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Acme Packet, Inc. (NASDAQ:APKT)

Q2 2011 Earnings Call

July 21, 2011 4:30 PM ET

Executives

Brian Norris – Director, IR

Andy Ory – President and CEO

Peter Minihane – CFO and Treasurer

Seamus Hourihan – SVP, Marketing and Product Management

Analysts

Paul Silverstein – Credit Suisse

Brian Modoff – Deutsche Bank

Catherine Trebnick – Avion Securities

Alex Henderson – Miller Tabak

Rich Valera – Needham & Company

Jeff Kvall – Barclays

Brent Bracelin – Pacific Crest

George Copopulus [ph] – Morgan Keegan

Jonathan Kees – Capital Investment

Subu Subrahmanyan – Sanders Morris

Todd Kaufman – Raymond James

Sangit Singh – Wedbush

Larry Harris – C.L. King

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 questions. (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.

Brian Norris

Thank you Christina. Good afternoon everyone and welcome to our 20th quarterly earnings results conference call. I’m joined today by Andy Ory, our President and Chief Executive Officer, Peter Minihane, our Chief Financial Officer and Treasurer and Seamus Hourihan, our Senior Vice President of Marketing and Product Management.

The press release announcing our second quarter results is available on the Investor Relations section of our website at www.ir.acmepacket.com. Please note that our earnings press release includes additional disclosures and reconciliations designed to further improve transparency and accessibility.

All results and expectations we review are on a non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share are non-GAAP financial measures, which excludes stock based compensation expense as well as amortization of intangible assets and merger integration related expenses associated with the company’s acquisition activities. Please note that all earnings per share amounts are on a fully diluted basis.

Also please note that statements made during this call that are not historical fact may be forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These 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 can be found in our recent filings with the SEC. Investors should not place undue reliance upon 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 to your attention several of our upcoming Investor Relations events. On August 8th, we’ll be at the Pacific Crest Technology Forum. On August 9th, we’ll be at the Morgan Keegan Technology Conference in New York. On August 10th, we’ll be at the Oppenheimer Technology Conference. On September 7th, we’ll be at the Kaufman Brothers Technology Conference. On September 13th, we will be at the C.L. King Tech Conference and on September 14th, we will be at the Deutsche Bank Technology Conference. So for more details on our IR outreach plans, please feel free to contact me at 781-328-4790.

One last calendar item; please make plans to join us at 4:30 pm eastern time on Thursday, October 20th for our third quarter results conference call.

With that, I’d like to turn the call over to Andy.

Andy Ory

Thank you Brian, and good afternoon everyone. We’re pleased to be reporting our 11th consecutive quarter of sequential growth in both revenue and earnings. We continue to see growing momentum in all areas of the company, as demonstrated by record revenue, earnings and ending cash.

We are well positioned for growth in one of the fastest growing areas in the IP communications market, and are raising our financial forecast for 2011. Top line growth was strong, and ahead of our previous forecast. Total revenue increased to $79.7 million in the second quarter, reflecting growth of 49% year over year.

Our performance was strong in all four major regions; in particular, our Europe, Middle East and Africa, or EMEA region, which has achieved sequential growth in each of the last three quarters. Gross margins remained robust at 84%, while operating margin expanded to a record 41%. Non-GAAP EPS was $0.29 in the second quarter, an increase of 53% year over year and $0.02 ahead of first call consensus.

We improved our already strong balance sheet. We ended the quarter with $318 million in cash, up from $298 million at the end of the first quarter. Looking at some of our non-financial highlights from the quarter, we again experienced healthy new customer adoption. We added a record 94 new customers in the quarter and now serve over 1,440 customers in 105 countries.

We added 38 new service provider customers and a record 56 new enterprise customers. Our solutions are deployed at 90 of the top 100 service providers and 20 of the top 25 cable operators globally, and 34 of the Fortune 100 companies.

We continue to see evidence of our expanding market share. According to a recent report issued by Infonetics Research, our share of the service provider SBC market expanded to 65% for the first quarter of 2011, more than eight times greater than any other supplier in the market.

We continue to extend our technology leadership with the introduction of the new Net-Net 1400, our high end platform for service providers who require the highest levels of performance and capacity. We also introduced a number of exciting enhancements to the Net-Net 9200, Net-Net 4500 and Net-Net 3820 platforms.

Our results reflect the rapidly growing demand for real time, IP enabled applications and services supported by session delivery network, or SDN’s. SDN’s enable service providers, enterprises and contact centers to leverage their existing IP transport networks for the delivery of real time, interactive voice, video and unified communications.

We estimate that our total addressable market is as simple as A plus B, where A is the opportunity for our solutions to replace legacy voice connection technologies as voice becomes VOIP. We estimate that more than $30 billion of legacy solutions have been deployed in service provider and enterprise networks globally to support voice applications.

Spending on legacy voice connection technology is in the decline as service providers and enterprises increasingly turn to more cost effective and more powerful revenue generating SBN solutions to enable their end to end network.

The market for our solutions is very large and growing rapidly. We have often been asked how penetrated this market. This afternoon, we want to share with you a couple ways to think about that answer.

We will focus on the North American market, which is further ahead in adopting IP for voice than any other region in the world. Therefore, the penetration rates in every other region are lower. We believe they demonstrate the growth potential of the market for our solutions as voice becomes VOIP.

We estimate that the penetration rate of the North American residential VOIP market has increased from 12% in 2007 to 23% in 2010. We estimate that the penetration rate of the North American SNP trunking market is less than 5%. There are 130,000 enterprises with 100 or more employees in North America and just 250 of them are our customers today. Every one of these enterprises is a candidate for our solution.

Finally, consider that only 1% of the 311 million mobile subscribers in North America today use IP voice or video communications. We believe that LTE will ultimately enable every one of these mobile devices, which will drive increased demand for session delivery network solutions.

We expect to see dramatic growth in the number of smart phones here in North America and the percentage of those smart phones that are IP enabled, all of which represents growth opportunity for Acme Packet.

Beyond voice becoming VOIP, we see a second demand wave for our solutions as customers embrace new applications and services available only in end to end IP networks. This is the B in A plus B; a whole new world of IP based applications will drive further infrastructure investments requiring our solutions.

These new applications include easy to use, trusted first class video conferencing and tele presence, unified communications and collaborations, communication enable business processes such as customer relationship management and supplier relationship management, communication supported e-commerce such as banking, investing and retail, communication enable social networking, tele-medicine, distance learning and even interactive gaming.

This market is truly embryonic and admittedly, a challenge to size. That said, we believe that the market for our solutions to enable these new applications will be larger than simply replacing voice with VOIP.

