Aviat Networks Inc (AVNW) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Stratex Networks fourth quarter and full year fiscal 2006 financial results conference call. [OPERATOR INSTRUCTIONS] As a reminder, this conference call is recorded for replay purposes. I would now like to turn the conference call over to Ms. Mary McGowan of the Summit Group IR Group. Ms. McGowan, you may begin.

Thank you for joining Stratex Networks today to discuss financial results for the fourth quarter and full year of fiscal 2006. On today's call will be Chuck Kissner and Carl Thomsen. They will review the results for the most recent quarter and our current business outlook, followed by some comments by the Company's new CEO, Tom Waechter, and then a Q&A session.

During this conference call, we make forward-looking statements regarding our business and the wireless industry in general, including statements relating to our market share; future revenues, margins, operating expenses and net income or loss; balance sheet improvements; DSOs and inventory turns; backlogs; foreign taxes; anticipated introductions; 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's 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 SEC. In addition, please note that the date of this conference call is May 18th, 2006. Any forward-looking statements 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 a result of future events.

Now I'd like to turn the call over to Mr. Carl Thomsen.

Thank you, Mary, and welcome to everyone that's listening in on our fourth quarter and annual conference call for fiscal year 2006. 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. As we have in the past couple quarters, we included both GAAP and non-GAAP results in our press release. We believe these supplemental non-GAAP financial results reflect the basic operating results of the Company and facilitate comparison of operating results with cross reporting periods.

There was a $60,000 non-cash stock charge in the fourth quarter related to our restricted stock program, and a 1.5 million charge for the full fiscal year. For even comparison to prior periods, I will be discussing the results based on the non-GAAP results, which were included with the press release. Fiscal year fourth quarter 2006 revenue was 63.2 million, up 14% compared to last quarter and a 50% increase from the same quarter of last year. Gross margin on a non-GAAP basis were 30.7%, compared to 29.3% in the prior quarter. Orders for the fourth quarter were 65.3 million, and backlog ended the quarter at 86 million.

In the fourth quarter reported net income of 3.3 million, or $0.03 per share. We are pleased to again report a profitable quarter. While two quarters do not make a trend, we are proud to report these positive results they -- a culmination of the major turn-around effort we began several years ago. This is a major improvement compared to the 13 million loss we reported in the fourth quarter of last fiscal year. As I noted last quarter, these dramatically-improved results were accomplished through the dedicated efforts of our employees at Stratex Networks worldwide.

For the full fiscal year, we reported sales of 230.9 million, an increase of 28% compared to the prior fiscal year, and a non-GAAP net loss for the year of less than $1 million, compared to the net loss from the prior fiscal year of almost $36 million, excluding restructuring charges. I believe we can clearly say that this has been a major turn around year for the Company.

Now, I would like to review some specifics related to the quarterly results. First, orders received in the quarter. Like the sales we do every quarter and remind you that orders tend to be lumpy and can be -- vary significantly from quarter to quarter. As you'll recall, orders in the third quarter were quite significant. First, by geographic area, orders in the Americas were $9 million; in Europe, $20.9 million; in Middle East, Africa, 31.3; in Asia Pacific, 4.1, for a total of 65.3. By product line, Eclipse orders were 50.9 million; our XP4 Velox product group was 4.5 million; the Altium high-capacity product is 0.6 million; and DXR product family, 1.7 million; and services accounted for 7.6 million.

It was another strong orders quarter and brings orders for the full fiscal year to 255 million, or a 22% increase over the prior fiscal year. Eclipse has clearly established itself in the marketplace and accounted for 81% of the new product orders in the most recent quarter.

On the revenue side, I will do by product line first. Eclipse revenue is 46.1 million; the XP4 and Velox product group was 4.3 million; Altium was 4.5 million; and DXR product family was 1.5 million; services were 7.6 million, for a total of 64 million in revenue. On a geographic basis, the Americas were 6.6 million; Europe was 14.3 million; Middle East, Africa was 32.4 million; Asia Pacific was 10.7 million. Eclipse revenue is also over 80% of total product revenue in the quarter, up from 42% of product revenue in the fourth quarter of last fiscal year.

On a gross margin basis, gross margins were 30.7% in the fourth quarter, this compares with 29.3% in the third quarter, 26.1% in the second quarter, and 23.1% in the first quarter. This trend reflects the impact that Eclipse margins have on the overall Company margins. And this result is in line with our forecast given last quarter on the conference call, where we said we would have 29 to 31% margins. Based on the current backlog and forecast product mix, I expect gross margins in the first quarter of fiscal year 2007 to be in the range of 30 to 32%.

Now let's turn to operating expenses. Total operating expenses were 15.5 million, at the high end of the range of 15 to 15.5 that I forecast at the beginning of the quarter. R&D expenses of 3.7 million were up, compared to 3.3 in the third quarter, but in line with the forecast that had been provided. SG&A expenses, at 11.8 million in the fourth quarter, were at the high end of the range, and compared to the prior quarter, higher sales, expenses related to our worldwide sales conference, travel, sales commissions, as well as higher G&A expenses related to audit and other professional fees were partially offset by lower third-party agent costs.

