Acme Packet, Inc. Q2 2008 Earnings Call Transcript

Aug.13.08 | About: Acme Packet, (APKT)

Acme Packet, Inc. (NASDAQ:APKT)

Q2 2008 Earnings Call Transcript

August 7, 2008 5:00 pm ET

Executives

Brian Norris – Director of IR

Andy Ory – President, CEO & Cofounder

Keith Seidman – VP, Finance & CFO

Analysts

Simona Jankowski – Goldman Sachs

Paul Silverstein – Credit Suisse

Sanjiv Wadhwani – Stifel Nicolaus

Ted Jackson – Cantor Fitzgerald

Tom Champion – JP Morgan

Catherine Trebnick – Americas Growth Capital

Greg Mesniaeff – Needham & Company

Vijay Bhagavath – Deutsche Bank

Joanna Makris – Brean Murray Carret

Operator

Ladies and gentlemen, thank you for standing by and welcome to Acme Packet's second quarter 2008 earnings release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator instructions)

I would now like to introduce your host for today’s conference, Brian Norris, Director of Investor Relations for Acme Packet. Please go ahead sir.

Brian Norris

Good afternoon and welcome to Acme Packet's second quarter 2008 earnings release conference call. With me on the call are Andy Ory, our President and Chief Executive Officer; Keith Seidman our Chief Financial Officer. Let me begin by reminding you that statements made during this call that are not historical facts may be forward-looking statements within the meaning of Section-27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may relate among other things to our position in the session border controller market, our expected financial and operating results, including expected revenue and earnings per share for full year fiscal 2008 on both a GAAP and non-GAAP basis, our ability to build and grow Acme Packet, the benefits of our products, and our ability to achieve our goals, plans and objectives.

Such forward-looking statements do not constitute guarantees of future performance and are subject to a variety of risks and uncertainties that could cause our actual results to differ materially from those anticipated. A discussion of these risks, uncertainties, and additional factors that could cause actual results to differ from those projected or suggested in any forward-looking statement is contained in our recent filings with the SEC, including those factors discussed under the caption Risks Factors in such filings.

Investors should not place undue reliance on such statements which are current only as of the day they are made and we disclaim any obligation to update them. All results and projections we review this evening are on a non-GAAP basis, unless otherwise and explicitly described as GAAP. During this call, we will be referring to non-GAAP net income and non-GAAP net income per share which are non-GAAP financial measures that exclude stock-based compensation expense for all periods presented.

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

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

Andy Ory

Thank you, Brian, and good evening everyone. Revenues for the second quarter were $25.7 million and non-GAAP EPS was $0.03 per share. These were disappointing results, which are in contrast to the sequential and year over year revenue growth we have reported in each of the nine preceding quarters.

The second quarter reflected what we believe was a pause in the deployment of next generation network rollout. That said, we don't believe this pause was specific to Acme Packet or the SBC market or in any way compromises our long-term growth opportunity. We remain confident in the growth trajectory of the market and our leadership position within it.

We did not meet the second quarter revenue goal required to maintain our 26% to 30% full year growth objective. As we discussed in our July 3 call, there were two primarily factors affecting our quarterly result. The first was related to deal slippage at the final stages of the quarter. The second was related to time-based acceptance criteria of certain transactions.

Of the forecasted revenue which did not close, approximately 75% was due to deal slippage or push-outs by customers at the very end of the quarter. This involved over a dozen transactions. These delays were not focused on any specific customer or region. We do not believe that any of these opportunities were lost to competitors.

The remaining 25% of the forecasted revenue which did not close was due to time-based acceptance criteria, which limited our ability to recognize the revenue. While this happens every quarter, we had an unusually high level of such orders during the second quarter. We currently believe that approximately $5 million of the revenue we have previously forecasted to close in the second quarter will close in the third quarter and the balance pushed out beyond the third quarter.

We are encouraged by the closer examination of our second quarter results; there were a number of positive indicators. First, there was no change to our extremely high win-loss rates. We believe that we won nearly every opportunity that we competed in and were available to be closed in the June quarter. In fact, we added nearly 25 new customers, which brings our global customer base to over 540. We also continue to extend our presence in our large base of existing customers, which includes 84 of the top 100 Tier 1 in the world.

We delivered stronger margins of 79% reflecting the strengths of our people and our solutions. We generated another $6 million of cash flow from operations, in addition to 13 million we generated in the first quarter, and we ended the quarter with nearly $148 million in cash. In fact, we believe that the fundamentals of our business are very strong and we are optimistic about our prospects for sustained long-term growth.

Six months ago, we implemented a $20 million stock repurchase plan. We have already repurchased $2.6 million shares or about 4% of our outstanding shares for approximately $15.1 million. Tonight, we announced a $35 million expansion to the repurchase program. For a closer look at the numbers and our growth expectations for the second half of the year, let me turn the call over to Keith.

