Ditech Network, Inc. Q1 2010 Earnings Call Transcript

Ditech Network, Inc. (DITC)

Q1 2010 Earnings Call

August 20, 2009 4:30 pm ET

Executives

William Tamblyn – Chief Financial Officer

Todd Simpson – President, Chief Executive Officer

Analysts

Neil Goldman – Goldman Capital Management

[Tim Lehealy]

Presentation

Operator

Welcome to the Ditech Network's first quarter fiscal year 2010 conference call. (Operator Instructions) I'd now like to turn the conference over to our host, Chief Financial Officer, Mr. Bill Tamblyn.

William Tamblyn

Good afternoon everyone. This is Bill Tamblyn, CFO. Thank you for joining us on the conference call which will cover Ditech Networks announcement of our results for fiscal 2010 first quarter which ended on July 31, 2009. Today's conference call will cover our financial results for the quarter and we will also provide our outlook for the second quarter of fiscal 2010.

Todd Simpson, our President and CEO will provide the business and strategic analysis and I will provide a more detailed analysis on the financials. Following, we will open up the call for Q&A.

Before we begin, let me state that this conference call is being held on August 20, 2009. Any sound recording or republishing of the contents of this conference call is expressly forbidden without the written approval of Ditech Networks.

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

Factors that could cause results to differ include factors discussed today in this conference call and in our press release today as well as those detailed in the section entitled risk factors of Ditech's Form 10-K for the year ended April 30, 2009 which was filed on July 2, 2009 with the Securities and Exchange Commission.

We assume no obligation to update these projections or other forward-looking statements. Additionally, let me comment on our approach to governance and SEC compliance. Please allow me to mention that we have no off balance sheet entities or associations. We believe we have to the best of our knowledge disclosed all other obligations and related party transactions as required.

Our auditors do not perform consulting services such as IT systems reviews or any other reviews or forms of consulting services. We comply with all effective SEC and Nasdaq requirements, audit committee compliance and independence and we continue to adhere to Sarbanes Oxley compliance requirements.

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

Non-GAAP financial measures will be discussed on the call and a reconciliation of GAAP and non-GAAP financial measures is disclosed in our press release of today as well as in our press release of May 21, 2009 with respect to our Q4 numbers which is also located on the Ditech Network website.

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

Todd Simpson

Good afternoon everyone. So we are as you will hear in this report, executing on the plan that we have articulated over the last few quarters. First, our core voice quality business has grown over the last three quarters and we continue to focus on growing this business, and second, our market and business diversification efforts are well underway and poised for release this calendar year.

First let me highlight a few details on the quarter and I'll hand it back to Bill later for the detailed report. Our revenue for Q1 was $6.1 million, an increase of approximately 20% from last quarter. This, combined with a 58% gross margin and an OpEx number that was slightly less than we forecast means that our cash used in operations was well within the $2 million per quarter boundary that we had set for ourselves. With our current visibility, we project revenues for Q2 to be approximately the same as Q1.

The BQA did relatively well in Q1. Let me start with some details around that core business. We continued the roll out and installation of several large networks in the international market. In several of these locations, BQA is being used in only a small percentage of the carrier's network. Typically they start with a single region or a single high usage area.

Thus, there are growth opportunities for us both within the existing customers and with new international players. As part of an ongoing effort to get further penetration in the existing customers, we deployed our EXI Voice Quality Monitoring software across several of the networks we have installed. This represents the first time we have deployed EXI to run live across such large networks.

We shipped, installed and recognized revenue from a new Tier One player for our Voice over IP product, the PBP. The PBP is being used in a vertical application, not on the wireless network. Nevertheless, this is an important milestone for us.

We also entered into several additional trials with our smaller IP solution the 5U PBP. We recognized revenue from one such opportunity and believe we can convert more of the trials into revenue in the second quarter.

We further enhanced the marketability of our IP solutions by starting to offer both Voice Quality and Transcoding as hosted applications in the cloud. This hosted version of the PBP can be used to run early adaptor traffic from large players and to fully support smaller players.

The business model for the hosted solution involves a very simple recurring monthly fee based on usage. We have several potential customers running traffic through the hosted system today, and are working to convert some of those to paying customers in the months to come. This hosted solution leverages the infrastructure and support we have been building for the mStage Toktok offering.

