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Procera Networks (NASDAQ:PKT)

Q1 2014 Earnings Call

May 01, 2014 4:30 pm ET

Executives

Nicole Noutsios

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

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

Analysts

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

Vijay Bhagavath - Deutsche Bank AG, Research Division

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

Mark Kelleher - D.A. Davidson & Co., Research Division

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

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

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

Operator

Good afternoon. My name is Tunisia, and I will be your conference operator today. At this time, I would like to welcome everyone to the Procera Networks Q1 2014 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to your host, Ms. Nicole Noutsios. Ma'am, you may begin your conference.

Nicole Noutsios

Thank you, operator. Good afternoon, and welcome to Procera Networks' First Quarter 2014 Financial Results Conference Call. On the call today from Procera are James Brear, Chief Executive Officer; and Charles Constanti, Chief Financial Officer.

Please note that the financial results reported today include both GAAP and non-GAAP financial measures. Procera's non-GAAP measures exclude the impact of stock-based compensation, business development expenses and cost reduction efforts, as well as acquisition-related amortization and deferred compensation, amortization of intangible assets and related tax effects.

A reconciliation of GAAP to non-GAAP measures is part of the financial tables posted with Procera's news release of first quarter results, which is available on the IR section of the website.

Before we begin, let me also note that this call contains forward-looking statements, including statements related to the expected demand for Procera's products and the company's financial and other expectations for 2014.

These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, including the risks set forth in Procera's most recent interim report on Form 10-K filed with the SEC, as well as specific risks and uncertainties noted in Procera's news release on the first quarter 2014 financial results.

These forward-looking statements represent the company's judgment as of today, and the company disclaims any intent or obligation to update these forward-looking statements, whether as a result of new information or otherwise.

I will now turn the call over to James to provide an overview of the business.

James F. Brear

Thank you, all, for joining us today. Our Q1 revenue was $14.5 million, and we delivered a gross margin of 62% on a non-GAAP basis. In the quarter, we continued to execute on a long-term growth strategy of expanding partnerships, increasing our global customer base, and continued to enhance our product portfolio. The fairly flat year-over-year revenue masks a significant amount of strategic activity under way of Procera to deliver future growth. Over the next several months, you will see the results of our investments in the organization, including better alignment of resources and expansion of our product portfolio.

Looking at trends that could possibly impact our business, network neutrality has made headlines recently in the U.S. The FCC has endorsed business models that enables service innovation while still enforcing the transparency requirements on network operators. This is a positive development for Procera because it enables our sophisticated analytics and services capabilities to create competitive differentiation for operators in a highly competitive market.

Innovative operators looking to offer flexible service plans can leverage Procera's analytics capabilities to better understand what services generate value for their subscribers and to attractively package those services at compelling prices for the consumer. Our focus on the subscriber experience will enable an operator to provide reports to their subscriber and its regulatory bodies on how their broadband service is performing beyond simple metrics like average speed. Procera will be focusing on how the network performs during peak usage times, the impact on subscribers and the performance against promised service levels.

The market for our technology is rapidly evolving. Network operators that cannot deliver a high-quality broadband experience to their subscribers will suffer competitively. Working with our existing customers and prospects, Procera is focused on creating unique technology to address our customers' opportunities. We launched 2 new solutions that are differentiated and will be competitive advantages for Procera. Recently, the company has deployed our Service Plan Assurance and Customer Care Insights solutions.

We also have a number of exciting innovations that will be launched in the near future that will further separate us from the competition and increase our addressable market. Network Function Virtualization, NFV, is a high priority strategic initiative for our customers. We have made significant progress with our NFV solutions, and have 6 trials scheduled with network operators around the world and hope to generate revenue from these initiatives in 2014. The solution announcement that we made with HP and Intel for our virtual CP offerings and with Openet for a virtual PCC are being positively received by the market. In the coming weeks, we will be announcing a strategic partnership with Alcatel-Lucent focused on creating innovative NFV solutions to our customers. As part of this partnership, Procera will be joining Alcatel's cloud band NFV partner ecosystem and we will be integrating our PacketLogic technology into the cloud band platform for orchestration, automation deployment of NFV solutions.

