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Tekelec (NASDAQ:TKLC)

Q2 2010 Earnings Conference Call

August 5, 2010 8:00 AM ET

Executives

Mike Gallentine – Director, IR

Frank Plastina – President and CEO

Greg Rush – CFO

Analysts

Amir Rozwadowski – Barclays Capital

Brian Modoff – Deutsche Bank

Blair King – Avondale Partners

Catherine Trebnick – Avian Securities

Todd Kaufman – Raymond James

Larry Harris – C.L. King

Operator

Good morning and welcome to Tekelec’s 2010 Second Quarter Earnings Release Call. At this time, all participants have been placed on a listen-only mode and the call will be opened for questions following the presentation. It is now my pleasure to turn the call over to Mike Gallentine. You may begin.

Mike Gallentine

Thank you. Today I’m joined by Frank Plastina, President and Chief Executive Officer and Greg Rush, Chief Financial Officer of Tekelec. Hopefully by now you have access to a copy of the slides and supplemental material posted on our website at tekelec.com. From there you can access the slides by selecting the investors tab, which will take you to the Investor Relations home page. From that location you can access the press release issued earlier today.

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

I would also remind you that during the course of this conference call, we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The actual events or results for the company may differ materially from these forward-looking statements as a result of important risk factors including those discussed in our 2009 Form 10-K, the first and second quarter 2010 Form 10-Q, the press release issued earlier today and other documents the company periodically files with the Securities and Exchange Commission.

Also, unless explicitly noted, all financial results and metrics during our call today are non-GAAP results. Please see slides five through 12 in the supplemental material posted on our website for information reconciling GAAP to non-GAAP measures. We will also post the transcript of this call on the Investor Section of our website.

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

Frank Plastina

Thanks Mike, and good morning to everyone on the call. Tekelec continues to deliver strong gross margins, operating margins and earnings per share. During the quarter, we generated revenue of $109.5 million, gross margins of 67%, operating margins of 23% and diluted EPS of $0.25 per share. However, order inputs fell short of expectations. We generated $72 million in orders for the second quarter. Our year-to-date orders of $129 million are down 25% compared to the same period last year.

As discussed on the previous call, we continue to see lower SIGTRAN and SS7 solution orders primarily from the emerging markets. In addition, order input in India continues to be impacted by the new security regulations imposed by the Indian Government as well as delays in the expected deployment of 3G networks. These delays impacted the order input that we had expected from our base of customers in India during the first half. We are reviewing the most recent security-related regulations imposed by the Indian Government; and although the impact of such regulations on our operations and order flows is uncertain, we expect improved order flow in the second half of 2010. Also the pipeline in code activity for business in India is very healthy across many parts of our portfolio. Several of our customers in India have already consumed a signaling capacity purchased last year as part of their planned growth including number portability.

Despite the ongoing delays in order input, our work on the ground in India has continued. We recognized approximately $15 million of EAGLE and Number Portability related revenue in India during the quarter. These revenues are reflected in our Q2 gross margin performance of 67%.

Looking to other emerging market regions, the Middle East and Africa continue to be challenged with credit issues, forcing many service providers to delay purchases and run their networks at near capacity. As an example, we received approximately $4 million in orders from customers in this region during the quarter that we will not book until we have a clear view that payment will be secured.

On a positive note, orders from our customers in North America were up 24% during the first half of this year versus the same period in ‘09. This was primarily due to increased wireless CapEx spend, the addition of two new customers, and continued healthy book ship business. Both AT&T and Verizon were 10% revenue customers for the quarter; AT&T at 14% and Verizon at 12%.

We also achieved significant traction with our new products in the quarter with several strategic awards. For example, shortly after adding Policy Management Solutions to our portfolio in May, we were selected for multi-country deals by two different European-based global service providers. One of these customers is a new customer to Tekelec. Each of these deployments will span six countries in the initial phase. Also, one of these global service providers has since followed up with a multi-country award for EAGLE 5 signaling. We are currently negotiating the contracts for these awards and we expect order input in the second half of the year.

