Ditech Networks, Inc. F4Q09 (Qtr End 4/30/09) Earnings Call Transcript

Ditech Networks, Inc. (DITC)

F4Q09 Earnings Call

May 21, 2009 4:30 pm ET

Executives

William Tamblyn – Chief Financial Officer

Todd Simpson – President, Chief Executive Officer.

Analysts

[Tim Lehealy – Ditech Networks]

[Joel Accomowitz – Baylock Robert]

Presentation

Operator

Welcome to the Ditech Networks fourth quarter and full year financial results conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Bill Tamblyn, Chief Financial Officer of Ditech Networks.

William Tamblyn

Good afternoon everyone. This is Bill Tamblyn, Chief Financial Officer of Ditech Networks. Thank you for joining us for this conference call which will cover Ditech Networks of results for its fiscal 2009 fourth quarter and full year ended April 30, 2009.

Today's conference call will cover our financial results for the quarter and fiscal year. We will also provide our outlook for the first quarter of fiscal 2010. Todd Simpson, Ditech's President and CEO will provide the business strategic analysis and I will provide a more detailed analysis on the financials. Following, we will open the call for Q&A.

Before we begin, let me state that this conference call is being held on May 21, 2009. Any sound recording or republishing of the contents of this conference call is expressly forbidden without the approval of Ditech Networks.

Also, we must point out that with similar presentations, the following discussion contains forward-looking statements and in particular the financial projections of our first quarter of 2010, that involve certain risks and uncertainties. Our actual results may differ materially from those discussed here. We will attempt to identify such forward-looking statements with qualifying words such as we intend, plan, believe, estimate or predict or we may, could or will or other comparable language.

Factors that could cause results to differ include factors today in this conference call and in our press release today as well as those detailed in the section entitled future growth and operating results subject to risk of Ditech's Form 10-Q for the quarter ended January 31, 2009 filed March 11, 2009 with the Securities and Exchange Commission. We assume no obligation to update these projections or other forward-looking statements.

Additionally, let me comment on our approach to governance and SEC compliance. Please allow me to mention that we have no off balance sheet entities or associations. We believe we have to the best of our knowledge disclosed all other obligations and related party transactions as required. Our auditors do not perform consulting services for us such as system reviews, IT reviews or other forms of consulting services other than tax compliance services. We comply with all effective SEC and Nasdaq requirements related to audit committee compliance and independence. We continue to adhere to Sarbanes-Oxley finance requirements.

Today's announcement was released over the wire this afternoon in a press release and you may also read it on Ditech's website by going to the investor section of the site at www.ditechnetworks.com.

Non-GAAP financial measures will be discussed on the call and a reconciliation of GAAP and non-GAAP financial measures is disclosed in our press release of today as well as in our press release of February 19, 2009 with respect to our Q3 numbers which is also located on the Ditech Networks website at www.ditechnetworks.com.

With that, I'd like to turn the call over to Todd to comment on the announcement and our strategy going forward.

Todd Simpson

Good afternoon everyone and thanks for joining us for our fiscal 2009 fourth quarter conference call. I'm pleased to announce that we met our revenue projections for the fourth quarter. Our revenue increased quarter over quarter by about 4% to $5.1 million and our operating expenses, factoring out some one times costs are under control.

For our first quarter of 2010, we expect revenues to be up 5% to 15% and our operating expenses to remain relatively flat. Bill will give us more details on that in a few moments.

Ditech Networks has for the last 15 years been highly focused on voice processing and we still are. However, we have also recognized the need for more flexible and diversified products and business models as the voice industry evolves and converges with internet technologies and new wireless access methods.

This is particularly true in the current economic environment where traditional telecommunications budgets have been challenged and often re-thought or delayed. As a result, we are actively engaged in both meeting existing voice quality and trans coding needs as well as innovating new solutions to address convergence.

Thus, we will speak today about both our existing voice quality business which has served us well in the past and continues to do so today, in addition to our new initiatives that we envision will be an important component of our future growth.

In our platform business, we market three products that actively manage voice quality and voice compression for wireless, wire line and voice over IP networks. Our voice quality product is known and VQA for voice quality assurance and our support for different compression methods is known ad Codec Transcoding.

Two of these products support TDM networks in both domestic and international networks. We have good potential for these platforms internationally which I will expand upon in a few moments.