The second part of the partnership will be to collaborate on a joint NFV use case solutions, our first of which will be a personalized parental control system for operators.

As we've talked about during our prior earnings call, the company's growth rate was impacted by the U.S. cable market. We continue to be cautious about U.S. cable. However, we have a good pipeline of cable opportunities in international markets. We are cautiously optimistic the U.S. cable market might pick up toward the end of this year.

We continue to build our base of customers. We added 16 new service provider customers in Q1. We have announced that we were awarded the business of 2 new Tier 1 service providers in Asia and expect initial business to be valued at approximately $3.5 million, and this business is not reflected in our bookings. Adding these 2 wins with the Tier 1 win we previously announced for Q4, we now have 3 new Tier 1 accounts that are expected to benefit revenue later in the year. These 3 wins are competitive replacements of our direct competitors.

Looking back at first quarter, our revenue mix was 49% mobile, 26% fixed, 10% cable and 15% embedded enterprise and higher education. 24% of our first quarter was from new customers, and 76% was follow-on.

We continue to believe that approximately 40% of our revenue in 2014 will come from new customers and 60% from follow-on orders. Trial activity is strong. We have 16 direct trials with Tier 1 global service providers. These trials are under way or planned to begin in the next 60 days. It should be noted that in the quarter we were selected by a Tier 1 mobile operator in the U.S. for a field trial for analytics and personalized services capabilities.

For the remainder of the year, the company is focused on organic execution and separating Procera from the competition through differentiated and superior technology. We're also focused on expanding and developing our partnerships and continue to expand our international presence.

With that, I will turn the call over to Charles for a more detailed look at our financials.

Charles Constanti

Thank you, James. Total revenue in the first quarter was $14.5 million, up 3% from last year. Year-over-year revenue from U.S. cable was down. This is consistent with our cautious outlook for revenue from this sector. We guided that Q1 revenue would be flat to a slight increase compared with our revenue reported in Q1 of last year, and we met this guidance.

Bookings for the first quarter were $10.9 million. We were recently awarded business at 2 new Tier 1 service providers in Asia, and the initial business is valued at approximately $3.5 million. These awards are not reflected in bookings.

During the quarter, no customers contributed 10% of revenue. Support revenue in the first quarter was $5 million, up 34% from the prior year. Our support revenue reflects increases in ongoing support agreements, reflecting growth in our installed base and revenue from professional services. Total deferred revenue was $13.4 million and is primarily maintenance and support arrangements and term licenses for embedded NAVL business.

Looking at the first quarter revenue by geography, Americas was 40% of revenue, EMEA was 38%, and APAC was 22% of revenue. The non-GAAP gross margin rate for the quarter was 62%. Sequentially, this compares with 60% in Q4 and 55% from Q1 of last year.

The improvement in the gross margin rate reflects revenue mix, with a greater portion of support revenue compared with Q4 and a more favorable mix of software to hardware compared with Q1 of last year.

Non-GAAP operating expenses in the first quarter were $12.8 million, up $109,000 sequentially from Q1 and up $2.1 million from last year. Year-over-year, the increase reflects the additional investments made in the second half of 2013 in sales, business development and in product development and quality.

In order to improve the near-term leverage of our business model, we took cost-reduction steps to contain spending and improve the company's profitability while we invest in the business. The cost of these steps was $544,000 in Q1. This included a reduction in the workforce of 12 employees, or approximately 5%, and reduced spending on outside professionals. We engaged McGladrey as our independent auditors for 2014. McGladrey is the fifth largest audit firm in the U.S.

