Procera Networks Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Procera Networks, (PKT)

Procera Networks (NASDAQ:PKT)

Q1 2013 Earnings Call

May 02, 2013 4:30 pm ET

Executives

Todd Kehrli - Co-founder and Executive Vice President

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

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

Analysts

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

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

Catharine Anne Trebnick - Northland Capital Markets, Research Division

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

Operator

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Procera Networks' First Quarter 2013 Financial Results Conference Call. [Operator Instructions] This call is being recorded today, May 2, 2013. I would now like to turn the conference over to Todd Kehrli of MKR Group. Please go ahead.

Todd Kehrli

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

Please note that the financial results reported today include both GAAP and non-GAAP financial measures. Procera's non-GAAP measures exclude the impacts of stock-based compensation, business development expenses, as well as acquisition-related amortization of deferred compensation, amortization of intangible assets and tax benefits. The reconciliation of GAAP to non-GAAP measures is part of the financial tables posted with Procera's earnings release, which is available at the Investor Relations section of the company's website at proceranetworks.com.

Before we begin, let me note that information about to be discussed contains forward-looking statements, including statements relating to the expected demand for Procera's products and the company's expectations for 2013. These forward-looking statements involve risks and uncertainties, as well as assumptions that if they do not fully materialize or prove incorrect, can cause the results to differ materially from those expressed or implied by such forward-looking statements, including risks related to the achieving revenue growth, acceptance and adoption of Procera's products, the company's ability to service and update its products, lengthy sales cycles and lab and field trial delays by service providers, the company's dependence on a limited product line or dependence on key employees, its ability to compete in its industry with companies that are significantly larger and have greater resources, its ability to protect its intellectual property rights in the global market, its ability to manufacture product quickly enough to meet potential demand, its ability to realize anticipated benefits from the acquisition of Vineyard Networks and other risks and uncertainties described fully in the company's documents filed with or furnished to the Securities and Exchange Commission.

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

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

James F. Brear

Thanks, and welcome, everybody. We are pleased to report record Q1 revenue and bookings. The market environment for our solution is very strong, and we are confident about driving revenue growth around the globe with our expanded reach and returns from our strategic investments.

Revenue for the first quarter was $14.2 million, a record for the first quarter. This revenue total does not include more than $2 million of revenue that pushed from Q4, which we continue to expect to recognize during the second quarter. We achieved a record first quarter bookings of $18.6 million, up 27% from Q1 last year, and our pipeline is growing.

As we noted on our last call, we've been making investments to scale for substantial new Tier 1 customers we have added in 2012 and the ones that we're targeting for 2013. These investments precede anticipated revenue growth from these customers and will most likely produce either a breakeven quarter or a slight net loss in the second quarter. We continue to expect a significant portion of our revenue growth in the second half of 2013 and, as such, expect to return to operating profits in the second half of 2013 on a non-GAAP basis.

Having said that, Q1 was a quarter of significant investments, and one in particular had an impact on gross margins. Our non-GAAP gross margins for Q1 were 55% and reflected a onetime investment we made in a certain existing long-standing customer, which contributed to lower product margins for the quarter. The key investment was with a long-standing MSO customer in North America and was for a new application for big data. We believe this application could meet a substantial market need in the near future, which is why we chose to make this investment. We expect gross margin rates to increase in Q2, depending on the mix of software and hardware.

Moving on to the operating expenses. In line with our expectations, the investments we made in our business to support these new Tier 1 customers resulted in net losses in the first quarter of $6.1 million on a GAAP basis and $3.1 million on a non-GAAP basis. If you remove the Vineyard acquisition, the non-GAAP loss would have been around $2 million, excluding stock-based compensation. The acquisition part of the loss results from purchase accounting, which wiped out the deferred revenue, while the OpEx rolled in. We had transaction costs, acquisition-related amortization, intangibles and deferred compensation. In short, this $2 million loss is tied to our decision to make significant investments in our team and our future.

On the business front, we added 21 new service provider customers during the quarter, including 7 mobile operators. Our traction with mobile operators worldwide is solid. Our revenue mix for Q1 was 50% cable, 21% mobile, 18% fixed and 11% higher education enterprise.

During the quarter, we added a new Tier 1 customer in the mobile communications sector named Orange. This initial order was for the deployment of an 8920 throughout Orange's network, as well was a replacement for an existing solution.