I'm forecasting both R&D and SG&A expense to be about the same in the first quarter as in the fourth quarter. Excluding charges for restricted stock and stock option expense, I expect total operating expenses to be in the range of 15.5 to 16 million in the first quarter.

Operating income on a non-GAAP basis was 3.6 million, compared to an operating loss of -- loss of 12.8 million in the comparable quarter last year. For the full fiscal year, our operating income was 3.6 million, compared to operating loss of 34 million in the prior fiscal year, a $38 million turn around.

Interest and other expenses was a net expense of 540,000 in the fourth quarter, compared to a net expense of 660,000 in the third quarter. Higher interest expense was offset by higher interest income and lower foreign currency cost. Tax expense for the quarter was 184,000 and was lower than the forecast that we gave at the beginning of the quarter, due to the tax rates at certain foreign subsidiaries for the full year. Net income, and as the CFO I like the sound of those two words, was $3 million for the quarter and earnings were $0.03 a share.

Now on to the balance sheet. Cash was once again generated from operations during the quarter. Cash balance was 57.7 million at the end of the fourth quarter. This is an increase of 17.6 million from the end of the prior quarter. Of this increase, 5.4 million is from increased borrowings, as we converted $13 million short-term borrowings we had at the end of December quarter to a $20 million four-year fixed-rate term loan, and increased our overall credit facility to $50 million. Cash was favorably impacted by a decrease in DSOs to 59 days.

At the beginning of the quarter, I indicated that I expected we would use cash during the quarter for increased working capital requirements, as revenue was increasing. However, our credit and collections team once again did an outstanding job of collecting cash and bringing DSOs down well below the target of 70 days. Increases in inventory were offset by a comparable increase in accounts payable. I do expect that we'll use cash in the current quarter, as I expect DSOs will increase to a more normal level of 70 to 75 days.

Accounts receivable at 42 million decreased 9 million from the prior quarter, despite the substantially higher sales. As I increase -- as I indicated, DSOs decreased to 59 days in the fourth quarter, compared to 83 days at the end of the third quarter. Timing of shipments, letter of credit discounting, and focused attention on collection efforts all contributed to the excellent DSOs.

Inventory increased somewhat to 43.9 million, compared to 40.3 million that we reported at the end of the prior quarter. This was due to increasing product demand. With the significant backlog and rapid delivery requirements, we began increasing the inventory pipeline to support projected sales levels. As a result, the inventory turns were 4.2, compared to 4.4 in the prior quarter. I expect inventory to be about the same in Q1 as we had at the end of the fourth quarter. Liabilities increased 7 million in the fourth quarter, primarily due to the increased bank borrowings.

We are certainly pleased with the steady progress we have made during fiscal year 2006. As you know returning to profitability is a major milestone and a goal we focused on since we started the Eclipse product development effort. We certainly plan to continue the positive momentum in fiscal year 2007. I expect first quarter will continue to show improvement in our overall financial results. Due to the order levels in the fourth quarter, customer installation schedules, and our key suppliers' anticipated ability to ramp production, we are forecasting total revenue of 62 to 66 million in the first quarter, gross margins of 30 to 32%.

And as we customarily provide a range of earnings due to the normal business uncertainties that we face, for fiscal Q1 2007, that range is $0.02 to $0.04 per diluted share, excluding the impact of stock-based expense. As we indicated on the call last quarter, for the full fiscal year, the overall market we serve is expected to grow 10 to 15%, and we expect to do at least as well as the overall market.

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

Thanks, Carl. I would like to make a few comments about our progress over the past year. I would also like to make some points about the fourth quarter and what happened there, and give you, again, some perspective on where we are headed, including the management change that we announced today.

For the fiscal year, we are obviously very pleased with the financial progress over the last year. We are definitely excited about the growth of the new products, and the real traction that we have got in the marketplace right now. For the year that we are reporting today, FY '06, this, as I'm sure you know, is the culmination of many changes that were quite major that we began a little over four years ago. And those changes included implementing a new way to develop products, expanding our market coverage, and very significantly using a rapid innovation model in our quest to create a sustainable and a growing and profitable enterprise.

FY '06's revenue growth rate of 28% that Carl mentioned came on top of a growth rate of 19% the prior year. The driver for that was the innovative Eclipse product line, which dramatically grew the top line. Over the last two years, since it was introduced, we not only replaced almost all of our legacy product revenue, but, importantly, we grew the top line over that two-year period by over 45%. Eclipse itself, grew about 175% year-over-year. We turned profitable in the second half of the year. And we came very close to breaking even for the full year.

