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Executives

Maryvonne Tubb - IR

Pardeep Kohli - President and CEO

Terry Hungle - CFO

Analysts

Richard Valera - Needham and Company

Eric Ghernati - Bank of America Merrill Lynch

Scott Schmitz - Morgan Stanley

Vijay Bhagavath - Deutsche Bank

Mavenir Systems (MVNR) Q4 2013 Earnings Conference Call February 20, 2014 5:00 PM ET

Operator

Good afternoon. My name is Leticia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mavenir Q4 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question-and-answer session. (Operator Instructions). Thank you.

I will now turn the call over to Ms. Maryvonne Tubb. You may begin your conference ma'am.

Maryvonne Tubb

Good afternoon everyone, and thank you for joining us on our conference call to discuss Mavenir Systems' results for the year and fourth quarter ended December 31, 2013. This call is being broadcast live over the web, and can be accessed in the Investor Relations section of the Mavenir's website, at www.mavenir.com.

This afternoon, Mavenir Systems' issued a press release announcing these financial results, a copy of which can be accessed on our website or the SEC's EDGAR website. With me on today's call are Pardip Kohli, Mavenir Systems' President and Chief Executive Officer; and Terry Hungle, Mavenir Systems' Chief Financial Officer.

We would like to remind you, that during the course of the conference call, Mavenir Systems' management may make forward-looking statements, including statements regarding the company's future financial operating results, future market conditions and plans and objectives of management for future operations, and the company's future product offerings. These forward-looking statements are not historical facts, but are rather based on Mavenir Systems' current expectations and beliefs, and are based on information currently available to us.

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements. Including, but not limited to, those factors contained in the Risk Factors section of our prospectus filed with the SEC on November 7, 2013, and our annual report on Form 10-K, that we will file for the year ended December 31, 2013. In light of Regulation FD, I'd advise you its Mavenir Systems' policy not to comment on our financial guidance, other than in public communication.

Please note, that we will discuss non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating loss, non-GAAP net loss, and non-GAAP loss per share. Specifically, stock based compensation, depreciation and amortization and foreign exchange gains and losses are excluded from these calculations. We have provided reconciliations of these non-GAAP measures in our earnings release.

I will now turn the call over to Mavenir Systems' President and CEO, Pardip Kohli. Pardip?

Pardeep Kohli

Thank you, Maryvonne and thank you to everyone participating today in our fourth quarter and year end 2013 earnings call. We appreciate having this opportunity to speak with you, and provide an update on our results and share some highlights in our plan for 2014.

I am really very pleased to report fourth quarter revenue of $27.1 million, slightly above the top end of our guidance, setting a new quarterly revenue record for Mavenir Systems. This reflects a 62% increase over the fourth quarter of 2012. We also reported annual revenue of 2013 of $101.3 million, which also sets an annual record for Mavenir Systems and reflects a 37% increase over the fiscal year of 2012.

Operating leverage has been a strong focus for the company. We are very pleased to report that in the fourth quarter, we narrowed our non-GAAP operating loss to nearly breakeven at a loss of $0.1 million, around $100,000.

While I am very pleased with the numbers, I am actually more pleased with the quality of how we got to our numbers. As you know, AT&T, T-Mobile, U.S. and Deutsche Telekom have been our customers for long time. They were still 10% plus customers last year. We also announced Vodafone, Tele2 and Hutch as our customers. But in addition, we acquired a number of other new customers that we have not announced yet.

These customers together, have over 800 million subscribers. We have contracts with them for over five to 10 years. The pricing and terms and conditions in the contracts assume, that if we keep performing well, we will get to serve all the subscribers these customers have. This offers us good opportunities going forward. So I think the customer base we have is a great asset for us, and gives us a good opportunity to sell in more products we have into our customer base.

In 2013, our next generation VoLTE and RCS business was just under $70 million. That represented roughly 80% growth over 2012 for our next generation business. As you know, Mavenir is capitalizing on two trends, the first one is our customers migrating to 4G LTE, and migrating all their applications like voice and messaging on to LTE. The second one is the transformation of the networks to become similar to cloud based deployment, as all the top players have done it.

