RadiSys' CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: RadiSys Corporation (RSYS)

RadiSys Corporation (NASDAQ:RSYS)

Q1 2014 Earnings Conference Call

May 1, 2014 05:00 p.m. ET

Executives

Allen Muhich – CFO

Brian Bronson – President and CEO

Analysts

Rich Valera – Needham & Company

David Duley – Steelhead Securities

J.D. Pagett – ALMAK Capital

Tom Diffely – D.A. Davidson

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Radisys’ First Quarter Earnings Conference Call with Brian Bronson, Radisys’ President and Chief Executive Officer; and Allen Muhich, Radisys’ Chief Financial Officer.

As a reminder, this call is being recorded. Later, we will conduct a question-and-answer session. (Operator Instructions) Mr. Muhich, you may begin.

Allen Muhich

Good afternoon everyone and thanks for joining us on the call today. During today’s call, we will provide both an overview of first quarter operational strategic and financial highlights as well as an update on our expectations for the balance of 2014. We will then open up the call for questions.

Before I turn it over to Brian, let me caution you that any statements made regarding the company’s future expectations constitute forward-looking statements which involve a number of risks and uncertainties. We caution you not to place undue reliance on these statements.

Factors that could cause actual results to differ materially from those in the forward-looking statements are discussed in today’s earnings release and in our SEC filings, most recently in our annual report on Form 10-K for the year ended December 31, 2013.

All information provided in this call is as of today. Radisys undertakes no duty to update any forward-looking statement to conform to actual results or changes in the company’s expectations. In addition, during the call, we will discuss some non-GAAP measures and have provided a GAAP to non-GAAP reconciliation in today’s earnings release.

With that, I’ll now turn the call over to Brian.

Brian Bronson

Thanks Allen, and good afternoon, everyone. Overall, our first quarter financial results met the expectations we set back in February and are continuing to drive towards our objective of returning to profitability, starting in the second half of 2014.

I have mentioned to you previously that much of the progress we have made in key customer trials in our improved operational performance and our ability to cost effectively deliver technology, our customer’s value has been masked by the revenue challenges we have highlighted over the last year and a half.

While this largely remains true within our first quarter results, there are some early indications of our progress in transforming Radisys. In deferred revenue, which is a leading indicator of our progress in shaping next generation products, our balance is up sequentially from year-end by over 30% and is mainly driven by MRF product shipments in support of voice-over-LTE trials and early commercial deployments.

Our $70 million in first quarter operating expense is more than 30% lower than a couple of years ago and is at lowest level at eight years. That being said, we continue to invest over $8 million a quarter in R&D. We believe this level of investment combined with a more robust and targeted product strategy enables the delivery of the product road map needed to drive the expected growth in our high margin businesses.

We also remain on track with our contract manufacturing transition which when complete enable savings of $6 million a year or rough three gross margin points on expected revenue levels. None of this benefit is in our Q1 actuals or Q2 guidance given the expected late summer to early fall completion.

I have been very vocal about the notion that nobody cut their way to prosperity and so I am very proud of the team to have fortitude to make this happen, whilst still satisfying customer needs and ensuring we continue to invest in our best opportunities. Finally, we closed a very significant MRF design win in Q1 that once in peak production is expected to represent incremental revenue of [about] $10 million a year.

As I mentioned, these are just a few examples of the way that you are beginning to see the tangible results of our progress that when combined with the focus we are placing in three key strategic areas which will enable improved and sustainable financial results.

Let me provide you a brief update on what we are doing in each of these areas. First, in our T-Series systems and network appliance product lines, which include carrier grade 40-gig carrier grade platforms, network appliances that enable deep packet inspection and other low end applications as well as our yet to be publicly disclosed next-generation products that fully leverage our software expertise. For competitive reasons, I can’t provide more specific detail on these new products today. However, the early discussion we are having with large global carriers as well as telecom equipment manufacturers are the most meaningful I have seen in my time at Radisys. These early discussions need to turn into real wins but once closed have the potential to build meaningful shareholder value beginning in mid 2015 and into 2016 given standard telecom development to deployment cycles.

