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Acme Packet Inc. (NASDAQ:APKT)

Q3 2011 Earnings Call

October 20, 2011 04:30 pm ET

Executives

Brian Norris - Director, IR

Andy Ory - CEO, President and Co-founder

Peter Minihane - CFO

Analysts

Paul Silverstein - Credit Suisse

Alex Henderson - Miller Tabak

Brian Modoff - Deutsche Bank

Catharine Trebnick - Northland Capital Markets

Richard Valera - Needham & Company

Greg Mesniaeff - Kaufman Bros

Jeff Kvaal - Barclays Capital

Simona Jankowski - Goldman Sachs

Sanjiv Wadhwani - Stifel Nicolaus

Subu Subrahmanyan - The Juda Group

Brent Bracelin - Pacific Crest

Simon Leopold - Morgan Keegan

Todd Kaufman - Raymond James

Sanjit Singh - Wedbush Securities

Larry Harris - CL 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 question. (Operator Instructions). As a reminder ladies and gentlemen, this conference call is being recorded. I would now like to introduce your host for today’s call, Brian Norris, Director of Investor Relations for Acme Packet. Please go ahead.

Brian Norris

Thank you Lola. Good afternoon everyone and welcome to our 21st quarterly earnings result conference call. I am joined by Andy Ory, our President and Chief Executive Officer, and Peter Minihane, our Chief Financial Officer and Treasurer.

The press release announcing our third quarter results is available on the Investor Relations section of our website at www.ir.acmepacket.com. 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 exclude stock-based compensation expense as well as amortization of intangible assets and merger and 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 that we make during this call that are not historical facts, 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 those 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.

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

Andy Ory

Thank you Brian, and good afternoon everyone. Revenues for the third quarter were $70.6 million and Non-GAAP EPS was $0.21. Our third quarter results were impacted by a large opportunity at one of the major service providers in North America. As we told you on our October 4th call we expect the opportunity to close in the first half of the fourth quarter. It’s clear that the fundamentals of our business and market demand for our products remain strong.

Accordingly, we are tonight reaffirming our full-year outlook which calls for 36 to 38% revenue growth. A closer review of the third quarter results reveal the number of positive indicators. We continue to enjoy extremely high win rate. We continue to extend our leadership position in both the service provider and enterprise market and our pipeline is robust.

We delivered gross margins of 85%. We experience healthy new customer adoptions. We added over 80 new customers in the third quarter and now serve over 1525 customers in a 107 countries. Our enterprise business which continues to benefit from growth and SIP was strong in the third quarter. Our enterprise customer bookings activity grew 72% year-over-year. We added over 50 new enterprise customers in the third quarter and saw a number of deployment expansions. On a regional perspective, Europe continued to perform very well. We saw strong growth with our incumbent wireless markets and additional customer acquisitions.

In the European enterprise markets we are seeing good traction from the financial and government vertical. Despite the difficult economic conditions in EMEA we are continuing to see a strong demand from the tier 1 service providers particularly the large mobile operators. Our Caribbean and Latin American regions had their best quarter ever and is well ahead of the year-to-date plan. We replaced competitors at two different service providers and continue to be very well positioned at the largest tier 1s in the region.

Our Asia Pacific region performed in line with our expectations through the first nine months of the year. India is finally in the process of deregulating which will legitimize IP to IP communications and in China we are beginning to see real demand growth in the enterprise markets.

On the partner front, we were pleased to announce in the third quarter that HP has integrated our family of enterprise session border controllers into the HP unified communication solutions portfolio. By integrating our solutions HP can offer their customer solutions that strengthen security, enhance reliability and inter-op with a wide range of UC infrastructure and communications service offerings.

We also announced that our enterprise session border controller solutions have been qualified in Microsoft Lync Server UC Open Interop Program and we were the first enterprise class at the SBC technology to be qualified. Customers will now be able to leverage Acme Packet’s SBC’s in their Lync Server and Exchange Server deployment as they extend the power of unified communications and embrace desktop voice and video communications.

We are excited about the level of activities throughout our customer base and the new products and partnerships that we have launched to drive the next stage of our growth. We remain confident in our ability to execute on our full year business outlook.

Accordingly, we expect total revenues to range between $315 million and $320 million representing full year growth of between 36% and 38%. We expect non-GAAP EPS to range between $1.14 and $1.18, representing full year growth of between 43% and 48%.

When I speak with our customers, it’s clears that the demand for session delivery network solutions is growing and funding is being elevated on spending priority list globally. That said, here in the third week of October, many of our customers are still in the process of finalizing their plans for 2012. We do however have some insights into the future demand for session border controllers, which traditionally represent over 90% of our revenue.

