Starent Networks, Corp. Q1 2008 Earnings Call Transcript

May.16.08 | About: Starent Networks (STAR-OLD)

Starent Networks, Corp. (STAR-OLD) Q1 2008 Earnings Call April 29, 2008 5:00 PM ET

Executives

Mark Donohue - Director of Investor Relations and Assistant Treasurer

Ashraf M. Dahod - President and Chief Executive Officer

Paul J. Milbury - Vice President of Operations and Chief Financial Officer

Analysts

Jeff Kvaal - Lehman Brothers

Jason Ader - Thomas Weisel

Ehud Gelblum – JP Morgan

Thomas Lee - Goldman Sachs

Charles John - Piper Jaffray

Anil Doradla - Caris & Company

Operator

Welcome to the first quarter 2008 Starent Networks Corporation earnings conference call. (Operator Instructions) I would now like to turn your presentation over to your host for today’s call, Mark Donohue, Director of Investor Relations and Assistant Treasurer.

Mark Donohue

With me on the call this evening are Ashraf Dahod, our President and Chief Executive Officer; and Paul Milbury, our Vice President of Operations and Chief Financial Officer.

Today, after the market closed, we issued a press release announcing our results for the first quarter of 2008. A copy of the press release, along with accompanying income statement, balance sheet, and operating statistics, as well as a reconciliation of the most directly comparable GAAP financial measures to any non-GAAP financial measures used during this call, and for certain prior periods are available on the Investor Section of our website at www.starentnetworks.com.

The format for tonight’s call is as follows. Ash will begin with a few summary statements and review business highlights. Paul will then review the details of our financial results, and present our outlook for 2008. After that, we will open up the call for Q&A.

Before we begin, I would like to remind you that various remarks that we make about the company’s future expectations, plans and prospects, constitute forward-looking statements for purposes of the Safe Harbor Provisions under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors, including those discussed in our most recent annual report on Form 10-K filed with the SEC.

In addition, any forward-looking statements represent our views as of today and should not be relied upon as representing our views as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates change. And therefore, you should not rely on these forward-looking statements as representing our views as of any date subsequent to today.

During this call, we will be referring to non-GAAP financial measures. These non-GAAP measures are not prepared in accordance with Generally Accepted Accounting Principles. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release issued earlier today, which is posted on the Investor section of our website.

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

Ashraf M. Dahod

Good afternoon everyone and thank you for joining us for our first quarter of 2008 earnings conference call. We are pleased to report that we had a very good first quarter. The quarter was highlighted by the introduction of our SGSN. The enhancement of our role in delivering femtocell solutions, the announcement of our deployment in Vodafone Germany, UMTS wins in several new geographies and strong revenue and earnings growth.

Our revenue for the first quarter was $56.2 million, an increase of 103% from the first quarter of 2007. GAAP net income was $9.7 million or $0.13 per diluted share in the first quarter including stock-based compensation of $3.4 million. Excluding the stock-based compensation charges, non-GAAP net income was $13 million or $0.18 per diluted share in the first quarter.

This quarter marked one of the most significant product milestones in our company’s history with the announcement of the Serving GPRS Support Node or SGSN. The SGSN joins our gateway GPRS Support Node or GGSN offering to provide a more complete packet core solution. The SGSN plays an important role in mobility management as it tracks the location of mobile devices on GSM/GPRS, UMTS or HSPA network and routes packet traffic to that location.

A key differentiator of the Starent Networks SGSN is the integrator support of both 2.5G and 3G technologies on the same 4G radio platform, which is important as many mobile operators maintain that 2.5G radio networks along with their 3G radio networks and plan to migrate to 4G.

We believe our SGSN is market leading in terms of scalability, performance and intelligence. The development of this product with a significant undertaking and to the best of our knowledge Starent Networks is currently the only non-radio vendor offering an SGSN.

Also in the first quarter, we announced our first customer win for the SGSN with Vodafone Germany. Vodafone Germany will deploy the SGSN as well as our intelligence GGSN for the GSM/GPRS, UMTS and HSPA networks. Starent Networks is delivering this solution to Vodafone Germany as part of a global agreement with Vodafone Group to serve as a preferred vendor of multimedia core solutions.

