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| TLGD > SEC Filings for TLGD > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
IPTV, and DSL services. Customer traditional copper line loss is being driven by
competition from wireless and cable providers and also the elimination of second
phone lines due to DSL penetration. This has resulted in reduced demand for our
copper-based products.
In response to these conditions and trends our customers are attempting to
reduce their costs, including by reducing the prices of services they purchase
under long term service contracts. As a result, each time a contract is
scheduled for renewal, we must demonstrate to our customers the value of the
entire system and the costs saved by maintaining and even extending the system
capabilities. We successfully completed the renewal of maintenance contracts
with three existing large customers in recent months. Two of the contracts were
renewed for 3-year extensions and one was renewed for a 5-year extension. In
total, the contracts represent more than $5 million dollars a year in
maintenance revenue. While these discussions took an extended period of time, we
held firm on our pricing rationale. We believe that the successful outcome of
these negotiations demonstrates that our customers recognized the value that we
provide to maximize their customer satisfaction and lower their operational
costs.
Negotiations for the renewal of a service agreement with another large customer
whose contract expired on June 30, 2009 has yet to be finalized, which has
impacted our backlog figures since we do not include any expected revenue from
this source in our backlog at June 27, 2009. We are currently working to
finalize the renewal of the contract that expired in June and expect to complete
the negotiations during the third quarter of 2009. We also have two further
agreements that will expire at the end of 2009. We expect to commence
negotiations for the renewal of these contracts in the third quarter of 2009.
As described in the Form 10-K, management completed a comprehensive strategic
review of all our businesses in 2008 to address the trends affecting our
business. As a result of the review, we determined that the appropriate strategy
for the Company included focusing our strategic efforts and resources on the
substantial and growing telecom service assurance market, where we have a
significant installed customer base, and use this position to expand into
adjacent markets. Our refocused strategy allows us to leverage our strong
embedded base of customers, and enhance the value of our long term relationships
and services agreements. We have been implementing our refocused growth strategy
since October of 2008 and have achieved a significant number of milestones in
our strategic plan, including:
1. Developing a comprehensive strategic plan to focus on our core expertise in
service assurance and adjacent markets;
2. Selling off non-core assets that do not support our refocused strategy;
3. Bolstering cash reserves to more than $63 million;
4. Authorizing a $15 million stock buyback program;
5. Reducing corporate overhead by streamlining operations; and
6. Making key management changes to strengthen our functional expertise.
The Company expects that this strategy will position it for long-term growth, a return to profitability, and market leadership and increasing returns for investors.
Products
Services
Our services offerings include software maintenance and support for our
operating support systems ("OSS") offerings and hardware maintenance for the
test probes, and our professional services, which are designed to ensure that
all of the components of our customers' test systems operate properly. The
primary customers for our maintenance and professional services offerings are
the large domestic carriers and international customers. We have a number of
large service agreements with these customers which cover software and, in some
cases, hardware maintenance for our products.
Historically, our services business was comprised of the more traditional
POTS-based testability services, and the revenue stream was largely
project-based and as such, difficult to predict. During the last few years, and
primarily as a result of the Broadband Test Division acquisition, the services
business has moved toward more contract-based software maintenance services, the
revenue from which is more predictable. Because of this trend, our focus on our
software applications as part of our refined strategy, and the decline in
revenues from our other product lines, we expect services to continue to
comprise a larger percentage of our revenue in the future. During the second
quarter of 2009, we completed negotiations for the renewal of two multi-year
software maintenance agreements which were open at the end of the first quarter
of 2009.
In addition, we also entered into a new, multi-year managed services contract
with a large global network equipment provider to provide customer support and
engineering services. Under this new, multi-year managed services agreement, we
will provide customer support and engineering services capabilities. The
agreement is an important addition to our services business and is a logical
step for us as we offer an expanded portfolio of services to our current
customers as well as new customers.
Telecommunications Test and Measurement Products
Our proprietary telecommunications test and measurement products, which include
our System Test and MCU® products, enable telephone companies to qualify and
troubleshoot broadband DSL and IP services and remotely diagnose problems in
POTS lines. Most DSL lines today provide broadband Internet access for
residential and business customers, fed from a central or remote office Digital
Subscriber Line Access Multiplexer ("DSLAM") and configured with either a shared
POTS voice service or "unbundled" from the voice switch entirely (in the case of
a competitive local exchange carriers ("CLECs") service offering). Our systems
can be used to qualify loops for DSL service as well as ongoing maintenance and
repair of these "IP" lines. As telecommunications service providers transition
their offerings to IP networks and services (voice, video and data), we are in
the process of upgrading Tollgrade's test systems to support the testing of
these services. POTS lines provide traditional voice service as well as
connections for communication devices such as computer modems and fax machines.
