Network Equipment Technologies, Inc. (NWK)
F3Q2012 Earnings Call
February 1, 2012; 05:00pm ET
Executives
Nick Keating - President & Chief Executive Officer
David Wagenseller - Chief Financial Officer
Leigh Salvo - Investor Relations
Analysts
Brian Swift - Security Research
Nick Farewell - Arbor Group
John Nelson (ph) - Unidentified Company
Operator
Good day ladies and gentlemen and welcome to the third quarter 2012, Network Equipment Technologies Inc. earnings call. My name is Erin and I will be your coordinator for today. At this time all participants are in a listen-only mode. (Operator Instructions).
I will now turn the presentation over to your host for today’s conference, Ms. Leigh Salvo with Investor Relations; please proceed.
Leigh Salvo
Welcome everyone to our call this afternoon, during which we’ll discuss results for Network Equipment Technology, third quarter fiscal year 2012. With me today are Nick Keating, President and CEO; and David Wagenseller, CFO.
In keeping with the Safe Harbor provisions of the Private Securities Litigation Reform Act, I want to remind everyone that we’ll be making some forward-looking statements and projections today, including those relating to future revenue, operating results and financial condition.
Investors are cautioned that these statements are based on current estimates and assumptions that involve risks and uncertainties that might cause actual results to differ materially from those expressed or implied in the forward-looking statements.
These risks and uncertainties may include our ability to develop and commercialize new products and product enhancements, success in building new sales channels, achieving broad market acceptance for our products, the status of relations with and performance by third-party technology providers, challenges of managing inventory and production of products, certifications for new and existing products, compliance, controls and other government regulations, federal government budget matters and procurement decisions, circumstances regarding specific sales that can affect the recognition of revenue, and other risks, including those identified in the company’s filings with the SEC, including Forms 10-K and 10-Q and in other press releases and communications.
The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Additionally, though an audio archive of this call will be available on the company’s website for at least 12 months, the statements made on this conference call are only made as of February 1, 2012 and we disclaim any duty or intention to update forward-looking statements.
In addition to financial measures presented in accordance with GAAP, we’ll also be discussing certain non-GAAP financial measures that are adjusted from results based on GAAP to exclude certain expenses, gains and losses. These non-GAAP measures should not be considered a substitute for or superior to GAAP results. Please refer to the press release issued today for reconciliation’s to GAAP and further detail regarding non-GAAP measures. The press release is posted on our website.
Our agenda today begins with David Wagenseller, who will provide a detailed review of our financial results. Nick Keating will then comment on the quarter’s business and operational highlights, and David will then offer closing comments before we open the call for your questions.
At this time, I’ll turn the call over to David.
David Wagenseller
Thank you Leigh. In the press release issued today and available on our website, we reported that total revenue for the third quarter of fiscal 2012 was $11.2 million, down 32% from the prior quarter and down 20% from Q3 a year ago.
Product revenue was $7.1 million, a 45% decrease from the prior quarter, and a 33% decrease from the Q3 a year ago. Product revenue from our enterprise business was $5 million, down 36% from the prior quarter and up 17% from Q3 a year ago. A decline from the prior quarter reflects a large sale of our IP-based NX1000 platform that occurred Q2. Excluding that sale, and looking only at our voice products for UC applications, revenue from sales of those products to enterprise customers has continued to increase.
Product revenue from our governable business was $2.1 million, down 59% from the prior quarter and down 67% from Q3 of a year ago, reflecting the continued federal government budget delays and the trend to reduce defense spending.
Service and other revenue was $4.1 million, up $635,000 compared to the prior quarter and up $744,000 compared to Q3 for the prior year. Service revenue improved over the prior periods from contract renewals and increased professional services for both enterprise and government customers.
Gross margin as a percentage of revenue was 35.1% down two percentage points from the prior quarter and down one percentage point in Q3 of the prior year.
Product gross margin was 26.2%, down 10 percentage points compared to the prior quarter and down 15 percentage points from Q3 of the prior year.
The decrease from the prior quarter is primarily due to additional inventory reserves for our Promina product and from lower product revenue on fixed manufacturing costs. The decline from the prior year was the result of additional inventory reserves for legacy products, lower revenue and the mix of products sold.
Service and other gross margin was 50.3% up 11 percentage points from the prior quarter and up 30 percentage points from Q3 of the prior year. Service and other costs are relatively fixed, so service margins are affected by fluctuations in service revenue. The increase compared to the prior year was also due to the expiration of our revenue sharing arrangement with CACI, which expired in December of 2010.
Before reviewing operating expenses in the third quarter I would like to briefly note that during the first week of January we announced a range of cost saving measures to be implemented during calendar 2012 that we believe can reduce our operating expense up to $18 million on an annual basis.