In terms of the market, we believe Voice Quality products continue to have good potential. In particular, some wireless networks continue to struggle with voice quality. Several large carriers have indicated that the issues they face with putting voice on their 3G networks means that they will continue to support their 2G networks for many more years, perhaps as long as 10 more years. If they require increased capacity on these networks, then Ditech is a viable approach to scaling with a very low incremental investment.

In the international markets, the deployment of 2G continues to be a priority. The delays on 3G spectrum availability, very tight 2G spectrum allocations and low average revenue per user all support our value proposition.

In Voice over IP, voice quality can still be hit and miss as more essential business and consumer applications are converted entirely to Voice over IP, more transcoding and quality opportunities should arise. Today, many Voice over IP applications run within tightly controlled environments such as a cable network or an enterprise. As these islands of Voice over IP start to interconnect, the complexity of delivering high quality voice is increasing.

Given the breadth of our solutions and our mature algorithms, we're considered leaders in Voice Quality. This leadership is an important differentiation for us and we are continuing to enhance, update and maintain this position. We will have new versions of BQA available for both wireless and Voice over IP applications this year.

All of that said, BQA has been and continues to be a difficult product to sell. While the advantages are obvious to the ear, getting carriers to move quickly on a value proposition that is built largely around OpEx and CapEx savings is tough. That is why we have started to invest in software for our platforms that we believe will also enable carriers to generate incremental revenue from enhanced voice services. This is the impetus for our investment in MStage and Toktok.

On this call, I would like to spend more time on MStage to ensure that our investors clearly understand how the MStage platform is an evolution of and can therefore leverage our existing business and intellectual property. I will then touch on Toktok status as well.

To understand how MStage leverages our present, it is worthwhile looking at two fundamentals that are provided by our existing BQA platforms. First is the ability to have access to voice conversations in real time. The voice media is actually routed through our platforms. In networks where we are deployed, we have access to every call. This puts us in a fairly exclusive group as there are not too many vendors who sit in the middle of voice calls.

And second, is the ability to actively process those conversations. With BQA of course, our process involves removing the noise and echo, ensuring levels match, etc.

Our MStage initiative builds on these two capabilities to add support to revenue generating applications. First, MStage leverages our access to the voice media by allowing developers to look for other data or events within the voice stream and to initiate an action based on that. We are using this ability to spot the key word Toktok for example, but MStage could also be used for voice authentication or language identification as two other common examples.

Second, our ability to actively process voice is extended by MStage to allow many more algorithms to be run on the voice stream. For Toktok we use this ability to ad hoc, to whisper messages into the voice stream and to make telephony functions 100% hands free. Others we expect will deploy different algorithms to for example, incorporate music, to enable speech to text or to link to business systems for data retrieval.

Thus MStage is the clear evolution of our platform business. It is built on top of our PBP software infrastructure, but has a more flexible high level software architecture that allows developers to deploy modules that can monitor voice calls and alert applications when certain patterns or events are noted. Further, it allows developers to then change the user experiences based on those events.

We believe the combination of these abilities can fundamentally change how voice is used. Hand held voice can be further monetized by carriers. It makes voice always on as opposed to point to point.

A simple analogy may help to illustrate the evolution that we see occurring in voice. Many of us started on the internet by using a dial up modem and a walled garden web portal. For example, you dialed up to AOL and used the content that was available there.

In retrospect, this was quite limiting and did not allow for the myriad of online business models or services that we see today. Today the internet is always on. However, our phone calls today are much like dial up was 10 years ago. We phone a specific number and talk to a specific person or system, and that is really all you can do.

New services like Google Voice, Voice mail to text and advanced 411 services, are starting to show the potential for a new model of voice. In the new model, your voice controlled activity and services instead of being simply a point to point communicator. This is much closer to a social face to face model where we continually process interrupts and priorities.

We see Google Voice and services like it as proof that the evolution of voice is well underway and we see MStage as a tool that operators can use to enable these rich services.

Now let me touch on Toktok. If you recall, Toktok is a subscriber application which showcases the power of MStage. As mentioned earlier, Toktok deploys one real time event monitoring module on MStage, namely the ability to recognize the key word Toktok and several processing modules including the ability to mix multiple voice streams together, the ability to whisper messages into a voice call, the ability to record all or parts of the conversation, and much more.

