EX-99.1 2 j1846201exv99w1.htm EX-99.1 EX-99.1
 

Exhibit 99.1
(TOLLGRADE LOGO)
Contact: Bob Butter, Communications / Office: 412-820-1347 / Cell: 412-736-6186 / bbutter@tollgrade.com
TOLLGRADE REPORTS FOURTH QUARTER 2005 RESULTS
PITTSBURGH, PA, February 8, 2006 – Tollgrade Communications, Inc. (NASDAQ: TLGD) today reported revenue of $18.2 million and earnings of $0.14 per share for the fourth quarter ended December 31, 2005. In comparison, revenue and earnings per share for the fourth quarter of 2004 were $16.1 million and earnings of $0.04 per share, respectively. The Company recorded revenues of $66.3 million and earnings of $0.27 per share for the twelve month period ended December 31, 2005; revenues were $62.8 million and earnings were $0.07 per share for the prior fiscal year.
“Our fourth quarter was a very good finish for fiscal year 2005 and served as a capstone to our best revenue year since 2001,” said Mark B. Peterson, Tollgrade’s President and Chief Executive Officer. “The 2005 revenue growth came as a result of increased sales from our new broadband products. We experienced growth in our international sales, which in total, accounted for more than 20 percent of our overall revenue in 2005. I’m pleased with the progress we are making in our plans to help customers effect a transition to provide broadband services as we complete development of our new network service assurance solutions for the triple play market,” Peterson added.
Fourth Quarter 2005 Revenue Results
Sales of Tollgrade’s DigiTest ® system products were $4.7 million in the fourth quarter of 2005, compared to $2.9 million in the same period of 2004. DigiTest system revenues increased by 62.1% in the fourth quarter of 2005 compared to the fourth quarter of 2004, primarily due to deployment of products into South Africa, those related to a triple play network service assurance project rollout with Cincinnati Bell Telephone, and increased sales to existing CLEC customers.
Overall sales of cable hardware and software products were $3.5 million in the fourth quarter of 2005, compared to $3.0 million in the fourth quarter of the prior year. Cable hardware and software revenue increased 16.7% due to strong sales of our CheetahTM software and legacy transponder products.
TOLLGRADE COMMUNICATIONS, INC.
493 Nixon Road / Cheswick, PA 15024 / 412-820-1400 / 800-878-3399 / Fax: 412-820-1530
685 Route 202/206 South / Bridgewater, NJ 08807 / 908-243-3900 / Fax: 908-243-3300
7020 Professional Parkway East / Sarasota, FL 34240 / 941-373-6800 / 877-280-0030 / Fax: 941-373-6887
Telco Support: 800-777-5405 / Cable Support (TAC): 941-373-6850 or 888-486-3510
www.tollgrade.com

 

 

Overall sales of the Company’s MCU® products, which extend testability into the POTS network, were $5.2 million in the fourth quarter of 2005 and 2004. Sales of MCU products by our direct sales force were down 17% from the comparable period of the prior year, but these declines were offset by an increase in OEM sales. Although sales levels of MCU products have generally been declining, during the fourth quarter of 2005 this product line experienced increased demand likely due to increased emphasis on DSL rollouts at remote terminal sites by an RBOC customer.
Sales of LoopCare™ software products separate and unrelated to the Company’s DigiTest system products were $1.1 million in the fourth quarter of 2005 compared to sales of $1.7 million in the comparable period of the prior year. The LoopCare software product line typically has long and less predictable sales, purchase approval and acceptance cycles. Consequently, revenue from this product line can fluctuate significantly on a quarter-by-quarter basis. As a result, combined total separate LoopCare software license fees and services revenues decreased to $3.4 million in the fourth quarter of 2005 from $4.1 million in the comparable period of the prior year.
Fourth quarter 2005 sales from Services, which include installation oversight and project management services provided to RBOCs and fees for software maintenance across all product lines, were $3.7 million, up 12.1% compared to $3.3 million in the fourth quarter of the prior year.
Fourth Quarter 2005 Financial and Operating Data
Gross profit for the fourth quarter of 2005 was $9.9 million, an increase of $0.8 million, or 9.1%, from the fourth quarter of 2004. As a percentage of sales, gross profit for the fourth quarter of 2005 was down slightly from 56.6% in the fourth quarter of 2004 to 54.8% in the fourth quarter of 2005. The decrease in margins was largely a result of lower LoopCare software revenue, offset in part by increased sales of DigiTest products and Cheetah software.
Overall, operating expenses of $7.7 million for the fourth quarter of 2005 decreased by $0.2 million, or 3.4%, from $7.9 million in the fourth quarter of 2004. Selling and marketing expenses in the quarter were $2.3 million, a decrease of $0.1 million, or 5.8%, from the same period in 2004.
The decrease in selling and marketing expense is attributed to lower salaries and wages and commission expense. General and administrative expenses remained relatively flat at $1.9 million for each of the fourth quarter of 2005 and the fourth quarter of 2004. Research and development expenses for the fourth quarter of 2005 were $3.5 million, relatively flat compared to the fourth quarter of 2004.
The effective tax rate for the fourth quarter of 2005 was approximately 34.6%, compared to 57.4% in the prior year quarter. The decrease is directly related to the increase in pretax income and the proportional