Before I turn the call over to Peter, I’ll share with you some of the key developments and trends that we’re seeing in each of our geographies at midyear. I’m pleased to report that each of our regions executed very well during the first half of the year.

North America performed in line with our expectations during the first half of the year. We’ve continued to build out a strong leadership position in North American cable, fifth line, and wireless markets, thanks in large part to our incumbent position as the tier one service provider.

As demonstrated by the addition of over 50 new enterprise customers in North America during the first half of the year, we believe that SIP trunking is gaining momentum in the region. Also, in North America, we are beginning to see the positive impact of LTE architectural adoption and growing interest for our newest non SBC product offering.

We’ve had a very strong start to the year in EMEA, where we have acquired dozens of new customers and have done an excellent job of expanding our incumbent position in the largest tier one service providers.

Here again, we’re seeing strong interest for our newer products. We’re seeing market expansion opportunities in the Nordics as well as into the Middle East and African markets. I also think we are well positioned for growth in Russia and the Commonwealth of Independent States where the economic situation is better and regulatory restrictions are easing. Looking ahead, we believe the two most significant growth drivers in EMEA over the next several years will be wireless and enterprise.

Our APAC region had a very strong first half. In Japan, we’ve been very active with SIP trunking and contact center opportunities at the major tier one service providers. In the southern APAC regions, the competitive SIP trunking market is just starting to drive the enterprise interest. We’re actively involved in the first voice over LTE trials taking place in the region. And in Indonesia, we’re seeing significant interest in mobile tiering between operators.

In our fourth and final theatre, the Caribbean and Latin American region, we continue to be very well positioned at the largest tier one service providers. We also added over a dozen new customers since the beginning of the year and our competitive position continues to gain strength.

Based on the momentum of the business during the first half of the year and the growth drivers we are seeing in each of our geographies, we are again raising our outlook for 2011. Our confidence and outlook remain very strong. Accordingly, we now expect revenue of between $315 million and $320 million compared to our earlier forecast of $310 million and $315 million.

Further, we now expect non-GAAP EPS growth of approximately 45% in 2011 compared to our earlier forecast of approximately 40%. 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 second quarter of 2011, and then discuss our outlook for the balance of the year. As Andy mentioned, we continue to see growing momentum in all areas of the company as evidenced by our record revenue, earnings and ending cash.

Total revenue was $79.7 million in the second quarter, an increase of 8% sequentially. Product revenue was $64.7 million, an increase of 8% sequentially, primarily reflecting growth in our Net-Net 4500. Maintenance, support and service revenue was $15 million, an increase of 6% sequentially, reflecting growth in our install base and the timing of maintenance renewals. One direct customer accounted for 10% or more of revenue, and that was Verizon Business at 12%.

Geographically, 58% of our revenue came from the United States and Canada, while 42% came from the rest of the world. The distribution of revenue was 40% direct and 60% indirect. The strong channel contribution during the quarter reflects increased partner activity in all regions.

Gross margin remained strong at 84% in the second quarter, further demonstrating both our uniqueness and our relevance. Total operating expenses increased 6% sequentially to $34.7 million, reflecting head count additions in all functional areas of the company.

Operating margin expanded to 41% in the second quarter, up from 40% in the first quarter of 2011. Net income was $20.4 million, up 8% sequentially, while earnings per share increased 7% sequentially to $0.29. We ended the second quarter with 710 employees compared to 641 at the end of the first quarter.

Moving to the balance sheet, we ended the second quarter with $318.4 million in cash and in investments, an increase of $20.3 million compared to the end of the first quarter. Cash from operations was $8.7 million in the second quarter, while total capital expenditures were $2.6 million.

Accounts receivable net was $53.5 million at the end of second quarter compared to $43.3 million at the end of the first quarter. The increase in A/R was primarily due to the timing of shipments and the overall increase in indirect revenue.

Day’s sales outstanding were 60 days at June 30, 2011, in line with our traditional target range of 55 to 65 days. A/R aging improved in the second quarter. Inventory at the end of the second quarter increased to $9.7 million, compared to $7.1 million at the end of the first quarter.

As we mentioned on our last call, this increase reflects the strategic actions of our manufacturing organization to minimize the risk related to parts, which are sourced from Japan. Inventory turns were 5.4 times as of June 30, 2011.

Finally, deferred revenue was $34.9 million at the end of the second quarter compared to $40.1 million at the end of the first quarter. This reflects a $3 million decrease in deferred product revenue and a $2.2 million decrease in deferred service revenue. As we’ve discussed on previous calls, we view deferred product revenue as a liability and would prefer to have none at all.

To help you better understand how we are looking at our growth plan, 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 for our business, which may change at any time. We undertake no obligation to update these comments.

As Andy indicated in his opening remarks, we are raising our full year estimates for both revenue and earnings. We now expect revenue in 2011 to be between $315 million and $320 million compared to our earlier outlook of between $310 million and $315 million. We expect sequential revenue growth in the third and fourth quarters.

For the remainder of 2011, we anticipate gross margins will be in the low to mid 80’s. Additionally, we anticipate that operating margins will be in the upper 30’s as we invest in people and programs to continue building a great standalone company. Longer term, we expect gross margins to be in the low 80’s and operating margins in the mid to high 30’s.

We now expect non-GAAP EPS in 2011 of between $1.14 and $1.18 compared to an earlier outlook of between $1.10 and $1.15. Our earnings outlook assumes a full year GAAP and non-GAAP effective tax rate of approximately 36%. Finally, we are modeling full year, weighted average diluted shares outstanding of 71.5 million shares.

To summarize, the second quarter was the strongest quarter in the company’s history, highlighted by record revenue, operating margin, earnings and cash. Our outlook calls for continued strong financial performance in 2011.

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

Brian Norris

Thank you Peter. Christine, at this time, we’d like to open the call up for questions please.

Question-and-Answer Session

Operator

Thank you. (Operator instructions). And the first question comes from the line of Paul Silverstein with Credit Suisse.

Paul Silverstein – Credit Suisse

Andy, Peter, can you all talk about more about visibility and demand trends, what you see in the market and also linearity in the quarter?

Andy Ory

Sure. I guess I’ll give a qualitative, and Peter you give you a quantitative. We continue to see demand pick up. We held our semi-annual, so every six months we fly all of our sales executives and sales people somewhere in the globe to do some sales training. At the same time, we also go through a rather exhaustive global account review process.

And I would say we’ve never been busier. There’s never been more activity and we’re very exciting with what we’re seeing. That’s a big part of why we felt comfortable that we had to notch up a little bit where we thought we were going to land the plane for the full year.

