins at SDL
PIRI.
Research and development expense increased 32% sequentially and was 6.8% of
revenue in Q3. Including stock option taxes, R&D increased 37% sequentially and
was 7.1% of revenue.
Pro-forma SG&A expense was 10.4% of revenue in Q3, down from 11.4% in Q2.
Including stock option taxes, SG&A was 11.2% of revenue.
Pro forma operating income was a record $57.7 million for the quarter and a
record 39.4% of revenue. Pro forma operating income increased by 52%, or five
percentage points, over the June quarter, and by six times, or twenty percentage
points over the prior year quarter. This income excludes $2.7 million of stock
option taxes; the operating margin would be 37.6% including these taxes.
Pro forma net income for the September quarter was a record $40.4 million,
or 27.6% of revenue, and 45 cents a share on a diluted basis. This represents a
305% increase over diluted earnings per share in Q3 of 1999. EPS would be two
cents lower, 43 cents, without the stock option tax adjustment.
Turning to the balance sheet, we have $384 million of cash and cash
investments, with working capital of $458 million. Q3 cash flow from operations
was again positive, $26 million, driving year-to-date cash flow to $112 million.
Capital expenditures totaled $24 million in Q3. Days sales outstanding in
receivables decreased to 51 days from 55 days at June. Inventory turns remained
at 5.0.
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To summarize the Q3 highlights from a financial perspective, we would note:
the continued rapid revenue growth in both the terrestrial and undersea fiber
optic market sectors, higher margins due to operating efficiencies, improved
product mix and higher yields, and continued strong positive cash flow.
For Q4, we are again projecting sequential revenue growth of 15% or better,
with operating margins and interest income similar to that achieved in Q3. This
is basically the same quarterly revenue growth guidance we have given, excluding
acquisition impacts, for the last year. Q4 diluted share count is projected at
92 million shares. Please also note that it is possible that, because of the
great increase in profitability, we will need to increase the year-to-date tax
rate to 37% in Q4.
Forecasting into 2001, we estimate that we will generate year-over-year
revenue growth in the range of 100%. Our long-term model for operating margin
remains low to mid 30s, and our guidance is that operating margins will trend
toward that range over time as we grow our R&D back towards our target of 9% of
revenue.
This completes my review of our financial results and guidance. Consistent
with the SEC's new Regulation FD, we will not be able to provide any updates of
this financial guidance until the next quarter's conference call, except by
press release or public conference call. I will now turn the call back to Don to
give you an update on further developments at the company during the third
quarter.
V. CEO REPORT
Thank you, Mike. I'm sure you can tell from our operating results that
SDL's market position has never been stronger. In the next few minutes, I'll
describe some of the highlights of Q3 including the status of some of our recent
new product introductions and acquisitions which helped lead to these record
results. I'll also give you a brief update on the status of our pending merger
with JDSU.
Let's begin with Q3 highlights. In the third quarter, 90% of our revenue
came from fiber optic products versus 64% in Q3'99, and 38% in Q3'98. Clearly,
we have successfully repositioned the company in the sweet spot of today's fiber
optics industry. Our goal is to continue to position ourselves at the leading
edge high growth portion of the business. To
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achieve this, we believe we have added many new product lines with strong future
growth potential. These include light modulators and drivers, multiplexors and
demultiplexers, optical receiver and driver modules, variable optical
attenuators, network monitors, tunable filters and Raman and erbium doped fiber
amplifiers. Many of these new products exhibit some of the world's best
technical solutions and are enabling our customers to continue to drive systems
performance to higher speeds, longer distances and lower costs. We continue to
design in anticipation of the major fiber optic industry trends of higher
channel count, higher data rates, all optical networks and longer distances
before optical to electrical conversion. We believe that by servicing these
trends we can continue to achieve our lofty revenue goals going forward.
There are a number of specific examples of our ability to service these
trends, which I'd like to highlight for you today. First, we are proud to
announce that we have been awarded our first large orders to supply a very
exciting new product. The product is a combination of Raman and erbium doped
fiber amplifiers which work together to optimize long haul DWDM transmission.
These orders are from a major player in the fiber optics network market.
