NEI F3Q08 (Qtr End 06/30/08) Earnings Call Transcript

NEI (NENG)

F3Q08 Earnings Call

July 31, 2008 10:00 am ET

Executives

Geoff Grande -FD Ashton Partners

Greg Shortell - President and Chief Executive Officer

Douglas Bryant - Chief Financial Officer

Analysts

Shawn Hannon - Needham & Company

Ted Jackson - Cantor Fitzgerald

Michael Osterman - [Morris & Kevin]

Presentation

Operator

Welcome everyone to the NEI third quarter fiscal year 2008 earnings conference call. (Operator Instructions) At this time, for opening remarks and introduction, I would like to turn the call over to Geoff Grande of FD Ashton Partners.

Geoff Grande

Today we are joined by Greg Shortell, President, CEO of NEI and Doug Bryant, our CFO. We will go through some prepared remark this morning and then after those remarks, we will open up the lines to take any questions. As always, the call this morning will contain forward-looking statements regarding future events that are subject to risks and uncertainties and are made subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Those factors are incorporated by reference from the press release issued earlier today as well as those contained in the section titled Risk Factors as outlined in the company's filings with the Securities and Exchange Commission. This conference call will be archived on the company's website following the call. The company undertakes no obligation to update this information.

Now, let me turn the call over to Greg Shortell.

Greg Shortell

I am joined today by Doug Bryant our CFO who will walk you through our financials in just a few moments. But first I would like to begin by providing a brief overview of the quarter. The fiscal third quarter was difficult for NEI. Quarter flow reflected a heightened sense of caution among our customers in each of the markets we serve which we believe is tied to the macroeconomic environment. Financial performance was below our expectations and although we are clearly not satisfied with our financial results this quarter, we achieved a number of notable accomplishments.

Specifically, we reported our eight consecutive quarter of non-GAAP profitability. The majority of our new customer design wins were run rate business. The integration of the alliance systems continued to progress as planned. Gross margins were above the top end of our guidance. We implemented the stock repurchase plan and we generated positive cash flow. Base on our conversations with customers and what we see in the marketplace, there were several factors that affected our financial performance this quarter. Our customers continue to be cautious about placing orders until they receive a commitment from their customers for purchases.

As a reminder, our business is based on an indirect sales model so our volumes are directly related to sales secured by our clients/customers. We see that larger ticket orders are being postponed as users are increasingly cautious about significant expenditures. As we saw last quarter, a number of our customers whose business has generated from the financial sector saw orders especially from larger end users with large rollouts reduced or rescheduled for a later date. While we face this difficult environment, we are confident in the strength our value proposition to our customers and positioned well to weather this market.

We have a solid strategy in place to continue to drive toward our objective of long-term growth and controlling cost effectively in managing our business. We are continuing our integration of alliance and in doing so, we anticipate that more efficiencies and cost savings can be achieved. As a result, we plan to reduce current expenses and implement cost containment initiatives. At this time, I would like to turn the call over to Doug, our CFO, who will take you through our financial results and guidance. Doug?

Douglas Bryant

The results that I am about to review and the guidance that I would provide will be discussed on a generally accepted accounting principles or GAAP basis. Additionally, we are also providing our net income and loss and will share information on a non-GAAP basis. We believe these non-GAAP measures will aid investors overall understanding of our results by providing better transparency for certain expenses and providing a level of disclosure that will help investors to understand how we plan and measure our business.

However non-GAAP net income for share information do not be construed as an alternative to GAAP as an indicator of our operating performance. As the items exclude from the GAAP measures often have the material impact on our result of operations. Therefore, management uses and investors should use non-GAAP measures in conjunction with our reported GAAP results. Overall our results are consistent with a challenging environment we face. Our consolidated net revenues during our period fiscal quarter were $47 million, below our guidance of $50 million to $54 million and 68% higher than the $28 million of net revenues for the year ago June quarter. EMC made up 40% of total revenue for the current quarter compared to 81% in the year ago quarter.

