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Executives

Mike Borman - Chief Executive Officer

Teddy Blankenship - Executive Vice President, Chief Financial Officer

Robert Jackson - Director Investor Relations

Analysts

Scott Zeller - Needham & Co.

Reik Read - Robert W. Baird

Mark Kelleher - Canaccord Adams

Harsh Kumar - Morgan Keegan

Avocent Corp. (AVCT) Q4 2008 Earnings Call January 28, 2009 5:00 PM ET

Operator

Good day everyone and welcome to the Avocent Corporation conference call. Today’s call is being recorded. At this time, I would like to turn the conference over to Mr. Bob Jackson, Director of Investor Relations for opening remarks and introductions. Mr. Jackson, please go ahead.

Robert Jackson

Thank you and good afternoon everyone. Welcome to Avocent Corporation’s call to discuss our financial results for the fourth quarter and full year 2008. Today, we’re joined by Mike Borman, Avocent’s CEO; and Teddy Blankenship, Avocent’s Executive Vice President and CFO.

Mike will begin by providing some high level results and product and customer highlights from the quarter. Teddy will then offer some more in depth commentary into our fourth quarter numbers and outlook for 2009. Mike will close our prepared comments with some comments on 2009 and then we’ll get into some Q-and-A.

As always, I want to remind participants that this call will contain statements that may be characterized as forward-looking under the Private Securities Litigation Reform Act of 1995. These statements are based on current expectations and assumptions involving a number of risks and uncertainties that could cause our actual results to differ materially.

Additional information concerning these factors is detailed in our filings with the SEC; including our Annual Report on Form 10-K and our most recent Form 10-Q. Copies are available from the SEC, from our website or from our Investor Relations department.

Our presentation today also includes certain non-GAAP financial measures in an effort to provide additional information to investors. These operational measures are reconciled to the most directly related GAAP financial measures in our earnings press release, which was distributed earlier today. That press release is also available on our website, www.avocent.com and was furnished to the SEC today on the Form 8-K.

I would now like to introduce Mike Borman, Avocent Corporation’s Chief Executive Officer. Mike.

Mike Borman

Thank you, Bob. Good afternoon and welcome everyone. Thank you for your time and your interest in Avocent. Let me begin by describing some of the high level results of the fourth quarter and full year 2008. Teddy will then review the financials in more detail and I will close with some comments on 2009.

For the full year 2008, our results were solid. We closed the year with record revenues of $657 million and operational earnings of $1.98 per share. We acquired and integrated two companies. We delivered significant cost savings via our restructuring, initiated in July of 2008. We implemented several changes at the senior leadership levels of the organization and of course we witnessed turmoil in the world’s economy of historic proportions.

Any one of these major developments could have provided significant distraction within the company. I think our record results are a testament to our value that our products deliver, the loyalty of our customers, and the dedication and talent of our employees.

In the fourth quarter, Avocent was tested in the face of a worsening economy and steep drops in IT spending. I am pleased to say that despite the economic hurdles, Avocent continued to deliver on our strategic and tactical goals and produced solid financial results.

Avocent’s revenues in the fourth quarter were up 12% year-over-year. Our international revenues accounted for just over 51% of our sales, surpassing for the first time our domestic revenues.

LANDesk revenues increased 31% year-over-year. Management system revenues were up 9% despite lower server shipments during the fourth quarter. Operational earnings per share in the fourth quarter of 2008 were $0.61, compared to $0.55 in the fourth quarter of 2007. LANDesk operating margins came in at 21% for the fourth quarter.

During 2008, we expanded our relationships with key partners and customers and delivered products aligned to our customer needs. Let me highlight a few successes of the fourth quarter in particular. First, late in the fourth quarter we sold a first version of Avocent MergePoint infrastructure explorer to several high profile companies, including a popular overseas online auction site and Catholic Health Systems of New York.

This product is our first entry into the visualization and asset planning areas for the data center, allowing customers to have better control over their assets and provide enhanced planning and modeling of their assets deployed. In addition to the financial impact, we expect this product to begin delivering in the second quarter of this year.

