Q2 2010 Earnings Conference Call
August 5, 2010 8:00 AM ET
Mike Gallentine – Director, IR
Frank Plastina – President and CEO
Greg Rush – CFO
Amir Rozwadowski – Barclays Capital
Brian Modoff – Deutsche Bank
Blair King – Avondale Partners
Catherine Trebnick – Avian Securities
Todd Kaufman – Raymond James
Larry Harris – C.L. King
Good morning and welcome to Tekelec’s 2010 Second 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 Mike Gallentine. You may begin.
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 and supplemental material posted on our website at tekelec.com. From there you can access the slides by selecting the investors tab, which will take you to the Investor Relations home page. 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 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 for 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 and second quarter 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 transcript of this call on the Investor Section of our website.
With that said, I’d like to turn the call over to Frank Plastina. Frank?
Thanks Mike, and good morning to everyone on the call. Tekelec continues to deliver strong gross margins, operating margins and earnings per share. During the quarter, we generated revenue of $109.5 million, gross margins of 67%, operating margins of 23% and diluted EPS of $0.25 per share. However, order inputs fell short of expectations. We generated $72 million in orders for the second quarter. Our year-to-date orders of $129 million are down 25% 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. In addition, order input in India continues to be impacted by the new security regulations imposed by the Indian Government as well as delays in the expected deployment of 3G networks. These delays impacted the order input that we had expected from our base of customers in India during the first half. We are reviewing the most recent security-related regulations imposed by the Indian Government; and although the impact of such regulations on our operations and order flows is uncertain, we expect improved order flow in the second half of 2010. Also the pipeline in code activity for business in India is very healthy across many parts of our portfolio. Several of our customers in India have already consumed a signaling capacity purchased last year as part of their planned growth including number portability.
Despite the ongoing delays in order input, our work on the ground in India has continued. We recognized approximately $15 million of EAGLE and Number Portability related revenue in India during the quarter. These revenues are reflected in our Q2 gross margin performance of 67%.
Looking to other emerging market regions, the Middle East and Africa continue to be challenged with credit issues, forcing many service providers to delay purchases and run their networks at near capacity. As an example, we received approximately $4 million in orders from customers in this region during the quarter that we will not book until we have a clear view that payment will be secured.
On a positive note, orders from our customers in North America were up 24% during the first half of this year versus the same period in ‘09. This was primarily due to increased wireless CapEx spend, the addition of two new customers, and continued healthy book ship business. Both AT&T and Verizon were 10% revenue customers for the quarter; AT&T at 14% and Verizon at 12%.
We also achieved significant traction with our new products in the quarter with several strategic awards. For example, shortly after adding Policy Management Solutions to our portfolio in May, we were selected for multi-country deals by two different European-based global service providers. One of these customers is a new customer to Tekelec. Each of these deployments will span six countries in the initial phase. Also, one of these global service providers has since followed up with a multi-country award for EAGLE 5 signaling. We are currently negotiating the contracts for these awards and we expect order input in the second half of the year.