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Executives

Brian Norris, Director of Investor Relations

Andy Ory, President, Chief Executive Officer & Cofounder

Keith Seidman, Vice President, Finance & Chief Financial Officer

Seamus Hourihan, Vice President, Marketing & Product Management

Analysts

Paul Silverstein - Credit Suisse

Ehud Gelblum – JP Morgan

Brant Thompson - Goldman Sachs

Ted Jackson - Cantor Fitzgerald

Troy Jensen - Piper Jaffray

Eric Kainer - ThinkEquity

[Vejay Inaudible] - Deutsche Bank

Catharine Trebnick - America’s Growth Capital

Greg Mesniaeff - Needham & Company

Acme Packet (APKT) F4Q07 Earnings Call February 7, 2008 5:00 PM ET

Operator

Welcome to Acme Packet’s fourth quarter 2007 earnings release conference call. (Operator Instructions) I would now like to introduce your host for today’s call, Brian Norris, Director of Investor Relations, for Acme Packet.

Brian Norris

Thank you, Cindy, and good evening everyone. With me on the call this evening is Andy Ory, our President and Chief Executive Officer; Keith Seidman, our Chief Financial Officer; Seamus Hourihan, our Vice President of Marketing and Product Management. Tonight after the market closed, we issued a press release announcing our fourth quarter and full year results. This announcement will be the focus for this evening’s call.

Before we begin, we would like to remind you that the statements made during this call that are not historical facts, may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Such forward-looking statements may relate among other things, to our position in the session border controller market; our expected financial and operating results, including expected revenue and earnings per share for full year fiscal 2008 on both a GAAP and non-GAAP basis; our ability to build and grow Acme Packet; the benefits of our products; and our ability to achieve our goals, plans and objectives.

Such 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, uncertainties and additional factors that could cause actual results to differ materially from those projected or suggested in any forward-looking statements, is contained in our recent fillings with the SEC, including those factors discussed under the caption ‘Risk Factors’ in such fillings.

Investors should not place undue reliance on such statements which are current only as of the date made, and we disclaim any obligation to update them. All results and projections we review this evening are on a non-GAAP basis, unless otherwise and exclusively described as GAAP.

During this call, we will be referring to non-GAAP pretax earnings, non-GAAP net income and non-GAAP net income per share, which are non-GAAP financial measures that excludes stock-based compensation expense for all periods presented.

Non-GAAP measures in 2006 also exclude the benefit of the release of the company’s deferred tax asset valuation allowance, which was a one-time event which occurred in the fourth quarter of fiscal year 2006 and is not expected to recur in subsequent fiscal years.

A copy of our earnings press release, along with the accompanying income statement, balance sheet and operating statistics, as well as a reconciliation of non-GAAP financial measures to the most directly comparable GAAP measures, is available on the Investor Relations section of our website at www.ir.acmepacket.com.

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

Andy Ory

Thank you, Brian, and good evening everyone. We are delighted to be reporting solid fourth quarter results, which caps the most successful year in our company’s history.

We reported record revenues of $31.4 million in the fourth quarter, an increase of 32% compared to the fourth quarter of last year. This is the ninth consecutive quarter that we have delivered sequential and year-over-year revenue growth. Our full year revenues grew to $113.1 million, up 34%, compared to $84.1 million in 2006.

Our top line growth was fueled by significant new customer additions, deeper penetration within our existing customers, strength from our indirect sales channel and an increase in North American spending. We added 120 new customers in 2007, and now have 500 customers and over 5,000 session border controllers deployed worldwide. We expanded our market share in 2007 among the top 100 Tier I service providers from 72% to 82%, which we believe can lead to exciting expansion opportunities.

We delivered record gross margins of 82% in the fourth quarter, up from 79% in the fourth quarter of last year. Full year gross margins were 81%, up from 79% last year. Four consecutive quarters of gross margin expansion in 2007 is a strong testament to the strength of our solutions and clear position as the leader in our market.

We delivered non-GAAP operating margin of 28% in the fourth quarter and 27% for the full year. We reported record non-GAAP pretax earnings of $10.5 million in the fourth quarter, an increase of 46% compared to the fourth quarter of last year.

We also delivered non-GAAP EPS of $0.10 in the fourth quarter and $0.36 for the full year. Our earnings growth in 2007 bolstered by our already strong balance sheet as we ended the year with cash and cash equivalents of $136.4 million, up from $118.7 million a year ago.

Looking ahead, we are tonight introducing our business outlook for 2008. In developing our plan for the New Year, we gave great consideration to a number of factors, including the current macroeconomic environment, our current visibility, the nature of the strategic discussions we are having with our customers, and the expected impact of our new product releases for the enterprise, contact center and wireless market

I am going to turn the call over to Keith who will review our outlook in more detail, as well as provide a closer look at the numbers we reported tonight. But before I do, I want to briefly touch on the second release we issued tonight. Specifically, Keith plans to retire after nearly 30 years of service, the last seven of which have been with us helping build Acme Packet into the market leader it is today.

Keith will continue in his role until a new CFO has been appointed and a successful transition period has been completed. Keith has no immediate plans other than working with us to ensure an orderly transition to a new CFO and then spending more time traveling with his family and pursuing philanthropic interests.

On behalf of the Board of Directors, I thank Keith for all his contributions to our success. While there is never an ideal time to lose a valued member of the leadership team, we certainly respect Keith’s decision and timing.

His thoughtful leadership from our early stages of development to our IPO, to our now six quarters as a public company, has certainly strengthened our position as we enter into the next phase of our growth. I am confident that based on our leadership position in the SBC market, the strong value proposition we offer to our customers, and Keith’s continued involvement, we will be able to recruit a world-class CFO to join our already very strong management team and finance organization.

With that let me turn the call over to Keith for a closer look at the numbers.

Keith Seidman

Thank you, Andy, and good evening everyone. We are pleased to reporting solid fourth quarter results, which were highlighted by record revenues, gross margins and pre-tax earnings. I am going to start with a review of our fourth quarter results, then a few comments on our full year performance, and finally our outlook for 2008. As a reminder, all results and projections we review this evening are on a non-GAAP basis, unless otherwise and explicitly described as GAAP.

I will begin with our fourth quarter results. Revenues grew to a record $31.4 million in the fourth quarter, marking our ninth consecutive quarter of both sequential and year-over-year revenue growth. Our top line performance reflects strong sequential growth here in the United States and higher than expected contribution from our indirect sales channels.

Product revenues grew to $26.2 million, up 6% sequentially and 32% year-over-year. This growth is primarily due to an increase in the quantity of systems sold and increase in average selling prices driven by increased software content and overall strength from our channel partners.

