TEKELEC Q4 2009 Earnings Call Transcript

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 |  About: Tekelec (TKLC)
by: SA Transcripts

Operator

Good morning and welcome to Tekelec's 2009 fourth quarter 2009 earnings release call. (Operator's Instructions) It is now my pleasure to turn the call over to Mike Gallentine. You may begin.

Mike Gallentine

Thank you. Today I'm joined by Frank Plastina, President and Chief Executive Officer and Bill Everett Chief Financial Officer to Tekelec. Hopefully by now you have access to a copy of the slides of supplemental material posted on our website at tekelec.com. From there you can access the slides by selecting the 'about tekelec' tab and then from the drop down menu click on investor relations which will take you to the investor relations homepage. From that location you can access the press release issued earlier today.

As a reminder there will be a telephone replay of this conference available for seven days following the call. You may also listen to a rebroadcast on our website at any time during the next 90 days. All of this replay and rebroadcast information can be found on the investor relations section of Tekelec's website.

I would also remind you that during the course of this conference call we will make projections or other forward looking statements regarding future events or the future financial performance of the company. The actual events or results of the company may differ materially from these forward looking statements as a result of important risk factors including those discussed in our 2008and upcoming 2009 Forms 10-K, the first, second and third quarter 2009 Form 10-Q, the press release issued earlier today and other documents the company periodically files with the Securities and Exchange Commission. Also, unless explicitly noted, all financial results and metrics during the call today are non-GAAP results from continuing operations. Please see slides five through twelve in the supplemental material posted on our website for information reconciling GAAP to non-GAPP measures. We will also post the transcripts of this call on the investor section of our website.

With that said, I'd like to turn the call over to Frank Plastina. Frank?

Franco Plastina

Thanks Mike and good morning to everyone on the call. We were very pleased with the fourth quarter 2009 results. We had another exceptional quarter – specifically we generated orders of $162.4 million, up 1% year over year, revenue of $123.5 million up 3% year over year, gross margins of 69%, operating margins of 25% for the quarter and 23% for the full year and we had non-GAAP diluted EPS of $0.28 per share for the quarter and record diluted EPS of $1.04 for the year.

Our fourth quarter bookings exceeded our expectations and allowed us to show a 4% order growth in the second half of 2009 versus the same period a year ago. Our book to bill for the second half of 2009 was greater than one to one, resulting in a growing backlog. Further, a combined order input for out Eagle XG based applications, performance management and mobile messaging products grew by approximately 50% in 2009 versus the prior year.

Our full year revenue was up 2% over the prior year and our full year gross margin performance at 68% was also strong, despite the challenging economic and competitive environment. Our strategy of focusing on opportunities in wireless core networks has paid off nicely over the past few years. We have significantly expanded our gross margins from 61% in 2007 to 68% in 2009. Also, our full year operating margins in 2009 were 23% up from 13% in 2007.

Three years ago, our strategic plan set an objective of focusing our efforts on the controller of the network and migrating towards a software business model. Our financial results reflect the progress we have made in achieving this objective. This approach allows us to better leverage our base operating infrastructure as well as improve our ability to quickly develop applications that focus on the latest market opportunities. Our R&D efforts generated 118 patent applications and 27 issued patents last year.

Our portfolio is focused on efficiently and securely enabling connections for our IP and mobile data networks. Our solutions reside in what is referred to as the network control plane of communication networks. Given the complex ecosystem that is developing within the mobile internet, new descriptions such as the network management and personalization plan are also indicative of the role our solutions play. Specifically this layer houses contextual information, relevant to network performance, applications, devices and end users. With the deployment of LTE and the evolved packet core, mobile networks become even more complex. The network will need to support a mix of protocols including key signaling protocols such as diameter, SIP and SS7. Also, service providers will require intelligence in the signaling layer to ensure that each session is afforded the appropriate quality of service in this all IP world.

Specifically our solutions fit into three different functional areas of the mobile IP core. Session management, mobility management and network applications and databases. Within these functional areas the ongoing network evolution requires efficient solutions that replace proprietary hardware with software enabled platforms increasingly migrating towards cloud-based applications. To address this need, we are using the latest architecture and competing technologies in the industry such as application server and data clustering, as well as virtualization technology.

For example given the need to manage and monitor the explosive growth in mobile data traffic, our private cloud solution for performance management and monitoring is particularly attractive. This solution gives our customers flexibility and leveraging shared high performance applications and data generated by millions of users across the network in a cost effective way. As another example, our Eagle XG HLR router treats existing HLR's as a cloud, leveraging these existing resources through intelligent load balancing and providing geographic independence with greater scalability and security.