Mavenir is a pure play 4G LTE vendor, focused on enabling mobile network transformation. We have built a broad portfolio of 4G LTE products and solutions, that to-date, we have sold to the early adopters. These early adopters have already begun the transformation process, and in many case have already deployed our solution.

Throughout 2013, we observed that the adoption of 4G LTE is more broad-based than it was in 2012, and more importantly is clearly accelerating. The evolution of mobile networks to the cloud was also an important business driver in 2013. The wireless industry has galvanized to an enabling technology called Network Function Virtualization or NFV, which will define how the next generation networks are built. Mavenir anticipated this strength, when we started the company in 2005-2006 timeframe, and we are well positioned in this market. We have complete portfolio of our 25 products, based on fully virtualized software platform that we have built over number of years, and designed to meet the mobile operators requirements for scale and reliability, as they build their new networks.

As an example, the publication Fierce Wireless awarded Mavenir top honors in the Mobile Core category for our virtualized IMS platform, in November last year. We have 10 customers that have selected our virtualized VoLTE and RCS solutions. In part, because we offer the best combination of speed, agility and cost efficiencies that they require from their next generation technology suppliers.

We have seen trends lately, that more and more customers want to buy their own hardware and buy software and services from us. This will help us in improving margins, and scaling without significantly increasing working capital.

Cloud-based architecture is also easier to implement, and that will help us in scaling our business without requiring the same number of people we would have required otherwise, to serve our customers globally.

We continue to invest and develop new products, to drive future growth. We introduced our Session Border Controller to the market in Q4 last year. We already have four customers in Europe. We have a tier-1 customer in the U.S., which has already deployed our product in the live network and is carrying live traffic.

We are also investing in key enabling products, that help mobile operators better monetize the investment they are making with us, by expanding the breadth of their 4G LTE services. We developed a WebRTC Gateway, that enables mobile services to work seamlessly on PCs and tablets and non-cellular devices.

We can already claim a tier-1 mobile operator in U.S. as our customer for WebRTC Gateway, and we have entered multiple trials in 2013. Just a few days ago, we announced a completion of a successful trial with Croatian Telekom, which is part of Deutsche Telekom and is a center of excellence for their virtualization technology. We deployed our WebRTC Gateway in their virtualized pilot network, called TeraStream, to enable new and innovative voice and video services.

So overall, I am quite pleased with our progress in 2013. We have successfully grown our business, based on our strategic investments we have made.

Now I will turn my attention to the year ahead, and discuss the trends and opportunities as we see in the market for this year, and share with you, some of the key highlights for our go forward plan.

We believe 2014 will be the year that Voice-over-LTE will finally arrive. 4G LTE enables devices; the increase in the rate at which they are increasing is forcing the operators to move more and more traffic away from 2G, 3G networks to 4G network. The sooner the operators launch the Voice-over-LTE and move the traffic off the legacy network on to spectrally efficient 4G LTE, the sooner they can reallocate spectrum for new services. Therefore we believe that there is a business imperative for operators to launch VoLTE. Operators have been rapidly building their LTE coverage, but the build out takes time. When they reach the point when they believe that they can provide the same quality of service for their voice traffic, as they currently have on their [indiscernible] 2G, 3G network, they will launch VoLTE.

While there have already been a handful of VoLTE launches in select markets, we expect a first wave of key launches by tier-1 operators in the U.S. and European markets, starting 2014. The VoLTE device ecosystem is maturing. Several major device manufacturers have already delivered commercial grade VoLTE services or VoLTE devices to their operators, that are testing on pilot networks, and this testing has been going on for over a year now.

For example, Fierce Wireless recently reported, that the majority of the AT&T devices will be VoLTE ready by the second half of 2014, and the VoLTE will be market serviced in 2015. These positive market indicators bode very well for our business. We have been diligently working with our customers during the last three years, to build their next-generation networks, during the service intensive phase of the deployment. As our customers launch service, we expect our deployments to shift towards capacity expansions, and we anticipate our revenue mix to turn towards higher margin software. Over time, we anticipate the shift will continue and contribute -- and help us to achieve profitability.

As the industry approaches the first wave of VoLTE launches in the U.S. and Europe, we are seeing a significant increase of activity in other markets, such as Latin America, Middle East and Asia Pacific, with our first mover advantage in a growing roster of tier-1 customers, we are well positioned to enter these markets as a market leader. As we win new business, we will continue to invest in these markets by establishing local pre-sales and post-sales offices.

