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Executives

Mark Donohue - Director of Investor Relations and Assistant Treasurer

Ashraf M. Dahod - President and Chief Executive Officer

Paul J. Milbury - Vice President of Operations and Chief Financial Officer

Analysts

Michael Walkley - Piper Jaffray

Amir Rozwadowski - Barclays Capital

Brian Modoff - Deutsche Bank

Hasan Imam - Thomas Weisel Partners

Steven O'Brien - J.P. Morgan

Matthew Robinson - Wedbush.

Anil Doradla - William Blair & Company

Blaine Carroll - FTN Equity Capital

Richard Kramer - Arete

Edward (Ted) Jackson - Cantor Fitzgerald

Matthew Thornton - Avian Securities

Lawrence Harris - C.L. King & Associates

Starent Networks, Corp. (STAR-OLD) Q1 2009 Earnings Call April 23, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen. And welcome to the First Quarter Starent Networks Corporation Earnings Conference Call. My name is Jerry and I'll be your coordinator for today.

At this time all participants are in a listen-only mode. We will conduct a question and answer session towards the end of the conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Mr. Mark Donohue, Director of Investor Relations. Sir you may proceed.

Mark Donohue

Thank you, Jerry. Good evening everyone. With me on the call this evening are Ashraf M. Dahod, our President and Chief Executive Officer, and Paul J. Milbury, our Vice President of Operations and Chief Financial Officer.

Today, after the market closed, we issued a press release announcing our results for the first quarter of 2009. A copy of the press release along with a company income statement, balance sheet and operating statistics as well as a reconciliation of the most directly comparable GAAP financial measures, any non-GAAP financial measures used during this call and for certain prior periods are available on the Investors section of our website at www.starentnetworks.com.

The format for tonight's conference is as follows. Ash will begin with a few summary statements to review business highlights. Paul will then review the details of our financial statements to present our outlook for 2009. After that we'll open up the call for Q&A.

Before we begin, I would like to remind you that various remarks that we may make about the company's future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent annual report on Form 10-K filed with the SEC. In addition, any forward-looking statements represent our views only as of today and should not be relied upon as representing our views as of any subsequent date.

While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change and, therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call we will be referring to non-GAAP financial measures. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures and most directly comparable GAAP measures is available in our earnings press release issued earlier today which is posted on the Investors section of our website.

At this time I would like to turn the call over to Ash.

Ashraf M. Dahod

Thank you, Mark. Good afternoon, everyone and thank you for joining us for our first quarter of 2009 earnings conference call. We're please to report that we had a good first quarter.

Our revenue for the first quarter was 73.2 million, an increase of 30% from the first quarter of 2008. GAAP net income was 12.8 million or $0.17 per share -- per diluted share in the first quarter, including stock-based compensation of $4 million. Excluding the stock-based compensation charges, non-GAAP net income was 16.1 million or $0.22 per diluted share in the first quarter.

We continue to see positive trends impacting the mobile multimedia packet core market. Factors such as growing consumption of broadband multimedia services, ongoing deployment of higher bandwidth video technologies, increased availability of affordable multimedia handset and data cards continue to drive demand for Starent Networks solutions.

In addition to growth in basic mobile data services such as e-mail and internet access, there is also increasing usage of more bandwidth intensive applications such as mobile TV, video demand, advanced gaming services and rich media.

As a result, the mobile broadband network is moving for hundreds of kilobits per second to multi-megabit rates. According to Informer, operator data revenues are projected to increase at a 40% compounded annual growth rate from $31 billion in 2008 to $187 billion in 2013.

In 2008, the average data traffic at Tier 1 mobile operators was about 1 terabyte per day. A figure that is projected to grow approximately 35 times by 2012 according to the data from Informer. Some carriers have indicated that they are seeing monthly increases in data traffic in the range of 5 to 10%. Our business is largely driven by the operator's needs, to not only address this growth in throughput and capacity but also to integrate increased levels of intelligence, high availability and mobility management into the network.

Another key point is that many other 3G networks advertise our operators today are pushing the limits of their 2.5G platforms and have yet to make a true 3G multimedia packet core decision.

Networks are classified as 3G when they reach 384 kilobits per second. And network will still be classified as 3G when they are running at 100 times their speed. Due to performance limitations, operators utilizing legacy solutions are required to purchase large quantities of equipment that meets the growing data traffic demands.

By adopting Starent Networks next generation core solution, operators can deploy the performance and intelligence necessary to build a scalable, efficient and cost effective mobile broadband network.

We continue to see HSPA traffic serve as a key technology driver for GSM/UMTS operators to make their next generation packet core infrastructure decisions. HSPA technology involves broadband speeds ranging from 3 to 14 megabits per second. Speeds at which legacy competitive solutions fall short.

