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Mavenir Systems Inc. (NYSE:MVNR)

Q1 2014 Earnings Conference Call

May 7, 2014 5:00 p.m. ET

Executives

Pardeep Kohli - President and Chief Executive Officer

Terry Hungle - Chief Financial Officer.

Analysts

Brian Modoff - Deutsche Bank

Tal Liani - BofA Merrill Lynch

Rich Valera - Needham & Company

Scott Smith - Morgan Stanley

Operator

Good afternoon, everyone, and thank you for joining us on our conference call to discuss Mavenir Systems' results for the first quarter ended March 31, 2014. This call is being broadcast live over the web, and can be accessed in the Investor Relations section of the Mavenir Systems website at www.Mavenir.com. This afternoon, Mavenir Systems issued a press release announcing these financial results, a copy of which can be accessed on our website or the SEC's EDGAR website.

With me on today's call are Pardeep Kohli, Mavenir Systems' President and Chief Executive Officer, and Terry Hungle, Mavenir Systems' Chief Financial Officer.

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

The outcome of the events described in these forward-looking statements is subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from the results anticipated by these forward-looking statements, including but not limited to those factors contained in the Risk Factors section of our Annual Report on Form 10-K for the year ended December 31, 2013 and in other SEC filings we make from time to time. In light of Regulation FD, we advise you it is Mavenir Systems' policy not to comment on our financial guidance other than in public communications.

Please note that we will discuss Non-GAAP Gross Profit, Non-GAAP Gross Profit Margin, Non-GAAP Operating Loss, Non-GAAP Net Loss and Non-GAAP Loss per share. Specifically Stock Based Compensation, Depreciation and Amortization and Foreign Exchange Gains and Losses are excluded from these calculations. We have provided reconciliations of these Non-GAAP measures in our earnings release.

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

Pardeep Kohli

Thank you Maryvonne, and thank you to everyone participating today in our first quarter 2014 earnings call. We appreciate having the opportunity to speak with you to provide an update on our results and share some highlights from our business performance over the quarter.

This afternoon, we are pleased to report first quarter revenue of $28.7 million, above the top end of our guidance, and setting another new quarterly revenue record for Mavenir Systems. This reflects a 28% increase over the first quarter of 2013 and a 6% sequential increase over the fourth quarter.

We are also pleased to report Gross Margin of 56.9% that was 6% above the high end of our guidance range, and contributed to a nearly break even Non-GAAP Operating Loss of $(0.2) million.

I’m very pleased with the numbers and with our progress in the market winning global Tier 1 customers.

We acquired three new Tier 1 customers, two of which are leading mobile operators in two of the largest markets in the world, the US and India. Our customer win in the US now means 3 of the top 4 mobile operators in the US market use Mavenir products, and the win in India gives us a significant share of the very large Indian market as well as a key 4G customer reference in the Asia Pacific region. The third Tier 1 customer win is with a major European carrier for our Diameter Routing solution.

These new customer wins added to our growing roster of blue chip tier one mobile operators, which already includes AT&T, T-Mobile US, Deutsche Telekom, Vodafone, Hutchison and Tele2. With these new wins, our 4G next generation software product customers have a combined total of over 1 billion subscribers. With the contracts we have in place, our products and services now can reach a significant share of the world’s population, which we believe offers us very good opportunities for future growth.

Also, I am pleased to report that momentum in our 4G next generation business continues to build. Quarterly revenue from our 4G next generation software products was just over $20 million and grew 95% over the first quarter 2013 and 10% over the fourth quarter 2013.

We feel that we are very well placed to capture the growing market opportunity. According to a number of recently published industry reports from Dell Oro and Infonetics, our market is projected to increase to over $10 Billion annually by 2018.

As you know, the industry wide transition to 4G LTE is marked by two significant trends. The first trend is the implementation of voice and messaging services on all-IP infrastructure; the second trend is the evolution of mobile networks to the cloud.

