Aviat Networks Inc (AVNW) 2004 Q3 法說會逐字稿

Good afternoon. My name is Derek, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Stratex Networks third-quarter fiscal-year 2004 conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

I will now turn the call over to Lisa Laukkanen, Director of Investor Relations. Thank you, ma'am. You may begin.

Thank you for joining Stratex Networks today to discuss financial results for the third quarter of fiscal year 2004. Chuck Kissner, Chairman and Chief Executive Officer, and Carl Thomsen, Chief Financial Officer, will review the results for the most recent quarter and our current business outlook, 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 relating to our market share; future revenues, margins, operating expenses and net income or loss; balance sheet improvements; DSOs and inventory turns; backlog; 2004 foreign taxes; anticipated introduction, performance, market acceptance and financial impact of new products, in particular the Eclipse products; revenue generated from license-exempt products; breakeven and profitability; and future results of operations and cash usage. It's 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 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 disclosure under the heading "Factors That May Affect Future Financial Results" in Form 10-Q for the fiscal quarter ended September 30th, 2003, filed with the Securities and Exchange Commission on November 13, 2003, as well as disclosures contained in our other SEC filings. A press release will be furnished to the SEC as part of the Form 8-K. We will make this information and a Webcast of this presentation available on the investor page for a two-week period.

In addition, please note that the date of this conference call is January 21st, 2004, and any forward-looking statements that we make today are based on assumptions 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, Inc., and any recording, reproduction or rebroadcast of this conference call, without the express written permission of Stratex Networks, is strictly prohibited.

And now, with that out of the way, I would like turn the call over to Carl Thomsen, Chief Financial Officer.

Thank you, Lisa, and welcome to everyone that's listening to this call, our third-quarter fiscal-year '04 conference call. Let me start by saying that, while we are never happy reporting a loss for a quarter, there are quite a few positives for the Company since our last conference call. A loss of 12 cents per share for the third quarter was the high end of the guidance of a loss of 12 to 15 cents per share that we gave at the beginning of the quarter. Revenue, at 40.3 million, was also at the high end of the guidance that we gave at the beginning of the quarter, which was 36 to 41 million. Orders for the quarter, at 50.4 million, were above our internal expectations, and reflected solid order activity and customer confidence in our product strategy. Also, during the quarter, we completed the acquisition of the Plessey Broadband Wireless operation, which expands our product offering into the license-exempt area. The integration of this operation, which is located in Cape Town, South Africa, is going well. Excluding the accounting impact of the amortization of intangibles, this operation was essentially breakeven in the first quarter of the acquisition.

Backlog continued to build, and at the end of the quarter was at 52 million. This is the second quarter that we have seen quarter-on-quarter increases in ending backlog, and reflects the order pipeline momentum that we discussed on the past couple quarter conference calls.

Let the review some of the financial areas. On the order side, by geographic area, the Americas -- North America was 2.4 million of orders, South America 5.7, for a total of 8.1 in the Americas. Europe, Middle East and Africa was 31.6 million, and Asia-Pacific was 10.7 million, total orders of 50.4. By product line, our mid-capacity products, including XP4, DART and the new unlicensed or license-exempt products, were 19.9 million. The Eclipse product line, our newest product, was 4.5 million. Altium was 10.6 million in orders. Our DXR product line was 6.4 million, and services totaled 8.9 million. Overall order bookings were up 13 percent, compared to the second quarter, and represent the third consecutive quarter of increased orders. As a reference point, orders were up 25 percent over the fourth quarter of last fiscal year. We continue to receive Eclipse orders, and now have over $7 million in backlog for this new product. On the revenue side, our mid-capacity products and XP4 and our license-exempt products, 18.1 million. Altium product family was 10 million, DXRs 4.6 million, and services totaled 7.6 million, for a total revenue of 40.3. By geographic area, the Americas were 7 million, Europe, Middle East and Africa 23.8 million, Asia-Pacific 9.5 million, for a total of 40.3.

Revenue, at 40.3 million in fiscal third quarter of 2004, as mentioned, is at the high end of the guidance we gave at the beginning of the quarter. This was due to the solid bookings during the quarter, as about 50 percent of the third quarter's product revenue was derived from orders that we received during the quarter.

Gross margins for the quarter were 15.2 percent -- although lower than second quarter, were better than I gave as guidance at the beginning of the quarter, as we had a more favorable mix of products and customers. Based on the relative price instability we have seen recently, we are expecting margin percent to be about the same in the fourth quarter as in the third quarter, and begin to improve in the first quarter of fiscal year 2005.

