Tekelec CEO Discusses Q3 2010 Results - Earnings Call Transcript

Nov. 4.10 | About: Tekelec (TKLC)

Tekelec (NASDAQ:TKLC)

Q3 2010 Earnings Call

November 04, 2010 08:00 pm ET

Executives

Kyle Macemore - VP of Finance & IR

Frank Plastina - President & CEO

Greg Rush - CFO

Analysts

Catherine Trebnick - Avian Securities

Michael Genovese - Soleil Securities

Amir Rozwadowski - Barclays Capital

Blair King - Avondale Partners

Larry Harris - C.L. King

Todd Kaufman - Raymond James

Operator

Good morning and welcome to Tekelec's 2010 third quarter earnings release call. At this time all participants have been placed on a listen-only mode and the call will be opened for questions following the presentation. It is now my pleasure to turn the call over to Kyle Macemore, Vice President Finance and Investor Relations. Sir, you may begin.

Kyle Macemore

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

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

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

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

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

Frank Plastina

Thanks, Kyle, and good morning to everyone on the call. Tekelec continues to deliver solid financial results. During the third quarter we generated orders of $81.1 million, revenue of $108.3 million, gross margins of 63%, operating margins of 14% and diluted EPS of $0.15 per share. Our year-to-date orders of $210 million are down 22% compared to the same period last year.

As discussed on the previous call, we continue to see lower SIGTRAN and SS7 solution orders, primarily from the emerging markets. While we are disappointed with our overall order performance we are pleased with increasing momentum of order input for our next-gen solutions.

Specifically, our next-gen products continue to grow as a percentage of total orders. This past quarter our next-gen products were 37% of total orders booked. With the addition Camiant and Blueslice products, the year-over-year order growth for our next-gen solutions was approximately 50% during the first nine months of this year.

Orders from the products acquired from Camiant and Blueslice have already exceeded our initial order expectations of $20 million for the year. We achieved this level in just five months since the acquisitions and we hope to continue building on this momentum during the fourth quarter. This is also a positive indicator of the expected benefits of utilizing our existing sales channels to sell these products.

We had four next-gen session management wins for the quarter, three SIP Signaling router wins and one for our recently announced diameter signaling router. We now have two diameter signaling router wins; the first win, MetroPCS was announced a few weeks ago.

Our total pipeline is now 30% higher than it was last year and nearly 60% of this pipeline is for our next-gen products. Although we are pleased with the growth of our pipeline, we've recognized that these products have a longer sales cycle and may have a lower order conversion rate than our established products. Our expectations are tempered as a result. We had a quarterly record 12 new customers and extended our reach into five new countries during Q3. Given that we expect the gross margin of many of our next-gen products to be higher than our historical corporate average as we move to a software-centric business model, we believe that our operating margins will expand over the long term.

Revenues for the quarter were down 6% year-over-year and down 3% from the first three quarters of '09, primarily due to declines in SIGTRAN and SS7 related revenues.

Our next-gen product revenue has increased 59% this quarter versus the same quarter a year ago and 45% year-to-date compared to the same period in '09. Our gross margins for the quarter were 63% due to a higher mix of lower margin service related revenue.

On a year-to-date basis our gross margins was 66%, 1 percentage point lower than last year and our operating margin year-to-date was 20%. Greg, will provide more detail on this later on the call.

The rapid adoption of smartphones, netbooks, tablets and other wireless devices is driving increases in data traffic. Service providers must adopt network architectures that can more efficiently handle this growth. They are also adding more intelligence to their core network so that they can take advantage of new revenue generating features and applications.

Our customers are clearly addressing these issues as evidenced by both their public statements and through our FQs that we are receiving for our next-gen products. All of these demand factors and trend support Tekelec's vision of creating the next-generation network intelligence layer.

Our emphasis on network intelligence solutions is being recognized by both customers and industry analysts. For example, a recent report from current analysis states the following. "With the purchase of Camiant and Blueslice, Tekelec added strategically valuable control and application layer products, providing the company with a potentially lucrative source of future revenue in the burgeoning mobile broadband market and a strong compliment to its SIP-based next generation platforms."

