Aviat Networks Inc (AVNW) 2003 Q1 法說會逐字稿

Welcome to the DMC Stratex Networks First Quarter Fiscal Year 2002 Financial Results Conference Call--excuse me, 2003 Financial Results Conference Call. This program is being recorded. At this time, for opening remarks, I'd like to turn the program over to Laura Graves, Director of Investment Relations. Ms. Graves, please go ahead.

Thank you, Operator. Thank you everyone for joining DMC Stratex Networks Inc. to discuss financial results for the first quarter of fiscal year 2003. Carl Thomsen, Chief Financial Officer, and Chuck Kissner, Chairman and Chief Executive Officer, will review the results for the most recent quarter and fiscal year, and our current outlook for the business followed by Q-and-A session.

In addition to the financial results for 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, results of operations, as well as 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 risks related to unanticipated changes in customer demand, the ability of customers to pay for equipment purchased, the continued availability of financing for network expansions, the ability of Stratex Networks and its suppliers to respond to changes made by customers in their orders, the possibility that spending cuts do not result in anticipated expense reductions, and anticipated efficiency improvements are not realized, or the company incurs an additional unexpected expenses, and competition in the microwave and access business in general. For further discussion of such factors see the information provided under the heading, "Management's Discussion and Analysis of Financial Condition and Results of Operations, Factors that May Affect Future Financial Results," in Exhibit 13.1 of the company's Annual Report on Form 10K for the fiscal year ended March 31, 2002, as filed with the Securities and Exchange Commission on March 15, 2002.

Now I'll turn the call over to Carl Thomsen, Chief Financial Officer. Carl?

Thank you, Laura, and thank all of you for joining us today. Financial results for Stratex Networks for the first quarter of fiscal 2003 were in line with the expectations we discussed in the conference call at the beginning of the quarter and in our June 27 press release. Overall balance sheet continued to be strong with over $81 million in cash, ESO's at 87 days, and inventory balance was down $6 million in the quarter, inventory turns up to 5.5, the highest level since I've been with the company.

For the first quarter ended June 30, 2002, Stratex Networks reported revenues of $49.3 million and a net loss of $22.9 million. This results in a net loss per share of 28 cents. It appears to exclude the charges related to the manufacturing transitions, severance, excess facilities, investment impairment loss totaling $14.3 million, which we indicated in our June conference call, had not been finalized at that time and were not included in our guidance, net loss per share would be 10 cents.

We are pleased with the operations and sales initiatives we have taken and are being reflected in improved financial results compared to last quarter. Of course, compared to 12 months ago, business was still down substantially. Compared to Q1 of last fiscal year, our revenues are down $27.4 million or 36 percent. Had we not implemented the rapid changes in our expense structure and internal processes that we began focusing on over a year ago, our losses would have been significantly larger.

Let me review the overall results now. Orders for the quarter--new orders for the first quarter were $53.3 million, resulting in a positive book to bill ratio. Backlog was $98 million at the end of June. By geographic area, orders in North America are $2.5 million, South America, $6.3, total Americas are $8.8 million. In the Europe, Middle East, and Africa region, orders were $30.6 million. In Asia Pacific, $13.9 million. A total of $53.3.

By product area, in the mid-capacity XP4 family, orders were $22.9 million. In the high-capacity Altium product line orders were $14.4 million. In the DXR product family orders were $6.5 and services were $9.5 million for a total of $53.3.

Overall order activity was in line with our expectations. We are pleased with the continued strength in orders out of the Europe, Middle East, and Africa region, as well as the improvement in the XP4 orders over the prior quarter. We continue to bid aggressively to win new business. We expect a continued difficult market through the lack of available capital for building on new networks and the significant fees carriers in the U.S. and Europe have to pay for licenses.

On revenue, revenue was $49.3 million in fiscal Q1, which is a 36 percent decline compared to Q1 of fiscal year 2002, but an increase from the prior quarter. With expected Altium revenue increase compared to the prior quarter, the DXR product family was up significantly, in fact, at an all-time high revenue level for that product group. This product mix had a terrible impact on gross margins.

By product line, the revenues for the narrowband, or DXR--excuse me XP4 product family is $22.4 million, Altium product family is $6.5 million, DXR was $13.5, and services were $6.9. A total of $49.3. By geographic region, North America is $1.4 million, South America is $6.4, for a total Americas of $7.8. Europe, Middle East, and Africa is $21 million, Asia Pacific was $20.5 million. A total of $49.3.

Gross margins were 21.4 percent in the first quarter of fiscal 2003 compared to 15.8 percent in the fourth quarter last fiscal year. Manufacturing spending continued to decline in the first quarter and is now about 50 percent below first quarter of last fiscal year due to the cost reduction efforts undertaken during the past 12 months. Margins were also favorably benefited by approximately $1.1 million due to utilization of inventory previously reserved. Without this utilization of previously reserved inventory, margins would have been 19 percent, still an improvement over the past two quarters.

