Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Acme Packet, Inc. (NASDAQ:APKT)

Q3 2010 Earnings Call

October 28, 2010 5:00 PM ET

Executives

Brian Norris – Director, Investor Relations

Andy Ory – President and CEO

Peter Minihane – Chief Financial Officer and Treasurer

Analysts

Paul Silverstein – Credit Suisse

Catharine Trebnick – Avian Securities

Vijay Bhagavath – Deutsche Bank

Alex Henderson – Miller Tabak

Simona Jankowski – Goldman Sachs

Rich Valera – Needham & Company

Simon Leopold – Morgan Keegan

John Marchetti – Cowen & Company

Brent Bracelin – Pacific Crest Securities

Sanjiv Wadhwani – Stifel Nicolaus

Larry Harris – C. L. King

Jonathan Kees – Capstone Investments

Operator

Good afternoon, ladies and gentlemen, and welcome to Acme Packet’s Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. During the Q&A portion of today’s call, we ask participants to limit themselves to one question and one follow-up question. (Operator Instructions)

As a reminder, ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today’s call, Brian Norris, Director of Investor Relations for Acme Packet. Please go ahead sir.

Brian Norris

Thank you, Tony. Good afternoon, everyone and welcome to our 17th quarterly conference call. I am Brian Norris, Director of Investor Relations and I’m joined here today by Andy Ory, our President and Chief Executive Officer and Peter Minihane, our Chief Financial Officer and Treasurer.

The format for the call is as follows. Andy will begin with a high level overview of our third quarter results. Peter will then follow with a detailed financial review and a discussion of our updated outlook for 2010. And then Andy will provide an update on the key growth drivers that we see for 2011. He’ll then open the call up for Q&A.

All results and expectations, we review this afternoon, are on a non-GAAP basis unless otherwise described as GAAP. During our call, we’ll be referring to non-GAAP net income and non-GAAP net income per share, which are non-GAAP financial measures, which for all periods presented excludes stock-based compensation and amortization of intangible assets related to the company’s acquisition of Covergence last year.

The press release announcing our third quarter results along with our financial statements and a reconciliation of non-GAAP financial measures for the most directly comparable GAAP measures is available on the Investor Relations section of our website at www.ir.acmepacket.com.

Please note that the statements made during this call that are not historical facts may be forward-looking statements within the meaning of Section 27-A of the Securities Act of 1933 and Section 21-E of the Securities Exchange Act of 1934. Such forward-looking statements may relate among other things to our expected financial and operating results, our future business prospects including the opportunities for our solutions and market size, our leadership position in forecasted market conditions. Such forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated.

A discussion of these risks and uncertainties is contained in our recent filings with the SEC, including those factors discussed under the caption, Risk Factors in such filings. Investors should not place undue reliance on these statements, which are current only as of the day they are made and we disclaim any obligation to update them.

Before I turn the call over to Andy, let me briefly bring your attention to upcoming Investor events. On November 2, we’ll be in New York for the Needham Broadband Technology Day and then on November 30, we’ll be in Scottsdale Arizona for the Credit Suisse Technology Conference.

One last calendaring item, please make plans to join us at 5 p.m. Eastern Time on Tuesday February 1 for our fourth quarter earnings results conference call. For more details on our IR Outreach plan for the fourth quarter 2011, please feel free to contact me at 781-328-4790. With that, I’d like to turn the call over to Andy.

Andy Ory

Thank you, Brian and good afternoon everyone. We are pleased to be reporting the strongest quarter in the company’s history. Accelerating demand for our solutions over the last eight quarters has led to growing momentum in all areas of the business.

Our financial results during the third quarter were again highlighted by record revenue, earnings, operating margins and ending cash. Total revenue increased to a record $56.6 million in the third quarter, reflecting growth of 56% year-over-year. Gross margin remains very robust at 83%. Strong revenue growth and gross margin enabled us to expand operating margin to a record 38%.

We reported non-GAAP EPS at $0.20, an increase of 122% year-over-year. We further improved our already strong balance sheet, ending the quarter with a record $237 million in cash, up $20 million sequentially. Our visibility which qualitatively refers to bookings, backlog, customer activity and strategic partner engagements has never been better.

Beyond the financial highlights, we added 71 new customers in the third quarter. This included 30 new service provider customers and 41 new enterprise customers. We added nearly 200 new customers in the first nine months of 2010 and now serve the needs of nearly 1,200 customers in over 100 countries. This new customer adoption and the expansion opportunities that each represents is critically important to our long-term growth plan.

We announced several new customers during the third quarter, including China Mobile, the world’s largest mobile network. We also announced cable and wireless, which is one of the world’s leading providers of critical communication network and services.

We launched the Powered by Acme Packet program, which enabled IT communication solution providers to embed Acme packets to Net-Net OS-E, session border controller software, which allows us to expand our reach into the small and medium size enterprise market. Through this program, our branded technology is now available in both Avaya and HP offerings.

Our Net-Net 3820 and Net-Net 4500 platforms were certified by the U.S. Defense Information System Agency, Joint Interoperability Test Command for information assurance and interoperability with the U.S. Department of Defense Network. Having achieved these certification, our product are now listed on the DODs unified capabilities of proved product list. We continue to be excited by the overall tractions we see in the federal government market.

We see evidence of growing momentum in all areas of the company. We expect this momentum to continue in Q4 and 2011. Based on the strength of the business during the first nine months of the year and the growth drivers, we’re seeing in our key markets globally. We are raising our outlook for 2010. We are updating our earlier outlook which called for 53% revenue growth and 109% earnings growth in 2010.

We now expect revenue of between $220 million and $221 million, an increase of approximately 56% over 2009. We now expect non-GAAP EPS of between $0.76 and $0.77 per share, an increase of approximately 119% over 2009.

We believe we can deliver on this upwardly revised business plan while also properly positioning the company for 2011 and beyond. Our initial expectations for 2011 are for revenue growth and earnings growth of approximately 30%. We will continue to invest in the development of a great standalone company. We’re in the process of completing our operating plan for next year and will be in a position during our next call in February to provide a more detailed look at our plan for 2011.

For a closer look at the numbers and our outlook, let me turn the call over to Peter.

Peter Minihane

Thank you, Andy. This afternoon, I will review our financial results for the third quarter 2010 and then discuss our updated outlook for the fourth quarter. As a reminder, all financial information reviewed this afternoon, both historic and forecasted, related to our statements of income are on a non-GAAP basis unless otherwise described as GAAP.

Our discussion of sequential changes in our financial results compares this quarter to the second quarter of 2010. Finally, please note that all earnings per share amounts are on a fully diluted basis.

With that, I’ll begin with a brief review of our third quarter results. Total revenue was $56.6 million, an increase of 6% sequentially. Product revenue was $45.3 million, an increase of 8% sequentially, primarily reflecting an increase in average sell price and an increase in the total number of units recognized those revenues.

Maintenance, support and service revenue was $11.3 million, unchanged sequentially. The distribution of revenue was 48% direct and 52% indirect, consistent with prior quarters. One direct customer accounted for 10% of revenue negligible rise in business at 13%. One channel partner accounted for 10% of revenue and that was Alcatel-Lucent at 15%. I’ll remind you that Alcatel-Lucent like many of our channel partners represents dozens of end-user customers.

Geographically, 58% of our revenue came from the United States and Canada and 42% came from our international customers. Gross margin remained very strong at 83%. We now expect gross margins to remain in the low-to-mid 80s in the fourth quarter and throughout all of 2011.

Product gross margin was 84%, unchanged sequentially. Our product gross margins continued to benefit from higher average selling prices and strong adoption of our higher capacity software rich products. Maintenance, support and service gross margin was 80% compared to 83% in the second quarter.

Recall that cost associated with our maintenance obligations will vary overtime depending on the amount of activity in that period. Total operating expenses were $25.7 million unchanged sequentially. We expect the operating costs to increase in Q4 as we continued to hire in all areas of the company.

As Andy mentioned, operating margin expanded to a record 38% in the third quarter compared to 36% in the second quarter of 2010. We now expect operating margin to be in the upper 30s in the fourth quarter. Further, we are now modeling operating margins in the mid-30s through 2011 as we continue to make investments throughout the organization.

Our effective tax rate was 37% compared to 36% in the second quarter. Net income on a non-GAAP basis was a record $13.6 million compared to $12.4 million in the second quarter of 2010, an increase of 10% sequentially.

Earnings per share on a non-GAAP basis was $0.20 compared to $0.18 in the second quarter of 2010, an increase of 11% sequentially. We ended the third quarter with 529 employees compared to 503 at the end of the second quarter.

At the close of business this evening, we had 546 employees with another 18 pending hires with accepted offers. We expect to end the year with close to 580 employees.

