Aviat Networks Inc (AVNW) 2002 Q4 法說會逐字稿

Ladies and gentlemen, we're about to begin. Good day, everyone, and welcome to the DMC Stratex Networks, Incorporated fourth quarter and fiscal year 2002 financial results conference call. This call is being recorded.

At this time for opening remarks and introductions I would like to turn the call over to Laura Graves, Director of Investor Relations. Please go ahead.

Thank you, operator, and thank you, everyone, for joining us today. Welcome to DMC Stratex Networks, Inc. fourth quarter and fiscal year 2002 conference call. I'm joined today by Carl Thomsen, Chief Financial Officer and Chuck Kissner, Chairman and Chief Executive Officer, who will review the results for the most recent quarter and fiscal year and our current outlook for the business, followed by a Q&A session.

In addition to the financial results of Stratex Networks and to certain historical information that we may mention today, we may make some forward-looking statements during this conference call about our future business and the wireless industry in general. Such forward-looking statements are identified by our referring to the company's hopes, expectations, beliefs, anticipations, forecasts or projections. Stratex Networks' actual results could differ materially from our forward-looking statements as a result of risks and uncertainties, including the risk of increased competition, continuation or further tightening of global capital markets for telecommunications and mobile cellular projects, economic and political instability in the markets in which we compete and competition in the microwave industry in general.

For further discussion of such factors see information provided under the heading "Factors that may affect future financial results" in the company's quarterly report on Form 10-Q for the quarter ended December 31st, 2001, as filed with the Securities and Exchange Commission on February 13th, 2002.

To begin today I'd like to introduce Carl Thomsen, Chief Financial Officer.

Thank you, Laura, and thanks, everyone, for joining us today.

The financial results for Stratex Networks for the fourth quarter of fiscal year 2002 were in line with the expectations we discussed at the conference call at the beginning of the quarter. On a positive note, our cash position and overall balance sheet strength has definitely improved during the quarter.

For the fourth quarter, which ended March 31st, Stratex Networks reported revenues of $46.1 million and a net loss of $10.2 million on a pro forma basis. This resulted in a net loss per share of 12 cents, excluding a $926,000 one-time gain on the sale of Southern California Edison bonds that had been marked to market in the prior period. Including the one-time gain, the net loss for the period was $8.9 million or 11 cents a share.

For the fiscal year ended March 31st Stratex Networks reported revenue of $228.8 million and a net loss of 42 cents per share before special charges. During the year the company reported special charges for inventory, write down, severance costs, excess facilities cost and related items totally $135 million.

There is no question this has been a difficult year for Stratex Networks and for the telecom sector in general. Over the past year the effects of the global economic environment, reduced capital expenditures have plagued the mobile and fixed wireless industries.

Revenues of $46 million for the fourth quarter of this recent fiscal year are substantially below what we reported last year.

As you know, we have responded rapidly and directly to this changing situation. In the first quarter of the fiscal year 2002 we announced that we would consolidate our Seattle and San Jose manufacturing operations and reduce expenses company-wide. During the year we reduced personnel by over 35 percent, cut annual expenses on an annualized basis by $55 million and raised $70 million to strengthen our balance sheet.

Mid-year we began to focus our efforts on improving our cash position, accounts receivable and inventory, as well as our overall operational efficiency.

Despite a continued poor external environment the internal effects of these programs are reflected in our improved cash balances, lower DSOs and defining inventory. I'll discuss these in more detail in a few minutes.

First on orders, for the fourth quarter fiscal year 2002 orders were $50 million, resulting in a positive book to bill ratio. And backlog at the end of the year was $94 million.

Briefly by geographic area, North America was $4.4 million of orders, South America $3.1 million, Middle East, Africa and Europe $19.2 million and Asia Pacific $23.4 million for a total of $50.1 million.

By product line our mid-capacity product line of XP4, DART was $16.9 million, the high-capacity Altium product line was $13.9 million, our DXR product line was $12.5 and our services were $6.8 million.

Overall our order activity was slower than expected. However, we are pleased with the strength in orders out of our Asia Pacific region. We are bidding aggressively to win new business and we're pleased to announce some major projects in Thailand with Motorola and in India with . We have also recently won new projects in the U.S., in particular the AllCoNet system in the Allegheny County in Maryland.

