Radisys' (RSYS) CEO Brian Bronson on Q4 2015 Results - Earnings Call Transcript

| About: RadiSys Corporation (RSYS)

Radisys Corporation (NASDAQ:RSYS)

Q4 2015 Earnings Conference Call

February 09, 2016 05:00 PM ET

Executives

Brian Bronson - President and CEO

Jon Wilson - CFO

Analysts

Mike Latimore - Northland

James Kisner - Jefferies

Tom Diffely - DA Davidson

David Duley - Steelhead

Eric Gomberg - Dane Capital Management

Orin Hirschman - AIGH Investment Partners

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Radisys' Fourth Quarter Earnings Call with Brian Bronson, Radisys' President and Chief Executive Officer; and Jon Wilson, Radisys' Chief Financial Officer. As a reminder, this call is being recorded. Later, we will conduct a question-and-answer session. [Operator Instructions]

Mr. Wilson, you may begin.

Jon Wilson

Thanks, Skinner, and good afternoon, everyone. Thanks for joining us on the call. Today, we will provide an overview of our fourth quarter business and financial highlights, as well as our expectations for the first quarter and full year 2016. We will then open up the call for your questions.

Let me caution you that any forward-looking statements regarding the company made during the call involve a number of risks and uncertainties and, therefore, we caution you not to place undue reliance on them. Factors that may cause actual results to differ materially from those in our forward-looking statements are discussed in today's earnings release and in our SEC filings, most recently in our Form 10-K for the year ended December 31, 2014. All information provided in this call is as of today. Radisys undertakes no duty to update any forward-looking statement to conform to actual results or changes in the company's expectations.

In addition, during the call, we will discuss some non-GAAP measures and have provided a GAAP to non-GAAP reconciliation in today's earnings release.

With that, let me turn the call over to Brian, who will provide an update on the business and our fourth quarter results.

Brian Bronson

Thanks, Jon, and good afternoon everyone. Our fourth quarter results capped off a tremendous year for Radisys as we returned to full-year profitability and delivered significant growth in our Software-Systems business while at the same time investing for long-term growth in both segments. We are now poised to capture increasing share of wallet from communication service providers as they look to Radisys to help them move from today's network topology to the data center and virtualized world.

Before I move into key updates from the fourth quarter, let me recap highlights across our business from the full year. First, Software-Systems revenue grew 35% from just over $40 million in 2014 to $55 million in 2015 with growth in all three of our product lines. We shipped MediaEngine orders in excess of $14 million to a large Asian carrier in support of the largest Greenfield LTE rollout in the world. Today, we have shipped over $20 million of product to this carrier.

We formally released our first FlowEngine product, the TDE-500 which combines the capabilities of purpose-built load balancing, switching and routing into a single box while enabling service oriented networking within a software defined network architecture driving faster time to revenue and significant savings for operators. For the year, we shipped over 5 million in FlowEngine products exceeding the high end of our original guidance of 2 million to 5 million with the majority of this business coming from our Tier 1 North American carrier customer.

Our CellEngine product line returned to growth year-over-year as a result of initial royalties on shipments of small cells and closing new strategic licensing deals with large Tier 1 customers. We generated $9.7 million in operating income from our Embedded Products business while at the same time driving core EP revenue growth supporting the growing number of deployments in our Software-Systems business and incubating our new data center product.

We exceeded initial full year guidance for both revenue and earnings while at the same time accelerating key R&D programs and hiring initiatives in support of our Software-Systems strategy. And finally, and maybe most important in this release is, we secured orders totaling approximately $19 million, the majority of which is contained in deferred revenue at year-end for our new data center product targeted at telecom and cable operators which we expect to launch more broadly in the coming months. As evidenced from these statements, we made tremendous progress across every facet of our business in 2015 and are poised to continue driving growth in 2016 and beyond.

Let me now highlight the key strategic and financial progress items we made in each of our segments during the fourth quarter.

Revenue from our Software-Systems segment grew over 50% year-on-year to $15.7 million. In MediaEngine, we delivered an additional product to the large Asian carrier beyond the initial $11 million order we announced in May as this carrier continues to prepare for their network launch. As a reminder, this carrier is embracing our MediaEngine as the one Media Resource Function, or what we call MRF, for their entire Greenfield voice-over-LTE and voice-over-WiFi deployment enabling real-time media processing and a complete suite of other applications and enhanced services. While timing of future orders will be dependent on the success of this carrier’s rollout, I do expect more meaningful business from this account over time both in MediaEngine as well as other product lines.