Vodafone is an industry leader in the deployment of next generation broadband networks and Starent Networks is pleased to be partnering with such a visionary company. We have held our relationship with many of the world’s most prominent mobile operators, which provide us with a valuable insight into the market.

One trend that remains clear is that data traffic volume is significantly increasing due to several market dynamics. The emergence of higher-bandwidth technologies, new multimedia services, data subscriber growth, affordable multimedia handsets and bandwidth intensive applications are among the most notable forces driving this trend.

As data traffic continues to grow, so do our customers’ need for highly intelligent multimedia networking solutions. I will now review some of the positive indicators we are seeing in the market place that we believe support our growth potential. One such trend is the continued growth in smartphone devices. Smartphone devices are key to unlocking the value of carrier broadband data networks.

According to Gartner, January 2008 report, forecast mobile devices worldwide, smartphone unit sales were 122 million in 2007 representing 10.5% of total mobile phone devices sold. By 2011, smartphone unit sales are projected to be over 550 million and to represent one-third of the total mobile devices sold. This growth forecast represents a four-year compound annual growth rate of 46%.

Many mobile operators have identified the deployment and expansion of data service offerings as a key component of their business models. This strategy is paying off as data services have become an increasing portion of service revenues. For example, Verizon reported the data services represented 23% of the service revenues last quarter compared to 11.5% in the same period two years ago.

Operators continue to push to expand adoption of data usage with new services in new service plans. This past quarter some of our customers including Verizon and Sprint introduced more affordable data plans. We expect that these data plans will further drive data users, which in turn will increase the need for intelligent high performance multimedia core solutions. In part, we attribute these new plans to carriers having a need for greater insight and control around what is going on in their network.

Mobile operators are looking for solutions that will optimize their networks and more effectively manage the subscriber experience. Our solutions helped mobile operators fulfill these requirements by providing high performance and integrated intelligence including depacketing inspection, policy enforcement, intelligent traffic control and other service enhancing capabilities.

We are also seeing positive indicators in the UMPS market as these operators begin to deploy high bandwidth HSPA networks. Industry reports indicate that there are approximately 200 HSPA radio networks already in service, being planned for trial worldwide.

We view high bandwidth capable radio technologies as one of the most important enablers of our business, because radio build out must come before packet core infrastructure deployments. We therefore expect that the growth of subscribers on HSPA network will be an important driver for packet core infrastructure investments.

At the end of 2007, there were only 23 million HSPA subscribers. But that figure is expected to grow significantly and pass the 300 million mark by 2010 as reported by Wireless Intelligence. This growth forecasts represent a three-year compound annual growth rate of 135%.

A few operators currently running commercial HSPA networks have launched them at speeds of 3.6 and 7.2 megabits per second, with some having expectations to reach 14.4 megabits per second by later this year. HSPA networks represent at least a three-fold increase in network speeds from initial UMTS network deployments, which enable a higher quality user experience and further drives data usage. The increasing throughput demands and complexity of HSPA networks requires best-of-breed packet core solutions and we believe we are well positioned to deliver such solutions.

As strategic partners, we are committed to providing our customer with a long-term road map, emerging technologies such as LTE, WiMAX, femtocell, and IMS, all a number of migration performance and deployment challenges to our customers. We understand that our customers do not want to deploy new equipment with every evolution of the radio network. Our solutions are designed to adapt to the changing network landscape and address multiple access technologies, utilizing a single multimedia core platform. For instance, our solutions are designed to migrate to 4G technologies like WiMAX, LTE and SAE networks with software upgrades. We believe we provide compelling long-term value to our customers.

One of our key goals is technology leadership and we are continually introducing new and innovative ideas to the market. Leveraging our expertise in mobile multimedia networking, this past quarter we announced we will be offering the femtocell gateway and delivering comprehensive solutions to mobile operators worldwide by partnering with technology companies for customer premise equipment for the femtocell network.

These solutions are designed to deliver high-speed mobile services in the home or enterprise environment at a low cost allowing mobile subscribers to more readily access services anytime anywhere.

