Network Equipment Technologies, Inc. F1Q10 (Qtr End 06/26/09) Earnings Call Transcript

Network Equipment Technologies, Inc. (NWK)

F1Q10 (Qtr End 06/26/09) Earnings Call Transcript

July 23, 2009 5:00 pm ET

Executives

Leigh Salvo – IR

John McGrath – VP and CFO

Nick Keating – President and CEO

Analysts

Greg Mesniaeff – Needham & Co.

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2010 Network Equipment Technologies Earnings Conference Call. My name is Evette and I'll be your operator 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).

I would now like to turn the presentation over Ms. Leigh Salvo, Investor Relations. Please proceed, ma’am.

Leigh Salvo

Welcome, everyone, to our call this afternoon, during which we'll discuss results for Network Equipment Technologies’ first fiscal quarter of 2010. With me today are Nick Keating, President and CEO; and John McGrath, CFO.

In keeping with the Safe Harbor provisions of the Private Securities Litigation Reform Act, I want to remind everyone that we'll be making some forward-looking statements and projections today, including those relating to future revenue, operating results and financial condition.

Investors are cautioned that these statements are based on current estimates and assumptions that involve risks and uncertainties that might cause actual results to differ materially from those expressed or implied in forward-looking statements.

These risks and uncertainties include Federal Government budget matters and procurement decisions, the timing of orders, market acceptance for our new products, timely completion of product development initiatives, relations with and performance by third-party technology providers, new competition and technological changes, success in building new sales channels, circumstances regarding specific sales that can affect the recognition of revenue, the progression of patent litigation and other risks, including those identified in the company's filings with the SEC, including Form 10-K and 10-Q and in other press releases and communications.

The company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, an audio archive of this call will be available on the company's website for at least 12 months. The statements made on this conference call are only made as of July 23^rd, 2009 and we disclaim any duty or intention to update forward-looking statements.

In addition to financial measures presented in accordance with GAAP, we will also be discussing certain non-GAAP financial measures that are adjusted from results based on GAAP to include certain expenses, gains and losses. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Please refer to the press release issued today for further detail regarding the non-GAAP measure. Reconciliations to GAAP can be found in the press release which is posted on our website.

Our agenda today begins with NET's CFO, John McGrath, who will provide a detailed review of our financial results. Nick Keating, CEO, will then comment on the quarter's financial and operational highlights. John will then offer financial guidance for next quarter and we'll open the call to your questions.

At this time, I will turn the call over to John McGrath.

John McGrath

Thank you, Leigh. In the press release issued today and available on our website, we reported that total revenue for the first quarter of fiscal ’10 was $19.5 million, up 53% from the prior quarter and up 25% from Q1 a year ago.

Product revenue was $15.9 million, a 72% increase from Q4 and a 32% increase from Q1 last year. Produce revenue from our government business was $11.6 million compared to $6 million in the prior quarter and $7 million in Q1 a year ago. As we noted in our last conference call in May, we started to see an increase in government purchasing activity which continued through out this past quarter.

Product revenue from our enterprise business was $4.3 million, an increase of 35% from Q4 and a decrease of 15% from Q1 last year. The decrease from Q1 last year was related to declines in Quintum revenue, which was affected by the global recession. Service and other revenue at $3.6 million was essentially unchanged from both Q4 and Q1 of fiscal ’09.

Gross margin as a percentage of revenue was 45.5%, up from 31.5% in Q4 and 16.3% in Q1 last year. Product gross margin was 53.6%, up from 42.4% in Q4 and 22.3% in Q1 last year. Product gross margin benefited from increased product revenue, which made a higher proportion of fixed costs were allocated to product cost of goods sold. Service and other margin increased to 10% from 3.3% in the prior quarter, and a negative 3.9% in the first quarter of the prior year due to cost reductions.

First quarter operating expenses were $12.9 million, essentially flat sequentially and down $3.2 million from Q1 last year. Total company headcount was down to 251 employees at the end of Q4, a decrease of three from the end of the prior quarter and a decrease of 49 from Q1 last year.

Restructure cost and other employees severance cost including for our former federal sales executive was $751,000 in Q1 compared to $609,000 in Q4 and $242,000 in Q1 last year. On a temporary, most of our domestic employees have taken a 7.5% pay reduction with the executives taking a 10% to 15% pay cut. To compensate for this, we granted restricted stock to affected employees. This resulted in stock compensation charges in Q1 of nearly $700,000 in addition to other stock compensation charges in the quarter. We took this action both to conserve cash during this difficult economic period, as well as to incentivize our employees to increase shareholder value.

