Network Equipment Technologies, Inc. ( NWK)

F1Q 2012 Earnings Call

July 27, 2011 04:30 PM ET

Executives

Leigh Salvo – IR

David Wagenseller – CFO

Nick Keating – President and CEO

Analysts

Jim Gentrup – Discovery Investments

John Nelson – King & Associates

Craig Stephens – Stafford Capital

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Network Equipment Technologies Incorporated Earnings Conference Call. My name is Ian and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions) We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Leigh Salvo. Please proceed.

Leigh Salvo – Investor Relations

Welcome everyone to our call this afternoon during which we will discuss results for Network Equipment Technologies first quarter fiscal year 2012. With me today are Nick Keating, President and CEO; and David Wagenseller, our 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 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 27, 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 details regarding the non-GAAP measures. 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’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 that total revenue for the first quarter of fiscal 2012 was $11.3 million, down 10% from the prior quarter and down 16% from Q1 a year ago. Product revenue in first quarter was $7.7 million, in 11% decrease from the prior quarter and a 23% decrease from Q1 a year ago. On the cost side, product revenue from our enterprise business increased compared to prior quarter and for the first time in more than 10 years exceeded the product revenue from our government business which declined compared to the prior period.

Product revenue from our enterprise business at $4.8 million was up 34% for the prior quarter and up 47% from Q1 a year ago. The increase from last quarter resulted from higher sales of our VX and UX products for UC application and a large sale of our IT-based NX1000 through Chunghwa Telecom for Taiwanese Aircraft Control Agency and User. Product revenue from our government business was $2.9 million, down 43% from the prior quarter and down 57% from Q1 a year ago. The decline is primarily attributable to program delays, spending grid lock by US government.

Service and other revenue was $3.6 million, down $273,000 compared to the prior quarter and up $120,000 compared to Q1 from in the prior year. Gross margins as a percentage of revenue is 34% which is 6 percentage points lower than in the prior quarter and 1 percentage points lower than in Q1 of the prior year. The decline was due to lower product revenue, additional inventory reserves and mix of products sold.

Product gross margin was 30.5% which is 8 percentage points below the prior year and 13 percentage points below Q1 for prior year. The decline is attributable to reduced sales of our higher gross margins legacy products which are primarily purchased by the Federal Government as well as to lower overall product revenue that have to absorb fixed manufacturing cost.

Service and other gross margin was 41.6%, which is 3 percentage points below the prior quarter. Service and other gross margin was 31 percentage points higher than in Q1 the prior year, when the company was still in the revenue sharing arrangement with CACI International. I also note that service costs are relatively fixed, the service gross margin can be affected by small fluctuations in revenue.

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