So far we have shared where we fit in the network and how we plan to leverage the latest in technology. Now let's explore examples of the three mobile IP core functions we outlined and some of the successes we have achieved to date.

Let's start with Session Management. The Eagle XG SIP signaling router supports quality of service, SIP proxy routing, SIP session load balancing and we are introducing BIC to SIP signaling to the portfolio. We booked four new Eagle XG orders during the fourth quarter, including two expansion orders from existing Eagle XG customers. Both expansions involved a new SIP signaling router application, providing BIC to SIP inter-working. BIC is one of the many protocols used by most of the worlds mobile service providers.

In one of these wins we simplified session management between the mobile network and the long distance network. Our application cost effectively completes the session without disrupting the billing. We won this deal against an expensive competing solution that involved the costly proposition of upgrading a mobile switching server, adding multiple media gateways and modifying the back office systems for billing.

Including the four Eagle XG wins during the quarter we have now booked a total of 13 Eagle XG orders with 11 customers. Nine of these customers are tier one service providers. We finished the year with over $30 million of Eagle XG orders in our backlog.

Our second functional area is mobility management. We have developed routing algorithms in both our Eagle and our Eagle XG products that drive efficiency through simplified network design and more efficient routing in the signaling layer. One win during the quarter was with a tier one customer in the U.S. for an Eagle XG to be used as a query tool for their HLR database. This application enables our customers service group to have ready access to their subscriber profile information to improve the customer experience.

Our third area of focus is network applications and databases. Number portability is an example of this functionality. We sold our Eagle XG SIP signaling router to handle number portability adjusted SIP routing to a second customer this quarter. We also continue to strengthen our number portability leadership and now have 97 operators in 33 countries. Our number portability's success in India continues. We participated in 10 bids for India number portability this year and won 8. The remaining bids were split between two other vendors.

Another example of our focus on network applications and databases is our Eagle XG database application, which includes the ability to support one billion devices in a single network. This need to scale to one billion devices is driven by the increasing number of data only devices such as data cards, net books, e books, navigation devices and USB modems all tapping into the network. Service providers realize that network routing data is located in multiple databases and a number of them are looking to consolidate these data silos.

Subscriber data management saves provisioning time and can drive CapEx and OpEx savings. Additionally, data and application inter-working can create new service revenue opportunities. Our solutions are focused on enabling services that can scale and that integrate real time network and business intelligence.

Turning to mobile messaging, we continue to see service provider business models utilizing machine to machine messaging capabilities. One of our new customers for the quarter is a U.S. based machine to machine service provider that selected our mobile messaging solution. The customer needed a machine to machine platform that enables devices like meters or sensors to send data over a public wireless network via SMS. Our mobile messaging application gateway allows the customer to offer new applications to businesses who need to monitor assets in multiple locations.

Our continued success in the market is evidenced by our new customer wins. We added a total of five new customers during the quarter. In total we won 19 new customers last year and have won 59 new customers over the last three years. We now have products installed in 107 countries around the world. We are especially pleased with our growth in the emerging markets such as India and Brazil. And the innovative insights that we gain from emerging market service providers. In these markets, creative service providers are in many instances surpassing developed world market players in bringing innovations to market. For example, it is likely that a mobile device will facilitate a consumers first web surfing or banking experience in these markets. This scenario stresses the importance of having a global perspective and a strong installed base in order to remain at the forefront of innovation.

The fact that we do business with most of the world's major service providers across 107 countries is a distinct competitive advantage for Tekelec. Bill will now provide more details of our Q4 results. Bill?

William H. Everett

Thanks Frank. I will provide further insight into our fourth quarter and full year results and provide our 2010 guidance. Please refer to slides five to twelve which provide both our GAAP and non-GAAP results for the quarter and full year for 2009 and 2008 along with the associated reconciliations. As Mike mentioned earlier, unless otherwise stated, all financial metrics presented today are on an non-GAAP basis from continuing operations.

Tekelec had a strong fourth quarter and full year 2009 as seen on slides 14 and 16. As Frank mentioned earlier, our revenue grew 3% for the quarter and 2% for the year, and our gross margins increased to 69% for the quarter and 68% for the full year. On an annual basis this represents a seven margin point improvement in gross margins since 2007. Our operating margins also continue to improve and reached 25% for the quarter and 23% for the full year.

These strong margins also led to exceptional EPS of $0.28 for the quarter and $1.04 for the full year. Which is a record performance on an annual basis. I will provide more detail on these metrics later in the call.

As shown on slide 17, we had strong order entry in the fourth quarter, generating $162.4 million in new orders which exceeded the high end of our previous guidance. We've benefited from higher than anticipated demand, particularly in North America. Some of these fourth quarter orders generated bulk shift business in the quarter which also helped us exceed our revenue target and increase our quarterly gross margins. This (inaudible) order entry generated a book to bill ratio of 1.3 for the quarter which helped increase our backlog.