Maintenance, support and services revenue grew to $5.2 million, up 7% sequentially and 35% year-over-year. This growth primarily reflects an increase in maintenance and support fees associated with the growth in our installed customer base, as well as an increase in installation, professional services and training revenue.

Composition of our fourth quarter revenues was 69% indirect and 31% direct. Three channel partners each accounted for 10% or more of our fourth quarter revenues, Alcatel-Lucent, Ericsson and Nokia Siemens Networks. No direct customer represented 10% or more of our fourth quarter revenue. Geographically, 45% of the revenues came from United States and Canada, and 55% came from our international customers.

Gross margin grew to a record 82%, reflecting a favorable product configuration mix, as well as a higher level of software content, including software upgrades. Total operating expense in the fourth quarter was $16.8 million, or 54% of total revenues, compared to $13 million, or 55% of revenues in the fourth quarter of last year.

The increase in absolute dollars reflects growth in head count in all functional areas, higher selling expense related to our top line growth, and an increase in facilities expense due to our expansion here in the United States, as well in Europe.

Operating income grew to a record $8.9 million in the fourth quarter, with operating margins expanding to 28%. Total other income was $1.6 million compared to $1.3 million in the fourth quarter of last year, primarily reflecting strong cash flows from operations.

Pretax income grew to a record $10.5 million, up 46% compared to the fourth quarter of last year. We recorded a tax provision on a GAAP basis of $3.5 million, representing a fully effective GAAP tax rate of approximately 40%. In contrast, we recorded a tax benefit in the fourth quarter of last year reflecting the utilization of our net operating loss carry forwards.

Net income for the fourth quarter on a non-GAAP basis was $6.5 million, or $0.10 per share, on a diluted basis. Non-GAAP net income differs from GAAP net income, as it excludes stock-based compensation charges net of tax of approximately $1.3 million, or $0.02 per share.

Net income on a GAAP basis was $5.2 million, or $0.08 per share on a diluted basis. Net income in the fourth quarter of 2006 was $10.8 million, or $0.18 per share, which reflected a significantly lower effective tax rate we recorded in the year ago period with one-time benefit related to the release of our deferred tax asset valuation allowance in the fourth quarter of 2006 and lower share count. Head count at year end was 327, up 30% from 252 at the end of 2006.

Now for a few brief observations on our full year results, full year revenues grew to $113.1 million, an increase of 34% year-over-year. Strong revenue growth in Europe and increased traction to our indirect sales channel, enable us to drive and improve top-line growth.

Composition of our full year revenues was 61% indirect and 39% direct, which again reflects the growing strength we are seeing in Europe. Geographically, 48% of our full year revenues came from the United States and Canada, and 52% from our international customers. Full year gross margin was 81% compared to 79% last year.

Operating expenses were 54% of full year revenues, compared to 51% in 2006, reflecting an increase in head count in all functional areas to support our growth and to a lesser extent new public company expenses.

Total other income was $6.4 million, reflecting interest income from our short-term investments. Pretax income on a non-GAAP basis grew to $37 million in 2007, up 41%, compared to $26.3 million in 2006. Net income on a non-GAAP basis was $23.9 million, or $0.36 per share on diluted basis, compared to $25 million, or $0.43 per share in 2006.

Non-GAAP net income differs from GAAP net income in 2007, as it excludes stock-based compensation charges, net of tax, of approximately $4.3 million, or $0.06 per share. Non-GAAP net income differs from GAAP net income in 2006, as it excludes stock-based compensation charges, net of tax, and the benefit related to the release of a deferred tax asset valuation allowance in the fourth quarter.

Net income on a GAAP basis was $19.6 million or $0.30 per share on a diluted basis in 2007, compared to $28.9 million, or $0.50 per share last year. Results for 2006 reflect the significantly lower effective tax rate, the benefit relating to the release of our deferred tax asset valuation allowance in the fourth quarter of 2006 and the lower number of shares outstanding in 2006.

Recall that the 9.7 million shares issued to new investors in our capital raising IPO in October 2006 were considered outstanding for only the last 80 days of calendar 2006 for the purposes of calculating our weighted average share count. But were, of course, included in the weighted average share count for all of fiscal 2007. It’s important to just take a minute to review the impact of these adjustments to get a better sense of our true earnings growth in 2007.

We reported GAAP pre-tax earnings of $25.4 million in 2006. By applying our 2007 full year GAAP tax rate of 37% and our 2000 full year weighted average share count of 66 million shares, and removing the one-time tax benefit related to the reversal of the deferred tax asset valuation allowance, our GAAP net income in 2006 would have been $16 million, or $0.24 per share on a diluted basis.

As I just reviewed, our net income on a GAAP basis in 2007 was $19.6 million, or $0.30 per share on a diluted basis. This represents normalized GAAP net income growth of 22% in 2007.

Now let’s take a look at the balance sheet. We ended the fourth quarter with cash and cash equivalents of $136.4 million, up $8.6 million sequentially, and $17.7 million year-over-year. We generated approximately $16.4 million of cash from operations in 2007, including $8.2 million in the fourth quarter.

Days sales outstanding, or DSO, was 86 days at December 31st, reflecting the higher level of revenue which came through our indirect partners, as well as our international customers, which tend to have a longer payment terms than our domestic and direct customers, as well as the timing of revenue recognition and shipments within the quarter. In the future, we anticipate that DSOs will range between 75 to 85 days depending on the level of international and indirect revenues.

Inventory at the end of the fourth quarter was $5.8 million, virtually unchanged sequentially. Deferred revenue at the end of the fourth quarter was $10.0 million, up from $9.2 million at the end of the third quarter.

To help you better understand how we are looking at our growth plans, let me close with a few forward looking comments. I remind you that the comments I am about to make are based on the current indications for our business, which may change at any time. We undertake no obligation to update these comments. As outlined in our press release issued earlier today, we are introducing a full year outlook for 2008.

We expect revenues in 2008 to range between $142 million to $147 million, which represents growth of between 26% and 30% for the full year. Based on the historical analysis of our revenue growth of the last eight quarters, we expect that our revenues will be spilt approximately 45% in the first six months of 2008 and approximately 55% in the last six months of 2008.

While we have seen gross margins continue to expand throughout 2007, we are modeling gross margin in the upper 70s for 2008. We plan to continue investing in the long-term growth of our business, particularly in R&D, and sales and marketing.

Our operating expense plans reflect our current belief that we will experience no relief in currency rates in 2008 and that the euro and the British pound, which are the local currency for a portion of our sales expense, will remain at current elevated levels compared to the dollar.

Our full year earnings projections assume a non-GAAP effective tax rate of approximately 36.5% and weighted average diluted share count of approximately 67 million shares. We expect to face modest earnings headwind related to the interest rate environment, despite our growing cash balances. In light of the Fed’s recent actions, we are assuming, we can achieve an average annualized investment rate of approximately 3%.