Furthermore, we also believe that technology leadership requires exceptional product quality, this is of particular importance to our customers, and the reliability of the networks is paramount to the service delivery. As a result, we dedicate a significant percentage of our ongoing engineering expenses to testing and quality assurance.

Data services are an increasingly important element of the mobile operator revenue stream. We are selling into a strategic part of the carriers’ network and we believe that multimedia networking solutions will be an area of continued investments. We are encouraged by the current momentum and prospects of our business. We remain confident that if we execute our strategy we will have the opportunity to continue to grow our revenues and increase our market share.

I will now turn the call to Paul, to provide you a review of our first quarter financial results and our outlook for 2008, after which we will be happy to answer questions.

Paul J. Milbury

We had a very solid quarter in Q1, which gives us a good start to 2008. Our revenues were more than double the first quarter of 2007 and our non-GAAP operating profits for the quarter were $10.3 million or 18.3% of revenues excluding $3.4 million of stock-based compensation charges.

On the balance sheet side, our total cash position increased during the first quarter by approximately $52 million to more than $285 million or almost $4 per share and our deferred revenues more than doubled sequentially to over $138 million. Since we exclude non-cash stock-based compensation when we evaluate our operating performance internally, I will be referring to non-GAAP figures in this call, unless I specifically state that I am referring to a GAAP figure.

A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is available in our earnings press release issued earlier today, which is posted on the Investor Relations section of our website.

Gross margins were higher than expected coming in at 77.5% for the first quarter, this was the result of higher product margins, which were driven by a higher than planned mix of software related revenue in the quarter. At 50% service margins declined from Q4 as expected due to our investment in post sales customer support personnel, which increased service expenses by 23% sequentially.

Operating expenses were $33.3 million, up approximately $3 million sequentially. Research and development spending increased $2.2 million sequentially accounting for the majority of the sequential increase. The primary drivers for the increase in the research and development spending were higher interoperability testing related to our new SGSN business, increased personnel costs and higher depreciation. Sales and marketing spending, which have been planned to decline slightly in Q1 from Q4 rose slightly as a result of variable expenses tied to business activity in the quarter.

Overall, operating expenses declined slightly as a percentage of revenue to 59%. Total headcount was 635 up 25 from the beginning of the year. Other income was $3.2 million for the quarter, higher than expected due to a favorable currency revaluation of our Euro-denominated receivables and higher average cash balances, which mitigated the impact of lower interest rates.

Tax expense was $450,000 for the quarter. Non-GAAP net income was $13 million or $0.18 per diluted share on 74.3 million fully diluted shares outstanding. When we gave guidance six months ago in October of 2007 we indicated that we expected our cash balance to increase fairly significantly in Q1 of 2008 and it did. We ended Q1 with total cash and short term investments of approximately $285 million up approximately $52 million from the beginning of the quarter.

Accounts receivable increased $25 million in the quarter in spite of very strong cash collections which were over $100 million in the quarter. The increase in receivables was related to our highest ever quarter of customer invoicing which was approximately $130 million.

Invoicing was high in Q1 not only because of the high level of shipments in Q1, but also due to a catch-up in invoicing for certain 2007 ST40 shipments where invoicing had been help up pending the initial product acceptance.

DSOs increased, but as we’ve discussed previously DSO is not usually a good measure of the quality of our receivables. More than 95% of our receivables are current relative to stated payment terms.

Inventories increased by approximately $4 million driven largely by finished goods associated with our deferred revenue increase. On our last call, we updated our original outlook for 2008 revenue and we increased the expected revenue growth rate to approximately 50%.

At this time, we are increasing the outlook for revenue growth to a range of 56% to 60% or a revenue range of $228 million to $233 million. The increase in our revenue outlook is based on our Q1 performance and our solid differed revenue position at the end of the quarter. Based on the timing of projects in our backlog, we would not expect Q2 revenues to be lower than Q1, but we would also not expect the material sequential increase either.

