Network Equipment Technologies F2Q08 (Qtr End 9/28/07) Earnings Call Transcript

Network Equipment Technologies Inc.(NWK)

F2Q08 (Qtr End 9/28/07) Earnings Call

October 31, 2007 5:30 pm ET

Executives

Leigh Salvo - IR

Nick Keating - President and CEO

John McGrath - CFO

Analysts

Michael Prouting - 10-K Capital

Anton Wahlman - ThinkEquity

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 Network Equipment Technologies' Earnings Call. My name is Lacy, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the call over to Ms. Leigh Salvo with Investor Relations. Please proceed.

Leigh Salvo

Welcome everyone, to our call this afternoon, during which we will discuss results for Network Equipment Technologies' second fiscal quarter of 2008. With me today are Nick Keating, President and CEO, and John McGrath, CFO.

In keeping with the Safe Harbor provisions of the Private Securities Litigation Reform Act, I'd like to remind everyone that we will 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 include market acceptance for our new products, timely completion of product development initiatives, completion of the acquisition of Quintum, and successful integration of its operations. Success in building new sales channels, 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 the 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 October 31, 2007, and we disclaim any duty or intention to update forward-looking statements. In addition to financial measures presented in according with GAAP, we will 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 further details regarding the non-GAAP measures. Reconciliations to GAAP can be found in the press release which is posted on our website.

Our agenda today begins with NET's CFO, John McGrath, who will provide a detailed review of our financial results. Nick Keating, CEO, will then comment on the quarter's financial and operational highlights. John will then offer financial guidance for the remainder of this year, and we will open the call for your questions.

At this time, I would like to turn the call over to John McGrath.

John McGrath

Thank you, Leigh. In the press release issued today and available on our website, we reported that total revenue for the second quarter of fiscal '08 was $27.3 million, up 4% from the prior quarter and up 40% from the second quarter of fiscal '07. Product revenue was $24 million, a 4% increase from the prior quarter and a 39% increase from the same period last year. We again saw an increase in government revenues, which includes both U.S. and international government agencies. Government revenues were $22.7 million in the second quarter, representing increases of 4% sequentially and 44% from Q2 last year.

Promina revenue in Q2 was 54% in total product revenue, compared to 58% in the prior quarter and 60% in Q2 fiscal '07. Service revenue at $3.4 million was 12% in total revenue. Service revenue was relatively flat compared to Q1, but up 45% compared to the second quarter last year. Service revenue has increased primarily as a result of revisions made to our relationship with CACI International, which was revised and expanded in the fourth quarter of fiscal '07. Under the new arrangement, both companies sell services for NET products, each company is responsible for various aspects of service delivery and revenue from the service are shared between both companies.

Gross margin as a percentage of revenue were 53% in Q2, compared to 52.9% in Q1, and 50.2% in Q2 last year. Product margins as a percentage of revenue were 58.7% in Q2 '08, compared to 58.6% in Q1, and 57.5% in Q2 at the prior year. It should be noted that Q2 '08 included cost in excess of $500,000 related to the transition to a new contract manufacturer, and we expect these transition costs to continue in Q3 before trailing off by the end of the fiscal year.

Service margins in Q2 were 11.9%, this is down from 13.3% in the prior quarter, and up from a negative 3.7% in the second quarter of the prior year. Service margins in fiscal '08 have been positively affected by our new revenue sharing arrangement with CACI.

Second quarter operating expense was $13.5 million. This is up from $13.3 million in the prior quarter due to higher stock compensation charges, higher legal fees and additional restructure charges, partly offset by a decrease in variable compensation.

Operating expenses increased from $12.6 million in Q2 of the prior fiscal year as a result of increases in stock compensation charges and investments in sales and engineering, offset by a decrease in facility charges of $850,000 related to the write-off of an underutilized facility in Q4 '07.

Total headcount at the end of Q2 was 243 employees, an increase of four from the end of the prior quarter.

Sales and marketing expense in Q2 was $4.7 million up slightly from $4.5 million in the prior quarter and up from $4.2 million in the second quarter a year ago. The increase relates primarily to stock compensation and other compensation expenses due to additional headcount.

R&D expense in Q2 was up $5.9 million down slightly from $6.1 million in the prior quarter and up from $5.3 million in Q2 last year. The year-over-year increase is primarily due to investment in our VoIP product line.