Moving to the balance sheet. We ended the third quarter with record cash, cash equivalents and investments of approximately $237 million compared to $217.3 million at the end of the second quarter of 2010. This was an increase of approximately $19.7 million sequentially. We generated $9.7 million in cash from operations during the third quarter.

Cash flow provided by financing activities was approximately $15 million, primarily reflecting $6.2 million in proceeds from stock option exercises and $8.7 million related to excess tax benefits recognized upon the exercise of stock options. Total capital expenditures in the third quarter were $4.5 million, which included $2.1 million in expenditures related to the relocation to our new corporate headquarters.

Recall that in July, we doubled our footprint from 75,000 square feet to nearly 150,000 square feet with our relocation from Burlington to Bedford, Massachusetts. We anticipate cash capital expenditures of approximately $1 million to $2 million in the fourth quarter.

Accounts receivable net was $30.3 million at September 30, 2010 compared to $27.5 million at June 30, 2010, primarily reflecting the increase in revenue during the third quarter. Day sales outstanding were 48 days at September 30, 2010 compared to 46 days at June 30, 2010.

As a reminder, our targeted DSO range is 55 to 65 days. Inventory at September 30, 2010 was $6.3 million compared to $5.9 million at June 30, 2010. Inventory turns were inline with our expectations at 5.2 turns.

Inventory turns reflect the efforts by our manufacturing team in balancing the difficult task of preventing part shortages, while keeping inventory from exceeding acceptable levels. Finished goods at customers at September 30, 2010 was $2.5 million compared to $3.2 million at June 30, 2010.

Finally, deferred revenue was $31.2 million at September 30, 2010 compared to $33.4 million at June 30, 2010. This reflects $1.1 million decrease in deferred product revenue and $1 million decrease in deferred service revenue reflecting the amortization of customer service contracts.

As we’ve discussed on previous calls, deferred revenues can fluctuate from period to period based on the timing of shipments and revenue recognition. And it should not be relied upon as an indicator for the health of our business.

To help you better understand how we are looking at our growth plans, let me close with a few forward-looking comments. I remind you that the comments I’m about to make are based on the current indications of our business, which may change at any time. We undertake no obligation to update these comments. We are raising our full year outlook to both revenue and earnings.

During our most recent call in July, we discussed our revised outlook for 2010, which called for revenue growth of approximately 53% and earnings per share growth of approximately 109%. Since then, we’ve had the benefit of completing another quarter highlighted by record revenues and improved visibility.

We are now raising our outlook for full year revenue growth to approximately 56%. We now expect revenue in 2010 to range between $220 million and $221 million compared to our earlier outlook of between $214 million and $218 million.

We expect gross margins to remain in a low-to- mid 80s in the fourth quarter. We expect operating margin to be in upper 30s in the fourth quarter. We are raising our outlook for full year earnings growth. We now expect non-GAAP earnings per share to grow by approximately 119% in 2010 and our GAAP earnings per share to grow approximately 113%.

We now expect non-GAAP EPS to range between $0.76 to $0.77 per share compared to our earlier outlook of between $0.72 and $0.74 per share. We now expect GAAP EPS to range between $0.59 to $0.60 per share compared to our earlier outlook of between $0.53 to $0.55 per share.

We expect non-GAAP net income to differ from GAAP net income in 2010, as it is expected to exclude stock-based compensation expense of approximately $10 million or $0.15 per share and the amortization of acquired intangible asset of approximately $1.1 million or $0.02 per share.

Our earnings outlook on a non-GAAP basis continues to assume a full-year GAAP and non-GAAP affected tax rate of approximately 36%. We continue to monitor full-year weighted average diluted shares outstanding of approximately 68 million shares.

As Andy mentioned, our initial expectations for 2011 are for revenue growth and earnings growth of approximately 30%. We are in the process of completing our operating plan for next year and we will be in a position during our next call in February to provide a more detailed look at our plan for 2011.

To summarize, the third quarter marked the best quarter in the company’s history, highlighted by record revenue, operating margin, earnings and ending cash. Our outlook calls for continued strong performance in Q4.

With that, I’ll turn the call back over to Andy.

Andy Ory

Thank you, Peter. Our improved financial results in the third quarter highlight the broad secular trends that continue to redefine the global communication landscape. Our customers, which includes fixed line, mobile and cable service providers, as well as enterprises, governments and contact center deploy our products to deliver and participate in next-generation applications and services with the same reliability, quality and security as historically offered over the legacy telephone network.

Our customers are also turning to our solutions to enable the deployment of new applications and services not available in legacy TDM network. This transformation is driving growth, in what is expected to be a multi-billion dollar global market.

Industry forecaster, Infonetics Research estimates that the aggregate market for our solution will reach $2 billion annually by 2014. This is consistent with our own analysis. Another way to think about our opportunity is that our total addressable market or TAM is equal to A plus B, where A is the opportunity for our solutions to replace legacy voice connections technologies.

This is all about TDM voice becoming VoIP. There are numerous signs pointing to the decline and even the demise of TDM and the rapid rise of IP services with the initial application being VoIP. We estimate that more than $20 billion of legacy solutions such as gateways have been deployed worldwide in support of TDM VoIP but more and more service providers and enterprises are now turning to Session Board of Control solutions to enable their end-to-end IP network for VoIP.

We believe that A, the opportunity for our solutions to replace legacy voice connection technology will reach $2 billion by 2014, at $20 billion of gateway is converted to Section Board of Controller. The other part of the TAM being the A plus B is of course B, where B is the greater of the two opportunities by our estimate. This is the opportunity for our solution to support new applications and services available only in an environment of end-to-end IP networks.

Just as the e-mail was the first drop in a tidal wave of applications in the data world, we believe that a vast array of applications will be developed to leverage this new end-to-end IP services network. New IP based applications like video conferencing, unified communications and collaborations, these will drive further infrastructure investments requiring our solutions. The future is all about video and multimedia based collaboration. It’s all about new ways for people to interact while they work and play.

Consumers will pay less for network connectivity per bit and more for these types of new services. The size of B is difficult to estimate but we believe it will exceed A. This opportunity cuts across each of our customer markets, fixed line, enterprise and mobile.

Next generation IP networks being deployed by service providers and enterprises require a unified service delivery architecture, which encompasses other products category including session routing proxies, multiservice security gateways and session-aware load balances. We are well positioned to capitalize on A plus B. Why?

Our solutions are now deployed at 92 of the top 100 service providers in the world and 11 of the Fortune 25 enterprises. We now have over 10,000 Session Border Controllers deployed by nearly 1,200 customers in all major markets around the world.

We hold a growing number of patents that are critical to the market. We have the largest workforce in the world singularly focused on the secular growth trends that support the SBC market. We have a large and robust partner ecosystem for both distribution and technology and finally, we have sustained -- we have a sustained companywide focus on innovation to meet the rapidly evolving need of our customers.

Our recently introduced Net-Net SIP multi-media express and our new Net-Net 3820 are just the two latest examples of industry leading innovation being developed by the engineers in our R&D lab. The Net-Net SIP multi-media express or SMX reduces the complexity and cost of delivering high value revenue generating SIP multi-media services.

Our new Net-Net 3820 is our newest platform offering and is targeted at both small and mid size IP communication service providers as well as mission critical enterprise and contact center application. We are widely recognized as the leading provider of SBC solutions among fixed line and cable service providers. In fact, in a recent survey of service provided conducted by Infonetics Research, 95% of respondent named Acme Packet the top vendor in the market today.

We have a unique opportunity to extend our leadership positions beyond fixed line and cables and expand our addressable market as mobile service provider, enterprises and government agencies, accelerate their adaption of IP for end-to-end interactive communication. Mobile service provider use our solutions to deliver interactive communication and data services to their mobile subscribers. They’re are in a very early stages of service delivery evolutions encompassing both new communication services in new ways to deliver them.

We are seeing service providers to lay the ground work for integrated mobile services such as voice over long-term evolution or LTE through continued deployment of IMS-based infrastructure. The goal of maximizing revenues and reducing cost is driving mobile service providers to consolidate network, adopt next generation technology, innovate with new services and off-load legacy network.

SIP and IP transport are the next regeneration technologies that lie at the heart of this movement, enabling both the replacement of legacy voice and messaging services in the creation of new forms of communication. As 3G and 4G radio technologies increased broadband fees, mobile service provider, need to revamp their services portfolio to offset average revenue per user pressure and gain share in an increasingly complex and competitive marketplace.

By tapping into SIP, mobile service providers can realize both enhanced services revenue and reduced costs. Mobile service providers are embarking on a multifaceted migration involving IMS, integration of Wi-Fi access and sensor sales for fixed mobile convergence, deployment of 3G and 4G mobile broadband radio access network and the consolidation of all services on a single IP backbone transport network.