In addition, contract negotiations with Verizon for the previously announced LTE policy management win have been substantially completed, and we expect order input will begin in the third quarter. We believe this significant policy management software order will open up follow on opportunities with the rest of our portfolio into Verizon’s LTE and files networks.

Including these recent awards, we expect that our policy management solution will be deployed in 25 countries by year-end. During the quarter, we booked orders with four new customers. Two, in North America, and one each in Canada and Western Europe. One of these customers purchased our combined EAGLE performance management and EAGLE XG solutions. One purchased our Subscriber Data Management solution and two purchased our EAGLE 5 signaling solutions.

One of our new customer wins in North America, a US-based wireless service provider bought EAGLE XG to support core Diameter routing for their LTE deployment. This new Tekelec solution utilizes Diameter as a key protocol interface for mobility management, charging, and policy applications in 3G and 4G networks. This customer also purchased our Performance Management Solution. Our solution aggregates, interprets, and measures end-to-end quality of service data for prepaid voice and text services.

Our programmable key performance indicator based reports enable the customers to examine traffic, troubleshoot issues and analyze subscriber usage activity. As we mentioned last quarter, our recent momentum with this product line moved Tekelec up two slots in market share to No. 3 in this space according to the latest Analysys Mason Report.

In addition, a new European MVNO customer bought our Subscriber Data Management solution that includes an integrated next-gen HLR supporting SIP and Number Portability applications.

Turning to new solution wins with existing customers, we had our 100th global number portability win with MTNL in India. We’ve won nine of the 11 number portability India bids within which we participated. Also, an existing EAGLE XG Tier 1 customer purchased a next-gen signaling application Traffic Management to prevent overloading congestion. This application helps the service provider protect their network resources from spikes in traffic caused by events such as New Years Day and Mother’s Day. We now have 13 EAGLE XG customers, ten of which are Tier 1 service providers. Three of these 13 EAGLE XG customers have also purchased additional XG-based applications.

Regarding our opportunities for our orders going forward, the overall sales pipeline is currently higher than it was at this time last year. And more importantly, the next-gen products in our portfolio comprise over 50% of the total. Our EAGLE XG performance management and mobile messaging opportunities have been nicely complemented by the pipeline additions for Policy Management and Subscriber Data Management. However, we recognize that the success of our next-gen products is not currently compensating for the weakness in our established SIGTRAN and SS7-based products, and we are tempering our expectations accordingly. We will therefore continue to ensure that our OpEx is lined up to support the expected growth of our next-gen products and is adjusted to reflect the market demand for our established products.

Margin expansion beyond current levels continues to be our long-term goal, and generating healthy, positive, cash flow from operations will continue to be our day-to-day objective and focus. Tekelec now has the industry’s strongest portfolio focused on the network intelligence layer. The opportunities across our portfolio have been enhanced by the addition of Policy Management and Subscriber Data Management. We are currently defining many cross portfolio solutions and plan to start rolling those out later this year.

We are now the only player in the industry to uniquely blend and capture the synergies across Session, Policy, Subscriber Data Management, network and business intelligence and mobile messaging. The market has recognized the need for an independent scalable and intelligent control layer across all deployed technologies. We are building a set of solutions aimed at improving the end users’ experience by adding intelligence to this network control layer. In simple terms, we enable service providers to give consumers a consistent and tailored broadband experience.

Now I would like to turn the call over to Greg Rush to provide more details on our Q2 results. Greg?

Greg Rush

Thanks Frank, and I would like to welcome everyone to the call. I’ll provide further insight into our second quarter and year-to-date results, and provide updated guidance for the full year. Please refer to slides five to 12 that provides both our GAAP and non-GAAP results for the second quarter and year-to-date periods, along with the associated reconciliation.

