Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

RadiSys Corporation (NASDAQ:RSYS)

Q4 2012 Earnings Call

March 5, 2013 5:00 PM ET

Executives

Brian Bronson – President and CEO

Allen Muhich – CFO

Analysts

Rich Valera – Needham & Company, LLC

James Kisner – Jefferies & Company, Inc.

Aalok Shah – D.A. Davidson & Co.

David Duley – Steelhead Securities

Operator

Ladies and gentlemen, thank you for standing by and welcome to RadiSys Fourth Quarter Earnings Conference Call with Brian Bronson, RadiSys President and Chief Executive Officer; and Allen Muhich, Chief Financial Officer. As a reminder, this call is being recorded. Later we will conduct a question-and-answer session. At that time if you have a question, please press star one on your telephone keypad.

Mr. Bronson, you may begin.

Brian Bronson

Thanks, Paula. Good afternoon, everyone, and thanks for participating on the call today. We will be discussing fourth quarter business and financial highlights, a strategic update, and our outlook for the first quarter. We will then open up the call for questions.

Before we get started, let me turn it over to Allen for a caution about forward-looking statements.

Allen Muhich

Thanks, Brian. Any statements in this call regarding future expectations for the business of RadiSys constitute forward-looking statements that involve a number of risks and uncertainties. We caution you not to place undue reliance on these statements. Factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in today’s earnings release and in our SEC filings most recently in our quarterly report on Form 10-Q for the quarter ended September 30, 2012.

All information provided in this call is as of today. RadiSys undertakes no duty to update any forward-looking statement to conform to actual results or changes in the company’s expectations. In addition, during the call we will discuss some non-GAAP measures. We have provided a GAAP to non-GAAP reconciliation for these measures in today’s earnings release.

Now, I’ll turn the call back over to Brian.

Brian Bronson

Thanks, Allen. Our fourth quarter revenue of $69.3 million and non-GAAP EPS of $0.3 exceeded our expectations. We had a good Q4 Media Resource Function or MRF shipments, which enabled us to finish the full year with 23% year on year revenue growth.

In ATCA, we’ve seen market demand stabilize when combined with the continued ramp of our new T-Series 40G ATCA products resulted in 25% sequential quarterly revenue growth. These new products accounted for nearly 30% of our total fourth quarter ATCA revenue. And I’ve been particularly pleased with the passion our team has exhibited in meeting our customer demand.

Taken together, our overall revenue increased 9% sequentially and when combined with solid expense management resulted in a return to profitability.

Turning to design wins within our platforms business, our customers awarded us wins that span many of our targeted products including Femto Gateways and Edge Routers as well as our new network appliance, the RMS-220. Taken together, we added over 60 million in expected platforms revenue over the next five years to our design win portfolio.

Additionally, we make great progress on the strategic objectives I outlined to you at the end of October. During the quarter, we conducted a very structured and thorough strategic planning process to confirm and in some cases tighten our strategy to focus our investments on our most important areas.

These predominantly include software, full hardware systems, and complex solutions targeted primarily at the telecommunications infrastructure market. Our number one strategic focus is taking our MRF, the MPX-12000 and capturing the huge growth opportunity in Voice over LTE and moving video through the network. We have units in lab trials at over 10 significant global carriers and a growing funnel of additional opportunities.

In 2013, we expect these trials will modestly build on our 2012 audio conferencing revenue growth and will meaningfully add to revenue in 2014 as expected Voice over LTE deployments ramp.

Our leadership position in audio conferencing makes us the incumbent as we expand our capabilities into Voice over LTE. We are also increasing our investment in the areas of video conferencing as well as enabling Rich Communication Services.

By the way, we have renamed this product line from media server to Media Resource Function or, again, MRF to more clearly label its true capability of processing audio, video, and other media throughout 3G and LTE networks.

Another area of focus will be leveraging our 150 plus employees in our professional service organization to uniquely combine our hardware and software technologies to enable telecom solution such as Load Balancers, Edge Routers and various types of telecom network gateways including both LTE and Femto Gateways.

