Aviat Networks Inc (AVNW) 2004 Q2 法說會逐字稿

My name is Saihana. And I will be your conference facilitator. At this time, I would like to welcome everyone to the Stratex Networks' Second Quarter Fiscal Year 2004 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press "*" then the number "1" on your telephone keypad. If you would like to withdraw your question, press "*" then the number "2" on your telephone keypad. At this time, I would like to turn the call over to Mr. Carl Thomsen, Chief Financial Officer. You may begin, sir.

Thank you. And thank you all for joining Stratex Networks today as we discuss the financial results for the second quarter of fiscal year 2004. Chuck Kissner, our Chairman and Chief Executive Officer and I will review the results of the most recent quarter, as well as, our outlook and that will be followed by a Q&A session. During this conference call, we may make forward looking statements regarding our business and the wireless industry in general including statements related to our market position, future revenues, margins, operating expenses, net income and loss, balance sheet improvements, DSOs and inventory turns, backlog, foreign taxes, anticipated introduction performance and market acceptance and the financial impact of new products, in particular the Eclipse products, as well as revenue generated from the license exempt products, our projected breakeven and profitability and future results of operation and cash usage.

It's important to know 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 risk of increased competition, continued or further tightening of global capital markets for telecommunications and mobile cellular projects and economic and political instability in the Middle East and other markets in which we compete or in which our products are manufactured. For a further discussion of these risks as well as risks related to our business in general, we refer you to the disclosures under the heading, "Factors That May Affect Future Financial Results" in our quarterly report on Form 10-K for the fiscal quarter ended June 30th 2003 filed with the Securities and Exchange Commission on August 13th 2003, as well as disclosures contained in our other SEC filings.

The press release has been furnished to the SEC as part of the Form 8-K, and we'll make this information and the webcast replay of this presentation available on the investor page of our website for a 12 month period. In addition, please note that the date of this conference call is October 22nd 2003. Any forward-looking statements that we make today are based on assumptions that we believe to be reasonable as of this date. We undertake no obligation to update these statements as a result of future events. Lastly, this conference call is the property of Stratex Networks. Any recording, reproduction or re-broadcast of this conference call without our express permission is strictly prohibited. Let me go over the quarterly results.

First, a brief summary. Revenue for the quarter was 36.9 million. It was at the low end of the guidance we gave at the beginning of the quarter, which was 37 to 45 million. Orders for the quarter at 44.5 million were in line or slightly above our expectations and reflect good order activity and some momentum. Delivery schedule, of course, for these orders is spread out over future quarters. Reported loss of 8 cents a share in the second quarter of fiscal 2004 was also at the low end of the range of a loss of 4 to 8 cents that we gave as guidance at the beginning of the quarter. While expenses were in line with our internal forecast and continued to decline compared to prior quarters, margins were below expectations due to continued pricing pressure and the mix of products shipped during the quarter.

Backlog, we believe, is beginning to build and ended the quarter at 45.5 million. This is the first quarter in over two years that we have a seen quarter on quarter increase in ending backlog. I believe this reflects our aggressive market positioning, as well as the growing interest in the new Eclipse product line. Over 2 million of backlog is specifically related to Eclipse and one case which represents about 50% of the backlog, the customer will take either current product or Eclipses depending on the final installation schedule and will shift the Eclipses available or current product to meet the customers' needs.

Let me review some of the specific financial results for the quarter. First, on the order side, as I said, we had 44.5 million in orders. The breakdown by geographic area -- 2.9 million, and that's North America; 6.7 million, South America; Europe, Middle East and Africa is 23.1 million; Asia Pacific is 11.8 million -- for the total for 44.5. By product breakdown: with capacity products, primarily, XP4 is 13.7 million; LPM, high capacity products, 13.2 million; our DXR product family is 9.1; new Eclipse product, orders were 2.8 million; and orders related to services were 6.7 million -- for the total of 45.5.

Overall order bookings were up 6% compared to the first quarter. More importantly, new orders for products were up 22%. The orders in all regions, except the Americas, improved sequentially. As I mentioned, we received our first Eclipse orders; and we believe about 8 million of the total orders were directly impacted by future availability of Eclipse. Given the fact that we expect to be shipping Eclipse early in next calendar year, we focused on winning certain projects and bid our current products very aggressively to maintain or establish our market position in anticipation of the Eclipse rollout. While we believe this is the right approach and will benefit Stratex long-term, this aggressive pricing had a negative impact on margins in the second quarter and will significantly impact margins in the third quarter. Order activity is improving and will significantly impact margins in the third quarter.