As Mike mentioned earlier, unless otherwise stated, all the financial metrics presented today are on a non-GAAP basis.

Revenues for the quarter were $109.5 million, down 12% compared to the second quarter of ‘09. For the first half of 2010, revenues were $225.5 million, down 2% from the first half of ‘09. These declines were solely within our EAGLE 5 related products, as orders and backlogs of EAGLE 5 related products have declined in recent periods for the reasons Frank mentioned earlier.

Specifically, this quarter’s EAGLE 5 related revenues declined by 12% compared with second quarter of ‘09 and declined by 8% in the first half of 2010 relative to same periods in ‘09. In contrast, next-gen product revenues increased 34% in the first half of 2010 as compared to the first half of ‘09. I would like to point out that essentially all of this growth was from our pre-acquisition portfolio, as only $1.3 million of this quarter’s revenue was recognized from Camiant and Blueslice products.

As mentioned on our first quarter call, revenues from these acquisitions have been negatively impacted by purchase accounting, particularly in the initial quarter’s post acquisition.

Given the significant growth of these next-gen products and our expectations for continued growth, we have provided a more granular product level view of these revenues on Slides 18 and 19.

In addition to continuing to provide a breakdown of our revenues between Session Management and Performance Management products, we now provide additional details regarding revenues across established products and next-gen products. Please note all of the information provided on these slides is for total product line revenues, including the related services and warranty-related revenues.

For the second quarter of 2010 Session, Policy, and Data Management related revenues were $97.7 million, a decrease of 8% compared to $106.3 million in the second quarter of ‘09. For the first half of 2010, Session, Policy, and Data Management related revenues were $195.5 million, a decrease of 6% compared to $207.6 million in the same period of ‘09. As mentioned earlier, this decrease was due to a decline in orders for our EAGLE 5 product line which has outpaced the growth in sales of our next-gen session policy and data management products. The year-to-date decrease from revenues for these products was across all regions with the exception of India and there was a particular softness in other emerging markets on a year-over-year basis.

Revenues from our performance management products increased 50% to $11.8 million in the second quarter of 2010 from $7.9 million from the second of ‘09. Revenues from these products increased 29% to $30 million in the first half of 2010 to $22.2 million in the first of ‘09. Growth in these revenues reflect the continued market penetration of our performance management solution, which is now installed in over a 150 customers around the world.

Next, I’d like to comment on the geographic write-downs of our revenues. Please refer to slide 22. As a reminder, a significant portion of our revenues continues to be derived from our backlog. Therefore, the geographical trend in orders that Frank discussed earlier is not reflected in current period revenues.

US revenues for the second quarter of 2010 were 41% of total revenues compared to 44% in the second quarter of ‘09. For the first half of 2010, US revenues were 36% compared to 38% in the first half of ‘09. Despite the recent declines in orders in emerging markets, these markets continue to be an important part of our business going forward.

For example, India now represents our second largest country and accounted for 14% of our revenues during the second quarter and 12% of our revenues for the first half of 2010. AT&T and Verizon both were 10% revenue customers in the second quarter of 2010, represented 14% and 12% of total revenues respectively. For the first half of 2010, AT&T was our only 10% customer and represented 14% of our revenue.

Turning to gross margins, we continue to generate healthy margins at 67% for both the second quarter and first half of 2010. This gross margin level is essentially flat with last year. I would like to add that this gross margin performance included over a $15 million of revenue recognized from customers in India.

Total operating expenses for the quarter were $48.4 million, down 8% compared to the second quarter of last year. Total operating expenses for the first half of 2010 were $98.8 million, down 7% compared to the first half of ‘09. Operating expenses are down in each of these periods despite including $4.2 million of expenses associated with our recently completed acquisitions Camiant and Blueslice.