Accordingly, we are currently forecasting interest income of approximately $5 million in 2008. We expect diluted non-GAAP net income in 2008 to range between $0.38 per share and $0.42 per share, and GAAP net income to range between $0.28 per share and $0.32 per share. Our estimate for non-GAAP net income in 2008 differs from GAAP net income as it excludes estimated stock-based compensation expense of approximately $6.4 million, or $0.10 per share.

In summary, we reached new company records in nearly every key measure of the business in the fourth quarter and completed the most successful year in our company’s history. We are excited about the growth plan we outlined tonight, which reflects continued revenue growth and a strong gross margin profile. We believe that our plan has earnings leverage to the upside if we are able to deliver revenue growth above the target range we shared with you this evening.

We look forward to updating you on our progress during future calls. With that, I will turn the call back over to Andy.

Andy Ory

Thank you, Keith. Tonight I want to share with you our view of the SBC market, including key trends and growth drivers, as well as briefly recap some of the key operating highlights from the fourth quarter and full year.

Let me start with the business highlights, which are best reflected in our new customer wins, our expanding deployments and our new product initiative. Our SBCs have become an integral part of how our customers participate in the new wave of voice, video and data services for business and residential customer.

Our customers adopt and deploy our solutions to capitalize on the one undeniable shift that is disrupting the global communications landscape, specifically the transformation from TDM to IP. Our customers are racing to deliver IP-based services, which in turn enables them to lower cost and expand market share.

These customers turn to our solutions, because of our vast domain experience among the Tier I service providers and our commitment to innovation, which was again demonstrated this week with our two new product announcements. We exited 2007 with over 5,000 SBCs deployed in 85 countries around the world. We now have 500 customers with the addition of 30 new customers in the fourth quarter and 120 new customers in the full year.

Our growth rate in the fourth quarter and full year was fueled in part by these new customer additions, as well as by an increase in spending here in North America, strengths from our indirect sales channel and deeper penetration within our existing customers.

We expanded our market share in 2007 among the top 100 Tier I service providers from 72% to 82%, which we believe is critically important given their capacity for follow-up activity. Geographically, we saw strong growth in the United States and Canada, with 19% sequential increase in revenue from that region.

We saw significant growth from our channel partners which continues to validate the importance of our solutions in our partner’s success. It also underscores the role that we believe SBCs will continue to play as an independent network element.

Revenue from our channel partners represented 69% of our fourth quarter revenues, up from 50% in the fourth quarter of last year. This was led by growing traction from Alcatel-Lucent, Ericsson and Nokia Siemens Networks.

Our growth strategy has always been predicated by our ability to drive expansion within our existing customers. After making our customers successful, we believe we have a unique opportunity to establish incumbency and expand each of these deployments over time with additional applications and additional subscriber growth.

For this reason, we believe that the depth and breadth of our customer base continue to be key company strength. Last August, we shared a number of statistics that measured expansions within our existing customers. We mentioned then that we had intended to refresh that data here on our February call to see what progress we had made.

I am pleased to report that we have seen progress in every measure of expansion. The number of customers that have invested at least $1 million in Acme Packet products and services has grown from 26 at December 2006 to 39 at the end of 2007.

The number of customers that have invested more than $10 million in Acme Packet products and services has grown from two at the end of 2006 to four at the end of 2007. The number of customers which have at least 25 Acme Packet SBCs has grown from 21 at December 2006 to 32 at the end of 2007.

Finally, the number of customers with at least 100 Acme Packet session border controller has grown from four at December 2006 to 10 at the end of 2007.Based on the expansions we are seeing in our own customer base, we believe this growth will continue as service providers convert to all-IP network.

I want to shift gear and address some of the major trends we are seeing in our core markets, as well as our emerging markets, and share with you what we are doing to capitalize on the opportunities in each. I will start with the wireless market, where we have recently made several major announcements.

We had roles in wireless markets and wireless carriers for several years. We are currently deployed an interconnect and peering point, and we are enabling the delivery of services over fixed line network. We have relationships with many of the world’s largest mobile operator, including Brasil Telecom, Telefónica Móviles and Vodafone.

Earlier this week, we announced new products aimed squarely at the fixed-mobile convergence security gateway market. Specifically, we launched two new product offerings, our Net-Net Multiservice Security Gateway, or MSG, and our new Net-Net 4000 ATCA blade platform.

Wireless service providers are searching for ways to maximize revenues and reduce cost. This is driving them to use IP in the delivery of all services, in both their access and core networks. Fixed-mobile substitution making the wireless phone the only phone is well under way.

Femtocell and WiFi access points increased radio coverage and reduced cost by tunneling mobile endpoint traffic across untrusted hybrid wireless and Internet broadband network. FMC and the deployment of all-IP 4G radio access networks, including LTE, mobile WiMAX and UMB will ultimately reduce cost by leveraging a single IP-based service infrastructure for all voice and data services.

In the interim, we believe that there are additional revenue opportunities for our customers by delivering enhanced SIP-based services over today’s 3G radio access networks. These include video sharing, video calling, push-to-talk, home monitoring, instant messaging, multimedia collaborations, white-boarding, international toll bypass and others.

The delivery of SIP-based interactive communication services over fixed and mobile, trusted and untrusted network has proven to require carrier-class, feature-rich session border controllers. Service delivery over untrusted networks will additionally require carrier-class, high capacity, high-performance security gateways.

Our new Net-Net Multiservice Security Gateway is a flexible high-capacity, high-performance solution, and with our integrated SBC functionality enables the delivery of SIP and IMS services. It is configurable as a standalone product or as a tightly integrated solution when combined with our SBC.

This new carrier-class product is designed to enable wireless service providers to maximize revenues and minimize cost by accelerating fixed-mobile substitution and supporting the transition to all-IP network. They will extend service reach to wireless endpoints over untrusted networks, femtocell and wireless LAN access networks and Internet backhaul.

They also provide the secure bridge to rich, interactive multimedia IMS and SIP-based applications accessed over both wireless and fixed networks by mobile, residential and enterprise subscribers.

Our new Net-Net 4000 Advance Telecommunication Computing Architecture, also know as ATCA, is a blade which integrate our SPG and Multiservice Security Gateway functionality in an ATCA chassis of wireless system vendors. The blade is purpose-built hardware and uses a design based upon the most widely deployed SBC in the world, our Net-Net 4000, which has been upgraded with the latest processing and memory component, including IPsec hardware acceleration module.

