EXHIBIT 99.2
RADISYS CORPORATION
THIRD QUARTER CONFERENCE CALL
OCTOBER 27, 2005
2:00 PM PST
Operator: Good afternoon. My name is Miles and I will be your conference
facilitator today. At this time I would like to welcome
everyone to the RadiSys Third Quarter Earnings Release
conference call. All lines have been placed on mute to prevent
any background noise.
After the speakers' remarks there will be a question and
answer period. If you would like to ask a question during this
time simply press "*" then the number 1 on your telephone
keypad. If you would like to withdraw your question press the
"#" key. Thank you.
Mr. Grout, you may begin your conference.
Scott Grout: Thank you Miles. Good afternoon and thank you for
participating in our third quarter conference call. In this
call we will review our results for the third quarter as well
as our outlook for the fourth quarter and then open the call
up for questions.
Participating on the call today are Julia Harper, our CFO;
Brian Bronson, our VP of Finance and Business Development; and
myself, Scott Grout, President and CEO. Before we get started
I'd like to turn the call over to Julia for a caution about
forward-looking statements.
Julia Harper: Thanks Scott. Any statements in this call regarding
future expectations for the business of RadiSys
("the Company") constitute forward-looking statements that
involve a number of risks and uncertainties. We caution you
not to place undue reliance on these statements.
Factors that could cause actual results to differ materially
from those in the forward-looking statements are discussed in
our press release today, which may be found on our web site at
www.RadiSys.com and in our SEC filings including our 2004
annual report on Form 10-K and our quarterly report on Form
10-Q.
All information provided in this call is as of October 27,
2005. The Company undertakes no duty to update any
forward-looking statement to conform the statement to actual
results or changes in the Company's expectations. Now I'll
turn the call back to you Scott.
Scott Grout: Thank you Julia. Revenues for the third quarter were at the
highest level we've seen in five years, closing at
$74.9 million, which is up 21% versus last year and up 13%
sequentially. Net income for the quarter was $5.9 million or
$0.25 per diluted share versus $3.8 million or $0.17 per share
a year ago.
We generated over $13 million in cash in the quarter, ending
with $225 million in cash and investments. This is an increase
of $36.4 million over last year at this time.
In addition to a strong financial quarter I would like to
emphasize the progress that we are making with our new
products and with our long-term strategy for the Company. We
had a very good quarter in getting customer traction with our
new products.
As you are likely aware, over the past year we have been
progressively redirecting our focus from single use custom
designs to RadiSys defined standard products and platforms. We
believe this will further our long-term strategic goals by
offering products with broad market appeal that can be used by
multiple customers across a variety of different applications.
In support of this long term strategy, over the last four
quarters we have shifted our new product R&D investments from
80% focused on custom single use designs to now over 80% of
new product investment directed towards multi-use standard
product platforms.
This was a major shift in strategic focus and the drivers for
this shift have been as follows:
- First, we believe that we can generate more revenue
and grow more rapidly by developing products that are
targeted at multiple applications rather than developing
only single use custom designs.
- Second, we believe that we can provide greater content,
value and differentiation to our customers than we have
provided in the past by providing more compelling and
more complete products.
- Third, and more importantly, we believe that there will
be a large and growing market for these types of
modular, platform-based solutions that will be
attractive to RadiSys.
I did want to take this opportunity to share some of the early
successes we have seen with our new and planned products,
which we believe are validating our strategy. Since the
beginning of this year, when we began marketing some of our
new products, we have closed new business that we currently
estimate will bring us approximately $200 million in new
revenue over the first three years once initial production
begins, if programs roll out in line with our customers'
plans.
I'd also like to mention that based on successes to date and
our current funnel, we believe that we will close twice the
level of new business in 2005 than we did in 2004. This new
business is a mix of existing and new customers with the
majority of the new expected business to come from 17 new
customers. This gives us early confidence in our ability to
deploy our new products across multiple customers and multiple
applications.
For example, in the networking space with our ATCA products,
the kinds of applications closed to date include deep packet
inspection for wire speed 10-gigabit monitoring and security,
soft switches that provide an all-packet based voice and data
network, media gateways for line speed protocol conversion in
next generation voice over IP and packet wireless networks,
and network controllers for very high speed wireless packet
networks which are now beginning wide scale deployment.
