Veraz Networks 3Q07 Update

3Q07 VoIP revenues $19.4m, a decline from $21.4m in 2Q07. Veraz stock suffered a massive 44% decline yesterday, the biggest decline among all stocks on Nasdaq on Wednesday. The marginal decline in VoIP revenues was due to volatility in expansion orders. VoIP revenues from existing customers decreased from approx $16m in 2Q07 to $8m in 3Q07.

In 3Q07 more than half of the VoIP revenues came from early stage NGN projects from five new service providers. Early stage NGN projects typically carry lower gross margins than expansion sales. There is usually 2X to 3X sales related to follow on orders within 18 to 24 months for an NGN deal according to Veraz.

70% VoIP ports shipped to wireless providers in 2Q07. “Fairly similar” breakdown for 3Q07. Contract signed with wireless carrier in Brazil which is yet to be announced. Veraz now has 22 wireless customers for packetized wireless trunking, four of whom have been announced. The type of traffic these wireless carriers are shipping over Veraz platform includes switched and unswitched packetized voice, and SS7 backhaul.

VoIP gross margins for the quarter were 50%, down from 64% in 2Q07. Margins are down because in Q2 (in comparison to Q3) a significant portion of deployment had resulted from expansion sales rather than initial NGN deployments. Longer term company target: 55% to 60% gross margins.

Two customers accounted for more than 10% of Veraz revenues in 3Q07: Excel Communications 12% (Class 4 project), and OSS Corp 10% (Class 4 project). Top 10 customers accounted for 73% of Q3 revenues.

Geographical revenue split (of overall revenue which includes DCME business as well): 34% North America, 66% International.

Class 5 business: Two active launches, “at least 3X of that number in pipeline”, one in Russia, one in Western Europe, a couple in Africa and Latin America.

Competition: Continues to win business in tier 2 market from the legacy vendors; Coming across Cisco in Latin America and Huawei in Russia. Ericsson and NSN seen more often (than previously) in Q3 in international markets.

Other Recent Highlights: Text taken below from Veraz 3Q07 press release:

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Recent Highlights

-- Deployed Class 4 NGN solution at Excel Communications, a US based national long distance network provider, allowing Excel to retire virtually all of its Nortel DMS switching infrastructure and reap the benefits of the Veraz solution.
-- Deployed Class 4 NGN solution at OSS Corporation, a large carrier serving the Russian market.
-- Enhanced WiMAX capabilities with completion of interoperability testing with Alvarion, a leading provider of WiMAX networks.
-- Launched Veraz's first Class 5 IMS over WiMAX solution for Onemax in the Dominican Republic, which required interoperability with the Alcatel WiMAX platform.
-- Announced that three service providers in Brazil have chosen to deploy Veraz's IMS-ready solutions, thus significantly increasing our footprint in Brazil.
-- Transit Telecom has installed a complete NGN solution that allows for voice and data convergence over IP for services in 20 Brazilian cities, with an expansion to 80 cities expected by 2008.
-- Telemig Celular deployed Veraz's I-Gate 4000 Media Gateways for bandwidth optimization of the transmission links between its sites. The deployment reduces bandwidth requirements by a ratio of 12:1 on average, resulting in substantial operational expense reductions.
-- Sercomtel implemented Veraz's I-Gate 4000 Media Gateways to interconnect their networks with other carrier's networks.
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