There was one other enterprise customer and that customer made up approximately 12% of the quarter's revenue. Revenues are up over the year ago quarter primarily due to the October 2007 acquisition of Alliance Systems. For the third quarter, we had seven accounts that contributed greater than million dollars of revenue, 19 accounts that contributed between $250,000 and a million and 18 accounts that contributed between a $100,000 and $250,000. These top 44 accounts for the third quarter made up approximately 86% of our net revenues. This compares to the March 2008 quarter when 42 accounts made up approximately 88% of our net revenues.

Third quarter gross margins on a consolidated basis were 16.3% which was above the top end of our guidance of between 15% and 16%. Gross margins came in at the top end of the guidance range primarily due to the sell through of previously reserved for inventory. As expected, the decrease from the prior year 19% was primarily due to lower gross margin associated with the Alliance Systems business. Our operating expenses for the June quarter were approximately $8 million and included $426,000 of stock compensation expense and $485,000 of amortization expenses related to the acquisition of Alliance Systems.

Operating expenses were at the low end of our guidance of between $8 million and $8.5 million primarily due to lower compensation expenses related to incentive compensation as well as delayed new hires. The June quarters operating expenses increased compared to the year ago operating expenses of $5.4 million primarily due to the acquisition of Alliance. However, as the percentage of revenues, operating expenses in the June quarter were17% compared to 19.3% in the year ago period despite the $485,000 amortization expenses included in this year's expenses.

We had an operating loss of $370,000 compared to an operating loss of $92,000 in the year ago quarter. GAAP net loss for the quarter was $283,000 or $0.01 per share which was in line with our guidance of between a net loss of $300,000 and a net income of $300,000. The June quarter’s net loss compared to last year's net income of $416,000 as higher revenues were offset by lower gross margins and higher operating expenses including the $485,000. The amortization expenses related to the Alliance acquisition. Our non-GAAP net income for the quarter excluding total stock compensation and amortization expenses were $669,000 or $0.01 per share which was slightly below our guidance of $700,000 to $1.3 million primarily due to the revenues coming in below guidance.

This represents our eight consecutive quarter of non-GAAP profitability. Turning to our balance sheet, our cash position at the end of June was $12.2 million which was up from the $11.8 million at the end of March 2008 primarily due to the June quarter's non-GAAP profit and the timing of inventory purchases per quarter that was fairly backend weighted. Our cash is down from the year ago balance of $40.1 million primarily due to $34 million that we utilized to fund the acquisition of Alliance Systems in October 2007. In addition to our cash position, we have an income tax receivable of $2.6 million that we recently filed to amend the tax returns for in order to recover income taxes made by Alliance Systems in prior years.

Because we paid cash to Alliance option holders as part of the merger consideration, this generated a disqualifying disposition resulting in a net operating loss for Alliance that could be carried back up to two years. You will also notice an asset line item in our balance sheet named contingently returnable acquisition consideration for approximately $4 million. This represents an escrow claim we have submitted for the escrow agent related to the Alliance Systems acquisition. This amount is being contested by the prior shareholders of Alliance.

This week, we are also extending our credit facility with Silicon Valley Bank. A prior $15 million facility was to expire in October 2008. The current facility of $10 million is for two years and will expire in July 2010. We decided to lower the amount of the credit facility to be more in line with our needs. To date, we have not had any borrowings against these credit facilities. On June 12, we announced the stock repurchase program for up to $5 million. On that same day, we implemented a 10b5-1 claim with Needham & company to purchase up to $2 million of our shares through November 7, 2008 if the stock is trading below $2 per share.

On June 30, we had purchased a little over 138,000 shares at a total cost of approximately $173,000. From inception through yesterday, we had purchased 376,000 shares at a total cost of approximately $431,000. Accounts receivables were $31 million with a DSO of 60 days which was higher than last quarter's DSO of 49 days primarily due to the June quarter's revenue being more backend weighted than the prior quarter. The aging of the June 30 accounts receivable is in good shape. Unreserved amounts greater than 90 days are slightly less than 1.5% of net receivables.

