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Executives

Mark Donohue - Director, Investor Relations and Assistant Treasurer

Ashraf M. Dahod - President and Chief Executive Officer

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

Analysts

Vivek Arya - Bank of America/Merrill Lynch

Brian Modoff - Deutsche Bank Securities

Charles John - Piper Jaffray

Amir Rozwadowski - Barclays Capital

Thomas Lee - Goldman Sachs

Matthew Robison - Wedbush Morgan Securities

Anil Doradla - William Blair

Hasan Imam - Thomas Weisel Partners

Richard Krammer - Arete Research

Alex Henderson - Miller Tabak & Co.

Edward Jackson - Cantor Fitzgerald

Lawrence Harris - C.L. King & Associates, Inc.

Matthew Thornton - Avian Securities

Blaine Carroll - FTN Equity Capital Markets

Joanna Makris - Brigantine Advisors Llc

Starent Networks Corp. (STAR-OLD) Q2 2009 Earnings Call July 23, 2009 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the Second Quarter 2009 Starent Networks Corporation Earnings Conference Call. My name is Litrecce. I will be your coordinator for today's conference. At this time all participants will be in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions).

At this time I would like to turn the call over to your host for today's conference Mr. Mark Donohue, Director of Investor Relations. Please proceed, sir.

Mark Donohue

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

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

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

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

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

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

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

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

Ashraf M. Dahod

That you Mark. Good afternoon everyone and thank you for joining us for our second quarter of 2009 earnings conference call.

We are pleased to report that we had a good second quarter. Our revenue for the second quarter was 78.3 million, an increase of 28% from the second quarter of 2008. GAAP net income was 15.2 million or $0.20 per diluted share in the second quarter. Excluding the stock-based compensation charges and the related tax effect, non-GAAP net income was 18.8 million or $0.25 per diluted share in the second quarter.

We continue to see strong trends in the mobile data driven by three major factors in the industry including evolving mobile broadband technology, new service offering and improved multimedia devices.

We believe the combination of these factors will result in a mobile data traffic tidal wave that will place unprecedented pressures on the operators' core networks well into the next decade. This presents a great opportunity for Starent Networks as we address this market with focus, robust business solutions that we believe are technically unmatched in the industry.

The mobile Internet is rapidly migrating from e-mail and basic Internet access to mobile TV, video demand, rich media, social networking and advanced gaming services. PC mobile application stores lunched by device and software vendors such as Nokia, RIM, Palm, Microsoft, Apple and Google as well as mobile operators like Vodafone. Social networking sites such Facebook, Twitter and Bebo are increasingly being accessed on the go.

Netbooks and PCs that are 3G-equipped with USB dongles or embedded cards are driving data traffic volumes due to the ease of connections to the network.

Furthermore, advanced mobile devices such as the Palm Pre, the BlackBerry 2 and iPhone 3GS are evidence that mobile elements continue to advance and unlock the potential of the mobile Internet.

As these services of multimedia devices continue to grow richer and more diverse, the average pricing per subscriber is expected to grow dramatically, making the multimedia package go increasingly strategic for operators. According to Informer, the average traffic per subscriber will grow more than ten-fold in LTE over 3G. The evolution of network to HSPA, HSPA Plus and LTE present major technical leaps in mobile transmission speeds, ranging from 3 to 14 megabits per second with HSPA, 28 to 42 megabits per second with HSPA Plus and more than 100 megabits per second with LTE.

We are clearly at the forefront of this trend as only 132 million or 3% of GSM subscribers use HSPA today, a number that is expected to grow at a 68% compounded annual growth rate through 2013 according to wireless intelligence.

As further evidence, vendors are using... are also investing heavily in HSPA. According to a recent GSF survey, there are over 1600 HSPA capable devices launched as of July 2009, of which about 40% are mobile phones and smart phones, 20% are notebook, 10% are data cards and the reaming 30% are other network and consumer devices.

We recognize that the projected growth of data transferring for HSPA and LTE requires a scalable platform optimized for high bandwidth data services. That is why we believe the decision for the Evolved Packet Core or EPC is today. Operators launch to preserve their investment in 3G knowing that they can scale with Starent's current platform and add LTE capability to the same multimedia course; thus avoiding a very expensive and destructive forklift upgrade.

Furthermore, we realize that our technology must continue to evolve to address the changing performance demands in the core networks. This quarter, we increased the performance options within our product portfolio by introducing new processing and line cards that supercharge the performance of our ST40 platform.

The Starent Packet Services Card 2 or PSC2 and 10 gigabit Ethernet line cards enhance capacity, throughput and transaction rates, increasing performance by up to four times. These enhancements further extend Starent's industry leading capabilities and give operators additional flexibility in architecting the multimedia core networks.

While the growth of data traffic has a tremendous impact on throughput requirements, it also increases the performance requirements for mobility and session management, signaling in operator network.

Signaling as an important network function that drives connection procedures such as connection setup and tear down. New multimedia devices and applications require superior signaling performance because they drive significant growth in transaction event per second. For instance, a mobile device which simultaneously operates a Skype phone call, send an e-mail, download a video and receive a Twitter message. Behind this theme, these applications drive numerous data connections and mobility signaling events, particularly if there is an always-on connection.

This signaling challenge becomes even more pronounced in the migration to LTE as the radio network controller is eliminated, creating greater signaling and mobility management requirements on the go.

Competitive platforms focused either on throughput has extensive signaling and mobility management or vice versa. Their multi fast approach involves disparate elements in plate dedicated to specific features and functions. For instance, routers are designed for handling high throughput with little or no processing power while servers are designed for high-end processing with limited throughput.

We believe this is a narrow approach to one of the largest challenges operators face. The signaling and performance limitation of such platforms require stacking additional equipment, ultimately increasing cost as their networks scale. Quite often, customers tell us that call transaction events are creating a bottleneck in the network core. Starent has demonstrated that we're able to handle both the high throughput requirement while also handling our call transaction rate that is in order of magnitude higher than the nearest competitor.

Mobile operators can monetize their growth in data traffic by adding intelligent inline services into multimedia phone. An intelligence core provides valuable insight into a subscriber and network utilization trend allowing the operators to add features and functions that enhance the mobile experience.

Furthermore, it allows operators to construct and enforce policies that ultimately control capital and operational expenses such as backlog, spectrum, and radio access resources.

