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Executives

Brian Norris – Director, IR

Andrew Ory – President and CEO

Peter Minihane – CFO and Treasurer

Seamus Hourihan – SVP, Marketing and Product Management

Analysts

Vijay Bhagavath – Deutsche Bank

Paul Silverstein – Credit Suisse

Alex Henderson – Miller Tabak

Catharine Trebnick – Northland Securities

Ehud Gelblum – Morgan Stanley

Rajat Gupta – JP Morgan

James Kisner – Jefferies

Simon Leopold – Raymond James

Rich Valera – Needham & Company

Brent Bracelin – Pacific Crest

Simona Jankowski – Goldman Sachs

Jeff Kvaal – Barclays

Acme Packet, Inc. (APKT) Q1 2012 Earnings Call May 2, 2012 4:30 PM ET

Operator

Good afternoon and welcome to Acme Packet’s Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. During that time, we ask that participants limit themselves to one question and one follow-up question. (Operator Instructions) As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today’s call, Brian Norris, Director of Investor Relations for Acme Packet. Please go ahead.

Brian Norris

Thank you, Nick. Good afternoon, everyone, and welcome to the conference call. I am joined today by Andy Ory, our President and CEO, Peter Minihane, our CFO and Treasurer, and Seamus Hourihan, our Senior Vice President of Corporate Strategy. The press release announcing our first quarter results, as well as a reconciliation of management’s business outlook for 2012 using non-GAAP financial measures as compared to the most applicable GAAP measures are available on the Investor Relations section of our website at www.ir.acmepacket.com.

All results and expectations we review on a non-GAAP basis unless otherwise described as GAAP. Non-GAAP net income and non-GAAP net income per share are non-GAAP financial measures, which exclude stock-based compensation and related payroll taxes, amortization of intangible assets and merger integration-related expenses associated with the company’s acquisition activities.

Please note that statements made during this call that are not historical fact may be forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934. These forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated.

A discussion of these risks and uncertainties can be found in our recent filings with the SEC. Investors should not place undue reliance on these statements, which are current only as of the day they are made, and we disclaim any obligation to update them.

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

Andrew Ory

Thank you, Brian, and good afternoon everyone. We are encouraged by our progress on many fronts during the first quarter. Revenues in the first quarter were $70.8 million. We expect to deliver sequential growth in each of the remaining quarters in 2012. Gross margin was 83%, unchanged from last quarter. Operating margin was 26%. Longer term we expect operating margin to return to the mid to upper 30s. We delivered non-GAAP EPS of $0.17 in line with First Call Consensus.

We generated a record $26.7 million in cash from operations. We also continued to improve our already strong balance sheet. We ended the quarter with $401 million in cash compared to $372 million at the end of the fourth quarter. After careful consideration of our core business and the current trends in the marketplace, we are this afternoon reaffirming our earlier business outlook of approximately 10% revenue growth in 2012. As we indicated on our last call, it is our intention to improve visibility in the back half of the year.

We have never been more excited about the market opportunities and our ability to extend our leadership position in it. For the better part of 10 years, our customers, mostly wireline and cable service providers, have been turning to our solutions to solve critical security and interoperability issues as they migrate from traditional circuit switch connectivity to next generation IP network.

Now in our second decade, we are expanding our focus and investing in the strongest drivers of future market growth, specifically enterprise and wireless. We’ve done this by investing in people, products, programs, and even via acquisition. The acquisition of IPTEGO is a prime example of this investment in our future. We acquired IPTEGO to expand and extend our session delivery network management capabilities, addressing the end-to-end real-time management of and visibility into multi-vendor communication networks that include both Acme Packet and third-party products.

Both enterprise and service provider customers are looking for ways to reduce costs and complexity and optimize their all IP communication network so they can deploy new value-added applications and services. IPTEGO’s Palladion software optimizes next-generation IP communication networks, enabling customers to rapidly troubleshoot customer experience issues down to the individual session or device level, proactively identify and isolate communication network faults and events, and detect and prevent fraudulent activities in their network.

The combination of our session delivery network solutions with IPTEGO’s real-time intelligence engine will enable customers to move beyond individual element management and give them real-time network-wide visibility and analytics into their multi-vendor IP communication network.

This includes most elements in IP communication network using SIP or diameter signaling, including all of our products and third-party soft switches, media gateways, policy servers, application servers, IMS core element and IP PBXs. The acquisition is complete and the integration efforts are well under way. We plan to sell the IPTEGO Palladion software suite alongside the direct in our product portfolio and will offer it to service provider and enterprise customers through existing IPTEGO and Acme Packet channel partners, as well as through direct sales.

We are excited and proud to welcome the talented and dedicated IPTEGO team to the Acme Packet family and look forward to accomplishing great thing together.

I want to shift gears and share with you some of the key developments and trends that support our outlook for 2012. First, we continue to see robust activity with regard to new customer acquisition. We added 70 new customers in the first quarter and now serve 1,688 customers in 108 countries. We added 24 new service provider customers and 46 new enterprise customers in the first quarter. Our solutions are now deployed at 88 of the top 100 service providers, 20 of the top 25 cable operators globally, and 41 of the Fortune 100 companies.

Second, we continue to see evidence of our expanding market share. According to a recent report issued by Infonetics Research, our share of the service provider SBC market remained strong at 57% in 2011. A similar study of the enterprise market indicated that our share of that market had expanded to 34% in 2011, making us the leader in that market as well.

Third, we are seeing some interesting developments in the North American service provider market. As we shared with you last quarter, from our perspective this market experienced a slowdown in capital expenditures in the second half of 2011. 90 days later, the environment has not changed materially. And while we don’t expect much change in this market in the second quarter, we see signs that spending may tick up in the second half of the year. That said, we think it’s appropriate to continue to take a conservative view of the North American service provider market until we see further evidence of an improving trend line.

Fourth, we are seeing some exciting developments in the enterprise market where the single most significant growth driver continues to be SIP trunking. Enterprises are rapidly embracing SIP trunking to reduce costs and set the foundation fore-costs and set the foundation for end-to-end IP Unified Communication. While others are just starting to actively invest in this opportunity, we have been investing aggressively for the better part of four years. Our solutions are now deployed at 595 enterprise customers globally. Our enterprise business represents 21% of our business in the first quarter. As we mentioned previously, we expect our enterprise business to grow by at least 40% in 2012.

Beyond SIP trunking, we’ve seen growing demand for our enterprise session management solution that integrates and unifies multi-vendor IP PBX in Unified Communication environment, including Microsoft Lync. In fact in Q1, we made two strategic announcements with Microsoft regarding Acme Packet’s differentiated offerings for both on premises and hosted Lync environments.

Our UC vendor-neutral solutions enable enterprises to further consolidate and evolve their communications infrastructure with support for multi-vendor interoperability, centralized dial plan management and session routing, compliance-based recording and logging and the ability to communication-enable their business applications. And now, through the acquisition of IPTEGO, we’re able to offer our customers end-to-end network monitoring, troubleshooting and analytics such as fraud detection and prevention.

