Ixia Q2 2009 Earnings Call Transcript

Ixia

Q2 2009 Earnings Call

August 6, 2009, 05:00 pm ET

Executives

Brent Novak - VP, Finance

Errol Ginsberg - Chairman and CIO

Atul Bhatnagar - President and CEO

Tom Miller - CFO

Analysts

Samuel Wilson - JMP Securities

Matt Robinson - Wedbush Morgan

Joanna Makris - Brigantine Advisors

Ajit Pai - Thomas Weisel

Presentation

Operator

Good afternoon. This is Jennifer. I'll be your conference operator. At this time, I would like to welcome everyone to Ixia's second quarter earnings conference call. All lines have been muted to prevent background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Please note that the call is being recorded.

I will now turn the call over to Mr. Brent Novak, Ixia's VP, Finance. Mr. Novak, you may begin.

Brent Novak

Good afternoon. And thank you for joining us on today's conference call to discuss Ixia's second quarter results. This call is also being broadcast live over the web and can be accessed in the Investor Relations section of Ixia's website at www.ixiacom.com for 90 days.

With me on today's call are Errol Ginsberg, Ixia's Chairman and Chief Innovation Officer; Atul Bhatnagar, Ixia's President and Chief Executive Officer; and Tom Miller, Ixia's Chief Financial Officer.

After the market closed today, Ixia issued a press release reporting the results for its second quarter ended June 30, 2009. We would like to remind you that during the course of this conference call, Ixia's management may make forward-looking statements including financial projections, statements as to the plans and objectives of management for future operations and statements as to the company's future economic performance, financial condition or results of operations.

These forward-looking statements are not historical facts but rather are based on the company's current expectations and beliefs. Words such as may, will, expects, intends, plans, believes, seeks, estimates and variations of these words are intended to identify forward-looking statements. The company's future results may differ materially from those projected in these forward-looking statements.

With that said, I'd now like to turn the call over to Ixia's Chief Financial Officer, Tom Miller. Tom?

Tom Miller

Thanks, Brent. I should mention that unless specifically noted otherwise, we are discussing all numbers on a non-GAAP or pro forma basis prior to non-cash and certain non-recurring charges for the impact of stock-based compensation, acquisition related costs, amortization of acquisition related intangible assets, restructuring charges and certain inventory related write-downs, as well as the related income tax affects on such items.

In the second quarter, these charges consists of $2.6 million related to stock-based compensation, $2.5 million for acquisition related cost, $1.4 million for the amortization of acquired intangible assets, $1 million related to restructuring expenses, $773,000 for certain inventory related write-downs, and a net tax benefit of $3.6 million related to these items.

A full reconciliation of the non-GAAP financial measures covered in this call to the most directly comparable GAAP measures is available in the Investor Relations section of our website at www.ixiacom.com.

Revenue for the second quarter of fiscal 2009 was $38.4 million, within our guidance of $35 million to $40 million. This $38.4 million of revenue compares to $37.1 million in the immediately preceding first quarter of 2009 and $45.9 million in the second quarter of 2008.

Revenues for the second quarter of 2009 included $2.8 million related to our acquisition of Catapult. Our GAAP loss for the second quarter of 2009 was $0.04 per share which includes the previously mentioned non-cash and non-recurring charges. Non-GAAP earnings for the second quarter of 2009 was $0.03 per diluted share.

In the second quarter, interface cards accounted for 60% of our revenues, software accounted for 21% of revenues, with the remaining 19% representing revenue from chassis, warranties and other products. From a geographic perspective, revenue from the Americas represented 69% of our total second quarter revenues with EMEA representing 13%, and Asia-Pac 18% of revenues.

From a customer perspective, 56% of our revenues in the second quarter came from network equipment manufacturers, 14% from service providers, a combined 15% from enterprise, university and government customers, and 15% from distributors, communication chip manufacturers and other account

Our top five non-distributor customers represented approximately 39% of revenues in Q2 and included CISCO, Juniper, Alcatel-Lucent, AT&T and Comcast Cable. Sales to CISCO, our largest customer were $7.1 million, representing 19% of revenues.

Moving down the income statement, non-GAAP gross margins were 79.6%, within our target range of 78% to 80%. We expect our non-GAAP gross margins to remain in the 78% to 80% for the third quarter of 2009. Non-GAAP operating expenses were $28.8 million in the second quarter and included approximately $700,000 related to Catapult. This is down from the $28.9 million, reported in the immediately preceding first quarter.