Keith Seidman

Thank you, Andy, and good evening everyone. Tonight, I'll review our financial results for the second quarter which is in line with the financial update we issued on July 3. I will also share with you our outlook for the second half of the year. As a reminder, all results and projections we review this evening are on a non-GAAP basis unless otherwise and explicitly described as GAAP. Also, all earnings per share results I'll review this evening are on a diluted basis.

I'll begin with our second quarter results. Revenues were $25.7 million in the second quarter, a decrease of 5% compared to the second quarter of 2007. Product revenues were $19.9 million in the second quarter, down 13% year-over-year. This primarily reflects a decrease in the quantity of systems sold. Maintenance, support and service revenues grew to $5.7 million, up 37% year-over-year reflecting growth in our installed customer base as well as increases in installation, professional services and training revenue.

Composition of our second quarter revenues was 70% indirect and 30% direct. Two channel partners each accounted for 10% or more of our total second quarter revenue; Alcatel Lucent and Nokia Siemens Networks which in the aggregate represented 37% of our total revenues for the quarter. Alcatel Lucent and Nokia Siemens Networks, like many of our distribution partners, represent dozens of end user customers with whom we do not have a direct commercial relationship.

Geographically 40% of our revenues came from the United States and Canada and 60% came from international customers. Gross margin was 79% compared to 80% in the second quarter of last year, primarily reflecting our manufacturing and other indirect costs being absorbed by a lower product volume base. Gross margin remain within our target range of mid to upper 70s.

Total operating expenses in the second quarter was $17.8 million, reflecting a growth in headcount in all functional areas. Total other income was $762,000 compared to $1.6 million in the second quarter of last year, reflecting the impact of lower interest rates despite significant growth in our cash balances.

Our effective tax rate on a non-GAAP basis in the second quarter was approximately 37.1%. Net income for the second quarter on a non-GAAP basis was $2.0 million or $0.03 per share compared to $5.7 million or $0.09 per share in the second quarter of last year. Net income on a GAAP basis was $816,000 or $0.01 per share compared to $4.6 million or $0.07 per share in the second quarter of last year.

Non-GAAP net income differs from GAAP net income as it excludes stock based compensation charges net of tax of approximately $1.2 million or $0.02 per share in the second quarter of 2008 and approximately $1.1 million or $0.02 per share in the second quarter of last year. Headcount at the end of the second quarter was 359 compared to 343 at the end of first quarter and 303 at the end of the second quarter of 2007.

Now let’s take a look at the balance sheet. We ended the second quarter with cash and cash equivalents of $147.9 million, up $3.2 million from the end of the first quarter 2008. We generated $6 million in cash flow from operations in the second quarter, bringing to $19.1 million the total cash flow generated from operations during the first six months of 2008.

Day sales outstanding or DSO was 86 days at June 30, primarily reflecting a higher revenue contribution from our indirect partners and international customers, which tend to have longer payment terms than our domestic and direct customers, as well as the coming of [ph] shipments within the quarter. Inventory at the end of the second quarter was $7.6 million, up from $6.7 million at the end of the first quarter.

Deferred revenue at the end of the second quarter increased to $14.5 million, up 13% sequentially, primarily reflecting the timing of service contracts and the timing of product shipments.

Finally, a brief update on our stock repurchase program. Recall that back in February 2008, the Board authorized the repurchase of up to $20 million of the company's common stock. Through June 30, 2008, we repurchased approximately 873,000 shares or $6.7 million. Subsequent to June 30, we repurchased an additional 1.7 million shares for $8.4 million. So to date, we have repurchased approximately 2.6 million shares for $15.1 million, leaving $4.9 million available for repurchasing activity under the original plan. The Board has authorized a $35 million expansion to the repurchase plan. We will continue to keep you updated to the activity under the plan during our quarterly conference calls and filings.

To help you better understand how we are looking at our growth plans, let me close with a few forward-looking comments. I remind you that the comments I am about to make are based on the current indications for our business, which may change at any time. We undertake no obligation to update these comments.

As outlined in our press release issued earlier today, we are updating our full year outlook for 2008. We expect revenues in 2008 to range between $116 million to $119 million, compared to our earlier forecast of $142 million to $147 million. We expect sequential growth in both the third and fourth quarter.

We expect diluted Non-GAAP net income in 2008 to be between $0.23 per share and $0.25 per share, down from our earlier forecast of $0.38 per share and $0.42 per share. We are continuing to model gross margins in the upper 70s for the balance of 2008. We are modeling full year operating margins to be in the upper teens.

We now expect full year interest income to be approximately $3 million compared to the $4.4 million we had previously forecast. While our strong cash flow from operations over the last 12 months has enabled us to grow significantly our cash balances, our lower interest income forecast reflects the current interest rate environment as well as cash used for the repurchase program. Our full year earnings projections continue to assume a non-GAAP effective tax rate of approximately 37.5%.

