Ixia, Q1 2009 Earnings Call Transcript

Ixia (XXIA)

Q1 2009 Earnings Call

April 23, 2009, 5:00 pm ET

Executives

Brent Novak - VP, Finance

Tom Miller - CFO

Atul Bhatnagar – President and CEO

Analysts

Ajit Pai - Thomas Weisel Partners

Doug Ireland - JMP Securities

Presentation

Operator

Good afternoon, ladies and gentlemen and welcome to the Q1 2009 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Brent Novak. Mr. Novak you may begin.

Brent Novak

Good afternoon and thank you for joining us on today’s conference call to discuss Ixia’s first quarter results. This call is also being broadcast live over the web and can be accessed in the investor relations section of Ixia’s website at www.Ixia.com for 90 days. With me on today’s call are Errol Ginsberg, Ixia’s Chairman and Chief Innovation Officer; Atul Bhatnagar, Ixia’s President and Chief Executive Officer; and Tom Miller, Ixia’s Chief Financial Officer.

After the market closed today Ixia issued a press release discussing the results for its first quarter ended March 31, 2009. We would like to remind you that during the course of this conference call Ixia’s management may make forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations and statements as to the company’s future economic performance, financial condition or results of operations.

These forward-looking statements are not historical facts but rather are based on the company’s current expectations and beliefs. Words such as may, will, expects, intends, plans, believes, seeks, estimates and variations of these words are intended to identify forward-looking statements. The company’s actual results may differ materially from those projected in these forward looking statements.

With that said, I would now like to turn the call over to Ixia’s Chief Financial Officer, Tom Miller. Tom.

Tom Miller

Thanks Brent. I should mention that unless specifically noted otherwise, we are discussing all numbers on a non-GAAP pro forma basis prior to non-cash charges for the impact of stock-based compensation, amortization of acquisition related intangible assets an impairment charge related primarily to the company’s investment in auction rate securities as well as the related income tax affects of such items.

In the first quarter these charges consists of $3.8 million related to stock-based compensation, $1.3 million for the amortization of acquired intangible assets, $1.4 million investment impairment charge and net tax benefit of $2.2 million related to these items. A full reconciliation of the non-GAAP financial measures covered in this call to the most directly comparable GAAP measures is available in the Investor Relation section of our website at www.ixiacom.com.

Revenues for the first quarter of 2009 was $37.1 million within our guidance of $37 million to $42 million. This $37.1 million of revenue compares to $41 million in the immediately preceding fourth quarter of 2008 and $41.7 million in the first quarter of 2008.

Our GAAP loss for the first quarter of 2009 was $0.06 per share, which includes a $1.4 million write down on auction rate securities. Non-GAAP EPS for the first quarter of 2009 was $0.01 per diluted share.

In the first quarter interface cards accounted for 71% of our revenues, software accounted for 15% of revenues with the remaining 14% representing revenue from chassis, warranties and other products. From a geographic perspective, domestic revenues represented 55% of our total first quarter revenues with Canada representing 7%, EMEA 12% and Asia-Pac 26% of revenues.

From a customer perspective 56% of our revenues in the first quarter came from network equipment manufacturers, 15% from service providers, a combined 12% from enterprise university and government customers and 17% from distributors, communication chip manufacturers and other accounts.

Our top five non-distributor customers represented approximately 36% of revenues in Q1 and included CISCO, Juniper, NTT, Alcatel Lucent, and Huawei. Sales to CISCO, our largest customer were $6.8 million representing 19% of revenues.

Moving down the income statement, non-GAAP gross margins were 77.7%, slightly below our target range of 78% to 80% due impart to pricing on certain load modules including end of like units that we sold at discount prices.

We expect our non-GAAP gross margins to be in the 78% to 80% range for the second quarter of 2009. Non-GAAP operating expenses were $28.9 million in the first quarter, approximately $3 million lower than the $31.9 million reported in the immediately preceding fourth quarter. The sequential decrease in non-GAAP operating expenses was primarily due to the non-recurring cost of $2.1 million incurred in the fourth quarter.

