Mavenir Systems' (MVNR) CEO Pardeep Kohli On Q2 2014 Results - Earnings Call Transcript

Jul.28.14 | About: Mavenir Systems (MVNR)

Mavenir Systems Inc. (NYSE:MVNR)

Q2 2014 Earnings Conference Call

July 28, 2014 5:00 PM ET

Executives

Maryvonne Tubb – Investor Relations

Pardeep Kohli – President and Chief Executive Officer

Terry Hungle – Chief Financial Officer

Analysts

Tal Liani – Bank of America Merrill Lynch

Scott Schmitz – Morgan Stanley & Co. LLC

Brian Modoff – Deutsche Bank Securities, Inc.

Catharine A. Trebnick – Dougherty & Co. LLC

Presentation

Operator

Good afternoon. My name is Wanda and I will be your conference operator today. At this time, I would like to welcome everyone to the Mavenir Quarterly Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the call over to Ms. Maryvonne Tubb. Please go ahead, ma’am.

Maryvonne Tubb

Thank you. Good afternoon, everyone, and thank you for joining us on this conference call to discuss Mavenir Systems’ results for the second quarter ended June 30, 2014. This call is being broadcast live over the web, and can be accessed on the Investor Relations section of the Mavenir Systems website at mavenir.com. This afternoon, Mavenir Systems issued a press release, announcing these financial results, a copy of which can be accessed on our website or the SEC’s EDGAR website.

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

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

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

Additionally, we have filed a registration statement with the SEC with respect to a public offering of our common stock. This registration statement has not yet become effective, any discussion of our pending common stock offering on this call will not be deemed and offered to sell no solicitation of any offers by our common stock, which may not be sold, nor may offers to buy the acceptance prior to the time the registration statement becomes effective. For information about our public offering, we refer you to our registration statement on file with the SEC.

Please note that we will discuss non-GAAP gross profit, non-GAAP gross profit margin, non-GAAP operating loss, non-GAAP net loss and non-GAAP loss per share. Specifically, stock-based compensation, depreciation and amortization and foreign exchange gains and losses are excluded from these calculations. We have provided reconciliations of these non-GAAP measures in our earnings release.

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

Pardeep Kohli

Thank you, Maryvonne, and thank you to everyone participating today in our second quarter 2014 earnings call. We appreciate having this opportunity to speak with you. I am pleased to report second quarter revenue of $33.3 million, which was $2.3 million above the top end of our guidance and setting another new quarterly revenue record for Mavenir Systems. This reflects a 29% increase over the second quarter of 2013 and a 16% sequential increase over the first quarter.

We are also pleased to report the gross margin of 56.5%, which was 1.5% above our high end of our guidance range and contributed to a non-GAAP operating income of $0.1 million. While I am very pleased with our second quarter results, which I will elaborate on shortly, I wanted to take this opportunity to share my thoughts with you regarding the wireless market space in the progress that our customers are making in transforming the networks to 4G LTE.

As we have heard me discuss previously, Mavenir is focused on two major trends, driving this transformation. The adoption of all-IP technology and building next generation networks using software-based solutions. The adoption of all-IP starts with building our 4G LTE networks. Today, 645 operators have begun investing in LTE and 329 have already launched, which is roughly heard of operators globally.

In this first phase of 4G LTE deployments, operators are offering their subscribers fast data speeds that can be up to 15 times faster than today’s networks. And then they will deploy Voice over LTE provide their subscribers a new and improved voice service and move voice traffic onto LTE networks.

Mavenir is the leader in providing Voice over LTE solutions to mobile operators. We have 14 Tier 1 VoLTE customers globally and have one multiple industry award for our VoLTE solution, most recently for – we won an award for Voice over LTE leadership and innovation at the LTE World Summit held in Amsterdam.

Our leadership days back to when we provided the IMS core network and voice solution that MetroPCS used to become the world’s first mobile operator to launch VoLTE in August of 2012. I am particularly proud that Mavenir continues to lead in the deployment of Voice over LTE in key market. We recently announced that T-Mobile U.S. is using IMS core network from Mavenir and our voice solution for their VoLTE launch, launched on May 22.

T-Mobile initially launched the service in Seattle, but has already rolled out the service in 15 markets, including San Francisco, New York, Los Angles, Chicago and Dallas and has steady plan for machine wide availability before end of the year.

As we had anticipated, 2000 is becoming the year of VoLTE. along with T-Mobile in the U.S., they are several other announcements made by mobile operators during the second quarter, in the U.S. market AT&T launched VoLTE on May 23 and Verizon have reconfirmed their commitment to launch nationwide VoLTE service before year-end.

