DSET Reports Financial Results
for Fourth Quarter and Year
Bridgewater, NJ - February 15, 2001 - (Nasdaq: DSET) - DSET
Corporation today reported financial results for the fourth
quarter and year ended December 31, 2000.
For the fourth quarter of 2000, total revenues amounted to
$5.3 million, as compared with $15.1 million for the same
period in 1999. For the fourth quarter of 2000, license revenues
accounted for $2.8 million, or 51.7% of total revenues, and
service revenues accounted for $2.5 million, or 48.3% of total
revenues.
Of total revenues, $2.4 million, or 45.6%, came from sales
to competitive telecom service providers and $2.6 million
came from the sale of legacy product lines now discontinued
or being resold by a third party.
The net loss for the quarter amounted to $18.7 million, or
a loss of $1.61 per share on a basic and diluted basis, as
compared with net income of $3.2 million, or $0.27 per share
on a diluted basis, for the quarter ended December 31, 1999.
The weighted average number of basic and diluted common shares
outstanding for the fourth quarter of 2000 was 11.6 million
and the number of diluted shares for the fourth quarter of
1999 was 11.8 million.
The net loss for the quarter included charges of $9.8 million
for reserves for doubtful accounts, consolidation of operations,
and impairment of certain intangible assets. In addition,
the loss included a provision of $6.9 million for a valuation
allowance against deferred tax assets not previously communicated.
Revenues for the twelve-month period increased 5.4% to $47.0
million as compared to $44.6 million in the prior year. License
revenues were $32.9 million, or an increase of 36.4% for the
twelve-month period, and service revenues were $14.2 million,
or a decrease of 30.9% as compared to the prior year.
The net loss for the twelve months ended December 31, 2000
was $18.8 million, or $1.65 per share on a basic and diluted
basis, as compared to net income of $6.5 million, or $0.59
per share on a diluted basis, last year. The loss for 2000
included charges of $15.6 million for write-offs and reserves
for doubtful accounts, consolidation of operations, and impairment
of certain intangible assets. The loss also included the $6.9
million valuation allowance for deferred tax benefits mentioned
above.
Fourth-Quarter Analysis
As we pointed out in our December 27, 2000 press release,
our financial results for the fourth quarter were down significantly
due to the following reasons:
- Our revenues were approximately $15
million lower than expected due to all the factors that
had been discussed publicly in the industry over the last
few months. These include a lack of confidence in the ability
of many competitive service providers to establish viable
business models into which various financing sources would
invest capital. This lack of funding forced service providers
to stop spending on many capital projects, including DSET
gateways. Many of our targeted customers had already purchased
billing and order management systems but decided to delay
their purchases of gateways until the funding climate improved
and the order flow from their customers increased. These
purchasing delays not only occurred at under-funded CLECs
but also at well-financed service providers.
- The aforementioned funding crisis also
affected existing customers who had not paid us yet. We
recognized a charge of $4.3 million to increase our reserves
for doubtful accounts in the fourth quarter of 2000, reflecting
our concerns about certain customers who we now believe
will not be able to pay us.
- Two more of our customers went bankrupt
in the quarter, resulting in an additional charge of $1.2
million to increase our reserves for doubtful accounts.
- We also provided additional reserves
to allow for charges of $2.1 million associated with customers
who have delayed projects.
- We recognized a charge for employee
severance and other costs of $600,000 associated with the
consolidation of our development centers into two rather
than three facilities.
- We recognized a non-recurring charge
to write down $1.3 million of certain intangible assets
associated with products no longer being offered for sale
or technology that will not be used in our products going
forward.
- We sold our subsidiary in China and
recorded a provision of $300,000 against our remaining investment
in that company.
In addition, we have recorded a valuation allowance of $6.9
million against the future benefit related to deferred tax
assets. We concluded that we could not meet the accounting
standard which requires that it was more likely than not that
the benefit of the deferred tax assets would be realized as
an offset to future earnings. In making this assessment, we
considered, in particular, the unpredictability of our customers'
purchasing decisions. We believe that many competitive service
providers will consider and, eventually, purchase DSET's software
products.
However, due to the volatility that this market segment displayed
in the last half of 2000 and the significant capital that
these companies require to be competitive, DSET's future revenue
stream is not subject to the level of predictability necessary
to support the deferred tax assets. We will continue to evaluate
the realizability of these deferred tax assets at each balance
sheet date and will reverse the valuation allowance as we
generate income to take advantage of the allowance or as business
prospects improve.
2000 Overview
In 2000, we recognized about $15 million in revenues from
our legacy products (application development tools) and certain
LNP (local number portability) applications. We expect no
material revenues from these discontinued product lines in
2001.
Although our sales of $32 million for gateways were up from
$20 million in 1999, we were short of everyone's expectations.
We believed that our transformation to a supplier of gateway
software and services in 1999 and 2000 was a good strategy
for the company. We knew we could not support the expense
associated with our legacy products, which continued to experience
revenue deterioration, so we transitioned out of them in various
ways. We counted heavily on the continued growth opportunities
in the competitive service provider marketplace, and during
the first nine months of 2000 we were in the process of expanding
product lines and geographical markets to capitalize on these
opportunities.