Second, is our media processing capabilities, which include our MRF products that enable voice-over-LTE, conferencing, transcoding, and video. We are in over 20 different trials with carriers and telecom equipment manufacturers around the globe and as I mentioned earlier, we have recently won a significant voice-over-LTE opportunity that unfortunately given our agreement with our partner are not able to more fully disclose at this time. What I can tell you though is that we expect this win again to meaningfully ramp in your higher margin revenue in the later part of ’15 and as this new award is incremental to the 20 plus trials we have previously messaged.

Additionally, we are pursuing similar sized opportunities with large partners that are in the very early stages and I am cautiously optimistic we will also lead to wins and revenue later in 2015 and 2016.

Our MRF platform, at the heart of these opportunities which now includes our recently announced carrier-grade media processing blade, delivers the industry’s highest capacity of media processing platform that is essential for the processing of both voice and video heavy content through the LTE wireless networks.

Our intent is to leverage the flexible platform to enable our customers that they deploy a myriad of applications that require media processing. These applications run the gamut from traditional audio conferencing to voice-over-LTE, WebRTC, video and transcoding to name a few.

Our common MRF again from a full platform as well as a virtualized (inaudible) only is positioned well to meet these market requirements, and we are optimistic about its potential to again drive meaningful shareholder value. And finally our LTE solutions in professional service pipeline of opportunities for small cells intelligent gateways, and load balancing applications remains robust and resulted in Q1 bookings growth of nearly 40% year-on-year.

Not only have we been able to successfully leverage our core technology into small cells, we have also had good success in adjacent markets that leverage our broad LTE expertise in areas such as aerospace and defense and load balancing.

Many of you have already known about during the quarter we issued a little over 6.5 million shares raising nearly $21 million in cash. The main driver for the equity raise was to ensure we demonstrate to our customers and these new exciting markets that we can “handle” taking on their next generation virtualized platform or take over all of their MRF responsibilities.

Allen and I had over 35 meetings with potential investors and the reception to our turnaround story was fantastic.

With that let me turn the call over to Allen, who will speak more about our first quarter financial results as well as projections for the second quarter and for the full year 2014.

Allen Muhich

Thanks, Brian. First quarter revenue was $43.8 million and our non-GAAP loss was $0.14 per share. Revenue came in modestly better than the mid-point of our expectations as we experienced in modest uptake in ATCA demand. The sequential reduction in COMe Rackmount Server revenue came in as expected and results from our previous strategic decisions.

Additionally and as expected our software solutions revenue decreased sequentially due to the timing of voice-over LTE deployments and continued softness in audio conferencing demand.

Our non-GAAP loss per share of $0.14 was also within the range of expectations and included $1.4 million of the $2 million vendor credit against defective raw material we indicated would be recognized in Q1. We now expect the balance to be recognized in the second quarter.

Turning to customer mix, first quarter top five customers accounted for 55% of total revenue and is in line with our recent history. The top five customers were Arrow, Danaher, NEC, Nokia and Philips Healthcare. Three customers Nokia, Philips and NEC each accounted for more than 10% of first quarter revenue.

Q1 non-GAAP gross margin was approximately 30% representing about 4 percentage point increase when compared to the fourth quarter. As I indicated earlier, our first quarter gross margin included a $1.4 million credit and you may recall the fourth quarter included a $2 million non-cash excess inventory charge, normalized for these two one-time items gross margin decreased sequentially by approximately 3 percentage points and results primarily from the sequential decrease in our higher margin software solutions revenue.

First quarter non-GAAP R&D and SG&A expense of $17 million represents a nearly $2 million sequential quarterly reduction and marks an eight year low spending for us as we have completed most of the cost reduction initiatives launched earlier in 2013.

