Aviat Networks Inc (AVNW) 2005 Q4 法說會逐字稿

Welcome to the Stratex Networks fourth quarter and full year fiscal 2005 financial results conference call. Later we'll open the call for your questions. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mary McGowan of the Summit IR group. Ms. McGowan, you may now begin.

Thank you for joining Stratex Networks today to discuss financial results for the fourth quarter of fiscal year 2005. Chuck Kissner, Chairman and Chief Executive Officer, and Carl Thomsen, Senior Vice President and Chief Financial Officer, will review the results for the most recent quarter and our current business outlook.

During this conference call we may make forward-looking statements regarding our business in 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; DSO's and inventory turns; backlog; foreign taxes; anticipated, introduction, performance, market acceptance and financial impact of new products, in particular, the Eclipse product; break-even and profitability and future results of operations and cash usage.

It is important to note that these forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially.

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 discussion of these and other risks we refer you to our press release issued today, as well as other filings made with the Securities and Exchange Commission.

In addition, please note that the date of this conference call is May 9, 2005 and 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 Network Inc., and any recording, reproduction or rebroadcast of this conference call, without the expressed written permission of Stratex Networks, is strictly prohibited. I would now like to turn the call over to Carl Thomsen.

Thank you Mary, and welcome to those of you that are listening in to our call this afternoon.

First I'd like to provide a summary of our quarterly results for those of you who may not have had a chance to read our press release. Fiscal year 2005 fourth quarter revenue is 41.2 million, a 17% decrease compared to the prior quarter. As previously announced, in the fourth quarter, the company recorded approximately a $3 million reduction in revenue related to the fact that certain volume discount levels were reached by major customer. This reduced fourth quarter revenue, margins, and net income by this amount.

In addition, the company decided to defer revenue recognition on one long-term contract valued at approximately $1 million. Adjusting for these two items, revenue for the fourth quarter would have been approximately $45 million. Gross margins were reported at 9.2% and were negatively impacted by several items I'll cover later in my comments.

Orders for the fourth quarter were very strong at 63.1 million, a 16% increase over the 54.4 million in orders reported last quarter. Eclipse product line is clearly having a positive impact on sequential orders. As we continually remind you, however, orders tend to be lumpy, so you shouldn't extrapolate quarter-to-quarter order trends. However, we're very pleased with the strong Eclipse orders in this quarter.

Backlog at the end of the quarter was 69.7 million. I'd also like to mention that today we announced an extension and expansion of our $35 million credit facility with Silicon Valley Bank. This facility has been extended through April 2007, provides for additional availability under their revolving credit facility.

Now, I'll review some of the specifics related to the quarterly results. First, on orders received for the quarter, by geographic area, quarters in the Americas were 11.4 million, Europe, Middle East and Africa regions 37.6 million, and Asia-Pacific 14.1 million, again for the total of 63.1. And by product line, Eclipse orders were 31 million, the mid-capacity XP4 and Velox products lines were 13.3 million, Alcan was 9 million, DXR is 3.4 million, and services totaled 6.4 million.

Orders for Eclipse increased 39%, to the 31 million I just mentioned, compared to the 22 million in the prior quarter and accounted for 55% of product orders during the quarter. We're very pleased by the growing market acceptance of this product. The new Eclipse version began shipping in the fourth quarter as planned and the order pipeline for Eclipse continues to be very good and gives us confidence in the continued success of the Eclipse product family, and confidence in significant improvements in Stratex’s financial performance in fiscal year 2006. On the revenue detail by product line, Eclipse amounted to 14.7 million, XP4 or mid-capacity products were 13.4 million, the high capacity Altium product families, 4.5 million, DXR is 2.4 million and services were 6.1 million to the total of 41.1 million.

By geography, revenue in the Americas was 7 million and in Europe, Middle East and Africa was 21.4 million, and Asia-Pacific, 12.7 million. Eclipse revenue increased 20% from the prior quarter, and more than 80% from two quarters ago. Based on the orders received during the quarter, current backlog on our forecast of new orders, we fully expect revenue for this product line to continue to accelerate in the first quarter of fiscal year 2006.