We anticipated these trends early on and believe we are well-positioned to capitalize on both with our portfolio of next generation software products. The wireless industry has galvanized on an enabling technology called Network Functions Virtualization, or NFV, which will define how next generation networks are built. We have a complete portfolio of over 25 products based on a fully virtualized software platform that is designed to meet mobile operator requirements for scale and reliability in software. We feel we are uniquely positioned to capture the growing market opportunity.

Our business model is based on providing virtualized software products to operators that are building their own private cloud networks. This offers higher margins and better scale without significantly increasing their working capital requirements. We believe we have a “first mover” competitive advantage as the industry transitions to 4G LTE more swiftly than most anticipated. In fact, in the first quarter, each of our new customer wins was for our all-IP software based products, where the mobile operator is sourcing software and services from Mavenir, and virtualized hardware platforms from leading 3rd party platform vendors, such as Cisco, HP and IBM.

I would now like to talk about operator adoption of Voice over LTE and how this transition is a key growth driver for our business. We believe that VoLTE will be a dominant technology in the future. Strategy Analytics predicts that VoLTE users globally will increase from 9 million in 2013 to over 800 million in 2018, an increase which represents an annual growth rate of 145%. The question, though, is the timing, and when the initial launches take place.

As you may know, other than South Korea, the US market is the most advanced in terms of 4G LTE network coverage and will be the lead market for VoLTE launches, followed by select markets in Western and Northern Europe. AT&T and Verizon have been the most aggressive and visible as US operators publicly committed to launching VoLTE. Both announced VoLTE launches by the end of 2013, but then delayed as they continued to improve LTE network coverage so they could achieve the same level of voice quality as they have on their 3G networks today.

As I indicated on our previous earnings call, we remain confident that 2014 will be a pivotal year for us and the year that VoLTE arrives. There are positive signs in the press that AT&T and Verizon are on track to launch VoLTE in 2014. Wireless Week, recently reported that AT&T plans to launch VoLTE on May 23rd in two select markets with ASUS Padfone X or Samsung Galaxy VoLTE-capable phones. Fierce Wireless recently confirmed that Verizon also remains committed to launch VoLTE in 2014. T-Mobile has indicated that they will be an “early player” in VoLTE as well.

On the device side, the ecosystem is developing rapidly. For example, according to the Global mobile Suppliers Association (GSA), there are 57 handsets that support VoLTE today, including Samsung, Sony, HTC and LG. Apple has indicated that the iPhone6 and iOS 8 will both support VoLTE. Many of these devices are powered by Qualcomm’s Snapdragon 800 processors, which have supported VoLTE and the more complex mobility feature called SR-VCC since 2012, and have been tested in live networks since 2013.

Voice over LTE is a key growth driver for our business. Based on experience with our customers, we believe other operators beyond AT&T and Verizon will also launch VoLTE in 2014. We have 14 major tier one mobile operators that have selected us for VoLTE and we are actively working with several of them towards commercially launching VoLTE, as well as Voice over WiFi, this year.

It’s important to understand that VoLTE is about more than just delivering plain-vanilla voice service. Operators offering VoLTE are looking to provide “new and improved” voice services over what they currently offer. The VoLTE service will offer faster call setup times and HD Voice quality. Ease of use and an overall better consumer experience will empower operators to compete better.

Operators will use the VoLTE infrastructure to offer Facetime-like video calling and video conferencing services to counter competitive threats from OTT service providers such as Apple and Skype video.

We have expanded our product portfolio to help operators build a better voice network with Voice over LTE and Voice over WiFi services. We announced our Videomail and Voicemail solution which is a converged solution that replaces legacy voicemail systems while offering new services such as Videomail and Visual Voicemail. We already have three customers globally for our Videomail and Voicemail solution, one of whom will implement it as their first 4G LTE service in their virtualized cloud environment.

