Aviat Networks Inc (AVNW) 2005 Q1 法說會逐字稿

(OPERATOR INSTRUCTIONS).

Please hold for your first question. Your first question comes from Matt Robinson with Ferris Baker Watts.

Actually, yes, its Mark MacKatny (ph) calling in for Matt. Good afternoon, guys.

Hi Mark.

I wanted to ask, on the -- you said there was a cash burn projected for next quarter around 11, 12 million. How big is the Telegen's legal settlement?

It's around 1.5 million.

That's about 1.5 million. OK. And, another quick question. On that loan from Silicon Valley Bank, congratulations there. What are some of the covenants on that? Is that public? Can you share some of that with us?

Details will be in the cue. They really aren't - there isn't much in the way of covenants.

OK. We will check the covenants there. Finally, for this current quarter, you got a pretty big range there on your top line guidance. To hit the mid point of that, how much do you have actually booked and, how much do you need to do in terms to hit the mid point of that?

As we said in the comments, we are depending on some significant quarters that are expected early in the quarter to ship during this quarter and, you know, the range as we gave it is quite wide, so there's a wide variety of different orders that have to come in at any point in time.

Mark, I characterize it as the low end of the range is very solid. And, the book and ship is what makes the difference between the low end and the higher end.

Yes I see. And, a lot of it sounds like has to do with, how quick you can convert some of these trials you are doing on Eclipse and, to actual orders that you can get the process and ship this quarter?

Well, I think it's more dependent on, because we are ramping Eclipse so rapidly during Q2, that the earlier the quarter the better. That's the real issue. It's a percentage ramp on that particular product line that's making all the difference in the world.

Do you feel like you might be -- I mean, I guess there's a lead time involve, but are you a bit capacity constrained on the ramp for that right now? Maybe from a raw material perspective?

I don't think from a material perspective, it's just -- it just takes time to ramp a production. We can't ramp it up 100 % overnight.

: That's pretty big, yes.

We implied that the percentage ramp, even at the low end is quite high on Eclipse in Q2, so it definitely stresses the production facility. I think we're extremely confident we can ramp it, but our confidence drops if orders come in real late in the quarter, that's all.

OK. That's fair. That's it. Thanks.

OK.

Your next question comes from Todd Allen with Kenny Securities.

Good afternoon.

Hi Todd.

I just wanted to qualify the comments about gross margins. You said Eclipse gross margins are running about 2,000 basis points above the average being above the 15%, is that correct?

Yes.

At the rate that Eclipse is ramping, which seems to be even ahead of earlier comments and expectations, could you give us an idea what the mix might look like at the end of fiscal '05 and, what types of margins that might generate?

It's 40 to 50% by the end of fiscal '05, this is consistent with what we have been saying all along and, the range of margins is probably 27 to 30% gross margins. I'm talking about the blended gross margins for the whole company.

Right.

Just to be clear. We don't expect the margins to drop on Eclipse in its first year, we expect them actually to go up as we introduce a number of new things.

Also, could you speak to the pricing environments for the mid capacity product line, I know it's been fairly intensive. Would you characterize it as stable, is it even more competitive?

I don't think it's stable. I think the prices continue to drop on, what we call the TDH products. This is mostly focused around XP 4. Although, they are not dropping at the rate that they were last year, I think they are at a more normalized rate right now but, it's still a very competitive market.

Also, I had a question, you talked about getting on the approved list for product purchases from a carrier that you hadn't sold equipment to for several years and, bet on Ecllipse. Could you go a little deep near that and, talk about the customer mix that's being attracted to Eclipse? For starters, what percentage are new to Stratex, but if you just sort of characterize the types of customers you are drawing and, where are you drawing them from?

Well, most of the initial interest I would say is from our traditional carriers, which are mostly mobile oriented. There seems to be a fairly -- key drivers for it, though, besides the fact that, Eclipse reduces network cost and, one of the key drivers that we have noticed is overlay of data on to the networks on the existing voice networks and, when that happens, Eclipse tends to hit a hot button.

We did in these initial, the 8 million cost or so we have shipped so far, on Eclipse, has the higher percentage than normal new customers. Normally, we are running around 20 % new customers per year and, the numbers probably in the 30 to 40 % range in terms of new customers and, the reason for that is, we have got some pure data applications that came in, for Eclipse in the early stages and, those were from non traditional customers.

