Veraz Networks, Inc. Q3 2008 Earnings Call Transcript

Veraz Networks, Inc. (VRAZ)

Q3 2008 Earnings Call

November 10, 2008 4:30 pm ET

Executives

Ron Vidal. - IR

Douglas Sabella - President and CEO

Albert Wood - CFO

Analysts

Eric Kainer - ThinkEquity

Greg Mesniaeff - Needham & Company

Ted Jackson -Cantor Fitzgerald

George Notter -Jefferies

Paul Silverstein -Credit Suisse

Todd Koffman - Raymond James

Presentation

Operator

Welcome to the Veraz Networks' third quarter 2008 financial results conference call. (Operator Instructions)

At this time I would like to turn the conference over to Ron Vidal. Mr. Vidal the floor is yours sir.

Ron Vidal

Thank you operator. With me today on today's call are Doug Sabella, Veraz's President and Chief Executive Officer and Al Wood, Veraz's Chief Financial officer. At approximately 4.05 pm Eastern Time Veraz issued a press release with the results of its third quarter ended September 30 2008 on Business Wire. The text of this release is available on our website at www.veraznetworks.com.

We would like to remind you that during the course of this conference call Veraz Management may make forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations, and statements as to the company's future economic performance, financial condition or results of operations.

These forward-looking statements are not historical facts, but rather are based on Veraz's current expectations and beliefs, and are based on information currently available to us. Words such as may, will, expect, intents, plans, beliefs, targets, and estimates; and variations of these words are intended to identify forward-looking statements. By discussing our current perception of the market and making these forward-looking statements we are not undertaking obligation to provide updates in the future.

Veraz's actual results may differ materially from those projected in these forward-looking statements and no one should assume at a later date that these comments from today are still valid. Please refer to Veraz's recent SEC filings for a more detailed discussion of these and other risk factors. Any future product feature or related specification that may be referenced in today's call are for informational purposes only, and are not commitments to deliver any technology or enhancement. Veraz reserves the right to modify future product plans at any time.

I would now like to turn the call over to Veraz's President and CEO Doug Sabella.

Douglas Sabella

Thanks Ron. And thank you for joining us on our third quarter 2008 earnings call. With me today on the call is our CFO, Al Wood. I'll begin the call by providing an overview of our business, products and customers and then I will turn the call over to Al for a detailed description of our financial results and outlook.

As you look at our results for the third quarter its important to recognize that this was a quarter marked by many challenges and opportunities. In the midst of a global economic crisis, our business rebounded to nearly the levels we achieved in the first quarter of this year. At a time when we're also managing the restructuring actions that we announced last quarter, we are very encouraged by the agility and focus our company maintained as we resized the business to these new market realties.

External to the organization we witnessed a solid reaffirmation from our customers as to importance of our solutions to their businesses. Complimenting this reaffirmation was continued success in winning new business with new customers. In fact, this resulted in our Q3 IP bookings being the largest non-Q4 performance in the history of Veraz, as we achieved a book-to-bill of greater than one.

On the revenue side we achieved $23 million of total revenue in the third quarter, up 41% from the $16.3 million we achieved in the second quarter. Our IP business which consists of switching and gateways increased by $15.1 million, while our services revenue grew to $5.7 million. This growth was complimented by an increase in our deferred revenue end-growth in our total backlog.

As we stated last quarter it is our goal to maintain a cost structure for our business that will create long-term value for our customers and shareholders. We implemented the previously announced restructuring initiative, and while they were difficult, they were necessary for the long-term health of our business. These actions also reduced our quarterly revenues breakeven point to approximately $25 million.

Our head-count is currently at 320 and we continue our efforts to further drive down our overall cost structure. We fundamentally believe that our model continues to have significant leverage that will be achieved as we grow through the $25 million breakeven point. The resizing has not slowed down our commitment to our core products.

In Q3 we continued to maintain our product deliverables, customer deployments, and trials and we expect that trend to continue in the coming quarters. At a recent user-group meeting our customers were not only supportive and complimentary of the progress we made from the previous meeting, but in fact commented that we had become more focused and responsive since the restructuring. It is our intention to maintain that focus while continuing our quest to remain lean and efficient.