Infrastructure explorer is also an important success story for us from a variety of standpoints. It’s the first product designed and delivered from the ground up, on the Avocent management platform. Second, the development team included members from both management systems and LANDesk working together to deliver software for the data center.

Third, it was shipped late in the fourth quarter, on track with our expectations and lastly, it demonstrates our ability to develop software solutions for our data center customer base, which continues to move Avocent in a more software solutions centric direction.

A second example; we experienced increasing demand for our power management products. We recently sold approximately 100 of those units, including 50 units delivered on the first day of availability of our new PM3000 vertical power units deployed in a pilot project at Brocade’s development lab.

The PM3000 units are capable of measuring power at the socket level and will be monitored and controlled using our DSView3 software. Utilizing a combination solution of the PM3000 and DSView 3 software, customers will be able to monitor, model and ultimately manage their power consumption at the outlet level to save money.

Third, in asset management; a media company on the East Coast needed a way to get control and track all of their fixed hardware and software assets. They were using their ERP package to do it, but found it very cumbersome. The company attended one of our seminars and within 24 hours, purchased our LANDesk asset lifecycle manager. They liked the feature that the asset lifecycle manager is open and will integrate with their help desk, ERP and existing LANDesk application solutions.

A fourth example in service desk; a company in California, an existing Touchpaper customer was struggling with managing their maintenance contracts and their leases. It was costing them money because they were unable to easily know when issues could be corrected under warranty or under existing service contracts. They purchased LANDesk service desk and LANDesk asset management solution.

Now they can quickly identify an asset, understand the time left on the warranty and the third party contract service levels to get the asset up and running again. They expect to save money immediately in head count and service expense, as well as in their ability to get revenue generating assets back up and running quicker. In short, Avocent provides solutions to the real life pain points of our customers.

Now, despite the difficult macroeconomic environment, we continue to make in roads on several of our key strategic and tactical initiatives. Our cost cutting measures that we announced in July ‘08 and our overall supply chain improvements allowed us to improve operating margins to 20%, up from 18.5% a year ago. The majority of the benefits from those efforts will be felt throughout 2009.

In addition, we were able to reduce spending during the fourth quarter through concerted spending constraints and the efforts, diligence and discipline of Avocent management and employees alike. The measures included a hiring freeze, travel restrictions and eliminating or reducing spends on consulting and contractors.

In addition though, we used technology that gives employees the opportunity to identify, share and collaborate with coworkers to identify areas for cost savings. The site was exceedingly well received and utilized and we have begun acting on several of those front line ideas during the fourth quarter.

From an acquisition standpoint, Ergo has been completely folded into all systems and processes within Avocent. The Touchpaper sales force, marketing group and R&D team are successfully integrated into Avocent, with certain open areas in administrative and standardizing systems. So in general, we were pleased with the progress that we were able to achieve during fourth quarter despite the economic environment.

Now, let me turn the call over to Teddy who will provide a more detailed commentary on this quarter’s financial results and our first quarter 2009 outlook. Teddy.

Teddy Blankenship

Thank you Mike and good afternoon everyone. Given what has become an increasingly difficult macro environment, we are pleased with both our Q4 results and the progress we have made on many of the key initiatives that Mike just covered. We retain good market share and our products remain in demand due to their compelling ROI arguments.

Q4 was for Avocent a tale of two quarters. October and almost all of November were on track with our expectations, with very few anomalies. However, we experienced some slippage in deals in December, as customers put tech spending on hold due to economic concerns.

During the quarter, we also began an aggressive cost containment program to protect margins and operating profits, combined with the restructuring efforts we began and our focus on OpEx and profitability paid off.

Our revenues for the quarter were $173.5 million, slightly below our guidance, with a 12% increase over Q4 of ‘07. Our revenues were adversely impacted by approximately $6 million from declines in the pound and the euro. Our operational EPS was $0.61. Our EPS was not significantly impacted by the decline in the pound and euro due to our matching of expenses with revenues.

Our EPS did benefit from the restructuring, integration and supply chain realignment initiatives that we began earlier in 2008. Also, our effective tax rate for the year was 20%, rather than our anticipated 23% as we were able to increase the use of our new Singapore hub.