Ditech's other voice quality product is the Packet Voice Processor, or PVP which support voice over IP networks including internet based voice, three G wireless voice networks, cable based voice offerings and the emerging WiMax and LTD base networks. The value proposition underlines all three of these voice quality platforms is cost savings for the carriers through a combination of reduced capital expenditures and reduced churn of subscribers.

Leveraging this experience with voice processing, we are also developing a new voice platform called mStage and an associated application called toktok which will allow carriers to deploy compelling revenue generating voice applications. We believe these initiatives will help carriers remain relevant in voice and will allow Ditech to introduce new and innovative business models beyond our traditional platform sales.

In particular, we foresee both hosted and revenue share models which can help to smooth our top line revenue and make that top line more predictable than it has been in the past.

Let me first talk a little bit more about VQA and then I'll return to mStage and toktok. Internationally, we sell VQA on the value proposition that it allows an operator to maintain or improve their voice quality while adding new subscribers to their network, especially if they use higher voice compression in order to save the capital expense of deploying more radios.

In fact, our models show that an operator can add a subscriber to an existing network using VQA for up to one-tenth the cost of deploying RF infrastructure. This is obviously an important value proposition given the current focus on CapEx in the global economy and the increasing difficulty and cost of securing real estate and permissions for new radio sites.

For this reason, we see an overall increase in our international VQA activities and the international marketplace currently represents the majority of our TDM VQA funnel. This international activity is also helping us to establish a more diversified customer base.

To be more specific, we are pursuing attractive opportunities in the Middle East, in Africa, India, China and Southeast Asia. These are all areas that are still building out 2D wireless networks and are therefore targets for out TDM products.

We do still see some TDM opportunities in the mature markets such as the U.S. and Europe, but these opportunities are centered more around maintenance as opposed to build outs.

In the domestic and other mature markets, we continue to identify new opportunities for our third platform, the PDP. We have repeat revenue on the PDP platform, and it was also recently certified by a large player for a specific voice over application. We believe this is a sign that quality within voice over IT solutions is started to gain importance as providers compete for users and market share.

Further, as discussed on our previous call, we also launched a new smaller version of the PDP last quarter. It was introduced in order to lower the barrier to entry for smaller carriers and for those large carriers who are moving as opposed to weakening into voice over IT.

I'm happy to report that we have already sold multiple units of this smaller form factor. The product is installed and running in several networks, and in one interesting case, the carrier hasn't seen an increase in the minutes of use on her network which they attribute to increased quality. Increased use in their case, translates directly into increased revenue.

We are also seeing an increase in Codec transcoding requirements which can be services with the PDP. As islands of IP networks become interconnected, carriers have to translate from their internal compression format to that of their partners in order to hand off the voice traffic. We are in some of these cases, partnering with other ecosystem players on more complete service offerings which include our PDP platform for the transcoding component.

While IP networks have certainly taken much longer to mature than any of us would have expected five years ago, they are now making measurable gains.

Within VQA business, we have also discussed licensing our algorithms. While we do have an active commercialization of our Blue Tooth version of VQA underway, we have slowed our investment in this area temporarily because from what we've seen, the current economic slowdown has impacted new Blue Tooth development. We are capable of ramping this initiative back up when reinvestment in that market returns to prior levels.

So in summary, we have seen a modest increase in our VQA revenue over the last few quarters and believe that there is more potential within the marketplace. Our ongoing R&D investment in those platforms are now limited as they are mature and robust offerings.

Let me now switch gears and talk about our new initiatives; mStage and toktok. These are the products that position us strategically for the convergence of voice, data and the internet. Our motivations for investing in these new products are four fold.

First is the market opportunity. There is a large existing and emerging market for voice applications, representing a large amount of revenue for carriers and for their suppliers. The inner section of the web with unified communications, wireless devices and always on services, are leading to a rapid evolution of voice services. Players who position themselves for this disruption and provide flexible and open infrastructure components will benefit from the transition.

Second is demand. We see a growing sense of urgency in the traditional voice industry as carriers position themselves to remain relevant in voice applications as innovative and fast moving internet cable companies offer compelling solutions including voice video and data.

Some leading carriers have already realized that their underlying networks are becoming commodities and that they must compete using not only those networks, but also compelling voice applications.

Our new solutions are applicable both to the new entrance into voice such as the cable and internet players as well as to traditional carriers who can leverage our platform to better differentiate their services.