The shift to IP networks continues to advance because IP networks are the most cost-effective ways to move network traffic of all types around the corner or around the globe. We believe we have the right products, at the right time for the global IP market place and our customers agree.

We can grow during this slowdown because the solutions we offer enable service providers to lower their operating expense, while providing new revenue trends.

Our existing installed base continues to migrate its legacy switches to Veraz and new customers continue to engage with Veraz because they increasingly recognize the competitive advantages we have to offer. Since almost all of our customers are outside the United States, and in some of the fastest growing communication services regions we are at the forefront of observing and capitalizing on global trends that may not be evident if we simply sold our products and services in North America.

Clearly. the growth and importance of mobile networks is well-documented and Veraz is firmly established in this marketplace. According to a report, earlier this year, from the International Telecommunications Union or the ITU there were 3.3 billion mobile phone users at the end of 2007. Africa and Asia are cited as among the fastest growing regions and we have had much success in those regions.

Today our products are deployed in the networks of three of the top five and seven of the top 20 mobile operators in the world, and in nearly 40 mobile operators worldwide. In the aggregate we have approximately 110 IP customers of which 55% are switching and gateway customers, and 45% are pure gateway customers.

Critically important in these market conditions is our bandwidth optimization and switching products, which provides significant operating expense reduction for carriers.

We continue to build upon these competitive advantages as we're actively collaborating with our customers to align our development programs with their goals. A great example of this collaboration is reflected in our efforts around the Session Bandwidth Optimizer or SBO and the IP eXchange or IPX both of which in Q3 we completed successful trials with Tier 1 providers.

During our Q2 earnings call we announced the availability of our SBO. This quarter we have introduced the SBO 3G bandwidth optimization for core networks, providing bandwidth savings of up to 75%, to service providers deploying 3G networks, while maintaining total quality voice service.

The SBO will become generally available in Q4. Furthermore this solution is upgradeable with those wireless providers that have already deployed our 2G solution thus providing easy deployment, and a solid gross margin for Veraz.

We have successfully concluded a trial with a Tier 1 wireless provider and we're now certified for deployment. Complementing this solution is our efforts with the Tier 1 wireless provider to extend this 3G bandwidth optimization capabilities beyond voice and into other content-rich services.

Regarding IPX we have been active participants in the GSMA standard body defining the technical specifications. Mobile operators need to connect to other carriers for national and international roaming. Additionally multi-property carriers need to connect between their properties. Today this is done via TDM or IP with bilateral agreements or private lines. But the future will be session-based and the path is one of migration not flash-cut.

With Veraz's flexible routing and multi-protocol architecture that supports SIP IN applications ,we believe that we're uniquely positioned to lead. To-date we have successfully completed trials with Belgacom and TNZI, and are in active discussions with several Tier 1 carriers.

As we stated during our Q2 earnings call we expect the first orders for our IPX solution the Global Multimedia eXchange or GMX this quarter. Our GMX solution is based upon our extensible C4 platform. This same platform also is enabling us to successfully deploy LNP and our M3UA signaling solutions. An example, is the previously announced switch expansion with Bezeq, in which they are using our platform to address their LNP requirements. This deployment leverages our high performance LNP capabilities and M3UA enabling robust SS7 signaling over IP.

In summary, our investment direction is targeted at wireless IP peering or more specifically IPX; bandwidth optimization for 3G networks; and a continuing broadening of our C4 platform. As it relates to Q4, we have good visibility as a result of our growing backlog. In Q3 we made good progress in all regions.

The EMEA and CALA regions were especially strong having closed million-dollar-plus switching and bandwidth optimization deals with several large Tier 1 wireless providers. The CALA region has step-by-step been engaging in winning business with the largest Tier 1 wireless providers in the region and Q3 was no exception.

To date we have deployed Class 4 switches in two of the largest wireless providers in the region. Digicel has deployed both our Class 4 and SBC throughout its Caribbean properties and a Tier 1 wireless provider has deployed our Class 4 and SBC in two of its properties.

Lastly a Tier 1 provider is standardizing on our gateways throughout the region and to-date we have deployed gateways in four of its properties.

The EMEA region continues to be the largest region and Q3 was no exception. We won several significant Class 4 expansion orders, and also were awarded significant gateway deals in Africa and France.