Excluding the non-recurring cost from the Q4 run rate, non-GAAP operating expenses for the first quarter droped by approximately $1 million sequentially due in part to lower bonus expenses and travel cost in Q1 as a result of our previously discussed cost cutting measures.

First quarter 2009, non-GAAP net income was $385,000 or $0.01 per diluted share. This compares to $2.8 million or $0.04 per diluted share for the same period last year. The non-GAAP effective tax rate was 26% in the first quarter within our target range of 21% to 27%. We expect the non-GAAP effective tax rate for the second quarter of 2009 to be 27%.

Turning to the balance sheet. Cash, cash equivalents and investments were approximately $202 million on March 31 which compares to $206 million reported three months earlier. As noted we recorded a $1.4 million impairment charge for auction rate securities in Q1. After the impairment charge Ixia had auction rate securities current value of $1.8 million at period end. Pursuing to our 25 million share repurchase program announced in November of 2008. During the first quarter, we repurchased 1.1 million shares of Ixia's stock at a total cost of $5.3 million on an average of $5 per share including commissions.

Since the inception of $25 million share repurchase program through March 31, 2009 we have repurchased approximately 1.5 million shares of the Ixia stock at a total cost of $8.1 million or an average price of $5.28 per share including commissions. The $25 million share repurchase program expires at the end of May 2009.

Cash flow from operations for the first quarter of 2009 were $4.5 million compared to $1.7 million in the immediately preceding fourth quarter. Capital expenditures for the first quarter of 2009 were $1.9 million compared to $1.4 million in the immediately preceding fourth quarter.

Accounts receivable decreased from $34 million on December 31, 2008 to $29.4 million as of March 31st. Days sales outstanding for the first quarter based on trailing figures was 71 days.

Inventory was $14.9 million at March 31 for an annual turnover rate of 2.2 times. The number of full-time employee equivalents as of March 31, 2009 was 825 as compared to 805 employees at the end of the fourth quarter.

Looking forward the current economic climate continues to limit our visibility. Taking this into account and based on a review of the sales pipeline and discussions with our sales management team, we expect second quarter revenues in the range of $35 million to $40 million and we expect second quarter revenues from CISCO to be $5 million to $7 million. We currently expect our non-GAAP EPS to range from a loss of $0.02 per share to earnings per diluted share of $0.03 in the second quarter.

With comparable GAAP EPS estimates in a range between a net loss of $0.03 to $0.07 per share. The difference between anticipated GAAP and non-GAAP result relates to expected non-cash charges and the associated tax effect, including non-cash charges relating to stock based compensation.

We estimate at this time that our stock based compensation charges will be between $2.4 million and $3 million of second quarter of 2009 on a pre-tax basis. With that said, I would now like to turn the call over to Atul.

Atul Bhatnagar

Thanks Tom. While we made our revenue guidance for the first quarter of 2009 and beat the consensus EPS number. We have been impacted by the current economic turbulence like others in our industry. We have seen a slow down in most geographic regions, most customer segments and across most of our product lines.

However we do have some bright spots where we have performed well despite these difficult times, for example carrier bookings are up 19% compared to the first quarter year ago.

Asia-Pacific revenues are up both sequentially and year-on-year. Our market leading IXU content gigabyte load module hit record revenue levels in the quarter. We continue to be the only test company in the world shipping 100 gigabit Ethernet solutions. And we did this while controlling cost and generating cash from our operations in a though market.

But more on that despite this near term uncertainty, we still believe in the long-term fundamentals of the Ethernet test market. Ethernet has been a standard LAN technology for over 20 years and the last several years have seen Ethernet take off in the metro, wireless and wide area markets.

With many indicators pointing to Ethernet as a Internet backbone of the future. We believe that demand for the greater bandwidth which is the fundamental driver of our industry remains strong.

