Tekelec Q1 2008 Earnings Call Transcript

May. 6.08 | About: Tekelec (TKLC)

Tekelec (NASDAQ:TKLC)

Q1 2008 Earnings Call

May 6, 2008 8:00 am ET

Executives

Penny St. Clair-Holmes

Frank Plastina - President and CEO

Bill Everett - Executive Vice President and CFO

Analysts

Scott Coleman - Morgan Stanley

George Notter – Jefferies

Jon Goldberg - Deutsche Bank

Larry Harris - CL King

Ken Muth – Baird

Todd Koffman - Raymond James

Operator

(Operator Instructions) At this time I would like to welcome everyone to the Tekelec 2008 First Quarter Earnings Conference Call. Conducting today’s call will be Frank Plastina, President and CEO and Bill Everett, Executive Vice President and CFO. I would now like to introduce Penny St. Clair-Holmes.

Penny St. Clair-Holmes

I am joined today by Frank Plastina, President and Chief Executive Officer and Bill Everett, Chief Financial Officer of Tekelec. Hopefully by now you have access to a copy of the slides of supplemental material posted to our website at www.Tekelec.com. You can access the slides by hitting the link labeled Investors and then clicking on the Investor Relations home page. From that location you can also access the press release issued earlier today.

As a reminder there will be a telephone replay of this conference call available for seven days following the call. You may also listen to a rebroadcast on our website at any time during the next 90 days. All of this replay and rebroadcast information can be found in the Investor Relations section of Tekelec’s website.

I would also remind you that during the course of this conference call we will make projections or other forward looking statements regarding future events or the future financial performance of the company. The actual events or results of the company may differ materially from these forward looking statements as a result of important risk factors including those discussed in our 2007 Form 10-K filed on February 27, 2008, the press release issued earlier today and other documents the company periodically files with the Securities and Exchange Commission.

Also, unless explicitly noted our financial results and metrics during our call today are non-GAAP results from continuing operations. Please see the slides of supplemental material posted to our website for information reconciling non-GAAP to GAAP measure. With that said I’d like to turn the call over to Frank Plastina.

Frank Plastina

We continued our focus on execution in the first quarter and delivered strong results. We view the quarter as a positive step in extending our leadership position in core signaling solutions as well as building momentum for related network applications such as number portability, performance management, flexible routing, and messaging. As networks continue to migrate new opportunities are presenting themselves. Our customers depend on us to provide them with the industries most advanced signaling solutions and you can see that reflected in today’s results.

We continue to win new customers because of our expertise, our ability to deliver, and the simple fact our technology enables them to evolve with their business needs. Our customers continue to see signaling as a key enabler of next-gen networks and are looking to us to bridge today’s reality with tomorrows needs. We were pleased by our operating results for the quarter. Gross margins and cash flow from operations were particularly strong.

Non-GAAP operating margins were 22% during the quarter. We were also pleased with the level of new orders we generated during Q1 following the very strong orders booked during the fourth quarter of 2007. The highlights included the following; we continued to expand our geographic footprint adding seven new customers in the first quarter all outside of North America. This builds on the momentum from 2007 when we added 23 new customers.

Three of these new customers purchased both our Eagle and Performance Management products and one purchased Performance Management alone. The seven new customers are in seven different countries and two of the countries, Nigeria and Indonesia, are among the worlds top growth markets for net subscriber additions according to Pyramid Research.

On a broader scale we have significantly increased the breadth of our orders and revenues and we do not have a large dependency on any particular region or customer. In fact, over the past five quarters we have had six different customers represent 10% or more of our revenues in any given quarter. Only once did any of those customers represent more than 20%. These 10% or more customers included AT&T, America Mobile and Telmex Group, T-Mobile, Orange Group, Telecom Italia Group and Verizon.

This quarter our 10% customers included AT&T, Verizon and Orange Group. We also received Eagle expansion business to support number portability implementation throughout the world. For example, we received an order from our third wireless carrier in Mexico bringing our estimated market share for mobile number portability in Mexico to more than 70%. We also won our fifth number portability replacement opportunity with a Tier-1 European wireless operator.

