Network Equipment Technologies CEO Discusses F3Q2012 Results - Earnings Call Transcript

Network Equipment Technologies, Inc. (NWK)

F3Q2012 Earnings Call

February 1, 2012; 05:00pm ET

Executives

Nick Keating - President & Chief Executive Officer

David Wagenseller - Chief Financial Officer

Leigh Salvo - Investor Relations

Analysts

Brian Swift - Security Research

Nick Farewell - Arbor Group

John Nelson (ph) - Unidentified Company

Presentation

Operator

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

I will now turn the presentation over to your host for today’s conference, Ms. Leigh Salvo with Investor Relations; please proceed.

Leigh Salvo

Welcome everyone to our call this afternoon, during which we’ll discuss results for Network Equipment Technology, third 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’ll be making some forward-looking statements and projections today, including those relating to future revenue, operating results and financial condition.

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 may 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, 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 February 1, 2012 and we disclaim any duty or intention to update forward-looking statements.

In addition to financial measures presented in accordance with GAAP, we’ll 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 reconciliation’s to GAAP and further detail regarding 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’ll 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 2012 was $11.2 million, down 32% from the prior quarter and down 20% from Q3 a year ago.

Product revenue was $7.1 million, a 45% decrease from the prior quarter, and a 33% decrease from the Q3 a year ago. Product revenue from our enterprise business was $5 million, down 36% from the prior quarter and up 17% from Q3 a year ago. A decline from the prior quarter reflects a large sale of our IP-based NX1000 platform that occurred Q2. Excluding that sale, and looking only at our voice products for UC applications, revenue from sales of those products to enterprise customers has continued to increase.

Product revenue from our governable business was $2.1 million, down 59% from the prior quarter and down 67% from Q3 of a year ago, reflecting the continued federal government budget delays and the trend to reduce defense spending.

Service and other revenue was $4.1 million, up $635,000 compared to the prior quarter and up $744,000 compared to Q3 for the prior year. Service revenue improved over the prior periods from contract renewals and increased professional services for both enterprise and government customers.

Gross margin as a percentage of revenue was 35.1% down two percentage points from the prior quarter and down one percentage point in Q3 of the prior year.

Product gross margin was 26.2%, down 10 percentage points compared to the prior quarter and down 15 percentage points from Q3 of the prior year.

The decrease from the prior quarter is primarily due to additional inventory reserves for our Promina product and from lower product revenue on fixed manufacturing costs. The decline from the prior year was the result of additional inventory reserves for legacy products, lower revenue and the mix of products sold.

Service and other gross margin was 50.3% up 11 percentage points from the prior quarter and up 30 percentage points from Q3 of the prior year. Service and other costs are relatively fixed, so service margins are affected by fluctuations in service revenue. The increase compared to the prior year was also due to the expiration of our revenue sharing arrangement with CACI, which expired in December of 2010.

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