Based on the high gross margins we had in Q1, we now expect the gross margins for the full year to be in the area of 73.5% compared to the 72% outlook we provided last quarter. We expect gross margins to transact towards 72% for Q3 and Q4, but to the somewhat higher than 72% in Q2. Using this revenue on gross margin outlook we currently expect full year operating profit to be in a range of $50 to $52 million or about 22% of revenues.

We are maintaining our outlook for other income for the year at $8 million in spite of having earned $3.2 million in the first quarter. This is based on an expectation that the current low interest rate environment will continue.

With the tax rate of approximately 5%, we expect non-GAAP net income to be in the area of $55 to $57 million or $0.72 to $0.75 per average fully diluted share, assuming a little less then 76 million shares outstanding for the year. Stock based compensation expense was $3.4 million in the first quarter and is expected to be approximately $15 million for the year making GAAP net income around $40 to $42 million or $0.52 to $0.55 per diluted share.

Let me finish up the P&L review with some commentary on operating expenses. We still expect Q1 to be the highest operating expense quarter of the year. We expected a $2 to $3 million sequential decline and expenses from Q1 to Q2 and we still expect second half expenses to be lower than first half expenses in 2008.

First half expenses include high rates of sales compensation that were based on over achievement of bookings quotas in 2007 but not earned under formal sales plans until the recognition of the revenue associated with those bookings which is happening now.

In addition, as mentioned earlier the first quarter included some unplanned spending through SGSN interoperability testing. Relative to our last outlook, we expect operating expenses to be higher for the full year with somewhat higher sales and marketing expenses offsetting the benefit for some research and development NRE or non-recurring engineering expenses for which we expect to be reimbursed from some customers in the second half of the year.

Turning to the balance sheet, we expect to have another strong cash quarter in Q2 with receivables coming down and showing a more normal relationship to quarterly revenue. At this time, we would expect year-end cash to be approximately $325 million.

Ash and I would now be happy to take your questions.

Question-and-Answer Session

Operator

Your first question comes from Jeff Kvaal - Lehman Brothers.

Jeff Kvaal - Lehman Brothers

On the CDMA spending outlook, obviously business was well ahead of plan for you in the first quarter, is that uniformly across your carriers and is that what is driving the upside of your guidance for the course of the year?

Paul J. Milbury

In the increased outlook for the year and for the good performance in Q1, it is based largely on the business activity that we have with our CDMA carriers and that’s what’s reflected in the deferred revenue as well.

Jeff Kvaal - Lehman Brothers

Are your US carriers uniformly healthy for you or is there some variability between them?

Paul J. Milbury

We had strong revenue performance from both carriers, both large North American carriers in Q1 and obviously we expect for the full year to have both of them to be strong, greater than 10% customers.

Jeff Kvaal - Lehman Brothers

What can you tell us about your 3G market and how you are doing with competitively there, what the pace of market development with 3G?

Ashraf M. Dahod

We continue to make progress in UMTS 3G market and as you can see we have added more geographies and obviously we also expect to add many more geographies in Q2. And hopefully at some point just as you are able to get the customers permission and announce that Vodafone D2 Germany deployment that we have been able to at some point announce more deployment. So, we continue to make progress in capturing our fair share of the UMTS market.

Jeff Kvaal - Lehman Brothers

Is that within Vodafone, or outside of Vodafone as well as?

Ashraf M. Dahod

We have customers beyond Vodafone in the UMTS market and we are making progress with all of them.

Operator

Your next question comes from Jason Ader - Thomas Weisel.

Jason Ader - Thomas Weisel

There has been a couple of vendors that have suffered from one of your largest customers in the recent past year, I am speaking of Sycamore and Tellabs talking about some pressures on CapEx and one of your large carrier customers, so I think the question that is been swilling around the last couple of days is, could it be a CapEx freeze with one of your large customers, and if so how much that would impact you.

Could you talk about the deferred revenues, what’s going into that besides obviously, your current big CDMA customers? Is there any other major contributors in there that, Vodafone probably would be in there, but is there anybody else in there that’s not been announced that we should be thinking about going forward? It was primarily on one of your large carriers customers in the US.