Operating expenses increased in the third quarter, compared to the second quarter, primarily due to the inclusion of Plessey Broadband Wireless operations, which as I mentioned were acquired at the beginning of the quarter. They are about $500,000 in direct expenses and $400,000 of amortization of intangibles related to the Plessey acquisition. R&D expenses were 4.4 million in the third quarter, up from 4 million in the second quarter. This was due primarily to the Plessey expenses I just mentioned. Selling, general and administrative expenses were 10.9 million in the third quarter, compared to 9.9 in the second quarter. This increase was due to sales expenses, primarily related to the increased revenue as well as the mix of geographic sales.

Other income and expense -- interest and other was a net other expense of $200,000 in the third quarter, compared to a net $100,000 other income in the second quarter. This change is due primarily to foreign exchange losses related to the rapid movement of the euro during the quarter. We did record an income tax expense of about $100,000 in the third quarter, due to profits in certain foreign subsidiaries. As I've mentioned in the past, due to the number of foreign subsidiaries the Company has around the world, we will continue to show a tax expense for future quarters. Net loss for the quarter was 9.9 million. Intangible asset amortization of $400,000 related to the Plessey acquisition wasn't considered in the original guidance I gave for the quarter. Without this non-cash accounting charge, the loss per share for the quarter would have been 11 cents.

On the balance sheet, the cash balance was $55 million at the end of the third quarter, and this was in line with the expectations that we gave at the beginning of the quarter. The decline of 19.9 million compared to the second-quarter balance is due to the losses of 9.9 million during the quarter, cash payment related to the Plessey acquisition and increased working capital for receivables and inventory. I'm forecasting a decline in cash in the fourth quarter to about 45 million. We could have used our credit facility for current working capital requirements, but decided not to do this in the third quarter. However, as we increased inventory to support the Eclipse rollout, and as receivables increased due to higher inventory, or revenue levels, we may utilize a portion of this expanded credit facility in future quarters to maintain our cash balances.

Accounts receivable increased 6.3 million in the third quarter to 35.2 million. DSOs were 79 days, compared to 71 days in the second quarter. Receivables were higher due to the increased revenues, due to some extended terms given selected customers, and partly due to non-linearity (ph) of shipments during the quarter. I expect DSOs will continue to be in the 75 to 80 day range in the fourth quarter. Inventories increased $7 million during the quarter to 27.3 million. Although inventory turns did remain fairly consistent, and were 5.7 compared to 5.9 at the end of the second quarter and 5.5 at the end of the first quarter, a major portion of the increase was related to the Plessey operation. I expect inventory turns will stay in the 5.5 to 6 range for the next several quarters. The inventory controls and manufacturing outsourcing strategy that we implemented last year are proving to be very effective at controlling inventory levels. As you may recall, inventory turns at Stratex historically have been two to three times, so improvements in this area are quite significant. Total liabilities increased 1.5 million compared to the second quarter, and this was mainly due to normal trade liabilities in the Plessey operation.

Let me talk a little bit about the forecast for the fourth quarter and beyond. The order pipeline continues to look strong. Backlog is increasing, so our confidence in increases in revenue is improving, and is quite strong. However, predicting when the orders will actually be booked, and when specific deliveries will be scheduled is, of course, an ongoing challenge. As mentioned earlier, we have very aggressively priced several key orders, in order to position Stratex with these customers for the Eclipse product. As a result of these market positioning actions, plus the initial production cost of the Eclipse product, we are expecting margins in the fourth quarter and in the first quarter to be about the same as the third quarter. As the Eclipse product phases into full production in fiscal year '05, we're anticipating that margins and overall financial results will steadily improve. At this point, we believe revenue in fiscal Q4 will be in the range of 40 to 44 million. While it's difficult to project beyond the current quarter, based on the order pipeline, current backlog and customer interest in Eclipse, we're providing initial guidance for Q1 fiscal year '05. We believe revenue in the first quarter of '05 will be in the range of 44 to 46 million, and will continue to grow from that base, as the completed Eclipse product moves into full production.

Operating expenses are projected to be about the same in the fourth quarter as in the third quarter, in increase somewhat in the first quarter of fiscal year '05. I expect to report a loss in the fourth quarter of 8 to 12 cents per share, improving to a 7 to 11 cent loss in the first quarter of fiscal year '05.

