Tekelec Q2 2008 Earnings Call Transcript

Aug. 6.08 | About: Tekelec (TKLC)

Tekelec (NASDAQ:TKLC)

Q2 2008 Earnings Call Transcript

August 6, 2008 8:00 am ET

Executives

Penny St. Clair-Holmes – VP of Corporate Marketing

Frank Plastina – President and CEO

Bill Everett – EVP and CFO

Analysts

Scott Coleman – Morgan Stanley

Larry Harris – CL King

Brian Modoff – Deutsche Bank

Amir Rozwadowski – Lehman Brothers

George Notter – Jefferies

James Falkoff – Robert Baird

Tim Savageaux – Merriman

Operator

Good morning. My name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Tekelec second quarter earnings conference call. Conducting today’s call will be Frank Plastina, President and CEO and Bill Everett, Executive Vice President and CFO. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Wednesday, August 6, 2008. Thank you.

I would now like to introduce Penny St. Clair-Holmes. You may begin your conference.

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 web site 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 web site 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 web site.

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 first quarter Form 10-Q filed on May 8, 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 in our web site for information reconciling non-GAAP to GAAP measures. With that said, I’d like to turn the call over to Frank Plastina. Frank?

Frank Plastina

Thanks, Penny, and I welcome each of you on the call today. We continued our focus on the core elements of our portfolio in the second quarter and we were very pleased with the operating results. We are encouraged by the opportunities the current market trends are driving for our signaling, session management, performance management, and messaging solutions. Our customers' networks continue to evolve and increase in complexity as they scale to support tens of millions of subscribers in a single network. The fundamental need to manage this complexity is driving the demand for our solutions.

Other concurrent market trends are creating additional challenges for our customers in the core of their networks. The bottom line is that there are a number of factors that drive and we believe will continue to drive our business. These factors include the following: Subscriber growth with worldwide mobile connections growing to 5 billion by 2012, text messaging growth, flat rate plans that entice users to talk and text at will, increases in services as operators look for new revenue options like adding game downloads for pre-paid subscribers, number portability implementations or increased porting activity, new interface speeds for example from low speed to SIGTRAN, implementation of new protocols to connect different equipments such as SIP-enabled MSCs or IP PBXs, the migration from one over-the-air technology to another, and the increased signaling traffic that is generated to hand off sessions between the various technologies. And finally, signaling intensive 3G devices will continue to be rapidly deployed given that the number of 3G subscribers is forecasted to grow at 50% per annum over the next five years. Tekelec is well-positioned to capitalize on these trends, which is reflected in the results we reported today.

Orders, revenue, gross margins, operating margins, and the cash flows generated from our operations were all strong for the second quarter. I might add that orders of $122.9 million reflect a 45% year-over-year increase and represents the highest Q2 order input ever recorded for the company. Bill will provide additional details on our financial results later in the call.

The highlights for the quarter include the following: We added four new customers in the second quarter and we have now added 34 new customers over the last six quarters. This is an important growth indicator for us because our experience shows that we have been successful in leveraging our new customers with follow-on sales.

All four of our new customers purchased both our Eagle and Performance Management Products. One of the wins was in India and as a result, we are now in five of India’s top seven wireless service providers. Over the last 12 months, India has been adding 7 million new subscribers per month on average, making it the fastest growing market in the world in terms of subscriber adds. We enjoy a diverse customer base in 68 countries and we are not overly-dependent on any particular customer.

Over the past two years, we have had eight different 10% customers. The list includes AT&T, America Mobile, and Telmex Group, T-Mobile Group, Orange Group, Telecom Italia Group, Orascom, SFR, and Verizon. Three of these customers represented 10% or more of our Q2 revenues. Our penetration across all of the large global service providers will serve us well as these groups continue to expand outside their home markets and strengthen their competitive positions around the world.

We also continued to gain competitive ground with the non-signaling based elements of our portfolio. For example, our Performance Management Solutions, as mentioned previously, were purchased by our four new customers, which now brings the total to 14 new customers for these solutions in the past four quarters.

Customers have a need for real-time visibility and trouble shooting as well as key performance indicators across a variety of networks, including Fixed, Mobile, and VoIP. These capabilities enable the customer to differentiate themselves by delivering quality of experience which becomes even more relevant in the Telco 2.0 business model. For example, one of our customers is using our Performance Management Solution to alert them if the display time of the first Web page for a Blackberry user exceeds five seconds.

