Tekelec Announces First Quarter 2008 Results

Tekelec (NASDAQ: TKLC), a leading developer of high-performance network applications for next-generation fixed, mobile and packet networks, today announced its results for the three months ended March 31, 2008. Results from Continuing Operations Revenue from continuing operations for the first quarter of 2008 was $118.2 million, up 9% compared to $108.8 million for the first quarter of 2007. For the first quarter of 2008, the Company had orders from continuing operations of $82.4 million, up 4% compared to $79.2 million for the first quarter of 2007. Backlog from continuing operations as of March 31, 2008 was $381.2 million, compared to $417.0 million as of December 31, 2007. Non-GAAP operating margins for the first quarter of 2008 were 22% as compared to 12% for the first quarter of 2007. Cash flows from continuing operations for the first quarter of 2008 were $38.4 million, up 59% from $24.2 million in the first quarter of 2007. On a GAAP basis, the Company’s income from continuing operations for the first quarter of 2008 was $11.9 million, or $0.17 per diluted share, up 325% compared to income from continuing operations of $3.0 million, or $0.04 per diluted share, for the first quarter of 2007. On a non-GAAP basis, income from continuing operations for the first quarter of 2008 was $18.3 million, or $0.25 per diluted share, up 67%, compared to income from continuing operations of $10.6 million, or $0.15 per diluted share, for the first quarter of 2007. Please refer to the attached financial statement schedules for a reconciliation of the Company’s GAAP operating results to its non-GAAP operating results. Frank Plastina, president and chief executive officer of Tekelec, stated "We were pleased by our operating results for the quarter. Operating margins and cash flows from continuing operations were particularly strong. Also, we were pleased with the level of new orders we generated in the first quarter following the very strong orders received during the fourth quarter of 2007. In fact, we continued to extend our footprint worldwide by adding seven new customers during the quarter." Results from Discontinued Operations The Company completed the sale of our Switching Solutions Group ("SSG”) to GENBAND Inc. ("GENBAND”) on April 21, 2007 and the results of the operations of SSG have been presented as a discontinued operation in the three months ended March 31, 2008 and 2007. During the first quarter of 2007, the Company recorded a loss of $53.5 million, net of tax, or $0.76 per diluted share related to the operations and sale of SSG. In the first quarter of 2008, the Company recorded net income of $1.6 million, net of tax, or $0.02 per diluted share related to our settlement of lease obligations associated with SSG at an amount that was less than previously estimated. Consolidated Results On a GAAP basis, the Company generated net income of $13.5 million or $0.19 per diluted share on a consolidated basis for the three months ended March 31, 2008 compared to net a loss on a consolidated basis for the three months ended March 31, 2007 of $50.5 million, or $0.72 loss per diluted share. Balance Sheet Results At March 31, 2008, the Company held $119.5 million of Student Loan Auction Rate Securities ("SLARS”) valued at fair value in accordance with FAS 115 and 157. As a result of the valuation, the Company recorded a decline in value of $4.5 million ($2.7 million net of tax) in the quarter ended March 31, 2008. This decline in fair value is considered to be temporary and accordingly, the write-down was recorded in accumulated other comprehensive income within shareholders' equity. The Company reclassified these SLARS at March 31, 2008 from short-term to long-term investments because of the uncertainty as to when liquidity will return to the student loan auction rate market. Accordingly, Tekelec’s consolidated cash, cash equivalents and short-term investments at March 31, 2008 totaled $316.5 million, down from $419.5 million at December 31, 2007. Short-term deferred revenues were $175.9 million at March 31, 2008, up from $166.3 million at December 31, 2007. Stock Repurchase Program As previously announced in March 2008, Tekelec’s Board of Directors approved a stock repurchase program utilizing a Rule 10b5-1 plan that authorizes the Company to repurchase up to $50 million of the Company’s common stock. The