I expect some improvement overall in margins in the second quarter based on the forecasted product mix as well as lower spending due to the outsourcing of manufacturing to MTI, Microelectronic Technology, Inc. in Taiwan. We have been seeing price declines in selective competitive situations and have built these into our projections for the second quarter of fiscal 2003. As far as operating expenses are concerned, R&D expenses were $3.6 million, down 39 percent from the $5.9 million in the first quarter a year ago, and down slightly from $3.7 million reported in the prior quarter. The major reason for the decline in R&D expenses compared to last year relates to the closure of the Seattle operations a year ago. Chuck will address some of the specific current projects in engineering and the new product pipelines later in this call.

Selling, General and Administrative expenses were $14.6 million in the first quarter compared to $15.7 million in the first quarter of last fiscal year, and $14.1 million in the prior quarter. The increase compared to last quarter relates to increased selling expenses. I expect to see Selling, General and Administrative expenses will decline in the second quarter.

We did have some substantial restructuring from manufacturing transition costs in the quarter. It's related to severance, excess facilities, and totaled $14.2 million, primarily related to the transition of manufacturing for the XP4 and Altium products to Microelectronics Technology, our outsourcing partner in Taiwan. A portion of these costs are also attributable to a reduction in personnel outside of manufacturing operations, as well as relocation of certain field offices to less expensive facilities.

Operating income, excluding the severance and transition expenses, was a loss of $7.7 million. This is a significant improvement compared to the $10.5 million operating loss in the prior fiscal quarter. In operating--or other income and expense, interest and other income was a $100,000.00 expense in the first quarter compared to $400,000.00 income in the prior quarter. This decline is due to foreign currency losses in South America as well as lower interest income and letter of credit discounting costs.

The tax rate is due to the high level of DXR sales up in New Zealand. Tax expense of $800,000.00 was higher than expected in the first quarter. We expect to continue to provide for foreign taxes quarterly for the balance of the fiscal year but at a lower amount than in the first quarter.

Net loss for the quarter as I said was $22.8 million or 28 cents a share, excluding the severance, facilities and manufacturing transition cost, and the investment impairment loss. The net loss for the quarter was $8.7 million or 10 cents a share.

On the balance sheet, cash declined during the quarter from $85.7 million reported last quarter to $81.1 million at the end of this current quarter. While inventory turns improved and DSO's only increased slightly, the operating losses resulted in cash utilization. We expect to use about $4 to $5 million in cash in the next quarter due to continuing losses and payment of severance expenses. This cash utilization will decline as the profitability begins to return.

Accounts receivable. Total accounts receivable decreased $5 million in fiscal Q1 to $47.9 million on higher revenues. DSO's, while increasing slightly, paid 87 days from 47 days at the end of the prior quarter are still down significantly compared to 104 days in the first quarter of last fiscal year. I expect to see a decline in DSO's in Q2 as more of our sales are being made by a letter of credit rather than open account currently.

Inventory decreased $6 million or 19 percent during the quarter as a result of reduced receipts, inventory management practices, and the initial phase of the manufacturing outsourcing. Inventory at the end of the quarter was $25.1 million. Turns were $5.5, a substantial improvement over the $4.4 turns reported last quarter. With the outsourcing of the San Jose manufacturing operation and the supply chain processes we have established we expect to see additional reductions in inventory over the next several quarters. We will continue to work with our key suppliers and to control not only current inventory balances but also long-term inventory procurement processes. Of course, we continue to operate without any short-term or long-term debt.

Looking forward to second and third quarter, while we are seeing order opportunities around the world, some near term stabilization of revenues and continued cost reductions as the manufacturing operations are transferred to MTI. Given the current economic environment and the near-term uncertainty in the mobile and fixed wireless markets worldwide, forecasting the fiscal year remains extremely difficult. We are restructuring the way we do business and have taken decisive actions in response to and anticipation of the market and the worldwide economic and political environment.

In last quarter's conference call, I indicated we had several plans to return the company to profitability. With the announcement of the MTI manufacturing program, we have embarked on a new direction that we believe will benefit our customers and shareholders. This transition will take considerable effort and expected to be completed by the end of the calendar year. In the near term, we expect second quarter fiscal year 2003 revenues to be in the $48 to $52 million range with a loss per share of 7 to 10 cents. While we anticipate some improvement in the bottom line and top line in the third quarter, such improvements will be modest and generally in line with the current street expectations.

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

Thanks a lot, Carl. By the way, the DSO's went from 84 to 87 days. I was just here taking notes. I want to cover three areas or our operational progress, the market and product situation, what the status is right now, and what our outlook is at this point. And then we will open the call to questions right after that.