The North American region continues to show significant improvement from 2007 performance and has some solid wins. We won expansion orders from our commercial and federal channels. In Q3 we sold our second Class 4 switch in SBC for use by the federal government market via a very large government communications service provider.

The Asia-Pacific region has begun to revamp and this is attributable to the new leadership in a rebuilt sales team and the strength of our solutions. We won several significant gateway deals in the subcontinent and also were awarded a Class 4 and SBC contract with a regional provider in Pakistan.

Overall our revenue, customer-mix, and product-mix validated this trend of the Veraz solution. We continue to see new customer opportunity, and growth on the sales front, while we continue to execute our strategy on the product front.

And now I'll turn it over to Al.

Albert Wood

Thanks Doug and good afternoon everyone. We are pleased to be reporting third quarter results. I'm going to start with the financial highlights of the third quarter and then I will provide an update on our outlook for the fourth quarter of 2008.

For Q3 FY '08 total revenues were $23 million, above the Q3 guidance range we previously provided of $20 million to $22 million. The Q3 revenues of $23 million were a 41% increase from Q2 FY '08 and a 29% decrease from Q3 FY '07.

The 41% increase in sequential quarter-over-quarter revenue seen in Q3 was attributable to a combination of factors, including solid bookings in Q3, where book-to-bill ratio was above one. This is the second consecutive quarter in which book-to-bill ratio was above one, thus allowing us to grow our ending backlog at the same time we are posting solid quarterly revenue.

Improved bookings linearity within Q3 that allowed a substantial portion of the Q3 bookings to then convert into revenues in Q3, and capital spending via our customers in our markets, while still restrained compared to what we had seen historically, was somewhat better than what we had seen in Q2.

We continue to steadily expand the already diverse customer base from which our revenues are generated. We had two customers that each accounted for 10% or more of our Q3 revenues VimpelCom at 14%. And 12% from a distributor in Africa that sells to the large regional telecom carriers such as DelTel and Mobilom. Our top ten customers accounted for 58% of our Q3 revenues and prior customers each accounted for $1 million or more of Q3 '08 revenues.

We believe this lack of customer concentration has been, and continues to be a significant advantage, as we are not overly reliant on any particular customer, capital budget, geography or type of network operator.

On a geographic basis, our Q3 FY'08 revenues were 19% from North America and 81% international, as compared to Q2 FY '08 revenues which were 21% from North America and 79% international. The geographic mix of revenues could vary significantly on a quarterly basis, depending on the timing of the completion of projects and other factors.

Our Q3 IP product revenues consisting of our Media Gateway and ControlSwitch family of products were $15.1 million, an increase of 56% from the $9.7 million IP product revenues recognized in the preceding quarter, and a 22% decrease from Q3 FY '07.

Our legacy DCME products revenues were $2.2 million for Q3 FY '08. While this is a substantial decline from the same quarter on a year-over-year basis, the Q3 DCME product sales reflects the decline we've been predicting for sometime. As we have said previously, at this late stage of the product lifecycle of this legacy product, the rate of decline of the DCME product revenues will vary from quarter to quarter. We still expect our DCME product sales to continue to decline over time, while there'll be some periods where the DCME sales are different than our expectations.

Our services revenue of $5.7 million is a 6% increase from the preceding quarter and a 10% decline from the same quarter of last year. As expected, the mix of services revenues continues to steadily shift towards the IP business, which partially offsets the expected decline in the service revenues attributable to our DCME business.

Total gross margin was 59.2%, an increase from 52.7% in Q3 FY '07 and from 43.7% for Q2 FY '08. As we have stated previously the percentage of total gross margin as well as the IP product margin will vary due to the mix of revenues, as well as the characteristics of the specific deals recognized within the period.

For Q3 the higher gross margins were attributable to higher margin expansion projects with existing customers, along with better contract terms. We continue to strive to achieve the right balance between maintaining relatively high gross margins for our products and growing our market share. Despite a challenging economic environment we're pleased to be able to continue to maintain relatively strong gross margins.

As we have stated in the past, while we're often not the low-priced leader in competitive situations, our customers recognize the quality of our products, services, and our overall commitment to their success. While there will be some variability in any given quarter, for our long-term business model we expect to have total gross margins of 55% to 60%, and this quarter's results are consistent with those goals.