In the Asia-Pac region, NTT launch in Japan, SingTel launch in Singapore and Hong Kong Telecom launch in Hong Kong. There are also several announcements for mobile operators in Europe, few UK and everything, everywhere in the UK along with Bouyges Telecom and SFR in France. We have announced the plans to launch VoLTE in 2015. There is a good progress in the device ecosystem as well.

To date, there are 92 VoLTE enabled device models available from major device manufacturers, such as Samsung, LG, Sony and HTC. In some cases manufacturers are already shipping VoLTE-ready devices that can be actively, that can be activated remotely once the network is ready. For example, T-Mobile recently made a software update available for Samsung Galaxy S5 to activate VoLTE service on devices that were sold prior to the VoLTE launch in May.

Also, Apple has rumored that iPhone 6 and iOS 8 might both support VoLTE. This will be the first Apple phone to support VoLTE and its introduction this fall is expected to further the progress of VoLTE. The way of VoLTE launches and announcements during the second quarter signals the increasing momentum in this next major phase of LTE network evolution. Along with the progress in the device ecosystem, the encouraging science that the VoLTE is on its way to become a mass market service.

To better appreciate the significance that VoLTE has through the mobile operators, it’s important to understand that the transition to 4G LTE network is driven by the need operators have to increase the capacity of their networks to cope up with the massive growth in the mobile data. Network capacity is ultimately a function of spectrum and to increase the capacity operators have two choices. they can buy more spectrums, or they can better utilize the spectrum they already have and the operators are in fact doing both.

In the U.S. market, for example, the FCC has recently announced plans to reverse auction in 2015 that will transfer for large blocks of valuable 600 MHz spectrum from television broadcasters to mobile operators.

T-Mobile and Sprint have the wheel plans to fund a joint venture with $10 billion to purchase spectrum in the auction, and AT&T has announced that they’ve earmarked $9 billion for the auction, assuming that the Verizon brings in a similar number, the auction could take over $30 billion, significantly, more than the last such auction, which pays $19 billion in 2008. we are stating these numbers, because these are meaningful numbers for an operator, as they look at their overall cost.

In addition to buying a network, a new spectrum, operators are deploying LTE as the means to better utilize the spectrum they already own. LTE is at least 3x more spectrally efficient than the high speed 3G networks, and it’s 5x and 10x more efficient than standard 3G. In simple terms, the spectral efficiency directly translates network capacity. for example, 3x the increase in spectral efficiency is equal to 3x gain in the network capacity.

VoLTE plays a key role in this equation, operators building out 4G LTE networks, or in transition as voice still runs on the legacy 2G, 3G network. so their spectrum is split across two networks on 2G, 3G and 4G. VoLTE enables voice on 4G LTE networks, allowing operators to move all their subscribers in the traffic of the 2G, 3G networks, which in turn allows them to reallocate the spectrum to more spectrally efficient 4G LTE and transition to a single network.

While we are capitalizing on 4G LTE and VoLTE and the transition to all-IP technology, we’re also capitalizing on a second trend, building the next generation networks, using a software-based solution. The wireless industry has centered on enabling technology called Network Function Virtualization, NFV, which we will – which will define how the next generation networks are built. they are a leader in this transition with a broad portfolio of 30 products, based on a fully virtualized software platform, designed to meet mobile requirements for scale and liability.

Our business model is based on providing virtualized software products. The operators they are building their own private cloud networks. this offers them higher margins and better scale without significantly increasing their working capital requirements. We believe we are a first mover competitive advantage as the industry transitions to software-based networks more strictly than most anticipated.

We feel that we are uniquely positioned to capture the growing market opportunity for virtualized next generation solutions, all of our new customer wins in the first half of 2014 are called all-IP software-based solutions, their mobile operators is sourcing software and services from Mavenir and virtualized hardware platforms from leading third-party platform vendors, such as HP and IBM. This allows us to focus on higher margin software solutions. In recognition of our commercially deployed virtualized technology, Mavenir just received an award for NFV Innovation of the Year at the LTE World Summit 2014, Amsterdam.

Now I will shift the discussion to address the business highlights for our strong second quarter. Momentum in our 4G next generation business continues to build. we acquired two new Tier 1 customers for 4G LTE software products, one for our Rich Communication solutions and other for our Diameter Routing solutions.