Demand for Ethernet network has been driven by rapid growth of business and consumer broadband applications utilizing data, voice, and in particular video traffic. We see no reason why demand for broadband capacity will do anything but increase over the long-term.

Looking at our Q1 results let me first say that I am very pleased that we were able to beat the consensus earnings number and remain profitable on a non-GAAP basis as these reduce revenue rates.

We saw our operating expenses drop under $29 million for the first time in almost two years. We have implemented a series of internal expense deduction including increasing salaries, eliminating bonuses and cutting major expenses such as travel.

And with approximately 25% of our cost outside of US we also benefited from the strong dollar, which has increased by 20% to 30% versus the British pound and other currencies where we have foreign operations. These currency declines result in real savings for Ixia when measured in terms of the US dollars. But foreign exchange rates can be volatile especially in this market. So we know we can not count on these foreign exchange savings indefinitely.

Although we saw some softness on our gross margins this quarter. We are confident that we will see an improvement in margins later in the year.

First quarter margins were impacted by pricing on certain load modules including some end supplies unit that we sold at discount prices.

Our lower revenue levels also negatively impacted our gross margins. As lower revenue level our relatively fixed overhead costs tend to be a higher percentage of revenue and as a result difference our gross margin.

But as we announce during the first quarter we have a new manufacturing agreement with Plexus Services Corporation, a major electronic manufacturing services company.

We have already started to transmission a portion of our manufacturing and material sourcing to Plexus. While leveraging their operational expertise and purchasing power we expect to reduce our product cost over the next several quarters. These savings should start to show up as reduction in our cost of goods sold in the second half of the year. We are comfortable that we will be able to get back to our gross margin target range of 78 to 80%.

Our goal is to work forward from this point to control expenses and to increase our profitability as whatever level of revenue we find ourselves.

This increased profitability will be the result of improved gross margins coupled with lower operating expenses.

Now I would like to discuss how some of our products performed in the first quarter. Ixia continues to be the leader in high density, high performance Ethernet load modules. We continue to shift the industry's highest density and highest performance load modules available.

Even in this down market we saw our 10 gigabit Ethernet revenue increase by $22.3 million or 23% from the fourth quarter. 10 gigabit represented a record 33% of our revenues in the first quarter.

Our leading 10 gigabit Ethernet project line IxYukon was introduced in the second quarter of 2008. And it has become rapidly our best selling product line. Achieving a density of up to 96 coats per chassis, IxYukon is the most scalable and densest 10 gigabit solution in the market. And it represents a 4:1 density advantage for what the competition is shipping. This scalability and performance to make the IxYukon ideal for testing the needs of today's advanced datacenter environment. There is clear momentum in the datacenter market to move to a consolidated unified fabric for servers and storage that leverages Ethernet as a transfer mechanism for the next generation.

Ethernet is replacing fiber channel and other legacy technologies in storage area network, or SAN.

Datacenter will soon be wall-to-walk Ethernet environment, bridging servers and SANs with the common Ethernet transport mechanism. To test these new datacenter technologies, Ixia recently introduced support for fiber channel, or Ethernet protocol and data center bridging protocols on our IxYukon 10 gigabit load modules.

We have already sold the solution into several major accounts. And in 2009, we released our IXN product, which test the application layer of the data center with the real storage traffic. Ixia now provides the industry's only layer 2-7 solution for testing next generation datacenter solutions.

At Cisco and at Hitachi, Ixia is able to sell into new business growth that are more focused on storage than network testing. These deals were due to the superior datacenter solution and real storage traffic generation capability that no other company can come close to matching.

Server virtualization is another compelling phenomenon that is drawing Ixia into innovative new markets. In the datacenter, we see virtualization as a transformational technology as companies are getting ready to consolidate several resources, gain flexibility and improve availability of their services while optimizing cost.

Ixia has introduced virtualization test capabilities with our IxChariot product line and we continue to make innovations to facilitate our customers with rollout of their virtualized data centers. And the IxYukon architecture is at the foundation of all these new exciting capabilities.