We also continued to see deployment progress through our voice-over-LTE channel, specifically within Asia and Europe. While the broad market adoption of voice-over-LTE has been slower than our initial expectations, the funnel of opportunities through our channel partners remain strong and we continue to expect these partners to grow year-over-year in 2006.

Moving on to FlowEngine, we shipped initial commercial deployment orders to the Tier 1 North American carrier we are engaged with and continue to see progress as they move towards full commercial deployment. Given this momentum, we remain well-positioned to double revenues from our FlowEngine product line in 2016. We continue to target further opportunities with large telecom carriers and cable operators globally and expect these to accelerate into more meaningful trials during the latter half of 2016.

We also announced our formal partnership with Sanctum Networks which along with EZchip is our second strategic partnership within FlowEngine. Sanctum’s FDN controller is gaining strong momentum in the market and together our products deliver a combined solution for service providers to rapidly deliver rich network service offerings while reducing both cost and complexity of software-defined network deployments.

Our CellEngine product line had a strong quarter as we secured two new strategic license opportunities with Tier 1 accounts tied to the broad deployment of small cells in third world geographies, as well as test and measurement applications as carriers work to validate the interpretability of small cells within their networks. Our [indiscernible] opportunities within this product line remains robust and coupled with the expectation of royalty growth tied to LTE small cell deployments, this product line is poised for future growth as we enter into 2016.

Moving to our Embedded Products segment, revenue for the fourth quarter was $28.4 million with operating income generation of $1.6 million. We continue to do an excellent job servicing our core customer base as these customers value the collective product differentiation, flexibility and service and support capabilities we offer. Further, we are beginning to secure new design wins within these core accounts that we expect to stabilize this portion of business over the next few years.

And most importantly of note within our Embedded Products segment was the receipt of the orders totaling approximately $19 million for a new data center platform solution from a Tier 1 North American carrier. By the way, this is the same carrier that is embracing our FlowEngine product. This yet to be formally announced product is targeted at the data center infrastructure for telecom and cable operators and specifically supporting initiatives within this Tier 1 carrier to bring differentiated services into their network. Our team internally has been working on this initiative for over the past two years and this meaningful win provides initial validation of our product strategy.

While much of this initial order was deferred to year end, we do expect more orders from this carrier in 2016 and more importantly, we recently launched this product through our global sales team. Given the enthusiasm and interest, we are already in discussions with other Tier 1 carriers. As a result of this new initiative, we now expect Embedded Products revenue to grow modestly in 2016. Further, over time, we expect this new product to create strong pull-through for FlowEngine product family as well as other products and service opportunities. Stay tuned over the coming months for further announcements from Radisys on this exciting new product offering.

As I highlighted earlier, given the momentum of this new initiative and coupled with our growing Software-Systems business, we continue to accelerate hiring in sales and marketing as well as key CTO office and service and support personnel to ensure we capture the tremendous growth opportunities we have ahead of us. We will make strategic investments in these areas to secure long-term revenue growth while at the same time we're committed to delivering year-on-year earnings growth.

Before I turn the call over to Jon who will speak more about our fourth quarter financial results as well as projections for the first quarter and full year 2016, I did want to highlight that just last week we launched our new corporate website. Please do take a peak. The new site is yet another step forward for Radisys and what clearly outlines our product positioning as we work to help operators solve the complex challenges of next-generation networks.

Jon, over to you.

Jon Wilson

Thanks, Brian. Across the business, our team executed extremely well in the fourth quarter which allowed us to exceed the top end of our revenue guidance and beat the midpoint of our earnings expectations all while putting forth tremendous efforts to secure and deliver on the new data center product initiative within our Embedded Products segment which Brian highlighted previously. This new win is a testament to the value we continue to build across our business and sets the stage for Radisys to return to consolidated revenue growth in 2016.

With that, let me recap our fourth quarter results. Revenue was $44.1 million with Software-Systems revenue growth of over 50% year-on-year fueled by growth in all of our product lines. Non-GAAP gross margin was approximately 36%, up 280 basis points year-on-year and 250 basis points sequentially with gross margin expansion resulting from improved mix within our Software-Systems segment.

Software-Systems gross margins were 62%, representing a sequential increase of 280 basis points. Fourth quarter non-GAAP R&D and SG&A expense of $13.1 million was in line with expectations and largely the result of increased selling expenses. Non-GAAP net income was $2.8 million or $0.08 per diluted share compared to net income of $400,000 or $0.01 per share in the fourth quarter of 2014.

Switching over to the balance sheet, cash increased by $2.4 million to $20.8 million. During the quarter, we borrowed an additional $5 million on our Silicon Valley Bank line of credit to cover supplier payments of $5.4 million during the quarter associated with the $19 million order for our new data center product. Excluding these advanced payments, cash from operations would have been $3.4 million during the quarter.

