Interim Report July - September 2001

Interim Report July - September 2001 Telelogic July - September 2001: · Continued growth despite further weakened market climate 19% in pro forma growth during the first nine months · Sales in the US affected by terrorist attack Lower demand also in Europe · Continued strong development in Asia 50% organic growth during the quarter · Additional successes in wireless communication Telelogic's largest deal ever with European telecom company · Focus on product development Launch of three new product versions during the quarter Continued unstable market Telelogic's revenue amounted to SEK 340 M for the quarter. This is equivalent to an increase in billing by 70% compared with the same period the previous year, including the effects of the acquisitions in the year 2000. The sales of new licenses increased by 73% and sales of services increased by 64% compared with the same quarter the previous year. Excluding the effects of the acquisition, the pro forma growth for the first nine months of the year was 19%, not counting the effects of fluctuations in foreign currency. New license sales during the quarter accounted for 64% of the billing, which is in line with the second quarter 2001. During the third quarter, the world market has continued to dip. The tragic events in the US on September 11 had a tangible effect on Telelogic's American sales, as a great deal of business takes place during the last weeks of the quarter. The majority of Telelogic's offices in the US were evacuated and cancelled flights meant that customer visits to our offices had to be cancelled. With one third of Telelogic's total sales in the US, the events had a major effect on the Company's total sales for the third quarter. The growing instability has also had a negative effect on sales in other parts of the world. American subsidiaries and global companies are all being influenced by the recession. In Asia, however, Telelogic is still growing strong. Organic growth there was 50% during the quarter, which means an organic growth of 120% during the first nine months of the year. Telelogic's new subsidiaries in Korea, India and China all show good profitability. Telelogic's short-term prediction is that coming quarters will continue to be weak. The dip in the market has deepened further. Clients, today, feel an increased insecurity, which leads to a more restrictive investment policy. Projects are postponed or are cancelled to a greater extent than previously. Despite this, Telelogic has continued to grow. Telelogic's products are market leaders in requirements management and software development. In the long-term, the underlying growth on this market should not be affected. The need to streamline and automate development processes is still great. Consequently, the long-term forecast is for good growth. Earnings Telelogic's earnings excluding goodwill write-offs and costs for reorganization for the third quarter amounted to SEK -49.5 M. This is equivalent to an operating margin of -14.6 %, which is somewhat lower compared with the same period the previous year, but an improvement compared with the first half of this year. The costs for reorganization, which have resulted from the action program, amount to SEK 75 M for the third quarter, which is 75% of the estimated costs for the action program that was initiated in the beginning of the quarter. The gross margin for the quarter has decreased from 68% to 67%, which can primarily be referred to a weak gross margin of 31% for consulting activity. The action program, which was initiated in the beginning of the quarter, has cut fixed costs. These are, in relation to earnings, lower than the same quarter the previous year and compared to the second quarter this year. They are also lower in absolute numbers compared with the second quarter this year, despite an increase in costs as a result of the Swedish crown's weakened position relative to mainly the dollar. The cut in costs has had the greatest effect on sales overhead, which, among others is a result of a slower expansion rate. Also costs for administration have been reduced somewhat, compared with the third quarter the previous year, and even in comparison with the second quarter of this year. Product development costs have been reduced from SEK 73.0 M to SEK 62.9 M from the second to the third quarter. Wireless Communication Increasingly More Important The first 3G system was put into operation in Japan in early October. In Europe, the first systems are estimated to get underway next year. In 3G, Telelogic has built up solid skills and a strong bid. During the quarter, a number of contracts were signed in the 3G area, among these, a number of contracts which total approximately SEK 10 M with a leading Japanese mobile phone manufacturer. In the beginning of the quarter, Telelogic received the biggest ever- single contract. A leading European telecom company gave Telelogic the overall responsibility for a project in the further development of GSM. The order is worth SEK 50 M. The need for communication solutions is growing in a number of areas of technology outside the traditional telecom industry. During the quarter, a major contract was signed with a European supplier of wireless networks. The contract is worth more than SEK 5 M and includes new licenses for the development of wireless local networks, LAN, based on the international standard 802.11. This is one example of the results of Telelogic's presence in different bodies for communication standards Continued Strong Position in the Aerospace and Automotive Industries With a customer base spread over many segments, the effects of the market slump have been subdued somewhat. Sales to the telecom sector have continued to be low during the quarter, while sales to other segments have been stable. Telelogic estimates that the company has held its position within both the telecom as well as the aerospace and automotive industries. Focused Range of Products During the quarter, new versions have been released of Telelogic DOORS, Telelogic Tau and Telelogic DocExpress. These products contain improved integration with other products in Telelogic's range of products as well as improved support for large, complex projects, which are some of Telelogic's main competitive advantages. A new feature of the latest version of Telelogic Tau is that all parts of this product family are now adapted to Japanese. The concentration of the product range, which was initiated during the second quarter, has continued during the current quarter. Telelogic has put a strong focus on core products