Paul J. Milbury

I can certainly repeat what I said earlier is that we expect, we had good results from our North American carriers in the first quarter and both were greater than 10% customers in the quarter. I don’t know what to say about what other people are saying about certain carriers, potential plans for spending or lack of spending obviously we’re getting good results today and we built up significant deferred revenue on the basis of orders that we’ve taken in.

Our deferred revenue is primarily CDMA based, but there is UMTS deferred revenue as well that’s begun to build up in there. I think I said on the last call, we can’t completely predict what’s going to happen in the marketplace and carriers purchasing patterns and the like. But that if one or more of our carriers did slow down purchasing not just in total capital, but also in the core, it was more likely to have an impact on how we would be positioned exiting 2008 and going into 2009 as opposed to having an impact on the outlook for 2008 that we have provided.

Jason Ader - Thomas Weisel

And, is that because of just the way you recognize revenue?

Paul J. Milbury

Yes.

Jason Ader - Thomas Weisel

Then for your 10% customers in the quarter, could you give us an idea of, I don’t know if you give the exact numbers, but can you give us an idea of how much Verizon and Sprint were in the quarter?

Paul J. Milbury

I can only break it out the way we’re required to break it out in the Q according to our agreements with those customers. So, our overall customer concentration was similar to last quarter, where our top four customers were over 90% of our revenue, and we had two greater than 10% customers, but I can’t provide the specific levels.

Jason Ader - Thomas Weisel

Can you say if they were the same customers as last quarter?

Paul J. Milbury

Yes.

Jason Ader - Thomas Weisel

Just one final thing on Vodafone were they material part of the revenue this quarter?

Paul J. Milbury

We have been saying for actually a number of quarters that we don’t expect to recognize our first revenue from that source until the back half of ‘08, so there was none.

Operator

Your next question comes from Ehud Gelblum – JP Morgan.

Ehud Gelblum – JP Morgan

First of all, can you dig a little bit more into the deferred revenues and the DSOs that Paul they seem to be related, just trying to understand the process for in order to shelf in your deferred revenue. I am assuming that these are deferred revenues for the most part because the movement was so strong that you did not collect revenue on.

So, therefore the vast majority is it true that the vast majority that went into deferred revenue also went into accounts receivable and therefore, you did not collected cash on that. And if that is true, how firm are these orders, in a sense that if someone wanted to stall them, cancel them or just push them out would they be able to do that or is the revenue recognition process in place and therefore, the deferred revenue would turn into revenue automatically regardless of what they wanted to do. Can you give us a sense on those two issues?

Paul J. Milbury

Well, we expect all of the deferred revenue to turn into revenue.

Ehud Gelblum – JP Morgan

But does it have to? If someone wanted to could they stop that order or those orders are already in process and you cannot stop them?

Paul J. Milbury

Everything that’s in the deferred revenue is revenue, is product that’s been shipped under contracts where the terms and conditions don’t allow you to cancel it. So, I don’t think there is any issue there. So, we create deferred revenue when we shift an invoice to customer. So given that we’ve got $138 million worth of deferred revenue on the books at the end of the quarter and we had accounts receivable of $82, the implication would be that we have already collected some of that deferred revenue, which is typically the case.

Ehud Gelblum – JP Morgan

Is there a sense of in accounts receivable, I think one of the things that we discussed last quarter, was one of the reasons it’s so high is because, its not all receivables on recognized revenue, a lot of it is receivables on deferred revenue. Is there anyway of breaking out how much the accounts receivables is receivables and actually recognized revenue, how much is it on deferred revenue, and a more accurate DSO account?

Paul J. Milbury

Yes. I don’t actually have that detail I suppose it could be done. We talked about the fact that, receivables are related to billings. Billings under the terms and conditions with each carrier are different and can take place at different times from shipment to certain number of days after shipment to ultimately revenue recognition that vary from contract to contract.

As I said in the script earlier, we invoiced a total of $130 odd million in the first quarter, and if you were to do receivables related to those billings, we would have about 56 days of billings outstanding in terms of receivables. And, as I also mentioned we collected about $100 million of cash in the quarter.

Ehud Gelblum – JP Morgan

Your top four customers are over 90%, and you only had two 10% customers?