Based on data from wireless intelligence, there were 19 million HSPA subscribers as of end of 2008, which represents only 3% of the worldwide GSM subscribers. That figure is expected to reach 933 million by the end of 2012, which is a compounded annual growth rate of 79%.

Today, we estimate that 30% of HSPA subscribers worldwide are served by Starent's platforms. We continue to successfully diversify our business within our current customer base, approximately two-thirds of our subscribers are CDMA and one-third of subscribers are GSM/UMTS.

We believe that both the CDMA and GSM/UMTS markets provide significant growth opportunities because 3G mobile broadband reduction is still in its earlier stages. Today there are only 10% of GSM subscribers and 30% of CDMA subscribers on 3G networks according to wireless intelligence.

The world's two largest mobile communications markets China and India are just now beginning to migrate to 3G. While 3G will be a growing technology for many years to come, operators are already looking at 4G for next generation deployment.

As such there has been significant discussion in the market about the Evolve Packet Core or EPC for 4G. We continue to see competitors introducing 4G solutions that are retrofitted from other markets and applications similar to their 3G approach. However, we believe all the drivers for a purpose driven platform in 3G are even more applicable in 4G.

Customers are looking for focused solutions that we'll solve through this core network challenges and equally prepare them for tomorrows. Starent delivered on the both fronts, offering best of 3G platforms that are upgradeable for 4G LTE networks.

Tracing point in our recent announcement that mobilkom Austria group known as mag has selected Starent's multimedia core solutions for deployment in its mobile operator member companies serving eight European market for HSPA as well as in the future LTE mobile broadband services.

Net services of our 18 million mobile subscribers. The ability to easily migrate the Starent multimedia core platform to the 4G LTE evolve package core was a key element in the selections I made.

As an example, is the leadership position Verizon is taking as they aggressively prepare for deployment of LTE. Verizon's announcement of its LTE vendors was a top story and the industry's largest ratio Mobile World Congress in Barcelona in February. Starent Networks was included in an announcement as a vendor for the LTE packet core.

We have a long standing and successful relationship with Verizon and their decision to specifically address the LTE packet core in that announcement exemplified its growing strategic importance. As further recognition of the value and commercial viability of our LTE solution, Motorola has selected Starent Networks to provide multimedia core networking solutions for use in its LTE network offering.

Innovation and technology leadership continue to be the corner stones of our success. It is imperative we provide our customers with more comprehensive solution that enable us new service and revenue opportunity, for example, Starent IMS base solution enabled new services and provides inter-working and migration of current voice and messaging to next generation SIP-based networks. This solution has been selected by tier-1 UMTS carrier, our second IMS-based win in this quarter.

Our first IMS-based win was Cellcom with selected Starent Networks to provide its next generation Femtocell service days on IMS and SIP technology. Cellcom had utilized Starent, Femtocell Network Gateway and Session Control Manager, which together provides security, aggregation and mobile authentication and traffic routing functions.

As mobile data networks transform from lower speed, best effort to the next generation broadband technology that demands for advanced multimedia networking solution is expected to continue to grow. While we believe the multimedia packet core will be an area of continued investment, we are closely monitoring the effect of the global economy on our market.

Our plan is to remain focused, flexible and to aggressively pursue our business opportunity. We remain confident that if we execute on our strategy, we will continue to be successful.

I will now turn the call over to Paul to provide a review of our first quarter financial results and our outlook for 2009, after which we would be happy to answer questions.

Paul J. Milbury

Thank you, Ash. As always, I just want to remind you that since we exclude non-cash stock based compensation when we evaluate our operating performance internally, I will be referring to non-GAAP figures on this call, unless I specifically state that I'm referring to a GAAP figure.

We are pleased with our performance in the first quarter, which gives us a good start to 2009. Revenues of $73.2 million grew 30% from the first quarter of 2008. Gross margins were higher than expected coming in at 80.9% for the quarter, which was driven by higher product gross margin.

Most of the revenue we recognized in Q1 came from existing customers and we had a higher than expected mix of software related to licenses for capacity expansion. We do not expect that we will be able to sustain gross margins at this level as we expand our business and recognize revenue from new customers in new markets.

Services gross margins of 57.2% declined from last quarter as service expenses grew 10% based on new customer activity while service revenue declined slightly. Service revenue was slightly lower sequentially due to certain customers not renewing maintenance on older products.

Operating expenses were $33.5 million this quarter, which is approximately flat or sequentially in the year-over-year. Research and development spending increased $1 million sequentially to $12.6 million driven mostly by an increase in personnel costs and higher depreciation in the quarter.

Sales and marketing spending declined $2.2 million sequentially to 15.2 million, primarily due to timing related to variable computation plans. Overall, operating expenses declined slightly as a percentage of revenue from 47% last quarter to 46% in Q1.