Yet customers in general have curtailed their capital expenditures, due to the difficult capital market and overall economic uncertainty, and we expect a difficult market for at least the next six to nine months.

On the revenue side revenue was $46.1 million for fiscal fourth quarter, which is a 58 percent decline compared with the fourth quarter of fiscal 2001, but a slight increase from the prior quarter.

Spectrum 2 revenue continued to decline as expected and was offset by increased revenue from the XP4 products.

Altium revenue decreased during the quarter. However, based on current backlog Altium sales are expected to increase in Q1 of fiscal year 2003.

The breakdown by geographic area: North America was $2.7 million, South America $4.7, Europe, Middle East and Africa was $18 million in revenue and Asia Pacific $20.7.

By product family the mid-capacity XP4, DART and Spectrum were $29.1 million, Altium was $4.7 million, the DXR product line was $5.5 million and services were $6.9, for a total of $46.1 million.

Gross margins were 15.8 percent in the fourth quarter, compared to 11.3 in the prior quarter. This was slightly better than anticipated but our underutilized capacity in manufacturing continues to negatively impact margins.

Manufacturing spending declined in the fourth quarter and is now more than 50 percent below fourth quarter of last fiscal year due to the cost reduction efforts undertaken during the past 12 months, in particular the consolidation of the Seattle and San Jose operations.

I expect to see some improvement in gross margins for the first quarter of fiscal year 2003 based on the expected product mix.

We have been seeing price declines in selected competitive situations and have built these declines into our projects for fiscal Q1 of '03 and beyond.

R&D expenses were $3.7 million in Q4, down from $4.1 million in the prior quarter and down 40 percent from the same quarter in last fiscal year.

The major reason for the decline in R&D expenses compared to last year relates to the closure of the Seattle operation. Although R&D spending has declined we remain focused on our efforts for next generation products and incremental improvements to the existing product line, which improve manufacturability and further reduce product costs.

SG&A expenses were $14.1 million in fiscal Q4 compared to $13.7 in the prior quarter. This increase is attributed to legal costs related to our M&A activity, as well as consulting costs incurred related to our process improvement programs.

Interest and other income was $400,000 in fiscal Q4 compared to $500,000 in the prior fiscal quarter.

We had a tax benefit in Q4 of $300,000 due to a refund of alternative minimum taxes in the United States. Due to the U.S. losses we do not have to pay the minimum alternative tax and can claim a refund for prior taxes paid. However outside the U.S. we will continue to pay taxes in selected other countries. Therefore I expect we will continue to provide foreign taxes in fiscal year 2003 at a rate similar to the first three quarters of the last fiscal year.

The quarter net loss on a pro forma basis, as I said, was $9.8 million or 12 cents a share. This is in line with the 12 cents to 14 cents estimate we provided at the beginning of the quarter and excludes a one-time gain on the California Edison bonds of $926,000.

For the fiscal year March 31st we had a pro forma loss of $33.6 million or 42 cents a share, excluding the special charges.

On the balance sheet I'm pleased to report that Stratex Networks had positive cash flow on fiscal Q4. Cash increased during the quarter to $85.7 million, up $7.5 million from the prior quarter. This is a major accomplishment, given the burn rate our company had last year at this time. Cash increased as a direct result of improved inventory purchasing processes, diligent accounts receivable collection efforts and lower expenses.

We also reduced our accounts payable by over $8 million during the quarter by paying down vendor and other liabilities, and of course we continue to operate without any debt.

Total accounts receivable decreased $13 million and 24 percent in the quarter to $41.3 million on flat revenues.

DSOs were dramatically reduced to 84 days at the end of the quarter compared to 112 at the end of Q3. This is the lowest DSO number we've had in a number of years.

Inventory also decreased, going down 8.9 million or 22 percent during the quarter as a result of reduced receipts and improved inventory management practices. Inventory at the end of Q4 was 31.1 million, with turns of 4.4 times. This is a significant accomplishment in such a rapidly deteriorating sales environment. We've worked through essentially all of our major vendor liabilities during Q4 and thus will be able to control and execute our inventory management processes in fiscal year 2003.

Focused actions taken this year, including consolidation of manufacturing facilities, increased outsourcing of certain production and focused supply chain process improvements are favorably impacting our balance sheet position.

We will continue to work closely with our key suppliers and consultants to control not only current inventory balances but also the longer-term inventory procurement process.