With Facebook’s recent acquisition of WhatsApp, a lot of attention has been focused on the implications of competing Over-The-Top (OTT) service providers for mobile operators. There is no doubt that mobile operators have taken notice and are implementing strategies to compete for their subscribers. The evolution of mobile networks to the cloud is one such strategy. The implementation of all-IP technology on cloud-based infrastructure lowers capital and operating costs, enables new IP services and increases the speed and agility for new service introduction.

Operators are using Rich Communication Services, or RCS, as a means to offer their subscribers comparable services to OTT, such as instant messaging, group chat, live video and file sharing. RCS is based on the same technology standard as VoLTE and is a logical add-on to the 4G LTE core network. We have 14 customers for our RCS solution. Our customers plan to use RCS to introduce new OTT-like services to their subscribers and generate new revenues. Some customers have also selected our WebRTC Gateway to deliver RCS services to web browsers, as well as to create new real-time voice and video services.

Mavenir’s RCS solution enables mobile operators to offer comparable services to OTT service providers, but in a manner which is fully interoperable between operators and is native to the smartphone. OTT services are limited to the community of users that have downloaded a specific client while operators’ RCS services will work between users on any operator network that has the latest generation of smartphone.

Our RCS solution just received an award for Best RCS Package at the Informa IMS Industry Awards, which took place at the IMS World Forum 2014 in Barcelona.

We also announced our Voice and Messaging client, along with our Client Provisioning Server, which enables operators to extend their voice and messaging services to 3G or first generation 4G devices that don’t already have embedded clients, as well as tablets. Our client solution removes the dependency that operators would otherwise have on new devices to launch new services.

Let me comment on the progress that we are making with our major product announcements over the last six months. We are making good progress with our next generation Session Border Controller. We were awarded a major expansion from a tier one US mobile operator planning to deploy our SBC as an IP Interconnect solution to carry voice and RCS traffic between operator networks. This particular operator has already deployed our SBC for wireless access which is carrying live Voice over WiFi traffic today. We also announced in the first quarter that T-Mobile Netherlands selected our SBC for both wireless access and IP Interconnect.

Since our product launch in December 2013, we have 6 SBC customers.

As operators move closer to deploying their Voice over LTE and Voice over WiFi networks, the volume of Voice over IP traffic between operator networks will ramp significantly so operators are looking for higher performance solutions than the first generation SBC appliances that have historically been deployed at the next edge. Operators are deploying our SBC for IP Interconnect because it is software-based and because of its flexible and scalable architecture.

We have also begun our first customer trial for our Evolved Packet Core (EPC) that we announced in Q1, with a tier one mobile operator here in the US. We are excited about the value that our uniquely designed EPC product architecture and value proposition brings to the market. Our design leverages architectural principles from Software Defined Networks, or SDN, that provides a more efficient framework for deploying data networks. We hope to have at least 2 EPC customers this year.

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

Terry Hungle

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

Now on to the financial results for the quarter…

Revenue in our first quarter of 2014 was $28.7million, an increase of 28% over Q1 2013, and 6% above Q4 2013. As Pardeep noted, we are pleased that our first quarter performance was above the high end of the guidance we provided in our last earnings release.

As reflected in our revenue results and our customer wins, we are continuing to see strong momentum in our 4G next generation business. Revenue from 4G next generation business was $22.3 million in the first quarter, an increase of 95% over Q1 2013, and an increase of 10% over Q4 2013. Revenue from our 4G next generation business represented 78% of our total revenue in Q1 2014 and our 2G/3G products representing the rest.

In terms of product groups, VoLTE is driving significant growth in our Voice and Video product group, with revenue growing by 324%, or roughly three times over Q1 2013 and 144% over Q4 2013. This has resulted in Voice and Video being 79% of our revenues in Q1 2014. This strong growth in Voice and Video revenue is a result of the increased momentum in the VoLTE network build-outs, which is well underway in the market.