The decrease in our total operating expense for both the quarter and year-to-date period reflects lower incentive compensation and our continued focus on expense management. It generated operating margins of 22% during both the second quarter and the first half of 2010, up from 22% in the second quarter of ‘09 and 21% in the first half of ‘09.

Net income for the second quarter of 2010 increased to $17.4 million from $16.8 million in the second quarter of ‘09. Earnings per share was $0.25 per share for both second quarter of this year and last year. Net income increased to $35.4 million or $0.51 per share for the first half of 2010 from $32.8 million or $0.49 per share for the first half of ‘09.

Our operating results during the past quarter and for the first half of 2010 were negatively impacted by approximately $3 million due to foreign currency fluctuations. Foreign currency fluctuations did not have a material impact on our operating results in ‘09.

Our non-GAAP effective tax rate was 27% for the second quarter of 2010 compared with 34% in the same quarter last year. For the first half of 2010, our non-GAAP effective tax rate was 30% compared to 33% in the first half of ‘09.

Our effective tax rate has declined during 2010 due to a higher percentage of our earnings being derived in jurisdictions with lower tax rate. I would also like to point out that the 2010 effective tax rate does not currently reflect a benefit for the Federal Research and Development Tax Credit. This credit has not been extended. During ‘09, our effective tax rate included this benefit.

We exited the quarter with a very strong balance sheet as shown on slide 23. We had cash and cash equivalents at $226.3 million and working capital of $295.5 million at the end of the second quarter. The decrease in our cash and cash equivalents and working capital from the first quarter is due primarily to the $102 million of cash used to acquire Camiant and Blueslice.

During the second quarter, we’ve generated $6.3 million of cash from operations, down from $12.8 million generated in the second quarter of ‘09. During the first half of 2010, cash from operations is $21.2 million, down from $34.6 million during the first half of ‘09. The decrease reflects a decline in our orders and related billing in the recent periods along with the continued [inaudible] in the billing and payment terms associated with orders emerging market. I’d also like to add that our acquisition activity during the second quarter reduced cash from operations by approximately $3 million.

I’d like to turn to our guidance for the year shown on slide 24. Given the order input for the first half of 2010, we’re reducing our revenue and earnings expectations for the year. We now expect our revenues to range between $430 million and $450 million with gross margins in the mid 60% range.

We expect our non-GAAP EPS to range between $0.75 and $0.85 per share and our GAAP EPS to range between $0.30 and $0.40 per share. These EPS estimates include the operating results from Camiant and Blueslice.

I’ll now turn the call back to Frank, for some closing comments. Frank?

Frank Plastina

Thanks Greg. Selling all of our solutions into our install base of over 300 customers, spanning 108 countries continues to be our goal. Tekelec’s current install base includes eight of 10 of the world’s largest wireless carriers, 100 number portability wins, a milestone reached this past quarter, 12 EAGLE XG customers, over 150 performance management customers, 59 mobile messaging customers, policy management deployments in 25 countries by yearend, which includes solutions that serves 70% of North American cable modem subscribers, 20 subscriber data management customers, and approximately 100 of our customers who already have deployed two or more of our products. We will continue to build on this base of customers with a powerful portfolio that addresses the need for a scalable network intelligent flair.

I thank you for your time today and we’ll now open up the call for any questions. Operator?

Question-and-Answer Session

Operator

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

Amir Rozwadowski – Barclays Capital

Thank you very much and good morning.

Frank Plastina

Good morning, Amir.

Amir Rozwadowski – Barclays Capital

I was wondering if you could talk a bit more on India and understanding sort of the implications for your lowered expectations. We’ve seen this challenge of security really to challenge with the number of vendors who supply the region. Do you have a thought process in terms of when you expect that issue to be resolved?

Frank Plastina

Yes, at this point, we’re working closely with our customers. The government in India has issued what they expect from the customers or the service providers in India.

