Acme Packet Inc Q3 2008 Earnings Call Transcript

Dec. 1.08 | About: Acme Packet, (APKT)

Acme Packet Inc. (NASDAQ:APKT)

Q3 2008 Earnings Call

November 6, 2008 5:00 pm ET

Executives

Andy Ory - President and Chief Executive Officer

Peter Minihane - Treasurer, Chief Financial Officer

Brian Norris - Director of Investor Relations

Analysts

Paul Silverstein - Credit Suisse

Sanjiv Wadhwani - Stifel Nicolaus

Vijay Bhagavath - Deutsche Bank

Tom Champion - JP Morgan

Greg Mesniaeff - Needham & Co.

Catharine Trebnick - Avian Securities

Ted Jackson - Cantor Fitzgerald

Troy Jensen - Piper Jaffray

Operator

Good afternoon ladies and gentlemen and welcome to Acme Packet’s third quarter 2008 earnings release conference call. At this time all participants are in a listen-only mode, so later we will conduct a question-and-answer session and will give instructions at that time. During the Q-and-A portion of today’s call, we ask participants to limit themselves to one question and one follow-up question. (Operator Instructions)

I’d now like to introduce your host for today’s call, Brian Norris, Director of Investor Relations for Acme Packet; please go ahead.

Brian Norris

Thank you, Bob. Good afternoon everyone and welcome to Acme Packet’s third quarter 2008 earnings release conference call. With me on the call this evening are Andy Ory, our President and Chief Executive Officer; and Peter Minihane, our Chief Financial Officer and Treasurer.

The format for today’s call is as follows: Andy will begin with an overview of key business highlights and market opportunities. Peter will then review the details of our financial results and discuss our outlook for the balance of 2008. We will then open the call up for Q-and-A.

I’ll begin by reminding you that statements made during this call that are not historical facts may be forward-looking statements within the meaning of Section 27(a) of the Securities Act of 1933 and Section 21(e) of the Securities Exchange Act of 1934. Such forward-looking statements may relate among other things, to our position in the session border controller market; our expected financial and operating results, including expected revenue and earnings per share for the fourth quarter of 2008 and full year 2008 on both a GAAP and non-GAAP basis; our ability to build and grow Acme Packet; the benefits of our products; and our ability to achieve our goals, plans and objectives.

Such forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated.

A discussion of these risks, uncertainties and additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statement, is contained in our recent filings with the SEC, including those factors discussed under the caption Risk Factors in such filings. Investors should not place undue reliance on such statements, which are current only as of the date they are made and we disclaim any obligation to update them.

All results and projections we review this evening are on a non-GAAP basis unless otherwise and explicitly described as GAAP. During this call, we will be referring to non-GAAP net income and non-GAAP net income per share, which are non-GAAP financial measures that exclude stock based compensation expense for all periods presented.

A copy of our earnings press release, along with the accompanying income statement, balance sheet, as well as operating statistics and a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is available on the Investor Relations section of our website at www.ir.acmepacket.com.

At this time, I’d like to turn the call over to Andy.

Andy Ory

Thank you Brian and good afternoon everyone. Before we begin, I’d like to formerly welcome Peter. Peter has been onboard for about seven weeks now. Over the last 35 years, Peter has served as CFO of several high-growth, high-tech companies, for both publicly traded and private entities. We’re looking forward to having each of you meet him in the weeks and months ahead. Peter welcome.

We’re pleased to report that we achieved our financial and operating objectives for the third quarter. Third quarter revenues were $28.4 million, up 11% sequentially from the second quarter of 2008. Our top line results reflect the addition of over two dozen new customers in the third quarter as well as the continued expansion of existing deployments within our customer base.

Gross margin was 80% which reflects the strength of our competitive position as well as our value proposition. Operating margin was 17% in the third quarter, up from 10% in the second quarter, again demonstrating the leverage in our business model. We believe we are well on the path to returning to our long-term target operating model of 24% to 26%. Non-GAAP EPS was $0.05 in the third quarter, inline with consensus analyst expectations.

Our balance sheet continues to be a source of strength. We ended the quarter with $127 million in cash and no debt. Our deferred revenues grew sequentially from the second quarter of 2008, primarily reflecting the timing of product shipments. We generated another $2.5 million in cash flow from operations in the quarter and we repurchased 4.0 million shares of our stock for $22.6 million under our previously announced share repurchase program.

Beyond our financial results, I want to take a few minutes to describe why we believe we are well positioned for long-term growth in a very large market opportunity. The world is undeniably moving to IP, the Internet Protocol, for the delivery of all services and applications. Data is already there. All data services and applications use IP for transport, over the Internet, over service provider wire line, cable and wireless networks, and over private enterprise networks.

Voice however, is only at the very beginning of this migration to IP. Furthermore, other advanced forms of interactive communication, video conferencing, telepresence, the unified communications, multimedia communications and collaboration, will all require IP for transport. Our session border controllers enable the trusted first class delivery of these services and applications across IP network borders.