Looking at the split between software product revenue and maintenance revenue, revenue from software products was $23.0 million in Q1 2014, representing 80% of our total revenue, an increase of 30% over Q1 2013 and 8% higher than Q4 2013. Maintenance revenue was $5.7 million, an increase of 21% over Q1 2013 and 3% lower than Q4 2013. We expect that maintenance revenues will continue to increase over time as operators launch their networks and the initial warranty periods expire.

From a geographic perspective, we are experiencing significant growth in the Americas region as operators prepare for the initial launches of VoLTE and RCS services. Revenue of $13.6 million from the Americas region in Q1 2014 is 62% higher than Q1 2013 and 23% higher than Q4 of 2013. The Americas region represented 47% of our total revenue in Q1. Revenue of $12.4 million from the Europe, Middle East, and Africa region, otherwise called EMEA, in Q1 2014 is 65% higher than Q1 2013 but is 8% lower than Q4 2013. The EMEA region represented 43% of our total revenue in Q1. Revenue of $2.7 million from the Asia Pacific region in Q1 2014 declined by 59% from Q1 2013, which reflects a slowdown in the 2G/3G business.

We expect that revenue from the Asia Pacific region will increase over time as the regional adoption of 4G LTE picks up. The Asia Pacific region represents 9% of our total revenue in Q1.

As we discussed earlier, the majority of our customers are still in the network build-out phase as they work towards VoLTE and RCS launches, with several launches planned for 2014. During this phase, the revenue mix is weighted towards hardware and professional services, and revenue recognition is highly dependent on customer acceptances. In the longer term, we expect the revenue mix to weigh more heavily towards software licenses as operators need to expand capacity as they get closer to service launches. In the short term, our Gross Profit Margin will be subject to volatility depending on revenue mix and customer acceptance milestones.

Non-GAAP Gross Profit Margin in Q1 of 2014 was 57%, a 2 percentage point decrease from 59% in Q4 of 2013 and 6 percentage points higher than the guidance provided on February 20, 2014. The driving factors for the improvement over our February 20th guidance are lower costs on completed projects, improved operations labor efficiencies and higher services revenues.

With the accelerating adoption of 4G LTE and with an expanding product portfolio, we are adding to our talent base. During Q1 2014, we increased our headcount from 786 to 867 people, mostly in the areas of R&D and Sales and Marketing. Heading into 2014, we slowed the growth of post-sales support headcount and as a result, we are seeing our non-GAAP maintenance gross profit margin percentages begin to increase. At 51.8% the maintenance non-GAAP gross margins are up from their low point of 37.5% in Q4 2013.

Non-GAAP Operating Expenses of $16.6 million in Q1 2014, were $1.3 million or 8.7% higher than they were in Q1 2013 and $0.5 million or 2.9% higher than Q4 of 2013. With 28% revenue growth in Q1 2014, we continue to see good Non-GAAP Operating Expense leverage. We continue to benefit from cost improvements from our offshore Research and Development activities, as the value of the Indian Rupee has declined versus the US Dollar from Q1 2013 to Q1 2014.

Even though we increased R&D headcount, Non-GAAP Research and Development costs remained flat from Q1 2013 to Q1 2014. In our last earnings call, we advised that we are increasing our spending in Non-GAAP Sales and Marketing costs as we begin to focus on markets such as Eastern Europe and Latin America that are beginning to make their buy decisions related to VoLTE and Rich Communications. As such, in Q1 of 2014, we are seeing Non-GAAP Sales and Marketing spending of $6.7 million, which is $1.7 million or 33.7% higher than in Q1 2013 and 11% higher than in Q4 2013. Non-GAAP General and administrative expenses were flat to Q1 2013 and $0.3million lower than Q4 2013.

Non-GAAP Operating Loss of ($0.2) million in Q1 2014 was $0.4 million less than the Non-GAAP Operating Loss recorded in Q1 of 2013 and $0.1 million higher than Q4 of 2013. Higher revenue is the key driver to this improvement over Q1 2013. Non-GAAP Net Loss of ($1.1) million improved by $0.5 million over Q1 of 2013.