The high degree of interest and growth in our pipeline of opportunities supports our view that our solutions help service providers manage their most valuable assets, namely customer experience, subscriber profiles and network resources.

As I stated earlier, during the third quarter, 37% of our order input was comprised of next-gen products. Six of the 12 new customers mentioned earlier purchased our next-gen solutions. We also had a strong third quarter, selling our next-gen solutions into our existing customer base with a total of five Tier 1 wins.

As we discussed in prior calls, we noted that our next-gen solutions would provide us with an opportunity to penetrate the China market. We are pleased to announce that two of the new customer wins included our first entry into China with orders for our policy management and performance management solutions. Although the initial order input from our new Chinese customers was modest, we believe this is a significant break through for the company.

The China orders included a performance management solution win with a Tier 1 wireless service provider for their Voice-over-IP deployment supporting SIP and Diameter. Our second win in China was with a cable provider who will deploy our policy management solution to ensure quality of service for video on demand as part of their IPTV service bundle. Both of these solutions will use our EAGLE XG middleware platform.

In addition to our entry into China, we are also making significant progress with our next-gen policy solutions. Last quarter, we noted that our policy solutions were selected by two European Tier 1 mobile service providers with deployments across multiple countries. As announced recently, Telefonica was one of these wins. Both deals, which are reflected in our new customers wins for the quarter, extend the reach of our policy management solution to 44 service providers including Verizon Wireless and Vodafone.

Policy management is in the early stages of adoption. Our experience as the market leader indicates that initial policy management software deployments cover only approximately 5% of the total subscribers. We expect to continue to grow these deployments over the next several years. This growing base of policy customers now include solutions supporting 3G and 4G wireless, broadband wireline and cable networks.

Also, in a just released Infonetics survey of service providers, the Tekelec-Camiant policy management solution had the highest score for awareness and technology. This result help to confirm Infonetics belief that operators are increasingly interested in standalone software based policy control solutions that can support multiple network and service types. We also were highly ranked for price to performance ratio, service and support and product roadmap.

Continuing with new customer wins in our next-gen product fraction, we sold our next generation HLR to a Western European-based MVNO who provides database services including international roaming to a number of mobile operators across Europe. Another win included a European customer that purchased our mobile messaging solution. This customer will utilize our firewall to optimize their SMS interconnection operating costs.

In another report, Infonetics commented on our ability to deliver integrated solutions. Specifically, they noted that following our acquisition of Camiant and Blueslice, our performance management solution now allows service providers to address their network congestion issues by weighing quality of service against guaranteed service levels and making decisions accordingly. This cost portfolio strength is also resonating with our existing customers.

As we mentioned earlier, we sold our next-gen solutions into five existing Tier 1 customers. We have expanded our performance management footprint into two Tier 1 accounts, increased our policy footprint with Vodafone and sold our SIP Signaling router into a global wireless provider in two of their countries. All of our next-gen solutions are software based and we utilize the scalability and reliability of our EAGLE XG middleware over time. Also, all of the software will run on commercial computing platforms such as HP c-Class blade servers.

Turning to the industry's LTE rollout activity, we now have a full portfolio of LTE products that sit at the heart of LTE networks. Our portfolio now includes session, policy, performance, messaging, and data management solutions for 4G networks. More importantly, we have delivered software to customers for their initial deployments or evaluation for all of these LTE solutions. For example, after a successful trial with a Western European service provider, our LTE, HSS is carrying live commercial traffic driven by 4G datacards and dongles. We have now booked orders with four LTE customers to date including Verizon Wireless.

Finally, our EAGLE 5 product remains an important part of our portfolio. As mentioned above, six of the 12 new customers purchased EAGLE 5 solutions. In addition, we secured our first number portability win in Chile with an existing Tier 1 customer. We now have 107 customers in 37 countries that have ordered or deployed our number portability solution.

Now I would like to turn the call over Greg Rush to provide more details on our Q3 results. Greg?