In terms of operational progress, as Carl mentioned, the gross margin improvement is continuing about as we had planned and had laid out several quarters ago. Subsequent to this huge drop in the volume last year, our gross margins got as low as 11.3 percent in Q3 of last year. We commenced about that time significant costs in process improvements. Subsequently, the margins went to 15.8 percent in Q4, and now we were 21 percent in Q1. It's attributable to several factors. And this is initial reductions of fixed costs that were about $60 million a year, some manufacturing process improvements that are resulting now in more rapid cycle times through manufacturing, some recovery of low valued inventory, and a small improvement in mix and top line revenue.

We do expect gross margins to continue to improve based upon our assumption of the revenue levels that are at the level that we're at or somewhat greater over the next few quarters as the full impact of these prior process improvements takes hold. Of all the additional significant impact of this manufacturing outsource program of XP4 and Altium it was announced a few weeks ago that we've already begun the implementation of the MTI agreement and we expect further positive impacts immediately in the current quarter that we're in. But much more significantly in our third and fourth quarters and beyond. The agreement with MTI was made possible as a result of manufacturing process improvements that were done at Stratex and that were implemented over the past nine-months or so, and that enabled a graceful transition.

Now you should know that we have transferred other products to MTI in the past, so we do expect this operation to go very well. And under terms of our agreement, MTI is going to assume the assembly and the integration and the testing of the Altium product as well as the assembly and testing of the outdoor portion of the XP4 product family. We will continue building the DXR series, and we have a pilot production capability in San Jose for new products under development.

The balance sheet continues to remain a key focus area for us as it has over the last few quarters as we've used little cash despite the operational losses. Inventory turnover has seen a big improvement over the past couple of quarters and that's due to better supply chain management processes, implementation of our supply chain management and order processing and sales management systems, more rapid cycle times, and better linearity through manufacturing. And this is the highest turnover that we've achieved as far back as I can recall in my time with the company. So we went from 2.7 turns a couple of quarters ago to 4.4 and now 5.5 in this quarter. In the area of turns, we expect these improvements that we've already got in process to move us--move that number up going forward, and our goal the next couple of quarters is to get to the level of about 7. DSO's were up a bit over a pretty low number in the prior quarter, but it's still under the levels that we've been running.

This further balance sheet metric improvements and now the sequentially improving profitability should accelerate as we go forward. That's sustaining our confidence that we're gonna continue to maintain and then improve the balance sheet. We still do see a very clear path forward to profitability that's based on the programs that we've described. And we're assuming some stability in the market, so let me talk a little bit about the market now.

Based on our recent experience, we do not see a reason to lower our outlook. And this is gonna probably be a surprise to some people, especially with the volatility and the dynamics that are going on out there. And this is obviously always subject to change. But we believe there are dynamics in the geographic markets that we serve as well as our own competitive performance in those markets that are serving us pretty well right now. In general, we honestly believe our overall market position is strong. The environment today is obviously highly competitive and always has been. But clearly, we've had our share of success as a result of the broad product line and our focus on being close to customers. In particular, we've had some pretty good wins this quarter over larger competitors in several geographic areas. A number of things have come together now to help us win the business. The broad product line that really meets every reasonable transmission need, the very competitive individual products, the sales channels that we have, and more recently, our financial stability has played a competitive role for us. Having the operations run more smoothly again as we restructured and improved the processes has also been a big help in responding to customer needs.

And what we're hearing more and more from customers is that Stratex is considered the safe choice for microwave transmission, even compared to some of the larger multi-line infrastructure players. So we're very focused. We offer complete solutions, support our products, and we've got financial strength on top of that. This combination serves us very well in this environment.

Geographically, the distribution of revenue that Carl talked about didn't change much sequentially. But the orders were particularly strong in Africa, Eastern Europe and the Middle East, and a sequential reduction in Asia. I don't read anything particularly significant into these patterns basically because of the lumpiness of orders. For example, we had a couple of large orders in Asia the prior quarter. But it does indicate as we've said earlier that there is continuing to be good business out here but not as much traditionally in areas like Western Europe, North America, and Latin America. So here our geographic diversity is clearly an advantage in this tough environment.

On the products, if you recall, on last quarter's call if you were on it, we promised the launch of the new high-capacity system that builds on the Altium, and you'll also recall that with the Altium we already have the largest install base in the world in this type of high-speed radial platform. And during the first quarter we did launch our new Altium MX radio. It boasts an upgrade path from 155 megabits to 311 and up to 602. The Altium MX features an add/drop multiplexer capability as an option, which is what our customers have asked for, and it uses our high density [Vantex] chip set for lower cost, for higher reliability, and for more advanced coding or modulation of the radio signal. The Altium MX offers a new recordbreaking 258 QAM modulation for those of you who are interested in those things. And that enables transmission speeds of 311 megabits in the same size bandwidth as competing systems at half that speed, 155 megabits.