The savings from these steps are estimated to be approximately $1.5 million spread over the remainder of 2014 and approximately $2 million on an annualized basis. This cost containment will enable us to invest for growth without sequentially increasing operating costs. In other words, the benefits of these cost savings will be partially used for increased investments in other parts of our business, mainly partnership development, increased sales in certain markets and in the development of mobile and analytics solutions.

The GAAP net loss for the first quarter was $6 million compared to a GAAP net loss of $6.7 million in Q1 of last year. On a non-GAAP basis, our net loss for the first quarter was $3.9 million compared to a non-GAAP net loss of $3.1 million in Q1 of last year. We ended the quarter with $106 million of cash and short-term investments. This is approximately flat from Q4.

DSOs were 80 days and within our normal range.

Reviewing guidance for 2014, we continue to expect revenue growth of 15%. Revenue growth in 2014 is expected to follow linearity patterns similar to prior years, with growth skewed toward the second half of the year. Our gross margin rate is expected to be in the low- to mid-60s. Gross margins can fluctuate based on the mix of software and hardware in a given quarter.

Non-GAAP operating expenses in Q1 of 2014 were $12.8 million, and we expect quarterly operating expenses to be at or below this level during the remaining quarters of 2014. We are modeling a return to profitability in the second half of 2014 on a non-GAAP basis.

Thank you. I'll turn the call back to James.

James F. Brear

In closing, we at Procera are bullish about our future. This confidence comes from our interest and traction with U.S. mobile operators, strong growth outside the U.S., exciting planned innovations, and our clear leadership in virtualization and our broadening partnerships globally. The interest in our technology is the highest and broadest it's ever been. Our funnel is strong, with a number of large opportunities that are in the trial or planned and hope to close in 2014. The team is in place, energized, and we're ready to scale.

I will now turn the call over to the operator for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Jason Ader with William Blair.

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

I just had 2 questions. First, just on the guidance for the year. In the first half of the year, it sounds like it's going to be certainly sub-15% type growth, so that would require north of 15%, let's say, 20-plus-percent type of growth in the second half. And I just -- I'm just curious how you feel comfortable and confident with that type of sequential ramp, only because of lack of predictability in this business and lumpiness, and it just seems you're kind of rolling the dice a little bit on the second half, and if you can give some specifics that give you the confidence to provide the 15% annual guidance goal?

Charles Constanti

Yes. So we are basing our predictions at our guidance based on our bottoms-up pipeline, and it is skewed towards the second half. We do expect Q2 to pick up from Q1 in terms of revenue. But it is based on our bottoms-up. And I think, overall, we feel it's a good forecast, and we think we're going to hit that number.

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

Okay. Any specific -- I know you can't give us specific customer names or anything, but any specific deals or sectors where you're -- you feel like you can get some very large wins and that could help drive the second half?

James F. Brear

Yes. We -- as I've mentioned, we have a number of what we consider to be quite large opportunities that we're tracking on there. Actually, across all the regions, in particular, Asia and in Western Europe, where we feel pretty good about the trials and how they're going, and the competitive landscape, and we have confidence we can win them.

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

Okay. And then just on the Western European win that you've had in Q3 last year, and you had the depressed margins in Q3 because of the hardware portion. You had talked about starting to see that software portion hit the numbers, and then as the subscribers scaled the net customer, can you give us an update there?

James F. Brear

Yes, that has occurred. What you saw in Q4 and in this quarter, we continue to actually get hardware orders, but we also got software orders. So we're now getting that pickup of software, which is helping our margins. But they continue to buy hardware.

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

Say it again, is the software element going to continue to get bigger, or is it going to stay at a sort of a steady state every quarter?

James F. Brear

Unknown, but we're hopeful that there'll be more software. But they surprisingly continue to buy hardware as well. But not as -- the proportion is not as much as it used to be.

Operator

Your next question comes from Vijay Bhagavath from Deutsche Bank.