As we had discussed on our call in July, we have seen and expect to continue to see robust growth in three leading indicators; residential VoIP subscribers, enterprise SIP trunk and IP enabled mobile network. Next year, industry analysts expect the service provider SBC market to grow by 20% to 25% and the enterprise SBC margin to grow by 40% to 45%.

When we host our fourth quarter call, we will share with you the perspectives from our global sales meetings scheduled for January. We will also have a finalized full year operating plan and will provide clarity around our business outlook for 2012 at that time. Until then, we are very focused on executing what we expect will be the best quarter and the best year in the company’s history.

With that, I’ll turn the call over to Peter for a closer look at the numbers and our outlook.

Peter Minihane

Thank you, Andy. This afternoon, I will review our results for the third quarter and then discuss our forward outlook. Total revenues were $70.6 million, which included $53.1 million in product revenue and $17.5 million in maintenance, support and service revenue. Geographically, 52% of our revenue came from the United States and Canada while 48% came from the rest of the world. The distribution of revenue was 32% direct and 68% indirect.

Gross margins were 85% in the third quarter. Total operating expenses were $36.4 million and operating margins was 34%. Net income was $14.6 million or $0.21 per share. We ended the quarter with approximately $339 million in cash and investments, an increase of $20 million sequentially.

Cash from operations was $16.4 million in the third quarter while total capital expenditures were $5.6 million. Accounts receivable net was $51.2 million at the end of the third quarter.

Days sales outstanding were 65 day at September 30, 2011 compared to 60 days at June 30, 2011. While still within our targeted DSO range of 55 to 65 days, the increase reflected the timing of revenue within the quarter, as well as the higher revenue contribution from our indirect partners which tend to have a longer payment turn than our direct customers.

Inventory at the end of the third quarter increased to $11.8 million compared to (inaudible) at the end of the second quarter. This primarily reflects inventory associated with an order we had expected to materialize in the quarter and to a lesser extent the continuing actions of our manufacturing organizations to mitigate the risk of supply-chain disruption.

Finally, deferred revenue was $30.7 million at the end of the third quarter compared to $34.9 million at the end of the second quarter. This reflects a $2.1 million decrease in deferred product revenue and a $2.1 million decrease in deferred service revenue reflecting the amortization of customer service contracts.

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

To help you better understand how we are looking at the remainder of the year let me close with a few forward-looking comments. I remind you that the comments I am about to make are based on the current indications of our business which may change at any time. We undertake no obligation to update these comments.

As Andy indicated in his opening remarks, we are reaffirming our full-year estimates for revenue and earnings. We expect revenue in 2011 to be between $315 million and $320 million. We expect non-GAAP EPS in 2011 to be between of $1.14 and $1.18 million and we are estimating a full-year effective tax rate of approximately 37%. Finally we are modeling full year weighted average diluted shares outstanding of 71.5 million shares. With that I’ll turn the call back over to Brian.

Brian Norris

Thank you, Peter. Well at this time we would like to open the call up for Q&A. Again we ask participants to limit themselves to one question and one follow-up question.

Operator

(Operator Instructions) And first we will go to the line of Paul Silverstein with Credit Suisse.

Paul Silverstein - Credit Suisse

Andy I don’t want it to be my question, but everyone wants whether you have got the orders in hand, but the question I have is about the pricing in the competitive landscape, if you seen any change whatsoever in terms of the all the different 40 competitors out there. Are you seeing an impact on pricing, is there anything that indicates there is a change in pricing as it relates to margins et cetera.

Andy Ory

You know Paul what we are seeing is the price per session continuing to go down, if you look back three or four years, look back two years, look back today, and look back that we project in the future. However, you will see more and more software content and a lower hardware cog. So, that will offset that and I think you’ve seen that our margins over the last few years have really been in the kind of range that we would expect and we don’t see much change to that. We do guide folks longer term to the low 80 percentile range for margin.

Paul Silverstein - Credit Suisse

But, Andy, to be clear, has there been a change one way or the other, has there been an increase in the rate of decline in this environment?

Andy Ory

No.

Peter Minihane

The client and gross margins, Paul?

Paul Silverstein - Credit Suisse

We could all see the gross margins, Peter, I am talking about pricing.

Peter Minihane

No, none at all.

Paul Silverstein - Credit Suisse

What is that rate of change?

Peter Minihane

No, there’s been no rate of change.

Andy Ory

There’s been no rate of change, Paul.

Paul Silverstein - Credit Suisse

I want to reconcile what you’re saying. So, I thought I heard you say that the price per session is been going down but now you are saying there’s been no change in pricing.

Andy Ory

No, because they’re buying more software content and they are buying larger session system. And you can see that shift if you go back to our 4250, which was three, four years ago. You go to our 4500. So, you know, what we’re doing is we are jointly using the right kinds of silicon for signaling, for packet processing, for encryption, for transcoding, such that we continue to add value and capacity while we can appropriately meet the price per session in the market. And I suspect that those trends are to continue.