Order activity is improving, and interest in new Eclipse product has exceeded our expectations; however, the next several quarters will be impacted by this decision to win business to position us for the Eclipse rollout as well as by the continued severe pricing pressure that we have experienced in the markets. Chuck will describe, in more detail, the market reaction to the Eclipse product line, which we introduced last quarter.

On the revenue side, by geographic area: North America was 1.4 million; South America, 3.9; Europe, Middle East and Africa was 25.1 million; and Asia Pacific was 6 million -- total revenue was 36.9. Broken down by product line: the XP4 mid-capacity products are 11.6 million, Alchem was 13.5, DXR product family was 5.1, and services were 6.7. The 36.9 million in total revenue in the second quarter of fiscal 2004, as I mentioned, is at the low end of the guidance we gave at the beginning of the quarter. As I stated in the last conference call, it's difficult to provide a forecast to the limited visibility; and that proved to be a true statement.

We continue to believe it is beneficial to provide our investors and the analysts who follow the company with information as to the near-term outlook of our business; however, as more of our shipments are related to orders received during the quarter and as a significant amount of revenue is derived from lesser developed countries -- where we require LC's, deposits prior to shipment -- it's clearly has become more difficult to forecast specific quarterly results. Also due to the significance of large key orders during any quarter, revenue can be impacted due to a variety of factors that change during the quarter. Part of the revenue shortfall in Q2, we also believe, is due to customers delaying orders, as we tend to introduce Eclipse.

On the gross margin line, we -- the gross margins declined by 19 or declined to 19.2% in the second quarter as compared to 22.4% in the first quarter of fiscal '04 and 24.2% in the second quarter of last fiscal year. Margin decline is primarily due to the aggressive pricing on several orders, which I discussed. We expect to see margin declines this fiscal year, as we've discussed in prior quarter, due to pricing competition; however, the declines have been greater than we expected. More importantly, we have priced several major proposals very aggressively to build momentum for the Eclipse rollout next year. This pricing strategy negatively impacted total margins by about 2 percentage points in the second quarter. We're expecting continued declines in margins for the remainder of the fiscal year; and I'll discuss that little more in a few minutes, when I give the outlook for the third and fourth quarters.

The operating expense side. Operating expenses were 3.9 million in the second quarter, about the same as the first quarter and up from 3.5 million in the second quarter of last fiscal year. As I'd indicated in last quarter's call, we expect that engineering expenses be about the same or increase slightly during the quarter and for the remaining of the fiscal year, as we focus on the introduction of new Eclipse products. Total operating expenses have been reduced in the past twelve months. We've decided to increase R&D due to our confidence with the impact this new product will have on our total company results in the future. Selling, general and administrative expenses were 9.9 million in the second quarter compared to 10.4 million in the first quarter and compared to 13.2 million in the same quarter, last year; just about a 25% decrease in this category over the past 12 months.

Interest and other income or expense, there was a net income of 0.1 million or $100,000 in the second quarter, about the same as in the first quarter. We did record income tax expense of about 300,000 in the second quarter of fiscal '04 due to profits in foreign subsidiaries, and as we indicated, was likely in last quarter's conference call. Due to the number of foreign subsidiaries, the company has [we] will likely show a tax expense for future quarters as well. Net loss in the quarter was 7 million or 8 cents a share due to the lower sales and lower margins. On the balance sheet side, cash declined by 9.8 million to 75 million during the second quarter, due to losses reported as well as payment of the legal settlement related to the Sealag bankruptcy trustee claim , which was discussed in the prior quarters conference calls.

Accounts receivables, they increased slightly by 3.3 million to 28.9 million at the end of the second quarter. And DSOs were 71 days, compared to 64 days at the end of the first quarter. DSOs increased due to the shipments being skewed to the last month of the quarter. I expect DSOs will be about the same next quarter, however to [inaudible] the position the company and certain key markets we have granted extended terms to several customers. This will result in an increase in longer-term receivables in future quarters and will somewhat negatively impact cash balances.

Inventory decreased by 1.2 million during the quarter to 20.3 million and inventory turns improved 5.7 compared to 5.5 at the end of the first quarter. As we introduced the new Eclipse product line and also continued shipping the current products, expect inventory balances to increase 5% to 10% from the current levels over the next several quarters. Total liabilities in the quarter decreased about $400,000 compared to the end of the first quarter. And of course, we continue to operate with no long-term or short-term debt. So, there was our major subsequent events. As previously announced in October, we acquired the Plessey broadband wireless division of Telemet in South Africa. Plessey has a license exempt microwave radio product, which will expand our product portfolio. We paid $3m in cash and $3 million in stock for the assets and operations of this division.

