Q2 2006 Aastra Technologies Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning and welcome to the Aastra reports second quarter financial results conference call for July 28th, 2006. Your host for today will be John Tobia. Mr. Tobia, please go ahead.

JOHN TOBIA, VP, SECRETARY AND GENERAL COUNSEL, AASTRA TECHNOLOGIES INCORPORATED: Thank you, Christine. In addition to myself, Francis Shen, our Co-CEO and Chairman; Tony Shen, our Co-CEO and President; and Allan Brett, our CFO, will be participating on the call. The first portion of the conference call will include management's presentation. Allan will present a brief overview of our second quarter financial results, and Tony will provide a general overview of our business. Afterwards we will commence our question-and-answer session. Analysts are most welcome to ask questions. Time permitting, we will also allow other participants to ask questions.

Prior to commencing our presentations, we want to briefly provide you some cautionary statements. This conference call may contain forward-looking information or forward-looking statements within the meaning of applicable securities legislation. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plan, projections, objectives, assumptions or potential future events often but not always including words such as believes, expects, anticipates, intends or stating that certain actions or events may or could or might or will likely be achieved are not statements of historical fact, but are forward-looking statements.

Such forward-looking statements involve known and unknown risks and uncertainties and other factors that may cause actual events, performance or achievements or developments in our business to differ materially from the anticipated results or performance implied or expressed today. Forward-looking statements may include, but are not limited to, our expectations regarding our restructuring and integration of our plans for our DTV operations.

Please refer to the heading, "Risk Factors," in our annual information form filed on SEDAR for material factors that could cause our actual results to differ materially from forward-looking statements made today. Relevant risk factors include our integration and restructuring efforts relating to our DTV operations, continued demand for our products, reliance on third-party manufacturers and component suppliers, exchange rate fluctuations, risks associated with product returns and product defects, our ability to protect our intellectual property, competition from third parties, consolidation and reorganization in the industry, as well as rapid technological changes in our industry.

The material factors and assumptions that were applied in making any forward-looking statements today include that we'd be able to continue with our restructuring and integration plans for our DTV operations without material amendments, that after the implementation of such restructuring and integration plans no further material changes will be required to return this business to a sustainable level of profitability. It is important to note that unless otherwise indicated, forward-looking statements made today describe our expectations as of this date. We caution readers not to place undue reliance on any forward-looking statements made today, as actual results may differ materially from expectations. Therefore, we cannot provide any assurance that forward-looking statements will materialize and we assume no obligation to update or revise forward-looking statements.

Now I'll introduce Allan, who will commence his presentation.

ALLAN BRETT, VP OF FINANCE AND CFO, AASTRA TECHNOLOGIES INCORPORATED: Thanks, John. As indicated, I will review the Company's unaudited financial results for the second quarter ended June 30th, 2006. Net income for the three months ended June 30, 2006 was 17.1 million or $0.94 diluted earnings per share, compared to 7 million or $0.39 diluted earnings per share for the second quarter of last year. Included in the net income for this quarter are a few items that should be explained in more detail.

As previously announced, on May 31st this year, Aastra completed the sale of its Digital Video group to Harris Corporation for gross proceeds of USD$34.8 million or Canadian $38.3 million. As a result of this sale, the historical sales and expenses of this group have been reclassified as a net one line profit or loss from discontinued operations. In addition, the gain realized on the sale of division of approximately 16.6 million, which is also net of income tax expense of 11.5 million, has been included in the discontinued operations section of the income statement.

Further to this, as a result of receiving the cash proceeds from the sale of this group, combined with the excess cash that have been generated in the past few quarters, one of Aastra's US subsidiaries made the decision in the second quarter to repurchase certain shares that have been previously issued to the Canadian parent company. In short, US dollars were repatriated into Canadian dollars during the quarter, and in this process Aastra realized a foreign exchange loss of approximately $12.9 million.

As discussed in previous quarterly conference calls, as a result of the appreciation of the Canadian dollar over the past two years, Aastra has recorded a cumulative translation adjustment loss of 25.5 million in the equity section of its balance sheet at the end of last year. And in the process of repatriating over US$45 million, a large portion of the CTA balance has been recognized on the income statement during the quarter. We should also note that the Company recorded an income tax benefit of approximately 5.1 million relating to this large foreign exchange loss. I will expand on this further when I discuss our income tax recovery for the quarter.

Looking at the topline, sales in the second quarter were 151.3 million compared to sales of 120.6 million in the same quarter last year, an increase of approximately 25%. The results for the second quarter include three months of operations from the DTV Communications Systems business we acquired in July of 2005, while the results for the second quarter of last year do not include the sales of this acquisition. In addition, sales for both the first and second quarters of this year, as well as for comparable periods last year, have been adjusted to exclude the revenues from the Digital Video group.

Excluding the Digital Video sales and looking at our sequential revenue growth, sales increased by 3.9% when compared to the first quarter of this year. Please note that sales in the first quarter of this year, excluding Digital Video, were 145.7 million compared to 151 million as announced at the time we released our first quarter numbers.

As indicated in previous conference calls, Aastra continues to be negatively impacted by depreciation of the Canadian dollar, primarily against the euro and Swiss franc. For example, in the second quarter of this year, the average exchange rate on the euro to Canadian dollar was 1.40 compared to 1.59 for the same period last year. The impact on our sales from foreign exchange when compared to the foreign exchange rates in the second quarter of last year was a decrease of over $10 million in sales for the second quarter this year.

If we consider sales by segment, sales in the European Enterprise Communications segment were 123.9 million in the second quarter of this year compared to 85.5 million in the second quarter of last year. On a more comparable basis, sales in this segment increased by 3.9% when compared to sales of 119.2 million in the first quarter of this year. Sales in our European segment now account for approximately 82% of our total sales.

Sales in the North American Enterprise Communications segment were 27.4 million compared to sales of 35 million in the second quarter last year. If we look at the first quarter of this year, sales in this segment increased by approximately 4.1%.

We should also note that as a result of the Digital Video group sale, we have decided that the disclosure of the Network Access segment is no longer necessary or relevant. And as a result, the remaining sales and operating results from this segment, specifically the results of the CVX product line, are included in their respective regional enterprise communication segments.

Gross profit margin was 42.4% of sales in the second quarter compared to 43.6% of sales in the same quarter of 2005. While the gross margin …