We now have 39 mobile operators as customers around the world, 8 of these are Tier 1 customers. In addition, we received follow-on orders from 5 Tier 1 operators during the quarter. These included a multimillion-dollar follow-on hardware order from a mega-carrier in Western Europe for our PL20K. This initial implementation has gone very smoothly. We may begin to recognize revenue in Q2 and expect to see additional follow-on orders from this provider in the second half of this year. We also received a multimillion-dollar expansion order from a North American cable company and from a Tier 1 service provider in Russia.

First quarter revenue is comprised of 27% new customer revenue and 73% follow-on. We continue to expect to see, by the end of the year, approximately 50% of our revenue coming from new wins and approximately 50% from our existing customers. Two service provider customers represented more than 10% of our revenue in the first quarter and represented 39% of revenue in Q1.

Trial activity is growing and is balanced across customer types and regions. We have 18 direct trials with Tier 1 service providers, of which 3 are mega-carriers around the globe. These trials are underway or planned to begin over the next 60 days.

On the product innovation side, during the quarter, we announced availability of our ContentLogic solution. This is a groundbreaking enhancement to our Deep Packet Inspection technology and a unique solution for the market. With ContentLogic, Procera can provide insights into a specific site and classification of each site that are being visited. For example, with ContentLogic, an operator can see the volumes of subscribers accessing specific Google services, such as Google Docs, Gmail, Google Maps and the rest of the Google portfolio.

Visibility into these services is critical for delivering software-defined networking and cloud services to consumers and enterprises as it will enable network operators to ensure high quality of experience for these services. As consumers and enterprises rely on cloud-based services, visibility on how these services are being delivered will form the linchpin upon value-added services and new business models. This is part of our larger strategy to deliver the highest level of network intelligence in the world.

Our customers tell us that we provide valuable data for analytics, either directly, through our report studio solution and our dashboards or through data sent to big data systems. We expect to announce more development in this area in the near future.

On a competitive front, when carriers evaluate our technology, Procera wins. We're hopeful to announce a new important Tier 1 win in the coming months. On the partner front, we're actively working on a number of large global partnerships that we expect will materialize in the very near future.

In January, we completed our acquisition of Vineyard Networks, and the integration has gone very well. Interest is building for NAVL products, and we're hopeful we will close on a significant new OEM customer in the coming months. The Vineyard acquisition creates a complementary revenue stream and provides a leap forward in building our development team in North America. While the Q1 revenue from Vineyard is modest at $370,000, as expected, it should more than double in Q2 and continue to rapidly grow. Having now worked with the Vineyard team for 4 months, I'm happy to say that this is a great team, great technology and a great -- and has great market reach, and we believe the results of this acquisition will be fantastic.

Before I talk about our expectations for the remainder of 2013, let me turn the call over to Charles to review our first quarter financials in more detail. Charles?

Charles Constanti

Thank you, Jim. Bookings for the first quarter were a Q1 record at $18.6 million, up 27% from Q1 of 2012. Total revenue in the first quarter was $14.2 million. For Procera this is also a Q1 record and up 15% from the first quarter last year. Product revenue for the first quarter was $10.4 million, up 6% from the prior year and down sequentially from the fourth quarter of 2012, reflecting our typical seasonality.

Support revenue continued to grow and is an important source of recurring revenue. Support revenue in the first quarter was $3.8 million, up 50% from the first quarter of 2012 and up slightly from Q4. Our support revenue reflects continued expansion of the installed base of our products and ongoing support arrangements. Deferred revenue was $9.7 million, combining short and long term, and is mostly maintenance and support.

We closed the Vineyard acquisition in January of this year, and our Q1 revenue tied to the acquisition was $370,000. This reflects the impact of purchase accounting that eliminated most of Vineyard's deferred revenue. From this level, the Vineyard revenue is expected to grow rapidly from a combination of new wins and renewals with existing customers.

Looking at the first quarter revenue by geography, Americas was 58% of revenue, EMEA was 28% and APAC was 14% of revenue.

The non-GAAP gross margin rate for the first quarter was 55%. The decrease in the Q1 margin was due in large part to an investment in a new application with an existing North American customer. As Jim noted, we expect the gross margin rate to increase in Q2, depending upon the mix of software to hardware. In some situations, the hardware is sold in advance of software licenses. We continue to model the gross margin in the low- to mid-60s.

Over the past 7 months, we accelerated our organic investments for growth and completed the Vineyard acquisition in Q1. The organic investments were in response to our significant traction with Tier 1 mobile carriers, including winning 2 of the largest carriers in the world. With these wins and the expectation for more, we ramped up our service and support organizations, invested in R&D and continue to expand our go-to-market reach with sales and sales engineers.