Let's look briefly out at the next quarter. Given the current economic environment and near-term uncertainty in the mobile and fixed wireless markets worldwide forecasting fiscal year 2003 remains extremely difficult. We have taken rapid and decisive actions in response to and in anticipation of the market and worldwide economic and political environment as it unfolded during the past fiscal year and management at Stratex Networks is committed to return the company to profitability in fiscal year 2003 while at the same time positioning the company with operational efficiencies, new product and a solid market position to take advantage of opportunities as they develop going forward. We have several alternative internal plans to meet these objectives.

In the near term we expect revenue in the first quarter to be $46 to $50 million and loss per share in the 10 cents to 12 cents range. While we anticipate some improvement in the bottom line and top line in Q2, such improvements will be modest and generally in line with current street expectations.

In summary, we are proud of the improvements in our balance sheet during the past year and the past quarter in particular in this extremely difficult environment. The improvements in cash balances, reductions in spending, improved DSOs provide a solid base from which to begin our new fiscal year.

I'd now like to turn the call over to Chuck Kissner for an operational summary and some comments on the company's overall plans going forward.

Thanks, Carl.

I'm going to comment on three main areas, the market, products and the financials and touch on the operational aspects throughout this, and then a quick summary and we can open it up to questions.

As far as the market, it's pretty clear that the market conditions have been quite tough. For us the past year was particularly challenging because we have been a leading supplier to the U.S. CLECs and that's a business that you know disappeared or almost disappeared in what seemed like an overnight condition.

One way to look at the change in our top line last year was CLEC revenue declined almost 100 percent for the year and our remaining business declined about 30 percent for a total decline of about 45 percent for the year.

And we've moved fast to reduce and reorient our resources and, in fact, this is still an ongoing process. We've also focused very quickly on where the real market opportunities exist and this has recently produced a stabilization in sales and at least in the near term now some potential growth.

Over the past year we have contracted several turnkey wireless transmission projects and we've been building up the ability to rollout complete wireless transmission networks. And I expect this will be a significant driver of our business as carriers continue outsourcing more of this activity in the current tough market.

Also during the year we made a number of product improvements to support this solutions approach and most importantly a new release of our Provision Network Management System, as well as additional Altium interfaces.

The current market is healthiest right now in areas where the penetrations of wireless mobile infrastructure is lower, such as developing areas of the world. The market is relatively weaker in areas that have high penetration like Western Europe and they're more dependent in those areas on enhanced services to drive growth and we see no near term drivers to change the situation.

And we believe that there are no significant changes in the capital environment, that increasing network traffic and the ensuing pressure will result in some modestly increasing capital expenditures for transmission late in 2002 or early 2003. We also believe that some time is needed to sort out any structural changes in the carrier market as well as the supplier market and these changes are necessitated by the economic environment that we're in.

Again, we anticipate most of these structural changes will take place by late this calendar year, creating efficiencies and better stability in 2003 as a precursor to network infrastructure growth returning.

The bottom line for us is that even in a flat market in the short term we currently expect modest sequential revenue growth driven by this solutions approach that we're providing and a significant bottom line growth later in the year, and that's driven by the next wave of effect of our internal operating initiatives.

Let me talk a little bit about products. As I mentioned, our complete product line has been a key to stabilizing the business. Incremental enhancements on a number of our products and services has helped us secure more business than if we had stayed focused on just delivering boxes as we had in the past.

We have now got a solution for pretty much every frequency and capacity requirement on the planet, a complete network management solution and standardized engineering, installation and support.

Now we've also been working on a significant new product release and will shortly launch a new high-capacity system, which builds on the Altium. Now, Altium sales recently have been relatively low, but we're expecting increases based on the projected known demand. The Altium has been very successful overall. We now have the largest installed base in the world of 128 QAM -- that's high modulation -- 155 megabit radios. And next month we plan to announce a new product, which builds on our experience and that offers our customers more capability and value.

And just to preview some of the new capabilities, this is a single product that offers an upgrade path from 155 megabits to 311 megabits to 622 megabits on a single platform.

It's got a fully featured multiplexer as an option and this gives much greater flexibility than simple built-in multiplexers, and it's designed to meet the demands of integrating with optical networks at speeds above 622 megabits.