Our software has also provided another one of our customers with reports based on real-time traffic that look at the volume, failure rate, and the delivery time of text messages. This enables operators to quickly pinpoint issues in their network and better plan their capacity needs.

Another element of our product portfolio, our Messaging Solution or TekMedia continues to gain customer traction and we now have ten customers in nine countries. TekMedia provides improved network routing, advanced network security, enhanced network performance, and increased revenue opportunities via mobile advertising.

We recently announced a TekMedia deployment with Mobilink, part of the Arescom Group, which is the largest operator in Pakistan with 31 million subscribers.

I will now turn it over to Bill, who will go into more detail about second quarter results. Bill?

Bill Everett

Thanks, Frank. I will comment on our second quarter results and update our annual guidance for 2008. Please refer to Slides 5 to 12 which provide both our GAAP and non-GAAP results for the three and six months ended June 30, 2008 and 2007 along with the associated reconciliations.

As Penny mentioned earlier, unless otherwise stated, all of the financial metrics presented herein are on a non-GAAP basis from continuing operations.

Orders for the second quarter of 2008 were $122.9 million, up 45% compared to $84.7 million for the second quarter of 2007. The total of $122.9 million represents record second quarter orders and we are particularly pleased with the strength of our orders from our EAAA and CALA customers.

Revenue for the second quarter of 2008 was $116.4 million, up 6% compared to $110 million for the second quarter of 2007. We generated consolidated gross margins of 64% and net income from continuing operations of $15.7 million or $0.23 per diluted share for the second quarter of 2008. This compares to gross margins of 58% and net income from continuing operations of $9 million or $0.12 per diluted share for the second quarter of 2007. Operating margin from continuing operations for the second quarter of 2008 was 17%, up from 9% in Q2 of last year.

Orders for the first half of 2008 were $205.3 million, up 25% compared to $163.9 million for the first half of 2007. Revenue for the first half of 2008 was $234.7 million, up 7% compared to $218.8 million for the first half of last year.

For the six months ended June 30, 2008, we generated consolidated gross margins of 65% and net income from continuing operations of $34 million or $0.48 per diluted share. This compares to gross margins of 58% and net income from continuing operations of $19.6 million or $0.27 per diluted share for the first six months of 2007.

Operating margin from continuing operations for the first half of 2008 was 19% compared to 11% for the first half of last year.

Please refer to slides 21and 22 for a breakdown of our revenue by product and service categories for the three and six months ended June 30, 2008 to 2007. For the second quarter of 2008, total product revenue was $77.5 million, up 2% compared with $75.9 million in Q2 of last year. This increase was driven primarily by a $7.2 million increase in number portability product revenue for the period, which was offset in part by a reduction in performance management and monitoring product revenues. As we have discussed in prior quarters, we’re seeing an increase in number portability revenues as additional countries mandate number portability particularly within the CALA region.

Warranty and extended warranty revenue in the second quarter of 2008 was $20.6 million, up 35% from $15.2 million in the second quarter of last year principally due to the increases in our installed base of customers. Professional and Other Services revenue was $18.4 million, down 2% from $18.8 million in the same period a year ago, principally due to the decline in revenues related to our performance management product line which typically requires a greater level of professional services.

For the first half of the year, overall product revenue was up 8% driven by our continued success with our signaling product line, particularly our higher margin extension and upgrade business along with the increase in our number portability revenues for the reasons discussed previously.

Partially offsetting the increases in these product lines was a significant decline in our performance management and monitoring products revenue. This is primarily due to a longer revenue conversion cycle and the timing of orders received in 2007. While we experience a significant decline in revenues from these products in the first half of 2008, our backlog for these products and services as of the end of Q2 2008 has increased significantly when compared to a year ago.

Next, I would like to comment on the geographic breakdown of revenue and our continued strong international performance. Slides 18 through 20 provide a breakdown of revenue by region. During the second quarter of 2008, international revenue represented 58% of our total revenue compared with 71% in the same quarter last year.

For the first half of 2008, international revenue represented 55% of our total revenue compared with 59% in the first half of last year. We expect that international orders and revenue will continue to represent more than 50% of our consolidated total on an ongoing basis as we continue to expand our global footprint.

