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Procera Networks (NASDAQ:PKT)

Q4 2012 Earnings Call

February 28, 2013 8:30 am ET

Executives

Todd Kehrli - Co-founder and Executive Vice President

James F. Brear - Chief Executive Officer, President and Director

Charles Constanti - Chief Financial Officer, Principal Accounting Officer, Vice President, Secretary and Treasurer

Analysts

Alexander B. Henderson - Needham & Company, LLC, Research Division

Georgios Kyriakopoulos

Amelia Harris - Sterne Agee & Leach Inc., Research Division

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Procera Networks 2012 Fourth Quarter and Full Year Financial Results Conference Call. [Operator Instructions] I would like to remind everyone, this call is being recorded today, Thursday, February 28, 2013. And I would now like to turn the conference over to Mr. Todd Kehrli with the MKR Group. Please go ahead.

Todd Kehrli

Thank you, operator. Good morning, and welcome to Procera Networks Fourth Quarter and Full Year 2012 Financial Results Conference Call. On the call today from Procera are Jim Brear, Chief Executive Officer; and Charles Constanti, Chief Financial Officer. On today's call, Jim will start with an update on Procera's performance and growth strategy, Charles will review fourth quarter and full year results and Jim will then provide an outlook for 2013 before opening the call for questions.

Please note that the financial results reported today include both GAAP and non-GAAP financial measures. Procera's non-GAAP measures exclude the impacts of stock-based compensation and business development expenses. A reconciliation of GAAP to non-GAAP measures is part of the financial tables posted with the Procera's press release, which is available on the Investor Relations section of the company's website at proceranetworks.com.

Before we begin, let me note that the information about to be discussed contains forward-looking statements, including statements related to the expected demand for Procera's products and the company's expectations for 2013.

These forward-looking statements involve risks and uncertainties, as well as assumptions that if they do not fully materialize or prove incorrect, can cause the results to differ materially from those expressed or implied by such forward-looking statements, including the risk related to the acceptance and adoption of Procera's products, the company's ability to service and update its products, lengthy sales cycles and lab and field trial delays by service providers, the company's dependence on a limited product line or dependence on key employees, its ability to compete in its industry with companies that are significantly larger and have greater resources, its ability to protect its intellectual property rights in the global market, its ability to manufacture product quickly enough to meet potential demand, its ability to integrate Vineyard Networks and realize anticipated benefits from the acquisition, and other risks and uncertainties described fully in the company's documents filed with or furnished to the Securities and Exchange Commission.

More information about these and other risks that may impact its business are set forth in the company's Form 10-Q filed for the third quarter ended September 30, 2012, and Form 10-K filed for the year ended December 31, 2011. All forward-looking statements in this presentation are based on information available to us as of today and we assume no obligation to update these forward-looking statements.

I'll now turn the call over to Procera's CEO, Jim Brear. Go ahead, Jim.

James F. Brear

Thanks, and welcome, everybody. I'm talking today from Istanbul, Turkey. We are pleased to report another very strong quarter that includes record revenue, record bookings, profitability and a continued positive traction and diversity across all customer segments and geographies.

Revenue for the fourth quarter was a record $16.6 million. We saw a couple of deals we expected for Q4 move into 2013, including one that was worth over $2 million in revenue. Due to a last-minute feature request by this customer, we could not meet the revenue recognition criteria required, despite the product having been shipped, installed and in production at the end of the quarter. As such, we cannot recognize any of the revenue from this quarter until we deliver the last feature and the customer accepts it, which we now expect sometime within the first half of this year.

Gross margins for Q4 was 65%, up 9 percentage points over last year. And we reported a non-GAAP net income of $2.4 million, about flat compared to last year. For the full year, we grew revenue at 34% year-over-year, increased margins 8 percentage points over last year, achieved record non-GAAP net income of $9.4 million and generated $7.2 million of cash from operations.

For the fourth quarter, bookings reached a record $22.4 million, up 124% from Q4 last year. The total bookings for the year were $67.6 million. To give some added color, 49% of the $67.6 million in bookings came from new service provider customers, of which there were 50, including over 20 new mobile operators. This highlights our continued strong momentum with new customers and our leadership position in the market.

We continue to see a strong market environment for our products, including strong traction with mobile operators worldwide. We added 17 new service provider customers during the quarter, of which 7 were mobile operators. We now have 32 mobile operators as customers around the world, with 7 of these being Tier 1 customers.