The flexibility of our platform is one of our key advantages as Starent Networks continues to provide its customers with innovative solutions that enable new service and revenue opportunity. In the second quarter we announced that Cox Communications, the third largest cable operator in the United States selected Starent solutions for its wireless network. We also continue to expand our footprint within the operators we serve today by deploying functions beyond traditional action gateways on the same platform.

For example, one of our long standing customers KDDI is deploying Starent Security Gateway to provide Wi-Fi service for their growing subscriber base. KDDI's, Wi-Fi wing service allow subscribers to benefit on similar service experiences as they roam between unsecured Wi-Fi network and secured CDMA network.

We will continue investing in key research and development program to expand our product portfolio. Our success is driven by our intense customer and technology focus. We are confident that if we continue to execute on our strategy we will maintain our competitive advantage and market leadership.

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

Paul J. Milbury

Thank you, Ash. I hope you're referring to non-GAAP figures in this call, unless I specifically state that I'm referring to a GAAP figure.

We focus on these non-GAAP figures because they exclude non-cash stock-based compensation which we did not include when we evaluate our operating performance internally.

The reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings release -- press release issued earlier today, which is posted on the Investor Relations section of our website.

We are very pleased with our financial performance for the second quarter and for the first half of the year. Revenues were $78.3 million for the second quarter of 2009 up 28% from the second quarter of 2008. For the first half of 2009, revenues were $151.5 million, up 29% compared to the same period last year.

Gross margins were 80.5% for Q2, which was higher than expected due to product margin. Similar to Q1 these product margins were driven by greater than expected mix of software. As we've said in the past in the second half of the year and over the longer term we do not expect that we will be able to sustain gross margins at this level as we grow our market share with new customers in evolving markets.

Service margins were down slightly to 55% in the second quarter from 57% in Q1 and service expenses increased faster than revenue.

Operating expenses were $35 million in Q2, up 1.5 million from the first quarter. The increase in spending was driven by research and development which increased $2 million sequentially to 14.6 million. The increase in R&D expense was primarily driven by higher personnel costs, and higher depreciation related to capital spending. Therefore, marketing spending was $15.1 million for the quarter essentially flat with Q1.

G&A expense decreased modestly from Q1 to 5.3 million largely as a result of lower net professional services. Overall, operating expenses declined slightly as a percentage of revenue from 46% last quarter to 45% in Q2.

Total headcount at the end of Q2 was 917 up 68 from the end of Q1, and up 143 since the beginning of the year.

Operating profits for the second quarter grew 58% year-over-year to $28 billion or 35.8% of revenue. Operating profits for the first half of 2009 were $53.7 million or 91% increase over the same period last year.

Our non-GAAP operating profits exclude $5.6 million of stock-based compensation for the second quarter of 2009, and 9.6 million for the first six months of the year and the related tax effect.

Other income was $2 million for the quarter driven mostly by a positive currency retranslation of our euro and British pounds denominated receivables. Our cash currently has very low interest rate yield as it is in invested conservatively in both prime corporate and U.S. government related money market funds.

As we've discussed in the past our financials began to reflect a normal provision for income taxes in 2009. As a result, our non-GAAP tax expense for the quarter was $11.2 million on $30 million of profit before tax, a tax rate of 37.4%.

In Q2 of 2008, we had a tax expense of $1.3 million on 19.6 million of profit before tax a tax rate of only 6.9%.

Net income for the quarter was $18.8 million or $0.25 per diluted share based on 75.8 million shares outstanding.

Moving to the balance sheet, we ended the quarter with $389.9 million of cash and short-term investments. Accounts receivable were down 3.8 million sequentially to 54.9 million and inventory rose by 1.8 million sequentially to $50.4 million.

Capital expenditures which were mostly for engineering and customer lab equipment were $8.5 million in Q2 and $14.7 million year-to-date.

Balance sheet deferred revenues were down sequentially to $146.6 million as a result of recognized revenues being higher than billings for the quarter. As we've noted in the past deferred revenue is a component of our total backlog along with unbilled orders that can fluctuate based on contractual billing milestones, which vary from account-to-account.

Right now, we've good visibility for the remainder of the year based primarily on our total backlog. As always either with respect to backlog we have to execute on our plans to complete deployment in customer commitments in order to get acceptances and achieve revenue recognition.

Now, I would like to talk about our updated outlook for 2009. For revenues we are increasing our full year outlook to a range of 315 million to 325 million up from our previous outlook of approximately $315 million.

On our last call we estimated full year gross margins would be in the area of 76 to 76.5% but given the results in Q2 we now expect gross margins to be in the range of 77 to 77.5% for the full year.

We expect increased engineering spending during the second half of the year with a number of programs focused primarily on new product and new technology initiatives. We've been investing in LTE for a number of years and is the first deployment to get closer we are ramping up our investment due to the importance of LTE to our key customers and our future business. Some of these expenses later in the year could be one-time in nature.

Sales and marketing is also expected to increase substantially in the back half of the year due to significant trial and demo activity related to new business prospects and higher variable sales compensation expenses. As a result, we still expect full year operating expenses to be in the area of 49% of revenue.

With these assumptions for revenue, gross margins, and operating expenses, we would expect operating profits to be in the range of 28 to 28.5% of revenue up from our prior guidance of 26 to 27%.

Guidance for other income remains unchanged at 2 to $3 million, but we now expect our non-GAAP tax rate to be in a range of 36 to 37% for the full year.

Non-GAAP EPS for the full year is expected to be between $0.75 and $0.80 a share on 76 million shares, up from the $0.71 to $0.74 range that we provided in the last quarter. Although we still expect full year stock-based compensation to be about $22 million, we now expect our full year GAAP tax rate to be approximately 39% resulting in GAAP EPS in the range of $0.55 to $0.60 per diluted share.

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

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Vivek Arya, please proceed with Bank of America.

Vivek Arya - Bank of America/Merrill Lynch

Thank you. Couple of questions. First is Ash how is your visibility in winning new Tier 1 contracts and especially if you could give us some frame of reference how is the visibility say versus three months ago?

Ashraf Dahod

Essentially, as you mentioned three months ago I'll say at the beginning of the year, I mean we have clearly seen an increased activity in terms of RFP and really on the lines -- the various stages and as you mentioned earlier that we do expect some decisions to be made before the end of this year.