As previously announced, we did modify the loan agreement with one of our major lenders. The result is a substantial reduction in our financing costs. We were able to extend the maturity of the loans with no material change in the amount of liquidity the company enjoys today. The transaction resulted in the non-cash write-off of unamortized loan costs, increasing the GAAP net loss by $1.8 million.

Our Q1 2014 Loss per Share is $(0.17). On a Non-GAAP basis, which excludes the $1.8 million write-off of the unamortized loan costs, the Non-GAAP Loss per Share is $(0.05)

Now I’ll provide our outlook for the second quarter of 2014 and an update to our outlook for the year.

Revenue for second quarter 2014 is expected to be in the range of $29 to $31 million, which will represent an increase of 13% to 20% year-over-year. This will then bring our 1st half revenue range of between $57.7 million and $59.7 million, representing growth of 20% to 24% over the 1st half of 2013.

We expect non-GAAP Gross Profit Margin percentage of 53% to 55%, which continues to reflect the higher percentage of revenue coming from network build-outs. This means that our software products revenues will be comprised primarily of hardware and professional services along with a small amount of software. For the 1st half of 2014, we therefore expect non-GAAP Gross Profit Margin percentages to be in the range of 54% to 56%

We expect non-GAAP Operating Loss for the second quarter of 2014 to be in the range of $(2.6) million to $(1.3) million. This non-GAAP Operating Loss is the result of higher revenues offset by higher cost of sales and higher non-GAAP Operating Expenses. The higher non-GAAP Operating Expenses reflect the investments we are making in research and development to introduce new products such as the EPC and the SBC. As noted above, we are also investing in Sales and Marketing as we begin to address new markets. This will then result in our non-GAAP Operating Loss being in the range of $(3.5) million to $(2.2) million.

We expect the weighted average share count for the quarter to be approximately 24.5 million shares. As a result, we are estimating a Non-GAAP Loss per Share to be in the range of $(0.14) to $(0.09). The non-GAAP Loss per Share for the 1st half of 2014 is expected to be in the range of $(0.19) to $(0.14).

For total 2014, we see revenues continue to strengthen and as a result, we are now increasing 2014 annual revenue outlook to a range of $124 million to $127 million, representing annual growth of 22% to 25% over 2013. We expect to see total year non-GAAP Gross Profit Margin at between 57% and 59% compared to the 56.2% achieved in 2013. We expect this increase in non-GAAP Gross Profit Margin to be the result of software license capacity expansions and the impact of selling our own software-based products such as the Session Border Controller.

To support future growth and take advantage of new market opportunities, we are increasing our rate of investment in research & development and sales & marketing throughout 2014. We continue to expect non-GAAP operating profit to be at or about break even for 2014.

With that said I would like to turn the call back to Pardeep for concluding remarks.

Pardeep Kohli

Thanks, Terry

In summary, I am pleased with our business results in the first quarter as well as the quality and quantity of our new customer wins for our next generation software products. Each new customer win confirms that our software based technology and business model positions us well to continue to be successful transforming mobile operator networks to 4G LTE. I am also encouraged by positive signs that 2014 will indeed be the year of VoLTE – AT&T and Verizon have both recently confirmed their launch plans, and with Apple committing to VoLTE, the devices will be ready.

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

Question-and-Answer Session

Operator

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

Brian Modoff - Deutsche Bank

Question is for Pardeep. Can you talk us through some of your -- the three new ads you discussed in the release and give us a little more color on who they are? Perhaps maybe not wanting to name them specifically but give us an idea. And then what specific products are you -- are they buying? Give us an idea which platforms that they are bringing online? And a little bit of the timing of where you see the adoption? Thanks.

Pardeep Kohli

Yes, so I'll start with U.S. customer, this is actually for our Videomail product, so as you know like we already had announced AT&T and T-Mobile as our customer. So this customer already has a good LTE network and as they’re launching the next generation services, they picked our product for next generation Videomail. In India we’re actually working with a Tier-1 operator as they’re launching our LTE to build the VoLTE as well as other some next generation services. So, we’re providing almost complete IMS network, it includes the SBCs, includes our core network, all the application layers as well as all services and support to help them launch this network. And in Europe it’s on our DRA product, Diameter Router product.

