Aviat Networks Inc (AVNW) 2003 Q2 法說會逐字稿

This is Premiere Conferencing. Please stand by.

Welcome to the Stratex Networks, Inc. second quarter fiscal year 2003 financial results conference call.

This call is being recorded.

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

Thank you, and thank you everyone for joining Stratex Networks today to discuss financial results for the second quarter of fiscal year 2003. Carl Thomsen, CFO, and Chuck Kissner, Chairman and CEO will review the results for the most recent quarter, and our outlook for the business going forward, followed by a Q&A session. During this conference call, we may make forward-looking statements regarding our business in the wireless industry in general, including statements relating to customer demand, future revenues and earnings per share, profitability, reductions in our spending rate, balance sheet improvements, performance in Asia, the Middle East and Africa, results of manufacturing outsourcing, order pipeline and new product pipeline, efforts to reduce expenses, benefits of our supply-chain management program, inventory reductions, quarterly output, and results of our efforts to penetrate the U.S. market. It is important to note that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those results stated in such forward-looking statements. These risks include the risk of increased competition, continuation of further tightening of global capital markets for telecommunications and mobile cellular projects, and economic and political instability in the markets in which we compete, or in which our products are manufactured. For a further discussion of these risks, as well as risks relating to our business in general, we refer you to the disclosure under the heading, Factors That May Effect Future Financial Results in our quarterly report on Form 10-Q for the fiscal quarter ended June 30th 2002, filed with the SEC on August 14, 2002, as well as disclosures contained in our other SEC filings.

To begin today's conference call, we turn the call over to Carl Thomsen, Chief Financial Officer. Carl?

Thank you , and welcome to those listening to our second quarter fiscal year 2003 conference call. It's hardly time to throw a big party, but I must say I'm pretty happy to be able to tell you today that Stratex is reporting it's third quarter of increasing top line revenues, improved bottom line results, although we're still losing money, it's at a lower amount, continued and substantial improvement in the balance sheet, with cash over to 83 million, DSOs at 79 days down from 117 in the same quarter last year, and inventory turns at 7 compared to just under 2.5 four quarters ago.

These times are not fun for companies in the telecom space. You know it as well as I do, but it's clear from our results that our customers are continuing to buy from us to build out their mobile and fixed wireless networks around the world. We continue to focus on delivering top quality products and services to the major telecom carriers--carriers worldwide, and thirdly, our efforts over the past 12 months to improve the balance sheet metrics and our internal processes are paying off. For the second quarter ended September 30th, Stratex reported revenues of 52.6 million, a net loss of 4.4 million, or a net loss per share of .05. Our revenues are up 7 percent, or 3.2 million compared to last quarter, and last quarter revenues were up 7 percent over the prior quarter, and the quarter before that was also up from the prior quarter. Yes, you heard that correctly, revenues increased for each of the past three quarters during a period when the overall telecom industry is in one of the worst periods it has ever experienced; certainly since I've been involved in telecom.

Let me discuss some of the specifics. New orders for the second quarter of fiscal year 2003 were 47 million, and backlog was 86 million at September 30th. By geographic area, North America was 3 million of orders, South America was 4 million, Europe, Middle East and Africa was 24 million, Asia-Pacific was 16 million, a total of 47, and by product line for the XP4 DART mid-capacity products, the orders were 19 million. The Altium product line were 14 million, DXR products were six million, and services totaled eight million, for total orders of 47. Overall order activity was in line with our expectations although the actual orders booked during the quarter were a bit below our expectations. As we have said many times in the past, order bookings can be lumpy, so it's hard to extrapolate based on one quarter's bookings.

We have a good backlog position and the pipeline for orders in Q3 also looks quite good. Current pipeline of possible orders leads us to expect Q3 orders to be in excess of 50 million. We are pleased with the continued strength in orders out of the Asia, Middle East, and Africa regions as well as the solid Altium orders that we received.

I should note that during the quarter, we determined about seven million of orders booked in prior years now look unlikely to ship in the next 12 months given the specific customer's financial situation. Thus, we have deleted these from the reported backlog.

Revenue, as I said, was 52.6 million in the second fiscal quarter. By product line, the XP4 DART product family was 23.4 million; Altium was 13.2 million; long-haul 8.5; and services 7.5. And by geographic area, North America was 3.3 million, South America 2.7, Europe, Middle East, and Africa 22.1; and Asia, 24.5; 52.6 total.

Gross margins were 24.1 percent in the second quarter compared to 21.4 percent in the first quarter and 19.3 percent in the second quarter of last fiscal year. Overall margins were favorably impacted by lower manufacturing expenses as well as improved installation and service margins.