For Q3 operating expenses were $18.1 million including $800,000 stock compensation expense, $800,000 restructuring costs, and $200,000 in expenses related to the informal SEC query. As compared to $16.9 million, including $400,000 stock compensation expense for Q3 FY '07, and $19.9 million including $1 million stock compensation, and $2.1 million in expense related to the informal SEC query for Q2 FY '08.

On a non-GAAP basis, our Q3 operating expenses were $16.4 million as compared to $16.5 million for Q3 FY '07 and $16.8 million for Q2 FY '08.

Immediately following our Q2 performance and in anticipation of the developing economic crisis, we stated that we would take immediate measures to streamline our operations and reduce our operating expenses. In July 2008, we began implementing such measures including a reduction enforced designed to bring operating expenses back into line with our long-term business model.

Specifically, we recently reduced our headcount, employees and contractors from 474 to approximately 320, a reduction in force of approximately 32%. The reductions were across the board in all departments, but were primarily focused in engineering in particular our India engineering team and in services.

Due to the streamlining of operations and a reduction in force. we have recognized a one-time restructuring expense in Q3 of $800,000. which is smaller than our previous guidance of $1.2 million to $1.5 million. This additional restructuring and work-related expense in Q3 was largely offset by the expense savings resulting from taking these streamlining measures early in Q3.

Going forward, we believe that such streamlining measures will reduce our quarterly non-GAAP operating expenses to $14 million to $15 million per quarter, starting in Q4 2008.

We have said in our previous earnings call that we would quickly reduce our non-GAAP operating expenses and we expected that we could then lower our breakeven point for cash flow or non-GAAP operating income to approximately $25 million in revenues per quarter. We now have completed the streamlining and [rev] as we had stated and we reaffirm that our breakeven point for cash flow and non-GAAP operating income will be approximately $25 million of quarterly revenue.

Operating loss was $4.5 million, as compared to breakeven operating income for Q3 FY'07 and Q2 FY '08, where we had a $12.8 million operating loss. Other income and expenses and income tax benefits netted to $900,000 negative for Q3, which was driven primarily by foreign exchange losses on some balance sheet items that are denominated in foreign currency from our foreign subsidiaries.

Net loss for the period was $5.4 million or $0.13 loss per share, which was smaller than our previous guidance of $0.17 to $0.14 loss per share. On a non-GAAP basis, net loss was $3.4 million or $0.08 loss per share, which was within the range of the previous guidance of $0.09 to $0.07 loss per share.

Turning to the balance sheet; our cash in short-term investments were $35 million, as compared to $38.3 million as of Q2 FY '08. For Q3 FY '08 we had a negative cash flow from operations of $2.2 million, which is better than the guidance previously provided of $5 million negative operations cash flow. After taking into account the cash flows from investing and financing activities in Q3 our total cash flows were a net decrease of $1.6 million.

In Q3 we did not factor any of our accounts receivable. As compared to Q2 FY '08 in Q3 we grew our deferred revenue by $1.9 million. We decreased our accounts receivable by $3.8 million and we improved our DSO to 132 days as compared to 207 days. On a year-to-date basis we have grown our deferred revenue by $2.9 million and we have reduced our accounts receivable by $7.2 million.

Let me close with a few forward-looking comments concerning an update to the outlook for Q4 FY '08. I remind you that the comments I'm about to make are based on the current indications for our business, which may change at any time. We undertake no obligation to update these comments.

As outlined in our press release issued earlier today, we expect Q4 revenues to be in the range of $22 million to $24 million and a loss of $3 million to $2 million or $0.07 to $0.04 loss per share on a GAAP basis. And on a non-GAAP basis a net loss of $2 million to $1 million or $0.04 to $0.01 loss per share, after exclusion of approximately $1 million expenses related to stock compensation. We expect Q4 net cash use from operations to be approximately $2 million to $3 million.

In summary while we still have many challenges in front of us we are encouraged by the fact that we were able to swiftly trim expenses and take other measures to adjust to the difficult economic times that are now unfolding and at the same time continue to grow our business, through increased bookings, higher revenues, new customer wins and lower costs. We believe that although we're in a challenging environment, we're committed to taking the steps necessary to meet those challenges and deliver value to our customers and our shareholders.