All of the product models use our new chipset for lower costs and higher reliability. The new product has up to 256 QAM modulation, which enables 311 megabits in the same spectrum, the same carrier as competing systems that run about half that speed or 155 megabits.

And besides the multiple 155 megabit interfaces we're providing optional interfaces giving 21 E1 drops, 100 base-T and some others.

And as always the product line has the broadest frequency coverage in the industry.

Now, beyond this new product, later this year we plan to announce the next significant step in our long-term product development program that we've been referring to as Millennium, with the planned release of a new long-term platform that we expect will further strengthen our competitive position in our current market but will also allow us further penetration in other markets, such as the enterprise market, and we'll discuss this development more fully in future calls.

And finally, this is important, we've developed a number of important process and product improvements in how we build our current products, especially the popular XP4. As a result of these developments, we expect to be able to more fully effect product cost reductions and gross margin improvements over the next couple of quarters.

In the financial area over the last few quarters we've been relentlessly focused on improving the balance sheet parameters, even while the market environment continues to deteriorate.

In Q3 and now again in Q4 our diligence has paid off, as you've heard from Carl. Part of this effort has been in just gross cost cutting but also tighter supply chain management and aggressive collections, but we've also been improving our long-term internal business processes here at Stratex. For example, we're now turning inventory again at rates not achieved in the last two years and a team of employees here and worldwide at Stratex has responded very decisively and we're very proud of them.

Going forward we've got some specific plans to return to profitability this fiscal year by a combination, but leveraging the improvements that we've accomplished so far as well as additional cost reductions in the business. There is an assumption of mild growth in the business and it's mostly the result of our continued share improvements. We expect to see gross margin improvements throughout the year and we're firmly targeting profitability by Q4, assuming the current market conditions.

Just to wrap up before we go to questions, as we enter a new fiscal year we're still facing a challenging market environment and we've now positioned ourselves though with the necessary tools to survive and to thrive. Our asset management gives us a staying power that we need. We have a great portfolio of solutions that continue to win business. We've got a credible internal plan to return to profitability and we've got a product roadmap that will propel the company to the next level, and we'll serve our customers well both in the traditional markets that we've been in and in new markets.

As those of you who have followed us through this downturn know that we've taken it as an opportunity and our progress confirms we're doing the right things to take advantage of that opportunity.

Operator, we're now ready to begin questioning.

If you would like to ask a question at this time, please signal us by pressing the star key followed by the digit 1 on your touchtone telephone. If you find that your question has been asked and answered you may remove yourself from the roster by firmly pressing the pound key. Once again, please press star-1 to ask a question at this time.

And ladies and gentlemen, while the operator polls for questions I'd like to notify investors that we will be presenting at CIBC World Markets Telecom Investor Conference in New York, New York on June the 10th and we look forward to seeing many of you there.

Operator, we're ready for our first question.

And we'll take our first question from Dale with CIBC World Markets.

Good afternoon. Congratulations. Think we've turned the corner now?

We were hoping you'd tell us.

Well, it looks that way.

Operationally I think we feel very confident and the visibility is, to use a word that's often used around the industry, visibility is not great but it hasn't gotten worse than it was last quarter and it appears we have some momentum in some areas.

A couple of questions on the financial metrics. Carl, what is your break-even point and what do you anticipate your break-even point being by Q4? And associated with that, what kind of gross margins can we expect at that break-even point?

Well, we've said all along we're shooting for break even at around the $60 million revenue. We expect to bring that break-even point a bit below that during the year, but I'd still have it in that range. And to get to break even we need margins that are in the mid 20 percent to high 20 percent range.

And, Chuck, the competitive landscape out there, you know, obviously the end markets are a little bit in turmoil and difficult, but has there been some lessening of competitive pressure or has that increased? Give us a little bit of color on that, please?

Compared to the last conference call I think it's about the same as it was then. We have I think moderate pressure in all parts of the world and we have heavy pressure in certain parts where in Asia we have very heavy pressure and we have heavy pressure in the Middle East. But basically it's about the same as it has been over the last three months.

And could you talk a little bit about China, give us a little breakout of your Asia Pacific revenues and bookings? What percentage of that was China and what's your viewpoint going forward?

Carl will give you the numbers and he'll probably turn to me for the viewpoint.

So China was certainly not as big a percentage as it's been in the past. In terms of orders in Asia Pacific it was around 20 percent of the Asia Pacific orders. And as far as the go-forward view I will let Chuck speak to that.