Shipments are expected to begin in Q4. As you are probably aware, Raman
amplifiers enable higher data rates over longer distances in fiber optic
systems. As such, Raman is the new rage in amplification. Strategies Unlimited
has projected the Raman amplifier market to reach approximately $2 billion by
2003. This is on top of an estimated 3.5 dollar billion EDFA market in that
year. We expect a significant portion of the future EDFA market will have Raman
and EDFA capability working in combination, as does our present design. Our
customer has indicated to us that the new SDL Raman/EDFA product was chosen due
to its superior technical performance in their system. These orders are the
result of a long design and qualification cycle and a close working relationship
with this very important customer. We are expanding our facilities in Santa
Clara, California by about 50,000 square feet in part to accommodate our
anticipated demand for Raman and EDFA amplifiers from both, this first customer
and other new Raman customers with which we are presently working.
In the fourth quarter, we anticipate shipping not only the new Raman/EDFA
product but also our first InP semiconductor Raman pump lasers operating in the
1400 nm wavelength band. These represent the commercial introduction of the very
high power 700 mW semiconductor lasers we described at OFC in March of this
year. We believe that the market opportunity for our InP Raman lasers could be
as large as that we are now seeing for our 980 nm product line within a few
years. Obviously, we're very excited about the future opportunities created by
our emerging Raman/EDFA amplifier and Raman laser product lines.
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The future opportunities for our newly acquired mux-demux AWG product line
are also growing. This is, of course, the set of products we acquired in our
merger with Photonics Integration Research, Inc. Yesterday, we announced sizable
orders from Huawei, a new customer in China for these AWG products. We believe
our relationship with Huawei has high future growth potential as they are a
leader in the Chinese long haul DWDM market.
We had very strong bookings in this quarter for these AWG products. In
addition to Huawei, we received production orders from three new customer
programs in Q3. As such, we are continuing our plans for expanding the PIRI
facilities by a factor of almost 3 over the next six months. We have just about
completed a 24,000 square foot expansion of our existing building and also
purchased an adjacent building with an additional 47,000 square feet. The goal
is to be able to make five times as many units as we make today over the next 18
months. This expanded new capacity is expected to enable production of several
new AWG products as well. One of these is an L Band AWG. The L Band is becoming
a very important area for communications. In Q3, we began shipping these L Band
AWGs.
We are adding greater functionality to the AWG product line by integrating
new optical devices with the AWGs as well. As an example, we are presently
testing AWGs with variable optical attenuators in each channel. This will reduce
the cost, size and optical loss relative to having AWGs and VOAs as separate
products connected by fibers. AWGs integrated with interleavers are under
development as well. Such advances will open up new markets and enable new
customer capabilities in higher channel count DWDM systems. AWGs with increasing
levels of functionality enabled by optical integration in silica clearly present
a high growth opportunity. As you can tell from our facilities expansion and new
product development activity, we are very excited about the future for SDL's AWG
products.
SDL is also highly optimistic about high growth opportunities at SDL
Veritech, which we acquired seven months ago. Veritech is a leader in designing
high-speed receivers and modulator drivers. This leadership has led to a large
new contract with a leading supplier to the undersea fiber optic networks
market. Under this agreement, SDL Veritech will supply an expected tens of
millions of dollars of advanced high-speed low noise transmitter and receiver
products over the next 24 months. We also expect to firm up multiyear contracts
of similar value with two key terrestrial customers in Q4. In order to
accommodate the growing list of Veritech customers, we are expanding our New
Jersey facility from approximately 18,000 square feet to over 130,000 square
feet. This expansion will be done in two steps. The first expansion to
approximately 70,000 square feet is expected to be capable of producing product
in Q1 of 2001. We are
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presently rapidly adding and training staff as well as purchasing new automated
equipment for Veritech. We expect to achieve production rates approximately five
times larger than today in the next 12 - 18 months.
I should mention that a similar expansion scenario exists for SDL
Queensgate, another recent acquisition. Queensgate's optical network monitors
which measure the wavelength and the power of each channel are just beginning to
be installed into fiber optic systems. The desire of systems integrators not to
perform costly optical to electrical to optical conversion promises to rapidly
increase the use of Queensgate's network monitors. The addition of the SDL sales
force working with Queensgate has opened up new opportunities for our
state-of-the-art 256-channel C and L band monitors. We have won two major orders
for our equipment and have another four recent design wins. We again are well
positioned at the leading edge of a new market with a billion dollar potential
over the next several years. This is exactly the spot where we like to be
positioned, at the leading edge technically with large market opportunities.