We have strong design win traction in this area and expect this to be an area of accelerating growth moving forward.

Our investment in providing software solutions into the small cell market will also continue to be a focus. While small cell LTE deployments have ramped more slowly than originally anticipated, they remain a key element of carrier plans to optimize spectrum utilization and meet the expanding capacity requirements of moving data through wireless networks.

Our total eNodeB product is ideally positioned alongside our Silicon partners to capture this growth as carriers deploy. We expect a nice growth in 2013 accelerating into 2014 and beyond.

And finally our ATCA portfolio products will continue to be the foundation for much of the above plus will continue to be sold on a stand-alone basis. This product line remains the building block for many network elements and applications that carriers require as they continue to optimize 3G and deploy LTE networks.

We will continue to focus on leveraging our full systems including the software layer necessary for the interoperability of the various components for Gateway, depack and inspection and other network applications.

And by the way, 90% of our investments moving forward will be focused in driving growth in the areas I mentioned above. As part of our strategy, we have also made difficult decisions to stop doing things where the product was approaching end of life or revenue profit expectations were too far in the future and the market opportunity was not material enough to warrant continued investment.

One such example is our Security Gateway where we began investing a couple of years ago, have good initial traction with some important customers yet shipping revenue generating units remained at risk and didn’t outweigh the continued necessary investments.

So we have changed our go-to-market strategy on Security Gateway to align its development funding model with the rest of our solution portfolio where we’ll require customers to fund the product development cost. This is a change for our customers and puts future product volumes at risk, however, it’s more aligned with their ability to fund and take the product to market.

Another example at some older non-strategic software that was approaching end-of-life and is used in highway traffic control called OS-9 that we have now sold to our distributors for $1.7 million in cash over the next couple of quarters without materially affecting our ongoing business results.

So both of these are examples of the types of difficult decisions we have made and we’ll continue to make that help position us for improved execution and focus by enabling us to do fewer things better.

Before I turn the call over Allen, I want to say a few words about my time last week at Mobile World Congress. Overall the show was a huge opportunity for us to demonstrate to our customers and partners the progress we’ve made in several key areas

Number one, one of the key themes at the show was voice-over LTE. And as I indicated earlier we are in a market leadership position with our MPX-12000 and after seeing real time how product is aligned with our customer’s deployment strategies, I’m more optimistic than ever that we’ve hit the mark in terms of features, cost and timing with this product.

Number two, I remain confident that small cells will be an area of growth and profit for us and we are well positioned given our complete solution offering and partnerships with key players such as we’ve announced just over the last two weeks with Broadcom and Airspan.

Number three, our unique ability to take our hardware and software capabilities and deliver solutions to our customers such as Femto and LTE Gateways, Load Balancers and Edge Routers are gaining significant traction with several different customers.

Number four, thought leadership matters as our broad market is going through rapid technological changes. Manish Singh, our CTO held a key speaking slot at the show talking small cells and his leadership has helped position us with the right technology and product set to capitalize as carriers accelerate their small cell deployments.

We have a unique opportunity to help our customers navigate this paradigm with our solutions capabilities.

Number five, at the show we celebrated our 25 years in business by inviting 80 key customers and partners as well as a number of executives from leading telecom equipment providers and carriers.

I have to tell you we have come a long way as a company. And given our tightened focus, robust product roadmap, established partnerships and key customer relationships, I am confident we are well positioned to capitalize as carriers continue to build out their global LTE networks and reduce network congestion.

With that, I’ll turn the call over to Allen who will speak more about our fourth quarter financial results and projections for the first quarter.

Allen Muhich

Thanks, Brian. Our fourth quarter revenue was $69.3 million and non-GAAP EPS was $0.03. Our fourth quarter top five customers were AAI, Aero [ph], NEC, Nokia Siemens Networks and Phillips Healthcare. Most of these customers have regularly been in and out of our top five, however AAI maybe a customer we have not discussed in the past.