Brian Modoff - Deutsche Bank

Excellent. Can you talk about how you see multi deployments evolving this year? You seem a little more optimistic. You've taken your revenue guide up for the year. Just a little bit of rundown on how you see the multi-deployments improving through this year and visibility that you're starting to see. You mentioned Apple. But what other indications are you seeing in terms of improving visibility? Thanks.

Pardeep Kohli

I think our customers in U.S. have started buying more capacity, which were always -- I think as we've talked in the past, is that in the last couple of years they've bought a coupon for initial rollouts, but the sign for when, I guess when they will start buying more additional capacity, it will be the sign that they’re going to launch sooner than later. And we have started seeing that, we actually did get some capacity there in use in first quarter and we also got purchase orders in the second quarter for more capacity growth. And in Europe…

Brian Modoff - Deutsche Bank

Well, good luck guys. Go ahead.

Pardeep Kohli

In Europe, I guess it'll be more like third - fourth quarter, so we’re still in a testing stage and verifying the network.

Brian Modoff - Deutsche Bank

You talk about breakeven by year-end, any chance that happens a little sooner?

Terry Hungle

I think, Terry speaking -- so what we’ve indicated is that we’re having to make some additional investments in R&D in sales and marketing. I think there’s opportunity as we drive towards the end of the year and if we start to see some of the launches occur, there’s additional opportunity for more revenue, particularly of the software variety, which will help our margins and of course drive forward our profitability. So we think we’re at breakeven, depending on how the revenue goes, maybe a little bit more, but not sufficient for me to make a further call on that, Brian.

Brian Modoff - Deutsche Bank

Okay. Nice progress guys and good luck on the rest of the year. Thanks.

Terry Hungle

Thank you.

Operator

Your next question comes from the line of Tal Liani with Bank of America Merrill Lynch.

Tal Liani - BofA Merrill Lynch

I’m impressed how well you pronounced my name. All right guys, I have a few questions. First on the revenue recognition policy, so you mentioned this is a drag on certain items in the P&L. Can you just explain what needs to happen for you to recognize revenues? How do we see revenues recorded or how do we see the orders coming? How do we see the orders recognize -- or on the balance sheet is it going to be in deferred before it goes to revenues et cetera? So that's question number one.

The question number two is about your guidance for margins. You guide for the quarter -- for next quarter you guide gross margin below and you also said that you're guiding OpEx. I need to work the numbers but you're guiding OpEx up. But then for the year you are in line with the street guidance. So that means that you expect the gross margin to recover in 3Q and 4Q, to be above what we originally expected and compensated for the year. So can you discuss the margin dynamics throughout the year? Thank you.

Terry Hungle

Certainly, so let me take the first one first, Terry speaking. I -- try to deal with the deferred revenue, so take a moment to clarify a point. We don’t see it as a drag on our revenue, what we see it as the process by which we recognize revenue, so as we recognize a lot of our revenue on a completed contract basis. So that means that it’s installed, we have to complete the various acceptance test procedures that are mutually agreed between us and the customer, we get to an acceptance certificate and then we take the revenue. So you’re correct Tal, so that as we’re building up the costs or incurring the costs, they are sitting on the balance sheet, they sit in, we see deferred revenues going up and we see deferred costs, deferred cost of sales go up so all those items sit on the balance sheet. So far I don’t think it’s been a drag on our revenue. We’ve been able to complete those tests in a timely basis or at least in line with what we've expected and in fact the improvement in the Q1 revenues, it's because we completed a set of tests early on a particular project, so allowed us to take the revenue. So I think that’s fair to say if we just lay that out there and that’s how we do the revenue, it can create a little bit of volatility or choppiness in it, so far we haven’t experienced that in our public life here and I just want to keep reminding folks that, it is a risk in terms of how we do this business.