Our lithium niobate light modulator business is also doing very well. The
team in the UK is continuing to ramp up their 10 Gbs programs. We received two
new multimillion dollar orders this quarter. We expect to be growing our
revenues for modulators by well over 30% per quarter going forward.
Finally, I would be remiss if I did not mention our incredibly successful
980 nm pump product lines. I continue to be amazed by our success in this area.
I would highlight the progress we are making with our new 300 mW 980 nm
grating stabilized pump module product. This is the world's highest power
Telcordia-qualified 980 nm pump module. It is used in high channel count EDFAs.
In Q4, we are beginning volume production of this new product. Demand for all of
our 980 modules continues to be strong. As such, we are planning to once again
expand our Victoria, British Columbia pump module manufacturing facility. We
will be adding 23,000 square feet by the end of this year. We are currently in
the late planning process for an additional 120,000 square feet. We are
continuing to push for unit volume expansions of up to five times over the next
12 - 18 months.
Our undersea 980 nm business is also expanding rapidly; it grew by 28%
sequentially in Q3. In Q4, we expect to begin production of our new high power
980 nm undersea chip that is capable of allowing record power levels from
undersea pump modules. Specifically, this new chip will allow over 200 mW from
undersea pump modules which is almost double the power
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levels of prior modules. The submarine market is rapidly raising power
requirements for 980 nm pumps. Our chip's unprecedented power level and
reliability are expected to enable even higher channel count undersea systems to
be deployed going forward.
So there you have it. Our leading edge products are again opening up new
opportunities for growth, and our acquisitions are fulfilling our strategy to
rapidly expand into new emerging markets. As Mike indicated, we expect to be
over a one billion dollar company in 2001. We may be able to do significantly
better than that. Of course, since we expect to be part of JDS Uniphase by that
time, I don't expect to be reporting separately on that to you.
With regard to the JDS Uniphase merger, I'd like to briefly update you on
the status. At this time, we have completed a majority of the document
submittals required in the second request by the Department of Justice. We
believe we will finish all the required submittals within the next month. We
continue to believe the process will be completed in December so that we will
close the merger prior to year-end. As the discussions with the Department of
Justice officials are ongoing, I'm afraid I cannot elaborate further on this
subject in the question and answer session.
At this time, however, I would be glad to take questions on all other
topics. Thank you for your attention and support.
VI. Q&A - OPERATOR
Ladies and gentlemen, we will now begin the question and answer session. If
you have a question, you will need to press the "1" followed by the "4" on your
push-button phone. You will hear a three-tone prompt acknowledging your request,
and your questions will be polled in the order they are received. If your
question has been answered and you would like to withdraw your polling request,
you may do so by pressing the "1" followed by the "3" on your push-button phone.
If you are using a speakerphone, please pick up the hand set before pressing the
numbers. One moment for the first question, please.
VII. SUMMARY
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Thank you for your questions and for participating in SDL's third quarter
earnings release conference call. As this may be our last earnings call before
the merger is complete, I would say that it has been a great pleasure working
with everyone in the financial community and I hope to continue to interact
frequently with you as a member of JDS Uniphase. As always, between now and the
close, Mike and I will be pleased to speak with you to discuss our business and
long term growth prospects.
VIII. SEC STATEMENTS - HOST, STEPHANIE MISHRA
You are urged to read the proxy statement/prospectus included in JDS Uniphase
Corporation's Registration Statement on Form S-4 in connection with the merger
of JDS Uniphase and SDL, Inc. filed with the SEC because the proxy
statement/prospectus and the Registration Statement on Form S-4 contain
important information. You can get copies of the proxy statement/prospectus and
the Registration Statement on Form S-4 and any other relevant documents, for
free at the SEC's web site, and copies of our reports, proxy statement and other
information regarding us filed with the SEC are available free from us. Requests
for documents relating to us should be directed to SDL, Inc., 80 Rose Orchard
Way, San Jose, California 95134, Attention: Investor Relations, Telephone (408)
943 4343.
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