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Executives

Robert Vrij – President & Chief Executive Officer

Anne Brennan – Interim Chief Financial Officer

Analysts

Tom Roderick – Thomas Weisel Partners

Matthew Hoffman – Cowen and Company

Amir Rozwadowski – Lehman Brothers

Peter Jacobson – Brean Murray, Carrett & Co.

Scott Sutherland – Wedbush Morgan Securities Inc.

Scott Zeller – Needham & Company

Openwave Systems Inc. (OPWV) F2Q08 Earnings Call January 24, 2008 5:00 PM ET

Operator

Good afternoon and welcome to the Openwave second quarter conference call. Today’s call is being recorded and will be available for replay starting at 5:00 p.m. Pacific time today. For opening remarks and introductions, I would like to turn the call over to Mr. Michael Bishop. Please go ahead sir.

Michael Bishop

Good afternoon and thank you for joining us today to discuss the result of Openwave Systems’ second quarter of fiscal year 2008. Joining me today from Redwood City are Robert Vrij, our President & Chief Executive Officer and Anne Brennan, our Interim Chief Financial Officer.

Before we discuss the results for the quarter, I want to remind everyone that we are operating under the rules of Regulation FD. Our second quarter financial results press release was distributed at the close of the NASDAQ stock market and if you have not seen a copy, you can find one at our website at www.Openwave.com. For your convenience, this call is being recorded and will be available for playback from our website for one year. Before we begin, I would like to remind you that any remarks that may be made on this call or in our earnings press release about future expectations, plans or prospects for the company may constitute forward-looking statements for the purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. The actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors. These factors include the specific risk factors discussed in the company’s press release that was distributed today at the close of the market and in the company’s filing with the SEC including, but not limited to, Openwave Systems’ peak fiscal 2007 financial results on Form 10K and any other reports subsequently filed with the SEC. We intend to make several forward-looking statements during the call that are based on management’s current outlook as of today. We do not intend to update these business outlook statements until the release of Openwave’s net quarterly earnings announcement and disclaim any obligation to do so prior to that time. However, we reserve the right to update the outlook for any reason during the quarter.

And with that, I would like to turn the call to Robert.

Robert Vrij

Good afternoon and thank you for joining us. Today I will cover our financial results and customer successes in the last quarter. I would also like to take a moment to address a topic related to the recent management change. As many of you are aware, Anne Brennan, our VP of Finance has assumed the additional responsibilities of Chief Financial Officer until we appoint a new CFO. Anne has been with Openwave for the past six years and brings considerable financial acumen to the business and is very committed to maintaining our continued operational discipline. Although we have initiated a search for a new CFO, I have every confidence in her abilities. A little later on in the call, Anne will provide a more detail view of the financials results and I will then discuss our financial performance for the remainder of fiscal year 2008. We will then take your questions.

The results for the second fiscal quarter fiscal year 2008 were revenue of $63.2 million. The EPS was a loss of $0.06 on a pro forma basis and we signed $80.4 million in bookings. Our EPS was less than we had anticipated, primarily due to lower than anticipated gross margin. As we discussed at our last conference call, bookings for Q1 fiscal year 2008 were $46 million, which was lower than expected partly due to two deals, which ended up being closed in early Q2. I am pleased that these deals, plus other substantial new deals that closed in the quarter, propelled us to $80.4 million in bookings for Q2 with nine new product wins. We remain subject to the typical purchasing pattern of our customers where the vast majority of deals are done in the last few weeks of the quarter and therefore, deal slows can move from one quarter to the next as we saw these past two quarters.

There is also natural cyclicality to our business and the close of the calendar year historically has represented an increase in new bookings, primarily driven by end of fiscal year purchases by our customers. That said, combining Q1 at a .73 book-to-build and Q2 at a 1.27 book-to-build, results yielded a book-to-build ratio of one to one for the six month period. Bookings for Q2 reflected a substantial increase in contribution from new products and licenses as a percentage of the total.

Before discussing key wins for the quarter, I want to take a step back and highlight the progress we have made in the last three quarters to stabilize Openwave. I consider this stabilization phase one of the plan of Openwave’s turnaround. From an operational standpoint, we have completed the first step in the process of right-sizing the company in line with our revenues, moving headcount from 1,231 in March of 2007 to 918 employees as of the end of December, 2007. During this three quarter period, we have been able to stabilize revenue, validate our new products in the marketplace with a total of 22 new product wins, completed phase one of our product portfolio rationalization, including the divestiture of a non-core asset in Musiwave this past quarter. We also have our first productized, versus customized, orders in house for our market differentiated Integra offering.

In the second phase of our product portfolio rationalization, which we are currently planning to implement in Q4, we will further streamline our offerings in order to maximize our relevancy in our core product areas. This product rationalization will be the primary driver in lowering the expense base of the company in order to achieve profitability over the next several quarters. The management team is currently working with the Interim CFO validating all of the variables and assumptions as we will consequently come back with more details on the Q3 earnings call. Understanding the need to execute as well in phase two of our turnaround, as we did in phase one regarding expense reductions, I can say that we expect to be profitable, that we as management need to get more comfortable with the timing and extent of our profitability.

