Network Equipment Technologies (NWK)

Q1 2011 Earnings Conference Call

July 29, 2010, 5:00 PM ET

Executives

Leigh Salvo - Nagle & Ferri, LLC - IR

David Wagenseller - Chief Financial Officer, Vice President

Nick Keating - President, CEO

Analysts

John Nelson - King & Associates

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the first quarter 2011 Network Equipment Technologies earnings conference call. My name is [Kendle] and I will be your operator for today.

At this time all lines are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Leigh Salvo. Please proceed.

Leigh Salvo

Hi. Thank you. Welcome, everyone, to our call this afternoon during which we'll discuss the results for Network Equipment Technologies first quarter of fiscal 2011. With me today are Nick Keating, President and CEO, and David Wagenseller, Vice President and CFO.

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

Investors are cautioned that these statements are based on a current estimate 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 federal government budget matters and procurement decisions, the timing of orders, timely completion of product development initiatives, challenges with managing inventory and production of products, certifications and regulatory compliance for new and existing products, market exceptions for our new products, relations with and performance by third party technology providers, new competition and technological changes, success in building new sales channels, circumstances regarding specific sales that can affect the recognition of 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 only made as of July 29, 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. These 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 quarter's financial and operational highlights. David will then offer closing comments and will 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 a total revenue for the first quarter of fiscal 2011 of $13.5 million, down 29% from the prior quarter and down 31% from Q1 a year ago.

Product revenue in the first quarter was $10 million, a 35% decrease from the prior quarter and 37% decrease from Q1 a year ago. Product revenue from our federal government business declined significantly compared to the prior period, while product revenue for our enterprise business grew modestly compared to the prior quarter.

Product revenue from our government business was $6.7 million, which was $5.6 million less than the prior quarter and $4.9 million less than Q1 a year ago. We attribute the decline primarily to program delays by US government customers.

Product revenue from our enterprise business was $3.3 million, up 10% from the prior quarter and down 24% from Q1 a year ago. The increase from last quarter results from higher sales to domestic customers for UC applications. The decline from the prior year resulted from lower sales of our Tenor product, which declined approximately $1 million.

Service and other revenue was $3.5 million, down slightly from $3.6 million in both the prior quarter and Q1 of the prior year. Gross margin as a percentage of revenue was 35.2%, down 15 percentage points from the prior quarter and down 10 percentage points from Q1 of the prior year. The decline was primarily the result of lower product revenue.

Product gross margins was 43.7%, down 14 percentage points compared to the prior quarter and down 10 percentage points from Q1 of the prior year. The decline in product margin is due to fixed manufacturing costs being spread over less revenue.

Service and other gross margin was 11%, down four percentage points from the prior quarter and up one percentage point from Q1 of the prior year. Service and other gross margin costs are relatively fixed and small fluctuations in revenue can affect service gross margins.

First quarter operating expense was $12.5 million, up $115,000 from the prior quarter and down $424,000 from Q1 of the prior year. Q1 of the prior year included one-time employee separation costs of approximately $700,000 for the retirement of a former federal sales executive.

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