Given the traction of our new product launch in support of telecom and cable data centers, we also announced today an extension to our Silicon Valley Bank line of credit. This extension renews our line through February 2018 and increases our borrowing base from $25 million to $35 million. This increased availability will ensure we have sufficient working capital to support this important new growth initiative.

Compares for our working capital accounts were meaningfully impacted by the large data center order we secured during the fourth quarter. However, normalized for this order, all working capital ratios improved sequentially. Fourth quarter accounts receivable increased $17 million as a result of receivables tied to shipments for our new data center infrastructure product and offset by strong collections across the remainder of our portfolio. Fourth quarter inventory increased sequentially $1.2 million to $16.8 million and accounts payable increased $15.8 million from the third quarter to $43.5 million resulting from the orders for our new data center infrastructure product.

Moving over to outlook for the first quarter and full year 2016, we expect Q1 revenue between $49 million and $52 million, representing year-on-year growth of nearly 4% at the midpoint. Software-Systems is expected to grow year-on-year with more modest growth from our Embedded Products segment resulting from recognition of deferred revenue from our new data center product and offset by a significant reduction in our base Embedded Products revenue which aligns to our expectations from that portion of the business.

First quarter non-GAAP gross margin is expected between 27% and 30% of sales, down modestly year-on-year as a result of the significant orders for our new data center product. Non-GAAP R&D and SG&A expenses are expected to approximate $13 million or flat sequentially as we continue to ramp hiring initiatives across our growth product lines and we expect first quarter non-GAAP EPS to range from a profit of $0.01 to $0.05 per diluted share.

For the full year 2016, we expect revenue to be between $180 million to $200 million. Software-Systems is expected to grow approximately 10% year-on-year while within Embedded Products we expect revenue to grow modestly over 2015 levels with our base business down approximately 25% year-on-year and offset by growth from our new data center product beyond the approximately $19 million order we expect to recognize in the first quarter.

Non-GAAP gross margin is expected between 33% and 34% of sales with continued expansion in Software-Systems gross margin offset by a decline in Embedded Products gross margin. Embedded Products gross margin will be impacted by our new data center product which we expect to be modestly lower than traditional Embedded Products gross margins and coupled with modest pricing pressure in our core customer base as we work to grow revenue from these core accounts.

Non-GAAP R&D and SG&A expenses are expected between $51 million and $55 million with accelerated spending in sales and marketing to support our key growth initiatives. And non-GAAP EPS is expected to range from $0.22 to $0.28 per diluted share.

Finally, while we don't expect significant headwinds from the recent global economic uncertainty, this economic uncertainty coupled with concentration from large customers may result in non-linear revenue growth in earnings on a quarterly basis in 2016 as we navigate the timing of customer orders.

Let me now hand the call back over to Brian for final remarks.

Brian Bronson

So, in closing, let me leave you guys with a few things. 2015 was a tremendous year for Radisys. We really have a tangible proof of what we've been working on over the last three-plus years, as I'm sure, all of you know, a strategy doesn’t turn to results overnight. We delivered on nearly every financial objective we set out at the beginning of the year while at the same time materially advancing the company forward.

Our Software-Systems segment remains poised to deliver double-digit long-term revenue growth rates despite a difficult compare with the results tied to a large Asian customer in MediaEngine. Maybe even more significant today is that we have turned around Embedded Products and are poised to return all of Radisys to revenue growth. As many of our current shareholders know, but maybe the overall market hasn’t recognized yet, is that we are onto something at Radisys and we're looking forward to see how 2016 unfolds.

So, with that, Skinner, I think we're ready to take investors’ questions.

Question-and-Answer Session

Operator

Absolutely. [Operator Instructions] And our first question comes from Mike Latimore from Northland.

Mike Latimore

Hi guys congratulations on the great year and strong start it looks like to the year so, congratulations. On the datacenter product and order here, I guess can you just elaborate a little bit more on the functionality you’re providing and little color on whether you’re replacing something or who the competitors might have been in this field?

Brian Bronson

So what I can tell you is that our product is definitely focused in telecom and cable I kept referencing in my prepared remarks and that's important because what it's not doing is currently the enterprise. And for the most part not even really targeting the OTT guys. So for us it's about migrating carriers from the central office to largely Greenfield telco-based datacenters. And what’s required and what's unique about those guys relative to again more standard enterprise or OTT datacenters.

Mike Latimore

And then, in terms of the guidance for the year, what gets you to the upper end of the guidance is it another order for the datacenter product or what would kind of get to the upper-end again?