As Frank mentioned previously, we continue to diversify our customer base and are not overly-dependent on any specific customer. In the second quarter of 2008, we had three customers, each of which represented 10% or more of our total revenue: T-Mobile at 16%, American Mobile and Telmex Group at 12%, and AT&T at 10%.

Now let me turn to consolidated gross profit margins. The company’s consolidated gross margins were 64% for Q2 of 2008 compared to 58% in Q2 of 2007 and 67% in the first quarter of this year. Our strong gross margins in the second quarter of 2008 compared to the second quarter a year ago were due primarily to a shift in revenue mix to higher margin number portability products and to extension and upgrade business in Eagle and other signaling products.

In addition, Q2 2007 included a higher level of Eagle initial systems revenue and higher installation service costs and international contracts which reduced our Q2 2007 gross margins. Our ability to sustain these gross margins in the second half of 2008 will depend in part on continued receipt of high margin extension orders and growth in number portability revenues.

R&D expenses for Q2 of 2008 were $25.4 million, up 9% compared to $23.4 million in Q2 of 2007 and $23.6 million in Q1 of this year. This increase in R&D spending was due in part to investments and developing SIP -based products to help customers migrate to IP networks. 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 $18.2 million in Q2 of 2008, up 4% from $17.5 million in both Q2 of 2007 and Q1 of this year. Salaries and sales commissions in Q2 2008 were up over the same period a year ago, reflecting higher orders and revenue. This increase was partially offset by lower marketing and advertising expenses.

G&A expenses were $11.1 million in Q2 2008, down from $12.6 million in Q2 of 2007 and $11.8 million in Q1 of this year. The decrease from the prior year was due primarily to lower IT infrastructure spending and reduced consulting expenses overall.

I would also like to update you on the status of certain tax matters. During the second quarter, the IRS completed its examination of our tax returns for the years 2002 through 2006. As a result of completing the exam, we recorded certain adjustments to our previously filed tax returns that were primarily timing in nature. As a result of these audit adjustments, our taxable income in prior years increased, allowing us to utilize certain capital loss carry-forwards generated by the sale of our switching business in 2007.

These capital losses were previously fully reserved and therefore, the utilization in Q2 of 2008 resulted in an income tax benefit of $3.7 million, which increased our GAAP earnings by $0.05 per share. The utilization of these capital losses do not have any impact on our non-GAAP effective tax rate in Q2 2008. These losses were generated by the sale of the switching business, and accordingly have been treated as a non-GAAP adjustment. The other adjustments, however, resulted in the reclassification of certain income tax receivables to deferred tax assets.

Our non-GAAP effective tax rate for Q2 2008 was 22% compared to 28% in Q2 of last year. The quarterly effective tax rate for Q2 2008 was lower than our last guidance of 32% to 33%. This reduction was due primarily to a change in the estimate associated with our ability to realize certain federal and state research and development tax credits, due in part to the IRS completing its work.

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 second quarter of 2008 was $3.4 million compared to $4 million in Q2 of 2007 and $3.1 million in Q1 of this year. Pre-tax stock-based compensation from continuing operations for the first half of 2008 was $6.5 million compared to $8.7 million in the first half of 2007.

We have provided a summary of the impact to stock-based compensation from continuing operations by line item on slides 23 and 24. Total stock-based compensation from continuing operations has declined from the prior year due primarily to changes in our equity compensation policies.

We exited the second quarter with a very strong balance sheet. We have cash and short-term investments of $190.1 million as of June 30, 2008, compared to $316.5 million as of March 31, 2008. This decrease is attributable to the repayment of $125 million of outstanding convertible notes in June 2008. Our working capital balance at June 30, 2008 was $201.8 million, essentially unchanged from last quarter. The quarter-end cash balance includes the impact of completing $33.7 million of our previously announced $50 million stock repurchase program. Please refer to slide 25 for certain key balance sheet metrics.

At the end of the second quarter, we continued to hold $119.7 million of Student Loan Auction Rate Securities measured in fair value, all of which are either AAA or AA rated by one or more rating agencies. We continue to classify these securities as long-term investments, as a result of the ongoing liquidity issues in the credit markets.

Of this portfolio, approximately 92% of the principal amount is collateralized by student loans issued under the Federal Family Education Loan Program, or FFELP. We currently believe that the reduction in market value of $4.3 million or $2.6 million after-tax recorded in the first six months of the year is temporary and we expect to recover the face amount of these securities when liquidity is restored, or if necessary, at maturity.