Manufacturing expense was actually about 65 percent below Q2 of last year due to the cost reduction efforts and the manufacturing outsourcing program that we implemented. Outsourcing of San Jose, California manufacturing is going very well - in fact, better than expected thanks to the excellent efforts of Stratex employees in San Jose as well as a significant effort by our outsourcing partner in Taiwan, .

Pricing continues to be very competitive worldwide with prices continuing to decline in line with our expectations.

On the expense side, R&D expenses were 3.5 million - slightly down from 3.6 million in the prior quarter - down significantly from 4.8 million in Q2 of last year. After the significant cost reductions taken last year of focused engineering new product platform completion of the release of the new Altium MX product and ongoing improvements in the XP4 product line.

Chuck will address some of the current projects in engineering and the new product pipeline. I expect engineering expenses will increase slightly in the next quarter as we increase the effort in this function to keep the new product introductions on target.

SG&A expense was at 13.2 million compared to 14.6 million at prior quarter. This decrease is in all areas including selling, marketing, and administrative expenses as a result of the restructuring initiated in the first quarter as well as our ongoing efforts to trim back expenses in spending wherever possible. I expect SG&A will decline further in Q3. The loss from operations was 3.9 million, that's about half of the 7.7 million operating loss reported in Q1. Interest in other expense was $4 million expense in the second quarter, compared to $1 million expense in the first quarter. This increased expense is due to a variety of factors, including a write down to market value of one of our investments, credit discounting costs, foreign currency cover costs, and lower interest income due to lower interest rates.

The tax rate that due to the lower level of DXR sales out of New Zealand, the tax expense in the second quarter was $1 million, or $.1 million, or $100,000, or $600,000 less than last quarter. I expect we will continue to provide for foreign taxes for the balance of fiscal 2003, in the range of $200,000 to $400,000 dollars per quarter. As I said, the net loss for the quarter is 4.4 million, or $0.05 a share, as compared to a loss of 8.5 million, or $0.10 a share, excluding special charges, last quarter. On the balance sheet side, cash increased during the quarter, from just over 81 million at the end of June, to a little in excess of 83 million at the end of September. Foreseeable collections exceeded our expectations, and loss from operations were lower than initially forecast. We are expecting to use about $3 to $6 million in cash in the next quarter, due to operating losses and payment of accrued restructuring expenses. On the accounts receivable, those decreased during the quarter by 1.5 million to 46.2 million on higher revenues. As a result, DSOs improved from 87 days in Q1 to 79 days in the second quarter.

In the second quarter of last fiscal year, DSOs were 117 days, so we have seen a 33% improvement in our DSO ratios. I don't expect to see much further improvement in DSOs in Q3, given our heavy mix of international accounts. DSOs of 79 days, I believe, is excellent. Inventory continued to decrease and was down 4.4 million, or 18% during the quarter. Inventory has decreased almost 59% since the end of Q3 last year, and inventory turns have improved to 7 times, compared to 5.5 last quarter and 4.4 at the end of last fiscal year, and the low point of 2.2 turns mid last year. The improved inventory management supply chain processes as low as manufacturing outsourcing have had a significant payroll impact on inventory. I have to give a note of thanks to the manufacturing operations personnel in San Jose, California, as well as Lorington, New Zealand, for the excellent job they have done in this area.

We set some pretty aggressive inventory goals nine months ago, and these dedicated employees have definitely made our improvement programs a success. Our outsourcing partner, Technology also exceeded our expectations and the outsourcing program is actually ahead of schedule. We are on track to have virtually all San Jose manufacturing outsourced by the end of the current quarter. With the outsourcing of San Jose manufacturing operation and supply processes we have established, we expect to see some incremental reductions in inventory over the next several months. However, the majority of reductions have already been reflected in Q2 results. As you know, Stratex Networks continues to operate with 0 long-term or short-term debt. We are considering establishing a working capital credit facility to further strengthen our balance sheet position, and have had some relatively attractive options presented to us in this area.

Let me give you a brief outlook for the next couple of quarters. Although new orders in the second quarter were below revenue, we believe the order pipeline is reasonable, and our costs will decline as the manufacturing outsourcing will be substantially completed at the end of this quarter.

We are forecasting revenues in the third quarter in the range of 47 to $50 million, with a slight increase in the margin percent. While this is slightly below our Q2 revenues, our view is that, basically, over the past several quarters, revenues have stabilized and have averaged around $50 million. We don't expect to see an increase in this range until the fourth quarter of this fiscal year.

While reduced manufacturing costs will benefit margins in Q3, Q2 margins did have the benefit of a payment we received for the settlement a customer contract cancellation from last year that was partly offset by higher warranty costs. The net benefit of these actions was about half a percentage point.

Operating expenses should continue to decline in the third quarter, although, not as significantly as the decline in the second quarter. As a result of the better margins and lower operating expenses, I expect the net loss per share in the third quarter to be in the range of three cents to six cents on the lower revenues.