These new data intensive wireless networks will give mobile
users DSL-like speeds using today's cellular infrastructure.
Within these high profile applications our content and ability
to add more value is also increasing. Over half of the new
business won this past quarter was for platform level
solutions where we integrate multiple hardware and software
functions together to provide a fully or partially integrated
platform.
These solutions have ASPs that range from $20 thousand to $30
thousand and can go as high as $60 thousand. This contrasts
with our typical ASPs today of $2 thousand to $4 thousand for
board level products.
In addition to greater content, we are also providing greater
value in the solution with high speed packet processing, high
speed IO, high speed switching, our high reliability
architectures, and by providing a more fully integrated
platform. This added level of value is resulting in margins
that average in the mid-30s and can be quite a bit higher in
some cases on business we have closed.
Furthermore, we intend to increasingly focus our development
effort on moving deeper into the data path and further up the
software stack, allowing us to provide more functionality and
more value for our customers. Finally, as I had mentioned
earlier, we believe that turnkey modular solutions like ATCA
will grow to become a large and very attractive market to
RadiSys.
If you follow the ATCA market, you may have recently seen
studies done by firms such as ABI Research, VDC, and others
that call for the ATCA market to grow to between $800 million
to $1.7 billion in 2007. These same studies then project that
the market will grow to $2 billion to $4.5 billion by 2009.
We also believe that ATCA will become a more prevalent way to
implement network equipment and that it will reach
multi-billion dollar levels over the next several years.
However history has shown us that rates of adoption in this
space can be slower than projected. So our own estimates call
for the size of this market to be roughly $500 million in 2007
and grow to over $1 billion by 2009.
For RadiSys this is virtually an all-new market opportunity
that does not exist in a meaningful way for us today. Up until
this point only a limited number of equipment makers have used
a modular platform model like ATCA. Based on our interactions
with customers, we believe this model will become widely
adopted as network equipment makers strive to bring more
product to market, faster, and with lower R&D and life cycle
costs.
The last area I'd like to update you on before moving back to
third quarter results is our R&D team. I sincerely believe
that RadiSys has an exceptional R&D team of world-class
hardware, software and systems engineers. Over the past
several quarters we've grown our R&D team from 162 to 195 and
we intend to grow this team to over 200 by the first quarter
of 2006.
Over the past several years we've added more software and more
system strength to our already strong hardware design
capabilities. Today our engineers are designing
some of the most integrated, dense and the most complicated
technical solutions in our space. We have deep expertise in
high speed packet processing, high speed switching, high speed
IO, robust high availability systems, to name a few.
We believe that this technical expertise, combined with our
heritage of working hand-in-hand with customers in a virtual
division model, is a core competitive strength of the Company.
We are very encouraged by our new product traction and in the
building momentum we are seeing with our new and planned
products. While much of this new business will take a number
of quarters to produce significant revenues, our funnel
activity and rate of new business closure affirms our belief
that customers will migrate to modular solutions like
RadiSys's ATCA product.
With our strong balance sheet and increasing validation of our
strategies, we will continue to make investments to capitalize
on the emerging opportunities that we see in our markets and
position the Company for long-term growth.
Moving back to results for the quarter, as we discussed last
quarter we have combined the reporting of our previous service
provider and enterprise markets into one reported market
called communications networking.
We continue to report wireless infrastructure as a sub-market
and added one additional sub-market called IP network and
messaging. Current large customers in IP network and messaging
sub-market include Avaya, Nortel and Converse. Based on this
reporting structure our third quarter revenues were derived as
follows:
- 77% or $57.9 million of third quarter revenues were
from our communications networking market. This market
includes wireless infrastructure, IP networking,
multi-mode messaging and other networking
infrastructure. Wireless networks represented 44% of
revenues for the quarter and IP networking and messaging
totaled 23% of third quarter revenue.
- 23% or $17 million of third quarter revenues were from
our commercial systems market. This market includes
medical imaging and diagnostics, test and measurement,
transaction terminal, and semiconductor and
manufacturing capital equipment. Medical systems
represented 10% of total revenues for the quarter.