to obtain the greatest possible returns on investments in product development. Two peripheral products, VisionMap and Bluetooth PreQual, have, as one step in this direction, been sold off during this period. Telelogic is participating in the standardization of UML2, which is the technology that joins the two languages, UML and SDL, in a mutual development standard. Telelogic is the chairman of two of the standardization group's task forces and is also a member of a consortium, which has presented a proposal for the new standard. The consortium consists of, among others, Alcatel, Computer Associates, Ericsson, Hewlett-Packard, IBM, IONA, Motorola, Oracle and Rational Software. The UML2 standard is estimated to be finished next year. The Action Program To adapt business activities to the weak market and the increased uncertainty, Telelogic has initiated an expansive plan of action during the month of July. Within the framework of this program, staff will be cut by 280 people. All these people were given notice during the period. Of these people, the majority left the Company during the quarter. At the end of the quarter, the staff amounted to 1,160 people compared with 1,375 at the beginning of the quarter. The American organization has been trimmed by approximately 20%. In Europe, sales have been focused on the markets, which generate the highest return. In the Nordic countries, primarily consulting services have been trimmed to ensure a long-term satisfactory balance between sales of new licenses and services. In Asia, cutbacks have, primarily, been made in Australia where business activities have been affected by cutbacks in the major telecom companies. In the product organization, previous product divisions have been integrated into one division and support has been concentrated to a few units in Europe and the US. Telelogic has decided to expand its action program to continue to adjust the Company's costs to the recession. In all market operations, costs will be cut to a level deemed to ensure positive returns during the fourth quarter as well as during the first quarter of next year. In the product development organization and in administration, there will be more consolidation and slim lining. As a part of the action program, wages will be cut by 10% and will return to the previous levels when Telelogic returns to a positive cash flow. The wage cuts will be implemented as of November for all employees in the US and all of Telelogic's managers. In other countries, due to legal reasons, this will be done on a voluntary basis. In total these actions are estimated to give an additional reduction in costs of slightly more than 10% annually and lead to additional restructuring costs of SEK 50 M. New Issues Fully Subscribed On September 11, Telelogic completed an issue of new capital stock and convertible debentures directed to the Company's shareholders. The issue was fully subscribed, of which 98% within the frame for shareholders' preferential rights, which Telelogic deems as successful given the current market climate. The new issue brought in a total of SEK 234 M after costs for the issue. Financial Position Investments in the first nine months of the year amounted to SEK 148.7 M, of which SEK 63.8 M are referable to tangible fixed assets, above all, in IT infrastructure. SEK 53.8 M is referable to activated product development and SEK 31.1 M in costs related to acquisitions, primarily for the Continuus acquisition. The cash flow for current operations during the January-September period amounted to SEK -170.5 M. During the year, loans have increased by SEK 54.8 M, which is referable to the convertible part of the new issue of SEK 234 M. Liquid funds, as of September 30, amounted to SEK 178.8 M. In addition, there is an unutilized check overdraft facility of SEK 153.2 M. The equity ratio is 77.1%. Outlook for 2001 The weakened market conditions have been aggravated by the events in the US on September 11, and this has had a negative impact on Telelogic's sales. Telelogic estimates that the entire second half-year and the first half-year next year will be weak. This means that the conditions for obtaining previous growth objectives have been significantly weakened. The recession and the increased insecurity have caused Telelogic to decide to take strong actions aiming at securing a positive cash flow in the Company next year. The described action programs and the weakened market conditions lead to that sales during the fourth quarter is estimated to be lower than the prediction that was made in the interim report delivered after the second quarter. In spite of this, sales are estimated to increase somewhat compared with the third quarter. Costs during the fourth quarter are estimated to be lower than for the third quarter. The cost reductions will generate full effects first during 2002 and will therefore not balance the drop in sales during the second half-year. This means that Telelogic also revises the objective with respect to the operating margin that was communicated in the interim report for the second quarter. Due to the great insecurity on the market, no further forecast is given. Malmö, Sweden October 17, 2001 The Board of Directors This report has not been subject to special review by Telelogic's auditors. During this period, there has been no modification of the accounting principles. UML2 UML2 is the next version of the visual development language UML. UML2 is strategically important to Telelogic since the language is a combination of SDL-2000 and UML, which are the development languages that two of Telelogic's products are based on. UML2 will mean a major step forward for today's UML customers, since they will have access to properties, which are currently only available in SDL, for example, the automation of software development. Even SDL customers will be interested in UML2, since they will be able to use certain UML descriptions without sacrificing the advantages of SDL. Telelogic is pushing UML2 on two fronts: first, as part of the joint venture which defines the language, and second, by producing tools for UML2/SDL-2000. The standard for UML2 is estimated to be finished during the next year. Financial Information Dates for financial information: · Financial Statement for 2001: January 24, 2002 · Interim Report, Jan-Mar: April 18, 2002 · Interim Report, Apr-Jun: July 18, 2002 · Interim Report, Jul-Sep: October 17, 2002 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2001/10/17/20011017BIT00040/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/10/17/20011017BIT00040/bit0001.pdf The full report