As it relates to the gross margins, so you’re right we did guide down Q2. But I think the whole reason for us to look at the first half performance is that we believe we’re on track by the end of the first half of what we had really built our model to for gross margins, so we were head in first in the first quarter as we noted we’re 6 percentage points above the guidance that we had previously provided, based on new contracts coming in to more costs.

Slight shift in the revenue mix towards services and that made for a much stronger Q1.

Q2 is a little bit lower, because we have more -- I’ll call them network build out revenues in the pipeline for Q2, which means more hardware -- more hardware related to it, not as much software and as a result of that our margins are down a little bit. But as we come out of the first half, I expect that we’re on plan with all of our projections, right, we're right on target at that point and then Q3 and Q4 we’ll continue to increase as we start to see Q4 and I would anticipate that we’re running higher because of more software content in that quarter.

Tal Liani - BofA Merrill Lynch

Got it. Can you talk about competition? How is competition now given that you started seeing orders for VoLTE capacity, can you speak about the entire portfolio? What are the areas where you were surprised with, negatively surprised by the competition pricing aggressiveness, et cetera.

Pardeep Kohli

So Tal, as you know right, when we signed the contract, these are long term contracts where the price is already fixed for a number of years. So, obviously we are not getting any price competition, the customers we already had in the past, because when we signed the contract two or three years ago the price was fixed. Now as we go to the new markets, for example in Indian market or new Asian, Asia Pac markets or Tier-2 markets in Europe, obviously those are different markets and different volumes and different type of customers. So we obviously are seeing the new contract, the prices are lower but that is expected in those markets. But in the existing customer base we already have, we don’t have any pressure there.

Tal Liani - BofA Merrill Lynch

So, the reason why I ask this question is as follows. You report in the first half roughly give or take $60 million of revenues. You guide the year to roughly $125, so there is $5 million growth between 3Q and 4Q versus the run rate of first half. So you talk about all these VoLTE projects going in and you sound very bullish and you're naturally a conservative person. You sound very bullish about deployments, about new customers, but then your guidance -- the growth guidance for second half is not very aggressive. So what drives you to be conservative with second-half revenue guidance -- the implied second-half revenue guidance versus the bullishness of your statements?

Terry Hungle

So I think when, Tal what we look at it is - we look at where we’re going, we have a pretty strong backlog so that gives us pretty good confidence in terms of where we’re at. We still have some new accounts to win and some new projects to start working on to get there, as the -- those projects solidify, harden up, we’ll call it forward. I think you’ll see that we’re starting to increase the range at the back end of the year, we’re guiding on, whether it’s 125 we’re saying now it could be as high as 127 and we’ll continue to communicate to you and to the marketplace as we see strength in that area.

Tal Liani - BofA Merrill Lynch

Got it. Great. Thank you very much.

Operator

Your next question comes from the line of Rich Valera with Needham & Company.

Rich Valera - Needham & Company

Thank you. Good evening gentlemen. Pardeep, you talked about the state of VoLTE deployments. I wonder if you can give your view on how RCS is going in terms of deployment? And both in your role and just broadly how RCS is being adopted versus maybe your expectations a year ago?

Pardeep Kohli

So, I think it’s market-by-market basis. In U.S. all the operators are building their networks to do it and in Canada they’re doing it. In Western Europe in key countries, all the operators are working on it. So it’s just a -- I think when all these operators will launch at the same time, you would not see and right now in the process of doing interoperability across different networks, and then it will, it will work smoothly that you won’t even notice that you’re using RCS and with the same button you’ll be able to do a lot more things than just send a simple message. And there will not be any need for you know, any over the top client to be downloaded or any of those things, so I think in some ways in key markets there is some collaboration between operators that when they do it, they will do it together in I guess more meaningful way, so that way it kind of take off much faster. So, it has been slower than what we had predicted, but I think in the key markets where we are, as I said we have 14 customers worldwide who are using RCS and in some markets we have two or three of them out of four or five of the customers. So we can see in each market how the progress is going and I think by the end of this year when people will launch VoLTE, they’ll launch RCS as well.