Finally, we continue to improve our overall position in what we expect to be the single largest growth driver in the service provider session delivery networking market over the next three to five years, the advent of Voice over Long Term Evolution or VoLTE. While there are nearly 5 billion wireless endpoints in the world today, virtually none of them are IP-enabled for real-time voice or video. VoLTE will change all of that.

We believe our solutions will play a critical role in VoLTE networks. There is a direct relationship between the number of VoLTE subscribers and networks and the demand for our solutions. There remains some question around the timing of VoLTE deployment, but as we told you last quarter, we do not believe VoLTE spending will have a meaningful impact on our business in 2012. That said, we are very encouraged by the tenor of the architectural discussions that are under way globally.

We are continuing to gain traction in the VoLTE space. We are currently involved in 27 VoLTE opportunities globally, up from 25 a quarter ago. We have been architecturally selected in 10 of these 27 opportunities with the remaining 17 still under evaluation, and we will soon be live with one of these 27, MetroPCS.

So here are the key takeaways for this afternoon’s call. We have established a clear leadership position and are actively investing to extend that position in both the enterprise and service provider markets. The acquisition of IPTEGO enables us to expand our session delivery network management capabilities by directing the end-to-end real-time management of and visibility into multi-vendor communications networks that include both Acme Packet and third-party products.

We are excited about the growth in our pipeline and the prospects of improving visibility in the second half of the year. We’re seeing signs pointing to a possible improvement in the service provider spending environment in the back half of the year. SIP trunking and enterprise conversion to IP communication services remains a critical investment area and the strongest growth driver in our business today.

Finally, based on our conversations with our customers, we believe that more service providers are seeing the growing importance of VoLTE. We expect that there will be meaningful investment in VoLTE solutions in 2013, which will in turn lead to increased contribution to our revenue.

For a closer look at our first quarter results and our 2012 outlook, let me turn the call over to Peter.

Peter Minihane

Thank you, Andy. As a reminder, all financial information reviewed this afternoon, historic and forecasted related to our statements of income, are on a non-GAAP basis unless otherwise described as GAAP. Our discussion of sequential changes in our financial results compares the first quarter of 2012 to the fourth quarter 2011. Finally, all earnings per share amounts are on a fully diluted basis.

Total revenue in the first quarter was $70.8 million, which included $53.5 million in product, and $17.4 million in maintenance, support and service revenue. Geographically, 62% of our revenue in the first quarter came from the United States and Canada, while 38% came from the rest of the world. The distribution of our first quarter revenue was 56% direct and 44% indirect. One customer accounted for at least 10% of our first quarter revenue, and that was Verizon Business at 16%. This reflects the continued strength of the overall SIP trunking market.

Gross margin was 83% in the first quarter, unchanged sequentially. Total operating expenses were $39.7 million in the first quarter. Net income in the first quarter was $12.2 million or $0.17 per share. We ended the first quarter with 764 employees compared to 752 at the end of the fourth quarter. We added another 28 employees on April 25th after the close of the quarter with the acquisition of IPTEGO.

We ended the first quarter with $401 million in cash and investments compared to $372 million at the end of the fourth quarter. As Andy mentioned, cash provided by operations was a record $26.7 million in the first quarter, while total capital expenditures were $3.7 million. Accounts receivable net was $60.6 million at the end of the first quarter compared to $59.7 million at the end of the fourth quarter.

Despite record cash collections in the first quarter, DSOs increased to 77 days at March 31, 2012 compared to 65 days at December 31. We realized that deterioration in our accounts receivable aging as passed to accounts increased from year-end across all four regions. DSOs by geographic region range from approximately 61 days in North America to 114 days in Asia-Pac. That said, we experienced very strong cash collection in the month of April. We expect DSOs to improve throughout the balance of 2012 and return to our targeted range of 55 to 65 days by year-end. Inventory at the end of first quarter increased slightly to $11 million compared to $10.2 million at the end of the fourth quarter.

Finally, deferred revenue increased 53% sequentially to $37.1 million at the end of the first quarter compared to $24.3 million at the end of the fourth quarter. As we have discussed on previous calls, deferred revenues can fluctuate from period to period based on the timing of shipments and maintenance renewals along with the associated revenue recognition, and we do not believe it should be relied upon as an indicator of the health of our business.

I will close with the few forward-looking statements to help you better understand how we are thinking about 2012. In short, we remain confident in our ability to execute on the plan for full-year revenue growth that we provided on our last call. We are continuing to take a conservative view for 2012, reflecting our near term expectation of the North American service provider market and the timing of voice over LTE deployment. We are continuing to use this opportunity to focus on improving our position for sustained long-term growth while increasing our visibility, predictability and overall operational effectiveness. While we expect demand for our solutions to grow at a compound annual growth rate of 25% to 30% over the next three to five years, we still expect it to be closer to 20% in 2012.

This afternoon we are reaffirming our plans for top line revenue growth of approximately 10% in 2012. Again, we expect this plan will enable us to increase visibility and predictability in the back half of the year. We expect our revenue to be distributed roughly 42% in the first half and 58% in the second half. We expect to deliver sequential revenue growth in the second, third and fourth quarters.

As Andy mentioned in his earlier remarks, we are very excited to have completed the strategic acquisition of IPTEGO, which we announced last week. If not for the acquisition, we would be reaffirming our plan to earn between $0.96 and $1.00 in non-GAAP EPS in 2012. However, in light of the acquisition, we are now modeling non-GAAP EPS of between $0.91 and $0.95 in 2012.

We look forward to updating you on future calls as to our continuing progress on our plan for 2012. With that, I’ll turn the call back over to Brian.

Brian Norris

Thank you, Peter. Nick, at this time, we would like to open the call up for Q&A. Again, if we could ask participants to limit themselves to one question and one follow-up question, that would be terrific. Nick, if you could open the call up please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question today comes from the line of Brian Modoff with Deutsche Bank. Please go ahead.

Vijay Bhagavath – Deutsche Bank

Hi, this is Vijay Bhagavath calling on behalf of Brian. Yeah, hi, Andy. Hi, Peter.

Andrew Ory

Hi, Vijay. How are you?

Peter Minihane

Hi, Vijay.

Vijay Bhagavath – Deutsche Bank

Hi, doing fine. So I mean a question for you is, I mean, if you look at your full-year 10% guide, flow it to the Consensus model, in the second half you’re looking double-digit sequential revenue growth. What are your thoughts that in terms of visibility and your conviction on sales execution as we head into Q3 and Q4? I mean, these are big sequentials heading into the second half?

Andrew Ory

Yeah, I mean, our conviction is rooted and the fact that we’re able to maintain and take market share. So it’s more of a market event than it is an Acme Packet execution event. And when we sat down at the beginning of the year and looked at from bottoms up what our sales folks thought the total addressable market opportunity was, lens that through what the analysts were saying and through what our own market and through our own marketing organization was saying, it looks like around 20% was the number that we had. We’re at 91 days into that. We don’t see really any reason to change it and it’s all based upon what the market opportunity will yield. We ought to maintain and/or take market over time, so we’re very happy with that.