Accordingly, the adjustment had been recorded through shareholders' equity and not the income statement. Subsequently to the end of the quarter, five of our auction rates securities with a total fair value of approximately $12.3 million have been called by the issuers and redeemed at par value.

For the first six months of 2008, we generated positive cash flows from continuing operations of $56.9 million compared to $45.9 million for the first six months of last year. The increase in cash flows for the first six months of 2008 are primarily attributable to the increase in earnings from continuing operations compared to the first half of last year.

We are updating our guidance for full-year 2008. Please refer to slide 26 for a comparison of our previous guidance and today's updated guidance. Our new revenue estimate for full-year 2008 ranges from $460 million to $470 million, with the book to bill ratio at or slightly above one to one. This forecasted revenue represents revenue growth of approximately 7% to 9%. We expect non-GAAP consolidated gross margins for the full year will be 62% and 64% and non-GAAP EPS will range from $0.82 to $0.86 per diluted share for 2008. This represents non-GAAP EPS growth of approximately 24% to 30%.

We expect our non-GAAP annualized effective tax rate will be between 28% and 30%, assuming that the R&D tax credit will be renewed by Congress during 2008. If the R&D tax credit is not renewed, we expect that our non-GAAP effective tax rate will be between 31% and 33%. We expect that the share count used to calculate diluted non-GAAP EPS will be approximately 70 million shares.

Finally, we expect GAAP EPS to range between $0.65 and $0.69 per diluted share. After our strong orders performance in Q2, we now expect that our orders will be the strongest in the second and fourth quarters of 2008, with the fourth quarter being the strongest quarter overall. We also expect the Q4 revenues will be strong and that Q3 revenues will be the lowest of the four quarters during the year. Frank?

Frank Plastina

Thanks, Bill. 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. It has now been just over a year since we refocused our energy into doing what we do best; we are a much stronger company as a result and we are delivering increased value to our share holders.

We have generated over $500 million in orders in the past four quarters, which reflects a 28% increase over the previous four quarters. Over the last year-and-a-half, we have added 34 new customers, expanded our footprint to nine additional countries and launched two next generation products, one of which has ten customers. We are well-positioned to build on this success and capitalize on the market opportunities ahead.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question is from Scott Coleman with Morgan Stanley.

Scott Coleman – Morgan Stanley

Hi, good morning. Thanks for taking my question. I am wondering if you could address two things; first, is the amount of orders coming from the 34 new customers. I think you referenced, Frank, return orders from some of the ones that you saw in last year, but I am wondering if you could break that out a little more. And then second, I think related to that is, your professional services revenue was essentially flat year-over-year, actually down slightly. Given the amount of new customer activity, it is a bit of a surprise to me at least, I am wondering why you are not seeing good growth in that line of your business segments.

Frank Plastina

I will take the second one first. Professional services is a value-add service that really is dependent on the type of product line that we sell. If you look at the extended warranty line, that went up and that was attributable, as Bill said in the prepared remarks, to the increase in the installed base.

So, there really are two service lines to look at, one is really the extended services and warranty revenue which is up nicely and we expect that to be, given the increase in the installed base, and professional services is really dependent on how much activity we have and how much revenue recognition, in particular, that we have for our performance management and monitoring solutions, because that is the product line that attracts most of the professional services work.

In terms of the new orders from the customers, we don't breakout the new orders from the 34 new customers, but one thing we have been doing is tracking our success over time once we book that initial customer. And generally speaking, it is not unusual for us – for our new customer to generate expansion orders at a level of 3 to 4 times their initial order value within the first three years, and beyond that, it’s a multiple over and above that over the life of the relationship. So, it is a very healthy re-order kind of amount after that initial win.

Scott Coleman – Morgan Stanley

If I could ask one follow-up there. Bill, I think you said in your remarks that the numbers for performance management, the revenue numbers, were low but that the order rates and the backlog were both quite strong. Should we expect to see the professional and other services revenue grow in line as you start to recognize more revenue from your performance management products?

Bill Everett

Yes, Scott, I think just to clarify what I have said, I said that our backlog was significantly higher than it was a year ago. And as those deals roll into revenue which will occur in the latter part of this year and maybe into early part of next year as well, that we should see a corresponding increase in professional services. As Frank said before, professional services, because we have a very configurable product, services is part of the installation process and getting the customer up to speed and running effectively. So, you will see a -- there is a relationship there and it should play out over the second half of this year and into early next year.