Vivek Arya - Bank of America/Merrill Lynch

So is it fair to assume that at least for this year's guidance you don't expect any Tier 1 wins and if they were to occur they would really benefit 2010 projections?

Ashraf Dahod

I think in our planning we always assume that any Tier 1 wins we have in any particular year then it does not mean any significant revenues in the year and as revenue is reflected in the following years.

Vivek Arya - Bank of America/Merrill Lynch

All right. Next, what is your sense of readiness of this LTEE co-system in terms of handsets and devices, I know your products may be ready but if let's say a particular large carrier were to push out LTE because the handsets or the devices aren't ready is that a positive or a negative for you?

Ashraf Dahod

I think LTE is in a variety of devices besides handsets and it will be also netbook, we've have data cards for PC, and it will be there the initial focus and grow via netbooks and as portable computers which I just -- but at sometimes as you know that all of the Tier 1 carriers who were pushing LTE are looking very closely at and tech providers that do expect their handsets have learnt already to launch to LTE.

Vivek Arya - Bank of America/Merrill Lynch

All right. And just the last question can you give us the contribution from Verizon this quarter or basically your top five customers and how you see that trend in the second half of the year? Thank you.

Paul Milbury

In the second quarter we had two 10% customers that together made up about 85% of our revenue. That's as much detail as I can give you on the specifics for the second quarter. For the first half of 2009 we had one customer that was greater than 10% and they represented approximately 74% of our first half revenue.

Vivek Arya - Bank of America/Merrill Lynch

Okay. Thank you. Good luck.

Operator

And our next question comes from the line of Brian Modoff with Deutsche Bank. Please proceed.

Brian Modoff - Deutsche Bank Securities

Hi, guys. Can you talk about summing your 3G opportunities on a global basis? And what you see in terms of WCDMA benefiting you in the back half of the year and into next year, and talk about WCDMA activity or bid activity on a global basis particularly with emphasis on Europe, China, and India?

Ashraf Dahod

I mean we're obviously -- I mean all the three geographies that you mentioned are very active in terms of RFPs not only the Tier 1 operator but also with Tier 2 operators and they are engaged a significant number of these RFPs initiative and we believe that reasonable a number of those will make it represent this year.

As far as India and China are concerned, in China, we are right now undergoing a lab testing and field testing of our equipment to qualify for bidding, China Mobile and China Unicom with our WCDMA product and once the quarters is completed we expect China Unicom and China Mobile to issue RFPs to all those vendors who qualify.

In India we are engaged with all the Tier 1 carriers. However, as you know in India since the 3G customers are delayed, we don't really expect any significant decision into the carriers who have a much better understanding on the schedule for the 3G auction.

Brian Modoff - Deutsche Bank Securities

And then on AT&T you've made into the next round of bidding for their EPC can you talk about how that is looking for you and any other carrier you might talk about that's you think look interesting in the back half of the year. Vodafone is an example do you expect them to became material in revenues in any quarter in the back half of this year?

Ashraf Dahod

So let me take on the AT&T question and then for Vodafone I will pass it to Paul. As far as AT&T is concerned I mean obviously the decision you made is something that I can neither confirm nor deny because we're in NDA. But as you know that they are going through process where they rely a piece to select EPC supplier. And in the meantime they are as you know to finding domain players and the latest is that they're going to have eight different domains and two players in each of the domain and depending on where EPC ends up in which domain, will probably determine who is the domain player that we have to work with. So that's the thing, I believe we stand on AT&T maybe a positive comment on Vodafone revenues--?

Paul Milbury

I will issue that in sort of high level. We do expect to start to get some contribution to revenue from Vodafone in the second half of the year. With respect to the full year outlook it's pretty much the same as what we talked about last time and that's that in the first half we have a fairly immaterial contribution from non-CDMA sources. Our revenue is primarily a CDMA based, for the full year our outlook is still for non-CDMA revenue to represent somewhere in the area of 15% of full year revenue. So it would be obviously higher than that in the back year after the year as a percentage.

Ashraf Dahod

I will also like to add that if you look at our total subscriber base of the carriers they have already have as customers, there is much weighted diversification than what you see in our revenue. But today if I were to say all the carriers that has deployed Starent gear and look at the subscriber base it adds up to close to 500 million subscribers and nearly 35% of those are WCDMA. The same profile about couple of years would have been nearly 100% CDMA.

Brian Modoff - Deutsche Bank Securities

That's fine. All right thank you. Let us go to the next caller.

Ashraf Dahod

Thanks.

Operator

And our next question comes from the line of Michael Walkley with Piper Jaffray. Please proceed.

Charles John - Piper Jaffray

Hi, this is Charles sitting in for Mike Walkley. Hi, Ash and Paul.

Paul Milbury

Hi.

Ashraf Dahod

Hi.

Charles John - Piper Jaffray

Thanks for taking my questions. Just start with up the Vodafone may be just to clarify this is my understanding once they have the customer acceptance of the product you would transfer from the deferred revenues to in the balance sheet, to the P&L. Looking at this quarter you've seen a slight downtick in the deferred revenue. And so, Paul, maybe this question is for you, to get to the 15% of total sales in '09 we need to see a pretty significant ramp in the back half and with the deferred revenue kind of having a downtick this quarter maybe if you could just help us understand what stage is the sales cycle Vodafone is at right now and if we do complete the customer acceptance does it accelerate the future sales cycles for the next couple of deployments in the different properties in Vodafone? That will be helpful.

Paul Milbury

Okay. Well with respect to the stage and the cycle, we're into the cycle with Vodafone deployments. The final issues here are around some technical deliverables that are in the original global agreement with Vodafone. And we need to get through those before we can move that from deferred revenue into accounting revenue and we expect that to begin to happen in the back half of the year.

As I said earlier, in terms of the deferred revenue, I think the deferred revenue on the balance sheet plus the unbilled orders that we already have in hand and the pipeline of sales activity with our existing customers gives us very good visibility to the sources of our revenue for the back half of the year that are implied in our guidance.

Charles John - Piper Jaffray

So Paul, would it be fair to assume that once these technical issues are resolved and as customer acceptance occurs and the sales cycle for the overall contract that starts more closely matching something like you have with Verizon or is that still further out?