In this particular case the telecom operators existing signaling equipment was declared end of life and the customer required a solution that reduced complexity in the network, condense the footprint, and deliver operational savings. Our Eagle products met this need. Our number portability base now includes 85 customers across 28 countries.

Our Performance Management solution was purchased by four of the seven new customers and we received a number of expansion orders from our current customers. This solution provides improved multi-protocol end to end call tracing and the ability to choose from a library of key performance indicator reports as well as the ability to run custom reports.

We continue to see market acceptance of the Tech Media product. For example, Telecom Italia Mobile Brazil or TIM Brazil, one of our tech media customers attended CTIA in Las Vegas a few weeks ago and shared their Tech Media experience with media and analysts. TIM Brazil is experiencing a 23% year over year subscriber growth rate, the fastest growing telecom operator in Brazil. TIM manages 1.1 billion SMS messages per month which translates into 2,200 messages per second.

Specifically they shared how they are utilizing the Tech Media first delivery attempt capability to offload their existing legacy equipment to handle traffic growth more efficiently. With Tech Media’s modular approach TIM has been able to double their system capacity at a faster roll out pace than with other solutions. They have also seen a reduction in their revenue leakage by 90% on average due to Tech Media’s real time charging capability.

Additionally, Tekelec is providing the complete local number portability solution for TIM addressing multi-media message service as well as voice services. As a final highlight, we maintain a very strong balance sheet in the first quarter and we generated $38.4 million in cash flow from continuing operations. After completing $13.4 million of our previously announced $50 million stock repurchase program we ended the quarter with $435.9 million in cash and investments and $201.2 million in working capital.

I will now turn it over to Bill who will go into more detail on the results for this past quarter.

Bill Everett

I will provide some additional comments on our first quarter results and update our annual guidance for 2008. First, let me provide more detail on the results from continuing operations for the quarter. Please refer to slides four to eight which provide both our GAAP and non-GAAP results for the first quarter of 2008 and 2007 along with the associated reconciliations. Unless otherwise stated all of the financial metrics are presented on a non-GAAP basis from continuing operations.

Orders for the first quarter 2008 were $82.4 million up 4% compared to $79.2 million for the first quarter 2007. We are particularly pleased with the level of new orders we generated in the first quarter following the very strong orders we received during the fourth quarter 2007. Revenue for the first quarter 2008 was $118.2 million up 9% compared to $108.8 million for the first quarter 2007.

We generated consolidated gross margins of 67% and net income from continuing operations of $18.3 million or $0.25 per diluted share for the first quarter 2008. This compares to gross margins of 57% and net income from continuing operations of $10.6 million or $0.15 per diluted share for the first quarter 2007. Operating margin from continuing operations for the first quarter 2008 was 22% compared to 12% in Q1 of last year.

Please refer to slide 14 for a breakdown of our revenue by the respective product and service categories for the first quarter 2008 and 2007. Total product revenue for the first quarter 2008 was $84 million compared to $73.9 million in Q1 of last year. This increase was driven by a $21 million increase in Eagle and other signaling product revenue for the period which was offset in part by reductions in number portability and performance management and monitoring product revenues.

However, orders for our Performance Management and Number Portability products were strong in the fourth and first quarters and we expect higher revenues in these categories during the remainder of the year. Warranty and extended warranty revenue in the first quarter 2008 was $17.4 million down 2% from $17.8 million in the first quarter of last year. Professional and Other Services revenue was $16.8 million essentially unchanged from $17 million in the same period a year ago.

Next I would like to comment on the geographic breakdown of revenue in our continued strong international performance. Slides 12 and 13 provide a breakdown of revenue by region. During the first quarter 2008 revenue outside North America represented 53% of our total revenue compared with 46% in the same quarter last year. Specifically revenue from the EAAA and CALA regions represented 39% and 14% of total revenue respectively compared to 20% and 26% in the same period 2007.