Now not included in the orders numbers, we did receive notification during the quarter of an award to a significant new customer that we've been trying to establish actually for several years. And the award was based specifically upon the evaluation of the Altium MX. Now there are no specific orders yet under this award, but we are very gratified by how the MX won against some major, major competition.

As we indicated last quarter, we are developing another new platform which we'll comment on later in the year as we get closer to our announcement. However, we do believe it will be considered yet another revolutionary product from Stratex, and it will especially fit the new reality of both the telecom and the enterprise markets.

So this complete product line has been a stabilizing force for us in our business, and it will continue to be a determining factor in the business growth going forward. As an example, we analyzed the orders that came in in the last quarter. Over 70 percent of the value of the new orders was comprised of providing multiple products and services into a single network, which is continuing to validate, in our viewpoint, our value proposition for Stratex Networks, as being a complete high-speed wireless transmission solutions provider.

A little bit on the outlook and then we'll move into some questions. We've had several quarters now of modestly positive book to bill, small top line increases, and an improving bottom line, and we've maintained the balance sheet. And we haven't had to make any adjustment to backlog this past quarter as we have had to in a couple of other quarters. And we see this as a sign of some stabilization, at least in the markets that we serve.

Carl has indicated that we expect further financial improvements to be realized next quarter and that's based specifically on existing internal programs, but likely customer demand that we see based on the order flow, not only for the quarter, but what we've seen subsequent to that. And at the moment we see that is a likely trend over the next few quarters.

We do remain committed and totally committed now to returning to profitability and preserving and improving the balance sheet and we do have a solid plan for achieving these goals. And I think we've demonstrated progress so far according to our plan. And we do appreciate your continued interest and your support of Stratex Networks.

With that, we'll go ahead and open the call to questions for the--up to about a half hour or so that we have remaining in the call.

Operator. Thank you. At this time, if you would like to ask a question simply signal by pressing "*1" on your touch-tone telephone. Again, for any questions, please press *1, and we'll pause for just a moment.

And we'll move first to Rich Valera with Needham & Company.

Good afternoon, Chuck and Carl. In terms of a couple of things on the specifics of the numbers for the quarter. You mentioned you expected gross margin improvements sequentially, Carl. Is that off of the 19 percent or the 21.4 percent?

21.4.

And in turn, it sounds like the impact of the MTI transition will really hit you more in the later half of the year. Can we expect sort of an acceleration of gross margin improvement in that second half of the year? And, you know, maybe if you could give us an idea of where you would expect to exit the year, maybe the fiscal year, in terms of gross margin level.

I think we basically have said we aren't changing our outlook. We, you know, we'd expect modest improvements in gross margin on a quarter-to-quarter basis. I wouldn't see any dramatic acceleration when we move over to MTI, but a continued modest improvement.

Right. And on the SG&A level, can you give us a little bit more granular guidance. It was--it was up, you know, [technical difficulty] from where I had expected it. You know, could you give us any idea how much that might go down sequentially?

I would say definitely in excess of a million dollars quarter-to-quarter.

Okay.

For the next quarter. Not every quarter, but the coming quarter.

Right. And you've met--you've talked about your break even level before. Does that change with the MTI outsourcing?

A bit. We, you know, we've said before break even is in the $60 million dollar range and we say it's a bit below that at this point because of all the other cost reductions we've had. Yeah, $55 to $60 is sort of our--depends on the pricing is really a key driver there, but certainly, it's below the 60 level.

And for you, Chuck, are there any signs of life in Western Europe or cracking into the North American market?

There are signs of life in Western Europe in terms of the, well I'd call it meaningful bid activity. It's very specific stuff. But we'll believe it when we see it. And in terms of the U.S., I'd say the U.S. still, the total amount of volume is small and we're definitely not in the leading position in the U.S., but we're clearly making progress in I'd say three accounts. We're making progress in three accounts. So let's say we hope to break one of those in the-- in the reasonable near future.

Great. And I'm sorry--one final question, Carl. Did you say that your net other income was a loss of $400K this quarter?

We said it was a loss of $100K this quarter.

I'm sorry. Okay.

It was a gain of $400K last quarter.

Great. Thank you. Those are all my questions.

And we'll move next to Dale Pfau with CIBC World Markets.

Congratulations, gentlemen. Nice quarter, and it looks like we've got at least some stability. A couple of questions here just on housekeeping first, Carl. On your expense item, "other expense items." How much of that was related to currency translation to South America?

I don't have a specific. I'd say it's $100,000.00 or so. Not a, you know, dramatically large number. The number is small to start with so anything has an impact.

Okay. And then on your cash burn, if I remember right, you said that you were still gonna burn $4 to $5 million in the September quarter. Is that right, Carl?

Yeah, that's what we said. Correct.

And then as we head to December, could we see that cash burn, you know, drop to a kind of cash break even, assuming that your guidance holds?

Yeah, as we--as the profitability--or the losses decline, that cash burn will decrease as well. So, that's correct.