AAI purchases our ATCA products for use in defense and aerospace networking applications. Two customers, Nokia Siemens Networks and NEC each accounted for more than 10% of fourth quarter revenue.

Q4 non-GAAP gross margin was 33.4% representing approximately a 2 percentage point increase when compared to Q3, an increase in higher margin software solutions revenue combined with improved overhead absorption on increased ATCA revenue resulted at higher fourth quarter gross margin.

Fourth quarter non-GAAP R&D and SG&A expense of $22 million represented an $800,000 reduction when compared to the third quarter. Switching over to the balance sheet, fourth quarter of DSO of 67 days represent a five-day improvement when compared to the third quarter. We made some progress in the quarter smoothing out our shipments which enabled more of our fourth quarter shipments to be collectible before December 31st.

Total inventory and associated inventory deposit decreased by $1.1 million to $28.9 million as we continue to focus on reducing overall inventory levels. Our cash balance at the end of December increased by $1.4 million to $33.2 million. We generated $3 million from operations and had $2 million in capital expenditures.

Moving over to our first quarter outlook, we expect Q1 revenue between $66 million and $71 million. At the midpoint, revenue is expected to remain relatively flat when compared to Q4 and reflects the stabilizing demand environment Brian mentioned earlier.

We expect first quarter non-GAAP gross margin to approximate 32% representing a 1 percentage point decrease when compared to the fourth quarter, a modest decrease in our higher margin software solutions revenue that is offset by an increase in ATCA revenue is expected to adversely affect overall gross margin rates.

Q1 non-GAAP R&D and SG&A expenses are expected to remain relatively flat. In Q1, non-operating expense and non-GAAP taxes are each expected to approximate $200,000. We expect first quarter non-GAAP EPS to range from a loss of $0.05 to a profit of $0.03 per diluted share. I should also mention that as a result of the strategic decisions Brian mentioned earlier we anticipate taking its first quarter non-cash charge of approximately $3 million to ride off prepaid licensing fees associated with our Security Gateway product.

Somewhat offsetting this will be a $1.7 million gain on the sale of our OS-9 assets. Given the non recurring nature of both these items, we intend to exclude the net $1.3 million charge from our first quarter non-GAAP income.

I anticipate our net cash balance will increase in the quarter reflecting positive cash flow, net of changes and debt. Capital expenditures will approximate $2 million. As I mentioned earlier, our cash balance at the end of December was $33.2 million. On February 14th, we retired $16.9 million of maturing convertible debt living $18 million outstanding with a maturity date of February 2015.

As of December 31st, our borrowing base supported $25.1 million in unused and available credit from our Silicon Valley bank line. With that, I will hand the call back over to Brian.

Brian Bronson

Thank you, Allen. Now, in summary, I’m pleased with the progress and the tightening focus we brought to the business over the last five months. I believe our employees have responded well with the direction we’ve set on focusing the company, improving the customer experience and driving increased accountability throughout the organization.

We beat fourth quarter financial expectations top to bottom, return the company to non-GAAP profitability and generated positive cash flow. We completed a structure, strategic evaluation of all our product lines. The organization has responded well to the strategic clarity as well as to the additional focus again we placed on accountability.

We do what we say we’re going to do. I continue to be extremely excited by the market opportunities and the acceptance of MRF within the voice-over LTE market and then into the video market. The market opportunity for our product is significant.

And while our small cell opportunity is pushed to the right, we are absolutely poised for profitable growth moving forward. And our unique solutions play has exceeded my expectations and will be a fundamental differentiator for RadiSys moving forward.

And last but not the least I’m encouraged by the improved market stability for our ATCA business and with that, we are ready to open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) You have a question from Rich Valera of Needham & Company.

Rich Valera – Needham & Company, LLC

Hey, good afternoon, gentlemen.

Brian Bronson

Hello, Rich.

Allen Muhich

Hi, Rich.