Greg Rush

Thanks, Frank, and I like to welcome everyone to the call. I will provide further insight into our third quarter and year-to-date results and provide updated guidance for the full year. Please refer to slide five to 12 which provides us our GAAP and non-GAAP results for the third quarter and year-to-date periods, along with associated reconciliation.

Orders for the quarter in year-to-date periods were $81.1 million and $209.9 million respectively, representing year-over-year declines of 14% and 22% respectively. As Frank mentioned earlier, while we are making great progress with our next-gen products with year-over-year order growth of nearly 50%, this growth has not offset the decline in EAGLE 5 related orders.

Specifically, our EAGLE 5 and other established product orders are down 34% on a year-to-date basis, a decline at a faster rate than we expected and historically experienced. This decline is across all regions with the majority of the decline within emerging markets. Particularly in India, our orders are down over 50% on a year-to-date basis.

As we have discussed in our previous earnings calls we continue to be impacted both directly and indirectly by India's security regulations. While the Indian government has to the temporary moratorium on the most restricted of these regulations, we have only experienced modest order flow during the third quarter. One of the primary drivers for the continued slower order flow in India relates to the impact that these regulations are having in delaying the rollout of 3G and the implementation of number portability. Once deployed, the 3G and number portability typically result in a significant increase in signaling traffic within our customer networks.

Given a delayed implementation date, orders that we have previously expected in 2010 are now expected to shift to 2011. Orders from other emerging markets also continue to be impacted by cautious spending due to continued credit related issues, particularly within the Middle East and Africa. Within developed markets, we are also seeing double digit declines in EAGLE 5 related orders due to our customer shifting their attention from investments in their 2G and 3G networks to investments in their next-gen networks such as LTE, along with reduced demand from slowing growth of voice and text messaging traffic.

While the shift in our customers' focus has accelerated the decline and order from our EAGLE 5 and other established products has resulted in a significant increase in the demand for our next-gen products. This is reflected in the growth in orders and our pipeline associated with these products.

Revenues for the quarter were $108.3 million, down 6% compared to the third quarter of '09. For the first nine months of 2010 revenues were $333.8 million, down 3% from the same period in '09. Please refer to slide 18 and 19 for more information on our revenues by product.

As you can see on these slides, the year-over-year decline in our revenues is principally within our EAGLE 5 and other established solutions. EAGLE 5 related revenues declined by 23% during the current quarter compared to the third quarter of '09, and declined by 13% during the first nine months of 2010 compared to the same period in '09. This decline is directly related to the decline in orders that I discussed earlier.

The most of the significant increase in orders for our next-gen solutions, revenues from these solutions increased 59% this quarter and 45% on a year-to-date basis. During the current quarter we also recognized record revenues for next-gen session management solutions. This was principally due to a large multi-million dollar deployment at a Tier 1 US-based customer.

During the current quarter we booked $6.2 million of revenues related to the products acquired from Camiant and Blueslice. During the five months and as we completed the acquisitions we recorded a total $7.5 million of revenue from these solutions. While the majority of our next-gen products showed significant year-over-year growth, revenues from our performance management products decreased 3% year-to-date to $42.6 million from $44 million last year.

As we noted last year we recorded approximately $9 million of revenue on a large performance management project for our Tier 1 provider in Europe during the third quarter of '09. This resulted in both the third quarter and year-to-date periods being higher than typical trends associated with this product and thus accounting for the decline in revenues during 2010.

Next, I would like to comment on the geographic write-down of our revenues. Please refer to slide 22. As a reminder, a significant portion of our revenues continue to be derived from our backlog. Therefore, the geographical trend in orders that we discussed earlier are not necessarily reflected in current period revenues.

US revenues for both the third quarters of 2010 and '09 were 41% of total revenues. On a year-to-date basis US revenues were 38% in 2010 compared to 39% during the same period of '09. Despite the recent decline in orders in emerging markets, these markets will continue to be an important part of our business going forward.

For example, India now represents our second largest country and accounted for 14% of our revenues during the third quarter and 12% of our revenues for the first nine months of 2010. AT&T and Verizon are both 10% revenue customers in the third quarter of 2010 and represent a 22% and 10% of total revenues respectively. For the first nine months of 2010, AT&T was our only 10% customer and represented 17% of our revenues.