Second quarter 2009 non-GAAP net income was $2 million or $0.03 per diluted share. This compares to $385,000 or $0.01 per diluted share in the immediately preceding first quarter, and $4.3 million or $0.07 per diluted share for the same period last year. The non-GAAP effective tax rate was 16% in the second quarter and benefited from the lower tax rate on Catapult's international business. We expect the non-GAAP effective tax rate for the third quarter of 2009 to vary significantly depending on the results achieve.

Turning to the balance sheet, cash, cash equivalents and investments were approximately $136 million at June 30th, which compares to $202 million reported three months earlier. The decrease was principally due to the acquisition of Catapult, net of the acquired cash and investments.

Pursuing to our $25 million share repurchase program announced in November of 2008, during the second quarter, we repurchased approximately 558,000 shares of Ixia's stock at a total cost of $3.1 million or an average of $5.55 per share, including commissions.

From the inception of the $25 million share repurchase program through its expiration in May of 2009, we repurchased approximately 2.1 million shares of Ixia's stock at a total cost of $11.2 million or an average of $5.35 per share including commissions.

Cash flow from operations for the second quarter of 2009 was at outflow of $1.2 million, compared to an inflow of $4.5 million in the immediately preceding first quarter, due primarily to working capital changes.

Capital expenditures for the second quarter of 2009 were $2.8 million, compared to $1.9 million in the immediately preceding first quarter. Accounts receivable increased from $29.4 million on March 31, 2009 to $31.6 million as of June 30th.

Excluding the impact of Catapult, DSOs for the second quarter based on trailing figures was 68 days, down from 71 days reported three months earlier. We ended the second quarter with $18.4 million of inventory.

Our annualized turnover rate excluding the impact of Catapult was 2.1 times. The number of full time employee equivalents as of June 30, 2009, was 1,100, which includes 209 employees from our Catapult acquisition, as compared to 825 employees at the end of the first quarter.

Looking forward, the current business conditions continue to limit our visibility. Taking this into account, and based on a review of the sales pipeline and discussions with our sales management team, we expect third quarter revenues in the range of $42 million to $47 million, and we expect third quarter revenues from CISCO to be $5 million to $7 million.

We expect our non-GAAP EPS to range for the loss of $0.03 per share to earnings per diluted share of $0.02 in the third quarter with comparable GAAP EPS estimates in a range between a net loss of $0.04 to $0.08 per share. The difference between anticipated GAAP and non-GAAP results relates to expected non-cash and certain non-recurring charges and the associated tax effects including charges relating to stock based compensation.

We estimate at this time that our stock-based compensation charges will be between $1.5 million and $2.1 million for the third quarter of 2009 on a pre-tax basis. With that said, I would now like to turn the call over to Atul.

Atul Bhatnagar

Thanks, Tom. Despite these turbulent economic times, Ixia has not stood still. During the second quarter, we took actions in several important areas including a significant cost restructuring, the introduction of some exciting new products and (inaudible) acquisition that will move us into a new strategic area.

In June, we announced a restructuring, that we expect will drop out annual expenses by $6 million. We also have some very innovative product developments to talk about namely our new Acceleron card, our 40-Gigabit and 100-Gigabit Ethernet cards and soon to be released major update of IxNetwork, our Layer 2/3 testing software. The most significant of all in late June, we completed the acquisition of Catapult Communications. For Ixia, this acquisition represents our first major step into the very strategic wireless test space.

I will discuss all of this is detail, but first I would like to make a few comments on our Q2 results. Overall, our revenue came in at $38.4 million and we made $0.03 per diluted share on a non-GAAP basis. While our revenues from the core Ixia business of $35.6 million were near the lower end of our guidance, our bookings are closer to the midpoint of our guidance. In fact, Ixia bookings excluding activity from Catapult increased from Q1 to Q2.

Looking at the Ixia side of the business, revenues in Europe were essentially flat in Q2 Q2 versus Q1, while Americas were up 14% on the basis of strong service provider and government business and a slight up-tick in network equipment manufacture business. The softness in Q2 revenue came from Asia Pacific with both Japan and China down sequentially. As is typical and expected in Japan, Q2 was down after a strong Q1 which is their fiscal year end. We also saw signs of a spending slowdown and order deferrals that we hope to book in Q3. China was down also as the global recession took its toll.

Looking forward to Q3, we expect the US carriers and government to perform well and we expect to see a rebound in Asia Pacific. The US carriers are beginning to look at the buildout of their next generation networks and that could benefit Ixia with increased sales of wireline and wireless solutions. Also, the government is usually strong in the third quarter as year end budget dollars are spent. And we think our IxCatapult wireless offering could have a strong quarter in Asia that could help to get our Asia business back in line with historic trends.