Paul J. Milbury

Yes.

Ehud Gelblum – JP Morgan

And those two 10% customers were roughly in the same percent of revenue this quarter as they were last quarter?

Paul J. Milbury

We didn’t break that out at that time, and we didn’t break it out this time. But at the end of the year we are required to provide the specific percentage for the year. But, on a quarterly basis, the requirement is that we disclose 10% customers but under our agreements with those customers, we are not allowed to disclose more than that.

Ehud Gelblum – JP Morgan

Given the out performance on both the top line and the bottom line, at what point right now do you expect the NOLs and start recording taxes?

Paul J. Milbury

Our current expectation remains that that will be 2009.

Ehud Gelblum – JP Morgan

So, it wouldn’t creep into 2008 with the out performance you are seeing now on the bottom line?

Paul J. Milbury

Well, you are required under the rules to assess on an ongoing basis, on the quarterly basis. But, I believe the way it would work even if we came to the position before the end of ‘08 that we were to reverse the valuation allowance that wouldn’t have any affect on certainly the non-GAAP tax rate that we would have for this year.

Ehud Gelblum – JP Morgan

We have a little bit that seems to have come out in the SEC filings on what UTStarcom has filed. Can you just give us your perspective on the time line, and where that stands and what we should know about that?

Paul J. Milbury

I would recommend to you and everybody else to make sure you read the stuff that we put in those SEC filings because there is a lot of detail. But, since you asked the question I would like to take the opportunity to review the history of the UTStarcom legal issues. So, going back to the first one, the first IP claim from UTStarcom came in March of 2004, and that claim was decided by the district court in our favor in December ‘05 and then reaffirmed in appellate court in April of 2007

So that first one came and has been resolved. The second IP Claim from UTStarcom came in February of ‘05 and our response to that one was that we didn’t infringe on the patent and we didn’t believe the patent was valid and enforceable anyway. And then, in December of 2006 UTStarcom filed a reissue, reapplied for that patent and as a result of that the proceeding has been stayed, so that one remains, that 2005 one which is a very rather narrow patent as I understand it has been stayed pending that patent issue application.

So, then it brings us to the most recent one, which was filed in May of 2007, just ahead of our IPO road show. And in that one UTStarcom filed a new complaint against Starent as well as a complaint against a number of individuals, employees and former employees of Starent, who joined Starent between four and seven years ago, and who were previously employed by a business unit that UTStarcom acquired. So, in addition to more IP claims that came in May of 2007, there were claims of trade secret violations and related claims.

So, at the time of that claim in May of 2007, just ahead of the IPO road show, we evaluated the claims, determined the claims were not well founded and that we had very strong defenses and as a result proceeded with our IPO road show and IPO. The litigation related to this May of 2007 issue is really still at a very early stage with factual discovery expected to go through most of 2008 and if there is a trial, it likely won’t be until the first half of 2009.

Starent’s most recent action in this case was to ask the court to either dismiss the case or require UTStarcom to be more specific about what its claims were regarding these trade secrets and related matters. And the court’s expected to rule on that particular motion of ours in May, so in the next month or so. On an overall basis our assessment of the validity of UTStarcom’s claims or the strength of our defenses hasn’t changed since we received the initial notice of the claim in May of last year and that’s where we sit today.

Operator

Your next question comes from Thomas Lee - Goldman Sachs.

Thomas Lee - Goldman Sachs

Gross margins, can you just give us a sense in terms when you talk about the higher software content that was driving higher gross margins, what exactly drove the higher software sales and what’s the best way to think about that going forward?

Paul J. Milbury

Well, we typically sell our products as solutions and that’s a bundle of both hardware and software. But in any given quarter, we also do sell some standalone software, and in this particular quarter we had a couple of fairly significant software only orders, which were enough to swing the gross margins up several points should give us a better than expected gross margin. So, we always have some software sales in the quarter if we get a couple of more significant ones like we did this Q1 and like we did in Q1 of a year ago it pushes up the gross margins for products in that quarter.

Thomas Lee - Goldman Sachs

Can you give us a little bit more detail in terms of what part of the product this was related to or what aspect?