As we discussed previously, we streamlined our operations in fiscal 2009 as well as completed the integration of Quintum. We consolidated many of our back office functions, which now leverage a single ERP system for the company. We also continue to focus on a single product direction, which has enabled us to consolidate overlapping R&D functions.

Q1 ’09 results included the amortization of intangible assets acquired from Quintum of $806,000, of which $451,000 was related to operating expense and all of which was fully written off in Q2 '09.

Sales and marketing expense was $5.4 million in Q1, up $830,000 compared to the prior quarter and down $356,000 from the first quarter a year ago. The sequential increase was mostly due to the employee separation cost of approximately $700,000 in connection with the retirement of our federal sales executive and also included higher commission charges as most regions made their sales target. Year-over-year decreases were primarily related to the integration of NET and Quintum sales forces offset by the employee separation cost in Q1 of the current year.

R&D expense at $4.6 million was unchanged from Q4 '09, and down $1.7 million from Q1 ‘09. This year-over-year decrease is due to lower headcount and expense reductions as we consolidated our R&D plans into a single companywide strategy.

G&A expense was $2.9 million in Q1 compared to $3.2 million in Q4 '09 and $3.8 million in Q1 '09. This sequential increase resulted from lower compensation related expenses. The year-over-year decrease was in large part due to the consolidation of the back offices at Quintum and NET, as well as lower legal costs related to an ongoing defense of a patent lawsuit related to Quintum product.

Other income in the first quarter was $483,000 compared to expense of $282,000 for Q4 '09 and income of $3.8 million in Q1 ’09. The sequential increase is due to $555,000 of gains in Q1 can from the early retirement of our convertible debt at a discount. The gain from a debt retirement in Q1 last year was $3.7 million.

Net interest income for Q1 was $88,000 compared to income of $10,000 in the prior quarter and expense of a $105,000 in Q1 of the prior year. With the low interest rates, we continue to see smaller returns on our portfolio, which is in large part invested in securities backed by the U.S. government.

The first quarter of fiscal ’10 had a tax provision of $58,000 as compared to a tax provision of $52,000 in the prior quarter and a tax provision of $17,000 in the first quarter a year ago. Although we are not profitable on a consolidated basis and also have significant NOLs, we will need to make payments of required minimum taxes, although we do not expect this to be significant.

Turning to net income, the company reported a net loss of $3.7 million for Q1 ’10 or $0.13 per share compared to net loss of $9.3 million or $0.32 per share in the prior quarter and a net loss of $9.8 million or $0.34 per share in the first quarter of fiscal ‘09.

On a non-GAAP basis, the net loss was $2 million in Q1 '10 compared to $7.3 million in Q4 '09 and $11.2 million in Q1 '09. Non-GAAP income adjusted for non-cash compensation, amortization of acquired intangibles; restructure charges, gains from the early extinguishment of debt and other significant nonrecurring items including the separation charges related to the retirement of our federal sales executive.

Cash balances at the end of Q1 fiscal 2010 were $94.7 million, down from $98.2 million at the end of Q4 ‘09. During the first quarter of fiscal 2010, we repurchased $2.5 million of convertible debt at a gain. Cash and investments decreased by $56.2 million from the prior year dealing large part to the retirement of $63 million at a convertible debt at a gain and cash used in the operations.

During Q4 '08, our Board of Directors approved a stock buyback of up to $20 million based upon market conditions. As the company is committed to a long-term growth and acquisition strategy, the company will balance its buyback program with its cash needs. To date we have purchased approximately $1 million or 258,000 shares and none in the last quarter.

Accounts receivable were $9.6 million, up $2.5 million from Q4 '09 and up $1.3 million from Q1 ’09. The increase in accounts receivable is primarily due to decreased revenues. DSOs at 45 days decreased six days sequentially and decreased four days year-over-year.

Net inventory was $6.5 million in the first quarter of fiscal ‘10, representing a decrease of approximately $873,000 as compared to the prior quarter. Net inventory decreased $2.1 million compared with the same quarter a year ago. We continue to reduce our deposit for aging inventory at our contract manufacturer. At the end of Q1, our deposits were $6 million, down from $8.1 million at the end of Q4 ’09.

Now I will turn the discussion over to Nick Keating, our CEO.