What we’re doing now is working through the process of actually making that happen, the implementation of those new security guidelines. We still expect that to be some we work through hopefully within the next month or so. But clearly it’s held back our business now for about three months or four months. And not getting that input early enough and as expected in the first half really did lead to that revenue adjustment of about 7% from where we were.

Having said all that, the amount of activity and the growth in India continues at a pretty torrid place. India added 18 million subs just last month in total. We have nine customers now where we have all of our signaling equipment as well as number portability installed.

A couple of our customers has actually – have gone through entire capacity frames that they initially purchased from us for the number portability implementation. And, as an example, because they had to put that all in place, we got $15 million worth of revenue recognized in the second quarter in India. So it’s a very, very interesting situation where the end customer demand is very, very strong, yet we’ve got that artificial pause in our business due to the government imposed security regulations.

Amir Rozwadowski – Barclays Capital

The way we should think about it is, is once that security regulation is listed, we should expect to see some sort of catch up ordering from the carrier community.

Frank Plastina

Yes, we’re certainly expecting that, because our code activity has remained very healthy not just for course signaling and that’s just SS7 SIGTRAN related. But now we’re coding policy management, we’re coding subscriber data management, we’re coding a lot of our new products that were originally – I mean, the attempt in India was, let’s break into these customers with our course signaling and then start selling the rest of the portfolio and that’s actually working out.

We’ve already got performance management in several of those customers and now we’re looking into the future and really seen a very, very good business in India. And it’s our second largest country in terms of revenue today and we expect that to continue growing going forward.

Amir Rozwadowski – Barclays Capital

That’s very helpful. And then, if I can switch gears to the policy management and the subscriber data management solutions that you now have within your portfolio. It seems as though based on our commentary that sales synergies have pretty much already started, that you are able to gain traction and the combination of Camiant and then Blueslice with your sales portion, with your portfolio, has garnered additional wins in the market that were previously not there for other company on an individual basis, is that a fair assumption?

Frank Plastina

Yes, definitely. We’ve been very pleased with the amount of traction we’ve gotten from the highest parts of various search providers. We’ve had a lot of proactive CTO network planner kind of inquiries to come in and present our vision for our network intelligence lair. It’s something that we were doing sporadically in the past and now we’re doing that as part of an essential ingredient or an essential part of the next gen planning and how LTE gets hold of data from our high speed 3G gets rolled out. We even had a couple of very significant award, as I mentioned in the prepared remarks, within the first 90 days we’ve already gotten two multi-country awards from two European-based global service providers. Each of those initial phases includes six of their country properties. So that’s a pretty good start to policy management, and looking at the quoting activity in the amount of pipeline that we’ve had at Justins (ph) purchasing Camiant 90 days ago and purchasing Blueslice on the SDM part, we’re very pleased that prospect going forward.

The other thing that’s interesting is, if we look at our overall pipeline of opportunities, over 50% of our total opportunities now are represented by these Next-gen products. The policy management SDM performance management at mobile messaging, Eagle XG and all of the applications on Eagle XG. So going forward, we’re very encouraged by the amount of activity on the Next-gen part of the network and we expect those products to grow at a very, very healthy clip going forward. This morning we actually started breaking those out just to give you a better idea of where the traction is and if you look at our Next-gen products, year-over-year, we were up 34% on a six-month basis. So we did about $40 million in revenues in the first six months of this year and that excludes any contributions from policy management at SDM with the exception of , I think, $1.3 million.

So that was just performance management and mobile messaging on Eagle XG. Going forward, that number is going to be much bigger. It’s already almost 20% of our revenue. It’s going to continue to grow, going forward.

Amir Rozwadowski – Barclays Capital

Where do you see sort of a normalized growth level for your Next-gen products if we were to include sort of the policy management subscriber data management?

Frank Plastina

I think we’re going to have to get through a few quarters of having policy management SDM in the base before we get to a normalized growth rate because we’re going to see this very significant bump-up which is very good going through zero to a significant amount of revenue. I think after this year, we probably will see a much more normalized base from which to comment on in terms of growth rates.