In addition to the wireless opportunities, we are making progress in the enterprise and contact center market, where infrastructures are evolving to leverage the benefits of IP. We have been making investments to develop our position and our product set. We have many new features and enhancements to our product offerings, which interestingly are applicable to our core service provider customers as well.

During the fourth quarter, our activity in the enterprise and contact center market picked up appreciably across multiple verticals, including financial services, technology and government. We look at the opportunity in the enterprise and contact center market as strategic to our success in 2009 and beyond, and believe that we are properly positioned to capitalize on the growth opportunity.

In our core market, the service provider market, we are seeing some very interesting trends emerge. There are two new trends in the North American market that are worth discussing. The first is to build and keep interconnects and the second is SIP trunking. Let’s take a look at these one at a time.

First, and most importantly, many top tier carriers in North America are entering into build and keep interconnects. These interconnects essentially are unbilled exchanges of similar volumes of traffic. The service provider bills their subscriber and keeps all the money without paying their interconnect partners for transit or termination.

The advantages of this are numerous for carriers, but clearly the operational expense reduction is the primary driver. Many of our top tier customers are already engaged in programs to begin this kind of interconnect. The implications are fascinating. Third, we believe that a very high percentage of bill and keep interconnect will be all-IP based, requiring session border controllers.

Secondly, the return on investment for bill and keep interconnect is extremely compelling, because it enables much more efficient routing in the core, it facilitates the transition from media gateways to SBCs and eliminate per call transit or termination charges. And finally, we expect bill and keep to extend beyond its origin here in North America and will become an international trend.

What is perhaps most compelling is the parallel that can be drawn with the way in which data networks evolve. When free peering became prevalent in data network, amorphous interconnections were established that drove the creation of the Internet. The Internet as it stands today has many thousands of free exchanges in data that carry the bulk of traffic between networks.

We believe that VoIP technology market will now start to move in this direction, favoring all-IP components such as ours. What will be required in this future network are smart, secure session border controllers.

As with the Internet, where companies pay for direct access, many carriers we are working with are developing and marketing SIP trunking services. These will provide enterprises with direct access to their all-IP VoIP networks and their interconnects.

Since the majority of enterprises today are starting to deploy VoIP at the desktop, we believe that we are at the threshold of end-to-end IP communications from VoIP. The SIP trunking services combined with the bill and keep initiative, we believe will ultimately deliver VoIP end-to-end as all-IP.

The primary network infrastructure required for the delivery of both of these services is a session border controller, and Acme Packet is the world leader in making and delivering these platforms.

Before we open the call for Q&A, I want to share one final thought about the market opportunity we see ahead. In the fourth quarter, we hosted a record number of attendees at Acme Packet Interconnect 2007, our global customer conference. Over the years this conference has become a powerful platform for not only knowledge transfer, but also true customer collaboration.

Our customers continue to drive our greatest inspiration. Our customers are truly transforming the industry one IP border at a time, and we couldn’t be proud of our role in that transformation.

So as we have shared with you this evening, we had a solid finish to 2007 and are focused on kicking off 2008 stronger. We feel great about the level of activity throughout our customer base and the new products that we have launched to drive the next stage of our growth. We look forward to our next call in May when we will update you on our progress for the first quarter.

Thank you all for joining us tonight. With that, let’s open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Paul Silverstein - Credit Suisse.

Paul Silverstein - Credit Suisse

I recognize you just entered the marketplace, so I trust your numbers are small, and you may not be prepared to talk about it. But given your entry into enterprise and contact center and the guidance, can you give us some sense for how much of the revenue growth is a function of the entry into new product markets and how much of that growth is organic to your original service provider efforts?

Andy Ory

Yes, I mean, Paul, it is hard to breakdown for several reasons. First of all, it’s a forward-looking statement. It is hard for us to know where the growth is going to come from. What I can say is that since we started the year on January 1, we have seen activity pickup in every region across all of our market sector and that includes enterprise and contact center. So I do have a pretty good feeling about enterprise and contact centers this year.

The major shift that I have seen is that the service providers some of them are really starting to lean into offering SIP-based IP trunk. That really wasn’t around last year, that’s one thing.

Secondly, we are starting to see that the ecosystems, systems integrators, as well as equipment manufacturers, both to the contact centers and the enterprises, are starting to recognize that IP interconnect is pretty darn important, and we have seen our business development activity pick up with them as well.

We haven’t quantified what percentage of our business is going to come from the IP, from the contact centers and the enterprises. I do suspect that Europe and North America will provide most of the revenue opportunity, though we do have customers in all four of our regions.

I think that 2009, it is strategic. It will really be a significant portion of our business and it will be an independent growth driver. In 2007 it was clearly a seven figure business. There is no question about it. It’s hard for me to know exactly where it is going to be in 2008. I guess you could say, if you want to quantify, again, this a forward-looking statement, I have no basis to back this up, but it’s probably less intense.

Paul Silverstein - Credit Suisse

In ‘08?

Andy Ory

Yes.

Paul Silverstein - Credit Suisse

Andy, if I could just back up, you said it’s already broken $1 million in ‘07?

Andy Ory

No, no, no. It’s several. ‘07 was a pretty darn good year for the enterprise and contact center market. But, again, it’s the length of sales cycle that’s qualifying all of the infrastructure. It’s getting the SIP-based interconnect. So what I look at is the funnel activity and the funnel activity is growing quite significantly.

Paul Silverstein - Credit Suisse

If I may, if we just looked at your service provider business, without the enterprise and contact center, your original business would still be an overwhelming majority of your revenues.

Andy Ory

Yes.

Paul Silverstein - Credit Suisse

I guess I am trying to understand the growth rate. There are these two new drivers in SIP, trunking and interconnect, and bill and keep. Which you sound excited about and its sounds like those should prove incremental.

And yet if I do the math, I am trying to understand the growth rate for your core business. In light of you have two new applications which you are excited about, and I would think it will be incremental growth and if I back out the enterprise, it doesn’t sound like it.

Andy Ory

No. All right, so let me answer the question this way. We don’t know what our growth rate is. I mean, nobody does. All we know is how much money we are prepared to invest or spend. And we have a look at current dynamics that are going on in the market.

So we made the determination that we could spend somewhere between $142 and $147 million of revenue into an operating model, and we felt that we could run a profitable business that way. We also felt that running the business at that level didn’t preclude our ability to announce new products, develop new technologies, invest in new partnerships and go after new markets, basically adjacent markets that we talked about.

At the beginning of 2008 we are laying out a business where the spend plan has the revenue somewhere between $142 and $147. At the beginning of the year there are a lot of macroeconomic trends that are way beyond our control, and I think that we’ll be able to update you over the next 90 days; we will get a lot more visibility. And I really do think that six months into the year we will have a much better sense of what the true growth rate is.