Paul Milbury

It starts to move us in that direction, yes.

Charles John - Piper Jaffray

Okay. And then maybe a real quick question on gross margins. You guys have entered some really strong margins the last couple of quarters. Maybe the question is just what is really driving this improved software mix, is it... if you could remind us what really triggers these software revenues? Is it some kind of application that the carriers are launching versus just a plain chassis upgrade or what's really triggering these really high growth margins? Is it some specific software application?

Paul Milbury

In this particular quarter, it was driven really by primarily by a particular application in combination with an expected amount of software for capacity expansion. So licenses for capacity expansion. Last quarter it was primarily on the capacity expansion side.

I just want to get back to that Vodafone revenue question for a minute. As we've stated in the past, once we get to our initial revenue recognition with Vodafone under the terms of the contracts where we have done most of our business to date, it allows us to begin to take revenue but on a ratable basis. And going forward for new business, there might some opportunities to get revenue more in line with the way we do it for existing customers. But the existing deferred starts to come out on a ratable basis over time.

Charles John - Piper Jaffray

Okay, that's helpful. And just a final question. Ash, six months into the year and a few people are getting a lot more optimistic on the overall macro. Are you seeing maybe customers asking for acceleration of orders, or is it pretty much the same pace of orders as you saw in Q1?

Ashraf Dahod

In other business, I mean we haven't seen any, what I would call, negative trends and therefore, we haven't seen any unusual acceleration. So we see the market probably developing and above the way it has been in the first half of the year.

Charles John - Piper Jaffray

Okay. Thanks a lot guys. Great quarter again. Good luck.

Ashraf Dahod

Thanks.

Operator

And our next question comes from the line of Amir Rozwadowski with Barclays Capital. Please proceed.

Amir Rozwadowski - Barclays Capital

Thank you very much. Ash, I was wondering, you'd mentioned sort of commentary round Unicom and some of the other carriers. On the China Telecom side of the equation, how are things progressing there? Is there a second wave of spending coming by them? I was just wondering if you could give us an update from that perspective.

Ashraf Dahod

Amir, I think we reported the last quarter that they added some PDSN capacity. They did some more additions in PDSN capacity this quarter. And the rest of the year, we do expect them to even add more capacity on the core maintenance and maybe possibly with some of the inline services. But that will be always more like you would expect an existing customers to evolve versus China Mobile and China Unicom more sort of new opportunities. And therefore, we expect the RFP process and the sales cycle to get a bit longer because all of the bidders have to put their equipment through the certification process.

Amir Rozwadowski - Barclays Capital

So from Telecom's perspective, we should start to see a larger contribution to your top line over the back half of the year?

Ashraf Dahod

There way we plan China Telecom revenues is we don't expect to see an impact on the top line until next year.

Amir Rozwadowski - Barclays Capital

Okay. Okay, that's helpful. And then Paul, I was wondering. Could you give us sort of a breakdown perhaps on the CDMA versus non-CDMA contribution to your deferred revenues? I mean is the mix on the deferred side increasing as Vodafone comes on line?

Paul Milbury

Yes, absolutely, it has been.

Amir Rozwadowski - Barclays Capital

Okay. Okay, that's helpful. And then within your current installed base, are there any carriers perhaps on the CDMA side that have been under investing. Obviously, Verizon continues to be strong for you folks, but we could see sort of as spending trends probably, hopefully improve in the back half of the year that you could see some sort of catch up spending going into the back half of the year?

Paul Milbury

I guess we can't really talk about specific customers and their purchasing decisions and we may not know all of what their intentions are and what they might do either. But I think that possibility exists from some existing customers, yes.

Amir Rozwadowski - Barclays Capital

Okay. Okay, that's helpful. Thank you very much, gentleman.

Paul Milbury

Okay.

Operator

Our next question comes from the line of Thomas Lee with Goldman Sachs. Please proceed.

Thomas Lee - Goldman Sachs

Hi, thanks for taking my question. Just a couple of questions, one kind of housekeeping. Just curious, what percentage of your revenues were outside of the U.S. or...

Paul Milbury

We had I think it was 85% of our revenue North America-based and 14% in the Asia Pacific region.

Thomas Lee - Goldman Sachs

Got it, okay. And then in terms of your revised revenue guidance, I was wondering, can you talk a little bit about kind of what give you greater confidence either from the technology perspective or geographically that caused you to raise that? Just greater visibility in either area would be helpful.

Paul Milbury

Well I think as you know, we gave our initial guidance for 2009 back in October 2008. And we put it in the context of in the area of 315 million plus or minus; we are now... we've maintained that 315 plus or minus guidance for the period between October and now. I think just as we've gone through the year and seen the business and see where we stand at this point from the perspective of our total backlog with deferred revenues plus unbilled orders in hand and normal sales pipeline activity from existing customers, we felt confident enough to kind of put 315 as opposed to the area around which the result to be the low end of the range.

Thomas Lee - Goldman Sachs

Got it. So it wasn't necessarily kind of any incremental increase in activity let's say over the last couple of months that caused you to change that? It was just more... it's basically greater confidence in kind of backlog and I guess your visibility.

Paul Milbury

I think it was... yes, it's as a combination of things.

Thomas Lee - Goldman Sachs

Got you. And then maybe just a couple of questions for Ash. I was curious in terms of... are you getting any sense from operators that they may be holding off making 3G kind of mobile core decisions and perhaps thinking about just jumping straight to 4G or LTE?

Ashraf Dahod

I would say there are a couple of operators globally who had not moved very aggressively into HSPA or HSPA Plus. Likely to go from UMTS straight to LTE. However, those who have committed to HSPA and HSPA Plus we believe will stay with HSPA only because HSPA as you can see does deliver true broadband experience.

Thomas Lee - Goldman Sachs

Which...

Ashraf Dahod

They are not under as much pressure to move to LTE.

Thomas Lee - Goldman Sachs

All right. That's helpful. Can you talk about maybe regionally which carriers do you see that type... which carriers are perhaps maybe kind of just making that decision to pause and jump straight to 4G in Western Europe?

Ashraf Dahod

I think there is a carrier in Europe who have jumped directly and there is a carrier in Asia-Pac region. I can't specifically name them because of our NCAs.