Turning to gross margins, our gross margins in Q3 2010 were 63% compared to 68% Q3, '09 and 67% in Q2, 2010. On a year-to-date basis, our gross margins were 66% in 2010 compared to 67% in '09. Gross margins were lower on a year-over-year basis during both the current quarter and first nine months of 2010 primarily due to a higher mix of lower margin service related revenue. In addition, a significant portion of both our product and service related revenue was derived from customers in emerging markets, where our margins are typically lower than our corporate average.

Given the significant growth in our install base of customers in India and other emerging markets, we continue to shift resources from higher cost markets by adding resources and skills in emerging markets, allowing us to provide local support in a more cost efficient manner. We expect that these investments will improve our service margins in emerging markets over time.

In addition to the impact of the shift geographically and the shift to a higher concentration and service related revenues, gross margins declined sequentially from the second quarter due to a lower book ship business consistent with seasonal trends in previous years. We'd like to note that book ship business was essentially flat during the first nine months of 2010 as compared to the first nine months of 2009.

Total operating expenses for the quarter were $53 million, up from $51.3 million in Q3 '09. The increase year-over-year was primarily related to approximately 6 million of additional expenses associated with our recent acquisitions, partially offset by lower incentive compensation.

Total operating expenses for the first three quarters of 2010 were $151.8 million, down 3% compared to same period in the prior year. The decrease in our year-to-date operating expenses reflects lower incentive compensation and our continued focus on expense management, especially if we transition our focus from investments associated with our EAGLE 5 solutions to our next-gen portfolio. Partially offsetting the declines in operating expenses is an increase of approximately $11 million associated with our recent acquisitions of Camiant and Blueslice.

We generated operating margins of 14% during the third quarter of 2010 and 20% on a year-to-date basis, down from 23% in the third quarter of '09 and 22% in the first nine months of '09. The decline in operating margins in the current quarter was primarily due to the dilutive impact of our recent acquisitions. The decline in operating margins for both the quarter and year-to-date was also reflective of the decline in revenues and our continued investment in our next-gen portfolio. We will continue to evaluate our cost structure for further cost savings to ensure the proper balance between acceptable operating margins and the growth opportunity that we see with our next-gen portfolio.

Net income for the third quarter was $10.2 million or $0.15 per share, down from 18.2 million or $0.27 per share in the third quarter of '09. Net income decreased to $45.5 million or $0.66 per share for the first three quarters of 2010 from $51 million or $0.76 per share for the first three quarters of '09.

Our operating results during the third quarter and for the first nine months of 2010 were negatively impacted by foreign currency fluctuations of approximately $1 million and $4 million respectively. Foreign currency fluctuations did not have a material impact on our operating results in '09.

Turning to the GAAP earnings, we had a small net loss for the third quarter of 2010 of $100,000 or $0.00 per diluted share compared to earnings in the third quarter of 2009 of $9.4 million or $0.14 per diluted share. For the first nine months of 2010 net income was $23 million or $0.33 per diluted share compared to $31.5 million or $0.47 per diluted share for the first nine months of '09. The primary driver for the [small loss] during the current quarter relates to an increase in intangible amortization associated with our acquisitions of Camiant and Blueslice.

Our non-GAAP effective tax rate was 27% for the third quarter of 2010 compared to 31% in the same quarter last year. For the first three quarters of 2010 our non-GAAP effective tax rate was 29% compared to 32% in the same period of '09. As we mentioned last quarter, our effective tax rate has declined during 2010 due to a higher percentage of our earnings being derived in jurisdictions with lower tax rate.

Please note that our 2010 effective tax rate did not currently reflect the benefit from the federal research and development tax credit as this credit has not been extended. During '09 our effective tax rate included this benefit.

We exited the quarter with a very strong balance sheet as shown on slide 23, with cash and cash equivalents of $223.7 million and working capital of $297.1 million at the end of the third quarter.