Vijay Bhagavath – Deutsche Bank

Okay and then a quick follow-up, Andy, which is you had an interesting press release recently with Accuris this LTE, WiFi. Any part of that, is that an opportunity you plan to kind of enter organically or inorganically. What’s your view on that opportunity overall?

Seamus Hourihan

Yeah, this is Seamus. The press release went out early this week with Accuris around enabling WiFi roaming, okay. So enabling subscribers to roam to WiFi networks and get – basically get the same services they would from a 3G or an LTE environment in the future. And our product plays a role in terms of security gateway solutions where the traffic is coming directly from an endpoint, using TLS or IPsec or alternatively from a WiFi gateway, a WiFi access point itself. And the Accuris role is basically around in a syndication role plus being able to bridge the communication from the WiFi environment into the 3G or LTE environment from a signaling perspective.

Vijay Bhagavath – Deutsche Bank

Great. Okay. Yeah. Thanks, Andy.

Andrew Ory

All right. Thank you, Vijay.

Operator

Thank you. Your next question comes from the line of Paul Silverstein with Credit Suisse. Please go ahead.

Paul Silverstein – Credit Suisse

Hey guys it looks like Verizon business did a little lower $11 million at16% of total. Last two quarters it hadn’t broken 10%. Well, last time it was 10%. It was about $9.6 million. Any takeaways that – I know there is sensitivity by any particular customer, but can you help us understand what’s going on there or why did it return to above 10%, and more importantly, what’s the outlook going forward?

Andrew Ory

Yeah.

Paul Silverstein – Credit Suisse

Not just at Verizon, but maybe some granular insight, Andy, in SIP trunking in terms of the size of the deals, the number of the deals that you’re seeing? Any incremental color would be helpful.

Andrew Ory

Sure. We’re seeing some of the Tier 1 market leaders in Europe starting to become very inquisitive and engage us for SIP trunking. We’re also actually seeing that now in parts of Canada on behalf of some of the Tier 1s. I think it’s purely a response to perceived market opportunity, and we believe obviously it’s real market opportunity. SIP trunking should be one of the main growth drivers for our business this year.

What was interesting is that I think there was a lack of borrowing from Q1 and bringing it into Q4 last year because I think people were sort of souring on CapEx expenses. And I think what we’re seeing now in Q1 and Q2 is normal budgetary activity that these Tier 1 service providers are doing for SIP trunking. What’s going to be interesting is that as the SIP trunking market progresses throughout 2012, what their tenor is in the fourth quarter of 2012 about perhaps moving some of the 2013 budget back into the last quarter of 2012.

Paul Silverstein – Credit Suisse

Great. Andy, if I may and I apologize if you just answered this in the first question, I missed it, if you did. But in your commentary, you mentioned that there were signs of improvement in the second half in terms of CapEx in general and as that relates to Acme. Is that just generic, you’re looking what industry folks are saying and others are saying? Or is that based on real insight that you’re gaining from the customers in terms of their spend with you?

Andrew Ory

Well, we are seeing some. I won’t say all. It’s not even, but we are seeing some of our Tier 1 North American service providers looking at connection-oriented technologies and starting to say I’m not really going to invest anymore in gateways. I’m going to want to do native IP peering, and they’re between our customers and those are real opportunities for us. So we’re seeing that kind of dialogue. We’re also seeing the cable space start to be more active, and we believe that as they get involved in SIP-based access and get involved in termination of SIP-based communications with partnering with Tier 1 service providers, that also provides us a lot of activity. That coupled to just general SIP trunking.

Paul Silverstein – Credit Suisse

And Peter, can you comment on the size of the SIP trunking deals?

Peter Minihane

I think, Paul, what we saw in the first quarter was a fairly even BP rate of standard business from Verizon business, so there was nobody showing up with a $10 million PO, but rather it was every other week, every third week an order would arrive.

Paul Silverstein – Credit Suisse

And the size of the deals in general and at Verizon, are they increasing?

Peter Minihane

I think they are pretty consistent, Paul, I don’t think – again...

Seamus Hourihan

Hey, this is Seamus, Paul. Our SIP trunking customers will add capacity as they are successful winning enterprise opportunities, okay. So it should be a fairly steady pace over the course of the year and...

Andrew Ory

And Paul, if I can throw something in, because I think this is really important, SIP trunking is strategic to Acme Packet because SIP trunking is what leads the way and enables the transformation for the enterprises to communicate, change the way they communicate. And this is why IPTEGO is so important to us. So what’s happening is these large enterprises are saying, wow, there’s quantifiable ROI if I get rid of my business connections that are TDM and I pick up SIP trunks.

It really only works if they consolidate into datacenters. So SIP trunks connected into consolidated datacenters requires technology like ours, not only for security but for them to integrate their different UC environments. Whether it’s a Avaya or it’s Mitel or it’s Cisco. So they want to do the consolidation, then they wanted to be able to turn on Microsoft Lync. We’re seeing this as a real trend for – it’s not only for video but they have Lync on all the desktops and they want to turn it on.

They then have the Bring Your Own Device phenomenon. Everyone’s already doing it, every single person who works in a major enterprise has their own device. So now to integrate those devices into the call path to maintain the same user behavior, the same dial plan. Now to integrate all of that and make it such that they can manage it and they’ve got network intelligence when there’s fault isolation, that’s where the technology from IPTEGO turns our SBCs from products into solutions.

And so this pathway of moving enterprises from the way they communicate now, which is largely TDM and through a lot of different islands and a lot of different non-integrated devices and incredible complexity to resolve any fault, into a unified front where it’s lower cost, easier to manage and they can start to put applications into it, all starts with the SIP trunking and is complemented with this acquisition.

So I really wanted to bring that up. You’re going to see us continue to invest in SIP trunking globally whether it’s in Japan or it’s China or it’s in the Benelux countries or it’s in Germany. You’re going to see that because this is the gateway into converting the enterprise interactive communications from the way it is to the way it’s going to be.

Operator

Thank you.

Brian Norris

Paul, thank you for that question. Nick, can we go to the next caller, please?

Operator

Certainly. And our next question is from Alex Henderson with Miller Tabak. Please go ahead.

Alex Henderson – Miller Tabak

Hey, guys.

Andrew Ory

Hi, Alex.

Alex Henderson – Miller Tabak

I’m having a little trouble with the guidance that you gave. So if I’m going to do up 10% for the year and I’m going to do 42% in the first half and 58% in the back half, that doesn’t make the June quarter an up quarter. So you also said that you thought you would grow...

Andrew Ory

Yeah.

Alex Henderson – Miller Tabak

In each of the remaining quarters. I assume that was a year-over-year growth rate?

Peter Minihane

No. I think what we intended, Alex, is that the first half would be 42% and second half 58% with each quarter up sequentially quarter-over-quarter. And on an EPS basis it would be roughly flat.