So we feel that we have established a new business model now with this constant product innovation, that is designed to sustain margins and then a growing software business that's designed to enhance margins, and it's showing strong evidence for us of creating a success paradigm shift, the one that we were after when we began to make all these changes. I think most importantly, it's our employees that deserve a tremendous amount of credit for what they have been able to accomplish over the course of, not only the last year, but the last four or five years.

For the fourth quarter, innovation continued. We announced yesterday another big leap forward in Eclipse technology. We announced the E300sp system. That's a major new product for us. Now, this is a companion product to the E300hp that was announced in January, and I know all these product designations can get very confusing. So think of the E300hp that we introduced in January as high-performance, as high-end, high performance and the 300sp as standard performance for the lower-capacity solutions.

And you might recall, that the 300hp that we introduced in January used new radio technology, so we could create, not only lower costs, but also a different supply chain model, and a new licensing channel for the high-end, high-capacity products. That was the agreement that we announced with Alcatel. The new 300sp now covers the low end, low-capacity range of our product line, with a very highly cost effective and more capable solution than previous low-end products.

Because we have got heavy duty Eclipse software and signal processing technology, we have been able to so dramatically reduce the technical requirements for the low-end radio outdoor units, that for the first time ever, we are now able to outsource, not just the manufacturing, but the design of the entire low-end radio outdoor unit. This is the part that we have been really working on driving simplicity and cost. And these -- sourcing now is coming from China for the first time. In addition to the cost savings that we expect to realize, we also believe this is going to enable us to ramp up our volume over the next year or so to meet the anticipated demand.

We are currently shipping the new E300sP, the low-end units in commercial volumes. Over the course of the next few quarters we're going to continue to introduce a very broad range of radio frequencies for both the E300hp, that's high end, and E300sp, for the low end.

Now why are these products important to us? First, the new products are designed for high-volume production, much higher than previous designs. Now, over the course of the last year, our unit volumes actually have increased around 80%, and we anticipate further significant increases in the coming year. Secondly, both of these products are substantially lower in costs, and they are part of our plan to keep growing our margins.

I would like to also discuss the status of the licensing agreement that we signed with Alcatel earlier in the calendar year, and the progress in Q4. We are very pleased with the progress of the new agreement. During Q4, it became very clear to us that Alcatel is strongly behind this product line. They did show this product at the CTIA show recently, and they are beginning to source Eclipse products with commercial shipments. We expect contribution from this agreement during fiscal year '07, the current fiscal year, with the contribution becoming meaningful during the second half of the year.

We now have received additional interest from others in our Eclipse E300hp licensing program. Now there's no assurance that any of this is going to result in another agreement, but so far, the reaction to the program is very encouraging. Between the licensing program and the software upgrade program through the install base, we do have growing confidence in our plan to migrate the business to a higher software content business model.

Overall, the demand for Eclipse products is very strong. The exceptionally high orders for Q3 and then the continuing strong orders for Q4 that we just reported today, and the additional demand we are seeing for product on the licensing program, all of those things together are creating some challenges for us. Mostly, increased demand has been for the newest products that are just -- have just been introduced. This has placed additional pressure on us and our suppliers.

The good news is, we have a much stronger supplier base than we've ever had. We have shown excellent progress in ramping output over the past year, but we see that keeping up with the demand is probably our most significant task for the next couple of quarters.

Now just going forward, beyond FY '06, we believe we have largely achieved the objectives that we set for ourselves about four and a half years ago, when I returned to the Company as CEO. Now, there are always ups and downs in any business, but we do believe that the general trend is very positive for Stratex going forward. We think the Company is solidly repositioned, is profitable, and is a sustainable business model, with very substantial business opportunities in front of us right now, as well as the challenges of growth.

We also have underway now, a continuing product innovation to sustain and grow the business and the business model. During fiscal year '07, we will be rolling out, as I said, the various frequency bands across a broad range based on the new E300sp and the 300hp products in order to continue the margin expansion as we planned. There's further innovation in terms of the next-generation of product that's also planned, in order to continue to propel the innovation model for the next couple of years.

Now as we have emerged as a stronger enterprise over the past year, we are confident we can continue to deliver on the promises that we made to our investors when we rebuilt Stratex Networks after the telecom bust. We are also seeing a broader range of opportunities right now, and it's both tactical and strategic, and we want to be able to execute responsibly on all fronts while the window is open to the benefit of our shareholders.

Now, fortunately, Tom Waechter, whom I have known for some years now and who joined our Board late last year, is an ideal leader for this phase of our Company. Tom's strong operational skills and strategic vision, his knowledge, and his enthusiasm for our business, I think, are a perfect fit. So effective today, as you saw in the announcement, Tom becomes our President and CEO, and I become Executive Chairman. Tom and I have worked well together, and I look forward to turning the day-to-day leadership reins over to him and focusing on helping us move forward on some additional strategic initiatives that are actually in front of us right now.

I also want to mention in addition to Tom becoming CEO, another one of our executives, John Brandt, who was Vice President of Operations, is now Vice President of Business Development, and he will work closely with me on these strategic initiatives.