So, if I project a little bit forward and projections obviously are subject to all the limitations of the statement that Carl made before, instead of being 70 % mobile, I would expect that number a year from now will be less. It's probably going to be 60 % mobile and, that will be more fixed wireless, a lot of the data oriented and some certainly more enterprise business than we have before. And again, this is mostly driven by the characteristics of the product. It's cutting a wider swathe in terms of the functions that it's picking up and, that's attracting some other people. Does that help?

Yes. Very much. And, I have one more question and I'll yield the floor. Could you talk a little bit about the geographic regions and, what's hot where we're seeing growths?

We're still seeing good strength in Africa, Russia, the Middle East, and those areas. We're seeing some re-awakening in Latin America and, a continuation of last quarter we're seeing much more bid and proposal activity going on in Western Europe than before. US for us is getting a little warmer just because the licensing exempt products that we rolled out, the demand is fairly heavy on that stuff right now.

It's on some of the new products that we rolled out in the last three months or so, so we're scrambling a little bit. That's a small part of our business, so it's not that noticeable, but most of that is North America is warming up quite a bit. The Eclipse product just for North America to anticipate the question, the frequency bands for Eclipse will be coming later this year, so we expect to see some more popularity in the license products going into next year in North America.

Great. Thank you very much.

OK.

(OPERATOR INSTRUCTIONS).

Your next question comes from Kevin Dede with Merriman.

Good afternoon, guys. Thank you for taking my question and hosting the call. Would you mind commenting again, just on why you didn't feel comfortable going out one additional quarter on your guidance?

Part of it's tradition and, part of it is, I think, you know, I think we're anticipating that the delta improvement in financial performances will be very significant in Q3 but, because it's such a large delta I think it's too early to make that call.

OK.

And remember, a lot of it is dependent on what ramp do we actually achieve coming out of Q2 with Eclipse, that's going to shake the whole situation for Q3. I would say, this is from a personal point of view, I don't think I am not little more comfortable projection Q4 than I am on Q3, because well, have been through know if but wood a little more comfortable projecting Q4 than I am Q3 because we have been through a lot of the change period but, I don't think anybody is expecting us to project right now other than what we have said about our profitability objectives.

Right, so if I have things right, there was a $5 million or, so order in Eclipse that you think pushed out into the current quarter and, 6 million that you booked and, if you're able to turn all of that, you think you're maybe in the mid -- maybe in the high side of your guided range, what would your sales mix look like?

Well, first of all, let me just characterize the $5 million order. I think we mentioned that just to make sure that people understood the overall demand for Eclipse is pretty strong, 6 million wasn't bad in terms of booking but, there was a lot more stuff going on. That $5 million order isn't necessary to achieve the middle or, the high end of the range, because there's a lot of other deals in progress right now, so it's all dependent on the timing of all this stuff that's in motion right now, not just that $5 million order.

But, in terms of the range, I think we're -- we do have to have some more book and ship business to get into the middle or the high end of that range. But, there's nothing abnormal about that. We always have to have book and ship business, to get into the middle of the high end of the range that we have, so I don't think it's all that strange. I think we're getting a wider range than normal just because it's such a mess of product transition that's underway right now. We have people holding back, for example, are not ordering XP 4 because we are not aggressively pushing it or, their saying we want Eclipse, tell me when you can ship it so, that negotiation is going on so, the standard deviation is just a little higher than normal going into Q2. I think it's all great stuff, its all very positive, it's exactly was we said was going to happen but, with it upon us now, it's just a little bit, slightly less predictable than it has been the last couple of quarters. But, I will say in that range of slightly less predictable, it's probably a better outlook than we have seen for long.

Yes. That was my next question. If you were to look at the whole picture if the 20,000-foot view, are you feeling more comfortable that there is more spending in your general direction?

I think we are getting reinforcement that there's more spending. I think the biggest thing with us has been, with such a dramatic change in our product doctrine, not just replacing what we have the expanding the functionality, it certainly has been a test, is it really going to be popular with customers, are we really going the able to build it in the volumes that we have, and can we release all the software, which is somewhat new for us and, have it be robust and functional? I think, on all three of those things we are feeling more confident than we were six months ago. Yes. Things seem to be coming together nicely now.

