Network Equipment Technologies CEO Discusses F3Q2011 Results - Earnings Call Transcript

Network Equipment Technologies, Inc. ( NWK)

F3Q2011 Earnings Call Transcript

February 1, 2011 5:00 pm ET

Executives

Leigh Salvo – IR

David Wagenseller – VP, Finance and CFO

Nick Keating – President and CEO

Analysts

Jim Gentrup – Discovery Investments

Peter Conrad – Kopp Investment Advisors

Jack Morbeck – First Washington Corporation

John Nelson [ph] – King and Associates [ph]

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Network Equipment Technologies third quarter fiscal 2011 conference call. My name is Jonathan, and I will be your operator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of this conference. (Operator instructions) I now like to hand the call off to Ms. Leigh Salvo with Investor Relations. Please proceed, ma'am.

Leigh Salvo

Thank you. Welcome everyone to our call this afternoon during which we will discuss results for Network Equipment Technologies third 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 will be making some forward-looking statements and projections today, including those relating to future revenue, operating results and financial conditions.

Investors are cautioned that these statements are based on a 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 commercialize new products and product enhancements, success in building new sales channels, achieving broad market acceptance for our products, the status of relations with and performance by third party technology providers, challenges of managing inventory and production of products, certifications and regulatory compliance for new and existing products, federal government budget matters and procurement decisions, 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 February 1, 2011 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 David Wagenseller, who will provide a detailed review of our financial results. Nick Keating will then comment on the quarter's business and operational highlights, and David will then offer closing comments before we open the call for your questions.

At this time, I will 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 third quarter of fiscal 2011 was $13.9 million, down 31% from the prior quarter and down 15% from Q3 a year ago. Product revenue was $10.6 million, a 37% decrease from the prior quarter and a 16% decrease from Q3 a year ago.

Product revenue from our government business was $6.3 million, down 49% from the prior quarter and down 28% from Q3 a year ago. We received a few orders from US government customers late in the quarter that we were not able to ship for revenue. The majority of the decrease in the Federal business was an attributable to delays in approval of a defense budget. The lack of a defense budget could also affect our results in Q4 if timely passage does not occur with the new Congress.

Product revenue from our enterprise business was $4.3 million in Q3, down slightly from the prior quarter and up 13% from Q3 a year ago. In Q3, enterprise revenues were aided by the first sales of our new UX products, and combined VX and UX product revenue together increased more than 50% for the prior quarter.

Service and other revenue was $3.4 million, down approximately $100,000 from the prior quarter and down $405,000 from Q3 a year ago. Our revenue sharing arrangement with CACI International ended in December. Going forward we will be able to retain a larger portion of the service revenue, as a result gross margin should significantly improve our service business.

Gross margin as a percentage of revenue was 36%, down 13 percentage points from the prior quarter and down 4 percentage points from Q3 of the prior year. Product gross margin was 42%, down 14 percentage points compared to Q2 and down 6 percentage points from Q3 of the prior year. The decrease in product margin is due to fixed manufacturing costs being spread over less revenue. The decrease from Q2 is also due to the fact that Q2 results included a credit from a favorable ruling related to freight spend in a refund of duty fees paid in prior years.

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