Paul Silverstein - Credit Suisse

And that’s not new and different from last quarter, the quarter before year-ago timeframe?

Andy Ory

No, this is a multi-year trend that will continue for several years.

Operator

Next, we will go to line of Alex Henderson with Miller Tabak.

Alex Henderson - Miller Tabak

So, there is a whole bunch of rumors and innuendo flying around this contract and I was hoping you could clear a few of them up. One obvious issue is you had said that you had a handshake agreement and obviously that leads the question to whether you actually have a contract in hand at this point to give you the visibility on the 16 to 18 million in the quarter. The second piece of that would be is there any reason to be concerned about any delays in this contract in terms of the timing of realizing it. There is a specific rumor around a second source supplier requirement that the CFO apparently has put in place at the customer which it doesn’t sound likely to me since I don’t think anybody else can actually do this.

And then third you know you said in your original press release that this was 5% of the equipment needed to do this deployment and left it very open ended from there. Is it reasonable to think that that I could, should take the 16 to 18 million, use the 5% and come to the general size of the equipment necessary to deploy and would that be in the contract or would that be loose overtime?

Andy Ory

I mean first of all our guidance reaffirming the full year was about a large order that we felt very confident in, that moved from the third quarter to the fourth quarter. We talked on the October fourth call about the first half of Q4. We reaffirm the first half of Q4 on this call and clearly that order is part of our overall ability to reaffirm our guidance for the year. As far as you know multiple sources you know I really can’t speak for any of our customers and I really don’t want to. We worked very, very hard to create value and enable a value proposition for our customers and we have to work very hard everyday to earn their business and that's what we are going to do and I expect that folks over time are rational and they will do business with people they think are going to increase their value for their respective shareholders.

So we are at a very, very early stages of a broad secular shift of voice and other services moving from wireline to wireless and from TDM to IP and we feel that over the last 10 years we've executed very well, but given that we are at the very beginning of this shift, we are going to have to work very hard everyday to continue to maintain this kind of position and cultivate or maintain a compelling value proposition.

As far as the size is concerned, if you look at any tier 1 service provider anywhere in the world, the movement from wireline to wireless and from wireless 3G to LTE is a very, very large opportunity from a services point of view and so we are very, very excited at just how large opportunities like that with tier 1 carriers represent for technologies like ours.

Alex Henderson - Miller Tabak

But to pin it down here, you didn't say you had a contract in hand which still leaves open the speculation that you don't have it and you didn't say that this was a multi-tranche of orders, it’s, you've only implied one order which you imply is only 5%. Is this a larger order or is this just a one quarter order?

Andy Ory

No, no, I was very clear. I did not talk about a contract in hand and did not talk about any future business opportunity or commitment. I talked about overall size of a service provider that you know is in the very early stages of migrating from a 3G to an LTE network and the opportunity to enable a service infrastructure and protecting normalizes, did not talk about anything that was in the future.

Operator

And next we’ll go to the line of Brian Modoff with Deutsche Bank.

Brian Modoff - Deutsche Bank

You did back on the call talk about this being used to tie together all access technologies for that operator?

Andy Ory

I think that what we are trying to do is share with you our opportunity, the excitement we have around our business and we are trying to be very careful not to talk about our customer’s business and we’ll let our customers do that. But suffice it to say that you are going to see Tier I service providers globally migrate all their access infrastructure and all their transport and all their connection points to IP and having a unified service core and certainly it seems like in architecture that many of them are going to want to embrace and we are very well positioned globally with a number of those Tier I operators to protect, normalize and integrate and extend those services from that core to all devices across all access infrastructures.

Brian Modoff - Deutsche Bank

And do you expect, since obviously it’s kind of a contract, so do you expect operators in other regions, Europe and Asia to want to do similar type architecture in your network next year?

Andy Ory

You know it is hard to pin down timings; I do believe that all service providers have a truly defensible value proposition where they are able to offer services, they are able to extend their service core to all access infrastructures in a secure, high quality, regulatory complaint way where they can guarantee the kind of user experience that will significantly differentiate them from the over-the-top competitors that they are dealing with.

I do think and I am Darwinian, and I think there are going to be very few types of technologies or architectures that they all settle on because their competitors overtime, the over-the-top folks that don’t and aren’t operating network. And so our goal is to continue to engineer technologies that have the lowest cost, quickest time-to-market, ease of operation and greatest amount of flexibility for them to compete in this kind of environment.

I would say that it is global that our service providers on a global basis are wrestling with what are the wide architectures and technologies and who are the right partners and what is the value proposition. We are being engaged on a global basis currently as far as when that materializes from architectural and design explorations to actual orders, I’ve really said that I expected the second half of 2012 to be when I would see a lot more activity.