timing, duration and actual number of shares repurchased will depend on a variety of factors including price, regulatory requirements and other market conditions. The Company may terminate the repurchase program at any time. As of April 30, 2008, the Company had repurchased approximately 2.6 million shares at a total cost of approximately $33.7 million. Conference Call Tekelec has scheduled a conference call for Tuesday, May 6, 2008, for management to discuss first quarter 2008 results. The Company also plans to provide on its web site immediately prior to the call non-GAAP numbers (including GAAP reconciliations) for the first quarter and to discuss during this call certain forward looking information concerning the Company’s prospects for 2008. "Live" Webcast and Replay Tekelec will host a live webcast of its conference call on Tuesday, May 6, 2008, at 8:00 a.m. EDT. To access the webcast, visit Tekelec's web site located at www.tekelec.com, enter the Investor Relations section and click on the webcast icon. A webcast replay will be available at approximately 11:00 a.m. on May 6th and for 90 days thereafter. Telephone Replay A telephone replay of the call will also be available for one week after the live webcast by calling either (800) 642-1687 or (706) 645-9291, and entering the conference ID #44213630. Non-GAAP Information Certain non-GAAP financial measures are included in this press release, including a full non-GAAP statement of operations. In the calculation of these measures, Tekelec generally excludes certain items such as amortization of acquired intangibles, restructuring and other charges, non-cash stock-based compensation charges, acquisition-related charges, and unusual, non-recurring gains and charges. Tekelec believes that excluding such items provides investors and management with a representation of the Company's core operating performance and with information useful in assessing its prospects for the future and underlying trends in Tekelec’s operating expenditures and continuing operations. Management uses such non-GAAP measures and the resulting non-GAAP statements of operations to (i) evaluate financial results, (ii) manage the Company’s operations, and (iii) establish operational goals. Further, each of the individual non-GAAP measures within the non-GAAP statement of operations and the non-GAAP statement of operations itself are utilized by the Company’s management and board of directors to determine incentive compensation and evaluate key trends within the business. In addition, since the Company has historically reported non-GAAP measures to the investment community, the Company believes the inclusion of this information provides consistency in our financial reporting. The attachments to this release provide a reconciliation of each of the non-GAAP measures, including the full non-GAAP statement of operations, referred to in this release to the most directly comparable GAAP measure, GAAP net income from continuing operations. The non-GAAP financial measures are not meant to be considered a substitute for the corresponding GAAP financial measures. FORWARD-LOOKING STATEMENTS Certain statements made in this press release are forward looking, reflect the Company's current intent, belief or expectations and involve certain risks and uncertainties. The Company's actual future performance may differ materially from such expectations as a result of important risk factors, which include, in addition to those identified in the Company’s 2007 Form 10-K and its other filings with the Securities and Exchange Commission, the impact of the liquidity crisis in the United States credit markets, valuation of Student Loan Auction Rate Securities, the timeliness and functional competitiveness of our product releases, our ability to maintain OEM, partner, and vendor support and supply relationships, changes in the market price of the Company’s common stock and reductions in telecommunications carrier capital spending. The Company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. About Tekelec Tekelec leverages its global leadership in core multimedia session control and network intelligence to ensure scalable, secure and highly available communications. The Company’s leading signaling solutions enable the interworking of different network applications, technologies and protocols, providing a smooth transition to next-generation networks. Corporate