As you well know, it's difficult to forecast far into the future in today's uncertain economic environment. As a result, we've refrained from forecasting beyond one quarter for some time. However, given the current visibility on business opportunities, we are reasonably comfortable saying we are expecting slightly higher revenue in the fourth quarter in the range of 51 to $54 million, which should result in earnings per share close to breakeven, with a range, I'd say, of a loss from about three cents a share to breakeven, or even a slight profit.

Balance sheet metrics should stay about the same with DSOs around 78 to 82 days, and inventory turns above seven.

We have restructured the way we do business, and took decisive actions over the last year in response to an anticipation of the changes we have now seen in the telecom market, and the worldwide economic and political environment.

We reduced cost, reduced headcount, outsourced manufacturing, shut down facilities, and lowered our breakeven point. By the end of the year, we expect our annual expense rate to be about $75 million, compared to 160 million at the end of last fiscal year.

In last quarter's conference -- the announcement of the manufacturing outsourcing program -- I stated that we had embarked on a new direction, which put us on track to return to profitability, which would benefit our customers and our shareholders. This change is an ongoing process to increase market share, improve efficiency, and become the number one microwave solutions provider.

To continue this pursuit of efficiency, we are now in the process of reassessing our facilities and fixed asset requirements based on the positive results of the manufacturing outsourcing to date. Outsourcing has been more beneficial than original estimates, so it appears that we will now be able to further consolidate our facilities in San Jose beyond what we had planned and reserved for previously.

I expect this to result in a special charge of five to $7 million in the third quarter, primarily related to lease commitments on vacated space, plus writing off certain fixed assets in the San Jose location. There will also be some reduction in expense in the G&A area.

This facilities consolidation does not involve any additional inventory write-downs or inventory reserves, this will accelerate our cost reduction program and lowers further our break even point to below 55 million. With these additional reductions, we expect quarterly expense to drop another $500,000 to $1 million beyond our prior plans. This gives us even greater confidence in returning to profitability within a reasonable time frame. I would now like to turn the call over to Chuck Kissner for an operational summary and comments on the Company's plans going forward.

Thanks Carl. I would like to give a little more flavor to the results Carl discussed and what was announced today to give our investors our view of what our progress has been, some of the challenges, and then what our outlook is.

In terms of the progress, as you can see by the second quarter results, and this is really just a culmination of the last few quarters of changes that we've been making, they are producing tangible and sustainable improvements on the balance sheet and the income statement, and ultimately as well in the--how effective we are in the market. What I'll do is talk about these improvements, first by touching on the operations, and then some information for you on the market and the products.

In operations, our supply chain management process is vastly better than at any time that I know of in the Company's history, and this is the result of some fundamental changes that were initiated about a year ago. These included the installation of and the adherence to a demand planning system that reaches further into our customer environment. It is a production planning system that provides 100-percent coverage of all of our products, a supplier management system that minimizes material waste, and encourages lower cost. There are fundamental changes in manufacturing that resulted in higher yields, linearity of output, and that's what enabled us to effectively step up the outsourcing of our production.

In Q2, the production was essentially linear throughout the quarter. The cycle times from receipt of material until shipment are about 1/3 of what they were a year ago. Our average cost of goods sold per units are down about 30 percent compared to the peak about a year and a half ago, and we haven't seen the full effects of the outsourcing yet.

Our total spending is down about 40 percent from the peak and this is the result of scaling back costs because of lower demand, but also it's the result of improving the efficiencies and cycle times throughout the system. Just to illustrate the benefit of this approach, we now estimate we could ramp our quarterly output to $75 million or so, which is about a 50 percent increase, without an appreciable increase in fixed cost. So our model is much more than it was before.

Let me touch on the market, that's another area where we are pleased is the effectiveness that we've had on the market. The market isn't great out there, but we're doing pretty well, we think, and again, this is the result of a set of programs that were launched almost a year ago. We've migrated to a solutions orientation for our customers selling transmission network solutions, and that's helped cement relationships, especially in new networks where there are developing telecom networks.

A third of our backlog is associated with complete network transmission solutions, and almost all of our orders are associated with combinations of our multiple product lines. The product and service portfolio is very competitive, we believe, in today's marketplace, and the direct sales approach is providing us with good position. To date this year, about 85 percent of our sales have been direct.

Also, the geographic focus has been helpful; we are very strongly focused on those areas of the world where new network builds are still going on.

In addition to that, while Western Europe and the U.S. are pretty weak right now. We are encouraged by our progress in the U.S. market, which is evidenced by the recent Sprint announcement, and our progress in the private network market in the U.S. By the end of the fiscal year, we anticipate we will have relationships with about 20 to 25 in the U.S. versus only about five a year ago. And though we're quite strong internationally, there are some areas we still have yet to penetrate. And we are pleased that we secured our first order from a large in France, which traditionally has been a--it was very hard for us to break into--which was a competitive win against a large incumbent infrastructure supplier.