Third is our competitive advantage. We have a lot of expertise in voice processing and can deliver superior solutions in the space we have targeted. These new voice applications are highly synergistic with what Ditech has done in the past. They require a detailed knowledge of voice and require exceptionally stable and high volume deployments as we have done with our existing platforms.

We believe that success in this market will depend on a combination of applications and tier one quality platforms giving us the distinct advantage.

And fourth, is growth potential and diversification for us. These initiatives give Ditech the tools we require to evolve our business models as well as our product offerings. Toktok has the potential to drive revenue for carrier much like caller ID, voice dialing or voice mail protect services. By generating revenue for our customers, we are able to position our business models beyond the pure platform sales that we use today.

To date, players both large and small have been open to these new models. Our goal is to generate a recurring and sustainable revenue stream on top of mStage and toktok. We are using those four factors to steward our investment.

In capability terms, toktok provides two new services which highlight some of the capabilities of the mStage platform. The first is the ability to invoke services based on a key word. In our case, toktok. This key word can be used before, during or after a call. Having a three way conference call is not as easy as saying, "Toktok call John Smith."

Second, toktok has the ability to alert the user before, during or after a call of an event in their online world. We have integrated toktok into Face Book where you can see with the appropriate permissions of course, who is on the phone and you can voice to that call. Your spouse may for example, have permission to alert you that the pick up location of your son or daughter has changed. Teenagers may coordinate their meeting spot at the mall by voice poking their group of friends.

In marketing terms, toktok is an example of a highly reusable and broad based brand strategy. The toktok brand is constantly reinforced through usage. Toktok can be used with no change of behavior on your landline phone, your cell phone, or your talk box. It is the service that you want that is important, not the specific microphone or speaker you are using. By connecting users seamlessly with their contact list, and other personal data, toktok can promote customer loyalty and increase differentiation.

We are currently hosting a version of toktok in order to generate demand within carriers who are our primary target. This hosted version is in use today by Ditech employees and a limited number of other users. We'll be opening it up to more invited users over the next month and then a full beta launch based on the feedback from those invited users.

We have a significant number of carriers, partners and content providers interested in this solution. At this time we believe our challenge is not demand generation, but bringing the solution to market in a timely manner and within budget.

Sitting underneath toktok is mStage, our new platform which features an open API that allows other developers and customers to build their own applications. We cannot anticipate or deliver all of the possible applications of toktok, and thus we will publish the open API to allow others to innovate.

For example, using the API and enterprise focused development could integrate with sales management systems with corporate data or with telecom expense management initiatives. A consumer oriented product could easily integrate with Twitter or social networks beyond Face Book or could set up music or data sharing services that are initiated by voice.

This open API concept is one of the most compelling aspects of our mStage initiative. Every prospect we talk to has a new idea that they would like to utilize mStage for. As mStage also features industry standard interfaces, it can be utilized in a wide range of IP efforts including 3G and 4G wireless, voice over IP wire line and cable, as well as other networks based on internet protocols.

A large consideration for voice application is the deploying them cost effectively. We believe mStage can deliver the services we have outlined above at disruptive pricing points. Also as discussed on our last call, the mStage platform is on track for early customer engagement in the summer time frame.

We continue to have excellent demand and interest of both mStage and toktok. We are largely on schedule with the underlying development and expect to show tangible results this calendar year. As a whole, we are executing to the plan we have outlined over the last few quarters. We continue to see demand for our VQA products and are confident that mStage and toktok will position us within an exciting and growing marketplace.

I'll now hand the call back to Bill to discuss our numbers in more detail.

William Tamblyn

The key points of the fourth quarter results as noted in our press release are as follows. Revenues were $5.1 million. Non-GAAP gross margin was 16.2% which includes a $2.2 million inventory charge. Non-GAAP operating loss was $5.5 million and non-GAAP loss was $8.7 million, and non-GAAP diluted loss per share from continuing operations was $0.33 per share.

The fourth quarter details are as follows. Total revenue $5.1 million was up 4% from the prior quarter of $4.9 million. Q4 revenues were in the middle of the projection we provided on our February call.

International revenues were $3.1 million or 60% of total revenue. We had four greater than 10% customers in Q4 and they approximated 59% of revenues compared to three greater than 10% customers in Q3 which totaled approximately 72% of revenues.

Non-GAAP gross profit for the quarter was $800,000 or approximately 16.2% of revenues, obviously less than our prior projections. This is impacted specifically by our product mix and a $2.2 million reserve established in Q4 for certain excess inventories.

