Network Equipment Technologies CEO Discusses Q1 2011 Results - Earnings Call Transcript

Network Equipment Technologies, Inc. ( NWK)

Q1 2011 Earnings Call

May 3, 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

Brian Swift – Security Research Associates

Jack Morbeck – First Washington Corporation

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Network Equipment Technologies earnings conference call. My name is Kathy, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today’s call, Ms. Leigh Salvo, 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 fourth quarter and fiscal year 2011. 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 conditions. 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 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 May 3, 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 reconciliations to GAAP and further detail regarding the non-GAAP measures. The press release 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 a total revenue for the fourth quarter of fiscal 2011 was $12.5 million, down 10% from the prior quarter and down 34% from the fourth quarter of fiscal 2010. For the entire fiscal year, revenue was $60.1 million, down 19% over the prior year.

Product revenue in the fourth quarter was $8.6 million, an 18% decrease from the prior quarter and a 44% decrease from Q4 a year ago. Product revenue for the entire year was $45.9 million, a 21% decrease from the prior year. Product revenue from our government basis, which includes both federal sales and sales to international ministries of defense, was $5 million in Q4, down 20% from Q3 and down 59% from Q4 a year ago.

Our government business continues to be affected by delays in unapproved federal budget, although that does not account for the entire decline in Q4. For the year, product revenue from government customers decreased to $30.4 million from $44.5 million a year ago. Product revenue from our enterprise business in Q4 was $3.6 million, a decrease of 15% in Q3 and an increase of 21% in Q4 a year ago.

A significant part of the decline from the prior quarter was due to the deployment delays on UC applications, particularly by North American customers Product revenue from our international customers increased due to sales of our UX and DX products for UC applications. For the year, product revenue from commercial customers increased to $15.5 million from $13.5 million a year ago.

Service and other revenue in Q4 was $3.9 million, up from $3.4 million in Q3 and up from $3.6 million in the fourth quarter last year. The increase in Q4 was largely attributable to new direct business we won following the end of our service partnership with CACI, offset by the absence of the revenue sharing portion of service revenue from CACI. For the year, service and other revenue was $14.2 million, a decrease of $2.1 million from the prior year, which included $1.3 million of funded R&D that was recorded as other revenue.

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