Operating expense in the third quarter was $11.7 million, down $1.3 million from the prior quarter and down $1 million from Q3 of the prior year. The decline from the prior quarter largely resulted from a bump in second quarter expense due to the inclusion of a catch-up 14 week under our 445 fiscal structure which occurs every six years or so and resulted in additional expense for fixed cost incurred during the extra week.
The decline from the prior year was primarily from lower sales and marketing expense from the reassignment of technical sales support personnel to our service organization for the increased support requirement, following the termination of the CACI arrangement and no restructure as it was in the prior year.
Total company headcount was 250 employees at the end of Q3, an increase of four from the prior quarter and an increase of 15 from a year ago. Today total headcount is down to 215 as a result of the restructure actions in the first week of January.
Sales and marking expense was $4.7 million in Q3, down $472,000 compared to the prior quarter and down $584,000 compared to Q3 of the prior year. The decrease from the prior quarters, primarily from lower commission expenses on reduced product revenue and from having one less week of salary payments compared to the extended fiscal Q2.
These decreases were partially offset by non-recurring costs for field trial (ph) units in connection with the release of the UX 1000 product. The decrease from the prior year resulted from the reassignment of technical sales support personnel to our service organization as mentioned earlier.
R&D expense was $4.6 million in Q3, down $496,000 from the prior quarter and down $163,000 from Q3 of the prior year. The decrease compared to the prior quarter resulted from having one less week of salary expense compared to Q2 and lower consulting expense and engineering related materials for development efforts. The decline from the prior year results from small decreases in travel and entertainment, engineering materials for development and depreciation expense.
G&A expense was $2.3 million in Q3, down $318,000 compared to the prior quarter and up $68,000 compared to Q3 of the prior year. The majority of the decrease in the prior quarter was lower consulting fees. The increase in the prior year results are from higher consulting and audit fees, partially offset by lower compensation related expenses and outside legal expense.
Other expense was $78,000 in Q3 compared to expenses of $38,000 in the preceding quarter, an income of $65,000 from Q3 of the prior year. The income in the prior year was primarily from foreign exchange fluctuations and realized gains on investments that incurred in fiscal 2011.
Net interest expense was $478,000 in Q3 compared to $456,000 in Q2, and $256,000 in Q3 of the prior year. With lower cash balances and lower yields on our investments, the declining returns on our portfolio are offset by the interest expense from our debt.
The company reported a net loss of $8.4 million or $0.27 per share in Q3. On a non-GAAP basis the net loss was $7.7 million or $0.25 per share. Cash and investment balances were $36.9 million at the end of Q3, down $8.5 million from the end of Q2. The reduction resulted primarily from cash used for operations and to a much lesser extent from delayed collection activity from accounts receivable.
Accounts receivable were $11.6 million, up $630,000 from Q2, primarily due to three large accounts, which collections got delayed beyond the end of the quarter. With these delays DSOs went to 95 days, increased 29 days sequentially, but our expectation for year-end is that DSO returned to our expected range between 60 and 70 days as we collect on the delayed account. Net inventory, including long-term inventory classified and other assets was $5.2 million at the end of Q3, down $318,000 from the end of Q2.
Now I’d like to turn the call over to Nick Keating, our CEO.
Nick Keating
Thank you David. As I do each quarter, I’d like to give all of you some additional detail on our operations strategy and development in our targeted markets. As David commented, we implemented a restructuring of our business last month, with the goal of accelerating our return to profitability, simplifying our organization and refining operations.
Following major releases in our UX series product line and with most of our significant hardware development initiatives complete, we thought it was the right time to focus our resources on markets with the largest growth potential, specifically the Unified Communications and the emerging Enterprise Session Border Controller or eSBC market.
Further with the continued uncertainty in federal government legating plans and continued delays in program rollouts, it was necessary to reduce continued investments and legacy products for that market and rather redirect our resources on expanding customer relationships with our new products in both the enterprise and government sectors.
Revenue from our new product lines that address the Unified Communications market have been growing and is up sequentially and year-over-year. Although the growth rate has not yet hit an inflection point, it is apparent that significant shift has taken place in our business and I am encouraged by growing support from Microsoft Lync worldwide within the enterprise market. Today more than 75% of our product revenue comes from our next generation switching platforms or enterprise customers and government agencies.
In January Microsoft’s second quarter financial results indicated that Lync revenue had grown 30% year-over-year. In comparison, during our six-month period beginning July to December 2011, NETs UC revenue grew approximately 40% and that’s during the six-month period and our new UC customer wins grew by 36% over that same six-month period.
To give further color to that, in this past quarter we added nearly 60 new Unified Communications customers, as we continue to see approximately 50 to 60 new customers each quarter. Through our network of integrators and resellers, the significant direct touch by our sales and sales engineering professionals, our UC product portfolio continues to generate new and follow-on wins with key customers worldwide.
