DSET Reports Third-Quarter
Results
Bridgewater, NJ - October 24, 2000 - (Nasdaq: DSET) - DSET
Corporation today reported its financial results for the third
quarter, which ended September 30, 2000.
For the third quarter of 2000, total revenues amounted to
$13.9 million, as compared with $12.9 million for the same
period in 1999, a 7.4% increase. For the third quarter of
2000, license revenues accounted for $9.8 million, or 70.6%
of total revenues, and service revenues accounted for $4.1
million, or 29.4% of total revenues. For the same period in
1999, license revenues accounted for $6.6 million, or 50.8%
of total revenues, and service revenues accounted for $6.3
million or 49.2% of total revenues.
Of total revenues, $10.6 million, or 77%, came from sales
to competitive telecom service providers. This is an increase
of 43% compared to the $7.4 million in sales to competitive
service providers in the third quarter of 1999.
The net loss for the quarter amounted to $3.3 million, or
a loss of $0.28 per share on a basic and diluted basis, as
compared with net income of $2.1 million, or $0.19 per share
on a diluted basis, for the quarter ended September 30, 1999.
The weighted average number of basic and diluted common shares
outstanding at September 30, 2000 was 11.5 million and the
number of diluted shares at September 30, 1999 was 11.5 million.
Gross margin for the quarter was 64.8% versus 79.1% for the
third quarter of 1999. Gross margin for license revenues was
84.1% in the third quarter compared to 90.5% in the same quarter
of 1999. Gross margin for service revenues was 18.3% in the
third quarter of 2000 compared to 67.3% in the third quarter
of 1999.
Revenue for the nine-month period increased 41.3% to $41.7
million as compared to $29.5 million in the prior year. License
revenue was $30.1 million, or an increase of 88.6% for the
nine-month period, and service revenue was $11.6 million,
or a decrease of 14.3% as compared to the prior year.
The net loss for the nine months ended September 30, 2000
was $159,000 or $0.01 per share on a basic and diluted basis,
as compared to net income of $3.4 million, or $0.30 per share
on a diluted basis, last year.
Quarterly Analysis
Shortfall Factors
As we reported on October 3, 2000, several factors had a substantial
negative impact on our third-quarter results. These factors
included two unexpected developments in the final days of
the quarter.
A total of 9 competitive service providers made decisions
in the last few days of the quarter to delay purchases that
amounted to $8.7 million in potential quarterly revenue. Another
3 providers actually became new customers but scaled back
their initial orders by $4.2 million to conserve cash. Such
changes to the business plans of these customers came as a
surprise, since we were in final negotiations with them.
The filing for Chapter 11 bankruptcy protection by NETtel
Communications on September 29 was another financial setback
in the quarter. Although NETel had paid us approximately $700,000
for prior orders, they still owed us $1.9 million. Accordingly,
we have established a reserve in our allowance for bad debts
for this account. As a result of the NETtel bankruptcy and
uncertainty in the financing environment for competitive service
providers, we have provided an additional $1.7 million of
reserves to the allowance for bad debts.
We also settled some disputes with customers related to our
legacy business and, as a result, wrote off accounts receivable
amounting to about $1.6 million, which was greater than we
expected. This is part of our previously announced strategy
to move completely out of DSET's legacy product lines in application
development tools, GR-303 applications, and local service
management systems.
Gross margins for licensed products of 84.1% were below expectations
due to lower volume and higher fixed costs of amortization
and third-party license fees. Service gross margins of 18.3%
were also below expectations due to a lower than expected
volume of service revenues and the added costs from DSET's
ramp-up of technical support and implementation teams while
still incurring higher than normal expenses from third-party
contractors brought in to provide interim support. These third-party
costs are expected to diminish in the fourth quarter.
Operating Performance
Operating expenses, excluding the bad debt and other charges
noted above, were in line with expectations.
Cash, cash equivalents and marketable securities were $39.5
million at quarter-end, reflecting the impact of the net loss
for the quarter, capital expenditures, and deferred payments
for previously acquired technology.
Days Sales Outstanding (DSOs) for the third quarter of 2000
were 124 days. This increase from last quarter was due in
part to lower advance payment receipts in the quarter from
third-quarter customers and payment delays from prior customers.
We have collected an additional $3.0 million since September
30, 2000, which would have equated to an additional 20-day
reduction in DSOs for the quarter.
Unbilled receivables in the third quarter decreased 24% to
$2.9 million from $3.8 million at December 31, 1999. Percentage
of completion revenue, which drives unbilled receivables,
decreased 10% to $1.8 million from $2.0 million in the second
quarter and amounted to 13% of third quarter sales.