China has been a bit soft for the last couple of quarters, as you know, and we still think it's pretty soft. We still think that the network rollouts are not rolling at the rate that they had anticipated last year.

On a positive side they are working down pretty quickly the inventory of Stratex stuff, so we do expect some pick up in China business over the next couple of quarters. But we still expect that to be a significant part of our business, based on the projections that we're seeing out of China.

But you'll have to recall we were a couple of quarters ago throwing some caution in about what the real growth rate was going to be in the China market and it seems to be settling down about what we expected.

And one final question on your DXR product. The bookings looked relatively good there. Could you tell us a little bit about where you're seeing strength in the DXR product and what's your outlook for that particular product line?

Yeah, this is an example of where when we go in with a complete network it tends to have a positive impact on a couple of products, but one is the high capacity Altium and the other is the DXR product. It's very useful in areas where we're building new infrastructure. In this case we're seeing strong demand out of Africa and out of Asia, out of Southeast Asia.

Great, thank you.

And we'll take our next question from Rich with and Company.

Hello?

Hi.

Hi, Rich.

Hi. Chuck, you'd talked before about 3G deployments, and I know that I wouldn't expect much here but you'd said that you were being bid with at least one major European OEM for 3G deployments. Can you just give us a quick update on where that stands right now?

If we had to pick an area of the business that's running very slowly I think it's just not making much progress at all at this point and still looking like we are shipping some things for 3G infrastructure, anticipated for 3G infrastructure but the numbers are very, very small right now.

We're still anticipating some pickup in business there late this calendar year, early next year but right now we're not counting on it being very significant, Rich.

How about the U.S. market cracking the cellular carriers here? Obviously they're probably the carriers that are spending relative to just about any other geography. Can you give us an update on how you're doing there?

We're seeing some more business out of the U.S. as you can see from the numbers. I think that the beginning stages of that penetration are occurring right now. I have not seen a big break in that area yet. First, I don't think they're deploying that much microwave and what they're deploying is mostly to the current share leaders. But we're definitely making progress in a couple of accounts. If we do manage to make that break I expect it would be in the second half of the year.

Great. And could you characterize, last quarter you had real big bookings but you characterized a lot of them as longer-term contracts that you'd really be seeing over a several quarter period. Can you give us a feel for how this quarter's bookings were on that scale in terms of how long-term, similar profile and delivery timeframe?

The last two quarters actually have been much more significant in terms of complete network builds. It's one of the reasons why we have some confidence in the next couple of quarters in the business. If you look at our backlog that's some evidence of it since we were in excess of $90 million of backlog. A lot of that is network stuff that either is to be completed by us or at least the product has already shipped out in the network.

This quarter I think one of the big differences is it was significantly lower in terms of network build-outs, complete network build-outs of long-term nature and just looking at the numbers here it looks like maybe about 10 percent of that was complete network build-out order and in those cases that was add-on to what we already had in existing network build-outs. In prior quarters it was running at least twice that much.

So it's a little deceiving to look at the orders number. You really have to moderate the last three quarters, this quarter and the prior two quarters to get a view of what the general average level of demand is.

Right. That's great. Thank you.

And we'll take our next question from Tim Long with Credit Suisse First Boston.

Thank you. Chuck, if I could just get a question for you, have you seen any changes following on the competitive situation? It seems like some of the point to multiple point players have been talking about using that technology in backhaul more for mobile networks. Could you just comment if you've seen that at all, and also give us your view, you mentioned the win in India, what your view on that market is and what kind of ramp we could see? And then I have one for Carl as a follow-up.

We certainly have heard a lot about the multipoint being used as backhaul and that seems like a very natural thing to go after since that actually is still a market that exists. As tough as it is right now it's much healthier than the broadband fixed wireless access market, as far as we can see.

We've looked at the numbers, and as you know we look at the numbers in quite a bit of detail because we have lots of visibility into this. And no matter what we see and what's been purported, so far the numbers don't seem to add up for us.

I guess the proof right now is that we've run this by a number of customers, because it's always an area we might go after in one way or another. And right now it's hard to see any significant penetration of multipoint for backhaul, at least in the current environment.

With regard to India I expect this year -- I don't have the numbers in front of me right now, Rich, but I expect because we've had a couple of breakthroughs here in India for us we should see good business compared to last year in India.