Branded sales increased within all major geographies to an overall increase of approximately 17%; with the largest increase in the Americas at about 18%, followed by Europe at approximately 17%, and Asia Pacific at 15%. OEM sales increased by 1% overall during Q4, compared to 2007, due to weakness in the Americas offsetting growth internationally.

Our management systems business unit achieved Q4 revenue of approximately $127 million, compared to $119 million in Q4 of ‘07 for an increase of 7%, including the contributions of products from the Ergo acquisition. Channel inventories increased slightly by approximately $1 million due to a drop off in sell-through at the end of December.

LANDesk revenues increased 31% to $41.6 million for the fourth quarter of ‘08, from $31.8 million in ‘07. Touchpaper product sales contributed 19 points of this growth. The remaining 12 points of the growth was mainly due to an increase in new license sales of LANDesk management suite and new subscriptions of the LANDesk security suite products.

We continue to gain operating leverage in the LANDesk operating model, producing an operating margin of 21%, surpassing our targeted range for Q4 and resulting in full year 2008 operating margin of 14.4%, above our stated goal of 12%. The improvements here were attributable to continued sales efficiencies from programs initiated earlier in the year, continued R&D improvements, including shifting more work to Beijing and synergies gained in the integration of Touchpaper. LANDesk accounted for approximately 24% of our fourth quarter 2008 revenues, compared to about 20% in the fourth quarter of 2007.

Our gross profit was $113.5 million for the fourth quarter of 2008, compared to $102.4 million in 2007. Our gross margins held steady year-over-year. Cash flow continues to be a strong focus for Avocent. We generated $31 million from operations, which we primarily used to pay down debt and add to cash on our balance sheet. At December 31, we had approximately $127 million in cash and cash equivalents. We had $170 million outstanding on our credit agreement, with an available capacity of another $170 million.

R&D costs during the fourth quarter were $22.8 million or 13% of sales, compared to $21.6 million or 14% of sales for the same period in 2007. Our fourth quarter R&D expenditures were flat with those of the third quarter of ‘08 at $22.8 million. We continue to realign our R&D resources towards higher growth opportunities.

Selling, general and administrative expenses were $56.6 million or 32.6% of sales for the fourth quarter of ‘08, compared to $51.9 million or 33.4% in the same quarter of ‘07. The increase in dollar terms was primarily a result of new personnel acquired in the Ergo and Touchpaper acquisitions and expansion of our LANDesk domestic and international sales teams.

Our operating profit increased by $3.1 million or 11% to $31 million for the fourth quarter of ‘08, compared to the $28.7 million in the fourth quarter of ‘07. This resulted in operating margin of 19.6% for the fourth quarter of ‘08, compared to 18.5% for the same period of last year. Operational net income for the fourth quarter of ‘08 was $28.8 million, compared to $27.5 million for the same period of ‘07.

We’re operating in an environment of extremely limited visibility. Even now the IT budgets and projects of many of our customers worldwide have yet to be finalized. So our outlook for ‘09 is very guarded, recognizing that many forecasts for overall declines in IT spending and server shipments. As a result, we have adopted a proactive stance to facilitate our continued long term growth and shorter term maintenance of operating margins and operating profit.

In addition to restructuring efforts announced last July and integration activities related to Ergo and Touchpaper, we are now tackling the next set of actions designed to further margin expansion to continue to rebalance R&D toward higher growth opportunities and to become a more lean, nimble and profitable organization, both now and in the future.

First, earlier this month, we announced internally, an additional 8% workforce reduction of roughly 170 positions. These reductions, which began on January 16, affected positions in North America, Europe and Asia in sales, engineering and administrative areas. Approximately 140 of the 170 impacted positions have already left Avocent in the last two weeks.

Second, we will be closing our Shanghai R&D location as we consolidate R&D functions to improve development efficiencies. Third, we have suspended merit increases across the company and will continue with the spending constraints we initiated during the fourth quarter.

As a result of this new workforce reduction action, we estimate we will record additional pre-tax restructuring charges of about $2.6 million and $1.5 million in the first and second quarters of ‘09 respectively. Expected annual savings from the workforce reductions are in excess of $13 million annually, with about $2.4 million coming in the first quarter.