Nick Keating

Thank you, John. Revenues in the first quarter were at the higher end of our guidance, reflecting an improvement in sales in all the sectors we are targeting. This includes revenue from the Federal Government, commercial international customers and commercial domestic enterprises.

During this quarter, we were able to continue to reduce expenses, improve gross margins and as John mentioned, reduce debt by another $2.5 million through the buyback of our bonds. Our investment focus continues to be on developing IT-based solutions and in the first quarter, this represented 90% of our total R&D expense.

In the first quarter, nearly two-thirds of our product revenue came from sales of IP-based solutions to commercial enterprises and government entities worldwide. Sales of our voice-over-IP switches represented the majority of that revenue. However, given our broad family of IT-based products, our product mix could change in any given quarter. These results demonstrate that we have reached the key inflection point in which any transition from a legacy and PBM based company to an IP-driven company.

We currently have more than 300 UC pilots underway, up from a 120 at the end of the fiscal year. In addition, we have other pilots underway in adjacent markets including the SIP Trunking market. We are seeing more acceptance of the market over our VX series products as customers and systems integrators seek Unified Communications solutions and select NET for interoperability, performance, security and ease-of-use.

We are seeing a shift however in the marketing strategy at Microsoft that will affect how we market measure our success. Microsoft initial UC plan was focused on building a large base of pilot users. Their programs refer to as Voice Pilot and Lighthouse accounts placed its emphasis on seating the market with as many pilot programs as possible. As such it made sense for NET to track the number of pilots, pilot accounts where our products were used.

Microsoft’s new fiscal year began July 1 and their goals for UC have shifted to larger enterprises with a potential for larger scale rollouts. So while tracking pilot growth has been a meaningful metric for gauging early traction, moving forward, NET will certainly be focused on driving large scale deployments. The shared number of pilots will become a less meaningful metric for us, while the size of the enterprise customer opportunity will be in an increasingly important factor.

NET’s global approach has enabled us to target geographic markets where early adopters have embraced the benefits of Unified Communications. We are seeing that trend materialize. Looking at our business by region, in North America, excluding our federal market, our product revenue increased 46% from the prior quarter. Other highlights at North America included, our VX series platform was recently certified by AT&T for its IP Flexible Reach SIP Trunking service. Quintum’s line of Gateways had previously been certified for this same service.

Last week, we had the opportunity to participate in Microsoft’s Worldwide Partners Conference. Together with Microsoft and Plantronics, we sponsored a successful event which brought together Microsoft’s sales team, the OCS Business Group and Microsoft’s top OCS resellers. NET was also a sponsor and keynote speaker at the Avanade Global Technology Summit, Bellevue, Washington. This event brought together top Avanade consulting technologists worldwide as well as other key industry leaders.

Turning to international markets, in the first quarter, European product revenue increased 37% over Q4. We had a number of successful adoptions and deployments in Europe that I expect to highlight in the near future. These programs move quickly from pilot to adoption with early customer feedback being quite positive for ongoing enterprise rollouts. Over 50 partners in this region currently support our efforts in the UC market.

In the Middle East, as we announced last month, the Dubai Executive Council is deploying our VX series to enable its transition from a traditional hardware based voice system to a software powered voice solution. The Dubai Executive Council or DEC is responsible for delivering public services in the United Arab Emirates.

Working with partners, our VX series was placed in front of DEC’s existing PBX and successfully integrated throughout the network, thus enabling DEC to bring voice services in out and build a secure and reliable network. Since commencing that program, we have had nearly a dozen additional pilot programs emerge in the United Arab Emirates and other Middle Eastern countries.

In the Asia-Pacific region, our product revenue increased 34% from the prior quarter, including five new UC deployments in Australia. We are continuing to expand our existing partner networks and are gaining traction with service providers picking Microsoft OCS and SIP Trunking solutions to integrate with their product offerings. Our new distribution partner in Japan, Sumitomo Shoji was appointed because of their ability to effectively deliver UC solutions to channel resell partners as well as their expertise in the communications industry. The appointment of Sumitomo or SMX is part of NET’s strategy for the selection of global corporate partners with significant scale.

In Latin America, product revenue increased 9%. We have more than 25 UC partners throughout the region spanning Mexico to Argentina supporting Microsoft OCS, SIP Trunking services, call centers and enterprise voice applications.