Finally, in addition to being our number one seller, IxYukon is also one of the highest quality new cards that we have every introduced. The failure rate on these cards is amazingly low, and that quality contributes directly to increase customer delight and higher profitability.

IXIA continues to be the only company in the world shipping 40 and 100-gigabit Ethernet products. While our early shipments represent design wins with leading equipment makers, we are seeing growing interest in this next generation of Ethernet technology.

As internet application consume more bandwidth and carriers and equipment makers look for ways to get more throughput out of their networks, we are seeing an increasing level of interest in 40 and 100 gigabit Ethernet.

As you saw with 1 gigabit and 10 gigabit Ethernet, the first application of this new technology will be at the core of the internet. Eventually, over the course after few years 40 and 100 gigabit Ethernet will spread from the core to the edge and to the advanced datacenters just as earlier technologies have done.

According, we would initially expect to see a slow ramping of these technologies with a coupon makers followed by wave of demand from carriers as they get their networks ready for this new technology.

Over the next few years, we expect increased equipment marker demand as they build multi-port and then high-density 40 and 100 gigabit solutions. We have now shipped our 100 gigabit solution to several of the top equipment markers in the world, and we believe that we will add more customers in the second quarter.

As I stated earlier, Ixia is the only company with a solution in this space right now and we plan to leverage that advantage into a leading market position in 40 and 100 gigabit test solutions.

Looking now at how our various customer segments performed, both in comparison to the last quarter of last year, and sequentially in comparison to the fourth quarter. We saw our biggest declines in revenues coming from the major equipment makers.

Cisco was down $1 million sequentially, and $3.7 million from a year ago. Other equipment makers were down $1.5 million sequentially, and about $3.4 million from a year ago. These large equipment makers directly impacted by economic crisis.

They are seeing slowdowns at major financial institutions and large enterprises, and they are reducing their R&D CapEx accordingly. However, we believe that the long-term trends will be positive as the requirement to meet increase bandwidth demand will result in increased spending by all parties overtime, though the lack of urgency may continue for several quarters.

On a more positive note, in the short-term, we are optimistic about our carrier business for the second quarter and for the rest of the year. Inline with normal seasonality trends, we saw a slight dip in carrier bookings from the fourth quarter, but we had a robust gain of 19% in bookings compared to first quarter of last year.

While we saw softness in our North American carrier business in the first quarter, we had a very strong quarter in Japan. Looking forward, we expect a rebound from North American carriers over the next several months.

As we have stated before, we have made significant investments in our carrier sales force and we are beginning to see signs of major progress.

Carriers use our products for a variety of pre-deployment testing needs, including testing core network technologies such as new routing protocol of new 10 gigabit and 100 gigabyte technologies.

Testing the interoperability of equipment from various equipment makers, testing advanced IT services for just converged triple play traffic and VPN capability and testing voice-over-IP networks before they deploy to customers.

Over the last few years, AT&T has become one of our top five customers, and we are beginning to see sales progress at other major North American carriers. At the same time, we need to caution investors that the uncertain economic environment may result in lumpy performance in carrier space over the next few quarters.

So, we think we are at the start of a major spending cycle and that there will be increased demand for test here as carriers upgrade their networks to meet the demands for increased bandwidth and the adoption of triple play services.

And our Ixia product, which is targeted at service verification of live carrier network is generating major interest also. Building on our years of proven leadership in testing IP networks and protocols, IXA combines in a (inaudible) centralized test engine, virtual software endpoints and light weight probes to achieve full end-to-end network coverage cost effectively.

IXA has enabled the carrier to quickly isolate and resolve the source of problems from a centralized location that is integrated directly into existing customer management systems, processes and support team.

During the first quarter a global Europe-base carrier, which provides critical layer 3 VPN transport for businesses and government organizations purchased Ixia's IXA to ensure if service level agreements are consistently met.

Also during the first quarter, we secured a key proof-of-concept wins at a large Tier 1 carrier in Europe by providing a fiber-to-the-curve, centralized test engine solution. The sales funnels for IXA was beginning to develop and we expect to see bookings grow in the second half of the year.

