Network Equipment Technologies CEO Discusses F2Q2012 Results - Earnings Call Transcript

Network Equipment Technologies, Inc. ( NWK)

F2Q2012 Earnings Conference Call

November 1, 2011 5:00 PM ET

Executives

Leigh Salvo – IR

David Wagenseller – VP, Finance and CFO

Nick Keating – President and CEO

Analysts

Nick Farewell – Arbor Group

Peter Conrad – Kopp Investment Advisors

Craig Stephens – Stafford Capital Management

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2012 Network Equipment Technologies Inc. earnings conference call. My name is Nancy and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator instructions)

I would now like to turn the presentation over to your host for today’s conference, Ms. Leigh Salvo of Investor Relations. Ma’am.

Leigh Salvo

Thank you. Welcome, everyone, to our call this afternoon during which we will discuss results for Network Equipment Technologies second quarter fiscal year 2012. 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 develop and 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 for new and existing products, compliance with export controls and other government regulations, 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 November 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 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 some 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 second quarter of fiscal 2012 was $16.4 million, up 45% from the prior quarter and down 19% from Q2 a year ago.

Product revenue in the second quarter was $13 million, a 68% increase from the prior quarter and a 23% decrease from Q2 a year ago. Product revenue from our enterprise business was $7.8 million, up 62% from the prior year and up 77% from Q2 a year ago.

The increase from last quarter results from higher sales of our voice-over IP products for UC and other IC based applications.

Product revenue from our government business was $5.1 million, up 78% from the prior quarter and down 58% from Q2 a year ago. Additional product shipments of $495,000 to government customers occurred in the last two weeks of the quarter that were not recorded as revenue as of contractual delivery terms prohibiting revenue recognition. The increased product revenue in Q2 was expected as Q2 is typically a strong quarter for NET as a result of the US government’s fiscal year end.

The decline from prior year is partly attributable to program delays, and reduced spending by the US government customers as part of the ongoing spending constraint by the government.

Service and other revenue was $3.5 million, down $137,000 compared to the prior quarter, and down $12,000 compared to Q2 from the prior year.

Gross margin as a percentage of revenue was 37%, up 3 percentage points from the prior quarter and down 12 percentage points from Q2 of the prior year. Product gross margin was 36.2%, up 6 percentage points compared to the prior quarter and down 20 percentage points from Q2 of the prior year. The increase was primarily from higher product revenue absorbing fixed manufacturing costs. The decline in product margin from the prior year was the result of numerous factors including first, aggressive pricing in highly competitive sales situations, second, a large credit in Q2 of the prior year for cost of goods sold for a duty refund, third, less overall government revenue, which typically includes higher gross margin of legacy products, and fourth, lower overall product revenue that has to absorb fixed manufacturing costs.

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