Now, let’s look at the traction of our new products. As previously communicated, we are accelerating development of certain product roadmaps that are now paying off via new product insertions, including Integra and its service management enablers, specifically OpenWeb and Contextual Merchandising. In Q2, we sold the Integra service management proxy as the first productized solution offered by Openwave, securing three orders from tier one operators with no additional functionality or enhancement. This reflects real innovation from Openwave and a return to industry-leading products built for markets, rather than individual customers. Integra is clearly differentiated from the rest of the market to meet the needs of tier one operators. I am pleased with our execution in the area of productization, specifically with our Integra product, and we will look to replicate the success with more fully productized offerings across our portfolio.

This quarter we also witnessed our first hosted live deployment with a tier one North American operator for OpenWeb, our open Internet browsing solution. We also received our first channel order for Rich Mail, one of our next generation messaging products, which reflects early progress in our more diversified go-to-market strategy. The sale of Musiwave to Microsoft, which closed on December 31, 2007, will also allow us to fully focus on those core products responsible for enabling applications and infrastructure that allow operators to monetize the mobile Internet. As a result of the planned implementation of phase two of our product portfolio rationalization in Q4, we’re excited about mapping our portfolio to critical changes in the industry. The next phase of the mobile Internet is here. Operator’s barriers are coming down and more consumers are accessing the Internet via their mobile phone driven by much simpler, easier to use experiences. The successes we are witnessing in mapping to this key trend are tangible. A little later on the call, I will run through new product traction that demonstrates our success with our next generation gateway line, including our Integra proxy and OpenWeb, open Internet browsing technology which delivers mobile adapted web pages in an easy to read intelligent format.

Another critical trend in the mobile market is the entrance of new business models built around mobile advertising. We announced the general availability of our Contextual Merchandising solution in November and I’m pleased to report that we signed our first Contextual Merchandising customer during the quarter. Contextual Merchandising is a content and advertising recommendation solution that enables carriers to monetize off-deck traffic with targeted portal content and third-party advertising. We have ad enabled key lines of business and our leveraging our clients’ server advantage to create a complete value proposition for operators and a holistic experience for consumers. On the client side, we have ad enabled promotional widgets that can be customized by consumers or pushed by the operator. On the network side, our Contextual Merchandising solution allows operators to deliver targeted bannered advertising. Our Rich Mail solution also features the ability to include hyperlinked and context-based ads. We’re also working to extend our location solution to address new opportunities in location based advertising. In addition, we plan to extend the functionality in our key product lines to support growing areas, such as social networking, user-generated content and mobile video building new enabling applications that leverage our core messaging gateway and location infrastructure. I look forward to reporting on our new product development process in these areas in future calls.

Now I would like to discuss some highlights of our new product attraction. As I mentioned, we secured nine new product wins this quarter. These wins demonstrate positive momentum for the new functionality we’re bringing to our core set of offerings. In our gateway line of business, we’re witnessing demand for Integra, which is our next generation proxy. The Integra solution readily addresses our customers’ desires to leverage their existing gateway investment while an embracing an evolution path beyond that base content delivery to HTTP and RSTP protocols. Integra allows our customers to support these protocols inherently without the need for costly and time-consuming integration with a lower cost of ownership.

As I mentioned earlier, this quarter we secured three Integra wins with tier one operators, the deployment had no significant added customization, a key indicator of our return to a core software focus and a meaningful return to innovating in our gateway product line. This is a significant mark for the company and demonstrates not only our ability to productize key offerings, but also allows us, once the SOE is established, to recognize revenue for new product deployments in a much more meaningful way. The Integra wins included a license agreement with Telstra, one of Australia’s leading telecommunications and services company. Telstra selected Openwave Integra to support its evolution to a next generation proxy that supports open secure multimedia and multi-protocol service management support. We also secured an Integra win with Vodafone Spain, which follows last quarter’s successful implementation of our OpenWeb open Internet browsing solution. In addition, we signed an agreement with another tier one operator in Europe to deploy Integra.

In our Messaging line of business, we signed a deal with a top three North American cable provider to deploy Openwave’s new IP based commercial voicemail solution. The Openwave voicemail system is designed to enable a converged communications experience for their commercial and residential customers. We also signed an agreement with Vodacom South Africa, a Pan African GSM operator with more than 23 million customers to enable their mini-call service. We’re gaining increased momentum with Rich Mail, a key product that we offer to broadband providers. In the quarter, we signed an agreement with a European operator for Openwave Rich Mail a new [ajex]-based web mail solution that is designed to increase the value of messaging services. The value of Rich Mail for operators is that it’s taking email, which has traditionally been known as a cost center and turns it into a revenue generator with the ability to include contextual advertising and promotional opportunities.

In the location line of business we also continue to support emergency and commercial location services and this quarter signed an agreement with a tier one U.S. operator to support their latest E911 location offering. As we continue to innovate in our client line of business, we’re working with an operator in Asia Pac to deploy Midas for mobile widgets. I hope to report further details on this collaboration once our customer goes live with the solution.

Before I turn the call over to Anne, I would like to note the recent appointment of our new non-executive Chairman of the Board, Charles Levine. Charles brings nearly 30 years of experience in building profitable businesses for some of North America’s largest companies and previously served as President and Chief Operating Officer for Sprint PCS. I am personally pleased to have him serve as our Chairman of the Board. We also announced yesterday that Robin Abrams joined the Board, which increases our Board to eight directors, seven of which are independent. Robin brings nearly 35 years of executive management experience to Openwave, including key leadership roles at VeriFone, Apple and Unisys.