Mobile customers contributed 40% of our revenue in the fourth quarter. Our remaining revenue mix for Q4 was 35% cable, 17% fixed and 8% higher education and enterprise.

For the full year, mobile contributed 30% of our revenue for 2012, up from 4% in 2011. During the quarter, we added 4 new Tier 1 customers. These included a major U.S. fixed line service provider, a mobile operator in the Middle East and a cable operator in Eastern Europe. In addition, we received follow-on orders from 2 large Tier 1 APAC mobile operators.

Fourth quarter revenue was comprised of 41% of new customers and 59 of follow-on. Two service provider customers represented 10% of revenue in the fourth quarter, with these 2 customers combined representing 23% of revenue in Q4.

For the full year, we added 13 new Tier 1 customers across all regions. The geographic expansion and regional diversity we are achieving, including significant wins in the past year in Japan, Europe and the Middle East, Russia and the Commonwealth of Independent States, reflect the continuing positive impact of our investment we made in late 2011 and early 2012 to expand our global footprint.

Trial activity remains strong, and it's balanced across all customer types and regions. We have 19 direct trials with Tier 1 service providers that are currently underway or plan to begin in the next 60 days.

Now let's touch on why we're winning. We believe we're the proven technology leader in the industry with leading performance and scalability. This past year, we refreshed and enhanced our entire product portfolio as part of our ongoing innovation. We launched the PL20K early this year and already have 3 customer wins for that product, along with a number of key 1 -- key Tier 1 operators conducting trials around the world. The PL20K represents the industry's first intelligent policy enforcement platform that scales up to 320 gigabits per second in a single system and has been proven to be a very unique value proposition to the mega carriers' requirements for significantly increased scale and performance.

In addition, the PL8920 has now become our product leader for the number of units sold. More recently, we announced our new innovative content logic product. We have taken content identification to a new level of granularity. For example, our technology now enables operators to identify certain packet that's not just video traffic, but its sport content. And it's not just sports content, but it's ESPN. And it's not just ESPN, but it's Major League Soccer.

This unmatched access to deep network analytics is a primary reason why we're winning versus the competition. Our solutions enable carriers to better manage their networks and more increasingly to create meaningful and sticky personalized services for their subscribers that differentiate their offerings and generate increased revenues.

We recently announced our acquisition of Vineyard Networks. Vineyard is an OEM supplier that provides DPI solutions to enterprises and has relationships with prominent enterprise network solutions providers. We believe we will be transformative with this combination in the network industry. We will further separate ourselves from the competition. This acquisition expands our total addressable market, strengthens our team, with an over 40% increase to an R&D team, adds a development center in the America and brings some amazing technology and features to the table.

What makes this acquisition such a game changer for Procera is that by leveraging Vineyard's existing OEM relationships, we can now go beyond service providers and offer state-of-the-art DPI solutions to enterprises in just about every industry. Enterprise IT vendors will now be able to include Procera's Intelligent Policy Enforcement software in their offerings in any of the many different areas. For example, enterprise security, enterprise WiFi, network assurance and monitoring, data center infrastructure, security enterprise and service provider routers and mobile infrastructure.

On the partner front, we've recently announced a partnership with Openet. Openet is a best-in-class solution for policy management and charging, and has been working to lower the cost and complexity of implementing personalized services. Their technology is a complement to Procera's personalization solutions, and the Openet express service they're offering is being bundled with the Procera solution for customers. Together, we are delivering a solution to market that we strongly believe will significantly differentiate us from the other policy management and policy enforcement combinations.

Before I talk about expectations for 2013, let me turn the call over to Charles to review Q4 and full year financials in more detail. Charles?

Charles Constanti

Thank you, Jim. Total revenue for the fourth quarter was $16.6 million, up 6% from the prior year and up slightly sequentially from Q3. Total revenue for the year was a record $59.6 million, up 34% from 2011. Bookings for the fourth quarter were a record $22.4 million, up 124% year-over-year.

Product revenue for the fourth quarter was $13.1 million, down slightly from 2011. For the full year, product revenue was $47.7 million, up 27% from 2011.

Support revenue continued to grow and is an important source of recurring revenue. Deferred revenue was $9.8 million, combining short- and long-term deferred revenue, and is mostly from maintenance and support. Support revenue for the fourth quarter was $3.5 million, up 59% from the fourth quarter of 2011, up 12% sequentially. Support revenue for the full year was $11.9 million, an increase of 71% from 2011. The increase reflects the continued expansion of the installed base of our products and ongoing support arrangements.