At present, we expect our weighted average diluted share count to be approximately 64 million shares in 2008 compared to the 66.5 million shares we had previously forecast, reflecting activity to date on the stock repurchase program. We are forecasting GAAP net income of between $0.14 and $0.16 per share down from our earlier forecast of between $0.29 and $0.33 per share.

Our estimates for Non-GAAP net income in 2008 differs from GAAP net income as it excludes estimated stock based compensation expense of approximately $5.5 million or $0.09 per share.

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

Andy Ory

Thanks Keith. I want to share my thoughts on the market, as well as the reasons I believe we are well positioned for sustained long-term growth. I'll start with the market. After conducting a thorough territory by territory, opportunity by opportunity review of the business over the last three weeks, we have come to the conclusion that there was a pause in the rollout of VoIP and IMS networks in the June quarter.

It's more likely that it began earlier in the year, but did not impact our top line until the second quarter. We believe that this slowdown or pause was not focused on the SBC market in particular, but rather on the next generation network market in general. We still very much believe that there is a long-term migration underway among service providers, enterprises and contact centers, which are moving from antiquated circuit switch technology network or TDM to Internet protocol or IP-based network.

The largest service providers in the world as well as more enterprises and contact centers are making investments to lower their operating cost and to introduce a broad selection of IP-enabled interactive communication services and application, from basic telephony services to video sharing, to fixed mobile convergence, to present state unified communications. This migration is strong and undeniable. It has also given rise to important areas of growth, such as the SBC marketplace.

While the industry analysts like the Dell'Oro Group forecast the SBC market to grow significantly from $204 million in 2007 to $970 million by 2012, the practical realities of the current marketplace suggest that this growth may not always be smooth. But the underpinning of that growth is the belief that over the next several years, end-to-end IP communications will generate demand for tens of thousands of SBCs.

As a leading provider in the market with over 50% market share and over 6000 SBCs deployed, we believe Acme Packet is well-positioned to leverage this growth opportunity. We feel very good about the business and the growth opportunity ahead of us.

There are reasons to be optimistic. First, our pipeline of new opportunities from both new and existing customers is robust. There continues to be a high level of interest in next generation VoIP network and SBCs are at the very heart of these deployments.

Second, we continue to lead the market in terms of product innovation. Our Net-Net 4000 is the industry's most widely deployed solution and continues to be the standard among Tier 1 operators. Our newer Net-Net 9000, our high-end platform, offers the highest levels of functionality, performance, capacity and availability in a 7U hardware chassis. We're beginning to see exciting traction with the 9000.

We recently announced the deployment of our Net-Net session router, our session routing proxy, in conjunction with several routing database partners in our open session routing architecture. OSR enables providers to deploy more opening cost effective core session routing solutions to scale their network in terms of SIP routing performance and capacity.

Earlier this year, we also announced a multi service security gateway or MSG. The MSG enables mobile service providers to maximize revenues by accelerating fixed mobile substitution and convergence into lower operating costs by supporting the transition to all IP network.

Third, we continue to expand our focus into adjacent market opportunities, including enterprises, contact centers, and government. We have made significant investment and progress in these markets, which we continue to believe will be important to our success in 2009 and beyond. These factors give us confidence in our market positions and continued prospects for growth.

We are also optimistic about the nature of the strategic discussions we're having with our customers and prospects. We are also encouraged by the level of activity in the marketplace. We're optimistic about the long term, but are going to remain cautious in the near term and be conservative in our expectations for the balance of the year.

Our plan is to deliver second half revenues of between $58.5 million and $61.5 million, with sequential growth of approximately 10% in both Q3 and Q4. The growth may not turn out to be evenly split within the two remaining quarters of the year. But we feel good about the total second half plan. We believe that this plan also enables us to build additional predictability in our business as we move into 2009.

We're focused on having a strong second half here in 2008. We're excited about the level of activity throughout our customer base and the new products that we have launched to drive the next stage of our growth. We look forward to our next call in November, at which time we will update you on our progress for the third quarter.

With that let's open up the call for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question will come from Simona Jankowski from Goldman Sachs; please go ahead.

Simona Jankowski – Goldman Sachs

Hi, thank you very much. It looks like there was an almost 40% decline in the quarter in your direct sales, which I think is mostly in the US. Can you just give us a little more color of how concentrated that decline was, and what is your best visibility at this point of – is that coming more from the equipment or the licensing side and to what extent are those utilized with customers? In other words, how long should we expect for them to take – to kind of come back and start ordering again, whether it's equipment or licenses?

Keith Seidman

Hi Simona, this is Keith. I think as we have mentioned in previous calls, when our equipment is deployed, they are pretty much utilized at full capacity. And so, when new subscribers are acquired by our customers, they buy new systems. They don't buy systems and then fill them up over time. Most of our customers are usually at a pretty much near capacity, and then when they get to their internal threshold of capacity, they buy new system. So, we don't believe there's an inventory of systems out there at our customer side with much more expansion capacity that they don't need to buy additional systems from us.