Jon Wilson

Well, I think it would be a couple of things Mike. Certainly further traction in the datacenter initiative is one way we get there. I think also just accelerating growth in our software systems product lines, right. So, as you know, we had a fantastic year in MediaEngine this last year both with our channel partners beginning to ramp but then also from other large Asian carrier customer and their Greenfield LTE deployment. Challenging compare there going into 2016 but we do expect as Brian indicated more business from that account over time. And the way we get to the top end is further acceleration of both the channel partners within MediaEngine potentially timing of new orders from that large Asian carrier. And then frankly FlowEngine is beginning to accelerate from trials in second half into real revenue earlier than we currently expect. So I thing all of that gets us to the high end.

Mike Latimore

I guess on the royalty channel specifically, what does the visibility you feel like there kind of entering this year versus say entering 2015?

Brian Bronson

Well, it's better for some of our channel partners maybe no change for others. So if you think about those partners that were more meaningful for us, continue to be most meaningful for us such as Nokia, Mitel, I think the visibility is getting better. Don't translate that into you know revenue from this will grow very nicely but it still not to the level that we experienced with this Asian carrier. So I do think that there is upside there but the bigger swing factor in MediaEngine is what this Asian carrier does in 2016, how successful they are at launch which as you probably know, they are in the middle of that right now.

Mike Latimore

I guess just on that Asian carrier, I guess what kind of subscriber count do you need to see to sort of get comfortable, there will be another material order or is there some other variable there?

Brian Bronson

This carrier is talking about wanting to go from zero and they’re kind of in that friends and family place now to about 100 million subscribers and they’d like to do that by the end of the year. While we’re bullish on them that might be too aspirational. So, I would say though that they don’t need to get to a 100 million for them to procure more product let's put it that way.

Mike Latimore

Great, good luck for this year.

Brian Bronson

Yeah, thanks.

Jon Wilson

Thanks Mike.

Operator

And our next question comes from James Kisner from Jefferies.

James Kisner

Hi, thanks to take my questions. So, just again on this datacenter win congratulations.

Brian Bronson

Yeah, thanks.

James Kisner

Just want to understand, it sounds like the gross margin you said it's lower than the average for Embedded Products, [indiscernible] is it commodity or hardware that you are passing through or is it just sort of a large deal and that's the nature of large deals? And I guess I'm also wondering if there is any significant application of this beyond the current customers that are buying it and there is our guidance assumed for the year that there are follow-on orders for that product? Sorry, a lot of questions in there at once.

Brian Bronson

So I would tell you that the margin profile I would ask you to maybe fixate on operating income even though we didn't share it. So gross margins whether it's 20%, it is 18%, it is 22%, hopefully you can see the range there, it's much more of a scale game. There is clearly third-party product that we’re passing through in our solution. But at the end of the day, it’s much more scalable. So I would tell you that from the original Embedded Products business even pre-strategy shift to now there is much more scale in OI percent and OI dollars in this datacenter product. So, in terms of the guidance, we have very little baked in for orders beyond this current customer. And we have every intention of targeting new customers.

Jon Wilson

Correct. But James we do in fact as we indicated in the scripted remarks expect more orders from this current carrier throughout the course of 2016.

James Kisner

Okay, that's interesting. So, I guess [indiscernible] FlowEngine for a second, did I hear you correctly, you said that you thought you would double FlowEngine this year, did I hear that?

Brian Bronson

Yes, you heard it right.

James Kisner

And so, you just guided ‘16 and I hate to even just ask this question but I will anyway, but I mean is there an opportunity for this business to kind of really inflect and become an even more bigger part in 2017 as you add more customers and your current customers get more comfortable with the product?

Brian Bronson

I’m glad that you referenced ’17. So doubling any business at any size is a tall order and we feel pretty good particularly given that house account that we [ph] commercially deploy with. So we do need new revenue from new customers as I hinted out in the second half of this year that ‘17 is the pivot for sure. When we expect to have at least a handful of customers if not something closer to 10 that we’re shipping this product to. And that's not including FlowEngine on the context of enabling our datacenter product that's a completely separate initiative where today we are embracing third-party product and fast forward six months; we'll be using our own inside this datacenter product.

James Kisner

So that -- could that be good for gross margin for that product then?

Brian Bronson

Well it depends on how we report it out but the bottom line is, it would be yes, it will be enhancement to the overall Radisys’ gross margin in the context of software and systems. I don't know whether we're going to report it as embedded or software and systems, probably software and systems because it’s FlowEngine.

