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Executives

Rick Wadsworth - Director of IR

Dave Caputo - President and CEO

Scott Hamilton - CFO

Analysts

Scott Penner - TD Securities

Robert Young - Canaccord Genuity

Richard Tse - Cormark Securities

Ron Shuttleworth - M Partners

Angelica Uruena - GMP

Naser Iqbal - Salman & Partners

Maher Yaghi - Desjardins Securities

Sandvine Corp (OTC:SNVNF) Q3 2013 Earnings Call October 3, 2013 8:30 AM ET

Operator

Welcome to the Sandvine’s 2013 Third Quarter Results Conference Call. My name is Jean and I will be the operator for today’s call. At this time all participants are in a listen only mode. Later, we will conduct the question-and-answer session. Please note that this conference is being recorded. Certain information presented in this presentation by management of Sandvine that is not historical actual information may constitute forward-looking information within the meanings of securities laws. Actual results could differ materially from a conclusion, forecast or projection contained in such forward-looking information.

Certain material factors or assumptions were also applied in drawing the conclusion or making forecast or project as reflected in such forward-looking information. Additional information about material factors that could actual results to differ materially from the conclusions, forecast or projection in the forward-looking information and details regarding the material factors or assumptions that were applied in drawing such conclusions or making such forecast or projections are contained in the Company’s Annual Information Form and in other filings made by the Company’s applicable securities regulators from time to time. All of which are available through SEDAR at www.sedar.com.

I will now turn the conference over to Rick Wadsworth, Director of Investor Relations for Sandvine. Please go ahead.

Rick Wadsworth

Thank you, operator. Hello, and welcome to Sandvine’s third quarter 2013 results conference call. During the call we will walk through slide presentation that you can download from the Investor Relations section of our website, sandvine.com. And those of you following along we’re currently on slide two we’ll let you know when we change slides. On the call today are Dave Caputo, President and Chief Executive Officer and Scott Hamilton, our Chief Financial Officer. Sandvine reports financial results under International Financial Reporting Standards or IFRS.

During the call Dave and Scott will refer to certain non-IFRS results. Non-IFRS results exclude the effective stock based compensation and amortization of intangible assets acquired to business acquisitions. A reconciliation of IFRS to non-IFRS results is included in Table 1 of today’s news release and in the Company’s Management’s Discussion and Analysis, which we’ve filed on SEDAR. Management uses these non-IFRS measures to evaluate Sandvine’s business and accordingly believes they may be useful to investors.

I’ll now turn the call over to Dave for some introductory remarks.

Dave Caputo

Thanks Rick. We’re on slide three. Third quarter revenue was $27.2 million and year to date revenue was just under 76 million, representing 25% growth over the comparable periods. This represents our fourth consecutive quarter of year-over-year revenue growth, profitability and cash generation.

Slide four. Net income was $4.7 million or 17% of revenue. Our cash balance grew to over $91 million up by more than $16 million from the end of 2012. In all we’re pleased with our Q3 and year-to-date results. The wireless market was our top contributor to revenue in the quarter and year-to-date. During Q3 we were able to name C Spire Wireless which we won as a new customer in Q2 as one contributor to that performance. In all six of the top 12 wireless operators in the United States are Sandvine customers and we are deployed in over 80 wireless communication service providers globally.

As we expected and communicated at the beginning of the year, EMEA and APAC have been driving our revenue growth most notably EMEA where we just had record revenue in Q3. We were pleased that our strategy to increase investment in that region is paying off. A number of significant orders drove revenue in Q3 including a $4.5 million and follow-on orders from a Tier 1 converged North American operator, $2.5 million in follow-on orders from two European mobile properties that belong to a major multinational operator group and $2.5 million in orders from a new communication service provider customer in Africa.

Our business intelligence and service creation suite of products figured prominently in these orders. Service creation has continued to be the largest component of software order value in the third quarter and year-to-date. During Q3 we continued to enjoy success winning new customers. We won eight new service providers including three wireless operators, four DSL operators and one new cable company.

We launched our latest service delivery engine platform with enhanced policy and charging rules function or PCRF capabilities. This new version qualified as a fully 3GPP compliant PCRF. It can work in conjunction with our policy traffic switch for traffic, inspection and policy enforcement for our fully unified network policy control solutions or it can interface with third party inspection enforcement point such as offered by other network equipment vendors.