As of the end of the quarter, approximately 90% of our cash and cash equivalents were in the United States. During the first three quarters of 2010 cash flow from operation was $20.2 million, down from $46.9 million during the first three quarters of '09. Cash used in operations was $1 million during the third quarter of 2010. The decrease reflects the decline in our orders and related billings in recent periods along with a continued linking in our billing and payment terms associated with orders in emerging markets.

I would like to turn to our guidance for the year as shown on slide 24. We now expect our revenues to range between $430 million and $440 million with gross margins in the mid 60% range. We expect our non-GAAP EPS to range between $0.75 and $0.80 per share and our GAAP EPS to range between $0.30 and $0.35 per share.

As we mentioned in the past because of significant portion of our revenues are dependent upon the timing of customers acceptance, our quarterly revenue can be volatile. For example, our current guidance includes of India number portability project valued at more than $10 million. This project is currently in our backlog and we expect to complete it in the fourth quarter. However, the number portability implementation date or associated customer acceptance testing continues to be delayed. Revenues associated with this project may move to 2011.

I will now turn the call back to Frank for some closing comments. Frank?

Frank Plastina

Thanks Greg. So with a creation of a unique network intelligence layer, Tekelec enable service providers to deliver the best customer experience over broadband, wireless and fixed network. We were pleased to win 12 new customers this past quarter as well as selling next-gen solutions into five of our existing Tier 1 customers. It is also encouraging to see that we have already exceeded our targeted $20 million of order input for the year from the Camiant and Blueslice acquisitions. The acquisitions have also enabled us to significantly expand our 4G and fixed broadband portfolio.

As I noted earlier, our portfolio now includes session, policy, performance, messaging, and data management solutions for all next-gen wireless and wireline broadband networks.

Margin expansion beyond current levels continues to be our long-term goal and generating healthy positive cash flow from operations will continue to be our day-to-day objective and focus.

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

Question-and-Answer Session

Operator

(Operators Instructions). Your first question comes from the line of Catherine Trebnick with Avian Securities.

Catherine Trebnick - Avian Securities

My question is on your China Win, Frank are you going through any channel partners or is that direct?

Frank Plastina

We are actually reusing local partners for the initial two wins and we are actually looking at expanding that to include more partners. We think it's an opportunity particularly with policy management to go through several channels and that's because it addresses different sectors. So we are targeting these different partners to address wireless versus cable versus wireline and the opportunities are pretty good. The other thing that's interesting that's given us a bit of an edge in China is through the Camiant acquisition we acquired at China at lab. And that has been very, very instrumental in helping us accelerate the [gooey] work in all of the in country requirements.

Catherine Trebnick - Avian Securities

Got it. And then my other question is what's the plan for currently went before Camiant was purchased by you all. They were on servers, what's the plan to migrate their products into the EAGLE platform?

Frank Plastina

Yes, the plan is that its going to be done in stages over the next 12 months so we are putting it on a faster server as an initial step and then after that we are going to put it on to the HPC class, blade servers and whatever other blade servers our customers need. We have already integrated their EAGLE XG middle ware, now it's a matter of just catching up with the hardware integration and not being too disruptive to some of the initial deployments.

Catherine Trebnick - Avian Securities

And then one final question is, how does the pipeline look for next-gen products in terms of the policy control on a European versus North America basis?

Frank Plastina

Actually, it's very healthy in both regions and we are almost double where we were from when we bought Camiant and Blueslice and that's for both FDM and policy management pipeline. And as we noted in the prepared remarks, our overall pipeline for the company is up 30% year-over-year and 50% of that total now is coming from those next-gen products, so we are very encouraged by their size of the pipeline and the deals are at literally in every region around the world.

Operator

Your next question comes from the line of Michael Genovese with Soleil Securities

Michael Genovese - Soleil Securities

First question, can you just speak about any gross margin differences, again if any between the legacy in the generation product?

Frank Plastina

Generally, the next-gen products have a higher gross margin than our corporate average, as you know our EAGLE 5 historically has been the one that's where our revenues come from the net into the mid to high 60s but generally the next-gen products will have 70% plus gross margin.