We expect future DSOs to be highly dependent on the timing of shipments during the quarter as well as by customer mix. The net inventory balance was $19.4 million at the end of June and our annualized inventory returns for the quarter were 8.2 versus 10.4 for the March quarter. As we have noted before, the net inventory balance will tend to fluctuate based on the growth of our business, customer mix and the timing of shipments to our larger customers.

With regard to providing guidance, we anticipate net revenues from the September quarter will be between $44 million and $48 million. These estimates are based by the current forecast from certain customers as well as historical trends. Certain customers have lowered their forecast in an effort to reduce the amount of inventory they were carrying at the end of the June quarter. One of the lessons learned during the integration of Alliance Systems is that the forecasting of revenues has become more complex. Some of the revenue from the telecommunications and enterprise communication's industry segments is project driven and another element is transactional in nature.

Combine these factors with this period of economic uncertainty and forecasting revenues are much more complicated these days. Consolidated gross margins for the June quarter are expected to be in the 14.5% to 15.5% range based on our current estimates of sales, product mix and component cost during the quarter. The projected decrease from the June 2008 quarter is primarily due to the June quarter benefiting from the sell through of previously reserved for inventory which is difficult to estimate for the current quarter as well as lower projected revenue volumes.

As we noted that gross margins cannot fluctuate to be fairly volatile depending on customer mix and revenue volumes. Property expenses were projecting a range of between $7 million and $7.5 million which includes an estimated $410,000 related to stock base compensation. Estimated amortization charges are $485,000 and estimated restructuring charges of $400,000. As you can see, projected operating expenses have been reduced from the June quarter and we will continue to closely manage these expenses during this period of economic uncertainty. Based on the above, we are projecting a GAAP net loss to be between $600,000 and breakeven.

These amounts include approximately $450,000 of stock compensation, $485,000 for amortization of intangible assets and $400,000 of restructuring charges. On a non-GAAP basis which excludes the estimated stock compensation, amortization of intangible assets and restructuring charges, we expect a non-GAAP net income of $700,000 to $1.3 million. At this point, I will turn it back to Greg for comments on our operational performance and go-forward initiatives.

Greg Shortell

In the third quarter, we continue to make progress executing our go-forward strategy. We added six new customer design wins during the quarter. Within our sales pipeline, we are seeing continued interest among customers currently using competitive solutions. Of the six wins, five were with customers that have established revenue generating appliance solutions. As we have discussed, securing run rate business has been an important part of our strategy as it should shorten our time to revenue with these engagements but we are pleased with the makeup of the wins in the third quarter.

We continue to have a goal of 20 design wins for the second half of the fiscal year although we are targeting larger accounts and with the conservatism within the current environment closing these new design wins requires time, we continue to be focused on achieving our goal for the second half. We are confident that we have a strong value proposition for customers in this market. Companies are continuing to implement an appliance strategy as an integral part of their market solution.

There are number of benefits to this approach. For independent software vendors, we have a compelling value proposition that reduces their cost and shortens time to market. Storage security and communication application developers are recognizing the inherent development, deployment, manageability and cost saving benefits that the appliance model provides. On the other hand, for end users, an appliance lowers the total cost of ownership by reducing the complexity of installation and ongoing maintenance. Unique to our solution, NEI offers innovative services such as our ACE Element Manager and provides unmatched capabilities from monitoring and supporting the appliance from initial deployment through ongoing patches and uptakes.

The software enables ISPs to rapidly deliver their applications to market as full featured appliances with lower development and support cost. This capability is then supported through our image management, health monitoring, alarm reporting, operating system and application updating, configuration capabilities and troubleshooting tools. We allow ISPs and Telecom equipment manufacturer companies to strengthen their value proposition to their customers. Regardless of the platform that has been selected, we offer customers lower deployment cost, reduced time to market, controlled image integrity and reduced cost of ownership especially with ongoing field support.