Brian Modoff - Deutsche Bank

May we discuss how many operators you might be engaged in this discussion with and then last question, enterprise, you talked about it becoming more significant. What percent of your revenues in Q3 came from enterprise versus Q2? Thanks.

Andy Ory

So from an enterprise point of view, I think it was 27% of the business in Q3. And if you were to normalize it, because if you were to have it closer up to 80, 81, $82 million, you would then be inline where enterprise would roughly be about is 28%.

Peter Minihane

It’s actually 28% Andy.

Andy Ory

28%.

Peter Minihane

From the revenues.

Andy Ory

Yeah, and the enterprise is performing very well both in the United States and EMEA. As far as how many operators, we are doing business with 90 of the 100 largest service providers in the world and 20 of the 25 largest cable companies. And you can imagine that we are actively engaged with as many of them as we can be in terms of their plans for unifying. There are different types of access infrastructures to extend and enable service delivery across all the different access infrastructures including wireless. So it will be quite a large number, I don’t know the number on hand.

Operator

And next we will go to the line of Catharine Trebnick with Northland Securities. Please go ahead.

Catharine Trebnick - Northland Capital Markets

Two quick questions, one is you had mentioned win rate in your overall discussion Andy, and could you give us some more details around that or percentages perhaps and then also on the enterprise side, could you discuss how strong that pipeline and then the types of used cases that might be in the pipeline for 2012?

Andy Ory

Sure. In terms of the win rate, I guess the reflection of that is probably market share and my guess is that when you look at the end of 2011, our blended market share between service provider and enterprise should be like it was moving into the year. So you know we expect to be able to maintain the relative market share as we have in what we consider to be a rapidly growing market.

You know, as far as, I guess, you were asking about used cases for the enterprise, I would say that SIP trunking, the quantifiable ROI that can be realized by collapsing and unifying your different networks over MPLS VPNs and cutting down the number of connections you have to a service provider and running that all over a SIP trunk really had a significant payback. And I think that’s still going to be the large majority of the revenue that we’re going to realize with enterprise customers in 2011.

That being said, what really excites us as a communication enabled business process, where enterprises aren’t interested in reducing transponder connectivity costs for their services, but want to find ways to deal with their internal and external customers in a way that is more profitable and more valuable, and you know that fits in with our whole application session controller and our ISR. We do except to see those revenues continue to increase throughout 2012.

Operator

We’ll go to line of Rich Valera with Needham & Company.

Richard Valera - Needham & Company

Last year at this time on this call you actually did gave kind of a preliminary growth target for the out year and it looks like this year you are going to differ that to the fourth quarter call, is anything different about the environment this year that’s causing you to differ that initial guide?

Andy Ory

No. We’re in the planning process for our budget. We are going to talk to our sales guys at the Global Sales Conference the beginning of the year; not having the final budgets and not talking our sales guys. We just feel that it’s better for us to put those plans in place and then provide I think a crisper communications to you on the fourth quarter call.

Richard Valera - Needham & Company

And then with respect to the network implementation that talked about with large carrier last quarter, I think you had talked about it being something that would initially handle over the top traffic for that carrier. Is there anymore you can add to that you know sort of who is over the top traffic that would be, would that be the Skype’s of the world or this carriers owned sort of VoIP traffic, is there any other color you can give us on sort of the use case for that major new network that you are a part of that carrier?

Andy Ory

So Rich you know what, you know that we work really hard to provide as much information as possible by our business technology in the market opportunity, because we are so excited about this fundamental shift in the communications landscape. We are going to shy away from actually talking about any of our customers and let them do that themselves.

Operator

Next, it will be Greg Mesniaeff with Kaufman Bros.

Greg Mesniaeff - Kaufman Bros

I was wondering if you can further breakdown the ratio of direct-to-indirect, you know, the 32% direct, 68% indirect rather by carrier and enterprise or give us some color as to, you know, what the different sales channel dynamics are looking like right now.

Andy Ory

We don’t exactly talk about what is direct and indirect as it relates to the service provided channel but rather we just simply break it out between direct and indirect within the region on a quarter-by-quarter basis Greg.

Greg Mesniaeff - Kaufman Bros

Okay. Now, as it relates to enterprise, you know, you had mentioned the work you’re doing with HP and Microsoft, is there any other color you can give us on, you know, some of the partnerships that are helping drive the sales and the ramp in that business?

Andy Ory

Yes. We’re really excited about the HP opportunity. We’re looking for and we’re actively developing value add distribution relationship globally in the enterprise market. Clearly we work with many of the SIP trunking service providers, where it’s in their best interest to provide and accelerate this kind of technology so they can sell more SIP trunk. So, that’s wonderful.