The change in the competitive telecom marketplace in the last
few months of 2000 was so severe that it affected us in many
ways, as evidenced by the different types of charges to earnings
that we outlined above. Although we anticipated a slowdown
in gateway purchases after the third quarter, the rapid nature
and severity of the change took the industry by surprise.
Our view is that competitive service providers put both feet
on the brakes as it relates to committing cash to purchasing
gateway software. They have not yet taken their feet off the
brakes.
We did, however, achieve much in 2000:
- We ended the year with
$35 million in cash, cash equivalents, and marketable securities.
- We have 38 active customers
who have bought into the value proposition that they cannot
compete and provision new services effectively if they do
not have a significant level of electronic flow-through
for order processing with the former regional Bell operating
companies (RBOCs) and other trading partners. Our gateways,
managed by a service provider's IT team or outsourced to
an application service provider (ASP), make this possible.
- Our customer base of
competitive service providers includes CLECs (70%), independent
LECs (17%), cable and energy companies (8%), and DLECs (5%).
- Our partnerships with
software vendors providing order management systems continue
to grow, and our ability to integrate our products with
these vendors is also improving, solving what the industry
now recognizes as a critical problem - the integration of
disparate software products that provide flow-through of
information between systems.
- Our new partnership with
Siebel Systems has the potential to produce excellent results,
as our competitors do not have gateway solutions for automating
the resolution of trouble tickets with the RBOCs.
- Our new PreOrder-Advanced
Edition gateway provides capabilities for enhanced translation
of the information in customer service records (CSRs) that
some of our competitors do not have.
- Our move to Java 2 Enterprise
Edition (J2EE™) technology, using BEA Systems Inc.'s
WebLogic Server™, is an important strategic step that
will translate into a competitive advantage. This software
development platform will enable us to introduce leading-edge
products more quickly and cost-effectively, while our competitors
may still be utilizing proprietary development platforms.
- Our ILEC/LSOG "Change
Management Service" provides updates to our customers' gateway
software in days, and in some cases hours, via the Web,
while our competition claims it is almost impossible to
cope with the challenges of making such changes so quickly.
Looking Forward
As a result of market uncertainties and the impact on our
financials, we have taken action to reduce our expenses going
forward. We reduced our employee base by approximately 100,
with most of these employees being associated with our discontinued
legacy product lines and our Chinese subsidiary. We expect
to end the first quarter of 2001 with 235 employees.
As discouraging as 2000 was in some ways, we believe that
there is hope for the future. Our belief is that the most
telling sign of potential for DSET's current products (electronic
bonding gateways) is the number of competitive service providers
who have purchased order management systems.
We believe the lag time between an order management system
going into production and the purchase of gateways has historically
been three to six months. Now, as a result of industry-wide
funding issues, we believe that the lag may be six to twelve
months. Therefore, we are hopeful that the third or fourth
quarter will see the beginnings of a rebound. As a company
that has had a rich heritage of success (29 profitable quarters
in a row through Q2 2000), we are committed to returning to
profitability.
In our segment, the ASP model has not yet taken hold. Possibly
10% of service providers using gateways for ordering local
loops have decided to outsource to ASPs. The funding problems
for competitive service providers may change this and we are
glad that two early-stage ASPs have chosen to offer the capabilities
of DSET software to service providers that do, in fact, want
to outsource.
Even for those service providers that want to manage the RBOC
interfaces (gateway software) internally in their IT shop,
the industry-wide funding issue may force a move to financial
terms that are stretched out over time, on a transaction or
lease/rental basis. A move to a recurring revenue model may
be embraced by many software and hardware companies because
of the risks associated with large sales closing in the last
week of the quarter.
In the first quarter of this year, we are introducing alternative
pricing models that will allow customers to purchase our gateways
in various ways. This may allow some customers to pay for
their licenses over time and provide DSET with a recurring
revenue stream with upside potential as compared to our fixed
license fee model. Although this could have a short-term impact
on our revenues, we believe that it may strengthen our forward-looking
revenue picture over time.
In light of all of this, and the overall turmoil in the telecom
sector, we have decided to not provide 2001 guidance in this
report. Hopefully, we will have a better view of the year's
potential when we announce our earnings for the first quarter
in April 2001.
Conference Call on Friday, February 16, 2001
A conference call will be held at 11:00 AM Eastern Time on
February 16 during which the quarter's results will be discussed
by William P. McHale, Jr., DSET's chairman, president and
chief executive officer, and by Bruce M. Crowell, vice president
and chief financial officer of DSET.
Investors can listen to a live Webcast of the conference call
at www.StreetFusion.com. The DSET Web site, www.dset.com,
will also have a direct link to the conference-call broadcast
at this site. Listeners should go to the Web site at least
15 minutes prior to the call to download and install any necessary
audio software.
For those who cannot listen to the live Webcast, the teleconference
will be archived on both the DSET and StreetFusion sites for
30 days. In addition, you may also listen to the playback
of the call after 2:30 PM by dialing 1-800-475-6701, access
code 568469 through February 23, 2001.
About DSET
DSET Corporation supplies software and services that enable
telecommunications providers to 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.
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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.
BEA and WebLogic are registered trademarks of BEA Systems,
Inc. BEA WebLogic Server is a trademark of BEA Systems, Inc.
Java and J2EE are trademarks or registered trademarks of
Sun Microsystems, Inc. in the United States and other countries.
All other trademarks are the property of their respective
owners.
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