We are not just waiting for the recession to end and for revenue to rebound. During the second quarter, we announced and started a significant restructuring of cost at Ixia. This restructuring will be phased in over two quarters. The figures I'm giving do not include any of the synergies related to Catapult that I will discuss later. Overall, we plan to eliminate 80 positions or roughly 9% of our workforce. We expect to realize $6 million in savings on annualized basis, just on the Ixia side of the business. We are committed to streamlining our operations and making sure that Ixia remains profitable even in this downturn.

Now, I would like to discuss some of the advances that we made on the product and technology front this last quarter. Notably in this second quarter, we introduced our next generation 4-through 7 load module, the Acceleron-NP. The new Acceleron-NP card combines the processing power and resources of up to 12 CPUs into one physical port and combines that with innovative Ixia proprietary network processor or NP technology.

The innovative NP technology enables the Acceleron load module to achieve a level of performance not possible with standard hardware. As an illustration, some of the leading internet sites receive 300 million hits per day. The Acceleron-NP can process 10 million connections per second and can induce a 300 million hit load on a website within 30 seconds.

The Acceleron-NP solution was successfully showcased at Interop Las Vegas in two large scale test demonstrations. In the first test, Ixia IxLoad desk application and Acceleron-NP load module were used to test Juniper's SRX 5800 Firewall in the largest ever public demonstration of firewall capacity with 120-Gigabit per second of application traffic, delivered over millions of connections.

This represents a two fold increase in firewall throughput and a new milestone for [state] full application testing. Ixia's IxLoad and Acceleron-NP were also used to validate the ultra high performance of Brocade Communication ServerIron ADX application delivery controller generating the highest number of concurrent connections and transactions per second in the market.

The Acceleron-NP solution has already been adopted by several large network equipment manufacturers to validate their next generation devices and the feedback has been very positive. In the short time since its introduction, 80% of our applicable L7 customer purchases have shifted towards the Acceleron-NP module.

As we reported last quarter, interest in higher speed Ethernet testing has been very strong and Ixia continues to be the only company offering 40-Gigabit and 100-Gigabit Ethernet test products for sale, including 40-Gigabit Ethernet, 100-Gigabit Ethernet and Ixia's Dual Speed 40 plus 100-Gigabit Ethernet on a single load module.

Customer interest in these products is very strong. Q2 '09 resulted in several new strategic sales of 100-Gigabit Ethernet test systems to network equipment manufacturers and optical transceiver manufacturers with now every co-router manufacturer purchasing this product. Ixia higher speed Ethernet offers customers a clear differentiated platform that provides a unified hardware platform able to run 1-Gigabit Ethernet, 10-Gigabit Ethernet, 40-Gigabit Ethernet and 100-Gigabit Ethernet.

Another key product focus for our teams is the IxNetwork 5.40 release. IxNetwork is our layer 2/3 switch/router test software and released fiber 40 represents its most dramatic leap forward in terms of usability, functionality and scalability. The recent consolidation in network infrastructure to provide content rich, cost effective, converged services has been driving next generation router and network design to new highs in terms of scaling and complexity.

IxNetwork 5.40, powered by our next generation infrastructure ViperCore, offers unprecedented scaling and analysis capabilities to test these new networks. Our customers will be able to use IxNetwork 5.40 to model and analyze the performance of networks offering the complex IT services that consumers are now demanding. IxNetwork 5.40 has started to get traction at several key Ixia customers including Force10 and Juniper. Force10 as an example was able to successfully qualify the next generation ExaScale core switch/router with multi-terabit throughput and service differentiation for video, voice, data and data center Ethernet.

In addition, the innovative TrueView convergence time measurement provided by ViperCore is industry's first service level measurement that can independently characterize the high availability and resiliency of video, voice, data and data center Ethernet services build into ExaScale. The most important event for us in the quarter was acquisition of Catapult Communications. Ixia and Catapult represents a compelling strategic combination. Ixia's product expertise has always been an IP, Ethernet and wireline testing, while Catapult has long been a leader in wireless protocol testing.

With these acquisitions, Ixia immediately becomes a leading player in wireless infrastructure testing and now has the capability to test across the entire span of the network, from [ViperCore] to the wireless edge. Catapult brings to Ixia almost 25 years of experience in wireless markets and a wealth of wireless protocol testing, including 2G, 3G, 4G and LTE test modules as well as legacy technology such as SS7.

We have a skilled product development team and established international distribution channel, a respected and recognized brand name and an enviable customer list. Most important, they are a clear leader in the early stages of 4G and LTE testing. And market that by all indication is about to ramp up.

It is because of this LTE leadership position and the belief that we are at the beginning of a development cycle for the next generation wireless networks that Ixia was attracted to Catapult as an acquisition target.

