Tekelec CEO Discusses Q3 2010 Results - Earnings Call Transcript

Tekelec CEO Discusses Q3 2010 Results - Earnings Call Transcript
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Tekelec (

TKLC

)

Q3 2010 Earnings Call

November 04, 2010 08:00 pm ET

Executives

Kyle Macemore - VP of Finance & IR

Frank Plastina - President & CEO

Greg Rush - CFO

Analysts

Catherine Trebnick - Avian Securities

Michael Genovese - Soleil Securities

Amir Rozwadowski - Barclays Capital

Blair King - Avondale Partners

Larry Harris - C.L. King

Todd Kaufman - Raymond James

Presentation

Operator

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Previous Statements by TKLC
» Tekelec Q2 2010 Earnings Call Transcript
» TEKELEC Q1 2010 Earnings Call Transcript
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Good morning and welcome to Tekelec's 2010 third quarter earnings release call. At this time all participants have been placed on a listen-only mode and the call will be opened for questions following the presentation. It is now my pleasure to turn the call over to Kyle Macemore, Vice President Finance and Investor Relations. Sir, you may begin.

Kyle Macemore

Thank you. Today I'm joined by Frank Plastina, President and Chief Executive Officer and Greg Rush, Chief Financial Officer of Tekelec. Hopefully by now you have access to a copy of the slides of supplemental material posted on our website at tekelec.com. From there you can access the slides by selecting the Investors tab which we will take you the Investor Relations homepage. From that location you can access the press release issued earlier today.

As a reminder, there will be a telephone replay of this conference call available for seven days following the call. You may also listen to a rebroadcast on our website at any time during the next 90 days. All of this replay and rebroadcast information can be found in the Investor Relations section of Tekelec's website.

I would also remind you that during the course of this conference call we will make projections or other forward-looking statements regarding future events or the future financial performance of the company. The actual events or results of the company may differ materially from these forward-looking statements as a result of important risk factors including those discussed in our 2009 Form 10-K, the first, second and third quarter of 2010 Form 10-Q, the press release issued earlier today and other documents the company periodically files with the Securities and Exchange Commission.

Also, unless explicitly noted, all financial results and metrics during our call today are non-GAAP results. Please see slides five through 12 in the supplemental material posted on our website for information reconciling GAAP to non-GAAP measures. We will also post the transcripts of this call on the Investors section of our website.

With that said, I would like to turn the call over to Frank Plastina. Frank?

Frank Plastina

Thanks, Kyle, and good morning to everyone on the call. Tekelec continues to deliver solid financial results. During the third quarter we generated orders of $81.1 million, revenue of $108.3 million, gross margins of 63%, operating margins of 14% and diluted EPS of $0.15 per share. Our year-to-date orders of $210 million are down 22% compared to the same period last year.

As discussed on the previous call, we continue to see lower SIGTRAN and SS7 solution orders, primarily from the emerging markets. While we are disappointed with our overall order performance we are pleased with increasing momentum of order input for our next-gen solutions.

Specifically, our next-gen products continue to grow as a percentage of total orders. This past quarter our next-gen products were 37% of total orders booked. With the addition Camiant and Blueslice products, the year-over-year order growth for our next-gen solutions was approximately 50% during the first nine months of this year.

Orders from the products acquired from Camiant and Blueslice have already exceeded our initial order expectations of $20 million for the year. We achieved this level in just five months since the acquisitions and we hope to continue building on this momentum during the fourth quarter. This is also a positive indicator of the expected benefits of utilizing our existing sales channels to sell these products.

We had four next-gen session management wins for the quarter, three SIP Signaling router wins and one for our recently announced diameter signaling router. We now have two diameter signaling router wins; the first win, MetroPCS was announced a few weeks ago.

Our total pipeline is now 30% higher than it was last year and nearly 60% of this pipeline is for our next-gen products. Although we are pleased with the growth of our pipeline, we've recognized that these products have a longer sales cycle and may have a lower order conversion rate than our established products. Our expectations are tempered as a result. We had a quarterly record 12 new customers and extended our reach into five new countries during Q3. Given that we expect the gross margin of many of our next-gen products to be higher than our historical corporate average as we move to a software-centric business model, we believe that our operating margins will expand over the long term.

Revenues for the quarter were down 6% year-over-year and down 3% from the first three quarters of '09, primarily due to declines in SIGTRAN and SS7 related revenues.

Our next-gen product revenue has increased 59% this quarter versus the same quarter a year ago and 45% year-to-date compared to the same period in '09. Our gross margins for the quarter were 63% due to a higher mix of lower margin service related revenue.

On a year-to-date basis our gross margins was 66%, 1 percentage point lower than last year and our operating margin year-to-date was 20%. Greg, will provide more detail on this later on the call.

The rapid adoption of smartphones, netbooks, tablets and other wireless devices is driving increases in data traffic. Service providers must adopt network architectures that can more efficiently handle this growth. They are also adding more intelligence to their core network so that they can take advantage of new revenue generating features and applications.

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