The new lower cost E100 Eclipse product, often used in an Edge application, is proving to be quite popular and very price competitive, worldwide. Total revenue in the fourth quarter was negatively impact by the customer credit recorded in this quarter, as I just mentioned. In addition, delays and site availability for one project, delays in availability of a key component for a specific application, and the decision to defer revenue on one contract due to terms, all negatively impacted total revenue, as reported in the fourth quarter.

For gross margin, as I mentioned, gross margin percentage was 9.2%. Major items negatively impacting gross margins were the approximately $3 million credit for volume discounts that were recorded, and about 2/3 of the 3.7 million increase in accruals related to a large long-term turnkey project also impacted gross margins. Balance of this accrual was recorded in G&A.

On a more normalized basis excluding these two unusual items, margins would have been about 21%.

For the first quarter of fiscal year 2006, based on a current backlog, we're forecasting a return to the improvement trend we had seen earlier in the year, and are estimating margins to be 22 to 23%. We expect overall Eclipse revenue and margins will be the major drivers to reach these levels.

Now let me turn to operating expenses. R&D expenses decreased to 3.7 million from 4.4 million in the third quarter. That's as we expected and was a result of the cost reduction efforts that were initiated in the third quarter. Selling, general and administrative expenses at 12.6 million in the fourth quarter were up somewhat from the 12.2 million that we reported in the third quarter.

As I mentioned, the accrual related to the large turn-key project I just discussed, plus higher sales commissions due to the significant order levels in the fourth quarter, more than offset the reductions related to the restructuring initiated in the third quarter. We're forecasting a significant reduction in SG&A expense in the first quarter, expect it to be about $11 million.

Other income and expense was a net expense of 436,000 in the fourth quarter. It is in line with the forecast I provided at the beginning of the quarter. I would expect this other expense to be in the range of 500 to $600,000 in the first quarter.

Tax expense for the quarter was actually a benefit of $18,000, which brings total year tax expense to $454,000, related to our international operations. Going forward I would expect income tax expense of 150 to $250,000 per quarter, as a result of our international locations. Net loss for the quarter on a GAAP basis was 12.9 million and earnings per share loss of $0.14.

Now, let me review the balance sheet status. Company's cash balance at the end of the fourth quarter, March 31, was 48.7 million. That is a decrease of 3.6 million from the end of the prior quarter. It includes about $2.3 million in severance payments and, of course, $1.5 million related to the reduction of the terminal.

Looking forward, I expect cash usage in the first quarter to be in the range of 9 to 11 million, most of this due to increased working capital requirements to support the higher first quarter and second quarter anticipated demand for this product, plus, of course, quarterly repayment of the term loan. Cash usage is expected to decline significantly in the second quarter, as losses decline and working capital requirements remain at about the same level as we expect at the end of the first quarter.

Accounts receivable at 35.1 million declined 5 million from the prior quarter, due to the lower revenue levels. Days sales outstanding, or DSO's, were 77 days in the fourth quarter, compared to 74 days at the end of the third quarter. This is in line with the mid-70-day DSO forecast I provided at the beginning of the quarter. I expect the foreseeable DSO's to continue to be in this range at the end of the first quarter.

Inventory at 37.1 million was up somewhat from 36.3 million in the third quarter. Considering the fact that revenue was lower than expected due to the issues that I just discussed, our operations organization did an excellent job managing the inventory. Inventory turns were 4, compared to 4.1 at the end of the third quarter. We don't expect inventory to continue to grow next quarter and turns should improve steadily beginning later in the year as the operational benefits of the Eclipse transition and certain current supply chain initiatives are realized.

On the liability side, current liabilities increased $4 million in the fourth quarter, due to an increase in accounts payable. Compared to the end of last fiscal year, however, accounts payable actually decreased 6.5 million.

I will summarize the forecast for the first quarter of fiscal year 2006. As you note, the fourth quarter was a transition quarter, with the employee reductions initiative in the third quarter impacting the fourth quarter, and with the initial rollout of new Eclipse low-capacity E100 version. We're encouraged by the strong orders booked for the Eclipse product line, and the product transition from the legacy products to Eclipse is moving forward rapidly.