Looking at the fourth quarter revenue by geography, EMEA was 37% of revenue, Americas 33% and APAC was 30% of revenue.

The gross margin for the fourth quarter was 65%, up 9 percentage points year-over-year. Gross margins for the full year were 67%, up 8 percentage points from 2011. Gross margins in the fourth quarter were consistent with how we have modeled gross margins and reflected a mix of products, including the benefit of good software sales and higher support revenue.

The quarter included initial revenue from the 20000 series chassis products and continued strong sales of our 8000 series appliance products. The high-priced and high-performance 20000 series generates a strong absolute gross margin, but a lower gross margin percent compared with our appliance products because of more hardware.

With our growing Tier 1 account base, we have added to our customer support and professional services teams. The cost of support sales increased in Q4 because of these additions. We are continuing to hire for these teams to support our expanding portfolio of Tier 1 accounts. The gross margin for support reflects this investment.

For Q1 of 2013, support margins are expected to be around the 77% level reported for Q4, while we continue to invest, but should increase in the future as support revenue surpasses the impact of this investment.

For 2013, we are continuing to model our gross margins in the low- to mid-60s. We have experienced volatility in our gross margins and expect this volatility to continue.

For the full year, non-GAAP operating expenses were $31 million compared to $21 million in 2011, reflecting the full year impact of the increase in the size and reach of our sales and marketing teams during 2012, as well as continued investments in R&D. Higher G&A reflects increases to the team and the infrastructure supporting the growth of our business.

Non-GAAP operating expenses in the fourth quarter were $8.4 million compared to $8.1 million in the preceding quarter and $6.4 million in the fourth quarter of 2011. These increases reflect scaling our business for growth. The increase in R&D reflects the cost of greater headcount and testing equipment for quality and new product introduction.

Increased sales and marketing expenses reflects the cost of expanding the reach of our sales team and higher commissions on higher revenue. The year-over-year increase in G&A expense reflects a greater use of professional services, the implemented -- the implementation of accounting system and the cost of additional hires.

We expect operating expenses to grow sequentially in Q1 of 2013 and be greater than $10 million on a non-GAAP basis as a result of the Vineyard acquisition, the timing of annual audit fees, additional hiring and the full quarter impact of Q4 hires.

The operating costs of Vineyard are expected to be approximately $6 million in 2013, and this cost will be spread fairly evenly in the year. Stock-based compensation and business development expenses are the 2 reconciling items between GAAP and non-GAAP in 2012. In Q4, we incurred $590,000 of business development expenses for due diligence and legal support of the acquisition of Vineyard and expect to incur approximately $900,000 of acquisition costs in Q1 of 2013, including advisory fees related to the Vineyard acquisition.

Following the acquisition of Vineyard, we will incur quarterly operating charges for the amortization of acquisition-related intangible assets and for certain deferred compensation costs. The 3 founders of Vineyard became employees of Procera. Half of the acquisition proceeds to the founders of Vineyard, or approximately $5.6 million, is contingent on their continued employment with Procera for the 1-year period following the acquisition. This portion of the acquisition proceeds will be treated as contingent compensation by Procera and amortized to expense over this 1-year period and will be excluded from non-GAAP operating results.

OEM software licensing is a new business model for us that we began with the Vineyard acquisition. We will license software for 1 or more years and recognize the revenue over the license term. We expect to renew licenses to Vineyard's existing customers, and sell licenses to new customers, building a renewable revenue base. Almost all of Vineyard's pre-acquisition deferred revenue was eliminated as part of purchase accounting for the acquisition and we expect to rebuild the deferred revenue over the next few quarters.

GAAP net income for the fourth quarter was $1.2 million compared to net income of $1.8 million in the fourth quarter of 2011. For the full year, GAAP net income was $5.3 million compared to net income of $3.8 million in 2011. On a non-GAAP basis, net income for the fourth quarter was $2.4 million compared to non-GAAP net income of $2.3 million in the fourth quarter of 2011.

For the full year, non-GAAP net income was $9.4 million compared to non-GAAP net income of $5.5 million in 2011. We generated $7.2 million of cash from operations in 2012. During the fourth quarter, we used $400,000 of cash in operations, primarily to build inventory for 2013. We ended the year with $132 million of cash and short-term investments.

