Aviat Networks Inc (AVNW) 2006 Q1 法說會逐字稿

Welcome to the Stratex Networks first quarter fiscal year 2006 financial results conference call. At this time all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for queuing will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Ms. Mary McGowan of the Summit IR Group. Ms. McGowan, you may begin.

Thank you for joining Stratex Networks today to discuss financial results for the first quarter of fiscal year 2006. On today's call will be Chuck Kissner, Chairman and Chief Executive Officer, and Carl Thomsen, Senior Vice President and Chief Financial Officer. They will review the results for the most recent quarter and our overall 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 shares, future revenues, margins, operating expenses and net income or loss, balance sheet improvements, DSOs and inventory turns, backlog, foreign taxes, anticipated introduction, performance, market acceptance and financial impact of new products, in particularly the Eclipse product, breakeven 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 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 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 August 3, 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 Networks, Inc. and any recording, reproduction or broadcast of this conference call without the express written permission of Stratex Networks is strictly prohibited.

Now I would like to turn the call over to Carl Thomsen.

Thank you, Mary, and welcome to everyone that is listening to our first quarter fiscal year 2006 conference call. First I would 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 in detail.

The first quarter of fiscal 2006 revenue was 54.9 million. This revenue included 4.4 million of previously deferred revenue from one customer for legacy products that was not included in the guidance for the quarter. This deferred revenue was recognized upon receipt of a cash payment.

The 54.9 million is an increase of 19% compared to the same quarter of last year and 33% compared to the prior quarter. Gross margins were reported at 23% compared to 15% in the same quarter last year and 9% in the prior quarter. Backlog at the end of the quarter was 56 million.

Now I'll review some of the specifics related to the quarterly results, first, as far as orders received for the quarter. By geographic area, in the Americas orders were 8.5 million; Europe, Middle East and Africa, 20.1; Asia-Pacific, 18.5.

By product line, the Eclipse orders were 26.9 million, the XP4 and Velox mid capacity products were 3.5 million, Altium was 4.7, DXR was 4.7, and services were 7.3, for a total of 47.1 (ph). As we remind you each quarter, orders tend to be lumpy and those can vary significantly from quarter to quarter.

Orders for Eclipse for -- at 26.9 million decreased from the strong orders reported in the prior quarter but are still up almost 500% from the 6 million recorded in the same quarter last fiscal year. Eclipse accounted for almost 70% (ph) of new product orders in this quarter. We're very pleased with the continued market acceptance of this product.

The order pipeline continues to be very good for Eclipse and gives us confidence in the continued success of this product family and continued improvements in Stratex financial performance in the balance of fiscal year 2006. Chuck will talk more about the Eclipse order trends in a few minutes.

Some details on the revenue. Eclipse accounted for 24.8 million of the revenue. The XP4 and Velox product lines accounted for 10.7 million, Altium 6.3, the DXR product line was 6.6, and services were 6.5, for a total of 54.9. By geographic area North America was 9.1 million, Europe, Middle East and Africa 29.1, and Asia-Pacific 16.7.

As I mentioned, Eclipse revenue increased almost 70% from the prior quarter and was more than 50% of total product revenue. Total revenue was positively impacted by the 4.4 million of non-Eclipse legacy product revenue that had previously been deferred that I just discussed. During the quarter, this customer paid the outstanding balance for the equipment in this order which resulted in us recognizing the related revenue. This also resulted in improved cash collections, improved DSOs, and better inventory turns.

On gross margins, we reported 23%. This was clearly a major improvement from the 9% reported in the fourth quarter, which was negatively impacted by several unusual items. As we indicated in last quarter's conference call, normalized margins in the fourth quarter were about 21%. So the first quarter margins of 23% continue the steady margin improvement from the first quarter of last year, which was 19%, increased to 15% and increased to 19% in the second quarter, 20% in the third quarter, 21% in the fourth quarter on an adjusted basis, and now 23%. This trend reflects the impact of Eclipse margin on the overall company margins. For the second fiscal quarter we are forecasting gross margins of 25 to 27%.

Now let's turn to operating expenses. R&D expenses were essentially the same as last quarter at 3.7 million. Selling, general and administrative expenses were 12 million in the first quarter compared to 12.6 million in the fourth quarter. Our guidance for the first quarter for this area was approximately 11 million. This difference was a result of third-party agent commissions due to the significant revenue levels in the first quarter, about $200,000 related to the restricted stock plan which we implemented in the first quarter, as well as some severance costs. These factors resulted in higher selling, general and administrative expenses for the quarter than we forecast. I am forecasting a reduction in SG&A expense in Q2 to about 11.2 to 11.5 million.