Plessey has a dedicated team of approximately 55 employees located primarily in South Africa. We believe this product's offering will expand our market presence, our overall product offering, and our service to available market. We believe our worldwide sales and service organization will provide Plessey with increased market opportunities, increased visibility, and increased creditability in the markets we serve. We expect this product line, initially, will add $1 million to $2 million of revenue per quarter, and we'll be breakeven overall.

We're expecting this revenue level will increase next year as they introduce several new products and expand their channels. I'd like to talk a little bit about the forecast for the third quarter and beyond. Of course, forecasting continues to be a challenge, while the proposal or order pipeline remains good and backlog is increasing, predicting when new orders will actually ship or when they will be booked and when specific deliveries will be scheduled, is an ongoing challenge. As mentioned earlier in the call, we have aggressively priced several key orders in order to position Stratex with these customers for the Plessey product.

Aggressive pricing for major network will significantly impact margins in the third quarter and likely in the fourth quarter as well. As a result of this pricing and more importantly certain market positioning actions, we're expecting margins in the third quarter to be in the range to 10% to 11% substantially below current levels. As Eclipse product phases into production in the fourth quarter and throughout fiscal year'05, we're anticipating the margins in overall financial results will steadily improve. At this point we believe, the revenue in the third quarter will be in the range to 36 million to 41 million based on the Q2 orders levels and current backlog and expected new orders in the third quarter.

While it's difficult to project out beyond the current quarter, based on the order pipeline and customer interest in Eclipse, we are now projecting one additional quarter. We believe the fourth quarter revenues will be in the range of 40 million to 44 million. And we'll continue to grow from that bases to compete Eclipse product [indiscernible] into full production. Chuck will discuss the impact we're anticipating from the new Eclipse product and the benefits our customers will derive from this product platform. One major customer we have will switch to Eclipse product in place of their current quarter [indiscernible] HP4, VXR products as soon as the Eclipse is available.

As an example, the expected impact that Eclipse will have on gross margins, as we calculated one large recent order received using existing products and using the projected costs and prices for the Eclipse product. In this particular case, gross margins would have improved in excess of 25 percentage points, as we were currently shipping Eclipse in production volume. As Chuck will describe in more detail, this improvement in margins and large products comes from the functions built into Eclipse that currently have to be separately purchased to complete the network connections.

And we currently have been to Network Systems, we have to purchase the additional products such as cross connect panels, which are no longer required for comparable Eclipse implementation. While the actual improvement, we realize, will vary depending on the network configuration, we do believe there will be a significant margin improvement when Eclipse is in standard production. This effect, however, of shipping current products into a network, which we believe will ultimately use Eclipse, is a significant reason for the projected short-term decline in gross margins.

Operating expenses are projected to increase about $1 million in the third quarter, mainly due to the additional of Plessey operating expenses in South Africa. As a result, we expect net loss for the third quarter, and the one that we're currently in of about 12 cents to 15 cents per share. And we expect that will narrow to 8 to 12 cent loss in the fourth quarter. As Eclipse ramps in fiscal year' 05, we would expect to break even in the latter half of next fiscal year. Our primary objective at this point is the successful introduction and launch of the new Eclipse product line. Of course, we will continue our focus on asset management to maintain our balance, including DSOs of 70 to 75 days and inventory turns of 5.5 to 6. Due to the expected losses in cash payment related to the acquisition of Plessey Broadband, the initial build up of the Eclipse inventory, as well as some vendor financing to promote Eclipse opportunities and forecasting the decline in cash in the third quarter to about $55 million to $ 60 million.

While we expect cash usage to continue this usage will decline after the initial introduction of Eclipse. We could use our credit facility to fund certain current working capital requirements but decided not to do this in the second quarter. However, as we increased inventory to support the Eclipse roll out and use some vendor financing to facilitate initial sales of Eclipse, we may utilize a portion of this credit facility in future quarters to maintain current cash levels. I'd 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. We've made obviously a number of steps here going forward in trying to transform the product line of the company and to better enable you to understand the current results as well as why we're projecting the financial results including the future. It's pretty important that you know what's happening with Eclipse. We've said this several times before, near term margins are going to before until Eclipse ramps, and so I'm going to cover Eclipse in some detail here. I'm going to do this by covering first what is Eclipse. The general availability is just around the corner now. So we're going to provide you some additional information that we have not been able to provide you before. Secondly, we'll talk about the progress of the rollout and third, I'm going to give you some flavor, sort of reaction that customers are giving us now to Eclipse. I'll do this by covering three main points.