Thomas Lee - Goldman Sachs

Understood. That's helpful. And then just lastly, just curious as we kind of talk about you mentioned capacity constraints and that driving incremental software sales. How much of... when you kind of think of the broader network, how much of the bottleneck is kind of constraint wise, the core versus the radio? And so when networks... when operators talk about increasing greater capacity, I guess I was just curious to know kind of what... how that split works. I mean if pretty much equal attention needs to be placed to both or is it typically... the radios typically, there is a bottleneck versus a core, any commentary around that would be helpful.

Ashraf Dahod

I think in the case of the radio, once the radio is deployed and it becomes unique with them, then in radio, you end up having hot spots versus in the core, where you don't really need to add a lot more capacity beyond what you think you have to reveal during any period of time. So the addition to the capacity in the core is a bit more linear than what you would see in a radio, because in radio, the capacity gets added in much bigger chunks than you would add in the core.

Thomas Lee - Goldman Sachs

Got it. Okay. Well, thank you very much. That's very helpful.

Ashraf Dahod

You're welcome.

Operator

Your next question comes from the line of Mat Robison with Wedbush Morgan Securities. Please proceed.

Matthew Robison - Wedbush Morgan Securities

Hi, thanks. In the past you guys have talked about being involved with 30% of HSPA system deployments. I wonder if you could characterize where you think you are now. And I think you said last quarter, 33% of your end users were GSM, WCDMA, so I guess that's what compares to 35% now or where you're rounding up to a third last quarter. Then just kind of catch up on some housekeeping stuff, if you could provide cash from operating cash flow, cash from options exercised and repeat that non-CDMA figure for the first half please?

Ashraf Dahod

Let me answer the first question. I mean, clearly, our percentage of... the total footprint coming from UMTS continuous to grow. And when I said 35%, I mean for the past 90 days, the number of subscribers that we cover in UMTS is indeed... is higher than what it was 90 days ago. So footprint on UMTS continues to grow, but obviously not yet reflected fully in our revenue.

Matthew Robison - Wedbush Morgan Securities

Right.

Paul Milbury

With respect to the question about the non-CDMA revenue, I think all I said was that in the first half, it was a fairly immaterial amount. For the full year, we still currently expect non-CDMA revenue to be approximately 15% of the full year revenue.

Matthew Robison - Wedbush Morgan Securities

Okay. Ash, do you think you are still at 30% of the HSPA systems or where do you think you are there?

Ashraf Dahod

Yeah, I believe that we are maintaining our market share in HSPA. I mean we have to wait unit some of the independent marketing organizations come up with new surveys. But we believe we're maintaining our position in HSPA.

Matthew Robison - Wedbush Morgan Securities

Paul, do you have the cash flow numbers?

Paul Milbury

Yeah, the cash from operations was approximately 7 million. Capital expenditure... and than I should mention that in that cash flow from operations of 7, there was a $16 million... there was a total of $16 million of tax payments in the quarter. So an unusually high level of tax payments including really our first significant estimated U.S. federal income tax payment. And there were some catch up in that payment. So it was very unusually large in the quarter. So that was included in the 7 million of cash from operations. Then capital expenditures were about 8.5 million for the quarter and cash inflows from stock option exercises were about 4.5 million. And we also made one small long-term investment in another company of $1 million.

Matthew Robison - Wedbush Morgan Securities

So it sounds like that tax payments probably more than you were going to see for a while, would that be a correct assumption?

Paul Milbury

Yes.

Matthew Robison - Wedbush Morgan Securities

Thank you.

Operator

And our next question comes from the line of Anil Doradla with William Blair. Please proceed.

Anil Doradla - William Blair

Thanks for taking my question guys. Just delving a little bit on the gross margins. On a blended basis, the first half was somewhere around 80%, and given your guidance of 76 to 77, if I'd look at the midpoint of your top line, if I've done my math right, we're talking about somewhere around 72.5, 73% for the second half '09 and somewhere in the low 70s. So I'm trying to understand why is it falling down so much from 80% down to the low 70s?

Paul Milbury

Yeah, I don't know what number you're using for revenue for the full year and that makes a difference. But 74, 75% is the math that you would probably get if you stuck to the range of guidance that we gave. And the reason it's coming off at 5 to 6 points from the first half to the second half is again the expectation in the outlook that we're not going to get the same contribution from a mix perspective of software-only sales' it's going to be more of a blend of... normal blend of hardware and software mix. I mean that's the explanation.

Anil Doradla - William Blair

So Paul, it's not really a CDMA versus wideband CDMA? It's more of a software applications versus kind of the software, hardware combo, is that right?

Paul Milbury

That's the biggest factor, yes.

Anil Doradla - William Blair

The second thing is that now with so much cash, I mean any M&A activity planned out there?

Paul Milbury

No, I mean there are obviously always a variety of things that are being looked at or being presented to us, which I think we would look at just as harder if we didn't have quite as much cash and really wouldn't like the cash to dictate what we did from an M&A perspective. But there is at this point in time nothing on the radar screen of any significance that we have to talk about.

Anil Doradla - William Blair

So I mean would it fair to say that over the past 3, 4 months at least you are scouting more opportunities more actively or it's basically opportunistic?

Paul Milbury

I think it's basically opportunistic. We've always been in close touch with a lot of companies in the sort of ecosystem in which we operate and there are always opportunities to think about. But I wouldn't say this it's accelerated recently.

Anil Doradla - William Blair

Okay. And finally on relationships with OEMs, can we expect over the next several quarters maybe greater relationships with larger OEMs and tie-ups, strategic relationships given that the AT&Ts of the world are going more towards domain systems? I mean is that something we can expect or I mean how do you view that whole shift towards this kind of domain culture out there?

Ashraf Dahod

The shift to a domain culture is not something that's an industry wide phenomenon which you see in AT&T. All other engagements that we have are direct even though in some instances the operator may fulfill through another entity. But we haven't seen the phenomena of domain players that we see unfolding at AT&T and other operators.

Anil Doradla - William Blair

Okay. Well, thank you very much.

Ashraf Dahod

Welcome.

Operator

And our next question comes from the line of Hasan Imam with Thomas Weisel Partners. Please proceed.