Looking at our performance on the regional basis, we saw weakness EMEA and US. EMEA revenues were down 13% from the fourth quarter and US was down 20%. We did however see remarkable strength from our Asia-Pacific operations where revenues were up 25% from the fourth quarter and 32% from the last year. Our Asia-Pacific business is derived mostly from Japan, China and India.

In the first quarter we benefited by the seasonal year end budgets research in Japan with carriers contributing significantly to the strong performance in Japan. As we have noted before, during 2008 we replaced some of our key sales management team in Asia and we’re seeing the rewards today. We have made similar changes in parts of North America and EMEA and we expect to read the benefits of these investments over the next few quarters.

In spite of difficult challenges we expect to see during 2009 on a global economic front. We continue to remain very confident about IXIA future. We are a strong balance sheet with over $202 million of cash and investments and no debt. We enjoy competitive advantage and technology leadership in many of our key markets in our customer delight level are at in all time high. Lately we have been telling our employees, customers and investors that same simple message; IXIA is committed to continued investment in its people and technology so that we can continue to meet the ever expanding needs of our customers.

At the same time, we have committed to developing growth and profits to our investors. While significant growth that require improvement in the macro economic environment, we will start by enhancing profitability before then. In 2009, it is our goal to innovate new products to keep our people engaged, to deliver high quality, industry leading solutions which our customers need, and to generate cash flow and profits for our investors.

With the continious support of our employees, customers, suppliers and investors we look forward to the challenges and opportunities that 2009 and that years beyond will bring. And we fully hope and expect to emerge from these trying time as a better, stronger and more profitable company.

Operator, you can now open it for questions. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions). And our first question comes from Ajit Pai. Please go ahead.

Ajit Pai - Thomas Weisel Partners

Yeah, good afternoon.

Tom Miller

Good afternoon.

Brent Novak

Hey, Ajit, how are you?

Ajit Pai - Thomas Weisel Partners

Couple of quick questions I think one on the carrier opportunity I think you’ve mentioned that year-over-year days was up, but on a sequential basis it was down. So, could you give us some color as to the kind of applications that carriers are looking at your product for? And why you haven’t, when you talk about it being lumpy why there hasn’t been further progress in penetrating that market?

Tom Miller

So, Ajit, overall I would say carriers in Q1 generally are softer and carrier sales in general has a longer gestation period. But I have to say that triple play services voice-over IP network in MSOs and a lot of interest in 40 and 100 gig are probably the key areas where we see definitely expanding interest. And also I think carriers are becoming lot more sensitive to the quality of experience of end users, all large carriers, and this is a global phenomena, all large carriers are ensuring that as they bring IPTV services or video services or interactive services or gaming services, they absolutely simulate and test the realistic end user traffic and scaling before they deploy their services. And that’s we have products IxLoad are really shining and doing very well.

Ajit Pai - Thomas Weisel Partners

Got it, but if you have a look at the number of carrier customers, not like necessarily just to revenue, has that count being going up and is it still, it is in single digits, it is in low double digits, how many carrier customers did you have in the quarter?

Tom Miller

I don’t have that number, we'll look at up right now and get it to you in minute here. But I think that, that is numbers not going up as much or as we would expect the volume per customer to go up. We think there is a lot of potential in some of the major carriers to increase our share of the business and to sell more. Over the last several year we had great success with AT&T where we took it from a relatively small account to a major account, and we think there is a opportunity at a lot of carriers both in North America, Europe and Asia. So, we are looking of course to grow the number of accounts but it's really the volume for account where there is a great opportunity.

Ajit Pai - Thomas Weisel Partners

Right, and when you are looking at Cisco as a customer, the revenue they’re fallen now I think probably to the lowest level they have been in like many, many years. So, when you are looking at that, is it that the company itself is taking it's R&D spending down to sort of very low levels, is it share loss is that, loss surprising power, I mean, what exactly is driving Cisco down as much as it is? And what’s going to -- is that a customer that can actually come back to levels of revenue that you’ve gotten from them as recently as about 6 to 12 quarters ago?