Interest and other was a net expense of 795,000 in the first quarter, somewhat higher than the 5 to $600,000 I forecasted at the beginning of the quarter, due to foreign exchange expenses as well as letter of credit discounting fees. Tax expense for the quarter was $277,000. With our international operations I expect income tax expense of $250,000 per quarter for the balance of the fiscal year. Net loss for the quarter was 4.2 million, or $0.04 a share, compared to a loss of $0.10 per share in the comparable period last year.

Now I'll comment on the balance sheet. The Company's cash balance at the end of the first quarter was 45.5 million. This is a decrease of 3.2 million from the end of the prior quarter and includes a reduction of $1.5 million in our term loan. As mentioned earlier, cash was favorably impacted by the collection of about 4.4 million related to one item that had been deferred in revenue.

As we continue to move closer to breakeven, the main impact on cash utilization, in addition to the quarterly repayment of the term loan, will be working capital changes. Changes in working capital, as you know, are dependent upon projected and actual sales levels and timing of collections. We are continuing our focus on cash and the items that have the largest direct impact on cash -- expenses, inventory and receivable collections. However, given the decreasing losses going forward, we believe that the balance sheet is not an issue, so we will not be providing specific quarter-to-quarter guidance on cash balances.

Total accounts receivable of 36.1 million increased about $1 million from the prior quarter; however, DSOs were 59 days in the first quarter compared to 77 days at the end of the fourth quarter. This is a significant improvement and is a result of the collection of the deferred revenue item, resulting higher income, with no related receivable balance at the end of the quarter. I expect receivable DSOs to return to the 70 to 75 day range in the second quarter.

Inventory at 30.1 million was significantly lower than the 37.1 million reported at the end of the prior quarter. This was a result of improvements in inventory management that were discussed in last quarter's conference call, as well as a reduction in inventory related to the deferred revenue item. Inventory turns were 5 compared to 4.1 at the end of the fourth quarter. I do expect inventory to increase somewhat during the balance of the year due to the growth profile of Eclipse. Current liabilities decreased 3 million in the first quarter due to a decrease in accounts payable. Compared to the first quarter of last fiscal year we had a decrease in accounts payable of almost $9 million and repaid $6.3 million of the long-term loan balance.

Looking forward to the second quarter, Q1 was certainly a great start to the new fiscal year, with solid revenue margins continuing to show excellent improvement over the prior quarter and prior year, and of course, Eclipse revenues increasing dramatically. We expect the second quarter will continue to show good improvement in overall financial results, and in particular, improvement in product margins.

Due to the orders levels in the first quarter, the timing of new orders in the current quarter, and customer installation schedules, we are forecasting total revenue of 46 to 49 million in the second quarter, gross margins of 25 to 27%, and a loss per share between $0.02 and $0.03. We expect that Eclipse shipment volume will be up again significantly in the second quarter and should exceed 65% of total product revenue.

We are optimistic about the Company's outlook for this fiscal year and beyond, we are well positioned from a product point of view and as an organization to take advantage of a wide variety of market opportunities.

I would now like to turn the call over to Chuck Kissner for an operational summary and comments on the Company's market position, Eclipse status and plans going forward.

Thanks, Carl, for your comments. We're very pleased to report to you that we believe we are on track with the transformation of this business model that we began about three years ago. There's a large and growing family of products now that are based on the Eclipse platform, and they're clearly gaining traction. And the operational improvements that our employees are implementing are taking hold.

Based on the progress to date on Eclipse and certain key wins that we have had recently, we want to reiterate that by the end of the current fiscal year in March 2006 we expect the legacy products to be a very small part of the business. There will be continuing improvements in financial performance and introducing the next wave of major product innovations from Stratex will begin to enter the marketplace. I'm going to touch on these items now.

Let me first focus on Eclipse. In Q1, as Carl mentioned, the revenue for Eclipse products increased almost 70% sequentially. There was improvement also in Eclipse product margins (indiscernible) 37 to 38%, which is up from the mid 30s last quarter. The volume and the margin improvement drove overall margins substantially higher than we have seen for a long time. It did reinforce our confidence in the continued expansion of the margins, as we had predicted going forward.

During the quarter we also announced several key orders as examples of validating Eclipse's unique features and its functionality and the cost savings, as a number of operators moved to expand and enhance the network infrastructures that they are building.

You recall we announced the deployment of the Eclipse platform in the BPL Mobile GSM network in India at TM International, that is in Bangladesh, for Actel, which is its (ph) GSM network. We began shipments to one of our long-standing European mobile network customers.

There are many other customers in Eclipse as well. Specifically, there were a large number of customers deploying Eclipse in the data transmission market segment. These are normally smaller contracts, but it did represent about 15% of Eclipse revenue in Q1.