POTS excludes non-switched and private lines, such as data communications
service lines, commonly referred to as "special services."
An important aspect of efficiently maintaining a telecommunications network is
the ability to remotely test, diagnose and locate any service-affecting problems
within that network. Tollgrade's System Test Products are made up of a
centralized test operating system integrated into the customers' repair handling
database systems, and remote test hardware located at telephone companies'
central and remote offices. These systems enable local exchange carriers to
conduct a full range of fault
diagnostics in the "local loop," the portion of the telephone network that
connects end users to the central office. In addition, line test systems provide
the capability to remotely qualify, deploy and maintain services such as DSL and
Integrated Services Digital Network ("ISDN") services which are carried over
POTS lines. These test systems reduce the time needed to identify and resolve
problems, eliminating or reducing the costs of dispatching a technician to the
problem site. Most POTS line test systems, however, were designed only for use
over copper wire line; as a result, traditional test systems could not access
local loops in which fiber-optic technology had been introduced. Our MCU product
line, which is used primarily by large domestic carriers, solved this problem,
extending LoopCare™ testing from the central office to the fiber-fed remote
Digital Loop Carrier ("DLC") lines by mimicking a digital bypass pair, which is
essentially a telephone circuit that connects central test and measurement
devices to the copper circuits close to the customer, i.e., "the last mile."
We believe our DigiTest® system is well positioned for the present and future of
telecommunication network testing, combining our line test system with a next
generation test platform to provide a complete test system solution for POTS and
DSL local loop prequalification and in-service testing.
During 2008, the Company determined after a thorough strategic review process to
reposition itself with a greater focus on its service assurance offerings. The
Company intends to build upon the strength of its System Test Products, which
are at the center of our service assurance offerings, but with a greater
emphasis on expanding our service assurance software solutions. Our System Test
product software offerings include four separate OSS: LoopCare, 4TEL™,
Celerity™, and LTSC™, each having an established installed base. LoopCare is
also the primary application for broadband DSL testing and can be architected to
overlay 4TEL and LTSC to add this functionality to the existing line test
application with the addition of the DigiTest measurement platform. We plan to
leverage our incumbencies with our installed base of software customers, and
extend testing coverage to next generation network architectures. The
implementation of our strategy initially will expand upon existing customer
requests for enhanced features and capabilities. With regard to our software
development activities, we have been planning, architecting, coding, and are now
into the testing phase to deliver our new software platform. We expect to
announce general availability of our first release of the platform this fall and
will formally launch the offering in September.
Our legacy MCU products plug into DLC systems, the large network transmission
systems used by telephone companies to link the copper and fiber-optic portions
of the local loop. MCU products allow our customers to extend their line testing
capabilities to all of their POTS lines served by a DLC system regardless of
whether the system is fed by a copper or fiber optic link. DLC systems, which
are located at telephone companies' central offices and at remote sites within
local user areas, effectively multiplex the services of a single fiber-optic
line into multiple copper lines. In many instances, several DLC systems are
located at a single remote site to create multiple local loops that serve
several thousand different end-user homes and businesses. Generally, for every
DLC remote site, customers will deploy at least two MCU line-testing products.
One of three patents for our legacy MCU products will expire during 2010, and we
expect that the loss of this patent protection will permit greater competition
within this market segment that could cause our revenues from this product line
to decline.
Electric Utility Monitoring Products
The Company's new product development effort, the LightHouse™ product line, is
being designed to provide power grid monitoring capabilities to electric
utilities. Research and investment throughout 2007 and 2008 enabled the general
availability of the first release of the product line during the first
quarter of 2009. The test system solution currently consists of line mounted
sensors, aggregators, and centralized software providing an end to end solution
for power providers to efficiently monitor their overhead distribution circuits
in real time. A LightHouse sensor, mounted directly on the electrical conductor,
will continuously monitor key circuit parameters and transmit data over a
wireless network to a central location, reducing time of detecting a problem on
the grid, identifying its location and restoring service. LightHouse is intended
as an innovative means for electric power utilities to deploy technology to
provide real-time grid intelligence to detect faults and help minimize the
impact of outages while optimizing the utilization of assets. The system is
designed to improve the overall efficiency of energy delivery, improve customer
satisfaction and improve the financial performance of the electric utilities.
During the quarter and since our general availability of the Lighthouse solution
in February, we have upgraded many of our current trial systems with new
hardware and software. While the trials continue to receive positive response,
we are still awaiting feedback on deployment decisions and timing. We have new
trials planned and are in preparation stages with customers to design the trial
system configurations for their networks.