Atul Bhatnagar

So, Ajit, my read is that like most of the mems and everyone is feeling the economic crisis. I think CapEx definitely is down at all mems not just as good all mems. On other hand important projects which are next generation projects it's still are getting necessary resources. Another thing I am seeing and not just as good I think most of the mems say that there is more consolidation going on within the companies. So, sometimes the gears are being reused from one place to another, that also contributes some of you buying less.

In Ixia, we very strongly believe that when customers come back from a slow down, they don’t buy legacy products. And one of the reasons why we have done reasonably well in this tough economic climate and maintain profitability is that our 100 gig product we sold for the first time we shipped for revenue in Q1. Our 10 gig IxYukon investments which we've made aggressively last year are absolutely gaining market share. We maintain very maintained very close touch with our key customers like CISCO. And our market share I can tell you across the board we’re gaining share, its just that there are less dollar to go by given the economic climate.

Ajit Pai - Thomas Weisel Partners

Got it. And last question would just be the competitive dynamics with Agilent and then with Spirent. Have there been any changes in terms of the manner in which two competitors have been competing with you. Any pressure the reason why you had to give up some pricing or your margins of that, was it anything to do with competitive pressures or the fact that it was end of life stuff that you had to sell?

Atul Bhatnagar

There is always some competitive pricing pressure in every situation in all times, but I would say there is nothing abnormal or we are seeing. If anything some of our new capabilities like 100 gig there is no competition. On 10 gig IxYukon we have the highest density board, which customers absolutely love because it consumes less power, gives them the right density. So I would say no Ajit there is no abnormal competitive pricing pressure.

Ajit Pai - Thomas Weisel Partners

And any change in competitive dynamics with those two? Are they more focused, less focused?

Atul Bhatnagar

I would not comment, we take every competitor seriously I think Agilent and Spirent both as you mentioned they're very respectable companies. We just focus on our products and our capabilities and customer delight. I would really not comment on that. We wish them good luck.

Brent Novak

Yeah, I just want to add to that I think that the impact of selling some of these older modules that we are taking about at discounted prices was enough to push us out of our target range. And then also we had the impact of slightly lower volume for our fixed overhead costs in that area and that also had an impact on margins. Taking those two factors away, we've been well in the range of our target margins.

Atul Bhatnagar

And so, Ajit, I think one key point I want to make is that our strategy of investing in the future; anticipating the customer needs, innovating new solutions is absolutely going to continue because we believe even when markets come back it will not come back and buy more of legacy products.

Ajit Pai - Thomas Weisel Partners

Right, I mean that is true but if you have a look at the amount of investment that's required on your expense line right now I mean, the company for the first time I think in it's history or at least recent history of the public company actually hasn't had a positive operating margin. So when you're looking at investments relative to the potential opportunities and especially your confidence in the network equipment manufacturers coming back, if they're consolidating, what gives you the confidence that that business is going to come back and when do you think it's going to come back?

Atul Bhatnagar

It is very difficult to predict in this climate when things will come back but I would say that as enterprises and carriers start to buy more and more, the 10 gig density switches will definitely scale to much higher numbers. So they will need lot more testing gears. The entire conversions in data center conversions carry a triple play services. So it will definitely require more investment. It is anybody's guess right now in terms of when the markets will come back. But as they come back they will buy more but my key point is, they will buy more of the next generation products, not necessarily the last generation architecture.

Ajit Pai - Thomas Weisel Partners

Right, right but will you have pricing power, will they want more equipment but you are not able to get more revenues is the question?

Atul Bhatnagar

Overall so far what we are seeing is wherever we have products which are satisfying that need with their next generation programs, we are able to maintain our pricing and our margins.

Ajit Pai - Thomas Weisel Partners

Got it, okay thank you.