Alex Henderson – Miller Tabak

So the comments that you’re going to grow in each quarter was not a year-over-year comment?

Peter Minihane

No. It’s sequentially. I’m sorry.

Alex Henderson – Miller Tabak

Okay. I just wanted to make sure I had that correct.

Peter Minihane

That’s fine.

Alex Henderson – Miller Tabak

Second, you have a large project that you’ve talked about coming in in the second quarter. I assume that you started some of that in the March quarter. Can you talk a little bit about whether that project started in the March quarter or whether that’s all going to be starting in the June quarter?

Peter Minihane

Alex, I think what we’re all looking – Seamus, Andy, myself and Brian are all looking at each other and we’re little confused.

Alex Henderson – Miller Tabak

Yeah. If we miscalibrated...

Andrew Ory

I’m sorry.

Alex Henderson – Miller Tabak

You said at your analyst day that you were starting MetroPCS, it would be either in late March or...

Andrew Ory

I’m sorry.

Alex Henderson – Miller Tabak

Or starting in the June quarter?

Andrew Ory

Seamus, do you want to...

Seamus Hourihan

I wasn’t there.

Andrew Ory

Oh, you weren’t at the analyst day. Okay, yes, so MetroPCS is the first VoLTE deployment. They’re a customer. We continue to do business with them and we expect them to be live with their service in the second half of the year, but they were a very solid customer in Q1.

Alex Henderson – Miller Tabak

So they already started the deployment in Q1 and will be continuing then?

Andrew Ory

That’s right. They started the acquisition of our equipment as far as when they go lives far as when they go live with their services, I’m expecting that’s going to probably the second half of the year.

Alex Henderson – Miller Tabak

So just so we avoid the contour of lumpiness, is that expected to be a solid portion of the June quarter and then fall off into the back half? Or is that expected to continue to ramp smoothly through the year?

Andrew Ory

Well, I mean they’ve been customer I think, I don’t have the data in front of me, but Seamus I think for the last eight quarters?

Seamus Hourihan

From bookings.

Andrew Ory

From a bookings point of view, so we do expect them to continue to buy. I don’t know exactly whether they’re going to buy more or less in Q2. I don’t. It’s not so big that it factors into the swing of Q2 and Q3 revenue.

Alex Henderson – Miller Tabak

One last question and then I’ll cede the floor.

Andrew Ory

Sure.

Alex Henderson – Miller Tabak

You characterized the service provider spending, you said that it was still limited visibility to pickup kind of slowish, sluggish conditions, but you were hoping to see it improve in the back half. When you talk about the sluggish conditions, and normally it’s seasonally weakest in the March quarter and it seasonally picks up in the June quarter. Do you mean sluggish relative to what you’ve been seeing or do you mean sluggish relative to the normal trajectory of the seasonal pick up in the June quarter?

Andrew Ory

Well, I mean, for us the pickup really tends to be in the September and the December quarter. I mean that really – we traditionally see more of the spending that’s back-end loaded. So we don’t really see any difference from the normal pattern, but we’re twice burned thrice shy kind of thing where we’ve got a very strong funnel and good expectations for the second half of the year. But on May 2 I’m not willing to take that too far.

Alex Henderson – Miller Tabak

I was just really asking about the generic spend conditions though. I’m trying to get a gauge of not just for Acme but for broadly what the service providers are telling you?

Andrew Ory

So I think for us the generic spend position, we’ve got a couple of different large customers in the Tier 1 space that we’d think about in North America, and we think that they spend – that they have different profiles for how they spend for their own macro business reasons. So I wouldn’t characterize what we’re looking at for the next 180 days as blanketing across all the Tier 1s in the United States and North America. I think there are some of the Tier 1s that are spending and there are some that still appear to be kind of challenged in their willingness to spend.

We are seeing the cable environment where people are spending, and we ‘e starting to see a very, very slight but interesting pickup in the government space as well. And we’ve been in that business for long time, and we think that could be significant over time. The other thing is that the enterprise funnel is very, very strong. And we’ve had different characteristics and it’s much earlier stage than the service provider space, but we are pleasantly surprised with the level of activity that we’re seeing the enterprise space.

Alex Henderson – Miller Tabak

Very helpful, thank you.

Andrew Ory

Thanks, Alex.

Operator

Next, we will take a question from the line of Catharine Trebnick with Northland Securities.

Catharine Trebnick – Northland Securities

Oh, good afternoon. My question is you’ve said in Europe things look a little bit better. Could you provide more color on that background? Are there any big deals that you’ve won, and are things more focused in Europe on their voice of our LTE preparation or IMS? Thanks.

Andrew Ory

Sure. Well, Catharine, what’s interesting is that we have most of the incumbents as customers of ours in Europe, but we’re starting to see some of the leading wireless providers in Europe really start to look at innovative ways to use our technology to solve the voice and video over LTE in terms of looking at cloud-based solutions and leveraging our kind of technologies, and we’re excited about that. We’re also seeing one large Tier 1 that has been very reluctant to embrace any next generation network technology starting to engage us saying I think it’s time that we may be look at how to change out our network.

We’re also seeing some of the service providers in the Benelux countries who are saying that SIP trunking is actually really important. And when the incumbent in one of those countries says I want to do this, 80% to 85% of the enterprises have their business line connections with that incumbent, that’s a very big deal.

Another one of the incumbents that’s a customer of ours is also looking on a wireline basis how to move to IMS that’s more cloud-like using our technology. So there’s a lot of activities across Europe. It’s not in any one country.

Catharine Trebnick – Northland Securities

Okay, and the other question is are you seeing any change in pricing between you and the competitive field?

Andrew Ory

No, not really. We continued to engineer more capacity in and engineer COGS out, so that allows us – I am sure that the price per session for a simple SBC instance is going to ride a normal attenuation curve, whatever that may be. Our pricing both in the enterprise space and on the service provider space is probably right in the middle where it needs to be.

What’s really happening is that we’re able to engineer a lot more value in. So for example, with our technology, we don’t want to compete with other folks for SIP trunking based upon price.

We want to compete on value. We want to work with the SIP trunking provider and say if you replace a business line connection at T1 with a SIP trunk, you can then turn around and sell compliance-based recording, and with our new IPTEGO acquisition you can turn around and sell customer partition of all network analytics and network intelligence and network monitoring management that they can get on their own network by dialing into the network and looking down the SIP trunk you’re providing them. So as we provide new tools and new sources of revenue for our service provider customers, that helps us maintain the value equation, and so we ought to be able to maintain our margins.

Catharine Trebnick – Northland Securities

All right. Thank you very much. Thanks.

Andrew Ory

Thanks, Cath.

Operator

Our next question id from the line of the Ehud Gelblum with Morgan Stanley.

Ehud Gelblum – Morgan Stanley

Hey guys. Thanks, appreciate it.

Andrew Ory

Hey, Ehud.

Peter Minihane

Hey, Ehud.