First Eclipse is not directly compatible to make any radios, even those that have just come near the market now. It does represent a quarter of the market segment. Secondly, besides this well known pricing pressure in today's market, certain action we've taken to accelerate the market introduction for Eclipse, this is further depressing the short-term gross margins. And third, we do believe strongly that the actions we're taking in the short term will create a much larger pay off in the coming year. Our first -- what Eclipse is, we discussed previously on a couple of calls, some of the attributes of Eclipse, for example, it's wide range of frequencies and capacities, it's ability to provide multiple radio interfaces, and the software upgradeability. We did position it externally during the development phase of the microwave radio with extended capabilities.

Since we've traditionally, obviously been a microwave radio supplier and also for some competitive reasons, we felt that this initial positioning was a reasonable approach. But actually, Eclipse is quite radically different than anything before. And we do believe customers are ready for a different kind of approach. That's probably because of economic pressure and probably because of increasing complexities that's causing the need to integrate a number of network capabilities. And as of now, we now feel much more strongly that customer acceptance will be very hard to approach based on recent activity.

With Eclipse, what we've done is we've integrated many of the functions that previously were separately used to provide a complete network transmission system. In other words, it's not actually [a microwave] radio. The heart of Eclipse is not a microwave radio but a node processor. This processor controls a number of functions including driving, multiplexing, cross connection, quality of servers and transmission bandwidth and speed. This node, which is called the intelligent node unit is located at strategic conversion points in the network. It supports many kinds of interfaces, including a complete complement of software-controlled radio interfaces with initial data rates from 8 megabits to over 300 megabits time division multiplex, plus fast Ethernet and gigabit Ethernet. It works with voice networks, data networks and mixed mode networks. The node supports multiple transmission paths, both wireless and wired.

The wireless transmission paths are provided by Eclipse radio units or if desired, can be completed to handle traffic from other microwave radios including those of our competitors; as an example of an application of mobile carrier microwaves to back haul second generation mobile voice, 3G voice and data, and wireless land traffic from a particular node in this network. And with Eclipse, this is possible in one intelligent node unit. As a network node processor, Eclipse eliminates the need for a number of other products that are normally required for network implementation, which are purchased separately as Carl indicated on one of the bids that we won. These other outside purchased items if you add the multiplexers, patch panels, patch cables, separate microwave radio, indoor units, routers, and gross multiplexers.

For example, in data networks, Eclipse now eliminates the need for something called the ML TTT, which is the multi link protocol in data routers that are connected to time division multiplex networks; for example, a functionality that would be added on to a Cisco router implementation for multiple E1 interface. And what this enables is increased traffic throughput on the routers and a lowered cost for the router itself. For Ethernet network, it offers its own QOS or Quality of Service capability by providing multiple levels of service - up to four levels of service with a software prioritization of packets that's built into our node processor. In a typical network compare to the current approaches the Eclipse family of products would provide mobile wireless, fixed wireless and data network customers about 10% to 30% reduction in initial Capital Expenditure.

On an annual basis the cost savings results in more significant returns. For example, one of the bookings that we achieved this quarter for a combination of current products in Eclipse is made after comparisons were done between the old way of using microwave radios versus using Eclipse. The analysis showed this mobile network customer about 16% initial Capital Expenditure savings and an ongoing combination of CAPEX and OPEX reduction of around 70% per year. In addition to enhancing our customer's financials our own financial performance on Eclipse is expected to be significantly better than existing products and it will take us to our target financial model of 35% to 38% gross margins and the transition to Eclipse is essentially complete.

As we do transition to Eclipse, we are bidding some complete network implementations. As Carl pointed out, one of the large jobs we took in Q2 was a combination of current products and Eclipse. This was a strategic win due to the large deployment of Eclipse. It uses Eclipse pricing which includes the functions of a number of other non-microwave radio products. When shipping our current products we have to use other people's products to provide the complete Eclipse functionality. As we transition, the Eclipse margins are expected to be about 25 to 35 points higher in the combination of current products included in this contract. Let me talk about the progress of the rollout.

