Aviat Networks Inc (AVNW) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Harris Stratex Networks third quarter 2007 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 up 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 conference call over to Mary McGowan of the Summit IR Group. Ms. McGowan, you may begin.

Thank you for joining us today to discuss financial results for the third quarter of fiscal 2007. On today's call will be Guy Campbell, President and Chief Executive Officer of Harris Stratex Networks, and Sally Dudash, Chief Financial Officer.

During this conference call, we may make forward-looking statements regarding our business including statements relating to projections of earnings and revenues, the timing of expected synergies and operating efficiencies, and the successful integration of the operations of the former microwave communication division of Harris Corporation, which we will refer to as MCD with those of the former Stratex Networks, which we'll refer to as Stratex.

These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information please see the press release and filings made by the company with the SEC. In addition, in the table of our press release and on this teleconference, we may discuss certain ratios and information that are non-GAAP financial measures. A reconciliation from the comparable GAAP measures is included in the tables of our press release and on the Investor Relations section of our company website, which is www.harrisstratex.com. We have also posted on our website pro forma combined tables for Harris Stratex Networks for each quarter of FY06 and the first two quarters of FY07.

Both GAAP and non-GAAP results are included in our press release and the tables reconciling these amounts can also be found on our website. We believe the supplemental non-GAAP financial results, which are used by management, reflect the basic operating results of the company and will facilitate comparison of operating results across reporting periods.

Now I'd like to turn the call over to Guy Campbell.

Thank you, Mary, and thanks to all of you for joining us today. We have now completed our first quarter as Harris Stratex Networks. The revenue momentum that both MCD and Stratex had entering the merger was interrupted more than anticipated during the implementation of our integration plans.

This has been a complex merger with a significant reach into global markets. We believe the integration challenges are temporary, and necessary actions have been initiated to regain the revenue momentum and achieve the potential presented when the merger commenced.

Looking at the first quarter, we delivered a number of positive results. On a non-GAAP basis, orders in the first quarter were greater than sales, and backlog executable in the six months was $137 million at the end of March.

Revenue for the third quarter of fiscal 2007 increased 7% year-over-year to $147 million. The North America segment had year-over-year revenue growth of 34% reflecting continued market strength with both mobile operators and private networks. As the number-one supplier in North America, we are well-positioned to take advantage of this growth opportunity.

Our net income was $3.7 million, or 16% growth over the year-ago period. New product revenue, which we define as products less than three years old, increased year-over-year.

Before going into some of the specifics on our cost-savings plan, I'd like to say a few words about the integration process, in general. As I'm sure you can appreciate, it is no easy task bringing two companies together. I am pleased to report that things have gone well in most areas. There has and continues to be a strong desire on the part of all Harris Stratex Networks employees to build a vibrant, energetic, and responsive company.

Since our January call, we have a number of integration accomplishments. We began the convergence of our financials onto one system with phased deployments expected to be completed in the first half of fiscal '08. When completed, we will have a single accounting system streamlining the financial close process.

We completed training across all product lines for the global sales force, and we presented our new company at several major trade shows including the 3GSM World Congress and CTIA, with positive reaction from new and existing customers.

With regard to our performance in the cost-savings area, I am pleased to report that the $3 million to $4 million in cost savings we anticipated in January is on track to be captured or exceeded by the end of this fiscal year. We have made solid progress in the following areas -- our plans to eliminate overlap in staff and facilities have entered into the implementation phase. By the end of the stub period, we will have achieved 40% of our targeted staff reduction of roughly 200 people.

We recently leased new space for consolidated operations in Mexico where we will see savings this quarter and annualized run rate in excess of $450,000. We are meeting our plans for a European restructure, and progress is being made in remaining international regions and North America.

In IT, we will have achieved operational savings of $500,000 for the stub period. These savings will continue into the next fiscal year with anticipated savings from the merged IT operations of over $1 million annualized.

Supply chain is another area where we have made excellent progress. On March 1st, we held a supplier day with our key suppliers, where we shared our vision and strategic plans. We had an outstanding response from all participants resulting in new and revised supplier contracts. These will enable us to meet our cost-saving targets set for the stub period and fiscal '08.

To better serve our customers in Asia and to improve our logistics and supply chain functions, we have created a foreign trading company in Singapore. The infrastructure for this company has been established, and key positions have been filled.

Our integration strategies and cost-reduction goals stand and should be completed in approximately six months.

Later in the call, I will provide comments on our technology and product roadmap and an outlook on the industry and financial guidance.

Now let me turn the call over to our CFO, Sally Dudash, who will provide the financial detail for the quarter.

Thank you, Guy, and good afternoon, everyone. First, I'd like to review the financial performance of Harris Stratex Networks for the quarter ended March 30, 2007. The GAAP results this quarter are those of our new combined company, except they exclude the January results for Stratex, which preceded the date of the merger.

For the new company, this is the first quarter that the Stratex results are included for GAAP. As such, the prior-year comparisons will be against the results of MCD only.

Third quarter revenue was $139 million compared to $73.6 million in the year-ago period. We reported a net loss for the third quarter of $23.2 million, which includes $28.9 million in pretax charges associated with the combination. This compares to a loss of $6.9 million in the third quarter of fiscal 2006.