It’s coming from all the traditional areas. The enterprise continues to increase in strength in terms of enterprise sales, to enterprise customers I guess I should say. We are continuing to see our wire line service providers buy gear as they expand and all four regions performed in line.

And one area I just want to note is that the EMEA region, or Europe, really is performing quite strong for the last three quarters, so we sort of feel like maybe Europe is starting to follow the demand trends that we saw in North America over the last eight quarters. Peter.

Peter Minihane

The linearity Paul, is something that we obviously track. We track it by month. To Andy’s point – I’ll get back to that in just a moment. To Andy’s point, EMEA had its three strongest quarters in its history and they were up sequentially both in Q4 of 2010 followed by Q1 and Q2.

And again, North America had three of its strong quarters in its history in the same time frame. So we have seen ongoing demand for the product at our own internal record levels.

Paul Silverstein – Credit Suisse

Peter, looking at demand throughout the quarter, did it pick up? Was it constant? Did it subside as you went later in the quarter? Can you give us some characterization?

Peter Minihane

I mean Paul, typically the second quarter is the more difficult quarter for us. If you go back over the last let’s say 12 to 16 quarters, I think that we’re starting to see that that is the seasonal impact, and usually we do have a strong June. And again, we had a strong June.

Paul Silverstein – Credit Suisse

All right. I know you haven’t broken it out in the past, but can you tell us what EMEA is as a percentage of revenue and what Asia PAC is as a percentage of revenue?

Peter Minihane

Yes, Paul. I think we’ve only gone to the extent of breaking out the geographical – this is 58% and 42%, and I think Andy has always talked about the U.S. being about – North America being about 50%, EMEA being about 25% followed by...

Andy Ory

10% to 12% for Asia.

Peter Minihane

Asia Pac and the 4% to 5% for Cala.

Andy Ory

Yeah, it’s also minus a percentage point or two. The business pretty much performed as it has the previous quarters.

Paul Silverstein – Credit Suisse

Peter, can you give us an idea what the growth rates are on a regional basis?

Peter Minihane

It’s funny Paul. Every region grew in the second quarter over the first quarter. Normally, we would have a region may be flat or down where the other regions were stronger. However, every region was up and up for the entire quarter, so quarter over quarter.

So for example, I think you’ll find somebody like North America was probably up 5% to 10% Q2 over Q1. EMEA would have been a little stronger, up 15% or so Q2 over Q1. Again, you look at Cala, and it’s up almost 40% or 50%, but it’s such a small number Paul, that it doesn’t have the impact of something like EMEA would have.

Paul Silverstein – Credit Suisse

How about Asia Pac?

Peter Minihane

Asia Pac again was probably up in that 5% range quarter over quarter.

Andy Ory

Something I want to add that’s really important. Paul, we also had in this past quarter, our annual users meeting. It’s called Interconnect and we held it in Europe this time and customers flew in from all over the world, and there were two things that I noticed that were different from all the others that we’ve held.

Number one, there is a complete agreement of a capitulation that TDM is going away. Nobody wants to talk about it, invest in it or do it. They’re all trying to figure out how they can move all of their voice services to IP.

And the second thing is, people understand it’s not about telephones and voice service. It’s about communications services; voice and video tied into applications. And that was a real departure from the previous year’s interconnect that we held.

Brian Norris

We’re going to have to leave it there.

Paul Silverstein – Credit Suisse

Thank you.

Andy Ory

Thank you Paul.

Operator

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

Andy Ory

Hi Brian.

Brian Modoff – Deutsche Bank

Hi guys.

Peter Minihane

Hey Brian. How are you?

Brian Modoff – Deutsche Bank

I’m good. How are you?

Andy Ory

Good thanks.

Brian Modoff – Deutsche Bank

Good. I have a couple of questions. You were kind of talking about kind of sequential trends here across the globe looked pretty bullish. I’m wondering on your guide of 36% to 38%, why not a little more? Why not have a little bit of a higher guide? And then can you talk about enterprise SIP trunking adoption and how you see that trend in the back half of the year?

Andy Ory

I guess we’ll take the easy one first. We’ll talk about the enterprise trunking. Clearly, what we’re seeing is just continued momentum. In the US, I think that if you were to do some channel checks, and I’ve read some reports that people have read, more and more enterprises are saying, wow, I get the most experienced ROI to position myself for offering new services.

So the enterprises are continuing to adopt it. The equipment manufacturers are finding ways to either have a solution or partner to bring the solution to market that integrates their communication services into SIP trunking, and the service providers are starting to say wow, how do I do this on a region wide or nationwide basis.

So we would expect to continue to see the demand trend increase in the United States. We’re starting to see the incumbents in Europe getting very interested in offering SIP trunking. We actually think we’ll see it in one or two of the significant countries in Cala before the end of the year and even in Japan, we’re hearing people talk about it as well as in places like Australia and China. So I really do think that it’s going to continue to be a driver of our business.

As far as how to go about where we think the plane is going to land, it’s always a tricky thing. We take a look at the growing momentum and we look at the rhythm of the business and it looked like notching it up a little bit seemed to make a lot of sense, and we didn’t really think much beyond that.

Our main focus is, if you look at our numbers right now, we’re at 30% to 38% growth and 45% on the bottom line. I think the Street has us at about 40% top line growth. Clearly, 2011 is a growth year over a very big growth year of 2010, and a lot of our focus is, how do we sustain that growth into 2012 and 2013, because that’s what we believe we ought to be able to do.

Peter Minihane

But I think part of that Andy, is this mindset that we’ve had and we’ve ad for a long time of building a great standalone company, and I think what we’ve said is that we’re going to raise our estimates, revenue estimates and our earnings estimates.

And yeah, more would be better but I think we have to be reasonable when we look at this and we also mentioned during the comments on the call is that we expect both Q3 and Q4 to be up sequentially. So think when you look at the total, I think that’s a reasonable message for us to be delivering.

Andy Ory

And I also think that we’re a business that’s firing with one engine that’s firing really well, but there’s another engine that’s going to come on line that we are working like heck and that is the non-telephonic interactive communications like voice and video that would be integrated into businesses and social media, that’s going to change the way we communicate and the way we engage in commerce; and that is even bigger.

And that is so nascent that nobody is even talking about it. We’ve had to define the technology, develop the product, and we’re still in the prosthetizing stage. So when that starts to kick in, it’s like having – you’re going to have a second booster rocket.

Brian Modoff – Deutsche Bank

A couple more questions then. One, what’s the timing of that. Two, LTE timing in terms of the (inaudible). That seems to me like when I talk to the operators, more of a 2013of them for their launching of the service, but when do you see equipment shipments occurring. And then finally, how is the order book or the book to go ratio in the quarter?