Now I would like to turn the call over to Anne. Anne.

Anne Brennan

This afternoon I would like to cover the highlights of our financial results for fiscal quarter two 08. Unless otherwise indicated, gross margin, expense and earnings release items are reported on a non-GAAP basis which excludes stock based compensation, amortization of intangibles and other acquisition-related costs, restructuring expenses and certain legal expenses. I would like to provide an update on the divestment of the Musiwave business. As you’re aware, we acquired Musiwave in January, 2006. In fiscal quarter four 07 we announced that Musiwave was no longer a fit with the long-term strategic direction of Openwave and accordingly, began accounting for Musiwave as an asset held-for-sale. On December 31, 2007 we concluded the sale to Microsoft for cash received of $41.4 million, plus a note receivable of $5.9 million which resulted in a gain of $16.5 million. For further details on the terms of the transaction, please refer to our 8K filed on January 7, 2008. Please access our financial metric summary that is available at www.Openwave.com to review Openwave’s historical financial performance, excluding Musiwave.

Revenue for fiscal quarter two 08 was $63.2 million compared to $63.0 million for fiscal quarter one 08 and $75.7 million for fiscal quarter two 07. For fiscal quarter two 08, the majority of our revenue was related to legacy products and services. The decrease in revenue on a year-over-year basis was the result of our ongoing product transition. For fiscal quarter two 08, Sprint-Nextel and KDDI represented approximately 21% and 12% respectively, of total revenue on an individual basis. No other customer represented more than 10% of our quarterly revenue. On a geographic basis, the Americas represented approximately 49% of total revenue, [inaudible] 17% and Asia 34%. After a strong fiscal quarter 08, [inaudible] has returned to its historic contribution rate. Asia experienced a more robust revenue quarter due to the revenue recognized from one large project.

Gross margin for fiscal quarter two 08 was 56.0% versus 58.8% for fiscal quarter one 08 and 62.2% for fiscal quarter two 07. The primary reason for the decrease in gross margin percent compared to fiscal quarter one 08 was related to our professional services business with a higher than expected costs associated with installations at tier one service providers in fiscal quarter two 08. The reduction on a year-over-year basis, in addition to the professional services impact noted above, was also due to lower license revenue at the percent of total revenue. For fiscal quarter two 08, license revenue represented 27% of total revenue and 28% for fiscal quarter one 08 and 33% for fiscal quarter two 07. The decrease in license revenue was the result of our ongoing product transition.

Operating expenses for fiscal quarter two 08 were $41.4 million compared to $41.5 million for fiscal quarter one 08 and $53.8 million for fiscal quarter two 07. The decrease in operating expenses for fiscal quarter two 08 as compared to fiscal quarter two 07 was primarily due to a reduction in force which was announced in fiscal quarter four 07. R&D expenses for fiscal quarter two 08 were $14.0 million compared to $14.2 million for fiscal quarter one 08 and $17.1 million for fiscal quarter two 07. The reduction in R&D expenses for fiscal quarter two 08 versus prior year was mainly due to restructuring. Sales and marketing expenses for fiscal quarter two 08 were $18.4 million compared to $16.6 million for fiscal quarter one 08 and $22.3 million for fiscal quarter two 07. The increase in sales and marketing expenses for fiscal quarter two 08 as compared to fiscal quarter one 08, was due to increased commission resulting from our strong bookings number as well as severance expenses incurred during the quarter. Sales and marketing expenses were lower in fiscal quarter two 08 as compared to fiscal quarter two 07, primarily due to reduced travel expenses and labor related charges. G&A expenses for fiscal quarter two 08 were $9.0 million compared to $10.7 million for fiscal quarter one 08 and $14.3 million for fiscal quarter two 07. The decrease in G&A expenses for fiscal quarter two 08 as compared to fiscal quarter one 08 and fiscal quarter two 07 was mainly due to lower professional fees and headcount related costs. Headcount as of December 31, 07 was 918 compared to 962 as of September 30th 07 and 1,264 as of December 31st 06. Headcount decreased by 346 or 27% year-over-year exclusive of Musiwave.

For fiscal quarter two 08 our operating loss was $6.0 million versus an operating loss of $4.5 million for fiscal quarter one 08 and an operating loss of $6.7 million for fiscal quarter two 07. The increase in the operating loss for fiscal quarter two 08 when compared to fiscal quarter one 08 was primarily due to reduced margins as covered above and when compared to the fiscal quarter two 07 was essentially due to lower revenue offset by improved operating expenses. Other income for fiscal quarter two 08 was $2.5 million versus $2.9 million in fiscal quarter one 08 and $4.9 million in fiscal quarter two 07. The decrease in other income for fiscal quarter two 08 when compared to fiscal quarter two 07 was the result of lower interest income due to our reduced cash balance.

