Procera Networks Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 7.13 | About: Procera Networks, (PKT)

Procera Networks (NASDAQ:PKT)

Q2 2013 Earnings Call

August 07, 2013 4:30 pm ET

Executives

Nicole Noutsios

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

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

Analysts

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

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

Jason Ader - William Blair & Company L.L.C., Research Division

Gregory Allen Weaver - Invicta Capital Management, LLC

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Mike Lin - Stifel, Nicolaus & Co., Inc., Research Division

Georgios Kyriakopoulos

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Procera Networks Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] I would like to turn the conference over to our host, Ms. Nicole Noutsios. Please go ahead, ma'am.

Nicole Noutsios

Thank you, operator. Good afternoon, and welcome to Procera Networks Second Quarter 2013 Financial Results Conference Call. On the call today from Procera are Jim Brear, Chief Executive Officer; and Charles Constanti, Chief Financial Officer. Please note that the financial results reported today include both GAAP and non-GAAP financial measures. Unless specifically noted otherwise, we're discussing all numbers, except revenue, on a non-GAAP basis, which excludes stock-based compensation, business development expenses, amortization of acquisition-related intangibles, as well as acquisition-related deferred compensation and tax effects. A full reconciliation of GAAP and non-GAAP information is contained in our financial results press release issued earlier today and is available on the IR section of the company's website.

Before we begin, let me note that this call contains forward-looking statements, including statements related to the expected demand for Procera's products and the company's financial and other expectations for 2013. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including the risks set forth in Procera's annual report on Form 10-K and quarterly report on Form 10-Q filed with the Securities and Exchange Commission, as well as the specific risks and uncertainties noted in Procera's news release on the second quarter 2013 financial results. These forward-looking statements represent the company's judgment as of today, and the company disclaims any intent or obligation to update these forward-looking statements.

I'll now turn over the call to Jim.

James F. Brear

Thank you for joining us today. We've made progress on a number of business initiatives since last quarter, expanding our customer base, partnerships and product portfolio.

We reported a second quarter revenue of $17.8 million, a 22% increase year-over-year. Contributing to this growth, Vineyard continued to execute, with revenue increasing 63% sequentially, and the integration has gone well.

The company has also made a number of important customer, technology and partnership announcements in the last 2 days that will position us well for the future. These announcements are leading indicators that Procera continues to separate from the competition through superior technology and execution. We believe that Procera is uniquely positioned and is differentiated in the market. We believe our unique advantage include our high-performance, scalable software-based solution; our industry-leading application library; our contextual network intelligence; unparalleled service flexibility; and our embedded DPI engine for the enterprise.

During the quarter, we made several important product innovation announcements. We launched our Dynamic LiveView product, which provides unparalleled real-time visibility for network operators. Now network operators can troubleshoot and conduct forensic analysis on their network with the same level of detail and visibility as a reports do to a product, but in real time.

Dynamic LiveView is a clear differentiator in providing configurable real-time views of the network and subscriber activity.

Combined with our ContentLogic product, Procera is the only company that delivers Internet intelligence. Where the competition is offering non-IPE add-ons to enhance their value, we continue to deepen our core technology and offer a compelling vision for the future, while partnering with companies that offer best-in-breed add-ons.

These partners also invite us to new customer opportunities.

Procera also announced Virtualized PacketLogic Solutions. NFV and SCN are absolutely a game-changer for service providers. It promises to the same powers of flexibility, scalability, higher utilization and, ultimately, cost savings that data center operators have benefited from ever since virtualization was popularized a decade ago.

For network intelligence and policy enforcement, the powers of virtualization will be transformative, enabling a better subscriber-aware service.

Procera is perfectly positioned to bring this Internet intelligence to this rapidly-evolving, virtualized and software-defined network.

Our offering provides the same software functionalities on current hardware platforms used by hundreds of network operators worldwide, but easily scalable. As virtualization gains traction with operators in 2014, we will believe it will put us in front with margin-rich revenue opportunities.