Total headcount was 849, up 75 from the beginning of the year. Excluding $4 million in stock-based compensation charges, our non-GAAP operating profits for the quarter were $25.7 million, which is a year-over-year increase of 150%. Other income was a loss of $500,000 for the quarter. This was primarily driven by an unfavorable currency revaluation of our euro and British pound denominated receivables.

Additionally, our cash is invested conservatively in U.S. government related money market funds, which currently have very low interest rate yields.

As we have discussed in the past, and as expected, I would like to point out that in Q1, we had a major change in our tax situation as we began to provide a normal provision for income taxes. Non-GAAP tax expense in Q1 was $9.1 million on 25.2 million of profit before tax, a tax rate of 36.2%.

In Q1 of 2008, we had tax expense of $500,000 on $13.5 million of profit before tax, a tax rate of 3.3%. So, while our profit before taxes grew by 87% year-over-year, our net income grew by 23%. Net income was $16.1 million or $0.22 per diluted share based on 74.6 million shares outstanding.

Turning to the balance sheet, we increased our cash position in the quarter by $17.9 million to 387.2 million or $5.19 per diluted share. Accounts receivable were up 5 million from the prior quarter to $58.7 million, while inventory was unchanged.

Balance sheet deferred revenue increased by $8.2 million sequentially to $160.9 million. Capital expenditures, which were mostly for customer lab and test equipment, were $6.3 million in the quarter.

On our last call, we affirmed the preliminary that we provided in October of 2008. At this time, we are maintaining our guidance for revenue in the area of $315 million for 2009 but we are raising our profit outlook.

Based on the higher than expected gross margins we had in Q1, we now expect gross margins for the full year to be in the range of 76 to 76.5% compared to our previous outlook of 75%. We expect the additional gross profit to fall through to operating profit.

Additionally, we expect operating expenses for the year to be slightly under 50% compared to our prior guidance of 50% with Q1 likely to be our lowest quarter for expenses. With expectations for improved gross margins and slightly lower operating expenses, we are increasing our 2009 operating profit outlook from 25% to a range of 26 to 27%.

Below the operating profit line, we expect other income to be several million dollars lower than our initial guidance of 4 to $6 million due to the substantially lower interest rate and the unfavorable currency revaluation in Q1.

Lower other income is being partially offset by a lower than expected tax rate of 36% compared to our previous guidance of 37 to 39%. We now expect non-GAAP EPS in the range of 71 to $0.74 on 76 million diluted shares versus our previous outlook of 65 to $0.68 per share.

We expect full year stock-based compensation to be about $22 million and our GAAP tax rate to be approximately 39% resulting in GAAP EPS in the range of 49 to $0.52 per diluted share.

Ash and I would now be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Mike Walkley with Piper Jaffray. You may proceed.

Michael Walkley - Piper Jaffray

Great. Thank you very much. Ash, I just wanted to ask a question as it relates to LTE, with the Verizon win as a good reference, has this increased carrier interest in your own solutions, have you seen the change in your RSP activity? And also with the Verizon announcement with the move to LTE, are you seeing any of your carrier, customers or carrier contacts indicating an accelerated plans for other carriers to move to 4G?

Ashraf Dahod

Well, I mean obviously getting an endorsement from Verizon for 4G technology like LTE has significantly raised our visibility in the market. And obviously has made us a extremely credible supplier for LTE to other carriers.

And we actually not only expect that to have a positive impact on their LTE decision, but we also expect that to have a positive impact on some of the 3G decisions that carriers have not made yet. So, overall, obviously getting such an endorsement from Verizon is a huge plus.

As far as the plans of other carriers to move to LTE, immediately following the Verizon announcement and the several carriers had their own announcement accelerating their plans to deploy LTE as far as what comes out in reality remains unseen. So one thing is clear that the movement of higher speed, greater migration to EV-DO, HSPA and HSPA Plus, it's happening all around the world.

Michael Walkley - Piper Jaffray

Right.

Ashraf Dahod

That extensive driver carriers at some point will move towards the yield.

Michael Walkley - Piper Jaffray

Okay. And Ash with a challenging macro environment, are we seeing any carriers delaying decision on packet core or the pace of RFP is about the same?

Ashraf Dahod

I mean, obviously, as I mentioned in my script. We are very carefully watching the macroeconomic conditions. But fortunately, for the market and the industry, there has not been any significant slowdown in the use of data and the data revenues for the carriers. And, therefore, so far we haven't seen any impact on our business. As far as the RSC activity is concerned, we see an increased level of activity we've started towards the end of the last year, and it has continued through the first quarter.

Michael Walkley - Piper Jaffray

Okay, thanks. And Paul just one quick question for you guys. There are various specific guidance, so I appreciate it. Just on the general and administrative line, it was a little bit of ramp than we expected, is that, is there anything new in that line item or is -- or can you eye a loophole to that expense line item?

