Q4 2006 Aastra Technologies Inc. Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Please be advised this conference call is being recorded. Good morning and welcome to the Aastra Technologies fourth quarter 2006 financial results conference call for February 28, 2007.

Your host for today will be Mr. John Tobia. Mr. Tobia, please go ahead.

JOHN TOBIA, IR, AASTRA TECHNOLOGIES LTD: Thank you, Jenny. In addition to myself, Francis Shen, Co-CEO, Tony Shen, Co-CEO, and Allan Brett, our CFO, will be participating in the call. First portion of the call will include management's presentations. Allan will provide an overview of our fourth quarter and year-end results. 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'll also allow other participants to ask questions. Prior to commencing the presentations, we want to briefly provide some cautionary statements. This conference call may contain forward-looking information or forward-looking statements within applicable securities legislation. Any statements that express or involve discussions with respect to predictions, expectations, beliefs, plans, projections or assumptions or future performance, often but not including words and phrases such as believes, expects, anticipates, intends, are not statements of historical fact, but are forward-looking statements.

Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual events or performance in our business or in our industry to differ materially from our anticipated results or performance. Forward-looking statements may include, but are not limited to, our expectations regarding our European integration plans, our research and development efforts, and the success of the commercialization of our new products and solutions. Please refer to the risk factors in our annual information form filed on SEDAR for material factors that could cause our results to differ from our forward-looking statements today. Relevant risk factors include our European integration plans, continued demand for our products, including our new IP and wireless products and solutions, reliance on third party manufacturers and component suppliers, streamlining our supply chain operations, exchange rate fluctuations, risks associated with product returns and product defects, consolidation and reorganization and rapid technological change within our industry and the risk of third party intellectual property claims.

Material factors and assumptions that were applied to making forward-looking statements today include our research and development efforts and our European integration plans will be able to-- will enable us to successfully commercialize our new products and solutions to become a leader in providing IP and standards-based solutions in the enterprise communication market. It is important to know that unless otherwise indicated, forward-looking statements may today describe our expectations of this date. We caution readers not to place undue reliance on such forward-looking statements 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 any forward-looking statement, whether as a result of new information, future events or otherwise. Now I will introduce Allan, who will commence his presentation.

ALLAN BRETT, CFO, AASTRA TECHNOLOGIES LTD: Thanks, John. As indicated, I will review the Company's unaudited financial results for the fourth quarter and year ended December 31, 2006. Sales for the three months ended December 31, 2006 were approximately $160.8 million compared to sales of $163.1 million in the same period last year, a decrease of approximately 1.5%. Sales in the North American Enterprise segment were $26.2 million in the quarter compared to $28.8 million in the fourth quarter last year, a decrease of 9%. Sales of both legacy -- both the legacy terminals and sales from our Intecom division in the U.S. were both slightly lower in the fourth quarter, while IP sales were approximately 2 million in the quarter. Sales in the European Enterprise segment -- Communications segment were $134.6 million in the fourth quarter, compared to $134.3 million in the same quarter last year, an increase of approximately 0.2%. This was the first quarter of comparable sales data for the Company with both the DTV and the EADS acquisitions included for a full three months in the fourth quarter of each of 2006 and 2005.

Sales in this segment were negatively impacted in the fourth quarter as the Company made the decision to defer additional service revenue of approximately $2.5 million that in previous quarters would have been recorded. This change was due to a change in the method of billing to certain customers in France. Sales for the year ended December 31, 2006 were $600.5 million compared to $500.8 million in sales for 2005, an increase of approximately 19.9%. Gross margin was 42.5% of sales for the three months ended December 31, 2006, an increase from gross margins of 37.5% in the fourth quarter of 2005. This increase in gross margin is a result of the combined effect of favorable product mix and lower inventory provisions in the fourth quarter of 2006. Material costs also decreased slightly in the fourth quarter of 2006 as a result of the Company's ongoing focus to improve its product acquisition costs. Gross margins for the year ended December 31, 2006 were stable with 2005, at 41.9% of sales. Gross margins were negatively influenced by the full year impact of lower margins on the EADS and DTV product lines.

However, this was offset by lower overhead costs and an improvement in product mix, as well as a mild improvement in material costs late in the year. Selling, general and administrative expenses were $38 million, or 23.6% of sales in the fourth quarter of 2006 compared to $32.3 million, or 19.8% of sales in the fourth quarter of 2005. SG&A expenses increased substantially as a result of higher sales and marketing expenses incurred in the fourth quarter. SG&A expenses for the year ended December 31, 2006 were $144.3 million, or 24% of sales compared to $115.9 million, or 23.1% of sales in 2005. Research and development expenses for the fourth quarter of 2006 came in at $16.0 million, or 9.9% of sales compared to $15.4 million, or 9.5% of sales in the same quarter last year. R&D expenses increased in the fourth quarter as a result of increased development project activities as well as a decrease in government assistance benefits when compared to the same quarter in 2005. These factors were partially offset with lower research and development labor costs from certain restructuring efforts earlier in the year.

R&D expenses for the year in 2006 increased to $59.6 million, or 9.9% of sales from $47.2 million, or 9.4% of sales in 2005. Lower government assistance benefits, as well as a full year impact of acquisitions were the main reason for this increase. Amortization expense was $4.5 million in both the fourth quarter of 2005 and 2006. For the year, amortization expense was fairly constant at $16.8 million in '06 compared to $16.3 million in 2005. As a result of a weakening Canadian dollar against the Euro and Swiss Frank in the fourth quarter of 2006, the Company recorded a foreign exchange gain of $1.9 million compared to a loss of $2.8 million in the same quarter last year, when the Canadian dollar strengthened significantly against these same currencies. For the year, we recorded a foreign exchange gain of $2.9 million compared to a loss of $4.3 million in 2005. As a result of substantially higher cash balances and better interest rates, investment income increased to $1.5 million in the fourth quarter of 2006 compared to $0.3 million in the same quarter of 2005.

Investment income for the year was $4.4 million in 2006 compared to $1.1 million in 2005. The balance of other charges on the income statement for the year ended December 31, 2006 includes the effects of two unrelated transactions. First is a one-time non-cash foreign exchange loss of $13.2 million that was incurred when one of the Company's U.S. subsidiaries made the decision to repurchase certain shares it had previously issued to its Canadian parent Company. This transaction resulted in a decrease to the foreign currency translation account in the equity section of the balance sheet. The second item was a gain from contingent consideration not earned by the seller on a previous acquisition. This contingent consideration had been previously recorded in the financial statements as a liability and as the threshold were not met, it was reversed into the income statement in the fourth quarter. The Company expects a similar income statement …