ECI Cuts Loss in Q4ECI Cuts Loss in Q4

ECI Telecom's net loss was $13.6M or $0.13 per share, down from a net loss of $14.7M in Q3, but up from $7M or $0.07 per share in 4Q02

February 12, 2004

8 Min Read

PETACH TIKVA, Israel -- ECI Telecom Ltd. (Nasdaq: ECIL - News) today announced its consolidated results of operations for the fourth quarter and twelve months ended December 31, 2003.

Fourth Quarter Results

Note: Earlier this week, ECtel Ltd. (NASDAQ: ECTX - News), in which ECI Telecom holds a 58% interest, signed a definitive agreement for the sale of its government business to Verint. ECtel reported the results of operations of the government business under "discontinued" operations in all reported periods. The following GAAP results for ECI reflect the discontinuation of this business.

Revenues in the fourth quarter of 2003 were $109 million compared to $102 million in the third quarter and $137 million in the fourth quarter of 2002. Revenues in the fourth quarter of 2002 included revenues from ECI's NGTS Division, which was subsequently spun off. Gross margins were 39.1%, compared to 39.7% in the third quarter and 43.9% in the fourth quarter of 2002. The operating loss for the fourth quarter was $11.0 million compared to an operating loss of $16.8 million in the third quarter and an operating loss of $7.8 million in the fourth quarter of 2002. The net loss for the fourth quarter of 2003 was $13.6 million or $0.13 per share, compared to a net loss of $14.7 million, or $0.14 per share, in the third quarter and a net loss of $7.0 million, or $0.07 per share in the fourth quarter of 2002.

Excluding Ectel, ECI's revenues in the fourth quarter of 2003 were $103 million, up 9% from the third quarter. (See tables 3(1) and 3(2) for a full reconciliation of the GAAP revenues and the non-GAAP revenues which exclude ECtel.) The net loss for the fourth quarter, excluding ECtel, was $6.8 million, compared to a net loss of $7.9 million in the third quarter of 2003.

ECI continued to generate positive cash flow from operations and ended the year with cash, equivalents, short and long term investments in deposits and marketable securities totaling $256 million.

Revenues of the Optical Networks Division were $48.6 million in the fourth quarter of 2003 compared to $47.0 million in the third quarter and $51.7 million in the fourth quarter of last year. The operating loss in the quarter was $8.7 million compared to an operating loss of $6.8 million in the third quarter and an operating loss of $8.6 million in the fourth quarter of last year. Demand for the Division's products was strong with the book to bill ratio again well above 1. The strong demand derived primarily from emerging markets, including the former Soviet Union countries, India, China and Korea. During the quarter ECI announced that Tata Teleservices Limited, one of India's leading CDMA mobile carriers, will deploy ECI's XDM® MultiService Provisioning Platforms (MSPPs) within its optical transmission access and backbone network. The first phase of the project is expected to involve hundreds of XDM platforms and is valued at approximately $20 million, to be recorded over the first nine months of 2004. During the quarter, ECI completed a multi-million deployment of the XDM at leading Ukrainian carrier, Ukrtelecom. The equipment is carrying live traffic across 50 sites. ECI also announced that China Unicom has deployed its XDM® MSPP in Beijing.

Optical Networks Division revenues were $178 million for 2003, compared to $233 million in 2002. The operating loss for 2003 was $37 million compared to an operating loss of $30 million for 2002.

The Broadband Access Division recorded revenues of $46.6 million in the fourth quarter of 2003 up 16% compared to $40.3 million in the third quarter and $52.0 million in the fourth quarter of 2002. Operating income was $3.9 million compared to $2.3 million in the third quarter and $1.8 million in the fourth quarter of 2002. The strong sequential growth in revenues reflects growth in the market and the Company's strengthened position at key accounts. During the quarter, the Company began commercial deployment of video over DSL at several customers.

In December, ECI Telecom announced that it had entered into a strategic relationship with Nortel Networks* to deliver broadband access networking solutions that will address the increasing global demand for multimedia and triple play services (voice, video and data). This agreement provides a framework for the two companies to cooperatively engage in sales and marketing activities that will leverage Nortel Networks global telecommunications experience with ECI's industry-leading broadband access products and market presence.