As mobile service providers navigate this migration, they will increasingly turn to our solutions to overcome the many challenges in the delivery of these new IP voice, video and data services and applications. Another market which is expanding our TAM is the enterprise market, which includes government agencies and contact centers.

Customers in this market use our solutions at SIP Trunking borders connect to the PSTN to outsource IP contact centers and to hosted IP services. We also see enterprise SIP Trunking driving demand for our solutions on the access side of our service provider networks.

We see VoIP as the leading opportunity with IPTV access being connected enterprisewide by all IP infrastructures. We also see enterprises transitioning to IP for new interactive communication such as telepresence, video-conferencing and video calling and multimedia collaboration. Enterprises are working to integrate mobile, remote and home-based workers into the enterprise IP communication environment.

We planned to upgrade existing tools, real time capabilities like instant messaging, presence, video-conferencing and multimedia collaboration as well as to integrate unified communications with business applications and processes. Finally, we see evidence that the multi-protocol real time nature in totality of interactive communications is exposing gaps in network security.

This new universe of threat demand more sophisticated state full defense mechanism. We think most people have not thought hard enough about all the issues involved in making new applications like video and multimedia collaboration easily viewed and delivered securely with high quality and reliability.

Consider the case of Medtronic which has headquarter in Minneapolis, Minnesota. Medtronic is a $15 billion medical device manufacturer with 38,000 employees worldwide. They have deployed Acme Packet SBCs to support a Verizon business SIP trunking solution.

Medtronic is 11,000 IP telephony users spread across 102 size in the U.S. and is realizing up to 70% cost saving by leveraging SIP trunk for remote site, with additional savings, up to 20% on net long distance and hosted conference calling. Acme Packet delivered a cost effective Session Board of Controller solution that met all of Medtronic key technical requirements for security, interoperability and reliability.

Medtronic is but a single example of our success in the enterprise market. Today, nearly 300 enterprise customers turn to Acme Packet to enable their end-to-end IP strategies. And we believe there is much more opportunity in the enterprise market. Given the importance of this market to our overall strategy, we have been adding relevant expertise throughout the company for the last three years.

We listen to the needs of our customer and brought breakthrough innovation to the market like the Net-Net 3820 and the Net-Net OS-E. We forged strategic relationship hardly -- we forged strategic relationships would go to market partners like Avaya, Dimension Data and Westcon. And finally, we launched an OEM program to expand our market presence among enterprises with small and medium sized site. We look forward to updating you on future calls as to our progress in both the enterprise market and the mobile market.

Before we open the call for questions, I want to thank all of our employees for their continued hard work and dedication to achieving our vision. During the third quarter of this year, we celebrated our 10th anniversary. And I can tell you that we are even more excited about the opportunity ahead than the incredible journey we’ve been on for the last decade.

Thank you for joining us this afternoon and for your continued support of Acme Packet. With that, I will turn the call back over to Brian.

Brian Norris

Thank you, Andy. Tony, at this time, I would like to open the call up for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question in queue from the line of Paul Silverstein with Research Analyst and your line is open.

Paul Silverstein – Credit Suisse

Good afternoon. And your couple of quick questions, if I may and then I’ve got a larger question. First off, can you share with us your split between enterprise and service provider?

Andy Ory

Its consistent Paul prior quarters. Its approximately mid to high teens for enterprise and then 80% to 83% in service provider.

Paul Silverstein – Credit Suisse

Right. What’s the largest enterprise deployment to-date, is it Medtronic?

Andy Ory

No. In terms of revenue, we have a number of seven-figure customers that have quiet a few Session Board of Controller. In fact, there is one customer that’s probably most of the way towards $10 million.

Paul Silverstein – Credit Suisse

And has there been a trend in terms of the number such as the size of the number increasing?

Andy Ory

Yeah. The trends in enterprise in the North America is that the funnel has been increasing and the size of the deals that we are involved that has been increasing.

Paul Silverstein – Credit Suisse

Okay. With respect to your software base SBC you told Avaya last quarter, you mentioned HP this quarter. Can you give us any sense for, I assume, is where it is from a revenue standpoint, can you give us any sense for your expectations of what you are saying and same question for the new apps load balancing in the multi-service security gateway et cetera?

Andy Ory

Sure. We’re excited about the nature of the software. I think more and more people that actually want to integrate our software as part of it a go-to-market strategy either integrated into their other appliances, products or as part of the service delivery mechanism. And I think that’s going to be a big opportunity for us. Clearly, we are excited about Avaya and HP and then Norris talk about others as well. It is early days. It’s a lot of training, it’s a lot of education, a lot of funnel building. But I have some pretty high hopes for over the next 24 months.

Paul Silverstein – Credit Suisse

And I assume you saw the Avaya Skype announcement from the other week, are you -- I assume its your SBC that they are using for the SIP Trunking application that they spoke aboutt?

Andy Ory

Yeah. We did a press release about our SBC and Skype and SIP Trunking probably four months ago or so.

Paul Silverstein – Credit Suisse

You know I saw that, but so it’s safe to assume that in the Avaya Skype relationship you would be the SBC?

Andy Ory

Yeah. That’s a safe assumption Paul.

Paul Silverstein – Credit Suisse

All right and last two – my apologies. Services gross margin, I see in the last 19 quarters, they have been in mid ‘80s. This quarter, it came down to just below 80. It’s actually been in low 80s, Peter any reason for the fluctuation of what we should expect going forward?

Peter Minihane

You know, Paul, I think it’s just a reflection of the period activity within the quarter. Some quarters were little heavy than others, some were little less. I think we continue to look at it as 20% of our overall business on an 80:20 product versus service SIP. And we model it at about 80% during the course of our annual budgeting along with our quality forecasting period.

Paul Silverstein – Credit Suisse

Even though that’s been in the higher 80s for the most of the period?

Peter Minihane

Yeah. But again it’s a smaller piece combined, so it’s not a dramatic change Paul.

Paul Silverstein – Credit Suisse

All right. Last question. Deferred revenue why shouldn’t The Street be concerned? It’s been flat to down for the third straight quarter. I did hear your comments in the prepared remarks but Peter why shouldn’t this be concerned about it?

Peter Minihane

Because I think we’ve always maintained that is not an identical part to understanding our business. Its going to go up a little bit, it’s going to come down a little bit. There is no major fluctuation changes. You will have increases, Paul, For example in the third -- I’m sorry, in the fourth quarter and the first quarter of the subsequent year on service bookings. So while the sudden deferred revenue look dramatically and it will be my god, that’s an important piece of our business.

Well, it is but it’s not an important piece of understanding our business. Our business is driven by market and the market that we serve. And I think that’s a much more important piece. You have a good understanding of all that.

Paul Silverstein – Credit Suisse

So you would argue your visibility hasn’t changed. It’s improved not withstanding the deferred revenue not picking up?

Peter Minihane

I think it has changed. It has improved.

Andy Ory

Yeah. I would say that our visibility has probably improved in every metric.

Peter Minihane

Yeah.

Paul Silverstein – Credit Suisse

I will pass it on. Thanks guys.

Peter Minihane

Thank you.

Andy Ory

You are welcome, Paul.

Operator

Thank you. And our next question in queue and will come from the line of Catharine Trebnick with Avian Securities and your line is open.

Catharine Trebnick – Avian Securities

Hi Good afternoon.

Andy Ory

Hi Catharine. How are you doing?

Peter Minihane

Hi Catharine.

Catharine Trebnick – Avian Securities

Good. Two questions. I noticed your split international and domestic is stronger internationally, can you break that out farther between Europe and Asia-PAC and then follow on to that is it safe to assume that China Mobile perhaps has been this quarter’s revenue and when do you expect that to hit if it wasn’t? Thank you.

Andy Ory

Okay. I need Peter to keep me honest here, but I believe the China Mobile -- while we expect to do business with China Mobile on an ongoing basis, we have had a number of transactions with them in the past and we filed a press release probably 45, 70 days ago and that was about the business that we had done. We feel that, so well, okay, good $1.2 million that was in this quarter, okay, good.

You will see us do business with them on an ongoing basis. We have one business with a number of Chinese carriers, Taiwanese carriers and Hong Kong carrier and we are starting to see enterprise opportunities there as well. Historically, our business has been 55% or so North America, 25% EMEA, 15% APAC, 5% CALA, plus or minus.

Peter Minihane

Plus or minus, I think CALA...

Andy Ory

Yeah.

Peter Minihane

I think if you look back, in the past couple of quarters, we did have a little bit of a spike in North America because of the rise in wireless and the overriding business. So with a spike up as high as 66%.

Andy Ory

Right.

Peter Minihane

But realistically I mean, it’s 55, 45%.

