2Q Report January 1 - June 30, 2006 for SwitchCore AB (publ) Corporate Identity Number 556541-8869
* The Group's sales for the period totaled SEK 38.7 million (61.2). Sales calculated in USD amounted to 5.2 million (8.5). 2Q sales reached SEK 21.5 million (30.5) with sales calculated in USD reaching 2.9 million (4.2).
* The Group's operating loss for the period totaled SEK 35.4 million (-14.5). Loss after taxes amounted to SEK 34.6 million (-13.2). The loss per share totaled SEK 0.06 (-0.06). The Group's operating loss for 2Q totaled SEK 22.5 million (-6.4). Loss after taxes amounted to SEK 21.8 million (-5.3). The loss per share totaled SEK 0.04 (0.03). Escalating losses are ascribed to lower sales and increased depreciation related to investments in capitalized development costs.
* Orders received during the period reached SEK 39 million (46), with orders received during 2Q reaching SEK 12 million (23.0).
* SwitchCore expects the sales from Xpeedium to decline over the coming years. Combined with that Xpeedium2 and Xpeedium2pro have not evolved as the company anticipated affects the revenues. SwitchCore currently has 11 design wins with this family which will generate income over the next few years. The company's sales figures for 2006 are expected to total SEK 70-75 million, compared with SEK 108 million in 2005.
* After the spring's considerable new share issue, which secured just over SEK 200 million for SwitchCore, the company is well equipped to handle both the development of Xpeedium3 and counter 2006's decline in sales. Liquid funds at the close of the period amounted to SEK 175.5 million (31.3).
* The development of SwitchCore's third product generation, Xpeedium3, is progressing according to plan with the ambition to launch the first products by the end of 2007. The Xpeedium3 venture is considered to be Europe's single largest ASIC project.
* SwitchCore continues its long-term efforts to find partners for both Xpeedium2pro and the third generation Xpeedium3, as well as to increase direct sales of its devices.
Events after the period SwitchCore and the North American company World Wide Packets signed a volume contract in July. According to the terms of the contract, SwitchCore will supply the Xpeedium product for World Wide Packet's network equipment for broadband connection which is marketed on the global corporate market. World Wide Packets has the potential to become one of SwitchCore's largest customers.
General information about the business: SwitchCore AB develops, markets and sells integrated network devices for data, voice and video communication based on the Ethernet standard. The core of SwitchCore's expertise is in its CXE technology, which allows for significantly higher network product capacity. Using SwitchCore's components, customers can develop network products that cost-efficiently manage and prioritize data, video and voice traffic for many demanding applications. Customers and partners are network equipment manufacturers and suppliers, including Intel, Allied Telesyn, Huawei/3Com, Alloptic, Corecess, Dasan, Radisys and World Wide Packets. The Group presently has about 55 employees and some 40 consultants contracted. SwitchCore's headquarters is in Lund, Sweden. The Company also has offices in San Jose, USA, as well as Singapore and Shanghai in Asia and Rotterdam in Europe. The Company is listed on Stockholm Stock Exchange's O List under the SCOR ticker. For more information visit http://www.switchcore.com/
Footnote: The figures in parenthesis (xx) correspond to the figures for the same period last year.
Comments by the CEO "Sales during the second quarter climbed for the second consecutive quarter, due largely to a relatively high share of sales from Intel.
"Orders received during the second quarter have been patchy and not up to my expectations. This is due both to variations in volumes to Intel and to a surprisingly cooler response to Xpeedium2Pro, which is intended for the IP-DSLM market. One reason for this reaction is that Xpeedium2Pro lacks 10 Gigabit ports, a feature we have elected to incorporate in the Xpeedium3 family.
"SwitchCore's development organization is now fully concentrated on producing the company's third product generation, Xpeedium3. This is a collaborative effort that has required the addition of 40 individuals, mainly consultants, to our development department. The Xpeedium3 venture is currently Europe's larges ASIC project. I am confident that we will regain SwitchCore's position as a leading engineering company through this multi-functional, module-based product family.
"Consolidation of the market for communication equipment continues. At the close of the second quarter, Intel sold its communications and application processor business to Marvell for USD 600 million. This deal does not have any bearing on SwitchCore's sales to Intel which will continue as planned. It is essential that SwitchCore exploits the opportunities that arise in the consolidation process and we are constantly negotiating with other companies the possibility of partnerships, both within existing and imminent product generations.
"In my opinion, SwitchCore has a definite advantage after the spring's substantial injection of capital since it has the financial strength to both carry out the company's to date largest development venture and counter short-term declines in sales."