Deferred revenues representing future sales were $3.3 million
compared to $1.7 million at the end of last year.
Third-Quarter Highlights
New Customers and "Win-Backs"
We won seven new customers in the quarter: six in the United
States and one in Canada. These increased the number of DSET
customers that are competitive service providers to 46. The
average software sale in the quarter amounted to $1.1 million.
The current mix of our customers reflects increasing diversity
as well as growth in numbers. Our base of competitive service
providers consists of facilities-based CLECs, non-facilities
based resellers, DLECs, independent telephone companies, cable
companies, application service providers, utility companies,
and former regional Bell operating companies.
This is also the second quarter in a row in which we replaced
a competitor that a service provider had initially chosen
instead of DSET.
Trading Partner Networks In Production
The pace of implementing Trading Partner Networks with DSET
products is accelerating through the direct efforts of our
Professional Services group and the systems integrators who
have joined our Alliance Program. By the end of December 2000,
we believe that 60% of our customers will be in production
and another 26% will be in final acceptance testing with their
trading partners.
Products
New releases of each of our existing major gateways were shipped
during the quarter.
Our new ezPreOrder gateway also shipped during the quarter.
This product enables a competitive service provider to automatically
retrieve information from an incumbent carrier regarding xDSL
loop qualification as well as a prospective customer's address
and the services they currently receive from the incumbent
provider. This ensures that the competitive provider has the
correct information about their prospective customers before
actually submitting an order to the incumbent.
Validating information such as a customer's address in an
order accelerates the realization of revenues from the competitive
carrier's new customers. Without ezPreOrder, the rejection
rate for orders sent to trading partners in other ways can
exceed 40 percent due to incorrect information. We anticipate
that this product will be purchased almost every time that
we sell our ezLocal ordering gateway to a competitive service
provider.
Integration testing of our ezTroubleAdmin gateway with BellSouth
was completed by our alliance partner KPMG Consulting. At
Allegiance Telecom, similar integration testing with SBC was
completed during the quarter. Certification by BellSouth and
SBC will enable competitive carriers interconnecting with
these incumbents to automate the exchange of trouble tickets
and speed the resolution of service problems, an important
aspect of customer retention for the competitive providers.
We believe that this gateway provides us with an additional
competitive advantage.
New Products in Development
We plan to introduce several new products in the first half
of 2001 as part of our continuing commitment to offer competitive
service providers the best set of solutions for building Trading
Partner Networks. And along with offering new products that
solidify our position in the telecommunications market, we
are researching products that will expand our market potential
beyond the North American telecom industry.
Partners
During the quarter, our gateways were successfully tested
for integration with the newest version of MetaSolv Software's
order management and service fulfillment solution. DSET was
also named one of MetaSolv's "Alliance Partners of the Year"
in recognition of the strong, productive relationship between
the two companies.
DSET's ordering gateways and MetaSolv's solution were also
cited during the quarter as key elements of the SUPERQuest
Award presented to Allegiance Telecom at SUPERCOMM 2000. The
Allegiance operations support system was recognized as the
best application in the "Best Built Public Network or Service/OSS"
category. This advanced system has cut the interval required
to switch customers from an incumbent carrier to Allegiance's
network from 30-45 days to 10-15 days.
Our gateways are currently integrated with two commercially
available order management systems (OMSs) and multiple proprietary
OMSs. We anticipate being integrated with one or two additional
OMSs by mid-year 2001.
Web Seminars
As part of our aggressive marketing effort, we are conducting
a series of seminars on the Internet that enable us to discuss
our products with a broad audience in the telecommunications
industry. Over a period of just a few months, approximately
400 people have taken part in this educational program.
Looking Forward
Before providing guidance for the fourth quarter of 2000
as well as for 2001 and 2002, we would like to give our overall
perspective on the market. These views are the underpinnings
for our future guidance.
Relative to the size of the market, we track over 300 facilities-based
competitive service providers that have at least one switch
each. For each of these providers, we believe that an automated
software-based solution is critical if they are going to compete
effectively - which means turning on service in less than
two weeks.
We are confident in our future success because we believe
the number of competitive service providers we need to win
over the next two years is relatively small. If we define
the market by the number of competitive service providers
that have already bought an order management system, but not
gateways to build a Trading Partner Network, we can conclude
that we will start 2001 with 60 to 70 prospects that have
bought an OMS in the last 12 to 18 months and another 50 to
60 that have their own proprietary OMS. And we believe that
competitive service providers will need to spend on software
even if they slow down hardware purchases. They will do this
in order to improve efficiency, shorten processing-time cycles,
and reduce costs.