We expect that international orders and revenue will continue to represent more than 50% of our consolidated total over the long term. In the first quarter 2008 we had three customers each of which represented 10% or more of our total revenue, AT&T, Verizon, and the Orange Group. None of these customers represented more than 16% of our total revenues for the quarter.

Now let me turn to consolidate gross profit margins. The company’s consolidate gross margins were 67% for Q1 of 2008 compared to 57% in Q1 of 2007 and 62% in Q4 of last year. Our strong gross margins in the first quarter 2008 compared to the first quarter of last year were due primarily to shift in revenue mix to higher margin Eagle and other signaling products particularly extension and upgrade revenue. In addition, Q1 2007 included a higher level of Eagle initial systems revenues and higher installation service costs on international contracts which reduced our Q1 2007 gross margins.

R&D expenses for Q1 of 2008 were $23.6 million compared to $21.2 million in Q1 of 2007 and $22.6 million in Q4 of last year. This increase in R&D spending was due in part to investments in developing new products to help customers migrate to next-gen networks. The Q1 2008 R&D expense includes the cost of the Estacado development team that was acquired in January 2008. In addition, our success in continuing to win new customers and new number portability orders outside North America has required investment in ITU and local feature development to respond to international customer requirements.

Sales and marketing expenses were $17.5 million in Q1 of 2008 essentially unchanged from $17.6 million in Q1 of 2007 and down from $18.2 million in Q4 of last year. Salaries and sales commissions in Q1 of 2008 were up over the same period a year ago in line with our increase in revenue with the increase essentially being offset by lower marketing and advertising expenses.

G&A expenses were $11.8 million in Q1 of 2008 compared to $10.2 million in Q1 of 2007 and $13.3 million in Q4 of 2007. The increase over the prior year was due primarily to the fact that Q1 2007 included approximately $1.9 million of one time cost reductions related to the recovery of certain legal fees, taxes and other items. The reduction sequentially is due primarily to lower bad debt expense and incentive compensation.

Our non-GAAP effective tax rate for Q1 2008 was 33.5% compared with 33% in Q1 2007. The effective tax rate for Q1 2008 exceeded our initial 2008 guidance due primarily to the fact that the US Congress has not yet renewed the R&D credit for 2008 and lowered than anticipated tax exempt income for the year. The forecast reduction in our tax exempt income is due to lower than anticipated levels of investments in tax exempt securities.

Our GAAP financial results for the quarter include the impact of stock based compensation under FAS 123R. Pre-tax stock based compensation from continuing operations for the first quarter was $3.1 million compared to $4.7 million in Q1 of 2007 and $3.6 million in Q4 of last year. We have provided a summary of the impact of stock based compensation from continuing operations by line item on slide 15. Total stock based compensation from continuing operations continues to decline due primarily to changes in our equity compensation policies.

We exited the first quarter with a strong balance sheet; we have cash and investments of $435.9 million as of March 31, 2008, compared to $419.5 million as of December 31, 2007. As noted on slide 18 we have reclassified $124 million of our Student Loan Auction Rate Securities to long term investments as a result of the current liquidity issues in the credit market. After giving effect to the investment reclassification our cash and cash equivalents in short term investments at the end of the first quarter totaled $316.5 million down from $419.5 million at the end of December 2007.

Our working capital also declined from $302.3 million at year end to $201.2 million at March 31st primarily as a result of the reclassification of the Student Loan Auction Rate Securities. The quarter end balance sheet includes the impact of completing $13.4 million of our previously announced $50 million stock repurchase program. Please refer to slide 16 for certain key balance metrics.

I would like to comment briefly on our Student Loan Auction Rate Security investments and specifically on our accounting for the market value adjustment in Q1 and our decision to reclassify these investments to long term as of March 31, 2008. At the end of the first quarter we held $124 million of face value Student Loan Auction Rate Securities all of which are rated AAA by one or more of the rating agencies.

Of this portfolio approximately 92% of the principle amount is collateralized by student loans issued under the Federal Family Education Loan Program, or FFELP. Repayments of the student loans issued under the FFELP Program are 97% guaranteed by the Federal Government. We valued these securities at fair value as required under FAS 115 and interpreted under FAS 157 and accordingly recorded a decline in value of $4.5 million or $2.7 million after tax in Q1.