Scott Coleman – Morgan Stanley

Great, thanks guys.

Operator

Your next question is from Larry Harris with CL King.

Larry Harris – CL King

Thank you and congratulations on the results of the quarter. With respect to number portability, I believe you referenced India. Are there any other countries or geographic regions that are significant contributors to that right now?

Frank Plastina

Right now, the activity for this year in 2008 is all about CALA. Mexico and Brazil are the big countries in the big markets that we are actively deploying and in fact have taken both orders and revenue from that region in number portability. On the horizon, 2009 and beyond, the big countries left to go are India, Russia and then a whole slew of others around the world that are smaller countries but there are countries that we have an installed base of Eagle. So, back to the 34 new customers over the past six quarters, that really is what is representing the opportunity going forward for the follow on sale because number portability frankly for us is a natural upsell once you have got the Eagle base installed.

Larry Harris – CL King

Understood. And you know, any comments in terms of where we stand relative to TekCore, the number of trials for the SIP signaling router?

Frank Plastina

Yes, can we continue on the trial with SSR, we got trials around the world; I am just looking up the exact number here so I can pass that on to you. But the SSR pipe line, SIP Streaming Router pipeline is doing quite well. We have -- the product is generally available. It is installed and running, and right now it is in an all SIP environment, which essentially handles the SIP traffic between our particular case Nokia, MSCs and IP PBXs.

In terms of the actual trials, we’ve gotten feedback and trials are both in SSR functionality, TekCore SSR, as well as TekCore as a CSCF and as you may recall, it‘s just a software upgrade to get it to a CSCF fully functional. One of the trials has already resulted in an order, the others remain underway and the people or the customers are still looking at them. So, the work continues, it all depends on what the pain points are at the particular customer. The customers that we are seeing that have the most interest in SSR, the ones that are seeing a lot of SIP-based traffic hitting their network and they are having a much bigger problem handling the mesh between all the switches in IP PBXs, that is where the first implementation went and we think, given the pipeline that we see, we think we are going to see several more opportunities in the next few quarters turn into orders.

Larry Harris – CL King

Great.

Frank Plastina

Okay. Thank you.

Operator

Your next question is from Brian Modoff with Deutsche Bank.

Brian Modoff – Deutsche Bank

Going on with TekCore, so several opportunities in the next few quarters, where do you see TekCore as a percent of revenues evolving in 2009, do you see that as over 10% of revenues?

Frank Plastina

It’s hard to see if it’s over 10% of revenues, because I certainly can see a much bigger order uptick in 2009. We see the market being anywhere from $100 million to $300 million in the next three years. So, that is a market that I think that we are well positioned to get a big share of. And Brian, really it’s going to depend on how quickly the customers need to move to an SSR configuration based on the actual pain points that we are hitting. I mentioned in the prepared remarks the factors and I think they were about a dozen of them, that are generating a lot of traffic in the session control and signaling layer. To the extent that there is a lot of SIP based traffic in that layer, SSR right now we feel is the best way for them to go in terms of handling all that in an efficient way. The only other alternative that we can see out there is meshing everything together and that becomes awfully expensive.

Brian Modoff – Deutsche Bank

Yes, it's similar to what happened with your platform back in the original days of the (inaudible) SS7 then.

Frank Plastina

Yes, actually it’s incredible, it’s about, it’s the exact same set of events and you go back to when standalone STP became prevalent, it really was based on the fact that it was no more cost-effective to use up a whole bunch of switching trunks meshed between switches. We’re seeing the same thing now. We’re seeing wireless service providers who are seeing a huge increase in traffic but not necessarily a large increase in revenue. So they don’t want to go out and blow all their CapEx budget on access and transport to handle all the traffic when their revenues are growing at single-digits. They need to find a more efficient way to do it. Having that separate connectivity layer is a big, big cost favor and we see as you rightly know that we see the same thing happening over time with our SIP products.

Brian Modoff – Deutsche Bank

And back then you really didn’t have competitors with similar products. DSC and Nortel were the two names and they didn’t have these kinds of capabilities in terms of the performance of the product. Who do you see as your competitors in SIP, in this area?

Frank Plastina

Well right now, what we see is, we see boxes that really have been designed for other purposes trying to do SSR functionality. We see the smaller players, kind of the session border control players thinking they’ve got SSR. They may have it in a very small environment when you don’t really have to scale to a large capacity.