By the end of the first quarter there were over 110 Eclipse customers. This was up over 30% from the prior quarter. Q1 is normally a weak order quarter, but orders for Eclipse continued to be strong. In addition, since the end of Q1 we had a great start in orders in July. As Carl mentioned, we expect Eclipse to continue to grow in revenue in Q2.

In Q1 two of our largest customers decided to change over from legacy products to Eclipse. This was a pretty big step for us. There were no Eclipse orders from these customers in the first quarter due to the changeover. We have subsequently received orders from one of these customers and we have been notified by the other that Eclipse has been selected in a competitive bid for future network requirements. Now, there are no guarantees, but both of these customers have been 10% or greater customers during certain quarters in recent history. So we fully expect that by Q3 we'll be shipping Eclipse to these customers in volume.

The revenue guidance that Carl provided for Q2 does take into account the changeover from these two large customers, but there's a short gap between the discontinuation of the legacy products and the volume shipments of Eclipse products to these customers. Now, even without these customers in Q2 going forward there is strong Eclipse demand, which is another reason why we're confident about topline growth in Eclipse.

We are also seeing more activity in larger deal sizes. A few of these closed in the first quarter and I expect we will continue to see these larger deals become a more significant portion of Eclipse sales as we go forward. These larger deals and the traction on the new Eclipse product, as you know, has been key to the growth in demand.

Let me touch a little bit about new products. The new gigabit ethernet Eclipse product that was introduced at NetWorld Plus Interop in Las Vegas, and other Eclipse data products have turned out to be very popular. We are seeing surprisingly early strong demand as this product set is being used as a unique way to provide high-speed wireless data transmission infrastructure. And the new E100 EDGE product has been key to gaining new business in highly price competitive regions.

The unit shipments for the E100 were up roughly 40% sequentially. The combination of these new products is the primary driver behind strong performance that we saw in Europe and Asia in the first quarter. That was mostly the data business in Europe and the E100 business in Asia.

This more than made up for a relatively weak performance in Q1 in the Middle East and Africa. And actually, the Middle East and Africa numbers were more a reflection of the timing of orders that were related to the changeover in Eclipse from a couple of large customers, and there is no indication of any fundamental weakness there. In fact, during Q1 I did travel extensively in the Middle East and Africa, and I'm very impressed with the level of interest and the pipeline of deals that are there.

I did have a high-level meeting with a large customer during the first quarter who was looking at evaluating Eclipse. And after quite a while in the discussion he decided to summarize Eclipse to me in what I thought was a very succinct way. When I asked him what he thought of Eclipse he said Eclipse is sexy. Now that is not a word we're used to in the microwave business, but I think it was positive.

Now, we are exceptionally pleased with the progress we made executing on our strategy to expand our served available markets that we announced as an initiative in calendar 2004 to double our served markets by the end of 2006. The data transmission market, which is driven, obviously, by the growth in the IT infrastructure, continues to drive healthy growth in new Eclipse customers all around the world. The Eclipse product line has not only proven itself to be financially successful, but it has also driven us into some pretty new and exciting market opportunities.

Now let me turn to operations. We did actually continue to reduce operating expenses in general; however, a combination of higher than planned commissions that were associated with the recognition of the deferred revenue that Carl discussed, as well as further severance charges associated with the restructuring of the sales force, resulted in an OpEx number higher than we had planned. Nevertheless, the ongoing spending rate did come down and we have no plans to increase expenses substantially above that rate. This is reflected in the guidance for Q2 and our continued confidence that we will have positive operating earnings by the subsequent quarter.

The supply chain improvements that we discussed last quarter have been implemented and they're quite encouraging. This is resulting in shorter lead-times, which in turn helps us with some of our new market opportunities, especially the data network transition business, but also improves our competitive position in traditional markets.

This success has encouraged us now to launch an internal program to drive operations and customer satisfaction metrics to levels that we have never been able to achieve before at the Company. This was launched early in the first quarter and it's being implemented over the next several quarters within the current spending structure. Internally, we refer to this company-wide program as the Delight program to delight our customers, which I think will also delight our shareholders.

A little bit about the field experience with Eclipse. It's obviously widespread now. And one thing we're very gratified about is the extremely positive real-world experience that is being demonstrated by these Eclipse products.

You may know the Eclipse products were designed to be installed rapidly and to stick into the network with very high reliability. This is critical for these network infrastructure products. Our design goal was to triple the mean time between failure, or the average time between failure number that is being demonstrated around the world. And it demonstrates reliability levels well above any new product that we've ever introduced. A typical comment I hear from the field service folks is this is a sweet product; you just install it and it works.