As with many of our recent wins, Mavenir is providing software and professional services, and customer is providing the hardware platforms based on industry standard, commercial-off-the-shelf or cost servers. Our quarterly revenue for 4G next generation software products was $27.5 million and it grew 66% over the second quarter 2013 and increased 23% over the first quarter 2014. This has been one of the major contributions of our gross margin expansion.

We continue to focus on expanding our business in new markets, one of our customer wins in the quarter was in the Middle East and represents our first major win of our 4G products in that region. These new customer wins have added to our growing roster of blue chip customers, tier 1 operators such as AT&T, T-Mobile, Deutsche Telekom, Vodafone, Hutchison and Tele2. With these new wins, our 4G next generation software product customers have a combined total of over 1 billion subscribers.

Now that U.S. market is launching VoLTE, our U.S. customers are buying more capacity. In Q2, we closed deals with two of our four tier three tier 1 customers in the U.S. with significant capacity expansions that included our Session Border Controller and RCS solution. Along with providing capacity, we are delivering new conversion features that enable our customers to handle legacy subscribers and traffic from a single consolidated in the core generation network, sorry, next generation network. And begin the process of replacing the legacy equipments and reducing suppliers in the network, that significantly reducing the cost.

It is important to understand that VoLTE about more than just delivering plain-vanilla voice services. Operators are monetizing their investment in VoLTE in three ways. First, operators will use VoLTE to provide their subscribers with better quality of experience on their network with a new and improved voice service with faster call setup and a high definition voice quality.

Second, operators will enable interoperable rich communication services that will be needy for the smartphones such as video calling, and video conferencing, as well as group chat, location sharing, and presence. We are addressing this opportunity with our RCS solution that again was recently recognized at IMS World Forum in Barcelona with the award for the best RCS package.

We believe that VoLTE is disruptive and represents a first step towards competing with OTT players, such as high Facetime, Viber et cetera. We have enhanced our suite of IMS based next generation support, our speculation solutions to support multi-device service ubiquity, whereas operators can create a user experience for their subscribers such as today Apple does with their iPad and iPhone solutions.

Operator services such as VoLTE and RCS will work seamlessly across smartphones, tablets, PCs, TVs such as Facetime and iMessage services do across Apple devices ecosystem. Our approach to enabling this experience is analogies to what Apple has done with iCloud, we provide the network intelligent that manages multi-device service delivery, and synchronization, any dependency – without any dependency on the proprietary plans.

Third, operators will improve the network coverage by leveraging VoLTE to offer Voice over Wi-Fi, which extents the reach of voice and text messaging the subscribers using the Wi-Fi access. Momentum for Voice over Wi-Fi is surging as indicated by recent announcements by our customers in UK, through UK and everything, everywhere. They have plans to launch Voice over Wi-Fi this year based on Converged IMS Solution that will be used to launch Voice over LTE as well in 2015.

This is in fact the approach that T-Mobile U.S. took with Mavenir’s converged voice solution, which was commercially launched in 2011 to support Voice over Wi-Fi service and it enabled them to accelerate network revenues for VoLTE.

Several other operators across the world have successfully launched Wi-Fi Calling, including Orange, France; O2UK and Rogers Wireless in Canada. Apple recently announced various support for Voice over Wi-Fi in iOS 8, which is a major development for the industry because that will significantly boost a number of compatible devices for Wi-Fi Calling.

For example, T-Mobile announced that with the Apple support or 90% of smartphones in their network will support Wi-Fi Calling. We also disclosed that Wi-Fi Calling has impact the audio mass market service with over 17 million Wi-Fi Calling enabled devices in their networks today and over 5 million active users of this service monthly and both the numbers are growing.

We are capitalizing a momentum for Voice over Wi-Fi with the introduction of two new products announced during this quarter. First, we announced our ePDG, or Evolved Packet Data Gateway product, which is part of our virtualized EPC portfolio. The ePDG enables secure access from Wi-Fi as well as seamless mobility as subscribers move between Wi-Fi and operator networks. Subscriber can maintain constant access to high-speed data and voice services whether they are in healthy coverage, or in Wi-Fi coverage at public hotspots.

For example, as subscribers are in office, the data section remains active and voice calls stay up, while the service – while the device, which is formality to Wi-Fi access. We have implemented ePDG on the same common platform as our virtualized EPC, which has a distributed architecture that can optionally be integrated with our Session Border Controller. This approach optimizes the end-to-end architecture for delivering Voice over LTE and Voice over Wi-Fi services. In simple terms, we believe we have built a more comprehensive and cost-effective solution.