G&A expense in Q2 was $2.8 million up slightly from $2.7 million in Q1 and down from $3 million in Q2 of the prior year. The decrease is primarily related to the elimination of expenses related to underutilized facilities, offset by increases in stock compensation and other compensation expenses related to additional headcount.

Total charges related to stock compensation resulting from FAS 123R in Q2 were $838,000 including $160,000 related to accelerate investing for a retiring board member. The Q2 charges by line item are $73,000 in cost of revenue, $169,000 in sales and marketing, $102,000 in product development and $494,000 in G&A.

Stock compensation charges totaled $454,000 in Q1 '08and $280,000 in the second quarter last year. Other income in the second quarter was $14,000 compared to expense of $21,000 for Q1 and expense of $69,000 in Q2 of the prior year.

Net interest income for Q2 was $675,000 compared to $692,000 in the prior quarter and $403,000 in Q2 of the prior year. The improvement over the prior year was primarily the results of increased yields in our investments and higher cash balances.

The second quarter had tax expense of $101,000 as compared to $58,000 in the first quarter and $4000 in the second quarter a year ago. Although we have significant tax loss to carry forward, we still incur tax expense as a result in international taxes in alternative minimum tax.

Turning to net income, the company reported non-GAAP earnings in Q2 of $2.5 million or $0.09 per share compared to net income of $1.8 million or $0.06 a share in Q1 and net loss of $2.1 million or $0.09 per share in Q2 a year ago.

GAAP net income Q2 was $1.6 million or $0.06 per share compared to net income of $1.3 million or $0.05 per share in Q1 and net loss of $2.4 million or $0.10 per share in the second quarter of fiscal '07.

Cash balances at the end of Q2 were $97 million up from $96.6 million at the end of Q1. Cash and investments increased by more than $12 million from a year ago. In Q2 fiscal '08, we receive cash proceeds of $3.7 million related to the exercise of stock options and large portion of which are from exercises by former executives and a former Board member of the company.

Accounts receivables were $16 million an increase of $4.6 million from Q1 and an increase of $3.8 million compared to Q2 '07. The increase is a primarily due to higher revenues. DSOs of 53 days increased from 39 days sequentially and decreased from 56 days year-over-year. The increase from the prior period is due to the timing of shipments in the quarter. Our target DSO remains between 60 and 70 days.

Net inventory was $14.4 million in the second quarter, an increase of approximately $900,000 as compared to the prior quarter and $4.4 million from the prior year. The increase was primarily due to product shipments late in the quarter for which revenue recognition was differed. Revenue from those shipments will be recognized in Q3.

Now I'll turn the discussion over to Nick Keating, our CEO.

Nick Keating

Thank you, John. The second quarter was a strategic quarter for NET. Highlights for the quarter included the following. First, we achieved our sixth consecutive quarter of revenue growth. Our recent growth has been driven by sales of our new products which continue to provide value to companies seeking advanced networks and voice exchange solutions. Since, though, year-to-date revenue from our VX exchange platform nearly doubled over the same period of last year. And we had our most significant revenue quarter-to-date for NX 5010 network exchange program, product excuse me.

Second, while we have been discipline in managing our spending for growth, we have been able to sustain margins with an increase in new product revenue, remain profitable and stay cash flow positive. Finally, in keeping with our play under growth, both organically and through key strategic relationships. Last week, we announced an agreement to acquire privately held Quintum Technologies, a leading enterprise Voice-over-IP access, switching and gateway solutions provider. Quintum is an excellent complement to our existing business and reaffirms our commitment to the Voice-over-IP market.

I would now like to provide an additional detail on these highlights before I turn call back to John for his remarks of guidance for the remainder of the financial year.

NET continues to add new customers and expand relationships with existing customers. Revenues for the second quarter of this fiscal year grew 40% year-over-year due in part to orders for VX Voice-over-IP switches and our NX5010 broadband products. In the second quarter, NX and VX product revenues reached more than 40% of the companies total product revenue, with our VX product line achieving record growth.