I'd also note that the first quarter is shaping up well. We expect that Eclipse shipment volumes will be up again in the first quarter and should exceed 50% of total product revenue. We're forecasting total revenue to be between 47 and $50 million, and loss per share of 3 to $0.04.

Gross margins are expected to increase substantially, as I mentioned, from 22 to 23% in the first quarter, for the reasons I discussed.

There is no question that the fourth quarter was disappointing in terms of revenue and overall financial results. Nonetheless, Stratex made substantial progress, in line with our plans in the past quarter.

We're optimistic about the Company's outlook for the new fiscal year and we're positioned from a product point of view, and as an organization, to take advantage of a wide variety of market opportunities. I'd now like to turn the call over to Chuck Kissner for an operational summary and comment on the company's plans, going forward.

Thanks, Carl.

The big picture story here, at least from my point of view, is that we continue to make progress in managing this transition from legacy products to the Eclipse business model.

The Eclipse business is doing very well. We continue to balance the success with the challenges of the legacy business.

As we closed our fiscal year and carefully examined the legacy business we believed it was appropriate to record a few issues. We're disappointed with the effect on Q4 results, but the premise for our transition and our business recovery remains unchanged.

We expect by the end of the current fiscal year, the one we're in now, for the legacy business to be a very small part of our business, due to the adoption rate on the products that are based on the Eclipse platform. Carl discussed the adjustments to Q4, so hopefully it is clear that, on an ongoing basis, the business trajectory is still on plan.

What I'd like to do is expand upon what is happening with Eclipse, our operations, and then our outlook going forward. With regard to Eclipse, in Q4 we began shipping the new E100, the low-end version of Eclipse. We've said a number of times that the new E100 was a key to maintaining the momentum of Eclipse and to reach and sustain profitability in FY '06. That is because of its expansion of the market size and its lower cost to build.

The new E100 was developed in record time and it was a very good test of using Eclipse as a platform for rapid development of new features and capabilities. In Q4 about 35% of the Eclipse units shipments were actually for this new E100. And considering that it was released part-way through the quarter, and virtually all of the shipments for the E100 occurred in the second half of the quarter, it was pretty impressive. And we were running at a very high run rate on E100 late in the quarter.

As a result, we expect to continue to significantly ramp Eclipse, as Carl mentioned, in the current quarter. We shipped about, actually close to 16 million of Eclipse. About 1 million went to deferred revenue. This was about 40% or more of total product revenue, depending -- which is total revenue less service revenue -- depending on how you count the credit -- with the customer discount that Carl mentioned, it would be higher.

Gross product margin percentages for Eclipse were in the mid-30's, which included the start-up costs for the new E100. With a ramp on Eclipse continuing, we expect Eclipse product margins to expand in the current quarter and contribute to the total gross margins. So that is what impacts net income in a very significantly positive way.

By the way, Eclipse data networking applications had product margins in the 30 to 60% range during Q4. We expect Eclipse margins to be strong in the coming quarters, as we had planned.

New orders for Eclipse hit a record at over $30 million, as Carl mentioned. What he didn't mention was the broad global coverage of our business of Eclipse.

Q4 is typically a strong order quarter for us. Nevertheless, the underlying count of customers and the continued growth in larger orders has clearly shown that Eclipse continues to be very well received.

New Eclipse orders were attributable to 55 customers during Q4. There were eight orders over $1 million. There were a number of new clients, especially for the data transmission capabilities of Eclipse. These new clients tend to start out with smaller orders, so we're hopeful that a number of these will blossom into larger levels of business in future periods.

Eclipse has now shipped to about 80 customers in over 70 countries, so we definitely feel we have a strong foundation toward growth, going forward.

I want to give you a flavor for some of the diverse applications of Eclipse as it's being deployed around the world.

One example is the use of super PDH rings from a mobile network operator in India in place of using more expensive synchronous products, like the fiber. The capacity upgrade expansion and modernization for a leading mobile operator in Poland, backhaul and interconnected several pre-WiMAX systems in Latin America, Africa, Middle East and in Europe. Metro ethernet LANs for hospitals and other medical offices in Ireland and also in the United States, a video and infrared fire protection network for a [core street] apartment in Portugal. Reconstruction projects in Iraq. Remote DSLAM interconnection for increased bandwidth delivery, and that is in France.