The reserves are due to two trends; first we see the international market moving from E1 interfaces to STM interfaces. Second, our new smaller PDP chassis uses a difference mix of cards which impacts the inventories on hand for the larger chassis.

Both of these situations, albeit good to address customer needs results in conclusions that translates to reserve on inventories for excess at this time. The inventory is still sellable, but for GAAP, we must reserve a portion.

Non-GAAP operating expenses were approximately $6.3 million for the quarter in line with our projections. This is up nominally from Q3 and down from the $9.6 million in the same quarter the previous year.

The details of the operating expenses for each area are as follows; non-GAAP sales and marketing expense was $2.5 million. This was an increase of $300,000 from the prior quarter due primarily to trade shows internationally such as the Mobile World Congress, domestically and some severance costs.

Non-GAAP R&D expense was $2.7 million supporting our sustaining activities and new mState and toktok activities. This was relatively unchanged from our Q3 level.

'The non-GAAP G&A was $1.1 million, flat from the prior quarter, approximating the levels expected. Net interest expense approximated an expense of $3.2 million due to Q4 write downs on our auction rates to 10% of the par value of $10 million. We had previously written this down to 44% of the $10 million par, however, we will be seeking an aggressive approach to dealing with the situation on a go forward basis. Interest income of approximately $166,000 was netted against this write down.

The non-GAAP pre tax loss approximated $8.7 million versus the non-GAAP loss of $3.1 million last quarter. Non-GAAP income taxes is tied to AMT and foreign taxes. Our non-GAAP net loss was $8.6 million which is $0.33 per share compared to $31 million or $0.12 per share in the prior quarter.

To reiterate, all the operating expenses that I just gave you other than revenue and net interest expense are on a non-GAAP basis. Please refer to our press releases for the third and fourth quarters of fiscal 2009 for comparative GAAP results as well as reconciliations of non-GAAP results to our GAAP results.

Moving on to the balance sheet and cash flows which are on a GAAP basis, cash equivalents short term and long term investments at quarter end totaled $43 million, a $6.2 million reduction from the prior quarter. This reduction was greater than our expectations primarily due to the $3.5 million further write down of our auction rate securities. There are now only a net $5 million of auction rates left on the balance sheet.

Cash used in operations was approximately $2.3 million for the quarter. This was $300,000 greater than expected based on not being able to collect a couple of receivables at the end of April of '09.

At quarter end, accounts receivables were approximately $4.5 million. This was a $300,000 increase from the prior quarter. DSO's in Q4 exceeded our long term expectations at approximately 79 days compared to 61 days in the last quarter.

As we stated last quarter, we would expect our long term target to be between 45 and 55 days. Most of this increase is tied to international. Let me emphasize that our DSO numbers are subject to change. The timing of sales, shipments in any given quarter is always subject to fluctuations.

Net inventory was $11.6 million at quarter end, down $2.6 million from the prior quarter of $14.3 million. This decrease in inventory included a $2.2 million reserve for excess inventory on specific items. As spoken before, two of the factors that contributed to the reserve, internationally as the customers are moving from E1 interfaces to STM1. This is fine as we have the solution PDP flex which we have sold over $200 million in the last five years in using this application. However, some of the E1 units become excess per our policy.

Also of PDP, we've improved efficiency and introduced our 6RU form factor which moves from the 14RU product to excess at this time. At quarter end, we believe the remaining inventory is still usable based on our forecasts.

Gross deferred revenues at April 30 was approximately $4.1 million. This is $600,000 higher than our prior quarter. Capital spending during the period was $450,000. Depreciation and amortization was approximately $550,000.

We ended the quarter with 105 employees. This was down from 160 at the end of the prior quarter and down from 148 in the prior year.

I will now review our GAAP projections for first quarter 2010. In this regard, please note the cautionary statements regarding these forward-looking statements that we gave at the beginning of the call.

Our Q1 outlook is derived from existing backlog, deferred revenues and our booking forecast. Therefore, we project revenue growth of 5% to 15% from Q4 levels of $5.1 million. We believe gross margins will be similar to Q4 levels before the inventory reserves. We believe the gross margin to approximate 54% to 58%. This may vary based on product and customer mix.

Regarding operating expenses, we are continuing to maintain in our TDM and Packet platform businesses as sustaining and break even businesses. Therefore, we have moved resources and related dollars to our new initiatives of mStage and toktok.