The acquisition integration continues to go well and in line with our original plan. As part of the second phase of the integration, we are focusing on automating and streamlining our operations and pursuing ongoing improvement. Just this week, we consolidated our accounting, engineering and shop floor automation software systems. This lowers our combined cost and going forward should lead to greater efficiency. In addition to the internal integration, externally we are continuing to see the benefits of being a larger organization with an expanded set of capabilities and exposure to new markets.

One such market where we see opportunity is the ATCA segment where proprietary technologies are being superseded by standardized commercial off-the-shelf or cuts designs. ATCA represents the forefront of this effort. As we have discussed before, our ability to meet TELCO's specific requirements such as integrated voice technology, neb certification, minus 48 full systems incorporating ATCA platforms is opening a whole new segment in talking to larger customers. Our increased size and capabilities has enabled us to sign several strategic partnerships with ATCA market leaders positioning us to provide the most comprehensive, best in class ATCA product range in the industry.

This quarter we completed partnership agreements with the following market leaders. RadiSys and NEI announced the distribution agreement to deliver best in class ATCA solutions. The agreement unites each company's complementary strengths to best serve Telecom equipment manufacturers and service providers that require ATCA standards based cuts systems for their next generation communications applications. Astute Networks and NEI announced the industry's first stateless ATCA service solution which combines Astute Networks' Caspian R1100 Edge Storage Blade with NEI's A-13000 high availability ATCA platform.

Kontron and NEI signed an agreement to co-develop and market highly integrated ATCA platform choosing Kontron's extensive selection of GbE AdvancedTCA and AdvancedMC products to expand its best-in-class approach to integrating solutions and match application requirements. Moving forward, we are committed to our long term business strategy to grow NEI while in the near term managing through the challenges of the economic environment. Our priorities continues to be first, expanding our customer base by securing new design wins with a focus on larger engagements with run rate businesses. We believe that the current market provides opportunity to win new business.

Secondly, integrating and improving our technological capabilities. Third, leveraging the benefits of the combined company and finally, carefully managing expenses and creating additional operating efficiencies. Let me take a moment to expand on these. First with respect to expanding our customer base by securing new design wins, we are working hard to grow and diversify our customer base. Adding new design wins is a priority and we are confident in our capabilities as we go to market with a larger cross trained sales organization capable of working with customers across our target vertical markets.

We are targeting run rate businesses. Our approach to targeting customer engagements with run rate businesses is even more important in a difficult economic environment as time to revenue was shorter and these clients can benefit from our value proposition. In support of this effort, we also entered an engagement with a major public relation's firm starting in July to increase our visibility and extend our message into the marketplace. We believe we can build our visibility and position in our industry especially in the area of appliance management and virtualization services.

Secondly, integrating and improving our technological capabilities. In line with our initiatives to integrate and improve our technical capabilities, we continue to develop comprehensive services that allow ISPs and Telecom equipment manufacturer companies to strengthen their value proposition to their customers as outlined earlier. We believe that developing innovative and complementary software services and technical capabilities will also help us win new programs within our existing base. High value solutions that we have innovated such as ACE Element Manager and ACE Linux are a clear and important differentiator for us that can translate into revenue by enabling us to gain competitive advantage when competing for new customers.

We are learning how to leverage the element manager software and the significant service it provides to our ISPs and we have been getting excellent feedback on these services. In leveraging the benefits of the combined company, we are now able to deliver a complete portfolio of capabilities to help our customers provide the best possible solution. In a difficult economic environment, customers will be looking for compelling advantages that NEI as a quality partner can provide. This includes a broad range of application deployment platforms, comprehensive software enabled services, global support operations, appliance life cycle management and a deep understanding of multiple technologies.