Second, we introduced our mobile client and client provisioning server to enable Voice over Wi-Fi and Rich Communication Services on tablets or existing devices who do not have already embedded clients. This has a benefit of the moving that dependency on new devices, without mobile client solutions, we provide operators an end-to-end approach to monetize the investment in VoLTE and easily offer Voice over Wi-Fi. In fact, during the quarter, one of our existing VoLTE customers purchase our mobile clients and is now planning to launch Voice over Wi-Fi as well.

Now I’ll hand over to Terry Hungle, our CFO. Terry?

Terry Hungle

Thanks, Pardeep. Before I get started, and while Maryvonne pointed this out during her introductory remarks, I would like to remind you that unless otherwise noted, we are discussing all numbers except revenue on a non-GAAP basis. non-GAAP numbers exclude stock-based compensation, depreciation and amortization, foreign exchange gains or losses and the uncertain tax position component of our income taxes.

To that extent, I’d like to direct you to our earnings press release, which contains the detail reconciliation of GAAP to non-GAAP measures. Now on to the financial results for the quarter. Revenue in our second quarter of 2014 was $33.3 million, an increase of 29% over Q2 2013 and 16% above Q1 2014. This spend results in the first half 2014 revenues of $62 million, an increase of 29% over the first half of 2013.

As Pardeep noted, we are pleased that our second quarter performance was above the high-end of the guidance we provided in our Q1 2014 earnings release held on May 7, 2014. As reflected in our revenue results, new customer wins and capacity expansions are continuing to see strong momentum in our 4G next generation business. Revenue from 4G next generation business was $27.5 million in the second quarter, an increase of 56% over Q2 2013 and an increase of 23% over Q1 2014. Revenue from our 4G next generation business represented 83% of our total revenue in Q2 2014 and our 2G/3G products represented the remainder.

In terms of product groups, Voice over LTE or VoLTE is driving significant growth in our voice and video product group. voice and video revenues up $20.3 million or 61% of our total revenues in Q2 2014 and grew 113% over Q2 2013. However, voice and video revenues were 10% lower than Q1 2014.

This change from Q1 2014 is indicative of the revenue flows we can experience as a result of the acceptance based completed contract method of revenue recognition. Thus said in another way, different projects were completed in each of Q1 and Q2 2014. As the acceptances are achieved, the scene is set for the next stage, which is capacity expansion in the network. When that happens, we expect to result in more software revenues from Mavenir.

Looking at the split between software product revenue and maintenance revenue, revenue from software products was $27.2 million in Q2 2014, representing 82% of our total revenues in Q2, an increase of 39% over Q2 2013 and 18% over Q1 2014. Maintenance revenue is up $6.1 million, it is flat to Q2 2013 and 8% higher than in Q1 2014.

We expect that maintenance revenues will continue to grow over time as the operators launched their network at initial warranty periods expired. From a geographic perspective, we are experiencing significant growth in the Americas region, as operators have begun the initial launches of VoLTE and RCS services. Revenue of $19.7 million from the Americas region in Q2 2014 is 52% higher than Q2 2013 and 44% higher than Q1 of 2014, reflecting completion of the initial network build-out phase.

The Americas region represented 59% of our total revenue in Q2. Revenue of $4.2 million from the Asia-Pac region in Q2 is 52% higher than in Q2 2013 and 59% higher than in Q1 2014. This improvement reflects the impact from new account wins in Q1 2014. The Asia-Pac region represents 13% of our total revenues in Q2.

Revenue of $9.4 million from the Europe, Middle East, and Africa region, otherwise called EMEA, in Q2 of 2014 is 7% lower than in Q2 2013 and is 25% lower than in Q1 2014. This again reflects the revenue flow that we can experience as a result of the acceptance phase completed contract method of revenue recognition.

The EMEA region represented 28% of our total revenues in Q2 2014. Although, we saw some launches and the capacity expansions in the U.S., the majority of our worldwide customers are still in the network build-out phase as they work towards VoLTE and RCS launches, with several more launches planned for 2014.

As we’ve discussed previously, during the network build-out phase, Mavenir’s revenue mix is weighted towards hardware and professional services, and revenue recognition is highly dependent on customer acceptances.

In the longer-term, we expect the revenue mix to weigh more heavily towards software licenses, as the operators need to expand capacity as they get closer to service launches. In the short-term, non-GAAP gross profit margin percentage will be subject to volatility depending on the revenue mix and customer acceptance milestones.