Rich Valera – Needham & Company, LLC

Let’s talk about sort of what I’d consider, I guess, your non-core businesses at this point, COM Express and the legacy other. I think in the past you’ve talked about the potential for maybe divesting them to make yourself sort of a more pure higher margin growth play. I just wanted to get any sense if you have any updated ideas on that front.

Brian Bronson

I mentioned in my prepared remarks that there’s more focus to think through, I think it’s still a possibility. That being said this business and, Rich, and you know this, it’s a contributor. I mean, it’s a flat business today going from a decline, right? So the business have been stabilized, design wins have been good. It adds "profit". But I’m not done with focus yet.

So you’ll have to stay tuned on what that means. But it could mean that we’re running it and it’s a different cost structure moving forward or could mean that we’re going to continue to sharpen the focus of the company. But I’m sort of four months into those remarks at this point in time.

Rich Valera – Needham & Company, LLC

Great. And then at public presentation in January or conference, actually, you gave some color on kind of expected growth rates for your four existing business segments for 2013. And wondering if you’re sort of reaffirming them, how should we think about that commentary you’d given on those segments, which included I think about 10%, 15% growth for ATCA and 20% for software solutions.

Brian Bronson

Yes, I would say still my point of view hasn’t changed. And what I don’t want to do is get into the specific quarters out in 2013 because my visibility really hasn’t changed. But for the year you’re quite right. ATCA I think over time 10%, 15%, I’m not sure it gets to the higher end of that but we’re still driving towards growth. And I absolutely see 10 points of growth there.

We really need our software business to grow, 20 %. Yes, I mentioned in our MRF business was ahead of that in 2012. I expect more of that this year. We need to get Trillium growing at the same clip and our solutions business helps, small cells will start to deploy, that will add somewhere; we thought originally would add in 2012. I think our COM E and Rackmount Server business is flat plus or minus so, again, no change.

And then the good news is our legacy business is smaller now but it’s still looks to be $25 million, is it $30 million and that will be a haircut from what Allen close to $50 million, I think, in 2012.

Rich Valera – Needham & Company, LLC

Right. Okay. That’s helpful. I just want to get a feel for this MRF pipeline and your thoughts on the conversion of that pipelines revenue. I guess one thing history is shown is that whatever you tend to think the conversion timing will be push it out six months or 12 months, and you may be are right.

I just want to get your feel for that and what kind of conviction you have that some of that converts to revenue this year. If it’s seen that it could need a pretty healthy back half ramp in probably in MRF to get to that kind of 20% type of growth rate for software solutions. Thanks.

Brian Bronson

Yes, really good question. And the good news about, cross your fingers, on MRF we delivered 23% growth in 2012 and again a bulk of that was our existing audio conferencing business. That will continue to be the same in 2013. So we aren’t expecting in meeting big growth in Voice over LTE to deliver the growth rates that I’ve been mentioning.

So we hopefully get to have our cake and eat it too around and join ongoing audio conferencing and audio related MRF sales and then start moving from trials into real POs in the case of Voice over LTE. What does that mean for 2013? Maybe only plus or minus 10% of our revenue will be Voice over LTE. And then expect it to be more meaningful in 2014, which means I don’t expect our audio business to decline. But Voice over LTE and in the video conferencing sector I’m hoping it will allow us to accelerate our growth rates in 2014 and beyond, and that’s the intent, and that’s what we see.

Rich Valera – Needham & Company, LLC

That’s helpful. Thank you. And Allen, just one question for you. How did you fund the payment of the convert? Was that on your credit line or out of cash or some of both?

Allen Muhich

So at the end of the quarter, at the end of the fourth quarter, Rich, we did not have any of our line drawn from Silicon Valley Bank. In the quarter we have drawn on the line. We are into the line today. But at the end of our quarter, we may be outside of the line. We tend to have some cash consumptions specifically on US entity mid-quarter that requires us to get into our SVB line.

But at the end of the quarter, here at the end of the first quarter, we likely will be all out of it or maybe have $5 million to $10 million drawn on it. But essentially we checked with the cash that we have in the US utilizing some of SVB.