Our non-GAAP net loss for fiscal quarter two 08 was $4.9 million or $0.06 per share compared to a non-GAAP net loss of $3.4 million or $0.04 per share for fiscal quarter one 08 and a non-GAAP net loss of $4.0 million or $0.04 per share for fiscal quarter two 07. As in the case of our operating loss, lower margins and particular professional services was the cause of the unfavorable comparison. Our GAAP earnings per share from continuing operation for fiscal quarter two 08 was a net loss of $11.3 million or $0.14 per share compared to a GAAP net loss of $13.8 million for fiscal quarter one 08 or $0.17 per share. For fiscal quarter two 07 our GAAP net loss was $15.8 million or $0.16 per share. Please refer to the financial statement included with our press release issued earlier today which has a reconciliation table for GAAP and non-GAAP net income.

[Inaudible] funding for fiscal quarter two 08 were $82.4 million, $82.2 million for fiscal quarter one 08 and $93.4 million for fiscal quarter two 07. The decrease from the prior year reflected the impact of our share repurchase program of 11.8 million shares completed in April, 2007. Biddings for fiscal quarter two 08 were $80.4 million which represented a bid-to-bid ratio of 1.27 on a quarterly basis and 1.0 on a year-to-date basis. Our biddings for the quarter included nine contracts for our next generation products or large new projects.

Backlog as of December 31, 07 was $262 million compared to $249 million as of September 30th 07 and $284 million as of December 31st 06. Deferred revenue as of December 31st 07 was $53.4 million compared to $62.3 million on September 30th 07 and $59.7 million on December 31st 06. The primary reason for the decrease in fiscal quarter two 08 versus fiscal quarter one 08 was a release of revenue from a contract with one major carrier. Cash and investments as of December 31st 07 were $292.8 million compared to $369.9 million as of September 30th 07 and $470.6 million as of December 31st 06. The increase in cash and investments as of December 31st 07 compared to September 30th 07 of $23 million was a result of the conclusion of the Musiwave transaction which generated $39.4 million net of cash divested and cash used for operations of approximately $18 million offset by other net cash activity of $2 million. Net cash use for operations included approximately $8 million of cash paid for one off retention bonuses.

On a year-over-year basis, cash and investments decreased as a result of our stock repurchase program of $100 million and a special dividend of approximately $100 million in fiscal quarter four 07. Accounts receivable were $51.0 million as of December 31st 07 compared to $56.3 million as of September 30th 07 and $135.1 million as of December 31st 07. During fiscal quarter two 08, cash collections were $60 million. Turning to the elements of accounts receivable, first billed accounts receivable, these include payments due from customers for which we have recognized revenue and in some cases have not recognized revenue. Billed accounts receivable as of December 31st 07 was $35.3 million compared to $42.1 million on September 30th 07 and $104.1 million on December 31st 07. Next we have unbilled accounts receivable which reflect future customer billings but have been included in revenue. Unbilled receivable as of December 31st 07 were $15.8 million compared to $14.2 million on September 30th 07 and $31.0 million on December 31st 07. Finally DSOs were 73 days as of December 31st 07 compared to 80 days on September 30th 07 and 161 days on December 31st 07. Our DSOs decreased by over 50% year-over-year as a result of improved financial disciplines and cross function collection efforts. We continue to maintain our targeted DSOs of 80 days.

Back to you, Robert.

Robert Vrij

With respect to the convertible debt which is due in September of 2008, we’re actively investigating all available options at this time taking into consideration the current market environment. When we have something to report on this topic, we will let everyone know.

I’d like to close the call by saying that, as I indicated when I was appointed Openwave’s President and CEO nine months ago, my intentions remain to instill operational discipline and managed growth at Openwave. I can assure you the entire management team is committed to profitably rebuilding the company. We’re seeing tangible market validation of our new products which fundamentally demonstrates alignment with our customers’ needs and their continued support of Openwave as a vendor of choice for applications and infrastructure that enable the modernization of the mobile Internet. I am committed to continuing the positive momentum we have built since I joined the company. We’re focused on building long-term value for our employees and shareholders and we’ve made progress over the last nine months in stabilizing our top line while reducing operating expenses by approximately 25%.

To the specific point of expenses, forthcoming reductions should be viewed as tied to the next phase of product portfolio rationalization which we’re currently scheduled to begin in Q4. We anticipated that it might take two subsequent quarters to get the full reduction realized. This is consistent with what we have seen with the expense reductions tied to our Q4 2007 initiative. The net result will be a streamlined portfolio maximizing our ability to innovate as we’re already seeing with our Integra offering via the concentration of R&D investments, as well as further alignment of R&D with growing addressable markets and capitalizing on positive industry trends. This will serve as the foundation of building the business for long-term sustainable profitability.

With that, Operator, I’d like to open the call for questions.

Question-and-Answer Session

Operator

The question and answer session will be conducted electronically today. (Operator Instructions) We will go first to Tom Roderick with Thomas Weisel Partners.

Tom Roderick – Thomas Weisel Partners

I wanted to turn my question here onto the cost side and Robert you just gave some indication that some cost reductions might be forthcoming in the fourth quarter here. Can you talk a little bit about the operating expense line as we look at it for the next few quarters? I mean, has there been sort of some shift in philosophy towards expense reductions or is this a timing issue where you simply need to wait for further product rationalization and that takes a couple of quarters? Can you just walk us through some of the timing and what level ultimately you’d like to see that operating expense line get to?