Paul Silverstein - Credit Suisse

If someone asked you, Andy, has the service provider business decelerated relative to last year in terms of what you are seeing now, and I appreciate that you only have so much visibility and you are giving your best guess. But when you look at trends, are you seeing deceleration in service provider market?

Andy Ory

There is a difference between activity and stuff that will meet the accounting test for revenues. I would say that in terms of activity we have seen an acceleration. The interesting thing and I am sure I am going to be asked about the cable space as well in North America.

The cable space in North America in 2006 was pretty robust, because I think people saw an opportunity to start to accept packet voices and compete with the ILEC. In 2007, the cable space didn’t grow quite as quick in North America. We are starting to see a pickup in the cable space in 2008 as it relates to bill and keep in making their networks now available for free peering, for termination and access to their subscriber base.

So that’s an example of a pickup that we are seeing. We are seeing that the wireless space is starting to pick up as well, particularly as they start to invest in soft hand-off technologies. Where at the base of their radio access network, the base stations there instead of having voice as ADPCM or TDM variant circuit switch, they are now having IP.

And that means that there is a whole lot more VoIP traffic that’s going to be created by a lot more endpoints, and I think that’s going to drive a lot more interconnects as well. The hard part for us is actually the timing, when is it going to happen. But the activity feels like it’s picked up, Paul.

Operator

Next we have Ehud Gelblum – JP Morgan.

Ehud Gelblum – JP Morgan

You mentioned obviously that the indirect business seems to have gone up in Alcatel-Lucent, Ericsson and NSN, 10% customers. Can you give us what they are in total? How big those three are in total and how that has changed from the prior quarter? My guess is it went up.

Keith Seidman

The three of them in total were approximately 48% of our total revenues. No one single channel partner was greater than 20%, so it is a fair representation. That’s up from about 40% in the third quarter.

Ehud Gelblum – JP Morgan

And do you think that it stays at the 48%, 50% range or was supposed to go up, but does it continue going up now?

Keith Seidman

69% indirect is a very high number that actually caught us by pleasant surprise. We are still modeling our indirect business to be about 55% to 60% of our total revenues in 2008.

Ehud Gelblum – JP Morgan

So you expect it to probably come back down again?

Keith Seidman

Right, and again we always cautioned in any given quarter, based on revenue recognition rules and spending patterns, one could see a shift. That’s why we try to look at it on an annualized basis. But we are comfortable. We’ve seen a lot of activity through our partners and we are very excited about that activity as well.

Ehud Gelblum – JP Morgan

And so as that comes down, your gross margin gets a little bit of a boost which should offset the disfavorable, because you are coming off of a huge software quarter, right?

Andy Ory

For the last several quarters, when we went on the road in September and October of 2006, we did talk about the fact that distribution would have an impact on our gross margin downward. We have not seen that trend at all in 2007.

It’s really the driver in the software content, the mix of the configuration. And so when we model 2008, we are agnostic whether it’s direct or indirect, because it’s really the software driver as opposed to the channel.

Ehud Gelblum – JP Morgan

North America was strong as well. What kind of things were going on there trend wise this particular quarter that drove that? Or was it just a couple of customers that just needed more bandwidth, and therefore you gave more software too?

Andy Ory

No. When we talked about the third quarter back in the beginning of our fourth quarter, we had said that we would expect to see North America return back to the levels that we were hoping it should have been at. We expected that return sometime in 2008. It happened a little bit sooner. It’s just general activity, it’s just general spending, and it’s very broad based and it continues into this quarter. It’s not really driven by one or two customers at all.

Ehud Gelblum – JP Morgan

So we have no idea what the market actually did in ‘07, although I would love to hear what your thoughts were. You grew roughly 35% and you are guiding next year to about, I think, it’s 28% and kind of at the mid-point sort of.

Do you think that, first of all, on that 35% growth in ‘07 that you gained share. So was the market growing slower or you think it was basically growing with you? And as you look out into ‘08 and you look at your competitors and where they are, is your 28% growth at the midpoint, do you think you will be gaining share or do you think that’s basically what the market is doing and how should we be trending that going forward beyond that?

Andy Ory

That’s a really tough question. I mean, one of the things that we measure is our increase of Tier I wireless customers and our increase of the top 100. And we do feel like we gained share in the areas of market that we are focused on, where we do think there will be buying opportunity that are quite significant. We mentioned that, we had 10 customers that had purchased more than 100 session border controllers. We have a number of customers that have more than 200 session border controllers.

So the ability and the conversations that we are having with, I’d say, the top 50 worldwide and their ability to buy a lot of gear makes me believe that the sales cycles are long and the revenue is a little bit unpredictable. But in the end we will increase market share by focusing on the Tier I.

As far as whether or not there is session border control technique embedded in appliances in one off or very small locations where we are really not competing, that’s picking up as well. I just don’t have any visibility into that.

Ehud Gelblum – JP Morgan

Are you seeing any impact or are your customers seeing anything from the macro slowdown. We have seen broadband adds in the U.S. slowdown doesn’t really impact you that much. Voice-over-IP adds haven’t been really that strong. Yet you are coming up with new drivers of the businesses as well. From any of these particular drivers, are you seeing any impact at all, customers talking at all about macro slowdown, anything?

Andy Ory

No. We certainly are seeing that a class of our customer base cares an awful lot about the cost savings. It’s really important to them. And there is a segment of the market where bill and keep is so dramatic and soft hand-off is so dramatic that it makes Acme Packet technologies and technologies like ours very, very compelling even in tough environment.

Andy Ory

One way to think about it, Ehud, is that we are a software company, and we have 113 engineers I believe at the end of the fourth quarter. And it’s got to be 75% or more that are software folks. So we are really and our revenue recognition rules are as a software company. And so people do business with us. They recognize they are doing business with a software company.

I think that what our customers really enjoy is that we are able to deal with rapidly emerging requirements and deliver them carrier class solutions, so that the rest of their installed base and infrastructure doesn’t have to change much. And they value that enough that I think they are comfortable paying knowing it’s an investment in our ability to continue to do it.

Ehud Gelblum – JP Morgan

Any seasonality that you see next year, I know Keith, you actually talked about first half versus second half. But as you look out at the year, do you see any seasonality picking up in terms of the quarters?

Andy Ory

Yes, and Keith you should comment on this too. I was a little bit surprised. I didn’t expect to see quite as much seasonality, in the sense that we went back eight quarters. I mean, all we have is the data that we have and you have it too.

You go back eight quarters and what you really do see is you see 45% first half, 55% second half in both 2006 and 2007. I don’t know if that trend is going to continue or not. But given that we’ve had 24 months and 1,000 transactions that have fallen into that, we are going to model that. I mean, we certainly can handle just about any way in which the business unfolds, whether it’s 50-50, 45-55, it doesn’t much matter to us.