We are also discovering new opportunities for our products and technologies. Acme Packet is evolving from a pure focus on only session border control for interactive communications such a voice to a wider focus on border control for session based services and applications, both voice and data. This wider focus is significant and is the result of requirements emerging from our broad customer base.

In February, we introduced a multi-service security gateway or MSG for fixed mobile convergence or FMC services. This product controls IP-sect encrypted sessions supporting both data and voice services as they traverse the untrusted internet and Wi-Fi networks. In March, we announced deployments of our session routing proxy. This product selects the best border point for session crossing into another network on their path to a subscriber.

In our latest software release, we support a new session control protocol, RTSP or Real-Time Streaming Protocol, to deliver streaming video for services like pay per view. We are even seeing the emerging use of our products in the delivery of IPTV using an IMS service infrastructure.

These are examples of the broad opportunity for our products and technologies to participate in the build out of the emerging session layer. We are well positioned to capitalize on this opportunity based on our current market leadership.

Now, let me take a moment to review current activities and trends in our existing market segment. We are the leading provider in the SBC market with over 6,000 systems deployed in 85 countries and over 580 customers, including 84 of the top 100 Tier-1 service providers in the world.

In the Tier 1 space, we are very well positioned. Today, we have over 160 Tier 1 customers, some of which have as many as 10 to 15 separate projects using our solutions. We have nearly 100 IP multimedia subsystems or IMS deployments worldwide. IMS was initially focused on replacing TDM networks with IP networks, primarily focused on residential services. IMS has been more complex than originally envisioned to architect, test and deploy. As a result, IMS deployments are still in their early stages. In contrast, SIP trunking is simpler and has been growing faster.

We have also built a strong market position in cable IP voice services. Today, eight of the 10 largest North American cable companies are Acme Packet customers and we’re seeing growing traction in the European cable market as well. Growth in the cable market has been primarily driven by new subscriber growth. Cable companies, both here in the US as well as in Europe, are moving to IP interconnect using SBCs and core SIP routing using session routing proxies.

Beyond our traditional markets, we continue to invest and see growth in emerging market opportunities, including wireless, enterprise and contact centers. In the emerging wireless market, fixed WiMAX using session border controllers is happening right now, in developing countries as an alternative to fixed lines for residential and business services.

In addition, CDMA and GSM wireless providers are beginning to interconnect using SBCs and core SIP routing using session routing proxies to address the growing demand for bill-and-keep services. As we announced in June, we are participating in the creation of settlement-based interconnects like those of the GSM association IP Exchange.

Another driver within wireless is the growing demand for fixed mobile convergence or FMC services. Measures of our progress here are the growing number of RFPs, lab evaluations and trials for services to SEMCO cells and dual-mode handsets using our MSG and access SBCs. An additional driver is the growing demand for 4G services like mobile WiMAX and LTE. We continue to be actively involved in many of the architectural discussions and decisions among our customers and prospects.

Another early market opportunity is in the enterprise, where the primary driver is SIP trunking. Momentum is building in the US now that SIP trunks are finally available from Tier 1 providers. The value proposition for an enterprise to adopt SIP trunking solutions includes a very compelling ROI. Europe trails the US market in terms of enterprise adoption, but we are seeing signs that service provider and enterprise investments will be made in 2009 and beyond.

We’re also excited by the recent appointment of Mike Thurk to our Board of Directors. Some of you may know Mike from his time as Chief Operating Officer of Avaya. We look forward to Mike’s contributions and council as we continue to expand our reach further into the rapidly emerging enterprise market.

Another emerging market opportunity for us is the contact center market. Here again, SIP trunking is driving adoption. Early customers have included the contact center operations of our Tier 1 service providers throughout North America, Europe, as well as Central and Latin America. Other opportunities for our solutions within the contact center market are the financial services, retail and insurance.

Our leadership position in our traditional wire line and cable markets and our early successes in emerging markets such as wireless, enterprise and contact center, are based on our unique strengths in the marketplace. The strength of our solutions and our singular focus on the opportunity at hand has led to both market leadership and customer acquisition.

We pioneered the market nearly 10 years ago and we are the leading innovator in the SBC market. Our Net-Net 4250 is the industry’s most widely deployed solution and continues to be considered by many as the standard among Tier 1 service providers. Our newer Net-Net 9000, our high-end platform, offers the highest levels of functionality, performance capacity and availability in a 7U hardware chassis.

We’re also very excited about our latest product release, our Net-Net 4500, introduced just six weeks ago. The Net-Net 4500, delivers dramatic performance capacity improvement over the Net-Net 4250. This additional speed and capacity is critical as our customers support an ever-increasing number of users and volume obsessions.

Each of these platforms, the Net-Net 4250, the Net-Net 4500 and the Net-Net 9000, are available in three different product configurations: as a session border controller or SBC, for multi-protocol border control; as a session routing proxy or SRP, for core chip routing; and as a multi-service security gateway or MSG, for fixed mobile convergence configuration.