Andy Ory

On the LTE, you’re right. We also see 2013 as the year where there’s service initiation. What’s interesting is that they’re starting to pilot LTE architectural decisions today and throughout 2012, and that’s having a positive impact on the decision to perhaps extend the utilization of Acme Packet technology beyond their traditional 3G and wire line and enterprise facing services into LTE.

So while we’re not seeing purchases for LTE currently, what we are seeing is a real positive impact on people becoming more strategic and thinking about Acme Packet. I suspect that the back half of 2012 is when we would see equipment purchases that would really be directly tied to capacity for services that would be intended for LTE.

And again, I’m a little bit different than the rest of the managers here. I think the rest of the managers on the team would tell you 2013 but I think you’re going to see it in the back half of 2012.

As far as the timing for these non-telephonic services, the B in the A plus B, I mean we have shipped millions, low millions, but millions of dollars over the last two quarters for applications that people communication enable and we’re investing heavily in our messaging and our technology, and there’s a tremendous amount of interest.

It is going to require general change. You know the applications and the handsets, the technology and the websites and the marketing methodology that enterprises are going to use in B to B and B to C communications, but it will, it is going to happen.

Examples I always use are when you get online and you communicate with your bank and you’re not sure – or your travel agent – and you’re not sure you like what’s on the screen, you have no one to talk to. You can’t initiate a call into that secure session.

But if you could click on a button and you could safely and securely and contextually have some multi-modal voice and video help in real time, explaining what’s on the screen, showing you options to allow you to conduct your business and then going away, that would save so much money from a call center perspective, and that would engender such a positive customer experience for almost any kind of any interaction they have with an enterprise.

And I just can’t for the life of me believe this isn’t going to be huge, but I don’t think you’re going to see a major contribution until 2012. I think that 2011, our application session controller, or ASC and some of the associated technology, will sell millions of dollars a quarter, but it’s not going to be much more than that. I think it’s a 2012 contribution.

And as far as visibility; we really have never given out book to bill, but we do give out qualitative visibility and when we look at our funnel and we look at our key activity, we feel that it continues to be very robust.

Brian Norris

Sorry, we’re going to have to move along. Christina.

Operator

Thank you. The next question comes from the line of Catherine Trebnick with Avion Securities.

Catherine Trebnick – Avion Securities

Oh, thank you for taking my call. I have two quick questions. One is on July 15th, the SEC put out a notice asking for everyone to reply regarding all IP to direct IP inter connections. Andy, how long do you think this would take to get through the ruling phase and then actually impact the carriers?

Andy Ory

First of all Catherine, we’ll never not take your call. Secondly, I’m happy we took the call and thirdly, I have no idea.

Catherine Trebnick – Avion Securities

Okay. I was just wondering if you had any insight on that.

Andy Ory

I really don’t. I’m just hoping they raise the debt limit August 2nd. I can’t see beyond that.

Catherine Trebnick – Avion Securities

Okay. All right. Then the other question has to do with the session delivery network that you just talked so eloquently about. Can we break it down into something more pragmatic? There are several and my channel checks are fees that are percolating within the financial community. Could you describe different types of use cases where it’s really there are so many IP end points and that these end points need some session management. So that to me talks a lot about the product that you’ve just discussed. Is that – not that the RP’s is the activity, that would be an application or a use case.

Andy Ory

Absolutely.

Catherine Trebnick – Avion Securities

And that is what you’re saying is a very nascent market but you expect it to grow and there’s not a way to quantify it correctly?

Andy Ory

Yeah, you almost have to look at it. There’s a tale of two worlds here. There’s the telephone centric world and there’s the web world, and when we talk about A and B, A is the telephone centric world.

They’re the largest networks in the world. There are six billion end points. There are several hundred billion dollars a year we’re spending to have secure, trusted, first class voice communications, and it really isn’t going to go away in the short run, but it is going to have to move from TDM to IP for so many reasons.

And so that’s a main engine that’s firing right now, which is great. But the other one, the B side, is all about the web world and the web will win. And the web world is all about putting interactive voice and video in a trusted, first class way, into web applications.

And all you have to do is look at everything you do on the web and imagine which of those tasks would be more beneficial to you when you are a customer or you’re dealing with a customer, if you could dynamically and contextually, with high SOA and security, put in voice and video communication as required.

And you begin to see whether it’s buying or selling stock, whether it’s calling retail customers, whether it’s purchasing airline tickets – I can’t even – it’s limitless. But we are all equipping ourselves with broadband, multi-modal devices like I-pads and I-phones and android phones. They have cameras. They have voice capability, and they’re currently involved in completely separate data sessions.

And when you start to put secure, trusted voice and video into those data sessions, it’s going to be transformative. It will change every aspect of how we do business.

Catherine Trebnick – Avion Securities

Okay. Thank you.

Andy Ory

Thank you Catherine.

Operator

Thank you. The next question comes from the line of Alex Henderson with Miller Tabak.

Alex Henderson – Miller Tabak

Hi guys. A couple of bookkeeping things. Did you say what the enterprise percentage was?

Andy Ory

We actually didn’t.

Peter Minihane

It’s about 20%.

Alex Henderson – Miller Tabak

20%. Thanks.

Peter Minihane

It’s stayed the same now for the past couple of quarters.

Alex Henderson – Miller Tabak

Right. Second, you’d indicated that Verizon business services was 12% in the commentary I believe. If I recall last quarter, all of Verizon was 15% to 20% and Verizon business was actually less than the wire line. Can you talk about what happened with wire line and do you expect to come back in or are they just absorbing? Give us any sense of what’s going on there.

Andy Ory

So Alex, we traditionally talked about Verizon business and Verizon wireless. Those are the two customers that we’ve called out over the last several quarters when they bump above 10%.

Alex Henderson – Miller Tabak

Excuse me, not wireless, right?

Andy Ory

That’s okay. And we I believe had Verizon wireless that was 12% last quarter and we said that combined, Verizon wireless and Verizon business were under 20% but were fairly healthy, and I think that that same statement is probably true except that the actual players are reversed.

In this case, Verizon business is 12%. Verizon wireless did purchase a fair bit of gear like they continue to do every quarter. They didn’t hit the 10% level and in the aggregate, Verizon wireless and Verizon business wouldn’t be 20%, but I mean, they’re in the healthy teens.

Alex Henderson – Miller Tabak

So basically, the all in Verizon is about the same, but the two segments switched relative scale. What’s going on with the wireless piece? Is that why the down sequentially by that level?