In summary, our primary objective near term is the successful rollout of our new Eclipse product line. The improved overall business outlook, the release of Eclipse and the positive trend in recent Stratex orders supports our plan to return to profitability in the next 12 months.

I would now like to turn the call over to Chuck Kissner for an operational summary and comments on the plans of the Company going forward.

Thank you, Carl. I'm going to make a few comments about the market, quite a bit about Eclipse rollout of finally, our financial strategy, and at that point we will go to questions.

First, with regard to the market, we have noticed, over the past couple of orders, some stabilization in our markets. And we think this is generally due to needs for increased wireless network capacity. And that's required to serve the continuing increase in subscribers, as well as the minutes of usage.

Globally, there has been an acceleration of activity, but in particular, the areas that have slowed the most in the past two or three years are showing some signs of life. China is getting more active. In addition to the new distribution partners that we have signed over the past six months or so, in Q3, we signed a new OEM agreement with a major China manufacturer of data and telecom equipment.

While customer activity has continued to be strong, and in fact growing, in our case there has also been obviously a strong interest in our new product platform, and we know that this has influenced quite a bit of the order activity. Of the 50-plus million in new orders this quarter, there was a substantial portion that was directly or indirectly associated with Eclipse. Eclipse orders, as Carl indicated, were about 4.5 million, which is a bit ahead of what our internal projections were, given that the commercial shipments didn't actually occur until post Q3, just recently, and that is about twice what we booked in the quarter before.

In addition to that, we also estimate that about another $8 million of the orders of current products are indirectly associated with Eclipse. And this occurred because certain customers did elect to order the legacy products from us for near-term requirements in competitive bids, and the Eclipse migration differentiated us from other offerings. So we estimate that Eclipse positively impacted about 25 percent of our total orders for the quarter. Now, the other way to look at this is that the market is showing stabilization, and it's the Eclipse offering that is driving our growth right now.

As Carl indicated, pricing does appear to have stabilized somewhat in the last quarter, and while the current prices, on average, are not too exciting for our current products, some of the business we're picking up is priced a bit better than we have seen recently. Of course, we still do have a fair amount of low-priced businesses in that backlog number that will need to work through the system in the next few quarters. Pricing on Eclipse, so far, is about what we expected, as the customers that we're dealing with seem to understand the value proposition of using Eclipse to bill transmission networks in a different way. And as shipments of Eclipse build to higher volumes over the next few quarters, unit costs will reduce, and the percentage of business increases we expect to drive much higher margins in our business, as we've indicated previously.

By the way, order activity has continued to be strong subsequent to the end of the quarter, and it's largely been driven by the same customer capacity requirements and the interest in Eclipse.

Now, some stuff about Eclipse for you. The big news on Eclipse obviously is that it achieved commercial shipments subsequent to the end of the quarter, about a week ago. While this initial release just represents a portion of the total Eclipse product platform, there is a pretty good matchup between the Eclipse backlog and the initial configurations. So we should be able to show meaningful revenue for the current quarter, Q4. And that will set us up to begin the real ramp next fiscal year, which starts in about 10 weeks or so. Eclipse backlog stood at a little over $7 million at the end of the quarter.

Now, a limited number of customers have Eclipse now. A major software release just completed will now enable commencing delivery of a significant number of the 26 or so trials that we previously indicated we committed to. The bulk of these trials we anticipate to be shipped in the current quarter and into Q1. These trials are being allocated amongst customers, along with prioritization for commercial shipments, and I'll get into what those are in a bit.

The first of these high-functionality trials began shipping about a week ago. These are the first Eclipse systems to contain something called aggregation, or the ability to manage multiple wireless transmission links in the same process or intelligent node unit. Aggregation is one of the basic architectural capabilities of Eclipse that sets it apart from point-to-point microwave radios, and that includes those new point-to-point radios now just being introduced to the market. A new software release that was made coincident with the Eclipse commercial announcement last week provides much of the Eclipse unique functionality, and we are extremely pleased at how these new features are operating.

There has been a surprisingly strong interest in our new data transmission applications, including the new Liquid Bandwidth offering for actively managing mixed TDM or voice traffic and IP traffic sent over Eclipse radio links. So far, one-half of the customers who have selected Eclipse for their networks are applying it for data applications. And those of you who know us know traditionally we haven't had as strong a penetration into the data market as this, but we do expect this to be an increasing portion of the business, going forward.

