Radisys Reports Second Quarter 2017 Results

HILLSBORO, OR - August 1, 2017 - Radisys Corporation (NASDAQ: RSYS), a global leader of open telecom solutions, today announced financial results for the second quarter ended June 30, 2017.

Second Quarter Summary

  • Consolidated revenue of $35.1 million, consistent with the Company’s preliminary revenue estimate of $35 million;
  • GAAP loss per share was $0.19, with a non-GAAP loss of $0.06 per share improving from a loss of $0.14 per share sequentially;
  • Cash flow from operations was $10.3 million;
  • Successfully launched the FlowEngine TDE-2000 and secured the first commercial program award.
  • Additionally, TDE-2000 is already in five active proof-of-concepts and trials; and converted initial CORD lab system order from a new Tier 1 U.S. service provider while also being named the systems integrator by a Southern European service provider for CORD trials beginning in 2018.

“As we announced on July 6, second quarter financial results were below our initial expectations due exclusively to business challenges at two of our largest customers,” said Brian Bronson, Radisys President and Chief Executive Officer. “Although revenue declined sequentially, our non-GAAP loss improved significantly from the first quarter as a result of increased orders across our Software-Systems product lines.

“Despite these dynamics, Radisys continues to be viewed as a disruptor by leading service providers around the globe. The growing number of proof-of-concepts and trials as well as the initial lab system order we received from a new Tier 1 U.S. service provider serves as continued validation of our relevant market position. Current and prospective customers recognize the value of our products, solutions and thought leadership as they look towards fundamentally transforming their network infrastructure. Given these longer-term favorable market conditions, our primary objective entering 2017 was to secure new customers in order to realize greater revenue diversification in 2018 and beyond. Although it continues to be difficult to predict the timing of new technology and commercial product adoption, we have made meaningful progress over the past few quarters as demonstrated by our over thirty active engagements, including over fifteen ongoing proof-of-concepts and trials which span all of our strategic product lines. As a result, I remain confident we will secure new commercial wins in the second half of 2017, which will drive material strategic revenue growth over time.

“Finally, as we stated at the outset of 2017, achievement of our full-year financial guidance required that two of our largest customers would continue to drive significant revenue and associated profits. While we continue to make progress in expanding our footprint within our top two strategic customers, and while we have not lost previously awarded orders or programs, near-term visibility has become limited for various customer-specific reasons. Based on recent discussions with our largest customer, we are revising our full-year revenue expectations to exclude any new product orders from this customer as they now expect orders to resume in 2018. We remain confident in our ability to generate long-term revenue growth with both of these customers; however, we also believe it’s appropriate to acknowledge the reduced visibility by taking a more conservative approach near-term. We will provide another update on our third quarter earnings call and in the interim continue to focus on making the strategic progress required to significantly diversify our revenue streams over time in order to deliver longer-term growth.”

Software-Systems Results

For the second quarter of 2017, Software-Systems revenue was $11.5 million, compared to $10.1 million in the prior quarter and $14.6 million in the second quarter of 2016. The sequential improvement was the result of growth in MediaEngine and FlowEngine product sales tied to both existing customers and initial new customer traction. Gross margin was 54.3%, compared to 53.8% in the prior quarter and 62.8% in the second quarter of 2016. The sequential improvement was the result of revenue growth tied to product sales. Operating loss was $1.9 million, compared to an operating loss of $3.3 million in the prior quarter and break-even results in the second quarter of 2016.

Hardware Solutions Results

For the second quarter of 2017, Hardware Solutions revenue was $23.6 million, compared to $27.5 million in the prior quarter and $46.7 million in the second quarter of 2016. The sequential decline reflects a delay in DCEngine orders from our largest customer and partially offset by a sequential improvement from last-time customer builds across our legacy embedded product lines. Gross margin was 24.3%, compared to 17.4% in the prior quarter and 17.8% in the second quarter of 2016. The sequential improvement was the result of favorable product mix given the decline in DCEngine orders relative to the first quarter.

Operating income was $0.2 million, compared to an operating loss of $1.3 million in the prior quarter and operating income of $3.7 million in the second quarter of 2016.

Consolidated Results

For the second quarter of 2017, consolidated revenue was $35.1 million, compared to $37.6 million in the prior quarter and $61.3 million in the second quarter of 2016. On a GAAP basis, gross margin in the second quarter of 2017 was 28.5%, compared to 21.9% in the prior quarter and 25.2% in the second quarter of 2016. Second quarter 2017 GAAP research and development and selling, general, and administrative expenses were $14.2 million, compared to $15.9 million in the prior quarter and $14.9 million in the second quarter of 2016. The decrease in operating expenses sequentially was the result of prudent expense management across the business in the second quarter. On a non-GAAP basis, second quarter 2017 gross margin was 34.1%, compared to 27.2% in the prior quarter and 28.6% in the second quarter of 2016. Second quarter 2017 research and development and selling, general and administrative expenses on a non-GAAP basis were $13.7 million, compared to $14.8 million in the prior quarter and $13.8 million in the second quarter of 2016.