We currently believe that this reduction in market value is temporary and we expect to recover the face amount of these instruments when liquidity is restored or if necessary at maturity. Accordingly the adjustment has been recorded through shareholders equity and not the income statement. We have classified these investments as long term because at the end of Q1 it is not clear when liquidity will return to this Student Loan Auction Rate Securities market and it is possible that that may be longer than one year.

Our DSO at the end of March 2008 was 57 days compared to 60 days at March 31, 2007 and 69 days at December 31, 2007. This lower DSO is due primarily to strong cash collections during the quarter. As Frank mentioned earlier for the first quarter 2008 we generated positive cash flows from continuing operations of $38.4 million compared to $24.2 million for the first quarter 2007. The increase in cash flow is primarily attributable to the increase in earnings from continuing operations and reductions in accounts receivable.

First quarter cash flows from operations are generally the strongest of any of the four quarters of the year. As a result of the strong billings and order inflow from the preceding quarter. We are updating our guidance for full year 2008. We are increasing our target ranges for orders, revenue, non-GAAP consolidated gross margins and non-GAAP EPS.

Our new estimate for full year 2008 revenue ranges from $455 to $470 million with a book to bill ratio of approximately one to one. This forecasted revenue range represents revenue growth of approximately 5% to 9%. We expect non-GAAP consolidated gross margins for the full year will range between 61% and 63% and non-GAAP EPS will range between $0.75 and $0.80 per diluted share for 2008.

This represents non-GAAP EPS growth of approximately 14% to 21%. We expect our non-GAAP effective tax rate will range between 32% and 33% which assumes the R&D tax credit will be enacted by Congressional Legislation at some point during 2008. Should the R&D tax credit not be extended we expect that our non-GAAP effective tax rate will range between 34% and 35%. We expect the share count used to calculate diluted non-GAAP EPS will be approximately 70 million shares.

Finally, we expect GAAP EPS will remain unchanged from previous guidance and will range from $0.55 to $0.59 per diluted share. Please refer to slide 19 of our GAAP and non-GAAP guidance and the associated reconciliations.

We continue to expect the quarterly distribution of our 2008 orders will be similar to that of 2007 resulting in orders being significantly higher in the second half of the year than in the first half. In addition, with respect to revenue we expect that the first and fourth quarters of 2008 will be the two strongest quarters of the year. The distribution of revenue as between Q2 and Q3 is difficult to predict because of the uncertain timing of customer acceptances on several large contracts.

I will now turn to Frank for some additional comments.

Frank Plastina

As I mentioned at the beginning of this call our customers depend on us to provide them with the most advanced signaling solutions in an increasingly complex operating environment. At the end of April we held our annual Americas Technical Symposium. More than 100 engineers and planners representing our major customers met with our teams to hear about our latest solutions. We also heard what was on their minds and what keeps them up at night.

The recurring theme was the ability to scale next-gen networks and provide today’s level of service from multi-media applications to millions of users. Signaling the scene as a clear enabler to facilitate next-gen services such as social networking, mashups and the markets move toward software as a service. As a result the evolving role of signaling whether the signaling is SS7, Sigtran, a multitude of Sig variance or all of the above is a hot topic for our customers.

The industry is moving from executing simple voice calls to the richer and more complex world of Telco 2.0 and Web 2.0 and signaling is an essential enabler to making this happen. Complexity has also been added by the explosive growth of text messages particularly in a pre-paid service environment. These seemingly simple services are extremely signaling intensive and are therefore creating greater demand for our Eagle products around the world.

For example, we stated earlier that TIM processes one billion text messages per month and we believe that some operators are nearing that milestone in a single day or two. Also, 70% of the world’s wireless market is pre-paid which requires an incremental level of signaling to ensure subscribers have a sufficient balance in their account to make calls, send text messages and download ring tones.