Let me now share how we are expanding our product portfolio and addressable market in 2014. We recently announced our Virtualized Evolved Packet Core or EPC offering, and we will begin the customer trials in the second quarter, as mobile operators move to the cloud, Mavenir can provide a complete mobile core network solution, including EPC and IMS core and all the application servers, on a common software platform.

Our EPC architecture is uniquely designed to provide data efficiencies and scale than the competitor solutions, and it more optimally utilizes the operator's cloud based infrastructure. Even though operator's cloud is based on general purpose hardware purchased at commodity price points, hardware costs can still be significant for networks built-to-scale. We believe our efficient software architecture can result in reduction of total cost of ownership of up to 30%, due to the hardware CapEx savings.

Cisco's virtual networking index on global mobile data growth forecasts 61% compound annual growth over the next four years. As illustrated by AT&T's domain 2.0 initiative and Deutsche Telekom's [indiscernible] project, carriers are looking at virtualization, as a way to reduce the overall cost of implementing and operating their networks.

Another differentiating feature of our EPC solution is our ability to integrate our special modem controller, with our EPC. This optimizes the overall LTE architecture for Voice-over-LTE, by localizing the voice media path, thus reducing backhaul and improving latency. Our approach is evolutionary and has the potential to define how LTE architectures are designed to carry voice traffic.

We also recently announced our Diameter Routing solution called DRA, that we have commercially deployed in two western European mobile operator networks, to enable LTE roaming. Along with SBC, DRA is a key component needed to connect operator networks together and provide interoperable 4G LTE voice and data services. So overall, we can offer the complete end-to-end mobile core network applications in virtual environment.

In summary, we are quite optimistic about the year ahead. We expect the two key market trends, that I highlighted earlier, 4G LTE adaptation and virtualization to be key growth drivers for us, in 2014. With the addition of EPC on our fully virtualized software platform, we have significantly increased our addressable market and are well positioned for growth in the year ahead.

Now let me hand the call over to Terry Hungle, our CFO. Terry?

Terry Hungle

Thanks Pardip. Before I get started, and while Maryvonne pointed this out during her introductory remarks, I would like to remind you, that unless otherwise noted, we are discussing all numbers except revenue, on a non-GAAP basis. Non-GAAP numbers exclude stock-based compensation, depreciation and amortization, as well as foreign exchange gains or losses. To that extent, I would direct you to our earnings press release, which contains a detailed reconciliation of GAAP to non-GAAP measures.

Now on to the financial results for the quarter, as well as those for the fiscal year 2013. Revenue in the fourth quarter was $27.1 million, an increase of 62% over Q4 of 2012. This brings our total revenue for 2013 to $101.3 million, an increase of 37% over 2012. As Pardip noted, our fourth quarter performance was slightly above the high end of the guidance we provided in our last earnings release.

As reflected in our revenue results and our customer wins, we are seeing strong momentum in our next generation business. Revenue from next generation products was $20.4 million in the fourth quarter, an increase of 140% over Q4 of 2012, and $69.7 million for the full year 2013, an increase of 82% over the full year of 2012. Revenue from our next generation products represented 69% of our total revenue in 2013.

In terms of product groups, Voice-over-LTE is driving significant growth in our voice and video product group, with revenue growing by 89% over the fourth quarter of 2012, and 47% over the full year 2012. Rich communications and converged messaging is driving growth in our enhanced messaging product group, with revenue growing by 50% over the fourth quarter of 2012, and 33% over the full year 2012. This proportionately stronger growth in voice and video products, is a result of the increased momentum in the VoLTE network build out, which is well underway in the market.

In terms of the split between software products revenue and maintenance revenue, revenue from software products was $79.3 million, representing 78% of our total revenue and an increase of 51% over the full year 2012. Maintenance revenue was $22 million, an increase of 2% over 2012 and as I previously explained, we expect that maintenance revenues will increase, as operators launch their networks and the initial warranty periods expire.