James Kisner

Okay that's helpful. And you made some comments here just last one here on OpEx about sales and marketing [indiscernible] efforts. I don't think you commented on R&D, it just seems like you're pursuing a lot of new opportunities and I thought you might have more growth in R&D from future developments or prototyping and is that a fair assumption or perhaps you just can carve out your legacy R&D resources and not have much R&D growth, what do you think about that?

Jon Wilson

So James, our R&D will be flat to be maybe down a little bit year-on-year. But within R&D, you’ll remember that in the first half of ‘15 we took down Embedded Products’ R&D pretty meaningfully and so fast forward to 2016, we’re actually incremental investing in our software systems businesses. Thus you don't see R&D down more significantly for Radisys proper because of that. So R&D will grow in the context of software systems incrementally and then will be down year-on-year within Embedded.

Brian Bronson

So James just a couple of things that I want to make sure. I mean, this was the same sort of the counter question that was asked a year or two ago when I was taking on the chin with investors, hey you’re spending too much in R&D, right. So, we’re seeing the fruits of that now. So some to is normalizing in the place of selling more of what we have and that's why a lot of our sales and marketing services support and CTO architect related. I think we're doing a much better job of targeting in those R&D dollars in places that are differential returns for our shareholders and where it's not we’re embracing third-party products. We’re no longer sort of an NIH, not invented here shop that was our DNA originally, it was to do everything ourselves that’s what our customers handed off to us right. Now we're turning around and doing that to the largely a Taiwan ecosystem.

Jon Wilson

But, largely Brain to accentuate on that on the hardware side.

Brian Bronson

Exactly.

Jon Wilson

Still doing, embracing -- we are -- count on Radisys more and more to look -- to differentiate in the software space and then be looking externally for third-party hardware.

Brian Bronson

And Jon’s right and then maybe to pile on one more point I mentioned Sanctum Networks, right, in the prepared remarks, we are also looking for even on the software side those partners would make sense so that they have a great SDN controller, why invest in our own. Let’s have us focus on our differentiated L4 and above level FlowEngine capabilities embrace Sanctum, embrace either our own hardware or a third-party hardware platform that’s the new Radisys.

Operator

And our next question comes from Tom Diffely from DA Davidson.

Tom Diffely

Yes good afternoon, another question here on the datacenter side. So the $19 million of that business as of today, does that cannibalize any of the older tools or is it got completely new tool type and a completely new market for you?

Brian Bronson

Completely new market.

Tom Diffely

So, when you look at the core business being down maybe 25% this year, is that a faster decline then you were previously expecting?

Brian Bronson

No, not necessarily. I think let's see when we made I’ll keep using the word pivot strategically you know we were about $150 million of Embedded revenue, I think we finished up plus this year what, Jon, close to $130 million something like that.

Jon Wilson

Correct.

Brian Bronson

And I think we've been messaging the shareholders over the last year that could get us as low as $75 million to $100 million, I still don't think it will get that low. But yeah, this is all sort of by design, in fact in some respects, we’re making traction faster in some of these core growth accounts that we've been hinting at. For example, Philips continues to be one of our largest customers and we are going to grow very nicely in embedded over the next couple of years.

Jon Wilson

Correct.

Tom Diffely

So, now I guess because of the datacenter tool kind of your updated long-term embedded number now, it was $100 million to $125 million or what are we looking at?

Jon Wilson

So Tom I would tell you stay tuned on long-term Embedded number but we continue I would expect long-term that we’re continuing to grow the Embedded Products business over time. And stay tuned for what growth percentage that may be longer term.

Brian Bronson

I mean look this $19 million is one order largely loud, a little bit of production in one customer, $19 million. So that is the scale of this opportunity, of course there is going to be competitors but we believe we can be a meaningful player here not just for the datacenter product alone but when you couple it with our services approach and the other point solutions we have such as FlowEngine, we’re very different than the traditional competition, very different.

Tom Diffely

Okay. So it's really you say that 2015 was the low point in revenue?

Jon Wilson

Yes.

Brian Bronson

Absolutely.

Tom Diffely

Moving onto the FlowEngine, if you do ramp that double the revenue this year does it become profitable at that point or do we need a little more growth?

A - Jon Wilson

No, Tom we need more growth off of that. We’re still investing heavily to bring the full product to market specifically investing right in the differentiated software features. So when does FlowEngine gets a profitability, I'm not ready to call it yet but I think we continue to set the stage for a scalable business longer term as we grow the revenue base.

Tom Diffely

Okay. But it sounds like the other two software pieces are if not profitable close to profitable at this point?

Brian Bronson

Yes, need to be. That's again by design.