Rich Valera - Needham & Company

Got it. Just wondered if you could give some more color on the new mobile clients. Wondering what drove you to develop that. Was there one or more customers that maybe requested that you develop your own mobile client to give them an end-to-end solution? And are you engaged with any customers at this point that could lead to near-term wins with that?

Pardeep Kohli

Actually in the press release we did, we already announced that we have two Tier-1 customers using our client and the purpose there is that, you always have handsets which are already out there, right. So once we launch RCS or any of the advanced services, the new handsets will have these things built in, but if you want to interoperate with somebody else who does not have the latest handset, then you still want to be able to do it. So the operators will be able to let them have downloadable clients where you can go to Google Play or any of those things and download a client. So that was a idea that you can launch with only over the top service or interoperate with the integrated clients. And we already have two customers and there’re more customers who are trolling our client and, so they will some built in clients if they’re launching new phones with a high end service and some others they will let people download. And then there are other devices like tablets and non cellular devices as they call it which do not have SIM card or don’t have LTE but only Wi-Fi connection, and if you still want to interact with them you can download the client and do it.

Rich Valera - Needham & Company

Got it. Okay. Thanks for those answers, Pardeep.

Pardeep Kohli

Thank you.

Operator

Your next question comes from the line of Scott Smith with Morgan Stanley.

Scott Smith - Morgan Stanley

Thanks and congrats on the quarter, guys. Just a couple of quick questions. One, I was wondering if you could dive into the revenue mix a little bit more. There was a massive acceleration in the voice and video line and a follow-up on the messaging line. Can you give us a little more detail on what happened and what you expect or does that mix remain the same going forward? Thanks.

Terry Hungle

I think what ends up happening Scott is that it’s project specific, right. One quarter it’s RCS projects coming to a conclusion, another quarter it’s VoLTE and then, in the first quarter we saw a lot of VoLTE projects get completed and that’s where revenue rec is. I’d say as we go forward we’ll see voice and video, and our RCS be roughly 50-50 over the longer term. If I look at what’s in front of us for the remainder of 2014 I’d probably say it’s flatter towards the voice and video side and that, if you looked at where we were in 2013 we were stronger on the RCS side. So over time they’re going to be both strong competitors or not competitors, but two strong products that we’re bringing into the marketplace and I expect it'll be relatively equal. But for this year I expect that maybe we’ll see it a little bit stronger.

Scott Smith - Morgan Stanley

Okay great. And just on the margin side -- you classify that we're still on the build out phase. Can you just help us understand a little bit better what drove the margin upside in the quarter? Was it less hardware at your carriers? What was the impact from the SBCs, those type of things?

Terry Hungle

Not so much impact from the SBCs in Q1. As we look at Q2 and what gives us confidence in calling that margin a little bit higher that we had, we will have some SBC in Q2. But as we look at what happened in Q1, I guess as we got close to -- as we closed some of the projects off the costs were a little bit lower, little bit less hardware. As I mentioned we didn’t have quite -- didn’t take quite the same labor effort to complete the acceptance testing as a result costs were lower from that aspect of it as well, so those were the key items that kind of drove it and along with a little more service revenue mix than we had anticipated made for the strength in the margins.

Scott Smith - Morgan Stanley

Great, thank you.

Operator

Thank you. At this time there are no further questions. I would like to turn the call back over to Pardeep Kohli, Mavenir’s CEO for any closing remarks.

Pardeep Kohli

Thank you gentlemen, thanks for giving us this opportunity and operator with this I’ll ask you to end the call. Thank you.

Operator

Thank you, ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and we ask that you please disconnect your lines.

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Source: Mavenir Systems' (MVNR) CEO Pardeep Kohli on Q1 2014 Results - Earnings Call Transcript
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