From a geographic perspective, we are experiencing significant growth in Europe, Middle East and Africa region, otherwise called EMEA. Of our 15 customer wins in 2013, 11 were from the EMEA region. Revenue from this region grew by 247% over the fourth quarter of 2012, and by 87% over the full year 2012. The EMEA revenue represents 38% of our total revenues in 2013, and that's up from 28% in 2012.

Our business in the Americas region remained soft. During 2013, we added few customer wins and were awarded two major extensions. Revenue from the Americas region grew by 33% over the fourth quarter of 2012 and 29% over the full year of 2012. The Americas region revenue represents 48% of our total revenues in 2013, just down slightly from the 51% than it was in 2012.

While we added two customer wins in the Asia-Pacific region, revenue from the region declined by 8%, largely due to declining investment by customers in their 2G, 3G networks. Investments of 4G deployments in the Asia-Pacific region have lagged investments in the Americas and the EMEA region.

Overall, the majority of our customers are still in the network build out phase, as they work towards VoLTE and Rich Communication Services launches, with many other launches planned for 2014.

During this phase, the revenue mix is weighted towards hardware and for fiscal services. Whereas the software contribution is light, as relatively few software licenses are being purchased. In the longer term, we expect this mix to change, as operators get close to their service launches and need to expand capacity. However in the short term, our gross profit margin will be subject to volatilities pending on the mixture of network build outs and capacity expansions.

So with that said, our non-GAAP gross profit margin in the fourth quarter was 59%, a 10 percentage point increase from the 49% we reported in the third quarter of 2013. This is primarily driven by the major expansions in the Americas that I mentioned earlier. These expansions resulted in a higher proportion of software and services being sold versus hardware. In the fourth quarter, revenue from software and services represented over 60% of our total revenue versus the 36% recorded in the third quarter of 2013. For the total year 2013, non-GAAP gross profit margin was 56.2%.

While the accelerating adoption of 4G and with the expanding product portfolio, we are growing the company. During 2013, we increased our headcount from 647 people to 786 people, and in doing so, established several local operation centers in both Western and Eastern European markets, to support deployment of our Voice-over-LTE and Rich Communication Solutions. This investment is negatively impacting our maintenance, non-GAAP gross profit margins, which we also then expect to improve, as we begin to grow maintenance revenues.

Non-GAAP operating expenses of $16.1 million in the fourth quarter were higher than Q4 2012 by 18%. With 62% revenue growth in the fourth quarter of 2013 versus 2012, our operating expense leverage has clearly improved considerably.

We continue to benefit from cost improvements achieved by our offshore research and development activity, as the value of the Indian rupee has declined versus the U.S. dollar. In Q4, we had increased investments in direct selling activity, as we began to focus on markets, that are making VoLTE and Rich Communication decisions; such as Eastern Europe and Latin America. General and administrative expenses are $0.3 million or $300,000, lower than those reported in Q3 2013. We believe these expenses to be in appropriate level to support the business.

Our non-GAAP operating loss for the quarter was essentially breakeven, showing a loss of $0.1 million or approximately $100,000. This loss has narrowed considerably from the $3.4 million that we recorded in 2012. As discussed previously, revenue mix has driven this improvement; the revenue, which resulted in higher non-GAAP gross profit margin, partially offset by higher operating expenses. Non-GAAP net loss at $1.6 million, improved $3 million in the quarter from the corresponding quarter of last year.

Higher interest rate expenses on new loans that we took in 2012 and mid-2013 lessened the improvements compared to the non-GAAP operating loss, previously discussed.

Now I will provide a view to the outlook for the first quarter of 2014, and also how we see our total revenues unfolding in 2014. Revenue for the first quarter of 2014 is expected to be in the range of $26 million to $27.5 million. This will represent an increase of 18% to 23% over the first quarter of 2013. We expect non-GAAP gross margin of 48% to 51%, reflecting a higher amount of revenue coming from the network build out in our revenue mix.

We expect non-GAAP operating loss for the first quarter of 2014 to be in the range of $5 million to $3.5 million. This non-GAAP operating loss is a result of lower non-GAAP gross profit margin percentage, coupled with higher non-GAAP operating expenses. The higher non-GAAP operating expenses are again the result of investments we are making in research and development to introduce new products, such as the EPC and the SBC.

As noted above, we are also investing in sales and marketing, as we begin to address new markets, that are beginning to open up, such as Eastern Europe and Latin America.