We’ve talked about folks like Dimension Data who want to do more systems integration. They don’t just want to sell, you know, simple routers or boxes. They want to get more involved in the consultative selling process. We announced the Hewlett-Packard relationship. That’s a global relationship where Hewlett Packard thinks about the Global 1800 service by enterprises. Those are the kinds of relationships that we want to be able to accelerate our penetration and extend our reach. You know for example at Hewlett Packard we’ve worked for quite sometime to get to the front, we could announce a relationship. We’ve said in the past that you know it is operationalized and it’s you know somewhere in the single digits to up to $10 million of business this year but the real growth should come in the next 18 to 24 months as we trained the channel as we enabled the channel and as we participate in the growth in the market.

Operator

Next we go to the line Jeff Kvaal with Barclays Capital.

Jeff Kvaal - Barclays Capital

Andy, I would like to broaden the question a bit from beyond this particular contract, but just in general it feels to many of us on this side of the line that the CapEx environment has deteriorated quite materially over the past two, three, four, five weeks. And so I am wondering what you’ve seen in the realm and what kinds of extra steps you might have gone through in terms of proofing your guidance.

Andy Ory

Well, I mean we certainly had another 16 days since the October 4th call and that was very helpful. We do engage with the sales organization and we do have pretty sophisticated funnel metrics that we’re able to go through, so we see all of our customer engagement. We’re also able to see business as it comes in and business obviously has come in between 4th and 20th. An awful lot of this business is stuff where we’ve been involved in budgets and architecture and design and the deployments are either underway or will happen.

So you know the deterioration that you are talking about we haven’t seen. I can’t say whether that will be something that we’ll see next year or not I mean certainly we’re going to know a lot more as we get through the end of the year and we’ve worked with our customers with their budgeting cycle for 2012 and subsequently get to work with our direct sales organization at a global sales conference.

But you know our guidance is tied to the activity that we are seeing and the confidence we have in terms of the material transaction that make up this particular quarter.

Jeff Kvaal - Barclays Capital

And then Peter on your side, could you help us understand a little bit as we think about 2012 number one, how should we expect that enterprise bookings to translate into revenues and then number two just to be clear we should expect the business to return to its normal run rate in the first quarter.

Peter Minihane

So Jeff, as Andy mentioned in his prepared remarks we are still finalizing our plans for 2012. I think if 2011 can be an indicator of that, I think we have as Andy mentioned about 20% of our business on a normalized basis is enterprise and 80% will then be service provider. So again enterprise is defined by enterprises contact centers and government. We don't see that as a major change looking forward, but again I think we still have to finalize that plan.

Jeff Kvaal - Barclays Capital

So lumpiness in the enterprise bookings I guess.

Peter Minihane

No, no, actually the enterprise, and sorry if you had that takeaway, I mean our enterprise business globally has actually been pretty smooth. Lots of transactions and the transaction price obviously is less than some of the large service providers.

Andy Ory

And I maybe the lumpiness Jeff came from the fact that we had 28% of our revenue in the current quarter versus 20% for the remainder of 2011 and I think that is because our overall revenue was coming in at approximately $70 million versus approximately $82 million to $83 million. If it had come in at $82 million to $83 million, it would be consistent at 20% to 21% right.

Jeff Kvaal - Barclays Capital

No, I am sorry, I guess I was thinking that your bookings growth of 70% plus was very impressive but it has also been growing faster than your enterprise revenue growth.

Andy Ory

And the 70% was same quarter a year ago.

Peter Minihane

September to September

Andy Ory

So it was Q3 of 2010 versus Q3 of 2011.

Operator

Next we will go to Simona Jankowski of Goldman Sachs.

Simona Jankowski - Goldman Sachs

Just a couple of questions on your customers and I apologize if I missed it, but did you have any 10% customers this quarter?

Andy Ory

We did, we had one customer Simona that was 14% of our revenue.

Simona Jankowski - Goldman Sachs

And that was I imagine either Verizon business or wireless?

Andy Ory

No it wasn’t, it was a distribution partner

Simona Jankowski - Goldman Sachs

Okay interesting. So I guess that explains kind of my follow up which was that your direct revenue seemed to decline 30% sequentially and 17% year-on-year. So it sounds like a lot of that was actually Verizon, may be if you can just expand on that a little bit.

Andy Ory

So if I think about our direct business for the current quarter is approximately $22.5 million and that’s compared to $32 million in the prior quarter. So that would be down approximately 30% quarter-over-quarter and 18% versus the prior year similar quarter and I think most of that is again reflective of the fact that we don’t have the same contribution from service providers that what we historically have. So again to your point 14% was in the sense historically if you looked at Verizon business, Verizon Wireless at 11% in Q1, 12% in Q2 as standalone entities, not combined, I think you would find that that business was down quarter-over-quarter.