Non-GAAP gross profit margin percentage in Q2 of 2014 was 56.5%. This is approximately flat to the non-GAAP gross profit margin reported in Q1 2014; it is 3.6 percentage points higher than the amount reported in Q2 2013 and 1.5 percentage points than the guidance provided on May 7, 2014 for Q2.

The driving factors for the improvement over our May 7 guidance are first, selling more software, including selling our own software-based Session Border Controller solutions; and second, as we installed more next generation network, we are gaining operational efficiencies that’s improving our cost profile. This brings our first half 2014 non-GAAP gross profit margin to 56.7%, versus approximately 1.7 percentage points lower than the corresponding results for 2013.

With the accelerating adoption of 4G LTE and with the expanding product portfolio, we are continuing to add to our talent base. During Q2 2014, we increased our headcount from 866 to 968 people, mostly in the area of R&D and Sales and Marketing.

Heading into 2014, we did slow the growth of post-sales support headcount and as a result, we are seeing our non-GAAP maintenance gross profit margin percentages begin to increase. Q2 non-GAAP maintenance gross profit margin percentage is 52%, which is flat to Q1 2014, but above the low point of 38% experienced in Q4 of 2013. Non-GAAP operating expenses of $18.7 million in Q2 2014 were $5.3 million, or 40% higher than they were in Q2 2013 and $2.1 million, or 13% higher than Q1 of 2014.

I’ll now go through each of the key increases in operating expenditures. Q2 2014 non-GAAP research and development cost of $6.5 million, or 27% higher than they were in Q2 of 2013. This increase is a result of increasing effort to bring new products to market, such as the EPC and including the ePCG.

Previously, we advised that we are increasing our spending in non-GAAP sales and marketing costs, as we begin to focus on markets such as Eastern Europe and Latin America that are beginning to make their buy decisions related to VoLTE and Rich Communication. As such, in Q2 of 2014, we are seeing non-GAAP sales and marketing spending of $8 million, which is $3.3 million, or 72% higher than in Q2 2013 and 18% higher than in Q1 2014.

In addition to adding sales resources to focus on new regional opportunity, we have stepped up the number of files that we are performing on customer side. Q2 trial costs, which included hardware to perform the trials, were approximately $1.1 million. There is a significant step-up in the number of trials being requested. We see this as a positive, because more and more operators are getting ready to deploy VoLTE and RCS components in their 4G LTE network.

Having to perform many trials at the same time has resulted in trial cost increasing from $0.6 million that we incurred in Q1 of 2014. Q2 non-GAAP general and administrative expenses of $4.3 million were 16% higher than Q2 2013 driven by increased cost to support our public company activities. This brings non-GAAP G&A cost to 12.8% of revenue versus 14.3% rate that was recorded in Q2 of 2013. The Q2 non-GAAP G&A expenses were slightly lower than those costs incurred in Q1 of 2014.

Non-GAAP operating income of $0.1 million in Q2 2014 was $0.1 million lower than the non-GAAP operating income recorded in Q2 of 2013, and $0.4 million better than the non-GAAP operating loss recorded in Q1 of 2014. Higher revenue is the key driver to this improvement over Q2 of 2013. Non-GAAP net loss of $1 million, improved by $0.7 million over Q2 of 2013, and by $0.1 million over Q1 2014. Our Q2 2014 loss per share is a loss of $0.16. On a non-GAAP basis, the non-GAAP loss per share is a loss of $0.04.

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

Revenue for the third quarter of 2014 is expected to be in the range of $31 million to $33 million, which will represent an increase of 19% to 27% on a year-over-year basis. This will then bring our revenue range for the nine months ended September 2014 between $93 million and $95 million representing growth of 25% to 28% over the corresponding periods for 2013.

For Q3, we expect non-GAAP gross profit margin percentage of 51% to 53%, which continues to reflect higher percentage of revenue coming from network build-out. This means that our Q3 software product revenues will be comprised primarily on hardware and professional services along with the small amount of software.

We expect non-GAAP operating losses for the third quarter of 2014 to be in the range of a loss of $2.5 million to the loss of $3.5 million. This non-GAAP operating loss is a result of flat revenues and lower non-GAAP gross profit margin percentage which reflects the significant hardware components and a continued increase in non-GAAP operating expenses. The higher non-GAAP operating expenses reflect investments for American research and development to introduce new products such as ePDG.

As noted above, we are also investing in sales and marketing as we begin to address new market. Most of these new opportunities require trials which is a significant element of our increased cost. We expect the weighted average share count for this quarter to be approximately $27.4 million. This includes the impact of any potential share offering activity, which I will discuss briefly below.