In some markets wireless service providers are delivering service plans that include unlimited texting and voice calls. Our recent increase in our North American extension business shows that these service plans are leading to a significant increase in traffic. Therefore, the need to continue investing in the core of the network is becoming more pronounced.

Each of these examples demonstrates that signaling plays a critical role in the evolution of today’s networks. Network evolution requires a robust service layer to manage the increasing traffic, the multitude of protocols and the resulting complexity. Our customers see that need as well and they see Tekelec as one of the few companies focused on solving these issues.

I thank you for your time today and will now open up the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Scott Coleman - Morgan Stanley.

Scott Coleman - Morgan Stanley

I’m wondering if we could dig into the guidance a little bit. If I understood you said you expect your revenue in the first and fourth quarters to be the highest for the year. Is that a matter of visibility, did some business get pulled, get recognized a little bit earlier than you would have thought and that’s why Q1 was a bit higher than expected?

Bill Everett

With respect to the second part of your questions in Q1 we did receive some additional orders that we didn’t initially anticipate in Q1 so we did end up with a little bit more revenue than we expected. As you know overall we’ve slightly increased our guidance for the year. With respect to the comment that we made in the presentation itself the visibility we have today is that in total we expect our revenues in total to go up slightly from the guidance we previously gave.

The comment about Q1 and Q4 is that we do expect those two to be the two strongest quarters with respect to revenue and with respect to Q2 and Q3 because of our revenue recognition policies its always very difficult to predict the quarterly split of revenue which is why we don’t give quarterly guidance. With respect to Q2 and Q3 the timing of things like software releases, customer acceptances on major pieces of the business and even the book ship business in terms of how it comes in and when it comes in makes it very difficult for us to predict the split between and revenues and correspondingly in earnings between Q2 and Q3.

There are a lot of factors moving around but in general the Q1 the favorable variance that we got in Q1 relative to even our own expectations really was the result of business that came in that we didn’t have visibility to when we gave the last guidance.

Scott Coleman - Morgan Stanley

Will you expect, given your order guidance which picks up here on higher revenue, do you think orders should increase sequentially as you go through the year?

Bill Everett

The comment we made in our last earnings call about the quarterly distribution of orders as compared to revenues was that it would follow similar patterns of last year. The second half was a lot stronger than the first half. We’re not making predictions about sequential growth in orders but we feel quite comfortable that we slightly raised our guidance with respect to orders. We’re comfortable with the comment that it will follow the distribution pattern similar to last year.

Scott Coleman - Morgan Stanley

I’m wondering if you can walk us through any impact on your business from currency, the weakening dollar over the last year or so and what you expect any impact could be as you look out across 2008 if the dollar does begin to strengthen.

Bill Everett

Currency exchange rates in our business did not have a material impact on our operating results in Q1. If anything it slightly dampened the results relative to Q1 of last year. Because we have a worldwide business and some of our revenues are in Euros and Brazilian Real and some other currencies we in part hedged the impact of the higher costs that we incur overseas. On balance it was not a material impact on our business or results or expectations for the year.

Operator

Your next question comes from George Notter – Jefferies.

George Notter – Jefferies

Did I hear you say correctly you’re giving the GAAP guidance unchanged going forward for the full year?

Bill Everett

Yes, that’s right. The reason for that is in our original guidance for the year we had not included the R&D write off for example from the acquisition of Estacado and there are GAAP items that are not in the non-GAAP guidance. To make a long story short our GAAP guidance is unchanged from what we provided earlier.

George Notter – Jefferies

If I could peal all those items out and then look at your GAAP guidance let’s call it the adjusted GAAP guidance, if I could look at your adjusted GAAP guidance including the FAS 123R. In other words I’m asking you if the FAS 123R assumptions you have for the year changed.

Bill Everett

No, actually they’re not changed from our earlier projection.

George Notter – Jefferies

Anything new competitively on the signaling side, Siemens, Huawei, others, what else are you seeing in the marketplace.

Bill Everett

Let me make one other comment. If you refer to slide 19 in the slide deck it reconciles the GAAP to non-GAAP guidance so I think it will be helpful to you.