Michael Genovese - Soleil Securities

I think if you look to next year, would you think that you would mix shift back to products on the way from services?

Frank Plastina

With the next-gen solutions also have some initial solutions but yes, over time we certainly expect that the services contain of a smallest percentage of our revenue especially the software-centric model.

Michael Genovese - Soleil Securities

And then finally you are guiding down fourth quarter in with normally seasonally up quarter, I am wondering it doesn't sound like it's a coincidence that your largest customer normally has a big budget question in the fourth quarter but they also guided our CapEx sequentially down and I am hearing that they may have even frozen most if not all new purchase order activity in the month of November and December. How much of the down guidance is related to the continuing decline in the legacy products and how much could just be related to some sub-seasonal spending by carriers that are normally up in the fourth quarter?

Frank Plastina

Depending of the range, Michael it was really due to that one deal that we talked about in this script, that is a large number of portability deal in India that is over $10 million and we don't know what the timing of number portability continuing to shift whether or not we are going to compete all the customer acceptance requirements to book that in revenues in the fourth quarter. That's a big swing.

With regards to the U.S. based customers we are seeing some pretty solid EAGLE 5 opportunities. Today we closed opportunities this quarter and our book shift outlook is really in line with our historical experience. We are not seeing any kind of change there.

Frank Plastina

I would add, if you go back on this. Really due to our order performance has been for year-to-date backlogs go lower so it's really not due to order fall outs or anything in the Q4.

Operator

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

Amir Rozwadowski - Barclays Capital

I was wondering if we can talk a bit more about India here. It seems to be a persistent challenge for yourselves and another folks who are selling into the region. What type of visibility do you have in terms of things clearing up here?

Frank Plastina

I think we are cleaning up. As we said that, we did some order flow come back in the third quarter. If you step back, at the beginning of the year for India, the way we saw it play out was we had assumed and these were the dates that were in place, that number portability would be up and turned on by mid year and then 3G rollout would start and earn us at least from an order input perspective in the second half of the year. All that has been pushed out, none of it has gone away. It's all been pushed out literally about six to 12 months depending on the individual details.

That's really what happened is our order flow has been caught up in that security issue that really has pushed out number portability and 3G. In terms of where we see it right now, the initial date for the first circle for number portability is supposed to be turned on at the end of November and then subsequent circles are going to be done week to week until the end of January. That's the plan right now, we don't know if that's going to slip, but once number portability gets turned on we do expect some signaling traffic to start hitting the core and therefore extensions and orders to happen after that. And then, once number portability is up and running, we will see a lot more effort on expanding the corporate 3G. We are seeing some radio work on 3G so they are starting to prepare, the Indian service providers are starting to prepare and deploy the ran piece of 3G and then we will see the core after that.

Amir Rozwadowski - Barclays Capital

That's very helpful, and then if we think about the opportunities in India, I'm just trying to assess how much of a benefit that would have on your Legacy products? Obviously we've seen a steeper than expected decline with the Legacy products here. Do you expect that to lead to a snap back in spending with respect to your Legacy products once those factors adjust themselves to be a number portability or 3G?

Frank Plastina

Yes, we do see a return to where we were. We're down significantly year-over-year and that has nothing to do with the opportunities within India. The market is very healthy, the economy is growing, there is going to be a lot of network demand. So we see the same dynamics from a demand factor perspective playing out as they did in every other emerging market. Its that security issue that really has put a damper and a delay on the near term opportunities. The fact that we got into nine customers in India and the fact that now we've got that EAGLE 5 base to be able to sell all of the rest of our portfolio into, is till a very important achievement and then obviously a very important asset for us going forward.

Amir Rozwadowski - Barclays Capital

And then if I may switch use here, you first had announced a contract win with MetroPCS for the LTE network earlier in the quarter and it seems as though that was for some of your legacy products. How do you view sort of the opportunity for legacy products as additional carriers migrate to LTE? I know we've talked about opportunities with Camiant and Blueslice but is there still an opportunity for potential deployments of some of your legacy products within the migration to LTE.