If you look at SDM and policy, a quarter ago when we purchased Camiant and Blueslice, we said that we would make – we would get about $20 million of orders and maybe about $10 million of revenue net of purchase accounting adjustments. We’re still on that path, we haven’t moved off of that view from 90 days ago. So the Next-gen portion of our portfolio still is pretty healthy and we’ve got some good traction out there. It’s really the one-time issues such as India and some of the credit issues in the Middle East and Africa that has stripped up the first six months worth of order input.

Operator

Your next question comes from the line of Brian Modoff with Deutsche Bank.

Brian Modoff – Deutsche Bank

Hi, guys. So, Frank, how many Eagle XG customers did you add this quarter?

Frank Plastina

We added two this quarter and then we had an additional application –

Greg Rush

Both of them existing Eagle XG customer.

Brian Modoff – Deutsche Bank

And then Eagle XG is relative to your signaling business. What percent of that revenue is it now?

Frank Plastina

Right now it’s still a very small percentage, included in that $40 of Next-gen products that we’ve broken out. If you’re going to apply 18 and 19, you’ll just see that we didn’t break out (ph) itself, but there’s a line item there that’s Next-gen signaling and in that number includes messaging and all the applications built on XG.

Greg Rush

But the vast majority of the bookings that we’ve had with these wins that we’ve been announcing are still sitting and backlogged.

Brian Modoff – Deutsche Bank

So what part do you think – previously you’ve been talking about SS7 kind of declining mid-single digits. How do you feel about that now? What do you think it’ll do for the year, and I know it’s a hard question to answer, it comes down the life of the, especially in the life (ph) power –

Frank Plastina

It is, yes. It is a hard question to answer only because it seems like we’re having some very distinct regional trends that are playing out. We’re seeing the situation in India but they come off of that as a one-time thing because the core demand in India is very strong, as you know. Middle East and Africa we’ve raised (ph) issues, particularly issues are going to sort themselves out. We think a very conservative view on the book orders, if we don’t think we’re going to get payment, we don’t even book the order.

We don’t wait until the revenue recognition is after (ph) that. So $4 million we kept aside, related to Middle East and Africa was really just our conservative approach to booking orders. That we expect to sort itself out and book those orders in the second half. If you look at the U.S., which is predominantly SS7 SIGTRAN related, we were up 24% in North America, year-over-year, in ordering plate. In average underlying healthy book ship business, we even got a couple of new customers in the U.S., which is interesting considering out market share there. And one of those new customers purchased our Diameter signaling routing application and they’re going to use that for their LTE roll out going forward.

Brian Modoff – Deutsche Bank

I guess, we’ll just – in terms of growth, something’s got to play it so far over the next several quarters as we see the new products grow, you guys get more, a better feel for how this business is going to form overtime.

Frank Plastina

Yes, absolutely. What we’re seeing now is we’re seeing a lot of discussions pertaining to Diameter and stuff which is really the evolution path, and back to your question of SS7 and SIGTRAN, ramping off Diameter and SIG traffic, that’s replacing the traditional SS7 SIGTRAN traffic. Having said that, a lot of parts of the world are still predominantly SS7 SIGTRAN will be for quite some time. India is a good example. India hasn’t even started 3G build out. So 100% of what do in India from a core perspective right now is SIGTRAN, and we expect that to continue for several years. So if we’d look at the overall SS7 SIGTRAN market globally, we still see a decline in single digits overtime but there’s going to be some regional peaks and valleys depending on where the level of the maturity of the market is and where the various deployment and schedule is throughout the year in Next-gen networks, the smart phone penetration range, a whole bunch of factors that really impact that SIGTRAN traffic.

Brian Modoff – Deutsche Bank

And, Greg, real quick, any changes to your OPEX tax rate, anything like that?