Sales and results for the period * The Group's net sales for the period amounted to SEK 38.7 million (61.2). Billing in USD reached 5.2 million (8.5). OEM sales to Intel made up 40 percent (48) of the total sales. SwitchCore complies with IAS1 as of January 1, 2005. This means the Group will separately account for capitalized development costs among the Group's earnings, in total SEK 40.2 million (10.3). The sum is not included in the above net sales. * The gross profit margin for the period was 52.8 percent (53.0). * The Group's operating loss was SEK 35.4 million (-14.5). Most of the increased operating expenses are explained by large investments in product development of next generation products. A total of SEK 23.7 million (8.7) for R&D costs brought forward were depreciated in 2Q. * USD exposure in the operating loss amounts to about 15 percent of sales since all billing is issued in USD and most of the company's operating costs are in USD. The Group's results for the period include a foreign exchange profit of SEK 0.2 million (1.4). * The loss after tax was SEK 34.6 million (-13.2). * Earnings per share totaled SEK -0.06 (-0.06).
2Q sales and results * The Group's 2Q sales amounted to SEK 21.5 million (30.5). Sales calculated in USD totaled 2.9 million (4.2). OEM sales to Intel answered for 54 percent (53) of the total sales. Investments were reported in capitalized development costs totaled SEK 25.5 million (6.2). * The Group's 2Q operating loss was SEK 22.5million (-6.4). A total of SEK 17.9 million (4.4) in previously capitalized development costs were depreciated for the period.
Financing and liquidity Stockholders' equity stood at SEK 234.7 million (84.8) on June 30, 2006 and equity per share was SEK 0.38 (0.41).
Liquid funds at the end of the period totaled SEK 175.5 million (31.3). The company has a utilized credit facility of USD 1.1 million (1.5).
Capital stock amounts to SEK 123,880,039.20 with the number of stock totaling 619,400,196.
Parent company * The parent company's sales during the period amounted to SEK 38.7 million (36.6) * The loss after net income/expense was SEK 10.2 million (-25.4).
The market SwitchCore's products address applications based on the Gigabit Ethernet standard, a standard that is ten times faster than its predecessor, Fast Ethernet. The Gigabit Ethernet market is in the early development phase and expected to grow in volume from about 50 million network connections (ports) in 2005 to over 200 million ports in 2008.
According to market analysts IDC, SwitchCore's market is expected to reach about USD 600 million in 2005 and climb to about USD 1000 million by 2008, which corresponds to an annual 20 percent growth in sales. The actual growth for 2005 was considerably higher than 20 percent.
SwitchCore's business concept is based on developing and supplying integrated devices for advanced Ethernet-based applications. Its strength presently lies in its position as one of today's few independent suppliers to the promising market for advanced Ethernet-based access networks within telecommunication and enterprise networks.
Sales SwitchCore's customer segments consist of companies that develop advanced network equipment (network switches) for enterprise and access networks (telecommunication) based on the Ethernet standard. Products developed by SwitchCore's customers cost-effectively manage and prioritize data, video and voice traffic for many different applications. The company estimates there are about 500 potential customers for its products, concentrated to North America and Asia (mainly China, Korea and Japan). The European market is expected to evolve at the same rate the demand for access networks grows.
SwitchCore had about 110 design wins and some 65 customers by the end of 2Q. A design win is when a customer decides to develop a switch or router based on SwitchCore's CXE products.
SwitchCore is looking for partners to push the sales of both present-day and next generation products. The company has excellent experience of this type of partnership through is long, successful relationship with Intel. The task of finding a partner to promote sales of the Xpeedium2 family, as well as the pending Xpeedium3 product generation is underway, though it has taken longer than anticipated.
North America Original Equipment Manufacturing (OEM) sales to Intel answered for about 40% of SwitchCore's total sales. Based on Intel's forecasts, the company finds that Intel's demands for SwitchCore's devices will remain strong also in 2006.
Asia During the period SwitchCore signed an agreement with a new consultant/dealer to target the Japanese market. The company has also landed a new design win in Taiwan.
Europe and Africa One of our European customers is preparing for volume production the beginning of 2007. The company launched an IP-DSLAM product at the 2006 CEBIT trade show that is based on SwitchCore's Xpeedium2Pro devices.
SwitchCore has established new relationship in Russia on order to increase penetration.
Products Xpeedium is the common name for SwitchCore's products and the first generation of products answer for most of our sales today. The OEM contract with Intel includes the Xpeedium products. The company expects there will be a market for this product family up until 2010.
Xpeedium2 and Xpeedium2Pro are the second generation product family from SwitchCore. The product has not advanced as the company expected. We had planned for volume sales to take off during the second half of 2006, but we now believe this will occur in 2007. SwitchCore has 11 design wins coupled to this product family. We are working diligently to increase our sales of this product family, both directly and indirectly through dealers.
SwitchCore is now developing its third-generation product family, Xpeedium3. Xpeedium3 consists of a number of circuits for advanced next-generation system for enterprise and access networks. The new architecture solution allows faster data transfer and for many functions to be integrated in the circuits. SwitchCore's technology enables customers to cost-efficiently develop a complete product range from a basic platform.