Andy Ory

None of the – I don’t think we actually have a customer yet, that purchases at the same level every single quarter, and the reason is, it’s still most reactive buying on a project by project basis, and as the project becomes successful and they sell the gear up, they buy more gear.

Alex Henderson – Miller Tabak

But is it something where you expect them to come back in and strengthen again in the back half or is it that they rolled out and sated their needs and they don’t have needs for a while.

Andy Ory

Well a couple of things to remember is that the base of the business that we’re comparing any individual company’s purchases against, continues to increase. So it’s actually getting harder for us to have 10% customers in a way, which is a good thing.

Verizon wireless, it would be a mischaracterization is I were to leave you with the impression that Verizon wireless wasn’t a very active and significant customer in 2012 for Q2. They were. They just weren’t at the 10% level.

Alex Henderson – Miller Tabak

You mean 2011.

Andy Ory

2011. I apologize. They were. They just weren’t at the 10% level and I don’t actually see much of a state change one way or another.

Alex Henderson – Miller Tabak

I mean to be blunt, if it goes from 10% to 13% to say 6%, which would put you in the middle of that 15 to 20 band, that’s a pretty good sequential decline. That’s like a 50% sequential decline. So it’s a material number and if you think it’s going to stabilize in the 10% vicinity over the back half, or do you think it’s going to be more like what we’re seeing in Q2 in the back half? How should we think about it? Are you seeing any evidence this is kind of a six month periodicity or a nine month periodicity to orders. How should we think about it?

Andy Ory

Well I’m trying to figure out the difference in bookings and revenue and the way we call out 10% and greater customers, versus not and how that’s impacting you, because if you asked me over the last three quarters to think about Verizon wireless and Verizon business, I would say the purchasing just seems steady.

I realize you’re looking at it and trying to say well, is it declining. Is it going to attenuate? I actually – it’s funny. I wouldn’t characterize much of a state change in Verizon’s purchasing over the last several quarters. I mean we do revenue slightly differently than we book, but Peter, maybe you can provide some insight on that.

Peter Minihane

We also have different recognition rules for Verizon business versus Verizon wireless and so, and that’s just simply because they have different contracts and different terms and conditions.

But again, I think Andy was talking about in Q1, they were approximately 15%. I don’t think that changes a lot in Q2 Andy, and I think the exception to that rule was back in Q4, when both business and wireless were very strong as direct customers for that one quarter.

Again, the fact that one is not a 10% customer doesn’t mean that they’re at $500,000 a quarter. They’re still buying millions of dollars every quarter.

Alex Henderson – Miller Tabak

So it’s probably second half is comparable to the first half as a percentage of revenues on a relative basis.

Andy Ory

If you ask me to call it...

Alex Henderson – Miller Tabak

Okay, let’s move on because I don’t want to take too much time. Did you change your staffing target of 820 for the year?

Andy Ory

No.

Peter Minihane

No, we still have the same target actually that I think we started at 570. We’re going to add 250 and we also did an acquisition January 20th of this year where we added 11 people, which was not included in our original number of employees at the time we did our...

Alex Henderson – Miller Tabak

Oh, so should I be using 831 then?

Peter Minihane

830, 835 about.

Alex Henderson – Miller Tabak

Okay. And then finally, just one last point of reference on this LTE. It sounds like your comments around the LTE are more aggressive than they had been in terms of seeing an impact from it. Is that characterization accurate? The terminology around an impact of LTE architectural adoption was not in your vernacular in prior quarters.

Andy Ory

That’ correct.

Alex Henderson – Miller Tabak

So it sounds like you’re seeing some pull forward of timing realization of the need for this product a little earlier than you initially thought. Am I characterizing that correct?

Andy Ory

Yeah. I think you are. I think it’s principally around the fact that LTE is an access network and it needs to play well with the whole Packet core and all the other access networks and there are people that are beginning to understand that and engage us a bit more strategically in how that’s going to happen, and that’s really good.

Alex Henderson – Miller Tabak

Last question. In the past, in three separate calls talked about 42% in the first half and 58% in the second half as sort of being the historical norms, yet your guidance implies that you’re breaking that pattern this year. Any reason for that?

Andy Ory

No, what we’ve said is that our booking activity, which is different than our revenue recognition, our bookings activity has traditionally been 42/58 in the last two years.

Alex Henderson – Miller Tabak

So is there any reason to believe that the booking activity is any different this year?

Andy Ory

No, I don’t have any reason to believe that.

Alex Henderson – Miller Tabak

So wouldn’t that suggest a stronger second half than what you’ve guided at?

Andy Ory

It would suggest a stronger booking second half.

Alex Henderson – Miller Tabak

So maybe more going into deferred.

Andy Ory

Yep.

Alex Henderson – Miller Tabak

Okay. Thank you. I appreciate your time.

Peter Minihane

No, no, not deferred.

Andy Ory

No, backlog. Fine.

Brian Norris

Christina.

Operator

The next question comes from the line of Rich Valera – Needham & Company.

Rich Valera – Needham & Company

Thank you. I was hoping you could talk about the voice over LT trial that you referenced in your comments, I think in the Japan region; what you’re seeing there, what it might tell you about how your products might be used in a voice over LT implementation and kind of what’s the timing of that trial going into something beyond a trial?

Andy Ory

Okay. Let’s talk briefly, and Seamus, maybe you want to comment on our product suite that would apply to voice over LTE in general.

Seamus Hourihan

Sure. So it’s again LT is just another access network so with an LTE having our products deployed between subscribers and their LTE devices, whether they’re laptops with smart phones in them or LTE smart phones or whatever. So between subscriber devices and the IMS voice over LTE core is where our product would fit in the access side.

The other border is the interconnect border between service providers. In fact, we’ve been active in actually another sort of test call if you will between two different service providers on that border as well as on the access border for them.

We also play a routing roll like we’ve talked previously at Verizon wireless in terms of routing sessions within an individual service provider’s network between their access borders and their interconnect borders.

We have our policy exchange controller that enables LT roaming for data and for voice services. And then this other product that can be tied into services service delivery or just the application session controller even in terms of we’re talking to one service provider around rich communication services and using it in that environment.

And then our session recorder, recording sessions that need to be recorded as a hosted server.

Andy Ory

Right. And as it relates to the LTE trial, I wouldn’t read much more into it other than it’s a trial, which is great and that our incumbency in the wire line side is carrying over to what’s being able to influence the wireless side.

Rich Valera – Needham & Company

Okay. Thanks gentlemen.

Andy Ory

Sure. Thanks Rick.

Operator

Thank you. We’ll go to the line of Jeff Kvall with Barclays.