Communication networking revenues were up significantly from
Q2 on strong demand from our wireless customers, due to
increasing levels of RadiSys content in their 2-1/2 and 3 G
systems. We also benefited from strong early deployment and
supply positioning for one of our customer's new networking
products. Our commercial business was up sequentially due to a
strong quarter with our medical customers.
Our top five customers for the quarter were Avaya, Converse,
Nortel, Nokia, and Phillips Medical. Collectively they
represented about 72% of our revenues for the quarter. Nokia
represented 44% of the quarter's revenue and Nortel
represented 13% of revenue.
From a geographic perspective, approximately 53% of our third
quarter business was in Europe, 30% was in North America, and
17% was in Asia Pacific. The increase in Asia Pacific revenue
is principally attributable to shipping product for existing
customers directly into the Asia Pacific region.
I'd now like to now turn the call over to Julia who will give
you some additional details about our third quarter financial
results.
Julia Harper: Thank you, Scott. As previously mentioned, our revenue for the
third quarter totaled $74.9 million and net income for the
quarter was $5.9 million or $0.25 per diluted share. Our gross
margin percentage was 29% even versus 29.4% in Q2.
For Q4 we expect gross margins to come in around 28%, which is
in line with the range provided in the last earnings call.
This is based on our current forecast of revenue mix, more
potential for inventory exposure associated with the reduction
of hazardous substances (commonly called ROHS), as well as
higher than expected pricing on silicon due to market supply
constraints.
Operating expenses, excluding intangible amortization and
restructuring reversals, totaled $15.5 million this quarter,
about even with the second quarter. As a percentage of sales
R&D spending was 9.9% versus 11.1% in the prior quarter and
SG&A spending was 10.2% versus 11.7% in the second quarter.
We had previously advised you that operating expenses would be
up about $1 million sequentially but we weren't able to ramp
up hiring as quickly as we had originally planned and there
were some project material expenses associated with our new
standard products that moved to Q4.
Based on revised timing of project expenses that were
originally planned for Q3 and on the successful hiring of new
engineers in the past six weeks, we expect R&D to increase
approximately $1 million in the fourth quarter. We expect to
continue growing R&D modestly in the first half of 2006 before
leveling off in the second half of the year.
Intangible amortization stayed at $513 thousand in the third
quarter and we expect it to remain at about the same level in
the fourth quarter. Non-operating income for the quarter was
$1.1 million, up from $758 thousand in the second quarter. Net
interest income improved by $351 thousand as we continue to
realize higher yields on our growing investments and
marketable securities. We expect non-operating income of about
$1.2 million in the fourth quarter.
On October 20, 2005, we bought back $6.35 million of our
5-1/2% convertible notes. While we bought these notes at a
slight discount to par, it will result in a loss in the fourth
quarter of about $50 thousand due to the associated
unamortized discount. This net debt reduction will result in
an annual pre-tax savings of about $125 thousand in interest
expense. As of the conclusion of this transaction, $2.5
million of the 5-1/2% notes remain outstanding.
We booked a tax rate of 19.9% for the quarter and now expect a
slightly lower full year tax rate of 23% versus the 27% that
we had been previously forecasting. The projected lower tax
rate for the year is attributable to a favorable mix of
foreign versus domestic income. For 2006 we still expect our
tax rate to be in the high 20s but this can vary depending on
our revenue and earnings mix.
Our basic share count was 20.3 million and fully diluted
shares increased to 25 million as compared to 20 million basic
and 24 million diluted shares in the second quarter.
The increase in basic share count this quarter is attributable
to stock option exercises and ESPP purchases by our employees.
We expect our fully diluted share count to be between 25.2 and
25.4 million for the fourth quarter.
Now taking a look at the balance sheet, our total for cash
short term and long term investments increased by $13.5
million to $225 million giving us about $9 per diluted share
in cash and investments. Net cash increased to $116 million
from $103 million at the end of Q2.
As a reminder, we define net cash as cash and investments less
our convertible debt at face value. We expect to generate
additional cash of close to $10 million in the fourth quarter
in spite of ramping up our product investment.