Beyond expanding our product suite, another key to our growth strategy is accessing more customer opportunities so that we're involved in more RFP processes. We have found that when customers conduct detailed lab tests and technical evaluations, we have a very high win rate. We need to continue to expand our sales reach and develop key partnerships that can further broaden our access to the market.

In addition to relatively recent successes in Japan, Middle East and Latin America, we are now entering India and Africa. Demonstration of our traction in India, we're pleased to announce today that we were selected by an important partner, Tata Communications. Tata Communications is a global network, which is one of the largest advanced IP networks in the world, with connectivity to more than 200 countries and territories across 400 points of presence, as well as nearly 1 million square-feet of data center and co-location space worldwide.

We expect Tata will be delivering the Procera IP system's ability to quickly offer revenue-generating services. This win was a competitive displacement, and this service will open up markets that Procera is not directly addressing today in emerging markets where we did not have sales or partnership footprint.

We also announced in June our Revenue Express solution with Openet, an industry leader in 3GPP policy and charging space. We have a number of joint customers today and expect the partnership to grow.

Revenue Express is a collection of prepackaged services, designed to enable mobile operators to rapidly configure revenue-generating services.

We continue to win deals and added 10 new service provider customers in Q2. Of the 10, 2 were Tier 1 mobile operators, including 1 competitive displacement. Our traction with mobile operators worldwide strengthened each quarter. Our revenue mix for Q2 was 48% mobile, 28% cable, 12% fixed and 12% higher education and enterprise.

28% of our second quarter revenue was from new customers with 72% follow-on. We expect a higher percentage of revenue in the second half of 2013 will come from new customers and that the ratio of new to follow-on will shift towards more balance.

Trial activity is strong and balanced across customer types and regions. We have 16 direct trials with Tier 1 service providers balanced across mobile, cable and fixed. These trials are underway or plan to begin over the next 60 days.

Today, we announced that we won business from 2 new European mobile operators, one of which was a Tier 1 operator. The third is a multimillion dollar expansion order from an Asian Tier 1 mobile operator. By deploying our systems, these 3 mobile operators can monetize their LTE investments.

As you may recall, we were selected by a Western European mega-carrier late last year. The opportunity has expanded since we originally were selected. We believe the size of this opportunity over the next several years is going to be important for the company.

I'm happy to report that this customer has been installing our systems in preparation to launch their service in Q3.

We are expecting to recognize a significant amount of the hardware revenue in the short term, but don't anticipate activating most of the software licenses until later this year when they begin to add subscribers to the network.

We'll now turn the call over to Charles who will provide financial review.

Charles Constanti

Thank you, Jim. Total revenue for the second quarter was $17.8 million. For Procera, this is a Q2 record, and up 22% from the second quarter of last year.

Bookings for the second quarter were also a Q2 record at $15.7 million. Product revenue for the first quarter was $13.6 million, up 15% from the prior year and up 30% sequentially from the first quarter of 2013.

Support revenue continued to grow and is an important source of recurring revenue. Support revenue in the first quarter was $4.2 million, up 51% from the first quarter of 2012 and up 13% sequentially from Q1.

Our support revenue reflects continued expansion of the installed base of our products, ongoing support arrangements and growth in professional services.

In Q2, we received final acceptance, and thus recognized approximately $2.2 million of revenue from the customers that had originally been anticipated for Q4 of last year, but was delayed because of revenue recognition criteria.

This customer and 2 other customers each represented over 10% of revenue at a combined total of 48% of revenue for the current quarter.

Over the past couple of years, it has been typical for 3 or 4 customers to make up about 50% of revenue in a given quarter but with only 1 or 2 of these customers ultimately comprising more than 10% of revenue for the full year.

Our revenue concentration should diversify as we grow.

Deferred revenue was $11.1 million, combining short and long term, and is mostly maintenance and support, together with term licenses for our NAVL products.