Jeff Kvall – Barclays

Yes, thanks very much. I was wondering if you could help us on two fronts. One is, would – Peter would you mind helping us understand the European exposure that you folks have and as a percentage of sales. I think there’s a lot of focus on that and certainly that includes where you are, if you’re shipping to Alcatel, does that count as European revenue for you for example?

Peter Minihane

Well we have limited exposure as virtually 100% of our business is conducted under US dollars. We will, in various situations, ship directly to the end user customer for a distributor or if the shipper requests, we may have to ship it to the distributor and have them integrate it into an entire system that they may be in the process of implementing.

So we don’t view it that we have a very large exposure at all from the European side. I think we do occasionally run into, as we did I think in the current past quarter, into some accounting translation issues as we convert the Pounds and the Euros into dollars, but that’s simply an accounting issue and not an economic issue.

Jeff Kvall – Barclays

Okay. And is it fair that Alcatel is somewhat less than 10% distributor?

Peter Minihane

Yes.

Jeff Kvall – Barclays

But not dramatically so.

Peter Minihane

Not dramatically so is right.

Jeff Kvall – Barclays

Okay. All right. Good. Then Andy, this might be getting a little bit cute, but I think in the past you have been able to say business has never been better and I think you typically beaten and raised over the last two or three quarters by raising the full year guidance but about 5% so I think just on the margin, I’m wondering if there’s anything that you guys are seeing that would slow down the growth rate; may well be the law of large numbers, but I’m just inquiring along those lines.

Andy Ory

Most of it – it’s a very fair question. I mean we came out of the box I think going from 231 to 286. We raised that to 300. We raised that to 310, 315, and tonight we’re raising it to 315, 320. I mean we’re really happy with the way the business is performing.

We do believe that even in A of the A plus B, there is a significant compound annual growth that we expect to see over the next several years. It’s really B that’s going to be the second cylinder on that rocket that we’re working hard to ignite, but no, it’s steady as she goes. Full speed ahead.

Operator

Thank you. We’ll go to the line of Brent Bracelin with Pacific Crest.

Brent Bracelin – Pacific Crest

Thank you. A couple of questions quickly here. I guess on the last quarter, you had some strength in tier two’s. If I kind of back out enterprise and Verizon combined, it looks like you had another healthy quarter. Was that rebound after a very strong surge in Q2 from tier two’s driven again by tier two’s or are there some new tier one’s starting to pop up?

Andy Ory

Well I mean, I think in fairness, most of our service provider business comes from existing customers and it’s either expansion of projects or new projects. There aren’t that many tier one’s in the service provider space left to get.

What I like is that it really is broad based. It’s across all four regions and...

Peter Minihane

All sizes of service providers.

Andy Ory

And it’s all sizes of service providers. So I mean it is a market. It’s not a boat of a few customers that we’ve cultivated and come to the sea with.

Brent Bracelin – Pacific Crest

Fair enough. And then more specifically, Verizon has been a 10% plus customer for the last three quarters. What point do you think you could see a non-Verizon tier one that has a chance to become a 10% plus customer? Could it happen this year or is potentially more of a 2012, 2013 event?

Andy Ory

Yeah, I mean no, I think it would be a mischaracterization for people to think that there aren’t other service providers that have the capability to do that. It certainly could happen in the back half of this year.

Peter Minihane

But again, if you look at some large – pick a name – AT&T for sake of discussion, they buy indirect so we would not see them as a certain percent customer. You’d see that through distribution.

Andy Ory

And given that we have four different ways of going to that customer, we only account for each one of the four, but individually.

Peter Minihane

So that’s not to say that we don’t have very large customers outside of, in the case of Verizon business in Q2, Verizon wireless in Q1, so it really is a mix within the mix of level there.

Andy Ory

I think that one of the key takeaways is that we have both customers that really are depending upon us and investing over time quite a bit, but we also have a real lack of customer concentration.

I mean we can argue whether 15% or 20% in the aggregate is customer concentration or not, but I don’t really think it is.

Peter Minihane

Writing business is the first mover globally, the trucking state. That’s a huge thing and they are our first movers in just enabling their 3G network today, so again, they are just first movers in both the mobile and SIP trunking application areas.

Brent Bracelin – Pacific Crest

Very helpful. My last question is around Q3. You guided to sequential growth. Obviously we saw a decline in product defer. I know that’s noise, but as you think about visibility entering Q3, do you think it’s going to be more of a back end quarter similar to Q2 where most of the business comes in September or could there be better linearity in Q3?

Andy Ory

Well one of the – we expect to have a good July. I think that as we get into July, most of the world is still working. In August, we tend to see EMEA shut down. It just is a reality of EMEA and EMEA is not an insignificant revenue contributor, so that does weight a little bit more into September, but that’s the natural rhythm of the business that we’ve seen for the last couple of years. I wouldn’t expect to see much departure.

Brent Bracelin – Pacific Crest

Thanks bud.

Operator

Thank you. We’ll go to the line of Simon Leopold with Morgan Keegan.

George Copopulus [ph] – Morgan Keegan

Hi guys. This is George Copopulus [ph] in for Simon Leopold.

Andy Ory

Hello George. How are you?

George Copopulus [ph] – Morgan Keegan

You mentioned that you’ve only scratched the surface in terms of the service enterprise customers using your products. I believe you said something like 5% penetration. Given the size of these accounts can vary from business to business, mainly as a function of their footprint, can you give us a sense about this percentage please in dollar terms and better quantify the (inaudible).

Andy Ory

So when we’re referencing the North American SIP trunking market, and we’re saying that the opportunity is that every enterprise – every enterprise has voice services and almost all those voice services are over TDM networks, and so that means that they’re connecting to TDM infrastructure on the service providers access side and for the medium to large enterprises, they probably have their own TDM infrastructure on their own enterprise side.

And we’re saying all of that goes to IP. Nobody – I meet almost nobody that disagrees with that. And as it all goes to IP, SIP trunking is going to be the vehicle for those voice services to be delivered. And so when we look from a service provider point of view, we see that about 5%, probably less, of those TDM trunks and lines have been converted to SIP trunks.

So that means that 95% still remain and it is – they are buying as they’re converting. So it’s not like they’ve purchased capacity for 25% and they’ve only substantiated less than 5%. They’ve only bought enough capacity for less than 5% so that means that 95% still remains to be purchased and for them to be deployed.

On the other side of the link, the same thing is true for the medium and large enterprises. So I’m not sure how to size that in terms of dollars.

Peter Minihane

Yeah, specific numbers, according to Infonetics Research, the total number of SIP trunks deployed at the end of 2010 was a little over a million in North America. The total number of business trunks, both TDM and IP based was a little over 39 million, which gives you a little over 2.5% penetration as an example.