As of the end of Q2, we have products deployed now in over 110 countries worldwide. Now, you might be asking yourself how there can still be a reasonable market for microwave wireless transmission given all the telecom horror stories these days. There's an aspect of the wireless telecom market that may not be apparent, but it is helping us. We obviously benefit when there's new networks built out in developing areas because most of the time, microwave is used as the transmission vehicle of choice. But worldwide, the of usage is still growing in not only developing areas, but developed areas. And so there is a need for higher speed back to support this. As the speed requirement goes higher, it becomes much more economical to use microwave. For example, in the U.S. it's tough to justify microwave at T1 leased line rates, but as the base stations become more loaded with traffic, which is becoming more and more the case as new base stations aren't put in to preserve capital, two, three or four T1s become a much more economic proposition for microwave.

But let me talk about the products a little bit, what's coming in the pipeline. Work continues on a major new platform that's to be released next year. This platform has been shown to a few large clients for their planning purposes and the reaction is very positive. And we're very convinced that this new platform, which is clearly named Unity prior to its official release, will be another industry breakthrough for us. This quarter, we will announce the introduction of a new product line that bolsters the offering of our complete solution set. This new line is going to offer customers the ability to start small with wireless transmission by providing lower speed solutions in the 2.4 gigaherz and 5.8 gigaherz unlicensed radio bands. The first of these products will be available for sale in the U.S. market this quarter and shipments are scheduled to begin in our fiscal fourth quarter. We don't expect these sales, on their own, to be very large, but they will be helpful to bring customers on board with wireless transmission at an easy entry point.

Let me talk a little about the outlook and then we can move into questions. There's no question that the market is a challenge, but how are we able to maintain our top line? We had a market share report commissioned last quarter that covered the first half of calendar 2002 and we--we normally use other people's reports, but we needed to do something because of the dynamic nature of the telecom market and the only recent reports were for last year. Bottom line is it indicates that our share is growing and we believe there are three main reasons for this. One is we are targeting places where there's business. Secondly, the dynamics of the--both the mobile and the fixed wireless market favor the solutions that we're offering right now. And our third reason is our balance sheet and our financial progress, as well as the new product pipeline. Compared against most people in the business, it does provide our customers with some confidence that we'll be there with the right solutions for them.

As Carl indicated, the pipeline of new business is reasonably good right now. I know the term "visibility" has been a bad one over that past year or so. We're getting better visibility than we've had for some time. That's why even our CFO actually gave a two quarter outlook rather than one this time.

And as Carl mentioned, due to customer demand schedules, we wound up shipping a little more than we planned in Q2. Q4 now appears to be a strong quarter, due to current and anticipated customer schedules. Q3 will be a little light, though not too bad.

Another way to look at it is that the last few quarters and next quarter average are about flat and we expect growth in the fourth quarter.

At the same time, we expect more cost improvements over the next two quarters, with the bulk of the next set of improvements affecting our Q4.

So, we do expect to complete the fiscal year very close to profitability, assuming our current top-line expectations remain realistic.

We have been pretty much on target recently, so our confidence is pretty good. I guess, I'd like to say that one of our other challenges is to convince the investment community that there are winners and losers emerging now, and while we're not forecasting a big industry turnaround, I and the other employees here at Stratex Networks -- including those who have had to leave as a result of our cost reduction -- are committed to our investors to turn in strong financial performance nevertheless, and we're on track to do it.

Laura?

Operator, that does conclude our prepared remarks, if you'd like to poll the audience for questions.

Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key, followed by the digit one on your touchtone telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We will proceed in the order that you signal us, and we'll take as many questions as time permits.

Once again, please press star, one on your touchtone telephone to ask a question.

And we'll pause just a moment to give everyone an opportunity to signal for questions.

Ladies and gentlemen, while we're waiting for our first questions, I would like to remind everyone that management at Stratex Networks will be presenting at the AEA Technology Conference in San Diego, California, on November 4th and 5th, and we look forward to meeting many of you there.

, we are ready for our first question, please.

Thank you. Our first question comes from of Needham and Company.

Thank you. Evening, Chuck and Carl.

Hi.

You mentioned, I think, Carl, pricing continues to be very competitive, but within your expectations. Can you give a little more flavor for how competitive, like, what kind of year-over-year declines are you seeing and what is driving that -- if there are any particular regions or products where you're seeing that more than others?

I'd say we'd probably -- you know, typically we expect five to 10 percent declines year-on-year. Where we see them is in some of these large, new projects that we've been winning. And obviously, if there's a new project out there, there's a lot of competition for it. So, we've seen it in selective cases, not across -- not entirely across the board.