Additionally, in the first quarter, we incurred $1.3 million in restructuring and other charges that are associated with restructuring activities in the United States as well as reserves associated with the closure of our Penang development and operations support facility.

Switching over to the balance sheet, first quarter accounts receivable decreased $3.8 million from the fourth quarter to $37.5 million reflecting Q1’s lower revenue levels. First quarter inventory decreased sequentially by $1.5 million to $23.9 million and nearly $24 million our inventory for company as manufacturing is fully outsourced remains higher than required and therefore as we complete our contract manufacturing transition and burn through the required transfer buffers, we expect inventory to come down into the mid to high teens generating $5 plus million in cash flow throughout the balance of 2014. Cash increased by $16.8 million during the quarter to end at $42.3 million.

As Brian mentioned previously, during the quarter we successfully completed an equity offering resulting in net proceeds of nearly $21 million. Excluding the offering proceeds we consumed $3.8 million in cash which is aligned with the expectations we set back in February. Included in this cash consumption was $1.2 million in cash payments for severance and other restructuring related items.

Moving over to the second quarter outlook, we expect Q2 revenue between $44 million and $50 million which at the mid-point reflects the sequential increase in software solutions revenue that results in the traction we are seeing in both MRF and Trillium software deployment.

Q2 non-GAAP gross margin is expected to increase sequentially to between 32% to 33% of sales and results from the increased overall revenue levels combined with increased shipments in higher Software-Solutions products.

Q2 non-GAAP R&D and SG&A expenses are expected to decrease by approximately $500,000 to $16.5 million when compared to the first quarter. We expect second quarter non-GAAP EPS to range from a loss of $0.11 to a profit of $0.01 per share.

Our first quarter results and second quarter expectations are not meaningfully different than what we expected at the beginning of the year. That said, we are seeing some unfavorable product mix inside of our platforms business as well as continuing softness in our audio conferencing deployment that will somewhat offset expected second half’s faulty revenue growth.

Taken together for 2014 ATCA revenue is now expected to be down 5% to 10% year-on-year and COMe Rackmount Server revenue is expected to be better than our original expectations and decrease by only about 10% year-on-year. We also expect a 50% annual reduction in low margin other legacy hardware revenue. In software solutions, we anticipate revenue to increase by approximately 10% plus or minus when compared to 2013. To be clear, our long term, 20% software solutions growth expectation remains unchanged and frankly our new voice over LTE opportunities are progressing better than expected. That said, audio conferencing demand remained soft and has adversely impacting our 2014 software solutions revenue growth expectations.

So for the net (inaudible) we expect 2014 revenue to remain unchanged that between $200 million and $220 million, albeit with a more unfavorable product mix. Operating expenses will approximate 65 million which at the low end of the range I provided at the beginning of the year.

Taken together, along with the completion of our contract manufacturing transition that is expected to result in 6 million of annualized savings beginning in the third quarter and are now approximately 36 million shares outstanding, we expect 2014 non-GAAP EPS between $0.10 and $0.20 per share.

As we exit 2014, given the completion of our cost reduction activities and expect the revenue mix shift towards the higher margin software solution products, we anticipate our non-GAAP break even to come down to approximately $45 million in revenue per quarter.

With that I will hand the call back over to Brian.

Brian Bronson

Thanks Allen. I am encouraged by the expected second quarter’s sequential revenue growth which when combined with our significantly reduced cost structure puts us in an excellent position to return to profitability beginning in the third quarter of this year.

Additionally, we continue to make great progress against our longer term strategic objectives. I believe the tangible progress we are making in small cells, voice-over-LTE and in our next generation software Rich enabled platforms continue to position us well to drive long term improvements in our financial model. All this said, this remains a 2015 and beyond story with improving financial results along the way, so I do appreciate your ongoing trust in fortitude as we complete the transformation.

With that let me open up the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Rich Valera from Needham & Company. Your line is open.