The NAVL product was acquired as part of the Vineyard acquisition in January of 2013, and our Q2 revenue tied to the acquisition was $593,000, up 63% from the first quarter. We expect this to continue to grow rapidly due to a combination of new wins and customer renewals.

Looking at first quarter revenue, by geography, the Americas was 46% of revenue, EMEA 29% and APAC was 25% of revenue. With expansion -- with the expansion of our global sales force, we will grow, and we expect the mix of revenue generated from outside the Americas to increase.

The non-GAAP gross margin rate for the quarter was 62%. Our operating expenses grew in advance as we expected, with revenue growth, and this is reflected in our Q2 results.

Non-GAAP operating expenses in the second quarter were $11.6 million, up $900,000 sequentially from Q1 and up $3.9 million from the second quarter of 2012.

As we discussed last quarter, the increase in operating expenses fully reflects the Vineyard acquisition, additional hiring and other investments for future growth.

We have made these investments in response to our traction with large mobile carriers.

To support these customer engagements and extend our competitive position in the market, we ramped up our service and support organizations, invested in R&D and expanded our go-to-market reach with added sales personnel and sales engineers.

We expect to achieve a significant return on these investments in the form of future revenue growth.

The GAAP net loss in the first quarter was $3.3 million compared to GAAP net income of $766,000 in the second quarter of 2012.

On a non-GAAP basis, our net loss for the second quarter was $333,000 compared to non-GAAP net income of $1.4 million in the second quarter of 2012.

We are currently anticipating an effective GAAP tax rate of approximately 12% for 2013.

We ended the quarter with $111 million of cash and short-term investments. During the second quarter, we used $4.6 million of cash in operations. The use of cash reflects an increase in our inventory by $6.6 million in preparation for higher product shipments in Q3 and Q4.

DSOs were 87 days compared to 79 days last quarter. The increase reflects a back-end skewed quarter and higher international revenues. The company anticipates DSOs would typically be in the range of 75 to 95 days.

For guidance, we expect stronger sequential growth in the second half of the year, reflecting investments we have made in both our teams and customer relationships.

In Q3, we expect to begin to recognize revenue from a large deal with a mega-carrier, as Jim described.

Because the hardware portion of the sales to this customer are preceding most of the license revenue, the impact is expected to reduce our gross margin in Q3 to approximately 50%.

After Q3 and without the impact from this customer, we expect gross margin rates to more closely reflect our near-term model of the low- to mid-60s.

In Q3, we expect the non-GAAP operating expense to be in the range of $11.7 million to $11.9 million. Most of the sequential increase in operating costs will come from higher commissions on revenue growth. Increases in operating cost for our overall workforce should be moderate. We are modeling a wider net operating loss in Q3 on a non-GAAP basis as compared with Q2 of this year, as well as a return to profitability in Q4 on a non-GAAP basis.

We are reiterating our guidance for an annual revenue growth of at least 30% for 2013. Our guidance is based on a bottoms-up analysis of our pipeline, the deals we expect to win and revenue to be recognized during the year, combined with the revenue contribution from Vineyard and ongoing support revenue.

Beyond guidance, we would like to add some color around our long-term expectations for Procera. We're striving to manage our business towards a long-term target financial model with a gross margin in the range of 65% to 70%, R&D at 12%, sales and marketing at 29% and G&A at 7% of revenue and an operating margin in the range of 17% to 22%.

It is premature to indicate when we'll achieve this model. With that, I'll turn the call back to Jim.

James F. Brear

The future looks very bright for Procera. We have now built the foundation for long-term growth and leadership in the market. Our pipeline and sales channels are growing, and we have improved visibility to large new opportunities that include mega-carriers that we hope to close this year.

The team is more energized than ever, and we look forward to strong execution in the second half of 2013.

With that, I open up to questions.