Greg Rush

No, on the OPEX increased, all that we have is $4 million from carrying a voice license, it’s like that they went down, year-over-year, and that’s due to our continued cost controls and there’s been a compensation from the tax rate so we did it shift in the quarter from a year (ph) international market and start getting the benefits from the tax fine (ph) as we’ve done in the past. So the rates did drop a little bit.

Operator

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

Blair King – Avondale Partners

You guys talked a little bit about your signaling in your prepared remarks and some of the follow up questions but, Frank, I was hoping you might be able to give some color around the use of IM or signaling and the associate opportunity on the Eagle XG platform and, specifically, is your view that Diameter may even lead this in the U.S.?

Frank Plastina

Diameter, yes. So just a little bit of a background, Diameter is the protocol that’s used to connect the mobility management traffic, to the charging and to the policy applications. That’s where the Diameter traffic gets generated. So it, maybe, is applicable in a 3G context, it’s applicable in an LTE context and in an IMS context. So, obviously, it’s a big play in the data pack, it is going to be in the protocol of choice connecting a lot of these core pieces of functionality. And now, we’re seeing an increase, the real ramp-up, in the last three or four months of Diameter RFP activity, and we feel pretty confident that we’re going to be well-positioned to win some of the those in the fab we already have won and we have that, the North America win this morning.

Blair King – Avondale Partners

Do you see any specific region where that are more applicable than others, or is it worldwide?

Frank Plastina

Right now we’re seeing the activity primarily in the US, but we are seeing some RFP activity from Western Europe and from some of the more advanced networks in Asia as well, but right now the bulk of the activity is US based.

Blair King – Avondale Partners

Great, that’s helpful, and then one last follow-up question. It’s been a couple of quarters since we’ve heard of any commentary around activity in Japan, I was hoping maybe you might be able to give us an update of what’s happening there specifically given all the buildings and things about Japanese carriers going to 4G recently?

Frank Plastina

Yes, in Japan, so we just added a new head of sales for Japan about a month ago. We believe we’ve got some opportunities there particularly with our policy management and with our performance management products. We’re not going after the signaling core business initially because of the J7 requirement, we think that its old technology, there is no point in spending a lot of R&D chasing J7. We think once that 4G opportunity comes about and ship and diameter of the protocols of choice we will be very well positioned in Japan. We’re now working with several customers or sorry, partners in Japan to get us the entry points into some of the customers there and we think we’ve got a pretty good shot with our Next Gen solutions.

Blair King – Avondale Partners

Thank you Frank.

Operator

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

Catherine Trebnick – Avian Securities

Good morning. Frank, could you discuss more about the opportunities for Camiant and the performance management system, are you looking at integrating those to make it a stronger product and then some opportunities you see coming down the pipe perhaps in Europe. What I’m confused about is when you guys said on the call that you had more countries in Europe and I know that Camiant particular has been very strong as Vodafone. So is that more expansion of the Vodafone stuff or is that new wins with new carriers?

Frank Plastina

No the wins when we announced this morning, our wins with new carriers. Those are two grand new wins with two European based global service providers. This is in addition to the Vodafone and Verizon wins that we announced at the time of the acquisition. So these are two new global carriers, six countries a piece on the initial phase.

So the integration is going very well. With policy management, we’re probably at a very good impression point the timing of the deal was very good in the sense that there is a lot of RFP and selection activity and choice of work being done right now by service providers around the world. The amount of activity that we’ve had since the purchase is tremendous.

There are a lot RFPs out there, lot of business, a lot of trials going on, and these early wins give us great comfort that we’ve got the leading product in this space and I think with the addition of the SDM that we purchased from Blueslice, the diameter capability that we have in our core portfolio, we think we’ve got a very good bundle that can compete very well and differentiates us versus the point solution players. There are some players that only have a policy engine and there are some players that only have corresponding (ph) capabilities and some players that only have some of the other capabilities.