Our two best performing regions during the quarter were North America and Europe. Regional wins included the following. In North America one of the largest cosmetic and beauty care companies in the world, with over $1 billion in revenue and 5000 employees. One of the world’s leading car rental companies, with over 10,000 locations in more than 175 countries. A worldwide metal packaging company with manufacturing operations on four continents with 14,000 employees. A supermarket chain with $6.0 million in revenue and more than 232 retail stores across the eight mid-Western states.
A diversified designer manufacturer and distributor of engineered and applied products, with approximately 4,000 employees at more than 60 different facilities in 11 countries. A leading oil recycling and refining parts cleaning environmental solutions company with more than 4,000 employees in customer locations throughout the United States, Canada and Puerto Rico and also one of Canada’s largest energy company’s with worldwide operations, 4,400 employees and more than $18 billion in revenue.
Turning to Europe, new customers in the quarter included a Northern European shoe manufacturer and retailer, with more than 17,000 employees and more than 4,000 branded sales locations throughout the world. One of the most popular domestic TV networks in France, with over 4,000 employees and more than $4 billion in revenue; One of the world’s leading providers of aerospace insurance; Scandinavia’s largest independent research organization with more than 2,000 employees; a Belgian manufacturer of advanced metal transformation and advanced materials and coatings, with sales of approximately $7 billion and more than 28,000 employees worldwide; one of the world’s largest aeronautical components manufacturer; a French distributor of packaging throughout Europe with 17 subsidiaries, serving over 500,000 customers in 14 countries; and a Paris based organization dedicated to global development with 34 member countries around the world.
In the Australia, New Zealand region, wins in the second quarter included a provider of domain names, web hosting and business products to hundreds of thousands of businesses and individuals. Two universities, including one with three campuses and 35,000 students and Australia’s only regional, multi sector university with 25,000 students; organization of eight local and regional councils that is responsible for all the areas transport services and a nationally diversified project delivery construction planning and management company with more than 300 employees.
In the Asia Pacific region we had several notable new customer wins in Japan, including a $10 billion manufacturer of electronic materials components and recording media with nearly 90,000 global employees; a large auto parts manufacturer and a 100,000 employee architectural engineering firm.
In the Middle East we are included in a Microsoft Lync deployment in a Middle Eastern country’s Ministry of Health, which oversees 244 hospitals, 2,000 healthcare facilities and over 250,000 employees. Other customer wins included a hospital with 85,000 employees, a producer and distributor of liquefied natural gas that is one of the largest public-private joint ventures in the Middle East region and one of the Middle East leading industrial groups that includes 30 companies and exports it’s product to over 45 markets worldwide. And finally in Latin America, we closed one of the regions largest private banks.
Overall, sales in the quarter represented a diverse cross section of vertical industries, with concentrations in industrial, automotive and energy, government, engineering services and construction, high tech consumer goods, healthcare and education. Extending Unified Communications to remote branch offices poses major challenges for enterprises. These challenges include providing disaster recovery, local voice impact service, remote management and implementing tools for real-time diagnosis of network issues.
In December we released for general availability our newest product, the UX 1000, a multi-function single box appliance that solves these IP communications challenges for small to mid sized branch offices and has already been recognized as the 2011 Internet Telephony Product of the year.
With the addition of the UX 1000, we significantly expanded the range of opportunities that can be addressed by the U.S. series for Microsoft Lync applications in many verticals, including government, manufacturing, education and technology. Achieving product certifications is another key driver in the sales growth and the pursuit of new market opportunities.
We have successfully completed several Microsoft qualifications under the Unified Communications open interoperability program. This program ensures seamless set up support and the use of qualified telephony infrastructure with Microsoft’s UC software. I believe that today NET has the broadest product portfolio called under Microsoft’s Unified Communication’s open interoperability program for Lync server 2010 and for Office 365.
Recently we achieved certification for our Tenor VX and UX series in eight different applications with more in process. Recent qualifications include for our Tenor series, the Tenor BX was qualified as a basic gateway for Microsoft Lync. Our VX series was qualified as a session border controller for office 365. Our UX series, both the UX 2000 and the UX 1000 received several qualifications, including as a Lync, Microsoft Lync enhanced gateway and as a Microsoft Lync small business appliance and our UX 2000 received an additional qualification as a Microsoft Lync Session Border Controller.
We are continuously expanding our footprint in this SIP trunking market by expanding our coverage through certification, so that our products can be installed in customer premises as an enterprise session border controller for those customers who signed up for a SIP trunking service. Last quarter we completed certifications that included three carriers of Australia and New Zealand, one in the US, two in Europe and one in Russia.