Frank Plastina

It actually will be primarily session management on EAGLE XG. When we go to LTE, the opportunities for us there are Diameter Signaling Router, SIP Signaling Router, part of that deal at MetroPCS included a DSR, Diameter Signaling Router. That's the piece that's going to handle Diameter traffic in the LTE network. MetroPCS also bought EAGLE 5 for their current 3G network. So they needed to handle both sides of the equation. They used to outsource their signaling network to outsourced partners and they decided that they were at the point where there was so much traffic that they should build their own. That's really what drove the EAGLE 5 opportunity. Going forward, its really DSR, SSR and all the other flavors on EAGLE XG, as well as our performance management software on LTE. They also purchased that as part of the bundle.

Operator

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

Blair King - Avondale Partners

Maybe following up on one of Amir's questions earlier. If you were to kind of strip out the decline in EAGLE 5 sales through India and kind of normalize that given hypothetically had there not been a delay in orders from the security clearance process, what would the decline in legacy products look like this year or just a sense to what you are thinking might look like?

Frank Plastina

It would be approximately about half the decline. India is a big piece of the decline. To the extent that if India were to be flat, we wouldn't have had as much of a decline. We would have had a decline that we had expected. Frankly, we are expecting EAGLE 5 to decline over time but not at the rates that it did this year. India was a unique event that really accelerated that rate and that's the part that was unexpected. Going forward, we do see much more of a smoother decline in EAGLE 5 with a take up rate then with the new products, and we are seeing some of that new product traction especially on the session management side with four new wins this past quarter, three for SSR, one for DSR. We are starting to see a lot more RFQ activity to handle the new protocols in an LTE or IMS or even just in advanced 3G environment and we think that's going to take up some of the session management opportunity in market that we were hoping to get sooner.

Blair King - Avondale Partners

One last one. Greg, I think you had mentioned that India was about 14% of your revenue this quarter, is that correct?

Greg Rush

Could you repeat the question, sorry?

Blair King - Avondale Partners

Did you say that India was 14% of the revenue this quarter?

Greg Rush

I believe so, yes.

Blair King - Avondale Partners

I think you did. So if we pretend to take that to assume something about 15 million in revenues and then India is probably on a run rate of around 60 million this year in revenue and if we just assumed that India was sort of flat line under a normal environment, would it be fair to say that backlog would probably be up about 60 million this year relative to where it is today/ In other words, would it be 13ish instead of the (inaudible).

Greg Rush

I don't think you made that late. One of the things we talked about is that are, lot of our revenue this year has come out of backlog and orders are down substantially in India. So, the revenue and orders do not necessarily correlate this year.

Blair King - Avondale Partners

Okay, I will follow-up with you on that one later. And then may be one last question, maybe Frank. With regard to the competitive situation in India, can you just talk about that in terms of pricing and how that's playing out?

Frank Plastina

Yes, the pricing pressures continue in India but it's no worse than it was. One thing that's potentially and that's positive is there is a much more diligence on which vendors get the core pieces of the networks, and we believe over the long-term that could be enough positive for us.

Operator

(Operator Instructions). Your next question comes from the line of Larry Harris with C.L. King.

Larry Harris - C.L. King

Wanted to talk a bit about the timeframe between orders, the shipments and revenues both for India and then say for the EAGLE XG. So if say in the March quarter you get materially higher orders in India assuming that the number portability occurs according to the current schedule. How many months or quarters before we might see enhanced revenue recognition? Might it be couple of quarter lag? What sort of timeframe are we talking about under the current accounting rules?

Greg Rush

For EAGLE 5 typically our revenue conversion in market like India is around six months and nine months. Given a lot of this will be extension business and maybe slightly better than that. But I would say in that range.

Larry Harris - C.L. King

So in terms of improvement in India revenues doesn't appear like it will be significant in the first quarter of next year it might be second, third, fourth quarter of next year.

Greg Rush

Yes that would be a safe assumption.