I think North America, unlike the European and Asia-Pac and CALA region, is slightly more concentrated in those regions. There's a number of large carriers, there is not one specific carrier that caused any shortfall or slowdown in the North American market. But as we'd like to point out, we don't want to measure a particular region by a three-month period. We would like to know on an annual basis, we feel very confident about North America. In 2007, if you look at each quarter, there was a slowdown in Q3 2007 from North America, but they bounced back with a very strong fourth quarter. So I think we really don't want to look at the quarter on a one – we don’t want to look at the region on a one quarter basis, but in a full year. We still think there's a lot of opportunity in North America.

Andy Ory

And the other thing, Simona, I'd like to mention is that, the overall and majority of what was either not able to be recognized or was pushed out and subsequently will be closed in the third quarter are new large systems, it's not license upgrade. The systems that are in the field are largely fully utilized, and we have seen an increase in traffic in the marketplace, which we think bode very well for additional equipment purchases.

Simona Jankowski – Goldman Sachs

Thank you so much, that was very helpful. If I can just ask a follow-up on your enterprise traction, are any of your new 25 customers kind of new type of enterprise customers or were they all service provider or maybe you can slice it in other way, can you give us a rough percentage of your revenue right now that is from an enterprise customer base?

Keith Seidman

Sure, I know – we did have a handful of new enterprise customers in the second quarter. We continue to pick up enterprise and contact center customers every single quarter, it's not focused on any one region, we're seeing it globally, we are seeing the traction pick up dramatically. The enterprise customers and contact center customers represent real revenue-generating opportunities for our network service providers, and they're becoming increasingly interested in going into that opportunity, and they see Acme Packet as a partner that can help them justify their value proposition when they go to their large enterprise customers to help them securely and effectively and seamlessly migrate from TDM to IP.

So, it's a very good marketplace for us, we're seeing activity pick up. We had said that 2008 is still a year of investment in those opportunities, and that it's really 2009 and 2010, where we will see meaningful revenue contribution from those two market segments.

Simona Jankowski – Goldman Sachs

Okay, thank you very much.

Keith Seidman

Sure.

Operator

Thank you and we'll next go to Paul Silverstein from Credit Suisse.

Paul Silverstein – Credit Suisse

Hey, Andy and Keith. I have question for you in terms of the momentum of your business. I understand there’s another one [ph] quarter event since the lower guidance, but just I'm trying to understand your commentary, Andy, about 5$ million you expected to close in June, and now you're expecting in September. If I have done the math right, it looks like the guidance, by taking the point of the guidance, it looks like you're projecting in actual half over half the coin, if I ex out the $5 million that’s coming out of the first half into September. So it looks like it's around $55 million as opposed to $57 million that you're doing in the first half of the year, so it's actually down.

So, when you look at the momentum in the business, in terms of what you're looking at in the second half, I guess my question is, are things slowing down further? How much visibility do you have as to the issues that you encountered in the quarter being stable and having plateau-ed as opposed to things getting worse from here? The comment that Keith just made about the geographic, were those limited to direct business or does that also apply to miss that it was mostly North America as opposed to outside of North America? How much visibility do you have as to the timing of this downturn? I know you're only commenting on this year, I know there's only so much visibility you have, but how much – can you give some sense for how much visibility that is, and where the problems are from a geographic and a customer nature?

Andy Ory

Sure, I mean, maybe Keith and I can split this question. I mean first of all, if you listen to how we've given our guidance, we have said that there was a pause in Q2 and there was a push out into the second half of '08. We want to be conservative in the near term and we want to build predictability into our business over the next several quarters, setting us up for a good 2009. Now you also have to take all those comments in the context of – there is a robust pipeline, and we are seeing increased traction amongst our customer. So, we're confident that the marketplace will continue to accelerate.

Paul Silverstein – Credit Suisse

That being said, I'm hoping against for a little bit more color in terms of, again, I suspect you are being conservative, you've always been conservative in your bend [ph] but the numbers are actually going down in the second half versus the first half, when one takes into account the $5 million that has been pushed out into the second half of the year, and we do understand that you are being conservative. Are you telling us that you are already seeing a pick up in business, you just don’t want to put in the numbers, anymore insight you can give us? And also the nature of the problems, is this throughout the world, is it mostly the US per Keith's comments in particular, the nature, the carriers, where are you seeing the problems, is it limited to the Tier 1, is it Tier 1, Tier 2, is it really throughout the customer base, just how broad this is?

Andy Ory

I would say that several – one of the main changes that's occurred Paul in our business that actually plays to Acme Packet's strength long term is that we have seen the more entrepreneurial service providers, the smaller ones become less and less relevant in the market.