Operator

We will go to Brant Thompson - Goldman Sachs.

Brant Thompson - Goldman Sachs

I was wondering if you could give a little bit more color in terms of, you had mentioned kind of macro concerns potentially impacting the business. Cisco on its conference call talked about seeing weakness in their European carrier business.

When you look at your carrier focus business, are there areas that you are already seeing any indications in currently or is there any more color you can provide on this from a regional standpoint or where you feel the risk is?

Andy Ory

And again we are obviously much smaller and our sample rates are different than Cisco’s. But we actually have seen things pick up in every single region. The European activity is quite robust.

The biggest macroeconomic issue that we have, is that our interest income has gone from 5 plus percent down to 3%, and that the exchange rate, because we do business in Europe, is so expensive. So, I mean, I think a fair way to look at it is that if you wanted to take a look at what our EPS normally would be, if the world were the same in 2007 versus what we are modeling in 2008, I mean, we are taking a full 10% of EPS off the top, well, maybe 3 or 4 pennies in terms of exchange rate and interest income changes.

So those are the bigger macroeconomic trends. And I just certainly hope that they stop moving in the wrong direction. Regardless, we are very comfortable making these investments into these markets and we are not going to stop.

Brant Thompson - Goldman Sachs

And then could you just touch on any kind of changes you have seen in competitive landscape vis-à-vis what your customers are looking for?

Andy Ory

I think that the biggest change in the competitive landscape, and I really wouldn’t even call it a huge change, but if I have to think of one is probably Cisco’s awareness that this is a real market and that they do talk about it. We do run into Cisco from time to time and clearly we co-habitat and just about every one of our customers is a Cisco customer. And Cisco has announced a couple of session border controllers.

It has had almost no impact on our business in 2007. And I had a worldwide sales conference in the beginning of 2008, and Keith and I look every sales guy and gal in the eye and say tell us what you are going to do and what your risks are. And people weren’t too concerned about the router vendors at all. But I would say that the router folks understand the packet infrastructure and all these smart IP interconnects, there is going to be session border controllers there as well.

Operator

And your next question comes from Ted Jackson - Cantor Fitzgerald.

Ted Jackson - Cantor Fitzgerald

Keith, my first question for you is just if you could tell me what depreciation and CapEx were for the quarter and what you expect on a go forward?

Keith Seidman

Depreciation expense in the fourth quarter was $1.4 million. CapEx was about $1.3 million. We are modeling about $6 million of CapEx next year with a little bit over $5 million in depreciation expense.

Ted Jackson - Cantor Fitzgerald

But Sonus announced XO as an NBS customer in December. To be honest, at the time of that announcement it caused weakness in your stock. And lo and behold, you announced an extension of your agreement with them or expansion; however we want to look at it, today. So I thought it would be kind of fun if perhaps you might be able to juxtapose what it is that you are doing with in XO as opposed to Sonus?

Andy Ory

We are delighted at the opportunity that we’ve had to work with XO. We just feel it’s important that the market have clear visibility in terms of our leadership in every geography at all levels for session border controller. And we’ve got a lot of announcements that you are going to see throughout 2008 as well. There is no great planning or strategy to it.

I am by the way delighted as well if you want to talk about recent announcement, the new products that we announced. You should expect to see more of that as well. We are seeing market adjacencies that continue to pop up where our technology makes an awful lot of sense with minor changes and we just see more opportunities for it.

Ted Jackson - Cantor Fitzgerald

So relative to XO, could you maybe explain how it is that you can be in one part of XO in one project and Sonus is another. I mean, you talk about the fact that things are so project related, I just thought it would be a good example to sort of educate the investor community in terms of how your sales process work and how you could have a vendor like XO who is using different vendors for different things?

Andy Ory

While many, many of our customers are effectively single sourced on us, we do recognize that the way to look at a lot of these great customers is on a project-by-project basis. And from time to time there will be other session border controller solutions besides ours that will be in those projects. And that’s fine.

We work with every single session border controller, every softswitch, every gateway, every application server and router, because we have a vested interest in this change happening. It’s only 5% of the market, I’m just guessing at that, has even moved in this direction. So some level of co-opetition with everyone else still benefits us because of our market leadership.

Ted Jackson - Cantor Fitzgerald

Would it be fair to say if you looked into the statistics that you put forth relative to, I mean, let’s really focus on the ones that have taken like a 100 units if you would. That those are the customers that have really decided they are going to standardize on the Acme Packet, and maybe the ones that have taking 25 are the ones that possibly could make that decision?

Andy Ory

Well, I am looking at the list right here. I certainly agree with you that the ones that have taken 100 or more, we are strategic to. There is no question about it. And when I look at the ones that have taken 25 or more, we are still pretty darn strategic to them as well.

I mean, 25 is a fairly large footprint, only because these are operationalized as a signal element in their network. And if I had to look at the average sales cycle, just to get into their network would be measured in years, not quarters. So I think that it would be anyone north to 25, there is an 80% chance or higher just a guesstimate that we are pretty darn strategic to.

Ted Jackson - Cantor Fitzgerald

The new product announcement, which is entering the security gateway market, can you answer just a few market-oriented questions. And that is, how big do you see that market being? How fast do you see it growing? Who are the key players within it right now? And then lastly, what is the key benefit you see in terms of integrating the SBC with the security gateway?

Andy Ory

Well, I mean, let me start with just the key benefits for the integration, right? You have got encryption, you’ve got authentication, a tunnel terminating gateway, which is basically IPsec tunneling, and then you have all the session border control denial of service.

You don’t want to do these things twice, and what’s unique to Acme Packet solutions from our point of view is the degree to which our PPG and our session border controller are integrated. And we think that yields a solution that has price performance, capacity and feature richness that other people aren’t going to have. So we are really excited at the way we’ve architected it.

And Seamus Hourihan, our VP of Marketing, Product Development, if you want to comment?

Seamus Hourihan

This is just a very specific type of IP border controller, if you will. It sits at the border between a mobile services core network and the access network. In this context the access network is the Internet and vast majority of applications. And basically connected to the Internet, their access networks include femtocells or WiFi access points.

And so again at a high level, it’s actually a wireline access point facing into the mobile services core infrastructure. It’s very adjacent, again, from a primary functions here are security functions which we have always offered in our SBC, endpoint authentication, security from a IPsec calling perspective for both voice and data services, and also denial service protection. So those are key things and these are things that we have always had in our SBC as well.

Ted Jackson - Cantor Fitzgerald

So it’s just, like one step out of box for you?

Seamus Hourihan

Correct.

Andy Ory

Correct.