And so your objective is to get up there and hang around that cash neutral position?

Well, hang around there for awhile, but eventually generate cash, certainly.

Great. And Chuck mentioned that you didn't have to adjust the backlog for any questionable customers in the quarter. Did you have any bad debts in the quarter, Carl?

No.

Can you tell--can you tell us what your bad debt expense on the balance sheet is?

It's minimal. But I don't have that number right off hand. We basically have very few bad debts as we go along.

Okay. And your backlog of $98 million, Chuck, is that all shippable in the next 12 months?

Yes, it is. All scheduled to ship in the next 12.

And the trends are obviously encouraging with a book to bill over one. How have the trends been so far at the beginning of this quarter?

Well, we're not reporting Q2 yet are we? But let's say--there was a fair amount of business that didn't make it across the finish line until after the--after the quarter ended. So it's not counted in here. So we're encouraged by at least the beginning of the quarter.

And one last question on the pricing pressure out there. You mentioned it in your opening remarks, that you were seeing it selectively. And selectively, when you are seeing it, is it greater than what you normally experience, which is the 15 to 20 percent down? And what is still your forecast for the full year?

Our normal expectation isn't 15 to 20 percent down year-on-year. I guess I should start with that comment. We expect more in the 5 to 10 percent range per year. It's hard to tell--to make a generic statement. We do know on some large jobs we've bid that cut--the pricing was very tough. But our objective is to win business.

I want to try to give you a little bit of flavor for what's going on. Maybe this will help give you idea of why we can't give an accurate number, I think. There are a couple of suppliers, large suppliers, that have been competing in specific accounts using price and that's--so the standard deviation on price is pretty high right now. But both of those suppliers in the last quarter--our guess was their win rate wasn't all that high, even with a low price. But they were successful in driving some of the pricing down. They have faded back somewhat in this environment and so the price is apparently stabilizing again. So it's really dependent on whether they come out of the woodwork again. So right now, I'd say we are probably--right now I'd say we had some selective areas where it got hit and we're projecting that some of that will spread, as it normally does, over the next few quarters. But because of the competitive environment some of that pressure is off.

Great. Thanks, gentlemen.

And Arindam Basu with Morgan Stanley has our next question.

Hi. I've got a couple questions for Carl. Carl, could you repeat your gross margin commentary relative to the inventory for the fiscal first quarter? And then, secondly, regarding the letter of credit discounting costs, how much is that and have you--have you factored that into the gross margin pricing trends you talked about earlier?

Let me comment first on--what we said about gross margins is that they were, you know, 21.4 percent. We did get the benefit of utilizing some previously written off or written down inventory for about a million dollars--a little over a million dollars. Without that we would have had margins of 19 percent. You know, we do--we are working hard to continue to utilize our inventory, rework it and do what we can to get some benefits there.

As far as the letter of credit, that's sort of an ongoing--we did say that we are getting more contracts with letter of credit now than we have in the past. So those costs go down in "other" expense if we discount the letter of credit or there are any fees related to that. Again, it's not--that whole category is not a big item. It's just that it is a swing quarter-to-quarter. So I wanted to mention a couple other things that impacted it.

Okay. So what percent of sales do we think it--should be thinking about in terms of utilizing letter of credit in the previous quarter? Then, going forward, what's your anticipation of that level?

I don't have an answer for that.

Okay. Thanks very much.

And moving on to Tim Long with CS First Boston.

Thank you. A few questions if I could. Chuck, could you talk a little bit about what you guys have been seeing in Latin America? It looks like you had some pretty decent sequential ramp there in both orders and revenues and we've seen some shrink from some other companies there. And then, secondly, if you could just talk a little bit more about the new Altium win that has not yet led to some contract activity. Could you just give us a little more color on who that could be with and how big that opportunity can be for DMC? Thank you.

I wouldn't read anything into the Latin American numbers. There is nothing--there is nothing really of great significance. I think you are probably comparing it just to the prior quarter and the prior quarter was down quite a bit. But the quarter before that was at about the same level. So I think Latin America is continuing bouncing along at a level a lot lower than it was a year or two ago for obvious reasons in terms of the economic situation. We do have some good customers in Latin America that continue to buy from us and that's what we are seeing there.

With regard to the Altium MX win, this is important to us because, as I mentioned earlier, its a large customer located in Western Europe, by the way, who was shriveled by equipment over the next few years. But more importantly, it's part of a--part of positioning us more broadly with that customer to sell all of our products over time. And it's really just part of a general plan that we have as large carriers are rationalizing their purchasing decisions, to properly position ourselves. So that's why we are very encouraged and it's really an--it's an environment in which--it's some evidence that this customer thinks that we're a long-term player in this market.

Chuck, are there any specific capacities or frequencies associated with that deal at this point?