Now we would like to turn it over to questions, but before we do that, I would like to turn it over to Tom, in case he wants to make a few comments.

Thanks, Chuck. I really appreciate the warm welcome to the Stratex team. Since joining the Stratex Board late last year, I have had a chance to get a much closer look at the management team, the technology, and the strategic plan. This positive experience, combined with the growing success of the innovative new Eclipse product family, and the return to profitability were major encouragements for me to join Stratex as the President and CEO at this time.

As was mentioned by Chuck, the potential for Stratex looks very positive. Along with that positive outlook and rapid growth come a number of operational challenges. I plan to work with the Stratex team and partners to ensure that these challenges are met and that the potential for Stratex is optimized. At the same time, having the opportunity to work directly with Chuck on additional strategic initiatives is something I look forward to.

In the coming months, I look forward to meeting with many of Stratex's stockholders both on the road and at investor conferences. I would sincerely like to congratulate our Stratex employees for the strong finish to fiscal year 2006 and say I look forward to working with you to build on that success in fiscal year 2007 and beyond.

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

Thank you. [OPERATOR INSTRUCTIONS] First question comes from Ittai Kidron with CIBC World Markets. Please go ahead.

Hi, guys. Congratulations on a good quarter.

Thanks.

And Tom, good luck in your new role.

Thanks, Ittai.

And, Chuck, you as well, of course.

Thank you.

Guys -- Chuck, now that you are moving to more of a strategic role, can you tell us a little bit more insight as to what strategic opportunities do you envision for the Company? Are those more product-development-related? More M&A related? What should we think about from that standpoint?

I think right now from where we're positioned, we have got opportunity to expand the Company into other product areas, adjacent product opportunities, and there's certainly are always M&A opportunities out there, but we are tending to be pretty conservative about those, but I think they are both in front of us right now.

Can you give us an example of adjacent product line?

Well, what we connect to is probably what we would say adjacent. So, for example, with Eclipse, we originally were building point-to-point microwave radios, and we considered all of the other functions of the transmission network to be adjacent opportunities, and we subsumed a lot of those in the Eclipse platform, as you know. So if you look at what we connect to, there's a couple of areas -- one is going up the food chain in terms of higher capacity, beyond what we have today. And then, to some extent, we are getting more and more involved with some of the access areas direct to -- direct to users, especially business users. We are seeing more of that, for example, in our IP transmission systems. So getting into buildings and things like that. So I think in both directions we are seeing that.

Another area that's certainly a potential as we have gotten into many more complexities in networks, as we have subsumed more network functionality, is the management of those networks and the control of them.

Can you give us a little bit more color about the trends within the orders, they have declined sequentially $20 million, and I don't know if that's more a reflection of an unusually strong December versus a weak March, but if you could give us a little bit more color? And how should we think about the orders? What's in the mix of the decline? And how should we think about that number moving forward?

Well, I guess that's the trouble with reporting an exceptionally strong quarter. When we reported the December quarter, we said that that was pretty abnormal. That was not sustainable in the short term. I think we shipped 55 that quarter and booked 85. So you can only sustain that for so long.

So I wouldn't call the March quarter weak at all. We actually consider the March quarter quite strong. And if you look at a trend line going back over the last year or two, I think you would see that the trend is up. So I would more look at the December quarter as an anomaly in the short term, but hopefully not an anomaly in the long term.

As far as the -- what happens -- what's happened to the orders, they are lumpy, as always, and if we look at, for example, Asia Pacific, in terms of orders, that's a very, very lumpy area, so we expect ups and downs in that area as well. There's a tremendous amount of activity there, but it just happened because of the timing in the March quarter, those orders were substantially lower than the quarter before. But I wouldn't read anything into it. I -- clearly, we read this as strong. And I think one evidence of that as we went into this quarter, it was still with 85 million backlog.

Okay. Maybe I will put it differently. If I look at your orders and I look at your revenue, you are just over the 1 book-to-bill. And just given your strong commentary about the fact that you are trying to improve your processes and your supply base, you've had some challenges with that during this quarter. Would it be fair to assume that those challenges have possibly prevented you from recognizing either more revenue or accepting more orders through the quarter?

I think some of that is there, certainly. I think we probably could have put out a little bit more in terms of volume in the March quarter than we did, because of the supply chain constraints. Yes, that's definitely the case. When a slug of 85 million in orders comes in, it really stresses the supply chain. So we could have shipped a little bit more.

We do have to meet certain lead time requirements in the marketplace. And in order to do that, that limits what we can actually -- the kind of business that we can go after. So I think some of that is in there, but I think, just to put it in perspective, the orders still were quite strong. If we could ship more, yes, we could raise our -- we believe we could raise our revenue.

Right. But would you say that those challenges are, to a large extent, behind you now?

No, I don't think so, because we're still seeing a tremendous amount of growth in the marketplace, and we don't like to leave anything behind.

So what would it take for you to get to an optimized supply chain, manufacturing chain from your standpoint, either timewise or other?