Standing behind every one of our products is a committed and skilled workforce dedicated exclusively to this solution set. Based on the collective strength of this team, we look forward to continue to set the pace for innovation within the industry.

An important element of our success to date has been our distribution strategy. Within the service provider space, wire line, cable, and wireless and our emerging markets, enterprise and contact centers, we have coupled a direct-touch model with broad distribution partnerships, that’s important to our customers, who rely on both our expertise in the market and our ability to work with their other infrastructure providers.

We are well positioned for long-term growth in all of these markets. We remain optimistic about the level of strategic discussions we are having with our customers and prospects in the wire line, cable, wireless, enterprise and contact center markets.

For a closer look at our third quarter results and our outlook, let me turn the call over to Peter.

Peter Minihane

Thank you Andy and hello everyone. It’s a pleasure to be with you this afternoon. I’ll review our financial results for the third quarter and update you on our outlook for the fourth quarter. As a reminder, all financial results and projections we review this afternoon related to our statement of operations are on a non-GAAP basis unless otherwise and explicitly described as GAAP.

Our discussion of year-over-year changes and our financial results compares the third quarter of 2008 to the third quarter of 2007. Our discussion of sequential changes and our financial results compares our financial results for the third quarter of 2008 to the second quarter of 2008. Finally, all earnings per share results we review this afternoon are on a fully diluted basis.

I’ll begin with a brief review of our statement of operations for the third quarter. Revenues were $28.4 million in the third quarter, an increase of 11% sequentially and a decrease of 4% year-over-year. Product revenues were $22.3 million in the third quarter, an increase of 12% sequentially and a decline of 10% year-over-year.

The sequential growth reflects an increase in the average selling price of systems sold or ASP, as well as an increase in the quantities of systems sold. The increase in ASPs primarily reflects the changes in our product’s configuration mix, as customers continue to migrate towards higher-capacity systems as well as an increase in the level of software and license upgrades.

Maintenance, support and service revenues grew to $6.1 million, up 7% and 25% year-over-year. This growth, both on a sequential and year-over-year basis reflects the increase of maintenance and support fees associated with the growth in our installed products. Our distribution split of third quarter revenues was 44% direct and 56% through our channel partners.

Two channel partners each accounted for 10% or more of our total third quarter revenue; Alcatel-Lucent and Nokia-Siemens networks. In the aggregate, they represented 29% of our total revenues for the third quarter. Alcatel-Lucent and Nokia-Siemens networks, like many of our distribution partners, represent dozens of end user customers.

One direct end user customer accounted for 10% or more of our total third quarter revenue and that was Sprint at 13%. This marked the first time since the first quarter of 2007 that Sprint represented more than 10% of our total quarterly revenue. This also marked the second time this year that a direct end user customer has represented more than 10% of our total quarterly revenue.

Geographically, 53% of our total revenues came from the United States and Canada and 47% from our international customers. Gross margin was 80% in the third quarter of 2008, compared to 79% in the second quarter of 2008 and 81% in the third quarter of 2007. The increase in gross margin sequentially reflected an increase in ASPs and an increase in the number of systems sold.

Total operating expenses in the third quarter was $18.2 million, an increase of 2% sequentially and 16% year-over-year. We continue to remain cautious in our headcount growth and discretionary spending given the uncertainty of the financial markets. Total other income was $726,000, compared to $1.6 million in the third quarter of last year, reflecting lower average interest rates despite the increase in our investable cash balances. Our effective tax rate in the third quarter was 37.6%, virtually unchanged sequentially.

Net income for the third quarter on a non-GAAP basis was $3.4 million or $0.05 per share, compared to $2 million or $0.03 per share in the second quarter of 2008 and $6.7 million or $0.10 per share in the third quarter of last year. Net income for the third quarter on a GAAP basis was $2 million or $0.03 per share, compared to $816,000 or $0.01 per share in the second quarter of 2008 and $5.5 million or $0.08 per share in the third quarter of last year.

Non-GAAP net income differs from GAAP net income as it excludes stock based compensation charges, net of tax of approximately $1.3 million or $0.02 per share, in the third quarter of 2008, compared to $1.2 million or $0.02 per share, in the second quarter of 2008 and $1.2 million or $0.02 per share, in the third quarter of last year. Headcount at the end of the third quarter was 377, compared to 359 at the end of the second quarter and 323 at the end of the third quarter of 2007.

Turning to the balance sheet, we ended the third quarter with cash and cash equivalents of $127 million, compared to $147.9 at the end of the second quarter of 2008 and $136.4 million at the end of 2007. The sequential and year-to-date decline reflects the activity under our share repurchase program.

With regard to the stewardship of the company’s cash resources, we have always maintained a conservative investment policy and are invested primarily in money market funds which are focused on high-grade US Government securities.