In keeping with lower industry forecasts for tech spending and server shipments, we anticipate first quarter revenues will be in the range of $138 to $146 million. This includes approximately $12 million to $13 million in revenue from the Touchpaper and Ergo products. We anticipate gross margins to be approximately 65% to 67% during the first quarter.

We expect operating expenses to be within a range of $73 million to $76 million. So we expect EPS to be between $0.28 and $0.38. At the midpoint, this would approximate a 6.5% EPS growth year-over-year. The previous amounts exclude estimates of $6 million to $7 million for stock-based compensation, $13 million for intangible amortization and the $2.4 million for restructuring costs.

I’d now like to turn the discussion back over to Mike.

Mike Borman

Thank you, Teddy. The success of Avocent in 2008 has been attributed to our talented employees, our loyal customers and our technology with the value proposition that lowers the cost of managing technology and infrastructure, any place in the world.

We continue to stress to our sales and development teams, our business partners and customers, that this value proposition will save customers money in hardware, in software, in services, in power and then in people, while actually reducing their budgetary requirements. This will allow better management and the redeployment of expenses to other critical business projects. In effect, customers can do more with less.

Clearly, the short term outlook for non-mission critical IT spending is not encouraging. The natural result of that will be continued softness in some of our more traditional businesses. To offset this potential shortfall, we took a series of actions back in July 2008 and in January 2009 that Teddy just described. These were put in place to enable the company to grow profitably, generate cash and deliver innovative solutions like power management to our customers. Our ability to leverage our millions of touch points in data centers around the world, originally simple secure connectivity devices, allow us now to sell new products, such as infrastructure explorer, power management and other data center solutions.

The Avocent management platform provides a considerable advantage as well. It’s an open platform which allows our customers to quickly and easily integrate with other management tools they are using, saving them time and money and enhancing their infrastructure management capabilities.

Our new power products which I described, which are now shipping, show our result to not only stay pertinent in our customers data centers, but expand our reach, solving mission critical issues for our customers. Avocent’s asset management portfolio includes new software offerings, such as infrastructure explorer, which moves forward in the data center software market and in keeping with our overall metamorphose to become more of a software solutions centric solution model.

LANDesk’s lifecycle asset manager allows customers to manage any data center or desktop asset; hardware, software systems, processes and people from inception through disposal, providing more effective utilization, effectively cutting costs and reducing expenses.

Despite the uncertain macroeconomic picture, I’m more optimistic today regarding Avocent’s future than when I became the CEO six months ago. The original root of my optimism, our technology solutions, value proposition for our clients and our pervasive reach into our installed base, remained fully in tact. Those causes for optimism are now supplemented by my confidence in a battle tested team that maintained its focus and is willing to make the tough calls to deliver value in uncertain times.

So thank you again for joining us today. I would now like to open up the lines for questions.

Questions-and-Answers Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Scott Zeller with Needham & Co.

Scott Zeller - Needham & Co.

Hi. Thanks. Could you just help us out; there have been a lot of questions that I’ve been fielding about how management systems can continue to perform well in an environment when physical server shipments are contracting? So I have a few ideas, but if you could walk us through how you are optimistic on that front, it would be helpful. Thanks.

Mike Borman

Okay. Sure Scott. The decline in server units does have an impact on a portion of our management systems business. We’ve been successful over the last few years though, at diversifying that business unit so that we’re not so reliant on servers like we used to be.

So while we do have an impact, definitely from server shipments, we’ve been able to mitigate that somewhat through other efforts. For instance, we have a secure switch that we sell into the government market that is a desktop switch, which is unrelated totally to server units.

Also, we added power management capabilities initially through the Cyclades acquisition, but we’ve really strengthened those over the past few quarters with the new product offerings, so that we’re adding new capabilities in the management systems business unit that we weren’t providing to our customers before.

Scott Zeller - Needham & Co.

Great and on a related note, is there anything you can tell us at this point about the impact of maintenance revenue that we’ve heard of for MSD going through the calendar year; what would our expectations be for that?

