Financial: PairGain Reports Revenues of $283 Million for 1998

Financial: PairGain Reports Revenues of $283 Million for 1998 – Company Financial Information

PairGain Technologies, Inc. (Nasdaq: PAIR) Wednesday reported 1998 revenues of $283.1 million compared to $282.3 million in 1997. Net income for 1998 was $41.0 million, or $0.55 per share on a diluted basis, excluding a $1.5 million write-off taken in the fourth quarter to reflect the market value of a minority investment in a privately-held telecommunications company. Including the effect of the valuation adjustment, net income for 1998 was $39.5 million or $0.53 per share on a diluted basis. Net income for 1997 was $47.6 million, or $0.63 per share on a diluted basis, including merger expenses of $2.6 million related to the February 1997 acquisition of AVIDIA Systems. Revenues for the fourth quarter ended December 31, 1998 were $60.7 million compared to $74.5 million in the corresponding 1997 quarter. As the Company previously announced in December, the decline in revenues for the 1998 quarter was the result of continuing price erosion in the T1 access sector and the loss of primary supplier status at a regional Bell operating company for its HiGain T1 access products. Net income in the fourth quarter of 1998 was $5.1 million, or $0.07 per share on a diluted basis, excluding the $1.5 million valuation adjustment. Including the effect of the valuation adjustment, net income in the fourth quarter of 1998 was $3.6 million, or $0.05 per share on a diluted basis. Net income in the fourth quarter of 1997 was $12.7 million, or $0.17 per share on a diluted basis. Fourth quarter sales of the Company’s PG-Flex and PG-Plus products were up more than 135% over Q4 1997. Sales of these products for 1998 were more than three times the level of sales in 1997. Although unit shipments of the Company’s T1/E1 access products were 30% higher than the prior year quarter, revenues from those products declined 27%, reflecting significant price competition over the last 15 months. Gross margins were 42.0% in Q4 1998 and 48.2% for the full year 1998 compared to 49.8% and 49.5% in the comparable 1997 periods. This reduction was also due to the effect of T1/E1 price erosion. Operating expenses of $20 million in Q4 1998 increased 8% over Q4 1997 expenses of $19 million but were flat compared to Q3 1998. PairGain generated $57 million cash in 1998, ending the year with total cash and short-term investments of $234 million. In October 1998 the Company announced a stock repurchase program, and during the fourth quarter of 1998 the Company repurchased one million of its outstanding common shares. During the fourth quarter the Company’s PG-Plus small subscriber carrier product was approved by a major interexchange carrier. Also, the Company launched its new Avidia System, a product which provides PairGain entry into the high-speed Internet access market. The Avidia System allows service providers to deploy multiple ATM and IP based services from a single platform. Several trials are underway. The Company also achieved significant milestones in two “new technology” sectors. PairGain recently announced that it has successfully demonstrated interoperability with ADC Telecommunications between the two companies’ HDSL2 solutions. In addition, PairGain’s G.lite ADSL program is on track with product in development and interoperability testing well underway. PairGain announced the availability of a new open, non-proprietary HDSL solution, the HiGain Wideband system 3190 (WBS-3190). The WBS-3190 is the first truly open T1 access platform, enabling service providers to deploy T1 services using several manufacturers’ line cards, from a single managed platform. PairGain is a world leader in the design, manufacture and marketing of DSL (Digital Subscriber Line) networking systems. Service providers and private network operators worldwide use PairGain’s products to deploy DSL-based services, such as high-speed Internet access, remote LAN access and enterprise LAN extensions over the existing infrastructure of copper telephone lines. For more than ten years, PairGain has been recognized as a technology leader and industry innovator. The Company offers the widest range of HDSL, ADSL and SDSL-based systems available. Its product lines include HiGain T1/E1 access systems, small subscriber carrier systems, including PG-Flex and PG-Plus, enterprise LAN systems and megabit access solutions, including the Avidia System, integrated access concentrator and Megabit Modems. Currently, well over 1,000,000 PairGain DSL nodes are installed in over 70 countries.

PairGain Technologies, Inc.

Condensed Consolidated Income Statements

(In thousands, except per share data)

Quarter Ended Twelve Months Ended

12/31/98 12/31/97 12/31/98 12/31/97

(Unaudited)

Revenues $ 60,679 $ 74,510 $283,100 $282,325

Cost of revenues 35,182 37,436 146,569 142,571

Gross margin 25,497 37,074 136,531 139,754

Research and

development 8,974 9,595 37,576 31,982

Selling and

marketing 7,905 6,199 30,098 22,808

General and

administrative 3,351 2,903 13,321 10,583

Merger expenses — — — 2,642

Total operating

expenses 20,230 18,697 80,995 68,015

Operating income 5,267 18,377 55,536 71,739

Valuation adjustment to

minority

investment (1,500) — (1,500) —

Interest and other

income, net 2,762 2,048 9,029 6,204

Income before

income taxes 6,529 20,425 63,065 77,943

Provision for

income taxes 2,930 7,679 23,566 30,306

Net income $ 3,599 $ 12,746 $ 39,499 $ 47,637

Earnings per common share

Basic $ 0.05 $ 0.19 $ 0.56 $ 0.70

Diluted $ 0.05 $ 0.17 $ 0.53 $ 0.63

Earnings per common share,

excluding valuation adjustment

Basic $ 0.07 $ 0.58

Diluted $ 0.07 $ 0.55

Average shares outstanding

Basic 70,682 68,874 70,234 67,991

Diluted 74,257 75,458 74,802 75,225

PairGain Technologies, Inc.

Condensed Consolidated Balance Sheets

(In thousands)

12/31/98 12/31/97

Assets

Cash and cash equivalents $ 131,923 $ 111,602

Short-term investments 102,011 64,983

Accounts receivable, net 20,226 35,429

Inventory, net 34,320 30,538

Other current assets 18,712 19,074

Total current assets 307,192 261,626

Total long-term assets 21,328 20,793

Total assets $ 328,520 $ 282,419

Liabilities & Stockholders’ Equity

Trade accounts payable $ 6,358 $ 8,527

Accrued expenses 27,002 21,702

Accrued income taxes 16,119 16,673

Total current liabilities 49,479 46,902

Total long-term liabilities — —

Total stockholders’ equity 279,041 235,517

Total liabilities and

stockholders’ equity $ 328,520 $ 282,419

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