For the second quarter of 2017, the Company recorded a GAAP net loss of $7.6 million, or $0.19 per share, compared to a GAAP net loss of $10.0 million, or $0.26 per share, in the prior quarter and a GAAP net loss of $0.6 million, or $0.02 per share, in the second quarter of 2016. On a non-GAAP basis, the Company recorded a net loss of $2.2 million, or $0.06 per share, in the second quarter of 2017, compared to a net loss of $5.5 million, or $0.14 per share, in the prior quarter and net income of $3.7 million, or $0.10 per diluted share, in the second quarter of 2016.

Third Quarter 2017 Financial Guidance

  • Revenue is expected between $26 to $30 million, which represents approximately flat Software-Systems revenue sequentially and a reduction in Hardware-Solutions revenue tied to an expected decline in legacy embedded products revenue as well as no expected new product orders from the Company’s top DCEngine customer.
  • GAAP gross margin is expected to approximate 3% and GAAP R&D and SG&A expenses are expected to be approximately $13.8 million. Non-GAAP gross margin is expected between 6% and 15% of sales, which includes the impact of a potential $6.5 million non-cash inventory write-down at the midpoint given remaining exposures tied to final product end-of-life transitions within the Company’s legacy embedded products portfolio which are expected to be finalized during the third quarter. Excluding the impact of this inventory write-down, non-GAAP gross margin is expected to be between 33% and 35% of sales, largely consistent with the second quarter.
  • GAAP loss is expected to be in a range of $0.40 to $0.33 per share. Non-GAAP loss is expected to range from $0.31 to $0.24 per share. Excluding the impact of the non-cash inventory write-down, non-GAAP loss is expected between $0.13 and $0.09 cents per share.
  • Revised 2017 Annual Financial Guidance 
  • Revenue is now expected between $130 million to $140 million. The revised revenue range is based on the limited visibility provided by the Company’s largest customer, and does not include any new DCEngine orders from this customer for the remainder of the year. Additionally, any material commercial revenue from the existing proof-of-concepts and trials ongoing across the Company’s strategic product lines would represent additional revenue not reflected in the revised guidance range.
  • GAAP gross margin is expected to approximate 24% and GAAP R&D and SG&A expenses are expected to be approximately $56.5 million. Non-GAAP gross margin is expected to approximate 28% to 30% of sales, and excluding the impact of the non-cash inventory write-down in the third quarter, non-GAAP gross margin is expected to approximate 34% of sales. Total non-GAAP R&D and SG&A expenses are expected to approximate $54.5 million.
  • GAAP loss is expected to be in a range of $0.87 to $0.77 per share. Non-GAAP loss is expected to range from $0.50 to $0.39 per share. Excluding the impact of the non-cash inventory write-down in the third quarter, non-GAAP loss is expected between $0.32 and $0.24 cents per share.

Conference Call and Webcast Information

The Company will host a conference call to discuss second quarter 2017 results on August 1, 2017, at 5:00 p.m. ET. To participate in the live conference call, dial 888-333-0027 in the U.S. and Canada or 706-634-4990 for all other countries and reference conference ID # 19225505. The live conference call will also be available via webcast on the Radisys investor relations website at http://investor.radisys.com/. A replay of the conference call will be available two hours after the call is complete until 11:59 p.m. on August 15, 2017. To access the replay, dial 855-859-2056 or 404-537-3406 and reference conference ID# 19225505. A replay of the webcast will be available for an extended period of time on the Radisys investor relations website at http://investor.radisys.com/.

About Radisys
Radisys (NASDAQ: RSYS) helps communications and content providers, and their strategic partners, create new revenue streams and drive cost out of their services delivery infrastructure. Radisys’ hyperscale software defined infrastructure, service aware traffic distribution platforms, real-time media processing engines and wireless access technologies enable its customers to maximize, virtualize and monetize their networks.