We think once we continue to integrate some of these portfolio pieces, we’re going to be that much further ahead of the competition.

Catherine Trebnick – Avian Securities

Thank you.

Operator

(Operator Instructions) Your next question comes from the line of Todd Kaufman with Raymond James.

Todd Kaufman – Raymond James

Thank you very much, Frank, just got a clarification to an earlier question, what was the contribution from EAGLE XG in you’re the new reporting segment of Next Generation which I think is $40.5 million and then just a quickie, on the new lowered guidance, does that reflect any adjustment in your thinking with regard to revenue for the next six months for Camiant? Thank you.

Frank Plastina

Yes, Todd so the first question. As you can see the $40 million is comprised of performance management, mobile messaging, policy management, SDM and EAGLE XG. 30 of that we already break out as performance management. So the remaining 10 is primarily mobile messaging and some EAGLE XG. So its single digit millions in that 40 just to give you the answer to that question.

In terms of the second question, the – when we purchased Camiant, Blueslice, we said we would get approximately $10 million worth of revenue net of purchase accounting adjustment and about $20 million worth of orders. We still see that being the case. So we haven’t changed that from last quarter.

Todd Kaufman – Raymond James

Thank you very much.

Operator

Ladies and gentlemen, we have time for one final question and your final question today comes from the line of Larry Harris with C.L. King.

Larry Harris – C.L. King

Yes, thank you. Couple of questions, one with respect to India, I know the security situation there is still evolving, but how long under your – accounting rules say before we might see a rebound in revenue, in another words if this were to be resolved in the next month or two, how long before we might see orders and shipments and could the revenues from the resolution of these disputes occur in the fourth quarter or might we be looking at early next year?

Frank Plastina

Larry, this is really something that gets pushed out to 2011 because right now if we get our order ready in August. If we get orders from India, it’s very difficult for us to turn those into revenue before the end of this year depending on the size of the orders, obviously some small orders would be easier than others. So it’s just going to take us another month or so to sort this out with the Indian government – with the customers and the Indian government or perhaps even longer when looking at revenues being pushed out to 2011 for any orders that come from India this year.

That’s reflected in our guidance today. So that 7% adjustment that we’ve made brining the range down reflects the fact that we’re not going to get those revenues in this year.

Larry Harris – C.L. King

And with respect to the operating expenses which came down this quarter as part because of lower set of compensation, was there a onetime impact to this quarter or after taking into account that you will have a full quarters came in and Blueslice’s best quarter. Is this quarter’s operating expenses are fairly reflective of your spending in the second half?

Frank Plastina

Yes I think there was Camiant and Blueslice expenses. There was about two months worth of expenses. So we’re not – there definitely is a run rate already built into that reduced OpEx year-over-year and look organized the new guidance does factor all that in. So including all of the Camiant and Blueslice expenses and today’s new guidance on the earnings we still see a 20% operating margin for the year which is what we’re targeting and that’s where we have the number today and that’s obviously based on the new revenue level and the new earnings range.

Larry Harris – C.L. King

Understood. And then finally, any thoughts at this point, you’ve made these two acquisitions, you’ve converted the auction rate securities best, any thoughts about share repurchase?

Frank Plastina

Yes, I think so, I mean it’s something that we have actually talked about very, very seriously with the Board and certainly something that we’ll continue considering the – we’re quite encouraged by the amount of Next Gen pipeline opportunity. Having said that by definition since its Next Gen the time to close is a little bit longer than the established business because the customer bases isn’t established. So that’s why we tempered the expectations somewhat but we’re very encouraged with that Next Gen traction and certainly if we see a reason to go in and do a share repurchase because of that the market doesn’t recognize some of that value then that’s what we’ll do.

Larry Harris – C.L. King

Great. Thank you.

Operator

Ladies and gentlemen this concludes today’s Tekelec’s 2010 second quarter earnings release conference call. Thank you for your participation. You may now disconnect.

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