Previously, we provided Eclipse configurations to two customers in point-to-point microwave radio configurations. These units are expected to convert to revenue this quarter. This quarter, with the new Eclipse functionality available, customer activity level is way up. And I want to give you an overview of what is going on in the current quarter. First, with regard to commercial shipments, we are planning to ship commercially to three or four additional networks, which would bring the total commercial deployment by the end of Q4 to 5 to 6 customers. Between last quarter's bookings and bookings to date this quarter, examples of networks which have commercial deployment include a data network, a defense communications application, an ISP who is using it for Ethernet backhaul, with voice-over-IP, and the customer premise equipment is wireless point-to-multipoint. A large mobile network which is voice, a large mobile network with voice, and also using it in a data overlay fashion, a fixed wireless access broadband network, which is a TDM voice plus IP backhaul, that's carried to in-building distribution points, and finally, a public services application using Eclipse for high-speed data interconnecting a number of hospitals around the country.

A second category of activity is demos, and these, by definition, just so you know, these are shown to customers or they are lent to them. Normally, they don't go into a network. Scheduled to go this quarter are demos to the UK, Asia, Germany, Spain, China, Latin America and North America.

The next category is trials. Equipment is going into trials to be used by customers, usually in a network, and highly likely to convert to revenue. Trials this quarter going out are one to Latin America to a large mobile customer, and that's complete; that shipped about a week ago, and that's with a full Eclipse functionality. One to Russia, two trials to India, two to Eastern Europe, one to Western Europe and two to Asia.

The fourth category of shipments are units going out to regulatory agencies for regulatory testing, and a number of those are going out this quarter, but many of them actually went out last quarter. We have already received the European CE mark for most of the initial frequencies that are available for Eclipse. Safety testing was completed earlier. EMC testing was completed in September, and the FC (ph) testing, which is -- those of you who are familiar with this kind of equipment, that is some of the toughest testing we have to go through, is completed for three of the four initial frequency bands for Eclipse. Shipments that are going out this quarter are for some country-specific applications, where we have customers either waiting for delivery or waiting to order the product, and requires regulatory approval. Regulatory approval was received in a number of other countries, though, in the third quarter.

So there's a huge amount of activity, a lot of equipment moving through the pipeline right now that's currently in our inventory, by the way. But we expect a lot of it to move out of inventory.

Finally, I want to talk a bit about the financial strategy before we move onto questions. The financial strategy really hasn't changed much over the past few quarters, although as we indicated last quarter, we did decide to use some of our balance sheet to effect a more aggressive rollout of Eclipse, in order to drive a more improved financial improvement the next fiscal year and beyond. And you know we have traditionally kept a very conservative posture on the balance sheet. We do plan to continue that approach, consistent with the strategy of being aggressive with Eclipse.

Going forward, we anticipate that cash usage will decline pretty quickly from the rate of last quarter, due to reductions in operating losses and maintenance or improvement in some of the balance sheet metrics.

We have also avoided debt, traditionally, as a part of our strategy, but our agreement with the Silicon Valley Bank that was announced today to renew and expand our credit facility, we think, is very appropriate, given our prospects for next year in ramping up, and our prospects for improved profitability and the likely impact that will have on valuations.

Our most recent view of our financial plans indicates that we are on track to achieve profitability by approximately the end of the next fiscal year, assuming current market conditions. While there are some indications that conditions are improving, we would prefer not to factor that into our thinking yet. The bottom line is the reception for Eclipse continues to be phenomenal. It's affirming the dramatic changes that we have made in the Company, and that the product strategy was correct. And this is the underpinning of the financial strategy, so we are continuing to be more comfortable with the game plan that we launched a couple of years ago.

We will now open the call to questions.

(OPERATOR INSTRUCTIONS). Earl Lum, CIBC World Markets.

Congratulations, guys, on a good quarter, and also for the launch of Eclipse. Carl, could you give us just a quick housekeeping -- on the revenues for the Americas, can you break that up between north and south again? You said 7 million was the total?

Yes. So, on the revenue side, North America was -- revenues were 2 million in North America and 5 million in South America.

Okay. So a positive book-to-bill across the board in every region, is what it looks like.

Yes.

Chuck, as we look for Eclipse now to ramp, will we expect at some point that the midcap segment is where you are going to see the transfer of that revenue toward Eclipse? Or how should we view this product line, as it continues to gain momentum?