Once you get to the tens of millions of users, very large scale requirements, our TekCore SSR is a lot more cost effective, that’s one aspect. The other aspect is we still see some of the more traditional players trying to either put a media gateway or MSC in as essentially a de facto IPSTP that also doesn’t work in the long-term because inevitably that platform runs out of steam. We’ve redesigned -- we have designed this from scratch to be able to scale the ATCA Blade, the evolution of our platform is all about getting to the scale that’s required. And just to give you a little bit of a tidbit, one of our customers actually is planning their network to handle, to be able to handle 1 billion distinct IP addresses and IP devices. To get to that kind of scale and you really got to go way up a TekCore type solution that can scale to that level.

Brian Modoff – Deutsche Bank

Sounds very familiar. And then finally, looking at Q3, you’re talking about Q3 kind of been your low point and then having a quite a swing in Q4, are we talking significant differences relative to last two quarters, i.e., Q3 being down say 10% or more sequentially and then a strong recovery in Q4, is that your thinking? And then what is the drivers behind Q3? Is it just simply from what you’re seeing on the order book, what’s flowed through in Q2 that may have – have been intended for Q3, and are those the drivers?

Bill Everett

Yes, Brian, this is Bill. Is your question related to the P&L or to orders specifically?

Brian Modoff – Deutsche Bank

Both. I'm just trying to kind of understand your Q3 guidance and what is causing you to say it’s going to be the low point for the year and snap back in Q4?

Bill Everett

Yes, I think that if you recall at this point, a quarter ago we said that it was too tough to call out between Q2 and Q3 because of the time of software releases and the customer acceptances and a number of variables that made it difficult to predict the revenue split between Q2 and Q3. Obviously with respect to Q2, we did quite well and to some extent that we did well, because on the deals that were hanging in the balance, if you will, more of them got recorded in Q2. With respect to our backlog, it’s up for the full-year, we have a pretty good deal with our prior – our deals that can come into the revenue and into the P&L. I think that with respect specifically to Q4, if there’s always some in-quarter orders that we get, Q3 we haven’t had lots of those, so I think that there’s nothing fundamental here. It's simply a timing issue between when things get recorded or not.

Frank Plastina

And Brian, one more comment to clarify on orders, the comments we made specifically to Q3 relates to revenue. Orders for the year we're still comfortable with the 121, which is slightly above 121 which is up from last quarter. That's really what we're shooting for from an annual perspective and it's hard for us to time exact order inflow, right now the pipeline is pretty healthy.

Brian Modoff – Deutsche Bank

I understand. Okay. Thank you very much.

Operator

Your next question is from Amir Rozwadowski with Lehman Brothers.

Amir Rozwadowski – Lehman Brothers

Thank you very much for taking the question, Frank and Bill. I just wanted to get a sense in terms of the geographic breakdown of your orders at this point. We've certainly seen strength at T-Mobile and AT&T in the US, and I wanted to understand on a going forward basis, you continue to expect strength out of the US or should we see a shift more towards some of the international markets where you've been quite successful with new customer wins?

Frank Plastina

I think over time there will be a shift at the international as we've said. We expect on an ongoing basis the revenue which obviously is just a delay from the order input, is going to be over 50% outside the US and that could probably approach 60% and beyond over time simply because the networks that we're winning outside of the US are actually larger than a lot of the US based networks. So, over time, we expect to grow those networks. In terms of the actual order input now, as Bill stated in the prepared remarks, we were particularly pleased with the EAAA and CALA orders in the second quarter. Our US business remains healthy as well, and really the point that we're trying to drive home is that we've got a very diversified base. We've had eight different 10% customers in the last couple of years and that diversity serves us well, because obviously CapEx budgets go up and down at different times depending on which service provider group we're talking about. And the fact that we are in there already with a sizeable installed base in each of those large players positions us well for the future.

Amir Rozwadowski – Lehman Brothers

Great. Thank you very much Frank. And then just one quick follow-up, with respect to your India business, it seems as though you're well positioned with many of the leading carriers there. I wanted to get a sense as to where you saw the opportunity and we've seen some additional license issuances and aggressive build on networks, and wanted to get a sense of are we still in the sort of the early stages there with your opportunity, or where we sort of are right now?