Rich Valera – Needham & Company, LLC

Got it. Perfect. Thanks, gentlemen.

Brian Bronson

You bet. Thank you.

Operator

Your next question comes from James Kisner of Jefferies & Company.

James Kisner – Jefferies & Company, Inc.

Hi, guys. So the first question just on the software being down seasonally. The down sequentially, is that partly seasonality, is there anything connected to the divestiture there that would have that down sequentially, just give a little more texture on decline and software quarter over quarter that’s expected.

Brian Bronson

Yes, so nothing about the divestiture answered to your question first, but nothing has changed in our MRF business around audio conferencing. It comes in lumps. Sometimes it’s in the first half, sometimes in the second half. It’s really when our biggest customer wants to roll out a node or when our other top three audio conferencing customers decide they want to upgrade their current infrastructure.

So I would say that that’s shaping up to be another probably second half. And I speak with conviction because that’s just the way it’s been ever since we own the business, right? And sometimes again it’s first half, sometimes it’s second half but feel very good about the yearly projection for MRF.

James Kisner – Jefferies & Company, Inc.

Okay. So just related to – in terms of [inaudible] how that MRF business kind of scales. I mean, if we think about VoLTE, it kind of scales with the ratio of subscribers, the live sessions. Is there a way to think about that for the MRF business, is there a ratio of subs to audio conferences or someway to just try to scale that business in our minds?

Brian Bronson

Yes, it’s a good question. I’m not sure I’m quite ready to articulate what the right measure is. I mentioned we are in [10] [ph] trials, both of those by the way go through a couple of big channels or it’s not public. One of our partners is [Maviner] [ph] is one of those channels. But it’s more about port pricing. It’s about the upgrades and give us another couple quarters to give me the right metric to say here’s progress or not because right now I can tell you it’s counted trials. We have some receipts some POs, it is real. We’re in the network in at least one situation and maybe middle of the year I can provide some better color.

James Kisner – Jefferies & Company, Inc.

Fair enough. Okay. So just turning to your commentary on small cells, I guess I’m just trying to understand, I mean, small cells pushed out in the past, I’m just wondering if it has pushed out yet again in your expectations, or if that’s just your reiteration of what you previously said and, again, I can say that’s the question in a similar way on small cells. But how do we think about the scaling of that, you get paid on a per unit basis. Is it just an overall license? How do we think about small cells and timing and sort of the business model there?

Brian Bronson

Yes, really good question and thanks for the clarification and calibration. So nothing new for me on pushing the rights, so in reconciling that we originally had expectations for very, very nice growth. In the back end of 2011 and then through 2012, and it now starts to be looking to ramp in 2013 still not meaningful, but it is a technology access fee upfront and in royalty model on the back end.

So what I’m talking about deploying is more upfront licensing deals but more importantly starting to see widgets or actual units being shipped where we get a royalty per unit shipped from our customers. And that’s pretty much pure profit. And so even $2 million, $3 million of ROI makes a big difference for us.

James Kisner – Jefferies & Company, Inc.

Okay. That’s helpful. I guess, I’m going to sort of go back something Rich asked about you guys, I guess, are getting growth expectations by business. Did you give an expectation for the legacy businesses and what those sort of decline rates if – I assume their decline rates might be for ‘13?

Brian Bronson

I did, but it’s important to punctuate it right. So in the case of COM Express and Rackmount Server, I expect it to be flat plus or minus from 2012, okay? So the good news is we’re no longer declining. It’s flattened out. Thanks to design win we’ve won over the last couple of years. And then I do expect it to start to grow a bit in 2014, so that’s the trajectory for that business. And other still expect it to be $25 million, maybe $30 million this year, and what’s that Allen down with?

Allen Muhich

About 50%.

Brian Bronson

Yes.

James Kisner – Jefferies & Company, Inc.