I think it just takes time to ramp the supply chain because the component supply that's required has lead times associated with it. So I think the processes are fine. I think the supply chain, actually, has gone through a pretty big upswing in the last three months, since we got all those big orders in. So I just -- I just think it's a matter of time and focus right now.

Okay.

I don't see any particular obstacle to accomplishing it.

Okay.

We would like to have it done sooner, but it does take time to spool these things up.

Okay. Good luck, guys. Good quarter.

Thanks.

Thank you. The next question comes from Rich Valera with Needham & Company. Please go ahead.

Thanks. Good afternoon. Chuck, more specifically on the order outlook for June. Last quarter, I think you -- after that great quarter from bookings, you said that you were off to a good start in the March quarter. Do you have any feel for how the order start is to the June quarter?

No. Not at this point.

Okay. So no feel for, sort of, up or down sequentially orderwise?

It's -- I think it's -- not really. It looks like a fairly normal quarter at this point. That's all I can say. I can't -- clearly, there's orders that are coming in right now, but I think we're -- it's still a little early to project what it's going to be. We are probably more focused on filling the backlog right now.

Okay. And in your comments on the Alcatel agreement, you said that you expected that had a meaningful contribution second half of your fiscal year. Can you put any commentary around meaningful? I guess, anything to help us figure out what that means?

Yes, what we mean is enough to make a difference to the bottom line.

Okay. As --

I mean, a positive impact, is what I actually mean.

Yes.

Just to be clear.

Okay.

Somebody pointed that out to me here when I said it.

Okay. And you've talked before about Eclipse product margins just under 40%. I think that's what you said last quarter. I just want to clarify, one, is that is still sort of a level we should think of, even with these new lower-cost products rolling out? And, two, does that include the software revenue that you have said is sort of starting to ramp reasonably nicely as part of that line?

I would say that margins are probably up a little bit on Eclipse. And to keep them sustainable and growing, and we think we can grow them, we do have to have a strong penetration of these new products. That was always part of the original plan. So over time, the older Eclipse products, if they weren't replaced, it would start to bleed down. So I would say they're -- the margins are growing right now. We are hopeful that we can grow them more. And when I talk about those margins, those are the Eclipse products with the initial software license. So that would be the required license that comes with it. That doesn't include the effect of software upgrades.

Okay. That's helpful. So it sounds like you are somewhere around 40%. But I don't want to pin you down too much, but -- ?

Yes, a little on the north side of 40, yes.

Okay. That's very helpful. And, then, just with the -- with the Alcatel agreement, you did give some color that you are pretty encouraged with their activity. Anything more specific you can talk about in terms of any engagements you have had, particularly in North America, that gives you -- specific things that give you confidence that that's really sort of taking off?

I guess the best indicator from my point of view is that, remember that this agreement is for the E300hp-based product. The one that's resourced from the contract manufacturer. And that -- the supply of that is dependent on the frequency bands as we roll them out. So it's not completely available yet, as I indicated. We're rolling frequency bands out. We have some, and we have rolled out some -- rolled out some during FY '07.

Where there's an interesting indicator is that they are winning some business right now for some products that are not available yet in E300hp range. So to fill that demand, we have been filling some of that with other Eclipse products that we would sell on an OEM-type basis to fill that front-end demand. So that's one of the reasons why we are encouraged. The traction is taking -- some traction is taking place ahead of the actual availability of some of these products.

Great. And, then, just one final one for Carl. In terms of tax rate, could you give us any sense -- your best sense of where you expect the tax rate to be for fiscal '07?

Yes, given our international spread, it's difficult to take a tax rate, but I'm estimating 500 to $600,000 a quarter in taxes based on our foreign operations.

Okay. Thanks, very much. That's all for me.

Okay.

Thank you. Our next question comes s from Steve Ferranti with Stephens, Incorporated. Please go ahead.

Hi, guys. Wanted to add my congratulations on a good quarter. And good luck to Chuck and Tom and John in the new roles.

Thank you.

Thanks a lot.

Chuck, it sounded like earlier you were describing what sounded like a little bit elevated penetration to what sounded like metro Ethernet applications. Can you give us an idea as to what extent those segments are incremental to what you would describe as your, I guess, more traditional market segment?

It's 100% incremental. That was the -- that's one of the market segments that we said we were after to expand our served available market. So we would not have been able to adequately serve that market with the product lines that we used to have.

But it's still a small market, but it's very encouraging because our approach to this has been to approach that as carrier class Ethernet which is, we think, going to be the theme over the next few years, to really propel the wireless part of this business. That's the way Eclipse is positioned right now. And so we're pretty encouraged by the reception. The numbers are small, but the potential looks to be quite large.

Yes, and so these are, like, fiber replacement type of -- or alternative to fiber applications?

Yes, I'd say it'd be more alternative. The fiber is already there, we are probably not going to play that game.

Okay. So when you talk about general -- when you talk about seeing market studies of growth in the 10 to 15% range, that's really not including opportunities such as these?