In the second half of 2009, we generated orders of $257.2 million, up 4% from the second half of 2008. For the full year 2009 orders were $429.8 million up 5% compared to the full year of 2008. This performance was in an environment where year over year global telecom spending, excluding China was down approximately 12% based on Credit Suisse's most recent industry CapEx estimates. Further as we previously indicated our fourth quarter orders include four Eagle XG wins. These additional wins provide further market validation for the value provided by Tekelec's suite of next generation signaling applications.

Looking at revenues on slides 18 and 19, you will see that revenues for the fourth quarter 2009 were $123.5 million, up 3% compared to the fourth quarter of 2008. For the full year 2009 revenues were $469.3 million, up 2% compared to the full year of 2008. For the fourth quarter of 2009, total product revenues were $82.3 million, down 1% from the fourth quarter of last year. These product revenues exclude all warranty, installation, training and professional services associated with the individual product lines.

We had very strong year over year revenue growth in both signaling and performance management products for the fourth quarter. However, these quarterly increases were offset by a reduction in number portability products which as anticipated were significantly lower than the prior year.

Because of the nature of our current revenue recognition policy, we believe that full year information regarding product revenues is more meaningful than quarterly information, so the majority of our comments will focus on the full year amounts.

As shown on slide 19 full year 2009 total product revenues were $320.9 million, up $500,000 compared to the full year of 2008. The full year product revenue was driven by growth in performance management revenues which totaled $43.1 million, almost double the revenue level in 2008. Including the services associated with this product, total revenue for the year was $65.3 million. The increase in product revenues was partially offset by the declines in number portability in signaling revenues.

The growth in full year 2009 performance revenues reflects the progress we have made in gaining customer acceptance of our next generation carrier grade LINUX products. This was driven primarily by new software releases introduced during the year and our continued progress in delivering features and functionality required by our customers. Our next generation performance management solution is now installed in over 40 customers around the world.

The increase in signaling revenues is due primarily to a decline in signaling orders, particularly extension business in Western Europe. The decrease in number portability revenue in 2009 is attributable to the completion of several large deployments in Brazil and Mexico in 2008. India was the only major market to mandate number portability in 2009, and as Frank said earlier we were very successful by winning the number portability business, for eight of the ten service providers that we bid on.

The go live date for number portability has been deferred by the government for this year. And accordingly we expect these orders will be recognized as revenue in 2010 and beyond.

Full year 2009 warranty revenues were $85.3 million, up 16% compared to the same periods a year ago. This increase is due primarily to the growth in our installed base of customers globally and to the timing of our revenue recognition. Full year 2009 professional services revenues were $63.1 million down 5% compared to the full year 2008. The decline in professional services revenue is attributable primarily to lower signaling project revenues in 2009, compared to the prior year. Also in 2008 there were a number of particularly service intention projects recorded as revenue which did not recur in 2009.

Next I would like to comment on a geographic breakdown of revenues in our continued strong international performance.

Slides 20 through 22 provide a breakdown of revenues by region. Because of the nature of our revenue recognition we believe that our full year information regarding geographic distribution is more meaningful than quarterly information.

For the full year, revenue outside North America decreased to 57% of total revenues from 61% a year ago. This was due primarily to strength in our North American signaling business together with a decrease in CALA revenues, especially the CALA in number of portability revenues for reasons I discussed earlier.

We expect that international orders in revenues will continue to represent more than 50% of our consolidated business on an ongoing basis as we continue to expand and leverage our global footprint. Emerging markets continue to be an important part of our growth strategy. We define emerging markets to be low and middle income countries as classified by the World Bank. For the fourth quarter of 2009, 44% of our orders and 34% of our revenues came from emerging markets. For the full year, 49% of our orders and 40% of our revenues have come from emerging markets. India and Brazil two of the world's fastest growing economies, were the countries that contributed the most to emerging market orders this year.

Given ongoing wireless service provider consolidation, large wireless groups with global footprints have now become the norm and these do not necessarily coordinate with our historical regional presentation. Therefore, beginning with the first quarter of 2010 earnings, we will modify our geographical revenue disclosures to show only U.S. and international revenues.

On a related note for the fourth quarter we had two 10% customers. T-Mobile and Verizon each accounted for 15% of total revenues. For the full year we had three 10% customers. AT&T accounted for 14% of the total and Verizon and the Orange group each accounted for 10%.

Total operating expenses for the fourth quarter of 2009 were $54.3 million down 4% compared to the fourth quarter of last year. Full year total operating expenses were $211.6 million down 3% compared to the full year of 2008.