Okay. So I’m going to begin my questions here. Expenses, how should we think about the trajectory? How should we think about the trajectory, I know you’re not trying to talk about quarters, I’m assuming that you kind of see revenues kind of moving up sequentially through the yearly directionally.

And so is there some opportunity or leverage on those expenses or even maybe in some corners decline. What do you think about expenses?

Allen Muhich

Yes. I think that’s a really good question, James. So again in our fourth quarter, we had $22 million worth of expense. We guided that in Q1, we would stay at that $22 million. And I think frankly that $22 million level is a reasonable level to assume for the balance of the year and we’ll have a couple of different dynamics going on.

We will certainly have some merit increases that we have to provide our employees, significant number of our employees are in low cost, high inflationary geographies like India and China. And so those changes tend to be a little bit material for us in terms of the percentage exchange. So we got that dynamic.

We also in 2012 and in Q4 specifically did not have any variable compensation. We would like to pay our employees some variable compensation moving forward so that will be a little bit of a head wind.

But Brian and I are going to continue to focus on taking additional cost out of the organization. And so therefore, we believe that we will be able to offset those other natural increases to keep our operating expenses relatively flat through the balance of the quarter, through the balance of the year.

We might see a little bit of an increase in some quarters and a little bit of a lower number in other quarters, but again, relatively flat.

James Kisner – Jefferies & Company, Inc.

Okay, great. I’ve been the one asking the questions I guess. Going now, I’ll put a pass. Thanks very much, guys.

Brian Bronson

Thank you.

Operator

Your next question comes from Aalok Shah of D.A. Davidson.

Aalok Shah – D.A. Davidson & Co.

Hi, guys. I’ve got a couple of questions.

Brian Bronson

Hello.

Aalok Shah – D.A. Davidson & Co.

Hi, can you hear me?

Brian Bronson

You bet.

Aalok Shah – D.A. Davidson & Co.

Okay. So just a couple of quick questions, first around Nokia Siemens we’ve heard from some of your customers essentially or competitors talk about Nokia Siemens being down quite a big in Q1. And I’m curious as to what you think your visibility at Nokia Siemens look like for not only of this quarter, but also kind of going forward. And then do you see the AT&T CapEx ramp helping you this year?

Brian Bronson

Yes. I’ll qualitatively speak to NSN. Again, I just spent lots and lots of time with the folks at [inaudible] core and small cell and some of the other areas within NSN last week.

And to be honest with you, our numbers and our forecast looks plus or minus to me. I don’t get the sense at all insinuate they’re going to be down meaningfully. Again, we’re no barometer, but again it is our largest customer.

More important, really impressed with the transformation of the organization the kind of things that they’re focused on, their willingness to embrace, enabling technology, their ongoing focus on cost, quality, customer experience, again very, very bullish on them particularly relative to even just a year ago. They are winning in the market.

Aalok Shah – D.A. Davidson & Co.

Okay. And then in terms of AT&T, should you funnel through Nokia Siemens and improve Nokia if we do see the AT&T CapEx rises at that kind of indicator that showed on the wireless front?

Brian Bronson

Yes. We could see higher though. I’m pausing a little bit because at the end of the day, I still think the biggest upside for us relative to AT&T in the context of our current picture is MRF. And the existing business, their revenue look solid and the opportunities to do incremental business with AT&T look very, very good.

But my best barometer probably for them is not so much even on the ATCA, the platform side as it is on the MRF side.

Aalok Shah – D.A. Davidson & Co.

Okay. Brian, can you walk me through the Trillium Software licensing, how does that work? Is there a one-year kind of license agreement, is it a multi-year? How do you typically structure deals around Trillium?

Brian Bronson

Yes. And every deal, as you mention is different. So that being said, you enter into a conversation with a customer and you ultimately settle on a TAS [ph], a technology access speed that can be, let’s just say for the purpose of the conversation $500,000 or $250,000. You then also get some maintenance ongoing maintenance from that. And then you agree on a realty rate out in time when widgets or when units deploy.

Aalok Shah – D.A. Davidson & Co.