I mentioned some restructuring costs in sales. As you may remember, we made a change in our sales leadership at the beginning of the first quarter, bringing in Larry Brittain from Ericsson. This change was covered in the Q4 FY '05 results. But subsequently during Q1 other changes were made in the sales and service organization which resulted in some charges during the quarter as we strengthened that group for the Eclipse brand (ph) going forward.

Let me talk a little bit about the outlook and then we will go to questions. We have said before the fundamentals for the improved financial performance are progressing, and that is evidenced by the first-quarter results. The gross margin and the profitability are projected to grow further as Eclipse sales continue to increase in volume and the legacy products drop off.

We still have a lot of work to do to accomplish our near-term target, but we also have told our investors repeatedly that our other major task is to leverage this new business model that we have created into a sustainable and valuable enterprise. To accomplish this goal we've been developing the next round of major products based on the Eclipse platform for introduction next year. We believe that these products will generate another paradigm shift in wireless transmission as did the current products that are based on the Eclipse platform. So expect to see changes in how wireless transmission systems are built and in what applications they can be used.

And due to the power of this Eclipse platform, this new innovation round is being accomplished by leveraging the prior investment we made in creating Eclipse. In other words, no additional spending beyond what we have planned. We do remain fully committed to our goal of being an innovation leader, as demonstrated by the Eclipse platform and the whole family of products. We'll discuss these new innovations in coming quarters.

As I mentioned, our large customers are now beginning to make the transition to Eclipse. The size of the deals we're working on in the pipeline are growing on average. New Eclipse products continue to be released and they are fueling increased market coverage and demand. We do expect very strong Eclipse demand to continue to help us meet the goals we laid out over the past couple of years as we continue the financial improvements that we set out for FY '06.

That concludes our formal remarks. Operator, we're now ready to take questions.

(OPERATOR INSTRUCTIONS). Ittai Kidron, CIBC World Markets.

Congratulations on a good quarter. With regards to the guidance to the next quarter, can you give us a little bit more color on why you see potential sequential decline in the revenue from this quarter, even after we strip out this onetime $4 million revenue that is included in this quarter?

I think I covered that, just to reiterate. We have a couple of very large clients that were ordering legacy products previously. They decided to change to Eclipse. And during that decision to change they just did not order anything in Q1. So we have a period of time where we don't expect any substantial revenue from a couple of very large customers (indiscernible) Eclipse. (indiscernible) would have been legacy revenue in the past; it's going to be Eclipse revenue. But right now we're not projecting because of the timing for that to substantially hit until Q3.

You mean the December quarter?

Yes.

So would that be fair to assume that the increase that you saw in the DXR revenue this quarter is sort of a onetime increase, and we would expect that to decline going forward?

Yes. A lot of that deferred revenue was DXR.

Have you started seeing any pricing pressures on any -- on the either E100 or the 300?

No more than normal. I think right now prices have hit a level just based on the decline over the past year and a half or so (indiscernible) hit some pretty low levels. But we operate pretty well at those levels now.

Of the backlog, how much of it would you say is related to Eclipse? Would it be fair to assume around the 80%, if not higher?

I don't think it's quite 80% but certainly it is in the 70%-plus range. I don't have an exact number with me.

Matt Robison, Ferris Baker Watts.

First, Carl, a simple question. What is your short and long-term debt exiting June?

Short-term is 6.2 million and the term loan portion of that is 12 million. So total term debt is 18.2 million.

On the Eclipse mix, you mentioned unit growth on E100. Can you give us a flavor for what the mix of E100 was in the quarter? I recall -- you announced that early March (indiscernible) when you started to ship the E100 last quarter.

I don't think we gave an actual mix number for the prior quarter.

No, I didn't think you did. I was just asking for it now.

I actually don't have it here, but I don't think we're going to get into that level (multiple speakers)

Did you see growth in the higher-end products as well as the E100?

We actually saw more growth sequentially in the higher-end products in Q1.

Even though you only had a month or so of E100 shipments in the fourth quarter?

We did ship for the entire quarter -- we didn't start shipping until the middle of the fourth quarter the E100. But that's only because this stuff was built; it just wasn't ready to ship. So we really had a full quarter of production, but I think the issue here just to put it in perspective is you don't want to separate these things because a lot of the high-end business actually we got because of E100, if you follow what I mean.

You could provide a solution you mean?

Exactly. Most of these deals have both high and low-end products in them. So that's why E100 was so key for us to get out there.

Have you been able -- has the strength of the (indiscernible) I think you said your goal was three times; I don't know if you really said you achieved that goal. But have you been able to reduce the warranty reserves, or do you anticipate doing that based on the liability of the product?