Great. And, Chuck, you didn't talk too much about Europe. Sounds like things are pretty weak there. There's been talk for a lot of quarters about potential large bids going out, maybe for deployments. Obviously, there's been some push-outs there. But, are you seeing any signs of life there?

We're seeing a few cases where upgrades to the network are required because of traffic. But, it's really nothing very significant at this point.

There is some -- on a couple of the larger, multi country operators some alignment by looking at major long-term microwave biz to -- I'm sure their objective is to minimize the suppliers and lower their costs. There is quite a bit of activity in that area right now. But, I just don't see any huge demand, here, in the short term coming out of Europe.

I do think it's -- going into this quarter, I expected improvement there, because, you know, typically our Q2 -- which covers the summer months -- is pretty low. And that's certainly what the case has been here.

Great. And on the transition to MTI -- I don't know if this is for you, Carl, but how much -- can you say, can you quantify how much that helped the gross margin this quarter, and how much more impact there would be -- let's just say at similar revenue levels when that's fully implemented -- is it possible to quantify that?

I guess on a stand-alone -- if everything else were constant, you could. But, of course, pricing is moving the same time that we're outsourcing. But, we're -- the reasons that we're expecting to see an increase in margins the coming quarter is not because prices are going up, but because the outsourcing is gonna benefit us. And certainly, part of the current quarter increase was due to the margins -- I mean, due to the outsourcing benefit.

And, I think, Chuck -- I'm not sure if it's Chuck or Carl -- you mentioned that there was -- there appears to be substantial leverage. In other words, you could go to 75 million without significant fixed-cost additions. So, can you give us some -- do you have some estimate of where the gross margins would be if you were, let's say, at $60 million? Sort of, what's your, I guess, target gross margins at, you know, higher revenue levels? Pick a number, you know, whether it's 60 or $70 million.

Before I answer that, I think Carl pulled out some of the numbers and ...

Yeah.

... and could probably give you more visibility on the ...

On the MTI we probably saved. You know, near-term the benefit has been, you know, one and a half, two percentage margin points. Long-term, we're expecting four percentage points benefit from that outsourcing directly.

OK. And then, with regard to the longer term gross margin -- of course, there's a lot of things happening while we're completing the outsourcing. We have other things, other products coming into the stream, and so on.

In the short-term, I would expect margins -- by short-term I mean before there's a whole large-scale replacement of the product lines from our new product platform -- they would start to approach the 28 to 30 percent range. And long-term, at the volumes that we are projecting up in the 70 to 75 million range. With a combination of new products and old mixed together, we expect margins in the 36 to 37 percent range.

Great. Thank you. That's helpful.

OK.

Thank you. We'll now go to of CIBC World Markets.

Good afternoon, gentlemen.

Hello.

Hello.

When we look out across there, obviously it's a difficult market with ASP's pressure out there, and yet, you're gaining share. Would you hazard to guess on how the total market has been this year? Your projections -- are you expecting it to contract, and by about how much? And what's your view on next year for the total market for the radios?

We've gained ten percent this year. I don't--next year, we expect it probably to come down between zero and 10 percent. Again, this is the transmission market, so it's--you've got to segregate it out from the rest of the mobile market. The other thing that's happening, by the way, is we think that the capital reductions are quite significant in the North American market, and since we don't have a lot of North American business yet, that in itself, mathematically, helps us gain share. But overall, we're seeing about 10 percent reduction this year in high-speed wireless transmission, and zero to 10 next year. And the reason we're not necessarily saying the market will decline next year, even though there--we don't--we expect capital expense reductions--or capital reductions next year, in the total market is that in the transmission area we expect it to be used as a higher percentage of the backhaul requirement, for both existing and new networks.

And now a word about the competitive positioning with the exception of some of the very large captive guys out there, has the market share gains been as a result of some of the smaller guys just being marginalized and disappearing, or is it taking share from the larger guys, and what's your view on the competitive position over the next couple, three quarters?

Well again, part of it has been because of the dynamics of the way the money is being spent. Places that were strong tend to be places where the money is being spent right now, and so that helps us, and in that respect, we would gain from people who are very strong in North America and in Western Europe. So you can pretty well figure out who those people might be. But I think the big change in terms of the smaller competitors occurred six months ago. Today I think the people that we're competing against generally would be the people that you were trying to exclude, which would be the major infrastructure suppliers, and on average we are gaining share there. Without getting into each specific competitor.

And one final question, looking into the March quarter, when Carl, you were saying that revenues could be up a in there, is this a number of contracts that you're seeing, or is this a single contract, or is there geographic specificity that lead to this conclusion?

There is a number of proposals that are currently in the pipeline. We certainly are not expecting all those are going to either close or that we'll win them all, but they are--the number is such that we have reasonable probability that enough will close to cause that increase in our favor.

Okay, thanks guys.