Yes that's included in the -- let's say, the last year, we grew our data transmission business by about 50%. And that would be the segment that we would be in. That's part of that data business.

Got you.

And by the way, that one -- it's very difficult to actually find numbers. We can certainly find numbers for the metro Ethernet transmission business. We can look at the number of clientele, how many switches and routers and so on are being used, but the difficulty is figuring out how much of that is going to go wireless, because I think it's only been recently that there have been adequate wireless solutions to handle this triple -- to handle triple play in a reliable way.

Well, I guess -- and then -- I mean, when you enter that realm, do you get into, say, increased competition with some of the other suppliers that talk about wireless fiber applications, that operate in the higher frequency ranges, for example?

I think that's possible, yes. I don't -- I think most of our stuff, though, has tended to be longer range kind of stuff. Long length hops and things like that as part of a complete solution.

We call it an adjacent opportunity because the ones that we've been very successful in, we are supplying all of pieces of the wireless network. So the backbone, the trunk -- the equivalent to trunking, the backhaul, and then the last mile access is just part of the Eclipse node. So it would be a subset of where we see our business. If we just went after the last mile, I'm not sure that would be good positioning for us. And, in fact, some of those products, the high-frequency products I think are a nice compliment to what we are doing in certain applications.

Okay. Great. And one final question, are you seeing any opportunity, potentially, in government applications, Homeland Security, for example, is coming to the forefront lately. Anything there that might be a potential for you guys?

Yes, we have done more government business this year than we -- in FY '06, than we have probably done in many years. That being said, it's still small. I don't think we are well positioned in the U.S.

Okay. Great. Thanks for taking my questions and good luck going forward.

Thanks. Luck always helps.

Thank you. And our next question comes from Mark Donohue with Ferris, Baker Watts. Please go ahead.

Yes, nice quarter. Just a couple quick questions here. I was hoping you could talk a little bit about the mix of service provider versus private network sales and possibly how that trend might be changing or if it's staying the same?

Hang on a second. Let's see if we can figure this out. I would say private net business is probably in the 18 to 20% range. That's about the same as it was. That hasn't really changed much in the last half of FY '06, but last time -- we gave out a number in Q3, as well, it was about that range.

Okay.

So the amount of business has gone up, but not as a percentage.

Okay. So year-over-year, private networks is up, though?

Oh, yes, way up.

Okay. Okay. Last quarter you mentioned you had three customers in, I think in the 10% range. Is there any of -- that have come up above the 10% range? Or do you still see the same kind of trend there?

Hang on. We've got probably three in that range, but they are not -- they are right around 10. That hasn't really changed too much.

Okay.

Those kind of come and go. I'm just looking at them right now. I don't know whether they'll be 10% next quarter or not. So nothing out of the ordinary.

Okay. Okay. A couple of housekeeping questions. Headcount for the quarter? Maybe operating cash flow and CapEx?

Headcount was about the same. We have about 460 employees worldwide, and another handful of contract temporary people and supporting our service in a few locations. CapEx for the year was just over $2 million. What? Oh, and the operating cash flow. Well, as we said, we generated -- cash was up 17 million. Of that, 5 million was due to bank borrowings or increased bank borrowings and the balance, about 1 million was due to capital spending, and the rest was from operations.

Okay. Okay. And then do you expect the FAS 123R expenses? I know your guidance doesn't include them. Do you expect them to be sort of the same as the pro forma has been? I think it's been in the -- ?

No, the pro forma -- well, we haven't done -- the last year's expense was a restricted stock plan. That was not -- didn't include our option plan expense.

Right.

But we definitely have some options outstanding, but we have not yet calculated the exact impact that will have going forward.

Yes, well, typically, I think you've had a pro forma -- ?

On a pro forma basis it won't have any impact.

Right. Right. Is it still going to be about the same, though, because it's going to have to come into the GAAP number.

Yes, I'm not sure I understand the question. It will come into the GAAP number, correct. And on a pro forma basis, we'll exclude it.

Okay. Okay. All right. That's all I had. Thanks. Nice quarter.

Thank you. Our next question comes from Kevin Dede with Merriman. Please go ahead.

Hi. Nice job, guys.

Thanks.

It's really nice to see the positive trend and the slight uptick in backlog. Would you mind sorting the backlog out a little bit for us, Chuck? You mentioned that your focus is to work down on that. Can you sort of give us an idea of what the source issues are and how you are going to fulfill those orders?

The -- I think the big picture here is that these new products we introduced have turned out to be far more popular early on than we thought. So there's a great deal of the demand that has switched over to the -- to those products. Those products have new designs, new parts, and require ramping up the supply chain. So that's kind of the -- that's kind of big picture of what's going on. So it basically means accelerating the introduction of these products, ramping up the component supply as fast as we can, rolling out new frequency bands. In other words, operational -- Operations 101 in a fairly big way. It's what we call a good problem.