Ted Jackson - Cantor Fitzgerald

On the ATCA product announcement, would you ever sell that at just a blade level?

Andy Ory

Well, that’s effectively what we are doing. We are selling this to other vendors of wireline or wireless infrastructure that has ATCA chassis for integration into their platform. The ATCA blade, as we announced, supports all of our SBC and security gateway configurations either separately or combined.

Ted Jackson - Cantor Fitzgerald

I mean, so you could see an OEM vendor just throwing it out, develop an ATCA-based media gateway, and then with SBC functionality and they would take that SBC functionality from you.

Andy Ory

Sure. Ted, we are agnostic. I mean, so long as our technology, software, hardware, or both, can combine with a solution to provide the results that the service provider or enterprise want, fine with us.

Operator

Next in the queue we have Troy Jensen - Piper Jaffray.

Troy Jensen - Piper Jaffray

About seasonality, what have you thought on the March quarter? I know, previously you would give one quarter of forward guidance. Now you’ve just kind of given the year, with kind of some sense on first half and second half chunks. Do you think you can grow sequentially in the March quarter?

Keith Seidman

Troy, I think historically we have given sort of annual guidance with update on a quarterly basis. What we are looking for is what we said, 45/55% growth. Whether that means Q4 to Q1 sequential, it’s premature for us to talk about that now. If you do the math, most significant portion of growth will come in the second half of the year. But we are still very confident and optimistic about the first half of the year.

Troy Jensen - Piper Jaffray

Keith, you made a comment about high 70% gross margins, what you are thinking about for ’08. You also made a comment to that, you are a software company here and you’ve seen that the indirect, direct mix hasn’t really affected your gross margin. So what would be the drivers here that are going to actually take gross margins down slowly you have been talking about, but you have been kind of outperforming?

Keith Seidman

Well, I think, we have been consistent in saying that, we are going to do everything in our power to keep the gross margin at the 80-81% level. Well, we don’t want to model that. I mean there are some deals and projects that we may have some pricing discussions with the customer on, like would be an investment in opportunities, and give us the flexibility to drive some of that growth. But our goal, our mandate is drive our gross margins at the level they are today. But we just don’t feel it’s appropriate to model that.

Andy Ory

We don’t see any reason for us to change. But we model internally high 70s that gives us a little bit of flexibility in the event that we needed.

Operator

And next in the queue we have Eric Kainer - ThinkEquity.

Eric Kainer - ThinkEquity

I am interested especially in the new growth markets. Specifically, one thing that you talked about a quarter ago and then you followed up with a new product today, and that is obviously in the enterprise space. I wonder if you can talk about the new feature requirements there.

And what’s happening in the enterprise that is going to drive the penetration there? Because it sounds like the penetration in the enterprise is probably sub-10% number, and I would imagine that you see that rising pretty rapidly over the next several years.

Andy Ory

Yeah. First of all, enterprises want to run their business efficiently; global enterprises have large contact centers. Global enterprises have private VoIP networks or IP network router. And ways in which they can save money and/or put in place a SOA environment where they can start running applications and federate them across their different sites, deal with remote workers and integrate mobility into their environment, are all things they want to do. All of that really is best served by moving to IP.

Now the biggest driver, obviously, is when they can consolidate their interconnects down to a SIP-based IP interconnect, they can drop their cost enormously. When they can deal with one connection spigot to every cube and every desktop as opposed to two, they can save a lot of money. When they can rationalize how they deal with mobility and home workers, they can save a lot of money. So we see that most of the major enterprises we talk to really get it.

They need SIP-based IP interconnect. They need to understand how this is going to work. It’s new for them and we are investing heavily in helping them understand it. Our core session border controller product is 95% of the products they need. We have engineered some additional features. We’ve talked about intrusion detection reporting and so forth. But, by and large, we really do expect this market to be a significant market over the next 24 to 36 months.

Eric Kainer - ThinkEquity

When you look at the enterprise market, as it is today, what kind of penetration rates would you guess that you’ve got kind of the IP-enabled enterprises as far as having SBC products one form or fashion?

Andy Ory

Yes, low single digits. I mean, it’s just really starting. What’s interesting is that we are starting to see people communicate IP from their desktop with things like Skype and Microsoft and so forth, people are trying it. But the actual IP infrastructure may not have converted over yet.

We are seeing a lot of people buy IP PBXs. Clearly, there is more of those sold than PBXs moving forward. But that doesn’t mean that they’ve figured out that they are going to get rid of there gateways yet. But clearly getting rid of the gateways would allow them to reduce their connectivity costs dramatically. So we are starting to see it. It’s a long sales cycle.

And when you talk about the Fortune 500 enterprises or the Global 1000 enterprises, you are going to see exciting opportunities emerge within focused projects this year. But you are not going to see them convert their whole base over this year. They are going to think about their strategic communications requirements and make sure that they save some money and bring new application. They don’t take their business out.

Eric Kainer - ThinkEquity

You touched on the topic of sales cycle there. And I wonder if you can tell us, what you anticipate the sales cycle to be on the enterprise side as opposed to the multiyear cycle that you have referenced, not just in this call but historically carrier side?

Andy Ory

It’s interesting. What we are seeing is almost like a two-humped camel, right. We are actually seeing more calls come in where people are saying, “I have packetized my enterprise. I am trying to connect, and I have insurmountable problems. My firewall won’t work.” And the sales cycle, could really be measured in sub-three months.

We are also seeing an awful lot of thoughtful Global 1000 customers who are saying, “Yes, I would like to do a pilot. This is something I want to do over my entire network. But let’s put the first product and run it for six months and understand it.” And the sales cycle for them, apart from the pilot, is going to be measured in multi-quarters, four quarter or more. So we are sort of seeing those two types of activity.

Operator

Next in the queue we have Brian Modoff - Deutsche Bank.

[Vejay Inaudible] - Deutsche Bank

This is [Vejay Inaudible] calling on behalf of Brian. A question I would like to build upon, the earlier questions from Brant and Ehud.

If you kind of give us some color and just educate us overall on the market traction and demand trends for session border controllers this year and also next year? And ideally some color by geography, by type of service provider, by the use case? And also you could speak for some of your new product introductions as well?

Andy Ory

It’s hard to know what our absolute market share is. I mean, we report and we have SEC requirements for accuracy in terms of our reporting, but there is a lot of private companies, dozens that make up some of the additional.

Figure; just use round numbers for a second. We have said $142 to $147, so you double that number, assume that we are half the market. I know our market share numbers may be higher, but we don’t really know. So it comes out to $300 million this year. Is it a $300 million market? Yes, might very well be. The market could surprise us either way. Hopefully, it surprises us on the upside.