Smartphones and other mobile communication devices are rapidly growing in numbers and in capabilities. This results in skyrocketing demand for wireless bandwidth that is choking existing networks. To cope with subscriber demand, service providers need to deploy new network technologies that dramatically increase network bandwidth and resiliency. And more and more, it is clear that the next technology platform for mobile communications will be LTE.

As a leader in LTE testing, Catapult has already sold and delivered millions of dollars of LTE test systems to network equipment manufacturers and service providers. Most major telecom equipment manufactures are in full swing on LTE product development, including such companies as Nokia, Siemens, Alcatel, Ericsson, NEC, Cisco, Motorola, Huawei and ZTE. Wireless service providers are also announcing plans to adopt LTE, including such leading companies as NTT DoCoMo, Verizon and AT&T.

This acquisition puts Ixia front-end center on the development path for the next generation of wireless communications.

In addition to a deep and strong wireless product line up, and the LTE leadership position, Catapult brings Ixia a well developed international sales channel for wireless products, and a strong presence in Europe and Asia-Pacific, especially in Japan.

We have cultivated important customer relationships over the last two decades. When added to the existing Ixia distribution channel, the combined company will have an international reach into almost all of the major international telecommunications, equipment manufacturers and service providers. And these new customer contacts will provide Ixia with a valuable cross-selling opportunity.

There is a real opportunity to sell Ixia traditional products to wireless customers, so they can test their backhaul and integration into the wired IP core network.

On the cost side, to reiterate what we have previously stated, we expect to achieve significant cost synergies from this transaction. We estimate that we will be able to realize $3 million to $5 million in annual expense synergies, and these savings are on top of the Ixia restructuring savings we've previously discussed.

These savings include eliminating redundant public company cost such as audit, board and legal fees. We also expect to realize savings by leveraging Ixia's administrative functions such as accounting, IT and human resources throughout the combined company. We are well on our way to realizing many of these cost savings and we expect that the acquisition will become to be accretive to non-GAAP earnings by fourth quarter of 2009.

We see IP, Ethernet and LTE driving next generation wireless networks. Combining Ixia's robust real world IP and Ethernet traffic generation capabilities with Catapult, wireless platform will produce scalable and resilient tools for utility grade performance testing for these networks.

As voice, video and data traffic converge, and the wired and wireless networks converge, customers want unified tools that meet all of the needs in one seamless solution. We believe that the acquisition of Catapult will position Ixia at the forefront of this conversion and should give Ixia the tools to build an industry-leading solution. And with the transaction that we expect to be quickly accretive, we believe that Ixia is poised to become a leading player in converged next generation communications testing.

To summarize, Ixia's continuing to make bold moves in these uncertain and turbulent times. We are tightening our cost structure in an effort to increase profitability at lower revenue levels. We are continuing to release innovative products such as our new Acceleron cards, our 40 and 100-Gigabit Ethernet cards, and our powerful new version of IxNetwork. And we have launched ourselves into the wireless test market with the acquisition of Catapult.

We are positioning ourselves to succeed at these reduced revenue levels and to prosper handsomely when the markets rebound. And this just represents one step in our strategic plan and development. We will continue to aggressively hone cost, develop breakthrough products, and look for new strategic initiatives.

As a company, Ixia is committed to innovation, growth and delivering strong results to our investors. We are well on our way. Thank you for listening. Operator, you can now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Samuel Wilson from JMP Securities. Your line is now open sir.

Samuel Wilson - JMP Securities

I have three questions, one for Tom and two for Atul. Atul, starting with you, on the LTE opportunities, I wonder if you can give us a little perspective of when you looked at Catapult late last year, and when you announced the deal, have the LTE opportunities rolled out thus far as you expected this year? And for the North American carriers, there are several talking about trials before the end of the year. Does that seem like the trap that everybody is still on?

Atul Bhatnagar

When we look at the Catapult last year, to be very frank, we had doubts in our own mind, how fast this market will mature. As 2009 has progressed, the timing for Ixia could not be better. As the deal was going and as we were negotiating, Verizon definitely threw a lot of its weight behind LTE. So I would say compared to last year, we are not only seeing the opportunities they were pursuing last year but in addition, there are new opportunities emerging at almost every geography for two reasons. One is that the 3G network increasingly is looking at increasing bandwidth incrementally, since some cases even though LTE handsets may come later, LTE will bolster existing 3G networks. So there is a infrastructure play. When service providers look at iPhone, AT&T type of combination, and it's really very easy to use iPhone, they know that the future belongs to multimedia interactive applications. And LTE with their speeds and feeds, and the IP proximity in standards is definitely these standards all of them are adopting. So in summary, lot more acceleration, lot more deals compared to last year when you we looked at Catapult.