And of Ferris, Baker Watts has our next question.

Hey, good afternoon. A couple of market-related questions, then I've got to follow-up with some housekeeping. On the Europe, Middle East, Africa segment of--you know, there's a wide variety of applications and economic--in market economic considerations in that market. What--can you comment on the last couple of quarters where--what segments of that category have been working for you, and if there's been any change? I'd also like to know, you know the book-to-bill in Asia was lower than it was for the rest of the world; I know that there is lumpiness in all your markets but if you could comment on what your expectations for that to maybe turn the other way, if you think it's going to happen in the next couple of quarters. And then, I'd like to follow-up with housekeeping after we address these points.

release in Africa segmentation, it's very much driven by mobile and it's very much driven by Africa and the Middle East. That's clearly where the strength is. And we're seeing pretty strong revenue out of Africa and across a number of different countries where we're building the complete transmission network. And the Middle East, I think that probably is more reflected in the orders rather than the revenue this particular quarter. But, on average, they're both strong.

In terms of the book , I wouldn't read anything into that. I think that was--we had a pretty large deal that booked in Q1 in Asia and we have a large deal in Q2 that didn't book that, I believe actually subsequently booked in the following week. I believe that's the case. And in fact, that's probably a good note. If you just look at the two or three days following the end of the quarter and the bookings were pretty strong for that week. That's really more of a reflection of some discipline that we have in the order management process where we don't go through heroics to get them booked at the end of the quarter. If you added those in then we'd be about the same booking level that we were the quarter before. And I think Asia would probably look a little bit different.

Is there a phase relationship with the DXR versus the other product lines in the business you're seeing in Africa or is it where the long-haul goes in first or is it just ...

No.

OK.

No. But it is--it is true that it's more highly associated with large networks in developing countries.

Sure.

DXR.

Now, on the other--on the housekeeping side, can you comment, Carl, on what the other--the sequential increase in other current assets in the last couple of quarters, what that's resulted from? And also, on your facilities consolidation, if you could comment on your obligations for those leases and whether you've found tenants for those additional vacated facilities?

On the first question of facilities that we vacated earlier on we have a couple of those subleased already. The ones--obviously the one that we're just contemplating now, we haven't yet subleased that, but we've had some success earlier on subleasing that facility which is actually pretty good in today's--or amazing in today's environment here in Silicon Valley. So I think we're making progress on that.

On the other receivables, part of that is we've sold some of our inventory back to our suppliers and, you know, we'll collect that this quarter's timing issue of when we collect it, but basically selling off some of the inventory.

So those other current assets are receivables?

Right. receivables ...

Did I hear you right that the XP4's going to be completely outsourced by the end of this quarter?

Essentially. There'll still be a few--there'll be one production line still here for certain configurations, but the great majority of it will be outsourced by the end of this quarter.

OK, thanks. Good progress.

Thanks.

Moving on, we'll go to Mike Walkley of RBC Capital Markets.

Thank you. Most of my questions have been answered. Just a quick housekeeping question. I think last quarter you said you benefited on the gross margin line due to about a million in utilization of inventory previously reserved. Did you have that again this quarter?

No, we didn't have any of that this quarter.

OK, great. That's it. Thanks, thanks very much.

Thank you. of Bear Stearns has our next question.

Good afternoon, everyone.

I was wondering if any of the pick up in gross margin was attributable to sales mix shift -- noting, in particular, I think the better quarter for product? And is there any gross margin benefit by geographic mix shift?

It's typical to do it by geographic, but there was some benefit from the higher revenue related to , but conversely, the is a little bit lower this quarter, I think. Those two tend to both have pretty good margins. It was more the cost reduction benefit than the mix shift.

The other benefit we got was really in the service area, where our insulation -- you know, we said we'd start on this effort to do full turn-key projects early last year. As we've gotten more and more experience with that, our margins have point moved up in the service installation area.

And geographically, it's difficult to discern?

Yeah. Geographically it's hard to discern. It really tends to be more product-oriented than geographic oriented.

Chuck, congratulations on the Sprint announcement. I wondered if you might provide some detail on that when you start shifting lengths, possibility for extension, et cetera, major competition.

It's -- I think we estimated about $10 million is the contract. We do not have a detailed schedule, but we believe -- there have been no shipments to date, but we believe we'll be shipping about 300 K or so in the current quarter against that contract. But, I think that thing is just -- the visibility on that is just unrolling on that right now.

The predominant winner of that -- just to throw a, you know - make sure you're objective about that deal -- was . We were the minority winner on that thing.

But, interestingly enough, we both beat out people who have been generally strong in the U.S. to get that.

Again, congratulations.

Thanks.

Lastly, I wasn't sure if I heard -- Chuck, did you comment that the sales through the quarter were more linear now?

Yes.