In addition, we continue to see revenue growth from the NX5010. The NX5010 is being used by government customers for high-speed inscription and data transfer applications; transporting data over InfiniBand, 10-gigabyte Ethernet and solid networks. We are also focusing on expanding the NX5010 into the commercial market in areas such as database virtualization, disaster recovery and grid computing applications. Since the NX5010’s introduction in December ’06, we have shipped more than 50 systems.

Sales to government customers, both domestic and international remains strong. In Q2, we provided products or received orders from all branches within the department of defense, which are supporting for instance the Marine Corps Digital Tech Control program. The Marine Corps Transmission Switch Modules program contracted through EDO Corporation. The Army's Secure Switch System program, which is sourced through General Dynamics. Part II of the Navy's Ship-to-Shore program, the Air Force's integrated communications equipment program, the Defense Satellite Communications System or DSCS and the joint communications support element group located at Meg Del Air Force base in Florida.

In addition, we delivered products to NATO for their next generation tactical requirements of the NATO BME extension and the expansion of the NATO international security assistance force network in Afghanistan. The networking industry is in transition, which is raising opportunities for our products. Our existing customer base, as well as new customers are implementing next generation networks that provide the migration of TVM circuit based at ATM traffic to IT and MPLS.

The next release of the NX5010 is currently in the lab trials testing ATMs and MPLS transport at 10 gigabyte data rates. We continue to move forward in meeting our product development schedules.

During the quarter, we released software version 4.4 of our VX voice exchange platform. This release includes key building blocks and features for a supporting enterprise unified communications including a new configuration wizard that dramatically simplifies the VX installation process. We also introduced a new software release of our NX5010 system which include support for a bits tiny module used to synchronize traffic between nodes.

This release also supports InfiniBand over 10 gigabyte Ethernet, and can be multiplex over 4OC48 ports. Work continues on the NX5020 program, which incorporates Bay Network's new 20\40 gigabyte Chesapeake network processor. Prototype Interface Cards utilizing the Chesapeake chip have been built or are currently in preliminary testing.

Base Chesapeake processor will allow the NX5020 to deliver 20 gigabyte full duplexed data transfer capability to customers. With respect to the NX1000 product line, we recently added support for additional onboard data ports and doubled the systems capability by adding, the ability of stacking two systems.

These enhancements, coupled with the existing IP trucking and NVX voice-over IP features built a strong migration foundation for our customers. In future releases, we plan to extend the NX1000 IP capabilities by, adding additional security features including the support for IP Sec. We are seeing emerging tactical applications that can help drive future NX1000 sales growth.

Turning to the enterprise side of our business, in the second quarter, we delivered new system software and hardware upgrades to an existing customer Reuters, which has started and upgrade its existing Promina networks worldwide comprising 72 sites in total. The new equipment allows Reuters to upgrade and expand their existing real time content delivering network. This Promina networks transport Reuters most time sensitive traffic, foreign exchange and share trading information. Reuters needs to provide the same financial information to its subscribers worldwide within a guaranteed timeframe.

Our strategy for expanding our enterprise sales has been the secure relationships with other complimentary businesses. As we discussed on our conference call last Friday, our pending acquisition of Quintum, will provide scalability to our existing product line, expand our overall VoIP footprint, add financial scale to our growing VoIP business and put us in a better position to address enterprise customers, as well as government agency requirements.

NET and Quintum share a common vision for the converged unified messaging and unified communications markets. Our technologies, product strategies, sales focus are highly complimentary. We believe that following the acquisition, we would be the leading independent vendor in the market, delivering a complete media gateway solution providing IP to IP, IP to TDM and TDM to TDM to call routing from large enterprises to remote office users.

Quintum's VoIP access switching and gateway products are currently distributed in more than 50 countries through independent resellers and had been successfully deployed in both enterprise and service provider networks globally.

Quintum has established a strong market presence in Asia both from a customer and product feature standpoint which will enable NET to better diversify our revenue base and expand our business internationally. Additionally, Quintum has developed integrated manufacturing relationships in Asia and NET plans to proactively to evaluate opportunities to leverage Quintum's manufacturing capabilities to reduce our cost of specific NET products.

On the operations front. Over the past several quarters, we commenced the number of important changes that are now behind us. This includes the conversion of our ERP system to Microsoft's Dynamics AX which was live on September 29. The Dynamics AX system has already streamlined our business processing and offers a more seamless integration to our desktop applications and other internal business systems. This system also provides the foundation for UC enabled business processors which leverages our VX or voice exchange and Microsoft Unified Communications solutions to provide integrated communication services that has been directly implemented into our core business process.