Robert Vrij

So, basically our philosophy for the phase two really of our turnaround plan is to ensure that we have the portfolio that we can invest ample R&D dollars in so that we can be relevant to operators in those areas that we deem to want to dominate and have market leadership in. And so our concentration of operating expense reductions are going to have to be aligned with our decisions as it relates to the product portfolio that we want to build the future of Openwave around. And, as it relates to the specifics of that, I will be more specific on future calls, but right now as stated in basically the earlier part of the call, is that we’re going with this management team and validating currently all the different assumptions associated with what we have in terms of products, as I mentioned, new products that we’re going to be adding to the portfolio, the assumptions around that, and we want to go through that process especially with Anne’s new addition in order to validate and get comfortable around all the moving pieces of it. However, I have stated as I said in the script, that we’re all very dedicated and committed to make sure that at the end of all of this, we’re a profitable company.

Tom Roderick – Thomas Weisel Partners

Okay. Good. Just one quick follow up question, if I could here, you had some nice wins in the quarter on the Integra side of the business, the messaging side of the business, but would be curious for any update you can offer on the client side of the business, haven’t heard much about this in a little while. Can you offer some insights as to what’s going on in the client business? How much traction you’re getting? And then, as we look into next quarter, one thing that is called to mind here, as I do recall a somewhat sizeable deal with Motorola a few years ago that I think was a two year site license deal. So, if you could just provide some update on the relationship with Motorola as we sort of lap the two year comparison on that contract? That would be helpful. Thanks.

Robert Vrij

So, on the client side, we did earlier, as part of the early part of the call here, noted that we had traction in Asia Pacific to a mobile widget solution that we’re doing with a particular customer there. We’re in the process, we’ve secured that business and I want to provide more detail when that actual order turns into a live deployment. So, we do continue to see traction there and really, in terms of the sizing of it and sharing more information relative to that specific traction, I’d like to reserve that to when the customer actually puts the live deployment in place. So that’s one. On the other, I’m glad you asked the question because it also ties to the question around expense reductions, future profitability, etcetera. As you know, a couple of years ago there were some substantial transactions that were done that are in the next couple of quarters are due for their renewal and my philosophy relative to those transactions is to encourage the Phils organization to basically structure those deals so that the revenue can be taken ratably rather than in one big chunk. And so it’s a philosophy that we’ve committed to here. It’s basically a work to be on the Phils organization side to negotiate that and construct that appropriately, but every attempt and endorsement and sponsorship from my office is going to be to turn several of those sizeable contracts into ratable transactions so that we have a consistency in the backlog and the strength in the backlog that delivers the consistence that I’m looking for.

Tom Roderick – Thomas Weisel Partners

Do you have any evidence with customers, Robert, that they’re open to sort of restructuring the agreements in that manner? It sounds like a great solution. What would the customers have to say about it?

Robert Vrij

It’s really at this point work in progress on each individual case basis. There is, and just part of the normal process of negotiations, some of them might be more open to it than others. This is specifically though geared towards those renewals that you highlight or those transactions that were done a couple of years ago. And so, for those specifically, that’s my relevance to my statements or comments were specifically pertaining to those. I have just basically instructed the sales team to try to make those as structured as possible so that the revenue comes over, in certain cases a two year period, versus one initial and one only spike. So, relative to working with the customers just in short, it’s a different case-by-case basis and it’s just going to have to be grinded out by the sales team like most of our transactions require.

Operator

Next we’ll go to Matthew Hoffman with Cowen.

Matthew Hoffman – Cowen and Company

Robert, a couple of questions here on the backlog, I’d like to get a little bit more color. It seems like a pretty good number, 22 wins. Of the 80.4 million in backlog, or bookings rather, how much of it is the new products right now?

Anne Brennan

I can take that part of the question, Robert. I’d like to introduce myself actually because I’m new to a lot of you. I look forward to working with you over the next couple of days on the calls and getting out on the roads and spending some time with you. Specifically in answer to the question new product element of the bookings, it’s in excess of 30%.

Matthew Hoffman – Cowen and Company

Okay. And the comparable number last quarter was?

Anne Brennan

About half of that actually.

Matthew Hoffman – Cowen and Company

Okay. And then, Robert, as you look through , I know you don’t want to give me all the details here, but could you kind of rank the new products from the Rich Mail, OpenWeb, Integra and the Contextual Merchandising, can you give us an idea exactly what the mix is? Or not exactly, but an idea what the mix is in bookings?

Robert Vrij

I certainly can give you some indication. Relative to where we’ve seen an amazing amount of traction, where you’ve seen certainly some highlight in my earlier part of the call, Integra has been a great success for us to date and, furthermore, so I highlighted that those again were sold in a productized manner versus a customized, which is again a key element of execution I wanted to focus on as a company so that you actually can get success in the marketplace via innovation without customization. And we’re seeing Integra being a leader for us as it relates to that particular product offering, the real great way that we’ve designed and architected that product is that it actually can serve as the services platform for solutions such as OpenWeb and Contextual Merchandising. So, it’s once you sell Integra, it’s really a great product within itself, but then it becomes a very strategic element into the network of the operators by having these revenue-generating plug-ins like OIB, OpenWeb, as well as Contextual Merchandising. So that is definitely the biggest bucket of contribution that we see. Secondly, really our next generation product in the family of messaging has also seen success and we’ve highlighted some Rich Mail wins throughout the quarters and up through the last several quarters that we’re starting to see traction. But certainly between those two, we see Integra being the largest contributor.