Vijay Bhagavath - Deutsche Bank AG, Research Division

The first question is on your U.S. Cable opportunities. I think you mentioned the 10% number for your cable business. Do you think that would be kind of a floor for this year? How should we think about your cable business heading into the rest of the year? Would it go below 10% or flat?

Charles Constanti

We don't think so. So we think that is the floor. And like -- as we mentioned, we do see opportunities internationally in cable, so we expect revenue from there. And I think in the U.S. market, we could see -- I think, we're cautiously optimistic as the year progresses, we could see more there. But yes, it should be a floor.

Vijay Bhagavath - Deutsche Bank AG, Research Division

And then second question, you mentioned the $3.5 million of initial award. What's the cadence of these awards? Is it once in every few quarters, once a year? Help us understand the repeat cadence of these awards.

Charles Constanti

So I mean, as you know, we've been really growing our business based on new wins over the last 2 years, so we've really grown to north of 40 Tier 1s, as we measure them. And we continue to progress very well with gaining more Tier 1 accounts. So we think that this cadence will continue across the year.

James F. Brear

And what we've always said is that, if it's north of $1 million and it's a new Tier 1, we will -- we would put it out to the Street.

Vijay Bhagavath - Deutsche Bank AG, Research Division

Yes, that's very helpful. And then, the final question is help us understand the sales cycle. When you have these Tier 1 engagements, for example, in NFV, roughly how many months does it take to get the first revenue out of those Tier 1s? Would it be 12 to 18 months, 9 to 12 months? Help us understand the timing between an initial engagement to getting revenues from the Tier 1.

James F. Brear

Well, I guess, if I use the 2 that we announced today, those were both, probably 6 to 9 months it took to win those.

Charles Constanti

Are you talking about NFV only?

James F. Brear

I was going to address NFV as well.

Vijay Bhagavath - Deutsche Bank AG, Research Division

I mean in general, when you're engaged with a Tier 1, roughly, how many months does it take to see revenues from there?

James F. Brear

Yes. So I'd say it's 6 to 9 months, maybe a year for very large ones on average. On the virtualized side, it's still unknown. As I stated on my call, we have a sense that we may be able to actually generate revenue from our virtualized technology this year.

Operator

Your next question comes from Sanjiv Wadhwani.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

It's Sanjiv Wadhwani. A couple of questions, one specific on the Tier 1 U.S. mobile opportunity. Jim, I was wondering if you could walk us through sort of the dynamics of what's going on there. What are they specifically trying to do with you guys? And what's the cadence, and how long this trial might go on? And then, more broadly, and I apologize if you've talked about this, but some of us were put into the call a little bit late, but net neutrality, I mean, are you seeing any of that starting to come into discussions with your customers? How do you think that's going to impact you guys over the next 12 to 24 months?

James F. Brear

So I kind of got 2 questions. First, I'll address the network neutrality. We see it as a positive, it's not a major change. I think it allows cable companies to look at innovation and differentiation. At the same time, it allows them to provide the transparency, so you and I as subscribers feel like what we're paying for we're getting. So I see it as a positive for us as subscribers and for the carriers. In terms of the mobile, we have a number of activities in the U.S. mobile carriers going on right now. In particular, we are in field trials at one of them, and there are a number of other activities with that particular carrier as well. So we have a number of initiatives starting.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

How long do you think those trials will last, and any specifics on what they're trying to do with your equipment?

James F. Brear

Yes. So there -- like I said, there's actually a number of different activities. Some of those activities may end within the next 60 days, some are going to be longer. And I prefer not to comment just because of competitiveness, exactly what -- where and what we're doing.

Sanjiv R. Wadhwani - Stifel, Nicolaus & Company, Incorporated, Research Division

Got it. Just to follow up on the net neutrality, Jim, I mean is that coming into discussions with your customers, or is this something that was already sort of a topic of discussion a year ago, and you're starting to sort of move along as you're seeing some of the rulings come down? What's sort of the discussion like with your current customers on net neutrality and if -- I don't know, if that's changed in the last 12 months?