Cash flow from operations was $2.5 million during the third quarter and $21.6 million during the first nine months of the year. Cash flow used in investing activities reflects total capital expenditures of $1.1 million during the third quarter and $3.2 million during the first nine months of the year. Cash flow used in financing activities was $22.4 million during the third quarter and $27.8 million during the first nine months of the year. This primarily reflects the activities under our share repurchase program.

In February 2008, the Board of Directors authorized the repurchase of up to $20 million of our common stock. The plan was subsequently expanded in August, by another $35 million to $55 million in the aggregate. During the third quarter, we repurchased approximately 4 million shares for $22.6 million.

Additionally, since the end of the third quarter and through and including the close of business on November 5, 2008, we repurchased an additional 1.4 million shares for $6.5 million. In the aggregate, since implementing the program in February, we have repurchased approximately 6.3 million shares with $35.8 million, leaving $19.2 million available for repurchase activity under the plan. Day sales outstanding or DSO was 86 days at September 30. This is consistent with last quarter and within our target range of 80 to 90 days.

Inventory at the end of the third quarter was $9 million, up from $7.6 million at the end of the second quarter, reflecting previously forecasted demand growth for Q2 and Q3 as well as the build out associated with our recently introduced Net-Net 4500 product offering.

Finally, deferred revenue at the end of the third quarter increased to $14.8 million from $14.5 million at the end of the second quarter. This growth primarily reflects the timing of product shipment.

To help you better understand how we are looking at our growth plans, let me close with a few forward-looking comments. 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 are updating our full year outlook for 2008. We expect revenues in 2008 to range between $116 million to $118 million. We expect sequential growth in the fourth quarter, with total revenues ranging between $30 million to $32 million.

We continue to expect full year diluted non-GAAP net income to be between $0.23 to $0.25 per share unchanged from our earlier guidance. We expect diluted non-GAAP net income in the fourth quarter to range between $0.05 to $0.07 per share. We are continuing to model full year gross margins in the upper 70’s and the full year operating margins in the upper teens. We now expect full year interest income to be between $3.4 million to $3.6 million, up slightly from the $3 million we had previously forecasted.

Our earnings projections assume a non-GAAP effective tax rate of approximately 35% for the full year and 29% in the fourth quarter, reflecting the reinstatement of the R&D tax credit. At present, we expect our weighted average diluted share count to be approximately 63 million shares for the full year and 59 million shares for the fourth quarter.

We are continuing to forecast full year GAAP net income of between $0.14 to $0.16 per share, unchanged from our earlier guidance. We expect fourth quarter GAAP net income of between $0.02 to $0.04 per share.

Our estimate for non-GAAP net income in 2008 differs from GAAP net income as it excludes estimated stock based compensation expense net of taxes of approximately $5.2 million to $5.3 million, or $0.09 per share, which includes approximately $1.7 million or $0.03 per share in the fourth quarter.

During our next call in February, we will share some thoughts as to our business outlook for the first quarter of 2009. We look forward to updating you on our progress during future calls.

Again, it’s a pleasure to be with you this afternoon and with that, I’ll turn the call back over to Brian.

Brian Norris

Terrific! Thank you, Peter. Bob, at this time we’re going to open up the call for Q-and-A.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Paul Silverstein - Credit Suisse.

Paul Silverstein - Credit Suisse

I guess the most obvious question would be Cisco last night, Sonus this morning, the world’s collapsing around us; you guys put up pretty solid numbers. Andy, what are you seeing that gives you confidence, not just for the fourth quarter? I recognize you’re not giving us guidance for ‘09 right now, but as you look out to ‘09, it’s not that far off, what are you seeing in terms of the macro picture and the spending plans by your customers and are you concerned, as budgets are being reset, that ‘09 could be a very different picture?

Andy Ory

We are always watchful about what’s going on. We look at Cisco, we look at Sonus and we look at our own results and we try and figure out where the differences are and why. I think as it relates to companies that make gateways and soft switches, we don’t make those and I think that market is going to continue to come under pressure and so it’s hard for me to start to draw too many analogs there.

I think Cisco has an awful lot of exposure to things other than the focused market segment we have of NGN networks at our service providers and enterprises. I imagine that if we sold a lot of routers and switches to the financial services industry that would be a pretty tough row to hoe right now.

I think in a broader sense, we look back and try to understand; we’re seeing all these CapEx freezes and we’re still doing business with a lot of these service providers and I think the reason behind that is that the CapEx freezes tend to impact budgeted programs, but programs that are success based, that are either lower in cost of doing business with a quantifiable ROI or are involved in real revenue generating activities are things that they continue to invest in, which is why I think you see a company like Sprint continue to purchase products in Acme Packet, even though I think on the CapEx and OpEx side, they’re probably being a bit more conservative.

The same thing is true on the enterprise side. As we get more invested in the contact center and enterprise side of the market, we’re seeing real quantifiable ROIs, that in many cases you can measure in months and when that happens, these people are making tactical decisions that have strategic implications and it just makes me feel like we’re well positioned.