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impact of certain permanent items on the calculation, including tax exempt interest and the tax benefits related to international sales.
The Company’s order backlog for firm customer purchase orders and signed software maintenance contracts was $14.7 million as of December 31, 2005, which is the same amount of backlog the Company carried at December 31, 2004. The backlog at December 31, 2005 and December 31, 2004 included approximately $6.2 million and $5.5 million, respectively, related to software maintenance contracts, which is earned and recognized as income on a straight-line basis during the remaining terms of the underlying agreements. As of December 31, 2005, the Company had executed maintenance agreements with three of the four RBOC customers that extend those commitments to December 31, 2006 or beyond. The agreement with the fourth RBOC customer is still being negotiated, but has been extended through the first quarter of 2006.
Management expects that approximately 57% of the current total backlog will be recognized as revenue in the first quarter of 2006.
First Quarter 2006 Outlook
“Regarding our first quarter 2006 outlook, we expect our cable business to be a driver with continuing adoption of the DOCSIS® standard,” said Peterson. “Although there are other projects on the horizon, several significant projects – including those in Saudi Arabia and South Africa – are substantially completed. Also, the percentage of cable-related revenue during this period, which typically carries lower margins, will have some relative effect on earnings contribution for the period. As a result, we expect revenues in the first quarter, 2006 to range from $ 16.0 to $18.0 million with earnings per share of breakeven to $0.07.”
In a separate release today, the Company announced an agreement to acquire the test system business of Emerson Network Power, Energy Systems, which is expected to close no later than mid-March 2006. The first quarter, 2006 outlook contained herein does not give effect to any factors which may result from the consummation of this transaction.

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Restatement
This release references certain amounts for 2004 that were restated by the Company. Please refer to the Company’s press release on February 1, 2006 for further detail.
Conference Call and Webcast
A conference call to discuss earnings results for the fourth quarter of 2005 will be held on Thursday, February 9, 2006 at 9:00 AM, Eastern Time. The telephone number for U.S. participants is 1-800-860-2442 (international: 412-858-4600). Please reference Tollgrade/Peterson to identify the call. The conference call will also be broadcast live over the Internet. To listen to this conference call via the Internet, simply log on to the following URL address: http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventDetails&c=80100&eventID=1207499.
About Tollgrade
Tollgrade Communications, Inc. is a leading provider of network service assurance products and services for centralized test systems around the world. Tollgrade designs, engineers, markets and supports centralized test systems, test access and status monitoring products, and next generation network assurance technologies for the broadband marketplace. Tollgrade’s customers range from the top RBOCs (Regional Bell Operating Companies) and Cable providers, to numerous independent telecom, cable and broadband providers around the world. Tollgrade’s network testing, measurement and monitoring solutions support the infrastructure of cable and telecom companies offering current and emerging triple play services. Tollgrade, headquartered near Pittsburgh in Cheswick, Pa., and its products and customer reach span over 200 million embedded access lines, more than any other test and measurement supplier. For more information, visit Tollgrade’s web site at www.tollgrade.com.