Andy Ory

Right. And the other thing that we think is important, is that right now, people are using SIP trunks for an access technology to the enterprise, but if you’re an enterprise and you pick up your VOIP client or device, and you go across a SIP trunk across a service provider’s access network, you tend to still hit a gateway somewhere.

And so what’s going to happen is the rest of the infrastructure is going to have to change as well. So it’s more about directionality and magnitude than anything else and there are $20 billion of gateways in the service provider space and $10 billion of gateways in the enterprise space just to give a sense of the type of equipment change that’s going to occur.

Peter Minihane

And all that will need to be replaced.

Brian Norris

George, thank you very much for that question. Christina, can we move to the next caller please.

Operator

Thank you. From Jonathan Kees with Capital Investment.

Jonathan Kees – Capital Investment

Hi. Can you guys hear me?

Andy Ory

Yes. Hi Jonathan.

Jonathan Kees – Capital Investment

Hi. Hey, thanks for taking my question. I guess a couple questions; one will be housekeeping. You talked about your service provider for the market share for Infonetics in the service provider. Did you happen to mention what the market share was for enterprise and if not, can you share that?

Peter Minihane

Yes. In 2010 our market share was 32% out of a total revenue of $102 million. Our revenue was up 98% year over year compared to the market being up 70%. We actually gained 5% market share in 2010.

Jonathan Kees – Capital Investment

You don’t have Q1 stuff, because I think I have that for 2010.

Peter Minihane

Yeah, there’s no Q1 numbers out.

Jonathan Kees – Capital Investment

Okay. That’s fine. And second, I wanted to ask you, you were talking about a non SBC win or actually involvement in the LTE decision, architectural decision that was being made. I guess can you talk in terms of where you see which products are going to get the most momentum there? Is it going to be the policy controller for example and then is it going to be – still looking for the new products becoming material to revenues in 2012.

Andy Ory

So a couple of different answers in that. First of all, we’ve talked about the architectural implications of LTE positively impacting Acme Packet’s business with these service providers, which is great. We’ve also talked about North American service providers and other service providers globally having increased interest in our non SBC products and solutions. Those are two separate thoughts.

Jonathan Kees – Capital Investment

Okay.

Andy Ory

And the Seamus answered a question about our product and what our whole product suite would be as it applies to LTE. So I think maybe there was a little bit of cross motivation going on.

Jonathan Kees – Capital Investment

So in terms of the non SBC...

Andy Ory

I’m sorry. So Jonathan, you did ask that question. I have said we’re still in the mid 90 percentile of SBC contributions to product sales relative to all the other products, and I went out on the last call, 90, 91 days ago, and I’ll reiterate it now that with just from my guy – because how can I – forward looking statements can I really make that isn’t from my gut in this case – I believe next year, there will be a quarter where we pierce the 10% in terms of the aggregate for the non SBC technology in terms of product sales and it will continue to grow faster than the SBC market. That’s my belief, but it’s obviously going to take a lot of work.

Brian Norris

Jonathan, thank you for the call. We’re going to have to move along. Christina.

Operator

Thank you. Next question comes from the line of Subu Subrahmanyan with Sanders Morris.

Subu Subrahmanyan – Sanders Morris

Thank you. I have two questions. First, on the first half versus second half for the last couple of years, it’s been like orders have been 42/58. Revenue mix has been kind of 45/55, so would you expect to see any difference in the revenue trend, and if so, that would suggest a stronger number for the full year. Some color on that would be helpful. And if you could talk about competitive environment and how traditional resellers like Alcatel Lucent kind of – have their own products on the SBC side, how you see that playing out.

Andy Ory

Sure. Well first of all, welcome to the call. Appreciate you being here. I mean right now, the past is the best guide for the future. We don’t see any indication that there’s going to be much of a deviance from it, so while it’s 42/58 in terms of bookings, what we’ve seen that the kind of trend would extrapolate onto 2011, I think yeah, we’d have a closer revenue pairing between first half and second half. That’s somewhere close to the range you’re suggesting.

I mean granted, things could change, but that’s the way we see it right now.

Peter Minihane

And again, we’re talking 1% or 2% so we’re not talking major swings.

Andy Ory

Right. And from the competitive environment, we’ve really seen no dispositional change at all. In fact, the numbers that we’re seeing from Infonetics would actually suggest that we’re increasing our market share in the service provider space.

Peter Minihane

In 2010 we gained share in the enterprise space.

Andy Ory

In the enterprise space. I mean it just – it all feels like we’ve established thought leadership that we’re really able to sell successfully and grow as this market grows so we would expect pretty much everything should continue on track for the rest of the year. We don’t see any changes.

Subu Subrahmanyan – Sanders Morris

And your traditional resellers like Alcatel Lucent with their products, do you see some consolidation of share underneath you to a couple of players instead of multiple players especially in the (inaudible) market?

Andy Ory

It’s an excellent question since there seems to be 40 different companies that have session border controllers. When we highlight Q1, 65% market share and nobody was even 1/8th of our market share. That’s pretty much been the case now for the last eight quarters, so I’m pretty amazed, but I don’t think you’re going to see a number two emerge by – through consolidation for quite some time.

Brian Norris

Subu, thank you. We have to move along. Thanks for the call.

Subu Subrahmanyan – Sanders Morris

You’re welcome.

Brian Norris

Thank you.

Operator

And we’ll go to the line of Todd Kaufman with Raymond James.

Todd Kaufman – Raymond James

Thank you very much. I want to ask you about the enterprise side of your business. You said it’s about 20% of the business, so doing I don’t know, $15 million, $16 million. When you look at that business, is that all new customers or is that follow on requirements of existing enterprise customer business as well?

Andy Ory

Okay. One of the things, and Seamus, feel free to jump in too. Not all of our enterprise business is with SIP trunking. A large portion is, but not all of it and I would say that I don’t have a breakdown between new and existing, but if you ask me, it certainly feels like it would be majority new, minority, but a healthy plurality expansion from existing. Would you feel the same way Seamus?

Seamus Hourihan

Correct. Within some of our larger enterprise customers, again, you have the same phenomenon we had in service providers where you have multiple projects where products are being first selected, then deployed, and the timing of those projects is not all at once.

And so you have potentially come in for one application or project that spans multiple quarters in some cases and then come in later for a different project.

Peter Minihane

You know what we could do Seamus that we don’t do, we do track the number of purchase orders placed with us both from an enterprise side and the service provider side. We had in Q2 2011, the single largest quarter ever processing purchase orders from enterprise. That was like 350 deals. 350 purchase orders, not deals. I’m sorry.