Ehud Gelblum – Morgan Stanley

Good. Can we start off just by going back over something that I still am a little confused on, and I was confused on the last quarter and confused on it again now. And that is the delta between the fact that you think the markets are going to grow 20.

Peter Minihane

Right.

Ehud Gelblum – Morgan Stanley

But you’re going to grow 10%, but you’re not losing share.

Andrew Ory

So it’s...

Ehud Gelblum – Morgan Stanley

I know you described it, but can you just please help me out with it?

Andrew Ory

Yeah, and Ehud, please don’t ever spend 91 days confused again. Just call us. We sat down and we looked at the sales organization and we said to tell us bottoms up what you all think you could do. I mean, don’t make it falling off a log. We want you to work hard. We’ll hire more sales people. We’ll give you some additional product. What can you do? And then the number came in at around 20%, not exact, but came around in there.

Ehud Gelblum – Morgan Stanley

So if you don’t give them a hand this that what they think they can do if they worked super hard?

Andrew Ory

If they work super hard, people start buying. North America doesn’t have a 5.59% growth rate in service provider like it did in 2011, things like that. And so we said okay. Well, we’re willing to invest in the business. In fact, now is the perfect time to invest in the business because we have market lead. We’re generating cash. We’re profitable and so we can really extend our lead by pressing our advantage.

We want to invest. At the same time we want the company to grow, and so we looked at it and said "Jeez, if we were to express a 10% growth rate we’re going to create cash, we’re going to increase some profits, but we’re going to be able to bank whatever the delta is between what you book and what we revenue." And that’s going to help drive more backlog into subsequent quarters. And that was purely the analysis, no more than that.

Ehud Gelblum – Morgan Stanley

Okay, now that we’re 90 days further into it, you did what you thought you’d do in Q1 essentially, exactly spot on.

Andrew Ory

Yes.

Ehud Gelblum – Morgan Stanley

Your Q2 guidance hasn’t changed one bit, spot on there so – and that’s what you visibility is?

Andrew Ory

Right. Now you’re talking from a revenue point of view. We really haven’t made any progress, and we’re not really expecting to make much progress until the second half of the year. I mean, we – and just to be clear because it’s important, we’ve been consistent that we burn a little bit of backlog in the first half of the year. And we tend to generate backlog in the second half of the year. And while it would be nice to actually not burn any and accumulate backlog in all four quarters, our plan doesn’t really assume that.

Ehud Gelblum – Morgan Stanley

Okay, so now here we’re sitting here in early May, when you looked at the orders that happened over the first five months of the year, were they any different from – I mean you exited last year, yes, thinking you could 10% and the 20% that your sales people were telling you. But you and I and everyone else on this call know that sales people kind of tell you what you want to hear sometimes. And so do you – I mean did orders pick up at all? And it sounds like from your commentary orders have not picked up, especially in North America. So at what point during the year do you – would you start saying oh, maybe that 10% or the 20% is actually less and go to some smaller number? At what point would you change your mind or say it’s done, you’d bet the farm on it?

Andrew Ory

No, Ehud, I think that’s an excellent question. I think that our commentary of being cautiously optimistic or appropriately optimistic is the fact that we’re appropriately optimistic. It’s a fact that the second half of the year represents a disproportionate amount of our revenue. The engagements with customers, the funnel that we look at, the markets that we look at, the conversations with our business partners, tell us that there really is this activity in business in the second half of the year. I think that is we exit the second quarter and we talk to you folks already a month into the third quarter, we’re going to have a whole lot more data.

Ehud Gelblum – Morgan Stanley

So your customers are actually telling you, yes, we’re going to spend – we’re going to spend in the second half of the year and that hasn’t changed, and so does that...?

Andrew Ory

Our customers are asking for quotes. Our funnel grows when we provide quotes. Our customers are talking about projects, but none of that compares to receiving purchase orders and building backlog.

Ehud Gelblum – Morgan Stanley

So like you said, that’s the one thing we can’t – so the revenue and the orders haven’t grown but it sounds like the funnel actually has grown. Isn’t there a measurement we can look in that? Did the funnel grow 20% this quarter or something that will give you confidence that you’re moving in the right direction?

Andrew Ory

Yeah, I think that the leading indicator of all the data that we have would be that the funnel has grown. But again, it’s usually 42/58 so it’s you’ve really got to get into the first month of the third quarter for us to have the kind of the visibility that you’re talking about.

Ehud Gelblum – Morgan Stanley

So funnel – your funnel-to-bill ratio was pretty – was well above the line?

Andrew Ory

Oh, that’s very kind of you. I’ve never heard of that term.

Ehud Gelblum – Morgan Stanley

Me either. So finally on the Verizon business revenue and the sustainability of it, it sounds like it isn’t Verizon. This is basically a reflection of a very large bar reflecting the strength of the enterprise SIP business. And you happen to sell direct to them. That’s why your direct-indirect kind of got all Kapolei this quarter. But it really isn’t, and we should think it as an enterprise SIP end market and the service provider side of your business is still doing poorly as you sort of hinted with your North American comment, but the enterprise business is doing well. Should we then anticipate at least on an absolute dollar basis that that Verizon business is relatively constant going forward?

Andrew Ory

Well, so where I think there is some confusion is that the business with Verizon business is not selling products to them that they then turnaround and sell to enterprises.

Seamus Hourihan

It’s a little bit.

Andrew Ory

It’s a little bit of that, but 90% or so is up sell or even more, is up sell into Verizon business so that they can put it on the edge of their access network so they can offer the service of SIP trunking.

Ehud Gelblum – Morgan Stanley

Correct, but it’s one and same. It’s in response to the same driver.

Andrew Ory

Right, well, because when we talk about enterprise being 21% of our business, none of that product that I just described is in that 21%.

Seamus Hourihan

That’s right.

Ehud Gelblum – Morgan Stanley

Correct, which is why this is actually a larger – and so what’s really keeping the business going right now and why your numbers aren’t at 50 million or 60 million but it’s still at 70 million plus is enterprise, even though it doesn’t look at it necessarily from that 21%.

Andrew Ory

Yeah, Ehud, I would say Seamus and I argue, which is fair because it’s hard to know the future, I will tell you that I believe that the enterprise side of our business is going to be at least half of our business in three years. And I think it’s going to be big. It’s not just a trunking. I think it’s SIP trunking leading to an entire change. You can call it session management. You can call it enterprise session delivery networking, but it’s the ability to integrate, consolidate, lay it over the top services, mange it and then start to align your communications with your business processes.

Now Seamus’ counter is that the cloud-based VoLTE, IM- type services, so your solutions that we would offer, because there’s 5 billion TDM wireless endpoints that are all going to be wireless IP endpoints, he thinks there’s an equally large or larger opportunity. Those are the two opportunities...

Seamus Hourihan

And then you have the dynamic of medium and small businesses moving to hosted voice over IP UC-like (inaudible) curve product offering, which is a takeaway from the premise-based solutions as well. So for us it really doesn’t matter. We participate in all of them. We have strategic partnerships and offerings, and so...