Our Customers
The Company's customers range from the top telecom providers, to numerous
independent telecom, and broadband providers around the world. Our primary
customers for our telco products and services are large domestic and European
telecommunications service providers. The Company tracks its telco sales by two
large customer groups, the first of which includes Qwest, AT&T and Verizon
(referred to herein as large domestic carriers), and the second of which
includes certain large international telephone service providers in Europe,
namely British Telecom, Royal KPN N.V., Belgacom S.A., Deutsche Telecom AG
(T-Com) and Telefónica O2 Czech Republic, a.s. (collectively referred to herein
as the "European Telcos"). For the second quarter of 2009, sales to the large
domestic customers accounted for approximately 35.8% of the Company's total
revenue, compared to approximately 25.9% of total revenue for the second quarter
of 2008. Sales to AT&T individually exceeded 10% of the Company's total revenue
and comprised 19.6% of the Company's total revenue for the second quarter of
2009, compared to 14.4% of the Company's total revenue for the second quarter of
2008. Sales in the second quarter of 2009 and 2008 to the European Telcos
accounted for approximately 20.7% and 33.0% respectively, of total revenue.
For the three months ended June 27, 2009, sales to customers in the Americas
(excluding the United States) were approximately $1.0 million or 24.9% of
international sales; sales to customers in EMEA were $2.5 million or 66.3% of
international sales; and sales to customers in Asia Pacific were $0.3 million or
8.8% of international sales. For the three months ended June 28, 2008, sales to
customers in the Americas (excluding the United States) were approximately
$0.6 million or 9.9% of international sales; sales to customers in EMEA were
$5.1 million or 78.2% of international sales; and sales to customers in Asia
Pacific were $0.8 million or 11.9% of international sales.
For the six months ended June 27, 2009 and June 28, 2008, sales to the large
domestic customers accounted for approximately 43.7% and 30.6%, respectively, of
the Company's total revenue. Sales to AT&T comprised approximately 24.6% and
18.8% of the Company's total revenue for the six months ended June 27, 2009 and
June 28, 2008, respectively. Sales for the six months ended June 27, 2009 to the
European Telcos accounted for approximately 22.8% of total revenue.
International sales represented approximately $7.5 million, or 35.7% of the
Company's total revenue for the six months
ended June 27, 2009 compared to $12.1 million, or 51.9%, for the six months
ended June 28, 2008. Our international sales were primarily in three geographic
areas based upon customer location for the six months ended June 27, 2009: the
Americas (excluding the United States); EMEA; and Asia. Sales in the Americas
were approximately $1.7 million and $1.0 million, sales in EMEA were
approximately $5.3 million and $10.3 million, and sales in Asia were
approximately $0.5 million and $0.8 million for the six months ended June 27,
2009 and the six months ended June 28, 2008, respectively.
Backlog
The Company's order backlog for firm customer purchase orders and signed
software maintenance contracts was $17.7 million as of June 27, 2009, compared
to a backlog of $15.1 million as of December 31, 2008. The backlog at June 27,
2009 and December 31, 2008 included approximately $15.6 million and
$12.0 million, respectively, related to software maintenance contracts and,
beginning in the second quarter of 2009, also our managed services contract. Our
backlog specifically for software maintenance contracts has declined
sequentially from the first quarter 2009 even with the renewal of the software
maintenance agreements that were completed in the second quarter 2009 because
three additional major software support agreements have expired or will expire
within the next six months. Because one of these contracts expired at the end of
June 2009, the backlog figure does not include any amount from that customer. We
are currently working to finalize the renewal of the contract that expired in
June and expect to complete negotiations during the third quarter 2009. The
other two contracts expire at the end of 2009.
On a sequential basis, backlog increased from $12.0 million dollars at March 28,
2009 primarily due to the managed services contract as well as the maintenance
renewals signed in the second quarter. The order backlog includes only twelve
months of revenue from maintenance agreements and the managed services contract.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
On January 1, 2009, the Company adopted SFAS No. 160, "Noncontrolling Interests
in Consolidated Financial Statements-an amendment of ARB No. 51," (SFAS 160).
SFAS 160 amends Accounting Research Bulletin No. 51, "Consolidated Financial
Statements," to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This standard defines a noncontrolling interest, previously called a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. SFAS 160 requires, among other items, that
a noncontrolling interest be included in the consolidated statement of financial
position within equity separate from the parent's equity; consolidated net
income to be reported at amounts inclusive of both the parent's and
noncontrolling interest's shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on the
consolidated statement of operations; and if a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary be measured
at fair value and a gain or loss be recognized in net income based on such fair
value. The adoption of SFAS 160 had no impact on the Company's consolidated
financial statements.