We look forward to updating you with reports of our progress in future calls. We will now take your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Eric Kainer of ThinkEquity. Mr. Kainer please go ahead sir.

Eric Kainer - ThinkEquity

Thank you very much and congratulations on a successful rebuilding quarter here. First question is really about IPX which seems like potentially an area of very strong growth for you. I wonder if you can tell us -- okay you've had a couple of successful trials here with major operators. What should we expect here as we move forward and how quickly do trials in this area turn into substantial revenues?

Douglas Sabella

Okay. Eric, let me take a stab at that because it's always difficult to make a prediction on that but let me kind of parse it into two categories. First of all on the wholesaler's side, which would be folks like the Belgacoms et cetera the TNZIs. We think that's going to move fairly quickly and we're expecting our first orders this quarter and we'll see more we think over the coming three six months out.

But, beyond that we think we're now starting to see interesting opportunities from other Tier 1 carriers that actually also have wireless properties. So if you parse the market between what I'll call the traditional international and LD folks and then folks that have properties that are don't touch each other and need to actually move communications across discarded properties, we see it as a very big opportunity but it's also a longer cycle opportunity. So this intra-carrier opportunity is going to play out over the next year, year-and-a-half, two years and as I said we're actually actively engaged with several very large Tier 1 carriers in that respect.

Eric Kainer - ThinkEquity

Okay. And I'm sure larger opportunities specially take longer--?

Douglas Sabella

Yes.

Eric Kainer - ThinkEquity

To develop and that's just the nature of the beast. Second question is, I didn't hear a new customer count, maybe I just missed it on the call but could you tell us about new customers in the quarter?

Douglas Sabella

We had six new customers and we're now slightly above 110.

Eric Kainer - ThinkEquity

Okay great. Next question is about DoD. I think you mentioned that you had a couple of different deployments there. Obviously you came up with the JITC certification last quarter. I wonder if you could tell us how big the opportunity is within DoD.

Douglas Sabella

Well it's actually two points. First of all the JITC certification, which we received last quarter for our gateways, we're now beginning to get some order flow and its possible we'll get some more this quarter. So that's on the gateway side with DoD. In addition last quarter or two quarters ago, we actually sold a -- [switching that to PC] through an agent into what I'll just called some of the dark spaces inside the DoD or inside the Federal Government.

This quarter actually the switch [Del] that we had in Class 4 in SBC was to a very large service provider that had a very large government business and it is for a broader service offering for the Federal Government.

Eric Kainer - ThinkEquity

Okay. So that's not necessarily DoD then?

Douglas Sabella

No.

Eric Kainer - ThinkEquity

Okay. And then the last question from me is can you give us a feel for how much of the business in quarter was new deployments as opposed to expansion orders?

Albert Wood

Yes. So, Eric this is Al and while we don't break it down that way as far as -- this was a little bit more weighted towards expansion orders as compared to new deployments and that's the reason why the margin improved significantly.

Whenever we got expansion orders, the margin is going to be a little bit better than a brand new deployment. So it was weighted a little bit more towards expansion orders this quarter than what we may have seen over the past three or four quarters.

Eric Kainer - ThinkEquity

Okay. And the fact that those tend to come in a little faster I'm sure was part of the reason that you had the upside in the quarter also?

Douglas Sabella

Well actually I guess at some level you can say that but a lot of the expansion orders we got will actually roll into Q4. So they're kind of September timeframe and we had some very large -- I guess as a for instance we had a very large Class 4 expansion order of a Class 4 Switch with one of the largest -- a large wireless carrier -- a top ten wireless carrier. And we did not take that as revenue in the last quarter, it will become revenue in Q4.

Eric Kainer - ThinkEquity

Okay great. Well thank you and good luck.

Douglas Sabella

Thanks.

Albert Wood

Thanks Eric.

Operator

The next question we have comes from Greg Mesniaeff of Needham & Company. Mr. Mesniaeff, please go ahead.

Greg Mesniaeff - Needham & Company

Thank you. I have kind of a big picture question for you. When you look at your competitors, I mean are you really looking more at legacy switch vendors or at next-generation suppliers such as yourselves?

Douglas Sabella

Well hey Greg. This is Doug and I would just tell you that it's actually a combination of both. So there are times where we are going head-to-head with the usual suspects that are -- will be defined as next-generation and there are quite a few instances where we actually had a -- we replaced a switch this quarter and it was a Nokia-Siemens switch. So we're doing a little bit of both.