Now let’s turn to the government market. NET Federal this part quarter was involved in a number of partner programs and was appointed a Microsoft voice partner for the Federal Government market. In May, we participated in General Dynamics Partners Conference and showcased our VX series platform connected to Nortel and Avaya PBX communicating with General Dynamics next-generation Sectera Secure Phones.

As announced recently, the VX series platform passed preliminary interoperability testing with General Dynamics secure telephony equipment including the soon-to-be-released SIP version. The latest release of our VX software with a V.150 feature resulted in a successful connection on all calls from a VoIP secure phone to a cellular secure phone which is considered a significant accomplishment.

V.150 is a standard for MOIP or modem communications over Internet protocol and is the next-generation standard for Type 1 encryption voice and data for authorized US Government personnel over PSPN, VoIP, ISDN and GSM wireless and satellite networks.

In addition, NET Federal became an Avaya Gold Partner. Avaya solution now includes our VX series with the V.150 capability and we participated in the two trade shows with them, the DISA Partners Conference and the (inaudible) Virginia Beach Conference. On both occasions, we demonstrated the VX series with the V.150 relay interworking with an Avaya PBX and a General Dynamic secure phone.

During the quarter, we entered into an agreement with Nortel Government Solutions, enabling them to offer our secured VoIP solutions to their Federal Government customers. The first order was received from Nortel and was shipped to their customer the Department of State. As with Avaya, our V.150 capability was a key to securing this agreement with Nortel Government Solutions.

We recently completed development of our VX series platform for a MUOS program that included secured VoIPs using both V.150 and MLPP functions. MUOS or Mobile User Objective System is an array of satellites being developed for the United States Department of Defense to provide global satellites communications connectivity for use by the US and its allies. MUOS operates as a global cellular service provider to support the war fighter with modern cell phone capability such as multimedia. This solution will enable IP-based secure phone devices to integrate with any STU phone and other secured terminal equipment.

During the quarter, we received follow-on orders from several key DoD agencies including an order for the Marine Corp for our VX series platform to secure voice at multiservice tactical switch applications and another from the US Navy for installation of select naval vessels for ship-to-ship and ship-to-shore communications.

We also received an order from the US Special Operations Command or SOCOM, which purchased additional VX series units to enable the expansion of its existing deployable network. The VX enabled SOCOM to extend classified and unclassified voice services around the world to remote users in a secured, reliable and bandwidth efficient manner.

I would now like to take a few moments to discuss our strategic partnering efforts, which continues to be critical to the globalization of our business. To satisfy the evolving UC market requirements, we continue to work closely with Tier 1 service providers, global systems integrators, regional telecommunications partners and enterprises as they deploy their network applications. Leveraging our growing reseller and distribution partners position us well to expand customer penetration worldwide.

During the quarter, we added 40 new reseller channels, bringing our total to approximately 350 organizations. These relationships provide us with access to end user customers and increase our potential for further market penetration.

Another highlight in the quarter included IBM’s release of their Sametime Unified Telephony product for UC. We were one of the initial Gateway partners to complete the required interoperability testing. The combination of IBM solution in our VX series platform gives service providers and enterprises more flexibility when it comes to deploying UC and collaboration solutions.

To build knowledge and adoption of Unified Communication solutions, NET has created a UC integration course, highlighting voice integration, which is considered one of the most complex aspects of UC deployment. This course is designed as an in depth workshop featuring lessons on planning, deploying, integrating and troubleshooting emerging UC solutions that require integrated voice components. This is a five-day course and has been delivered in Dallas, Virginia. Future locations include Fremont, California, the UK and Australia. The course is also available electronically for remote training.

Microsoft recently wrote a key study highlighting NET’s deployment of Microsoft Dynamics AX ERP products. A link to the case study is currently in our website and the video which was created for the Microsoft Worldwide Partners Conference and shown in Microsoft’s (inaudible) will be available via our website shortly. In addition, Frost & Sullivan created a third-party validation case study promoting the benefits of a premises based UC solution as implemented at NET. This case study is also available on our website.

NET is rolling out an Enterprise 2.0 Web collaboration strategy which consists of UC federation among our partners and customers; Enterprise 2.0 enables product development in adoption of an Enterprise 2.0 marketing presence. We are intent to aligning these efforts with our prioritized growth opportunities while building strong customer and partner relationships.

Social networking and social software has become standard both in the consumer world and within the enterprise. Specifically with partnerships and alliance focused on using interoperability and federation. Federation allows independent organizations to agree to interoperate enabling their constituents to instant message, seat presence, web share documents and share work across different networks.