Simona Jankowski - Goldman Sachs

Right, you know, I mean that makes sense in the math and can you just give a little bit of color on the dynamics there, and so obviously with the Verizon Wireless you’ve had a multi-quarter project there, is that coming to a close now or if they’re just the one quarter pause? And then similarly on the Verizon business side where you’ve been very closely tied to their SIP trunking business initiative, you know, why would that business has declined still significantly quarter-over-quarter?

Andy Ory

Simona, I know that we talked for a long time about Verizon and to the point where I think a lot of folks have felt at that that is a proxy for the North America combined and that’s not really true. We’ve talked a number of Tier I service providers that buy – that tend to offset one another and there was a transaction that we expected in the third quarter that would have normalized just about everything. And that transaction has slipped into the fourth quarter and this is something that we’ve talked about and that really is the delta and the numbers. It is true that we would have had even if that transaction had closed in the third quarter, we would have had a higher indirect versus direct selling because this particular – the particular transactions would not have been direct with us, but would have been through partner.

Peter Minihane

Right and again so and just to confirm here, we received millions of dollars of business every quarter from whether it’s Verizon business or Verizon Wireless. I think some quarters are larger than other quarters obviously, but it’s not that there is a material pause, but rather it’s attributed somewhat to a little bit of the lumpiness within that industry.

Andy Ory

Right. And as far as working with any of our SIP trunking service providers and where they are on the buying cycle relative to converting their networks to enable SIP trunking, in the United States we’re pretty confident around 5%, and that means that there is another 95% of purchasing overtime that will happen. So I think it would be a mistake to characterize an opportunity is coming to an end.

Simona Jankowski - Goldman Sachs

Okay. I appreciate that. And just a last question on the customer side, I didn’t hear you mention via this time and first if you can just clarify if you can then within your direct or indirect business, but then just a question on Avaya was, you know I noticed they bought an SBC company during the quarter Sipera Systems and I was just curious what your expectation is for your relationship there going forward?

Andy Ory

Sure. I think for large valuable opportunities we will continue to work with Avaya. Most of the work that we do with Avaya is actually alongside Avaya not through Avaya. So in other words we have extensive relationships with folks like Westcon, [CADIUS] and others. You know, it is interesting that people are continuing to realize the value and the opportunity of being involved session border control technologies, I again think that our focus, our unparalleled commitment and experience in technology will continue to bear out and I think we will continue to enjoy the position in the market that we have today.

Operator

Next, we will go the line of Sanjiv Wadhwani with Stifel Nicolaus.

Sanjiv Wadhwani - Stifel Nicolaus

Andy, I am just curious about this large deal that have been pushed from Q3 to Q4; I am curious whether portions of those revenues will go into deferred till you have installed the equipment and its running life traffic, can you sort of talk about how that’s going to flow through?

Andy Ory

You know, there are lots of great reasons to work with large distributors and one of those great things is simplifying revenue recognition. And so no it is our expectation that orders that we receive from our partners are predicated on orders they receive from their customer and we have some relatively straight forward revenue recognition in terms with our distributors.

Peter Minihane

Distribution partners.

Andy Ory

That’s right.

Sanjiv Wadhwani - Stifel Nicolaus

Right. So that you’ll ship and you’ll be able to recognize revenues because it’s going through distributor into the service provider.

Andy Ory

That what we currently anticipate.

Sanjiv Wadhwani - Stifel Nicolaus

Got it okay. And then second question I had was just looking at the overall revenue guidance of what the implication is for Q4, its about 30% sequential growth or north of that. Is there a concern of your ability to bring in this business and other business, close all that stuff, get it manufactured, get it shipped, I mean there is a lot of stuff to be done for that large number for Q4; any thoughts around that?

Andy Ory

So I think one piece of it is the strength of our manufacturing organization historically being able to go to third party manufacturers and allow them to manufacture and now today do direct order fulfillment. So that it’s incumbent upon our in-house manufacturing organization but rather the planning that was put in placed by that organization; in this you get an aid process as far as we can sit on that report card and order to fulfill large orders from a very large manufacturing facility.

So I don’t think that’s the problem, again John Shields, our VP of Manufacturing is not here in the room with us, but I would suspect he would say, we have the capability of up to 50% increase of where we are today with our existing structure of third party manufacturers and in-house manufacturers.

Sanjiv Wadhwani - Stifel Nicolaus

Got it. I will sneak one quick one and is the distributors that are working with this large service provider are the same one that was a 10% customer in Q3?

Andy Ory

Yes it is.

Operator

Next we will go to the line of Subu Subrahmanyan with Juda Group.