Mike Borman

Well, with the grandfathering approach and the transition approach that we adopted for change in the DSView model last summer, we really don’t expect much up-tick in maintenance revenues until beginning in the summer of ‘09 and then we’ll start to see, we believe some up-tick in maintenance revenue, probably pretty gradually as people renew their maintenance contracts.

Scott Zeller - Needham & Co.

Thank you.

Mike Borman

Thanks, Scott.

Operator

We’ll take our next question from Reik Read with Robert W. Baird & Co.

Reik Read - Robert W. Baird

Hey, how are you guys? Mike, you talked in the past about wanting to reorient your sales force as you indicate in your comments. Lots of touch points out there and you want to be able to take advantage of that. Can you give us an update in terms of how the expansion of that account focus has proceeded, the desire of these guys to participate and as I recall, you were going to change compensation to get those folks oriented. What are the early returns on that?

Mike Borman

We had another set of customers in the fourth quarter that would be joint selling, meaning leads that were turned over from one of the sales forces to the other, so we continued to have more progress in them collaborating at a customer level. In the first quarter, we have formalized a program and a bonus program that rewards them for leads that they turnover instead of an informal program, so the compensation plan was changed to formally incent them to sell each other’s products.

Reik Read - Robert W. Baird

Okay and I mean I take it from your comments, you feel like you’re getting pretty good participation from those guys. There’s no lag down there that would be distracting?

Mike Borman

I think the challenge that we have is that you’ll find the sales team want to be able to do this. The challenge that we have and that I’ve asked my teams to step up to is, enabling the sales force, to make sure that when they show up in front of a customer to sell another product that they didn’t traditionally sell, that they have the understanding of the customer’s industry, the return on investment that the product or solution gives them and then our strengths versus our competitors.

Reik Read - Robert W. Baird

Okay and then on the cost side of things, with the programs that you implemented really mid-year last year, those are well underway and I think Teddy in your comments you said that you really ought to get the benefits of those as, I took it to be an acceleration as you go throughout the year. I would take it that those benefits don’t occur in a linear manner, that there’s more some step functions. Is that a fair way to look at it and are there some key milestones in terms of building closures or other that we should look to that would signify that those milestones have been reached?

Teddy Blankenship

Yes, Reik. There were several initiatives that were part of the restructuring plan we announced last summer. There were about 25 internal initiatives that made that up actually and most of those were completed over the course of Q3 and Q4, with a lot of them ending in the December timeframe.

There are two or three left open that we’ll complete later in the first quarter we expect, towards the end of the first quarter. So those involve the consolidation of our Redmond facility where we’re decreasing the size of that facility and transitioning a lot of engineering responsibilities and roles from Redmond over to Huntsville. That’s due to finish up in the late February or early March timeframe. That’s the last major part of that restructuring left to be done.

We did make one change. You may recall, last summer we announced we’d be working to potentially sell the Pro-AV portion of our connectivity and control group and we did work through that with a lot of potential buyers over the fall, but with deterioration in credit markets, a lot of them had to back away for awhile. So we’ve actually decided to keep and continue to work on that business.

We did reduce the cost of it significantly in December. We reduced the head count there significantly and then with a goal of making that unit breakeven over the course of ‘09, and we’re re-committed to growing the revenue of the new products that that group issued or released over the course of ‘08.

So the original restructuring plan is just about complete and will be later in this quarter and then this new restructuring effort that we just started a couple of weeks ago internally, already a lot of that has been done. The remaining part will happen again over Q1 and Q2. The longest effort there will be the closing of the Shanghai R&D center and we expect that to happen in Q2.

Reik Read - Robert W. Baird

Okay and then just one follow-up and I think that the improvement that you guys have talked about with; or the potential improvement with, Ergo and Touchpaper has really been aside from the cost programs that you’ve announced already. Can you talk a little bit about with the integrations essentially being complete there, what the opportunity is to see some additional expansion with those margins?

Teddy Blankenship

Sure. You’re right. We referred to those integration efforts as separate projects from the restructuring activities and we had separate teams working on those. The Ergo integration was completed during the fourth quarter. So we are expecting to see all the cost savings from that going forward in Q1 and going forward from Ergo.