Yeah, there are specific frequencies. I don't know what they are right now. And that probably would be too revealing anyway. So--but it's in both the 155 megabit and the 311 megabit configurations. No 600 megabit that I'm aware of.

Okay. And maybe if you could just touch on developments in China? Been a lot--a lot of news about CAPEX cuts there as well. And then I'm done. Thank you.

Yeah, in China--I think we've said that our business in China created a bit of inventory in the pipeline, especially with our partner there. And we have basically the equivalent of point of sale visibility into what they are doing. Deployments have actually been picking up in the last quarter or so, so that inventory is dropping reasonably well right now. So we haven't really seen a slow down in terms of our products. Mainly because I think we were very early in getting hit with a slow down. So the current view right now is that we are probably pretty close to having that one begin to build volume again, and that's our current view.

Okay. Thanks a lot.

Okay.

And moving on to Mark Roberts with Wachovia Securities.

Thank you. Good afternoon. A couple of questions. First of all, Carl, could you list significant customers during the quarter? Any ten percent customers?

We'll see if we've got a list of any specific customers. We did have I think one that was--a couple--well, we had five customers that were either above 10 percent or very close to ten percent spread out the--throughout the world. That's on the--that's on the order side. On the revenue side, there was one customer that was over 10 percent during the quarter.

Okay. And are you able to tell you who it was?

No, we usually don't give that specific information in terms of specific customers without their approval to release that.

We could say that it was the equivalent of an OEM, a major infrastructure supplier.

Okay. And your customer in Western Europe that's using the Altium XM, is that for a cellular wireless back haul application or is that for some sort of private network or a trunking back hauler--trunking or broadband network application?

That's for a mobile system.

Okay. So it is for a back haul application?

Yeah.

Okay. I believe that's all the questions I had. Thank you.

Sure.

Then Colin McArdle with Bear Stearns.

Good afternoon, gentlemen.

Hello.

Hi.

Revenue from measure continues to be more and more meaningful for you and I wondered if we could just talk about that market in a little bit more detail. First, who is the primary competition there? What is the pricing environment like? What percentage of--is your revenue is from China?

Hang on just a second.

Well, on the revenue side, Asia Pacific actually has done--the last two quarters were pretty consistent and its a--you know, it's up from two quarters before that, but compared to the beginning of first quarter last year, Asia is actually down a bit. So, I guess we saw some--on the revenue side, if you are looking at revenue. I think we saw some drop off in China earlier in the year. We are seeing some strong business out of other parts of Asia currently. If you look at the order side, the--Asia is actually down a bit from the last quarter. So--.

--I don't think that--Colin, I don't see the dynamics particularly changing for us in Asia. That's probably--that's why we had a bit of a pause when you asked the question. It's about as meaningful to us as it always has been.

At just over 40 percent of revenues? This time last year it was at that level?

Last year, Asia Pacific, first quarter was $26 million compared to $76 million total, so it was 33 percent or something.

I'd say it's generally--except for the period when the [indiscernible] were buying a lot in the U.S., it's always been 35 to 40 percent of our--of our revenue.

Yeah, it's in the mid-30's.

It really hasn't changed.

Okay. All right. Fair enough. But who is your primary competition and how is pricing?

Our primary competition is the same people we have everywhere else. There isn't a whole lot of difference. This one major infrastructure supplier out of Europe who has their own radio product line that typically is very strong competition, that's Ericson.

Right.

And then we see a scattering of lots of other people. They kind of come and go. In recent history we've seen more competition in certain parts of the world and certainly Asia from NEC, but that's been less of a factor in the last quarter.

And have they gotten aggressive on pricing?

They have typically been aggressive on pricing. There is no difference in the patter, but that phenomenon has been going on for oh, probably, nine months there--all over the world. And as I said, that's been much less aggressive in the last quarter.

Okay. And separately, I wondered if you could just identify what percentage of revenues in the quarter came in the last month and whether you see that trend becoming more or less back end loaded?

It was actually less back end loaded this quarter than it has been. It's under--I think it was under 50 percent was in the last month. It's been as high as over 60 percent last year in certain quarters. So we're seeing that level out a bit.

The manufacturing bill was almost completely linear throughout the quarter. Basically--basically, there wasn't a big rush at the end. It was basically clearance, some paperwork, letters of credit and so on.

All right. Thank you.

Okay.

And moving on to Mike Walkley with RBC Capital Markets.

Great. Thank you. Most of my questions have been answered. I just wanted to follow up on one though. When you talk about--on the competitive environment, and you are saying that your customers are seeing you as more financially stable. Could we read into that that you are seeing maybe some of your smaller players are starting to exit this business in this tough environment?

Yeah, I think so. But what I was really trying to communicate--that's been going on for a while. I think what I've really been trying to communicate is the people who we have--are mostly up against tend to be larger players. And many of those larger players aren't necessarily in the greatest financial shape. So since microwave isn't their only focus, and since they obviously have their own rationalization to do, their focus is changing a little bit and I'm sure customers are viewing them as not necessarily being as committed to this part of the business as we are.