Frank Plastina

I think we're still in the early stages simply because all we're selling right now is signaling capacity, very traditional SS7 signaling capacity. They haven't even gotten to that next level only because they're keeping with sub-ads. It's incredible. As I stated in the prepared remarks, 7 million new subs a month. All they're doing is keeping up with the growth and our extension business as a result is healthy. The next level of software capabilities such as performance management, number portability, those are all in the horizon. So we expect India to be a pretty important market for us going forward.

Bill Everett

Can I just add one (inaudible) here? We look to our Pyramid Research for a lot of the market data on the wireless market and they have indicated in a recent survey that between 2006 and 2010, they expect the fastest growing market – wireless market in the world in terms of new ads absolutely and then in percentage ads as well, that India in the market would be the biggest and fastest growing market in the world. So, they are very bullish on that market, and as you've correctly identified, we're very well positioned with a number of the major carriers there.

Amir Rozwadowski – Lehman Brothers

Great. Thank you very much for the incremental color gentlemen.

Operator

Your next question is from George Notter with Jefferies.

George Notter – Jefferies

Guys, I guess I wanted to ask about cycle times. Is anything changing in terms of your ability to convert customers from product shipment to revenue recognition? Is that cycle time changing at all?

Frank Plastina

Yes, George, I think that with respect to our IS [ph] product lines that it is the cycle time is slowing down a little bit for a couple of reasons. One is that the products are more complex and need to be – the implementation of the cycle is a little bit longer. We're also selling and generally speaking in tandem with – very often in tandem with Eagle Installations. So, first you have to install the Eagle and then you install the IS product. And the complexity of the product is growing with more protocols and different kinds of links and different kinds of over-the-air interfaces. So, all the levels of complexity make the implementation cycle longer than it was historically. The other factor I would say that influences it is whether or not the implementation is with a new customer or an existing customer. So, most of our – in cases of many of our new customers, I believe 14 of them also ordered the IS product and that – so you have not only the fact that you’re doing it in tandem with an Eagle, but you’re doing it in that customer’s environment, where you don’t have any currently installed base or existing relationship with a customer. So, all of those things together increase the cycle time for the IS implementation. So, I would say the answer to your question is yes.

George Notter – Jefferies

How about on the signaling side of the business?

Frank Plastina

I'll tell you it is fairly standard. I would say that if anything our processes are better – even better and faster than they were. New customers obviously take longer. So as we get more and more new customers, the initial time to get acceptance from the customer is longer than an incumbent customer of course. But fundamentally, there’s no change there. I would add though that, to the extent that we sell IS together with Eagle Systems, we can’t record the revenue on the Eagle piece of the system until we get acceptance on the IS implementation. So, those two things together sort of indirectly affect the timing of some, but not all of the Eagle Systems.

George Notter – Jefferies

And just one follow-up, just on currency impact, are you seeing anything material in terms of revenues or cost structure?

Frank Plastina

The net impact of currency changes for us for the first six months of the year and particularly for the last three months of this first half year really were not material overall to our business. It increased our OpEx expenses but we got a little bit of a benefit on our gross margins. So, it pretty much netted out. There were some costs but – in net cost to us, but not a big number in the overall scheme of things.

George Notter – Jefferies

Great. Thanks very much.

Operator

Your next question is from Ken Muth with Robert Baird.

James Falkoff – Robert Baird

Hi. James Falkoff on for Ken. A couple of questions. One, if you could just kind of clarify how the level of booked ship business was in the quarter relative to, I guess, what you are expecting? And then second, a follow-up on number portability. I just wanted to get a sense of the timing, if the strength this quarter was related to deployments that went live this quarter or how does this kind of go live based on the operators compared to when you recognize revenue on this?

Bill Everett

Right. This is Bill. Let me answer the first piece and try to cover the second one as well. With respect to booked ship business in the quarter, we had a fairly strong quarter with respect to our booked ship orders this quarter, I would say higher than the norm generally and in part that accounted for the higher gross margins than we had originally anticipated. Our booked ship business to the extent that it relates to either software upgrades and/or extension cards that add capacity to the customer’s network, either one of those has the effect of generally speaking increasing the overall gross margins of the business. So we had more than, I would say, is the typical norm that we’ve had pretty good with booked ship business in the last couple of quarters and I would say that this certainly continued that trend and was probably higher than it has been in the last few quarters.

