Network Equipment Technologies Inc. F4Q10 (Qtr End 03/26/2010) Earnings Call Transcript

Network Equipment Technologies Inc. F4Q10 (Qtr End 03/26/2010) Earnings Call Transcript
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Network Equipment Technologies Inc. (NWK)

F4Q10 (Qtr End 03/26/2010) Earnings Call

May 5, 2010 05:00 p.m. ET

Executives

Leigh Salvo - IR

Nick Keating - President and CEO

David Wagenseller - CFO

Analysts

Connor Irvine - Needham & Company

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2010 Network Equipment Technologies earnings conference call. (Operator Instructions)

I would now like to turn the conference over to your host for today call, Ms Leigh Salvo, Investor Relations.

Leigh Salvo

- Investor Relations

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Welcome everyone to our call this afternoon during which we will discuss results for Network Equipment Technologies fourth quarter and fiscal year 2010. With me today are Nick Keating, President and CEO; and David Wagenseller, CFO.

In keeping with the Safe Harbor provisions of the Private Securities Litigation Reform Act, I want to remind everyone that we will be making some forward-looking statements and projections today, including those relating to future revenue, operating results and financial condition.

Investors are cautioned that these statements are based on current estimates and assumptions that involve risks and uncertainties that might cause actual results to differ materially from those expressed or implied in the forward-looking statements. These risks and uncertainties include our ability to develop and commercialize new products and product enhancements, the status of relations with and performance by third-party technology providers, our ability to develop and maintain sales relationships with other vendors and systems integrators, achieving broad market acceptance for our products, challenges of managing inventory and production of products, compliance with government regulations, federal government budget matters and procurement decisions, and the volume and timing of orders and revenue, and other risks, including those identified in the company’s filings with the SEC, including Forms 10-K and 10-Q and in other press releases and communications.

The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additionally, though an audio archive of this call will be available on the company's website for at least 12 months, the statements made on this conference call are made only as of May 5, 2010, and we disclaim any duty or intention to update forward-looking statements.

In addition to financial measures presented in accordance with GAAP, we will also be discussing certain non-GAAP financial measures that are adjusted from results based on GAAP to exclude certain expenses, gains, and losses. The non-GAAP measures should not be considered a substitute for, or superior to, GAAP results. Please refer to the press release issued today for further detail regarding the non-GAAP measures. Reconciliations to GAAP can be found in the press release which is posted on our website.

Our agenda today begins with NET's CFO, David Wagenseller who will provide a detailed review of our financial results. Nick Keating, CEO, will then comment on the financial and operational highlights. David will then offer financial guidance and we'll open the call for your questions.

At this time, I'd like to turn the call over to David.

David Wagenseller

Thank you, Leigh. In the press release issued today and available on our website, we reported that total revenue for the fourth quarter of fiscal '10 was up 16% from the prior quarter and up 49% from the fourth quarter of fiscal '09. For the entire fiscal year, revenue was up 13% over the prior year to $74.5 million.

Product revenue in the fourth quarter was $15.3 million, a 22% increase from the prior quarter, and a 66% increase from Q4 a year ago. Product revenue for the entire year was $58.1 million, a 14% increase from the prior year. Product revenue from our government business, which includes both federal sales and sales to international ministries of defense was $12.3 million in Q4, up 40% from Q3, and up a 104% from Q4 a year ago.

In Q4, government orders returned to levels we experienced in the first half of the year, compared to a decline in Q3 that resulted from delays in an approved federal budget. The increase in government product revenue from Q4 a year ago can be attributed to sales of our NX1000 product, to agencies supporting the WIN-T program.

Through the year, product revenue from government customers increased to $44.5 million from $35.5 million a year ago. Product revenue from our enterprise business in Q4 was $3 million, a decline of 21% in Q3 and a decline of 6% in Q4 a year ago. This was largely due to a decline in basic Tenor sales, as the market shifted to more advanced UC and SIP Trunking applications that our VX series supports.

In the fourth quarter of fiscal '10, sales of our VX product to UC customers was the highest quarterly revenue today. Service and other revenue in Q4 was $3.6 million, down from $3.8 million in Q3, and up from $3.5 million in the fourth quarter last year. For the year, service and other revenue was $16.4 million, an increase from the prior year of $1.8 million, which includes $1.3 million of funded R&D that was recorded as other revenue.

Gross margin in Q4 as a percentage of revenue was 49.7%, up 10 points from the prior quarter, and up 18 points from Q4 the prior year. Product margin in Q4 as a percentage of product revenue was 57.8%, up 10 points from the prior quarter, and up 15 points from Q4 the prior year. Product margin in Q4 was aided by the increase in product revenue. It's in our fixed costs we allocated over higher cost of goods sold.

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