Paul J. Milbury

I actually don’t have the details, but it was related to some inline services essentially that had not previously been purchased by a customer.

Thomas Lee - Goldman Sachs

And then just a question in terms of the UMTS opportunity, you’ve talked before that you are best in breed and are very well positioned at Tier 1 accounts. Do you still feel as strong about your position in Tier 1 accounts now as you did like three or four months ago. Or has there been any change from some of the Tier 1 operators that they may decide to look beyond best-in-breed type technology and take other factors into consideration when they make their decisions on either the SGSN or GGSN deployments?

Ashraf M. Dahod

I believe our competitive position hasn’t changed. As a matter of fact it has strengthened by our introduction of the SGSN and also having one of the leading operating companies of Vodafone. Vodafone, Germany decided to not only deploy our GGSN, but also our SGSN. So, it not only allows us to introduce our GGSN, but also get a complete core network for Vodafone, Germany.

And, we believe that the number of geographies we have added in Q1 and the ones that we are going to continue to add in Q2 is a clear indicator that we continue to be very competitive and our advantages to our customers of deploying our solutions are still pretty compelling.

Thomas Lee - Goldman Sachs

How about your position with a non-Vodafone properties is that, is there anything that you could, any color that you share on that standpoint?

Ashraf M. Dahod

We continue to be engaged with other UMTS operators as they are making the HSPA decision. As we have said in the past we may not win all of them, but we are pretty confident that we’ll win our fair share of the non-Vodafone operators as they look at making the HSPA decisions.

Thomas Lee - Goldman Sachs

And then, is it still your expectation that we’ll get a decision with an SGSN and GGSN side from a Tier 1, Tier 2 operator some time this year?

Ashraf M. Dahod

Yes.

Operator

Your next question comes from Charles John - Piper Jaffray.

Charles John - Piper Jaffray

Some additional clarity on the W-CDMA markets, a lot of mixed messages are out there in terms of the different stages that carriers are at in the RFP process. So, as we look out into 2008, and maybe early 2009, if you could just walk us through some of maybe the key RFPs that you think are critical for your business model that you are bidding for and how you see yourself positioned with some of the larger competitors?

Ashraf M. Dahod

I think that there was the first most critical factor for us is to continue to expand our UMPS presence is to continue to win more and more geographies. We are being the one operator that we have already disclosed.

That is very important for us and beyond leading the intelligence GGSN business to also try to win more and more of the SGSN business within the same operator because that operator is leading in deploying 3G services using HSPA networks and is reflected in the results.

Second is for us to stay directly engaged with other Tier 1 operators as they go through the process and all of them are at different stages of deciding which core equipment they are going to deploy. And at this point, we believe that our engagement with those operators continues to be strong. And as I mentioned earlier, we believe that through the engagement, we will get our fair share of the UMTS market.

Charles John - Piper Jaffray

Could you just comment a bit of on the competitive environment, it seems Ericsson working activity with the Redback Solution; you have Nokia/Siemens coming in with some form of integrated platform with a core tier acquisition. So how much progress do you think these larger OEMs have made in closing the gap that what Starent has and if you could just give some commentary on the road map that you have for next generation product?

Ashraf M. Dahod

We have three or four key competitors. So, if you look at Ericsson, we haven’t yet seen a Redback base solution competing against us. So it’s not out there, they are still using the Juniper platform where they try to bolt-in intelligence on a router platform try to compete with us.

On Nokia Siemens, the [inaudible] acquisition doesn’t really impact us because the [inaudible] is more like a database. And we haven’t seen any new intelligent GGSN solution from Nokia Siemens.

Again Cisco, our intelligent GGSN still has a pretty overwhelming advantage and now with introduction of the SGSN in capturing some very key accounts within SGSN it increases our competitive lead against Cisco because Cisco does not have an SGSN solution.

Charles John - Piper Jaffray

So just switching gears to Verizon, when we look at the deployment, just given the strong numbers and data trends that we have seen this week from them and AT&T, as they deploying are they directly going to the ST40s in that footprint or they are

looking at both ST16s and ST40s based on network needs and throughput needs and the different scenarios of the network?