Hasan Imam - Thomas Weisel Partners

Yeah, thanks. I just had a couple of questions. The follow up on the AT&T question. Ash, can you maybe comment on how you think that would impact your probability of a win? I mean hasn't that diminished given if of the domain vendors is let's say Ericsson with their own product to push? Then even if you have the best-in-class product, the probability would diminish. And if it were to a reseller, how do you think for example margins would be impacted? Thanks.

Ashraf Dahod

I mean I think it's really... I prefer not to speculate on how things will unfold at AT&T. At the end of the day, as we have mentioned earlier, that there is an RFP for the EPC. We are expecting that through their RFP, we can demonstrate to AT&T the superiority of our product and the fit that we have now in the CE network, but also they migrate to HSPA and migrate to LTE. And then depending on where EPC ends up in which domain and who are the domain players, I expect AT&T to play a role in trying to match up suppliers of the U.S. products and technologies who made different domain players. Clearly any time you go through an integrator in terms of businesses we do today, it does impact in the bottom-line average selling price but at the same time it also reduces our operating expense for that particular operator.

Hasan Imam - Thomas Weisel Partners

And can you give us some update on the competitive landscape. Are you seeing more or less of the usual suspects? Thanks.

Ashraf Dahod

The competitive landscape hasn't changed much I mean we still continue to compete with -- essentially Ericsson, Nokia Siemens, and in some instances with Cisco, but mostly with Ericsson, Nokia Siemens.

Hasan Imam - Thomas Weisel Partners

Great. And just one last question on the guidance update could you maybe talk or give us a little more color on what prompted that is that some incrementally new piece of business you're seeing or is it more just feeling more comfortable with the backlog as the year progresses and so moving to the high end of your higher or let's say higher in your internal expectations? Thanks.

Paul Milbury

Yeah. I think it's no one piece of additional business or something completely new. Its just confidence from the visibility that we have been half way through the year and it is still earlier looking at the total backlog, which is the deferred revenue plus orders that are already in hand and normal sales pipeline activity with the existing customers.

Hasan Imam - Thomas Weisel Partners

Great. Thank you.

Paul Milbury

You're welcome.

Operator

And our next question comes from the line of Richard Kramer with Arete. Please proceed.

Richard Krammer - Arete Research

Thanks very much. Quick one for Paul, can you just say whether there is any portion of your cash which is trapped or received or somehow restricted?

And then two simple questions for Ash. First, have you see any instances whereby your large OEM competition are looking to win wider LTE deals by offering EPC at lower pricing levels or even free of charge. Do you see any evidence of this sort of behavior in any deals?

And second, have you won any deals or you're actively bidding anything through the Motorola channel partnership, and when we hear you announce channel partnerships like that. How long do you think it really takes until they transpire into some sort of business?

Paul Milbury

I'll take first one on cash, which is very straightforward. None of it is stuck anywhere for any reason tax or otherwise.

Richard Krammer - Arete Research

Okay. Thanks.

Ashraf Dahod

As far as comparisons that you raised on LTE I mean we haven't really seen any major LTE decisions where essentially a bit on the gear would have given up for free. LTE like I said is just lot of trials going on, lot of R&D activity and it's a little bit too early to decide how things will end up in LTE.

We do expect that the cherry is going to be LTE and recognize the significance and the roles that core can play and be able to monetize and also the ability to launch differentiated services to increase the revenue. I mean the carriers will be faced with the decision that really becomes the flier of the height or an intelligent core that allows them to make more money. And I think it's too early to say that things will end up I mean we are very confident that we'll get a whole fresh air of LTE this is we've done so far in 3G and HSPA.

As far as Motorola is concerned, we do see a lot of activity gearing up on the Motorola front for healthy trials. But we don't expect any significant revenues until next year.

Richard Krammer - Arete Research

Okay. And just a follow-up on that first question, are you seeing some or any push back from large carriers on sort of channel elements or software pricing models that go along with our long engagement like a Packet Core and for then looking to compare vendor side by side since you all have very different approaches to how you price those that stream of software upgrades?

Ashraf Dahod

I think the way we price this is not very different than our competitors do when it comes to inline services. The only difference is that in our case almost all of our inline services run on the same platform. Most of our competitors are not able to support all the inline services on the gateway platforms and are forced to sell additional hardware that goes alongside the gateway. So that's the thing I think makes the difference but in our case the software component appear to be larger because it runs on the same hardware that runs the gateway function in most of our competitors they are not able to run the same equivalent of services on the gateway hardware.

Richard Krammer - Arete Research

And do you see any instances where carriers are looking to have Packet Core vendors provide functionality on some sort of service level agreement or managed service spaces whereby may wouldn't necessarily take ownership of the equipments but would simply purchase functionality as it was used?

Ashraf Dahod

There are some opportunities of that nature that we're pursuing and obviously as they materialize and there could be opportunities where we are working through managed services like deal directly or through an integrator.

Richard Krammer - Arete Research

Okay. Okay, thanks guys.

Paul Milbury

Welcome.

Operator

And our next question comes from the line of Alex Henderson with Miller Tabak. Please proceed.

Alex Henderson - Miller Tabak & Co.

Hi, guys, how are you doing?

Paul Milbury

Fine.

Ashraf Dahod

We are good. How are you?

Alex Henderson - Miller Tabak & Co.

I am fine thanks. If I missed this earlier, I apologize and couple of companies, other companies of say, but I was wondering if you give us little bit of clarity on the tax line, it jumped round a little bit quarter-to-quarter, what was the guidance for that for the full year?

Paul Milbury

The guidance for our non-GAAP tax rate was between 36 and 37 so a little bit higher than the 36 that we talked about last quarter and it came up a little bit in the second quarter I think primarily as a result of some changes in the U.S. I am sorry, Massachusetts tax provision and some new portion that rules. And the GAAP tax rate is around 39%, slightly higher for the same reason.

Alex Henderson - Miller Tabak & Co.

I'm calculating around 37.4 in the second quarter which give you 36% for the latter two half quarters, which would get you right to the midpoint of about 36.5. So that would imply your tax rate will be lower than it was in the first half and the back half of the year, doesn't strike base right? Well, likely end at the high end of that range then?

Paul Milbury

No, I think that the math you just did is correct.

Alex Henderson - Miller Tabak & Co.

Okay, great. And the second question just logistics talk here the interest income line, can you give us some thoughts of where that's going. I was kind of surprised that jumping up so much?