Following the acquisition, we believe that our increased scale has improved our ability to manage through weaker spending climates. For example, as a combined company, we now have a wide variety of appliance solutions for storage, security, telecommunications and enterprise communication markets, our custom storage platform that provides customers with the ability to lower power consumption and increase this capacity. A global support services organization, ATCA solutions for the telecommunications and enterprise communications. Whole business continuity capabilities, a larger profile with more of the requirements needed to secure engagements with larger companies. These points are supported by a larger cross trained sales force that is becoming more effective and productive which should improve our ability to win new engagements and finally, carefully managing and creating additional efficiencies.

Moving forward, we are committed to managing expenses and gaining efficiencies as part of the integration of the acquisition. We have shown that we can effectively manage our operational expenses to better position our company for the future. This is evidenced by our team having brought the company to profitability over the past several quarters. As you can see by the operating expense guidance that we have provided, we continue to reduce expense and we are continuously working to identify additional areas for cost savings related to expense controls and operational efficiencies.

In closing as we head to the fourth quarter of our fiscal 2008, we know exactly what we need to do from the strategic and execution standpoint. Despite operating in a difficult economic climate, we are confident about our business. We are clearly navigating in choppy waters in the near term but our financial strength and unique value proposition to customers will ensure we not only weather the storm but emerge from this period of economic disruption, a stronger and more profitable organization with the ability to take advantage of growth opportunities long term.

Looking forward beyond fiscal Q4, we are seeing early signs that the December quarter will be a stronger quarter. Some of the forward forecast we are seeing from certain customers are encouraging. In addition to this being the yearend quarter for many of our customers, we believe some of the customers will have worked through their inventory issues by the end of the September quarter and should be in the stronger position for the December quarter. We also believe that some of the new run rate customer signed earlier in fiscal '08 will begin to ramp up their revenue shipments.

And with that, I would like to open the call for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Shawn Hannon - Needham & Company.

Shawn Hannon - Needham & Company

Just a quick question around your gross margin that actually seem to be a pretty decent accomplishment around the lower revenues you had in the quarter, can you perhaps provide a little bit more color around what drove that upside in the margin line?

Douglas Bryant

The upside was primarily through the sell through of previously written down inventory. So, by the quarters we had taken reserves on some inventory that proved to be conservative so to the extent that we sold that through this quarter that benefited the margin by approximately 9/10 of the point.

Shawn Hannon - Needham & Company

So, beyond that 9/10 of the point, there was still some relative strength. Is there a way to perhaps elaborate on that a little bit as well?

Douglas Bryant

Through ups in that is 15.4 if you take out the benefit of the sell through there. That actually was down from the prior quarter. It was down because of the lower volume compared to the prior quarter and so the rest of that would be based by the customer mix.

Shawn Hannon - Needham & Company

Can you talk a little bit about the cost reduction plans that you folks are working through, is there a way to do maybe expense on where it is that stands today and how it is that we should be thinking about that?

Greg Shortell

Shawn, I think that we have aligned the company kind of on a pay-as-we-grow basis and that the issue of cost reduction and efficiencies are coupled together not as a one-time exercise but as all the time exercise and I really feel that the expense levels that the company has should be consistent with the revenue levels that we are achieving in the marketplace and not have one get too far ahead of the other. Having said that, any adjustments that we make are always based on not disrupting our customers or any critical positions or skills that we have in the company. But not looking forward right now taking no sort of guidelines, we are looking at the integration of the company now that we have automated, as I said earlier, a lot of the backend systems have been automated, we think that going forward we can build on that in a cost reduced way.

Douglas Bryant

We also think that automation is going to have a strong benefit to our sales force. I mean, some of our sales people try to be more involved in the operations because of some manual processes. Now, that we expect their efficiency to increase and be able to focus more on the new design wins which is where the time is best spent.

Shawn Hannon - Needham & Company

Okay that is helpful and then so you have talked a little bit around having appliance offering provides a more pronounced value for customers or prospective customers today.

Is this leading to any increase in the run rate of discussions you are having with clients or prospective clients? What is you activity there given the value proposition?