Question-and-Answer Session

Operator

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

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

Just 2 real quick. Jim, when you look at the bookings number that you gave for the second quarter, how is that impacting us all by that slipped deal from Q4? Did that factor into any -- the calculations there? And then secondly, do you think that's a reasonable seasonal number to be below 1? And then my second question is, on this large deal that you're recognizing, most of the hardware upfront on this megadeal, is that how we should be thinking about how these deals are going to play out going forward, where a lot of hardware upfront and then software later on? Because that's a slight change in what we've seen in the past.

James F. Brear

Yes. So we feel good about the bookings from a -- year-to-date, we're above 1, book-to-bill. And in terms of the mega-carrier, that isn't usual for us. Not to say it wouldn't happen in the future, but that was a model that worked for the service provider.

Charles Constanti

And Alex, on the bookings, the deal from Q4 would have been reflected in bookings from last year.

James F. Brear

Right.

Operator

Our next question comes from the line of Alex Henderson with Needham & Company.

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

First, let me be the first to compliment you on the way you structured the press release. It was a pleasure plugging the numbers with the structure of that income statement. And so second question is, I'm trying to understand a little bit more about this transaction with the hardware upfront and the software licenses down the pike. How rapidly do you think you'll recapture the software licensing margin associated with that transaction as we go out into the December quarter, first half of next year? Or how should we think about the impact over time, as opposed to just in the third quarter?

James F. Brear

Yes, so just as you can imagine, the carrier's in, as I mentioned, in the process of installing all this hardware. And they actually bought more than we had planned for, which is good. They're going to turn the service on very soon, and thereafter, they'll begin to move subscribers over. We're anticipating we'll start to see those subscribers move in and onto the network in Q4. So we'll begin to get those licenses. And how many is undetermined. Obviously, we're bullish as they are. And hopefully that'll continue throughout 2014 as well. Which could even lead to more hardware.

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

So, I guess I'm confused. What is it that triggers the licensing revenue associated with the software elements when the -- when they turn it up? How do I know -- how do I think about -- I've installed the hardware and I move from the hardware install to recognizing the revenues? I would think when they turn the licenses up, there would be a set of thresholds based on the number of users? Is that the right way to think about it?

Charles Constanti

You're right. It is subscriber-based.

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

So the more subscribers at each threshold, you get a different level of revenues on the -- so, and to get to the normalized margin would take, what? 3 or 4 quarters to achieve that? Is that the way to think about it?

Charles Constanti

It really depends on how rapidly, as Jim mentioned, that they turn up subscribers on this particular network.

James F. Brear

But I don't see that it would be quarters. Over the length of period you mentioned would not be the case.

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

So it's a couple of quarters, max, then?

Charles Constanti

Yes.

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

To get to that revenue. Is there upside the margin associated with it in out periods if they go higher than...

James F. Brear

There is, there is. And remember, this is on a PL20K. So there's a lot of headroom in the hardware. So yes, there's a lot of opportunity for margin expansion.

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

Second question, I didn't catch the book-to-bill. I may have missed it in the presentation.

Charles Constanti

Booking is $15.7 million.

Operator

Next question comes from the line of Jason Ader with William Blair.

Jason Ader - William Blair & Company L.L.C., Research Division

I guess, just following up on the mega-carrier that you're talking about for Q3. Jim, could you help frame the size of the hardware piece out front? How big it could be over time in terms of, let's say, they outfit their entire network? And then secondly, how -- what's the magnitude of the software revenue? Kind of that sole capacity -- in other words, all of their subscribers running through your gear.

James F. Brear

Yes, we've characterized the size of this kind of opportunity in the $20-plus million over a 3-year period. And I'd say they've just begun to implement the first wave of the hardware that we hope would then continue to expand over the next several years. And as we've said, we're hopeful that as they turn the subscribers on, the software license will increase.

Jason Ader - William Blair & Company L.L.C., Research Division

So is the $20-plus million, does that include service as well? Or is that just hardware and software?

James F. Brear

That's hardware and software only.

Jason Ader - William Blair & Company L.L.C., Research Division

And is it half hardware and half software? Or is it more skewed towards hardware?