We expect to achieve a significant return on these investments in the form of revenue growth, including a rapid increase in Vineyard revenue during the remaining quarters of 2013. Consistent with the guidance we provided earlier, operating expenses are preceding our expected revenue growth, and this is reflected in our Q1 results.

Non-GAAP operating expenses in the first quarter were $10.7 million, up $2.3 million sequentially from Q4 and up $4 million from the first quarter of 2012. Consistent with our guidance, the increase in operating expenses reflects the Vineyard acquisition, additional hiring, the full quarter impact of Q4 hiring and the timing of the annual audit fees. We have attracted great talents and have only a few remaining open positions to fill. The organic expense to growth from hiring and the annual audit was $1.2 million, and our first quarter of Vineyard OpEx was $1.1 million. The balance of the increase compared with Q1 of last year was primarily headcount expansion across each function. We expect the non-GAAP operating expense to be approximately $11.5 million in Q2, reflecting the full quarter impact of Q1 hires, the hires we made in April and the variable pay on anticipated higher revenue. From here, increases in Q3 and Q4 are expected to be primarily variable pay on revenue performance.

There are a number of Vineyard acquisition-related costs and benefits in Q1 that were excluded from our non-GAAP reporting, and those included: $1 million of business development costs, including financial advisory and legal fees; $1.3 million amortization of deferred compensation. Half of the acquisition proceeds to the 3 Vineyard founders is contingent upon continued employment for one year and is treated as deferred compensation. Similar amounts will be recorded over the next 3 quarters; $260,000 amortization of technology intangible assets that have a 5-year life; $112,000 amortization of customer intangible assets that also have a 5-year life.

Taxes include $726,000 -- a $726,000 tax benefit that reflects the reversal of a Vineyard income tax valuation allowance and a 25% benefit on the amortization of intangible assets and adjustments to deferred revenue.

The GAAP net loss for the first quarter was $6.1 million compared to income of $579,000 in the first quarter of 2012. On a non-GAAP basis, our net loss for the first quarter was $3.1 million compared to non-GAAP net income of $1.9 million in the first quarter of 2012.

We ended the first quarter with $116 million of cash and short-term investments. During the first quarter, cash and short-term investments declined by $15.5 million. Most of this was for the Vineyard acquisition with $12.5 million of cash for the acquisition transferred to escrow and $1 million of deal costs that were paid in the quarter. The $2 million remaining decline in cash and short-term investments reflected the use of cash in operations and investment in testing equipment.

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

James F. Brear

Thank you, Charles. Now let's talk about what we expect for the remainder of 2013. As I noted earlier, our pipeline is growing, and we're very confident about the future.

On our last call, we set our 2013 guidance at 25% to 30% growth for the year. Based on our investments and growing pipeline, we now plan to grow at least 30% year-over-year and continue to expect to gain market share in 2013. As you can see, Q1 was striking, in that it reflects significant organic forward investments and the closing of Vineyard acquisition in January.

We've invested for the future. Over the last several quarters, we've invested across the company, including R&D, technical support. Based on the scale of these new wins over the next 12 months and those we expect this year, these investments were critical. The majority of our planned organic investments are completed, and we expect minimal investment for the remainder of the year.

We have a powerful team, and we're now in position to scale and lead the market. Most importantly, we have invested to change the industry. The Procera you know today is not the Procera you will know in 12 months. We have a strategy and a plan to make an impact. The competitors we have today will not be our competitors in the future. The industry is changing fast, and we see the opportunity for differentiation and scale. Today, we are a DPI company. Tomorrow, we will be the intelligence company. Stay tuned.

We'll now turn the call over to the operator to start the question-and-answer section for the call.

Question-and-Answer Session

Operator

[Operator Instructions] our first question is from the line of Alex Kurtz with Sterne Agee.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

Jim, just a couple for you upfront here. When you look at this guidance of 30%-plus for the year, how much of that is coming from just closed business that you have to recognize versus book, ship and revenue for, basically, the second half? Can you give us a mix between the 2?

James F. Brear

Probably not off the top of my head. But as I said, I still feel strongly that half of our business will come with -- from new wins and half will come from existing. And we do have -- we have built up some revenue that has yet to be recognized that will show up in the Q2 and beyond.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And then moving on to this win with the lower gross margin outcome here. Can you give us a little more color on that, a little more context? Was that a onetime situation with that customer? Does the customer gross margin, sort of, return to normal after that? Was it the gross margin profile of that product specifically?