Touchpaper, as we mentioned even back when we first announced the acquisition as a little bit different, because it’s a larger company with great technology and good people. The business side, the sales force, marketing teams and development teams, that integration has been completed, except for we’ll actually be combining some offices in the UK over the course of ‘09 to get some facility savings, but on the people side, that is all completed.

The administrative side, we have some further integration work to do over the course of Q1. That will finish probably in late March or early April, mainly bringing them onto our systems and integrating our processes and controls.

Reik Read - Robert W. Baird

Great. Thank you for the time.

Teddy Blankenship

Sure. Thanks Reik.

Operator

We’ll take our next question from Mark Kelleher with Canaccord Adams.

Mark Kelleher - Canaccord Adams

Thanks. I was just wondering if we could go back to the managed systems. If we look at the OEM growth, it seems to continue to be a little slower than the direct sales and the branded sales. Is there some thing going on there besides server unit shipments, bad headwind? Is there is something else that those OEM’s are doing? Are they increasing their embedded position? Is there something they’re doing with the technology that makes that weaker than the branded?

Mike Borman

Mark, the largest difference between the branded and OEM components is the nature of the products that we ship to them. So, the OEM products are largely impacted by the decline in their respective server shipments; whereas our newer products, the newer version of DSView, the power management products and the serial products that we have in the Cyclades acquisition are just sold on the branded side.

Mark Kelleher - Canaccord Adams

So, you wouldn’t say there’s a trend toward embedding, which would then give you lower revenue from what you’re selling into the OEM’s. You’re not changing the manner that they deploy your technology?

Mike Borman

No more so than before. There wasn’t any change in that trend over the course of ‘08. The biggest impact would be the OEM’s selling blade servers. That is where they tend to use our embedded technology or their own embedded technology in some cases. Where they’re selling the freestanding servers, they still tend to sell our appliances along with their servers.

Mark Kelleher - Canaccord Adams

Okay and then, just one quick question on the tax rate. Is that tax rate maintainable? Do we use Singapore at say a 20% tax rate going forward?

Mike Borman

We should definitely see benefits from that in the course of ‘09. Right now, we’re estimating for internal purposes our tax rate to be in the 21% to 22% range for ’09, given our expected mix of profits around the world. Of course, we’ll update that as the year goes on and we see where the revenues actually come in and where the profits are. So, we are expecting to see some improvement. That’s down from the 24% or so we started ‘08 with.

Mark Kelleher - Canaccord Adams

Okay. Thanks.

Operator

(Operator Instructions) We’ll take a follow-up from Reik Read with Robert W. Baird & Co.

Reik Read - Robert W. Baird

You guys maybe have said this in the past and I apologize if you have, but just given the focus Mike, that you’ve put on all of the good software solutions you have, can you give us a sense of where things are beginning of 2009 and where they would end 2009; maybe something as simple as a percentage of revenue?

Mike Borman

I don’t want to comment on a percentage of revenue, but I will say that I think your question is a very good one in terms of the strategy here, because as you look at infrastructure explorer for example, the enhancements to DSView, LANDesk asset management lifecycle, clearly those products all being software oriented and the sales force now enabled to go sell those products out in the field and us getting very little revenue and really they’re not replacing any products, if you know what I mean.

In hardware, you tend to come out with a new server that would replace old servers and supplement, exchange revenue or cannibalize revenue. These products don’t cannibalize any revenue. They’re all new market, new enhancements for customers out there. So, all that revenue should grow.

I will say when you start from a very little base and you’re a $657 million company, still on a percentage basis it’s going to take a while for this to be a major contributor to our revenue and to our profitability, but I don’t want to put any specific numbers. I’m looking at Teddy. Maybe he wants to comment after me.

Teddy Blankenship

Yes, you can look over the past two years with our new products that we’ve released and the acquisitions that we’ve done and while our appliance type revenue has remained relatively steady, the other products, particularly software products have continued to grow and do much better. So it’s given us a great diversification of products and revenue sources.

For instance, the legacy KVM type revenue has declined from I believe 60% of revenue in ‘07 to about 50% of revenue in the fourth quarter of ‘08 and while we don’t expect that that KVM revenue is necessarily declining in dollar terms, it’s just not likely to grow as fast as the software products. So by definition, the percentage of software revenue will grow over the course of ‘09.