Andrew Ory

Right, but so getting back to – and so in the spirit of Ehud’s question, in the short run the enterprise with SIP trunking is what’s stimulating the business.

Seamus Hourihan

Large enterprise SIP trunking.

Andrew Ory

Yeah. If we were dependent upon – and we’re starting to sell the SMX solutions and the cloud-based IMS, but if we were dependent upon that for our revenues, you’re right, revenues would be down.

Ehud Gelblum – Morgan Stanley

Great. I totally appreciate it. Thanks, guys.

Andrew Ory

Thanks.

Seamus Hourihan

All right, Ehud, thanks.

Operator

Next, we’ll go to the line of Rod Hall with JP Morgan.

Rajat Gupta – JP Morgan

Hi, this is Rajat Gupta from Rod Hall’s team.

Andrew Ory

Hi.

Rajat Gupta – JP Morgan

Hi. I just had a quick question on your VoLTE opportunity. You said you were in 10 out of the 27 opportunities available. I mean, can you just comment on when do you expect the actual deployment on them to start I mean what kind of timeframe would we expect? And I have a follow-up.

Seamus Hourihan

Right. So the first one out of the gate would be MetroPCS, as we mentioned earlier, will be starting in the...

Rajat Gupta – JP Morgan

Yeah.

Seamus Hourihan

Second half of this year. The rest by and large will be – there will be a few maybe toward the very end of this year, and then there’s some that are 2013. There’s actually a few that are early 2014. The projects that we’re in are equally distributed between North America, Europe and Asia. Relative to the last call, we added two new projects that we’re engaged with, both of those were in Asia, for example. So that’s the major change in terms of our engagements around voice over LTE since our last call.

Rajat Gupta – JP Morgan

Okay. So I had another question on the competitive landscape, and do you think that has changed at all moving into 2012? And do you see any impact from F5’s Traffix acquisition on your diameter signaling products?

Andrew Ory

Well, so let’s talk about first of all the majority of the business, the competitive landscape. I think that the market share gains in the enterprise and a slight gain call it holding the same 57% or whatever in the service provider.

Seamus Hourihan

Yes, so this is in the context of the SBC business?

Andrew Ory

In the context – that’s right.

Seamus Hourihan

There is absolutely no impact around – of F5 in our marketplace.

Andrew Ory

Right, and that’s correct and from the other competitors where I think the market share gains are pretty accurate in terms of what we’re seeing. We are maintaining and/or gaining market share in our core markets. And we also believe, as you’ve heard on this call in the prepared remarks, we’re going to step up our investment a little bit. Because when we look at the size of the aggregate opportunity between the VoLTE opportunity as well as the enterprise opportunity, in the aggregate it’s very, very large and the acquisition that we made and some of the additional investments we’re making are going to continue to further our advantage.

So I would expect that we’re sitting here 12 and 24 months from now, our competitive positioning should be at least as good as it is today. And I don’t see any signs of that changing. As it relates to diameter for the Traffix products, it’s such a small – it’s such a small amount of our existing market and even our future market, but we will be a tenacious competitor. And we would expect to be number one in that as well.

Brian Norris

Great, Rajat, thank you very much.

Rajat Gupta – JP Morgan

Okay, thank you.

Andrew Ory

Thanks, Rajat.

Rajat Gupta – JP Morgan

Thank you very much.

Brian Norris

Nick, could we get the next question please?

Operator

Thank you. And that comes from James Kisner with Jefferies. Please go ahead.

James Kisner – Jefferies

All right, guys, thanks for taking my questions. So I guess my first question, I just wanted to clarify in enterprise if I’m doing my math right it looks to me like the enterprise business has kind of been flattish year-over-year and quarter-over-quarter in the last couple of quarters? I’m just trying to make sure. I want to verify that and just understand that trend?

Andrew Ory

Okay. I mean, I guess, Peter – Peter, you’re looking at some of this data now.

Peter Minihane

Right, and if I look at it from a booking side during the course of the year, I think our bookings has over the past number of years, but more specifically if you think about it during all of 2011 heading into 2012, we grew it from an exit rate of 20% or so and the 18% to 20% at the end of 2010. We grew it up to as high as 22% in Q4 of 2011. In this current quarter I think we’re at about the 21% number. So again, I think it’s been steady growth, and if you go back long enough, obviously, but if you go back to the end of 2008 we’re at 3% above that rate. So if you think about the growth from 2008, 2009, ‘2010 to 2011, it went from 20% up to 21%.

Andrew Ory

Yeah.

Peter Minihane

For a material uptick it was – it didn’t occur in any one single quarter.

Andrew Ory

If you were to look, and I don’t have the data in front of me, but Peter, you probably have a pretty good sense, if you were to look at enterprise-stimulated business, either SIP trunking or products sold to enterprises, my guess is that that percentage is pretty healthy. And it’s probably going to increase throughout the year because the SIP trunking our largest – our only customer greater than 10% was for SIP trunking which is all enterprise.

Peter Minihane

We’ve talked about this before. Our business across service providers and enterprise breaks into thirds, okay? So a third of our business last year was interconnect a third, was access for hosted residential services or business services like Broad Soft or whatever, and then the third was enterprise-related. About 20% was on premise equipment and another 13% in the network.

Seamus Hourihan

15% is in the network.

Seamus Hourihan

Right, which is how we’ve historically positioned it more along a total of 35%.total of 35%...

Andrew Ory

But if the funnel is a leading indicator, and that’s an if, right, you will see our enterprise component increase as we journey across 2012.

James Kisner – Jefferies

Have some of these structurally happened, though? I mean I’m looking at it like a sequential progression of $16 million, $20 million in 2014 and 2015. I mean it just seems like it’s going down on a enterprise customer param portion here. I understand there is a service provider side as well, but is it because you’ve lost some partners and – or do you just see some weakness on the customer param sides of your enterprise business? Is there anything going on there?

Andrew Ory

Well, I mean we did have a large deal that we talked about a few quarters ago. The problem is is that, A, large deals can sort us skew one particular quarter, and secondly, the back half of the year represents so much more of our business than the front half of the year. And the two of those things taken together can make it kind of hard to see what the trend is.

James Kisner – Jefferies

Okay. Fair enough. One other question and I’ll pass, you talked – there’s been a lot of talk about Europe – you guys have not talked about Join at all? And I’m just wondering if I’m reading that correctly, that would be a positive development for you guys that there would be SBCs at the edge of these join deployments?

Seamus Hourihan

Yes. The RCF initiatives joined specifically the program in Spain, related to Rich Communication Services, RCF, and we are actively involved in almost all of those service providers’ specific program.

James Kisner – Jefferies

Okay. That’s it. Thanks a lot guys. I appreciate it.

Andrew Ory

Thanks, James.

Operator

Thank you. We’re now going now to the line of the Simon Leopold with Raymond James.