We are also in discussions to modify the loan agreements with one of our major lenders. We expect the results to be a substantial reduction in our financing costs, as well as extending the maturity of the loans with no material change in the amount of liquidity the company currently enjoys. While we cannot be assured that these modifications will be completed, we expect to reach a conclusion during the quarter.

The transaction would result in a non-cash write-off of [indiscernible] rolling costs, increasing the non-GAAP net loss by $2 million. If and when completed, we will file the necessary Form 8-K with the SEC to provide the necessary details.

We expect the weighted average share count for the quarter to be approximately $23.4 million, and as a result of that, we are estimating non-GAAP loss per share to be in the range of $0.34 loss to $0.28 loss. If I exclude the write-off of the unamortized loan costs, the non-GAAP loss per share is expected to be in the range of a loss of $0.26 to a loss of $0.19 per share.

For total 2014, we see revenue increasing to between $123 million to $125 million, this would represent annual growth of 21% to 24% over 2013. We expect to see full year non-GAAP gross profit margin increasing to between 57% and 59% versus the 56.2% achieved in 2013. We expect this increase in non-GAAP gross profit margin to be the result of software license capacity expansion and the impact of selling our own software-based solutions, such as the Session Border Controller.

To support future growth and take advantage of the new market opportunities, we are increasing our rate of investment in research and development and in sales and marketing throughout 2014. We expect the non-GAAP operating profit to be at a breakeven level for 2014.

With that said, I would like to turn the call back to Pardip for his concluding comments.

Pardeep Kohli

Thanks Terry. As I mentioned earlier, we anticipate that we will see the first wave of Voice-over-LTE launches this year, first in U.S. then in Europe. These are both markets, where we are well positioned and have a growing roster of blue chip tier-1 customers, so we are particularly excited about being at the epicenter of these critical developments as the year progresses.

As we begin this year, business momentum remains strong. We have a strong competitive position in the market. As Terry outlined in our outlook, we anticipate strong year-over-year revenue growth and improving gross margins, as our customers move closer to launching next generation 4G LTE services.

Terry and I are now happy to answer any questions. Operator, would you please open the call for questions?

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions). And your first question comes from the line of Rich Valera.

Richard Valera - Needham and Company

Hello. Good afternoon gentlemen. Pardip, first time I have heard you discuss the EPC product. I wonder if you can talk about how you view that product being differentiated from other products out there, and what are your thoughts in terms of when that might actually generate revenue? I am assuming may be not much revenue expected in 2014 from that product? Thank you.

Pardeep Kohli

Yes. I think as you probably have seen in the market, they move to take all the products to virtualization. So we definitely see this that, whatever wins people had in the past, its like a clean slate now and its open for everybody, so that's one thing. And we always wanted to have an end-to-end solution, which is optimized. So in some ways, with our product, with EPC, now we can offer a complete core solution. So if you exclude RAN and exclude OSS/PSS, we now have a complete solution, and we can offer a fully integrated, better optimized solution that other competition can offer, because we built all these products on the same platform. So you can think of this way right, that over time, we added a couple of products every year, but now we have it all in the same platform, everything, and its very optimized, very integrated and can be much easier to manage.

And other thing I'd point out was that, we are integrating our Session Border Controller with the EPC. So today for example, in a voice session, packets go from EPC and then they go hit an SBC and they are two different platforms; and if I can get copy from one box to another, even though those boxes in the middle are not doing anything. So we have actually optimized it, so that, even though you are running it in a virtual environment, the amount of hardware you need to run it, is going to be [indiscernible] less in our solutions, as compared to the alternative solutions from other vendors.

We are going to start trials actually very soon, and I certainly hope that we will have customers this year, and some revenue this year as well.

Richard Valera - Needham and Company

Great. That's helpful color. And Terry, with respect to the rest of the year, beyond Q1, is there any color you could give us in terms of the revenue profile, how you think that might play out, if any seasonality you'd expect? And also, if there is any color on gross margins beyond Q1, where it looks like we are taking a dip on that kind of higher hardware mix?