James F. Brear

Yes, yes. We -- majoritively, we had what we think as a very interesting opportunity to drive some innovation with one of our strategic customers, and we thought it was the proper investment to help them and help us. And so we're excited. I don't want to tell you all about the application yet. It's very strategic. But as I mentioned earlier, it's around the concept of data mining and big data and how we are developing our technology via a very key component in that ecosystem.

Alex Kurtz - Sterne Agee & Leach Inc., Research Division

And then, Charles, a few quick questions for you. Could you give us the breakout of stock-based comp? And then, also, it looked like the service margin popped back a little bit in March. How should we be thinking about that in June and September?

Charles Constanti

Yes. The service margin should continue to creep up. And I had a -- some kind of -- so the stock-based comp, $60,000 in COGS, $203,000 R&D, $320,000 sales and marketing, $355,000 in G&A.

Operator

Our next question is from the line of Sanjiv Wadhwani with Stifel, Nicolaus.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Just a couple of confirmations. The 10% customer, Charles, were these existing customers, or was there a new customer in that mix, therefore, the March quarter?

Charles Constanti

Both existing.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then the $2 million deferred from Q4, I just wanted to confirm, all of that is going to be recognized in Q2, or could there be some spillover to, sort of, the back half of the year?

James F. Brear

It's our expectation that we'll recognize that revenue in Q2.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Co., Inc., Research Division

Got it. And then, Jim, just broad-level question. I know we've been talking a fair amount over the last few months about how some opportunities are moving from just analytics and monitoring, to tiered services, and I don't know whether you can give any examples of what you might be seeing in terms of opportunities, either with existing customers or with new RFPs that are more targeted sort of towards new services.

James F. Brear

Yes. I'd say that I see an acceleration in interest in the concept of personalization across the globe. I would say most of the RFPs we do now get have some level of personalization requirements in them, particularly as it relates to mobile operators. So what we saw in the past is accelerating.

Operator

Our next question is from the line of Simon Leopold with Raymond James.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Just a couple of items. First, a housekeeping question. Just following up on the $2 million you expect to recognize, would that all be product, or would it be product and/or services? How should we split that?

James F. Brear

It's 99% or 95% product.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay, great. And in terms of kind of thinking about the trends in gross margin, I think in the prepared remarks, Charles suggested to think about low- to mid-60s for the June quarter. And with services putting up, I think, a very healthy gross margin, it suggests to me that products in the June quarter are likely -- maybe a mid-50s gross margin, which I think is lower than the levels you reported in 2012, but improvement in the March quarter. So I want to understand if I'm thinking about the gross margin trends properly.

James F. Brear

I'd say that it very much depends on the mix of hardware to software. We have historically -- if you've been tracking us, we've had these sways up and down quarter-to-quarter, and it's really dependent on how much hardware and what type of hardware and then the amount of software that's initially deployed. And that can sway it. Is there anything you'd add to that, Charles?

Charles Constanti

Yes. I think your thinking is correct, Simon.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

So if we were to really try to look past the lumpiness and think about the year in its entirety, how are you thinking about your overall gross margins when you get past the lumpy trends?

James F. Brear

I'd say nothing's changed there. We're still really targeting the low- to mid-60s.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And in terms of customer mix in the verticals, I definitely understand the lumpiness from quarter-to-quarter. And it sounds like the wins that you have really put you in a direction towards more mobile and maybe less dependence on cable in the future, and cable was gigantic this quarter. So if you could maybe walk us through what your business mix looks like, either for the year or exiting the year. Is there some way you could quantify how the mix is evolving?

James F. Brear

Sure. I mean, I would definitely agree that we'll probably end the year with mobile growing the fastest. I will not discount cable. There's still a lot of activity in the cable market globally. And so that'll still become -- I could see cable maybe being 40% of revenue rather than 50%, but then mobile moving up into the 30%, 35% range. And then the fixed operators, I feel that as 15% to 20%. I don't know what that adds up to, but something like that.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And in terms of kind of the applications in mobile, one of the things we're hearing during this earnings season is that service provider spending seems to be focused on just sort of the brute force radio deployment and has been a little bit weaker on areas where you'd be focused. I'm just wondering if you've observed that particular trend in your March quarter and that's part of the basis of why you perceive a much stronger back half of the year.