Simon Leopold – Raymond James

Great. Thank you, very much. Couple of things I wanted to ask, one was – and I know Peter did make some commentary on deferred revenue as kind of being lumpy, but I did notice that in this quarter it was up quite a bit by $13 million, which looks like one of the bigger increases we’ve seen in a long time. If you could help us understand what was behind that?

Peter Minihane

So again, Simon, and I’m not going to blow this trumpet for the rest of my life, but we don’t consider deferred revenue to be an indicator within our business. And I say that because the (inaudible) point that changed from Q4 to Q1 was almost $13 million, $12.8 million, $13 million for the sake of discussion. Almost all of that was service and support.

So somebody will show up and book a maintenance agreement with us in December. It’s a booking, which his great. It’s part of our customer intimacy. However, it turns out that that will show up as a Q1 deferred revenue. And in fact, all of the work was done by the sales organization in Q4 of the prior year and all of a sudden it looks like our deferred revenue was increased dramatically. In fact, again, most of that increase is deferred maintenance revenue and a very small piece of the deferred product revenue.

Actually product revenue was probably down slightly quarter-over-quarter. Again, we would prefer to have zero deferred product revenue because it only means we have more work to do or the customer has more work to do or both. So again, the comment I have is that that increase is 100% – virtually 100% maintenance revenue that we will earn ratably during the course of – 99% of it over the course of the year.

Simon Leopold – Raymond James

Okay, that makes a lot of sense and it’s pretty much what I expected, but the next question I’ve got to ask is when I look at sort of the gap between the 10% guidance and the 20% market, I think what I’m presuming we should be doing is looking at the changes in deferred revenue and the actual reported revenue to make the comparison on a year-over-year basis. Is that an accurate assessment?

Andrew Ory

I actually think you’re going to need us to provide you more color that that because backlog doesn’t go into deferred. And so if we ended up in the back half of the year booking much more than we’re revenuing, that may not impact the deferred product revenue. It would impact visibility. It could impact DSOs. It could impact things like that that we could talk about.

Peter Minihane

Right, tie it right in.

Andrew Ory

So that’s why we wanted to give you additional color because just looking at the deferred wouldn’t do it.

Peter Minihane

It doesn’t do it at all.

Simon Leopold – Raymond James

Okay. No, that’s helpful. And then in terms of kind of the trending, if you look at how you’re thinking about the business for the year, I’m wondering about the end market breakdown. Basically, my belief is that wireless sounds like it’s going to grow faster this year. So I’m looking for some sense from you as to for the full-year what percentage of your business do you think might come from wireless versus what percentage might come from enterprise for the full year, just rough figures?

Andrew Ory

Well, not having the data, so I need to go on record with that Simon, but we can certainly endeavor to try and provide that data at one of the next conferences we’re at. But I bet that wireless would be at least 25% and enterprise would be about 25% and the remainder would be...

Seamus Hourihan

Well, from a bookings perspective?

Andrew Ory

From (inaudible) product perspective.

Seamus Hourihan

From a recent perspective between mobile and what we call converged service lines, in another words people that have fixed line services as well as mobile that’s about a third total. Okay?

Simon Leopold – Raymond James

Okay, great, thank you.

Andrew Ory

Simon, thank you.

Operator

Our next question comes from Richard Valera with Needham & Co. Please go ahead.

Rich Valera – Needham & Company

Thank you. Just wanted to clarify that you’re still comfortable with the 20% bookings growth number for this year?

Andrew Ory

Well, I guess, Rich, the way I would sum it up is that we sat down in the beginning of January and we did our analysis. This was how we quoted the sales organization and how we’re directing the overall organization. It’s 91 days later and as we revisit it we don’t have enough data to actually cause us to want to change anything. And we look at the final growth, we do recognize that it is back-end loaded. That it is the way our business normally runs. And as we said on the few questions earlier, we’re going to have a lot more data when we finish the first month of the third quarter when we get back to you. But as we look at it now and do our analysis, we are just – we are reaffirming what we’ve said.

Rich Valera – Needham & Company

Okay and last quarter you’d talked about trying to give us some maybe additional metrics or color, and I thought that might be book-to-bill based on that discussion. And now it sounds that you are saying that you – it sounds like you had a book-to-bill probably less than one in the first quarter, but that’s what you expected. So I’m just wondering if you can talk about whether book-to-bill is a meaningful metric and when you would expect that to turn positive as we move through the year?

Andrew Ory

Yeah, no, I mean it is, it is what the business has done in the last several years. The first half of the year we do end up burning a little bit of backlog, and in the second half of the year we end up building backlog. If you would look at the extent to which that happened in Q1 of 2012 versus Q1 of 2011 or Q1 of 2010, we did a better job in Q1 of 2012. But to really make the journey successful across 2012 there has to be more bookings than there is revenue, and that’s really a back half of 2012.

Peter Minihane

Exactly.

Rich Valera – Needham & Company

And then with respect to the enterprise growth, so Andy, you said I think, during the prepared remarks, that you still expected enterprise to grow 40% this year

Andrew Ory

Yeah.

Rich Valera – Needham & Company

And going back to I think James’s question, it certainly doesn’t seem like it grew 40% in the first quarter. So do we expect that enterprise is going to accelerate pretty significantly over the next couple of quarters to get to that 40% year-over-year growth target.

Andrew Ory

Yeah, I do expect that. We did make a number of hires, and we have announced a number of partnerships or relationships with folks like Microsoft, Hewlett Packard and some others. It does take time for those investments to actually turn into revenue, but I would be surprised if our enterprise growth – and in enterprise I include government and contact center as well – if that did not grow by at least 40% for the year.

Seamus Hourihan

The other dynamic is increased number of SIP trunking service providers worldwide.

Andrew Ory

Will also stimulate that, there is no question about it. Year-over-year enterprise growth from a bookings point of view is probably close to 10%, so but we are expecting more growth later in the year. And as Seamus said, it’s really a confluence of factors.

Rich Valera – Needham & Company

Okay. And then finally from me on IPTEGO, obviously dilutive this year, do you see that as being neutral or accretive next year?

Peter Minihane

I think we are in the process right now of looking at our estimates for 2013. We have not even a detailed first half of it, but I think our belief is that it should be. If not a push it should be accretive.

Andrew Ory

Yeah, and I want to reiterate something about IPTEGOI want to reiterate something about IPTEGO, because this is a fundamental transformation for Acme Packet. We have one enterprise customer that has 500 IPPV access. They don’t even know where all the connections are or the routing path. And it took them three months to find an audio – an intermittent audio quality issue. And where they’re meeting almost every day trying to figure this out, because it’s really complicated when you move from connection-oriented TDM to packet route IP, where all these – where the packets go and how they’re getting there and how to follow them.

And the notion that our technology coupled to IPTEGO’s provides something very different. Our SBCs have the technology that we’ve engineered into them as a result of this acquisition, where they become active participants in the traffic that’s flowing across them and feed all that data to the IPTEGO product, so you can see at a session-by-session, connection-by-connection, endpoint-by-endpoint, exactly where the communications are going and how it’s going.