Toktok uses the open API that MStage publishes in order to implement these features. In its development, Toktok has also exposed a high level API that operators can use should they want to take advantage of Toktok's voice dialer, voice mail, whisper interfaces or the integration with Face Book and Google.

As services like Toktok grow, we believe carriers will require a new breed of high availability platform such as MStage in order to scale the applications for mass adoption. These platforms need to be highly reliable and very cost effective, two of the primary design goals for MStage.

MStage itself is on track for customer trials in the late fall. Toktok is currently in limited beta. We have early adaptors on the system, and they have given us valuable feedback on the service which we are incorporating now.

We are scheduled to launch a more wide spread beta soon with the ability to scale to thousands and thousands of users. We are being careful in how we roll out Toktok as like many new voice services, it takes several iterations in order to fine tune the interaction.

You may have seen that the website Mytalktalk.com is up and running. It too is being fine tuned for the larger beta launch. We expect to have the Toktok system fully released an operational this calendar year.

The demand for and interest in MStage and Toktok remains encouraging. We are working on multiple paths to market for the system. Our primary channel is through carriers using our sales force. We look at the carrier market in two ways; there are the large but relatively slow moving Tier One accounts where the typical sales cycle can be a year or more. However, there are also more nimble players such as Bandwidth.com that we announced as a partner for MStage and Toktok.

These players can move more quickly and can help decrease our time to market. Thus, we are putting effort on both approaches.

Toktok is a direct to consumer approach meant to drive interest within the carrier channel. This is becoming a fairly standard approach for proving the value of new applications to large carriers.

Ultimately, we expect to see early usage from the Toktok website and then growth being driven from carrier integrations and co-marketing efforts.

So in closing, we are pleased with the progress we are making in diversifying the business. We continue to face challenges both in the BQA business and in launching our new products. However, we also continue to make good incremental progress in both. We are continuing to manage the expenses around the business and are working to be judicious in our investments.

With that, I'll hand the call back to Bill for more detailed comments on the quarter.

William Tamblyn

I'd like to now share with you the financial results for the first quarter of fiscal 2010 as well as our outlook for the second quarter of fiscal 2010. Please allow me to mention that in our discussion today, our operating results will be provided on a non-GAAP basis. Our press release posted on our website includes the summary information from GAAP and related reconciliation for Q1.

The primary changes are the elimination of approximately $386,000 related to stock compensation.

The key points of the first quarter results as noted in our press release are as follows; revenues $6.1 million, non-GAAP gross margin 58%, non-GAAP loss from operations, $2.6 million, non-GAAP loss $3.4 million, the non-GAAP diluted loss per share from continuing operations was $0.13 per share.

The first quarter details are as follows. Total revenue for the quarter was $6.1 million, up 20% from the prior quarter of $5.1 million and 34% from the prior year of $4.5 million. Q1 revenues exceeded the high end of our projections that we provided on our May call which were 5% to 15%.

We had four greater than 10% customers in Q1 and they approximated 83% of revenues compared to four greater than 10% customers in Q4 that approximated 59% of revenues. The non-GAAP gross profit for the quarter was $3.5 million, approximately 58% of revenues at the high end of our prior projections.

The increased revenues over projections assisted in spreading our fixed costs over a larger base. We continue to address our inventory levels to ensure that adequate reserves are maintained.

Non-GAAP operating expenses were approximately $6.2 million for the quarter in line with our expectations. This is down from $8.4 million in the same quarter in the previous year. The details of the operating expenses for each area are as follows: the non-GAAP sales and marketing expense was $2.1 million. This was a decrease of $400,000 from the prior quarter due primarily to lower travel costs and improved efficiencies in managing our relationships with consultants and trade shows.

The non-GAAP R&D expense was $2.7 million supporting our sustaining activities and new MStage and Toktok activities. This was relatively unchanged from the prior year and quarter.

The non-GAAP G&A was $1.3 million, up $200,000 from the prior quarter approximating the levels expected based on audit fees expensed in the period that they were incurred.

Other income expense netted an expense of approximately $700,000 due to further Q1 write downs on one of our auction rate securities to 2% of the par value of $10 million. We had previously written down this to 10% of the $10 million par. We continue to look for aggressive approaches to deal with the situation. Included in the other income expense was interest income of approximately $173,000 and this was netted against the write down.