Tom Diffely

Okay. Jon, just a quick question on the financing. What is the rate on the term loan that you have?

Jon Wilson

Yeah, so it's prime plus 0.75%.

Brian Bronson

By the way on that point let me just punctuate something. We -- Jon successfully executed which I think was a very creative structure for us. Only because we need to show these new customers these whales that we’re hunting that we can handle these big Pos. We will continue to be a cash flow generator. You can see in the last year, our balance sheet has improved very nicely, but we got to show the capability to these guys and that's why we did it.

A - Jon Wilson

Absolutely, it’s purely for navigating working capital but quarter-on-quarter over time we are going to continue to generate cash flow.

Tom Diffely

And just one more clarification on the FlowEngine. The doubling of the revenue this year, does that require a second-end customer to come in or is that just with the first main customer?

Brian Bronson

Requires a second, we already have a second customer, we have multiple customers already. But it does require a second customer to come in and take a relatively meaningful order. And we have a couple of different angles there and we’ve been on that already. So I mean could there be timing issues of course. I mean, there's a lot of upside here, I think this large Asian carrier monitoring that is something that shareholders should pay attention to towards the second-half of the year. And then timing of FlowEngine revenues always, we’re sitting here in February feeling pretty good about the outlook.

Jon Wilson

And I think it’s also important to understand right with this even with our large Tier-1 account that we’re engaged with they’re moving to full commercial deployment in the first half of this year, right. As we see successes from that win, there is opportunities for us that may open up more broadly within that account as well. So we've got a lot of opportunities to pull that through.

Operator

And our next question comes from David Duley from Steelhead.

David Duley

Good afternoon and congratulations on finishing the year strong. I was wondering you used to tell us who your Top 5 customers were, to the best of your abilities, could you give us an idea of who your top customers were for the year or who the 10% customers were or whatever color you can give us on that?

Brian Bronson

Yeah. So, I'm just looking at my list here, Dave. So Nokia for the year for us was still our top customer, largely tied to the embedded business, and as you know, that customer is ramping down overtime in embedded, but offset by media engine ramping, more meaningfully. Philips Medical is still a top five customer for us. Mitel actually a reasonably large customer for us as well in the top 5. Our North American carrier, and then our large Asian carrier in media engine predominantly.

David Duley

Okay. And as far as, would you expect to have a new line up of top five customers next year or I’m not necessarily asking who the customers are, but would you expect new customers to appear on this list?

Brian Bronson

Well, I'd first say that maybe the sample back is that this large North American carrier will be a pronounced top five customer for us and I'm hoping still that, we're still being asked on the timing of making that public, but I'm hoping sometime earlier than later in this year, we can talk about who they are.

David Duley

You've got a different North American carrier than the one that's on the list now?

Brian Bronson

No. This will be the same, but it will be meaningful.

David Duley

Okay. Got you.

Brian Bronson

Yeah. But that is a -- I mean, there won’t be a new one either, but I just want to make, this one will be definitely solidly top five. And yeah, I do expect to see at least one more carrier.

David Duley

Okay. And excuse me, the operating expenses on an annual basis, when you look at it, what you spent this year versus what you're planning to spend next year, could you talk about where a majority of the incremental dollars are being invested and what kind of, I'm not quite sure, I don't have the numbers sitting in front of me, what kind of growth in expenses do you expect on a year-over-year basis.

Jon Wilson

Yeah. So -- Dave, total OpEx will be roughly flat year-on-year, but within OpEx, we should see a pretty meaningful acceleration within sales and marketing, offset by, I think we've done a really nice job over the last few years of reducing our footprint, reducing our infrastructure and we're continuing to see those savings come into 2016, so we get the benefit of those savings and infrastructure and kind of back office that offsets the acceleration of sales and marketing spend next year.

David Duley

Okay. And on a -- so how should the operating expenses look on a quarterly basis throughout the year?

Jon Wilson

Growing incrementally throughout the year from the roughly $13 million that we expect in the first quarter.

David Duley

Okay, great. Thank you for that incremental color. One final thing from me is, you've talked about this nice hardware order you've gotten recently of $19 million, could you just help us understand the linearity of the revenue recognition on that?

Jon Wilson

Well, yeah, Dave. So, right, we had, as you'll see in our balance sheet, we had deferred this order at the end of the fourth quarter. We do expect currently to recognize the balance of that order in the first quarter of ‘16 and then going forward, I would expect with this North American carrier we're engaged with, to recognize revenue on shipment and then with new carrier engagements, it will depend on the specific terms and conditions of any agreement we enter into. So, stay tuned on that, but with the North American carrier, it should be revenue upon shipment go forward.