The enterprise market is embryonic. It is a separate market and it is very small. The multiservice security gateway market is even smaller. It is a very, very small market. Now why are we talking about that particular market? Because the real conversion from TDM to IP, the largest single macroeconomic vector is going to be the people that have most of the traffic, the wireless network. They can save so much money moving from TDM to IP that once they do that, that change is going to happen more quickly.

So getting the design win, building the product, starting to work with them this year, to understand their requirements and understand their model is really important to us. But I wouldn’t expect that it’s going to have a significant impact in terms of the revenue this year and that the global multiservice security gateway market this year will be pretty small.

So that’s how I look at the three markets. The biggest market, obviously, is our core SBC service provider market. From a region point of view, I do think that cable likely will pick up. I mean, I don’t have a crystal ball.

But I do see that the cable provider with bill and keep, and connecting some of the wireless providers, some interesting opportunities there. I do think that if you look at some of the larger cable companies in the United States, you see that they are picking up VoIP subscribers, so that’s a good thing. I think that people that own access infrastructure are the ones that are going to continue to invest.

We are delighted in Europe to see the Tier I service providers that have been buying up properties in various foreign countries, who are trying to standardize on a single technology flavor to try and drive operational synergies, as they convert from TDM to IP. And a lot of these folks really are showing quite good business model to their respective public market. We think those people are going to keep investing. So we are actually generally pleased, I think, across all segments.

[Vejay Inaudible] - Deutsche Bank

And in terms of inflection point for the end SBC markets would that be sometime next year 2010?

Andy Ory

From an SBC point of view, we are starting to see the acceleration when you see that number of folks with 25 going from 21 to 32 in 12 months, and with a 100 plus going from four to 10 in 12 months. So we do think that the shift really is under way in the core SBC market. In the multiservice security gateway market, it’s still too early to tell.

Operator

Next in the queue we have Catharine Trebnick - America’s Growth Capital.

Catharine Trebnick - America’s Growth Capital

I have a question more along the Multiservice Security Gateway. Can you speak to any trials that you might be entering into in ‘08? And then a little bit more on the competitors, where do you see [inaudible], Evona and some of the other at this point next point?

Seamus Hourihan

We are working with a number of customers on the development and proceeding into trials in first part of this year. Again, we think vast majority of real action space is actually not this year, but into ‘09 and ‘10 and beyond. Anybody that’s in wireless access infrastructure potentially may have some interest in entering the space.

This is an access border; it takes us into a wireline access network. Much of the traffic that’s coming from the premise, whether its residence or even an enterprise, it’s going to be more in line with the SIP services voice, than it will be with packet data services in our analysis of consumer use. And so there is a natural combination of the FCC with the multiservice gateway.

And also the geographic location of wireless access infrastructure is not always in the same place. So that’s another dimension you have to look at in terms of whose positioned where from a physical deployment perspective. And again, in our analysis we have the combination of the SBC with the security gateway and in many, many environments makes a lot of sense.

Keith Seidman

Right, it is early. We do think that we are very well positioned, given the technologies that we are combining, the relationships we have and where we think we will fit geographically in the wireless access network.

Catharine Trebnick - America’s Growth Capital

But do you see this more near term in U.S. or maybe Europe, or Asia? Or is it kind of like everybody pretty much on the same continuum right now as far as getting into WiFi and femtocell access technologies?

Keith Seidman

A combination of Europe and North America, that’s primarily the areas.

Operator

And our final question for tonight comes from the line of Greg Mesniaeff - Needham & Company.

Greg Mesniaeff - Needham & Company

What was the revenue split geographically again?

Keith Seidman

In the fourth quarter, 55% of our revenues came from our international customers and 45% through our U.S. and Canada, which translated for the full year, was 52% international and 48% domestic, which is Canada and the U.S.

Greg Mesniaeff - Needham & Company

Looking at the U.S. business in the fourth quarter, what was kind of the pockets of strength was it wireline or wireless or cable? You mentioned cable is an up and coming opportunity.

Keith Seidman

I mean, it was pretty broad based, so nothing really stood out.

Greg Mesniaeff - Needham & Company

And looking into those key customers in the U.S., how much of that was upgrade business versus just incremental sales of SBCs?

Keith Seidman

I think the majority was incremental sales of SBCs. The upgrade revenue is a very small portion of total revenue, but it has a big impact on our margins. But the bulk of the activity in Q4 was incremental system shipments. And you should expect that to go on for the foreseeable future, since we have most every North American carrier, not every major one.

Given the fact that as expansion is required in networks, it’s both upgrading existing systems as well as deploying new systems because of the geographic aspect of where SBCs are deployed.

Andy Ory

And perhaps a better way to look at it would be to say, how many of these were for new projects versus expansion to existing projects within customers. And I think the majority of them probably were for expansions to existing projects.

Greg Mesniaeff - Needham & Company

What were the DSOs in the quarter?

Keith Seidman

DSOs were 86 as a result of the large contribution from our indirect channels at 69%, as well as our heavy focus on international customers. And as I said in the remarks earlier, given the international focus, the indirect sales we are projecting DSOs to be between 75 and 85 days based on the mix. Given the growth in the DSOs, we were still extremely cash flow positive in the quarter. The quality of the receivables is excellent, and so we are comfortable given our business today in the 75 to 85 range.

Greg Mesniaeff - Needham & Company

Yes, I would have thought that in the fourth quarter you would have had some of that Europe focused seasonality and that be an issue. And I was kind of assuming DSOs would improve sequentially over the third quarter. But I guess that was not the case.

Keith Seidman

What we are trying to figure out as we grow this business is what the natural state of the various elements in the business are. And I actually think that this may indeed be the natural state of the business.

We have a software revenue recognition. We have got partners. We have got international customers and we do get paid. We generally get paid on time. The quality of the receivables is very good. But I think our ability to drive and unnaturally lower DSO is not necessary and probably something we don’t have much control over.

Andy Ory

So very briefly the key takeaways from our Q4 results are as follows. We posted record quarterly revenues and full year revenues. We delivered record gross margins of 82% and operating margins of 28%.

We expanded our customer base to 500 customers in 85 countries, and we laid out our financial and operating objectives for 2008, which calls for top line revenue growth of between 26% and 30% and an appropriate spending plan, which will enable us to deliver operating margin in the range of 25% to 26%.

We are clearly in a much stronger strategic and financial position than at any time in our company’s history. We think we are extremely well positioned in our core service provider market, as well as in the emerging enterprise contact center and wireless market.

So with that, and on behalf of Keith, Brian and Seamus, thank you for joining us tonight. We look forward to our next conference call and we can update you on our continuing progress. Good night.

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Source: Acme Packet F4Q07 (Qtr End 12/31/07) Earnings Call Transcript
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