Okay. Great. Thank you very much.

And I would like to remind everyone, if you do have a question, to please press *1 at this time. And we'll move on to Shaun Slayton with Ferris Baker Watts.

Hi, gentlemen. Good afternoon. I apologize if this has already been answered. I kind of got kicked off the phone line here for a moment. Can you explain what the $12.7 million long-term liabilities on your balance sheet is please?

Yeah, most of those relate to equipment we have for facilities. As part of our restructuring we have some facilities that we have long-term leases on that we aren't using and so we put those as--accrued those as cost for excess facilities, and mostly that relates to--or a large piece of that relates to the future lease payments under those existing facilities leases.

Okay. Great. And I know that you're not--you're not willing to give a lot of guidance for the--for the end of the calendar year or the--or your fiscal year necessarily. But in the past you've been able to talk to us a little bit about what you think your break-even level is. Exiting the calendar year, can you tell us a little bit about what you think the top line break-even is?

Yeah, we did comment on that a bit earlier. We said the--you know, we've said all along it's sort of $60 million would pose a break-even point with some of the recent changes we've made, but I think it's a bit below that somewhere between 55 and 60, a little bit below $60 million level.

Okay. And that's--and that's even considering the latest outsourcing effort. Does that consider a full ramp on your outsourcing efforts?

Yeah.

Okay. Thanks very much, I appreciate it.

Moving on to Todd Allen with Kenny Securities.

Good morning, and congratulations on an apparently stabilizing quarter.

Thanks.

Could you give a little bit more detail on the nature and the size of the charges? If this was discussed earlier, I'm sorry I missed it.

Well, we said the charges were primarily related to the manufacturing, severance costs and manufacturing outsourcing transition costs, and facilities that we'd be vacating. Most of that is related to the manufacturing effort. We also had some reductions in force elsewhere in the--outside of manufacturing and another location besides San Jose.

And how great was the reduction of the force?

The total when completed, I mean, this was a phase--is a phase process because we're still doing some manufacturing. But when we complete it, it will be about 150 people I believe.

And is that total for all the restructuring or is this just related to this most recent wave of outsources?

I think it's related to the most recent wave of restructuring. So some of that, the bulk of that, is related to the outsourcing. But as I said there was a third or so, or less than a third that's not related to manufacturing but other areas of the company.

Were you asking about prior reductions before this?

Actually what would be helpful is just sort of full-time equivalence of something as of end of March versus end of June. I'm just kind of trying to get a size for the reduction. Hello?

Just a second. Yeah, the--for the number that we ought to have notified as part of the severance program during June, or during the June quarter, they said it was about 150 people. Not all those are gone yet. They will be phased out over the next six months or so. And the head count has us. Okay. So that's a pretty substantial reduction compared to our total numbers.

That was about 20 percent, right?

Yeah, it was about 20 percent.

Okay. Thank you. In terms of the overall charges, did you break out--and you may have--I may have missed it. How much was cash and how much was non-cash?

No we didn't split that--we didn't split that out. In terms of current cash, a lot of it relates to these facilities so that's a longer-term cash payment. But that's, you know, one way to look at it is most of it is, let's see, 75 to 80 percent is cash, but it may not be cash, you know, this here it goes out over three or four more yeas as far as some of these facilities costs go. So near term cash is, you know, a couple million dollars. $2 to $4 million is sort of next six month.

Was that $2 to $4 million next six months on a quarterly basis? $2 to $4 million each, or $2 to $4 million cumulative?

Total.

Total? Okay. Great. Thank you. I don't have any further questions.

Now we'll take a follow-up question from Arindam Basu.

Hi, Chuck. This question is for you. You were commenting about the ability to make some progress in three accounts in the U.S. Since your U.S. sales and bookings were down pretty substantially quarter over quarter, could you talk a little about, you know, this opportunity to get you back to the previous quarter levels of the March levels or are June of '01 levels in your anticipation right now?

Just a minute so I can see what I do. No, I don't think our target is anywhere near that low. You know, we do have a set of U.S. customers. They just don't buy a lot of stuff. And we have private network stuff, and we have some mobile back haul, and so on. And so, this is, again, it's very lumpy. It goes quarter to quarter and this is just a few customers that can jump around quite a bit. So it's--there is nothing meaningful--meaningfully different about the orders that we have in this quarter versus the prior one or the one before that. So we're talking about numbers that are probably at least 2X, more like 3X, what June of '01 was like, once this thing starts moving along. I think that's your question, isn't it?

: Arindam Basu: Yes, yes.