Samuel Wilson - JMP Securities

Speaking a little bit on sort of that Ethernet side of your business, the data networking side of your business, I just want to get a sense has the pace or cadence among your NEMs for new product introductions, and therefore the purchase of test equipment compared to a couple of years ago, is it slowed down dramatically? Is it roughly the same? I just want to get some stroke, kind of the cadence and pace of our new product developments right now as you see it?

Atul Bhatnagar

Again, comparing it with last year say third quarter, fourth quarter, there is no question NEMs are spending less, I think everyone knows that. If we look at any markets right now, last to three quarters or so, there has been a reduction. On the other hand, the NEMs we are working with -- just to give an example, 100 Gig Ethernet, all top NEMs have bought our 100 Gig-Ethernet product. So when it comes to next generation architecture and next generation products, all the large NEMs are very progressive and they know, if they miss a design cycle and the markets rebound, it will be disastrous. So when it comes to the new products they are definitely buying. When it comes to traditional 1-Gig type solutions, I think they are reusing more wood in the company. So it's a mixed bag of new products, new growth, as well as being judicious in terms of reusing the gear. Errol would like to make a comment.

Errol Ginsberg

If I could just add to that Sam, because obviously I've been heavily engaged in the 100-Gig and 40-Gig part of the business, and the 100-Gig, it's very, very early. The NEMs at this stage are building kind of prototype type routers, early stage 100-Gig ports and its very, very early. I would liken it to 10-Gig, maybe three or four years ago, and that's where they added [ph] the 100-Gig.

The beauty here though is that we are incredibly early in the cycle. We have a tremendous lead. Our product has been out for a while and we're very well positioned because you've got all this initial design wins. And really what amounts do the hardware design phase of 100-Gig, and a lot of these companies are still very early, they have to roll that out to the QA.

Initially, its just a relatively small number of ports, and then as they start to scale up they start to buy lots of those ports and I think, Atul, if you remember but many years ago I said that with 10-Gig. It starts up where they buy a few ports and eventually they start loading large chassis of these routers with lots of 10-Gig ports and that's what we're seeing today and there where (inaudible) has taken hold. So we're at the very early phase of the 100 gig.

I think there is lots of opportunity over the next two three years where 100 gig is going to really take of. And they're going to need it. Because as soon as you have a router filled with lots of 10-Gig ports, how do you connect it to another router? Are you going to need a 100-Gig to do that and pretty soon behind that is going to be terabit Ethernet, that I am sure.

Atul Bhatnagar

And then Sam, another point I would like to add is, our strategy is always be first to market with a innovative solution, work with the lab and juniors and architects. An example of that is, we introduced IxYukon last June, June 2008. In last 15 months or so, we have number one market share worldwide. 24.1% market share in 10-Gig. So, our strategy will continue to be innovative, work closely with customers and absolutely have a first mover advantage.

Samuel Wilson - JMP Securities

Tom, in the June quarter, can you give us a sense for how much expense of Catapult was in there, so that we can get some sense for how much expense to model for the September quarter?

Tom Miller

In our step period, post acquisition, we had about $700,000 in expense.

Samuel Wilson - JMP Securities

The $700,000 you mentioned was that for two weeks, three weeks, four weeks?

Tom Miller

That was about eight days, right. So, I think if you go back and look at some of the Catapult historic numbers, their expense rates have been in the $7 million to $7.5 million range. And so, I don't want to disclose what they did in the last quarter, but I believe if you go back and look at some of their non-GAAP results, it's in that $7.5 million range.

You also have to be careful when you look at some of their numbers that they were capitalizing LTE. So which you have to look at is something in that range and you are going to start to see some synergies that that you'll see more in the fourth quarter, but there will be some reductions in the third quarter that you'll see.

Operator

Your next question comes from Matt Robinson from Wedbush Morgan. Your line is now open.

Matt Robinson - Wedbush Morgan

Should we pretty much allocate the expenses proportionally the same as Ixia was or is there a greater proportion in one of the categories?

Atul Bhatnagar

You'll see some of the savings in G&A, that should drop the additional expense. A lower percentage of that will be G&A, but I think that you'll see probably something close to our percentages, maybe a little wider on R&D, but the percentage should be comparable, if that's what you are talking about how to allocate cost.

Matt Robinson - Wedbush Morgan

Yeah, on the customer mix, is it similar NEMs versus network operators?

Atul Bhatnagar

It is. There was a heavy bias towards equipment makers, and then service providers are a big category. It's a very lumpy number, but it can be in the 20% to 30% range. It bounces around.

Errol Ginsberg

Right, but there is no enterprise to speak of?