I don't think in the mobile markets you'll see much of a change, except for the introduction of those new super PDH capacities that we haven't offered before. I think that will displace some of the 155 Mb kind of stuff. It is a lower way of delivering that capability. I don't see that as a big change. I think where you'll see a big change is in the Ethernet business, but those capacities will become a larger proportion of the total -- if I understand your question.

That's great. And with the market positioning, with some of the key customers that you did to position Eclipse, were those existing customers, or were those new customers?

I think, so far, it's been about two-thirds -- I'd have to look at the list, but it's roughly about two-thirds new customers, for a number of reasons. But I think what is happening now is, with Eclipse having been out there and proving that it works, the transition to new customers will start to occur -- in existing customers will start to occur more rapidly.

But certainly, it looks like you are gaining traction in terms of your market share now with new customers, with the product?

That's what it appears to be right now. Of course, as you know, it's hard to tell what the market numbers actually are, at any one point, but especially over such a short period. But pretty clearly, we are picking up more customers; the customer count is going up.

And then, as you look across the board between demos and trials, et cetera, would you say that the two-thirds rule applies, as well, with new customers versus existing customers, or how do you characterize what's going on throughout the entire pipeline for Eclipse?

I think, if you look at this current quarter, it's probably two-thirds new customers. And the quarter after, it's probably about half new customers, so you'll see that's declining mainly because the existing customers are starting to take up Eclipse.

And certainly, there are other competitors out there that are trying to build similar products. At this point, it seems like you certainly have garnered significant or close to critical mass, as we come closer to the full commercial launch of this product, and as the revenues continue to ramp sequentially throughout the rest of this year. Do you think that you have a headstart now against everyone out there, or how do you feel you are competitively with some of the other products that are scheduled to launch, or in the middle of launching, as well, from your peers out in the industry?

Well, I think in terms of new products, we are moving very, very fast here. We've got a very rapid launch program, as you can probably tell, just based on what's happened over the last five months or so. So from an execution point of view, I think we're doing very well. Not that they are not more challenges, especially in something this big, but so far, things have been going very, very quickly. But I also want to make sure you understand that what we are launching isn't quite the same as what other people have. It does do microwave radio functionality, certainly, but it really is a network processor. So it is easy to get confused. It's not like our investors live this every day. So we try to explain it the best way we can, but I guess the difference is we're selling a network processor that has microwave radio functionality as a feature, rather than coming out with a new microwave radio. From that point of view, I think we are -- our lead in the marketplace is much stronger than what appears to be the case, if you just look at new products.

Then, specifically, if we look at the mobile market, certainly, we're expecting that CapEx is going to continue to increase, as we look throughout 2004. Is this a transition to where this technology will enable a mobile operator to migrate seamlessly toward a more data-centric network, as we move towards 3G technology?

That's a very, very hot topic with us, because of the Liquid Bandwidth feature, where we merge the mobile traffic and the IP traffic all onto one link, and we actively manage the IP traffic, in terms of assigning various levels of QoS, or quality of service. And that's been a huge hot button with the operators. Even if they are planning only to migrate later to an IP network, this is a great way to do it, because the hardware changeout is very minimal to make that happen. So I think you've really touched on a major issue there, in terms of migration.

Rich Valera, Needham & Co.

Carl, first just a couple of financial questions, if I could. You talked about your breakeven quarter, roughly sort of the last fiscal quarter of next year. I'm not sure if you have really talked about a breakeven revenue level. Are we talking sort of the mid 50 million type of range for breakeven revenue level at that time?

Yes; we said 55 to 60 million in revenue. Of course, the margins are the swinging point on that, but we said 55 to 60 million, based on our expected margin rates at that level.

And just to be clear, on your comments about the margins for the next couple of quarters, were you basically saying flat in the March quarter and then up in June? Or I thought you might have said something different on two different occasions.

Yes; I did say something different on two different occasions, just to see if you were paying attention.

I appreciate that, Carl.

It's about flat in the fourth quarter, and then improving in the first quarter.

Flat March and up in June, right?

Right.

And, Chuck, I think still the large majority of your revenue comes from the cellular market. And you sort of addressed this indirectly in a lot of your comments, but could you give us a sense of what you're seeing in the wireless infrastructure market, sort of regionally? I'm sure you've seen Nokia had a big pre-announcement which would tend to imply that maybe Western Europe was doing quite well, and there's been some stuff going on in China, obviously, with some orders out of there. Can you just give us your sense of what you're seeing, sort of maybe by geography, in the general wireless infrastructure and mobile infrastructure markets?