Its the larger service providers that have a bigger footprint that own more network access service subscribers who are really going to drive this market and those are our customers. Some of them have consolidated like between Telefonica and Telecom Italia or our core [ph] and others who have consolidated. And consolidation sometimes delays some buying decisions, but in the end, those are the folks who really have the value proposition to convert from TDM to IP and we believe that they will buy an awful lot of Acme Packet session boarder controllers. It does mean that the business may be a bit more lumpy. By being conservative, we want to make sure what we've seen in July across all of our sales folks which is good activity in Q3 and Q4, we want to make sure we see that activity close.

We also would like to make sure that the pressure that exists in the last two weeks of every quarter did not necessarily the right thing for the business to run a very efficient business and a cost-effective business. And so, being conservative and building in some predictability makes sense for the business if we want to set ourselves up for a good 2009, 2010. As far as what is going on regionally, we've actually, we announced a press release with Korea Telecom. Korea is doing great. We are very excited with Asia. We are very excited with CALA. The majority of our business is North America and EMEA and we continue to invest in those two – in those two market theaters and we believe that they will contribute the lion's share in the second half of the year and we think that they will contribute in line in 2009. We don’t see any one region that's causing a systemic problem or gives us too much reason to worry. Keith, I don’t know if you want to comment on that.

Keith Seidman

I think we have strong results year over year in all regions other than North America. As Andy indicated, the majority of revenue does comes from North America and Europe, but we're seeing strong results in Europe, CALA and APAC.

Paul Silverstein – Credit Suisse

All right, one last question in this line. In terms of pricing and discounts, I assume they hit the [ph] gross margin result volume related and you haven’t given any meaningful discounts or price concession?

Keith Seidman

That is correct, Paul.

Paul Silverstein – Credit Suisse

Thank you very much.

Keith Seidman

Thanks Paul.

Paul Silverstein – Credit Suisse

Sure.

Operator

Thank you and we’ll now go to Sanjiv Wadhwani from Stifel Nicolaus; please go ahead.

Sanjiv Wadhwani – Stifel Nicolaus

Hey you guys. I have a question on DSOs, that’s been trending up and understandably in the June quarter, you had a fair amount of shipments and I'm guessing that were skewed towards the back half of the quarter. But can you talk about, as far as ordering is concerned, is that much more linear and is it mostly shipments that have skewed towards the back half and how do you sort of change that, because if you look about a year ago, your DSOs stood at about 56 days and have continued to trend up and kind of be at 40 – [ph] 86 days in this just completed quarter, so any comments there?

Keith Seidman

Sure. So we have trended DSOs and at year end December 31, 2007, the DSOs were at 86, they improved to 81 in the first quarter, and now are back at the 86 level. When we had our fourth quarter earnings conference, we did talk about DSOs being in the range of 80 to 90 days. As we see more business in any one particular quarter through our international customers as well as our partners, we will inherently see longer DSOs, just the payment terms are much longer especially with our European customers. North America is pretty standard in net 30, when you get into Europe were talking net 90, net 90 end of month, and so that's the nature of an international organization depending on the geographic mix that will have any impact on our DSO.

Timing of shipments definitely has an impact, obviously if we shipped everything in the first month of the quarter, DSOs will be down. As we have talked in several conference calls now, we do see more activity in the latter third of the quarter, and so the DSOs will shift between 80 and 90 days depending on the timing of the quarter and the geographic mix. I do want to say our – the quality of the receivables is what we believe are very high. Our reserve for doubtful accounts is relatively small as it relates to the total accounts receivable balance. Again, demonstrated by strong cash flows from operations that we do collect our receivables, sometimes it's just a matter of timing. And so, from that standpoint, we think we do a good job on the session side, but the nature of the business is such that we will have a fluctuation between 80 and 90 days.

The bookings, the order input, it was skewed a little bit higher in the June month, but not significantly than other quarters. If you take, one-third, one-third, one-third as sort of your average, I would say that the third month of every quarter is higher than that, but not 2X that, but higher, maybe 10 points higher, maybe 15 in any particular quarter. But it's not like it’s 0%, or 10% and 80%. But, historically the third month of the quarter has a higher booking/order throughput as well as that translates into our revenue.

Sanjiv Wadhwani – Stifel Nicolaus

Got it. But booking side, you're a little more linear than you are on the shipment side, bottom line and of course, with international skewing some payment terms towards 90 days.

Keith Seidman

Yes.

Sanjiv Wadhwani – Stifel Nicolaus

Got it, alright, thanks so much.

Keith Seidman

You're welcome.

Operator

Thank you and we'll now go to Ted Jackson from Cantor Fitzgerald. Please go ahead.

Ted Jackson – Cantor Fitzgerald

Hey guys.

Andy Ory

Hey Ted, how are you doing?

Ted Jackson – Cantor Fitzgerald

I'm great, how are you?

Andy Ory

Good.

Ted Jackson – Cantor Fitzgerald

So I have a couple of questions, just two quick things on the model and then some more fun ones. On the model, could you just tell me quickly what CapEx depreciation were for the quarter and then could you give me a sense in terms of what you're thinking share cap might be in the third quarter?