James F. Brear

I would say it's going to be more skewed towards software.

Gregory Allen Weaver - Invicta Capital Management, LLC

More skewed toward software?

James F. Brear

Correct.

Jason Ader - William Blair & Company L.L.C., Research Division

So in terms of magnitude, the $20 million plus, let's say it's $20 million, it's going to be something like 60% software, 40% hardware? Or 2/3 software or 1/3 hardware?

James F. Brear

It's hard to say right now. I don't have my calculator.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay. All right. Just trying to get a feel for that. And then you talked about new customers for the second half, whether you expect a shift. I mean, obviously, part of that is this mega-carrier, I imagine. You have other significant design wins in your pocket that you're referring to for the second half? Or are these deals that haven't been won yet?

James F. Brear

Yes. They haven't been won but we have visibility to them and they're in kind of hopefully final stages of making a selection.

Jason Ader - William Blair & Company L.L.C., Research Division

Okay, and could you give us some color on geos and...

James F. Brear

Probably from competitive standpoint, I'd prefer not to.

Operator

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

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Two housekeeping items first. Did you say the split was 28-72 for new versus installed base for revenue?

Charles Constanti

The higher number was for new -- orders from existing customers.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Got it, okay. And then going forward, what exactly did you say? I blinked out on that. You said something about the second half would be split 50-50, and that's why I'm concerned I wrote down the wrong thing.

James F. Brear

It would just get -- it would get more balanced, is what we said.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Okay, got it. And then can you -- congratulations on Tata. And then one of the things on that question, Jim, can you provide more color? Is this for their wholesale network? Some of their mobile networks? Their cloud services?

James F. Brear

Yes, their cloud services network, which will include all of their infrastructure.

Catharine Anne Trebnick - Northland Capital Markets, Research Division

Got it. That's helpful. And then any color on what you're seeing versus -- one of the big... I think, investors are concerned on, they think DPI is maybe more of a niche market than not. And maybe give us on your opinion on where you think it fits in -- the priority and full on that background, I'd appreciate it.

James F. Brear

Sure, I mean, we have -- I haven't seen any changes in the macro that would indicate that there's any slowing of the market or interest in market. The RFP opportunities that we have in front of us is really equal to or better than a year ago.

Operator

Our next question comes from the line of Sanjiv Wadhawani with Stifel, Nicolaus.

Mike Lin - Stifel, Nicolaus & Co., Inc., Research Division

This is Mike Glenn speaking for Sanjiv Wadhawani. My first question was basically in regards to the margin profile of the mega-carrier deal that you mentioned and how you're splitting it up between hardware and software this time around. Is the software portion -- is the licensed portion, is that any different from what you've traditionally sold in the past? I'm just trying to get a better understanding for why things have changed and why that margin profile has potentially changed. Is it basically the same type of product you usually sell?

Charles Constanti

Mike, this is Charles. So this is the -- hardware platform-wise, the 20K is much bigger hardware platform. It's our biggest one we've ever sold before. So I'd say margin profile is certainly impacted by hardware content. If you kind of take out that element of it, I would say that the margin profile is consistent with large deals that we've done in the past. And we've had a fairly broad range of margins. But this is important and a very good deal for the company.

Mike Lin - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And the other question that I had was regarding the competitive landscape. I think a lot mentioned that they're starting to see more competitors in their geography. They said in the past and a lot of peer close competitors sort of operated and sold in their own geography. But now it's -- they're seeing everyone competing for the same deals. Do you find that to be the case? And do you see pricing pressure on some of the deals that you guys are bidding for?

James F. Brear

No, I'd say the competitive landscape is pretty consistent. And from a pricing standpoint, not much has changed over the last 3 or 4 years.

Operator

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

Georgios Kyriakopoulos

This is Georgios Kyriakopoulos for Simon Leopold. Just a follow-up on the competitive environment question. Do you see any changes in the environment, especially from integrated solutions? It seems that your partnership with Openet implies that there might be more interest among operators for bundled solutions?