Earlier this year, we projected revenue for Eclipse on our March quarter, our Q4 quarter. Based on our progress in the last quarter, we're confident we will meet or exceed this goal. As a platform it's the rapid rollout of features over the following quarters of the next fiscal year. Eclipse is now in pilot production. We expect the first set of data trials to complete this quarter. There are a large number of other trials scheduled beyond this due to extensive new products that we're rolling out through software. Right now we have a total of 39 trials anticipated. Of those about 60% or 23 trials have been confirmed and are committed to customers. These include mobile customers, data customers and standard carrier customers.

There are three of these are in North America, there are several tier one carriers around the world that are committed to trials of Eclipse. In addition to the core hardware and software, we completed initial production release of two other related new systems. We released something called the Eclipse license management system. This is a system that's required to manage the license management for both the initial and the subsequent billable software modules for upgrades. Unlike previous products, Eclipse customers can purchase software upgrades for capability management and for feature additions. The Eclipse license management system tracks hardware serial numbers, which are used to validate the licenses. License management system issues license keys upon purchase and validation and that's done electronically.

Secondly, the Eclipse network configuration tool was released in Q2 because Eclipse is actually a configurable network system, it can be optimized for specific customer networks. This tool is a major undertaking which designs a complete network transmission system. We also developed a tool that compares the standard microwave radio approach with an optimized Eclipse network and it calculates the comparative CAPEX and lifecycle for us. This tool is now been used on several real networks and has been important to rapid customer acceptance that we began to see during the last quarter. And finally, we've made some good progress on a very significant update to our Pro-Vision network management systems that accommodate the extensive new capabilities of Eclipse.

Our customer reaction to Eclipse, at this point it's a good new story for the most part, but it has some bad news as well. I think we have underestimated the positive responses but actually, we have been concerned that this radical change in Eclipse in terms of functionality might take a while to be well understood. But for the most part, customers seem to get it pretty fast. Is does depend on what kind of network they, but the more complex the network the more compelling the proposition. We have had some cases of customers wanting to wait for Eclipse since it's reasonably close, and that's affecting the short-term results even more than we'd anticipated. And that hits us both in revenue delays and in pricing on our usual products.

However, we are booking Eclipse somewhat earlier than we had thought as well. That also has allowed us to bring some business with a mix of current products in Eclipse, the Eclipse being the key driver. At the close of Q2, as Carl reported, we recorded more than $2 million of Eclipse backlog. That number actually could be as high as 5 million if the customers will accept either current product or Eclipse. But we've estimated the Eclipse backlog based on our current rollout schedule. The Eclipse applications we have in backlog right now include a pure data network and that's a complete transition system for a wireless IT network, a Mobil transmission network and a defense application.

We're currently looking on near-term opportunities, specific opportunities in the short term in a range of $30 million to $60 million. Those have broken down 83% for fix in Mobil wireless and 27% after data. Opportunities are being worked, include both tier I and tier II operators. Carl mentioned, backlog is growing again, and we expect the trends of outline growth again. Projected financial performance will continue to be poor in current products and then strengthen as Eclipse builds from nothing. Now, as a result of the stronger interest in Eclipse than anticipated, we are reviewing our roll out plans in order to determine whether we will make the additional investments to accelerate certain capabilities. We have also determined, based on customer input that we are going to take Eclipse into another market that we do not currently serve at all. The combination of the new future rollouts and the new market entries are expected to double or serve the available market by the end of the next fiscal year.

Now, let me summarize all this stuff. And then, we can move to the Q&A. Three main points; one, besides the well known pricing pressure in today's market, certain actions that we've deliberately taken to build backlog for a push, this further depressing short-term gross margin. Secondly, Eclipse is not directly comparable to microwave radios, even those just coming into the market. Those represented a larger market segment. And third, we believe the actions were taken in the short term will create a larger payoff in the coming year. While the current results do continue to be poor, it's apparent that overall all market activities between this increased activity and this very positive reaction to Eclipse from our customers, we are confident that we'll begin to see top line growth first and then, improving financial results as Eclipse comes in with more significant portion of the revenue. At this point, we will open the call up to questions.

At this time, if you would like to ask a question, please press '*" then the number "1" on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. The first question comes from Dale Pfau of CIBC World Market.

Good afternoon, gentleman.

Good afternoon, Dale.

Couple of quick questions to clarify things for me. You say the improvement in gross margins on the Eclipse is but 20 to 25 points over current products. Is that relative to this 10% to 11% margin that we're going to see in the December quarter, or was it relative to the 20% margin that we saw in the September quarter?