Andy Ory

Right.

Peter Minihane

So, and the other thing Catherine is that while all GOs are performing very well. And we are very happy about the opportunities the secular growth trends impacting all the markets and all the GOs. I think that APAC is a very big opportunity for us and I think there is an opportunity for it so expand over 15% contribution to Acme Packet over the next 18 months. And clearly, China is part of that, we are excited about Japan, we’re excited about India. These are key markets that really have embraced the notion of IP. And there is a fair bit of green field as well there.

Catharine Trebnick – Avian Securities

All right. I’ll jump out and come back with other questions. Thank you.

Andy Ory

Thank you Catherine.

Peter Minihane

Thank you Catherine.

Operator

The next question in queue that will come from the line of Brian Modoff with Deutsche Bank and your line is open.

Vijay Bhagavath – Deutsche Bank

Yeah. Hello, Andy. Hello Peter. This is Vijay Bhagavath calling on behalf of Brian.

Andy Ory

Hi, Vijay.

Peter Minihane

Vijay.

Vijay Bhagavath – Deutsche Bank

Hi. If I may ask a question and follow up, the question is really around, how do you view kind of spending on session border controllers next year versus this year up, down, flat, any color on that?

Andy Ory

Yeah. I actually think spendings will increase and I think it’s going to increase for several different reason, not the least of which the IPv4, IPv6 waves has not hit yet. We’ve been working several years on those technologies and we have people that have purchased and deployed our IPv4, IPv6functionality but I still believe that this addressing crunch is likely going to be increasingly problematic and people are going to respond to it in a more reactive way. I think that’s one reason.

Secondly, I think the enterprises themselves are embracing the notion of SIP trunks, Medtronic as an example the cost savings is very, very significant. The pay back is readily 0.5 and more importantly it enables application integrated into the business processes of an organization that you happen to have with CDM. And what that does is that of course drives the carriers who is our only greater than 10% customers this quarter, a SIP trunking provider.

We are doing more and more business on the SIP trunking side and there is a wonderful synergy between the savings for the enterprises and the compelling requirement in general in the SIP trunking providers. The other thing is mobility. We are going to see more and more broadband wireless and as that starts to happen I think you are going to see more and more interactive services emerging from mobile handset that are going to move into a packet core that’s going to be consolidated and its going to have to work across all the different access technologies, whether its cable or its copper or its fiber or its wireless and as you start seeing IP origination of interactive services on one network making them work across all the other network and to drive session border controllers.

So we are obviously very excited as long as these trends. We think these are broad secular trends that will impact every geography and every market.

Vijay Bhagavath – Deutsche Bank

Yeah. And thanks, Andy. Just a quick follow on, I mean obviously you have brand recognition, you have credibility in session border controller technology, any thoughts on being aggressive in terms of branching into product adjacencies, market adjacencies, or you prefer kind of to focus on your core competencies in session border controllers?

Andy Ory

No, no. That’s a very fair question. What we’ve been doing is aggressively developing a broad product portfolio, not a broad platform portfolio, though we have that too, but a broad product portfolio because we believe that there is a session layered build out that’s recurring on a global basis, that is going to be layered over the entire internet or all the layer 3 network combined.

And there is a lot of different elements required in this architecture, some are special to the wireline, wireless edge, some are special only to tech mobile conversions, some are special to mobile broadband access networks, some are special to scaling the access or appearing edge with low balancing. Some are special to replacing a Class 4 on networks and we are making all of those different products. And so, we have a family of products that’s playing all those different networks. That being said, we are aggressively looking at all the opportunity to add value to this build out of a session layer professionally into communication.

Vijay Bhagavath – Deutsche Bank

Yeah. Thanks Andy.

Andy Ory

Sure. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Alex Henderson with Miller Tabak and your line is open.

Alex Henderson – Miller Tabak

Thank you very much. So, I’ve got a couple of questions, the first, one can you talk a little bit about what percentage of the business came from interconnect type of connections, how much is related within the service provided, the hosted operations and maybe breakout a little bit between residential and SIP?

Andy Ory

Okay. First of all, Alex, I would like to welcome you to the call.

Alex Henderson – Miller Tabak

Well, thank you.

Andy Ory

Yeah. Thank you. There are three ways at quarters in service providers our products are used, one is for access only, the other is for interconnect only and some people use them for both. And so, we are looking at interconnect in Q3 are around 44% with access around 36% and 16% is for both.

Now, I have to tell you that you are asking me to tell you what people are doing with our product exactly and they can move around and I don’t know. So, this is the best data we have. I typically think of it as a 50:50 split right now. That’s how I think of it when I look at everything is going on, but the numbers that have been compiled that have been handed to me based upon your question will be both.

Alex Henderson – Miller Tabak

So, hosted side of it, can you talk a little bit about hosting whether there has been any change in trajectory in that?

Andy Ory

And when you say hosting you mean...

Alex Henderson – Miller Tabak

IP hosted services by service providers for enterprise voice and other related real time services?

Andy Ory

Yeah. Some of these services like IP-centric, continues to do fairly well. I mean the real drivers in our business have largely been the enterprise and wireless in North America. We have seen as of late some of the attackers in the North American residential market really start to lean on the paddle and buy more gear from us. And I do believe that the people that own the residential subscribers from a wireline point of view are looking at how they scale from a few million sub to their entire network.

So I think that the point has been made that I no longer going to offer hosted or residential TDMs, it’s not valuable and it’s not sensible. It’s probably dilutive to the value proposition and that architecturally they are making decisions to say I am going to move everything to IP. So, we continue to see some growth, but I again think that we haven’t seen the sweet spot of that growth opportunity.

Alex Henderson – Miller Tabak

So the service providers spending guidance that come out from Verizon and T have been fairly less than what a lot of people would have like to have seen, particularly at Verizon and particularly on Verizon’s residential piece. Most of the residential stuff you have is more on the cable side, but does that have an impact on you guys at all or is it more of the enterprise to service provider and the hosted side of it that is driving your business on that side?

Andy Ory

Well, it’s interesting because people and I understand this, don’t want to spend any money to lose money or not make anything. So if I’m already offering you voice services and you’re paying me $40 a month, why do I want to spend any money off of your voice services having spent $30 a month, I mean it’s kind of problematic. And if I have a network in place, I want to lower my OpEx as much as I possibly can. And so, I completely understand why the CapEx, it appears to be constraint. But I will tell you that all of these service providers are spending money as they believe that it advantages them. It increases their revenue stream and generates new revenue opportunities.

And that’s all we are really interested in. We are primarily interested in our service providers finding ways to acquire subscribers and offer services and enable value for their subscribers, residential mobile or enterprise, where people will start to say this is valuable and spend additional dollars with those service providers. And the reason people are buying SBCs today, is because they make money with the services they offer with those SBCs if their service providers and they save money over the services they offer if there are enterprises. There is no other reason and that I won’t say is immune to CapEx fluctuations, but certainly holds us in a pretty good position.

Alex Henderson – Miller Tabak

Okay. Just a follow through on the LTE comments earlier, obviously the initial rollout is mainly for dongle applications and the voice stuff doesn’t really come until you get an LTE phone sets out there. How do you think about the timing of the wireless radio access side of the market showing up as if their customers opposed to the wireless to wireline interconnect piece?

Andy Ory

Well, I think that LTE is going to be truly disruptive, I think that the folks like the cable companies and in wireless tunnels were disruptive to wireline communications. So the point now where not only is the second line gone into the homes, but 25% of homes in the United States don’t have a first line. I mean just think about how disruptive these technologies were.

I think that broadband mobile, things like LTE to devices that are essentially personalized mobile computers, I mean certainly this phone as here -- it’s like a mobile computer. You give me that kind of bandwidth and I think you’re going to see a disrupt even wireline communications, which is going to cause wireline communications to want to innovate because that’s why people are going to work with them.

But more to the point of the LTE network a lot of the LTE providers are saying we’re going to offer data first and we’re going to do voice later. Look, I have to tell you that someone in our company has a 4G phone here and we were watching TV on it, I couldn’t believe the bandwidth and what’s interesting is that if you think you’re going to provide somebody with 6 or 8 or 10 megabits per second of bandwidth to their phone and there is not going to be an over the top provider that’s going to offer them voice communications, I think that seems to me to be a stretch.

So I think a lot of these LTE networks are going to rapidly want to find out how they can participate in offering services and not trying to hold back to tie. So, I’m very, very excited by the roles that we can play. We can help deals with the 3G to 4G fall back. We can deal with the roaming issues. We can deal with basic security issues, service availability issues. I really do believe that mobile broadband is going to be valuable to actually impact.

Alex Henderson – Miller Tabak

So, just to the point on the question, when do you expect the SBC to be deployed for the wireless radio access piece for the LTE stuff?