What's driving that? And is there gonna be a natural benefit on your accounts receivable just because of that?

Well, there already has been a benefit on our DSOs and our inventory utilizations, and so on. That's been a prime goal of the company to get -- that's traditionally what we used to do. We'd be pretty linear on our output. So, it was getting partly discipline back in. But, this is also a natural result of this demand management system that we have in the company right now.

Basically, our production organization and supply chain have much deeper visibility into the customer network very early on as the opportunity develops. So, it's easier for them to plan the output for the quarter and be more accurate about it.

So, that's a role. It's a necessary element in our improvement program, and it's been progressive over the last three quarters or so.

OK. Thanks. Good luck.

OK. Thanks.

Next we'll go to or Morgan Stanley.

Hey, you guys. This is for .

I just had a couple of quick questions. You touched on this earlier, but we've also been hearing from some other competitors that there is some strength out of Africa, and I was wondering if you could comment on the pricing scenario, because, obviously, the revenues are up there. And in addition, you know, MTI just reported their third quarter results, and they stated that radio sales were up, I think about 15 percent sequentially thanks primarily to the ramp up of the ODU shipments to you guys. So I was wondering if you could just provide some more color on that relationship going forward in terms of units you'll be getting from them, higher or lower and likely the SP's that you'll see fiscal third quarter, fourth quarter? Thanks.

Well the second question is much easier to answer than the first one. Their volume will be going up, at least to us, because we didn't complete - we didn't have everything outsourced with them during Q2 and in the current quarter essentially everything will be outsourced that was planned.

So almost all the XP4 and , and since our volume is relatively flat for the quarter and since we see a buildup in volume in Q4 I would expect their business with us should ramp up during the current quarter.

With regard to Africa, the pricing in Africa has tended to be a little bit above average for the world market. I think recognizing the difficulty of doing business there and money risks and things like that.

OK. And just on that first part. So you anticipate higher volumes in the current quarter and also into the fiscal fourth?

I said for MTI, business with us would be higher. We said that our actual revenue that we're projecting right now is between 47 and 50 for Q3 and then higher volume in Q4. So since they have to prepare for Q4 certainly in the latter part of Q3 in terms of their bill schedule, I would expect them to have a pretty heavy load in Q3.

OK. Thanks a log.

OK.

Moving on to of Deutsche Bank.

Hi guys. Sounds like MTI is your outsource for your XP4 radio then, your primary outsource partner?

That's correct.

OK. Was there any impact on your gross margin from previous write-downs of inventory in the quarter?

No.

OK. Good. And then, China, any comments on how business trends are in China and then something also for Carl. Could you kind of walk us through what a break-even scenario would look like in terms of revenues, gross margins, operating expenses, kind of? What would get you to a break even numbers in that area? Thanks.

China is still weak. Signs are that we should see some increase in China in next quarter in Q4. The inventory of equipment there has come down dramatically though over the last few quarters, so end user demand I think is picking up a little bit there. So I expect we're going to start seeing that soon.

Any view on next year in China in terms of getting any ideas what the budgetary process is looking like over there in terms of what they're planning to spend?

No.

As far as the model goes, we said we would break even is slightly around 55 million, a little bit less than that. You know, we said our operating expense this quarter are 16.6 million, we're expecting those are going to come down over the next two quarters.

Last quarter they came down a million and half and we said it wouldn't come down quite that much. So I think as far as putting together a model, you know, you can fill in the rest of the details yourself.

... gross margins?

... We're saying gross margins to get to break even we need to be in the, you know, 25 to 30 percent range in gross margins.

Thanks.

We're expecting margins to go up, certainly in the balance of the year.

And is that driven by some of these outsourcing, giving you revenues are going to flat it really just driven by some of the restructuring you've done here in cost eliminating.

Right.

It's continuing cost reductions, partly to outsourcing, partly through reducing our own costs that are attributable to cost of goods sold and finally there is some product design cost reductions in progress as well.

How much are those benefit from product design cost reductions?

Nothing appreciable in Q3 and Q4. Those really start to hit in Q1 of next year, so two quarters out? So it would be premature to give you - to try to talk about that.

But is that one where you talk about getting towards, you know, getting up into the 30's again on your gross margin? Is that a big key to it or is it ...

That's an important part in the short term and, you know, that's not a - that's a very clear path. We know exactly what we have to do there and it's underway right now.

You know, again, obviously the goal is not just to get to profitability but to sustain it and grow it. So we obviously have some other things going on to give us some assurance there and that's one of them.

This may be a redundant question because you kind of talked about some of this. But could you walk us through that path Chuck.

I think it's a little premature to do that.

Thank you.

OK.

Mr. Mottles was there anything further?

No. Thank you.

Thank you. We'll move on now to of CSFB.