Our continued focus on cost control and strong gross margins generated fourth quarter operating margins of 25%, compared to 21% in the fourth quarter of 2008. For the full year operating margins were 23% compared to 20% for the prior year. Driven by these strong operating results, net income from continuing operations increased to $19.4 million or $0.28 per share for the diluted quarter of 2009. For the full year, net income from continuing operations increased to a record $70.4 million or $1.04 per diluted share with the earnings per share up 11% compared to the prior year.

Foreign currency fluctuations did not have a material impact on our earnings for the fourth quarter or full year of 2009. Our non-GAAP effective tax rate for the fourth quarter of 2009 was 34% compared to 28% in the fourth quarter of last year. This rate, which is consistent with our expectations is higher than the fourth quarter of last year, due primarily to lower levels of tax exempt interest income and higher pre-tax income in the fourth quarter of 2009.

We exited the fourth quarter with a very strong balance sheet, as shown on slide 25. We had cash and cash equivalents of $277.3 million at the end of the fourth quarter compared with $266.6 million at the end of the third quarter. The increase is attributable primarily to the $8 million of cash flow from operations generated in the fourth quarter and to a lesser extent the reduction of $5.6 million of auction rate securities during the fourth quarter.

In addition to our cash and cash equivalents we hold $92.9 million of auction rate securities and associated (inaudible) rights at year end, which we expect to turn to cash on June 30, 2010 under our settlement agreement with EBS.

Our working capital balance at the end of the fourth quarter was $441.3 million, up from $393.9 million at the end of the third quarter of 2009, due primarily to an increase in accounts receivables and a decrease in deferred revenue. At the end of 2009 our cash, cash equivalents and short term investments represented $5.49 per share.

For the full year 2009 we generated positive cash flows from continuing operations to $52.8 million compared to $106 million in 2008. The decrease in cash flows from the full year of 2008 is primarily attributable to changes in working capital and the $23.4 million in tax refunds received in 2008. Our lower accounts receivable and deferred revenue balances during the year are attributable primarily to our lower orders and associated billing activity for the year compared to 2009.

While there remains uncertainty in current economic conditions, based on improved visibility compared to last year, we are providing full year guidance for 2010. We believe that full year revenues will range between $470 million and $480 million and gross margins will be in the mid to high 60% range.

Finally we believe that our non-GAAP EPS will range between $1.10 and $1.15 per diluted share. We expect the range for our GAAP EPS will be between $0.90 and $0.95 per diluted share. In addition we expect our book to bill ratio will be approximately one to one for the year. We also expect a quarterly distribution of our orders and revenue to follow a similar pattern to 2009. Specifically we expect that orders will be lowest in the first quarter and strongest in the fourth quarter and that our revenues will be more evenly distributed than orders throughout the year.

Please refer to slide 26 for our current 2010 guidance. This guidance assumes that we do not adopt the new software revenue recognition rules during 2010 and we continue to account for all of our revenue in accordance with our current policy. We are evaluating early adoption of the new rules during 2010 potentially as early as the end of the first quarter, with retroactive application to the beginning of the year. We do not have an estimate of the impact of adoption in 2010 revenues or profitability at this time. If we do early adopt these rules we will update our guidance accordingly in conjunction with the appropriate earnings release.

I would now like to turn the call back to Frank for some closing comments. Frank?

Franco Plastina

Thanks Bill. In closing, 2009 was a challenging year for many players in the sector. However, we continue to post exceptional results and more importantly we continued to invest in our product portfolio. We added 19 new customers during the year and we now have products installed in 107 countries. I thank you for your time today and will now open up the call for any questions. Operator?

Question-and-Answer Session

Operator

(Operators Instructions) Your first question comes from the line of Brian Modoff with Deutsche Bank.

Brian Modoff - Deutsche Bank

Bill, it's been nice working with you and good luck with the retirement.

William H. Everett

Thank you Brian, I appreciate that.

Brian Modoff - Deutsche Bank

Let's discuss the secondary orders on XG with existing customers. Frank, can you give us a kind of rundown of the nature of these orders? Are these a situation where you've kind of moved from kind of some pilot trials into a more broad based deployment? Can you give us a little color around that first.

Franco Plastina

Yeah, actually that's the case Brian. In fact we are carrying commercial traffic in a few of the orders. We haven't recognized the revenue in any of them, but we have deployed some of those applications already and based on customer acceptance sometime in 2010 or perhaps even 2011 we'll start recognizing the revenue. But the important thing is we're getting some nice traction. We have a backlog now of over $30 million for Eagle XG and that represents 11 customers, nine tier one and it's essentially for us a very nice proof point that we've got a long way to go. We have 320 Eagle customers out there, you know we've only gotten started on Eagle XG and we're coming up the curve very quickly on all of the types of applications we can do on that platform. Right now the most – the application that's most in demand is the SIP signaling and routing.