Now, that being said, I think the thing to be careful of and we’re very careful of that, and Peter may comment to his part; is that things can turn off pretty abruptly as well and so we’re cautiously optimistic and we’re working hard to make sure that we continue to invest, continue to increase our coverage, continue to focus on markets that make sense, but protect ourselves in the event that disposition changes suddenly, but we have no evidence of that right now.

Paul Silverstein - Credit Suisse

Andy, if I may, if I could shift the question a little bit, because in all fairness it’s not that you’ll haven’t seen an impact. I mean, after all your revenues are down 4% year-over-year and September off of a 5% decline in June. It’s not that you haven’t seen an impact relative to your previous growth directory of 25% plus.

I guess the heart of my question or the thrust of my question is when you look beyond December into ‘09 and given the magnitude of the macroeconomic problems, the closing of the credit markets, the fact that it’s a pretty safe bet that budgets will be significantly different next year than they were this year, and especially in the first half of this coming year, given the visibility etc.

Have you seen in the communications that you and your team have had with your customers; have you heard and are there any anecdotal evidence that would give you cause for significant concern that next year is going to be dramatically different than what you’re looking at for the fourth quarter?

Andy Ory

No Paul, we have not. I would say that to provide color beyond that, is that I don’t trust anybody who tells me they know the next 90 to 180 days and I think that we have to counterbalance what our feet on the street are telling us with some level of caution to make sure that we’re always on solid footing, but no, I have not seen anything in specifics that would indicate that.

Operator

Your next question comes from Sanjiv Wadhwani - Stifel Nicolaus.

Sanjiv Wadhwani - Stifel Nicolaus

Andy I guess just following-up on that question; typically, when you go into a quarter, if you could just remind us, what kind of visibility that you have and how much business sort of needs to be completed? If I remember correctly, most of it is turns, right?

Andy Ory

That’s correct.

Sanjiv Wadhwani - Stifel Nicolaus

So I guess right now, sitting over here, visibility into what your customers’ spending patterns might be is fairly limited as we speak.

Andy Ory

Well, we have a fair bit of visibility, but there’s a big difference between something that they say is going to happen versus a purchase order that we receive. So it’s the last 10% of that effort where most of the risk exists. I won’t say that our bookings that we carry into the quarter are insignificant. They are a minority and the turns are a majority, but part of what we’re working on in Q3 and Q4 and beyond is to try and reverse that trend and it’s not going to happen in 90 days, but I think we’re doing the right things to make that happen.

Sanjiv Wadhwani - Stifel Nicolaus

But you didn’t see anything in the last I guess month or so that causes you to take a pause and maybe adjust numbers, I’m guessing, because you’ve obviously given some decent guidance for the December quarter.

Andy Ory

No, we haven’t. I think in the spirit of your question and also in Paul’s; I think that IMS related deployment and some of the European deployments are slower than elsewhere in the world. So I think that it’s unclear to me whether or not Europe is just six months behind the US in going through whatever it is they’re going through in the next generation network communication marketplace and that’s obviously factored into what we’ve talked about on the August 7 call, so there’s no new news there, but I’d like to highlight that because that may help you and Paul as you try and synthesize what’s going on.

Sanjiv Wadhwani - Stifel Nicolaus

And this was specifically in Europe, you said?

Andy Ory

Yes.

Sanjiv Wadhwani - Stifel Nicolaus

Okay and then one question for Peter. On the inventory, should we expect that to drop coming out of the December quarter or should we be expecting higher levels coming out of the December quarter also?

Peter Minihane

I think what we’re attempting to do today is put a longer term plan in place to take our inventory churns up to a best-in-class result; however, I think realistically, as a result of our Q2 shortfall and therefore the orders that we had to accept from our subcontract manufacturers in Q3 and in Q4. I think at best we’ll have a slight decline in inventory at December 31 and I think we will then put a program in place to try to again improve the churns from two times a year to three times to four times to five times.

Operator

Your next question comes from Brian Modoff - Deutsche Bank.

Vijay Bhagavath - Deutsche Bank

Hi, this is Vijay Bhagavath calling on behalf of Brian. A question and a follow-up; the question is, when it comes to the SBC deployments and the cable operators and the wireless operators, do you see the inflection points for those like the second half of next year or is it pushed into 2010?

Andy Ory

It’s a good question. I think it’s hard for us to provide much comment on ‘09. I think part of it’s because we’ve been working really hard to get a good handle on ‘08, which I think that we have and Peter’s going to be involved for the first time in our strategic planning for ‘09 and we’re starting the early phases now of going account-by-account, region-by-region and market-by-market for ‘09, but I have not seen that data yet.

Vijay Bhagavath - Deutsche Bank

So what’s the answer to the question in terms of the inflection point?

Andy Ory

I mean, I’m not hiding behind Reg FD or anything. You’re asking me to prognosticate when I think I’m going to see material pickup in the wireless and cable space. As near as I can tell, I listened to some of our large cable customers talk about their voice subscriber adds and they’ve been pretty healthy adds, so I think that that space is probably pretty healthy and will continue to grow.