Terry Hungle

Yeah. So let me start with the revenue question first. As I think, we have kind of book-ended it for you, Rich, we have got Q1 in the range $26 million to $27.5 million, calling -- obviously the year at 123 to 125, so we are comfortable on that. Obviously the rate of revenue has to increase, as we go through the rest of the quarters. Q3 is always a tough one for us, essentially because we have so much of our revenue now coming from Europe, and so that slows a little bit. So we might see Q2 being very strong, Q2 may be flattish to that, and then we will finish out the year. But Q3 is typically tough, and largely because of the amount of revenue that happens from a European marketplace.

As it relates to gross margins, again, we call on the year, book-ended it and that Q1 is low, because of the amount of network build out revenue we are going to take. Again, [indiscernible] every hardware services versus not a lot of software licenses. We see more licenses coming, strictly towards -- as we move through the year. Particularly, as networks launch and the carriers need to install the capacity necessary to launch. So I would expect that -- I am comfortable with the range of margin we are provided, 57% to 59%, so you can expect that its going to be increasing across the period.

Richard Valera - Needham and Company

That's great. One more if I could. With respect to your -- the restructuring of your node. Can you give us any sense of what kind of rate improvement you might see on that, or that's not something you're ready to talk about at this point?

Terry Hungle

Yeah. I think it’s a little early to do that, Rich. I think we need to get down the path and conclude the discussions. I mean, the key piece I wanted to signal here is one, we are doing it. Two, when we do it, it has an impact on our net loss, and I don't want anyone to be surprised by that. So we will lay it out, when we got everything negotiated and be able to share that with you.

Operator

Thank you. And your next question comes from the line of Tal Liani.

Eric Ghernati - Bank of America Merrill Lynch

Yes. Hi gentlemen. This is Eric Ghernati for Tal. Thank you. Pardip, on the -- [indiscernible] question on the package core. I just am curious, because there is a lot of announcements going in into Mobile World Congress from the likes of Cisco and Alcatel-Lucent [indiscernible] as well. I am just curious on what your thoughts are, because the other customers -- probably customers are giving you feedback on this and just wanted to know, what they are seeing in relation to other products that they have seen right now?

Pardeep Kohli

That's a good question. Yeah, I was thinking about how would I answer this and maybe give you a good example. So the whole idea of virtualization is, that you can run multiple applications on one common hardware. So the reason other companies are doing it, they have these legacy products, build different platforms on different hierarchy and legacy I guess, the way they had done IMS Core and EPC and all that. So you can always take, like for example EPC and run one application, for example, which you may be running Oracle database. The other one could be running [indiscernible], the third one could be [indiscernible]. But they are all running on the same hardware. But that's not the most optimal architecture, because all you are really doing is, taking the software which is not really same, but running it on the same hardware, and calling it virtual. So they are doing more as a product by product.

What are doing is, a solution virtual; that means at band, we want to make a voice call, it has to run virtual. What's the most optimal way of doing it, provided I can look at what all the pieces it goes through, and I can optimize it. So what we are betting is, that if you take all our software and all software for somebody else, the amount of hardware which customer will have to use, will be much lesser with our solution, than with others. Software is software, right? So it all depends on, even if the prices are same, all things equal for the software, what's the cost of the hardware it takes to run. And we believe, that with our software, there will be 30% at least, even at the low end, as compared to the other vendors. And as the scale increases, the amount of hardware which the operator will have to buy, will be much less with our solution, as compared with the competition.

Eric Ghernati - Bank of America Merrill Lynch

So just to clarify, this is with your Packet Core and SBC combined?

Pardeep Kohli

Actually, what we are offering is a -- as I said, we do offer a complete solution, so we already had IMS Core voice servers in the past. We announced Session Border Control

last year. As I said, we already have live deployments of that one. What we are doing, is enhancing our Session Border Controller, to include what Packet Core does, and deploy it in a virtual environment. So now with this solution, you do not need to process the same packet five times, because it goes from a -- I guess a serving gateway to a packet gateway and then to Session Border Controller. We actually optimize it, so that it uses less computer power as an integrated solution.

So nearly all the different applications we have, like voice and RCS, you could run them as independent, and they will be less optimal, versus if you run it as integrated, using a common database and quite easy to make and all that, it will use less CPU power. So it’s a complete solution, not only these two products.

Eric Ghernati - Bank of America Merrill Lynch

And do you feel like carriers are ready to look beyond the traditional vendors that have typically supply than the packet core?