On the $8.9 million sequential revenue increase, our trade
receivables increased by about $4.5 million to $47.8 million
and DSO for the quarter was 58 days, down 2 days from the
prior quarter. We expect our DSO to remain around 60 days in
the fourth quarter.
Net inventory levels decreased by $1.4 million to $18.8
million versus $20.2 million in the prior quarter and
inventory turns were up to 11.3 from 9.2 in the prior quarter.
We expect inventory turns to continue to improve in the fourth
quarter.
Our cash cycle time decreased to 20 days, down from 28 days in
the second quarter, and we expect it to remain below 30 days
moving forward. Capital expenditures were $1.1 million and
depreciation expense was $1.5 million for the third quarter.
We expect both of those to remain in similar territories in
the fourth quarter.
Based on the significant amount of cash generated over the
past several quarters, our board of directors has authorized
an increase in the repurchase of shares of common stock from a
previously approved $5 million to $25 million. We will
consider the purchase of our common stock in the open market
or through privately negotiated transactions from time to
time, subject to market conditions.
With that I'll now turn the call back over to Scott to talk
about the outlook for Q4.
Scott Grout: Thank you Julia. Regarding our outlook for fourth quarter
please note that this is our view as of today and it is a
forward-looking statement subject to risks and uncertainties
as discussed earlier and in our press release made available
earlier today.
For the fourth quarter we currently expect to see revenues of
$68 million to $72 million and diluted earnings per share in
the range of $0.12 to $0.14. This is compared to revenues of
$62.7 million and diluted earnings per share of $0.13 for the
fourth quarter of 2004.
Our revenues for the third quarter were particularly strong
due in part to an initial customer deployment of a next
generation networking product. While we expect this product to
continue to do well, the initial market introduction provided
a boost to revenue in the third quarter.
As you may have seen, customers in our wireless segment are
seeing some softness in their infrastructure business. In
addition we continue to see some lumpiness in our IP
networking and messaging customers and market demand. Overall
for the second half of 2005, we expect revenues to be up 15%
to 18% over the second half of 2004.
We will continue to leverage the strength of our existing
business and balance sheet to make investments that support
our long-term strategy and to help us capitalize on the
opportunities we see in our markets. We believe that these
investments will open up significant new opportunities for
RadiSys and we are seeing validation of our strategy in the
strength of our new business activity.
I think with that we are ready to open the call up for
questions.
Operator: At this time I would like to remind everyone, in order to ask
a question please press "*" then the number 1 on your
telephone keypad. And we will pause for just a moment to
compile the Q&A roster.
Your first question comes from the line of Brian White with
Kaufman.
Brian White: Hi, good afternoon. Could you talk a little bit about the
fourth quarter outlook? You said there was going to be some
softness in wireless and IP networking. Is this an inventory
build? Or is this a slowdown in demand? Maybe go into a
greater detail on what's happening in both of those markets.
Scott Grout: On the IP side of the business, if you look back over time you
can see that it's lumpy from quarter to quarter. We had a
pretty strong Q3. And it's a very project-related business so
it depends on what business they close and what sort of
projects they end up capturing.
On the wireless side, some of our customers have disclosed or
talked a little bit about what they see in terms of near term
business for them and we track revenues accordingly.
Brian White: Okay do you think any end market will actually grow
sequentially in the December quarter?
Scott Grout: So medical may potentially grow.
Brian White: Okay and that's it. Medical would grow and that's it?
Scott Grout: Yes.
Brian White: Julia, about the tax rates... You said 23% for '05?
Julia Harper: Right.
Brian White: So for the fourth quarter we're looking at just over 20%?
Julia Harper: No, so we trued it up this quarter. That's why we only booked
19.9%. In the fourth quarter we expect to book 23%.
Scott Grout: Thanks Brian.
Operator: And your next question comes from the line of David Duley with
Merriman.
David Duley: Regarding some information in your press release... when you
talk about $200 million of revenue that you've basically
closed since the beginning of this year, is that this calendar
year - so '05 - or is it dating back to a year from today?
Scott Grout: Calendar year.
David Duley: So this calendar year, $200 million?
Scott Grout: Yes, since January 1 of this year.