I think I alluded to this in the comments. I'd say developed countries were the areas where we had the most softness over the past couple of years. Because of a number of issues that are driving capacity requirements, we're seeing more activity there. So whatever is being -- I think that is being portrayed by a number of people in the history, that they are seeing that beginning to wake up. With for example, in Western Europe, we are seeing a lot more activity. We don't see it as much in North America, because our market penetration is so low in North America. In Latin America, we are seeing the beginnings of some activity, just like we did six months ago in the other parts of the world. The bidding activity is going up in Latin America, so we're hoping that will turn into stronger orders in Latin America. We're actually reasonably confident of that. The Africa/Middle East market is very, very strong right now. Russia is very, very strong. And in some of these areas, the rate of development is such that there is competition becoming stronger between individual carriers, and that's driving some increases in CapEx, as well. And Asia is probably about the same, I think, for us, in general, although we are seeing more business now out of China again. But I think in our case, we had some distribution issues in China that we were trying to work our way through. So I'm not sure if the market itself is getting stronger, or whether we're just seeing the business again now.

It's hard to find a negative area, is the bottom line. They all have individual drivers for what is causing the business to go up in the mobile market. If you stand outside the mobile market, clearly, the fixed wireless market, which is -- a lot of it is being driven by data, and the pure network stuff -- there's definitely growth in those areas.

Shawn Slaton, Ferris, Baker, Watts.

Hey, it's Matt for Shawn. I have a three-part question. First, I apologize if I missed it. Can you tell us how much Plessey revenue was in the quarter? And the second question is how much do you expect to go into the credit line? And then the third part is, since so much of this is a secular product story (ph), I was wondering if you could comment on how you position Eclipse versus the Harris TRuepoint radio product, and if you were competing for that business in Greece that they announced today?

First, on the Plessey, we didn't break that out separately; it's part of our lower-capacity -- mid- to low-capacity products. We said that in the last quarter we expected to initially do $1 to $2 million of revenue a quarter, and they were in that range. As far as drawing down a credit line, we currently don't have any plans to draw it down. We have the credit line available, but we are not, at this point, planning on drawing down in the third quarter. as I said, we are still projecting we would have 45 million in cash on the balance sheet in the third quarter, and beginning to stabilize that a bit. So we are not planning to draw it down. We may, but at this point, we don't have any immediate plans to.

As far as the Harris product, I'll let Chuck comment on that.

I don't the positioning vis-a-vis Harris is any different from how we position against any microwave radio, so it's really being positioned as a network solution rather than a microwave radio. Basically, I think, because of geographic strengths and weaknesses, we don't really run up against that particular alternative much at all in the marketplace. The people we run up against in the marketplace are usually NEC, Ericsson, Alcatel, Siemens. Those are the kinds of things that we are positioning Eclipse against. Again, it's really coming across as a different way of doing a network rather than point-to-point microwave (indiscernible).

Mike Walkley, RBC Capital Markets.

Good afternoon. This is Neil Shaw (ph) for Mike Walkley. Congratulations on the upward trends. I just wanted to touch base with you on something we've talked about, I think, in previous conference calls, where you were talking about a previously unserved market, and you expect to double your addressable market. Can you touch on that, or speak to that?

We said there was more than one market we're going into; at the conclusion of that, we would double our share of the available market. But the one that we are currently penetrating is the data market in general. That's a market that was underserved by us, because of the architecture of our products in the past. So that one, I think, is known, and we're making great progress in that one. The next market, which is a longer-term, larger development, we haven't announced yet.

Also, in the last call, I think you're saying that the Eclipse would probably contribute about $5 million to March revenue. Based on your current trends and what you're seeing, is there any chance that could be higher?

It's possible. I don't think so. I think it's probably more in the 3 to 5.5 million range, something like that. There is a lot of activity going on, but since the beginning of the launch, the standard deviation on the revenue in the first quarter of commercial shipment would be very high.

And then on the margins, I think you said you're targeting about 35 to 38. I guess, once it kind of reaches full swing -- is that still --

Yes, 37 to 38. That's when it represents about 75 percent of the Company's revenue.

Todd Allen, Kenny Securities.