Non-GAAP pre-tax operating loss approximated $3.3 million versus the non-GAAP loss of $8.7 million last quarter. The non-GAAP income taxes is tied to A&P and foreign taxes. Our non-GAAP net loss was $3.3 million which is $0.13 per share compared to $8.6 million or $0.33 per share in the prior quarter.

To reiterate, all the operating results that I have given you other than revenue and net interest expense are on a non-GAAP basis. Please refer to our press release for the first and fourth quarters of fiscal 2009 for comparative GAAP results as well as the reconciliation of the non-GAAP results to our GAAP results.

Moving on to the balance sheet and cash flows which are on a GAAP basis, cash equivalents, short term and long term investments at quarter end totaled $42.2 million an $867,000 reduction from the prior quarter. This reduction was better than our expectations.

This level included the $535,000 further write down of our auction rate securities which was not included in our prior projections. Within the auction rate security write down, without it, we would have had only less than a $400,000 reduction in our cash balance.

Cash used in operations was approximately $100,000 for the quarter. This too, was less than expected based on our revenue level and our ability to collect our A/R more effectively and consume $1.2 million in inventory.

At quarter end, accounts receivables were approximately $3.5 million. This was a $1 million decrease from the prior quarter. DSO's in Q1 approximated our long term expectations at approximately 52 days and were better than our prior quarter's 79 days.

As we stated in last quarter, we expected our long term targets to be between 45 and 55 days. Let me remind you that the DSO numbers are subject to change as the timing of sales and shipments in any given quarter is always subject to fluctuations.

Net inventory was $10.1 million at quarter end, down $1.5 million from the prior quarter of $11.6 million. This decrease in inventory is solely based on existing inventories for customers and bringing nominal new inventory during the period. At quarter end we believe the remaining inventory is still usable based on our forecasts.

Capital spending approximated $350,000 in the quarter. Depreciation and amortization approximated $570,000 in the quarter. We ended the quarter with 104 employees which is down nominally from the prior quarter.

I will now review our GAAP projections for the second quarter of fiscal 2010. In this regard please note the cautionary statements made at the beginning of the call.

Our Q2 outlook is derived from existing backlog, deferred revenues and our bookings forecast. Therefore we project revenues to be similar to the Q1 levels of $6.1 million. We believe gross margins to be in the range of 54% to 58%. This may vary based on product and customer mix.

Regarding operating expenses, we are continuing to manage our TDM and packet platform business as sustainable, break even businesses and are therefore moving resources and related dollars to the new initiatives of MStage and Toktok. Operating expense in the second quarter will be tied to customer and channel mix and the investments in R&D.

Overall we would expect our GAAP operating expenses including an estimated $400,000 stock based compensation to be in the range of $6.4 million to $6.6 million. This would approximate the first quarter level.

Our tax rate should be in the 1% to 3% rate due to our loss situation. Deferred revenues at the end of Q2 are expected to be in the $2 million range similar to the past several quarters.

Additionally, a couple of other data points for you. Weighted average shares should continue to be calculated on a basic basis due to our loses at approximately 26.3 million shares. Cash burn is obviously a major focus item for us. Based on our inventory levels, we should be able to consume existing inventory on most of our product sales activities.

Between similar collection rates on receivables and the monetizing of the inventory in the coming quarter, we expect our cash at quarter end to be down $1 million to $2 million from Q1 levels. The reduction in essence is the investment in the MStage, Toktok initiatives.

Looking at Q1 as a whole, we were pleased with the increased revenues and gross margins at the high end of our projections. We were disappointed with the further write down of the auction rates which impacted cash by $550,000. We, along with many other companies, are taking more definitive actions to resolve this auction rate issue.

Again, we now have one auction rate at $3.7 million which is at part and another at $200,000 with a par of $10 million.

On our cash projections, we were able to reduce the burn more efficiently than we had projected. We hope to continue to control the burn rate and keep it to a minimum. Obviously we would like to continue improving the cash flow, but this will require continued revenue growth.

As Todd discussed, the feedback on MStage Toktok has been very positive and is driving us to execute and launch to the public this calendar year. This could enable us to recognize revenues from these offerings in the later half of the fiscal year.

Looking forward, we remain very focused on legacy business revenue growth, conserving cash, minimizing operating costs while investing appropriately. With these comments, I'd like to turn it back over to Todd.