Greg Shortell

The appliance really is one way for a software company to deliver their product. They deliver the software, they deliver some appliance, they can deliver the software as a service which also requires an appliance and ultimately, they may need to deliver it as a virtual appliance which we can also do. What we are seeing is that to the level of no more power, no more space, no more people and no more budget is the four driving factors in the market today that a simple solution that reduces complexity, reduces ongoing support costs and does not require additional staff to implement is gaining tremendous favor in the marketplace and we think that we are being recognized for that and in tune with the market. So, I really think we have some very clear drivers in the market and the appliance is a very, very clear solution. So, more ISPs that we are speaking with are looking for that and companies that already have appliances are looking to us.

Several of them for example that are currently dealing with larger suppliers for their needs are moving to us because of the control, quality and engineering coordination that we can provide. We are winning business there. Again, some of our smaller competitors who are finding it difficult in this market and unable to sustain the quality controls that are needed, we are seeing customers from those suppliers come to us and ask us for a solution. So, we see a strong demand on the market side from the conditions in the market, we see an advantage from the existing customer competitors' base that we can fill and we see an advantage from the size and strength of our company against some of our smaller competitors to take business in this market.

Shawn Hannon - Needham & Company

Okay, that is helpful and then finally, your comments around forecasting around the Alliance side of the business, the project versus transactional mix, is there perhaps a way to provide a little bit of color in terms of how to think of the, I guess in order of magnitude, the size of those two pieces of business within Alliance? How the transactional side versus the project side might be mixed in any given period just general ranges?

Greg Shortell

I mean the project side is different quarter to quarter so I mean that is, you have a variety of customers that will buy from you one quarter but maybe not the next quarter. So, that is hard to get your arms around. We do our best. Our account managers, our sales people on the field work with those customers so you tend to get some visibility but in this economic environment, those are the types of things that we see getting pushed and delayed. From the transactional nature, there is a historical distribution side of Alliance and I would say that is anywhere from $2 million to $3 million per quarter but they also have another transactional component where it is almost like a custom build to order and I would say that probably would be another $5 million a quarter. So, between those 2 and 5 it is around $8 million there in any given quarter, I would say is a transactional nature and you do not get forecast on those customers, you reach out to them but it is really, again it is based on their business and what their needs are but it proved pretty difficult to forecast that type of business.

Operator

Your next question comes from Ted Jackson - Cantor Fitzgerald.

Ted Jackson - Cantor Fitzgerald

Just a couple of quick questions, one is I was curious exactly what operating cash flow was during the quarter?

Douglas Bryant

The operating cash flow if you, one second…

Ted Jackson - Cantor Fitzgerald

And what I am just curious what the depreciation was.

Douglas Bryant

Operating cash flow was approximately $750,000.

Ted Jackson - Cantor Fitzgerald

And then what was depreciation and what was CapEx?

Douglas Bryant

Depreciation and the amortization are $485,000 so in total it was about $840,000. That concludes the amortization of $485,000 so you can back in to the depreciation there and the CapEx was approximately $150,000.

Ted Jackson - Cantor Fitzgerald

And is that CapEx number relatively consistent on a go forward basis?

Douglas Bryant

It is I would say between that and $250,000. I would say I think from a budget point of view, from modeling perspective I think we normally use around $200,000 per quarter. So, that is probably slightly lower but you are talking small numbers here.

Greg Shortell

That is a good number.

Ted Jackson - Cantor Fitzgerald

And then looking into the weaknesses that you had experienced in the quarter itself, could you give a little color in terms of maybe particular verticals where you might have seen the weakness-storage, security and communications. Was there anything in particular that you felt maybe underperformed viv-a-vis the others?

Greg Shortell

No, it was pretty much across the board. I think in the TELCO sector, what we saw was delayed rollout and certain projects being slid until they were more market visibility was available. In the storage and security sector, there was inventory issues and there were large orders that were expected that also rolled. So, there was not one single element or market segment that was not touched. I will say that as we said in our call, the large ticket items and particularly in the financial area whether it was security storage or even communications seem to be the area where there was the most sensitivity.