Are these licenses kind of run on a rolling basis? Is there a quarter or two that really are strong for you guys in terms of licensing?

Brian Bronson

Not so much. That piece has been pretty consistent. What we’re really again looking forward to is to get those royalty starting to ramp. So our guys get new licensing deals or access speed deals every quarter. That makes up quote, unquote "a bulk of the revenue" on the non-professional service side of Trillium and Solutions and then again maintenance as a chunk.

And then overtime we need royalty to be a growing piece of that Trillium revenue stream.

Aalok Shah – D.A. Davidson & Co.

And then two last questions, I mean there’s only 25 days left in the quarter. You guys are giving a pretty wide range for a revenue, is it dependent on one big deal or two big deals or something that we should be thinking about or is it just you guys are trying to be a bit conservative with the guidance at this point? Because that seemed like a pretty wide range for guidance.

Brian Bronson

Well it’s a good question and there’s been, better quarters have been not from the linearity perspective, but the reality Aalok is that we’re shipping half a revenue in the last month and that’s just the way the linearity has played out.

There have been quarters again where it’s closer to a third, a third, a third, but we have quite a bit the shift in margin. Don’t pick a lot of the signal that that’s bad. But with Chinese New Year, MPOs come in, et cetera, we’ve got a lot to shift. And the margin variability even inside of our platform’s business, a pretty wide swing. So that’s the wider EPS range and idealistically I think you and others might want to have.

Aalok Shah – D.A. Davidson & Co.

And then last question maybe Allen, this is for you, but in terms of the working capital means of the company on a quarterly basis, I know you’re selling a [inaudible], but it does seem like you’ve got cash that’s dwindling right now especially with the payoff of debt. Are you concerned about that?

Allen Muhich

Certainly we are not concerned about it tremendously. We are paying attention to it. We are very focused on it. I would say that our cash is not necessarily dwindling. I would say that we did pay back some of our convert. But we are actually generating cash. Again, we generated overall $1.4 million this quarter. We expect to be positive in the first quarter.

We also touched on some of the divestiture activity that we’ve talked about. So Brian mentioned OS-9 being one of the areas where we were able to divest something to realize and bring some cash back onto the balance sheet.

We’ve got a number of other areas that we’re looking at in terms of selling off some older inventory et cetera that will not affect our ongoing operations but it should generate another $7 million to $8 million worth of cash kind of outside of operations over the next 12-ish months.

So we’re certainly managing it carefully. We are, I don’t think concern is the right word, but we’re certainly again managing it carefully and optimizing everything that we can to make sure that we bring more cash in the balance sheet, leveraging inventory, trying to address the linearity that Brian referenced earlier because again if you’re shipping 50% of your revenue in the back half of the quarter, it makes it very difficult to collect. And you can see that in our DSO numbers.

So we’re managing it carefully, but we feel like we’ve got adequate liquidity to be able to manage through this cycle.

Brian Bronson

And Aalok, I would just reiterate that we in this five months and of course I’m obviously not new to RadiSys, but new in the gig here, the piece of the accountability is we’re getting our act together and cleaning up things and in the meantime generating cash flow. I mean you should expect that we’re not going to be hovering around and around breakeven, right?

I mean the intention is to generate profit in this business or else, right? So in the second half you’ll start to see more meaningful cash flow from operations and then we’re often running again. That’s the plan.

Aalok Shah – D.A. Davidson & Co.

And Brian, since you bring that up, can I just ask one quick question on the margin mix?

Brian Bronson

Sure.

Aalok Shah – D.A. Davidson & Co.

It seems like you’re taking a little bit of a hit this quarter because of the mix. Do you think the back half of the year we get back to kind of the high 30s, maybe low 40s even possible?

Brian Bronson

Fall short of 40, definitely higher. And I speak with conviction because again software business is growing nicely. That’s a natural mix benefit. And also the other piece as you know is painfully low from a gross margin perspective, not losing a lot of money on it, right, but again painfully low from a gross margin rate perspective. And so as that goes to zero obviously, that helps the optics and the rate. But most importantly the overall mix moving towards software will help a lot, but it won’t be 40.