Todd Simpson

I think we can now open up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Neil Goldman – Goldman Capital Management

Neil Goldman – Goldman Capital Management

What would be the current sales level, a realistic inventory number that you should get to over time?

Todd Simpson

Based on the product mix we have three different products we're primarily selling. We probably want to be in the $5 million to $6 million range over time.

Neil Goldman – Goldman Capital Management

So that's another $4 million to $5 million to offset any cash burn hopefully.

Todd Simpson

That's correct. We also have, just an FYI, we do have, this is a net inventory number. We have reserved a lot of equipment that obviously we'd like to sell that's still sellable, but has been reserved, so there's actually an excess of the current amount. The amount on the balance sheet is a net number.

Neil Goldman – Goldman Capital Management

What's the reserve?

Todd Simpson

It's in excess of $7 million or $8 million.

Neil Goldman – Goldman Capital Management

Over time is that $0.10 on the dollar or much do you think you can derive out of that?

Todd Simpson

That's a question to be determined. We had this happen once before in our life cycle that we monetized 80% of what was reserved, but it depends on the product mix and what the go forward, so it could be anywhere from $0.10 to $0.50. It could be more, but currently it's reserved. I just want to give you the gross inventory is much greater than the $10 million on the balance sheet.

Neil Goldman – Goldman Capital Management

What kind of reserves do you have against these receivables?

William Tamblyn

Currently the receivables have about $280,000 reserved against the $3.4 million. In the history of the company in the over $500 million in sales, I think we've written off a grand total of $600,000 of receivables in the last 10 years.

Neil Goldman – Goldman Capital Management

Based on these numbers, it looks like about $10 million a quarter would be a cash flow break even. Is that a fair assessment?

William Tamblyn

It could be less than that depending on working capital activities.

Neil Goldman – Goldman Capital Management

Assuming working capital just is in line with sales or what have you, but from a standpoint, you're losing about $3 million operationally, not cash, but it looks like the incremental value you probably get 75% incremental margin.

William Tamblyn

If you're asking for operating profit on a GAAP basis, it's probably about $10 million. It would be less for cash flow break even.

Neil Goldman – Goldman Capital Management

Could you try to define the potential markets in terms of size for what MStage and Toktok are doing?

Todd Simpson

There's all kinds of large numbers to throw around, but maybe just to flavor that, really we're targeting sort of the intersection of unified communications, conference calling, ring back phones, music applications on the wireless networks. So the market that we're targeted is measured in billions of dollars.

The actual revenue being generated in the voice application space today is probably measured in fairly large hundreds of millions of dollars when you tie together things like text to speech voice mail, transcription services and the variety of voice applications. So we look at it as hundreds of millions of dollars today growing into billions of dollars in the foreseeable future.

Neil Goldman – Goldman Capital Management

You mentioned the Google voice. That competes against Toktok or doesn't, how big is that as far as you can tell.

Todd Simpson

We see Google voice largely as very positive for us. They are forging the path and forging innovation within the voice space and since our market is the carrier market, we see that as an opportunity to ensure that the carriers step up and offer competitive services to Google voice so that they remain relevant in voice and that is exactly where we have built the MStage infrastructure to target, is the ability for carriers to participate as what we see as the evolution of voice.

Neil Goldman – Goldman Capital Management

In terms of your offering versus the Google voice offering, are they similar or what are the differences?

Todd Simpson

The Toktok offering obviously has some similarities. The thing it does differently is it allows 100% hands free operation. So you can do everything by voice using the Toktok key word. So you can differentiate your products and we hope that the large carriers differentiate their products with that component. In terms of the function, what the end users can do is fairly similar to what Google voice does.

Neil Goldman – Goldman Capital Management

There's also another company, [Three-Jam]. Do they have a product out there?

Todd Simpson

Yes they do. Again fairly similar. We could either get more evidence of the move into the new model of voice. We're not as familiar with [Three-Jam] as Google obviously at this point in time.

Neil Goldman – Goldman Capital Management

Who were they selling it to, [Three-Jam]?

Todd Simpson

I believe they're going direct to consumer as well.

Neil Goldman – Goldman Capital Management

Not to the carriers themselves.

Todd Simpson

Right. That's how we're differentiating ourselves of course, is we are attempting to enable the carriers. We're doing a little bit of direct to consumer with Toktok to help prove the model, but the ultimate goal is the carrier sale.