Actually this is calling in for . Just a quick question on sales, direct sales. You had said 85 - I think you said 85 percent year to date sales were direct.

You had planned on 20 - 15 to 20 additional buyers this year?

Yes.

Can you talk about the target mix between direct and indirect sales? And even if it was possible if you could break that out by region. Because, you know, you're going with a solutions systems. Just wondering how you can, you know, look at this through that strategy with an indirect sales channel.

Can you just talk to that a bit? Thank you.

Yes. There's no - sales to for private network in the U.S. is really the target of ours and that's not an appreciatable amount yet. If that is successful and it's not just about signing up , it's also about providing with a set of solutions that will appeal to private networks.

Which is obviously one reason why we're introducing a new line of products this quarter in the unlicensed . That will cause the indirect portion, obviously, to grow but I think next year if it's successful we'll wind up doing 20 percent indirect versus 15 percent. Just because of the bulk of the business we have outside the United States.

Right.

We do partner with people, obviously, around the world. We don't carry the fixed cost to do all this network design implementation in every country, but the transaction still goes direct. And that's why it shows up that way.

OK. Great. Thank you.

OK.

Next we have of Sanders Morris Harris.

Good afternoon gentlemen. A few more questions. As far as your outsourcing, how many production lines do you expect to have left in San Jose for XB4 and after you're done with your transition?

Well we said we'd have one product line for XB4 but we'll have one for new product development, so it will be one to two production lines.

So it would be ...

Maybe another half, but right in that range.

So none for ? Oh, would be done by ?

That's correct.

OK. And also, as far as , did you ship any units this past quarter or - but in your mix?

We shipped a few units. It was a very low number.

OK. What do you expect this for the next couple of quarters? Do you think that's going to pick up?

Yes. It will pick up. That was production limited.

OK. And also the seven million that you took off from your backlog, what kind of products were that order?

Offhand I don't know the answer to that. This was an order we recorded over a year ago that now looks unlikely to ship in the next 12 months, but I don't know what the breakdown ...

Is it like a low capacity or a higher capacity product?

I just don't remember off hand.

OK. And then one last question. As far as your 10 percent customers, how many 10 percent customers did you have?

For this quarter, I think we had the usual number of on the revenue side, three of our customers were at 10 percent range for the current quarter. Not necessarily for the cumulative and about the same on the order side.

Great. Thank you.

Next we have of BBM Technologies.

Hi. I wonder if you could tell me what kind of effect you might expect to see on your business as a result of an Iraq war, if that happens to occur?

We haven't modeled that scenario.

You wouldn't see...

We obviously think about disruptions in the world. Lots of them.

Right.

I don't - we don't see anything immediate because the partners we have would probably like to maintain business relationships with us even if they're in the Middle East. But no model that we have - because we're not doing business in Iraq, obviously.

No model that we have is effected by that. I think it really depends on what happens to world sentiment, if it gets really aligned one way or the other. So it's beyond our ability to model. But we think we're pretty well protected in terms of the relationships that we have.

OK. Thank you very much.

OK

And our last question comes from of Wells Fargo Securities.

Gentlemen, nice job on the quarter.

Thanks.

Chuck, when you look out to that March time frame and you talk about these large contracts. Can you give us sort of a breakdown on the product mix do you think would be involved with them?

Hang on just a second.

Yes, , that's just the typical suspects. It's a cross section of XP4, and DXR. They're - you can pretty well look at the mix we have right now that Carl gave you on the revenue and that's what a typical network looks like.

OK. Just curious to see if you're noticing greater demand for a six 11 versus a 155?

No. I think we're seeing more demand for the 155 in relation to the total than we have for the XP4 recently, which is why you see the business picking up right now.

But we just don't see a whole lot of demand, actually, for 300 megabit yet let alone six 11.

So what sort of capacities are you working into your new on license product? I mean are you looking at taking those to maybe a point to multipoint solution or strictly a point to point?

It's strictly point-to-point. It's, again, this is for the low end where people might not want to start out with a license. It's one, two, four, T1's or E1's and a 10 base .

And is that what you plan to work through your newly developed bar channel in North America or are you targeting overseas markets as well?

It's both but the initial introduction is for the U.S. Market.

And are you interested at all about unity or are you just going to kind of keep it cloak and dagger?

We will give you a clue, step by step but not any more this quarter.

That's it, huh?

Yes.

It's big, though.

OK. Well. All righty. I guess I'll stay tuned.

All right.

Thanks very much.

OK.

OK. Well that brings us to the close. This is Chuck Kissner, I just wanted to say to all of you, we appreciate your interest in Stratex Networks and our progress is all of us, I guess, working together to meet the challenges of the market today.

I know we're looking for opportunities and we're seizing on them and intending to profit from them and I know you are as well. So, thank you and have a good evening.

That does conclude today's conference call. Thank you for your participation.