Operating expense in the first quarter will be tied to customer and channel mix and the investment of mStage toktok. Overall we would expect our GAAP operating expenses including an estimated $600,000 of stock based compensation to increase marginally to approximately $6.6 million to $6.9 million. This would be an approximate nominal $100,000 increase from the Q4 levels.

Our tax rate should approximate a range of 2% to 3% due our loss situation. Deferred revenues at the end of Q1 are expected to approximate the $3 million to $4 million level, similar to the past few quarters.

Additionally, a couple of other data points for you, weighted shares, average shares should continue to calculated on a basic basis due to our losses and an approximate 26.2 million shares.

Cash burn is a major focus item for us. Based on our inventory levels we should be consuming inventory on most of our product sales activities between collection on receivables and monetizing of the inventory in the coming quarter, we would expect our cash at the quarter end to be down $1 million to $2 million from the Q4 levels.

The reduction in essence, is the investment in the mStage toktok initiatives. Our intention is to keep operating expenses flat or down with a desire to continue revenue growth which may reduce cash burn moving forward.

Looking at Q4 as a whole, we achieved revenue growth and laid the foundation for continued revenue growth in Q1 of fiscal 2010. We were disappointed on the write down of the auction rates and not collecting on a couple of receivables, some of which we have received prior to this call.

On our auction rate securities, we are following what we believe are industry best practices and valuation, but we continue to look for ways to maximize their value. We with many other entities in the industry are taking more definitive actions to resolve this issue.

Lastly, the feedback on mStage toktok has been very positive and is driving us to execute as quickly as possible. In looking at Q1, we have a large portion of the quarter addressed based on backlog and deferred revenues which we addressed in our projections and we are encouraged by the funnel of activity in international wireless and well as the VOIP area. We believe we'll address growth in the short term before mStage toktok revenues later in the fiscal year.

Looking forward, we are very focused on legacy business revenue growth, conserving cash, minimizing operating costs while investing appropriately on our new initiatives that appears to be received well by those who we demonstrated to.

With those comments, back to Todd.

Todd Simpson

Just before we open up for questions, let me summarize our current position one more time. Our VQA business is supporting the core infrastructure of the company and has the potential to grow as we have indicated in our projections. The incremental money we are investing is being put to work the new initiatives.

Looking at this investment across quarters and assuming no further auction rate security write downs, we are on track with spending $2 million or less per quarter. Given the quality and quantity of interest in both mStage and toktok, we believe this is a very reasonable course.

We are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Tim Lehealy – Ditech Networks]

[Tim Lehealy – Ditech Networks]

This is Tim, obviously with [Lamesy] not with Ditech. I want to make sure I'm getting these numbers straight because they're pretty large numbers. You were saying you had a $3.5 million auction rate write down and the $2.2 million inventory write down. Were there other write downs?

William Tamblyn

No.

[Tim Lehealy – Ditech Networks]

So total of $5.7 million effectively lost to the company due to write downs in the last quarter.

William Tamblyn

Correct.

[Tim Lehealy – Ditech Networks]

And DSO's also went up significantly and is it fair to say you experienced collection problems. Can you give a little color on that? Maybe I misunderstood.

William Tamblyn

The DSO's did go up. Our absolute receivables went from $4.2 million to $4.9 million, about a $300,000 increase, so as we have done 60% of our revenues internationally, the timing of collection is tough. We have received some of the things we thought we would get by the end of April, we received in early May, but no significant write downs.

In the years I've been here, we've written off about $600,000 on about $500 million worth of business. So we usually collect it all. It's a matter of the timing issue.

[Tim Lehealy – Ditech Networks]

Let me understand the investment that's being made. You said that in the next quarter you would be investing between $1 million and $2 million in terms of net cash lost in the new initiatives but is that the actual investment or is the legacy business in fact profitable and that's just the net loss?

William Tamblyn

Not net loss. Net loss will be larger than that on a GAAP basis.

[Tim Lehealy – Ditech Networks]

I didn't mean net loss, I meant net loss cash.

William Tamblyn

Our cash burn, if we take the $43 million at the end of Q4, our comment would be that we would be $1 million to $2 million down on that number at the end of July.

[Tim Lehealy – Ditech Networks]

If you were to stop investing in the new initiatives, what would happen?

Todd Simpson

Round numbers, we are doing what we've been talking about which is approximately $2 million per quarter is going into the new initiatives. The cash number obviously is influenced by accounts receivables and accounts payables and a bunch of other stuff.