James F. Brear

We're very bullish on our relationship with Openet It marries policy with analytics and enforcement. It's a very natural combination. The carriers love it because we've got 2 best-in-breed companies interoperating. We've recently rolled out a shrinkwrap solution for smaller carriers to rollout. Personalization capabilities and revenue-generating services. So we're very excited about the partnership and it's across both companies.

Georgios Kyriakopoulos

Then how much incremental growth do you think that comes as a result of the offering between you and Openet?

James F. Brear

Undetermined at this point. We -- as I mentioned, we have a handful of opportunities we're jointly working together. And we have a couple of customers that we have jointly as well. So at this stage, it can't really go any much better. But it's still pretty early.

Georgios Kyriakopoulos

Okay. Then going back to your guidance, can you discuss about the activity you have seen so far in 2013? And your confidence to grow business by over 30%, especially when you expect that new win rates drive most of the growth, when, in the last 2 quarters, over 70% of revenue actually came from follow-on orders.

Charles Constanti

Actually, for new versus follow-on business we actually said it will be more balanced. And we would see more -- so that means we'll see more wins than we did in the first half. But we still expect follow on -- our follow-on business to be an important part of our revenue.

Georgios Kyriakopoulos

Yes, so that's why I'm saying that given that in the first half, over 70% came from follow-on orders. What gives you confidence that second half is going to be so much better in terms of new orders?

Charles Constanti

Really, it would mean as we analyze our pipeline, we see deals maturing. So we've been working on deals, clearly, over the course of this year and into last year, that we see maturing.

Georgios Kyriakopoulos

Okay. And then given reports from your competitors who are mostly flat at 2013, it seems that most of your growth will come from market share gains. So basically, again, based on your previous comment, is it fair to say that you're more competitive winning the new deals?

James F. Brear

Yes, as I mentioned we feel that if there's an evaluation and it requires testing, we typically win. We're very proud of that.

Georgios Kyriakopoulos

Okay. You also announced the virtual solution this week. Can you help us understand how the economics work for Procera? For example, let's say that the customer solution can be satisfied the same way by a hardware or a software product. What's the difference in terms of ASPs and gross margin between these 2 options? And also, how material do you expect the virtual solution to become in the mix over the next 12 months?

James F. Brear

Yes, we're quite bullish on the virtualization product that we announced, and we think that over the course of 2014, we'll begin to see customers leverage that technology. I'm not suggesting that all service providers are going to go down that virtualized path. I still believe there will be a requirement for very high performance, purpose-built hardware platforms that we leverage today. But we see it is a very nice margin improvement opportunity for us. Obviously, they -- we would not sell the hardware. They would leverage off-the-shelf hardware if it's from Hitachi or IBM, or you name it, and we would then be selling licenses. And we -- obviously, the way we would do that is to be able to bundle our solutions with those hardware packages.

Georgios Kyriakopoulos

Okay. So it's fair to say that your ASP will come down, gross margin will come up. But then when it comes to net-net, the gross margin dollars, do you expect it to be higher? Lower? The same?

James F. Brear

I would say it is a little undetermined at this point. We really just don't know, to be honest, what the interest level is. We did launch it based on a couple of very significant carriers in the market that are driving the initiative. So we're hopefully following that. So we think it's going to be quite important for the sector and we want to be leaders there. As I mentioned before, it's a natural for us, because we are 100% software company. So we think there'll be significant traction. To what degree? We're not sure.

Georgios Kyriakopoulos

Okay, and then the last question I have about the Vineyard acquisition. In the past, you mentioned that you expect $4 million to $5 million contribution from this acquisition. It seems that in the first half striking less than that on an annualized basis. Do you still expect the $4 million to $5 million?

James F. Brear

I think we really -- I think we originally kind of said $3 million to $4 million. That was prior to purchase accounting, some of the accounting issues. But we're targeting $3 million to $4 million. And we feel pretty good about that.