And final example is video over IP transport for high-resolution monitoring and surveillance, and that's in the United States.

Eclipse was purchased by two tier one accounts in small quantities in the last quarter. It's being bid in several significant deals now, as Eclipse has got some traction and some history operating in networks.

A main reason why our customer base is expanding is that Eclipse products are much more diverse than the legacy products that they're replacing. Even though we're moving quickly to one main platform, the actual market coverage has expanded well beyond the traditional mobile backhaul business.

For example, last week we introduced a new Eclipse product, the gigabit ethernet Eclipse at NetWorld+Interop show in Las Vegas. The gigabit ethernet Eclipse not only provides high speed wireless transmission, like our older products, but it also offers support for networking features such as quality of service controls, internal link aggregation, so we get higher throughput going to network, something called rapid spanning tree protocol for rapid network failure recovery, and it has a Layer II switch built into it.

As you can see, Eclipse was designed to actually be a platform upon which to introduce new products in multiple market segments. You may not know this, but most of the revenue growth that we reported last year -- our 15% revenue growth -- actually was from our new Eclipse data transmission products and going into a new market for us. At the same time, other Eclipse products are a superior solution for the traditional mobile backhaul customers.

Let me touch on operations. We continue to reduce operating expenses, as announced in Q3. These reductions were completed by the end of Q4 and will be reflected wholly in the current quarter of Q1 '06. We have no further reductions planned at this time.

We're in the process of streamlining our supply chain further, because the unit counts for our products are growing very rapidly. Unit counts for fiscal '05 grew over 25% compared to the prior year, and they're continuing to grow at a significant rate. Total Q4 fiscal year '05 unit counts grew 8% sequentially over Q3, and Eclipse unit counts which are measured differently than point-to-point radio -- they're measured in modules -- actually went up 110%, sequentially. And based on the current order input rate we expect significant growth in demand going forward.

With this volume we believe we can extract additional supply chain additions that will result in reduced lead times and additional competitiveness.

So at this point we believe we've got a very competitive product platform with Eclipse and that's based on existing and new Eclipse-based products and will be released in the current fiscal year. We're now stepping up the supply chain to take advantage of this competitive product line.

Also, in operations overall in April, Larry Brittain joined us as Vice President, World Wide Sales and Service. Larry has extensive experience in the telecom industry, especially in global sales and the wireless infrastructure markets.

Over the past 5 or 6 months we've made a number of adjustments and changes in executive organization and assignments, to raise the priority in terms of market opportunity and operational improvements. This is another element of our transition to build a stronger company going forward in preparation for Eclipse volume ramping up, as it and our overall customer base are now doing. Let me make a comment on outlook and then we can open it up to questions.

In the Q4 earnings release, we provided you with our earnings expectations for Q1 and our expectation for profitability during the year. Over the past year we've taken a number of write-downs and adjustments, largely driven by the dynamic nature of the transition that we've been undertaking.

However, at this point we believe that as Eclipse continues to ramp up, these type of adjustments are largely behind us. We spent the last year introducing Eclipse, rolling out the initial products based on the Eclipse platform, ramping production, managing the Legacy transition, dramatically reducing our spending as well as our cost of goods and we're now focused on emerging again as a profitable enterprise and expanding the top line.

Eclipse is popular. The financial performance of Eclipse is good, for both our customers and for us, and the demand is clear and is growing.

I want to tell you clearly, we're headed toward profitability. As Carl indicated, we are projecting a significant improvement toward profitability during this current quarter, and in the quarters that follow with total enterprise profitability at or before the December quarter. That concludes our formal remarks. Operator, we're now ready to take questions.

Thank you, sir. Ladies and gentlemen, at this time we'll begin the question-and-answer session. [OPERATOR INSTRUCTIONS] Our first question comes from Rich Valera with Needham & Company.

Thanks, good afternoon. In terms of the Eclipse E100 rollout, can you talk about how many frequencies you got out of the E100 during the March quarter and what is your road map there in terms of additional frequencies for the E100 in the next quarter?

We never talk about how many specifically but we rolled out somewhere between a quarter and a third. What I mean by that, is we got one out right near the end of the quarter, so it didn't affect shipments.