Pardeep Kohli

Well in a way, everything is opening up. So there, I would classify the carriers in two categories, the people who look at best-of-breed and they want to pick and choose best product in each category, and in which case, they may stay with their incumbents, because that's what they are used to and comfortable with. The other people who are looking for the total cost of ownership, and what does it take to move my 10 million subscribers, 20 million subscribers from 2G, 3G, to 4G LTE, so I think we will do better with the second category, because for them, the cost of ownership, the flexibility, how you integrate these things. If you pick best of breed, then you have -- the job of integrating falls on the carrier, right? Versus some other guys are saying, okay, I will give you three HV boxes, you give me all the software, you just make it work. We will send one or two engineers, we will make it all work and go back. So we would succeed better with those types of customers, and more and more of those and the one who can afford to have best of breed and put it all together.

Eric Ghernati - Bank of America Merrill Lynch

Thank you. And Terry, just one question for you. I see lot of moving parts on the gross margin line. Can you help us what you mean, I heard what you said about the trajectory, but maybe what kind of exit rate for Q4 2014, both from software products and maintenance gross margin if you don't mind. Specifically maintenance gross margin would be very helpful. Thank you.

Terry Hungle

So I think maintenance gross margins are going to be not where we want to be, as we exit this year. We won't see the improvements in the gross margin line, till we head into 2015. Again that has to do with initial warranty periods expiring, and getting into selling the next levels of maintenance and support that goes with that. So that's going to take a little bit of effort to get there. So I am not anticipating a major improvement in that as we go through this year. Some, but not major.

So I think you had a second question which was, on the overall gross margin level --

Eric Ghernati - Bank of America Merrill Lynch

Product line.

Terry Hungle

Product margin. So again, because what we are anticipating in the year is, where we will have more expansions in the selling software, more software licenses towards the end of the year, we can anticipate that the gross margins will increase, as we leave the year. So I am a little reluctant to tell you -- to give you an exit rate, because that might signify, that that's a sustainable rate, and the fact that our business is still going to be a combination of new network buildouts, and these expansions, we are still going to be a little bit volatile. So we expect it to be stronger at the end of the year, but as we go into the next year, I don't know what that looks like yet. So I can't comment on it.

Eric Ghernati - Bank of America Merrill Lynch

That's very helpful. Thank you.

Operator

Thank you. And your next question comes from the line of Scott Schmitz.

Scott Schmitz - Morgan Stanley

Hi guys. Thanks for taking the question. I just wanted to go back on the guidance and kind of your visibility into the back half of the year. Can you help us, I know Pardip, you talked about the first wave of deployments. Is there any way to quantify what that means, or what do you see in the back half of the year that gives you confidence that we start to roll this out?

Pardeep Kohli

Well, as you know, we get orders long before we get revenues. So we are seeing orders for expansions, and that gives us enough confidence that -- as we grow more and [indiscernible] launch. So carriers have plans to launch this year and they want to start building capacity to prepare for next year, and we are receiving orders for the expansion as well, so that gives us confidence in what we are projecting.

Scott Schmitz - Morgan Stanley

I think one of the things that carriers were waiting for was, make sure they have the perfect or the right LTE coverage. So are we past that phase, are they comfortable with the LTE radio network, and that we are ready to deploy their services, or are we still waiting for a better network on the LTE said?

Pardeep Kohli

I think carriers have been testing, as I said like in U.S., carriers are much farther along than in Europe. So in our test markets, we are seeing comparable rates that you can actually -- the quality of service is actually quite better than what they get in 2G, 3G, and that's what we are seeing in the past with Metro as well, when they had launched the quality of service of LTE, Voice-over-LTE call was much better than the CDMA network. The call, call set of times, how quickly the call goes through the codec, high definition voice versus 3G codec.

So they are the -- I mean, there are many things which come along with VoLTE, not just a simple voice call. And depending upon the operators and the CD you look at, they probably may not all want to launch everywhere -- some operator may want to do national, some operator may want to do city by city. So if they feel more comfortable doing it in [indiscernible], they may start here and then go to the next city and the next city. So the software actually does support, helps them to do it on a more selective basis as well. And as they improve the coverage in different cities, then they can bring those cities on board as well.