On the wireless side, we are seeing more and more of our businesses come from the wireless market. We’ve seen WiMAX deployments globally really pick up and we’re excited about that. That revenue is not insignificant, so it’s in the seven figures for ‘08 and I will expect that to really pick up in ‘09.

People are talking about investing in wireless access infrastructure applications and I suspect we’ll play a role in that as well. It’s hard for me, at this point to try and comment on what type of growth by segment at what period of time in ‘09. I clearly do expect this market to continue to accelerate in ‘09, but I really couldn’t give any more guidance than that because I just don’t have the data.

Vijay Bhagavath - Deutsche Bank

Is it mostly due to lack of visibility or just things you don’t know or…?

Andy Ory

Well, I mean I would say that the next 90 to 180 days are unusually opaque and I think that the disruption in the financial market is causing a lot of people to try and figure out what’s going to happen. The results and the way we’re looking at the next three months seem to be in contrast to traditional VoIP suppliers like Sonus and a company like Cisco, with IP infrastructure and we’re trying to understand that difference.

So reconciling the next 90 days to 180 days, we might have a shot at, but to try and comment on second half of ‘09 growth by segment, I think I’d probably be taking such a swag that I might be doing you a disservice at this time, but I would expect that we’d have a lot more data for you on the late January, early February call.

Vijay Bhagavath - Deutsche Bank

Now, in terms of the follow-up, from an RFP perspective, are you seeing RFPs which kind of explicitly ask for SBCs or are they kind of some integrated VoIP upgrade where SBC’s one component of it; any thoughts on that?

Andy Ory

I’m not sure I understand the difference. I mean, we are seeing lots of RFP activity where they ask for SBCs. Sometimes there are deals that we’re involved in that are just session border controlled and sometimes they’re looking at session border controllers as part of an overall architecture and infrastructure deployment scenario, where there’d be lots of other elements there and either way we’re comfortable.

Vijay Bhagavath - Deutsche Bank

So is it really a function of the size of the operator; like a TR1 would ask for more of an integrated or a bundled solution versus a TR2 or a TR3 would just ask for an SBC a la carte?

Andy Ory

When you say a bundled solution, you’re saying SBC element as part…

Vijay Bhagavath - Deutsche Bank

As part of a bigger upgrade, yes; so that the SBC wouldn’t be kind of explicitly asked per se.

Andy Ory

No, the SBCs are pretty much explicitly asked in almost all the activities that are going on, at this point.

Vijay Bhagavath - Deutsche Bank

So you’re seeing that across the board, tier 1, tier 2, tier 3?

Andy Ory

Yes.

Operator

Your next question comes from Ehud Gelblum - JP Morgan.

Tom Champion - JP Morgan

Hi, it’s Tom Champion, subbing in for Ehud today. It looks like gross margins had a nice up-tick in the quarter to above 80%, which is I guess about 150 point sequential increase. So curious if you could describe what was the source of the gross margin upside and the results of the quarter also seem to be above full year guidance. I’m curious if that implies a sequential downtick in the fourth quarter.

Andy Ory

No. I mean, I would posit that it’s statistically not relevant; that year-over-year, you’re looking at an 81% versus and 80% and sequentially quarter-over-quarter, it’s 79% to 80%. I mean, they’re all within basically 200 basis points. I think that what is statistically relevant is where we’ve been able to keep our gross margins and I think that’s a function of the value that we provide and I think that’s the disposition we have in terms of competition. I think that we’re able to fare well in both those environments and we’re able to realize, I think an appropriate level of value for the solutions that we provide.

We’ve historically modeled upper 70s for gross margin. I don’t know, as people build models, you always want a couple of percentage points of wiggle room. I’d hate to deliver 78%, 79% gross margins and have you think that that is something that is systemic in what’s going on with our business because it likely wouldn’t be.

When we went public, we were at the 72% to 74% gross margin, that’s where we thought it would settle out and it hasn’t. So I think that the guidance that we give is going to continue to be the upper 70s, but we’re certainly going to shoot for something with an eight in front of it.

The thing that impacts our gross margin more than anything else is the software content; either the number of protocols that someone would buy and/or the session capacity and as we have 160 Tier 1 globally and as people are making money with our products and the revenue and the traffic is ramping up, they buy bigger and bigger platforms and as they do that, there’s a higher software content and that’s principally what allows us to maintain these kinds of margins.

Tom Champion - JP Morgan

Just maybe to be asking the same question again, but just curious your overall comment on the SBC market in general. Any changes you’d describe versus say your perceptions last quarter, and in particular, any commentary by geography, say North America versus Europe?

Andy Ory

I mean, I think that we weren’t surprised this quarter, which I think is a very different disposition than the previous quarter. This quarter performed pretty much in line as we thought it would and I think that surprises are not good, so I feel better, given that we had a handle on things. I would suspect that the same thing will happen in Q4 that we should not be surprised and we should have inline performance; that’s our best guess at this point.