I would say at this point, it's probably somewhere in between those two.

Okay. That's fine. And you said we could start to see revenues from Eclipse in the March quarter, is that right, Chuck?

Yes. We are confident that we will have it.

And could we see as much as 10% of revenue in the March quarter being Eclipse?

It's possible.

It's possible. Yes.

Possible. Then how rapidly do you think you can ramp that product after that -- those initial shipments. In other words, how many quarters before we see the Eclipse being more than 50% of your radio revenue?

That will be the second half for the year.

That will be second half of next calendar year?

Right.

Okay. And...

It's probably the most -- I think the way we are projecting that roll-out right now, realizing again this is not like a net [microwave radio]. I think it's going to turn out, probably it will be the most rapid ramp up that we've ever seen.

And manufacturing of radios, is that all going to be outsourced, Chuck?

Yes.

And the RF front-end portion, I assume is there's a fair amount of backend but the front-end portion, have you already selected your suppliers for that?

Yes.

And are they beginning -- have you qualified them already?

Yes. Building front-end kind of -- we're building the product.

That is pilot -- it's in pilot production.

And you mentioned a brand new market for this product next year. And, help me out a little bit here, brand new marketing you're talking in geographic market, or you are talking a...?

Application.

An application. And end market that you have not traditionally addressed?

Yes. That's correct.

This will be something somewhere to a point to multipoint market?

We rather not get into it, because it's not going to be released in the next two quarters. And we prefer to get more specific as time goes on. But it's not for a fuel. We know how to serve a market. We have in the past, served occasionally by reselling other people's products. We are so much familiar with that.

Okay.

[You] will complement what we do.

Next question, let's talk about the current environment. In the last quarter I think, we saw some sort of slight uptick in demand it was difficult to know whether that was because of interest in Eclipse or overall market. Is there an uptick in terms of number of units exing out the pricing pressures we were seeing? Is there an uptick in total demand in the market right now?

I would say a little bit, you know, and I think in our case, I would describe the dynamic this way. We are grabbing more business because of Eclipse, but we also have some delays in bookings because of Eclipse. The people are waiting to look for business when we noticed they were shipping in volume. So those two, kind of, met each other out right now. And so I'd see there's some general uptick in demand and that's kind of what we are seeing here right now.

And is it possible with your Eclipse product that and certainly you're guiding for it that we avoid some of the normal seasonality that we normally see in the first calendar quarter?

Yes. I think it was -- because some of the places we are selling right now, we've got some offsets going on during that period. We've originally had slower sales in the Northern hemisphere because of the weather. We're shipping and also implementing in cold weather and we are doing a lot of business in the Southern Hemisphere right now. So I suspect as far as the revenue, not orders necessarily for just [indiscernible] as far as revenue, we expect relatively smooth really from the top line.

Great. Okay. Thanks gentlemen.

Dale. I want to come back to your earlier comment about the ramp of Eclipse in the margin delta. The margin delta improvement is when Eclipse is in full production. So the first quarter or so we're still ramping up production and, of course, have higher initial factory cost sort of per shipments. So, we'll have -- once we get in the full production we'll get that one.

Your next question comes from Mike Walkley of RBC Capital Market.

Hi, gentlemen. It's Neil Charlotte for Michael Walkley.

Hi, Neil.

Just a few quick questions, just don't if they've been asked. I have a question about if you can talk about your major customers, your larger customers and your 10% plus customers this quarter?

On the revenue side, as we -- I said, we have one or two customers that are in excess of 10% and this quarter. As we've said in our last couple of quarters, our business stand in Nigeria is really this quarter is only 10% and somewhere business in Russia is in that 10 range. Those are the only two areas that we have only 10% revenue for the quarter.

All right. And in terms of -- you discussed pricing, pricing was significantly lower this quarter, was that more just in terms of to move product or did you also see pricing pressure from competitors?

I don't think with pricing pressure -- I don't think there's much difference in this quarter. I think when we talk about pricing, we're rolling up number of other functions beside the microwave radio and that pricing is very aggressive from that point of view. Now, we price -- there has been some cases where we priced a deal as if it was an Eclipse deal, but we have to spend more money to deliver to the stuff that comes prior to Eclipse, because we're buying other people's product including those.

Yes. It could cost as more as your -- about several key accounts for other because they are important to us. We position there and so we've got very aggressive ourselves in pricing as to the competition. So that's rather than saying every quarter that we're getting is having the same type of pricing competition.

Okay. Thank you.