David Duley

But the fact that you've got the big order and you deferred part of it from Q4 to Q1, so there is more of the order being attached to what's in the deferred revenue number now, does that imply the deferred, that you expect this big slug of 19 million to mostly come in Q1 as far as the revenue goes?

Jon Wilson

That's correct.

David Duley

Okay, thank you.

Jon Wilson

Yeah. Absolutely. Thanks, Dave.

Operator

And our next question comes from Eric Gomberg from Dane Capital Management.

Eric Gomberg

Hey, guys. Congratulations on the strong fourth quarter and strong year. Just a couple of quick questions, so just wanted to make sure I understood everything, because you went through quite a bit. On the embedded business obviously of this one big Q1 order, but it sounds like there is a lot more behind that, but just want to clarify that you would expect that ‘15 was below for the embedded and that you now think that there is a growth opportunity in the embedded legacy business?

Brian Bronson

Absolutely, Eric.

Eric Gomberg

Okay. That's great to hear. And on the embedded, again trying to get an understanding of how tied it is to the systems and services software, it's something that -- is it something totally strategic or has someone offered you full and fair value, is it something that you would contemplate selling for full and fair value, because by my analysis, it probably exceeds the enterprise value of your entire company?

Jon Wilson

Well, maybe to your last point, yeah, I mean, if you take a look at our fundamentals, by segment and then look at our $2.40, what did we close it today, market cap less than 100 million, enterprise value roughly the same, plus or minus 6 million bucks, I mean you'll have to finish that sentence, but there is a lot of value being created by shareholders here, in the context of is it separable, we do run our businesses by product line and we are accountable. Yes. There are some allocations. Yes, we do enjoy synergy because of the two segments being under one roof, but no, I mean they run to create value separately.

Eric Gomberg

But it's something where you could sell subsystems to your potential buyer, if again if you've got full and fair value?

Jon Wilson

Always.

Eric Gomberg

Okay. And then it's great to hear that it’s no longer a melting ice cube and hopefully you get the appropriate multiple expansion for what now looks like a growth area. And then last question, stock actually, as you mentioned, it's lower, we will see how it trades tomorrow, but lower today than it was 12 months ago, prior to reporting 4Q of 12 months ago. And you guys basically delivered on everything you said you'd deliver this year.

I guess you have some potential well opportunities, but you also have a wonderful balance sheet. Just your thought on the ability to pursue repurchases or if you need that balance sheet to support customers and also you guys have been active money managers and board members of an open market and just to the extent that you could comment on your thoughts on buybacks, whether personally or the company's ability to do so at current prices?

Brian Bronson

Yeah. So I think Eric, as hopefully investors could tell from the call, right, we believe we are on to something here with this large tier 1 carrier win that we have as well as the tier 1 carrier's we're engaged with across software systems and what we expect to be more wins with large carriers and cable operators throughout the course of the next couple of years. Frankly, we need a strong balance sheet to secure these opportunities that are ahead of us and at my mind, are we undervalued, yeah, we are undervalued. But we need the balance sheet to continue to materially advance our business forward and continue on the path that we’re on in creating shareholder value here day-by-day.

Jon Wilson

I would just say that well put, despite the frustration in value, particularly given what we've been doing here, and what we plan on doing in ‘16, we have to stay focused, I can't get caught up on China and barrels of oil and playing in a micro caps, or what have you, we’re just going to continue to beat the hell out of the numbers and win new customers and good things will come to those who wait. I mean, I don't know what else to say in the market.

Eric Gomberg

Yeah. I appreciate it. Thanks so much and continued success this year.

Brian Bronson

Thank you.

Operator

And our next question comes from Orin Hirschman from AIGH Investment Partners.

Orin Hirschman

Hi. How are you? Congratulations on the progress, especially there is a lot of progress. And somebody has asked this question, but I couldn't hear this part of the answer in terms of the new products, who it competes with?

Brian Bronson

Yeah. Someone did ask that, it's a new product that ultimately I think will be -- competitors will be from the big traditional rack mount server guys, could very much be with the telecom equipment manufacturers, but whoever wants to play in delivering comprehensive telecom rack-based products, and it's not just hardware, it’s software, it's the added functionality, it's the services around it, I still think that's very early in the market. But there will undoubtedly be the big traditional players that want to try to play and ultimately we won against those guys.

Orin Hirschman

Is this something in this iteration of the product, what's proprietary value if I want to use that terminology?

Brian Bronson

I'll temporarily tell you that.

Orin Hirschman

Looking at a generally sense, is there something proprietary here or it’s just the fact of the whole package together?