Andy Ory

Well, that’s fair....

Alex Henderson – Miller Tabak

Along winded rate to say you are excited about it, but I knew that already.

Andy Ory

Okay. That’s fair, that’s fair. Timeline for deployment is not this year, it’s probably later next year and off a lot of testing in architectural battles are going on right now. But we are seeing wireless customer to increase as a portion of our business. I don’t know whether it was this quarter, last quarter was 27% and Verizon wireless is a greater than 10% customer. So I think you’re going to see more and more wireless as part of our business and it will see restricted to 3G only.

Alex Henderson – Miller Tabak

Yeah. So, last question then I’ll leave the floor, was there another 10% customer this quarter or no?

Andy Ory

There was only one and that – end user and that was Verizon business.

Peter Minihane

Right. To until

Andy Ory

To until and the other one is sound great…

Peter Minihane

Right.

Andy Ory

Right. Alcatel-Lucent has distributed to your point of Verizon business there.

Alex Henderson – Miller Tabak

Great. Thank you.

Andy Ory

Sure. Thank you.

Operator

Thank you. (Operator Instructions) The next question in queue comes from the line of Simona Jankowski, an Analyst. Please go ahead.

Simona Jankowski – Goldman Sachs

Hi. Thank you so much. Just wanted to ask you in the last couple of quarters, what has typically been the proportion revenues that has come out of the deferred as opposed to out of backlog and was opposed to the book, ship and build business that booked and ship in the same quarter?

Andy Ory

So, Simona I think as we’ve mentioned historically when we enter a quarter, we have either in deferred revenue and/or “backlog”. Probably 55 to 60% of our business completed. And as you then head in to the quarter obviously the remaining percentage will get booked and fulfilled. Again, the deferred revenue piece is not changed in awful lot here in the past year on a quarter-by-quarter basis and again we continue to maintain, it’s just not an important part of our business, so to understanding our market and how we fulfill the needs of those markets.

Simona Jankowski – Goldman Sachs

And just to maybe understand that a little bit better, if I think about you typically entering the quarter with 50% to 60% of that quarter’s revenues completed because you have them either in deferred or backlog, is it because your backlog has been higher, so therefore even though the deferred has been lower, you don’t like your visibility is impaired or is the velocity of kind of book and ship business increasing, so that’s why you feel your visibility not impaired?

Andy Ory

So I don’t – I think I have just – I think visibility has never been stronger for a number of different elements. I think as Andy mentioned during his portion of the prepared text, we consider a number of different elements of this utility. Importance from a where are we as we enter the first day of a quarter and what position are we in. But it’s also the point that I don’t think that in fact I know we have had the strongest three booking I this quarter in the company’s history in the past three quarters.

Peter Minihane

Yeah. I guess some more – what I think about how I feel about a quarter as I walk into it is, bookings, backlog, customer activity and strategic partner engagement and all those are continued to go up, so that to me is really important way think about how we feel about the business.

Andy Ory

Right. And its’ more around the trends, Simona, if I take a look at each of the 4G that we have between North America, CALA, EMEA or Asia Pac, now each of those regions in the past three to four quarters, the past four quarters each of those regions have had their largest two or three bookings quarter ever.

So, it’s a combination of -- bookings continuing to increase every quarter and its much more and the velocity comes from a number of different areas. One is the booking, another is the activity within partners. We talk to Avaya all the time. If that has anything that also do it with our bookings historically, it’s very small. There is the clear of indication as the momentum of our business heads to the OEM arena, for example, he knew that it’s just an exam.

Andy Ory

It’s an exam.

Peter Minihane

Right.

Andy Ory

Right.

Simona Jankowski – Goldman Sachs

So, can I interpret that is because the business mix is shifting partly to more OEM activity and more enterprise activity of that maybe structurally that is why, you still have good visibility, but we are just seeing less of it in the deferred?

Andy Ory

No, no. Bookings, backlogs, customer activity and partner agreements, there isn’t a big shift in our business to one particular area or vector or another. Every aspect of the business has never been stronger.

Simona Jankowski – Goldman Sachs

Okay. Okay. Thank you for that. And then, on your customers NSN used to be more than 10% I think it was 12% last quarter and this time it kind of dropped out bill at 10% line. Is that just fluctuation or anything else going on in that area?

Andy Ory

Yeah. In fact I believe the quarter before that they weren’t 10%, they were just under.

Simona Jankowski – Goldman Sachs

Okay.

Andy Ory

And so as – yeah we continue to enjoy a very good relationship and robust business with NSN, puts the rest of our businesses growing around that. I think if you take a look at our top two or three customers, whether a 10% customer or not. If you look at it for the past three quarters Simona, there is probably three, maybe four customers that comprise 30%, 35% of our business, mostly dominated by NSN ALU and the occasional Verizon Wireless into a Verizon business.

Simona Jankowski – Goldman Sachs

Okay. And then just last question on margins, it seems like you’re guiding operating margins in the mid 30s for next year which would be ticking it down from the high 30s of this quarter and last quarter, which would imply more significant investment in OpEx and things of that nature.

Do you think you’re going to be able to invest as aggressively as that guidance would imply and the reason I ask is it seems like its consistently hire people of the quality of that you would, like and I notice that the headcount you are targeting now its 580 and I think last quarter you had said 590. So, if the hiring trajectory is not as cheap as you might have thought, should we really think margins can come down to the mid 30s or is the high 30s more likely for next year?

Andy Ory

No. I mean that’s a very first question, I fear I brought you both answers. You are correct. We had initially targeted 590. We entered this year we are at about 450 people. We said we would go to about 560, we’ve raise that number from 550 to 590 and I think that as we get closer here we are it’s almost November just, given how quickly you can bring people a board we think closer to 580 is the way to think about it. And, yeah, when we came out of the beginning of this year, Peter was talk about casting a shadow on 30% operating margins and I think he was referring to seeing the high 20s not in the low 30s in terms of the shadow that was being cast and the operating margins have continued to go up.

We feel that there is so much opportunity in all of our market spaces that we would be remiss not to invest appropriately for really gaining opportunities in those markets and so we are targeting investment that would bring our margins – our operating margins down to around 35%, but you hit upon really the one major issue, we are unable to hire quickly enough that will impact our margins, because people represent by about 70% to 75% of the non-cognizant. So Peter how are you...?

Peter Minihane

So, that’s – so Andy you are 100% correct on that, I think we looked at Simona, then when we went from 450 and we had an internal choke that I was going to run out and hire the 108 employee because Andy didn’t think we could add 108 people 10 months ago and we then had very dramatic increases in our revenue during the course of the year. We do a second pass of our budget formally referred to internally as sub-2. We then added from 558 employees up to 589 and as Andy mentioned it becomes more difficult to hire as we head into this time of year between Thanks Giving and the related holidays of Christmas and New Year and it just becomes more difficult for our HR organization to find people.

We have added recently another senior recruiter to our HR staff so we continue to be aggressive in our hiring but we’re just not going to hire for the sake of hiring, we have very strict standards and we are going to adhere to those policies and continue as best we can. We love to get to 589, I think it was the number we had last quarter but it sounds like we are hell bent on doing that, so we’ve got a more reasonable direction would be 580 employees.

Simona Jankowski – Goldman Sachs

Great. Thank you very much.

Andy Ory

You are welcome.

Operator

Thank you. Our next question in queue that will come from the line of Rich Valera, an Analyst. Please go ahead.

Rich Valera – Needham & Company

Thank you. I just wanted to follow up on the operating margin question for next year, I mean it looks like you’re going to exit 2010 having averaged about a 36% OP margin, so to grow revenue and EPS at the same rate next year would seem you would have to be at least at about a 36% OP margin, I mean am I missing something there?

Andy Ory

It would be in that range.

Rich Valera – Needham & Company

Okay.

Andy Ory

And it’s not an exact size, so it depends...

Rich Valera – Needham & Company

Sure.

Andy Ory

Mix within the mix.

Rich Valera – Needham & Company

Sure. And...

Andy Ory

When we hire them.

Rich Valera – Needham & Company

Okay. I appreciate it. And I understand you haven’t completed your planning for 2011, but presumably you wouldn’t have put out that initial number without some level of analysis being done and backing it up, is there any color you can provide us with what underpins that initial guidance, whether may be how much business from existing versus new customers or any color you could give there would be helpful.

Andy Ory

Well, I mean typically, we’ve experienced roughly 80% of our businesses comes from existing customers, 20% will come from new. We’ve seen an increased base of customer acquisition because of new market, because of the enterprise, because of – well, soon to be the OEM opportunity contributing more as well. The service providers remember 92 of the top 100 have operationalized Acme Packet technology.