I'm excited about our achievements in 2012, scaling our team, booking Tier 1 wins, the Vineyard acquisition and how this positions us for growth in 2013.

With that, I'll turn the call back to Jim. Thank you.

James F. Brear

Now, let's talk about what we expect for 2013. As we move into the new year, we believe we've transitioned to become the leader in our industry. Based on the substantial new Tier 1 customers we've added and are targeting and the significant opportunity they represent, we are now hitting some key inflection points as we scale from winning small to medium-sized service providers, to now winning large and very large service providers.

However, as we saw this quarter, having larger new Tier 1 customer creates the potential for lumpiness in our quarterly revenue as we have less control over product acceptance and revenue recognition. With that said, our pipeline visibility remains strong and we now remain very confident about the future. We expect to grow revenue at a rate of 25% to 30% year-over-year, growing with the market and gaining market share.

We anticipate that most of our revenue growth will occur in the second half of 2013. Our 2013 operating expenses are expected to increase over 2012, beginning in the first quarter of 2013.

Because higher operating expenses will precede our anticipated second half revenue growth, we may incur operating losses in the first half of 2013, on both GAAP and a non-GAAP basis. We do expect operating profits in the second half of 2013 on a non-GAAP basis.

In closing, 2012 was the year of separation. It's now clear. We believe we are the new industry leader. We are not living off our past. We are winning the opportunities that will position Procera for the future and have visibility to additional mega carrier projects that may materialize in 2013. We believe we are separating ourselves from our competition with our technology, solutions, strategy and team, and we look forward to updating you on our progress in the quarters to come.

We will now turn the call over to the operator to start the question-and-answer section of the call.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question today will come from the line of Alex Henderson of Needham.

Alexander B. Henderson - Needham & Company, LLC, Research Division

A couple of just housekeeping things. Can you give us the geographic split, first? And then second, can you give us the split of the stock comp between the 3 line items so that we can do the actual? As for the question, I'm looking at the numbers in the guidance and I'm assuming that you're including the -- Vineyard's acquisition in the guidance, which would imply, I think if I'm doing my math right, about 15% to 20% baseline growth for the company, excluding Vineyard's. Am I doing my math right there? Something about $6 million worth of Vineyard's revenues?

Charles Constanti

Your percentage growth for the base business is kind of on the low side of it, at 15%, so we expect it to be more in the tune of 20%, if not more. The Vineyard revenue will have a gradual ramp as we rebook deferred revenue. So that -- your number on the Vineyard is too high, as it will take some time to rebook -- rebuild the book after the purchase accounting haircut to deferred revenue. On the geography, for the fourth quarter, EMEA was 37%, America's 30%, APAC was 30%. And on stock-based comp and other reconciling items to non-GAAP, I'll give you the breakdown. For stock, it's $52,000 for COGS, R&D $25,000, sales and marketing $233,000; G&A $281,000 and then also in G&A was $590,000 of business development costs.

Operator

Your next question today will come from the line of Simon Leopold of Raymond James.

Georgios Kyriakopoulos

This is Georgios Kyriakopoulos on behalf of Simon Leopold. Can you discuss productivity you are seeing so far in 2013? And your confidence to grow business by 25% to 30% in 2013? And overall, has anything changed on your view of the DPI market, perhaps more competition from integrated vendors or new entrants? And also, you mentioned that you increased your exposure to Tier 1 customers, which also comes with lumpiness but overall, you would expect there to have accelerated growth in 2013 but it seems like your 2013 number for growth is slower than 2012. Can you expand on this?

James F. Brear

Yes, this is Jim. I didn't catch the first part of your question.

Georgios Kyriakopoulos

Yes. So the first part was about, given that lower growth guidance for 2013, if anything has changed on your view of the DPI market. Perhaps you see more competition, either from pure play DPI vendors or from integrated vendors.

James F. Brear

Sure. So I would say, again, as I stated, the market conditions, from our perspective, are very good. Our funnel is the strongest it's ever been. Visibility is good. From a competitive standpoint, I'd say, not much has changed. In fact, I feel, based on our record of 13 wins in the year, I feel pretty good about our ability to execute and beat the competition. We had no material losses in Q4. I don't see any real impact of what you call the integrated competitors, I don't see them at all. That hasn't changed a bit. And my direct competitors, we continue to win all the major wins. So market's good, we feel good about the competition. And from a growth standpoint, what you're hearing is, we plan to grow faster than the market and take share. What we're signaling is revenue recognition, when you close a very large Tier 1, the supply agreements that we contract with are more stringent and it's a little more -- it's a little more difficult to time when we get recognition.