So, you mention that 30 to 40 % of your Eclipse buyers are new customers. How are your legacy customers arguing this product? Are they warming up to it, or, are they still involved in testing? What's your overall feedback on that?

They are definitely warming up to us. We are shipping to some of them now. That's why the volumes are beginning to build now. Most of those that tended to be a bit more conservative in their approach, so they have been watching it in the field and, wanting to see whether it really proves out or not. So, that's helping to spur more demand for it right now. So, I think most of them are not what we call early adopters. And frankly, we didn't necessarily want to start shipping large volumes of Eclipse into those customers anyway. We wanted to make sure the product was solid and robust and so on, so I think that's all coming forgot right now, its that pop later is picking up in our current customer base. Obviously, we're encouraging it more now because we do want to make money.

On R&D side, you that you have stated that you have upcoming software releases and, perhaps even other cards that you're holding closer to your vest. How do you envision those rollouts coming, going forward?

We have major releases every quarter for the next three quarters of something -- of one or more things. Most of those involve software and, in fact, I think this quarter we may have two releases of system software, which we'll probably roll into one. Our network management software, we have a major release coming out this quarter that supports some of the ring management capability that's out there. Some significant expansion to ProVision, which is our overall network management system so, it supports a much larger network, it can be also migrated backwards to some of our older stuff, so that's pretty important as we roll Eclipse into existing networks where we have existing products.

And, toward the end of the year and, then going into the first part next year, I expect another wave of some other hardware to come out that attacks some of the -- it will probably step our costs down quite a bit and expand our functionality. So, it's pretty busy around here in terms of development is the bottom line. The plate is pretty full here for the next three or four quarters right now. In addition to that, there's some significant functionality expansion that we have alluded to before, that we think will help expand our serve with available market that's slated for the following year.

And, I guess what I'm getting at is - is that you don't see your developing costs subsiding any time near?

No.

How would you characterize the Eclipse deployments at this point? Can you give us a feel for how much is Greenfield and how much is just getting imbedded into existing networks?

I'd say more than 50% of the Greenfield right now.

OK.

I expect that will change. I expect over the next two quarters that will change quite a bit. We're going to see a lot of Eclipse going into existing networks that have been buying our products for a long time.

Last question for -

So, let me give you just an example that Carl gave about re-picking up a customer. The customer deployed large numbers of our products over the years, SPECTRUM II, XP4, Altium and so on. And, a couple years ago when we decided to make this more dramatic leap in functionality, rather than develop another microwave radio, they said your older products just don't do what we would like, so come back to us when you have something really different. And, that's why they stopped buying.

They have gone through extremely intensive testing of the microwave radio and, the networking functionality of Eclipse. They wrapped that up a number of weeks ago and, at the early part of the quarter we received a letter from them, stating we were now back on as an approved supplier solely based on it -- and obviously, we're nice guys but, also based on the Eclipse testing. So, I think that would be fairly typical. Obviously, they are more radical than most, because most people kept buying from us. But, we're really talking about two product generation leap here from our older products to this one, and that makes people want to test it and know it better, but it also is very compelling.

So, all the releases that you have going forward are backward compatible so, you don't have people sitting not wanting to get Eclipse because, they expect future generations to be better than what you're offering now?

That's correct.

And, could you just give us a little more -

Although I have to say, that sometimes there's a software release that requires hardware that they don't have. It isn't purely always software. But, for example, if they are adding a IP connection, to an intelligent node unit and, they haven't had IP before, they have to have an IP interface card that goes into the Eclipse. If they bought a low cost OD - outdoor unit radio unit and, they want to upgrade to a 155 megabits they have to unplug that OD and put a new one in. If they bought a larger capacity unit in the beginning, they wouldn't have to get new hardware. But, basically the cordless thing is the intelligent node unit and, that's backward compatible with everything that we are doing.

Last question is just a little more color on Western Europe and, one of your large not aforementioned customers in Western Europe that has been rather silent lately. I was wondering if you could give us a little better indication on what you're seeing interest in and, whether or not you guys are being slated for 3G rolls?

I don't know which one you're talking about, but it is the one that selected us.