Right. Can you give us a little more detail on specific issues? Is it a -- are there transceiver components that are tough to find? Or you're just having to expand the range of products that you're -- or components that you're looking for in order to meet demand?

Well it's harder just getting to the detail of it. But I'd say the -- there's a big -- the E300hp, which is the high-end product, has turned out to be extremely popular, as has the high end of the market in general, and that's caused an upswing in our Intelligent Node Unit demand, that's the digital part that serves multiple radio links. That's far above what our forecast was. So the new outdoor unit has driven a swing in demand for these node units. And that's a supply chain getting the components into the system with the lead time constraints that we have on some of those components. And it's across a fairly broad area; it is not just one thing. That's one constraint.

The other constraint is the outdoor units are new frequency bands that have to be introduced, and as you know, it takes time to introduce them and ramp them up. So it's from those two areas, I would say would be the predominant supply chain challenges. Now in response to that, we actually have brought on -- besides accelerating the processes, we have also brought on some additional suppliers of some of the subsystem and components so that we can help to ramp this thing up faster.

Would you mind taking a crack at software contribution? I know in past quarters you offered that on occasion.

Well, we don't want to get into the habit of reporting it just yet, until it really becomes a significant part of the business. But it was -- it was up at least 50% this quarter, compared to the quarter before.

And how do you see gross margins going up? Is that based on, sort of, solidifying the source issues that you have and an increase in the software contribution and volume? Is that sort of the drivers that you see?

I think the biggest driver is ramping up the new products. That would be the core driver of the gross margin. We have always said that the software part is -- we haven't really counted it into our target business model, but we look upon it as either insurance or upside, depending on what your outlook on life is.

Okay. Now you mentioned maybe extending your business reach to include more on the access side. How hard would it be to migrate your Intelligent Node Unit to handle the multi-sectored radio and perhaps do point to multi-point?

I'm not sure we would do point to multi-point, but -- just to be clear. But if we did, I think the transmission and multiplexing part of those is pretty straight forward. We know that really well. I think probably the issue there is customer management. So how do we do moves, rearrangements, installation, billing, and all the rest of that stuff? That's not something that's contained in our products today.

So that, you think, would be the major hurdle to you folks trying to jump into that market?

Yes, I don't think we have any experience in that area. We know how to move bits and we know how to manage them and do it extremely effectively. But we haven't -- we've really been a supplier of transport, rather than a supplier of end user kinds of services.

The last question for me and I will let you go. What's -- what do you think the impact would be for yourselves or even Alcatel on First Avenue and Fiber Tower merge?

I don't know what the impact would be, but everybody tells us it's going to be positive.

Okay.

Well, they're saying that this is -- creates a kind of critical mass that would be good to accelerate the penetration of -- or accelerate the percentage share between microwave and fiber in the U.S. And having been in the microwave business a long time, I would like to believe the positive stuff. So, and I do think that's probably true. I think the attention that is being brought to this, as the microwave kind of solutions become more effective, more flexible, and have higher capacity, as the base stations require more backhaul capacity, I think those are inevitable to drive demand up.

Okay. Thank you. And congrats.

Thanks.

Thank you. Our next question comes from Matt Robison with Ferris, Baker Watts. Please go ahead.

Hi. Nice margin and cash flow. On the geographic book-to-bill, you had particularly strong results for Americas and Europe. First, was that Western Europe or Eastern Europe driving that book-to-bill? And, then, could you give a little color on the applications and type of business that you are getting in the Americas?

I would say as far as Europe, that's pretty broadly across Europe that's both Eastern and Western. By the way, I would say Eastern was probably a little bit stronger in the mobile part, and Western more in the data part. And what was the other question?

What were the drivers for the orders for Americas?

I think we have some strong business in Latin America, stronger than we have had in a while in Latin America in terms of orders, and there was some impact also in North America from Alcatel.

And, now, the Asia Pacific, those orders being relatively low, was that a function of the channel inventory or is it anything in particular?

Yes, I think that's a good way of expressing it. I wouldn't call it channel inventory. I would say we had a pretty large backlog of projects in Asia. We're rolling out some networks right now, and we have taken the orders for those in previous quarters and we need to complete those rollouts.

Okay. So just need to catch up with shipments before you can get some orders?

Yes, that's right.

Okay. Thanks.

Okay.

Thank you. Our next question is a follow-up question from Ittai Kidron. Please go ahead.

Hi, guys. Just a quick follow-up on the backlog. Is there a 10% customer or close to a 10% customer in debt backlog?

Yes, the answer is, yes.

Yes, more than one? Yes, one?

Yes, I think there's a couple. I don't have that detail right in front of me. But there's definitely a couple that are in 10% of the backlog piece.

Okay. And so when you look into your mix of revenue going forward, if I'm not mistaken, the Eclipse was around 76% of your backlog the previous quarter. It's now just under 60%. Does that make the -- your ability to achieve your margins in the next quarter -- to achieve continued gross margin improvement more challenging?