Rich Valera – Needham & Company

Thank you. Just wanted to discuss your visibility into the back half, pretty significant ramp you need to hit the full year revenue number and even deeper ramp in hit the profit number, just one of you could give us any color on what underlies that visibility, particularly may be on the video conferencing side, the audio conferencing side which sounds it has been soft, so do you expecting any rebound there to hit that sort of back half ramp.

Brian Bronson

Good question. Let me actually start from the bottoms. So from an expense prospective from a manufacture and transfer prospective, we are meeting if not exceeding expectations. So you can think about the ramp albeit in earnings growth that feels pretty good to me. Now will (inaudible) back now to platforms, overall I feel pretty good about the current projections. Now as Allen referenced, the margin mix is something that will continue to pay attention to but -- so a bit more on the blade side, a bit more in certain markets, something little less at the full system level, I do expect some uptick in the second half and I think we need to be cautious and we are (inaudible) it now that it could be mixed conversation, not necessarily a revenue conversation.

In MRF it’s a combination of and as you can see this in the deferred revenue balance growing, the deferred revenue balance will continue to grow and some of that growth has baken the second half, it has nothing to do with going off and generating demand it’s more to do with hitting our R&D milestones and getting acceptance with our customers. In one particular bit customer example, we need to see a little bit more payment history before we can report that revenue. So the good news is we are actually seeing POs for that particular customer coming in sooner than I would have expected. Next round of POs I would have thought originally when it comes into the fall and we just proceed with those a couple of weeks ago. So, MRF largely driven off with the couple of customers, and that's the storyline there and audio conferencing underneath on the “older stuff”. I think we have hit the bottom. For us to get back from sort of 10% growth in MRF this year back to the 20 it is going to have to come from a couple of key accounts that we don’t have POs for it and don’t have a forecast from yet and these are traditional folks like AT&T, (inaudible), Level 3 again those customers haven’t change. So, we could see it but if we don’t see it, that's why we are recalling it now and we are going to see a couple of million dollars low in the second half from a MRF revenue prospective.

And then on the software solutions, we have got the bookings for it, needs to roll into the revenue stream so first half relative to our plan, which is on track, I cannot see any reason why the second half wouldn’t follow the same trend in the areas that we are talking about Rich. Longer one but hopefully that's helpful.

Rich Valera – Needham & Company

So is the prior 5 to 10 million MRF targets still active, it sounds like that is? I think you mentioned last quarter you were targeting 5 to 10 million of MRF revenue?

Brian Bronson

Yes, absolutely.

Rich Valera – Needham & Company

And then the, just the follow up on the audio conferencing, it sounds like to get to the 10% which is kind of a new the bogie for software solutions, you need essentially new POs that are not currently, you have to go out and win, I just want to understand the color around that, what kind of visibility do you have that they may want to up their spending to something more like historical level as we move into back half?

Brian Bronson

Relatively limited although, what we have done. So we have done a lot to go back Q3 of the last year when, I mean I get little walloped by these surprises here. The team has done a really nice job of plugging much deeper into these accounts and again there is only four or five of them, Rich as you know the matter, so understanding their poor consumption, pricing trends, (inaudible) and usage going and so we are plugged in much better that way which is giving a early view on when the may need more reports but again we are short of POs at this point of time. So we have got better visibility. We can predict when many consumptions or what we are trying to do here until we have got better visibility on real POs, we are going to call it mix change here inside of the MRF business. That been said though I mean let’s not mix what is the audio conferencing business most likely decline somewhere between 15% and 20% this year versus last, which suggest that and into our point that voice-over-LTE and related business is going from virtually nothing to tripling 34 x what our expectations were at the beginning last year. So it’s overall, its going really-really nice but you (inaudible) its ten points of growth and it needs to be 20 and I do believe, we just had a strategic plan review for the business a couple of weeks ago. We do believe that audio conferencing continues to be a business for us but it’s probably going to be over the time as 10 million to 15 million it’s not going to be a grower but it’s not going to zero either.