Brian Modoff - Deutsche Bank

And then, you're kind of looking at that. Can you talk about – you had AT&T is an example, who petitioned the FCC to move away from PSTN, you've had carriers starting to look more at IT and move away from circuit switching. Can you talk about kind of the conversations you've had with these carriers around their desires and how you would propose they architect the networks as they move forward.

Franco Plastina

Absolutely. I mean, AT&T has really gone through a common core and it's been at least a couple of years since the conversation has really moved to how do they handle all of their traffic in a common core. We've been part of that discussion and we've been evolving all of their signaling to a common, all Tekelec at this point, signaling solution. Whether or not the PSTN (inaudible) that's actually pretty minor for us, because very little traffic is being generated – it's actually going down in some instances from a wireline perspective. All of the complexities, all of the challenges AT&T is facing today is coming from all the smart phones that are hitting the wireless network, all of the devices. That's really wrapping up a lot of signaling traffic and that's where all of our time is being spent.

Brian Modoff - Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Amir Rozwadowski with Barclays Capital.

Amir Rozwadowski - Barclays Capital

Thank you, and good morning. And Bill I'd like to echo these comments, it's certainly been a pleasure to work with you and all the best of luck in terms of your retirement.

William H. Everett

Thank you. I'll probably say something here at the end of the conversation but I appreciate that very much Amir.

Amir Rozwadowski - Barclays Capital

Frank, it seems as though if we think about sort of the upside to this quarter in terms of sales and bookings, it seems as though we've got some increased book ship business as well as capacity purchases, are fueling some of that upside. I was wondering if you could talk a bit on sort of where utilization rates are on the networks. We've seen robust traffic growth, particularly in messaging and it seems as though carriers are purchasing in order to support that growth, but perhaps a little bit of color in terms of utilization would be great.

Franco Plastina

They are certainly still in the mode of adding capacity as they go, there is very little being spent in anticipated capacity. Which is why, you know our visibility is actually quite near term on the book ship. We had a nice pleasant upside in the fourth quarter that really drove the upside on the orders and the revenue, and really that was just capacity that was needed and particularly in this case our North American customers added more signaling extensions in the quarter. I think that just shows that the base demand is still very healthy, and they're still dribbling out CapEx dollars very carefully and it's nice to see that obviously signaling is one of the purchases that they have to make because the demand is there.

Amir Rozwadowski - Barclays Capital

Okay, that's helpful. And in looking at your guidance for next year, is there a built in expectation that you see similar patterns or increased capacity purchases or book ship? I'm just trying to understand how you're sort of looking at it in terms of business coming from bookings versus book ship in 2010.

Franco Plastina

The mix we've left largely the same as it was, you know. The 2010 or $470-$480 million target reflects our current conversations and how our current customers think they're going to spend their CapEx budget. That will obviously be adjusted depending on base demand but right now there's enough visibility for us that we can at least give you that annual number. Last year we didn't have that visibility. So I think that's obviously a positive sign versus last year and right now that $470-$480 million literally reflects the conversations that we've had with all of our major customers.

William H. Everett

Amir, if you're asking is there a fundamental change in the function relative to that, I don't think that we have a fundamentally different view, you know, it represents a consistent component of our business. Some quarters it's higher than others. It was particularly high in Q4 but we're not assuming for example that we have to make some sort of fundamental change in our book ship business to arrive at our numbers for next year.

Amir Rozwadowski - Barclays Capital

Okay, that's very helpful. And then lastly, if I may Frank you talk about improving visibility and certainly last quarter when we spoke there were some concerns about particular regions not seeing any signs of recovery just yet, Europe was an area that you mentioned. I was wondering if you could talk a bit on sort of where we stand today – some of those more challenged regions, have they improved as we stand today, or how should we think about things from that perspective?

Franco Plastina

I think the emerging markets remain strong, in particular our position in India and Brazil, remain strong. Western Europe remains weak and that's still an area where there is very little CapEx - anticipatory CapEx spending is probably the best way to put it. It's really day to day maintenance and you know, we saw some of our book ship in 2009 to Western Europe go down versus 2008 – that was more than compensated by t eh strength in North America. I think it really comes down to – not necessarily a regional play but where are particular service provider is in their evolution path what is their smart phone penetration, what services are they doing on their network. How much penetration do they have, have they reached the saturation point and that's really how we look at it, as opposed to any kind of particular regional tendencies. The emerging market players are still growing because they are still adding a lot of subscribers – that's a very different dynamic than Western Europe for example.