Neil Goldman – Goldman Capital Management

How much of your current business, this $6 million a quarter is recurring revenue? When you look out on MStage and Toktok and those kind of features, is that all recurring revenue?

Todd Simpson

That's certainly part of our strategic plan is to get to a lot more recurring, repeatable revenue than we have today. The platform business for us and for I think all platform vendors can be quite lumpy so we get a small number of very large orders and getting them to fall into the right quarter is the challenge to show steady revenue growth.

So it's certainly part of our strategy is to use MStage and Toktok to get recurring revenue through a revenue share model with the carriers and we have had many, many conversations with carriers big and small around that model and they are willing to consider that approach. I would say not only willing, they are eager to try that approach.

Neil Goldman – Goldman Capital Management

Will it accelerate your basic business by offering a one stop shopping of all these different features?

Todd Simpson

Yes. There's certainly a lot of tie in between the new platforms and the new offerings and what we do today. For example, our voice quality algorithms can be deployed on the new MStage platform as well so we do see that our new pitch when we're going to the carriers involving both the revenue generation as well as the quality go together very well, and generate renewed interest in some of our voice quality offerings because of where we're going.

Neil Goldman – Goldman Capital Management

Who else competes in the voice quality area?

Todd Simpson

Our traditional competitors remain there with companies like [Telax] and then companies, the large OEM's like Ericson and Siemens who have some level of voice quality algorithms built into their boxes. We continue to be differentiated in that market in that that's our primary focus and we've applied more horsepower to the problem than the other vendors and because of that, we believe we can do a lot better job than anyone else in the market in voice quality.

Operator

Your next question comes from [Tim Lehealy]

[Tim Lehealy]

Same basic question I think I've asked every quarter now, it seems like the revenue associated with these new products or expected revenue continues to get pushed back farther and farther away from the present or at least it seemingly always remains four quarters ahead. What can you give us in terms of more definitive information on when you expect to have meaningful revenue from these products? I think I heard you said basically first half of 2010 or the second half of your fiscal quarter, but I'd like a little bit more specific than that and how you think it will come in. Do you think we can get to some meaningful revenue numbers relatively quickly or is because the model you're going for, recurring revenue, revenue share, is it going to take us a long time to get to bigger numbers?

Todd Simpson

I think we've consistently said that we would get the products out this year and start to show traction this calendar year. And we are still on schedule to do that.

In terms of the revenue, we would expect to see a relatively slow ramp from the direct to consumer side of the Toktok website because it's a new model and we have to sign up a user at a time and build up that model.

In parallel of course, we still have the platform business approach with MStage and as I said in my script, we're focused on both the faster moving Tier Two, Tier Three carriers who typically move quite a bit faster than the large Tier One's. But we're engaged with the Tier One's as well.

So I think Bill articulated fairly clearly that we will certainly get the products out this year, start to get traction, but expect to see revenue in the later half of the fiscal year.

[Tim Lehealy]

When you say expect to see revenue in the later half of fiscal year, talk to me about magnitudes. Revenue would certainly be $500,000 but obviously at this point we sort of need in the order of $4 million. So what is in your head when you make that comment?

Todd Simpson

We need millions in order to get back to profitability. Those millions of course could come through continued growth in the BQA business as well as starting to bring online some of the new revenue.

[Tim Lehealy]

But you don't expect meaningful growth in the BQA business, certainly not next quarter based on your guidance. Is there anything to suggest, can't we take that off the table as a meaningful driver of the type of numbers we need to generate. There's nothing to suggest that we've gotten meaningful growth there for awhile and you're certainly not guiding to it.

Todd Simpson

I wouldn't take it completely off the table. We still see large opportunities for the voice quality products. That's not saying that as I said in the script, that it's really, we need to sell or we that we can time those deals accurately because we have struggled with that and continue to struggle. But there is certainly the opportunity for the voice quality products to do better than they are today and we have a large focus on that.

And obviously they are mature ready to go products so I think we should continue to have a focus on that, as we do.

In terms of getting to $4 million or more of run rate in the new products, that is going to take us awhile and I don't want to say a specific quarter number, but it will have to grow like any other new product going into the carrier market where there are test cycles and acceptance cycles and what not and then typically trials involving a percentage of early adaptor users followed by full deployments. So we still certainly are in the carrier sales cycles.