[Tim Lehealy – Ditech Networks]

How much do you expect inventory to go down next quarter?

Todd Simpson

It's going to depend on mix of products. Obviously we have a lot of inventory related to certain product offerings. It's going to be a matter of what people order. Based on what we see, we would think inventories would go down anywhere from $500,000 to $1 million or could be more depending on the mix.

[Tim Lehealy – Ditech Networks]

Let me understand that. Inventories go down, just to keep numbers simple by $1 million. The cash goes down ultimately by $2 million. Didn't we invest $3 million?

William Tamblyn

Accounts receivable, accounts payable variations and our estimate of $1 million to $2 million so again, we haven't allocated every single nickel and dime in the company.

[Tim Lehealy – Ditech Networks]

We're talking orders of millions. I think you should be able to provide that.

William Tamblyn

Let me reiterate. We are on track with approximately $2 million per quarter invested in the new initiatives.

[Tim Lehealy – Ditech Networks]

So if you were to stop investing in the new initiatives, I want to make sure I understand all these numbers, and then inventories in fact went down $1 million, then you would have expected that quarter cash to go up $1 million.

William Tamblyn

Not necessarily based on working capital and all of that.

[Tim Lehealy – Ditech Networks]

All of the things are staying the same.

William Tamblyn

It would be close. Our intent is to run the legacy TDM and Packet based products at breakeven and to invest in toktok. So you're getting to the point where yes, we're trying to run everything else as breakeven and if obviously the cash, the working capital lined up, yes you would lose very little from a cash burn perspective.

[Tim Lehealy – Ditech Networks]

Why is it we can't run that legacy business profitably?

Todd Simpson

We run pretty close to cash breakeven. As we said in the script, as you know, it has historically been a fairly lumpy business and it is a fairly complex business given that we build, deliver and install platforms into tier one carriers. So there's a lot of components of the business that have to be supported to do that.

If we did not have some really good opportunities in front of us then it wouldn't make sense to sustain that business. But we do have some good opportunities in front of us. Just as lumpiness has hurt us in the past, it has the potential to help us in the future. So there's a certain amount of core infrastructure we have to keep to keep the engine going on the platform business which is also our leverage point into the new initiatives.

[Tim Lehealy – Ditech Networks]

Let me challenge some of those statements. You say it's lumpy but you look at the revenues and the revenues aren't particularly lumpy so I would think you could run it profitably. Why is that not correct? In fact the revenues have not been that lumpy. If you go way back in the business, of course there was a huge drop off, and that was indeed a lumpy event if you will. But in the past several quarters it has not been lumpy. So why can't we run that profitably?

Todd Simpson

Currently it's absorbing all of our costs from our prior structure and its also supporting a sales side that is going to leverage themselves both to the legacy business and will also sell to the mStage toktok side of the business because of the commonality of the contacts. So we're bearing a lot of the costs that will enhance the mStage toktok is currently being born by the legacy/P&L effectively.

We don't run separate segments of the business because there's commonality of certain pieces of it, but on out of pocket costs related to mStage toktok, they are running for the engineering, and consulting and other things. There's a component. We are trying to look at ensuring that with some growth in revenue, we hopefully will do better on the legacy and packet products.

[Tim Lehealy – Ditech Networks]

On the new products, when do we expect to have meaningful revenue? If I understood what you were saying, you weren't expecting them at least next quarter.

Todd Simpson

That's correct. We'll be introducing things to the market over the next quarter or two and then expect revenue to grow over time.

[Tim Lehealy – Ditech Networks]

You don't expect revenue from these new initiatives in the next two quarters, is that what I'm hearing?

Todd Simpson

What we said is that we intend to show traction with those products in this calendar year for sure and we're on track to do that.

[Tim Lehealy – Ditech Networks]

What does traction mean?

Todd Simpson

We can't be too specific obviously but based on the amount of interest and the number of people that we're dealing with around those products, we are confident that we're going to get going this year.

[Tim Lehealy – Ditech Networks]

Does get going mean you expect to show revenue that is significant? Obviously I'm not asking for specifics. I'm not asking for carriers. I'm just asking as an investor. You're putting a lot, you've put a ton of money into this. I think it's fair for us to have a sense at this point when we expect numbers that we can look at on an income statement and say I feel good about all this money we've put into this initiative.