Tom Miller

Right, in government and university is minimal, so it's really equipment makers and you'll see the service providers.

Matt Robinson - Wedbush Morgan

What do you say the equipment maker percentage was again?

Tom Miller

It can bounce around, it can be like 60%, 70% or more.

Matt Robinson - Wedbush Morgan

How does it go in the cycle? You've got LTE just starting to get deployed now and HSPA is pretty far along in a lot of places, and I know they have a pretty strong 3G legacy at Catapult

Atul Bhatnagar

So Matt, basically one of the strength Catapult has, it has strong 3G and 4G as well as co-existence and migration technologies, because we don't see either that somebody will be absolutely pure play LTE, I think you are going to see a lot of co-existence and one of the strengths which we are going to definitely market strongly is that entire transitional E technologies with 3G and 4G. One architecture, one set of solutions, so basically we see that mix as well and Catapult has a strong strength there.

Errol Ginsberg

If I could just add one thing, just to be clear, LTEs is very early right now. It's not really being deployed and there's a lot of talk about it getting deployed in the future, but in terms of where the products are at, they are very early in cycle and it's really mature at this stage, pretty much engineering development phase.

Atul Bhatnagar

That's where the Ixia opportunity is because we are pre-deployment testing and generally that's the right phase where a lot of testing gear is bought.

Matt Robinson - Wedbush Morgan

Are you all ready using a fair amount of gear going out for HSPA?

Atul Bhatnagar

I wouldn't say particularly HSPA, but basically I would say that the lot of accounts where 3Gand 4G combination is going and customers are asking for testing pre-deployment testing gear with multiple protocols. Some maybe 3G, 3.5G and LTE 4G so, we are seeing that mix and Catapult Solutions can cater for all that mix.

Matt Robinson - Wedbush Morgan

So, do you sell the same platform and there you get an upsale for to support LTE, is that the way it works?

Atul Bhatnagar

That's correct because software protocols, software testing tools, they run on top of the platform by and large and those capabilities can work on any platform.

Matt Robinson - Wedbush Morgan

You guys really don't get involved with the array interface testing right?

Errol Ginsberg

Well there is some relation there. There is some additional hardware related to LTE that is sold along with the standard Catapult chassis.

Matt Robinson - Wedbush Morgan

You guys have typically just broken out a cost to goods component for amortization, you didn't do that this time. Are you still working through the valuation on intangibles and such?

Tom Miller

We have changed the format of the income statement a little and so you'll see those two amortization lines combined going forward.

Matt Robinson - Wedbush Morgan

You'll put them down below in OpEx?

Tom Miller

Well, on the face of the GAAP income statement where they are, we don't really break it out into gross margin in OpEx. We just put the expenses all in a group there.

Operator

Your next question comes from Joanna Makris from Brigantine Advisors. Your line is now open.

Joanna Makris - Brigantine Advisors

As Verizon moves towards LTE and initially adopts eHRPD, is there some initial predeployment work that is involved in that stage of sort the pre-LTE deployment.

Atul Bhatnagar

Joanna, we are just starting to work with Verizon. So, it's difficult for us to give you a whole lot of details right now, but in just last four or five months I think Verizon has definitely increased the visibility on LTE and the co-existence of LTE with their current architectures. I think another few months we'll have a much better idea. So difficult to give a specificity right now.

Joanna Makris - Brigantine Advisors

As you look at the carrier business, obviously it's still relatively flattish relative to last quarter, but for the most part, people are starting to feel a little more optimistic about some backend weighted spending from most of the operators, how are you viewing the carrier business in the back half of the year?

Errol Ginsberg

So far when we look at the funnel, I think the carrier business we think second half would be strong and I think you are also pointing to a trend which is carriers are now looking 2010, 2011 interactive services engaged application. All these multimedia video flowing through their infrastructure. So, I think they will be spending on the carrier side and that definitely translates into more testing gear as well. So, far second half we are definitely optimistic on the carrier side of the business.

Joanna Makris - Brigantine Advisors

Then I don't know if you can breakout 10-Gig as percentage of sales number one and then maybe if you can comment about when you start to see some flowthrough in 1-Gig and 10-Gig also increased 40-Gig sales. When do you start to see that flowthrough happen?

Errol Ginsberg

The 10-Gig was about 27%of our business in the second quarter. Then I'll let Atul address the second point.

Atul Bhatnagar

So Joanna, I think there are two areas where we will see the 10-Gig pull. Most of it in the short term will come from converged data centers. Converged data centers are definitely looking at next generation aggregation link which are again mostly 100-Gig. So as data centers go more and more 10-Gig on the edge with storage and server aggregation.