These are very, very large companies, they have very, very large networks that are in a very, very early stages of a large transition. And their ability to buy and move the needle in a quarter or in a given year is very significant relative to even new customer acquisitions in the enterprise space.

And so, a lot of what’s making us feel on excited about next year is the fact that we are seeing signs that our large service providers really understand architecturally and from a business point of view what they need to do.

And at the same time, we are continuing to see the final build in North America for our enterprise business and we talked a little bit about the government business. The government is a very large enterprise, very, very large.

And over the last three years we’ve made significant investments and I think we’ll see a lot of business come through the government sector as well, so all the trends are pointing in the right direction. I mean when you wrap them all together it makes you feel, it makes you feel like we are moving in the right direction is pretty fast.

Rich Valera – Needham & Company

Okay. Thank you for that.

Operator

Thank you. Our next question in queue that will come from the line of Simon Leopold with Morgan Keegan. Please go ahead.

Simon Leopold – Morgan Keegan

Great. Thank you very much. I wanted to see if we could follow-on the discussion of the enterprise versus service provider trends. In the past, Andy, you’ve talked about I think a much faster growth rate from the enterprise opportunity, but of the smaller base. If you could give us an update of how you are thinking about the growth opportunity of enterprise relative to service provider?

Andy Ory

Sure. Simon, first of all, welcome to the call. And you are correct that we would have expected rather than the mid to high teens that we would have at least 20% of (inaudible) or enterprise based product revenue. We just are seeing higher than expected growth on the service provider side. We may actually see that on an obsolete basis continued higher than expected growth in the service provider side, so we’ll serve to hide or color a little bit the enterprise growth.

The enterprise should grow twice as fast as the service provider business. I mean there is no question about it is, it is coming off small numbers at a much earlier stage but it’s a very big market in it itself. And I think that the last numbers they looked at from Infonetics side, high teens are 20% in the service provider and 49% in the enterprise something like that, I don’t know if they’ve updated their numbers, but that seems sort of reasonable expect that we’re growing faster on the service provider space in that. But I think from an enterprise point of view that feels pretty good.

Simon Leopold – Morgan Keegan

Is there something, maybe linked to kind of macroeconomics that’s depressing the enterprise opportunity, whether it’s temporary or none of us can tell but would you make it to that or no?

Andy Ory

No. I think the enterprise business is performing the way people have expected it to. I think the 49% compound annual growth is probably what you are going to see all the way to 320, 340 million whatever Infonetics has for the next several years. It feels that way to me. It’s just that we are seeing so much growth on the other side that it’s going to take time for those numbers to have a big shift in Acme Packet.

Simon Leopold – Morgan Keegan

Thanks. Now, the second thing I was hoping you could comment on is an update on the competitive landscape. We had I guess Genband closed on the acquisition of Nortel assets, some had said that smattering of announcements I guess we can call it. If you could just sort of talk to what you are seeing in terms of competing bids in pricing environment, whether there are any changes in that dynamic? Thank you.

Andy Ory

Sure, sure. No, we are actually not seeing the competitive dynamic or the pricing dynamic really change much. I think that the guidance that we are giving for Q4 and the subsequent guidance that we are giving for 2011, I think is largely routed in us believing that what we’ve experienced in the last few quarters is what we will continue to experience from a pricing competitive point of view moving forward and we are very happy with that.

Simon Leopold – Morgan Keegan

And do you see [valve] much because they do sharpen the market share numbers, but not quite sure who sell to.

Andy Ory

No. I mean well when you see our market share numbers there are still people that can sell something somewhere. They do sell some product into China. There is a portion of the Chinese market that’s close to national companies. So they are going to get that business. There is going to be some other business that they may finance that we are not going to find. Where we find an important deal and we can get there, we can replace or beat them quite often.

And so, we are comfortable that we will continue to keep them isolated and contained in the small markets and the less valuable opportunities. Because what we do is, it’s so software centric, it is so responding to rapidly emerging requirement. It makes it very hard. It’s not a real profitable easy stage for Valve to go after. So, we are relatively isolated from that issue.

Simon Leopold – Morgan Keegan

Great. Thank you for the answers.

Andy Ory

Sure. Thank you, Simon.

Operator

Thank you. Our next question in queue that will come from the line of John Marchetti with Cowen & Company and your line is open.

John Marchetti – Cowen & Company

Thanks very much. Hey guys, a quick question for you, Andy. You made the comment that next year you see spending on Session Border Controllers higher than you’ve seen this year. Obviously, very, very good growth that you’ve have put up so far this year. How should we think of that comment relative to the 30 sort of topline guide that you are giving right now and given that you just kind of talked about the competitive landscape not really changing as we look into next year?

Andy Ory

Obviously, it’s hard for me to get number. I still have my guys and girls, who are trying to finish up this year and to really get numbers for next year is difficult. And so, what we do have is that we have relationships with the service providers and we see what their architectural plans are. We’ve had long-term on historical relationships that we see with their send trends are and we also have very sophisticated customer relationship management databases important tools, as well as quarterly business reviews with our partners, so we can look into the fund.

And then we look through the overall market activity that are going on and it gives us a sense that yeah, we’ve really do expect that there is going to be significant growth in 2011. But it’s hard sitting here on October 28, really quantifying exactly what it’s going to be. However, we do need to run a business and so, we sit down with the Board and we have the layouts for the Board what our operational plans going to be for 2011. And the initial plan in the new layout is, we ought to see 30% growth, which we think is significant growth and we ought to see no de-levering, we’ve got to see 30% growth on the bottom line as well. And that’s what we are planning towards.

Now clearly, we are going to update you every single quarter and as we get closer to 2011 and get into 2011, we’re going to have the better sense. But the trends are that everyone, the TDM is dying, people need to move to IP, they’re saving money, they’re generating new revenue, they’re offering new services and Acme’s addressable market continues to expand. We’re becoming more important to our customers, more important to our partners. So, we feel quite good about 2011. It’s very hard for us to provide more specifically than what we’re providing.

And the 30% numbers are good numbers because it requires us to do an awful lot to gear up for, but what we could always -- we could always modify that pretty easily if we needed to. We said 5% growth and there was a tremendous amount of growth that would be huge problem. So 30% is I think where our opening bid is. And it’s really the best visibility that we have on October 28. There is nothing else to us in that.

John Marchetti – Cowen & Company

Thanks. When you compare that sort of – when you gave the 20 and 20 at this point last year, do you feel better I guess about – you mentioned your visibility was increasing, did you feel better about that 30 today than maybe you did that 28 a

year ago?

And then Peter just sort of a follow-up on your point about going into the quarter with the 50% to 60%. Is it right to sort of extrapolate that from a year, you can sort of look at a year that way or is that trying to get for too granular where you are right now in sort of October looking out?

Peter Minihane

You’re certainly asking some good questions. To refresh people’s memory, it was on this call a year ago we said 20%. It was on the subsequent call for revenue we raised to 30%, the call after that to 45% then to 53% and now 56%. Those were the five calls and you’re right.

I don’t know, I mean, I felt good about the 20% a year ago and when we looked at it and said wow, this is really going to be growth year. We grew 22% ‘09 over ‘08. Looks like, it’s going to be another growth year. Clearly the market performed better than what would have been the best estimates that we could have given at that time.

Andy Ory

But it tentatively, if you go back John and you were covering at that point, we were the only company for the most part that grew 2009 over 2008 and we thought it was important that we gave some range to the Street.

John Marchetti – Cowen & Company

Right.

Andy Ory

They wouldn’t look at all the numbers, again growth numbers versus every other company’s disappointing numbers and have it go to 25%, 30%, 35%, 40%. We just didn’t know, but we did know we had a sense…

John Marchetti – Cowen & Company

Right.

Andy Ory

… that a 20% growth this time a year ago will be achievable based on the history that we had the prior nine months of 2009 and arguably recovering from the worst economy since 1907.

John Marchetti – Cowen & Company

Right.

Andy Ory

So there is a lot of elements that go into it. It’s not an exact size.

John Marchetti – Cowen & Company

Right. That’s right.

Andy Ory

And so, here we stand tonight and we have a sense that 30% seems achievable.

John Marchetti – Cowen & Company

That’s right.

Andy Ory

And that’s how we won the business, but clearly we run the business everyday and we look at every Monday we can make changes either way if we need to.

Peter Minihane

Right. And from a view of a bookings walking into a quarter versus walking into year, John we really view light year as four years every year. In every quarter a year we have a bookings policy that the booking is not a valid book unless it’s deliverable within six months. So we don’t encourage and nor have we seen historically, somebody showing up with a appeal that would to out over three, four, five, six quarter. So I think we really are focused on ahead of us in the 91 days.

John Marchetti – Cowen & Company

Got it. Thanks very much.