Forward-Looking Statements
This press release contains forward-looking statements, including statements about the Company's business strategy, changes in reporting segments financial outlook and expectations for the third quarter and fiscal 2017, and statements related to revenue and gross margins from our respective segments and product lines, investments in future growth, expense savings or reductions, increased profitability, product line focus, operational and administrative efficiencies, revenue growth, margin improvement, financial performance and other attributes of the Company. These forward-looking statements are based on the Company's expectations and assumptions, as of
the date such statements are made, regarding the Company's future operating performance and financial condition, customer requirements, outcome of product trials, the economy and other future events or circumstances. Actual results could differ materially from the outlook guidance and expectations in these forward-looking statements as a result of a number of risk factors, including, among others, (a) increased Tier 1 commercial deployments across multiple product lines, (b) continued implementation of the Company’s next-generation products, (c) customer implementation of traffic management solutions, (d) the outcome of product trials, (e) the market success of customers' products and solutions, (f) the development and transition of new products and solutions, including our FlowEngine appliance, CellEngine 5G RAN technology and our strategic MediaEngine channel agreement, (g) the enhancement of existing products and solutions to meet customer needs and respond to emerging technological trends, (h) the Company’s ability to raise additional growth capital, (i) the Company's dependence on certain customers and high degree of customer concentration, (j) the Company's use of one contract manufacturer for a significant portion of the production of its products, including the success of transitioning contract manufacturing partners, (k) matters affecting the software and embedded product industry, including changes in industry standards, changes in customer requirements and new product introductions, (l) actions by regulatory authorities or other third parties, (m) cash generation, (n) changes in tariff and trade policies and other risks associated with foreign operations, (o) fluctuations in currency exchange rates, (p) the ability of the Company to successfully complete any restructuring, acquisition or divestiture activities, (q) risks relating to fluctuations in the Company's operating results, the uncertainty of revenues and profitability and the potential need to raise additional funding and (r) other factors listed in the Company's reports filed with the Securities and Exchange Commission (SEC), including those listed under “Risk Factors” in Radisys' Annual Report on Form 10-K for the year ended December 31, 2016, copies of which may be obtained by contacting the Company at 503-615-1100, from the Company's investor relations web site at http://investor.radisys.com/, or at the SEC's website at http://www.sec.gov. Although forward-looking statements help provide additional information about Radisys, investors should keep in mind that forward-looking statements are inherently less reliable than historical information. Should one or more of these risks or uncertainties materialize (or the other consequences of such a development worsen), or should underlying assumptions prove incorrect, actual outcomes may vary materially from those forecasted or expected. The Company believes its expectations and assumptions are reasonable, but there can be no assurance that the expectations reflected herein will be achieved. All information in this press release is as of August 1, 2017. The Company undertakes no duty to update any forward-looking statement to conform the statement to actual results or changes in the Company's expectations.

Non-GAAP Financial Measures

To supplement its consolidated financial statements in accordance with generally accepted accounting principles (GAAP), the Company's earnings release contains non-GAAP financial measures that exclude certain expenses, gains and losses, such as the effects of (a) amortization of acquired intangible assets, (b) stock-based compensation expense, (c) restructuring and other charges (reversals), net, (d) non-cash income tax expense, (e) gain on the liquidation of foreign subsidiaries and (f) inventory write-down. The Company believes that the use of non-GAAP financial measures provides useful information to investors to gain an overall understanding of its current financial performance and its prospects for the future. Specifically, the Company believes the non-GAAP results provide useful information to both management and investors by excluding certain expenses, gains and losses that the Company believes are not indicative of its core operating results. In addition, non-GAAP financial measures are used by management for budgeting and forecasting as well as subsequently measuring the Company's performance, and the Company believes that it is providing investors with financial measures that most closely align to its internal measurement processes. These non-GAAP measures are considered to be reflective of the Company's core operating results as they more closely reflect the essential revenue-generating activities of the Company and direct operating expenses (resulting in cash expenditures) needed to perform these revenuegenerating activities. The Company also believes, based on feedback provided to the Company during its earnings calls' Q&A sessions and discussions with the investment community, that the non-GAAP financial measures it provides are necessary to allow the investment community to construct their valuation models to better align its results and projections with its competitors and market sector, as there is significant variability and unpredictability across companies with respect to certain expenses, gains and losses. The non-GAAP financial information is presented using a consistent methodology from quarter-to-quarter and yearto-year. These measures should be considered in addition to results prepared in accordance with GAAP. In
addition, these non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles. The Company believes that non-GAAP financial measures have limitations in that they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Company's results of operations in conjunction with the corresponding GAAP financial measures.

A reconciliation of non-GAAP information to GAAP information is included in the tables below. The non-GAAP financial measures disclosed by the Company should not be considered a substitute for or superior to financial measures calculated in accordance with GAAP, and reconciliations between GAAP and non-GAAP financial measures included in this earnings release should be carefully evaluated. The non-GAAP financial measures used by the Company may be calculated differently from, and therefore may not be comparable to, similarly titled measures used by other companies.

Radisys® is a registered trademark of Radisys