The latest service delivery engine lets communication service providers roll-out new revenue generating services such as roaming notification, bill shock prevention, family plans and data bundles faster and easier than ever before. We’ve also demonstrated a lead in the industries [in net turbo] [ph] march towards the carrier cloud through new relationships with Juniper and Dell for software defined networking and network functions virtualization.

With Juniper we will show how Sandvine can bring applications and subscriber awareness to an SDN controller through integration with the Juniper network -- Juniper networks Contrail platform.

With Dell, Sandvine will show how our solutions can work on general purpose high volume servers. With NFV, Network Functions Virtualization, Sandvine’s functionality can be executed on any such server with available capacity, driving significant economies of scale for operators.

Broad scale deployment of SDN and NFV by operators is still some way away. So we don’t expect material revenues for Sandvine, nor the markets soon. However, we plan on being the technology leader in this area when the time comes, and these relationships are good first steps.

Finally with respect to partners, we are pleased to be able to say that we won our second customer with IBM. Our joint pipeline is encouraging and we may be able to announce further wins this year. We are also pleased with the progress towards full productization with IBM and expect to complete that process in the coming months. I will now ask Scott to review Q3 results in more detail.

Scott Hamilton

Thanks Dave. Unless otherwise specified, all current and comparative period amounts referred to on the call are stated in U.S. dollars under IFRS.

Slide 5. Revenue for the third quarter was $27.2 million, up 25% over Q3 2012, and up 15% from last quarter. Product revenue is 66% of revenue and service revenue was 34% of the total. 40% of our revenue came from EMEA, 37% from North America, 12% from Asia-Pacific and 11% from CALA. The wireless market contributed 39% of revenue, DSL market contributed 32%; and the cable market 29%. Our reseller partners [inaudible] 75% of total revenue for the quarter, and 25% came through the direct sales channel. And all 20 partners resold our products during the quarter to 26 end customers. Year-to-date revenue was $75.8 million, up 25% compared to $60.5 million last year.

Slide 6. A total of 37% of our revenue was derived from major customers in Q3, who were both partners which together generated product revenue from 7 end customers. Year-to-date we only have one major customer, a partner that represents 20% of revenue and has sold product to 18 end customers in the period. We remain pleased with the diversification on our revenue base in this regard.

Slide 7. Our blended gross margin was 76% in Q3, up from 70% in Q3 of 2012, and up from 74% last quarter. Product margin was 79.8%, service margin was 68.6%. Gross margin was particularly strong this quarter due in part to a favorable product mix including higher follow-on software sales. While we are pleased with the result, we remain focused on achieving a blended gross margin of 70% or higher.

Operating expenses were $15.8 million, down 6% from Q3 2012, and up 11% from last quarter. However, during last quarter the company recognized a benefit of $1.9 million of non-cash investment tax credit. Excluding the impact of this adjustment, our operating expenses were $16.1 million last quarter which is in line with the current quarter’s result.

Included in expenses are approximately $1.4 million in depreciation and amortization, and $0.5 million in stock based compensation similar to last quarter in Q3 of 2012. The allocation of these amounts to the individual income statement line items is outlined in our MD&A which is available on our website and on SEDAR.

The company’s IFRS net income for the second quarter was $4.7 million. This compares to a loss of $0.9 million in Q3 of 2012, an income of $0.9 million last quarter. Non-IFRS income was $5.1 million. Year-to-date IFRS net income was $7.2 million, an increase of $18.7 million compared to the same period last year. The increase is a result of increased revenue, improved gross margins and decreased operating expenses. Non-IFRS net income for the period was $8.7 million.

Our cash and short-term investments balance at the end of August was $91.4 million, an increase of approximately $4 million compared to $87.4 million at the end of May. As Dave mentioned we’ve added roughly $16 million to our cash balance since the beginning of the year. We accept our DSOs on a Pro forma basis, which excludes accounts receivable associated with deferred revenue. Pro forma DSOs were 58 days, compared to 70 days last quarter, 86 at end of November.

The lower DSO level is consistent with more linear bookings during the quarter resulting in a lower level of accounts receivable at the end of the quarter. Despite a relatively low DSO at this quarter, the company continues to anticipate that Pro forma DSOs would typically be in the range of 75days to 90 days. Bookings in the quarter were slightly greater than total revenue for the period.