Ted Jackson - Cantor Fitzgerald

Okay, that was my next question is when you got out of through product verticals, you got into kind of end market verticals, was there anything on that front. So, you are saying that if there was one area to standout in terms of weakness on that front, it will be the financials.

Greg Shortell

Yes, I would say it would be the financials and some of the larger TELCO programs.

Douglas Bryant

Yes, as far as the comment about the financials that is obviously based on feedback that we get from our customers and we do not have that direct touch. When we talk to customers it is about how they can be in the forecast that was a common theme.

Ted Jackson - Cantor Fitzgerald

Okay and then maybe a little bit of an odd question given the weakness in revenue but was there anything or any verticals whether it be on the product level or at an end market, this level that maybe were better that you had expected and that is kind of throw in out there?

Greg Shortell

There were some bright spots. We had a number of our customers actually had hit-record numbers for their quarter in their particular business and I would say the area that was strongest for us with customers that are providing unique security solutions that was probably the area where we saw the biggest positive news for some for some of the new products being adopted, very encouraging.

Ted Jackson - Cantor Fitzgerald

Okay and then my last question is the 1/10% customer that you did said it is unnamed, can you at least tell us what vertical market it might address?

Greg Shortell

They are in the TELCO space and they provide test equipment to networks.

Operator

Your next question comes from Michael Osterman with [Morris & Kevin] .

Michael Osterman - [Morris & Kevin]

Can you comment on how, any relationship that is developing with Dell is going?

Greg Shortell

We really have two relationships with Dell. One is that we have some of our customers that build their platforms on the Dell hardware and to that extent we purchase the equipment from Dell as we would from any other vendor and then put it through our systems and controls and deliver any product that is based on a Dell hardware platform. The second is that we are in discussions with Dell relative to a TELCO solution based on a Dell platform. This would include some of the neb certification and minus 48 bulk requirements in that area. Right now we are defining the product with Dell and we expect to have the specifications of that product agreed by the calendar Q4 quarter, December quarter and if that product goes forward, as we think it will, then revenue and deliveries of that product will start in the second half of 2009. So, that is an ongoing project and keep in mind that some of this TELCO certifications require a lot of work and a lot of time to get all the boxes tick in the test run. So it is a long process but the program is active.

Michael Osterman - [Morris & Kevin]

And very generally, if economic conditions remain subdued such as you are projecting for the current quarter, into 2010 would you expect your result to, more or less, mimic what you expect for the third quarter through that time period?

Greg Shortell

Well, I am not able to see what the economic future looks like, Michael but what I do see at the moment, as what we said in our conclusion here, that our forward forecast that we are getting are starting to look a little bit more robust as we go into the fourth calendar quarter which would be our first fiscal quarter and we are also seeing programs that are potentially eliminating any inventory that was in the channel as we continue through this quarter. So, one I see the future as being perhaps a bit more positive than it is now. Secondly, we have a number of programs that are positioned to begin shipping revenue solutions into the market, production units into the market by fiscal Q1 to December quarter so I think we have some things working for us on the market side and on the company side. As we said, we are carefully managing and looking at our expenses so that they line up with where the revenues are from a health of the company standpoint. So, I think we are going through a tough quarter and we look like we are going to come out of it in better shape.

Douglas Bryant

And I would just add something that Greg highlighted before since we think we are extremely competitive both against larger competition and smaller competition. So, even in this economy, we think we can add new design wins, take business away from competition. So, we think the key to getting through this period of time is not only manage any expenses but going after and focus on those new design wins.

Operator

And there are no further questions on the queue at this point.

Greg Shortell

Well, this concludes our current call for the Q3 results. We are heavily focused on where we are going. I think the program that we have in place is sound and we look forward to reporting the results to you at the end of next quarter. Thank you.

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