But that would have been a third of what we would call the major runners. The next -- all the rest of the frequency brands will roll out mostly this quarter. There will be a couple left over for the quarter after. But the big runners will be done this quarter.

Okay. And then on the gross margin front it sounds, if I'm hearing you correctly, like your Eclipse gross margins are tracking according to plan. It doesn't sound like there was any change with respect to where they are currently and where you're expecting to be. But by some back of the envelope math, your core Legacy products seem to be very close to low double-digit. I'm just wondering do you see a floor on the margins for Legacy products? Do you assume that it is stable at current levels or if it does go down further?

I don't think they're going to go down further because our restrictions on selling Legacy products -- we're just not offering them as widely now. So people who are sticking with them, tend to stabilize their prices, which is the normal situation as we do a product transition.

This is no different than the past. I'm not sure how you're calculating that but obviously the margins were heavily impacted by the charges this quarter. So that's an impact.

The other is, our service margins were lower than normal during Q4, so that drags it down somewhat. I don't see that as a continuing trend. Those are project-specific.

Okay. And then looking out, you mentioned a break-even target, at or before the December quarter.

Yeah.

Could you talk about the expected revenue level there and maybe also the expected gross margin. Is it break-even?

Yeah, we stay the same for break-even. It is 50 to 55 million in revenue to get that break-even and margins in the high 20 range.

That's about 70% Eclipse, right?

Right.

That's probably a bigger driver, it's just the Eclipse ramp.

Right. And one final one, Carl, on the 9 to 11 million of cash used next quarter, could you just take us through the working capital pieces that are going to use that you said will be attributing to that cash burn?

Yes, by far the largest is the accounts receivable, as we're expecting revenues to be some compared to the 41 million we reported this quarter, high 40's next quarter, certainly it would be a -- with our DSO's at 70 to 80-day range, you know, a big chunk of that increase will be sitting in receivables at the end of the quarter,

So we will have to buy material but we would have the receivables still sitting in receivables, so that the sales are still sitting in receivables. So a big increase of working capital piece -- virtually all of it is in the receivables side.

Great. And the confidence that cash usage goes down substantially the next quarter, since you don't expect absolute levels of working capital to stay flattish moving into the next quarter?

Yeah, that's because we're expecting continued growth in revenue but not at the huge ramp that that we're looking at in the first quarter, compared to the fourth quarter.

So, you know, we're expecting inventory certainly to flatten out or even decline a bit, as I mentioned, later in the year.

Okay. Thank you. That's all for me.

Our next question comes from with Ittai Kidron with CIBC World Markets.

Hi, Chuck or Carl, a couple of questions for me on when you look at going forward. At what point do you expect and at what revenue level do you expect the, you know, the core DXP4 / Velox revenue to, kind of, level off? What is that dollar number that we should expect to level out, since it's been declining?

I don't think it's going to level off. I think it is going to continue to go down. Not the Velox, though. Velox is up. We expected it actually to grow. But DXR, XP4 and Altium we expect to continue to decline to the noise level by last year.

Yes, we have always said that Velox is the 1 to $2 million product, this past year, per quarter and we expect that is going to--you know, getting a good foot hold at this point, so it will be at that level or higher. But the XP4 will continue to decline, as it is being replaced by Eclipse.

And second question, with regards to the E100, does that have the same gross margins as the other versions of the Eclipse?

It has higher gross margins in the -- in the OD100 that it replaces. Roughly equivalent margins to the higher capacity.

Okay. Lastly, Carl, I don't know if you mentioned -- what do you expect on R&D for the next quarter, roughly?

I don't think I mentioned that. But we're expecting that to be, you know, similar -- I think, it is similar to this quarter. Not much change in that.

So the dollar figures you mentioned for, you know, if you take similar level for R&D and around 11 million for SG&A, are those, sort of, now the steady state operating expenses or do you expect those to go down even further as we go into next year?

No, those are pretty steady states. First quarter, reductions we announced in the third quarter, as we said, phased in during this quarter.

And then as we get into first quarter virtually all those reductions are reflected in the results, and as Chuck mentioned, on the further reductions, there will always be some changes within locations or they will offset one another, as we look at business going forward. But as we look at in terms of the total expenses, those would be pretty flat.