I think that it’s interesting for us to note that WiMAX opportunities and wireless opportunities in general are picking up and we’re happy with that. We’re seeing more and more activity in the enterprise space and we’re seeing the Tier 1 carriers becoming increasingly interested in buying access SBCs, to provide SIP based IP interconnects to these enterprise opportunities.

That really intrigues us because that’s a very different architectural mindset than lets say IMS and we have 100 IMS deployments globally; we believe in IMS as an architecture, but it’s more expensive and more complicated. It’s completely a replacement for the existing TDM and I think that that has been a little bit slower than people would have thought and I think that there’s an awful lot of IMS proportionately in Europe and I think that’s probably why things in Europe are a little bit slower.

As we look at overall activity in ‘09, we would expect all regions to perform in a fairly robust fashion. So we don’t really expect that for all of ‘09, we’re going to see any one region that’s not going to be able to improve itself pretty substantially.

Operator

Your next question comes from Greg Mesniaeff - Needham & Co.

Greg Mesniaeff - Needham & Co.

A question on Sprint; it was nice to see that customer come back nicely in the quarter. I was wondering if you can tell us whether this was the new 4500 product or was it the 4250?

Andy Ory

So to give an overview of Sprint; it’s a good question, Greg. I mean first of all, Sprint continues to buy, each and every quarter. Sometimes they’ll be a 10% or greater customer and sometimes they won’t. It takes time from the purchase cycle implementation integration and they buy some more. Absolutely; Sprint is buying a number of our different platforms and they do have both the 4250 and the 4500.

Greg Mesniaeff - Needham & Co.

And it just seems from your commentary that the wireless segment of your business appears to be relatively speaking, in better shape right now. Have fixed mobile convergence, related applications and deployments picked up in the third quarter, and is that something you see going forward?

Andy Ory

There’s a couple of different ways to look at wireless and one way is to look at wireless access; the other is to look at wireless infrastructure and tier and traditionally, most of our business has been involved in wireless infrastructure and tiering. So that as wireless carriers have more and more traffic, they’re finding ways that they can route it cheaper and they also want to find interconnects that are lower cost and so we’ve seen a real pickup there and we think that you’re going to see the wire line and wireless cores collapse to a SIP routed environment and Acme Packet technologies will play it well there.

We’re also seeing a pickup in relatively straightforward fixed WiMAX, which is different than mobile WiMAX and fixed WiMAX is essentially just using wireless as the last mile and it almost feels to our product and technologies, like it’s a wire line connectivity; so it doesn’t much matter.

It’s more the fixed mobile convergence in the MSG product. Those are still heavily architectural in nature. I wouldn’t say that we’re seeing a lot of revenue there yet, but a lot of design implementations and that’s something that we would look forward to in 2009 and 2010. So it’s just a way to segment the wireless market. I mean, clearly wireless is an important part of any IP strategy.

Operator

Your next question comes from Catharine Trebnick - Avian Securities.

Catharine Trebnick - Avian Securities

Back to wireless. You discussed several investments; the interconnect, IP, SEMCO and fixed and mobile WiMAX. So if I look into next year and this isn’t related to your product line, more just where do you see or could you give some color on where you see like industry is going to be with traction in those different areas?

Andy Ory

That’s a very good question and that’s something we’re trying to figure out as well. I do think we’re going to increasingly see fixed WiMAX internationally as an alternative for wire line connectivity in developing countries. I think you’re going to see the GSM world continue to invest in things like IP exchange for lower transport, whereas you’ll see bill-and-keep in the CDM world in North America.

I do think you’ll see a pickup in end-to-end IP across dual mode handsets, SEMCO cells, and fixed mobile convergence, but we have not really broken it down for 2009 yet, on which ones of those wireless segments, by region, are going to emerge over time, but that’s something that I think we could work on and provide you some clarity on the next call.

Catharine Trebnick - Avian Securities

And then the follow-on to that is then, for that the multi-service security gateway is more targeted for those applications, correct?

Andy Ory

That’s correct.

Operator

(Operator Instructions) Your next question comes from Ted Jackson - Cantor Fitzgerald.

Ted Jackson - Cantor Fitzgerald

I’m going to ask just a simple question and then actually the real ones. Since we’ve been on the wireless thing, do you have any sense in terms of the breakdown of your revenue between wire line and wireless and the relative growth rate?

Andy Ory

I don’t. I know that wireless is a minority. I’m sure it’s more than 10% and probably less than 40% and then given that the minority growth rate is probably higher, but my anecdote is probably only the last 200 or 300 transactions. So what we really need to do is get back to with a good analysis on that and that’s something that I think we probably should look at for the next call as we give ‘09 guidance.