The French one?

Oh yes. That's a good example of a -- we're getting a lot of pull from some of the subsidiaries to ship Eclipse and, from our corporate umbrella point of view there's testing of Eclipse going on right now and, I think that's nearing the end of testing. So, yes I do think Eclipse is slated for the 3G rollout.

Thanks a lot for taking all my questions.

No problem here. They were great questions.

Your next question comes from the line of Matt Robinson with Ferris, Baker & Watts.

Hey guys, this is Matt again. I'll be brief, the -- one question looking forward obviously looks like a transition quarter you have outlined it pretty well that way, XP4 versus Eclipse. Are you -- I don't remember if you said this, but ,you are basically not pushing for new orders on the XP4, I mean are you pretty much if someone wanted or you going to, at some point completely end of life or how do you manage that?

Well, we are still taking orders for XP4, it's an active product but, we do believe Eclipse is a better solution in more or more cases right now. So, that's how we are bidding it. We are bidding it obviously, with the interest of the customer in mind. But, the percentage of deals that we're bidding in for the second half, things that we would be shipping in the second half of our fiscal year, by far the majority is Eclipse right now. So, eventually all of our products have some end of life that's associated with it. So, eventually something like that will happen.

And this is a note, I think Eclipse, when we look at the customer requirements and, how they use Eclipse, I think the first replacement or, the more rapid replacement is Altium and, that's what's been happening so far. If you want to -- in fact, up until this last quarter if you looked at -- if you wanted to know what we were doing in high capacity, it was probably better to add Altium and Eclipse together and, that's probably a reasonable approximation of a high capacity demand.

So, you'll sell like a just about the lower end scalable Eclipse and, then have people build into it as they want to add capacity as opposed to just going Altium, full Altium up front?

Right or, somebody that says why am I using it, why do I have to use the synchronized network to get 100 megabits. Eclipse, as you know has the ability to go much higher in asynchronies mode than in any product we have had. So, it's lot cheaper for the customer to go with Eclipse and still get high capacity.

Thanks, Charles. Two more quick bookkeepers, one is just like your book-to-bill, you have explained it pretty well in terms of the lumpiness and what have you. But over, the past year we have seen a book-to-bill going from 0.85 to 0.86 decreasing sequentially every quarter. This quarter it dropped down closer to one. Looking forward into this current quarter, I mean, do you have reasonable visibility on your bookings, to feel like this was really truly an exception and, that your book-to-bill should be north of one and a quarter again next quarter?

We're not going to make bookings predictions because the lumpiness is so significant in our business and, it is so big deal oriented. But, the aggregate demand for Q2, Q3, Q4 that we're looking at right now would imply that's the case that we were see a greater than one book to bill. On average, you've got to smooth the average there.

I mean, it really sounds like you're planning for a ramp and, again a lot has to materialize but, you're planning for a pretty darn significant ramp up after you get through this September quarter.

That's the thinking here.

And, then finally, the last bookkeeping question, your cash burn a little over 10, you have said, if you break out the $25 million credit line, you were looking for 7. What was the reason for the miss and is that, was that a one time type miss do you think?

I really, we brought down our payables a little more than we thought we would because of timings of payments to some suppliers so, payables went down to $3 million and it was part of that increased cash.

What are you talking about, are you talking about earnings or balance sheet there, Matt?

Just balance sheet, when you talked about cash burn that, you said you have burned 10 and I think on the last call you were looking for 7, and I think that make sense, you got the credit so, you paid down your payables a little faster than -- I didn't pay attention there.

Right and, I think there's also another implication there. The ramp that we're seeing right now, implies that it's just good practice to keep those payables as up to date and as low as possible. So, we have done a lot of scrutiny on that right now.

Better response out of your suppliers, huh?

Right exactly. We like to treat them, like we like to be treated. We all say that, right?

Some people won't say that the masochist isn't going to say it, I think.

Exactly.

Thanks.

At this time there are no further questions. I would now like to turn the conference back over to the presenter's for closing remarks.

OK thank you. We here Stratex Networks want to thank all of you for your continued interest or, new interest depending on who you are. We hope, that through all the numbers you understand, that we are pretty excited here and, you can share our excitement as well going forward. Thank you very much.