Congratulations on a really good quarter, guys. My question -- I'd just like a little more color. You did address it in the comments, but I was hoping you could describe a little bit how the Eclipse product and its data-friendly nature is changing the types of clients you are selling into and the types of functions you are performing. You rattled off a number of deployments, some mobile, some fixed wireless. I was hoping you could just run through that again. If nothing else, just repeat what you already said, because I missed part of that.

There's a number of drivers for this that are inherent in the architecture of the product. But let's take the two that I would say are the real hot buttons right now, in terms of the features we've already rolled out. One is the ability to handle a mixed set of traffic on a specific link. So, because we have an architecture with network nodes, network processors, those network processors can gather information from both voice systems and IP-based systems together and wrap them into a bus that's inside the processor. That bus can then be connected over by a microwave link to a distant location -- over the same link; you don't have to set up separate facilities. Over that link, because we have an intelligent architecture, we can manage the data traffic, the IP traffic, in such a way to give priority to the voice traffic, since the traffic can't deal with latency. So we can buffer the data traffic, depending on what levels of service a customer is looking for, and we can buffer it up to four different levels of quality of service. Then, when it reaches the other end and hits another one of our Eclipse intelligent node units -- the processor at the other end -- we can then split the traffic and route it to whatever facilities are required, if they want to segregate the data traffic off to one place and the voice to another, which would be normally the case.

The bottom line is, with exactly the same facility, a carrier can handle his voice traffic -- let's say it's a mobile operator -- and he can overlay a data network and not have to change the facilities in the future. So he can start with a little bit of data, and then work up to eventually being an all-IP network, with exactly the same equipment that he put in to start with a mixed-node network.

So the front-end costs are lower, because that's the way Eclipse operates, because of its architecture. And the long-term costs of migrating to an IP network are dramatically lower; it's a huge difference from the past. The other thing that we can do that's also a cost savings is we can aggregate channels over the air to create a virtually large pipe. For example, we can take a lot of E1 or T1 channels and aggregate them together so we can handle multiple 100 Base-T interfaces, using what was previously voice type formats. And that's a feature that's actually available in other ways. For example, you can buy this feature as part of a router; it's called MLTPP (ph), and that does the same kind of thing. But since you already are buying a transmission link anyway, we just basically build this feature in. And it avoids having to make that investment in the router to accomplish the same capability. Again, this really appeals to people who are having to connect traffic around the geographic area using existing T- or E-based kinds of formats. There's no big extra investment required to put in a special IP network.

There's a number of other reasons why it works; but those, I think, in the early ones, have been real hot buttons with people, because the cost savings to put it in are very obvious. There's no soft savings; they can see the list of things they can avoid, and then anything -- any dynamic change in the future, which is basically what everybody expects -- everybody expects more growth in the IP environment than the TDM environment. They've basically made that investment at the front end and don't have to deal with it in the future.

That was a great answer, but I was hoping for one --

That wasn't the question, though, huh?

Well, one more layer of detail -- meaning, how do you anticipate your type of customer mix changes? Because you mentioned new trials and new types of networks. Give me a feel for where you anticipate Eclipse eventually getting you in terms of customer mix -- type of mix.

The first thing is, we have a large client base of the mobile, and we expect that to become stronger as a result of this. So that's number one. Number two, we expect that people who are building private networks to use Eclipse as a standard transmission technique. In private networks, that's been about 15 percent of our business in the past. We expect that to be a much larger percentage, going forward. And finally, people who are putting in fixed wireless access systems, a lot of them using point-to-multipoint systems, we expect that segment to grow, and we expect our penetration of that growing segment to grow, as well. So today, we're at 70 percent mobile and 15 percent private and 15 percent fixed wireless, roughly -- something like that. I would expect the fixed wireless and private network stuff to grow to be about 40 percent of our business over the next couple of years.

Okay, great. Thank you. And let me also ask you -- you had guided a bit more conservatively on gross margins. And we've heard from a number of companies in the industry that the general conditions for the purchase of the type of equipment is getting somewhat better. Is it volume that's driving the gross margins, or is it stabilization in pricing? Can you comment on the mid-capacity and the price wars that you've been experiencing?

I'd say there's two factors; one is -- in our particular industry, there was probably one company that was aggressively driving the prices down, and that seems to have abated in the last few months. It could always turn the other way, but that seems to have an effect, at least on our particular segment. The other is I think we have been projecting a continuation of price declination, based on -- here in the last 12 months. And because demand is going up for the products, I think those price declination assumptions were a little bit aggressive -- at least, so far.