Your next question comes from Kevin Deedy of Merriman and Company.

Hey, guys.

Could you explain a little bit how you plan on implementing vendor financing and why you feel you need to do this if there is so much excitement out there?

Yes. It's not going to be a major program but all these are on selected accounts where we think it's, if you see, an extra thing to push it over the edge that there -- you know I think its strategic to rolling out our new product. So, it's on the margin. So, it won't do a huge amount but we're -- we've said during the beginning of the year or this week, looking at financing maybe $5m, maximum $10 million with the selected accounts during the year, and - nowhere near that right now but that where the range we might get to. So, we have set as our financial objectives that we need that to win selected accounts verus the competition but they may be offering. We made a move on to do that and we're projecting that will in fact happen.

Okay. Could you give us a rough idea on where you think your breakeven is now that you have Plessey on board, I understand that you're not expecting that until the second half next year but...?

I think that would be some point in Eclipse introduction. You know next year what will be the breakeven?

Yes.

Probably -- the later half of the year is probably in the $50 million range.

That plus it really doesn't impact that [indiscernible] market for us and we had some incremental revenue. You know it's better to make someone money [indiscernible] sort of product portfolio doesn't impact the breakeven this fall.

Do you, Carl, do you see any other restructuring efforts maybe on SGA side, to get your cost more in line with the mid 40 revenue line that you're expecting near term?

Really look at that, we don't have any current plans.

Okay. All right. Then can you just, sort of, give us an idea on where you think you'll be at the end of '04 in terms of Eclipse in your overall sales mix?

More than 50%. For '04?

You mean calendar '04 or fiscal '04?

Calendar '04 for now.

Yes. More than 50%.

More than 50 but less than 60 or...

That's a little far out [indiscernible] fine tune that.

The other thing I would say is the latter half of the year when Eclipse is of higher percentage the breakeven point would come down from what we talked about.

Obviously, because you are expecting margin improvements.

Right.

Okay. Thanks for now guys.

Your next question comes from Troy Garry of Oppenheimer.

Hi. Thank you. I just have one question at this point. It sounds like you're getting good traction on Eclipse in terms of initial customer interest. On the Harris call yesterday, they talked about their new true point solutions, which is due to start rolling out early next year I believe. And they also talked about it eventually replacing some of there constellation deployment competing in, I guess, the mid to higher capacity markets. Can you talk a little about in addition to the overview Chuck gave -- can you contrast Eclipse for me against True Point, specifically I guess and where you think you'll get traction there versus the new products from Harris? Thanks.

You know, all we had to work from is the public material of this that they havesent out and we've had a chance to review. So, there may be more information available than what we've seen. But from what we've seen, it looks like an excellent implementation of newer technology for microwave radios, and it does contain some of those things that Eclipse has of a microwave radio product. For example, the ability to upgrade capacity to software, and use the software to control the bandwidth on demand, probably have a lower manufacturing cost from the previous version of the product, and I am sure there's a number of other capabilities.

But I would -- just based on what we've seen I would see that as a good implementation of Point-to-Point Microwave Radio. I think one of things that we've tried to portray today is that the microwave radio functionality is just a future offered products. Its just part of us, so we're really talking about more of a networking system with Eclipse. I am sure that's going to be one of our struggles over time is just being a microwave radio company is to go through that transition. But again, we're pretty encouraged as to we're actually getting some customers about it.

Can you give me any sense of your customer overlap in terms of market overlap between the market for constellation and the potential market for Eclipse, you know, geographically in that capacity -- I'm sorry in that mid to higher capacity market. How much do you overlap with Harris?

I would say right now it's more of geographic break down. I think Harris is particularly strong in North America and we're quite weake in North America. And internationally, we're I think this is broad -- without getting into detail on each country [indiscernible] probably a much more important part of our business than it is to Harris.

So there is not a lot overlap?

No. Yes. But I think both companies have said they are going to work hard to get into the other territories. Obviously, some of the things we're doing are to position ourselves in North America while still building our strength in a lot of places around he world, and obviously, Harris, I'm sure is -- from what we heard on the calls, running after the international markets more strongly, which is probably some work we should did. But I think today that's not necessary to the company. You probably don't want to [run] against us somewhat often and we probably don't want up against them all that often either. We're probably not each other's hit list.

Okay. Thanks

Your next question comes from Boitech Dusalavich .

Hi good afternoon guys. This is actually George Iwanyc calling in for Boitech.