Greg Mesniaeff - Needham & Company

I guess, I'm trying to gauge the level of competitive aggressiveness that the legacy vendors are exhibiting at this point in time. Are they becoming perhaps a little bit less aggressive given the overall economic backdrop or are you not noticing any such change?

Douglas Sabella

I would just say, it actually depends on the vendors. Some have actually become more quiet not more aggressive and others have become more aggressive. I would tell you that the -- and I don't want to define them as legacies since they're not, but the Chinese have absolutely gotten even more aggressive over the past quarter or so.

Greg Mesniaeff - Needham & Company

Okay. That's very helpful. Thank you.

Operator

The next question we have comes from Ted Jackson from Cantor Fitzgerald. Mr. Jackson please go ahead sir.

Ted Jackson -Cantor Fitzgerald

Thank you and congratulations on the nice rebounding you did.

Douglas Sabella

Thanks Ted.

Ted Jackson -Cantor Fitzgerald

A couple of questions. The number one is can you just tell me what depreciation and CapEx were in the quarter?

Douglas Sabella

Yes sure. The depreciation is $800,000 is what it was for the quarter and the CapEx was $500,000.

Ted Jackson -Cantor Fitzgerald

And then what was the actual impact of the foreign exchange office just to get a understanding of how -- I mean you're not the only company that this has happened to so I'm just kind of curious is what the magnitude that was.

Douglas Sabella

Sure. I'll break it up Ted into two lines. One would be on the operating expense line. We actually got a very small benefit about almost $200,000 that you use as kind of constant exchange rate, but on the other income and expense line, we actually had a detriment or a charge of $1.2 million is with our charge.

So, and that came from the sharp strengthening of the US dollar right towards the end of the quarter, which really affected some the assets we have been holding in our foreign subsidiaries.

Ted Jackson -Cantor Fitzgerald

Have you put any kind of hedging into -- stop that from happening again? I mean I know the last version (inaudible) those swings are kind of unprecedented. But are we saying that we wouldn’t [recognize] this assets and get into the next quarter?

Douglas Sabella

So first of all we didn't expect it to happen last quarter as far as it's happening this quarter we are taking steps. Yes we are taking steps primarily to reduce the assets that are sitting out there in foreign currency that's being less subject to the movement of [FX].

Ted Jackson -Cantor Fitzgerald

Okay. And then my last question is you've had a difficult second quarter and you'd said that none of the business was lost. It was either slipped into the next quarter or is still out there for you to get. I think that this quarter demonstrates that statements were true. My question would be to the extent possible, if you looked in your quarter, how much of your quarter do you think was a result of some of that business in the second quarter that went away coming through?

And as far as related to that when you're look in your deferred revenues -- if you think about fourth quarter, how much of fourth quarter might be from that and where these variable expect deferred revenue to decline eventually? And I'm done. Thank you.

Douglas Sabella

So Ted I'll give you a kind of qualitative view and then Al could respond with kind of quantitative view. From a qualitative standpoint, we actually as we reported last quarter, our book-to-bill was about 1.4. So we had solid bookings last that quarter and we had again positive bookings -- 1.2 in Q3.

So although our Q2 revenue didn't occur, our actual order flow was actually decent and at some level, I think we got caught in Q2 by just not being able to convert those orders into revenue. And when we look at Q4 we're seeing continued order flow. So I don't think we've kind of eaten off the past. We have thought had the opportunity though to build our back log over the past several quarters. But, I'll turn it from a quantitatively to Al.

Albert Wood

Yes. So dividing up your question into two parts what was the follow-on effect from Q2 into Q3 revenues and without a doubt there was some benefits some halo effect there. It frankly, it's a little difficult to parse through because at the end of Q3 we have significant orders that are not recognized in Q3 and pushed that to Q4. But it was significant.

We think that again if you look at it on a bookings basis, Q2 and Q3 were both reasonably good reasonably strong quarters. There was a timing of revenue recognition issue in Q2 that we're now -- we worked our way through and the strength will be when we look forward to Q4 and this kind of gets to the next part of your question -- is how do we see the world unfolding?