Matthew Hoffman – Cowen and Company

Okay. And then, the final questions here, as you look at Integra and you think about how you’re charging for that product and then you made some reference to wanting to make this a ratable product sale, how exactly are you doing that? Are you charging by the license? By the user that signs up? And in many cases, these are replacement for existing products that you have with the carriers? And the final question is, as you look at the total installed base of Openwave products out there, the old WAP gateways, the MAG gateway, what is the potential market for Integra? Is it a one-for-one? And what’s the rough penetration now? Thanks.

Robert Vrij

Relative to the pricing of Integra, we uniformly find that to be done on a case of by license and so now, in the second part of your question, really as it relates to the WAP gateway, the traditional MAG that you’re referring to is that we’re really starting to see those customers that have seen a lot of penetration in walk-run and walk-to traffic. Really looking at our solution because of the fact that it’s completely backward compatible and has all the feature functionality, the traditional MAG gateway, WAP one, lap two gateway delivered, plus now delivers in a much better total cost of ownership a solution that is not only an Internet working gateway function, but a service delivery platform. So, we are again leveraging the WAP gateway, our encumbrancy and the pioneering that we’ve seen historically from the MAG gateway, as being a huge leverage point because the association with Openwave is, “MAG gateway, boy these guys really know how to do this infrastructure piece well.” So, we’re coming into those solutions where operators are looking to grow and do a cap and grow strategy on the MAG gateway and move all their new traffic to Integra and we’ve seen also those customers that are looking opportunistically at getting a product with a better total cost of ownership, a lower price going in the market, but also delivers them a great way of driving new incremental revenue versus – from the plug-ins I referred to. For example, open Internet browsers [inaudible] Contextual Merchandising.

Operator

Next we’ll go to Amir Rozwadowski with Lehman Brothers

Amir Rozwadowski – Lehman Brothers

Based on what Anne said, you’ve seen some traction in revenue, in new products in backlog in terms of increased contribution. When do you expect to see some of these new products translate into increased license growth? When should we start to see a return to sequential growth and license revenues?

Robert Vrij

There’s a couple of different things, there is a couple of enablers that I think will help us as we go, specifically in Integra. As we look to take more advantage of the fact that we productized this offering, it allows us to establish VSOE and giving us an opportunity down the road to have shorter book-to-revenue cycles. The timing associated with that can be a couple of quarters or several quarters out. It’s a positive trend that gives us an opportunity to potentially get to revenue sooner than we’ve had in the traditional customized manner. Anne, I’m going to have you add a little bit of color to that if you’d like.

Anne Brennan

I think what we’re still seeing is traditionally we’ve seen a rollout of somewhere between four and six quarters and that’s still prevalent in the backlog that we have right now, as we move to a more productized solution, that is bound to change. But, as we see it right now, it’s pretty much as it was at four to six.

Robert Vrij

Relative to the part B of your question, relative to the size or contribution of the license component, certainly as I mentioned in part of the earlier script, we did see an increase in the percentage of license as part of the total bookings and so, at some point in time, that’s going to roll out of the backlog. That’s all at this point we want to comment about, but I think that is an important milestone for us, if you’d like.

Amir Rozwadowski – Lehman Brothers

In terms of the Integra revenue, is that booked in your gateway line of business?

Anne Brennan

Yes, that would translate to our gateway revenue in terms of our product split. Yes, you’re correct.

Amir Rozwadowski – Lehman Brothers

My question there is we’ve seen, including you folks are getting some traction when it comes to the next generation platform, but certainly there’s been a sharp drop in gateway revenues during the quarter on a sequential basis. Is that related to sort of a tapering down of the previous MAG gateway business? Or not revamping there? I’m just trying to understand where that drop-off came from.

Robert Vrij

Yeah, Amir, there’s certainly – and I don’t know exactly the extent to be honest with you in terms of the drop that you might be referring to, but it is related to the MAG business, which is just legacy business that is on the trend line as one would think as products age, that you should see some decrease there. What we’re replacing it with is obviously Integra and, though we put it in a gateway category, it’s very important to make a distinction here, Amir, because it is a gateway plus from a perspective of it performs that functionality, but then it has its service delivery capability that is really the ability for the operators to get to next generation revenue incremental applications and services to their customers. So, I know a lot of times we’d like to be grouped in a category of gateways as it relates to this specific product area, but really what allows to win and differentiate and really claim innovation and win based on feature functionality is having to do with that service delivery enablement that we bring with that particular offering.

Amir Rozwadowski – Lehman Brothers

Lastly, I believe that you had another line item, the other revenues that have sharply picked up from the last quarter. Is that were some of the new business lines that you’re seeing traction are being recorded? Some of the Contextual Merchandising and so forth?

Anne Brennan

That’s where it would be classified. However, Contextual Merchandising, the deal that Robert talked about earlier, doesn’t register in this quarter. But yes, in principal, you’re correct.

Amir Rozwadowski – Lehman Brothers

And then my last question is Sprint represents about 21% of revenues for you folks this quarter. Certainly we’ve heard many of the challenges that the carrier has faced. Just wanted to get your sense as to your positioning with them and sort of how the relationship currently stands?