Peter Minihane

All right. Thanks John.

Andy Ory

Thanks John.

Operator

Thank you. Our next question in queue now comes from the line of Brent Bracelin with Pacific Crest Securities and your line is open.

Brent Bracelin – Pacific Crest Securities

Thank you. I actually had a follow-up question on growth as well too, perhaps I’ll take a little bit different tack. Andy, as we think about the progression of this year, you had the rise in wireless, there was a huge lift in Q1, Verizon Business, 10% of sales in Q2 in Q3.

I guess my specific question is, one, should we think about Verizon as an early adopter in this TDM’s IP transition and we should start to expect other service providers to start to ramp similar to how Verizon has over the next six to 12 months?

And then, part two, do you have line of sight to any other kind of wireless self providers that could exceed 10% plus of sales within the next kind of 12 months period?

Andy Ory

So, the answer is, yeah to the first. That’s what so exciting to us, is that when you look at the magnitude of the opportunity for Acme Packet to help these service providers migrate their business from a position of really weakness to a position of strength, moving from TDM to IP, they’re all gong to do it. And they’re all, I mean, they just all well. Whether they use Acme Packet technology or not, I guess that’s a $64,000 question.

But given our relationship, our market position, our focus, our history of innovations, our thought leadership, I feel we’re going to get out on fair share. So I’m really excited that I’m starting to see service providers really lean into and purchase our elements in such a broad base.

Brent Bracelin – Pacific Crest Securities

From a timing standpoint, do you have some line of sight into kind of beyond Verizon in the next year in some early evidenced that that ramp could happen?

Andy Ory

So, I don’t have knowledge myself of any budget that any of our large wireless service providers currently have that could make any of them 10% customers. But I got to believe that they exist. But sitting in October 28th, what I have is a lot of interest in folks, a lot of great architectural discussions and a lot of great customers that I think have to evolve their business this way. But no, I’m not sitting here with three orders or real strong sense that wow this person is going to buy $70 million next year.

Brent Bracelin – Pacific Crest Securities

That’s helpful. My last question is for Peter, little bit of net pick, but you did see U.S. and Canada revenue down tick, I think $2 to $3 million sequential year, anything to read into that, was there any kind of softness or is that just timing of orders and there were kind of nice big ramp you’ve had over the last five, six consecutive quarters there?

Peter Minihane

Well, I think you have to look at, again I think Andy depicted as the 55, 45 split and I think if you go back the year ago, when you look at Q1, 2, 3 and 4 of ‘09, it was 55%, 54%, 54% and 53%. So I think historically it always looks like, feels like 55%.

The fact that we did in enjoy a Verizon Wireless Q1, Verizon Business Q2 and 3, kind of peaked that a bit from the 55% level up to the 58% or as high 66% last quarter. So, I don’t think any softness anywhere, I think to Andy’s point and I’ll echo that, it wouldn’t have been busy in very geo that we participate.

Brent Bracelin – Pacific Crest Securities

Thank you. Very helpful.

Peter Minihane

Thanks.

Operator

Thank you. Our next question in queue that will come from the line of Sanjiv Wadhwani with Stifel Nicolaus and your line is open.

Sanjiv Wadhwani – Stifel Nicolaus

Thank you. Two questions in my side. For Verizon business Andy, you’ve seen two quarters of them coming in as a 10% customer. If I’m not mistaken, it’s a SIP provider, is this something that could become an annuity business for your through Verizon business until that sort of industry matures, any color about that?

Andy Ory

I’m very happy about SIP trunking globally and Verizon business is a poster child of what we believe successful service providers who are going to do, who want to maintain and grow enterprise customers. I expect them to continue to purchase and I expect the other SIP trunking providers to continue to purchase. SIP trunking is a really important element of our business.

Sanjiv Wadhwani – Stifel Nicolaus

So any visibility in Verizon business, I think this question might have been asked forward, but just following up continuing to come in as 10% customer on a consistent basis?

Andy Ory

It’s not at that level. I mean, I don’t actually expect any of our customers to be 10% customer. I mean we have 1200 customers. We probably have 1,000 transactions a quarter. So, the way we’ve seen people buying to date has been largely reactive, which actually is a good sign because they’re not building up huge amount of capacity and then functioning like a channel and then they have to work it off. So, when people are buying, it’s because they filled up what they already have and they’ve made money with it and they’re buying more. And I think that trend largely is going to continue for the next six months or so.

I do think that we’re starting to see people make architectural decisions and ruminations about multi-year investments and changes in their network overtime. But, I’m not sure I see that impact in Q4 or the first half of 2011. So, I’m just expecting people to keep buying as they’re migrating. But, I don’t have any visibility that there is a SIP trunking provider out there that’s going to buy so much that to be a 10% provider and just going to earn to the visibility, doesn’t mean someone couldn’t place the order tomorrow.

Sanjiv Wadhwani – Stifel Nicolaus

Got it. And then, second question is on the government side, I know you mentioned it a couple of times during the call, curious how large it is as a percentage of your overall revenues today?

Andy Ory

Right. Right now the government is probably less than 10% of our global enterprise business, but it is millions of dollars on annual basis. It is going to grow in my opinion. The last number that sticks in my mind is the U.S. Bureau of Labor Statistics in 2008 had 114 million Americans employed from (inaudible) all the way up to the Fortune One which is Wal-Mart.

And now what you have is 22 million Americans at that same year that were local federal or state government. So it’s very big and it makes decisions and the government is going to move to all IT for so many reasons and active packet is very, very well positioned to participate there. We’re the only session border controller that made, design, tested, supported in the United States and I think that pretty important. We’re also I believe the only one that actually gone through the testing and received an APL GSA listing and passed all the test.

Sanjiv Wadhwani – Stifel Nicolaus

Got it, so just to – it’s less than 10% of your enterprise business not the total company?

Andy Ory

Correct. That’s correct, that’s correct.

Sanjiv Wadhwani – Stifel Nicolaus

Okay. All right. That’s helpful. Thanks so much.

Andy Ory

Sure.

Operator

Thank you. Our next question in queue that will come from the line of Larry Harris with C. L. King and your line is open.

Larry Harris – C. L. King

Yeah. Thank you and congratulations on the results.

Andy Ory

Larry, thank you and welcome to the call.

Larry Harris – C. L. King

Okay. Thank you. And just, in some of the newer applications as you’ve described like the, a load balancing product what percentage of revenue you think they might represent say this year and in 2011?

Andy Ory

So I would say, I can’t preannounce 2011, I would say that in 2010 it’s less then 10% those other functions added together. It’s definitely in the 90s that has been session board of controller – session border controllers that’s SBC.

Larry Harris – C. L. King

Right.

Andy Ory

But I have to say that there is – I love all the products, but a couple that have really received an awful lot of excitement recently one is the SMX and that’s SIP Multimedia-Xpress. It’s the ability to offer an IMS compliant architecture in a single platform at a much lower cost, in stead of maybe $12 of subscribers you can get there for $2 a subscribers and for people that want to be IMS compliance but don’t want to spend a whole lot of time for Tier 2 providers, this is really, really exciting to them. And I think that is going to be the real revenue contributor in 2011.

The other one is recession aware load balancer, we are starting to see customers with 100s of 100s session border controllers and the ability to scale and manage the access edge when they are devices that move and there mobile that need to be [re-firm]. It’s really an operational nightmare and we build technology into our core session border controller offering and into our session layer load balancing that allows for geographic redundancy, maintenance and scaling. And we are seeing awful lot of interest in that product as well. I think both those products are going to be revenue contributors next year.

Larry Harris – C. L. King

Great. Okay. Thank you.

Andy Ory

All right. Thank you.

Operator

Thank you. Our next question in queue that will come from the line of Jonathan Kees with Capstone Investments and your line is opened.

Jonathan Kees – Capstone Investments

Great. Thanks for taking my question guys and I’m glad it will be question before the year call ends. So I wanted to ask congratulations in the quarter and I guess I wanted to ask you are talking about 2011, if I can ask will it be talking more the traditional seasonality at least on the sequential basis. I know for 2010 it’s probably more shifted and more just a more first half loaded because of the acquisition, are you going to see more return to traditional seasonality for 2011?

Andy Ory

Jonathan, first of all thank you. Welcome to the call.

Jonathan Kees – Capstone Investments

Great. Glad to be here.

Andy Ory

Yeah. I know we are delighted to have you. Historically, we’ve talked about our business from a purchasing activity that’s 45% first half year, 55% second half year, its not exactly that, but those are the right ratios to think of it. And I would expect that’s what going to happen to you this year and while we have no crystal ball for next year, I think we’d expect the same dynamic next year.

Peter Minihane

While there is no information or indication that would lead us to believe otherwise.