Today NET has federated with over 50 different organizations including Hewlett Packard, Microsoft, British Telecom, NEC, Philips, and Sprint. With NET’s Enterprise 2.0 strategy, our customers and partners have a closer more sustained relationship with pure interaction including video conferencing, shared work spaces and tightly integrated online development chains. To remain agile and adaptive, NET is using virtual teams in our development centers in Fremont, California, Eatontown, New Jersey and Schaumburg, Illinois. Unified Communications and pure production is helping us to achieve scale of ideas, products and communities of users.

On the marketing front, NET’s 2.0 strategy includes blogs, social networking, and social media and we have already seeing the leverage that the network can give us. Before I conclude, I thought it would be worth noting that a recent research report by (inaudible) exacerbated at hosted UC services will accelerate with worldwide revenue doubling over the next four years. In addition, SIP Trunking service revenue is expected to have a compounded annual growth rate from 2008 to 2013 of more than 80% per year. NET is well positioned within these markets.

I will now turn the call back to John for some guidance and closing remarks. John?

John McGrath

Thanks, Nick. We continue to see a modest return in government business and with the Federal Government fiscal year ending September 30^th, we expect that our government business will remain steady this quarter. Keep in mind, however, that our quarter will end on September 25^th, so the timing of our revenue could be impacted as the government waits to place orders near at the end of the fiscal year which could fall [ph] shorter into our fiscal Q3. With that said, we continue to believe the revenue for the first half of fiscal 2010 will increase 15% to 20% over the first half of fiscal 2009.

Included in our Q2 revenue outlook is approximately $1.5 million funded R&D for the (inaudible) program which was performed in cooperation with General Dynamics. We will give more specific revenue guidance on our second half of the fiscal 2010 in October after the federal budget has been approved. Although we see a continued traction on our UC trials and conversion, our international commercial revenue maybe affected by the holidays in Q2, especially in Europe and the Middle East.

We expect to see our gross margins increases our revenue growth as we are able to spread our fixed manufacturing costs over a greater revenue base. However, in Q2, we expect the margin on the funded R&D program to be approximately 30% which may affect our overall gross margin this quarter.

We are approaching our cash breakeven revenue level at $21 million to $24 million quarterly. Keep in mind that our accounts receivable were particularly low at the beginning of the fiscal year due to the very low revenue in Q4 ’09. A large portion of our cash burn in the first several quarters of fiscal 2010 will be related to funding our increased accounts receivable commensurate with our revenue growth.

In summary, we believe that we executed solidly on our financial goals this quarter. We finished the quarter with our product revenue on the high end of our guidance. Nearly, two-thirds of our product revenue is now related to IP-based products. We managed our cash and further reduced our debt. We have lowered our inventory balances and increased our gross margins and continued to manage our expenses.

Recently, NET was added to the Russell 2000 Index, which is a small cap stock market index of 2000 smaller capitalized stocks in Russell 3000 Index. The Russell 2000 is the most common benchmark for mutual funds that identify themselves as small cap.

Next week, we have been invited by the NASDAQ stock market to participate in the market opening ceremony. Later in the week, we will participate in the CapStone Investor Conference in Milwaukee and return again to New York in mid September for the Jeffrey Growth Conference. Please contact Leigh Salvo if you would like to meet with us at either of these conferences.

Operator, this concludes our prepared remarks. We would like to open the call now for Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Mr. Greg Mesniaeff with Needham & Co. Please proceed, sir.

Greg Mesniaeff – Needham & Co.

Yes, thank you. And congratulations on a nice job on the quarter. I have a question on the pilot activity that you referenced in your remarks. Clearly, there is an uptick taking place here. But I was wondering if you can give us some color or indication as to what percentage of these pilots either translate or have translated recently into ongoing order commitments? And typically a little more color on the number of participants in these pilots, is it just you guys or is it you plus some of your competitors; kind of give us some background on that as well? Thank you.

Nick Keating

Okay. Thank you, Greg. No, certainly there are many companies that are participating in the pilots. And in fact early on, we achieved certification status, most of the pilots were done by AudioCodes or Dialogic or Quintum which was one of the early adopters also.

Greg Mesniaeff – Needham & Co.

Right.