With the economic outlook, we’re just not really in a position to give much guidance or any guidance for the rest of the year beyond the first quarter. We are expecting and are planning to have good revenue contributions later this year from the adds of MergePoint infrastructure explorer product and some other software products that we have coming out later this year, as well as a couple of the LANDesk products that were released in the fourth quarter like the LANDesk asset lifecycle manager.

Reik Read - Robert W. Baird

I appreciate those thoughts. Thank you very much.

Mike Borman

Thanks, Reik.

Operator

We do have time for one more question. Our last question will come from Harsh Kumar with Morgan Keegan.

Harsh Kumar - Morgan Keegan

Hi, guys. First of all, let me congratulate you guys on tremendous execution, cost control. Very few companies, even in the vicinity of making numbers for March and you guys are right there. Having said that, can you remind us what your goal for LANDesk operating margins is as you maybe look out for the next twelve months?

Teddy Blankenship

Sure Harsh. Our goal is to improve LANDesk to our next major milestone. After getting the improvement to 18% to 20% range for Q3 and Q4, is to work towards holding that level for a full year. I don’t believe we’ll make it there for ‘09 because of the economic environment we’re in, because we want to continue to invest in the R&D and marketing programs and sales channel development at LANDesk.

Now, we have made some adjustments so we can keep a good level of profitability in the first and second quarters. So we will still have a good operating margin there. I am just saying we probably won’t hit the 20% range for the full year, but we’ll be looking to get to the 17% to 18% range for the full year of ‘09.

Harsh Kumar - Morgan Keegan

That’s helpful Teddy and we’ve heard from a variety of companies and a lot of them are talking about sort of March being the trough quarter. I’m curious as you interact with your customers and people who you interact with, what kind of color could you provide on that, Mike or Teddy?

Teddy Blankenship

Yes. I suppose we didn’t give guidance for the rest of the year. I think we’re hearing what you’re hearing from people, but I think it’s pretty cautious that people would like to believe that things are going to improve in the second quarter or third quarter, but nobody seems to be willing to commit to that yet, certainly not in writing. I see that from a lot of the industry forecasters as well.

So that’s partly why we’ve taken a cautious outlook towards planning for our operating expenses and hiring plans and head count actions, so we can monitor our customer spending plans and the forecast that we get from our OEM’s over the course of Q1, to see how the actual projects committed to and budgets approved as the various customers turn out.

Harsh Kumar - Morgan Keegan

Fair enough. Let me ask that maybe in a different way, Teddy. You mentioned that December saw a lot of slippage in revenues, particularly for management systems. Are you still seeing those or have those largely gone away?

Teddy Blankenship

Well, in a few cases those deals went away, but in most cases they’re still being worked and the respective IT personnel that our people are working with, still want those projects, but they’re waiting on approval from someone within their company to proceed.

Harsh Kumar - Morgan Keegan

Fair enough and I guess if you could give me some idea of whether LANDesk will be worse than management systems in the March quarter or how do you see the split between the two for the March quarter in revenues?

Teddy Blankenship

I’m not sure I understood; be worse?

Harsh Kumar - Morgan Keegan

Which would be worse, down more than the other or which would hold up better than the other?

Teddy Blankenship

I believe LANDesk will hold up better in growth terms and if you look at it either in terms of percentage change year-over-year or the sequential change from Q4 to Q1, we have more room and opportunity for market share expansion and cross selling activity with the newer products in LANDesk right now.

Harsh Kumar - Morgan Keegan

Very helpful guys. Thanks Mike. Thanks, Teddy.

Mike Borman

Thanks, Harsh.

Operator

And that does conclude our question-and-answer session. I will turn the conference back over to our speakers for any additional or closing remarks.

Robert Jackson

Thank you all for participating today. We appreciate your interest in Avocent and if you have any follow-up questions, please feel free to call or email any one of us. Thank you.

Operator

Thank you and that does conclude today’s conference call. We thank you all for your participation and you may now disconnect.

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Source: Avocent Corp. Q4 2008 Earnings Call Transcript
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