First, the field numbers (indiscernible) exceeding the objective now, so we're doing better than the objective. Of course these things tend to come down over time, but I think we have got enough clearance where we're feeling comfortable. And in fact, one of these large customers that made the decision to change (inaudible) those numbers, and I think they felt pretty comfortable with them. As far as the reserve, I'll let our chief financial officer handle that.

Our warranties generally go (indiscernible) from 15 months to 30 or 27 months, depending on who is doing installations and so forth. But generally they're in the two-year range. So we've got a while before the legacy products we have been shipping over the last two years are out of warranty. But over time you're definitely correct, just not a next quarter or following quarter change. I think it will phase down over the next 18 months or so.

So we should assume that it's not a material aspect of the better margins you are recognizing for Eclipse?

It is part of the better margins for Eclipse, but if you look at total margins they're still --

So it is part of the story there? You are talking about it cycling through, okay.

Kevin Dede, Merriman.

Let me add my congrats to the quarter, gents. Chuck, can you give us the geography on the two major customers that are rolling through the transition period?

Those two I mentioned were in the Middle East and Africa.

How about your larger (multiple speakers)

The way we define Middle East and Africa. Carl is looking at me very funny here. Our territory in the Middle East and Africa. It doesn't include Western Europe.

It doesn't include Western Europe.

Which is probably what your question really was.

Yes, it is where do your large customers in Western Europe stand with relation to their adoption of Eclipse?

One has been receiving it. The one you're probably talking about, a very large one, is -- it looks like they're headed that way, but they -- that contract on legacy runs through December or January, I think. And they're right now -- we have passed a number of hurdles. They are still doing some product evaluation. Right now it's looking pretty good.

Where would you characterize your large customer that is not really Western Europe and not really Asia but somewhere in between in that very large continent?

We define Middle East and Africa territory as Africa, the Middle East and Russia.

That answered the question. Thanks. You mentioned enlarging your served available market, but you only talked about the data side. Can you give us a little more input on what is going on in the trunk radio market and maybe a better hint as to where your next product iteration will address, what particular market it might address or how?

The trunk radio market; you're talking about classical trunking. I think it is still pretty lethargic. For us it's okay because we've just gotten into it. But it's not a huge number. We do have an improvement in our higher capacity numbers as we told you. But I think a lot of that is being driven by the data market where we tend to run 100 Mb kind of stuff. So I'm not sure how to answer your question, but trunking itself as a classical voice trunking market I don't think is a huge market at this point, for us anyway.

At one point you thought that it would contribute to expanding -- just expanding the market that Eclipse can address.

Correct. And we said that this year the big lift was going to be in the data market for us, and we introduced a product for the trunking market that we felt by next year was going to represent some more meaningful numbers. Our view of that hasn't changed.

What else or what other targeted markets are you going after that you might not have been able to address as (indiscernible)?

We segregate into three different markets, so it's beyond the short haul market, which is our short haul voice market which is a traditional market which is dominated by mobile backhaul. There is the license exempt market which we kind of started to penetrate last year; the data market, which we include in that data transmission in general, which includes both private and public network data markets, but it also includes fixed wireless markets. Some people call it WiMAX or pre-WiMAX. That market we include in the data market because it's mostly IP based kind of stuff. And the third market is the trunking market. Those three together by the end of 2006 we think represent about $1.5 billion in market size. Put that up against the $1.5 billion or so of short haul and that represents 3 billion or the doubling of our current (indiscernible).

So I guess in your prepared comments you really only talked about data transmission. I was just --

Well, because that's the one that's as we said this year was going to have the most traction as the first new market, and that's clearly what is happening.

I just wanted to fill in the blank in my memory. Thanks for that.

You're welcome.

On your financial performance objectives, could you sort of rehash where you think the positive EPS inflection point might be and at what revenue level?

We said third quarter the December quarter, and we need to be in the low 50s for that. And based on the demand profile that we see right now, that is very achievable, which is why we said we're going to do it.

And at that revenue level you would need, what, 80% or so of your product sales mix in Eclipse?

That would make it very (indiscernible). We could probably do it at 70. Remember, pricing on the -- forget about this big deferred revenue thing because that definitely skewed the results this quarter. But if you look at the underlying margins on some of the legacy stuff, as we go forward those will settle down because we don't keep selling legacy stuff at very low margins. The stuff that's left would be stuff that we would have a reasonable return on, so that's kind of the variable in there.

Can I throw Altium in that?

Yes, exactly.

Where do you think Eclipse product margins would be at that point?

Again, it depends on the mix of low to high. But I expect that we're going to be in the low 40s.

Rich Valera, Needham & Co.