Paul Milbury

No, I think the primary drivers are some increases in headcount in the G&A area around the world in both; Q4, that affected the run rate in Q1 and additional price in Q1 along with in Q1, some higher spending on the UT.com (ph) litigation.

Michael Walkley - Piper Jaffray

Okay. Great. Well, thank a lot for answering my questions and best of luck.

Operator

And your next question comes from the line of Amir Rozwadowski. You may proceed.

Amir Rozwadowski - Barclays Capital

Paul, just a quick question on the annual sales guidance. If we look at sort of the implied year-over-year comparables as we progress through the year, it sort of seems to imply that year-over-year growth as we progress on a quarterly basis, somewhat tempers off the strong levels in the first quarter. If we assume that there are additional carriers sort of coming on line in the back half of the year potentially from the GSM arena, how should we think about sort of that implied year-over-year or that tempered growth? Is that, just trying to understand sort of the factors in incoming up with your guidance for the year?

Paul Milbury

Well, as you know, we like to be viewed as an annual company and not a quarterly company in any event. So we don't provide quarterly guidance. That said, when we did provide our initial guidance for 2009 back in October of 2008, there was obviously a lot of turbulence and uncertainty in the world. And that's how it continues, 2009 continues to be a lot of uncertainty in the world. But, now that we've completed the first quarter of the year, in spite of the fact that we are deciding to maintain the full year revenue guidance of 315. Clearly, we feel at this point more confident in our ability to achieve that number. We do expect to get more diversification in our revenue stream in the second half of the year from our traditional CDMA base to beginning to recognize more UMTS-based revenue.

Amir Rozwadowski - Barclays Capital

Do you have a sense in terms of what the breakout could be in terms of CDMA versus the UMTS revenue?

Paul Milbury

Just roughly speaking, I think we've talked in the past about non-CDMA revenue being maybe 7 or 8% of our revenue in 2008. We've said from a percentage point of view that could double in 2009 to be 14 or 15% of our revenue that would be have been much higher if we would getting slower than expected revenue recognition on some of our new customers. And the percentage would obviously be higher in the back half of the year, because that's, that should kick-in to a more meaningful way.

Amir Rozwadowski - Barclays Capital

Great. That's very helpful, Paul. And then, noticing a breakup on your deferred revenues, but we know that that's not necessarily always the complete picture with your bookings. Can you give us a little bit of color in terms of the traction in your bookings, on your overall bookings plus deferreds? I know, it's not something that you provide, but just a sense in terms of directionally how things have trended for you folks?

Paul Milbury

I guess since we've been pretty consistent about not providing bookings data, I really can't give you anything specific.

Amir Rozwadowski - Barclays Capital

All right. Thank you very much. And thanks for taking my questions.

Paul Milbury

Okay.

Operator

And your next question comes from line of Brian Modoff. You may proceed.

Brian Modoff - Deutsche Bank

In terms of your top customers and as a percent of your revenues in the quarter, and then can you talk about perhaps and maybe now you can about bookings. But, with deferred revenue growth, the visibility over the next couple of quarters relative to kind of the revenue expectations that are out there?

Paul Milbury

Okay. Brian, we didn't get the first part of your question on the audio.

Brian Modoff - Deutsche Bank

It was breakdown of your top customers, what was Verizon in percent of revs and what were your top five customers as a percent of total revenue? And also, as total percentage, total bookings, if you don't mind?

Paul Milbury

Okay. We don't provide detail on bookings. And we don't provide specific customer names and that's why we are required to disclose that in our 10-Q. But, we have one 10% customer in the first quarter, and our top five customers were about 90%. Our top 10% -- our one one-tenth customer was almost 75% of the total.

Brian Modoff - Deutsche Bank

And then, Paul, looking at your LTE win with Verizon, is that some more than the key gateway?

Ashraf Dahod

If you look at the announcement made by Verizon, what we believe that we are a contender for the EPC core and EPC core includes the key gateway, the head gateway in the MME. Unfortunately, under the NDA we have the Verizon, unless they make a specific announcement, we are not at liberty to disclose what elements of the core we will be supplying to Verizon.

Brian Modoff - Deutsche Bank

Okay. And can you talk also about the transfer '09 kind of deals in the pipeline, commentary on sales prospects by region, LTE, EPC trial activity, those kinds of things please?

Ashraf Dahod

In the present time, we see increased activity level in all the markets in Americas, North and South, the European market and also in Asian market. Obviously, the LTE market -- activity is not as global, really right now and most of the operators are moving more towards making the 3G decisions as they migrate their networks to ED-VO and HSPA.

However, the announcement for Verizon has changed the factors that the carriers are considering in the sense that even now while they are making the 3G decisions, they are also factoring in the ability of their platform to support LTE.

Brian Modoff - Deutsche Bank

Can you talk about China specifically, kind of activities you're seeing there, how many carriers you are engaged with?