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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per-share data)
                                 
    Three Months Ended     Twelve Months Ended  
    December 31, 2005     December 31, 2004     December 31, 2005     December 31, 2004  
            (Restated)             (Restated)  
Revenues:
                                
Products
   $ 14,596     $ 12,810     $ 53,007     $ 49,770  
Services
     3,555       3,296       13,312       13,048  
 
 
     18,151       16,106       66,319       62,818  
 
Cost of sales:
                                
Products
     6,117       5,354       24,327       22,191  
Services
     1,240       965       3,883       3,768  
Amortization
     856       676       3,003       2,624  
Impairment
     —       —       424       —  
 
 
     8,213       6,995       31,637       28,583  
 
 
                                
Gross profit
     9,938       9,111       34,682       34,235  
 
 
                                
Operating expenses:
                                
Selling and marketing
     2,289       2,431       8,882       9,483  
General and administrative
     1,845       1,901       7,486       7,346  
Research and development
     3,525       3,596       14,079       15,756  
Retirement and severance expenses
     —       —       775       269  
 
Total operating expenses
     7,659       7,928       31,222       32,854  
 
 
                                
Income from operations
     2,279       1,183       3,460       1,381  
Other income
     531       180       1,359       447  
 
 
                                
Income before income taxes
     2,810       1,363       4,819       1,828  
 
                                
Provision for income taxes
     973       783       1,301       914  
 
Net income
   $ 1,837     $ 580     $ 3,518     $ 914  
 
 
                                
Diluted earnings per-share information:
                                
 
                                
Weighted average shares of common stock and equivalents:
     13,275       13,225       13,217       13,253  
 
Net income per common and common equivalent shares
   $ 0.14     $ 0.04     $ 0.27     $ 0.07  
 

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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Balance Sheets
(In thousands)
                 
            December  
    December     31, 2004  
    31, 2005     (Restated)  
ASSETS
                
 
                
Current assets:
                
 
Cash and cash equivalents
   $ 49,421     $ 32,622  
Short-term investments
     18,010       18,537  
Accounts receivable:
                
Trade
     9,456       10,691  
Other
     1,406       106  
Inventories
     9,934       12,941  
Prepaid expenses
     1,397       2,543  
Deferred and refundable tax assets
     1,803       2,108  
 
Total current assets
     91,427       79,548  
 
                
Property and equipment, net
     6,390       7,860  
Deferred tax assets
     46       197  
Intangibles
     39,517       40,518  
Goodwill
     21,562       22,219  
Capitalized software costs, net
     4,099       6,453  
Other assets
     288       350  
 
                
 
Total assets
   $ 163,329     $ 157,145  
 
 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
 
                
Current liabilities:
                
Accounts payable
   $ 1,262     $ 1,087  
Accrued warranty
     2,220       2,081  
Accrued expenses
     2,579       1,735  
Accrued salaries and wages
     660       718  
Accrued royalties payable
     581       451  
Income taxes payable
     869       169  
Deferred income
     2,450       2,461  
 
Total current liabilities
     10,621       8,702  
 
                
Deferred tax liabilities
     2,447       2,042  
 
 
                
Total liabilities
     13,068       10,744  
 
Total shareholders’ equity
     150,261       146,401  
 
 
                
Total liabilities and shareholders’ equity
   $ 163,329     $ 157,145  
 

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TOLLGRADE COMMUNICATIONS, INC. AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
                 
    Twelve Months Ended  
    December 31,     December 31,  
    2005     2004  
            (Restated)  
 
Cash flows from operating activities:
                
Net income
   $ 3,518     $ 914  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Depreciation and amortization
     5,449       5,238  
Tax benefit from exercise of stock options
     43       65  
Deferred income taxes
     549       2,194  
Provisions for losses on inventory
     545       (45 )
Impairment of acquired intangible asset
     424       —  
Provision for allowance for doubtful accounts
     (289 )     (162 )
Cash settlement for Cheetah Acquisition
     478       —  
Changes in assets and liabilities:
                