Paul Milbury

Well, the interest income line jumped up so much because of ForEx translation gain on the balance sheet. So, that was 1.6, 1.7 of the 2.0 for the quarter so, interest income was relatively smaller than expected given that.

Alex Henderson - Miller Tabak & Co.

I see, surely I missed that earlier so, we should see assume it's no flat to zero -- ForEx going forward so assume more or like the nominal run-rate on interest?

Paul Milbury

Yeah. Exactly.

Alex Henderson - Miller Tabak & Co.

Okay. Yeah. That helps. Thank you very much. Question on the customer base, it seems pretty clear to me that your relationship with Verizon is very strong and I'm trying to understand how to think about the capacity additions that they are doing within their network. How should we think about the potential for constraint driving additional need for your product going forward and to extend of there is any issues associated with having built fair amount of capacity over the last year is there any risk diminution of that demand?

Ashraf Dahod

We expect as long as the overall factory continues to grow that all our customers I can't comment specifically on Verizon for all our customers they continue to add capacity. Our experience in the last several years has been that they are very resistance does the carrier add significant capacity in the core in any one shop. They really add capacity essentially as they need it and as they consume it.

Alex Henderson - Miller Tabak & Co.

So should really be thinking about the capacity adds there as driven off traffic growth and traffic growth is driven off from the obvious networks that we would anticipate. Not look at it as anything other than a linear demand equation in that environment?

Ashraf Dahod

And the factors that I mentioned in my remarks was there a much greater content of video, more peer-to-peer traffic.

Alex Henderson - Miller Tabak & Co.

Sure.

Ashraf Dahod

And people doing on the go what they were previously doing on the desktop.

Alex Henderson - Miller Tabak & Co.

Second question on the same lines. So Verizon has obviously been a huge success, but one could easily argue that KDDI and the Koreans have not ramped in scale the way you might expect given the size of the data traffic flows in those networks. Can you talk about why they are not as significant as customer base as your number one customer is? What are they doing that's different in terms of the acceptance and delivery of traffic on their networks and why haven't they scaled up more significantly as a customer?

Ashraf Dahod

So once again, avoiding comment to any specific customer, I guess our view was generally, what you see in the various devices to market. I mean, clearly, what you see is a much faster trend in North America where consumers and enterprises are moving to more broadband and wireless type experience than you see in other parts of the world. We see a similar trend in many parts of Europe. In some countries where even though they will not be viewed as sort of leading-edge countries, countries where the wireline infrastructure is not very good, we see a much greater and much faster growth in broadband wireless where essentially broadband wireless is used as a replacement for the wireline infrastructure.

So it depends on what country and what is the state of the total communications network within that country. But overall, one thing is clear that in North America, today, we use more broadband wireless than in the Asia Pac region.

Alex Henderson - Miller Tabak & Co.

Just so that I understand, therefore, when there is data traffic on those networks that were mentioned, that traffic is being handled by your gear and there is no reason to believe that they are not only using you for part of their network or only part of their traffic flow and not committed to you fully; they are in fact determined customers?

Ashraf Dahod

Yes, we believe they are determined customers. I mean I think that whatever revenues we derive from them is essentially a reflection of their growth in capacity.

Alex Henderson - Miller Tabak & Co.

The reason I ask the question that way is the obvious question that's looming is what kind of customer and user experiences are we going to be seeing at the three primary customers that are ramping over the next year, i.e. Vodafone, mag and the French company who's name I consistently screw up, so I am not going to try. I wish I could say that as smoothly and fluently as I should be able to. Anyway, the three of those customers are in areas that seem like they have much higher data traffic flows and more 3G phone flow than what you've experienced in Asia Pac. Is that a reasonable calculus?

Ashraf Dahod

Yeah, I mean that's our expectation. I think once we get as initial deployment some of those networks, then we would expect them to grow. So sort of following the trend that we have seen in North America.

Alex Henderson - Miller Tabak & Co.

And just a...

Ashraf Dahod

And I just want to add something to my earlier question about Asia Pac. I mean as you know, that one of our key customers in Asia Pac, we are not a single source supplier. We were actually brought in as the second supplier to that particular operator. So we believe that our percentage of traffic that we get from this carrier hasn't diminished.

Paul Milbury

And that carrier tends to buy on a lumpy basis than some of the customers because it's going to centralize core as opposed to a decentralized core. And so they will be a 10% customer one quarter and not the next. As we said earlier, this quarter, our geographic revenue is 85% North America and about 14% Asia Pac. Asia Pac specifically Japan I think will be the...report in our 10-Q. So they were a significant customer this quarter.

Alex Henderson - Miller Tabak & Co.

I see. Okay. That helps. So relationship seems to, along with the first announcement have expanded quite nicely then?

Ashraf Dahod

Yes.

Alex Henderson - Miller Tabak & Co.

Okay. Just in terms of the timing of revenues out of the three companies mentioned earlier in Europe, Vodafone, mag and the French company, is there any change in the timing of when you expect those revenues to start to ramp? Has it been pushed out or pulled in at all relative to your thinking in the last couple of two, three, four months relative to hitting the technical hurdles necessary to deliver those revenues to reported lines?

Ashraf Dahod

I mean as far as boig (ph) and mag are concerned, I mean they are determined essentially in this year and we never plan those generate revenues this year. So they will be generating revenues starting next year. And on Vodafone, I think Paul has already commented that we do expect to see some revenues from Vodafone this year on a ratable basis.

Alex Henderson - Miller Tabak & Co.

Has there been any change in the timing of either of those... any of those three though?

Ashraf Dahod

No.

Alex Henderson - Miller Tabak & Co.

Pull forward, pushed back?

Ashraf Dahod

No.

Alex Henderson - Miller Tabak & Co.

Okay. Great. Thank you very much. I will see cede the floor.

Operator

Our next question comes from the line of Edward Jackson with Cantor Fitzgerald. Please proceed.

Edward Jackson - Cantor Fitzgerald

Thanks. I'll try to be brief. I just have two questions left. One is that I missed the GAAP EPS guidance, so if you can just give that again.

Paul Milbury

GAAP EPS guidance was $0.55 to $0.60.

Edward Jackson - Cantor Fitzgerald

Actually, I have three questions. Second one is direct versus indirect?

Paul Milbury

Direct was 83% for the quarter.