As far as the growth of the India market I don't see the macro numbers as growing very dramatically in India, just our share. long: Okay, will that be a GSM network you're selling into?

Yeah, it's actually a combination of GSM and fixed wireless access.

Okay. And then for Carl, if I could, could you guys characterize a little bit for us the nice sequential improvement in gross margins, if you can maybe break that out somewhat for us or scale it between mix, how much was due to mix and maybe how much restructuring and if anything on the pricing front affected that? Thank you.

Okay. Well, there's a piece of it that's due to mix. I'd say about half, a little less than half of that improvement is due to either mix or the underlying customer mix or product mix. And then the balance is due to lower costs in some of our both manufacturing and service operations that impacted margins.

Okay, thank you.

And we'll take our next question from with Morgan Stanley.

Hi, folks. I have questions in two categories. It will be pretty quick. If you could talk about -- I understand the backlog comment you just gave regarding looking at the backlog over the last several quarters. Just so I get a sense of the percentage of backlog shippable over the next six months and perhaps maybe scale that over the next three months and the next six months?

And secondly on the pricing environment comments you made, Chuck, could you describe whether that's kind of being initiated by customers or competitors and if it's in the form of straight price competition or terms competition or even vendor financing being thrown in again?

Yeah, I think, Marindum, there's two -- while Carl looks that up on the backlog, there are two significant forms of price competition. One is what we would call focused pricing, where we've got a specific competitor going into an area where they consider it strategically important, and we really have -- it's more of one supplier right now, one global supplier that is targeting certain opportunities and puts price pressure on, and that's been going on over the last couple of quarters and that hasn't changed too much.

The other form of pricing pressure is more long term and this is something we see all the time in our business and we continue to see it. There are some potentially large network build-outs or there are situations where there's been disaggregated buying across a group of companies that are related and they want to get that buying consolidated into one purchase agreement, one master purchase agreement.

Both of those are looking at long-term future products and what's brought to market and those future products are expected to have lower prices than existing products, which should be no surprise.

So we do have some visibility into what those prices are going to be and I can't give you a number right now because a lot of this is obviously subject to negotiation, but I expect those prices to start to hit in our fiscal 2004 timeframe and those will be supported by the new product platform that we'll be talking about a little bit later this year.

Again, that's just a natural evolution in our product direction to follow the same route that the last two or three product generations have for us.

So the short-term is a spot pricing kind of thing, you know, it's geographically focused and long-term I think the general pricing level will go down, which you could expect over the next couple of years.

Right. And then your new product pricing strategy sounds like you're going to kind of come in, first focus on being the low cost producer but also focusing on a price per bid approach or being the low price provider with the new platform?

Well, our pricing philosophy, we'll reiterate it, it's the one we've been using for the past couple of years and as we target solutions that offer value to customers and we try to equate that value in price and we design the product around it, one of those parameters is speed. So dollars per megabit per second is a key parameter in how we're designing these products. Both the cost and the price have a far distance from each other. That would be the predominant one.

I think in addition to that we're offering with the product we're announcing next month and in the next generation platform we're offering a degree of flexibility that causes the customer's operating cost to dramatically be lower and I think that also besides speed offers him more value and we expect that to be reflected in the pricing as well, pricing with respect to cost anyway.

Does that answer your question or is that a little too complicated?

No, I understand that. Just the last point is the multiplexer going to be a fully integrated ADROP multiplexer?

It is integrated into the product but it's also optional, because our research with customers shows that there's more value in having that as an option.

Of the backlog, of the total backlog of 94 million I'd say 60 to 70 percent of that is shippable in the next three to six months. It could be a little more than that, depending on how fast some of these networks roll out. But it looks like it's about 60 to 70 percent.

Okay, thanks very much.

And we'll take our next question from Matt , .

Hi, guys. Good afternoon. Sean for Matt.

Congratulations on the balance sheet progress. A quick question for you: Can you just tell us in Q4 in I guess very coarse percentages what percentage of your products were new network, were sold into new networks versus existing networks?

Hang on just a second, Sean. About 30 percent, Sean.

So 30 percent new networks?

Yes.

Yes.

And also you mentioned broadband access. I would imagine that's a pretty small number, but in Q4 what percentage was non-mobile type of application? I mean, what percentage were mostly access applications?