Seamus Hourihan

Right.

Peter Minihane

So we could go back and track those and say whether it’s repeat business or if it’s new business.

Seamus Hourihan

Right.

Peter Minihane

It would be one way to do it. We just haven’t sliced it that way.

Andy Ory

That would be an interesting way to do it.

Seamus Hourihan

For large multi-nationals you also sometimes have a different timing around international deployments in certain regions, cities, and stuff like that as well.

Todd Kaufman – Raymond James

So can I ask a follow up to that.

Andy Ory

Sure.

Todd Kaufman – Raymond James

As the service providers build out the capacity to eventually support those enterprises coming on, and they look at their – really as you’ve pointed out – inconsequentially small number of enterprise customers, I think you said 56 is what you signed on. Does the service provider start to look at that and say well maybe there’s enough capacity on the service providers side since the number of enterprise customers you’re adding each quarter is really, really small.

Andy Ory

No. You know why? Remember, it’s true that we only added I think 56 or so enterprise customers, and Brian’s going to take a look at that.

Brian Norris

56 worldwide. We processed 432 total.

Andy Ory

432, and in North America, 250?

Brian Norris

250.

Andy Ory

A lot of – a number of the initial movers are the Fortune 100’s right. So they’re looking at these customers that actually can purchase an awful lot of gear and they’re saying, whoa, they’re really starting to move.

The other thing that’s going on is, we’ve seen analysts’ reports, some financial analysts on your side of the fence, that have cited statistics where a large majority of the IP managers in the enterprises based surveyed, said that they are moving towards SIP trunking. They’re just undergoing the analysis and ultimately, they’ll be implementation.

So I don’t think you’re going to find a tier one service provider that doesn’t believe that if they want to participate in enterprise communications, that they can do it by staying TDM. So that’s their mindset. They get it.

The other thing is, we’re not like an – an SPC is not like an application service platform. It’s actually a technology that connects, secures and normalizes communications at network intersect. And so when you look at a company like Verizon business for example, how many firewalls, how many points of presence do they have to connect to a GM?

I mean you just think about it. So if GM starts to do this, they can’t consolidate. They actually have to figure out how to engineer their network so they can have all those points of presence, and then they have to peer with their other suppliers.

And when you start overlaying hundreds of different service enterprises that are going to do that, you begin to see that it’s really a mindset shift in how they’re going to convert their whole network. It’s not just a little supplemental deployment to an existing TDM network and they run it from a TDM centric mindset.

Todd Kaufman – Raymond James

Just a quick follow on to that. That monumental mindset shift that the service provider has to put in place, you would think when they’re looking at the rate of adoption by enterprises now, wouldn’t they give you much more visibility than one or two quarters going forward?

Andy Ory

Architecturally, absolutely. We sit down and look at what they’re thinking about in 2012 and beyond and that gets us very excited. From a purchase order point of view, they’re still purchasing just in time. I’m going to buy it, put it in, fill it up, make money. I’m going to go buy more. And Todd, I do expect to see a shift in that thinking over time.

Brian Norris

Todd, we’re going to have to move to the next caller. Thank you for joining us tonight.

Operator

Thank you. We’ll go to the line of Sangit Singh with Wedbush.

Sangit Singh – Wedbush

Hi guys. Thanks for taking my question. A couple quick questions. First, on any improvement or deterioration in the sales cycles – maybe this quarter over last quarter?

Andy Ory

Well first of all Sangit, welcome to the call and I’m not sure what you mean by sales cycle.

Sangit Singh – Wedbush

Just lead times to close.

Peter Minihane

I think Andy, the lead time to close I think has stayed. I’ve not heard anything to the opposite. The only thing we did find is that a number of our indirect channel customers, took longer to process purchase orders from end users as a result of changing some of their internal processes.

For example, something would show up – and I’m making this up – in the Nordics, would get transferred down to India for processing, would get transferred back up to the Nordics before they placed the PO. That may have taken five or six weeks, where historically, it’s taken two to three weeks.

The sales cycle per se, that is, get the purchase order from the customer changed, I think the processing may have been affected in this current quarter.

Sangit Singh – Wedbush

Okay. That makes sense. On the enterprise side, with Alcatel Lucent trying to sell their enterprise business, I wondered if you are expecting any impact from that, if you’ve had any exposure to them at all. I know you guys had a partnership announcement just a couple months ago. And then on Microsoft link, it seems like that was the driver of the enterprise business. Can you tell us how that’s trending on the Microsoft link adoption with the halo effects for SPC’s?

Andy Ory

Yeah, I mean I think – well let’s talk about Alu first. Yeah, we actually have a pretty good relationship with the Alu enterprise folks. Whether or not they stay as part of Alu or someone else were to buy them, I think that likely they’d have some positive impact on our business, but I’m not – I wouldn’t say it’s going to be significant.

And on the Microsoft link side, we’ve been working with Microsoft for a long, long time, years.

Peter Minihane

We’ve got a great relationship with them.

Andy Ory

Yeah.

Peter Minihane

And improving every day, hour, really, and we’ve been certified for OCS for a while now. We did a press release I think many months ago now and are in the process of certifying for link as well, which is the bit for the next – rebranding (inaudible).

Andy Ory

And what I’m excited about with Microsoft is that they are already on everyone’s desktop.

Peter Minihane

Correct.

Andy Ory

And as they look at communication enabling their applications, the need to connect, normalize and secure between edges really can become quite significant, so we’re really excited about that.

Peter Minihane

(Inaudible) with Microsoft is not just in the enterprise, but for hosted Microsoft UC office 365 and premise based infrastructure as well on service (inaudible).

Operator

Thank you. The last question comes from the line of Larry Harris with C.L. King.

Larry Harris – C.L. King

Yes, thank you and congratulations of the quarter. Sort of a follow up question relative...

Andy Ory

Larry, thank you.

Larry Harris – C.L. King

Okay. Follow up question relative to Microsoft and their acquisition of Skype. From the consumer point of view with the adoption of Skype and other video type IP services, could that provide some additional business for you?

Peter Minihane

Well Skype really offers two services and we’re actively involved in their Skype connect service, the SIP trunking service for small and medium businesses. That’s their primary target market. And then again, I think Skype is more well known for their consumer service, which is a proprietary communications environment.

To the extent that that environment gets opened up in some way, which to link or other SIP environments, would be an opportunity for Acme Packet.

Larry Harris – C.L. King

Great. Thank you.

Andy Ory

Larry, thank you.

Brian Norris

Thank you everyone for joining us this evening. It was another very strong quarter with record financial results for Acme Packet. We see an exciting opportunity ahead for session delivery network solutions. 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.

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