With respect to your second question which had to do with number portability, I think the question was, what’s the timing of our revenue recognition compared to when operators are putting their systems into service. It depends on the circumstances. Let’s talk about Mexico first and Brazil second. Frank mentioned earlier that Mexico – that the CALA has been the region with the most significant number portability implementations this year. Mexico’s system went live on July 6, I believe, and we were able to get revenue acceptance from the customer and revenue from some of our customers in Mexico prior to that date. So, the second quarter revenue reflects some of that and that’s part of the reason why you see the strong number portability revenues on the product comparison chart.

With respect to Brazil, the implementation date is not until later in the year. There’s a series of phased in implementations and currently we do not expect to get revenue from those transactions until the latter part of this year or even conceivably into the early part of next year, but they tend to be pretty well coordinated with the revenue recognition. It tends to be pretty well coordinated with the mandated implementation date from the regulators.

James Falkoff – Robert Baird

Okay. And given that Brazil could be kind of slipping into next year, is the outlook for the second half for number portability be down sequentially or will it may be at this level?

Bill Everett

Well, at the moment, we believe that it will be in our fourth quarter results and so we’re targeting a fourth quarter even for those particular contracts.

James Falkoff – Robert Baird

Okay. Great, thanks.

Bill Everett

And just to clarify and Anatel, the regulator in Brazil, we certainly haven't had any changes in dates that we're planning for and not sure aware you are hearing that the Brazil implementation is slipping [ph] with their customers certainly haven’t changed their view of when the dates. And are our revenue recognition is dependent on the customer acceptance. So, whether or not Anatel, their regulator changes the dates and changes things, after the fact that’s a separate issue.

James Falkoff – Robert Baird

Okay. Thanks.

Operator

(Operator instructions) Your next question is from Tim Savageaux with Merriman.

Tim Savageaux -- Merriman

Hi. Good morning. Well, I guess one question and one follow-up then. With regard to growth through your first half year here, you posted sort of a high single-digit growth rate and are guiding for that for 2008. I wonder at this point if you could maybe frame how you're feeling about the longer term growth prospects at Tekelec relative to that? Do you expect that looking forward into '09 the growth rate can accelerate or what are the key metrics driving that growth rate one way or the other? Then I will follow up, thanks.

Bill Everett

Yes, Tim, I think the only longer term target that we put up there is really the operating margin up 20%. It's what we’re shooting for over time. We have said that we require some reasonable growth to hit that margin and what we define as reasonable is the high single digits range which is where we are now. We’ve got it this year for 7% to 9% growth from last year. So, we continue on that basis. We’re comfortable we can probably hit the 20% operating margins over time. We did 19% for the first six months, just as an example.

Going forward, that growth and anything beyond that number is really going to depend on some of the non-Eagle based product lines reaching a critical mass, to the extent that we can add $50 million worth of business over and above our traditional business will really determine how quickly we grow. And that’s where we’re spending some time and some efforts with Performance Management, with TekMedia, and some others that we're building an R&D program. And frankly, always looking at inorganic opportunities to do that as well and supplement the effort. So, a combination of all those will really determine the growth rate going forward.

Tim Savageaux -- Merriman

Great. Thank you. To follow up, if you look at your first half results, you’ve done something close to $0.50. You are guiding to sort of a mid range $0.85 for the year. Obviously, that implies sort of a lower earnings number in the second half. I mentioned some of that is due to the tax rate in Q2, but if you can talk about what’s happening in the model in the second half to drive that, I would appreciate it. Thanks.

Bill Everett

Tim, I think the – if you look at the guidance that we gave, while we have raised our overall gross margin assumptions for the full year, if you look at that it implies a lower gross margin for the second half of the year, and we do expect our gross margins in the second half of the year to be lower. Our model is very sensitive to gross margin assumptions because we can leverage the substantial amount of our gross margin incremental profit right to the bottom line. So I think that’s one of the areas that is certainly worth taking a look at. The tax rate for the second half of the year is expected to be higher than the tax rate was in fact for the first half of the year and we will have some continued increases in OpEx spending so that will be a little bit higher for sure. But I think the real key to our model given that we’re getting mid-to-high single-digit revenue growth in our gross margin performance. And so, I think that one factor probably more than anything is probably the driver for that.

Tim Savageaux -- Merriman

Okay. Thanks.

Operator

Thank you for participating in Tekelec’s second quarter earnings conference call. This does conclude the conference and you may now disconnect.

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