Broadband Access Division revenues for 2003 were $182 million compared to $242 million in 2002. Operating income for 2003 was $15.9 million compared to $4.7 million in 2002.

Commenting on the results, Doron Inbar, President and CEO said, "We are pleased to observe both an improving business environment as well as an improvement in the Company's fundamentals. We are also pleased to report another quarter of sequential revenue growth. Orders were very strong in the quarter and we built substantial backlog, especially in the Optical Networks Division. We are encouraged by the performance of our Broadband Access Division which continues to strengthen its competitive position and record strong operating performance. Our recently signed agreement with Nortel Networks is an important step forward reflecting ECI's strategy of partnerships and alliances with select industry leaders.

"We are also pleased with the recently signed agreement to sell ECtel's Government business. This will allow ECtel to focus on its core telecom business and, under its new management, formulate a comprehensive recovery plan aimed at returning it to growth and profitability.

"2003 was a particularly productive year for ECI during which we were able to turn our business around. We believe that we have emerged from the telecoms crisis a stronger, leaner, and more focused organization. We enter the new year with an excellent product line, impressive partners, a strong balance sheet, and a substantial backlog. We remain focused on growth, which we intend to achieve by continuing to improve our competitive position, implementing strategic relationships and by pursuing new business opportunities, including M&A. We expect to continue growing our revenues and return to profitability during 2004."

Guidance

ECI expects revenues in the first quarter of 2004, in its core Optical Networks and Broadband Access Divisions, to be slightly higher than those of the fourth quarter of 2003.

Other Businesses

ECtel, (58% owned by ECI), reported revenues of $5.6 million in the fourth quarter of 2003, compared to $7.9 million in the third quarter and $11.5 million in the fourth quarter of last year. As noted above, ECtel's results, in all reported periods, reflect the discontinuation of the government business. Its net loss in the fourth quarter of 2003 was $11.6 million compared to a net loss of $11.5 million in the third quarter and a net profit of $4.4 million in the fourth quarter of 2002. After the close of the quarter, ECtel announced the appointment of Eitan Naor as the Company's new President and Chief Executive Officer. Naor will assume his new responsibilities shortly.

Note that in connection with the sale of its government business to Verint, ECtel and Verint have entered into several agreements that address the transition of the business to Verint and the future allocation of relevant technologies and other assets and liabilities. It is expected that the impact of the transaction, and the related agreements, will be recorded in ECtel's (and ECI's) first quarter 2004 financial statements.

Sales to Veraz Networks totaled $6.4 million in the fourth quarter of 2003, about flat with the $6.5 million recorded in the third quarter of 2003. Privately held Veraz Networks, of which ECI holds 43%, is a leader in the emerging voice over IP market and has established a strong position for itself in this growing market. During the quarter, Veraz Networks announced that PowerNet Global, an integrated communications provider, selected Veraz's Packet Telephony Solution for its IP-based voice network in 11 U.S. cities.

Results for the full year, 2003

The following is a presentation of consolidated GAAP results. As noted above, the results reflect the discontinuation of ECtel's government business. Revenues for 2003 were $421 million compared to $603 million for 2002. Revenues in 2002 included revenues from the NGTS division which was spun off in 2003. The operating loss was $68.2 million, compared to an operating loss of $71.6 million last year. The net loss was $71.0 million, or $0.66 per share, compared to a net loss of $155.7 million, or $1.48 per share last year.

Excluding the impact of ECtel, as well as special items (consisting of a $6.6 million provision for a specific doubtful account, $8.4 million in restructuring expenses, $2.5 million in discontinued operations associated with InnoWave, and $0.7 million impairment of assets), the net loss in 2003 was $29.1 million or $0.27 per share, compared to a net loss of $52.9 million or $0.50 per share (excluding a $34 million provision for a specific doubtful account, $77.4 million in discontinued operations associated with InnoWave, and $1.5 million impairment of assets) in 2002. (See accompanying tables for a full reconciliation between the GAAP and non-GAAP presentation).

ECI Telecom Ltd.

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