Lastly, of the 80 customers you mentioned for Eclipse, can you tell us how many of those were not clients of yours for any other product, before you introduced Eclipse?

I don't have the specific number in front of me, but it's probably about half.

About half.

Yes.

Yes. Very good.

Our next question comes from Brian Modoff from Deutsche Bank.

Hi guys, a few questions. One, could you give us a similar breakdown on revenues, previous quarter?

Oh, sure. So if we look at revenues for the third quarter, by product line, third quarter, Eclipse was 12.2 million. The capacity XP4 and Velox was 20.9. Altium was 4.7. DXR was 4 million, and services were 7.7.

Thanks. And you said on SG&A you expect it actually to drop from 12.6 down towards 11 million in the current quarter?

Right.

But not at that point?

Right, in that $11 million range.

Margins on Eclipse can settle out at -- what do you think in those numbers? Is that, kind of, in the mid-30s, you think?

What was the question? Eclipse -- is that what you said? Hello? Hello? Operator?

Yes, sir, our next question.

I think we lost the last question.

Our next question comes from Matthew Robison with Ferris Baker Watts.

This is actually Mark Donohue, from Ferris Baker Watts, talking for Matt. Let's see here, you announced the introduction of BridgeLINK a few weeks back. We understand that this came as part of an acquisition. Can you shed some light on the strategy of that purchase -- the details of the transaction? How much revenue that entails?

Well, it's--we don't expect a lot of revenue. Let me start with that, at this point. The strategy here is, we developed a fairly complete line of data products with Eclipse, and we needed something to fill in the low end, the very low end of that market. Eclipse is not good for the low end of the market. We needed on OFPN -- very, very cheap product.

It is not strictly an acquisition. What it really is -- is a paid-up product license based on a number of units that we sell, after a certain number of units, which I don't have in front of me right now. And then we acquire the technology.

Okay. Great. Thanks. One other question, too. Your long-term debt, do you know what that was for the quarter?

Yeah. Sure. So at the end of the quarter, our bank loan was at $13.5 million.

Okay. How about short-term?

6.2 million.

6.2. Stayed the same. Great. All my other questions were answered by other people. So thanks a lot.

Our next question comes from Brian Modoff with Deutsche Bank.

My last question was, longer term Eclipse margins, where do you see those running out? Is it around mid-30s?

Eclipse, mid-40s. Let's say, low to mid-40s. You're cutting out, Brian. I can't hear anything. Obviously he needs a Stratex radio connected to his phone.

Can you hear me better now, Chuck? Over what time frame do you think you can achieve those margins? What is your thinking on that?

Second half of the year.

Second half '05?

FY '06.

FY '06.

The next question is from Troy Peery with Oppenheimer.

Thanks. You seem to have strong pipeline and the contribution from Eclipse seems to be ramping. You touched on this in the comments, but are the opportunities related to the Edge applications on pace? I'm thinking specifically, in Q1 you mentioned that you exited Q4 at a healthy run rate but just, kind of, given the strong contribution that we're expecting from Eclipse at this point in Q1, compared to your expectations, are those Edge deals, by this point in the quarter, still on pace?

Absolutely. Just to put some perspective on this, if you look at the total traditional market -- let's forget the data stuff for a minute, since that's not the largest market right now, the total traditional market -- probably 60% of the market would be mid- to low-capacity and that is what that E100 fits, that is why it is so critical.

Probably more importantly, strategically it is very difficult to do a total network deal without having a complete range of products from low- to mid- to high-capacity. So the edge application is absolutely critical. It's also very critical of the edge application to be extremely cost effective, or the total network deal, because of the percentage that's in the low to medium capacity, is a very dominant portion of it.

So what it has done is it has, not only on its own, created a lot of opportunities, but the edge product has opened up opportunities for the other types of products, as well.

Turning from that, then, to the data sales, I guess, you know, on the higher margin contribution there, you touched on what you're seeing as far as the uptake in data deals, and I know it is early days for fiscal '06, but can you give us a little more color on the order strength on the data side and how, if at all, your expectations for the data market might have been impacted near term by the ramp in Eclipse?