Carl, do you know what the impact of the deferred revenue was on gross margin during the quarter?

It had a percent 2% point impact (multiple speakers)

Negative 1 to 2.

Negative 1 to 2. That's a pretty big range.

Basically, at the margin level almost a breakeven.

Okay. Breakeven sort of gross margin level?

Yes, the operating -- that's the gross margin level (inaudible).

Okay. So you have actually cost you money on the bottom-line, because there was significant commissions associated with that?

A little bit, yes.

I'm glad we don't have too much of that going forward.

It is cash.

True, you did collect the cash. On the service line last quarter I think you had tough gross margins in service. Can you talk about the service margins this quarter and how we should think about them going forward?

The service margins improved this quarter, certainly compared to last quarter, more in line with what they were earlier last year or -- actually a year ago they were 12% on service margins and they're a bit better than that this quarter. So, we have --

(indiscernible) like 15%?

A little less. About 14%. We have a major focus on field service. Chuck mentioned some of the changes in the sales organization. Field service reports to (indiscernible) we now have a person who is directly responsible for worldwide field service organization rather than just each geographic period being responsible. We're definitely driving push on the costs in various regions where the revenue is down. Basically on field services we have a considerable fixed cost, so if there is revenue that fluctuates from quarter to quarter in particular regions. We have to look out longer than one quarter. But we certainly have put a lot of effort into improving the financial results in that area.

But if we reserve for modeling purposes --

We're expecting going forward it's going to be in the 15% range, give or take a little bit.

That's helpful. Chuck, what does it take to get to the low 40s Eclipse margins from I think 37 you said they were this quarter? Is it purely volume or are there some efficiencies you need to design into the product? What gets you there?

Two things. The biggest thing actually is we started rolling out the E100, the new E100 version in the fourth quarter. The rollout of that has to be completed. We're doing it by frequency (indiscernible). That doesn't complete for another quarter. Those costs are dramatically lower than the previous E100 product, so that brings our cost of goods down. And some of it is volume in terms of absorption. But most -- the biggest thing is just product cost.

On the competitive landscape, Chuck, has anything changed recently, any new competitors you're facing more than others? I was wondering if you could maybe comment on who are the companies that you run up against the most when you are bidding Eclipse on some of the larger deals?

We're running into the same people as before which would comprise Ericsson, NEC, Alcatel, Siemens -- basically larger players. Sometimes Harris. The certainly in the U.S., Harris a lot, where they're quite dominant. You know, they're all very credible. I think they're all very, very strong competitors, obviously. We are doing reasonably well against them right now in terms of the win rate. I think -- I do expect my next year we'll start to see some products from a couple of those guys that are Eclipse like based on the things that we have been hearing as we have been going through these large bid deals that we have been working on, which is obviously why we're so focused right now on what we are bringing out next year.

Sure. Just one final question in terms of the longer-term outlook. You have talked about confidence in getting to the $50 million level or slightly better by (indiscernible). What is your confidence in getting in sort of the mid 50s and higher where you can really start making some interesting profits? I mean, if you could just sort of talk about that in the big picture sense.

I think when we're talking about between 50 and 60, our confidence level is very high because of our performance, our market performance right now is better than it was last year when we were only selling legacy products. If you look at the implied demand. If we add back in for example these two clients that have decided to switch to Eclipse. If we add two back in we are there at the mid 50 level.

The market itself is still forecasted to have a 30% unit growth change per year or increase per year which translates to maybe a 15% revenue increase per year. If our performance in the market is better than it was a year ago you would think at the very least we should be able to sustain the market that we are at. And clearly we have a goal of growing that. And the evidence so far says it is there. So I think we're pretty confident that we can keep growing the topline based on those earnings (ph). I don't think it requires a miracle for that to happen by any means.

In other words, we're not using hope as the strategy here. I think there really is some solid numbers, there's a nice base of customers that is growing very rapidly. We have a lot of new customers that are buying in smaller quantities now that they are involved in growing businesses. And some of those -- it's like portfolio management; we think some of those are really going to start to blossom. And it won't take too many of those to sustain reasonable growth.

Brian Modoff, Deutsche Bank.

This is Jonathan Goldberg in for Brian. Most of my questions have been answered. But I have one housekeeping question and one that is a little bit broad overview question. The housekeeping question is (indiscernible) OpEx guidance you gave for R&D and expense.

Could you repeat that? That was a little hard to --

I'm looking for the -- could you repeat the OpEx guidance for R&D and SG&A?

So, for -- we can give -- R&D I didn't mention specifically, but basically it is going to be about the same level as going forward, might increase slightly during the year. But no significant change. And we said expect SG&A to be in the range of 11.2 to 11.5 for the next quarter.