David Duley: And this is incremental revenue? Is there a fall off in some
other stream of revenue or do you look at this as all
incremental on top of the revenue stream that you have now?
Scott Grout: Well, as we go through multiple years, current programs will
naturally fall off. They sort of run their course and this
revenue comes in. There's not a significant overlap between
this new revenue and any given program that we have today.
David Duley: So in other words yes, design wins are always falling off but
this new $200 million is not theoretically cannibalizing other
revenues that you have?
Scott Grout: It is not a direct displacement of current revenues we have.
David Duley: Could you help us understand the increased R&D expenditures? I
seem to recollect over the last couple of years you've done
this a couple different times and usually when you spent money
on R&D you also accelerated your growth rate.
This time we're talking about spending more money on R&D and
we're guiding down. So help me understand what the return is
going to be on this incremental $1 million. In fact, it sounds
like it's an incremental $1 million for three quarters in a
row. When will we see signs of revenue associated with this
incremental R&D?
Scott Grout: Clearly there's an offset between our investments in R&D and
when that ends up turning into revenue. As we talked about
some major programs like ATCA and Com-E, we continue to hold
the same view in that we should begin to see revenues as
programs are deployed - in the latter half of '07 very
significant revenues.
We believe the Com-E business has a little bit faster time to
revenue because the cycle's a little bit shorter for our
customers to get new products to market.
David Duley: So these R&D dollars are being spent on current programs.
Could you review again when we would see incremental revenue
in Com-Express?
Scott Grout: It is probably two to three quarters out that you would see
incremental revenue from Com-Express. And we've been
increasing revenue. The more experience that we have in the
marketplace David, the more validation that we're getting from
customers and the more wins that we're getting, we feel good
about the R&D investment that we're making and the payback
associated with that investment.
David Duley: Can you explain again how you consolidated three buckets into
two? I think it's fairly straightforward but I just want to
make sure I get it right.
If it's simply just consolidating two line items historically
- then I don't need the numbers for the first couple of
quarters of this year. But if there are some other adjustments
here, can you help me understand that and perhaps give me the
numbers for the first two quarters of the year?
Julia Harper: I'm glad to just give you those numbers if you want them. So
you have the wireless number already. The IP network and
messaging number for Q1 is $14.3 million and for Q2 it's $19.2
million.
David Duley: That's the only kind of new breakout?
Julia Harper: Yes.
David Duley: Is the Commercial bucket still the same? You took the
Enterprise and the other bucket and collapsed them together?
Julia Harper: Right.
Scott Grout: Service provider and Enterprise were combined and Commercial
stands alone.
David Duley: Just so we continue to understand, where will we find your two
biggest customers in those two breakouts?
Julia Harper: Nokia is in the wireless bucket and Nortel is in the IP
network and messaging bucket.
David Duley: Just looking at the percentages, clearly it looks like you're
knocking it out of the park with Nokia in the current quarter
and the language about a soft wireless quarter in Q4, I'm
assuming, would move back down on that number?
Julia Harper: That's a safe assumption Dave. It's a very strong quarter for
that wireless business this quarter and it's not going to be
quite as strong in Q4.
David Duley: When you look at all the things that you talked about - such
as the declining revenue stream... Is that the biggest
contributor to whatever perceptions or expectations you had
before?
Julia Harper: I'd actually say that and the lumpiness in the IP networking
is about the same amount of contribution from both of those.
David Duley: Did you use any of your money on the buyback in the current
quarter?
Julia Harper: Use any of our money for what buyback?
David Duley: Did you buy back any stock of the original $5 million?
Julia Harper: No, we have not bought back any so far, Dave.
David Duley: Thank you.
Operator: We now go to the line of Matt Petkun with D.A. Davidson &
Company.
Matt Petkun: First question and I don't know if there is any reason to make
any big deal of this, but last quarter, Julia, you guided a
range, I think it was a $3 million spread in your top line
guidance and you've hit it right square in the middle almost,
actually towards the high end of it.
Julia Harper: Actually, we were on the high end.
Matt Petkun: Yes, on the high end. This quarter you're providing a wider
range on lower revenue. Obviously I read a general lack of
visibility, but should we read anything more into that?