Nick Keating

We think that we are gaining significant traction and market share over the last couple of quarters in these pilots and the fact that we went from over a 100 to 300 is a good indication of the traction that we are getting and we are also getting that traction the all over the world. That was part of the point I was trying to highlight. This is not just North America. It’s Europe, it’s Middle East, it’s Asia PAC, Latin America. These pilots are both wins for the Quintum Tenor product and for the VX. And so for instance, Latin America, we see the more of the pilots for cost reasons are on the Tenor than on the VX. And then the larger enterprise customers, they tend to be almost exclusively VX customers.

What is happening, the pilot is typically two to three months pilot, could be anywhere from 25 users to a few hundred users. That’s kind of the typical profile. At the end of the pilot, then the customer has to make a decision whether they want to terminate the pilot and not do anything or if they want to continue with the product. At that point, they have to make a decision to either return the consignment back to us, order purchase the equipment. We are seeing the overwhelming number of those pilots purchasing the equipment, which I think is positive both for the UC adoption as well as for the success that we’ve had.

The next phase and I think we have talked about this before is that one point the customer then starts to deploy beyond their initial site. And I think this is where somewhat longer-term planning process takes place. We see early adopters and we have seen later adopters. I think the point that we made about the program now for 2009, 2010 for the Microsoft promotional program is an indication of where Microsoft sees this market going. They want us to get now enterprises that are prepared to rollout initially a 2500 or a 5000 or a 10000 seat network. And we are seeing that also in the planning stages. I think we have mentioned that we have a number of large enterprise early adoption customers that piloted. And we are looking at some very large rollouts now, which includes Fortune 100 and 1000 customers really on a global basis.

I had a Japanese customer in yesterday that’s looking at rolling out their corporate network and they are in 60 or 70 countries. We have another customer who’s talking in terms of over a 100 – I think it’s going to take a while for these things to implement. As you know, we’ve worked in the past with customers where it took two to three years to them to rollout all their networks. And I think that unless they outsource a lot of the rollout to an integrator which obviously we think makes a lot sense, it’s going to take a while for them to rollout to all their locations. If they work with a third-party integrator, I think that can accelerate the pace.

The other thing that we are all focused on right is coming up with better and better branch office solutions, which we will talk about, you know, some of our new solutions for that market, starting in calendar 2010. But all of the above is happening and I think that you can look back over the last 2.5 years and say, this has gone from concept to deployment and I don’t think that the customers will go back. It’s just a matter of how quickly they are going to implement not just their major locations around the world, but ultimately their branch office solutions and we are working on both the major office locations, but we are also working on a cost effective branch office solution.

Greg Mesniaeff – Needham & Co.

Thank you. And just a quick follow-up, obviously your government business showed a nice pickup in the quarter, I was wondering if you can give us some breakdown of that business among IP data and voice-over-IP type applications and additionally if you could give us some breakdown of next gen products versus legacy Promina products those were still selling. Thanks.

Nick Keating

Yes. There was a little bit of Promina income in certain locations, but I think the key thing that we wanted to point out if you look at it both from a government and commercial is about two-thirds of the total products sales were VX. So from a total product revenue, about a third of the total product both worldwide revenue, both commercial and government were IP-based solutions versus – let’s says legacy was about a third. In the government it was about 50-50, the Marine Corp order had both VX and Promina in it. We are going to continue to see from time-to-time Promina spikes. But I think the long-term trend is declining.

What I do think will happen over the next few quarters is we will see growing acceptance of our NX1000, which is an IP-based solution. It supports legacy TBM, but we have integrated pseudo wire capability into it, so it has that capability of emulating all of the legacy and then coming up with an IP-based solution through the IP trunk.

Now we are in a bunch of different programs and each one of them has a slightly different color. MUOS of course is a VX solution. WinT is an NX1000 IP and legacy solution. Some of the Marine Corp tends to be both a combination of VX and Promina, so it’s a mix in their. Fortunately the ability to have the VX highlights the ability and has somewhat of a pull through for the Promina also.

Greg Mesniaeff – Needham & Co.

Thank you.

Operator

(Operator instructions) With no further questions in the queue, I would now like to turn the call back over to Ms. Leigh Salvo for closing remarks. Please proceed, ma’am.

Leigh Salvo

Thank you. And I would like to thank everyone for joining us on the call today. Again, as John mentioned early, we will be in New York, and Minneapolis and Milwaukee next week and if you would like to meet with us while we are there, please give me a call at 510-647-8870, we’ll speak with some of you while we are out on the road or of course here in the Bay Area if you are visiting. Again that concludes our call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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