I was just hoping I could get your thoughts on how the overall wireless infrastructure space -- how the infrastructure industry trends are, where we are in the cycle, and what your outlook is for the next 9 to 12 months?

I guess we certainly have -- I want to caveat this by saying that our view is very much dictated by what we see in our own (indiscernible) markets. So in some sense we have our blinders on. But in terms of our own market, there's a couple of key drivers that continue to drive the numbers. One is building new networks in developing areas of the world. That's a very strong driver right now. The funds to do that seem to be available, and that continues to be a strong part of the demand going forward. There's also the IT infrastructure overlay on either existing voice networks or on new networks that are going in. And that is also a big driver. When we talk about developed areas, I think the numbers are still fairly lethargic. But when you add up the world in total because of those two drivers, I think it does support the market forecasts that we're seeing, which are quite high unit count growth over the next couple of years. And obviously, as I said before, the actual revenue growth is something less than that because we still forecast price declamation. So we're looking at market revenue growth for infrastructure spending at least in the transmission area of about 15% growth per year.

Rob Amman (ph), RK Capital Management (ph).

Just a couple of questions on gross margin and clarifying that. You mentioned basically (indiscernible) 4.4 million came through at a zero gross margin. Is that the right way to think about it?

Yes, that's pretty close.

So that would imply kind of base business ended at 25% gross margin, if my math is correct. Does that sound about right?

You have a good calculator there.

Can you talk a little bit more about the legacy product gross margin going forward? I kind of missed a little bit of, Chuck, what you mentioned. I think you mentioned that as you get toward end of life there that maybe the price pressure wouldn't be as great; the margin might actually stop falling as fast or stabilize.

I think that's correct. That is what we believe will happen, partly because we are not bidding the very, very low-margin stuff at this point. Pretty much if we have really low-margin stuff it's because of past obligations, contractual obligations and so on. For example, this deferred revenue was from a project that we did quite a long time ago where it was strategically important to sell into that customer what we had. We had to sell existing products. It definitely was a big boost for Eclipse by the way because that network is now deploying Eclipse at more reasonable margins. But generally, in the past as we have discontinued products we have stopped selling them at lower margins and people who want to keep them going tend to pay a little bit -- tend to pay us prices that are compensatory. (multiple speakers) we expect that to be the case.

Even something like a 10% gross margin there, reasonable assumption going forward do you think? It looks like you did better this quarter than that. I'm guessing though.

I don't expect it to be that low and steady state.

Help me understand your gross margin guidance as we look into next quarter, because if I take 65% of products that are Eclipse and you expect some modest gross margin improvement there, call it 38, that's 8.65 (ph). That was 0.38 (ph); I get 0.247. So that essentially gets you to the low end of your gross margin guidance range. If I layer on 7 million of service revenues, which would be about 14% of revenue at the 15% margin you talked about, that's about 2 points of gross margin contribution. So if you get any margin from the remaining 28% of revenues that would be legacy, that would put you pretty comfortably above a 27% gross margin.

Yes, that's probably true. But we're giving that guidance because we're trying to balance lots of items. We want to make sure that we anticipate the unanticipatable. It also includes -- we have to try to project what is the mix between high and low-capacity Eclipse, which will affect what the Eclipse margins are going to be as well. We've got to try to balance all of those, obviously, when we try to give guidance to our investors, and we try to be as accurate as we can.

That seems wise. But the gross margin is higher on the higher-end Eclipse product versus the low-end?

Yes, it is. It always will be. I think it is exacerbated by which low-end products we're selling in Eclipse. The ones that -- where we've rolled out the new E100 in those frequency bands have better margins than where we haven't rolled it out yet. So we have to execute on that rollout as quickly as we can.

Just a housekeeping question. It looked like PP&E fell sequentially, Carl. Is any restructuring going on there or some assets sold off or written off?

There weren't any assets sold or written off (inaudible)

Just depreciation (indiscernible) accelerated versus (multiple speakers)

(indiscernible) depreciation (indiscernible) adding (indiscernible) depreciation is certainly higher than our capitalization (ph) at this point.

I didn't realize depreciation was that high a quarter. But now looking back, it does look pretty normal actually. So I think that's my mistake.

Jim (technical difficulty)

Congratulations on a nice quarter, folks. I wonder if you could give us an approximate breakout by application, backhaul, etcetera.

It was about probably 60% backhaul, so that's down from our traditional of 70. It was about 15% data networks of one sort or another. And the rest was a mix of utility, military, hospital, (inaudible) that was in the data market. I would say defense and oil and gas, private network kind of stuff.

What do you feel about backhaul going forward as a percentage of total?