Keith Seidman

So for the second quarter our CapEx was $1.3 million, and depreciation expense was about $1.3 million as well, so it kind of netted out to net zero increase in PP&E. Year-to-date we have about $2.2 million in CapEx.

Andy Ory

We're looking about a $64 million share accounts for the full year, so if you look in – I think we reported about $65 million share accounts in the first half, we're looking about a $63 million share accounts in the second half, as we speak based on the activity to date on the stock repurchase program.

Ted Jackson – Cantor Fitzgerald

Okay, and then one more actually that I forgot on the model. Andy, you made a comment on your presentation that relative to the second half revenue projection that you didn't necessarily – you saw sequential growth roughly 10% on each quarter, although you could – did you made a comment saying that you could figure out – basically could see a scenario where you could have a really strong third quarter than a sequentially down fourth quarter, did I read that comment entirely correctly?

Andy Ory

What we wanted to do is give you second half guidance. We would like to run the business with a degree of predictability and sequential quarter over quarter growth. What we're modeling now for our own management of the business is sequential 10% quarter over quarter growth, however, it wouldn't be incredibly unusual if that changed a little bit or a little bit lumped, but we're trying to keep it.

Ted Jackson – Cantor Fitzgerald

But you weren't saying – you just based it, you weren't saying that you could see a big, huge third quarter and then a sequentially down fourth quarter –

Andy Ory

No.

Ted Jackson – Cantor Fitzgerald

We're thinking 10% each quarter but it could move around a little bit.

Andy Ory

That's right a few percentage point, but we're not – nothing like what you're suggesting.

Ted Jackson – Cantor Fitzgerald

Okay, great. And then my last question which is hopefully a little more entertaining for you is – in the past you've made a few, several actually, comments relative to the cable market. They were all (inaudible) and very bullish. And I was wondering if we could get an update on what's happening within cable and your participation there?

Andy Ory

Yeah, we actually continue to be successful in the cable market in North America, and we continue to see our cable customers on really generating more and more revenue and more and more subscribers across their infrastructure and we think that's very good. Cable purchases in general do tend to be a lumpy as you all know, if you follow a company that is exclusively cable. I would say that cable is a minority of North American business, and therefore it's a minority of our global business, so its lumpiness isn't necessarily all that relevant in our quarterly or annual financial result. But we're very happy with the traction that we've made there.

Ted Jackson – Cantor Fitzgerald

Okay, I'll step out of line. Thanks.

Andy Ory

Okay thank you.

Operator

Thank you. (Operator instructions) We'll next move to Ehud Gelblum from JP Morgan.

Tom Champion – JP Morgan

Hi it's Tom Champion for Ehud.

Andy Ory

Hi Tom, how are you doing?

Tom Champion – JP Morgan

Doing well, doing well. Thanks for getting the question. In light of the lowered expectations, I’m curious if any revenues had been lost or if you could comment on whether or not that’s realistic possibility. Thanks.

Andy Ory

You mean any opportunities that we’re in the marketplace that we were tracking that we were counting on that went to someone else?

Tom Champion – JP Morgan

Yes. That’s right or just didn’t close to anyone.

Andy Ory

Well, I guess there's all these revenues that – there's always opportunities that when they're delayed, they didn’t close to anybody. But as far as the deals that we're tracking, that we're involved in, no, we haven’t seen any of that thing lost at all.

Tom Champion – JP Morgan

Yes.

Keith Seidman

Tom, do you have a follow-up?

Tom Champion – JP Morgan

No, that’s it. Thank you.

Operator

Thank you. And we will move to Catherine Trebnick from Americas Growth Capital. Please go ahead.

Catherine Trebnick – Americas Growth Capital

Yeah, I do have that hard Croatian name. Hi guys. Anyway, mine is more on – could you give some insight into the growth margin relative to the product mix? Specifically you release like the Net-Net 9000 in December 2006. Then the multi-service gateway came out in February. Now any insight you can give me to how that blends with the growth margin now and then what you're seeing over time?

Andy Ory

I mean sure, it is true that we're seeing an increase in revenue from the 9000 series, which we're happy with. But the 4000 series still remains the overwhelming workhorse of the product mix at Acme Packet. As far as the 9000, I think that it has to do with capacity and how much trans-coding is in every system. So it has a much wider aperture of what its margin could be. Overall we blend the 9000 and the 4000 together, our growth margins are where we would expect them to be. It's slightly above where we got it.

Catherine Trebnick – Americas Growth Capital

All right, and then, Keith don’t take it the wrong way but how are you progressing on your retirement plan?