In summary, we continue to leverage our strong global market position and our technology leadership in the Unified Communications market to drive revenue growth for the long term. With partners like Microsoft, HP and Dell, we are constructing a best in class channel program by investing in partner enablement and capabilities. We are committed in working with our partners to deliver the technology and services necessary to compete and win.
The advances of our product portfolio, including the recent release of our UX 1000 enable our extensive global partner community to unify network architecture and strategy, to simplify the complexity of an enterprise UC environment. NET is dedicated to developing complete technology solutions that enable customers to meet their business objectives, from improving operational efficiency to better managing communications or implementing cloud based initiatives.
Now, I’ll turn the call back to David for closing remarks. David.
David Wagenseller
Thank you, Nick. As Nick mentioned, the recently released UX 1000 expands our range of solutions for enterprise customers, implementing Unified Communications Application. We believe we have the best products and are now poised for future growths in the enterprise markets we are addressing.
However, the current economy and the rapid decline of our federal business has hampered our ability to grow the top line and return to profitability. For those regions we have announced a series of cost reductions last month to streamline the operations throughout the company, to accelerate our return to profitability.
With that said, it is unlikely the total revenue in the second half of our fiscal year will match or exceed revenues in the first half. We do expect revenue for our UX series to increase in the second half compared to the first half; however, the revenues from that growth will likely be offset by declines in product revenue from government customers and from other IP based product sales to enterprise customers.
Operator, this concludes our prepared remarks. We would like to open the call now for Q&A.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Brian Swift from Security Research. Please proceed sir.
Brian Swift - Security Research
Thank you. I got a couple of questions. One, based on what your anticipated, cost reductions would come from your restructuring. It can only get you about half way to the breakeven level, so unless your margins are going to get a little better and maybe that’s another question is, what’s the margins on the UX 1000 versus the 2000? Is there much difference in that and so that what would be the implied top line, breakeven level when the dust settles from the two trenches of your announced cost reductions.
David Wagenseller
Hi Brian, this is David Wagenseller. Let me answer both those questions. First of all, the gross margin or the UX 1000 is slightly better than the 2000. The 2000 has been increasing, but we’re manufacturing that UX 1000 offshore and we are able to take advantage of the cost benefits in doing so, so those margins are slightly better right now and we expect those to improve as well with more volume.
And then I think the answer to your second question is essentially where do we believe our cash, the breakeven number is. By the end of this calendar year, when we have implemented all those cost reductions, we expect our top line breakeven number to be between $16 million and $18 million and that’s going to depend on what we sell and who we sell to.
Brian Swift - Security Research
Okay, and if I can ask a couple of more questions. One, last year when we were visiting with you, in addition to the 1000, at that time was under development, I think you had a 3000 under development, as well as versions of at least the 2000 that would be aimed at the government side of the business. Can you comment on where you are with these programs?
Nick Keating
Yes, it’s Nick. We have a longer-term program. It was not a 3000, it was a 5000, which is a server-based solution. We have concluded that it’s unlikely that we would develop that on our own. It’s really suited for the server manufacturers and so for us to proceed, it’s most likely that we will reach out to one or more of the server manufacturers and see if we could jointly work on it, so there will be a blade that would go in to an existing server platform.
Now both the 1000 and the 2000 have a variety of different configurations. They are both highly configurable and very modular, so you’ll find very low end, under $2,000 versions of the 1000 predominantly for analogue applications, scaling all the way up to close to $10,000. The same is the case with the UX 2000.
So even though they are two products, they are really two product families and with the various modules and software elements, we have a lot of flexibility within those two products, of addressing both the hub and spoke side of the market and it’s really when we get into large enterprise or even carrier based solutions that you would use the blade version and as we have looked at our capabilities, we have concluded that it’s unlikely we would do that on our own, that we would need to partner with someone that had both, a sales organization that it calls on those large, high volume accounts and also an installed base or a server based solution.
Over the next year I’m going to be reaching out to companies that are well known server vendors to see if they wish to team with us to develop a high performance blade that incorporates both our software and a lot of our high performance chip technology that we’ve incorporated into the UX 1000 and 2000 for acceleration purposes and if that’s the case, then that product could well enter the market, not necessarily sold by us, but maybe sold in conjunction with a partner and that’s where we think that we are likely to be. I don’t see us funding development of that magnitude on our own as part of our effort to cut back significantly on our expenses.
Brian Swift - Security Research
Okay and just to elaborate on that, would that also in both the restructuring press release and the one today, you stress the fact that you are looking at the potential for raising some additional funds for the company and the implication was that a strategic partner might be the direction that you’re looking.
You were just talking about a couple of examples of partnering more product wise, but should we – I mean I would expect a restructuring, I mean a strategic partner will certainly be less punitive to share holders than to apply for something like that at this juncture. Would it be safe to presume that that’s kind of the direction that the company is pursuing if we are going to raise any additional money?