While we're looking forward to Q4, but we're again forecasting or guiding to growth in Q4 as compared to Q3 and our expectation on the deferred revenue side as we've grown deferred revenue, our hope and our expectation is that deferred revenue continues to grow in Q4.

Ted Jackson -Cantor Fitzgerald

Okay. Thanks for the very poor part answered. Again congrats on the quarter and not just the top line but also balance sheet and bringing the receivables down and all that stuff.

Douglas Sabella

Thanks Ted.

Operator

The next question we have comes from Mr. George Notter of Jefferies. Mr. Notter please go ahead sir.

George Notter -Jefferies

Hi guys. Just from a macro perspective, I want to ask about emerging markets. Obviously the big piece of your revenues income is from emerging markets. I guess I was wondering, given all the consternation we've seen and heard about regarding the strength in emerging markets – I mean are you guys seen anything that's of issue in that space?

And then, I guess related to that I was hoping to ask about currency -- with the moving in the US dollar it seems that I would imagine your products to the customer will look a bit more expensive. Can you talk about what that impact is and are you seeing any push back from customers on that? Thanks.

Douglas Sabella

George the last one first. On the foreign exchange, interestingly George first of all we're going to – the strengthening dollar because we have a lot of OpEx overseas either in Israel or Europe et. cetera, where we expect to see some good operating income benefits in Q4, so it will continue to drive down our expense side.

On the revenue side we always price in dollars anyway, so I don't think that we would see a direct impact, but it's safe to say that the emerging markets are all getting as dicey as the US markets and we're kind of seeing people really think about what they're going to buy and how their going to buy and they are scrutinizing their CapEx considerably where you would have just gotten for instance a business case for a gateway for them with optimization that could payback much quicker. There's a lot more business case analysis going on with all of our customers.

George Notter -Jefferies

Got it. And I also want to ask about linearity in the quarter. I mean the DSO calculation obviously came down a fair amount. I guess, I was trying to figure out what the pattern of shipments might have looked like. Would it be a third, a third, a third across the three months or more front end loaded -- any comment there will be great. Thanks.

Albert Wood

Yes. So, let me give you a comparison to three areas. One is what we've seen historically then what we saw in Q2 and then what we saw in Q3. So basically what we had seen historically was -- it's always the last month at any given quarter is always going to be the best month for us. And so it's really it's more 20% in the first month, 25% to 30% in the second and then the balance in the third month.

In Q2, we actually had a much more back-end loaded. In Q3, we actually started returns to our old historical fact. So we expect -- look our buyers are smart, our customers are smart and they're going to hold out a little bit to the end of the quarter -- in the last month in the quarter, and we don't expect that ever to change hugely but we had a better linearity in Q3 then we did in Q2.

Ted Jackson -Cantor Fitzgerald

Got it. Great thanks.

Operator

Your next question we have comes from Paul Silverstein of Credit Suisse. Mr. Silverstein please go ahead, sir.

Paul Silverstein -Credit Suisse

Hi. Good afternoon guys a couple of questions if I might? First off obviously I assume what you've seen in the month of October is reflected in the guidance for the end of the year, but Doug can you give a little more insight in terms of what you saw in October vis-a-vis what you saw in September?

Douglas Sabella

First off just a little color. Actually as Al said, July August and September were all fairly good months and there was good linearity in it. In October, first of all we had the Jewish holiday so my Israel office was shutdown, so it slowed things down a little bit anyway but we didn't see a slowdown in terms of pace of orders et cetera.

And in fact we got several significant orders, some from very large wireless providers that kind of gave us -- we had actually lifted our production up in Q4. So, right now we have not seen that slowdown but I think we have to be blind not to expect some hesitancy et cetera.

Paul Silverstein -Credit Suisse

Okay. And then, on the SBO opportunity that you've been talking about, can you give us some sense -- is it too early to talk about what the potential revenue opportunity is for any one Tier 1 you know you spoke and I think that you mentioned talk on TNZI and Belgacom -- a couple of others. Can you give some sense for how big these opportunities could be overtime?

Douglas Sabella

So on the Belgacom and the TNZI that's the IPX side. On the SBO side, which is the bandwidth optimization for 3G networks, which is really MSC to MSC solution. We have one wireless provider where we think it's probably upwards of $7 million to $10 million opportunity just for them alone for that particular piece of network and we believe that beyond the MSC to MSC there were opportunities around backhaul and traffic et cetera that the same technology will leverage.