Ashraf Dahod

Yeah. I mean, as you know we already have China Telecom as a customer on the CDMA network. We are engaged with both China Unicorn and China Mobile and we are going through the various certifications and testing and trial statements to let go through the qualification process as a percent of supplier to China Unicorn and China Mobile. We expect the process to be completed over the next several months and then we have been able to go after that business.

Brian Modoff - Deutsche Bank

Thank you.

Ashraf Dahod

Welcome.

Operator

And your next question comes from the line of Hasan Imam with Thomas Weisel Partners. You may proceed.

Hasan Imam - Thomas Weisel Partners

Thank you. I just had a couple of questions. First one has to do with your elevated gross margin guidance or could you give us a little more granularity maybe in terms of what you are seeing driving, that's driving that. In particular, if WCDMA is higher mix -- part of the mix, one would actually have expected gross margins to go down a bit given those are new deployments?

Paul Milbury

Excuse me. I think most of the higher full year gross margin guidance is based on the result in Q1 and more than 80% gross margins that we did have in Q1, which as I said came from higher than expected sales of essentially software only in a capacity of expansion licenses. And we would expect gross margins in the second half of the year to be lower than in the first half of the year.

Hasan Imam - Thomas Weisel Partners

Got it. Thanks for the clarification. And second, Ash, could you talk about maybe what's going on that Sprint. I mean, they were kind anemic I think starting off in the year, even second half of last year, are you seeing some pickup there?

Ashraf Dahod

Unfortunately, we are not in liberty to disclose activity of any particular customer without their written consent. So I can't really comment on Sprint specifically. But I can comment on all over Tier 1 customers, we see increase in the activity.

Hasan Imam - Thomas Weisel Partners

All right. Would you expect now Sprint to move ahead with the LTE plan faster than anticipated before given Verizon's move?

Ashraf Dahod

I mean, Sprint has really not announced any LTE plans. As you know, they're supporting WiMax deployment during the ownership of Clearwire. And so far we have not seen any change in the commitment to support WiMax.

Hasan Imam - Thomas Weisel Partners

So either way they go WiMax or LTE, you'd be able to play in that, given that your products somewhat technology agnostic, is that correct?

Ashraf Dahod

Yeah, that's correct.

Hasan Imam - Thomas Weisel Partners

Great. Thank you.

Ashraf Dahod

You're welcome.

Operator

And your next question comes from the line of Ehud Gelblum with J.P. Morgan. You may proceed.

Steven O'Brien - J.P. Morgan

Hi, thanks for taking my question. This is actually Steven O'Brien on Ehud's behalf. First off, I was hoping for a little more clarity on the international revenue timing, specifically Ash already mentioned the China Telecom and Unicorn and the progress there. But, what was international revenue in the quarter? And would you have any sense for how that sort of progresses as the year goes on? I know China Telecom has already lunched their EV-DO network. So, I'm trying to figure out what the -- when revenues related to that launch start to come through?

Paul Milbury

Well, I can't really talk to the quarters, other than the first quarter. The international revenue was -- most of our revenue was North America based, probably 95% or more. And so the balance was international. As I said earlier, I would expect our -- us to start to recognize some of the UMTS-based revenues that we have yet to be able to recognized in the back half of the year. And for the most part that's international revenue. So, I'd expect a pickup in the international component of our revenue in the second half of the year.

But, I can't really quantify that more than what I did earlier with respect to the non-CDMA business expected to be 14 to 15% of our total business, up from last year at 7 or 8% and most of that in the back half of the year. And a large proportion of that is international.

Steven O'Brien - J.P. Morgan

And with respect the CDMA business, then I guess almost entirely North America this quarter, how would that sort of CDMA international contribution progress? Will that become a significant part of CDMA revenue as the year goes on?

Ashraf Dahod

Well, we do expect the international CDMA revenues to be more in the second half. While from China Telecom and couple of other operators that are deploying EV-DO networks.

Steven O'Brien - J.P. Morgan

Okay. And then if I could ask the gross margin question sort of another way. What drives the sort of sequential decline in gross margin? Is it all software mix or there are any other factors that plan to the gross margin in the coming quarters?

Paul Milbury

You're talking about going forward?

Steven O'Brien - J.P. Morgan

Exactly.

Paul Milbury

Yeah. It really is a level and magnitude of the software license revenue that we got in Q1 that we don't expect to continue at that same rate is I guess the first part of the -- or the biggest part of the explanation. But there is some impact in the later half, the second half of the year from the recognition of new business from new customers in new geographies as well.

Steven O'Brien - J.P. Morgan

And then if could I ask one more on the OpEx front. It seems you did bring down full year OpEx, guidance. What were the factors in Q1 that allowed OpEx to be sort of flat quarter-over-quarter, pretty much flat year-over-year, even though there has been top-line growth, were there any projects or prototypes or anything pushed out into future quarters?