Keith Seidman

We are – far along in our search. We have identified a number of strong candidates and just to revisit what we've said back in February there is no time frame on the search. And I will be actively employed until we find that new individual and will obviously be involved in the transition period. And so, whether it's another month or two months, I think it's really not a factor in the operation of Acme Packet day-to-day business. But we will announce it, and when we hire the new person, but again, there was never a time frame and that was one of the unique differences on what we're doing here. It was a very methodical process. We are progressing very strongly and hopefully, we will have an announcement within the next several months.

Catherine Trebnick – Americas Growth Capital

All right. Thank you.

Operator

Thank you, and we’ll go to Greg Mesniaeff from Needham & Company.

Greg Mesniaeff – Needham & Company

Yes, thank you. Good afternoon.

Andy Ory

Hi Greg.

Greg Mesniaeff – Needham & Company

Hi, how are you? It’s just a question on a topic that we've talked about in the past. And given the rather granular guidance that you’ve given us for year end, I was wondering if we can perhaps revisit the whole backlog issue or like thereof, it just appears to me that you seem to have pretty good visibility and your revenue has given the type range you’ve given us and with deferred revenues up and other indicators sort of suggesting that there is some pipeline building here. I can't help but wonder that if you're going forward you can share with us some backlog data as well, if that’s possible.

Brian Norris

One of things that Keith and I are committed to is in this transition process of looking for and bringing on board a new financial leader, we certainly could look with another year of public company experience behind us. We can do some trend analysis and see which data we’re accumulating would be relevant to help you understand our business on a go forward basis. We wouldn’t rule out anything, but we're not going to do anything during the transition period that is any different. As Andy has mentioned before we will discuss it, a lot of – we have two sources of revenue in a sense, one is backlog coming into the quarter and then this stuff that gets book shipped and dealt us in the quarter. Still the overwhelming majority of our revenue to date comes from activity within the quarter. Although we've seen it, we've seen its growth, a significant growth of the deferred revenue. I just want to reiterate that over 90% of that deferred revenue balance does represent the unamortized portion of our service contract that will be revenues anywhere from the one month to 12 months depending on the time in the service contract.

Greg Mesniaeff – Needham & Company

Thanks. All my other questions have been answered, thanks.

Andy Ory

Okay. Thanks Greg.

Greg Mesniaeff – Needham & Company

Thank you.

Operator

Thank you. And our next question will be from the line of Brian Modoff from Deutsche Bank; please go ahead.

Vijay Bhagavath – Deutsche Bank

Yeah, hi Andy, hi Keith. This is Vijay Bhagavath calling on behalf of Brian.

Andy Ory

Hi Vijay, how are you doing?

Vijay Bhagavath – Deutsche Bank

Hi, I'm fine. A question on the competition – you obviously play in several markets segment, so many geographic regions, and their product categories, et cetera. Perhaps you could give us a sense of any shifts or changes in the competitive environment, any trends you're seeing from a competitive perspective. And feel free to name any vendors you kind of mostly, frequently run into for instance, Sonus or Cisco. That’s my question.

Andy Ory

Okay, now we actually haven’t seen any changes in the competitive landscapes in the core markets that we've been involved in geographically.

Vijay Bhagavath – Deutsche Bank

And kind of a sense on the competitive environment like, is it pretty much the same, has it become any harder for you to compete in? I don’t know the voice or IPP [ph] market or is it kind of relatively easy in an enterprise call center segment? Any color on that?

Andy Ory

Yeah. No, there has really been no change. I think that our win-loss rate, our resulting market share percentage at the end of the year and our growth margins. I think as it come close to 2008 will probably back us off in the sense that things are just progressing as they always have and I think Acme Packet goes as the market goes and, we're expecting that people will continue to invest in 2008 and 2009, 2010, we should be accelerating.

Vijay Bhagavath – Deutsche Bank

And from a road map perspective, roughly how many months of lead do you have over your nearest competition. Would it be maybe six months, a year, over a year in terms of the product road map and the technology?

Andy Ory

Well, I think we have significant advantage. We put more than a thousand person a year into building, deploying our technology and articulating our methods. When you look at the length of sale cycle time to get into the tier 1, it's measured in years. I recently went and visited one of the largest carriers in the world that has an awful lot of Acme Packet product in nine different projects and I walked through some of their lab certifications just because I wanted to see how everything was going. And from the moment you put something into their lab to when it's finally deployed it can take 12 to 18 months. And I will tell you, Acme Packet was in that lab. And I think that’s probably true worldwide. So I think that there are significant advantages in terms of technology, deployment experience, understanding, methods, customer wins, breadth of partnerships that we have. So, it's very hard for me to boil it all down to how many yards ahead we are in the race. But I think it's quite significant.

Vijay Bhagavath – Deutsche Bank

And also from an overall product portfolio perspective, if you kind of see the big picture, do you see any obvious white spaces in the portfolio, any complementary product sets that would help you diversify your revenues screen, help you to better position your product sets?

Andy Ory

Well, we have talked about adjacent markets such as wireless access, basically open routing, partnering with ENUM suppliers and talked about in our investing in enterprise market as well as contact center markets. But as far as broadening our technology with something a bit deeper than a partnership, that’s not something that we're be able to comment on this call.