Nick Keating
Well, I think its fair to say that we are obviously exploring all possible scenarios, because one, obviously we would like to have a stronger cash balance sheet than we do today. But secondly, now that we’ve completed most of the development activates from the hardware and core software development standpoint, the applicability of what we’ve been able to accomplish could touch many different companies within the networking space.
To give you an example, when you have Cisco that comes in with all of their switches and routers, with the Cisco call manager, with their UC capabilities, they offer a complete wrap-around solution enterprise customers. Most of the other networking companies would feel exceptions are not very active in the UC space and so obviously that puts them in a competitive disadvantage when Cisco is offering a complete solution and they are only offering a partial solution.
So that’s where I think that we could play a key role in helping to enable the extensions of their technology that expands therefore into the Enterprise or even Session Border Controller area and so then its really a question of how would you structure relationships like that.
It requires us frankly to have a complete IT based Ethernet core solution with network management interfaces that are web-based and then to be able to function as a four peer on an IP network with routing and protocol conversion and so over the next few quarters you’ll see us accomplishing from a software standpoint the rest of that vision and I think that that open then the opportunity for a broad approach toward corporation that obviously probably will be limited to a couple of strategic partners rather than the industry as a whole.
Brian Swift - Security Research
Okay, I’ll let somebody else ask questions.
Operator
(Operator Instructions) Your next question comes from the line of Nick Farewell from Arbor Group. Please proceed sir.
Nick Farewell – Arbor Group
Thank you. David may I just get some clarity on a comment you made. I think in your comments about the fourth quarter you said you hope to achieve breakeven by the end of the calendar year. Did you mean calendar of fiscal?
David Wagenseller
I did not mention anything about when we intend to achieve breakeven. I said the top line for cash flow breakeven, was $16 million to $18 million.
Nick Farewell – Arbor Group
Right. I thought you associated that, that you might – you thought that had a timeframe associated with it. Perhaps I missed that.
David Wagenseller
No, I did not mention a timeframe with it.
Nick Farewell – Arbor Group
So hypothetically, purely hypothetically, because you’ve indicated you are not going to do better than $16.5 million in the fourth quarter, but if you did $20 million, just to make up a number, you would be breakeven in the fourth quarter?
David Wagenseller
In our fourth quarter right now, with the reductions that have occurred to-date, it would take $20 million to $21 million to be breakeven, so yes, that would be true.
Nick Farewell – Arbor Group
And that’s because of the timeline of working off the reductions. I’m not quite certain why there is a timeline? Once you’ve taken a restructuring change, is that not already occurred or is there some expenses that are taking time to work down?
Nick Keating
There are additional cost reductions as well as gross margin improvements and other market factors that all weave into the goal of achieving breakeven or profitability. I’ll give you an example; we have some excess capacity in some of our locations. We are trying to find ways, obviously shrinking that footprint or moving to a smaller footprint. And there is a whole series of other actions that we have planned throughout the rest of the calendar year, that drive us further towards lowering our breakeven to the area that David talked about, but we have not disclosed specifically what those actions are. We do have an internal plan however.
Nick Farewell – Arbor Group
So what you’re suggesting is that’s not going to be visible for some period of time as opposed to a fiscal year end, like a March year end, if it could extend out a couple of quarters at least to effect the changes you are talking about.
Nick Keating
What I’m suggesting is, is it is a phase program that will be going on throughout the calendar year 2012, and it ties to a number of other internal milestones that we have and other priorities. So as the quarters unfolded, we’ll obviously share those with you.
Nick Farewell – Arbor Group
Okay and just to look at the specifically the product revenue, ex-military; if I had these numbers right, either Nick of David, the second quarter had a, I think it was a $1.8 million or $1.9 million sort of extra UX sale and you take that out and it was say five, nine or six, something to that nature and third quarter was $5 million if my numbers were accurate. So that sounds like that’s down sequentially. Am I missing something?
Nick Keating
It wasn’t UX. We have a product our NX 1000, which is an IT based switch and we had enterprise revenue in Q2 that we took in and that was a specific project. We are continuing to promote that product, but it is not a UC, it’s an IP switching platform. It could work in conjunction with a UC network, but the customer and it’s a very large federal aviation type international Asian customer.
It is a very sizable project. Our sales team in Asia are continuing to pursue those, but it is an ancillary initiative and I don’t consider that to be in the same category as the core initiatives such as either by communications or Enterprise Session Border Controller. But when those close they can be very financially rewarding.
Nick Farewell – Arbor Group
Well, but it gets back to the point Nick that if you take out that $2 million or $1.9 million if I recall correctly, you still end up with a number that is actually down sequentially, if my numbers are accurate.
Nick Keating
No its not.