Our manufacturing transition to Plexus operation and void the either always underway and we expect to see continuing progress in ramping up manufacturing volumes.

We recently established the sales office in Sydney, Australia to broaden our reach throughout the Australia, New Zealand region. We've hired the first member of our sales staff who will be responsible for building our relationships with prospects customers, channel partners and system integrators.

Over the next few quarters, we will be working on the integration plan Quintum continuing our product development schedule, expanding our sale footprint and delivering and network and voice exchange products to our customers worldwide. At this point, I will turn the call back to John for his comments on fiscal 2008 guidance and some additional closing remarks. John?

John McGrath

Thank you Nick. As we enter the second half of the year our pipeline remain strong. As a result, we expect our fiscal year 2008 revenues excluding the effect of the Quintum acquisition to be in the $112 million to $115 million range. As a result of our recent transition to a new contract manufacturer, we expect that some shipments may occur later than usual and thus our revenue may be less linear in the second half of the year.

We anticipate that Quintum quarterly revenue will be in the $4 million to $5 million range until we can mutually benefit from the synergies of the combined entities going into fiscal 2009.

For Q3, the revenue impact will be dependent upon the timing of the transaction close which is currently anticipated to be in December. Excluding charges for stock options which fully waste upon the closing of the transaction. Quintum's un-audited operating results are about breakeven with un-audited margins in the area is 50%. As part of the acquisition the combined company will see increased expenses for newly issued stock options to Quintum employees as well as amortization of intangible assets acquired from Quintum.

The amount of these charges will be based upon the stock price at closing and an independent valuation to be performed in the coming month. For the remainder of the fiscal year we anticipate modest growth in our operating expenses which will include some investment in sales and marketing and research and development.

Further, as we ramp up our contract manufacturing at Plexus, we anticipate that we will continue to incur startup costs, which may reduce our product margins percentage by approximately 1% through the end of the fiscal year. Also, we see decreased interest income of up to $200,000 a quarter, due to lower cash balances after the close of the Quintum transaction and declining interest rates. Summing this all up, we anticipate that our non-GAAP earnings per share will continue to grow for the remainder of the fiscal year.

As of October 2007, we are not at full production capacity at our new contract manufacturer. As such, we anticipate that some customer shipments could be shifted later in the quarter affecting DSOs and ending cash. Upon closing of the Quintum transaction, we will use $21.5 million for the payment to Quintum's shareholders, as well as approximately $3 million to payoff debt in related transaction costs. To that end, we expect ending cash for Q3 to be in the $70 million to $75 million range. As we continue to transition our manufacturing to our new contract manufacturer, we expect inventory levels to begin to drop.

Operator, this concludes our prepared remarks. We would like to open to call now for the Q&A.

Question-and-Answer Session

Operator

(Operator Instruction) At this time there are no questions in queue. I would now like to turn the presentation back over to Leigh Salvo for closing remarks. Pardon the interruption, we do have late questioner.

Nick Keating

Go ahead Michael.

Operator

And our first question comes from the line of Michael Prouting with 10-K Capital. Please proceed.

Michael Prouting - 10-K Capital

Yeah, good afternoon and congratulations on another good quarter. John, as far as the DSOs are concerned, what's your outlook for DSOs going forward at this point?

John McGrath

Yeah, our target is between 60-70 days. That hasn’t changed in the six years that I have been with the Company. This quarter hopefully it won’t change out of that range. We've been lucky that we've been very linear in the past year with our shipments. But it could be impacted slightly by the timing of the some of the orders with our new contract manufacturer. But we set our goal to be between 60 days and 70 days.

Michael Prouting - 10-K Capital

In the list linear quarter, this past quarter than the prior quarter, was that a function of the transition to Plexus, was that mix issue between government and commercial or what was it that drove the line?

John McGrath

Our business right now is continuing as it has for the last year to six quarters. What happened in the transition as you obviously have to move all of the existing inventory from one location to the other and it takes a period of time to get it ramped up. So, it’s all a function of the timing to ramp it up as opposed to the business which is very much on track. Nick, did you want add anything?