James F. Brear

I wouldn't say it's dramatically changed. I think the overall kind of paralysis that we see is around the changes in the macros for U.S. cable. As I've stated before, I think the whole network [indiscernible] I think, has really been solved for the most part over last several quarters. This just enables, I think, everybody to move ahead in some concepts around providing improved experience and quality for subscribers.

Operator

Your next question comes from the line of Mark Kelleher with D. A. Davidson.

Mark Kelleher - D.A. Davidson & Co., Research Division

I just wanted to touch base on the competitive environment. I know one of your competitors earlier this week posted some pretty strong year-over-year growth in their March quarter. Can you just address what you're seeing out there competitively?

James F. Brear

Yes, I can. We feel very confident -- we're feeling very confident compared to our direct competitors. As I stated, we have now 3 Tier 1 replacement wins, and those were customers that had been with our competitors for years. So we're pretty proud of that.

Mark Kelleher - D.A. Davidson & Co., Research Division

What was the defining -- what made that decision go your way? If you could highlight 1 technological issue that helped you in that.

James F. Brear

I would say, broadly speaking, the level of information that we're able to extract and the intelligence that we can extract is significantly broader than our direct competitors. And by being able to extract more valuable information helps them deliver to their subscribers a better service, and that's really what I think where we're headed and where they see the value, and why they chose us.

Mark Kelleher - D.A. Davidson & Co., Research Division

Is there any regional competitive difference? Are you stronger or weaker in Europe, for example?

James F. Brear

No. It's across the board. Two of the replacements were in Asia, one was in Europe.

Operator

Your next question comes from the line of Alex Kurtz with Sterne Agee.

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

A couple of questions for you guys. So you talked about -- I just wanted to clarify what you talked about on the OpEx. Are you saying that OpEx should basically be linear from here and no uptick for the rest of the year on a quarterly basis?

Charles Constanti

Yes. We indicated that it should be either flat to down from the Q1 level.

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

Okay, and just the other clarification. In your assumptions for fiscal '14, are you assuming a flat contribution from cable this year, or a down contribution from cable this year?

Charles Constanti

In our 15% plan, it assumes a down contribution.

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

Okay. So any recovery there would be upside to the number? And Jim, I think, overall -- I think this is a good improvement here as far as your visibility. But I think that -- we're all wondering what's going to really happen in Q4 because that's really what the whole company comes down to, right? And the last couple of years have been challenging on the Q4. I think Jason was trying to get at that earlier in the Q&A. So are you applying higher discount rates? Do you have a bigger pipeline? How can investors get confidence that as we inch closer to December that there's going to be positive outcome?

James F. Brear

No, you're right. Last in -- Q4 was a miss, and that was a disappointment. Obviously, the U.S. Cable market, if we hadn't had that occur, we probably wouldn't be having that conversation. You -- we would be saying, "Hey, great quarter". So we're looking at Q4. We have visibility to deals right now. It's just a matter of winning them and execution. And we're on track in terms of the sales process for those to close and get recognized in Q4 and in Q3, [indiscernible] Q2.

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

So I guess I'm asking if are you applying a higher discount rate on the pipeline than you were in the last couple of years to give yourselves some margin for error here?

James F. Brear

Probably, to be honest, not really. I guess I would assume that maybe I was questioning my ability to forecast. If I -- again, I'm making up for excuses, but some of that does have an impact on our existing cable cos that kind of went quiet on us, and that was hard to plan for.

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

Okay. Well the 2 last questions here, what's the implied assumption on your acquisition vineyard for last year, from a dollar perspective, for this year? And Jim, can you just clarify on this Tier 1 mobile trial, is this one of the top 1 or 2, or top 3 mobile operators in the U.S.?