Amir Rozwadowski - Barclays Capital

Great, thank you very much for the incremental color.

Operator

Your next question comes from the line of Michael Genovese with Soleil Securities.

Michael Genovese - Soleil Securities

Great thanks a lot and congratulations on the strong numbers, guys. My first question is – you've had Alcatel loosen and Ericsson a couple of dates North American LTE wins, and listening to them talk about their package core and one of the elements being the mobility management element controlling mobility signaling. Can you just clear up any confusion for us and talk about how you could potentially be either complementary or competitive with what they are planning to do with these LTE networks, really what the LTE opportunity is?

Franco Plastina

Yeah, it's actually quite complimentary. What's lacking right now in a lot of the standards is how does traffic move from one world to the next. So there's quite a lot of mediation kind of activity – that's probably the best way to describe it that has to be done as you shift protocols from network to network. Blastcore (ph) for example and ATCA (ph) we had won essentially capability with one of our North American customers to do that 3G to LTE connection so that if a call or a session is initiated in one particular environment it can be terminated in another.

That's where the standards are weakest- they're not as defined, and it's good for us. We love that, we come in, we provide an inexpensive way to do a lot of that conductivity at the signaling layer without having to put in a lot of upgrades and do a lot of changes to their MME's or their other packet core elements. The other thing that we mentioned today in the prepared remarks is you need diameter capability as part of the signaling protocol suite of capabilities. So in addition to SIP and SS7 you've got to have a diameter connection. You know our opportunities to route all those messages, route all the things that go from one environment to the next and it's very complimentary to what the pure of all packet core players are doing.

Michael Genovese - Soleil Securities

That's very helpful. And then just secondly on margins. 69% gross margins in the quarter and 25% operating margins is the best that you've seen in many years in the company. Just talk a little bit more about trends you see in those margins going forward and is there any potential to sustain these numbers over a period of time?

Franco Plastina

I'm sorry, Michael, you cut off every second word, I didn't catch the end of your question.

Michael Genovese - Soleil Securities

I apologize. Just on the margins, the very high margins for the quarter can you comment on – just speak a little bit more on your expectations for the margins going forward and I'll just leave it at that?

Franco Plastina

Yeah, I think our expectations for this year, I think we've rolled into the guidance at the mid to high 60's. We believe that's still where we are with our business model. Until we become a full – what I call a full-fledged software company where all of our products are on off the shelf carrier grade hardware, I don't think we're going to move out of that range. Obviously you have the competitive pressures driving it down but you have some of the improvements on the software elements bringing them back up. So we're quite comfortable with that mid to high 60's range at least this year and for the foreseeable future.

Michael Genovese - Soleil Securities

And on the operating margin like, you know is the guidance still 20 and why wouldn't 25 be achievable?

Franco Plastina

It is achievable. It all depends on where we think we need to make investments in the R&D line in particular. You know from a sales perspective we're pretty well covered in every region we may have a few areas in particular where we may want to invest. We are actually looking in particular at some opportunities in both China and Japan which we have not addressed in the past, so we may make some sales and marketing investments in those markets. But the R&D line to the extent that we think we've got some opportunities out there that we can organically address with a few more dollars in R&D, we're willing to invest it in and that's why we thing the 20% range is still the long range target.

Michael Genovese - Soleil Securities

Great, thanks a lot.

Operator

Your next question comes from the line of George Notter with Jefferies.

George Notter - Jefferies & Co.

Hi thanks very much guys and let me echo my congratulations to Bill on the retirement. That's fantastic. I wanted to ask about India – obviously there's been some delay in the timing of the 3G license awards there and you mentioned all the success you're having in terms of LNP customer wins. I guess I'm just wondering if you're seeing some push out in the timing there. I know you're involved in the signaling piece there as well, but what are your thoughts there? Thanks.

Franco Plastina

We're seeing the live date push out George, but that doesn't really impact our revenue because the revenue is based on customer acceptances which is a contractual term, so we still expect to book most – the vast majority of revenues this year and next. So 12-24 month time frame is still what we're looking at to book all of the orders that we have in the backlog now for India number portability.

George Notter - Jefferies & Co.

Got it thanks.

Operator

Your next question comes from the line of Blair King with Avondale Partners.

Blair King – Avondale Partners

Thanks guys for taking the question. I’ll follow up on just a couple of that were recently asked. But with respect to the India local number portability opportunity, could you shed some light on how that transitions to those margins through the quarter. And then also as India moves into a 3G realm off of their current 2-2.5G platforms, how does that ultimately address maybe some margin expensing opportunities if there are in India?

Franco Plastina

I think to answer the second part of your question first. The initial department in India, as we’ve said in past quarters, is more hardware intensive. We’re getting essentially our eagle base, our install base of signaling, platforms is being put in to the networks today to do number portability initially. But also some basic signaling and handling of the signaling traffic.