Nick Keating

No, I mean, up to now we provided some revised guidance when we had our call on Friday. We have upped our revenue for projections for the rest of the year based upon the visibility that we have both from a backlog standpoint as well as new orders that we expect to come in. So, unless there is a significant change in the visibility that we have, we feel pretty comfortable with what we have seen now, from orders and backlog and pipeline standpoint for the next six months.

As John indicated, the big challenge is getting the manufacturing up and ramped to the levels to sustain the order rates right now. But we have done the Plexus ramp up in two phases. We started first with VX manufacturing, the NX5010 and the NX1000 and they were the first to begin production at the Plexus facility before the end of the quarter. So we saw product coming out of there in September.

The point that we are in right now, the Promina inventory now has been delivered to Plexus and next week we start ramping up that production. We will have a number of NET personnel that are up there working side-by-side, to ensure that, that production gets ramped up appropriately. My expectation is by the end of the quarter, then the transition should be completed. As John, I think indicated in his speech, we have had transitional cost associated with this last quarter of about $1.5 million, and we'll some additional cost this quarter. If we stay on plan, then that should tail off by the end of the year.

So, as we go on to the new financial year, I don't anticipate cost associated with that.

Michael Prouting - 10-K Capital

Okay, great. So, it sounds like things are very much on track with your plans and as far as the transition is concerned.

Nick Keating

Yeah, I would say yes, but my hesitancy is, that whatever you are converting from one manufacture to the other, there is always some startup experiences associated with it.

Michael Prouting - 10-K Capital

Sure. And then, just finally, can you give us an update on Microsoft and the timing of their communication server? Thanks.

Nick Keating

Well, to start with Microsoft has now launched their communications solution, their launch was in October, the part that we were most interested in was the second phase of their certification process, which they now referred to as Microsoft Unified Communications Open Interoperability Program and we have now registered for that program. We are anticipating over the next couple of months that they will then began all of the testing process and whereas I cannot provide a date as to when that testing will take place or guarantee that we will pass that. We have now received all of their specifications and our testing against those specifications to ensure that when we do test against that spec that then we will be in compliance. The spec--there is a lot more detail than what they've done before--it looks to us like a very sophisticated and very mature, a program that they put in place and we are looking forward to having the opportunity to certify to test and hopefully certify our product against those test parameters.

Michael Prouting - 10-K Capital

So, do you think, we see that before a year end?

Nick Keating

It's really hard for me for predict, I know that they are doing everything they can do to get the testing done as quickly as possible, but I'm sure that there are lot of companies that have also applied for test positions and we don't have a affirm date yet in terms of when that's going to take place.

Michael Prouting - 10-K Capital

Okay, great.

Nick Keating

In the mean time, let me say, we are continuing to provide product for their internal networks and in general not just relating to Microsoft but on a worldwide basis, we're continuing to do trials, we have got some very interesting installs that are taking place right now in the United States over the next few weeks that's hopefully, for the next time we have this call would have been converted into enterprise wins.

Michael Prouting - 10-K Capital

Alright. Fine, okay. Is that something that you would expect to be able to issue press releases about or not?

Nick Keating

If the customers would give us the authority to do it, we would do it. A lot of times when they are in and let say early deployment, they want to get further along before effectively they declare victory but one thing I would say to you giving a sense that a number of these that were doing are very large enterprise customers falling into the Enterprise 500 or Enterprise 1000.

Michael Prouting - 10-K Capital

That's good to hear. And then, I would assume that to the extent that you are able to press release those that that could further help your visibility and momentum in the marketplace?

Nick Keating

Yes. I would say to you, and then, we have talked a little bit about this Quintum acquisition but I can like to reiterate the strategy again. Our switch has really had to go if you think of a pyramid, we are at the upper end of the pyramid and we really are into the large enterprise locations. What we realized was that when you get into branch locations, we needed a more cost effective and really a jointly designed product and I think Quintum gives that particularly strong in the branch in the mid tier marketplace with the combination of the two companies product line being available. We are going to be able to go in and provide end-to-end solutions and we are not aware if anybody else who will have that capability.

Michael Prouting - 10-K Capital

So, you cater me to ask more question which is how, so how soon do you think you could begin to see if you will joint wins where you guys are, where your legacy and so if you will being instead head office and the Quintum stuff is being in the branch office?