James F. Brear

Probably not. Mine is mostly just due to either revenue recognition and/or just timing of the opportunities. So again, I'd say we're not -- I wouldn't align ourselves to any trends from a macro standpoint.

Operator

Our next question is from the line of Brent Bracelin with Pacific Crest.

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

Jim, want to go back to the guidance, the full year guidance raising that from 25% to 30% to 30% here and really trying to understand what's changed in the last 3 months. Are you seeing a pickup in RFP fee activity? Obviously, if you look at, kind of, the telco spending across-the-board come it's been relatively mixed. So what has changed in the last 3 months that kind of gives you some optimism this year?

James F. Brear

I wouldn't say necessarily our visibility has stayed about the same, but I think the confidence comes around the maturing of a handful of opportunities that we now feel better about closing this year.

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

Okay, that's helpful. And then secondarily, if you look at kind of the NAVL opportunity, you talked about pretty strong OEM interest there. Could you provide a little more color around where you're seeing the interest? Is this kind of the enterprise networking kind of vendors? Is this security vendors? How broad-based is the interest and the opportunities within kind of the OEM, kind of, NAVL opportunity?

James F. Brear

Yes. So we have -- it's quite diverse, to be honest. I'd say we have a handful of very large, just classic network equipment manufacturers across many domains. And we -- I'd say we also see a lot of interest in the security and enterprise markets as well. So I'd say those are the 2 heavy concentrations.

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

Okay. And then third question, really, is around, kind of, Orange. You talked about them, I think, for the first time here. Is that kind of one country that you're penetrating Orange in, or is this, kind of, the beginning of a broader opportunity? Maybe if you could just provide a little more color around where are the Orange opportunity, kind of, sits today and what's the scope of that opportunity longer term.

James F. Brear

Yes. So Orange is a very large operator. We won in Switzerland is the initial deployment. And we're hopeful that we can expand from there, but we have implemented, installed, and have, at this point, a very happy customer.

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

Okay, helpful. And then last question for Charles. As we, kind of, think about, kind of, this $2 million kind of opportunity here, that a rev rec triggers in June. If we were to back that out, do you still expect, on a normalized basis to, kind of, grow sequentially from the $14.2 million, excluding that $2 million accounting, kind of, contribution? Or how should we, kind of, think about, kind of, sequential growth from the $14.2 million this quarter?

Charles Constanti

Yes. We would expect our -- they're, kind of, like -- call our normal linearity to play out.

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

Okay. So strong opportunity, in kind, of June, little slower in September and another strong, kind of, opportunity in December. That's the type of seasonality that you would expect exclusive of that $2 million, kind of, rev rec?

Charles Constanti

Yes, yes. That's about right.

Operator

Our next question is from the line of Catharine Trebnick with Northland Securities.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Could you give a little bit of -- last year, you had a couple of opportunities in the wireline carriers of the United States, and just give some color between how that is panning out in North America and other regions.

James F. Brear

Sure, yes. We're optimistic about the fixed line operators in North America or in the U.S., in particular. They're following their European mobile brethren in terms of looking for ways to create differentiation and, on top of that, better understanding their subscribers. So we've -- we have had success, some of which have been broadly deployed, but we're hoping that we see some expansion in that segment in the second half from a number of the carriers.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

That would be more, Jim, Tier 2, Tier 3 carriers, more of the rural carriers with...

James F. Brear

Yes. It depends on what you define. But I'm talking about carriers that have 5 million subscribers or more, pretty big.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay, got it. And then the other question has to do with -- in general, you had said that -- in your prepared remarks, that you were with some of the largest carriers. To me, the largest carriers definition are more like China Mobile, in that category region or exactly what...

James F. Brear

You mean with Charles -- in Charles' statement?

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Yes. I just want more clarification on what you're seeing.

James F. Brear

Yes. He mentioned -- he kind of -- it was -- I think he said the largest, and that's probably not accurate. What we're working with, which we have talked about in the past, is some of the largest. If you look at the top 20 in the world, that's what we kind of think of our top 25 as the mega-carrier.

Operator

[Operator Instructions] We do have a question from the line of Alex Henderson with Needham & Company.

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

First question for you. When you talked about replacing somebody -- at Orange, can you tell me whether that was a -- an existing pure play system or whether that was an integrated router system? And broadly, as you look at the competition that you're running up against in these newer customers that you're lining [ph], are seeing more pure play, or are you seeing more integrated routing solutions? And how is the mix between those 2 changing over time?