James F. Brear

From a competitive -- I don't want to give my competitors any sense of where we are, so I would rather not answer it.

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

Okay, that's fair. And on the vineyard, Charles?

Charles Constanti

On the vineyard, we're still forecasting over 50% growth in that business compared to last year.

Operator

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

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Just a couple of things I wanted to see if we could follow up on. In terms of the cadence throughout the year, I think in the prepared remarks, you talked about seasonality similar to prior years', as well as most of the revenue or the majority of the revenue being in the back half of the year. And I guess what I'm trying to think about is we've seen some pretty -- a lot of variation over the past 3 years in the patterns, but I guess the sequential pattern has been strongest in the June quarter each of the last 3 years. And while I'm not looking for you to specifically give us a breakdown quarter by quarter, I guess I'm trying to get a sense of how the sequential pattern should look given the amount of variation we've seen over the last couple of years, particularly, the strongest sequential growth in the June quarter, and then slowing with the fourth quarter being a little bit softer at least in the last 2 years. How do we think about this?

James F. Brear

Yes. I guess my hope and expectation would be that we would not replay the Q4 flatness, and that, that would continue to grow in this year. That would kind of mimic the last, 2008 through 2011, which did have strong Q4 exits.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay, and the idea that the June quarter is a strong sequential seems pretty logical because you're coming off of the sequential drop that's normal seasonal for March, is that -- that's fair, I assume?

Charles Constanti

I mean, I'd go so far to say is I think the Street has the consensus that at less than 15%. And that's not far from how we're modeling it.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And then it's interesting in terms of you've got a growth story here, but you're -- you've got flat OpEx. And so I think it's a bit of a struggle, because normally we'd be thinking you'd be growing spending in terms of how you deliver it, that sales and marketing would go up with higher commissions as you grow sales, and R&D should be going into expanding feature sets around NFV and making it richer. So on one hand, it's good that you're controlling OpEx, but I guess I'm struggling with trying to understand, how you grow topline while keeping this OpEx flat?

James F. Brear

Good question. Actually, we did a lot of investment in the last 2 years, in particular, last year. So we made big investments. So we are, as Charles alluded, making very significant investments but more targeted on specific innovations. And so we have the footprint from a sales channel standpoint, but where we are investing is taking specific hits and focus on where we think we'll get the biggest bang in the buck for innovation.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

But is it safe to assume, or correct to assume that sales and marketing expense is probably up for the year, if you're going to grow the top line for the year?

Charles Constanti

That's correct.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Okay. And then just one last question, and I think this is kind of backwards-looking in terms of, you've got some recent competitive displacement wins and that's obviously nice. But if we just look back on the last couple of quarters where you've had a little bit of share loss. Your competitor -- your direct competitors have grown a little bit faster. Can you help us understand what they did differently during those quarters to take share?

James F. Brear

Well, what I can't tell you is my market share, I don't have it in front of me, was less than 10% in 2008 and now I'm in the 30s. And my competitors who were in the 50s and now are in the 30s, I think. So from my perspective, we've been gaining share year-over-year for the last 5 years. And so we're very proud of that. If you go from 2007 to 2013 and look at share, we've taken a bunch of share from our competitors.

Simon M. Leopold - Raymond James & Associates, Inc., Research Division

Yes. I'm really just looking at kind of the last couple of quarters. So absolutely, we've seen a tremendous move over the last several years. I'm focused a little bit more narrowly on the last 3 quarters of share trends. And maybe your answer is, "Hey, that's just lumpiness", but I want to understand if there's more to it than that.

Charles Constanti

And I think -- I mean part of the value that some of our competitors do have is a bigger installed base that they're still leveraging for revenue. I think if you look at kind of the new win side of the equation, I think that's where we really -- I think that's where we really shine.

James F. Brear

Procera has done a darn good job of extracting follow-on revenue from their existing customers which is great, and they get credits for that.

Operator

Your next question comes from the line of Alex Henderson from Needham.