Atul Bhatnagar

Thanks Ajit.

Operator

(Operator Instructions). Our next question comes from Samuel Wilson. Please go ahead.

Doug Ireland - JMP Securities

Thank you this Doug Ireland for Samuel Wilson.

Tom Miller

Hey Doug.

Doug Ireland - JMP Securities

Hi good afternoon. I had a couple of questions, I am sorry I missed the cash flow from operations number.

Tom Miller

Cash flow from operations, let me look at my table here, $4.5 million.

Doug Ireland - JMP Securities

Okay, great and then the headcount I though I heard 825, is that right?

Tom Miller

Yes, it was up a little in the quarter. Most of those resources were low cost contractors in India related to some projects that we have an upcoming dead line on.

Doug Ireland - JMP Securities

Okay because I thought that was, that's a pretty big jump and you are really keeping a lid on those expenses, so I thought there might be something going on.

Tom Miller

Right.

Doug Ireland - JMP Securities

On the remaining $1.8 million ARS. Do you anticipate fading that out or is that something you see is still collectable?

Tom Miller

Well I think that a piece of that is and I think that ultimately we have the possibility of collecting more than $1.8 million when some of these auction rates mature. Some of them won't be worth anything but I think that some are possibly could be worth less, but I think that we have a very strong possibility on some of the auction rates to collect at or near their full face value but that might not be for several years until they reach maturity. And so, we are discounting the value back several years and coming up with a lower carrying value.

Doug Ireland - JMP Securities

Okay so that will just sit as an asset on our books.

Tom Miller

It will just sit as asset on the book.

Doug Ireland - JMP Securities

Okay, great. Now, I was wondering if the increase in business in Asia and your appearance (inaudible) as a top customer in particular had anything to do with the margins?

Tom Miller

No, as a matter fact. Some of that the surgeon business in the first quarter in Asia Pac was from Japan where the margins are quite good. And I don't think that China in general was up that much and really impacted our margins overall. So, I think if anything Asia Pac's helped our margins this quarter.

Doug Ireland - JMP Securities

Okay. And finally on the service assurance products, do those have an endpoint on on-prem and off-prem a core network element as well?

Atul Bhatnagar

Yeah, so let me answer that. So the end points are generally Ixia leveraging the Chariot product line we already have. So Ixia overall end-to-end solution leverages that. And then Ixia solution also leverages our Chassis-based centralize solutions which to go in a central office or more in a centralize location. So we do have end-to-end solutions covering both edge and the core.

Doug Ireland - JMP Securities

Okay, now I am sorry, if this is something that is more of a different topic but I was wondering if there is a product mix element to the growing service assurance business in that. End points are somehow less profitable because they are less complex.

Atul Bhatnagar

The end point in our case is really running our software end points in the edge devices and its mostly software, and mostly software and mostly leveraging our abilities. We do have props which we use but Ixia solution is lot more less props, lot more a centralized solution with software end points in different devices.

Doug Ireland - JMP Securities

Okay so its more agent based or?

Atul Bhatnagar

Correct. More agent based and more active service verification.

Doug Ireland - JMP Securities

Okay. Great, because I know that growing the IxRave services assurance business is an area you have been focused on, I just wanted to know if there was going to be any impact from that. But it sounds like that’s also another very lucrative business.

Atul Bhatnagar

Yes, and then also our differentiation there is very much focused on as much centralized, highly skilled solution element and then software on the edge, which can scale more rapidly and that means end-to-end you have more active solution and more scalable solutions.

Doug Ireland - JMP Securities

Okay great. Now I’m all covered, thank you very much.

Atul Bhatnagar

Yeah, thank you.

Operator

(Operator Instructions) We have no further questions at this time.

Atul Bhatnagar

Great, thank you, I really appreciate everyone joining on the call today, appreciate to support, we look forward to updating you on our progress in the coming months. Thank you.

Operator

Ladies and gentlemen this concludes today's conference. Thank you for participating. You may now disconnect.

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