Hi. Just a two quick questions. Can you just comment status as to where exactly you're cash flow from operations and you're net cash flow were for the quarter? And you talked about kind a pick up in the activity. Is that just coming from you're general markets or can you kind of skip a little bit color where that uptick is coming from?

On the cash flow side, I mentioned that on the outlook for the third quarter we said we would - we ended second quarter was 75 million cash. We're expecting that could be in the $55 million to $60 million range for cash balances and in the third quarter because of the losses as well as the payment for the acquisition we had in the beginning of third quarter. We said that we continue to lose our used cash with losses that we [indiscernible] utilization would narrow going forward and would certainly narrow as Eclipse starts to roll out. We have a credit facility available that we haven't borrowed against - we'd consider borrowing against to maintain our cash balances if that were appropriate.

In terms of the market activity as I said before the market - the general market activity appears to be slightly - people are having to spend money to build these networks out because of various reasons from the networks that are probably more using up capacity in existing networks and that's the short term. The long term is if we look at the pipeline of specific opportunities we're working on right now is largely driven by Eclipse and that has dramatically multiplied the number of opportunities - situations that we're working on right now over the next two or three quarters. For that one I would have to say is truly because of Eclipse. One of the main pieces of evidence is that the number of new customers and number of Q1 new customers that have expressed interest in Eclipse and want to try it or buy it, has just skyrocketed for us. How much of that turns into real business we're not sure but given the normal funnel situation that thing is -- that's a very large dynamic in terms of a growing activity.

Do you [talk] on which geography these new customers or new potential customers are coming from?

Yes just a moment. Let me look at the specific list. Well, first of all in our traditional areas where we're doing well I'd say those obviously we have some great visibility on and those are the developing areas right now. So Africa and Southeast Asia and Russia are giving some very significant opportunities there - I think probably we are more interest - some of the interesting things here is that western Europe and North America are where we see the most number of new clients -- new potential clients that we're looking at across right now. So that would be where we'd see the greatest delta from the levels of the current business.

Thank you.

Your next question comes from Todd Allen of Kenny Securities.

Thanks [indiscernible]. I think most of my questions have been answered other than could you speak directly to the...?

Can you try to speak up Rod?

Can you hear me now?

Yes, that's much better.

I was hoping that you could speak to the outcome of the field trial that I presume has been ongoing since middle late summer with Eclipse.

They're supposed to complete this quarter I think and we're pretty confident they'll be successful. But again these - I'd say that field trials are in order -- it will be implementing or completing this quarter are microwave radio capability and the routing and the cross connect capability and the ability to upgrade to new software, are additional features that will roll out. These are -- those are very straight forward for us.

Okay. And what's the comment that you might be up to $5 million of Eclipse revenue in the December quarter?

March quarter. March quarter. All I say is that we have actually some of the large orders that are in backlog right now. Customers said we want Eclipse. We need to get this network implemented as quickly as possible. And we're actually building - we've designed and we're building the network for them. And so what they've said is we'd like to have Eclipse, but if you can't supply Eclipse then you can supply current products, which would include our product and other people's ancillary equipment that we would think this product would like to cross connect panels and add lot more connections and things like that.

So, it seems, I think the customer understands that's in our best financial interest to make as much of that Eclipse as possible. And so that's why there's a range in the backlog the way it's recorded at a little over $2 million. That represents a realistic rollout for the purposes of projecting financials. Well, if everything pulls our way, the number could be much higher than it was and we're free to provide that. Does that answer your question?

Yes. It does. One other question too. I know you have talked about the mixed capacity products coming under a great deal of pricing pressure from external competitors. How are margins holding up in the Altium high capacity? And could you speak to the other product lines in general?

Altium in probably doing -- is holding up clearly well. The long hold products are under some pressure. But that's mainly because of some very specific network implementations. It really does, I don't think there's a real general pricing pressure, it's just the way we had to use our product to build certain networks out. Tends to be a cross carrier implementation [indiscernible] that we would like. What I think in general I would say - the conclusion from that is the mid capacity is still the area that's under pressure. Nothing else dealing with the DSO.

Okay.

That's all I have. I answered all the questions before they have been asked. So thanks very much.

Okay.

At this time there are no further questions.

Okay. I just like to thank all of you for attending the second quarter conference call. And we look forward to find you on our next quarter conference call. We will be representing at the AEA conference in San Diego in early November.

Thank you ladies and gentlemen. Have a good evening.

Thank you for participating in today's Stratex Network Second Quarter Fiscal Year 2004 Conference Call. You may now disconnect.