[Tim Lehealy]

So let me ask you this. This is where all this questioning really leads. I've never been able to get a firm number or firm idea other than you always say you're not going to spend all the money, but what's an acceptable amount in reduction of total assets if you will. Let's not talk about cash but total assets before we're successful. What's an acceptable amount of total investment? I don't think anybody who's an active shareholder in this company would feel comfortable if cash and inventories dropped well below $40 million. But when you look at those numbers, what do you say? I'm comfortable with this amount of incremental investment.

Todd Simpson

We haven't given a specific number but we have given a number of $1 million to $2 million of cash and hopefully the lower the better per quarter.

[Tim Lehealy]

But that doesn't, that's sort of a meaningless number because in terms of assets, in terms of what I own as a shareholder, I own the inventory also, and that has real tangible values. So what I care about is the loss of tangible value each quarter. It's a pretty large number every quarter.

Todd Simpson

I believe the most tangible way to get the inventory converted back into cash is through our sales channel.

[Tim Lehealy]

But the point is, don't deflect the issue by just talking about cash. What I care about is the reduction of total assets and what I'm asking you now is what in your head is an acceptable total reduction of the assets that we shareholders own to prove out this new product line?

Todd Simpson

Again, I won't give you a specific number but I would expect to be closing the gap on a quarterly basis and showing traction towards that and certainly wouldn't be stringing this out for years and years trying to get mStage and Toktok to be large contributors.

[Tim Lehealy]

I don't need a specific number, but as a shareholder, I think all shareholders deserve a ball park and I don't think it's right for you to deflect the issue completely. You have to tell us listen, if we spent $10 million to $20 million on this thing and it's not working, we're going to pull the plug. I don't think it's an adequate answer to say I'm not going to give you, I'm just going to try to close the gap each quarter.

William Tamblyn

My take would be by the end of the fiscal year which is two and a half quarters from now, if we don't have significant traction or understanding that there's a significant revenue opportunity and looking at it from ROI basis, you have to make an assessment to continue to do something else with it. But we're going to give it a period of time to get to the carriers hands and also to the consumers hands to see what the uptake is.

My take is that it's two and a half to three quarters and you're going to make a hard assessment at that point. So you're either going to nominalize the investment to see if the sales side of it works or you're going to have to do something else. But obviously you won't continue to invest in it at the same rate if you don't start to see traction within a reasonable period of time.

So two and a half to three quarters, you're going to make an assessment. And that would be the time frame you would do it because by then you've had it in the consumer stream for a period of time and you've had beta's and trials with small Tier Two, Tier Three customers to see what their adoption rate is, as well as the potential for Tier One's to say what their adoption rate is.

Even if the Tier One loved it today, they just because of who they are and how they function, they can't deploy this for probably nine months to a year just because of who they are. That's why you have to go after the Tier Two's and Tier Three's to monetize what you can as soon as you can.

[Tim Lehealy]

So we're saying two to three quarters now and right now in terms of total assets, again forgetting the cash dynamic, we're chewing through between $3 million and $4 million a quarter. You're talking anywhere from $10 million to $15 million before we take a step back and assess where we are with this product.

Todd Simpson

I'm not saying that. You just made a comment earlier that cash and inventory declined from April through July, $2.4 million in this last quarter. So if you're looking at that rate, you're talking about between $5 million and $7.5 million over the next two to three quarters.

[Tim Lehealy]

Okay, so $5 million to $7.5 million.

Todd Simpson

I'm only basing on what you stated.

[Tim Lehealy]

But I want to know what you think, not what I stated. I want to know what you guys think.

Todd Simpson

We think in terms of the time frame and very actively managing the expenses as we go through that time frame. I think that's a fairly good ball park that Bill's put up.

[Tim Lehealy]

So I guess there are a couple of things. No, it really doesn't help. I don't know why you don't think it's a number that we should have as shareholders given the significant loss of the last several quarters, but clearly you're not going to give it to me so I'll just leave it alone.

Operator

We have no further questions so I'll turn it back to our speakers for any closing remarks.

Todd Simpson

Thanks everyone for joining us this afternoon. We look forward as always to updating you again in about three month's time. And if you have questions, please feel free to give us a call. The contact information is on the press release. We'd be happy to field calls and you're welcome to drop by anytime.

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