Aalok Shah – D.A. Davidson & Co.

Okay. And the royalties and licensing businesses also should be [inaudible].

Brian Bronson

Yes, exactly. Yes, exactly, absolutely.

Aalok Shah – D.A. Davidson & Co.

Okay, great. Thank you so much.

Brian Bronson

Thank you.

Operator

(Operator Instruction) Your next question comes from David Duley of Steelhead Securities.

David Duley – Steelhead Securities

Thanks for taking my questions. Just a couple of follow ups from me, could you just help us understand what the size of the audio conferencing market was or your addressable market in 3G and perhaps how much bigger it could be as LTEs rolled up?

Brian Bronson

Yes, Hey, Dave, by the way. So in the traditional audio conferencing space, we’re market leading there. And of course you now know that both of our revenue 90% plus of our revenue is in that space. I think that market then represents something in the order of $60 million, $70 million.

And that market will continue to have slight growth, so that’s not the exciting piece of the story. Now take that, jump the revenue that we’re shipping to the west, the premiers, the ultimate, the AT&Ts et cetera, and then layer on top our voice-over LTE, revenue that comes on partnering with Maviner and other channel partners. And that market is let’s just say it’s exponentially higher than the audio conferencing market. But it’s going to be out in 2015, right? So we go from sort of 10% of our revenue being Voice over LTE, more meaningful in ‘14, a significant opportunity in 2015 and layered on top of audio conferencing, and then sort of talking about video conferencing, and then other things on top of that. So it is a much larger market size than our traditional media server business has been.

David Duley – Steelhead Securities

No, just let me explain. Is it more just because the audio size getting much bigger or used adding or bolting on some other applications and video and these other areas that you’re talking about that you see the exponential growth.

Brian Bronson

Well, a bulk of the original media server business now called MRF was really putting our Media Resource Function into closets at these conferencing providers running this bridge that we’re talking on today. That has nothing to do with us now baking in our MRF into the IMS core and making it a key network element moving Voice over LTE network. That’s apples and oranges but we take our basic foundation and knowledge and deliver that same basic knowledge and functionality into the LTE network of Voice over LTE.

David Duley – Steelhead Securities

And then could you just make just a general comment about what you’re seeing in the end market demand? Just any other qualitative comments if you can talk about. I can see much on things stabilizing. Do you see any of the big folks deploying their CapEx dollars at or where are we there?

Brian Bronson

Yes, good question. It’s mixed, right? So I see strengths with Annecy, for example, is a big customer of ours, a top five customer of ours. And they’re very, very strong. Very, very strong as an example. E-LG, Ericsson-LG, is strong.

NSN, while it may not show up as I mentioned earlier in a Q&A, in Q [ph] 1%, well, I’m very bullish around that piece of the business for us in ATCA growing as we progressed through the year, simply based on the mood, what they’re weighing and the timing of their deployments.

But that being said for sort of the rest of the business I got to be honest with you it’s still sort of plus or minus, thus this whole stabilizing commentary not really ready to save it, we can go off and deliver that 10% to 15% ATCA growth. I think we can get on the bottom end but I need to see more data first.

And then in the overall froth of our software business, again, around small cells, around MRF, around our solutions we have to make sure that we’re careful from the actual revenue performance in 2013 and the opportunity out in ‘14 and ‘15.

So we see meaningful progress around the opportunity but I would say our existing forecast around our ability to deliver that 20 points of growth is holding. I don’t see it growing. I don’t see a forecast growing.

David Duley – Steelhead Securities

Okay. Thank you.

Operator

At this time, there are no further questions. I would like to turn the floor back over to management for an additional or closing remarks.

Brian Bronson

Yes, just I want to thank everybody again for participating in the call. And I know it’s March but I look forward to providing another update to you guys late in April. Thank you.

Operator

Thank you. This concludes your conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

This Transcript
All Transcripts