Rich Valera - Needham & Company

Right understood and just wanted to get your updated thoughts on cash generation for the balance of the year, it sounds like you expect to get some from inventory but what is overall thoughts on cash generation for the rest of the question.

Allen Muhich

Good question Rich. So from a cash generation standpoint, we expect the balance of the year to be somewhere in that, I call it, $10 million to $15 million, we consumed as I indicated in our prepared remarks we consumed about $4 million in the first quarter, we expect to consume a couple of million dollars here in the second quarter and then generates again somewhere between 10 and 15 million and the back half of the year, that comes roughly half from inventory from half form improved performance coming from other revenue growth in the cost of sales reductions and the expense reduction that we talked about.

Rich Valera - Needham & Company

Okay. Thank you.

Brian Bronson

Thanks, Rich.

Operator

Your next question comes from the line of David Duley with Steelhead Securities. Your line is open.

David Duley - Steelhead Securities

Thanks for taking my question. You mentioned this third revenue balance I think it’s up like $2.8 million sequentially, what exactly does that mean. Is that the revenue value or product that you installed but has yet to be for revenue or is that your cost or could you just explain a little bit more and deeply about it.

Allen Muhich

Yes, sure. David. Specifically it is the revenue value of what we have shift but are not yet able to recognize for one reason or another and in that particular situation, it has to do with some pretty long abnormal payment terms that when you go through the accounting guidance prevents us from recognizing the revenue in this particular timeframe. Most of that as Brian indicated earlier. We anticipate recognizing towards the back half of this year and again give us that visibility into the ramp that we have talked about.

David Duley - Steelhead Securities

And it is not complete profit calculations to it, is that bearing one of the balance sheet items or?

Allen Muhich

Yes, it is.

David Duley - Steelhead Securities

And what is that balance in the March quarter.

Allen Muhich

I would have to get to you a little bit more information on that. I don’t know that's our top of our head but from given that MRF is the primary driver behind it, this about it has been somewhere in covet 20% to 30% of that revenue would be the offsetting cost balance going up.

David Duley - Steelhead Securities

So those margins in the 70% to 80%, right?

Allen Muhich

Exactly.

David Duley - Steelhead Securities

Okay.

Brian Bronson

And David so what I would add to is that unless we find a way mechanically or we get to pay this customer sooner although we hit GA sooner with the particular couple of milestones expect this balance to grow. Again, pretty meaningfully in the second quarter and so you will get another inflection point, see how that could translate into revenue in the second half.

David Duley - Steelhead Securities

And theoretically then whatever that balance ends up being at the end of the Q2, that level it should be recognized in the second half of the year, of course if it will be replaced by other deferred revenue but it would be a good indications we have, a pretty good pipeline of this MRF stuff coming through.

Allen Muhich

That's correct.

David Duley - Steelhead Securities

Okay, I am just wondering (inaudible) and you mentioned the Trillium orders were up 38%, I think was it year-over-year sequentially and could you give us an idea about the relative size of what the baseline is, what the size of that number is now?

Brian Bronson

So that was a year over year percentage that we talked about and to give you a sense of it, I think we have talked publically about the fact that our Trillium revenue is approximately $20 million annually and so that bookings number is in that ballpark when you look at that form a quarterly prospective.

David Duley - Steelhead Securities

And could you just talk about, you have some moving parts here and there mix, expected revenue guidance for the year, I would imagine the mix, you are talking about your mix being a little bit worse so that was going to give margins, gross margins are going to be as high as you initially calculate and got more (inaudible), so if you could just help us understand what the impact to your initial forecast what was, given by the mix and less operated revenue, I hope you get it.