Frank Plastina

We’re seeing the same group of competitors that typically are coming into the open bids. Primarily internationally that includes Huawei, very little to a lesser extent Siemens but its predominantly Huawei. In the situations where we have large scale bids where entire pieces of networks or entire networks are being bid we’re seeing a pickup in our ability to bid in with larger network equipment providers. We’re seeing increased activity there.

The good news with Huawei competing with them head to head on everything that they do is that their only alternative typically from a signaling perspective is Tekelec.

Operator

Your next question comes from Jon Goldberg - Deutsche Bank.

Jon Goldberg - Deutsche Bank

You had said that revenue would be strong in the first half; orders would be strong in the second half?

Bill Everett

No, let me clarify. Our original guidance when we gave it in February was that with respect to orders that we expected to see the pattern similar to last year which was that orders would be stronger in the second half of the year than in the first half of the year and we continue to believe that’s the case. With respect to revenue we believe that the first quarter and the fourth quarter will be the strongest in terms of revenue and that there is some with respect to Q2 and Q3 it’s a little bit difficult to predict the actual split between those two quarters at this point for all the reasons I previously articulated.

Jon Goldberg - Deutsche Bank

I was hoping you could tell us a little bit more on Tech Core, give us some color what’s the status on the trials there, more clarity appreciated.

Frank Plastina

Tech Core, the SSR functionality within Tech Core went GA in the first quarter carrying live traffic that’s with one of our customers in South America. As a result of that GA date being hit we’re seeing a nice addition to our pipeline in terms of opportunities around the world. Right now we’ve got six separate trials with Tech Core. A couple of those are in the CSCF functionality piece of Tech Core and then the other four SSR functionality.

What is really gaining traction out there is the view that Tech Core is a nice evolvable platform meaning the SSR functionality which solved today’s problem in the next gen environment can them be evolved with the software addition to be a full blown CSCF should that particular service provider move to an all IMS architecture. The flexibility of the platform is really leading to some nice pipeline.

Operator

Your next question comes from Larry Harris - CL King.

Larry Harris - CL King

Obviously you had a very good gross margin this quarter and you saw increased upgrades and extension on STPs. Given that I think we saw that in the second half of last year why can’t we see maybe higher gross margin in the balance of this year if those trends continue?

Bill Everett

As you know from looking at our guidance we actually raised our guidance with respect to non-GAAP gross margins, from 59% to 61% to 61% to 63%. To some extent we’ve already reflected the question that you just asked. With respect to the absolute number running in the mid to high 60’s on a consistent basis we don’t see that. I think that’s really a reflection of the mix of business that we had particularly our extension and upgrade business which we had more of in the quarter than we anticipated.

I think that’s a very positive sign about the demand for signaling in general but with respect to the guidance we’ve reflected our best view about the impact of that business in our mix for our guidance for 2008.

Frank Plastina

The blend reflects the reality of very nice margins on extension business as a result of our installed base and obviously our market share in the space offset by very nice traction in new customers. The fact that we’re booking a lot of these new customers which typically on an initial deals its well below the 60% go in gross margin. That is all excellent for the future obviously because we’re building our install base. We’ve now picked up 30 new customers just in the last five quarters which is a very nice addition to our global install base.

Finally, on the extension, the SMS flat rates primarily in the US the all you can eat plans that have been implemented have very clearly given us some nice opportunities on the extension side because that has significantly increased the traffic of messaging and text messages and the traffic has increased well ahead of what AT&T, Verizon, T-Mobile and all the others were planning at the beginning of the year. That was actually part of the reason we had some nice additional business in the first quarter.

Operator

Your next question comes from Ken Muth – Baird.

Ken Muth – Baird

Just going back to what you said on the Tech Core CSCF functionality when does that become commercially available?

Frank Plastina

I’m going to have to get back to you I don’t know specifically because there are different pieces of the functionality I don’t know when the entire platform is going to be GA. There will be additional functionality added to SSR at almost every quarter between now and the end of the year. Let’s search that and go on to the next question and I’ll get the exact date back to you.

Ken Muth – Baird

The acquisition you closed in Q1 how does that factor into the guidance you just provided?