Larry Harris - C.L. King

And in terms of the EAGLE XG, it certainly seems based on your comments that there has been a lot more RFP activity even order activity. How much revenue should we recognize on the EAGLE XG thus far and when might we see sort of maybe a step function in terms of sales on the EAGLE XG.

Greg Rush

We haven't broken our revenues specifically for EAGLE XG in terms of the session management. Remember all of our next-gen portfolio is going to ride on the EAGLE XG middleware. But if you look at the slides in the director's special management policy, I think for the quarter, I ought to give you numbers, for the year-to-date we did 37 million of session policy and data management and most of that is coming from the session management part of the portfolio and we said policy was 7 million. You can do the math that way.

Frank Plastina

And one thing to keep in mind Larry and back to Catherine's question, right now SDM policy and performance management are in a transition to all going the EAGLE XG middleware. Our entire portfolio looking out 12 months is going to be on EAGLE XG. So it's really the solution set on top of that middleware program that we're going to start delineating. So session management policy, subscriber data management and the others.

Larry Harris - C.L. King

Okay. So you are recognizing revenues on the existing Camiant platform and that overtime it will transition to the EAGLE XG.

Frank Plastina

Yes, that's correct. The initial deployments for the Camiant policy management and for the subscriber data management are on their existing hardware and then we're very quickly moving it to the EAGLE XG. The reason for that is frankly it was one of the main synergies of the acquisitions. The EAGLE XG gives it a lot more scalability and a lot more reliability. So putting it on to that platform that we already do session management for DSR and SSR has really taken the policy management product to the next level and that's really what is driving a lot of these tier 1 wins. We don't see any other policy management player out there announcing as many tier 1's as we have. We're obviously in Verizon and Vodafone, we announced Telefonica and we've got several others and we're going to be in 44 networks by the end of the year. So we think we're clearly the leaders in policy management and we are just getting started.

We talked about the fact in the script that the initial deployments cover 5% or less of subscribers when policy softwares initially deployed. So we have got a lot of potential upside to continue to grow that product once we have got the initial installation done.

Operator

Ladies and gentlemen we have time for one last question today. Your final question comes from the line Todd Kaufman with Raymond James.

Todd Kaufman - Raymond James

Just a clarification on that last question in your response with regard to the EAGLE XG revenue in session policy and data management next generation line item in the quarter, that whole line item was called out as 26.6 million from 6.8 million. I am guessing about an incremental sequential increase of about 5 million from Camiant in the quarter. So was the rest of it EAGLE XG sequentially?

Frank Plastina

Yes effectively and, yes the vast majority of that is EAGLE XG session management related revenue.

Todd Kaufman - Raymond James

And then just a question on these, you called out in response to an earlier question about more than 10 million of number portability orders in India that have been pushed out, delayed maybe six to 12 months. When you ultimately are able to capture that business, how many quarters were you able to capture that business over? Is that a multi-quarter business opportunity or is that's one particular quarter that you mark that business down.

Greg Rush

Let me correct your understanding of that. I think you are asking two different questions. One, when we called out and prepared remarks, the $10 million that related specifically to revenue. That's the deal that we've already won, its in backlog. The timing of when we recognize revenue is a little bit more, and that's why we called it out, just because we can't control it as much as the government regulations and number portability testing.

So we called that out specifically in our guidance. As to the impact on our orders for the year which is not necessarily connected to the $10 million that you are talking about, that's more of an issue where the 2G and the 3G and number portability recommendation date have left. Once a carrier gets those implemented, we usually see a significant amount of signaling traffic in those networks. We've had that experience here in the United States. And so when we entered this year we had expected a significant amount of new orders to come in this year as that signaling demand increased because those dates have moved. Those orders which we have not quantified has left the 2011. They are not losses we've got the installed base, we fully expect to get those orders and that's one of the reasons why one of the other questionnaires asked about do we see may be a slight increase and Frank made the comment. Yes, you could see a rebound in the EAGLE 5 market next year specifically in India.

Operator

Thank you ladies and gentlemen. Thank you for participating in Tekelec's 2010 third quarter earnings release conference call. This does conclude today's conference. You may now disconnect.

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