And might we see even higher gross margins from data than you mentioned in the Q4 period?

Yes, I said -- generally all along throughout the year, as we've introduced data products, those have had higher gross margins, on average, than global business, the mobile infrastructure business. I think everybody knows by now, it doesn't matter whether you're selling microwave radios or base stations or terminal equipment, you're under a lot of price pressure.

And the data transmission business has margins that look more like networking kinds of margins. So obviously we have a difference there.

Now, in terms of scale, we probably did -- I haven't seen the total yet for the year, but it's probably around 25 million in bookings for data. Probably about 20 million in revenue last year. Almost nothing the year before.

So if we had a -- even if we had a 50% increase in FY '06, it still wouldn't be the dominant portion of the business.

But going out in terms of the '07 time frame and how this whole IP transition is going to work, our belief is it is going to be a huge percentage of the total within the next couple of years. Because there isn't a single operator out there right now that isn't putting some kind of -- either IP overlay in or building a pure IP network. That is, obviously, what we're targeting.

One other thing I'd like to ask is, do you expect the margins on the data deals for the rest of '06 to be any different than what they were in Q4?

I think it's too early to tell, because I expect, always, in the data market, for price to decline fairly rapidly. But we also have some very significant developments rolling out during fiscal '06 in the data area that makes the product line even more cost effective. So that's probably too much detail at this point, but overall, I would expect the financial performance to be equal on a per-unit basis, and greater in aggregate due to the larger volumes.

And then lastly for me, if I might, on the -- you mentioned some pre-WiMAX initiatives. Were those specific to Latin America for you, so far, and where do you see the opportunity there?

No, actually I think we said it was Latin America we had quite some in the Middle East, a number in Europe, and a growing number in Africa. I see that clearly as, first, a developing country, in terms of a larger volume, and I think it is going to be a growing business.

Now, whether it gets to be anything really large, we're still not sure of that, because we're -- I think we're going to have to get a mobile WiMAX chip set out in the marketplace adopted, and get enough terminal equipment to actually create a big market here. But certainly in the short-term, the numbers are small but they're growing.

Sure. Great. Thanks a lot.

Sure.

Our next question comes from Michael Kimmelman with Kimmelman and Baird.

Not to make a big deal out of a preposition, but did you talk about being profitable in '06 or for '06 fiscal?

Yes.

I know yes. That is the trouble with some of your announcements. You have got to be more specific.

All right. Mike, we said by the third quarter, no later than the third quarter which ends in December '06.

Right. You'll be profitable--you're hoping--expecting to be profitable in the third quarter, and you made no prediction regarding the fiscal year '06 in toto, is that correct?

That's true.

Okay. So now there is no confusion, going forward between "in" and "for." Thanks.

Thank you for helping us clarify that.

No, no, I was confused and now I'm not.

The next question comes from Kevin Dede with Merriman Curhan and Ford.

Congratulations, you guys, on the Eclipse. Can you just help me understand what happened at the end of the quarter as you were getting your financials together? I mean, you told us, April 14, you thought the revenue range would be 42 to 43 and then you found that you wanted to take another reserve.

Can you go through the process there, what happened, and how we might not hope to see that develop again?

It's hard to go through the whole process but certainly at year-end close and you're in the middle of all of the transactions we're involved in, there's an ongoing review of all the transactions. And as part of that, as I mentioned in my commentary, there was one transaction that we decided to defer revenue on, that because of the terms, that initially we thought would be revenue in the quarter.

That was a big piece of the revenue difference from the updated forecast. In fact, that was the entire difference for the revenue forecast. And as far as the other item, I don't think we've discussed those already in terms of the major project review that we had. We went through, and part of a negotiation with the customers, we wrapped up -- we moved forward on a major project.

We just thought it was appropriate, at this point to accrue some additional costs and accruals related to that project.

So, Carl, can I assume that, with your Sarbanes-Oxley review, that you'll put measures in place just to keep track of these sorts of things?

Yeah, it wasn't a Sarbanes-Oxley type of review, it was part of management's ongoing review of the process.

Okay. Thank you.

Our next question comes from John Nelson from State of Wisconsin Investment Board. Please go forward with your question, sir.