Nick Farewell – Arbor Group
Okay, so what am I missing? I thought you did about seven, eight sort of enterprises is what I noted down.
David Wagenseller
Nick, this is David. That’s correct. We reported $7.8 million in Q2 for enterprise revenue and I’m not sure what you are referring 1.9, because we did in excess of a $3 million combined for those products in Q2.
Nick Farewell – Arbor Group
Okay so my 1.9 whatever I picked that up was not accurate?
David Wagenseller
That’s correct.
Nick Farewell – Arbor Group
Well okay, well that helps answer it; I appreciate that. And Divide once you get speak, lastly if I can ask you the next question. Can you give us any kind of guidance as to what you think the cash burn might be for the fourth quarter?
Nick Keating
Well, let me go back and comment on one of your earlier questions. We will see some benefit from the cost reductions that we announced in January in Q4. And you will be able to track the benefit each quarter during the calendar year, because we expect to see some reductions almost in each quarter and so you will be able to see that.
As far as the current quarter, the cash burn; because our receivables will be higher, it will be definitely much less than what you just saw. But I have not disclosed the number exactly, because it’s too early in our quarter to give you a number with certainty.
Nick Farewell – Arbor Group
Right. Just to make sure I understand, because you are – if you haven’t already are going to collect on those three receivables that slipped into this fourth quarter, perhaps that’s a timing issue in accounts receivable, you hope – you don’t know, but you hope that fourth quarters cash burn will be less than $8.5 million.
Nick Keating
I would go further to say it’s more than a hope. But don’t forget, we have some severance payments.
Nick Farewell – Arbor Group
That’s why I ask.
Nick Keating
Ii impacted employees and that will offset the benefit, but yes, we expect our cash reductions in Q4 be much less than Q3 for the reasons we mentioned.
Nick Farewell – Arbor Group
Right. With respect to those three accounts receivable that slipped into this current fourth quarter, did any of them slip in because of related acceptance issues as opposed to purely timing sign off.
David Wagenseller
In one case it was a very large project with over 140 different notes in a variety of different locations and frankly not all of the units were installed and integrated in, but they were going through functional tests and it just took longer to get all of them installed that I think that the customer expected.
Nick Farewell – Arbor Group
Okay, has that now been fully delivered and so you are in a mode in which collection is likely in the fourth quarter.
Nick Keating
Yes, you’re right. I hate to do this, but I think we ought to give others the opportunity.
Nick Farewell – Arbor Group
Sure, absolutely, I’ll come back on.
Nick Keating
Okay.
Operator
(Operator Instructions). And your next question comes from the line of John Nelson (ph). Please proceed.
John Nelson (ph) - Unidentified Company
Yes Nick, I was kind of waiting for the inflection point. I wasn’t sure you are near that. It sounded like you said that the inflection point has arrived. Can you talk about the current activity out there and also, could you give us any idea of what you think the market opportunity is for you guys over the next year in the UC phase?
Nick Keating
I can give you some impressions from a macro standpoint John. It appears as those the acceptance of adoption of the Microsoft product is being well received global bases. I pointed out to you before that until July of 2011 it was being managed by a smaller incubation group and their new fiscal year beginning in July. It was made available to the Microsoft global sales organization.
We’ve seen a tremendous amount of initiatives and successes. It certainly a competitive market for everybody out there, whether you’re an NET or an HP or a Dell or a Microsoft of a Cisco or Avaya, so I wouldn’t want to leave the impression that we don’t live in a very competitive challenged environment. But we feel good about our alignment, both with our distribution channels and with our technology partners and then with what I would say our akin companies like the polycoms and plantronics of the world that we find ourselves co-marketing with.
So in general I feel much better about the market opportunity today than I did this time last year. I think the introduction of our UX 1000 fills out a critical part of the network solution. It allows us to address the small and medium sized locations. Keep in mind the 1000 can also be used as an Enterprise Session Boarder Controller in customer premise equipment environments and I think it is very competitive, both price and feature wise and so as the enterprise session boarder controller develops, the market develops, then that’s really a second leg of the stool, because not only is the UC market important, we believe enterprise session border controller is equally as important and it can be used either together with a UC solution or simply terminating SIP trunking sessions at the delivery standpoint.
Our sales teams are very efficient these days. I strengthened our organization on the west cost, which was one of our weak areas. We now put personnel in the Nordic area; we are seeing good traction out of that region. I was pleased with one of the strong wins we had in Japan. It was a very large enterprise customer and in general I think our sale organizations are doing as well as they could possibly achieve, just given the competitive environment out there.
Now, let me highlight a few other things that are happening. We have been emphasizing our professional services and you saw an increase in revenue, in service, that’s government service contract renewals, that’s enterprise service contract renewables, those are training revenue, those are installation revenue and we are now at the stage that we are quoting professional services assistance to some of our key partners, where we will actually put our personnel on-site, assisting them in the roll out of their networks and deployments that we think that that will accelerate opportunities.