Georgios Kyriakopoulos

Okay. And there, you mentioned that new orders this quarter was about 40% of revenue and was about 57% last quarter. Is it again a function of doing more Tier 1 business and why you see that?

James F. Brear

That's accurate. I'd say, if you see, we're definitely gaining traction in mobiles around the world. In particular, Europe is very strong for us and that's where we're gaining the most share.

Georgios Kyriakopoulos

Okay. And now moving a bit on wireless, it seems that the wireless continues to outpace the other verticals. Can you talk about the strength in wireless. Is it merely a function of customers increasingly adopting DPI for service creation by offering very big data plans or perhaps you see a shift in architecture from 3G to 4G that drives growth for pure DPI?

James F. Brear

We don't see it -- the move from 3G to 4G really hasn't been a driver for the adoption of our technology. It more is carriers looking for improved personalization and ARPU improvement. We see, particularly in the mobile operators, are driven predominantly out of Europe. And then in Asia, they are building now the capabilities to create personalization. We're not -- we are beginning to see some interest here in the North American market, but that will probably materialize in '13.

Operator

[Operator Instructions] Your next question will come from the line of Alex Kurtz of Sterne Agee.

Amelia Harris - Sterne Agee & Leach Inc., Research Division

This is Amelia on for Alex today. Most of our questions have been answered, except really looking into the operating margin outlook, it's obviously changing with the addition of Vineyard. Do you think you can reach 16% exiting the year? And what do you think that the OpEx will look like at that time?

Charles Constanti

Hi, this is Charles. So we're really not giving guidance on the kind of the absolute bottom margin -- bottom line margin. So the only outlook we wanted to give on operating cost right now, because of the variability of how things may play out, was in giving directional for non-GAAP for Q1. And then giving the directional that we may have operating losses in the first half, but we do expect to be profitable in the second half. So really just trying to give that directional guidance. Again, this is because of the variability of what may happen.

Operator

Your next question will come from the line of Josh Beck of Pacific Crest.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Calling for -- Brent Bracelin here. I don't know if I caught it, but did you give a service provider and enterprise mix number?

James F. Brear

Yes. We -- it was about 92% carrier/service provider and 8% higher ed/enterprise.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Okay. Got it. And then, I think you also gave a bookings number, it sounded like $22 million, which would imply a book-to-bill well north of 1 but contrasting that with deferred, which looked a little slower. Can you just kind of help us digest that and kind of look through the puts and takes between bookings and deferred and the kind of decline in product that we saw?

Charles Constanti

Yes. So the bookings, not all the bookings made it into either revenue or deferred revenue. So they wouldn't make it into deferred revenue until we're either paid or we've had full acceptance and everything is fully invoiceable and due for payment. So we did have a number bookings that they may have shipped, been deployed in operations but that inventory, the cost is still sitting in inventory and there's no kind of recognition in revenue or in deferred revenue. So you're correct that the book -- the bookings was nicely north of 1 if you held it against revenue in the quarter. That positions us for 2013 in those bookings.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Okay. And then earlier, it sounded like there were a couple of different, I think you mentioned the word variables, that could influence operating cost levels. I don't know if that also was influencing revenue levels or just a matter of maybe recognizing some of these contracts. Could you just help us maybe understand a little bit better what those variables are and kind of what the key drivers would be for those?

Charles Constanti

Yes. So it kind of was really in response to our outlook on, as you said, operating expenses, but also what would the operating margin be. So we've seen volatility in, I'll call it, say even at the top line. In terms of timing of deals, we see variability in our gross margins, which have really gone -- quarter to quarter, they tend to go up and down. And then in terms of the bottom line -- or sorry, operating costs, that really had to do with how much spending we'll do in 2Q -- in investment in Q2, 3 and 4. So we kind of know what we're going to do for Q1, we have multiple plans for what we may do in Q2, 3, and 4 on the spending side, but that's going to -- we're going to moderate or we're going to monitor exactly how we invest as we go forward and are not, at this point, ready to signal exactly what that would look like.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Okay. Understood. And then I think you also mentioned 3 wins with the new 100-gig chassis. I don't know, if you could just help us understand, is that where you get into maybe part of the footprint with those carriers and then that creates an opportunity for follow-on orders throughout 2013? Or is it a case where maybe, they're just trialing it, maybe just doing one and then you could really start to see follow-on orders, maybe beyond 2013. Just trying to kind of understand how those wins could go -- flow through the model.