I think it will probably as a percent -- in the long-term it will go down, but not because the backhaul market is weak; it's just because the data market is growing faster than the backhaul market right now.

WiMAX was included in data, correct?

That's correct. Still there, Jim?

I'm still here; I'm formulating the next question, which is -- I see a bunch of the tower guys have gotten together to do backhaul. I'm wondering if you've seen that and if you think there will be any impact on the business?

We have been seeing it for quite a while, actually, and we have participated in some of it. In general, we kind of like it because it tends to make microwave more attractive. There's been quite a bit of it in the U.S. where we haven't really done a lot of business recently, at least in terms of mobile backhaul. So that is kind of nice. The other thing we like about it is that we would rather sell a smaller quantity of high-capacity backhaul and lots of low-capacity stuff. So that tends to favor the high-capacity business.

On this particular consortium, have you talked to them or do you plan to talk to them about --?

I don't know which one you're you talking about because there's three that I know of right now.

I just read about one over the last week or two, and I've forgotten what its name was, frankly.

Let us know, because we are always looking for sales tips here.

This one was supposedly formed just for fiber backhaul.

Just fiber?

That was a name in the -- part of the name had fiber in it.

Fiber Tower? Is it called Fiber Tower?

That was it.

Thanks. We are aware of that one.

The E100; you said the units were up 40%, but is it significant yet in revenue?

Yes. We don't break the revenue out between E100 and the new E100 and the high-capacity. Just to be clear, we have the new E100, the old E100 and the E300, which is high-capacity. And those are the outgoing units that go into the Eclipse processor. So the E100 in total was probably about 40% of sales. We don't break out what the new E100 is versus the old one.

As you get to (indiscernible) the next few quarters (indiscernible) quite a bit of lumpiness, both positive I guess and negative, (indiscernible) what do you expect the long-term growth of the Company to be or the market growth to be for the served market?

We haven't commented on the Company growth at all, and we're not going to do that now, obviously. That might be extending beyond our normal guidance. But as I said before, we do believe the aggregation of the market forecasts say about a 30% growth rate on unit count and about a 15% growth rate on revenue. And most of the forecasts we have seen go out three years. So let's say two years of that is probably reasonable and agrees with the network rollouts that we are seeing around the world.

You're expecting, obviously, to gain share on that?

Yes, we are expecting to maintain share. We're hoping, obviously, to grow share because our competitive position has improved. But since we don't control the actions of our competitors, I think we've taken a default position (inaudible) we can keep the share that we have at a minimum.

(OPERATOR INSTRUCTIONS) (technical difficulty)

Chuck?

Yes, Rich (ph).

I hate to do this to you, but I think I came into the call just after you discussed the orders by product. Did you give that out, the Eclipse, Altium, DXR orders in the quarter?

Since Carl gave them, I will let him say it again. I want you to get the full replay.

This is orders. So on the orders, Eclipse were 26.9, the XP4 and Velox mid-capacity was 3.5, Altium was 4.7 million, DXR was 4.7 million, and services were 7.3, for a total of 47.1. On the revenue side (multiple speakers)

I have the revenues. I guess my question was to what extent are you (technical difficulty) revenue guidance for the current quarter, revenues derived from orders coming in in the quarter and being shipped in the quarter.

Say that again. How much is it based on backlog (multiple speakers)

How much is it?

We don't have that actually, but I guess our estimate is probably about 60, 65% out of backlog going into the quarter.

60% this quarter out of backlog or so, and a pretty big piece out of new orders.

You mentioned that the quarter is off to a good start, at least in July, in orders. So for example, would those likely be shipped in the quarter?

Most of those will actually. It's not always the case, but in this case they were, or they will be.

The confidence you have in the December quarter is based then it sounds like primarily on what you think you'll be able to book at the end of September quarter?

I don't think so, because I think the way this business is right now I think -- I don't know if you were on the call when I talked about lead-time reductions. That has been a general trend for us. I think generally we're going to go into these quarters with 60 to 70% in backlog and 30 to 40% will be booked and shipped in the quarter. I don't (multiple speakers) anything different about the December quarter. Because that's the way the market is right now, especially this data market that we are in; stuff moves very fast.

And at this time there are no further questions. Mr. Kissner, are there any closing remarks?

Thank you, operator, and thank all of you for your questions and your continuing interest in your company, Stratex Networks. We do hope to see many of you at the upcoming investor conferences. In the short-term, those include the San Francisco Tech fest which is next week, August 10, in San Francisco, and the Merriman, Curhan Ford & Co. investor summit which is on September 19 which is also in San Francisco. Thanks to all of you and have a good day.

This concludes today's conference call. You may now disconnect.