Ditech Networks Reports Q3 FY09 Financial Results

Ditech Networks, Inc. (NASDAQ: DITC) reported results for its fiscal 2009 third quarter ended January 31, 2009. Revenues for the third quarter were $4.9 million, a decrease of $1.8 million, or 27%, from revenues of $6.7 million in the same quarter of the prior fiscal year and an increase of $0.8 million, or 19%, from revenues of $4.1 million in the second quarter of fiscal 2009.

GAAP net loss for the fiscal 2009 third quarter was $3.8 million, an improvement compared to the GAAP net loss of $19.7 million in the same quarter of the prior fiscal year, as well as an improvement compared to the GAAP net loss of $7.0 million in the second quarter of fiscal 2009.

"Despite difficult economic conditions, we were able to sequentially grow the revenue in our VQA business while carefully managing our operating expenses and use of cash,” said Todd Simpson, Ditech’s president and CEO. "I am excited about the go forward opportunity for Ditech based upon current VQA trial activities and the positive feedback we have received on our recent mStage product announcement. The mStage platform is a key piece of Ditech’s plan to enable our customers to deploy revenue-generating voice applications.”

Ditech Networks will discuss its fiscal 2009 third quarter financial results and its outlook in today’s conference call (see details later in this release).

Third Quarter Fiscal 2009 GAAP Results

• Net loss for the third quarter of fiscal 2009 of $3.8 million compared to net loss of $19.7 million in the same quarter in the prior fiscal year.
• Net loss per share of $0.15, compared to net loss per share of $0.76 in the same quarter in the prior fiscal year.

Third Quarter Fiscal 2009 Non-GAAP Results

• Non-GAAP net loss for the third quarter of fiscal 2009 of $3.1 million compared to non-GAAP net loss of $2.8 million in the same quarter in the prior fiscal year.
• Non-GAAP net loss per share of $0.12, compared to non-GAAP net loss per share of $0.11 in the same quarter in the prior fiscal year.

A reconciliation of the non-GAAP to GAAP financial measures presented above is included at the end of this press release. These non-GAAP financial measures exclude the effect of stock-based compensation expense, the expense related to amortization of intangible assets, the expense of severance and restructuring costs, impairment charges associated with goodwill and the tax effects of the excluded amounts.

Fourth Quarter Fiscal 2009 GAAP Outlook

Based upon expected bookings, timing of shipments and deferred revenues, Ditech Networks expects fiscal 2009 fourth quarter revenues to be flat to up 15% from the third quarter of fiscal 2009. Ditech Networks expects gross margins to range from 54% to 58%. Operating expenses, including an estimated $0.3 million of stock-based compensation, are expected to be approximately $6.3 to $6.6 million.

Conference Call

Ditech Networks will host an investor webcast and conference call at 4:30 PM Eastern Time / 1:30 PM Pacific Time today, to review its fiscal 2009 third quarter performance and its outlook for the coming quarter. Any member of the public can listen to the conference call by calling the following number: +1 (612) 332-0932. The conference call will also be broadcast live over the Internet and can be accessed by going to either the "Press Room” or "Investors” section of Ditech Networks’ web site home page: http://www.ditechnetworks.com. A replay of the conference call will be available via Ditech Networks’ web site or by calling the digitized replay number at +1 (320) 365-3844. The conference call ID is: 984504. The replay will be available three hours after the call is complete until Ditech Networks’ subsequent earnings announcement.

About Ditech Networks

Ditech Networks is revolutionizing modern communications with advanced voice processing solutions that perform tasks spanning from voice-enabled Web 2.0 and unified communications services to voice quality enhancement. Ditech believes in the power and simplicity of human speech; its solutions deliver high-quality voice communication and will enable compelling voice capabilities to new communications methods like social networking and text messaging, allowing consumers to use voice in ways that make sense in today’s Web 2.0-savvy world.

Leveraging over 15 years of deployments with communications providers around the world, Ditech’s products help global communications companies meet the multiple challenges of service differentiation, network expansion and call capacity, by delivering consistent, dependable voice quality. Ditech’s customers include Verizon, Sprint/Nextel, Orascom Telecom, AT&T, Telus, Global Crossing and West Corporation. Ditech Networks is headquartered in Mountain View, California.

Ditech Networks is a registered trademark of Ditech Networks, Inc. All other trademarks are the property of their respective owners.

Forward-Looking Statements

The statements in this press release with respect to Ditech Networks’ fourth quarter fiscal 2009 projected financial results, and Ditech Network’s outlook based upon current VQA trial activities and the positive feedback received on its recent mStage product announcement, are forward-looking statements. Actual results could differ materially as a result of numerous risks and uncertainties, including: timing of orders and timely receipt of payments for Ditech Networks’ voice enhancement and echo cancellation equipment is variable and could affect Ditech Networks’ ability to meet revenue expectations; shipment of products Ditech Networks expects to ship before the end of the fourth quarter of fiscal 2009 may be delayed or cancelled due to unexpected factors and events affecting its customers; Ditech Networks may experience weakening in demand for its voice and echo cancellation products due to unexpected reasons; component supply problems may occur as a result of factors beyond its control; infrastructure demand could weaken or remain flat due to a weakening in the economy or for other unanticipated reasons; Ditech Networks’ competitors may develop products that compete favorably with Ditech Networks’ products; Ditech Networks has a limited number of customers, the loss of any one which could cause its revenues to decrease materially; inability to successfully convert Ditech Networks’ VQA trials to customer orders would limit VQA revenue; Ditech Networks uses various sales channels and depending on channel, may cause operating expenses to exceed projected levels; Ditech Networks’ ability to pursue revenue growth may require additional spending which may exceed projected operating expenses; the cost savings measures that Ditech Networks has implemented may not meet Ditech Networks’ expectations of cost reduction or ability to maintain opportunities due to unforeseen reasons; the risks inherent in developing new products, such as its current vision regarding Ditech Networks’ mStage project in development; as well as those detailed in the section entitled "Future Growth and Operating Results Subject to Risk” in Ditech Networks’ Quarterly Report on Form 10-Q for the quarter ended October 31, 2008 (filed December 8, 2008 with the Securities and Exchange Commission).

Use of Non-GAAP Financial Information

Ditech Networks provides all information required in accordance with generally accepted accounting principles (GAAP), but it believes that evaluating its ongoing operating results and in particular, making comparisons to similar companies, may be enhanced by providing additional measures used by management to assess operating results. Internally, Ditech Networks uses calculations of: (i) non-GAAP gross profit and gross margin, which represents gross profit and gross margin excluding the effect of stock-based compensation expense and severance and restructuring costs; (ii) non-GAAP operating expenses, which represent operating expenses excluding the effect of stock-based compensation expense and severance and restructuring costs and, in the case of total operating expenses, expense related to amortization of intangible assets and impairment of goodwill; (iii) non-GAAP pre-tax loss and non-GAAP net loss, which represents pre-tax loss and net loss excluding the effect of stock-based compensation expense, severance and restructuring costs and expense related to the amortization of intangible assets and impairment of goodwill; and (iv) non-GAAP basic and diluted net loss per share, which represents basic and diluted net loss per share excluding the effect of stock-based compensation expense, severance and restructuring costs and expense related to the amortization of intangible assets and impairment of goodwill. The non-GAAP financial measures also exclude the tax effects of the excluded amounts.

The non-GAAP financial measures contained in this release are included with the intention of providing investors additional understanding of Ditech Networks’ operational results and trends, but should only be used in conjunction with results reported in accordance with GAAP.

Ditech Networks believes that the presentation of these non-GAAP financial measures is warranted for several reasons:

1) Such non-GAAP financial measures provide an additional analytical tool for understanding Ditech Networks’ financial performance by excluding the impact of items which may obscure trends in the core operating performance of the business;

2) Since Ditech Networks has historically reported non-GAAP results to the investment community, Ditech Networks believes the inclusion of non-GAAP numbers provides consistency and enhances investors’ ability to compare Ditech Networks’ performance across financial reporting periods;

3) These non-GAAP financial measures are employed by Ditech Networks’ management in its own evaluation of performance and are utilized in financial and operational decision making processes, such as budget planning and forecasting;

4) These non-GAAP financial measures facilitate comparisons to the operating results of other companies in Ditech Networks’ industry, which use similar financial measures to supplement their GAAP results, thus enhancing the perspective of investors who wish to utilize such comparisons in their analysis of Ditech Networks’ performance.

As stated above, Ditech Networks presents non-GAAP financial measures because it considers them to be important supplemental measures of performance. However, non-GAAP financial measures have limitations as an analytical tool and should not be considered in isolation or as a substitute for Ditech Networks’ GAAP results. In the future, Ditech Networks expects to incur expenses similar to the non-GAAP adjustments described above and expects to continue reporting non-GAAP financial measures excluding such items. Some of the limitations in relying on non-GAAP financial measures are:

• Ditech Networks’ stock option and stock purchase plans are important components of incentive compensation arrangements and will be reflected as expenses in Ditech Networks’ GAAP results for the foreseeable future under SFAS 123R.
• Amortization of intangibles, though not directly affecting Ditech Networks’ current cash position, represents the loss in value as the technology in Ditech Networks’ industry evolves, is advanced or is replaced over time. The expense associated with this loss in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the ongoing cost of maintaining Ditech Networks’ current technological position in the company’s competitive industry which is addressed through the company’s research and development program.
• Restructuring charges reflect a real cost of doing business and reacting to market forces, and by eliminating these charges the non-GAAP financial measures do not reflect these costs of doing business.
• Impairment of goodwill, though not directly affecting Ditech Networks’ current cash position, represents the loss in value of its acquisitions of target companies due to the overall decline in the market value of the company resulting in the inability to demonstrate the recovery of these assets. The expense associated with this impairment in value is not included in the non-GAAP net income (loss) presentation and therefore does not reflect the full economic effect of the loss in value of the goodwill created from the company’s historic acquisition activity.
• Other companies, including other companies in Ditech Networks’ industry, may calculate non-GAAP financial measures differently than the company, limiting their usefulness as a comparative measure.