Paul Silverstein -Credit Suisse

Right. And I apologize, the SBO that's starting to ship?

Douglas Sabella

Yes. It's shipping as we speak its beginning to ship general availability.

Paul Silverstein -Credit Suisse

Okay. And Al the five customers you say about $1 million, I forget whether that was orders that you received or revenue that you booked in the quarter, but how did that compare to the previous quarters?

Douglas Sabella

So, it's roughly comparable to what we're seeing in other quarters. There was one 14% customers which was VimpelCom, so that was well over $3 million worth of revenue that we recognized. So that was a bit larger.

We generally have customers that are 10%, 12% so this was a bit higher and some of that came from -- there was a mix of orders that came from prior quarters and we recognize now plus orders that we got in Q3.

Paul Silverstein -Credit Suisse

Okay. And finally, going back to your comment about the Chinese getting more aggressive, can you give a little bit more color on that? It seemed you were talking about pricing, can you give any quantification on what you're seeing out there and is that limited to emerging markets that become a more global any color?

Douglas Sabella

First off I will tell you it's very heavily in the Asia pacific region and especially in India where we actually did loose one deal in Q3 and that was we've thought it would be priced pretty aggressively, and we lost by a significant amount because they pretty much bought the business in terms of getting their capacity et cetera. So they're being very aggressive in India. A little bit in Brazil we are seeing them, but in Africa also they are starting the pop-up quiet significantly.

Paul Silverstein -Credit Suisse

Okay. Thank you.

Operator

(Operator Instructions) The next question we have comes from Todd Koffman of Raymond James. Mr. Koffman please go ahead sir.

Todd Koffman - Raymond James

Thank you. It sounds as though in September and some of the December quarter you are seeing some recovery from the short fall you experienced in the June quarter and you're still, it's quiet bit off from the IP product side, the level of business you are doing in '07.

My question is -- as you talked to your customers, what do you think as you get back to sort of a more normalized level of business as you lookout into 2009 -- is there any clarity as to the customer demand looking out a little bit further since right now it seems like it's more of a recovery or recapture from shortfall?

Douglas Sabella

And Todd I would frame it this way, first of all from a booking standpoint, it's kind of a steady. In fact Q3, as I indicated was actually the best non Q4 IP bookings quarter we've ever actually had. Although it didn't show up in revenue it was the best IP booking quarter's non-Q4.

I would say though that our customers that we've talked to have been very clear that CapEx will be kind of flat year-over-year. We haven't heard people talk about shrinking CapEx but they are very, very clearly saying CapEx will not be growing.

Todd Koffman - Raymond James

And then, I'm going to guess that your IP product revenue for 2008 will end up being down versus 2007 maybe I'm just trying to eyeball it. I think that's probably a fairly good bet and so you're thinking that at least for your products as well it will be kind of a flattish environment that you're operating in for 2009 off the down in '08?

Albert Wood

Todd this is Al and first of all let's answer the first part. With respect to IP product total revenues for the year '08 versus '07, yes we will be down. It depends obviously on the mix of the revenues we'll be pulling in the Q4 but by any measure yes we will be down and it will be a significant drop.

We really haven't put any guidance forward with respect to 2009, and we're really still trying to get a read on the polls of everything from the macro-economic conditions of what the customers are going through to more than a micro-economic and individual business condition of the regions in which we operate. We have a better feel when we do have our conference call for Q4 and we'll be happy to update you then.

Douglas Sabella

And the only thing I would add to that is that we'll get more color in Q4, but this year we obviously don't have any DCME, so our over all revenue is down even more. It's kind of amplify because of that but in actuality our order flow for IP in 2008 year-to-date is better than it was in 2007.

Todd Koffman - Raymond James

Thank you very much good luck.

Albert Wood

Thank you.

Operator

Gentlemen it appears there are no further questions at this time.

Douglas Sabella

That's great. We want to thank all participants and all the thoughtful questions and look forward to reporting in our fourth quarter of 2008. Thank you very much.

Operator

Thank you sir. Thank you all very much for participating in Veraz Networks conference call. This concludes today's event.

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