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

I was hoping you could talk a little bit about the use cases that are driving your sales. How much of your use cases are driven by network optimization? How much is driven by the visualization data metrics? And then, how much of it's driven by the use of your technology to create new revenue-generating opportunities for the service providers?

James F. Brear

It's a good question, Alex. That's a little difficult to answer because there's so many moving parts to that question. And it depends on how you define new service creation. I'd say, if you break it down on a product standpoint, the technologies that we use, or the carriers use, for service creation is the fastest growing part of our revenue stream, which is our Subscriber Manager. But we also still continue to see optimization sales and for traffic optimization, but I don't think I could put it as a percentage.

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

So is it -- the bulk of it is still traffic optimization?

Charles Constanti

I mean, I think a lot of accounts and particularly mobile, and we really have growing share in mobile -- or growing revenue in mobile. They pretty much always use the optimization and new service creation. And when you're looking at other sectors, cable and wireline, they may be a little bit more geared towards visibility and network management.

James F. Brear

Yes, are you inferring, or suggesting in the service creation that, that includes PCRF, or is that just the PCEF?

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

I'm trying to understand what they -- your customers are using the equipment to do, the primary reason for the purchase. Was it to optimize the traffic on their network or was it to use the PPI device to generate a new service creation opportunity that they needed the granularity of the product and the systems capability to develop and articulate to the customer?

James F. Brear

Right, yes. So I'd say, we don't break it down in that respect. I'd say overall, if you were to think of the 3 buckets in terms of optimization analytics and service creation, probably the majority of our -- it's pretty balanced actually with the service creation element growing the fastest.

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

So it's a third, a third, a third? Is that what you mean by balanced?

James F. Brear

I don't know. I haven't really put it down that way.

Charles Constanti

I mean I think it -- what happens is, usually, if someone is buying service creation, they're usually using all, they're using the others as well.

James F. Brear

Right.

Charles Constanti

So nobody just buys our value creation, they buy all 3. And then you have some that just buy for 1 or the other, or both of the others. So if you are to say 1/3, 1/3, 1/3, that's -- I mean, that's probably as close as we could get right now.

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

So can we go back to the order rate? I thought -- did I hear you correctly in the presentation commentary, you're talking about $10 million in orders in the quarter, was that right?

Charles Constanti

$10.9 million, that's right. Bookings were $10.9 million.

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

Okay. I wasn't sure. You kind of broke up when that was said. And then can we go back a little bit and talk about the gross margins for a second? The product gross margins were so much below the average for the other companies in the category. Can you go back and explain to me why that's the case still? And I thought when you were talking about the service chassis gateways being sold last year that you were expecting an increase in the sale of blades into that installed base which would help your margins. Can you just update us on where that is as well?

Charles Constanti

So I think -- I'm not exactly sure the components of our competitors' gross margin, how they get there. I think there is a benefit from their legacy installed base. And I think they probably at least in part won some of those deals that were not heavily competed at the time, and that's a real benefit to their business models. And in terms of the chassis, we are seeing some pickup, as we responded to earlier, on say the software and the blades, and we expect that to continue this over the course of this year.

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

So you're saying that you think that competitors' product gross margins are comparable on new systems deployments now?

Charles Constanti

I don't really know, but I assume that there is a benefit of the legacy.

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

And then the final question, and I'll cede the floor, both of your competitors have come out with high-end 100-gig chassis-based capabilities over the last quarter. Do you think that, that's going to impact the competitive dynamics in the marketplace, the pricing in the marketplace, or any other of the elements of the competitive mix?

James F. Brear

No. We still are the performance leader, and we're going to maintain that leadership for the next several years.

Operator

[Operator Instructions]

James F. Brear

Okay, I think, thank you, operator. And that is it for the call. We look forward to speaking to you all next quarter. Thank you.

Operator

This concludes today's conference. You may now disconnect.

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