Todd Simpson

With any new product, you get it out to the public. It gets traction. It starts slow. There's a ramp and with this, there will be a ramp. Obviously we get this into people's hands, the opportunities we're addressing with larger players will take a longer period of time to get to because they're going to want certain quality initiatives.

But then as we've talked about, we're going to host this product as well. There will be smaller revenues on a hosted basis. So it will be, the exact timing is not specific but it will start at a smaller level and then ramp with time. So it's more towards the back end of the calendar year than in the next quarter.

[Tim Lehealy – Ditech Networks]

Then in the next two quarters, you don't expect to show appreciable revenue from these new products so we would be looking for appreciable revenue maybe in the first calendar quarter of next year?

Todd Simpson

We expect it to start ramping, judging the exact ramp is pretty difficult at this point in time, but again, we intend to show some of that traction starting this calendar year and then ramp it up from there.

If you would like, as with any investor, if you want to ask further questions after the call, feel free to give us a call later.

Operator

Your next question comes from [Joel Accomowitz – Baylock Robert]

[Joel Accomowitz – Baylock Robert]

Moving on to something into the future of the company, some of these new platforms sound very exciting. I'd like to ask a question regarding how you see the value proposition of the new toktok and server platforms. I'm trying to get a grasp of the competitive position of these platforms in the market. For instance, will you be doing or striking some kind of a major arrangement with a major voice recognition company like a nuance or something like that at least for part of that platform. And if that's the case, how would you articulate the competitive advantage of the platform. Historically Ditech has been very strong in voice processing, noise reduction, understanding filtering and transcoding of digital voice signals. Obviously part of that is still going to be in the platform but are there aspects, network management aspects, obviously additional software technologies that will set the new platforms apart in terms of functionality and performance. I just want to try to get some kind of an indication of the competitive nature of the platform and its ability to basically defend against possible entrants into the market.

Todd Simpson

First of all, I think you hit it exactly right, that we are a platform company and that is one of our biggest competitive differentiators. We believe to roll out these applications cost effectively and at large scale, you have to deploy a platform in the carrier network, and where that platform gets deployed is exactly where we install our current platform that do voice quality processing.

So in many ways, the new initiative is like extra software layers on our existing platform. So we believe that for someone to compete effectively with us on the platform side, they also would have to have the capability to put a tier one platform at the edge of a carrier network. So that makes the number of competitors fairly small.

We are not a voice recognition company in the sense that a Nuance or an IBM is. When there is complex interactions, we use one of those players today to carry out those complex applications. Our platform has embedded technology around the word spotting and the mixing capabilities and the web integration that allow us to do that very, very cost effectively. But we would use the best of breed in terms of voice recognition from other players in the industry.

So we don't necessarily see software, pure software internet based company having the ability to compete in this space. We would see it more from other platform vendors that could put very high mixed processing at the edge of the network.

[Joel Accomowitz – Baylock Robert]

So you're really leveraging your years of experience as a highly efficient, highly reliable voice platform and voice noise reduction filtering company and all those years of manufacturing and producing high quality infrastructure.

Todd Simpson

That's exactly right. There's the complexity of mStage and on the order of magnitude the complexity of the voice processing we do today, and at the 30,000 foot level, it fits in exactly the same spot in the network so very much leveraging our existing platforms.

[Joel Accomowitz – Baylock Robert]

Obviously this build out now in the mobile, using a mobile device is a very important communications end element is critical and you basically leverage off of it, that major build out.

Todd Simpson

Exactly. We see a lot of converging trends that look favorable including the hands free driving laws and the increased use of voice. So there's a lot of activity in voice again, which we think is very encouraging for where we're going.

[Joel Accomowitz – Baylock Robert]

And you're excited about some of the early signals you're getting from the market even though I recognize that they're preliminary.

Todd Simpson

Like I said in the script, the feedback we have gotten has been in many ways phenomenal so we're much more worried about getting the platform and the solution there quickly and efficiently as opposed to having to generate interest or demand around the solution.

Operator

There are no further questions in queue, so I would like to turn the conference back to our host, Mr. Tamblyn.

William Tamblyn

I'll hand it back to Todd.

Todd Simpson

As you heard there, we're pretty excited about our progress and the direction we're taking, and of course are happy to talk to anyone subsequent to this call. So please give us a shout if you'd like. As always, thanks for your attention and we look forward to talking with you again in this forum in about three months.

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