Julia Harper: Not necessarily, Matt. In terms of us giving a wider range,
obviously when we see revenues tick down a little bit, I'm
hoping for revenues to be a little better.
Matt Petkun: Historically we've seen Q3 as an actually weak quarter for
RadiSys. This is a long time ago. Are we perhaps seeing some
of the seasonality shift from Q4 into Q3 in terms of overall
seasonal builds? I think we're starting to see this more on
the consumer electronics market, but are you seeing that in
your market as well?
Julia Harper: I'm not ready to say it's a trend. Certainly we saw it this
time and Q3 was sort of unusually strong compared to prior
years. I can't tell you that I think there's any trend that
would continue into the future.
Matt Petkun: Last year you saw a sequential decline.
Julia Harper: I think it's more specific to products and product deployments
that are happening with our customers in their market at any
given time.
Matt Petkun: Julia, I'm wondering what the road to plus 30% or even plus
32% gross margin might be for RadiSys. Not just in terms of
when but how you get there. Also along with that, this $200
million in incremental revenue you guys have spoken of, can
you get any sense of what type of margin that could bring?
Julia Harper: Scott addressed that a little bit.
Scott Grout: It may not have been clear. The numbers that I was referring
to for margins in the mid-30s was in fact for that business
closed. And the ASPs that I referenced were in fact for the
business closed - business included in that $200 million.
Matt Petkun: So that will be a part of it. How much of that can you bill
next year?
Julia Harper: Not a lot. Not a lot next year as we've said, Matt.
Matt Petkun: So it's $200 million over three years and most of it is way
out there.
Julia Harper: Most of it's going to be starting in a meaningful way in '07.
Matt Petkun: So what's the nearer term three quarter expectation for gross
margin, not in terms of guidance but what's going to change
over the next three quarters?
Julia Harper: It's going to stay in the high 20s. We do still think that
there's some benefit that we'll get when we make further
progress on our outsourcing initiative and we get ROHS behind
us. But I can't tell you exactly when that's going to be and I
can't tell you exactly what the impact is. So all we're
comfortable saying right now is high 20s for the next few
quarters.
Matt Petkun: You've talked about further progress on the outsourcing
initiative for several quarters. I don't really understand
what you're planning on doing or if you're planning on doing
anything at all.
Julia Harper: Celestica, Mexico is the piece that we've talked about.
Matt Petkun: That's in place now?
Julia Harper: No, we have started transferring products. We don't have any
products coming out of that plant yet in a production mode.
We've got some early test products that they've done for us
that are being evaluated but we haven't actually started
meaningful production up there yet and that's what's yet to
come.
Matt Petkun: A target date for that might be?
Julia Harper: Well we're shooting for middle part of next year to have it
pretty much done.
Matt Petkun: Thanks.
Operator: We now go to the line of Brian White with Kaufman.
Brian White: Wondering if you could talk at all to seasonality in the March
quarter. Since we're going to be down sequentially in what is
typically a strong December quarter, how should we think about
the March quarter? Is there a possibility it could be flattish
or should we expect normal seasonality?
Julia Harper: Obviously we're not ready to give guidance for Q1. But with Q4
not being as strong as we've seen in the past I think it's
reasonable to assume that it could be flattish from Q4 to Q1
but we're not ready to say that yet.
Brian White: Thank you.
Operator: And your next question comes from the line of David Duley with
Merriman.
David Duley: I think you said last conference call or at one point or
another that you had three actual design wins in ATCA or some
number like that and you referenced that you had closed a few
more wins during the quarter. Could you help us understand
what the number is? And I think last quarter you had some ATCA
revenue. Any revenue this quarter?
Julia Harper: Yes, we did. We didn't have quite as much revenue this
quarter. We had between $300 thousand and $400 thousand this
quarter.
Scott Grout: It was more than three additional wins for this past quarter.
David Duley: So just to summarize, from the math that you just disclosed we
have at least six wins in hand for ATCA and those are wins
that would produce revenue at one point or another.
Scott Grout: Yes.
David Duley: Great, thanks.
Operator: Next we go to the line of David Nierenberg with Nierenberg
Investments.