Decrease (increase) in accounts receivable-trade
     1,524       (1,274 )
(Increase) decrease in accounts receivable-other
     (1,300 )     16  
Decrease (increase) in inventory
     2,462       (1,741 )
Decrease (increase) in prepaid expenses and other assets
     1,208       (1,027 )
Decrease (increase) in refundable taxes
     312       (581 )
Decrease in accounts payable
     175       79  
Increase (decrease) in accrued warranty
     139       (69 )
Increase in accrued expenses and deferred income
     1,012       3,127  
Increase in accrued royalties payable
     130       56  
Decrease in accrued salaries and wages
     (58 )     (194 )
Increase (decrease) in income taxes payable
     700       (850 )
 
Net cash provided by operating activities
     17,021       5,746  
 
Cash flows from investing activities:
                
Purchase of short-term investments
     (19,340 )     (15,246 )
Redemption/maturity of short-term investments
     19,867       14,333  
Capital expenditures, including capitalized software
     (1,048 )     (2,826 )
Investments in other assets
     —       (715 )
 
Net cash used in investing activities
     (521 )     (4,454 )
 
Cash flows from financing activities:
                
Proceeds from exercise of stock options
     299       270  
 
Net cash provided by financing activities
     299       270  
 
Net increase in cash and cash equivalents
     16,799       1,562  
Cash and cash equivalents at beginning of period
     32,622       31,060  
 
Cash and cash equivalents at end of period
   $ 49,421     $ 32,622  
 

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Forward-Looking Statements
The foregoing release contains “forward looking statements” regarding future events or results within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements concerning the Company’s current expectations regarding revenue and earnings results for the first quarter of 2006, its participation in the fundamental network migration currently underway in the telecommunications industry, its confidence in winning broadband customers and its ability to complete certain key RBOC maintenance negotiations in the first quarter, 2006. The Company cautions readers that such “forward looking statements” are, in fact, predictions that are subject to risks and uncertainties and that actual events or results may differ materially from those anticipated events or results expressed or implied by such forward looking statements. The Company disclaims any current intention to update its “forward looking statements,” and the estimates and assumptions within them, at any time or for any reason.
In particular, the following factors, among others could cause actual results to differ materially from those described in the “forward looking statements:” (a) the unanticipated further decline of the capital budgets allocated to legacy network elements for certain of our major customers; (b) the ability to make changes in business strategy, development plans and product offerings to respond to the needs of the significantly changing telecommunications markets; (c) possible delays in deployment of products under the Saudi Arabian and South African contracts due to project delays, political instability, inability to obtain proper acceptances or other unforeseen delays; (d) possible delays in, or the inability to, complete long term maintenance contracts with certain of our RBOC customers or to complete negotiation and execution of purchase agreements with new customers; (e) lower than expected demand for our cable testing products; (f) pricing pressures affecting our cable-related products as a result of increased competition, consolidation within the cable industry and the adoption of standards-based protocols; (g) our ability to close certain international opportunities, due to numerous risks and uncertainties inherent in international markets; (h) our dependence upon a limited number of third party subcontractors to manufacture certain aspects of the products we sell; (i) the ability to manage the risks associated with and to grow our business; and (j) the uncertain economic and political climate in the United States and throughout the rest of the world and the potential that such climate may deteriorate. Other factors that could cause actual events or results to differ materially from those contained in the “forward looking statements” are included in the Company’s filings with the U.S. Securities and Exchange Commission (the “SEC”) including, but not limited to, the Company’s Form 10-K for the year ended December 31, 2004 and any subsequently filed reports. All documents are also available through the SEC’s Electronic Data Gathering Analysis and Retrieval system at www.sec.gov or from the Company’s website at www.tollgrade.com.
äLoopCare is a trademark of Tollgrade Communications, Inc.
äCheetah is a trademark of Tollgrade Communications, Inc.
Ò DigiTest is a registered trademark of Tollgrade Communications, Inc.
Ò MCU is a registered trademark of Tollgrade Communications, Inc.
All other trademarks are the property of their respective owners.

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