Paul Milbury

No, not really. We expected a sequential decline in the sales and marketing line just again, as I said, related to the timing of variable cost Q4 to Q1, we expected that reduction. And I think from an overall perspective, we did hire 75 people in the quarter. We actually had plans to do more. We decided to have proceed through the first quarter carefully with respect to hiring and watch how the macroeconomic situation was going and our orders were going.

And we did somewhat constrained our capital spending in the first quarter as well which contributed to the lower than planned OpEx. Some of that, obviously in terms of the people stuff is what ends up as net saving. There is potentially a catch up on some of the CapEx that we expected?

Steven O'Brien - J.P. Morgan

Thank you.

Operator

And your next question comes from the line of Matt Robinson with Wedbush. You may proceed.

Matthew Robinson - Wedbush.

Hi, nice numbers. Can you talk in generalities about demand kind of aggregate RFPs and bookings and installations and so forth? And can you give us a flavor as to what regions showed the most change over the last few months and then may be quarters, the operating cash flow?

Ashraf Dahod

Sure, let me take the question on the RFP activity. I mean as I mentioned earlier, the RFP activity has increased significantly. We see that increased worldwide. That includes Americas. I mean greater activity in South America, in the Asian market, especially in India and China and Asia Pacific region.

We also see activity that we did see a year ago in the Middle-east and the African markets. And obviously, big push in Europe to move to HSPA. So the increased activity is really global. And the increase is not only in the number of RFPs, but also sort of move more towards the broadband wireless and the higher speed technology.

Matthew Robinson - Wedbush.

Did you see your customers changed their execution, was there a drop in the rate in which they were taken product sales December to February or to June, just have a linear process that was unabated despite the macro?

Ashraf Dahod

Commenting on whether it's linear or not I mean at macro level, we haven't seen the impact of the macro economic situation really affect the growth in data and we haven't seen that have an impact on our sales activity. As Paul mentioned, I think we continue to be very watchful and very cautious.

Matthew Robinson - Wedbush.

Okay. The operating cash flow number?

Paul Milbury

The net cash from operating activities for the quarter was 22.7 million and CapEx was 6.2.

Matthew Robinson - Wedbush.

Thanks a lot.

Operator

And your next question comes from the line of Anil Doradla with William Blair & Company. You may proceed.

Anil Doradla - William Blair & Company

Yes, hi. Ash, thanks for taking my question. With over 380 million in cash, any plans of any investments or M&A activities. I'm sure there are bunch of companies that you could pick out in the discount especially kind of in the application space?

Ashraf Dahod

Well I mean, obviously having a strong balance sheet in the current situation either positive conditions that we would like to maintain. Just because we already have cash, we don't intend to do an M&A but clearly as we get into the multimedia core and build out on ecosystem, and try to sale an integrated solution to our customers.

So, there are opportunities that we have considered and are considering and will continue to consider as the potential equity investment or a potential M&A. But there is nothing in the pipeline today.

Anil Doradla - William Blair & Company

Okay. And coming to the competitive landscape, can you give us an update on how you view the competitive landscape both; on the UMTS front and the LTE front?

Ashraf Dahod

Well, the landscape really hasn't changed. There have been a lot of announcements, a lot big players who lost the 3G battle, trying to re-enter in 4G. And as I mentioned in my script, we are following the same approach to use in 3G by taking in retrofitted routers and pushing it into the EPC (evolved packet core) core.

Sorry, go ahead.

Anil Doradla - William Blair & Company

Yes, so who would you say are your talk to competitors from kind of 4G LTE standpoint?

Ashraf Dahod

I think 4G LTE point of view, its Ericsson and Nokia Siemens and then Alcatel-Lucent and in certain markets, Starent (ph).

Anil Doradla - William Blair & Company

And is that -- and if you look at the 3G just for UMTS side, is it any different or pretty much the same line up in that order?

Ashraf Dahod

I think the only difference is that obviously at Cisco in the North American market.

Operator

And your next question comes from the line of Blaine Carroll with FTN Equity Capital. You may proceed.

Blaine Carroll - FTN Equity Capital

Thank you. Nice quarter and outlook, Ash. Ash, you talked about the migration path from 3G to 4G with the current product, and I guess two questions. Are the current boxes that are in the carrier networks, are they all upgradeable to 4G? And then secondly, what needs to be done by the operators, is it just a softer upgrade or do LAN cards need to be swapped out?

And then Paul, what's the revenue and margin implication on these upgrades?

Ashraf Dahod

I think the upgrade 3G to 4G; those current boxes can be upgraded to 4G through software download. But at the same time in 4G the bandwidth for subscriber is going to be higher than in 3G. So, at some point carriers would have to add more interface modules into their existing chase. But the same chase, the existing hardware can be upgraded to 4G through software and then capacity head it and to need it.