If we are successful in that area, I would certainly forward invest in other personnel, because I can providing those services to other of our partners – it’s fare to say that most of the integrators have scaled back during the recessions and in some cases don’t have enough confident field personnel to roll out these very complex and very global networks.
So, we are better positioned today than we have in probably the last 15 years as an enterprise provider. And I think this is ours to prove that when the market is there too that we can get a disproportionate share of the market together with our partners. We are involved in some of the most complex UC rollouts right now that exists and with a large percentage of the largest UC companies that are embracing the Microsoft solution.
So, I think it’s going to be execution and market acceptance across the board. We see early stages now of rollouts on the enterprise session border controller. I’m trying to ramp up the amount of certifications that we are doing.
Frankly I think this last quarter, with the eight or nine that we accomplished we just scratched the surface, but there’s a lot of major carriers around the world that we need to get certified with and then hopefully find ways of getting our equipment into their customers either through our reseller arrangements with them or bringing our local distribution partners in that will provide that equipment for there termination point with their enterprise customers.
So I say in general the opportunity has never appeared as great over the last few years as we have been perusing it and I think the inflection point is really one where the industry as a whole, wise as more and more adoption takes place and its not just adoption, but its also the confidence level for more aggressive deployment to all other operations around the world, not just their select headquarters location.
John Nelson (ph) - Unidentified Company
Can you put any size on the market for like the large enterprises or the smaller and medium sized enterprises?
Nick Keating
I think the market opportunity for us varies tremendously, from a few $100,000 to multi million dollar opportunities. But that really is dependent upon how broad the deployments are, likewise the configurations, because keep in mind, both the UX 1000 and 2000 have the whole series of incremental hardware and software modules that the net selling price can increase as much as 3X from the base level and that’s really dependent upon the complexity and the applications that are running on top of it.
So I think the overall dollar opportunity is large, but we are not totally in charge of the deployment, that’s a relationship which we are fact in it, but the systems integrator, the customer, the other major players. Most of these networks that we see today, continue to include switches, routers, load balancers and so these are very large upgrades in deployments on which we are an element; I think a strategic element but there are many other companies that are enjoying revenue from the same deployments.
John Nelson (ph) - Unidentified Company
Well, what can you say about it; you say you won the supermarket in the intention to roll out to the 232 stores. I’m just trying to get some examples there. Are you seeing its worth? Are you winning business where they are going to roll it out to remote locations?
Nick Keating
This is an area which is of great interest to us, the retail side of the business, because if they can justify the investment using a UX 1000 in their retail locations and I mean this generically rather than specifically, this group of the mid-west.
I’ve got a customer right now in France that has retail stores all over the world. We are kind of at their distribution center locations now, but I’ve got products either a inexpensive analog UX 1000 or an analog Tenor, with price points where I think that should they choose to deploy, I can probably get down to even some of their smallest retail locations from a price standpoint.
And we have certainly been in discussions with many different firms that have retail like locations and I think that the next year will tell us how quickly that adoption will take place and whether our class of product will be used in those retail deployments.
John Nelson (ph) - Unidentified Company
Thank you.
Operator
And your next question comes from the line of Brian Swift from Security Research. Please proceed.
Brian Swift - Security Research
You may have mentioned more comments when I had to switch phones when you are on your general comments, but I don’t think I heard about any kind of color on business going forward where it’s just that the second half wasn’t going to be as much as the first half and there’s only quarter to go. Maybe, can you give me a little bit of a color on our pipeline of business? I know you had this one big UX 1000 order in the previous quarter that’s kind of really dealt the last quarter. Do you have more of these larger deployments that you have some visibility on, that can give us a little bit of flavor on how the calendar year is going to develop.
Nick Keating
Well, we will provide guidance when we get into our new financial year, which starts in April. So I do not want to get into discussing guidance for the forthcoming fiscal year, beginning in April. So our focus right now is in completing this quarter, continuing to implement cost reduction programs, improving gross margins on our existing products, getting additional software and hardware features out that will allow us to sell more incremental hardware and software modules that improves the net selling price of the existing products, and continuing to win new large accounts, particularly those that involve many offices, many braches, many locations, whether in this country or around the world and continuing to get our distribution reseller and integrator base familiar with the 1000, so that as broader based deployment opportunities evolve, that the 1000 is a key element within the specification for our broader based network.
I would say that certainly one of the factors that we’ve encountered prior to the availability of the 1000 is that the UX 2000 was ideally suited for large headquarters locations, data centers, R&D facilities, distribution, but did not have the financial competitiveness to reach down into smaller locations. I believe we have fixed that issue now with the 1000.