Most of the servers are not building a 10-Gig port. It's pretty much standard. So I think you're going to see significant pull on the converged data center testing side of things for 10-Gig and then as the carriers build the backbones more 40 and 100, you'll also see again 10-Gig more and more pull through those. Those are the two key trends we see. I think I will touch briefly on 10-Gig. We see a lot of growth over the next three years or so, driven by aggregation, driven by both edge, density, as well as 100 and 40-Gig on the aggregation side.

Joanna Makris - Brigantine Advisors

In the near term, haven't you seen most of the data center guys cut OpEx? So I guess what has your view been so far in looking at some of the primary data center?

Atul Bhatnagar

I think if you look at the converged data centers where more and more storage and networking is coming together, there actually the new switch designs are building in lot more 10-Gig. And if you look at the networking vendors, and their switch designs for the next generation is lot more 10-Gig density. So in our radar screen, we definitely see good 10-Gig densities, both on the data center side, as well on the networking switch/router side.

Joanna Makris - Brigantine Advisors

The sequential decline in 10-Gig, what do you attribute that to? Is that sort of a normal lumpiness or how do explain that?

Atul Bhatnagar

In our case, basically we also cleared inventory on the last generation 10-Gig product and that was important because we wanted to make sure that in this quarter. So we did sell, dollar-wise the last generation ASP was little lower. So did that impact, but in general, I would say there is no macro trend. This was more our internal, just clearing our inventory, our last generation now. Basically all of our sales will focus a lot more on our next generation product.

Errol Ginsberg

Let me just clarify real quickly that when I say 27%, that's on the combined Ixia Catapult number. If you look at the Ixia business, its 29% which is actually a fairly high percentage for us. The last few quarters have been like 25, 25, 33 and then 29, if you look at it. So it's really not that out of line.

Operator

(Operator Instructions). Our next question comes from Ajit Pai from Thomas Weisel. You're line is now open.

Ajit Pai - Thomas Weisel

Couple of quick questions, I think the first as you talked about the 80 sort of head reduction. Is that from the end of the 30 of June?

Errol Ginsberg

Approximately, 80 jobs.

Ajit Pai - Thomas Weisel

Yes.

Errol Ginsberg

That's from when we announce the restructuring during the second quarter and the one point we are trying to make is that this is phase been and so that there will be some additional reductions in the third quarter that are part of that original Ixia restructuring. On top of that there are synergies coming from Catapult, which we haven't quantified a headcount on that. So, if you look at the March 31st, headcounts, headcount actually went up a little bit during the second quarter before we announce the restructuring. And so, it's starting from that point.

Ajit Pai - Thomas Weisel

Just looking at the Catapult integration, as well as some of the restructuring steps, you haven't quantified yet. When do you expect all of that together over? And is there sort of flip of switch for an ERP that has to happen at some point of time and when is that?

Errol Ginsberg

A flip of switch for what?

Ajit Pai - Thomas Weisel

For combining your systems.

Errol Ginsberg

We have that planed out and so the reductions that we'll see, the synergies that we'll have already started. And there will be a lot of them occurring during the third quarter, and then some during the fourth quarter, and some of the final things maybe some facilities approvals in the fourth quarter. The ERP switchover should be in the fourth quarter, we've got that planned, we're working on it. It is a complicated task, but we'll get there during the fourth quarter and it is our plan, really to run these two enterprises, these two businesses as one company and one integrated business. And so we will be putting them on our systems for ERP, for sales management, etcetera.

Ajit Pai - Thomas Weisel

Looking on the sales side, at the carrier opportunity over the past two or three years, you've re-tooled internally to address that opportunity. Can you give us some challenges that the current team over there is facing, not from a demand perspective per se, but more in terms of penetrating the customer base, whether your products need to be further customized to penetrate further. Is the opportunity smaller than you thought, as large as you thought, is there additional work required there? Could you give us some color as to what you are seeing over there? Then we start seeing some material progress in terms of revenues from that opportunity.

Atul Bhatnagar

Actually Ajit, Atul here. Overall, the carrier opportunity I think is bigger and I'll explain why. Most of the carriers we were dealing with, we were dealing with from the wireline point of view and typically the products we sold to carriers for three IxNetwork, IxLoad, and Test Conductor for automation. So from product's point of view, we feel we are pretty well placed.

Now IxNetwork, in general, we haven't missed it quite a bit, and this IxNetwork 5.40 release, which is coming out has focused a lot on scaling, resiliency and performance. So, from products point of view we feel even more confident that these products are now very, very well placed.