Bill Everett

That’s fully incorporated into the guidance we’ve given you. That was largely a technology acquisition not a business acquisition. The run rate of expense associated with Estacado is included in our projections that we’re providing for the year and certainly included in the Q1 results as well. That’s fully incorporated from an expense point of view and with respect to the technology that they have obviously they’re very well versed in all related activities and products and so we’ll build that technology and that expertise into our products as we go forward.

Ken Muth – Baird

This quarter results you just had some nice performance there but overall the revenue range really didn’t increase it only increased by $5 million in the high end but the low end didn’t get brought up what was the conservatism you’re worried about some geography the US market perhaps or what was the reason for not taking it up higher than what you already did?

Frank Plastina

It’s not really driven by the macro factors. It’s driven by the timing of some large deals. Some of these new customers we’re talking about $5 to $10 million swings so we’re really trying to time what we think the customer acceptance will be and which release is at customer acceptance going to come in. That’s really what’s determining that number as opposed to being any particular concern on a particular macro factor.

Operator

Your next question comes from Todd Koffman - Raymond James.

Todd Koffman - Raymond James

I wanted to ask you about the order book. In the last six months you had pretty strong orders approaching almost $300 million worth of business. How does that mix of orders shake out between your signaling products, portability products and the performance management products?

Bill Everett

Let me start to answer that question and then Frank may want to elaborate on it as well. For competitive reasons we do not give orders by product disclosures. It turned out to be not advantageous to us with respect to customers and competitors so we don’t do that. We have given qualitative comments and in Q3 of last year and specifically in Q4 of last year we talked about the strength of the IAS order book. We do give a geographic breakdown but we don’t give a product breakdown.

Signaling obviously continues to be the main driver overall for our business. IAS orders when we released Version 2.0 in the Q3 of last year we had a sharp uptake in orders there. As we said in the presentation we had strong orders in Q1 as well and that we expect that business to continue to grow on the revenue side as we move forward throughout the year. That’s really the issue there. You asked specifically about signaling, IAS and also number portability. Frank do you want to address that?

Frank Plastina

On number portability the traction continues there. What we’re seeing and what I find most interesting is there’s now a growing replacement market. As I commented on the prepared remarks we booked our fifth number portability replacement order in Europe which we see is significant because the cycle is starting. We missed the cycle when it happened in the earlier part of this decade because Tekelec did not have a large signaling install base particularly in places like Western Europe.

The old SCP based solutions are not keeping up with demand. As they start moving their entire signaling layer to something that can evolve to SIGTRAN and to SIF we’re seeing number portability solutions that are integrated with that signaling laying come back to us. We booked our fifth one, this one was in Germany and we think there is a continuing opportunity there.

In addition to the new markets we have alluded to the fact that we won significant deals in Mexico and Brazil. We see India, Russia, a few other countries in the next year or so are going to mandate number portability and we have Eagle installed bases in those countries and obviously we’ll take advantage of that when the opportunity comes.

Todd Koffman - Raymond James

If I could just follow up on that, in the March quarter just qualitatively was there any major shift in orders by product versus what you’ve been reporting and seeing and experiencing?

Frank Plastina

You mean shift within the product mix?

Todd Koffman - Raymond James

Correct.

Frank Plastina

We did book our highest ever performance management quarter in the fourth quarter of last year. We had a good quarter again this quarter from a performance management relative to last year. In terms of the overall mix I don’t think there have been any significant changes relative to historic mix other than perhaps more of a sku toward software and some of the applications on the Eagle base as opposed to the traditional hardware aspects of Eagle.

Operator

If there are no further questions we will turn the call back to Mr. Plastina for any concluding remarks.

Frank Plastina

I’d like to thank everybody for joining us again this morning. As you can see from our results the plans that we put in place 12 to 18 months ago are taking hold. We are very pleased with the operating leverage we are getting on our cost base and we look forward to going out there and gaining more market share. Thanks once again.

Operator

This does conclude the Tekelec 2008 First Quarter Earnings Conference Call.

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