As a result, we are estimating our Q3 non-GAAP loss per share to be in the range of a loss of $0.16 to a loss of $0.12. For the total 2014, we see revenues continue to strengthen and as a result we are now increasing 2014 annual revenue outlook to a range of $127 million to $130 million representing annual growth of 25% to 28% over 2013.

We expect to see total year non-GAAP gross profit margins at between 57% and 59% compared to the 56.2% achieved in 2013. We expect this increase in non-GAAP gross profit to be in the result of software license capacity expansion and the impact of selling our own software-based products such as the Session Border Controller.

To support future growth and to take advantage of new market opportunities, we are continuing to increase our investment in research and development, and sales and marketing throughout 2014. As a result we expect non-GAAP operating profits to be at or about break-even for 2014.

Finally, as you have seen, we have filed an S-1 indicating that we are – that we would be doing a follow on share offering. We anticipate that we will proceed with the share offering beginning tomorrow July 29, 2014. The share offering consistent of primary shares only and the anticipated use of fund is for general corporate purposes.

With all that said I’d like to turn it back to Pardeep for concluding remarks.

Pardeep Kohli

Thanks, Terry. In summary, I am pleased with our business results in the second quarter, now our prospects for the full year as well as the quality and the quantity of our new customer wins for our next generation software products. Each new customer win confirms that our software based technology and business model positions us well to continue to be successfully transforming mobile operator networks to 4G LTE. I am also encouraged by positive signs that 2014 will indeed be the year of VoLTE. The T-Mobile and AT&T already launching was in May Verizon recently conforming their launch plans, Apple committing to VoLTE in the devices that are getting ready.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Tal Liani with Bank of America.

Tal Liani – Bank of America Merrill Lynch

Hi, guys. I want to ask you about the dynamics with customers dual sourcing versus single sourcing, we hear from time to time about Alcatel won this and Exxon won that and then you announced a few deals. What is the rational for example for carriers to do VoLTE on the enterprise side with one vendor and VoLTE on the consumer side with another vendor? And then second question kind of related is if they choose you for VoLTE will they add – and let say building enterprise I’m just making up an example. What is the likelihood that they add another vendor in the same place, same facility in enterprise competing with you? What are the pros and cons and that it happened in real life? Thanks.

Pardeep Kohli

Yes, Tal what we’re seeing from our experience is that wherever there is a split decision that is the cost mainly happens with the integrator operators, which had some wireline asset or enterprise assets which are doing Voice over IP. So if you segment the customers into two categories, the tier mobile operator with no legacy wireline or enterprise market there they tend to make decisions which are one vendor for everything. So for example T-Mobile U.S., generating MetroPCS, we had everything, in Deutsche Telekom, in properties outside of Germany, we got everything. Rights, so the core that you see the application layers everything, right. But if you look at Germany for example, they had wireline solutions which already using Voice over IP, or Voice over DSL, or fiber or whatever and they had a core IMS network from another vendors, so they just stayed with that and used us for application layer.

Similarly, what we are seeing in another Orange for example, their first telecom has wireline properties, so they stayed with their core vendors from the wireline side for wireless results and picked us for the wireless properties, or wireless applications. So I mean I guess example regarding enterprise, we have not seen anybody other than what happened I guess in Sprint. Anybody who was picking an enterprise provider for consumer market, most of the time it is mainly the wireline vendor is getting a portion of wireless in case of integrated operator.

Tal Liani – Bank of America Merrill Lynch

Got it. Second question, not related, I joined a little bit late of the prepared remarks, maybe you’ve mentioned it. But Europe, EMEA was 28% of revenues this quarter, was 38% of revenues last quarter. And in the previous quarter conference call, you mentioned that typically EMEA is weak in the third quarter. you’ve guided flatter also, after a better than consensus quarter, you guided flat for next quarter. So can you go over again, the dynamics of Q3 and can you also discuss why EMEA was weak this quarter versus previous quarter?

Pardeep Kohli

Okay. so I’m actually (indiscernible) going to handle than the other order here. so let’s talk about what went on in EMEA, what we’ve talked about is the fact that we recognized the revenue on an acceptance basis, right. It’s completed contract acceptance-based, and just it reflects the revenue flows that we experienced as projects get completed.

So stated in another way, we had more projects completed in Europe in Q1 and we’re able to take revenues than we did in Q2. And as a result, EMEA was down. I would expect to see EMEA probably continue relatively flat for Q3, there is work to be done and those projects that will be completed in that timeframe, but you are right, it tends to be a little bit softer.