On January 1, 2009, the Company adopted SFAS No. 141 (revised 2007), "Business
Combinations," (SFAS 141(R)), which replaces SFAS No. 141, "Business
Combinations," (SFAS 141) but retains the fundamental requirements in SFAS 141,
including that the purchase method be used for all business combinations and for
an acquirer to be identified for each business combination. This standard
defines
the acquirer as the entity that obtains control of one or more businesses in the
business combination and establishes the acquisition date as the date that the
acquirer achieves control instead of the date that the consideration is
transferred. SFAS 141(R) requires an acquirer in a business combination,
including business combinations achieved in stages (step acquisition), to
recognize the assets acquired, liabilities assumed, and any noncontrolling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. It also requires the recognition of
assets acquired and liabilities assumed arising from certain contractual
contingencies as of the acquisition date, measured at their acquisition-date
fair values. Additionally, SFAS 141(R) requires acquisition-related costs to be
expensed in the period in which the costs are incurred and the services are
received instead of including such costs as part of the acquisition price. The
impact of the adoption of SFAS 141(R) will depend on the nature and extent of
business combinations occurring on or after the effective date.
On January 1, 2009, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 157, "Fair Value Measurements," (SFAS 157) as it relates to
nonfinancial assets and nonfinancial liabilities that are not recognized or
disclosed at fair value in the financial statements on at least an annual basis.
SFAS 157 defines fair value, establishes a framework for measuring fair value in
accounting principles generally accepted in the United States of America (GAAP),
and expands disclosures about fair value measurements. The provisions of this
standard apply to other accounting pronouncements that require or permit fair
value measurements and are to be applied prospectively with limited exceptions.
See Note 6 for the effect of the adoption of SFAS 157, as it relates to
nonfinancial assets and nonfinancial liabilities, on the Company's consolidated
financial statements. The provisions of SFAS 157 will be applied at such time a
fair value measurement of a nonfinancial asset or nonfinancial liability is
required, which may result in a fair value that is materially different than
would have been calculated prior to the adoption of SFAS 157.
On January 1, 2009, the Company adopted FASB Staff Position (FSP) No. FAS 142-3,
"Determination of the Useful Life of Intangible Assets," (FSP FAS 142-3). FSP
FAS 142-3 amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, "Goodwill and Other Intangible
Assets," (SFAS 142) in order to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141(R) and other
GAAP. The adoption of FSP FAS 142-3 had no impact on the Financial Statements.
On January 1, 2009, the Company adopted FSP No. EITF 03-6-1, "Determining
Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities," (FSP EITF 03-6-1). FSP EITF 03-6-1 states that
unvested share-based payment awards that contain nonforfeitable rights to
dividends or dividend equivalents (whether paid or unpaid) are participating
securities and shall be included in the computation of earnings per share
pursuant to the two-class method. The adoption of FSP EITF 03-6-1 had no impact
on the Financial Statements.
In April 2009, the FASB issued FASB Staff Position (FSP) FAS No. 107-1 and
Accounting Principles Board (APB) Opinion No. 28-1, "Interim Disclosures about
Fair Value of Financial Instruments" (FSP FAS No. 107-1 and APB Opinion
No. 28-1), which amends the disclosure requirements of SFAS No. 107 and APB
Opinion No. 28 and requires disclosure about the fair value of its financial
instruments whenever it issues summarized financial information for interim
reporting periods. FSP FAS No. 107-1 and APB Opinion No. 28-1 are effective for
financial statements issued for interim
reporting periods ending after June 15, 2009. The adoption of FSP FAS No. 107-1
and APB Opinion No. 28-1 resulted in the Company's inclusion of the appropriate
disclosures in the condensed consolidated financial statements.
In April 2009, the FASB issued FSP FAS No. 115-2 and FAS No. 124-2, "Recognition
and Presentation of Other-Than-Temporary Impairments" (FSP FAS No. 115-2 and FAS
No. 124-2), which amends SFAS No. 115 and FSP FAS No. 115-1 and FSP FAS
No. 124-1 and conforms changes to other standards including EITF Issue No. 99-20
and AICPA Statement of Position (SOP) No. 03-3, "Accounting for Certain Loans or
Debt Securities Acquired in a Transfer," and improves the presentation and
disclosure of other-than-temporary impairments on debt and equity securities in
the financial statements. FSP FAS No. 115-2 and FAS No. 124-2 are effective for
interim and annual reporting periods ending after June 15, 2009. The adoption of
FSP FAS No. 115-2 and FAS No. 124-2 had no impact on the Company's consolidated
financial statements.
. . .
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