headquarters are located near Research Triangle Park in Morrisville, N.C., U.S.A., with research and development facilities and sales offices throughout the world. For more information, please visit www.tekelec.com. TEKELEC UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS     Three Months Ended March 31,         2008   2007         (Thousands, except per share data)   Revenues $ 118,243 $ 108,793 Cost of sales: Cost of goods sold 39,946 51,902 Amortization of purchased technology 587   587   Total cost of sales 40,533   52,489   Gross profit 77,710   56,304   Operating expenses: Research and development 24,408 22,207 Sales and marketing 18,204 18,665 General and administrative 14,257 13,032 Acquired in-process research and development 2,690 - Restructuring and other (50 ) - Amortization of intangible assets 109   46   Total operating expenses 59,618   53,950   Income from operations 18,092 2,354 Other income (expense), net: Interest income 3,281 3,940 Interest expense (1,132 ) (895 ) Gain (loss) on sale of investments (2 ) 138 Other, net (516 ) (726 ) Total other income, net 1,631   2,457   Income from continuing operations before provision for income taxes 19,723 4,811 Provision for income taxes 7,860   1,811   Income from continuing operations 11,863 3,000 Income (loss) from discontinued operations, net of taxes 1,618   (53,472 ) Net income (loss) $ 13,481   $ (50,472 )   Earnings per share from continuing operations: Basic $ 0.18 $ 0.04 Diluted 0.17 0.04   Earnings (loss) per share from discontinued operations: Basic $ 0.02 $ (0.78 ) Diluted 0.02 (0.76 )   Earnings (loss) per share: Basic $ 0.20 $ (0.73 ) Diluted 0.19 (0.72 )   Weighted average number of shares outstanding-continuing operations: Basic 67,517 68,914 Diluted 74,199 70,248   Weighted average number of shares outstanding: Basic 67,517 68,914 Diluted 74,199 70,248 TEKELEC UNAUDITED NON-GAAP(1) STATEMENTS OF OPERATIONS FOR CONTINUING OPERATIONS       Three Months Ended March 31,         2008   2007         (Thousands, except per share data)   Revenues $ 118,243 $ 108,793 Cost of sales: Cost of goods sold 39,575 46,383 Gross profit 78,668 62,410 Research and development 23,599 21,193 Sales and marketing 17,457 17,648 General and administrative 11,789 10,177 Total operating expenses 52,845 49,018 Income from operations 25,823 13,392 Interest and other income, net 1,631 2,457 Income from continuing operations before provision for income taxes 27,454 15,849 Provision for income taxes (2) 9,197 5,246 Net income from continuing operations $ 18,257 $ 10,603   Earnings per share: Basic $ 0.27 $ 0.15 Diluted 0.25 0.15   Earnings per share weighted average number of shares outstanding: Basic 67,517 68,914 Diluted 74,199 76,609   Notes to Unaudited Non-GAAP Statements of Operations for Continuing Operations:   (1) Please refer to the attached reconciliations of the GAAP Statements of Operations to the above Non-GAAP Statements of Operations.   (2) The above Non-GAAP Statements of Operations assume effective income tax rates of 33.5% and 33% for the three months ended March 31, 2008 and 2007, respectively. TEKELEC UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS   March 31, December 31, 2008 2007 (Thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 252,710 $ 105,550 Short-term investments, at fair value 63,749 313,922 Total cash, cash equivalents and short-term investments 316,459 419,472 Accounts receivable, net 130,037 147,092 Inventories 21,842 20,543 Income taxes receivable 24,199 28,361 Deferred income taxes 28,093 18,793 Deferred costs and prepaid commissions 51,872 57,203 Prepaid expenses and other current assets 11,126 14,726 Total current assets 583,628 706,190 Long-term investments, at fair value 119,487 - Property and equipment, net 31,243 32,510 Investments in privately-held companies 18,553 18,553 Deferred income taxes, net 69,805 83,418 Other assets 1,350 1,320 Goodwill 22,951 22,951 Intangible assets, net 16,252 16,948 Total assets $ 863,269 $ 881,890   LIABILITIES AND SHAREHOLDERS’ EQUITY   Current liabilities: Accounts payable $ 21,052 $ 45,388 Accrued expenses 30,796 21,259 Accrued compensation and related expenses 27,289 40,234 Current portion of deferred revenues 175,856 166,274 Convertible debt 125,000 125,000 Liabilities associated with SSG 2,388 5,767 Total current liabilities 382,381 403,922   Deferred income taxes 1,248 1,295 Long-term portion of deferred