James F. Brear

Sure, this is Jim. We would not announce a win if it's just for revenue for a trial. So it would be if -- we announce wins if it's been used in a production environment. And so we did win 3 carriers and those are in production environments, and I would call all 3 initial deployments with expectations of expansion in '13.

Brent A. Bracelin - Pacific Crest Securities, Inc., Research Division

Okay. And then last question for me. It looks like on the geo numbers, that I think APAC and Europe were kind of the top performing geos on a year-over-year basis within the quarter. Is that a trend that we should expect to continue as we move into next year? Or are there a lot of other variables and it's kind of tough to call which geos could contribute the most growth as we get through next year?

James F. Brear

Well, I think it's a byproduct of our investment in the expansion. We originally had a significant investment in the North American markets. We've made investments now in Europe and in Asia. And that's paying off, so that's why you're seeing the increase in the market share there. As well as you're seeing the adoption from mobile operators, predominantly out of Europe, that's helping increase the European share.

Operator

Your next question will come from the line of Alex Henderson for Needham.

Alexander B. Henderson - Needham & Company, LLC, Research Division

I just want to talk a little bit about the sequential numbers as you're going into the March quarter. Given that $2 million swing, do you have any sense of whether that is likely to land in the March quarter, or should we be looking at sort of the normal 15% kind of decline sequentially in product sales from the December quarter into the first quarter, given the base is a little bit perturbed by that transaction sliding?

James F. Brear

Well, historically, we've always had kind of a down Q1, it's typically based on carrier sales, it's fairly normal pattern for us and in the industry. Charles, did you want to address the second part of his question?

Charles Constanti

Yes, so I think you're referring to the deal that we really had anticipated for Q4 and when will that land. We're really more signaling first half, so there could be -- well, there already is, if you will, a lengthier acceptance process than we were anticipating. So we don't want to kind of knee jerk that we're going to have it in Q1 because we may not, but we do expect it for the first half.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Okay. So then if I'm looking at the fourth quarter, which is a much softer quarter than you would have expected normally, I still am looking at a normal seasonal decline of say, 15%-type number, which has been your historical norms in the past in the fourth quarter...

Charles Constanti

Yes. And I would just note that 2012, as it played out, was probably more of a linear year than we typically have and we would anticipate 2013 being back, at least from our view at this point, we're back to our more skewed, as you're mentioning, down in Q1 and then growth into the -- particularly, into the second half.

Alexander B. Henderson - Needham & Company, LLC, Research Division

Right. So if I'm looking at the second quarter, I could use a baseline growth rate year-over-year and then add the $2 million back in, or would that be splayed out over a couple of quarters?

Charles Constanti

It's too hard for us to kind of nail it at that level of granularity. It's possible we have revenue recognition deferred issues, if not issues, but dealing with revenue recognition for other accounts in Q2, I'm not saying I predict that, but it's too hard to pin that down right now.

Alexander B. Henderson - Needham & Company, LLC, Research Division

I totally understand, but I'm just trying to figure out, so the $2 million, just trying to figure out where do I put it? Do I put it in 2Q, or do I -- or is it something that could be recognized over several quarters because of the way the acceptance comes in?

James F. Brear

No, it would be either be in Q1 or Q2.

Operator

And we have another follow-up from the line of Alex Kurtz from Sterne Agee.

Amelia Harris - Sterne Agee & Leach Inc., Research Division

It's Amelia again. Just wanted to figure out the breakout for appliance versus chassis in the quarter. 4Q.

Charles Constanti

I mean, I would say that the quarter was more dominated by -- continued to be dominated by appliances. As I did mention, we did have a recognition on the 20K series and that drove revenue. We didn't give an exact breakout but I would say the majority of the revenue is coming from the appliance side.

Operator

Ladies and gentlemen, this concludes the question-and-answer session. I'll now turn the call back to management for any closing.

James F. Brear

Thank you for calling in today and look forward to speaking to you next quarter. Thank you.

Charles Constanti

Thank you.

Operator

Ladies and gentlemen, this does conclude the conference call for today. We thank you for your participation, and you can now disconnect your lines.

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