As on all our previous calls, we cautioned that just that due to the nature of our business we continue to expect significant variability in quarterly results. This variability may manifest itself from many ways including but not limited to the product mix, geographical concentration market segment concentration, sales channel mix and customer concentration that we may report in any given quarter. Most notably it may result in significant variations in reported revenue and gross margin on a quarter-to-quarter basis.

I will now return the call to Dave.

Dave Caputo

Thanks Scott, as I mentioned at the outset Q3 represented our fourth consecutive quarter of year-over-year revenue growth profitability and cash generation. During that time we have regained our market share leadership amongst best of breed network policy control vendors. We believe that these results reflect the success of our strategies to increase investments in sales and marketing and years of out-investing our peers and R&D particularly in service creation and business intelligence solutions, I am pleased with our ongoing progress. I would like to thank everyone on team Sandvine for their efforts in the third quarter.

Operator we'll now take questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions). Our first question comes from Scott Penner from TD Securities.

Scott Penner - TD Securities

Thanks, good morning. Maybe first of all I wanted to ask about the APAC market, there was a question last quarter just on the weaker result for the quarter and it was chalked up just to be the function of a 13 week cycle. Just looking at this quarter it look a little weaker maybe again, so I wanted to just sort of get your perspective on that market Dave and how you see things shaping up.

Dave Caputo

In many quarters it's going to bounce around, I still like our prospects in the Asia Pac region, I think we're clearly the leader market share wise in that region. We've increased our level of investment and presence in that region and we've got some pretty big customers there that we expect to continue to be big customers, and there is a number of deals in the funnel there. So I wouldn’t -- the contribution might be a little bit light this quarter but I think it's still relative to what we expect from that region.

Scott Penner - TD Securities

On the IBM relationship can you just sort of give us a little bit of detail maybe on what the application is of the second customer that you talked about? And then separate from that really when you get to full productization what does that actually mean in terms of your ease of landing additional customers.

Dave Caputo

So we have a global relationship with IBM, we won our first customer back with them, back in Q4 2012 and it was in Africa. And where we fit in with IBM is they have the sort of smart universe, smart worlds type platform through their company and it's a very unifying vision for them. And that rolls down to something called smart networks, and our tagline from the very beginning has been intelligent broadband networks. And we see partnerships with guys like IBM large system integrators; they go in and present a very compelling vision on both sides of the house of customers on both the CTO and the CEO -- CIO side. And business intelligence fits into that smarter network type idea. But there is just great alignment with them because they don't really have a competing product to sell; they are just looking for ways to feed their large data warehouses to help service providers come up with good decisions on how to retain customers and how to generate new services so that they can generate new revenue streams with them. So I think it's a bit of a teacher for Sandvine that large system integrators are going to become increasingly important to us and IBM is a good one to have.

Scott Penner - TD Securities

And then just Scott for you, to make sure I understand how the R&D will change I guess when the government, some of the government grant money comes off at the beginning of next year, could you just remind us what that is?

Scott Hamilton

So we have our government program with [inaudible] Ontario government organization until the end of February next year. We have been recognizing that at about $1 million a quarter for the [indiscernible] including this most recent quarter. And then in addition this current quarter there is about $400,000 of non-repayable government assistance that we received through a different – a federal program.

Operator

Thank you. Our next question comes from Robert Young from Canaccord Genuity. Please go ahead.

Robert Young - Canaccord Genuity

I was wondering if you could maybe update your view on the strength of the funnel. It sounds like it’s strong, but recently you said it was the strongest that you’ve ever seen. And I was wondering if you could talk about how that’s tracking now.

Dave Caputo

So the funnel is good. The longer term funnel is good, and I think it is one of the strongest funnels we’ve seen, ever seen at this point. We’re obviously not giving revenue guidance and we’re happy with our growth of 25% through this year. We have obviously a tough comparable figure coming up Q4 last year was a record revenue that we’ve ever had but we like that we’re growing faster than the competition through this year and that’s really our number one objective here.

Robert Young – Canaccord Genuity

Okay, and then -- so you’ve always said that second half is always stronger than the first half. Would you expect that you’re going to see quarter-over-quarter growth in Q4?

Scott Hamilton

Yes, so we’re not going to provide quarterly guidance Robert; all the challenges that we have in our business why we haven’t provided in the past are still there in term of lumpy customer orders, our inability to forecast our position in terms of when orders are going to come in but I think that the comment that Dave provided earlier speak to our thoughts on business longer term certainly this quarter versus Q3 of 2012 helps with our back half being stronger and we’ll just see where Q4 falls in.