Nick Keating

Well, we have actually discussed that now with the number of organization just in the last few days, we have made the announcement. We obviously ended in discussions with the number of systems integrators who were looking at having to source from more than one vendor up to the large end and others in the mid-tier and branch and we've gone back to them now and indicated that we would be able to provide a completely integrated solution.

So, we've already engaged those integrators and keep in mind the way that we're going to sell as predominantly through those integrators who will provide direct touch in support of those integrator sales initiatives.

Michael Prouting - 10-K Capital

So, what's required then do they need to do any testing or verification before the appointment or what's the process there?

Nick Keating

Well, we obviously are doing testing ourselves between the respected platforms but the advantage that we both have is that we're fully SIP compatible and by being SIP compatible and that almost ensures interoperability but we are beginning a significant test program. We're also looking at it from an architectural standpoint in terms of how we can do some joint development and there is some of our technology in their products and take some of their technology embedded in ours. We're above the way, as you may know well, they just partner at Microsoft, and so they were even to the certification process.

Michael Prouting - 10-K Capital

Right. And how many focuses have been through that at this point then?

Nick Keating

So far they have approved three companies.

Michael Prouting - 10-K Capital

Three companies, okay. Alright, great. Thanks for answering my questions and I guess I'll let everyone get on with their Halloween plans then.

John McGrath

Thanks, Michael. It's a scary thought.

Michael Prouting - 10-K Capital

It is.

Operator

Our next question comes from the line of Anton Wahlman with ThinkEquity. Please proceed.

John McGrath

Good evening. Anton?

Operator

Mr. Wahlman, your line is now open.

Anton Wahlman - ThinkEquity

Yes, I am sorry, I was on mute. Sorry. I missed the first couple of minutes perhaps, but just sort of couple of little question here. One of them is on, now that you're on your way to completing your sort of first material acquisition in quite a while, I'm trying to remember when the last one was, and as we look one step further out into 2008 here, would you say that this acquisition is going to keep you really, really busy for a while or do you think that you have the sort of management and integration band when the two pursue with the relative ease other opportunities as they may arise, if you should think that would be, something that would make sense, or do you think that this really is going to strap you down for at least the couple of quarters to iron this thing out and make sure it works well?

John McGrath

That’s a really good question. Let me start by giving you a little bit of history. We began these discussions with the Quintum people this summer in the June-July timeframe. It gave us wonderful opportunity to really put our due diligence team together, and then prepare for pre-merger integration planning, and then ultimately the post merger integration implementation.

We've been able to draw on resources, both here and Fremont, as well our operation out of Dallas in Northern Virginia. What many of you may not aware of is that we have really a full functioning company in the Dallas operation. So our VP of finance, its based there, that handles all financial activities for Federal or International and for our global services group, was the one that led the financial due diligence. We have a key general counsel member also in that federal organization that did the legal due diligence and then we supplemented that with the technology operation service, another due diligence out of Fremont. I think that's been an excellent experience for our people. They worked extremely well. I have done a number of acquisitions over the years, both as a buyer and seller, and quite frankly, I think our team is as good I have worked with in any previous transactions.

So, the way I would just describe it Anton is that we are open for business. And we've got our team now that's working on the pre-closing integrations. The first phase of that is going to be accounting, IT, human resources. We are already engaged, Matt Krueger was at their development facility in Chicago yesterday. We have a series of engineering and technology meetings coming up. And likewise are starting to engage in sales and marketing strategy. So I think that's going to go on as an ongoing process, but I think it's going to be in the normal course of activity, and I see no reason if another opportunity were to come forward that we couldn’t engage in those at the same time.

I am sure that as with any acquisition there will be issues that will come up, but quite frankly I think we've got a strong team here that are capable of implementing this, and continuing to look at other opportunities to grow our company.

I think what I have said in the past is, that we really have three strategic units today. Our voice mobility and clearly that, this falls into that category, our broadband, we are looking for other broadband opportunities, maybe similar to what we did with Bay, or outright acquisition. And then finally, anything we can do to enhance our government business that can come in the form of products such as the 5010, that could come in the form of products, such as the Quintum product line. But it could also come in the form of external relationships. And so, we will continue to pursue all of those.