Hi, guys, just two brief questions. One, what can we expect -- reasonably expect -- to be the life cycle of the Eclipse line and its variants?

The current variants that are in the program right now are completely designed for the next year. They're in early-stage development for the following two years, so right now, we believe we have three years running on the current design platform.

Okay.

However, the design platform may have a lot longer life than that, because there are other things that we have in mind, longer-term, to change that platform. So this may be a longer run than maybe some of the other products because it really isn't a product, it really is a design platform.

All right. Good. And what trends in the industry, if they speed up, might accelerate the adoption of Eclipse?

Well, the biggest--biggest thing that would drive it right now is, putting more services on mobile networks. That will drive capacity up higher, and we're already seeing it. That's one of the reasons why Eclipse, with its mobile architecture is becoming much more attractive. It's easy to put into a large network and it's very easy to upgrade it and change the configuration dynamically without getting involved with moving a lot of hardware.

So, that's number one.

Number two is the transition to an IP-based network, so the more data-type applications that are put in networks and the more networks that are put into place, that plays right to Eclipse's strong point.

And the third thing, I would say, is the adoption of lower-cost terminal equipment for various wireless services like WiMAX, will also drive the need for infrastructure. We know all of those trends are in a positive direction right now. The evidence is right there that they have a fairly long run associated with them, so I think the question right now is just, what is the vector?

Okay. Thanks very much.

Our next question comes from [Rava Vaughn] Arcade Capital Management. Please go ahead with your question, sir.

You had highlighted that one of the impacts on the gross margins for Eclipse was the start-up cost on E100. I want to know if you're through that start-up phase?

Yes.

Okay. If I remember correctly, on the last conference call, I think you had highlighted Eclipse gross margins in the high 30's, like 37% type range, and now you're saying, mid-30, 35.

About the same.

What's that?

It's about the same if you net all of the costs, like the start-up costs, it's about the same level.

Okay. So we should look for Eclipse gross margins to bounce back, since you're through that transition, back to that high 30's level, next quarter?

We haven't said what the exact number is, but we're pretty -- I think your assumption is correct, we'll see Eclipse gross margins go up in Q1.

If I were right, in the December call, you had some accelerated amortization on [inaudible]? Was there any of that that carried over into this quarter, or is that completely behind you?

Yes.

Behind you?

Yes.

Great. Thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from Gunther Carver from Discovery Group.

Yes, good afternoon. The explanation for approximately $3 million volume related revenue reduction that has been referenced a few times?

I'm a little confused. To me, volume related discounts usually refer to an increase in volume at certain break-price points, but the revenue total typically rises while the revenue per unit decreases. How can you have, in this case, less revenues by offering volume-related discounts? That's my question.

Yeah, we hit a, as I -- we said on the earlier press release, we hit on a price point break that was basically retroactive that we weren't expecting to hit as we looked forward over this extended year -- multi-year contract.

And as the revenues ramped up, we actually got to the point where we realized we probably wouldn't get that break point, so at that point, we recorded the cumulative discounts.

So basically, it is reflecting build-up of tax revenue and future revenue, right? We have to recognize the liability at this point. That is the way the accounting rules work, even though the revenue wasn't necessarily in the current quarter?

Correct.

So what we're saying here, actually, is that the going retroactively, this reflected to discounts for prior period which you then will recognize, and that was the reason for the basic problem. Am I correct in that?

Prior and future.

Yes.

All right. Thank you.

Thank you. Mr. Kissner, at this time there are no further questions. Please continue with any further closing remarks that you would like to make.

Thanks, operator. I want to thank all of you for your questions and your continuing interest in our company -- I mean in your company.

We hope to see many of you at the upcoming investor conferences. That will include the CIBC Communications and Technology Conference tomorrow, May 10, in New York. The ADA MicroCap Financial Conference in Monterey on May 16. And the Oppenheimer Conference, which is focused on wireless, the next dimension, that's in Boston on May 24th. Thank you all and have a good day.

Ladies and gentlemen, this concludes the Stratex Networks fourth quarter and full year fiscal 2005 financial results conference call. If you would like to listen to a replay of today's conference, please dial in 303-590-3000, and use the access code of 11027231. We thank you for your participation.