Vijay Bhagavath – Deutsche Bank

Thanks Andy. That was just my question.

Andy Ory

Sure. Thank you

Operator

Thank you. Next we go to Joanna Makris from Brean Murray. Please go ahead.

Joanna Makris – Brean Murray Carret

Hi, good afternoon. I'm wondering if you could comment on linearity for the month of July. Is it trending similar to the June quarter? And secondly, if you could comment on some of the initial applications on the MSG, and whether or not you've sort of tempered your expectations for growth on the MSG for the back half of the year, anything you could talk about there would be helpful. Thanks.

Andy Ory

Well, let me take the MSG. The MSG is a new product for us and with the kind of carriers we work with, it takes quite some time from when we would introduce the product to when we would see any meaningful revenue, so that’s not something that is a major contributor into the second half of the year. So, there's really no change and I wouldn’t expect it. As far as it relates to the July month –

Keith Seidman

I think, historically the first month of any quarter has been traditionally slow, because of all the activities, the pent-up demand or supply activity to close a quarter, what I can say is that July bookings order book was in line with our expectations. As we mentioned in the earlier discussion point, the orders that we saw pushed out, we're confident that they are going to occur and revenue in the quarter, so July was in line with our expectations, but again, the first month of any quarter is probably the slowest of the three.

Joanna Makris – Brean Murray Carret

Thanks.

Operator

Thank you. And we do have a follow-up question from the line of Paul Silverstein from Credit Suisse. Please go ahead.

Paul Silverstein – Credit Suisse

Okay. With respect to Ericsson which has not been a 10% customer in the last two quarters, and I know there's only so much you want to say about any one account or OEM. But is that indicative of them not playing so much in this space or not as much as they use to? Is it indicative of them having turned away to other players? Can you give us some insight, if any, regarding that particular relationship?

Andy Ory

I mean sure, we had healthy revenue with Ericsson in the second quarter. It wasn’t 10% but it was healthy. With Ericsson, we share several large customers and some of them have other ways of purchasing the product other than just Ericsson, and I do think there will be a little bit of lumpiness there between us and Ericsson. Ericsson also does have a product called an SPG, and so traditionally, we have a relationship with Ericsson where we work with them and compete with them simultaneously. But I would expect our relationship with Ericsson to perform in line with what we would take for the year.

Paul Silverstein – Credit Suisse

Is there any difference between Nokia, Siemens, and ALU being your consistent 10% customer? And Ericsson having fallen off from that 10% level, albeit it's still healthy, that – you'll attribute that to their own products or is there something else that would account for that?

Andy Ory

Well, we had a longer relationship with ALU, and Nokia Siemens than we did with Ericsson. We also had independent relationships with Alcatel and with Nokia and Siemens. And so when they came together, they naturally were going to represent it. It's almost like two partners became one as it relates to the opportunity we had through them. But naturally, those factors made them slightly larger partners.

Paul Silverstein – Credit Suisse

Okay, one more if I may, and I thought I heard you earlier in the call mention that July, you had seen signs for pick up and then Keith just a moment ago, you had mentioned that July was not out of the ordinary relative to first month seasonality.

Andy Ory

Yes.

Paul Silverstein – Credit Suisse

I just want to make sure if I'm correct and so I want to reconcile the two comments.

Andy Ory

Absolutely. Well this all about being conservative. I'm talking about a pickup in activity. Keith was answering specifically bookings activity, which is a repeat of valid purchase order, and there is obviously a little bit of a lag between those two.

Paul Silverstein – Credit Suisse

Okay.

Andy Ory

But, I would say July has performed in line. We typically don’t comment on the current quarter, but we're on this call telling you about a robust pipeline and how we feel about the business, and clearly July was not performing in line. That would give us a cause of thought.

Paul Silverstein – Credit Suisse

And finally, on your service maintenance that obviously didn’t have the same hit (inaudible) once again. Did that continue to grow at the 30% level and it somewhat – there should be some corresponding relationship to underlying product revenue I would assume, given the nature of that revenue stream, but can you give us some insight there?

Andy Ory

I think as we install product each quarter, our base goes up, I do see growth in the service revenue. There are three components to service revenue; installation, training, as well as your typical support and maintenance aspect. 37% year-over-year was very strong, we are very happy about that. I'm not sure that we're guiding to that kind of growth going forward. But we will continue to project and realize growth in our service revenue, because of the installed base and the high level of renewals as well.

Paul Silverstein – Credit Suisse

All right. Thanks guys.

Andy Ory

All right. Thanks Paul.

Operator

Thank you. And Mr. Ory, I would like to turn the call back to you for any closing remarks.

Andy Ory

Well, thank you. Thank you for that final question. Thank you for joining us this evening. We look forward to our next conference call when we can update you on our continuing progress. Good night.

Operator

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