David Nierenberg: Just want to make sure I understand the magnitude of the
Board's commitment to the increased repurchase program. It
sounds quite significant in size. The stock is trading in the
after market right now between $16 and $17 a share. So if you
were to complete this program you would be looking at the
retirement of approximately 1.5 million shares, which is over
7% of your outstanding shares if I've got it right. That's
pretty significant.
Julia Harper: That's true, David.
David Nierenberg: One way to put it in perspective is that you are going to
spend only a little bit more than the cash flow that you
generated this past quarter combined with what you expect to
generate next quarter.
Julia Harper: That's right.
Scott Grout: True.
David Nierenberg: So if that happy trend were to continue, perhaps there might
even be further repurchasing activity in the future?
Julia Harper: Perhaps.
David Nierenberg: Well congratulations and thank you.
Operator: Your next question comes from the line of George Melas with
Lord Abbott.
George Melas: On the market size of ATCA, you talk about the market size of
$500 million. How much is the RadiSys market opportunity. Is
your particular opportunity within that $500 million?
Scott Grout: So we've knocked the market numbers down a little bit both
because of timing but also to really represent what we believe
our opportunity is.
Julia Harper: It's the whole $500 million George.
George Melas: The whole $500 million?
Julia Harper: Yes.
Scott Grout: Yes.
George Melas: And who else would really be competing out there for that $500
million?
Scott Grout: So most significant players, a division of Motorola called the
ECCG, Embedded Computer and Communications Group; a private
company called CCPU is a potential player in the space;
Mercury may be a potential player in the space.
Julia Harper: Then there's a lot of guys at the piece-part level that would
be competing, if these companies were outsourcing this on more
of an individual piece-part basis rather than a platform
basis.
George Melas: Do you see some new players coming in given that you have this
emerging market for standards product systems?
Scott Grout: That's potentially true. Our focus is really on data plane
inside which has quite a bit higher level of complexity,
higher speed switching and higher speed packet processing.
There are not an awful lot of companies, either big or small,
that have the wherewithal to be able to attack it the way we
do.
George Melas: Thanks a lot.
Operator: And your next question comes from the line of Matt Petkun with
D.A. Davidson & Company.
Matt Petkun: Just following onto George's line of questioning, the
competitors you called out, for the most part, relate to the
business model which you propose - which is really an
outsourcing, build versus buy of ATCA.
I'm wondering how you see the ability of some of your
potential customers to go into the market and buy componentry.
For example, Intel is offering an awful lot of
already-built-boards for customers in that market and working
closely with NEC on that. How do you see the overall market,
from a real business model perspective, changing over the next
couple of years?
Scott Grout: We are selling product or will be selling product both at the
board level and blade level or what we call individual
building block level as well as a more integrated platform. We
certainly are seeing some customers that want to start out at
the individual building block level and do integration
themselves.
What we're seeing is some of the tier two players that want to
move a little bit faster are adopting a more integrated
platform. A couple of the tier ones will adopt integrated
platform. So I think in the beginning, what we're going to see
as a mix between the two. I personally believe that over time,
it will move much more to an integrated platform model.
The reason for that is maybe 40% to sometimes 50% of the R&D
effort in investment is in integration and even tier one
players are going to want to take those resources and put them
on other more strategic projects.
Matt Petkun: Then of this golden $200 million you've talked about, how much
of that would you characterize as ATCA revenue?
Julia Harper: The majority.
Matt Petkun: The majority is?
Julia Harper: Yes.
Matt Petkun: And how much of that would you characterize as boards and
blades versus full up systems?
Scott Grout: We're not going to break that down. I can tell you again in
the third quarter more than half was at the system level.
Matt Petkun: In the third quarter more than half your new design wins?
Scott Grout: Yes.
Julia Harper: Yes.
Matt Petkun: Okay, at the system level. Okay, thank you so much.
Operator: And at this time there are no further questions. I will now
turn the call back to you for closing remarks Mr. Grout.
Scott Grout: Okay thank you, Miles. Once again thank you for participating
in our third quarter earnings call and I look forward to
chatting with most of you over the next couple of days. Thank
you much.
Operator: Ladies and gentlemen, this does conclude our RadiSys Third
Quarter Earnings Release conference call. You may now
disconnect.
END