Blaine Carroll - FTN Equity Capital

Okay. And then revenue and margins, Paul, I expect the margins to be pretty high?

Paul Milbury

Well, margins that are software upgrade are always pretty high. But if it's being done in parallel capacity expansion it's more or like a blended hardware/software margin.

Blaine Carroll - FTN Equity Capital

Okay. And then how much is the upgrade, do you had foot on ballpark on that?

Ashraf Dahod

We don't really have pricing that we can disclose.

Blaine Carroll - FTN Equity Capital

Okay. And then Ash, when you talked about the increased activity with all the tier-1s, can you define what activity is, is that Waters, is that RFPs, is that activity within the lab, if you can just quantify that?

Ashraf Dahod

It is all of the above. It's really got at different stages, different operators, and all of the above at an increased level.

Blaine Carroll - FTN Equity Capital

Okay. And then last one on the LTE, what do you see as the timing on that market, Ash?

Ashraf Dahod

I believe that that our most aggressive schedule at the layout of Verizon is to start doing some interrupt testing this year; some of it has already come in. And then as they have already announced their goal is to start deployment next year.

Blaine Carroll - FTN Equity Capital

Okay. Thank you.

Ashraf Dahod

You're welcome.

Operator

And your next question comes from line of Richard Kramer with Arete. Your may proceed.

Richard Kramer - Arete

Hey, thanks very much, just a couple of questions if I may. First of all, can you talk little bit about pricing? We know there are quite a few tenders coming up in the markets and I'm wondering, if you are seeing market entry pricing from some competitors you've mentioned or specific pricing to repaying our channel supply, some of the larger OEMs?

And maybe could you also comment a little bit about indirect channel revenue and whether you see overtime, it'd be more important for us than to secure some indirect channels via some of the larger OEMs that you might have mentioned these competitors that have a very week product portfolio? Thanks.

Ashraf Dahod

Let me take the second question first. I mean, we'd obviously, anytime we can get in India or China that increase our geography and recover into the positive. But I really obviously don't count on the indirect channel and establishment of the channel.

So, we are directly engaged in all of the tier-1 accounts and we pursue them directly. It is possible that in some cases, we may fulfill them through the indirect channel. Now obviously, as you know, with this quarter, we announced Motorola as OEM and our partner for LTE. We expect to work very closely with them and coordinate our sales activities, and wherever possible try to use their significant presence in the geographical market.

So, what we'll do, align our sales activity with theirs and hopefully improve the qualitative successful Vodafone. As far as our indirect revenue for this quarter,

Paul Milbury

Indirect revenues for 4 or 5%?

Ashraf Dahod

Yeah, okay.

Richard Kramer - Arete

Okay. And in terms of pricing, and what you're seeing some of the large OEMs?

Ashraf Dahod

In terms of pricing, I mean, it hasn't really changed, I mean continuous to be competitive. We believe that our technology gives us the cost advantage. So, we are able to hope for a variety of call models and bandwidth requirements. We are able to be very competitive. That doesn't necessarily mean that we are always at lowest price.

And then also we are able to add higher I mean greater value, if we can solve the same problem with fewer boxes, we make the overall OpEx lower. And therefore, being a little bit higher on the CapEx is justified because we have the carriers lower their operating expense.

Richard Kramer - Arete

Okay. Maybe two other quick questions, one with the customer like Verizon for LTE that you're already an established vendor for and you'd be talking about software upgrades potentially without any hardware swap-out.

Would you face the same revenue recognition issues that you do and that we've seen over the years with the UMTS customers or whether it be much more immediate revenue recognition potential? Maybe you want to answer that one and I have one other quick question.

Ashraf Dahod

I think LTE will be like, anytime we introduce a new inline service or new interfaces to Verizon, we go through a process of getting go through the testing, going through field deployment and accepted. So, it is not immediate revenue and it is when they are doing capacity expansion or adding modules to the existing catches or the existing features and functions. So, obviously the revenue recognition for LTE will follow a different panel than just straight capacity expansion to the existing network.

Richard Kramer - Arete

Okay. And finally, are there any particular steps you are taking right now for cutting power consumptions for the products because I know that's extremely tropical issue for carriers especially with LTE?

Ashraf Dahod

With each one of our platforms, going from ST16 to the ST40, we have reduced the power required for subscriber and the power per megabit and we'll continue to do that as we enhance our other platforms.

Richard Kramer - Arete

Okay. Thanks very much.

Ashraf Dahod

Welcome.

Operator

And your next question comes from line of Ted Jackson with Cantor Fitzgerald. You may proceed.

Edward Jackson - Cantor Fitzgerald

Thank you. Congratulations on your quarter. All my bigger picture questions were already asked, so just a couple of minor things. Number 1, as I was curious you gave an outlook relative to CapEx. Number 2 what was depreciation for the quarter?