Xpeedium3 is designed to attract more market segments than SwitchCore's products do today, making it easier to grow on the total switching device market. Xpeedium3 follows the original time plan and is one of the largest ASIC projects in Europe that will recover SwitchCore's leading position.
Organization and employees The SwitchCore organization consists of a parent company, SwitchCore AB, first-tier subsidiaries SwitchCore Options AB, SwitchCore Singapore Private Limited, SwitchCore Intellectual Property AB, Eroc Technology AB, SwitchCore Taiwan AB (dormant) and SwitchCore in Stockholm AB (dormant), and the second-tier subsidiary SwitchCore Corporation (a wholly-owned subsidiary of SwitchCore Options AB).
At the close of the period, the distribution of the Group's employees was as follows: The Group had 56 (53) employees of whom 49 (46) in Sweden and the rest of Europe, 5 (5) in the US and 2 (2) in Asia. Of the employees, 20 (15) percent are female and 80 (85) percent are male. The average age is 39 (37) years.
Investments The Group's investments in tangible fixed assets totaled SEK 0.6 million (0), of which SEK 0.5 million (0) was in the parent company. In addition, investments have been reported in capitalized development costs for a total of SEK 40.2 million (10.3) of which about 25% consists of personnel costs and the remaining portion of external costs such as consultancy costs, tools and license costs. Previously capitalized expenses were depreciated by SEK 23.7 million (8.7). In total, the change in capitalized development costs is SEK 16.5 million (1.6). These investments all relate to Xpeedium3, SwitchCore's imminent new product family.
Patents SwitchCore's patent strategy is built on creating a patent portfolio where the most important parts of the CXE technology are protected. The functions of future products are earmarked at an early stage for possible patenting. In total SwitchCore owns 13 patented inventions spread over 33 registrations; 7 in Sweden, 10 in the US, 2 in Taiwan, 1 in China and 13 in other countries. A further 4 patent applications have been submitted for review: 2 in the US, 1 in Sweden and 1 globally.
Outlook SwitchCore expects the sales from Xpeedium to decline over the coming years. In combination with that Xpeedium2 and Xpeedium2pro have not evolved as the company anticipated affects the revenues. SwitchCore currently has 11 design wins with this family which will generate income over the next few years. The company's sales figures for 2006 are expected to total SEK 70-75 million, compared with SEK 108 million in 2005.
SwitchCore's stocks The company's stocks are quoted on Stockholm Stock Exchange's O list. The average daily turnover of stocks for the January 1 - June 30, 2006 period was SEK 2,754,864. During the same period, the average number of traded stocks was 4,359,184 per day. The total number of stocks in the Company at the end of the period was 619,400,196.
Reports 2006 3Q report January 1 - September 30, 2006 October 19, 2006 Financial statement January 1 - December 31, 2006 January 25, 2007
Accounting principles This interim report was prepared according to the IFRS and is the sixth financial report that SwitchCore presents in line with the IFRS, meaning that the report complies with IAS 34. The conversion to IFRS had no effect on SwitchCore. However, there are some areas where IFRS will have an influence on the Group's income statement and balance sheet as of January 1, 2005:
Reporting and evaluation of Financial Instruments (IAS 32 and IAS 39): In accordance with IAS 39, all derivative instruments such as futures are to be reported in the balance sheet and evaluated at actual value. Since SwitchCore did not have any futures or other financial instruments on January 1, 2005 the impact of the opening balances was zero according to IAS 39. IAS 39 did not have any impact on the closing balance.
Translation of foreign companies accounts (IAS 21): All businesses abroad are classified as integrated, i.e. they have the same functional currency as the parent company. They have therefore been translated using the monetary method. Translation differences are reported in the consolidated statements.
Stock Option Plan (IFRS 2): The parent company has issued stock options. The programs were issued before November 7, 2002 and are therefore not affected by IFRS 2.
The Annual General Meeting held on May 4, 2006 resolved to introduce a stock option plan valid from 2006-2010. The Plan has had a marginal effect on SwitchCore's earnings and position presented in this report.
The same accounting principles and calculation methods used in the most recent Annual Report have been used in this report.
Lund, Sweden July 20, 2006
Erwin Leichtle, Chief Executive Officer SwitchCore AB (publ)
The report has not been subject to review by the company's auditors.
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For more information: SwitchCore will hold a phone conference for media and financial analysts today, July 20, 2006 at 10 a.m.. A presentation is available at www.switchcore.com
Phone: + 46 8 672 81 50 Register code SwitchCore
Erwin Leichtle, CEO SwitchCore Email: email@example.com Mobile: +46 703 389300
Maria Rydén-Persson, CFO SwitchCore Email: firstname.lastname@example.org Mobile: +46 73 429 2565
The entire report, including tables, can be downloaded at: