Network Equipment Technologies Q1 2011 Earnings Conference Call Transcript

These risks and uncertainties include federal government budget matters and procurement decisions, the timing of orders, timely completion of product development initiatives, challenges with managing inventory and production of products, certifications and regulatory compliance for new and existing products, market exceptions for our new products, relations with and performance by third party technology providers, new competition and technological changes, success in building new sales channels, circumstances regarding specific sales that can affect the recognition of revenue and other risks including those identified in the company's filings with the SEC including forms 10-K and 10-Q and in other press releases and communications.

The first quarter

Product revenue in the first quarter was $10 million, a 35% decrease from the prior quarter and 37% decrease from Q1 a year ago. Product revenue from our federal government business declined significantly compared to the prior period, while product revenue for our enterprise business grew modestly compared to the prior quarter.

Product revenue from our government business was $6.7 million, which was $5.6 million less than the prior quarter and $4.9 million less than Q1 a year ago. We attribute the decline primarily to program delays by US government customers.

Product revenue from our enterprise business was $3.3 million, up 10% from the prior quarter and down 24% from Q1 a year ago. The increase from last quarter results from higher sales to domestic customers for UC applications. The decline from the prior year resulted from lower sales of our Tenor product, which declined approximately $1 million.

Thank you, David. Although our total revenues were down in Q1, NET's continued focus on unified communications and secured voice opportunities is resulting in expanding global opportunities.

The introduction of voice

We are moving ahead with the introduction of voice and data products that enable us to stay at the forefront of delivering integrated communications to both enterprise and government customers.

Revenues during our first fiscal quarter reflected increase in enterprise sales of unified communication solutions, particularly in North America. We had approximately 50 UC wins during the first quarter of the fiscal year and the pipeline looks strong for the remainder of fiscal 2011.

A recent report from Frost & Sullivan noted that although enterprises may be upgrading only a certain piece of their communications infrastructure, most are including UC capabilities in their plans.

A recent report from Forrester stated that the market for unified communications within enterprises in North America, Europe and Asia Pacific will reach $14.5 billion in 2015. We believe that NET's products and partnerships position us well within this market.

The UC market

In addition to the UC market, we continue to address other VoIP applications including a recent deployment at the Bank of France, which is France's central bank. Our partnerships are expanding and we continue to add new distribution channels each quarter.

Turning to the federal government business, we were disappointed in our government revenue for Q1 in which we saw delays in a number of federal government orders. Unfortunately the nature of doing business with the US government today brings with it limited visibility to the procurement process and to potential spending delays.

Our extended product family now includes recent upgrades to our to our VX Series intelligence voice switch, with support from Microsoft's upcoming Communications Server 14 and our VXe software release which is designed for Microsoft's OCS RS applications.

The availability of our SmartSIP product

We recently announced the availability of our SmartSIP product, which provides interoperability for standard SIP endpoints and Microsoft unified communications. The addition of SmartSIP to NET's product portfolio supports collaboration in the workplace where real-time integrated communications are driving increased productivity throughout the enterprise.

SmartSIP is the first NET application built using Microsoft's unified communication managed API, which is referred to as UCMA, which enables a tighter coupling of NET's technology with Microsoft's OCS communications server applications.

This platform is designed to power next generation communications networks providing rich media, collaboration and interoperability, while reducing costs. The modular architecture allows deployment flexibility for locations of different sizes and enables easy scale for future expansion.

One of the first applications for the UX 2000 is a Microsoft-developed survivable branch appliance, or SDA, for Microsoft Communications Server 14. Plans for future releases include support for an integrated version of our SmartSIP application and select third party software solutions that will run on the UX 2000 application server module providing customers with a single-box solution that offers high performance and high reliability in a compact modular design.

Yes, not changing your guidance for the year, is there any change in your guidance for the federal business being flat and then the growth comes from the UC? Can you talk a little bit more about if there was any orders that are delayed that came in the second quarter?

Number of questions there

A number of questions there, John; right now I expect that the federal business will be as we indicated at the beginning of the fiscal year, flat. That could change. One of the things that we did see was an order for some NX5010s that came in and I think there's a good chance that we may get another order for 5010s this quarter.

We have an active program to engage other third party software developers to allow us to license their code and run them as additional third party apps. Unlike everything we've done before this is not only a hardware platform but a platform that will allow us to run third party application software. So we're getting in the app store business also.

The $10,000 to $30,000 range

It'll run in the $10,000 to $30,000 range and it depends on how many modules you put into it. By the time we complete the development I think there will be something like 14 different hardware modules. It has an ethernet backplane architecture and so you can simply drop in other modules to be able to expand the functionality.

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