Robert Vrij

Really, what we have as you know a lot of deployments within Sprint. Our footprint along a large number of products is quite substantial and we continue to work very closely with Sprint and we obviously recognize some of the organizational changes that are going on within Sprint. I believe our relationships are deep and alive within this account and the partnering that we’ve experienced between the two companies has been really unique and special. As it relates to some of the latest products that we’ve come up, they’ve certainly been one of those companies that has continued to want to get on the forefront and be an early adopter with us, so to speak. So, I don’t see that relationship materially changing, but we are conscious of anytime there’s a management change, that there might be a budgetary change associated with that, but right now I believe based on the investment we have with people on the ground, the relationship we have at executive’s levels as well as the lower levels in the company, really speak to a very special strategic partnership with the two companies. I don’t see that fundamentally changing.

Operator

Next we’ll go to Peter Jacobson with of Brean Murray.

Peter Jacobson – Brean Murray, Carret & Co.

Robert, on the point on the rationalization in Q4, I just wanted to understand that timing a little bit better. You’ve been rationalizing products all along and what’s the distinction between, say what’s happening in Q3 versus Q4?

Robert Vrij

Really what the focus of our product portfolio rationalization is this time as in phase two, it’s really the second part to really what an effort we started almost nine or ten months ago now, is to take a very rich robust set of products down to a much more manageable set. When we have a very specific and defined R&D budget and historically it’s been pooling from many, many, many products, we’ve decided to make a calculated decision to focus on those areas consistent with the legacy and pioneering that we’ve established as a company, the brand awareness, all of the things that customers know us the best for, concentrate our efforts along those products. And actually build new products around a couple of different major product lines that we basically now believe that with the reallocation and redistribution of R&D dollars on a smaller set of products, we can not only be relevant, we can actually have a very significant market leadership position in those products that we deem to build the future around.

So, it’s a again phase two of more narrowing down the portfolio and being very much so specific about where we’re placing the bets so that we have a manageable set of products within our portfolio to where we’re not being outspent every day, that we are having from an R&D perspective as good of a chance, and if not better, to lead the market with innovation, be to the market first and really lead the market with products that are best in class, that are within the families that customers are accustomed to seeing us participate in. So it’s just accelerating the narrowing of the portfolio and then aligning the R&D efforts behind that to give us more proof in the marketplace, so to speak.

Peter Jacobson – Brean Murray, Carret & Co.

So the timing is in Q4 that’s going to take place or completed in Q4 or starting in Q4?

Robert Vrij

Earlier I referenced that we will start that effort in Q4 and that would be the primary driver to expense reductions, very similar to what you saw from us in Q4 2007 and that reduction will be materialized over the two subsequent quarters like you saw in Q4 2007.

Peter Jacobson – Brean Murray, Carret & Co.

A question on the revenue mix, you’ve talked about standardization of products, less customization and does that – I would assume that would cause some shift from professional services into the license line item, but is it also a – would it also impact the project systems line item which I notice has come up substantially in the last couple of quarters?

Robert Vrij

Certainly one of the philosophies behind wanting to productize is, is that to your point exactly. The professional services component becomes less significant as a percentage of the total deal. Therefore, margins go up. But also it ties to the diversified go-to-market strategy that I articulated earlier. The only way really that somebody is willing and able to channelize your products is by looking a little more like a product that can be sold in an as-is manner without a lot of work associated with it, in terms of customization by the channel itself, so that now gives us an avenue to have other feet on the street selling our products and so there’s really a couple of selfish items that we wanted to capitalize that relates to that. Anne, I would like you to talk about the project question.

Anne Brennan

Peter, we will obviously need to do large projects, they tend to be in excess of $10 million, there’s a third-party component of hardware and software and we will continue to do those. We have a couple in the pipe right now that we’re working and that will tear off, but in terms of future, we will continue to do projects and that will remain our strategy with regards to productization.

Robert Vrij

So really what I think that means is that even though we have products that are “productized” or standardized, we still have customers out there that appreciate our system integration function and, therefore, we might be asked to go and, not only install and deploy our solution, but in some cases, some customers you might imagine would want a little bit more of a turnkey solution and, based on the relevant experience that we have in our professional services organization, they may ask us to do a little bit more rather than just our own products. Does that make sense to you?

Peter Jacobson – Brean Murray, Carret & Co.

Yeah and just in terms of, say the upcoming quarters, are you saying that this mix you anticipate would stay about the same and it’s quite a few quarters out before this mix might improve?

Anne Brennan

Our expectation is that the productization will take, as I explained earlier, the model that we’re seeing right now has been four to six quarters roll out. So in the immediate quarters we’re not going to see a significant change in terms of the license component of the revenue.

Operator

We’ll take our next question from Scott Sutherland with Wedbush Morgan Securities.

Scott Sutherland – Wedbush Morgan Securities Inc.

First a quick one for Anne, maybe you’ve already talked about the new products in backlog, maybe talk about the last few quarters, the percentage of new product revenue?

Anne Brennan

Yes.

Scott Sutherland – Wedbush Morgan Securities Inc.

How much of revenue is new products this quarter and maybe last quarter?

Anne Brennan

That’s not something that we normally disclose, Scott, but to give you a rough number, it’s relatively insignificant number right now. We are seeing growth in the number over the quarters and we will continue to see that as it rolls out from the backlog.