Another solution, we have targeted at the carrier, especially for the troubleshooting side is the IxRave and we are seeing lot of good design wins from that side as well. As you know very well, carrier business generally takes longer to [adjust], but overall as we look at second half of the wireline side of the Ixia opportunity, we feel very confident and good in terms of our capability, as well as the opportunity. And you will always see in our top 5, AT&T or Comcast as consistently.

Now, the reason I say that the opportunity is bigger is, that every carrier we are talking with, and I travel quiet a bit to different regions, all the carriers are increasingly saying guys give us convert solutions. Every carrier is looking at both, wireline side from the core network side of thing as well as the wireless edge and one of the key Ixia differentiation you are going to see and this is something we are going to pay a lot of attention and it has been an Ixia differentiation is one chassis as much as possible consolidated solutions, one architecture, as much as possible backwards compatibility. So customers can really focus on getting their job done rather than dealing with multiple chassis and multiple software.

So a lot of our integration effort is really going on the architectural side right now, going on making sure sales forces are tooled properly, trained properly to cross sell as well as we don't miss a beat in terms of our top-line in Q3 and Q4. So, we feel very good about business on converge play.

Ajit Pai - Thomas Weisel

So from a product perspective, I get that you are very well positioned and the market has expanded, but from actually converting those products into sales, are you facing any challenges in terms of not doing well in the organization to reach on the other side, or what's actually going to start getting the conversion rate accelerating?

Atul Bhatnagar

I think conversion rate wise, the challenges are normal challenges. I think there's definitely lot of price competitiveness in the market and especially in slow times, every one is hustling for every deal, so I would say there is no specific challenge which is very specific, but winning all the deals is not possible in this type of time because you really end up competing for every, every deal. I would say there if there is one challenge, it's probably the price competition in this economic time.

Ajit Pai - Thomas Weisel

You feel you have enough people able to address all the opportunity that are coming up, it's not like you are only addressing a small portion of the total carrier opportunity?

Atul Bhatnagar

We feel pretty good. If anything in IxRave, we are investing right now and in terms of top-line Rave's contribution, overall to the top-line is still not humongous, but we are investing. So on the carrier side we know, it takes little time, but we are seeing strong funnel. We are seeing global pull for the solutions like IxRave and with 5.40 IxNetwork with our scaling, we feel we have the right capabilities to go after those deals.

Ajit Pai - Thomas Weisel

You've guided to $42 million to $47 million sequentially and that's for the full set of quarter of Catapult. Now just given that this is typically for Ixia, a sequentially stronger quarter over the past several years I think with the exception of one. Would that mean that you're expecting, about $4 million to $9 million in revenues from Catapult for this coming quarter?

Atul Bhatnagar

I think we are being very conservative this coming quarter and the reason for that is, this is the first quarter we really are going with Catapult number one. Number two, we're also making changes. So we felt as we did the guidance I think it's better to be conservative than to be very aggressive. Overall in terms of deals and funnels and things that like that we feel very good. I don't know if Tom has any comments.

Tom Miller

No, I would agree with that. It's more conservatism that anything else. That's really it, Ajit.

Operator

Our next question comes from [Greg Weaver] from Invicta capital. You're line is now open.

Unidentified Analyst

At this point it looks like the core Ixian business, you're expecting it to grow sequentially here?

Errol Ginsberg

I think that there is a possibility. I think, we're looking at flat to up on it, to be very conservative with say flat, but we would hope there is some upside on it. There is a lot of activity out there. You've seen some news in the marketplace of some improvement in networking. We're just being very conservative with our guidance.

Atul Bhatnagar

You look at Q2, there's definitely sequential growth. These markets are uncertain markets, so again you are seeing a level of conservatism which we feel given the markets we just have to build in.

Unidentified Analyst

In terms of the $6 million core restructuring you talked about, when is that schedule to be finished?

Atul Bhatnagar

When we get the benefit of that $6 million is an annualized number of course and we would expect to see the full benefit of that in the fourth quarter. Transitionally, we will see a little bit in the third quarter because we made some moves starting in the second quarter, we will complete those actions in the third quarter and we should get that benefit in the fourth quarter.

Unidentified Analyst

In terms of your business with Cisco you highlighted that you have that sequentially down, any additional color there and any share shift going on there, are just spending less money?

Atul Bhatnagar

No, I think we are doing pretty well there competitively. The guidance for this quarter is the same as the guidance for last quarter. We were a little high because of some deals that maybe are non-recurring and so certain things happened in the second quarter. They pushed just over $7 million and we think we are going to be more in the $5 million to $7 million range in the third quarter.

Operator

(Operator Instructions). We have no further questions in queue.

Atul Bhatnagar

We thank you for being on the call today, appreciate your support. We look forward to updating you on our progress in the coming months. Thank you.

Operator

This concludes today's conference call. You may now disconnect.

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