Georgios Kyriakopoulos

Okay. And then have won any significant customers since the announcement of the deal a few months ago?

James F. Brear

Could you repeat the question?

Georgios Kyriakopoulos

Have you won any significant customers as part of the Vineyard acquisition since the deal was announced a few months ago?

James F. Brear

Yes, we have.

Operator

[Operator Instructions] And I'm showing a follow-up question from Alex Henderson with Needham & Company.

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

So, a couple of questions. First, when you're looking at the mix of business on a geographic basis, can you talk a little bit about the rate of activity by geography, in terms of how many deals there are in the pipeline? Is there more acceleration in Europe? Any pick up in conditions in Europe on a macro basis as opposed to just simply a result of you guys finding distribution and getting into accounts that you hadn't been looking at? Any way to tell what the backdrop is in terms of the absolute market conditions by geography?

James F. Brear

It's been pretty steady, Alex. To be honest, I'd say it's pretty balanced. What we would -- I would comment on is that, as we enter new regions, we gain new opportunities, and that's definitely helped us.

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

Yes. So you haven't seen any change in demand conditions as you're going from the first half to the second half, particularly in Europe? Is there any evidence that European CapEx conditions might be improving as a result of the gradually improving economic backdrop?

James F. Brear

Yes, we really never saw any slowdown and thus, we don't really see a pick up. It's been pretty steady.

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

So can't read it is the answer, because you didn't see enough of it. Okay. And the second one is, can you talk a little bit about the PL20K, whether -- how big a piece of the business it's become? And what your expectations for that product line is over the next year? Is that going to continue to increase as a percentage of revenues so that we might have to consider that impacting the gross margins upfront? How much risk do we have around that ramp shifting the mix to some empty chassis capacity that has to be produced on the hardware side?

James F. Brear

Yes, I guess, I heard 2 questions. The first question I heard was what's the expectations as to PL20Ks and then the second was the model, meaning chassis versus subscriber licenses. And the answer to the second question, first, again, it's only been requested by one customer, so that's not a normal model for us. And in terms of what we expect going forward, we have a number of opportunities in the funnel for this year, and I would expect you will see an increase in PL20K activity. It's one of our strategic advantages. It's the largest, most scalable platform available today. And as companies move to 100 gig, it will be positioned well for that.

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

Just to be clear, even without the licensing structure of this particular one transaction, isn't it also true that the chassis starts off at a lower gross margin than your key stackables?

James F. Brear

That's accurate. It's not much different than any chassis versus appliance. The chassis typically are out the door, less profitable because they're less populated with blades...

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

Upfront, they're less profitable, but over time, they're more profitable.

James F. Brear

That's correct.

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

Right. So should I anticipate, as a result of chassis ramping, that there will be a little bit of upfront pressure over the next year on margins as a result of the mix shift to chassis from stackables, which you'll catch up in down periods?

James F. Brear

Not necessarily -- we don't know that factually, because we don't know the impact of some of our other products like our Subscriber Manager, which is software. Or some of the newer features we've added. We could have one carrier buy a whole lot of that, which is all software, that could positively impact the margin. So unfortunately, as you've seen, depending on the customer type, the products they select can vary quarter-to-quarter. So what we're signaling is we don't really see a change on an annual basis, but it could fluctuate quarter-over-quarter, depending on, like you said, the chassis, the software and the features.

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

Okay. So second question, as you talked about the company getting back to profitability, what would be the share count on a fully-diluted basis if you were profitable?

Charles Constanti

I think it would be, probably, around -- somewhere around $21, $21 and change.

Operator

And I'm showing no further questions at this time. Please continue.

James F. Brear

Thank you for joining our call today. We look forward to updating you on Q3. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. You may now disconnect.

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Procera Networks (PKT): Q2 EPS of -$0.02 beats by $0.01. Revenue of $17.8M (+22% Y/Y) beats by $0.6M. (PR)