Allen Muhich

Yes, so again you just kind of work through and you touched on all the variables. So again, our previous guidance for the year on our older fewer or lower share count was in the 15 to 20 tenure range and now we are talking about $0.10 to $0.20 half of that reduction is driven by the new shares and the other half of that reduction is driven by the decreased profitability. When you look at the decreased profitability, there is an element of expenses coming out as well because again we changed from talking about $65 million to $70 million of expense getting us down to $65 million of expense and you might well how we are doing that, really it’s a more refinement of our estimate, around the edges so as an example, as you are going through and making your estimates, you don’t really know how much some line items will decrease and so again as an example, travel expense for us is down 30% and that's something that you can specifically count on when you are pointing your estimates together, the answer is no and therefore we are seeing some of those kind of peripheral things coming in and help again get more confidence on the lower end of that profitability. So that's helpful us which then says that gross margin will be likely come down a couple of percentage points from our initial estimate and so when you net that all that together that essentially reconciles you for old EPS to new EPS range. The final point that I guess I would make is that if you look at the sales side and what’s in their models, they had our margins probably at the rate that was less than what we thought it was going to be so they didn’t really give us credit for the full mix benefit that we were anticipating and so another way to think about this is softening and mix is already a big (inaudible), the analyst numbers that are out there.

David Duley - Steelhead Securities

Okay fair enough. And final thing from me is that Brian you mentioned a significant MRF win, I know you can’t talk about who the customers but could you just frame what that means and give us a little bit more details around what you are talking about there.

Brian Bronson

So let me try this way. I think everybody knows publically that Mavenir is one of our key channel partners. To that we shift in our MRF solution and they put it in as part of their broader VoLTE and so therefore you can infer that many of the trials we are talking about is with Mavenir as an example. They award that we just have been given is with a different partners, even bigger partner and you can think about the similar dynamics with this new partner where we provide MRF, they are putting in their broader VoLTE solution and then again giving in the trials.

David Duley - Steelhead Securities

And is the revenue for (inaudible) how you have measure similarly with this new customer as a little bit Mavenir?

Brian Bronson

A bit year and more scaled. This will be a bigger (inaudible) Mavenir as an example as they are wonderful customer, a case study and how you can leverage great assistant enabling technology. However, I think that and I would love to have both (inaudible) big but this has the opportunity to be bigger than a Mavenir.

David Duley - Steelhead Securities

Thanks so much.

Brian Bronson

Thanks Dave.

Operator

Your next question comes from the line of J.D. Pagett with ALMAK Capital. Your line is open.

J.D. Pagett - ALMAK Capital

Hi, just one point of clarification, when you are talking about the gross margin credit, did you say 1.4 that hit in Q1 and then the remaining 600,000 expect will be in Q2.

Allen Muhich

Yes, that's correct.

J.D. Pagett - ALMAK Capital

And then the other question with regard that the non-GAAP tax rate, what are you assuming for the year?

Brian Bronson

From a non-GAAP tax rate, I think the better way to think about it is in terms of absolute dollars because our tax expense which again on a non-GAAP basis, we are talking about it in terms of our cash tax expense. We are a cash taxed payer predominantly in India and as a function of how much we spend and not necessarily how much profits that we drive because of the spend based upon the cost plus relationship drives that profitability and so our non-GAAP tax expense of Q1are roughly 400,000 that number will remain relatively flat throughout the year and so that's the number to think then for the year and then the rate will just be driven based upon whatever profitability bake into your model.

J.D. Pagett - ALMAK Capital

So a non-GAAP tax dollar is about 400,000 a quarter?

Brian Bronson

Yes, 400,000 to 500,000 this quarter is about the right way to think about it and again it’s driven on our spend, not necessarily our profitability in U.S. given our evaluation allowance and NOS.

J.D. Pagett - ALMAK Capital

Okay perfect and then one other point of clarification when you are talking about the adjustment in the software business, (inaudible) at 10% growth this year that already takes out the audio conferencing stuff but could or could not close or are you still hoping that some of those POs come through.