Andy Ory

Right. That’s correct.

Jonathan Kees – Capstone Investments

Okay. Great. And last question, I don’t want to extend the call too much longer here. You talked about, Andy, you’re being a strong market for you possibly in 2011. Are you finding the security issues, clearance issues to be prime, have you factored that in or is India just more of a target market and it’s tried beyond more 2011?

Andy Ory

Yeah. For us, I mean, we’re American company, right, so, well way Chinese companies have much bigger problem with India. For us the bigger issue is regulatory, I mean for India it really allow for voice proliferate, it’s going to be much more important to us that was holding back to market. We’ve done some good business in India this year, we expect to good business in India next year.

I don’t highlight India as a territory globally highlighted more as one of the five or six markets in APAC that were excited about. I was talking about when I was saying Japan, China, India, it ought to be a good market for us but not anything that so significant that it would impact the overall corporation.

Jonathan Kees – Capstone Investments

Okay. All right. Thanks a lot.

Operator

Thank you. And our last question today will come from the line of Paul Silverstein with Research Analyst and your line is open.

Paul Silverstein – Credit Suisse

More than really for everybody -- more than (inaudible) skip the questions and put it back to the after call.

Peter Minihane

Okay. Thanks Paul.

Andy Ory

Paul. Thank you.

Paul Silverstein – Credit Suisse

Hey, you actually you know what, I’m going to make myself a large, just one question on margin.

Andy Ory

Go ahead, Paul.

Paul Silverstein – Credit Suisse

I can’t control myself, on the margins.

Andy Ory

Yeah.

Paul Silverstein – Credit Suisse

I just want to understand intellectually, I appreciate that you guys have been in service historically but when I think about going forward next year, on the gross margin line Peter, you guys was talking about this migration, it’s a higher margin platforms, it’s been ongoing.

Andy Ory

Yeah.

Paul Silverstein – Credit Suisse

I think last time you put a number and you said you are less than 50% away through, is that still true?

Andy Ory

I don’t understand the question Paul, I’m sorry.

Paul Silverstein – Credit Suisse

So, my understanding the pickup in gross margin is overtime, are you seeing them down this quarter because of the services. But if we look at the increase in the high 70’s to low 80’s, where they have been in a last couple of quarters. If I remember correctly you guys said that was from the ongoing migration to the higher margins 4500 or...

Andy Ory

Yeah. Now, there you go, I can answer your question now Paul.

Paul Silverstein – Credit Suisse

Okay.

Andy Ory

I understand what you you’re saying. It clearly what happened is that people are buying more software content. And as the software ratio increases relative to the hardware ratio our margins increase. And if the software content is reflected with higher capacity and more features and the 4500 platform has the ability for higher capacities in the 40 to 50, and so as people are buying bigger systems that’s increasing our margin and that principle is being driving our margin profile.

We are seeing that people continuing and the migrations in the 4500 is largely complete in the sense of, not that we are done only 4500, Peter.

Paul Silverstein – Credit Suisse

Right. I understand.

Andy Ory

More in the sense that the mix of 42 to 50s and 4500.

Peter Minihane

Right.

Andy Ory

Is really moving to many, many more times 4500, 40 to 50.

Peter Minihane

That’s correct.

Andy Ory

So, we expect to be a higher software content sales on an ongoing basis and I think that’s when the margins were flat.

Peter Minihane

Absolutely. So far you think about it from a product gross margin side, again on the non-GAAP basis, if you go back for the past three quarters of 83.4, 83.8, you look at the same number, I mean, if we are going to get any finer than that. Then I think we have to go higher and apply mathematician out of MIT that go in and do the modeling force, it’s generally more reasonable.

Paul Silverstein – Credit Suisse

Peter, it is my question, so services goes back to the margins where they were the mid high 80s, I understand this fluctuation depending upon the particular mix since circumstances. But services and general goes back to the mid high 80s, if your gross margin is on the product side, it’s already in the low 80s with that migration and you’ve got the software based SBC per view HP relationships, as well as these software-based apps that I presume are going to ramp overtime and contribute more dollars and $99 plus type gross margin.

My question to you is, in your growth -- at what point in your growth 30%, 40%, at what point the topline growth can you not keep up with OpEx growth and therefore operating margins have to go up?

Peter Minihane

Paul, I think that’s an interesting question intellectually, I look at it and I go back with some of your comments and think the software aspects of our business that is today a net-net OSE herein OEM, opportunity is in its embryonic stage. And I don’t think that’s going to have a material impact on this company in 2011, perhaps 2012 that we’ll stop to have an impact, but again I’m guessing.

And then you’re right if the service margins did return to the mid to high 80s, mathematically it has to happen. However that said we always model service at about 80% because it is so inconsistent with the period cost that we have to incur to support the 10 or 11,000 units that we have out there. So, it’s not – it’s not like we’re sitting around trying to figure out how to get our service group to 90 points in gross margin we just not – we just want to make sure that we fulfill our customer requirements from a service and support front.

Paul Silverstein – Credit Suisse

Right. So Pete, if net it out, it sounds like the gross line you are not going have much deteriorations from here if any – is this likely its flat to office it is down given that you’re going back, so what I think the key question, at what point in terms of revenue growth with a relatively stable gross margin profile, at what point do you think you cannot keep up in terms of OpEx growth and therefore operating margins go up not down?

Peter Minihane

It’s almost arguably Paul, we’re beyond that point based on this current year, because again we did talk, so you just answered, think…

Paul Silverstein – Credit Suisse

Peter, I understand you beyond at looking back but looking forward?

Andy Ory

No. But Paul, he actually answered.

Peter Minihane

Right.

Andy Ory

We think 30% in the topline. We can keep up with it. At 56% in the topline we couldn’t keep up with it, right.

Peter Minihane

Yeah…

Andy Ory

I mean, so this year it was 56% and we saw we couldn’t keep up with it.

Paul Silverstein – Credit Suisse

Right. Peter how better 40% growth?

Peter Minihane

That’s a good --we don’t know question.

Andy Ory

We don’t know the answer of that.

Peter Minihane

And we can sit down and look at it. Right and Paul, a good question, somebody said to me, you as a CFO should be modeling a 40% and 50% growth. I’ll tell you we just don’t have the time and the energy to do that. I think a 30% year-over-year growth and boy, it’d be great if we come out the call in April or July and talk about the 55% growth year-over-year. We’ll be thrilled as this can be.

But I think realistic expectations are important and I think they have to be grounded in some sense of reality, I think a 50%, 40%, 50%, 60% growth that we enjoyed this year and we’ve embraced that believe me would enjoy it I think. I think a number of individuals have. But I think we just have to play in 30%.

Andy Ory

30% we can keep up.

Peter Minihane

Yeah. And we’ll give you a much better feel for it I think in 91 days, its amazing how much more visibility and feel you get to the overall energy of the business.

Paul Silverstein – Credit Suisse

All right. Guys can you just remind us, what is -- you tell us what largest enterprise deployment, what in dollars, what’s been the larger service provider point since inception?

Peter Minihane

Got. I usually reference friend saying that, its $60 million in products and services, but I suspect we might be...

Andy Ory

You know…

Peter Minihane

Okay. I suspect little bit there we may see some others that emerge to be pretty large. We haven’t actually rolled everything up.

Paul Silverstein – Credit Suisse

While for the lot of, Andy, it goes to distribution, so it’s not a perfect road in that.

Andy Ory

Right. To the company like AT&T.

Peter Minihane

So, I think if I were to vote, I vote (inaudible).

Paul Silverstein – Credit Suisse

Investments 50 million.

Andy Ory

Sprint probably has been 60 so far.

Paul Silverstein – Credit Suisse

60, all right. Thanks guys.

Andy Ory

All right. Thanks Paul.

Peter Minihane

Thanks Paul.

Operator

Thank you. At this time, I will turn the conference back over to Mr. Ory for any closing comments.

Andy Ory

Tony, thank you. And thank you everyone for joining us this evening. It was another very strong quarter with record financial results and an upwardly revised outlook for 2010. We look forward to seeing as many of you as possible during this outreach period and updating you on our continuing progress during our next conference call. Thank you and good night.

Operator

Thank you. And ladies and gentlemen, this conference call will be available for replay after 7 p.m. Eastern Time today through November 11, 2010 at midnight. You may access the AT&T teleconference replay system at anytime by dialing 800-475-6701 and entering the access code of 173257. International parties may dial 320-365-3844. Once again those telephone numbers are 800-475-6701 and 320-365-3844 using the access code of 173257.

That does conclude our conference call for today. We do thank you for your participation and for using AT&T’s executive teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Acme Packet CEO Discusses Q3 2010 Results - Earnings Call Transcript
This Transcript
All Transcripts