It's kind of order of magnitude. In other words, there is not--U.S. is not--they are not huge consumers in the back haul areas. There are some suppliers that say some of our carriers buy a lot, actually in terms of back haul, the numbers are not that big. For their total consumption of microwave in the U.S., there's a fair amount of tradition microwave long haul and so on that sometimes make it counter in there. That's not the market we are particularly after right now. So, the members themselves are not huge, but they are a lot bigger than what we've been running as a company.

So there isn't necessarily any DXR or the XP4--it's literally an XP4, plus an Altium that are going to be marketed in those opportunities?

No. There are some DXR's we'll--you know DXR's use for some of the--we say long haul--I was talking about an application. For example the long distance network or a cease fire, that kind of stuff. The DXR is used in back haul in certain circumstances where there are a lot of runs that have to be made, let's say over a body of water or something like that. That applicant is appropriate.

Okay. Thank you very much.

Okay.

And moving on to Rod Emmon with Founders Asset Management.

Yeah, Carl, can you help me understand what the opportunity is for additional benefits or gross margin from inventory evaluation. Is that--do you have some of that going forward as you look out?

: Chuck Kissner: You asked our number to estimate. We are working hard a seeing if we can continue the utilized inventory. If we suddenly used $11 million, as shown in the financials, we pay one million this quarter by reworking and incorporating into various products. So we have an ongoing effort to do that. I would expect it to probably be at that level and it won't pay a dramatic number, but certainly an ongoing.

So if you weren't able to rework and it fell below that level, does that make kind of making an improvement in gross margins from the 21.4 you saw this quarter, much more difficult toward--.

We are expecting some benefits there but that's not what's driving the basic improvements.

Okay. Great. Thank you.

We should probably go back to the early question on cash out of the current restructure, and I said $2, but it's more like $4 to $6. There are some other costs I--as I look through the schedule there I hadn't counted in. Some utilization of the next two quarters. Hello?

Is there anything further, Mr. Emmon?

No, thank you.

Thank you. Moving on to Bob Voyarte with Twin Oaks Partners.

Hi. Can you explain why the decision to hold onto DXR and why it is not a candidate for MTI?

I think that the volume of radios on DXR is a lower volume. The--remember I said that we have changed a lot of processes here in order to transfer our products over to manufacturing has played a role. But we're also being a little bit simplistic in the way talk about outsourcing. We--Altium, for example, has mostly been outsourced from its design. From what was originally built. And what we are doing is we're just turning over the last vestiges of it.

In the case of DXR, it's already very highly outsourced and has been from its original design. Large assemblies come in and then--and they are system integrated and tested in the factory. We've looked at a cost benefit analysis, not only about manufacturing by the way, but almost everything in the company, about make versus buy. And it turns out there is really no benefit because of the way the DXR is designed to move it offsite. The margins by the way on DXR are quite respectable and so it's a pretty effective cost profile for the price of the product.

Okay. Thanks a lot.

: Operator: And Kevin Dede with Wells Fargo Securities has our next question.

Chuck, I just--getting back to where [indiscernible] was going on North America, could you tell us a little bit about what's going on with Alconet? I mean, orders seem to be down sequentially, but it seems to me that they--they are in a building phase and floors should be increasing.

They probably should be, but again, this is very lumpy. We ship quite a bit to Alconet and they move through various phases as they are rolling out their network.

How big do you see that getting?

Alconet alone? I really can't estimate. I don't--certainly no where near as big as the--as the mobile market that we're after in the United States eventually. Part of what's going on also with Alconet is that they have to move through various government approvals because it's a government-based organization, and that also has put some [indiscernible] on the rollout. But I don't--again, don't read anything into it. It's just adding more lumpiness to what's going on.

Right. Okay. Thank you.

And we'll take our last question. A follow-up from Rich Valera.

0057:51 Rich Valera: Thanks. Carl, just a quick question for modeling here. How should we look at taxes going forward?

I think I said in the commentary that taxes as an absolute dollar number were particularly high in the first quarter because of the high revenue out of the DXR product line in New Zealand where we are paying taxes. So you can't really do a tax percentage rate. But we're expecting that the amount of taxes recorded in a subsequent quarter, which are almost entirely for foreign tax issues, will be lower than recorded in the first quarter. But there still will be certainly some ongoing tax costs internationally for the company.

It's like in the 400 to 500K range?

Yeah, I think that's what we said last quarter. You should be expecting it. It was higher this quarter again because the DXR revenues were at an all-time high. So their profitability in New Zealand was higher which resulted in a higher tax situation.

Great. Thank you.

And gentlemen I'll turn the program back to you for closing or additional remarks.

Thanks. This is Chuck Kissner. We just want to say we certainly appreciate your interest today in our results. We know you have a lot of other calls that you need to listen to and probably some of you are listening to them simultaneously. So we appreciate your attention. Carl, Laura Graves and I are always available for questions of clarification on anything that we've talked about. And I wanted to also remind you that we have a shareholders meeting, an annual meeting, on Tuesday, August 13, so coming up in about three weeks. So, thank you very much.