I don't know where you got those numbers from. We didn't actually give Eclipse backlog. What did you do, look at the book-to-bill?

No, I'm sorry. I was calculating that out of the backlog. Your orders out of the backlog. I should have -- I guess, the Eclipse had total orders were stable, around three quarters of your orders. I'll take that back. Sorry about that, guys. Good luck.

Okay.

Thank you. Next question comes from Rob Amman with RK Capital. Please go ahead.

Yes, if I understand it Alcatel sources, or procures the components themselves through the channel. And can you just help explain how that works between you and them as you kind of fight for resources in a relatively tight supply chain?

We have a coordinating committee between us to try to -- if there are some conflicts in terms of supply. And it's their job to load the factory separately from us, but we do coordinate with them. I think, at the front end, we don't have much trouble right now because, as I said, some of the stuff that they are sourcing is not due to license agreements, it's through OEM and it's not the 300hp product. I think what we are looking at is probably the second half of FY '07, one of the reasons why we are urgently ramping up the supply chain is in anticipation of both of our demands. We are comparing both of our forecasts right now for demand, and that's where the coordination takes place, to make sure the capacity is there before there's a crisis.

Okay. And the backlog, the 12-month number, is there anything in backlog that extends beyond the 12 months?

No.

No. That's 12-month backlog.

And, then, just in terms of orders, given the tight supply chain, are you backing off a little bit on your pursuit of orders here short term to give yourself a chance -- give yourself a chance to catch up? Or maybe it's just a little harder to convert orders as customers see longer lead times right now? Any of those impact -- any of those things real impacts right now?

Yes, I think some of the lead times are a problem right now in terms of competitiveness. We are driving the business to extremely short lead times, better than our competition, and we are not there yet. So, we would like to have shorter lead teams. If we did, we would win more business.

Okay. And what sort of lead time would you be looking at on an -- I don't know, say, a relatively sizable E300hp order today?

Well, we don't advertise the lead times. So it's --

Okay. And, then, just relative gross -- just relative gross margin levels between the different products within Eclipse, traditional Eclipse, and then where the SP and HP versions sit relative to that? Are they both higher, with HP being the highest or -- ?

I would say that's true. HP is probably the highest, on average. And then the older, original -- not original, but the low-end Eclipse that we introduced about a year-and-a-half ago, would probably be the lowest margin. But even within that, application makes a big difference. Typically, an Ethernet application at a high capacity is going to have much more margin than a low-capacity backlog application, no matter what the product is. So it's not quite as simple as just what the products are.

Great. Thank you. Great turn around here, and good luck, Chuck.

Thanks.

Thank you. [OPERATOR INSTRUCTIONS] And our next question comes from Rich Valera. Please go ahead.

Thank you. Just trying to sort of figure out a blended gross margin here for the quarter. And if you take Eclipse around 40%, I'm just wondering what your other -- sort of if you took other products and then service, how we could think about those gross margins to sort of get to that just shy of 31% gross margin total?

Yes, we'd say, the other products are just below 15% and the services come out around 10, a little over 10% typically. They're about a little bit better than that this quarter on average.

Okay. So the other products are actually that high? Around that 15% level, because that was -- ?

Well, no, they're a little bit lower than that on average. But if you take this quarter by itself, they're a little bit below that.

Okay. And looking forward, is that sort of how we should think about it? Sort of service around that?

Yes, I think going forward, we'd typically say service 10 to 15% and then, basically, the other products are going to -- they're a pretty small piece going forward. I mean, Eclipse is, we said, over 80% now, and it will be -- of product revenue, and it will be growing from there. So that will be --

If kind of hold Eclipse just sort at that 40% level, it would seem like pretty quickly into this fiscal year, you're going to be heading towards mid-30% gross margins. I mean, is that -- is that accurate? Is there any reason why we wouldn't be heading towards mid-30% gross margin pretty quickly in this year?

Depends on the pricing environment. It's basically the pricing against the introduction of newer products, what the rate of both of those are.

I guess, if Eclipse does hold at this 40%, though, level, it seems like that's where you're going. I guess the key is --

I think that's right.

Yes.

You're right.

Okay. All right. Thanks.

Sure.

Thank you. And at this time, I show no further questions. I'd like to turn the conference back over to Chuck Kissner for any concluding comments.

Well, thank you, Operator. We want to thank all of you for your interest in Stratex Networks and all of your questions. They were good questions.

We do, by the way, plan on participating at the CIBC World Markets Wireless Technology One-On-One Conference, which is August 3rd in New York. And in addition to visiting investors and seeing many of you who stop by here and call, we look forward to seeing you in the future and for next quarter. I think Tom will be at the -- Tom Waechter will be at the CIBC Conference. And if you don't meet him before then, that would be a very good time to say hello to him.

I thank all of you, and have a good day.

Thank you. And, ladies and gentlemen, this does conclude today's conference call. Thank you for participating, and at this time, you may now disconnect.