We’ve only had the 1000 in the market for five weeks now. We had certainly some production prototypes. They were put in the hands of key resellers and perspective customers, but we are just now getting feedback both from a product analysis standpoint and from some deployment of the 1000 and I think we are going to know a lot more with that longer term opportunity. It looks like as we finish the rest of the quarter, i.e., there are two more active months in the quarter, February and March. So I think right now I would speculating and I think we are going to have a lot more hard data as we finish Q4.
Brian Swift - Security Research
Okay and just along those lines. When you look a year of so down the road, what would the ratio you think would be between the 1000 and the 2000? Would it be 70% or 80% of the population out there?
Nick Keating
Well, I think it will follow the normal course of the way our deployments work and I don’t think that’s going to change. When a customer decides to implement a UC solution, it typically starts at a data center, headquarters locations, key strategic locations and that’s typically the first six to nine months of the deployment. So for new customers I think that the 1000 deployment will be the second phase of their company wide deployment.
In the shorter term those, keep in mind that we have a number installed customers that have widely installed the UX 2000s and its those customers that are already existing customers using Lync, up and running, satisfied with what we’ve been able to do, that now are early customer opportunities for the UX 2000.
Now if you project that further out, it would not surprise me and this is all dependent upon the decision by these large enterprise customers to deploy similar UC solutions down to their smaller headquarters locations or host cloud based solutions in their own data centers or with a managed service provider. In any event we will see revenue coming out of that and I think the key in the 1000 is the broader extension of UC to the rest of the knowledge workers in the companies and to their smaller location.
Brian Swift - Security Research
Okay. But you wouldn’t guess at what the ratio would be.
Nick Keating
I said it one time, I though it could be six or eight to one.
Brian Swift - Security Research
Right, okay.
Nick Keating
It could be four or five to one, I could be wrong. We are going to get a good feeling for that I think very quickly. I have one customer right now that’s standardized of 2000s, that’s a broad deployment. We’ve got well over 150, 200 locations to do this year, calendar year. Its possible that some of those will end up being 1000s, even though right now they are all designed in as 2000s. There’s advantages to go both ways. 2000 has more redundancy than the 1000. The 1000 has a better price point than the 2000 and in today’s world you’re going to have to make the call between price versus redundancy.
Brian Swift - Security Research
Okay. I mean you’ve been adding 60 or so customers a quarter for quite a few quarters now. So there should be a number of these customers that are in deployment of whatever.
Nick Keating
Yes. Obviously in competitive situations we will aggressively promote the 1000 in our installed based, but we see them as early adopters.
Brian Swift - Security Research
Would it be meaningful to know that out of the 60 customers the ratio between UX 1000 and 2000 or would they all be combinations.
Nick Keating
Most of them leading with the 2000. We have very few that lead with the 1000, but if you take this mid-west retail, they are going right now into their distribution centers and headquarters locations and major purchasing.
My greatest pleasure would see that ultimately the 1000 or a Tenor would end up in all of their retail locations and the nice think about it is that we have a broad product family. We’ve got the Tenor family, the VX family and UX and these are price points that will scale from a few $100 up to $50,000 for a device. So now our product offering is the broadest that we see in the market place today.
Some people may have more models that we do, but what we have is an integrated solution and particularly between the 2000 and 1000, it runs the same code, has the same network management system, uses the same basic chip technology, some are bigger, some are smaller, but we are able to scale now with a single architecture from lets say as little as 15 or 20 people in an office, up to somebody that’s sitting in campus of 50,000 or 75,000 people.
Brian Swift - Security Research
And one last thing; while you say your only five weeks since you’ve been delivering the 1000, what are you seeing in terms of the difference in ASPs for the 1000 versus the 2000.
Nick Keating
Well, what usually happens with the 2000 is that they buy a relatively mid-range initial unit and then upgrade it later on, because the 2000 is designed, so that if you want more processing capability you will only slip in additional DSP cards.
Right now I’d say that the 1000 is about 40% of the 2000 from a cost standpoint, but I think that over time as the 2000s become more populated, i.e., bigger, more features, more processing capability, the ratio is going to be... Did you hear me? I think the ratio from a cost standpoint could get to more like four to one; that’s the UX 2000 is four times more expensive than the 1000.
Brian Swift - Security Research
Okay, so it’s like 30% or 40% now. It could go to 25% of something.
Nick Keating
Right.
Brian Swift - Security Research
All right, thank you.
Nick Keating
Thank you.
Operator
And this concludes the question-and-answer portion of the call. I would now like to turn the call over to Leigh Salvo for closing remarks.
Leigh Salvo
I want to thank everyone for joining us for the call today. This concludes our remarks and questions for the third quarter of fiscal year 2012 for NET. Thank you very much.
Operator
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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