Edward Jackson - Cantor Fitzgerald

And then lastly, you had some activity on the femtocell front and I was wondering if you could take a couple of minutes and maybe just talk about that market, the activity levels you see in it and perhaps... I don't know... like how big or broad of a deployment you will see in terms of some of femtocell as we are starting to see some activity on that on North America. Thanks.

Ashraf Dahod

I mean obviously there is beginning of an activity in the femtocell space in North America and also some of the other markets. But we still feel that it's too early and we haven't really factored any significant... or activity that. We have not factored any revenues from the femtocell market in 2009.

Edward Jackson - Cantor Fitzgerald

But is there... are you seeing much activity within the market itself? Is there a fair amount of trial activity? Are people, are carriers enthused with the technology and looking to evaluate and deploy or it's not even that far yet?

Ashraf Dahod

I mean it's too early to that because not enough of femtos have been deployed commercially. I mean clearly, the femto market has not risen to the expectations that was put on it about two, three years ago. So the deployment of femtos today is much behind what was presented two, three years ago.

Edward Jackson - Cantor Fitzgerald

Great, thanks very much

Ashraf Dahod

You're welcome

Operator

And our next question comes from the line of Larry Harris with C.L. King, please proceed.

Lawrence Harris - C.L. King & Associates, Inc.

Yes, thank you and thank you for taking my question. I'll also try to be brief here. With respect to the new processing card, will they be shipping here in the September quarter and will they be forming a significant percentage, say greater than 10% of revenues? Will the revenues be recognized upon shipment or will it be related to the overall contractual conditions?

Paul Milbury

The new cards will start to ship this quarter, but because they are a new product, they will need to go through an acceptance process. We expect revenue from the new cards to be a significant contributor to revenue in the back half of the year. Obviously, we're expecting the deployment and acceptance processes to go according to plan.

Lawrence Harris - C.L. King & Associates, Inc.

Understood. Okay, thank you.

Paul Milbury

You're welcome.

Operator

Our next question comes from the line of Matt Thornton with Avian Securities. Please proceed.

Matthew Thornton - Avian Securities

Hey good afternoon guys. I'll be really quick here.

Ashraf Dahod

Good afternoon.

Matthew Thornton - Avian Securities

Thanks for taking my question. Paul, just quickly, you gave the geographical breakdown. It was 85% North America, 14% APAC, 1% other. When you guys put out your 10-K, I think you break it out North America, Japan, Korea and the rest of world. Any chance you have those other numbers handy?

Paul Milbury

That 85 is North America, the 14% is Japan.

Matthew Thornton - Avian Securities

14% Japan and 1% other. Okay, got you, that's helpful. And then just really quickly, in China, Ash, in previous conversations, I know you guys are in China Telecom. I think it's something like 13 of 30 provinces and you saw at over time perhaps you had a chance to grow your share of that pie. I guess how are you competing right now relative to if you start Cisco NSN how is that it developed?

Paul Milbury

I just want to correct the information I gave you a minute ago. The Japan piece was right around 12% not 14% and Korea is about 1% in it and the rest of the world.

Matthew Thornton - Avian Securities

Got you. Okay, it's great.

Ashraf Dahod

I think in China Telecom essentially the provinces are head for us there has been no change.

Matthew Thornton - Avian Securities

And just to make sure I understand you discussed this earlier I want to make sure I understand the timeline here. It sounds like in China, China Mobile, China Unicom we should have RFPs in the next quarter or so public selection by year-end is that fair time line?

Ashraf Dahod

I mean that's what the timeline the two carriers have given us I think it all depends on how things continue to execute it.

Matthew Thornton - Avian Securities

Got you, okay. And in India sounds like with some of the recent delays in the 3G license and in your spectrum auction you're taking decisions could be more or like say late 2009, 2010 story more likely?

Ashraf Dahod

Yeah.

Matthew Thornton - Avian Securities

Okay, terrific. Thanks a lot guys.

Operator

And our next question comes from that line of Blaine Carroll with FTN Equity Capital Markets. Please proceed.

Blaine Carroll - FTN Equity Capital Markets

Yes, thank you, hi and thanks for taking my question. Paul if you are able to recognize revenue on the shipments, order shipments that you had during the quarter what was your underlying growth rate has been during the quarter or during the first half of the year?

Paul Milbury

I don't even doubting answer that question but I am not say the answer if I do.

Blaine Carroll - FTN Equity Capital Markets

Okay. I think a couple of quarters ago you had mentioned that the growth rate was more up around that 35% rate because of revenue recognition the actually revenue growth was a little bit lower?

Paul Milbury

No, we said from a full year perspective the guidance that we've given about 25% growth for the year would have been another 10 points or so higher if we had normal revenue recognition for some of that in the business.

Blaine Carroll - FTN Equity Capital Markets

Okay. And then any update on the UTStarcom?

Paul Milbury

A couple of things the case at this point continues in what I call the motion-in-discovery phase in June, UTStarcom did agree to dismiss all claims against 15 of the 18 individual defendants that were involved in the case and then in July they agreed to dismiss with prejudice, the copyright claim they had against Starent. So of the original 20 counts five remain related to tax and trade secretes but we obviously continue to believe that the claims are without merit and we're going to continue to defend ourselves.

Blaine Carroll - FTN Equity Capital Markets

Vigorously?

Paul Milbury

Vigorously.

Blaine Carroll - FTN Equity Capital Markets

Okay, thanks. I'll pass it on.

Operator

And our next question comes from the line of t Joanna Makris with Brigantine Advisors. Please proceed. Ms. Makris you're on the line your line is open, but maybe muted.

Joanna Makris - Brigantine Advisors Llc

Hi, I am sorry about that good afternoon. I know you did specifically comment on the dynamics impacting gross margins in the back half in terms of returning to a more normalized software and hardware mix but can you talk a little bit about any changes in the pricing environment specifically in the non-CDMA business I know that has been a key concern for folks out there? Thank you.

Paul Milbury

I would answer that question specifically or directly by saying that we really haven't seen any change in the pricing environment per say in the non-CDMA market.

Ashraf Dahod

Any other questions?

Thank you very much all of you for joining our second quarter earnings call. I will see you next quarter. Bye.

Operator

Thank you for your participation in today's conference. This concludes the presentation.

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Source: Starent Networks Q2 2009 Earnings Call Transcript
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