And so as things become more complicated, our session board of controllers are going to become more and more fundamental to solving that problem. So we’re defiantly investing in it and we think that is going to create a stickier solution and a more valuable solution for our SBCs.

Seamus Hourihan

And our other products.

Andrew Ory

And our other products.

Seamus Hourihan

It’s not just (inaudible).

Andrew Ory

That’s correct.

Rich Valera – Needham & Company

Okay. Thank you.

Andrew Ory

Rick, thank you.

Brian Norris

Nick, we have time for just a couple more questions.

Operator

Thank you. Our next question is from Brent Bracelin with Pacific Crest.

Brent Bracelin – Pacific Crest

Thank you. Most of the questions have been asked and answered. I wanted to touch a little bit on the gross – product gross margins. We saw that kind of down tick in Q4. We saw slight rebound here in Q1. What your thoughts are around kind of product gross margins? Have we kind of stabilized here? Should we expect product gross margins going forward to kind of be in this kind of low 82%, 83% kind of range going forward? Any color there would be helpful.

Peter Minihane

I think, Brent, that we view gross margins in the low 80s and that is that 80% to 83% type of a range as being where we expect it to be. Can it get up to 84%? Yes. Or even 85%? Yes, it can from a product side. I think you’d have to go back to mid-year last year to get it up as far as 85%. The overall mix of 83% is impacted by service gross margins. And those service gross margins are really driven more from a maintenance and warranty period costs to repair any of the equipment that is out in the field when it occurs. So we may have almost no activity in a quarter and the gross margins can jump as high as 87%, as we did I think in Q2 last year because there is no activity, right? You have all this revenue coming in and we had no products returned.

In this past quarter it went down, that is the service, to 81% and that’s just reflective of the maintenance and warranty activity that our support service and manufacturing organization worked on during the quarter. We expensed it during that quarter, and that’s why those percentages from the service side will jump up and down anyway from 81% to 87%. We do think overall we should be in the low-80s with an occasional 84%.

Brent Bracelin – Pacific Crest

Okay. Thank you.

Brian Norris

Great. Thanks, Brent.

Operator

We’ll go to the line of Simona Jankowski with Goldman Sachs. Please go ahead.

Simona Jankowski – Goldman Sachs

Hi. Thanks so much. I still want to just revisit the guidance again in terms of the second half, and I know you mentioned that it’s pretty typical for your business to be kind of back half-loaded which is certainly a fair comment. However, I just was more concerned with the magnitude of that because when I look at the average of the last five years it’s about 54% in the second half. And then even if I exclude last year, which was kind of unusual, it was about 53%. And so from that perspective what gives you that visibility into that incremental increase in the second half, especially considering that you’re going to be trying to build backlog at the same time?

Andrew Ory

Hi, Simona. No, and that’s a great question. When you’re doing your calculation, you are doing it on revenue. And when you do it on bookings when we talk about 42/58 what you find is exactly what you just did, which is a delta between that revenue and bookings growth tends to be the backlog that we create. So we have even more of a skew from a bookings point of view second half of the year versus first half of the year than we do from a revenue point of view. And so it really is a 42/58 back-end-loaded business.

Simona Jankowski – Goldman Sachs

Right. So then if the bookings is going to be even more back-end-loaded then what again gives you that kind of bookings visibility? Is it the enterprise business? Is it the beginning of some of the VoLTE projects, if you can just give us a few of the tangible examples that give you that bookings visibility for the second half?

Andrew Ory

Sure, I think it’s the largest enterprise funnel in North America that we’ve ever seen. I think it’s the enterprise business in Europe starting to come online. I think it’s a continued investment in SIP trunking in the United States and folks in Europe starting to invest into SIP trunking. And it’s the belief that some VoLTE spending might move into the back half of 2012. So that remains to be seen.

I also think that we’re seeing the cable space starts to pick up as well as they look away, as they move from just DOCSIS to things like SIP on the access side. And then the peering business between some of the Tier 1 service providers and some of the non-traditional termination providers perhaps like the cable companies or other Tier 1s are all areas in the market where we’d expect to see growth.

Simona Jankowski – Goldman Sachs

Okay. And then just last quick one, your indirect revenues seem to have declined about 42% sequentially if my math is right. Can you just comment on the drivers there?

Peter Minihane

I think from an indirect revenue side, Simona, we had, again, a very large order from AT&T in Q4 that was, for the sake of the ease of math, was approximately $15 million. That was in indirect in the prior quarter. And so what you’ve seen over the course of the year is indirect coming down slightly quarter-over-quarter and perhaps a little bit more dramatic from Q4 to Q1 if I pro forma it, that was probably about 38 million down to about 31 million from Q4 to Q1 and nothing real specific, again, mostly in North America at the end of the day.

Simona Jankowski – Goldman Sachs

Okay, very helpful. Thank you.

Peter Minihane

You’re welcome.

Andrew Ory

Thank you, Simona.

Operator

We’ll go now to the line of Jeff Kvaal with Barclays.

Jeff Kvaal – Barclays

Yes, thank you gentlemen. I think the only question that may be left is what the revenue contribution from the acquisition is this year, and what – how that plays your 10% view of the overall revenue growth? Thanks.

Andrew Ory

Sure, Jeff. One of the things that we’ve learned on this particular acquisition is that it is a truly great group of people, and we want to make sure that we leverage them for the strategic opportunity of building session management or enterprise SDN and leveraging the value proposition with the SIP trunking providers. And so some of the business that startup companies tend to claw out tends not to be kind of strategic business. So we don’t want to put them under a lot of pressure from a revenue expectation point of view, but I would say probably a few million dollars perhaps, I mean, that’s about it. Now, I hope we can do a lot more, but we’re not building it into our plan.

Peter Minihane

Yeah, again I think we’ve looked at it, Jeff, that it’s a incredibly strategic acquisition for us. Seamus and our other founder Pat Melampy, who were tremendous advocates of this acquisition, and the materiality of the revenue was not what drove us, but rather the importance strategically of the products.

Jeff Kvaal – Barclays

Okay. Thanks. I was just want to make sure that you guys were getting a little boost towards that 10% revenue growth and the underlying business was actually little bit lighter.

Andrew Ory

Well, no. We’re not.

Jeff Kvaal – Barclays

Okay, all right. Excellent, thank you. Thank you all very much.

Andrew Ory

Okay, sure, Jeff. Thank you. And thank you everyone for joining us this evening. We look forward to seeing as many of you as possible during this outreach period and updating you on our continuing progress during our next conference call. Thank you and good night.

Operator

And ladies and gentlemen, today’s conference call will be available for replay beginning at 6:30 PM this evening and running through midnight on May 16. You may access the AT&T playback service by dialing 1-800-475-6701 and then entering the access code of 243684. International dialers may use 320-365-3844. Those numbers again are 1-800-475-6701 or 320-365-3844 both using the access code of 243684.

That does conclude our conference for today. We do thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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