Brian Bronson

I would tell you that it's on a cost per terabit, petabit basis, it’s differential, the densities are apples and oranges with other providers, really it’s our services and our orientation and how we’re -- it's a relationship and how we solved our customers’ problems, you can't just roll a rack in to a carrier and plug it in and work, it’s not a Prineville, Oregon Facebook datacenter.

Jon Wilson

But Orin, I think, as we indicated in this data remarks, stay tuned for more detail on this product as we launch it more broadly over the coming months.

Orin Hirschman

Okay. You mentioned that this product had a carrier potential related to pull along some of the other products?

Brian Bronson

Correct.

Orin Hirschman

Anything more you can say, because those aren’t truly proprietary products, it's the fact that this product, let's say, has the density capabilities you described based on something that you guys figured out how to do?

Brian Bronson

Yeah. Here is what I would say in general. You know that if you’re familiar with telecom, today's central office is populated with a bunch of purpose-built network elements, switches, routers, gateways, you name it, right and the world be, whether it’s software defined networking, network function virtualization in the cloud, whatever you want the acronym or the buzzword to be, at the end of the day, all of that will be migrated from purpose-built network elements to racks.

And so anybody who’s got an element that solves a particular problem, better be virtual or better be able to play in and around the rack. And so, of course you know that we have network elements in particular in the data plane side that we’ll continue to live on, be very strategic. But as time moves on, you need to think about even flow engine and media engine and our other product lines being right in front of the rack, on top of the rack, inside the rack virtual and that's the way the market is moving.

Orin Hirschman

Okay. You've been talking about this market movement for a long time, you've seen something accelerate here in terms of market movement towards a datacenter format as opposed to proprietary format or more closed format?

Brian Bronson

Well, we are, but I would tell you it’s in the very early innings, and I think that the carriers in large part have made much more progress on, I’m going to use, traditional segregation here on the control plane side of the network versus the data plane side. Much more difficult to virtualize the data plane. So I would just say that we’re early, we’re very fortunate to have put the company in position where many other companies are either restructuring or distracted or they have big legacy revenues to try and maintain, we've been through all that and now we are just attacking.

Orin Hirschman

Okay, great. Okay, thanks so much.

Operator

And we have a follow-up question from James Kisner from Jefferies.

James Kisner

Hi, thanks guys. Just I don't think this was asked yet, but linearity through the year, I mean, should we expect if you are having a decent amount of revenue recognized in Q1 that Q2 could be down or is it going to be kind of steadily up through the year, any kind of comments on linearity on the quarter to the year would be helpful?

Jon Wilson

Yeah. Sure, James. So we’re obviously, as you know we are sitting here in February. Feel very good about the full-year guidance, maybe a little bit difficult to call the 8 46:04 right now, we may have some quarters that are a little bit stronger than others. What I would tell you is stay tuned. I think, think about the full-year and the progress that we are making there and we could have some quarters that are certainly with software systems are a little bit stronger, embedded products is a little bit stronger, but nothing specific that I’m ready to disclose quite yet.

Brian Bronson

It's really a value to shareholders that we have the multiple product lines that we do that we have the various levers that we can pull, but I'm not considering to report that we can -- last year was just incredibly linear at the service, what was a three, three, seven and eight for 21 pennies, Jon and I have worked like hell to try to make it linear like that again, but undoubtedly there will be a big datacenter product order in and it will be great. And then the next quarter will be down and it'll be up again and that's the way Radisys is going to roll here over the next year or two. But undoubtedly, we’re driving towards 25 pennies.

James Kisner

Okay. All right, thank you.

Jon Wilson

Thanks, James.

Operator

And we have no further questions. I would like to turn it back over to management for closing remarks.

Brian Bronson

Great. Thank you, Skinner and before closing out today's call, I wanted to quickly highlight several upcoming events of potential interest to shareholders and analysts. First, Radisys will be hosting meetings at Mobile World Congress in Barcelona, the week of February 22. I’ll be there. Then Jon and I also have plans to attend Northland’s growth conference in New York on, Jon, I believe it's March 9 and Roth Growth -- we’ve been invited there, it's a new invite for us, the Roth Growth Conference in Laguna Niguel, California the week of March 14. So, we welcome the opportunity to meet with investors who might be attending any of these events. Please do reach out to Jon or the Shelton Group, which is our IR firm to request a meeting or be notified of the next time that we have plans to be in your area. Thank you again for joining today's conference call and with that, Skinner, I think everyone can disconnect.

Operator

All right. Great. This does conclude today’s call. You may now disconnect. Thank you everyone for your participation.

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