Robert Young – Canaccord Genuity

Okay, if I can ask about gross margins, if I calculated right 80% product gross margins, that’s very strong. You said that mix is driving that. Is this a function of the service creation revenue being higher margin, what’s driving that very high product gross margin?

Scott Hamilton

Yes, we probably characterize our product gross margins as unusually high and it was product mix mainly helped by customers coming back and buying follow-on software sales, a lot of that type of revenue will be linked to service creation. So in a way I can answer yes but I don’t think that that’s a sustainable level of product gross margins I think what we’ve seen in past is more indicative. Our business just hasn’t transitioned to that point where we can rely on that level of follow-on software orders every single quarter.

Dave Caputo

On the service creation part of that Rob I’ll just say that we are trying to create a high valued product here and our software is a big chunk of that and we really try to win the deals on value versus price. We don’t like chasing prices down in our markets.

Robert Young – Canaccord Genuity

And last question just a broader one. I know that the architecture you guys have is X86 based and now you have this relationship with Dell. Can you talk about how that architecture helped that relationship and how it may help you with FCN going forward?

Dave Caputo

I think there are two components that get mixed up, both software defined networks and network functions virtualization. The Juniper relationship they meet an acquisition called Contrail that’s basically becoming their SDN platform and we’ll have some software running inside of that architecture with Dell to the extent that there is a simpler network topology out there that moves all the traffic to X86 servers, we will be able to take some of our functions and virtualize those inside of those environments.

It’s a major architectural ship that many service providers are looking since sort of Google announced that several years back what they are able to do in their data centers, we’ve always been software focused architecture. We test our products in a completely virtualized environment as it is and SDN and virtualization, network functions virtualization are a natural step for us. And the goal will be for this year and next to just demonstrate some tangible results and capabilities through that type of architecture and working with Dell and Juniper are good first steps for us.

Operator

Thank you. Our next question comes from Richard Tse from Cormark Securities. Please go ahead.

Richard Tse - Cormark Securities

Thank you. Can you guys comment briefly on the plans for the cash? I know you’re doing sort of the great job at accumulating that cash balance. Is there sort of the plan of -- sort of get aggressive on the buyback acquisitions, some comments around that?

Scott Hamilton

So for sure we’ve built our cash balance over the last and sort of p point I’ve gotten asked that question in the past, some of the usage of cash that we highlight are acquired to be on hand to give comfort to our larger customers that were sustainable vendor. Certainly we continue to look at acquisitions in terms of a company that could help us extend the platform itself to the same end customer being service providers. We just haven't found that sweet spot with the several and it's just nothing has materialized. And then lastly you are right we have a buyback in place until the end of January and so we continue to have discussions internally and with our board vis-a-vie using our cash with those three things in light.

Richard Tse - Cormark Securities

Okay and Dave, obviously you guys are making a bigger portion on the software side with service creation and business intelligence, can you give us a split where that be on sort of revenue from a product side or your sort of funnel as to how much of it represents of either of those?

Dave Caputo

So we have said we are not going to give the split on a quarter to quarter basis or an internal basis although we have given it over the past few years so at the end of next quarter I expect we'll give you something more specific. But let me just say right now that from the -- from our software order intake as a proxy for why people buy our solutions, usage management or service creation and business intelligence is greater than 50% of our business, it's the majority of our business. but we are also seeing some good progress on our traffic management business particularly on the wireless side where we have a very differentiated product but that is a sector where location where traffic management on the wireless side and as service providers get through their big LTE build outs and then start looking at optimizing that build out I think we are going to be very well positioned for that.

Richard Tse - Cormark Securities

And just for my understanding if you look at sort of that, the split on the traffic management and service creation side, it might be wrong to say that by region it’s a bit different like with the characteristics you know Africa be different from Europe and North America?

Dave Caputo

Yes, it generally is and there is a difference between established markets and emerging markets and it really has to do with subscriber growth and bandwidth growth. As subscriber growth becomes more predictable and bandwidth growth becomes more predictable, service creation becomes more compelling and when they are in the acquiring subscribers or crazy growth on their bandwidth happening, they are much more focused on traffic management solutions.

Operator

Thank you, our next question comes from Ron Shuttleworth from M Partners. Please go ahead.