Subu Subrahmanyan - The Juda Group

Talk about the sale patterns for this quarter, for the fourth quarter, you are going to be up a little over 30% and I know you are not providing specific guidance, but given the somewhat higher than normal seasonal uptick in December, that had, you know, what should be seasonal implications for March be? And in general, not specific to this customer, we have heard from some of your peers about in general, some delays in taking product multi-quarter orders and so on. Broadly, are you seeing that trend from any of your service provider customers?

Andy Ory

No, we are not. We sat down prior to our October 4th call and took a look at our business and we had to make the call, do we feel that the 36% to 38% is what we’re seeing for the year and this was, this particular transaction was anomalous or is this something that’s indicative of something larger. And after looking at all the data, we came to the conclusion that no it really is just anomalous, but this is one particular isolated incident and that we expect Q4 to track the way it appears to be tracking and we also expect this particular order to be part of that. So, we’re not seeing that. Could you ask, because you didn’t come through in the first part of your question?

Subu Subrahmanyan - The Juda Group

Yes. And the first part of my question was if you look at December seasonality this quarter, 30% plus sequential uptick that’s versus the last few years, not larger than the normal uptick in December and what kind of seasonal implication it could have on the March quarter?

Andy Ory

Okay. So, you’re talking about, when you say December you mean the fourth quarter.

Subu Subrahmanyan - The Juda Group

Yeah.

Andy Ory

Right, right. I mean I think the right way to look our business and certainly the way that I look at our business is that you are moving this particular, the one particular transaction from Q3 to Q4 and so you are going to see that kind of uptick in Q4, but I would. I think the right way to look our business would be to put that order back into Q3, so you can look at a more normalized progression throughout the year and use that as a basis to begin moving into 2012.

Subu Subrahmanyan - The Juda Group

So if I could follow up that would imply a mid-80 million number for Q4 rather than a mid-90 million number and then use that as a starting point to think about 1Q 2012?

Andy Ory

With the data that we have now.

Peter Minihane

Right so we are not thinking about 2012, Andy?

Andy Ory

That’s right.

Peter Minihane

I think what we have to look at is have the order come in that we had anticipated. I think that would have been an $82 million, $83 million type of quarter which would indicate it. I think we would have anticipated a slight increase quarter over quarter in fourth quarter in order to get us to our annual.

Andy Ory

315 to 320 million.

Peter Minihane

That we have given this [week].

Andy Ory

Right. So that’s really the way to think about the business and that’s why we have tried to talk a lot about this Q3, this particular order in Q3 and the impact so that you can normalize the fourth quarter progression.

Subu Subrahmanyan - The Juda Group

Alright. So I will just think about it from a more normalized Q4 runrate.

Andy Ory

Correct.

Operator

Next we go to the line of Brent Bracelin with Pacific Crest.

Brent Bracelin - Pacific Crest

Clearly Andy, your pretty exciting longer term opportunity and I guess you know the questions are really around just timing, house and folds and clearly we got a little surprise in the timing in Q3, have you kind of shipped any large deals in the first kind of 20 days of the Q4, could you talk a little bit about kind of Q4 linearity, is this still business that will largely kind of be done in November and December and again great longer-term opportunity but again just trying to make sure we have this modeled right and we know how this, the timing of this sequence plays out this quarter.

Andy Ory

Right. With the exception of the one order that we talked about having slipped out, we don't expect to see this fourth quarter look any different than the previous fourth quarter a year ago in terms of its linearity.

Peter Minihane

That's right Andy and I think if anything when we take a look at the linearity over the past three or four quarters I think we have found it to be slipping a little bit more into month three versus month one or two a year ago which I think accounts for some of the issue that we've had from a day sales outstanding, but I don't see any material change.

Brent Bracelin - Pacific Crest

Okay fair enough and then just one quick follow-up on Verizon, you know obviously Verizon business or wireless is kind of pumped up as a 10% plus customer for now six consecutive quarters except this one. Yeah I appreciate the lumpiness kind of comment and certainly within those two kind of groups there has been lumpiness, but this is the first quarter and in six, seven quarters where they haven't been a material customer. So you know, do you think this again is kind of a one quarter blip and they come back or is there something else that you would expect is causing some of that kind of slowdown at that Verizon business or wireless.

Andy Ory

I think that our business as Peter stated with both Verizon business and Verizon Wireless is very strong. It will continue to be strong and we don't really expect much of a state change. It is true, that neither Verizon business or Verizon wireless was a 10% customer in this particular quarter but I wouldn’t read too much into that.

Operator

(Operator Instructions) Next we will go to the line of Simon Leopold with Morgan Keegan

Simon Leopold - Morgan Keegan

I wanted to just get a quick clarification first on Verizon. In the past you have counted the entities as separate customers. I am just wondering if we can get an assessment of the combined Verizon entities whether together they achieved the 10% customer range?