While we believe that we will maintain our leading position
in our segment of the market, we also recognize that with
all the turmoil in the telecom sector we will need to prove
ourselves each quarter.
Guidance for the Fourth Quarter
We will continue our conservative outlook for the fourth quarter
that we expressed in our October 3, 2000 press release yet
raise our revenue estimates slightly to a range of $15 million
to $17 million. This should produce break-even results, assuming
that we don't encounter any additional changes in the buying
patterns of competitive service providers.
Financial Expectations for the Fourth Quarter:
· Revenues between $15 million and $17 million
· Gross margin between 75% and 77%
· Net income and cash flow from operations at about break-even
Outlook for 2001
Our revenues from competitive service providers were $3.0
million in 1998 and $20 million in 1999. We believe that we
will end 2000 with revenues from these customers of between
$40 million and $44 million, which is year over year growth
of 100%. In 2001, we believe that we can grow our business
as follows:
Financial Expectations for 2001:
· Revenues between $60 million and $65 million
· Gross margin between 75% and 77%
· Operating Income rate as a percent of sales of between 12%
and 14%
· Earnings per share between $0.45 and $0.55 on a diluted
basis
· Cash flow from operations of between $6.0 million and $8.0
million
Outlook for 2002
Independent research firms that track the telecommunications
industry have predicted a continual migration of billions
of dollars worth of local phone service revenue from the former
Bell operating companies to competitive service providers.
AT&T is also expected to lose a significant amount of long-distance
revenues to the competition. All of these shifts in revenue
require inter-company transactions that cannot be handled
efficiently via fax or Web interfaces because manual re-typing
of the orders is required.
We believe that the competitive service provider market will
continue to expand and contract as these competitors go after
these huge dollar markets and that different business models
will evolve. Birch Telecom's recent announcement of hitting
a total of 200,000 lines is a good example. Birch doesn't
have to buy Class 5 switches for millions of dollars because
DSET's software enables them to order comprehensive network
capabilities from their trading partners. Consequently, a
company such as Birch doesn't have the same cash demands as
a facilities-based provider.
In our software jargon, this is called ordering unbundled
network elements as a platform, or UNE-P. Support for this
software opens up the opportunity for sales to a new class
of competitive service providers known as non-facilities based
CLECs or resellers. Another key point is that existing facilities-based
competitive providers can expand geographically without buying
Class 5 switches, thereby minimizing capital expenditures.
Couple this dynamic with our ability to offer customers an
expanding line of products and we feel confident to predict
that we can grow revenue 30 to 35% in 2002 and earnings per
share growth in a similar range.
We are confident that our business plan is the right one for
success in what we see as a very viable market, generating
revenues from software sales and from an increasing demand
for implementation and maintenance services. Going forward,
competitive carriers may take longer to make purchasing decisions.
But if they are to remain in business and be profitable, we
believe that each must build a Trading Partner Network.
About DSET
DSET Corporation supplies software and services that
enable telecommunications providers to rapidly implement electronic
Trading Partner Networks, which significantly reduce the time
required to provision services for customers and resolve service
outages to maintain high service quality and ensure customer
retention. DSET is headquartered in Bridgewater, New Jersey,
and the company's Web site can be viewed at www.dset.com.
Statements regarding financial matters contained in this press
release, other than historical facts, are forward-looking.
Since all statements about DSET's plans, estimates, and expectations
are based on current projections that involve risks and uncertainties,
and are subject to change at any time, the company's actual
results may differ materially from expected results. Investors
should consider these risks and uncertainties, which are discussed
in documents filed by DSET with the Securities and Exchange
Commission. These documents identify important factors that
could cause the actual results to differ materially from those
contained in the projections or forward-looking statements.
DSET expressly disclaims any obligation to update any forward-looking
statements.
x x x
DSET Contacts:
Financial: Bruce Crowell, Chief Financial Officer,
908-526-7500 Ext. 1775, e-mail bcrowell@dset.com
Media Relations: Dean Maskevich, Marketing Communications,
908-526-7500 Ext. 1366, e-mail: dmaskevi@dset.com
Investor Relations: John P. Murphy, Westfield Investor Relations,
908-233-1558, e-mail: westfieldir@worldnet.att.net
DSET and the DSET logo are registered trademarks of DSET Corporation.
MetaSolv is a registered trademark, and MetaSolv Software
is trademark of MetaSolv Software, Inc.
All other trademarks are the property of their respective
owners.
|