We need to feed quite frankly each of those strategic groups.

Anton Wahlman - ThinkEquity

Very good, very helpful. Another question which, pardon me, but was maybe addressed earlier, and if so, I will just read the transcript, but unified communications, obviously Microsoft has gathered most of the attention here, recently for the obvious reason. However, Microsoft sort of wouldn't be the only game in town overtime. One can imagine a long list of other players, how would you say that your sort of business development and efforts, integrations, what have you, to extend your sort of UM footprint beyond Microsoft while not losing sight of the tremendous market opportunity that Microsoft affords you, and for the obvious reasons, but one would imagine, that there is going to be tail of other players that in aggregate probably would be a significant tail?

Nick Keating

Well, we've already engaged, from a preliminary standpoint with another unified messaging partner, where the early stages of that we are actually doing, we've done one install, we are in the process of doing a second install in the next couple of weeks. One of the other things that Quintum brings is an existing relationship with AT&T and Verizon, and I think one could assume that there will be unified messaging, unified communications solutions arising from those parties. We fully expect that we will see more solutions coming out of Japan and of course, we already installed in Japan and not only on the UC and UM side, but were also installed on the fixed-mobile conversion side in Japan.

Countries like France, China, elsewhere, I’m sure will have their own indigenous solutions. And so, we see each of the new entrance as an opportunity to take our VX platform or the Quintum platform and optimize it for those new UM and UC offerings.

Anton Wahlman - ThinkEquity

Okay. Well, I wasn't going to ask, but since you brought it up, I figured I would indulge a little bit. You mentioned FMC, do you have a perspective in your cooperation with your food chain partners, since you are little bit to the side of the sensor of that part of the action that I am getting to, but in terms of the whole debate of the UMA versus IMS or whatever other implementations may occur overtime, clearly we've seen that the major GSM operators in many countries particularly in Western Europe and the one of the two GSM carriers in the U.S. have pursue the UMA past. But we also have CDMA carriers, as we know here, and then other implementations that will be taking place with the AT&Ts and the Vodafones in the world in terms of IMS. Do you have perspective on what's happening here in terms of architectural past that will be taken in that front?

John McGrath

I probably can answer less on the architectural side than some of our key designers and strategists here. I think there is a couple of things that are going on however. There has been some rollout now, because Japan has been pretty far along than we've seen that, that has been well received. UMA is in the early stages in Europe, it's been predominantly consumer-driven. We haven't seen a lot of focus on the enterprise or customer premise equipment yet. I think what will probably happen is that the consumer will be addressed first, and once that consumer adoption has taken place that many of those are wireless providers will then focus secondarily on the enterprise marketplace. What we want to be able to do is, when they are ready to start focusing on enterprise solutions to be there with our own customer premise solution, and I would also say, keep in mind that Wi-Fi and WiMAX could well be players in that also.

Again if you address it to a enterprise market, you are going to need a gateway switch capability with a lot of security functions similar to what we have in the VX platforms. So, I think from our standpoint we have engaged in discussions with a number of the carriers and are frankly awaiting their lead to tell us, that it is now time to start engaging architecturally in integrating our device into their offering, if and when they are ready to address the enterprise customer.

IMS, I think is still further out. IMS is basically a SIP solution. My sense is that we'll play a role of that, say when we'll play with any other role, but the real key is for those wireless providers is, how tightly do the want to integrate together with the enterprise infrastructure, and the more tightly that they want to integrate with the enterprise infrastructure and the enterprise customers existing IP networks, we think we can play very well with them.

Anton Wahlman - ThinkEquity

Well, that's good color. Thank you very much and congratulations on a continued strong execution and solid guidance. Thank you very much.

John McGrath

Good

Nick Keating

Thanks Anton.

John McGrath

One thing I would leave with you Anton is, if you look at our voice business today and you couple with that the Quintum business, we're going to be looking at roughly a $50 million unit, and we think that those numbers, it really gives us critical maps to continue to leverage the VoIP business.

Operator

(Operator Instructions) I would now like to turn the call back over to Leigh Salvo for closing remarks.

Leigh Salvo

Thank you. NET will be at the Brean Murray Conference, the one-on-one conference next Tuesday, November 6. We hope to see some of you there. Operator, this concludes our conference call for today.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day.

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