In terms of overall Q3, then we had a stronger Q2, a couple of projects that we have initially layered for Q3 were completed in Q2, part of what we’re also experiencing is that the cycle between getting a purchase order and being able to recognize revenue is shortening, particularly when we’re doing follow-on business. So that has coupled with the European vacation activity, typically makes Q3 a flatter quarter for us. So that’s what we see happening today.

Terry Hungle

And Tal, I guess that we do see in Europe, the operators launching towards end of Q3 or early Q4. So we would be getting acceptances from operators who are going to be launching on that time. Of course, we did get acceptances from some other operators in Q1. So there is just a buying, when they bought the equipment, when they started testing it and when the acceptances happen. So it’s just a timing from a project point of view.

Pardeep Kohli

Yes. so I think we shouldn’t read in here that there has been any change in our success in Europe, our business continued to see very strong in that regard and it’s just a matter of how the projects get completed.

Tal Liani – Bank of America Merrill Lynch

Great, thank you.

Operator

Thank you. Your next question comes from the line of Scott Schmitz from Morgan Stanley.

Scott Schmitz – Morgan Stanley & Co. LLC

Great. Hey, guys. Just a couple of questions. one, can you just elaborate a little bit more on the completed contracts? and so I guess what I’m really trying to figure out is, if T-Mobile is going to launch VoLTE nationwide by the end of the year, it just seems like there should be a bigger ramp in your revenue, or maybe you can kind of walk us through and remind me how the revenue is recognized in your P&Ls, they’ve launched VoLTE and when you actually received the software revenue?

Pardeep Kohli

Yes. So, let me take your first part here and Terry can certainly add some color. So we’ve been working on building out networks such as T-Mobile for quite some time and as element to those networks, those projects get completed. we have recognized revenue through last year through this year. As we’ve done the network’s build-out phase, our T-Mobile’s launch, they have subscriber capacity licenses in place for their launch, but they have not yet bought the subscriber capacity licenses for their total network, and they will buy those software licenses as they see the need to add them to their network.

So they’re based that on what their take-up is, they’re based that on, and they’ll see their take-up based on how they add devices and market to their rollouts. So they don’t build out the whole network at one time, they’ve done the initial launch site, that’s been rolled out. we’ve taken the revenue on the hardware services and the capacity licenses that they purchase. But there’s more businesses in front of us we have, then as they roll out the remainder of – as they scale our network and add subscribers to it.

Terry Hungle

I think we are launching houses that means the follow-on business; we can take revenue much faster. That the product is already accepted and already done in any additional software license we can take revenue immediately. so that’s the only benefit we get from the revenue point of view that it can happen a lot quicker.

Pardeep Kohli

Yes. And that’s what we were saying earlier, Scott, about the cycle is kind of closing, narrowing from when we get a purchase order to when we take the revenue on all of this follow-on business, potential follow-on business.

Terry Hungle

And that also improves our margins, because the additional revenue is the price already fixed, it does not have the same amount of costs associated with it.

Scott Schmitz – Morgan Stanley & Co. LLC

Sure. and so what’s your visibility then is there potential outside, if T-Mobile adds the additional subscriber licenses faster, I guess for what – how, what’s your visibility into – when they come back and purchase that additional capacity?

Pardeep Kohli

They have – we have worked with them for a number of years now. so we have good visibility into their rollout plan for how they are adding the customers. They have announced publically that, at the end of the year, they would have done nationwide launch. So we do expect to see more business from them this year. and at least the guidance we have provided today is based on looking at our backlog, as it exists today and how we see the projects falling out. so if more things happen on top, we can always address that later. but at least, we are going with whatever we have in the hand today.

Scott Schmitz – Morgan Stanley & Co. LLC

Okay, thank you.

Operator

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

Brian Modoff – Deutsche Bank Securities, Inc.

Can you talk about the kind of the other side of your business, the messaging piece? how is RCS coming along anything new, any interesting new contracts on the messaging side? and then can you talk a little bit about visibility into the current quarter, obviously you’ve got some given the contracts you’re signing – how is your – how are you thinking about quarter in terms of your bookings versus drop shipments type scenario for the quarter?

Pardeep Kohli

Let’s do the first one, first question first Brian, relatively RCS, we have continued to make progress with our sales, we’ve continued to win, we saw one project in Middle East. we’ve continued to see other product wins with our DRA product in the quarter. So we continued to make progress with RCS in terms of getting the win, what we haven’t seen is okay, we’re now on the phase, were we now are starting to build-out these elements of the network and so we just haven’t got to the point where we’re starting to see the acceptances is gained on some of those projects. So again we continue to make progress in that area.