Scott Sutherland – Wedbush Morgan Securities Inc.

A quarter ago you guys talk about more stable revenue for the next few quarters in terms of operating margin by Q4 clearly the backlog should imply some stable revenue. But, it sounds like you might be pushing your operating margin goal out a couple quarters. Is that fair?

Robert Vrij

We’re just currently in the process, as you might imagine, with the recent management change here going through and validating every number. Any number I feel like I want to disclose to the street, as you might imagine, needs to have a full buy in from everyone and with the fact that we have some new faces around, I want to make sure that everybody has a chance to challenge some of the assumptions that were in there. One of them was actually called upon in an earlier question which had to do with our position relative to a couple of side license deals and my personal opinion to make a decision to structure those in a ratable fashion versus taking the revenue all in one chunk as we saw a few years back. So, those types of assumptions are ones that we’re discussing and validating that we need to just sort through as a team.

Scott Sutherland – Wedbush Morgan Securities Inc.

A couple of questions on products and that will be it. You guys, over the years have had over 50 carriers with the old lap one, lap two gateways and now you have Integra and going through new sourcing strategy. So, given the macro environments, what’s a necessity to then kind of go through this update cycle? What’s your ability to fend off any competition from replacing your [inaudible] insertion.

Robert Vrij

We do have somewhere north of 50 customers that have historically been on the MAG gateway. We do believe that we are certainly going to those customers with either a gap and grow or replacement strategy. We’ve also seen actually, the team secure a couple of new wins with new customers and so therefore, kind of expanding the universe so to speak beyond the traditional or existing customers where we just happen to have some incumbency. So relative to this particular product we’re so confident about really the innovation and the competitiveness it reflects that I’m challenging the sales organization to really bring this solution to as many customers as possible. This also might be a product that is again, due to the nature of the productization effort that we’ve been able to execute on that could find a home in a channel organization as well. So, I think we have a lot of options with this particular product and I do believe that we’re going to go, obviously the low hanging fruit is those existing MAG customers that really are accustomed to having Openwave’s product perform in an amazing matter and they’re very pro Openwave but, we want to go beyond that. This product has a huge market appeal and we’re going to look to really expand really our tradition reach of operators.

Scott Sutherland – Wedbush Morgan Securities Inc.

One last question is on product lines or products that have been discontinued. Should we assume it’s just the older products like the old gateways, the old basic email systems, the old browsers? Or, is there any sort of overall product lines that are being deemphasized out there?

Robert Vrij

There will be definitely emphasize around products that may be have less of an addressable market today that we’ll look to certainly put more effort just in the sustaining piece of that and move potential R&D dollars into those buckets that we believe give us the best ability to participate in the largest addressable market possible. So, you’re right it will be a combination of several things that are not only driven from a pure P&L perspective, aging of products, but also what’s the strategic value to us as we’re putting and have put our strategy together relative to participating in industry trends, social network and user generated networks and mobile advertising.

Scott Sutherland – Wedbush Morgan Securities Inc.

But nothing to share what you’re going to deemphasize like Musiwave?

Robert Vrij

No, not at this point. Operator, I would like to just have one last question please.

Operator

Okay. We’ll take our final question from Scott Zeller from Needham & Company.

Scott Zeller – Needham & Company

Could you tell us for the new product set, are all these products being sold as radable? And also, we heard Integra is less in need of customization, are all the new products similarly constructed?

Anne Brennan

We look at each individual contract in light of its specific characteristics in applying whichever revenue model suits be it term payable or ratable. It pretty much depends on the characteristics of each contract.

Robert Vrij

Just one more time can you restate the second piece of the question?

Scott Zeller – Needham & Company

You were speaking how Integra was deemphasizing customization and it’s more packaged. Do the rest of the new product sets look the same? Are they deemphasizing customization?

Robert Vrij

We first wanted to kind of prove to ourselves with Integra and we now believe with three orders in house from operators that have purchased this on an as-is basis without additional feature functionality enhancements to them that it’s a model that absolutely gives us a much bigger ability to accelerate the business and replicate the successes. So now, as it relates to the existing product portfolio we are in the process of looking into what is the requirement on a case-by-case basis to bring those particular products more in line with productization and then any new product development that we are going to do certainly as a major requirement is going to have this particular element. For the sole purpose again, for the ability to replicate success, the ability and benefits it brings from a potential revenue book-to-revenue cycle and then also from a channel perspective. Because, if it’s productized it can get in the hands of someone else to be sold somewhere else in the word.

Scott Zeller – Needham & Company

Lastly, on gross margins can you give us any sort of indication how that will trend in the next few quarters?

Anne Brennan

With regards to margins we’re expect the margins to pretty much have the same profile as the last two quarters. So, we did see a dip from 58 down to 56 this quarter, that was in regards to the PS margins which I spoke about earlier. But, we’re expecting it to pretty much have the same profile going forward for the next couple of quarters.

Robert Vrij

With that I’d like to again thank you for your time and interest in Openwave and personally look forward to spending more time with you as I have an opportunity to maybe see some of you on the road shortly. Thanks and with that I’ll close this call. Thank you operator.

Operator

That does conclude today’s call. You may disconnect your lines at this time.

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Source: Openwave F2Q08 (Qtr End 12/31/07) Earnings Call Transcript
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