Okay, great. And then, finally, were there any 10-percent customers during the quarter?

Yes, there may have been, but -- yes, we did have one 10-percent customer on the order side and on the revenue side. Other than that, they were all 5 percent or less, or 6 to 7 percent or less. So it was a pretty broad spread of customers.

Kevin Dede, Merriman & Co.

Hey, guys. Nice job on the quarter. Carl, first thing -- did I understand your guidance to be 40 to 44 for this next quarter -- the current quarter, March -- and then 44 to 46 for June?

Yes. We said 40 to 44 in the current quarter, and 44 to 46 in the June quarter.

I guess I am just a little curious as to why that range is out a little bit, further out.

Because the backlog is higher.

Yes, why it's tighter further out?

Yes.

Well, we could make it 43 to 47, if that makes you more comfortable. It's a range; we're just saying that -- basically, what we're trying to tell you is we expect revenue to be a bit higher in the first quarter than in the fourth quarter.

I like the trend.

Yes. So that -- you know, 44 to 46 is the net slightly better range.

And then, inventories were up about 35 percent sequentially?

Yes. Mostly, that was because of the inventories in the Plessey operation, where their turns are substantially less than we've experienced. So that was a big chunk to it. Overall, the turns were about the same, as I said, as they have been for the last several quarters.

Being the eternal skeptic on some of these things, when you go through a major product change, it's tough to anticipate how a traditional product is going to sell through. I guess I'm just kind of curious on how you guys plan to manage that process going --

As I mentioned in the comments, and the reason I mentioned that was just for that reason, we have put a lot of inventory management controls and systems in, in the last year and a half, two years. We've done a major outsourcing, stepped up the level of controls and monitoring that we do on the inventory position. We've looked very hard at the outlook for the current products, prior to Eclipse products. And the inventory levels are a lot lower than they have been in the past. When the turns are pushing six, the risk in terms of inventory obsolescence, let's say, is dramatically lower than when the returns are two. So we've got a lot less inventory on the balance sheet that we had in prior times. So we have two factors. One, because the turns are better, I mean, that's pretty clear that we are managing inventory better. And, two, we certainly are aware of the situation, and looking at it closely, and our partners that we've outsourced to are watching it closely themselves, for their own reasons.

Can you give me a rough idea of what you might expect your sales mix to look like, in terms of Eclipse/non-Eclipse, at the end of next year, when you're starting to get to that 55 million range?

We said that we'd have about 40 percent. We expect about 40 percent of the revenue to be Eclipse at the end of next fiscal year, 12 months from now.

And you are still seeing some pretty decent demand for your legacy product. I guess I'm just a little curious as to why customers would be interested in going that route if the eclipse was available.

Well, first of all, let's not degrade our current products. You know, they are pretty good; they sell pretty well around the world, and people like them. But traditionally, with network operators, it has taken time for some of them to make that transition. They want to see a lot of it out in the field. They want to see it working. They want to go through their own approval processes, and their speed of doing that is not necessarily the way we operate. So traditionally, it's taken a long time to make a complete transition within a major network. Specifically, it gets down to certain networks. We have a very large European customer who -- they have all of our current products on their approved purchase list right now. It took about a year to get all those products approved, and before we were awarded that contract. And I don't think it's going to take another year, but I think clearly, it's going to take another six months at least, and maybe nine months, to go through the whole process with Eclipse, especially since the current products are working very well.

So I think you take a few of those, and it does take some time for it to -- for the transition to happen. We'd like to have it happen faster, and actually we're going to be pushing to make it happen as quickly as possible, for obvious reasons. But we want to be very realistic in our projections or trends or hints that we give to investors.

Well, we all appreciate that. Can you talk about the large European customer? Would that large European customer be waiting for certain other European approvals before testing the product themselves?

No. In fact, they are supposed to take delivery of Eclipse for evaluation purposes, for trial purposes, within the next three months or so. The European approvals are not going to be an issue with them, because we are essentially through them now.

Okay. Well, good job.

At this time, there are no further questions. Do you have any closing remarks?

I would like to thank our investors and analysts and other interested parties who called in for their continuing interest, as we move forward and change Stratex Networks for the better. Thank you very much for your attention. Have a good day.

This concludes today's Stratex Networks third-quarter fiscal-year 2004 conference call. You may now disconnect.