Ron Shuttleworth - M Partners

Just a couple of questions on sort of the outlook, I think -- it’s really possible to see the software sales continue to build like that and just curious if you could give us an outlook, but a view point on the demand for moving sort of into a sort of a more term-based licensing for product to seeing any of that as you move towards SDN and virtualization.

Dave Caputo

Well, I think the business models for SDN and virtualization have still to be written out there and there is some service providers that have focused on CapEx strategy and some of that are focused on OpEx strategies or combination thereof. It will be interesting to see how that evolves. Obviously something that’s term based or could be, I think a great development for getting more predictable revenue streams but I don’t think it’s clearly known right now but we are definitely thinking about those types of things and as customers actually start buying I think we are going to have to, may be offer it up different ways depending on what their objectives are with their CapEx versus OpEx goals.

Ron Shuttleworth - M Partners

Just in terms of timeframe, do you see that happening in the next two to four quarters or is it something going to be longer than that that you start seeing guys actually demand that type of approach?

Dave Caputo

So certainly the advance engineering of our customer service providers, they all have people assigned to the evaluation, the understanding of software defined networking and network functions virtualization and so we're -- there is no shortage of discussions that are going on. I think that architectures are going to be more and more established in the coming year 2014. I think it’s probably a 2014 plus when you will start seeing big deployments of this and I think it will come on the mobile side faster than it will come on the wired side just given the types of bandwidth that are required in the type of aggregation that’s required that it likely fits into a mobile environment much sooner than it fits in a fixed line network.

Ron Shuttleworth - M Partners

The last question, it’s great to hear the relationship evolving with IBM and with Dell and I am wondering if now are you seeing some corporate large opportunities as oppose to more advanced networking? Are you seeing demand coming from those two partners?

Unidentified Company Representative

We’re really seeing focused on selling to broadband service providers and mobile service providers, but there is no question that a big part of their business or an increasing part of their business is selling to enterprises and corporations and the like, and so we’re trying to see how we could best fit into that. But the IBM relationship is with the folks that are focused on selling to carriers.

Now, there is a slight distinction that there is the network side of the house and then there is the IT side of the house and often the IT side of the house of the service providers responsible for the billing, is responsible for the service creation type elements that are in there. And what we’re seeing is someone like IBM almost naturally talks to those guys first.

And so what we are seeing is that convergence of the network and the IT departments and a lot of that is really driving the SDN and NFV because IT departments have had great success virtualizing their environments and getting operational efficiencies out of their capital. And it all plays into that same sort of convergence software if everything phenomena on that occurring out there.

Ron Shuttleworth - M Partners

So you don’t see any time the next 24 months that you would be deploying utility or some other type of subscriber pay system?

Unidentified Company Representative

We will see how the business models involve for software defined networking and I think for the most part it will be carrier file stuff, it will be inside the service provider for the most part -- there might be some opportunities on the business intelligence side. Our network analytics to do that more cloud based, but it would more the service provider setting it up as the utility across their organization as oppose to external of that, it is my thinking right now that I am happy to see where this goes.

Operator

Thank you, our next question comes from the Angelica Uruena from GMP Securities. Please go ahead.

Angelica Uruena - GMP

Hi, thanks for taking my question. Just quickly, what are the benefits of having integrated policy software in DPI and do you see opportunity to place in coming quality management software at some new larger customers?

Unidentified Company Representative

I am sorry was it Angelika?

Angelica Uruena - GMP

Yes, I am calling in for Deepak Kaushal at GMP Securities.

Unidentified Company Representative

Okay, thanks Angelika. So I think there is a great opportunity. So, on the PCRF side, the policy control side of things from the software architectures, there are many-many vendors out there that have sold a PCRF. There might be as many 50, 60, 70 vendors and there is a few that have had more success than others particularly [indiscernible] which became Oracle and couple of others have had a little bit more success there, but what we’re seeing is, there is potentially an upgrade cycle that’s already occurring in that space where people have made those decisions two or three years ago.

And that vendor might not be as committed to this space as they were given name out just intense competition that came into that, and so to the extent that folks are looking to simplify their architecture for what they were doing in use cases might have been around, traffic management or some very simple code management solutions. We are seeing potential upgrade cycle that’s been driven by our latest offering. I want to make it very clear though that to the extent that operators have made decisions with some of the more entrenched and established players in that where fully 3G compliant and our ability for our policy traffic switch to communicate and work with those guys is still very much intact and I suspect that we’re probably the largest best of breed player install base for them for working with us.