As the networks continue to grow and as more complex kind of traffic needs to be handled, we expect the growth in India to be very, very healthy. That’s why we’ve made the upfront investment. And typically, historically our pattern has been once we enter a customer, the initial hardware intensive order is usually lower margin. But over time we tend to nicely increase the gross margins on those particular deals.

Blair King – Avondale Partners

All right.

William H. Everett

Frank, one thing I would add to that is that the advent that 3G is still the best of seven, uses us to (inaudible) protocol. So it’s more traffic over the same network, as opposed to having to reinvest in new infrastructure.

Franco Plastina

Yeah. And we also have the 2G, the 3G roaming traffic and handoffs which is all signaling done. It benefit signaling lay routing.

Blair King – Avondale Partners

Now, just one more last question on that. Could the carriers typically, will they wait until they have that option take place before they start to place orders for that transition, or did they prepare your networks line (inaudible) to that transition so that you’re seeing orders happen already?

Franco Plastina

It all depends on how they deploy a 3G. Sometimes they do city by city, sometimes they do a 20 city roll out because they have a broader set of services that they want to provide. Really all depends on the roll out of the access piece. But certainly as soon as they start rolling out 3G they start planning out what the core looks like. And then the orders follow from there.

Blair King – Avondale Partners

Great, thank you. That’s helpful.

Operator

Your next question comes from the line of Catherine Trebnick with Avian Securities.

Catherine Trebnick – Avian Securities

Good morning, nice quarter, guys. My question is on the Eagle XG, on the sub signaling piece of it. Typically in the (inaudible) who are you competing against? And could you give me a little color on that? Thank you.

William H. Everett

Yeah, a couple of things that we’ve done in the past. I’ll give you some specifics of the wins that we’ve had with XG on the 16 router. In one instance the customer was trying to do things with an Edge SPC. And the SPC just could not scale and there was really no other way to do it other than put a whole bunch of Edge SPC boxes in the network. And we handled it at the core.

In the second instance, and what I said in the prepared remarks, there was a break to (inaudible) quantitative issue. And essentially it was the long distance network that was (inaudible) based and a mobile core that was BIC based and the only other way other than using our 16 router was to upgrade the switching. They had a bunch of Gateways. And actually tap into some of the billing capabilities. Which was very, very messy. So we showed this particular customer a way to just keep it at the signaling layer, use our sub signaling router and easily hand off traffic between their mobile core and their long distance network.

Catherine Trebnick – Avian Securities

Okay. And then my other question is, would you say the pipeline in 2010 is more related to the LTE and operators getting prepared for migration to LTE or what would you say some of the pipelines coming from in this case?

Franco Plastina

I would say it’s a combination. I mean there’s not a lot of emerging market activity in LTE right now. A lot of them are still just keeping up with growth in 2 and 2.5G. And in fact, in places like India haven’t even moved to 3G yet. The LTE preparations are really US driven. A little bit in Western Europe. But right now we see the US leading the way in those discussions. We’re obviously involved there because of our extensive installed base here. And if you look at the pipeline overall, our pipeline is healthier this year than it was last year in our non-Eagle products. So that’s a very good sign.

One think I would like to reiterate our Eagle XG plus performance management plus mobile messaging which we consider all our next gen growth products, that order impute was up 50%, as I said in the script, year over year. So it went up 50% from ’08 to ’09.

Catherine Trebnick – Avian Securities

All right. Thank you very much.

Operator

Your next question comes from the line of Larry Harris with C.L. King.

Larry Harris - C.L. King

Yeah. Good morning. Congratulations on the results for the quarter. And Bill, good luck with your retirement. Thank you. I wanted to talk a bit more about India. I think the number portability opportunity previously been sized as around 50 or 75 million, perhaps over several years. Did you think that that opportunity now that you’ve won 8 out of the 10 bids had increased? And also, I get the sense that you’re probably less concerned about margins in India then perhaps you were previously. Is that a correct assumption?

William H. Everett

I think that’s a correct assumption. I think if you look at our target for the year in 2010, we haven’t moved away from historical ranges, and we’re comfortable with that. And obviously 2010 includes some revenue from India number portability. I think the important way to look India number portability is it’s built up a beach head for us in all of those customers. In a few of those customers they did not have a separate signaling lair before they had to make this number portability decision. So we actually went in there and showed them the business case and having a separate signaling lair and the savings coming from it. And they decided to move to our solution for number portability. But at the same time start driving a lot of the core signaling traffic through our equipment as well.