Andy Ory

We’ve never disclosed that historically Simon and I think we are going to be consistent with our disclosure practices here in the current quarter.

Simon Leopold - Morgan Keegan

Okay and then it is kind of glaring the customer you haven’t mentioned on today’s call which was discussed on the October 4th call, so one of the issues that’s come up in discussions in the investment community is whether or not you had been given permission to identify the customer because it wasn’t in the press release, but it was discussed on the October 4th call and I guess what I am trying to get an understanding of this what was your impression in terms of what you were allowed to discuss versus not allowed to discuss and let’s say assuming you weren’t given permission what sort of been the sort of result of that.

Andy Ory

You know Simon we work very, very hard to be very transparent about our business and share with you the opportunities and the results. We are going to continue to do that and we are going to talk an awful often lot about the market opportunities and we are going to let our customers talk about their own opportunities.

Simon Leopold - Morgan Keegan

But Andy, I got to press you on this because you are not answering this question. So I am assuming you were not given permission on the October 4th call then?

Andy Ory

You are welcome to have any assumptions you want. We are very careful about the things we say and we want to be transparent, we want to be forthcoming and we want to talk about opportunities. We will talk about publically announced customers and you can let our customers that we’re not talking about, talk about themselves.

Simon Leopold - Morgan Keegan

Okay. And that would make you consistent with most of your peers. I am not sort of singling you guys out, I am just trying to get an understanding of what’s happened over the last couple of weeks?

Andy Ory

I think and the other thing you want to take into account is that of the 90 of the 100 largest service providers we have, our working relationship with these folks is somewhere between five and 10 years and we work very, very hard to be a very valuable partner and supplier to them. It’s a position that we enjoy very much and it’s a position that we have every expectation that we ought to be able to continue to extend.

Operator

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

Todd Kaufman - Raymond James

Thank you very much. One the additional question on that slipped AT&T order, it’s sounding like you are pushing very, very hard to have this thing closed and I know you’re free from the guidance, but I didn’t hear you say that it is closed. I was wondering if there are any new issues that have arisen since the October 4th announcement as it relates to that slipped order?

Andy Ory

Todd, you know, the transcript that we read from on October 4th states that we fully expect that this large transaction that was going to close in Q3, will close in the first half of Q4. Clearly, we’ve reaffirmed guidance today and that transaction is a material part of our ability to reaffirm guidance and I think that you can imagine that our diligence is pretty deep before we would come on the call like this and reaffirm guidance.

Todd Kaufman - Raymond James

Just a follow-up to that, Alex Henderson asked specifically if it is closed and signed as of today and I didn’t hear an answer yes or a no, could you clarify that?

Andy Ory

I’ll give you the same answer. We expect it to close in the first half of the quarter.

Operator

And next, we will go to the line of Sanjit Singh with Wedbush Securities.

Sanjit Singh - Wedbush Securities

Hi, guys. Looking beyond this particular contract, do you envision given your booking trends and the pipeline of opportunities that we could have another 10% customer whether it’s a servicer provider in Europe or North America, let’s say in the next 12 months?

Andy Ory

Absolutely. I think that it’s entirely possible that as we become more strategic to these large opportunities with our service providers globally that very imperative to deploy service offerings protects and normalize and extend service reach through devices that are connected to their network and provides very, very large set of opportunities for Acme Packet.

Operator

Certainly, and that will come from the line of Larry Harris for CL King.

Larry Harris - CL King

Yes. Thank you. Good to get in there. A question about gross margins, I think on the call on the fourth you indicated that, you know, based upon your best assessment of the accounting at that time we were looking at 84%, I think you came in at 85.1% and unless my math is you know wildly off here for the fourth quarter, it looks like the gross margin will be at least this high, you know, perhaps higher. You know, I know you indicated you are not seeing any sort of change in pricing trends, but do you think that you would be able to continue to generate gross margins here in the mid 80s as you go into next year?

Andy Ory

Yes, we anticipate that, again we gave guidance in the low 80s; to very point two weeks ago we had not closed the books of the corporation and estimated the margin to be approximately 84%. We came in a little stronger from a maiden service and support margin which pushed our margins little higher than we had anticipated.

Larry Harris - CL King

But do you think you can continue to do this I guess going forward?

Andy Ory

I think our anticipation is that we don’t see any price pressure. We see a shift in our business gradually all the time to more software which will enhance our gross margins. We have manufacturing organization that focuses on cost reduction and so I think if you swirl all of that together, I think we have a high degree of confidence that we will continue see margins in this range.

Andy Ory

Okay. Well, thank you everyone for joining us this evening. We will look forward to seeing as many of you as possible during this Outreach Period and updating you on our continuing progress during our next conference call. Thank you and good night.

Operator

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