We have done -- I can’t tell you how many interoperability tests and qualifications with PCRFs that are out there. So we know what they’re about and we know how to work with those guys. But to the extent that people are looking to simplify their architecture and get an end to end for the use cases that are at hand. We certainly don’t want slow those guys down and we think we have an upgrade cycle that we should participate in this coming year we've already seen it.

Operator

Thank you. Our next question comes from Naser Iqbal from Salman & Partners. Please go ahead.

Naser Iqbal - Salman & Partners

Good morning, thanks for taking my question. Just on the first side on the OpEx and the R&D, so start with your fiscal Q1 ’14 your R&D potentially go up by million dollar that the grant comes off?

Unidentified Company Representative

No Q2.

Naser Iqbal - Salman & Partners

Ok Q2. And in terms of the -- I think in general in the past few quarters your total OpEx has been a bit lower than in the 16 million to 16.5 million range. And excluding the R&D which is going to go up do you think that that’s a fair level or could that go up?

Unidentified Company Representative

No, as you think our expenses this past quarter were a little lower than I expected, there is some R&D initiatives that have pushed out, I am not sure whether they are going to follow into Q4 or Q1. And then our Q3 is generally a bit lower OpEx quarter where you could play could be in the summer months, people travel less, we attend tradeshows vacation pay people seem to think that vacations could drive down our accrual. So I would say that Q2 was probably a little lighter than I would expect for those various reasons.

Naser Iqbal - Salman & Partners

Okay. And Dave you talked about the pipeline being pretty positive and you sound pretty enthusiastic, do you think that with the maybe potentially improved pipeline you'd have some better visibility. So some of that that order lumpiness in the past that you would get some better I guess smoothing out of that or some better visibility into controlling some of that order lumpiness, do you think that’s going to emulate a little bit going forward?

Dave Caputo

Yes I don’t think the visibility has changed much, you take right one or two big deals out and you will get the lumpiness for sure. I think the space has better visibility in the sense that there is a little bit less evangelization that's required and the need is more readily apparent to the customers that we're talking to. And so longer-term maybe what you say is correct, but I would say in the short-term it would not be.

Naser Iqbal - Salman & Partners

Okay. And just in terms of I guess geographically you had -- EMEA was strong in the quarter but just in terms of the global macro issues has any of the like Europe issues macro and the U.S. government shutdown. I mean have you seen any of that affecting your business in the past couple of months such that when these issues improve potentially next year you think like the business could be that much better?

Dave Caputo

So I am wondering when I say EMEA and I think maybe you were saying EMEA but you might have said Europe there but I just want to be clear that EMEA is not just Europe, Middle East and Africa are also important markets for us. Africa is exciting market for us offering some pretty unique opportunities, just little fixed line infrastructure but it’s going to be a completely mobile infrastructure across the continent. Price sensitive customers, so you really have to figure out how to sell bandwidth in different ways to prepaid markets, no bank accounts. So the core of their phone becoming their wallet and that the implications of that.

I think the opportunity for unique services matches our expertise well. But Europe did, the entire EMEA region did have its best quarter ever for us and we -- there is no question we increased our level of investment and the number of [indiscernible] on the street there and we are expecting results when we undertook that strategy at the beginning of the year and this is maybe the most tangible realization of that. I gave up picking macro trends and what they mean to Sandvine long time ago.

Naser Iqbal - Salman & Partners

Okay, great. And just a final question, just in terms of that the investments you’ve been making and I think you made a push couple of quarters ago that you would have better sales and investments in the regions where you saw the best opportunities. Do you think that in terms of your happy from your organizational infrastructure with the opportunities you have or do you think would there a need to be much of an increase if your success you have been having the 25% growth kind of like you need to increase your staff much from these levels?

Dave Caputo

I think as we continue to drill we will scale the opportunity particularly on the sales side of things. I think there is still some leverage we could get out of some other investments we have in the organization but we are just very naturally you scale your sales organization as you go.

Operator

Our next question comes from Maher Yaghi from Desjardins. Please go ahead.

Maher Yaghi - Desjardins Securities

I wanted to just to highlight the fact that you know it is very nice to see the diversification of revenue coming in and improving over the last year, and that’s certainly I think in my view improves the success of the company going forward.