You know, you're right, a lot of those are real small and I don't know what the total aggregate number is, but my guess --

Less than 10 percent.

-- my educated guess is about 10 percent.

Okay, 10 percent.

Also, you mentioned going forward here or maybe it was Q4 where you were talking about increased outsourcing. Can you speak to that just a little bit?

I think what Carl was saying was -- I'll paraphrase for you -- we have been doing increased outsourcing.

Right, right. Have you done anything in addition to what you've spoken to previously?

No.

Okay, very good. That's all I have. Thanks very much.

And we'll take our next question from Mark Roberts with Wachovia Securities. Mr. Roberts, your line is open. Please go ahead.

We'll move next to Colin with Bear Stearns.

Good afternoon, gentlemen. I was wondering if you'd talk about your OEM relationships, what's on the horizon, elaborate on Motorola, and then I have a follow-up question?

I think we've spoken to this before. We've got various forms of relationships with a number of the infrastructure suppliers. The ones that we don't do a lot of business with are Ericcson and Alcatel and the others we do varying amounts of business with, depending on the networks that we're addressing and so on.

So it's really is very network dependent. Right now we're doing a fair amount of business with Motorola just because of the way the networks, the new networks have rolled out and the awards that they received.

In the last year our OEM business was about 20 percent of our total revenue and I expect it will be about the same this year. That's not a forecast but I don't think the conditions have changed dramatically.

Okay. And you mentioned an M&A fee that you paid in the quarter. I wondered if you'd talk about that. It does appear actually that you have a decent amount of cash now on the balance sheet and I wondered if in this shakeout opportunities have arisen and if you would talk about your strategy in that regard?

We didn't say we paid any MA& fees. What we did is, as you know, we made a bid for Western Multiplex and there were some legal fees related to that whole exercise that we did pay, but there were no, other than some retainer fees, minimal.

Oh, okay, I see. All right, thank you.

We'll take our next question from Scott , SG Cowen.

Good afternoon. A couple of questions. Chuck, could you talk a little bit about the linearity of orders in the quarter? When you provided a mid quarter update it sounded like we were seeing the upturn at that point in time. Now it seems like the outlook may have become a little bit more clouded. Could you talk about specifically what you've seen change, if anything, in the last 30 days and how order linearity has been? And also as it relates to Altium, it looks like we're starting to see a little bit of a pickup there in terms of both orders and your commentary. Is that sustained and what's the specific application, given that 3G is slow right now?

You can ask a lot of questions quickly.

Sorry, it's a fast New Yorker talking.

Oh, is that it?

As far as order linearity, it was a little bit worse last quarter than it was the prior quarter. It was better the prior quarter mainly because the first couple of weeks of the prior quarter we had some good order intake.

So actually basically the trend isn't much different. This quarter that we've already started it's a little bit early to announce results but we started off on a pretty good start with orders, probably because we should have been more linear last quarter. Some of it fell into the first week or the first few days of this quarter.

So I expect this quarter we'll probably have better linearity than we had last quarter because of that, but we're never really sure.

I don't think there's any conclusion to be drawn from this yet. As I said, I think the average level of demand over the past three quarters has been about the same, even though our orders number itself has a high degree of variability to it. It has always had that, depending on when big deals tend to close.

As far as the Altium increasing we think it's sustainable because this is a result of our network rollouts where we're doing complete networks. That's the biggest driver in terms of the Altium. And when we do that we tend to take responsibility for multiple levels of the network and the customer basically is making it a turnkey operation. And we think that that provides a more objective look at what a high capacity system will do, as opposed to fiber or opposed to leasing fiber. And since that is our business model going forward we feel pretty confident we can sustain that.

Now, even at that the level that we're talking about for Altium is a lot lower than it was a couple of years ago, so when we get down to the levels that we're at, where we're running between $5 and $15 million a quarter that's subject to variability just because of a lowness of the number. But in general we expect Altium to over time be a strong product and that's why we've invested in enhancing our high capacity product lines.

Chuck, along those lines, what percentage of your revenues and/or orders are you seeing really bundled solutions, you know, Altium going along with XP4 or otherwise?

Yeah, I'd say it's probably in terms of there's various levels of completeness of the networks. In some cases they're buying all the products. In some cases they're buying the products and some services and in some cases it's turnkey. If you bundle all that in I'd say most of what we're doing is packaged kind of stuff.