Allen Muhich

This assumption, this guidance we assume it is not happening in the current construct that we would find ways to get back to 20 points but again need the CPOs, need to see better visibility to do that.

J.D. Pagett - ALMAK Capital

Okay, perfect. Thank you.

Allen Muhich

Thanks a lot.

Operator

(Operator Instructions) your next question comes from the line of Tom Diffely from D.A. Davidson. Your line is open.

Tom Diffely - D.A. Davidson

Good afternoon. A couple of questions on the (inaudible). I think you have talked about $45 million breakeven by the third quarter, does that fully reflect the manufacturing transition then.

Brian Bronson

So Tom I think we have indicated is that that 45 million breakeven point would be as we exist 2014 as oppose to Q3 specifically and yes the answer is that it does contemplate the reduction that we would anticipate coming from our contracting transition.

Tom Diffely - D.A. Davidson

Okay and then how much variability do you see in that just based on some quarter to quarter.

Brian Bronson

Well, it’s a function of whatever the mix of our revenue is going to be. When you have a got platforms products that have margins in the, I will call it 30sh percentage range, 25% to 30 %range where you have got (inaudible) products that are in the I call it 70 to 80 and even on the license side upwards at the 100% you can have some meaningful variability in that revenue, that break-even revenue level, making it very difficult to pinpoint a specific number but given the growth that we are expecting, given our cost structure, that $45,000 plus or minus some number again based upon the particular quarter you are talking about and the particular mix that we have that would drive that non-GAAP operating income to be break-even.

Tom Diffely - D.A. Davidson

Okay. That makes sense. And then as a 45, the right number I think but on the long term basis, is it kind of work in progress though.

Allen Muhich

I think that again given the variability in the gross margin percentages that I just eluded to, that as growth continues in those higher margins products that break-even level will continue to come down. In which case, you don’t need as much as high margin software revenue to cover your fixed expenses essentially.

Tom Diffely - D.A. Davidson

Okay that makes sense.

Allen Muhich

Right so as time goes by it will come down.

Tom Diffely - D.A. Davidson

Okay and then previously you talked about a $0.70 run rate exiting the year, can you give us a feel for how you thought the third and fourth quarter linearity is going to go, what is that run rate. At this time we are down close to $0.57.

Allen Muhich

No, I think that our $0.70 exit rate could be in that $0.60 to $0.70 penny exist rate. I think it will likely remain relatively similar given that we expect the exit rate profitability which is driven by again software solutions revenue growth, the cost reductions that we are talking about et cetera those things will, we expect our exit rate to be about the same, however we now have a 36 million shares outstanding as oppose to 30 million shares outstanding and so it likely will come down by probably 20%

Tom Diffely - D.A. Davidson

Okay that makes sense.

Operator

And your next question comes from the line of (inaudible) your line is open.

Unidentified Analyst

I am little confused by your last answer to Tom Diffely’s if in this quarter just ended, we lost $0.14 and if we take the mid-point of your EPS guidance for Q2 of a loss of 11 to a profit of a penny that mid point is about $0.05 so you lose $0.19 in the first half. If then you say that you are going to make $0.10 to $0.20 for the full year, if we take the mid-point of that second half number, that suggests that you will be earnings &0.34 in the second half of this year even after the new shares which would imply an annualized exit rate o $0.68, what is wrong with math.

Allen Muhich

I think your math David is fairly consistent with, I think the math is indicating that I believe that our exit rate is going to be in that $0.60 to $0.70 range. Again, you are going to have a little bit of an offset based upon the new shares outstanding but I don’t think there is anything wrong with your math.

Unidentified Analyst

Thanks.

Operator

And we have no further questions at this time. I would like to turn the call back over to our presenters.

Brian Bronson

Alright, well thank you again for participating in the call and I look forward to providing you another update following our second quarter. I do appreciate all of your support and confidence as we continue to transform RadiSys and have a good rest of the day.

Operator

And this conclude today’s conference call, you may now disconnect.

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