And on that topic specifically, can you maybe highlight how your resellers are reacting to maybe your success in direct selling to customers? Do you feel that is there any -- is that jeopardizing your relationship with them? Can you just maybe talk a bit about how the sale process happens, and is there any issues with that?

Dave Caputo

It’s very much geographically driven and actually more than that it is customer driven, account driven; so we want customers to buy our product, in the most naturally way they would like to buy our product. And we certainly have large service providers, telephonic, and notably where they very much tell us which network equipment vendor, or which one of our partners they want to buy that equipment from, because they have frame agreements in place and that sort of thing. But what I will say is mostly true, but not universally true, that North America mostly the customers want to deal with us directly.

And in most of the rest of the world, particularly in countries where we don’t have a large presence, they want to deal with local partners, local resellers, people who speak their language, could spare Terry spare parts, can be feet on the street for where they need them to do what they need to do. And so we always try to figure out exactly how the customer would most like to buy our product, and to the extent that it’s a partner, we try to be extremely respectful to that partner’s relationship with that customer. And so I would say that we have – we are well aware of channel conflict that could occur, and I think we do a really good job at managing that. And if you look over the years, we leverage more and more business through those types of channel partners.

Maher Yaghi - Desjardins Securities

Correct. Can you remind us how gross margins are -- if you sell direct and through a reseller?

Dave Caputo

Actually we've never disclosed our gross margins at that level of detail. I think more generically you've seen our revenue through the reseller channel increase consistently over the last couple of years, 75% this past quarter and we've still been able to maintain our objective of 70% plus gross margins. Obviously the reseller needs to earn a margin for the service that they are providing in the deal. But other than that we haven’t disclosed that specifically in terms of those categories.

Maher Yaghi - Desjardins Securities

Just maybe your thoughts about this increased use of telecommunication companies in North America and you can highlight, maybe you can help us to see if how the trends are in Europe. But I certainly see in the companies, I look at in North America, a determination to offer complete access to clients across multiple platforms, wireless, also on the wired line side access to all the content on all the handsets and TV and internet. How, when a company goes about truth, I suspect that they want to have a network that would not be encumbered by all the data that would be consumed by the consumer if they’re offered this type of content. Are you -- is this really a nice opportunity for you, and that’s why we're seeing this wireless improvement in your operation?

Dave Caputo

Yes. I think you touched on two things that are good for us in the idea of sort of service creation selling them with a different way. One is family plans or the bundling considering revenue per account as opposed to revenue per device, or revenue per user, it becomes how do you think of a household as something that is somehow making a group decision and grouping quarters together via family plans and that sort of thing. I think that is very good trend for us and we have offerings in that area through our service creations suite of products.

The other thing, I think you are talking about is the concept of TV everywhere, particularly with the cable companies or folks who offer multichannel TV entertainment. The idea that they want to make it really easy for their customers to consume that content without creating unnecessary barriers like per device authentication.

Maher Yaghi - Desjardins Securities

Like Verizon's announcement yesterday for example.

Dave Caputo

And so that is something that we're absolutely have some traction on and we’re deploying actual solutions to make that happen. And we think that we're in a unique position to be able to identify that that is a user in the home accessing certain content within the service providers' control that we could make that considerably easier especially if they have carrier grade net. So carrier grade network address translation which makes it all look like it's coming from one IP address, we have ways being able to identify that it's a group of users behind that, and make that seamless authentication or sign on considerably easier. So it's absolutely phenomenon that's occurring in the market that we’re participating in.

Maher Yaghi - Desjardins Securities

And is this just North America or you would say it's also happening in other parts of the world as much or as fast as in North America?

Dave Caputo

It's certainly happening around the world, but I would say it is a dominant North American team right now.

Maher Yaghi - Desjardins Securities

And the success we’re getting is mainly from cable companies or also from wireline companies that you’re seeing right now?

Dave Caputo

Well certainly cable companies all have multi-channel TV entertainment but there are other types of companies that have it as well and are delivering it different ways via their portals stuff like that. Certainly it would be a regular topic of conversation with our cable company customers. But there are opportunities outside of that as well.

Operator

Thank you. I will now turn the call back to Rick Wadsworth for closing comments.

Rick Wadsworth

Scott and Dave thank you very much for your questions and for attending Sandvine's conference call. We look forward to be speaking with you again soon.

Operator

Thank you ladies and gentleman this concludes today's conference. Thank you for participating, you may now disconnect.

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