And in regard to some of the new product introductions that you're going to make, could you talk a little bit about the margin differential you expect from some of these solutions and how quickly they'll be phased in and really start to have a meaningful impact in terms of the gross margin mix?

Well, I'd like to first say that Altium still has good margins. It's a very strong performer in terms of gross margins. Volume presents a bit of a problem where it's turning at right now, but because of the operational changes that we're making we expect issues like absorption and so on to become less of an issue going forward.

Altium is still running in the 40 percent plus range in terms of standard margin.

We expect -- this is kind of the reference point to start. We expect that the new high capacity platform that we're rolling out will on average have margins at least that high.

The platform that we're talking about long-term I think it's way too early to comment on what the financial performance of that is going to be, but just let me reiterate that normally when we bring out a product we'll see gross margins in the 40 plus range. The Altium 311 when it came out the margins were in the 50 plus range. So somewhere in that range I would expect a new product platform to be, depending on what the world economy looks like at that time.

Just lastly two quick questions for Carl. In regard to SG&A, given what sounds like some one-time expenses, what's the baseline that we should expect to see SG&A cost in the June quarter and what sort of magnitude of a sequential up tick should we expect in gross margins?

And for Chuck, you talked a little bit about the pricing pressure and competitive landscape, but could you talk a little bit about who you're seeing on competitive bids? Are you seeing more of a rationalized competitive landscape? A lot of the smaller players now are starting to go away and don't have the means to compete, but how are the captive suppliers faring now? Is there more unbundling going on in terms of the network bids or is there no change in that front, and are the captive suppliers really investing in the next generation platforms going forward? Thanks.

How many questions was that exactly? Was that eight or nine?

Let's start with the SG&A question. I think if you go back to the third quarter SG&A was around 13.6, $13.7 million. This quarter it was a little bit higher. And I certainly expect it's going to come back down a little bit below the third quarter level and then decline during the year by small amounts, but I'm not expecting a dramatic drop in SG&A, but certainly it will be lower than what we had in the third quarter.

I think that was the financial question.

Oh and Carl, just sequentially on gross margins.

Oh, the gross margin question. Yeah, margins were a little better this quarter than I think we said at the beginning of the quarter. They'd be up 2 to 3 percentage points or something like that, would have put them at 14 percent, 13 to 14, and went up close to 16. So sequentially, as I said in the initial comments, we're not expecting a substantial change in Q1 either on top line or bottom line results, so margins may be up a half a percent or so but not -- maybe a percent but in that kind of range, not 2, 3 percentage points that we talked about last time. It will be pretty close to what we had this quarter.

And, Chuck, on the competitive landscape?

Yeah, with regard to that I think most of the suppliers from a pricing point of view have been relatively rationale, given the market conditions. There is one out of Japan that's been very, very low on pricing and that's fairly well known throughout the industry right now and it has been a fairly typical strategy out of that supplier and they've been quite aggressive over the last few quarters actually in terms of price.

As far as the captives going after this business, are they unbundling or being more aggressive, I'd say yeah, they're more aggressive now than they have been recently. On the other hand, so are we, so I think we're holding our own right now.

And as far as their plans going forward you'd have to ask them but our rumor mill would indicate that Ericcson and Nokia consider this area strategically important to the next generation of networks. The other suppliers, as far as we can tell for the most part, are not investing or disinvesting in this area because of whatever their own strategy is. So that probably indicates where we'll get most of the OEM business two or three years from now, depending on how things shake out.

Thanks.

Ladies and gentlemen, we have time for one more question and we'll take our final question from Joanna , .

Hi there. I just have a quick question on the new 622 megabit product, you know, in terms of where you are in the development cycle, have you begun testing with carriers? And if so, who's the customer base? Is it the existing Altium customer base or just a few of the applications?

It's in field trial now. It's with existing customers and the development is almost complete.

Thanks.

Okay, well, ladies and gentlemen, this is Chuck Kissner. I just wanted to thank you all for calling in today. I know you're usually up to speed a lot more at this point, because in the last couple of quarters we would have had a call just before this. We're very grateful we didn't have that this time and we're looking forward to future calls with you as we talk about some of the progress that we're making, so thank you very much.

This does conclude today's conference. We thank you for your participation. You may now disconnect.

END