And then, the third question would have to do with the ramp- up of UMTS business, which is mainly international. And my question on that is, as that business ramps, how that impacts your balance sheet, and in particular what do we see, may be receivables going up and DSOs go up as payment turn shift? Thanks.

Paul Milbury

Okay. The depreciation for the quarter was 3.8 million. With respect to the ramp-up of UMTS revenue in the back half of the year, there could be some incremental impact on DSOs and receivables in the terms tend to be longer than they are in North America.

Edward Jackson - Cantor Fitzgerald

And do you have an outlook relative to CapEx over the year that you would provide?

Paul Milbury

CapEx for the full year in the $25 million area.

Edward Jackson - Cantor Fitzgerald

Great. Thanks very much.

Operator

And your next question comes from the line of Matt Thornton with Avian Securities. You may proceed.

Matthew Thornton - Avian Securities

Good afternoon, guys. Thanks for taking my question. Most of my questions have been answered, but ask just quickly going back to an earlier question on China, particularly as it relates to China Unicom and China Mobile, do you get the sense or do you have any insight as to whether these deals could be multiple vendor deals in terms of the packet core or could these be source deals.

Ashraf Dahod

I think the way China offer is really not one mode as they tend to be. More so, all of the three operators are really divided their provinces.

So, they really end up making almost 32 different purchasing decisions. So, it's most unlikely the whole packet core in China will go to one vender. Because even China Telecom, who has been our customer since the very early days of the company, they have three different main suppliers for the CDMA Co. So, I expect that for China Mobile and China Unicom, we follow the same path, but it will multiple suppliers for the core. However, within the any one province, they are likely to have a single supplier for their core.

Matthew Thornton - Avian Securities

Got you. That's helpful. And then Paul, you mentioned UTSI litigation, the expense ticked-up a little bit I guess where are we -- anything new there or anything on the time horizon that we should be thinking about?

Paul Milbury

Well, I guess the main stuff that's new is that just recently 9 of the 15 counts were dismissed by the core and then UTStarcom filed a motion for reconsideration of these dismissals in that request just I think earlier this week was denied.

We are guiding the fourth amended trade secret comply, while the court didn't dismiss it, they made the comment and accorded while the allegations are all on information and belief then really heavily on it being inevitable that the named dependence would rely on misappropriate trades -- misappropriate trade secrets. There's division at the pleading stage to particularize the allegation the party is making.

So, that one is still with us for a while. We continue to believe that we've got a very strong defense. I expect that this is going to continue as our quarterly OpEx in the next several quarters and potentially get to a resolution in the first half of 2010.

Matthew Thornton - Avian Securities

Okay, that's helpful. And then finally Paul, you talked about on the OpEx line, it came a little bit lighter than I had expected, at lease particularly in R&D. Any impact there from the weakening of the Indian rupees. I guess, was there any impact from FX helping there?

Paul Milbury

Yeah, there actually is. There's little help from the Indian rupee and little bit of help from the euro on the expense side.

Matthew Thornton - Avian Securities

Alright. That's helpful. Thanks a lot guys.

Paul Milbury

Sure.

Operator

And your next question comes from line of Larry Harris with C.L. King. You may proceed.

Lawrence Harris - C.L. King & Associates

Yes, thank you for taking my question. I guess two questions, one; with respect to cash flow for this year, I think you previously indicated, you thought that cash flow would be equal to or less than income this year as opposed to last year's very strong performance. Any current though in terms of cash flow given the increase in deferred revenues we saw this past quarter?

Paul Milbury

No, pretty much the same outlook in 2008. We had from a timing perspective a number of things that contributed, a lot a cash especially in the first part of the year and as you know, we essentially we are not paying cash taxes. We do expect to start to pay fairly significant cash taxes in 2009. And so I stick with that earlier outlook of the net cash flow roughly equal to net income.

Lawrence Harris - C.L. King & Associates

Great. And the other question relates to R&D, I assume that with some of the initial installations LTE, you can modify the ST40 platform, should we expect that at some point, a step-up in R&D either because of LTE or a need to redesign the ST40 or introduce a new platform as we get significant number of LTE subscribers?

Paul Milbury

I would say nothing beyond what we've been talking about. We've got in the current outlook the total OpEx increase for the year in the high-teen, I believe it is and the R&D line is probably close to double the overall total. So, 30% plus.

Lawrence Harris - C.L. King & Associates

Okay. Thank you.

Ashraf Dahod

You're welcome.

Operator

This concludes the question-and-answer portion of your conference. I would now like to turn the conference over to Mr. Ash Dahod for any closing remarks. You may proceed sir.

Ashraf Dahod

Well, I would like to thank all of you for taking their time to participate in the call. And talk to you all next quarter.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. And have a great day.

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