Ted Jackson - Cantor Fitzgerald

Okay and what I wanted to ask was, I wanted to see if you could provide a little color relative to the different geographic regions and where you’re seeing better growth and the better opportunities. We’ve had a lot of clarity if you would with the wireless market within China. Are you seeing any impact or any pickup there? How’s APAC doing relative to other areas and then, I’d also like to hear a conversation relative to competition and kind of who you’re seeing out there and if there’s been any changes. That’s it; thanks.

Andy Ory

Sure. You asked a lot, so if I leave anything out, just re-ask it again Ted. As far as geographies are concerned, APAC is performing really well. I’d actually like to say that again; APAC is performing really well. We’ve been involved in Asia for a long time and things sometimes just take a long time.

We are seeing a pickup in the Japanese market. We think the Korean market is doing very, very well; we’re investing in India. We’re very, very careful because it’s a very, very big country and there’s lots of opportunities, but we need to make sure that we invest prudently, so we’re leveraging a lot of partnerships there.

The other thing that’s going on is we’re happy with what’s going on with Australia, but if I had to rank it, I would say that Korea, Japan, India; China as well, particularly if you include Taiwan. We’ve seen a lot of activity in Taiwan and so we feel good about that.

The other thing that Asia’s been covering before anyone else is this whole notion of an addressing boundary. We talk about network boundaries and security and protecting the service infrastructure and being able to convert signaling protocols. Well, the world’s going to run out of addresses pretty darn quick and some of the folks that we’ve talked to in Asia say that in two more years, there’s no more addresses.

Now, why is that? Because every single person on this call has an IP address that they’re using right now; if you’re using an iPhone or a BlackBerry that you use to surf the internet and so they each need an address and there are going to be so many more of these devices and they’re going to use so much internet access, that you’ll run out of IP V4 addresses and these devices are capable of supporting IP V6 addresses, but the core of these networks aren’t.

So one of the things that session border controllers are really properly positioned, both from a technology as well as a physical positioning in the network, is to resolve this addressing conundrum and so I think all over the world, session border control will benefit from that; but certainly I think places like Japan might realize that opportunity first.

We’re happy with the activity that we’re seeing in North America and Canada. We’re also happy with the activity that we’re seeing in CALA. A lot of activity in Brazil; We have landed assets in Brazil and we’ve been doing business there a long time; we’re just happy with that and in Europe, there’s a lot of meaningful activity and there’s a lot of good customer acquisition that’s going on; but the IMS portion is a little bit slower. So I don’t know if that helps from what we’re seeing geographically.

I guess you had asked another question as it related to competition. I guess our disposition toward competition hasn’t really changed much in the last 90 days. We still have a very high win/loss rate and I guess I would say that any privately backed company is having an increasingly difficult time being able to use cash to project resources to invest the source message and compete with us and so we’re seeing private companies having very, very little, if any real impact on what’s going on.

We historically highlight three competitors coming from three different parts of the marketplace. We talk about Sonus, we talk about Ericsson and we talk about Cisco and from our perspective, we think that we’re faring very well, really no change in what’s going on. We are an all-IP product and we tend to sit next to IP routers at IP edges and participate in IP transport and I think that that’s just what we’re going to continue to do. I don’t see any change for the next quarter either.

Operator

Your last question comes from Troy Jensen - Piper Jaffray.

Troy Jensen - Piper Jaffray

So a quick question for Peter. Looking at the DSOs here, I think Keith had previously stated that he expects DSOs to go to the 80 to 90 days due to the higher mix of international sales, but your international business is roughly the same as it was in the first half of ‘07 and the DSOs, those two quarters were 43 and 56 days. Can you just kind of help explain what’s the difference here? Is it linearity or terms or just any more color on that would be helpful?

Peter Minihane

I think it’s much more focused on the mix of business between international and North America. A cash collection here and a cash collection there at the end of any quarter, can move. In our case, we had focused on two cash collections at the end of the quarter that slipped into the fourth quarter and it could have moved our DSOs from eight to 10 days down and they were just two customers that we had focused on that just didn’t come to fruition; one was domestic, one was international, but I think the range of 80 to 90 days is are reasonable range, given the mix of our customers, both our direct end user customers and our service provider customers.

Troy Jensen - Piper Jaffray

So linearity hasn’t changed much?

Peter Minihane

No.

Troy Jensen - Piper Jaffray

Alright and then just a follow-up on the questions on Sprint. Previously, when they started build outs they were around for greater than 10% for several quarters. Is this the front end of another big build out there or is this just kind of a one time 10% chunk?

Andy Ory

Well, they are making money with the products. They’re continuing to invest in these programs and I think that our relationship with Sprint will continue to be very healthy. As far as whether they tip the scales on the fourth quarter at greater than 10% or not, suffice it to say that they’ll be significant whether they hit that 10% mark or not and I think that’s what’s going to impact whether they would hit that mark or not is purely timing of revenue and general revenue recognition.

Brian Norris

Thank you for that final question, and thank you for joining us this evening. We look forward to our next conference call, when we can update you on our continuing progress. Good night.

Operator

Thank you and ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and you can now disconnect.

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