revenues 9,871 8,917 Other long-term liabilities 6,038 6,569 Total liabilities 399,538 420,703   Commitments and Contingencies   Shareholders’ equity: Common stock, without par value, 200,000,000 shares authorized; 66,597,656 and 67,479,916 shares issued and outstanding, respectively 310,203 319,761 Retained earnings 152,860 139,379 Accumulated other comprehensive income 668 2,047 Total shareholders’ equity 463,731 461,187 Total liabilities and shareholders’ equity $ 863,269 $ 881,890 TEKELEC UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS     Three Months ended March 31, 2008 2007 (Thousands) Cash flows from operating activities: Net income (loss) $ 13,481 $ (50,472 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities:   Loss (income) from discontinued operations (1,618 ) 53,472 Loss (gain) on sale of investments 2 (138 ) Provision for doubtful accounts and returns 416 92 Inventory write downs 1,403 1,693 Depreciation 4,137 4,565 Amortization of intangibles 696 633 Amortization, other 327 753 Acquired in-process research and development 2,690 - Deferred income taxes 5,182 - Stock-based compensation 3,128 7,650 Excess tax benefits from stock-based compensation (317 ) (1,482 ) Changes in operating assets and liabilities, net of business disposal: Accounts receivable 16,169 33,888 Inventories (3,420 ) 1,252 Deferred costs 5,331 13,217 Prepaid expenses and other current assets 2,820 (3,214 ) Accounts payable (24,062 ) (1,867 ) Accrued expenses 9,568 (9,686 ) Accrued compensation and related expenses (12,729 ) (12,771 ) Deferred revenues 11,599 (22,600 ) Income taxes payable/receivable 3,631   9,222   Total adjustments 24,953   74,679   Net cash provided by operating activities - continuing operations 38,434 24,207 Net cash used in operating activities - discontinued operations (889 ) (3,708 ) Net cash provided by operating activities 37,545   20,499     Cash flows from investing activities: Proceeds from sales and maturities of investments 710,823 141,034 Purchases of investments (584,524 ) (170,299 ) Purchases of property and equipment (1,834 ) (4,106 ) Payments related to acquired in-process research and development (2,690 ) - Other non-operating assets (38 ) 76   Net cash provided by (used in) investing activities - continuing operations 121,737 (33,295 ) Net cash provided by investing activities - discontinued operations -   346   Net cash provided by (used in) investing activities 121,737   (32,949 )   Cash flows from financing activities: Payments for repurchase of common stock (13,444 ) - Proceeds from issuance of common stock 758 8,337 Excess tax benefits from stock-based compensation 317   1,482   Net cash provided by (used in) financing activities (12,369 ) 9,819     Effect of exchange rate changes on cash 247   183   Net change in cash and cash equivalents 147,160 (2,448 ) Cash and cash equivalents, beginning of period 105,550   45,329   Cash and cash equivalents, end of period 252,710 42,881 Less cash and cash equivalents of discontinued operations -   1,255   Cash and cash equivalents of continuing operations at end of period $ 252,710   $ 41,626   TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME       Three Months Ended March 31, 2008                   GAAP Continuing Operations   Adjustments   Non-GAAP Continuing Operations   Revenues $ 118,243 $ - $ 118,243 Cost of sales: Cost of goods sold 39,946 (371 ) (1 ) 39,575 Amortization of purchased technology     587       (587 ) (2 )   - Total cost of sales     40,533       (958 )     39,575 Gross profit     77,710       958       78,668 Operating Expenses: Research and development 24,408 (662 ) (1 ) 23,599 (147 ) (3 ) Sales and marketing 18,204 (747 ) (1 ) 17,457 General and administrative 14,257 (1,568 ) (1 ) 11,789 (900 ) (4 ) Acquired in-process research and development 2,690 (2,690 ) (5 ) - Restructuring and other (50 ) (170 ) (6 ) - 220 (1 ),(6) Amortization of intangible assets     109       (109 ) (2 )   - Total operating expenses     59,618       (6,773 )     52,845 Income from operations     18,092       7,731       25,823 Interest and other income, net     1,631       -       1,631 Income from continuing operations before provision for income taxes     19,723       7,731       27,454 Provision for income taxes     7,860       1,337   (7 )   9,197 Income from continuing operations     11,863       6,394       18,257 Income from discontinued operations, net of taxes     1,618       (1,618 ) (8 )   - Net income   $ 13,481     $ 4,776     $ 18,257   Earnings per share from continuing operations: Basic $ 0.18 $ 0.27 Diluted (9) 0.17 0.25   Earnings per share: Basic $ 0.20 $ 0.27 Diluted (9) 0.19 0.25     Weighted average number of shares outstanding: Basic 67,517 67,517 Diluted (9) 74,199 74,199   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (3) The adjustment represents consideration payable to the former Estacado employees that is contingent upon their continued employment by Tekelec.   (4) The adjustment represents an arbitration judgment and associated legal fees in favor of our former President and CEO, Fred Lax.   (5) The adjustment represents acquired in-process research and development related to the Estacado purchase.   (6) The adjustment represents the elimination of costs incurred during 2008 related to our initiating a plan to centralize certain functions in our EAAA region and changes in estimates related to our 2007 realignment activities.   (7) The adjustment represents the income tax effect of footnotes (1), (2), (3), (4), (5) and (6) in order to reflect our Non-GAAP effective tax rate of 33.5%.   (8) The adjustment represents the elimination of our discontinued operations.   (9) For the three months ended March 31, 2008, the calculations of diluted earnings per share include a potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method. TEKELEC UNAUDITED IMPACT OF NON-GAAP ADJUSTMENTS ON NET INCOME       Three Months Ended March 31, 2007                   GAAP Continuing Operations   Adjustments   Non-GAAP Continuing Operations   Revenues $ 108,793 $ - $ 108,793 Cost of sales: Cost of goods sold 51,902 (519 ) (1 ) 46,383 (5,000 ) (2 ) - Amortization of purchased technology     587       (587 ) (3 )   - Total cost of sales     52,489       (6,106 )     46,383 Gross profit     56,304       6,106       62,410 Operating Expenses: Research and development 22,207 (1,014 ) (1 ) 21,193 Sales and marketing 18,665 (1,017 ) (1 ) 17,648 General and administrative 13,032 (2,186 ) (1 ) 10,177 (669 ) (4 ) Amortization of intangible assets     46       (46 ) (3 )   - Total operating expenses     53,950       (4,932 )     49,018 Income from operations     2,354       11,038       13,392 Interest and other income, net     2,457           2,457 Income from continuing operations before provision for income taxes     4,811       11,038       15,849 Provision for income taxes     1,811       3,435   (5 )   5,246 Income from continuing operations     3,000       7,603       10,603 Loss from discontinued operations, net of taxes     (53,472 )     53,472   (6 )   - Net income (loss)   $ (50,472 )   $ 61,075     $ 10,603   Earnings per share from continuing operations: Basic $ 0.04 $ 0.15 Diluted (7) 0.04 0.15   Earnings (loss) per share: Basic $ (0.73 ) $ 0.15 Diluted (7) (0.72 ) 0.15     Weighted average number of shares outstanding: Basic 68,914 68,914 Diluted (7) 70,248 76,609   (1) The adjustments represent stock-based compensation expense recognized related to awards of stock options, restricted stock or restricted stock units and stock appreciation rights granted under our equity incentive plans and stock purchase rights granted under our employee stock purchase plan.   (2) The adjustments represent the charge associated with product credits issued to Bouygues Telecom, S.A. as part of our settlement of the Bouygues litigation.   (3) The adjustments represent the amortization of purchased technology, other intangibles and acquired backlog related to the acquisitions of Steleus and iptelorg.   (4) The adjustment represents legal expenses incurred to settle the Bouygues litigation.   (5) The adjustment represents the income tax effect of footnotes (1), (2), (3) and (4) in order to reflect our non-GAAP effective tax rate of 33%.   (6) The adjustment represents the elimination of the results of our discontinued operations.   (7) For the three months ended March 31, 2007, the calculations of diluted earnings per share related to GAAP continuing operations exclude the potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method. The calculation of diluted earnings per share related to Non-GAAP continuing operations includes the potential add-back to net income of $581,000 for assumed after-tax interest cost and 6,361,000 weighted average shares related to the convertible debt using the "if-converted" method.