Pardeep Kohli

I think with AT&T launching VoLTE as well, there is a portion of our messaging product which has gone live as well because, when you do VoLTE you also do messaging using IP have not launched RCS yet, yes but they are using our product for messaging, for SMS messaging on IP. So as more and more operators launch we would get into the same stage as we have that voice that there will be an increased demand for messaging products as well.

Brian Modoff – Deutsche Bank Securities, Inc.

Okay. And then in terms of…

Pardeep Kohli

Sorry, go ahead.

Brian Modoff – Deutsche Bank Securities, Inc.

Visibility and then also speaking about messaging, you talked about your video voice mail kind of offering with the Verizon now that’s coming along.

Pardeep Kohli

Yes, obviously they are, we are working with them and we’ll be I guess part of their launch plans and as they go forward, we have now acquired two more customers of that application as well and including another tier 1 in U.S. So as more and more operators launch VoLTE they will be making changes to their other applications like voice mail and adding applications like video mail that brings us the other opportunities as all. But we today have full customers of that application and they’ll all be I guess over time, next six to nine months going live with it. Regarding the visibility I’ll tell you…

Terry Hungle

So the last thing in terms of our visibility, we continue to carry basically two quarters worth of booking backlog, so that’s bookings on hand that were in the process of delivering, so we can generally see two quarters worth in front of us. I mean the other thing that goes with that is where we are doing follow on business to selling additional capacity into existing network whether that primary software or professional services, again that revenue cycle goes – or that cycle goes to revenue much faster. So I think we continue to see strong visibility and gives us reasonable comfort in terms of our outlook forward.

Brian Modoff – Deutsche Bank Securities, Inc.

Great. Okay. I’ll stop there, thank you.

Operator

Your next question comes from the line of Catharine Trebnick with Dougherty.

Catharine A. Trebnick – Dougherty & Co. LLC

Thanks for taking my question. Mine is more on your SBC and Diameter business, how many SBC customers you have at this time and then the wins that you are filing on in the SBC business is that can you give us some details on why they were deflecting you over (indiscernible) Acme packet or our solutions? Thank you.

Pardeep Kohli

So as you may already know like, we use to resell Acme packet I guess until like two years ago. So we already had contracts to sell SBC which was like a product independent to some extent that we could sell anybody’s product, but we are carrying the contract. So all those customers they already transition from Acme to all product, so that means we not only getting all the growth, but we also in some cases have replaced all products which we sold from the other vendor. But that give us the installed based and now when the new properties are coming up for bid, we have been bidding our own solutions. And what we can offer versus a point solution vendors did they complete end-to-end offering.

Right, so as you probably know Acme packet and of course the SBC product, but they didn’t have an Application Servers and RCS Server or VoLTE applications and all other things you need round it. And when the other piece come out they are coming for the whole solution and not only just one particular product and that’s were our advantage comes in that we can offer the whole solution as one package in all our product and on the same platform with same management system and same kind of how do you get the counters and alarms and all those things. So it becomes easier for an operator to deploy our solutions.

Catharine A. Trebnick – Dougherty & Co. LLC

All right, that’s very helpful. And then the follow on question is the pace of revenue, are you seeing the pace revenue from both the opportunities in aggregate or the messaging or you Evolved Packet Core which you just recently launched. Where would you say yore strongest revenue opportunities would be going forward?

Terry Hungle

Catharine, we are seeing a strong demand across the full portfolio of the product line.

Catharine A. Trebnick – Dougherty & Co. LLC

Okay.

Terry Hungle

I talked a fair bit about all the trial activities that we were doing right and we’re doing that trial activity in many areas of the world, but it’s not on a singular product base, right it is – it’s trailing all element or a number of elements for the product portfolio. So I think we are recognized for strength in the voice side of things with our Telephony Application Server, but we are definitely trailing and getting request to look at all the elements, all the product pieces.

Catharine A. Trebnick – Dougherty & Co. LLC

All right, thank you so much for taking my questions.

Operator

Thank you. There are no further questions at this time. I would now like to turn the call back over to Maryvonne, for any closing remarks.

Maryvonne Tubb

Thank you. And again thank you all for your attendance today. With that I’ll ask the operator to end the call.

Operator

Thank you. ladies and gentlemen, that does conclude today’s conference call. You may now disconnect.

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