Ashraf M. Dahod

No, unfortunately I can’t comment on any one specific customer, because of our non-disclosure agreements. But, I think it is fair to say that most of our Tier 1 carriers, customers are moving to the ST40 for any new deployments. And some of them are actually replacing some of the high throughput, high density locations replacing the ST16 with the ST40 and redeploying the ST16 to other less density lower bandwidth locations.

Charles John - Piper Jaffray

Paul, the unbilled orders, I know that’s not part of the deferred revenue. So, you said in the past you are not going to give guidance on that, but any high level indications in terms of for 2008 for that specific number?

Paul J. Milbury

No, I don’t think we’ve ever been given a specific number on that. We’ve said that we always have as a business some unbilled orders in addition to the deferred revenue but we are not going to break that out.

Operator

Your next question comes from Anil Doradla - Caris & Company.

Anil Doradla - Caris & Company

Were there any new IMS design wins during the quarter?

Ashraf M. Dahod

I think in IMS, it’s at a very early stage, and our focus right now on IMS is trying to do inter-op testing with other players of IMS Solutions and we continue to make progress on this front. So, we don’t really expect IMS only revenues, at least not for the next couple of quarters.

Anil Doradla - Caris & Company

Coming back to the litigation, does your ‘08 forecast incorporate any litigation expense and how much did you incur during the quarter?

Paul J. Milbury

We incurred about roughly $1 million in the quarter and we have budgeted about a $1.25 million for the year.

Anil Doradla - Caris & Company

So ‘08 you expect somewhere in the $4 million range.

Paul J. Milbury

Right.

Anil Doradla - Caris & Company

And finally, can you comment about where you stand and basically your philosophies regarding tie-ups with larger OEMs?

Ashraf M. Dahod

Our sales strategy is whether we fulfill the customer order directly or indirectly for us to be directly engaged with all of the Tier 1 accounts. And in some instances based on the particular carrier, we do fulfill the order through a large OEM equipment supply and that has been true in several instances. So, it’s really essentially driven by the end customer.

Anil Doradla - Caris & Company

So, has there been any change over the past four, five months in the statement or this is pretty much how you always position yourself?

Ashraf M. Dahod

I think our position is for all Tier 1 accounts and most of the Tier 2 accounts that we want to be directly engaged, and then if you have to fulfill through an OEM or a system indicator or a value added reseller.

Operator

Your last question is a follow-up question from Jason Ader - Thomas Weisel.

Jason Ader - Thomas Weisel

On the UMTS business this year did you say what percentage of sales you thought it might be on one of your previous calls for 2008 I am just curious as to whether you have any update to that?

Paul J. Milbury

No, we didn’t say, I think we may have said back in October or at a conference in November, we may have given a percentage. But since then, we said that with the increased outlook for 2008 the percentage would now be expected to be lower than what we had said at the time because the higher contribution was coming from the CDMA business. But we also said we weren’t updating that percentage quarter-to-quarter, we haven’t done that since November.

Jason Ader - Thomas Weisel

Can you help us understand a little bit about just getting back to this invoicing, deferred revenue, revenue conversion cycle? Can you help us at all understand the level of orders, of new orders in the first quarter and your outlook for the second quarter, it seems like a lot of the revenue that you are recognizing right now is from orders from last year, shipments from last year that either you are invoicing now or you are recognizing now? And just I think it would be helpful just to get some sense of the momentum from a new order perspective from the business?

Paul J. Milbury

Yes, unfortunately it’s our policy not to disclose bookings information on a quarterly basis, so or an annual basis, so we’ve never done that.

Jason Ader - Thomas Weisel

But qualitatively could you say that new orders and new order momentum continues to be strong, is that a fair statement?

Paul J. Milbury

We are happy with our business overall, we’ve for the third time increased our outlook for revenue for the full year, our deferred revenue position has improved and I think I’d just leave it at that.

Operator

We are showing no more questions in queue at this time.

Ashraf M. Dahod

I would like to thank all of you for joining us in our first quarter 2008 conference call. Thank you very much, and look forward to talking to you next quarter.

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