They also wanted to make sure that all of this was evolvable to 3G. They are planning ahead in the sense of they don’t just want to do number portability. They didn’t just want to handle today’s signally traffic. They wanted to make sure that there was a core and a set of products that could evolve to that next generation. And certainly our portfolio met those needs.

Larry Harris - C.L. King

So do you think that (inaudible) opportunity because there’s going to be installing this equipment and you won more carriers, that is larger than what you might have seen through your six months ago?

William H. Everett

I think this is just going to evolve towards a sizable signaling business, much like we have in other countries where we’ve been there a long time. And that’s the way to look at it. We think the India business now that we’ve got that very solid starting point is going to continue to morph and they’re going to have extension business and all the other things that our US customers have over time. And I think it’s probably this year or next that India will clearly be our second largest single country market after the US.

Franco Plastina

Yeah, Larry, without regard to even the advent of 3G, just from a subscriber basis alone, there’s roughly 525 million mobile subscribers in India today. That number’s projected to go up to over 800 million in the next several years. So just through subscriber growth alone there should be a significant amount of additional signaling traffic.

William H. Everett

Yeah. And right now all we’re doing is signaling to most of these customers. We do have a couple customers from monitoring and our other products. But obviously we have the up-sell opportunity to go deeper into each one of these accounts that we’ve won with the rest of our portfolio.

Larry Harris - C.L. King

All right. Sounds positive. Thank you.

Operator

Your final question for today comes from the line of Todd Kaufman with Raymond James.

Todd Kaufman - Raymond James

Thanks very much. Just want to squeeze in, you called out a couple of times on this call that your growth product orders were up, I think, more than 50% in the quarter. What percent of the revenue in the quarter did those growth products represent?

William H. Everett

That was for the year, Todd. So it’s full year they were up 50% in 2009 versus 2008. And during the quarter what we break out now is performance management is the only one of those products that’s getting broken out.

Franco Plastina

Right. And that was up about 50% as you can see from the analyst slides on a year over year basis.

Todd Kaufman - Raymond James

That’s an order number. But what percent of revenue –

William H. Everett

Yeah. In terms of revenue, the only number we break out separately is our performance management. And that product revenue basically doubled year over year.

Todd Kaufman - Raymond James

One other follow up, kind of, interrelated to that question then, in your prepared remarks early on you said that you had a strong order impute quarter. But some – you called out or cited that some of those orders already shipped in the fourth quarter of ’09 and it looks like the yearend backlog is down, I don’t know, 8%-9%. Was that an unusual that you had shipment against orders in the quarter, you called it out?

Mike Gallentine

No. I mean, the reason we talked about book ship business, because there’s always questions about it on the call. But it tends to be higher margin business and we exceeded our margin expectations in Q4. And one of the reasons for that was we had more book ship business than we had anticipated going into the quarter. And as Frank said earlier, we have the least visibility to those orders of all of our orders. So that’s the reason we mention it specifically. But every quarter we have book ship business. It’s not unusual and that, in fact, for the year, on a year over year basis our book ship business is almost identical year to year. Although in the 2009 fourth quarter was higher than the 2008 fourth quarter.

So we’re trying to give you a perspective on this because it tends to be the revenue that we have the least amount of visibility to and it tends to be among the highest margin business.

Todd Kaufman - Raymond James

Thank you very much and good luck, Bill.

William H. Everett

Yeah. Thanks, Todd.

Operator

At this time there are no further questions. I would like to turn the call back over to Frank Plastina and Bill Everett for closing remarks.

William H. Everett

Thanks very much. I appreciate all the comments today from everyone regarding my retirement. I’d like to just make a couple of brief comments. As you know I’ve been the CFO of Tekelec for five years and I’m really proud of what we’ve accomplished and the way we’ve run the company.

I’ll be 60 next fall and I think the job of being a public company CFO in these days is really a 24/7 kind of obligation and is extremely demanding. So I think it’s the appropriate time for me to step down and pass the baton to someone a little bit younger than I am.

I want to thank Frank and the board, in particular, for the opportunity over the last five years. And I really look forward to working with Tekelec in (inaudible) capacity that Frank has asked me to work with them on. So I’ll assist with the transition for our next CFO and I’m certainly proud to be associated with the company as we move forward. So thank you very much.

Franco Plastina

Thanks, Bill. And also it’s been a distinct pleasure working with you. I’m glad I’ll still be able to bother you once in awhile with phone calls and you can give me some advice as we move forward after your retirement. But I want to give you my heartfelt best wishes as you move on and become a full time husband, father and grandfather. I think it’s wonderful and once again, it’s been pleasure over the last four year.

I’d like to thank everybody for joining us this morning on the call and we’ll see you all next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s Tekelec 2009 fourth quarter earnings release conference call. You may now disconnect.

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