Scott Schmitz - Morgan Stanley

That's great.

Operator

Thank you. (Operator Instructions). Your next question comes from the line of Brian Modoff.

Vijay Bhagavath - Deutsche Bank

Hi guys. Its Vijay Bhagavath on behalf of Brian. Hi Pardip.

Pardeep Kohli

Hello. Looks like Scott got cut off. But Scott, we will get back to you. Hi Vijay, how are you?

Vijay Bhagavath - Deutsche Bank

Doing fine. The question for you is, on your gross margin guidance, for Q1 and then how it staircases up to the full year gross margin guidance? Help us qualitatively understand, what's your conviction behind an improving gross margin guidance for the full year versus Q1? Is it more of a product mix issue? Help us understand the gross margin outlook, Q1 and the full year?

Terry Hungle

Its Terry. Let me try to add some initial color here. I think as we described in the -- as we are going through our introductory comments here, we continue to have good visibility, probably. We believe we have backlog visibility of at least six months worth of business. So we understand what's happening in Q1 and into Q2, we have some pretty good visibility. We understand what the order fall is for that and what's anticipated. So very good conviction there.

I think what gives us confidence in the back half of the year is understanding how our customers are planning to launch, when they are planning to launch, and then what they will need to do to achieve launch, in terms of the subscriber capacity. So that's the discussions we have on a weekly, daily, monthly basis with our customers in terms of where they are at and how they are going. Do we have perfect visibility to it Vijay? Clearly, we don't, because we don't have those orders in-house. Our order [indiscernible]. But we have a very good sense of what our customers are planning to do it, how they are planning to do it, and that's what gives us the conviction that, that's where our margins will drive to. So very comfortable I think in where we are it with the first half, and we see that business straight away, and then we are working on closing the gaps for the rest of the year.

Vijay Bhagavath - Deutsche Bank

Just to conclude, are there any sets of used cases or specific products that you plan to ramp through the rest of the year versus Q1? I am trying to understand the delta between the full year margin guidance, Q1, what might be the set of products that would ramp in the rest of the year, versus Q1? Thanks.

Pardeep Kohli

So Vijay, I think its all as Terry mentioned, it's basically going beyond the initial stage to a capacity expansion stages, right. So like for example, pick any product, telecalling application server. If you are build out only for 2 million subs, but now you are going to go built out for 10 million subs, then you will have to buy more -- in some cases, they already bought the hardware, they only need the software. In some of the cases, they may buy both hardware and software. So it’s a mix of all of this, and as I said, we have entered the year with a good backlog, and we know how -- I guess in Q1, we are getting orders. So we kind of have a good sense of the next two quarters, on how this is going to play out, and also based on our feedback on the customer, on when they are going to start build out for the next year, we are projecting our revenue guidance for this year -- for the fourth quarter as well.

Terry Hungle

So if I can just add just a little bit there, maybe it will help Vijay. Let me contrast it for a minute with what happened in 2013. Particularly around the Session Border Controller product, right? In 2013, we resold that product. So when we [indiscernible] the product, we made very little margin on it etcetera. Then we have Session Border Controller revenues in our plant. Its our product, its our software solution, and it definitely has higher gross margins than we would have seen in 2013. So there is an example of some of the products which -- the investment we are making for the research and development and our [indiscernible] products to market, that help improve our profitability.

Vijay Bhagavath - Deutsche Bank

Good thank you. Its very helpful.

Operator

Thank you. And your next question comes from the line of Tal Liani.

Eric Ghernati - Bank of America Merrill Lynch

Hi this is Eric again, just a follow-up please. Pardip, if you were to look at by Q4 this year, do you think -- how do you think the mix between your voice and video versus enhanced messaging as a percent revenue will turn out to be?

Pardeep Kohli

I think voice and video is actually growing at a faster pace, because that is, as you know, a number of operators definitely believe in moving voice at least. In messaging, they may be debating how fast to move and already is available there as well. But on the voice side, its not moving fast. So we are seeing more acceleration on the voice side.

Eric Ghernati - Bank of America Merrill Lynch

Thank you.

Operator

And there are no more questions from the phone lines.

Pardeep Kohli

Okay. Thank you very much.

Terry Hungle

Thank you all.

Operator

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

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