James F. Brear

Sure. So the replacement was from -- with an existing standalone player. And to be honest, we have yet to compete with an integrated approach. I mean, not that we haven't competed, but they've never gotten down to even the finalists stage.

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

Can you talk about how much you're replacing when you go into accounts that might have had an existing player with an integrated in there? Do you see integrated routers as a important piece of what you're replacing or no?

James F. Brear

Not really, no.

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

That's interesting.

James F. Brear

Yes.

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

The second question I had for you is when you talked about the investment in 1Q impacting margins, I just want to clarify, that's completed in 1Q. There is no hangover at all into 2Q for that investment.

James F. Brear

There is. There may be some, but not to the scale of Q1.

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

So 5%, 10%, 15% or 25%, 30% or?

James F. Brear

No. Small, smaller than that.

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

Okay, very small. Okay, that helps. And I was wondering if you could break out the stock comp between the product and services? Is it all in the product side, or do you have some of it in the services?

Charles Constanti

You mean between COGS?

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

Yes. And while you're at it, I didn't catch the sales and marketing fees.

Charles Constanti

Sales and marketing is $320,000. It is -- I don't have the split between the different COGS -- the split of the 60,000. I don't have that. I can get that to you separately.

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

Is there any adjustment on the tax line as a result of this stuff running through?

Charles Constanti

The adjustment is related to the acquisition-based amortization, as well as adjustments to deferred revenue on the acquisition side.

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

What's the non-GAAP tax on it?

Charles Constanti

It's about -- non-GAAP tax is around $100,000 of cost.

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

Just out of curiosity, is there a reason why you don't put a non-GAAP reconciliation that allow people to actually build a model off of it out when you do your press releases?

Charles Constanti

There is a reconciliation. It should be one of the pages.

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

But it's not sufficient to do a model the way anybody would model.

Charles Constanti

To put more detail in it?

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

You need it to look like the models, right?

Charles Constanti

So Alex has asked for that details. We'll try to accommodate that.

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

I keep asking that each quarter until I get you to do it. The other question I wanted to ask you is -- you made a comment about seasonality going into the third quarter that would be "normal seasonality." On the other side of the coin, you've got Tier 1s that are in the pipeline that you've signed contracts with, that you're waiting on rev recognition on, that theoretically should be coming in more in the back half than in the first half, which I would think would perturbate that seasonality. Are you sure you want to imply that you have visibility one way or the other, whether it's flat, up or down 2Q to 3Q like that?

Charles Constanti

I mean, we have -- over the years, we've always had a dependency on large deals coming in and landing them. The way the cycles have played out, combined with how carriers like to close business, as well as the impact of our investment and growth, has tended to drive a trend of down in Q1 and then we grow throughout the balance of the year. We think that trend will continue.

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

So growth sequentially each quarter then?

Charles Constanti

That's right.

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

Okay. I think he was -- there was an implication that there might be sequentially down in the September quarter earlier. And then could you quantify the magnitude of the delays from the time you're doing installation or signing contracts with some of these Tier 1s? What's the length of time that you're seeing from the time you've signed them to the time they're actually showing up with rev rec based on what you're thinking at this point? Is it 2 or 3 quarters? Is it longer than that, in some cases? What's the variable -- variability look like?

Charles Constanti

It's pretty -- the variability is pretty broad. So I wouldn't say there's an average. There's still a fair amount of our business that closes fairly rapidly from where the testing, the trial is completely done. It really depends on the market. So certain markets takes longer. So we're seeing in, for example, the Middle East, it takes longer. North America is still pretty fast. So it varies, depending on the geo.

James F. Brear

It also depends on the type of carrier. If it's a mobile operator, generally, we are doing more interfacing and interoperability with other systems. So we're slightly dependent on them to get the acceptance. So where -- if it's a fixed operator, whether just using us for pure intelligence, then the dependencies are less. So that does have an impact.

Operator

And we have no further questions at this time. I'll turn it back to management for any closing remarks.

James F. Brear

Thank you for joining, and we'll talk to you next quarter. Thank you.

Operator

Ladies and gentlemen, this does conclude the Procera Networks' First Quarter 2013 Financial Results Conference Call. Thank you for your participation. You may now disconnect.

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Procera Networks (PKT): Q1 EPS of -$0.16 misses by $0.10. Revenue of $14.2M (+15% Y/Y) beats by $0.72M. Shares +18.7% AH. (PR)