As a result of the merger transaction, significant adjustments were made to both the balance sheet and the income statement. For accounting purposes, this transaction has been treated as if MCD acquired Stratex. As such, we have included both GAAP and non-GAAP results in our press release, and the tables reconciling these amounts can also be found on our website.

We believe the supplemental non-GAAP financial results, which are used by management, reflect the basic operating results of the company and will facilitate comparison of operating results across reporting periods.

Our non-GAAP income statement results include a full quarter of operating performance as if the companies were combined for the entire quarter and exclude the charges that resulted from the merger transaction.

This reconciliation adds $7.8 million of revenue and an operating loss of $2.1 million for Stratex for the month of January. It excludes $1.5 million of stock compensation expense reported under the provisions of FAS 123R and $2.4 million amortization of purchase intangibles.

Additionally, it excludes the following -- $15.3 million write-off of in-process R&D; $6 million write-off of inventory and fixed assets fair value stepups and deferred revenue; $1.7 million write-off of the purchase price allocable to customer backlog; and $3.5 million integration and restructuring charges.

To facilitate comparison and financial performance across the periods, the results for the comparable quarter in fiscal 2006 have also been combined for the two companies with similar non-GAAP adjustments. We have additionally provided on our website tables which show these pro forma prior-year results for each of the four quarters of fiscal 2006 and the first two quarters of fiscal 2007.

Today I will be discussing our financials based on non-GAAP results.

Revenue for the quarter was $146.8 million, an increase of 7% compared to the year-ago period. This was driven by revenue gains in North America, Africa, and network operation.

By segment, North America Microwave contributed $49.1 million of revenue, and increased 34% compared to the prior-year period. This reflected continued market strength with both mobile operators and private networks.

Bookings also increased slightly from the year-ago period. I'd like to remind you that Q3 is typically our slowest quarter in North America due to seasonality. North America customer orders driving Q3 results fell into two main categories -- 45% from mobile operators, and 55% from private networks. The drivers for mobile operators in this segment continue to be lease line substitution, increased bandwidth demand, footprint expansion, and 2 gigahertz microwave relocation for advanced wireless services.

Private network revenue strengthened in the quarter with significant business from state and local government for network hardening, network interoperability, and homeland security projects.

The international microwave segment contributed $92.5 million of revenue, a 4% decline versus the year-ago period. This came primarily as the result of lower orders and project delays in Europe, the Middle East, and Africa, as well as merger integration disruptions in these regions. Some regional political unrest and operator consolidation also impacted our international performance.

Within international, the geographic breakdown of revenue was as follows -- Africa, $37.6 million; Europe, Middle East, and Russia, $33.5 million; and Latin America and Asia Pac, $21.4 million.

Africa, Europe, the Middle East and Russia remain strong growth areas. Opportunities in these regions are driven by infrastructure buildout, the growth of IP networks and services, and 3G licenses being awarded in Russia. Operators are expanding their coverage and capacity across West Africa, East Africa, and the Middle East driving increased business activity.

The network operations segment contributed $5.2 million in revenue in the quarter, which is a 21% increase over the prior year driven by increased orders in the Middle East and Africa.

Gross margin was 30.3% compared to 32.5% in the year-ago period. While new product revenue increased from 54% to 56% of total revenue, and margins for these products improved year-over-year, overall gross margins were impacted by the mix between products and services.

Service revenue as a percent of total microwave revenue increased from approximately 12% to 22% between the third quarter of fiscal 2006 and the third quarter of fiscal 2007. This revenue was derived from major system and services jobs in both microwave segments at lower margins than products, which impacted operating performance for the quarter.

Although expansion of services is a core component of our growth strategy, we believe the mix between services and products in the March quarter is not indicative of long-term trends.

Total operating expenses were $38.9 million, or 26.5% of revenue compared to $39.1 million or 28.4% of revenue in the prior year. Expenses decreased from the December quarter by $1.1 million as the company has begun to see the impact of our cost reduction activity in the expense categories.

As discussed in the last earnings call, we will be reporting engineering, selling, and administrative expenses on a combined basis.

Our outlook on R&D spending remains consistent with what we discussed in January. For FY07, R&D spending will be approximately 7% of sales.

Depreciation and amortization of non-purchase-related intangibles and software capitalized under the provisions of FAS 86 was $5 million in the quarter. Capex for the quarter including additions of capitalized software was $3.2 million.

Operating income was $5.6 million, flat compared to the prior year, which is attributable to the margin change I just discussed.

Net income was $3.7 million, or $0.06 per share compared to $3.2 million in the year-ago period. For this comparison, we have normalized the tax rate for both periods at 30%. Our cash tax rate remained at 2% to 3%.

Employee headcount declined in the quarter from approximately 1,500 in December to 1,450 in March.

Moving on to the balance sheet, Harris Stratex's cash balance including short-term investments was $95.2 million at the end of March compared to a combined $69.3 million at the end of December, primarily from the cash infusion of $26.9 million from Harris Corporation.

On a GAAP basis, operating cash flow was a negative $6 million for the quarter. This amount would be reduced by approximately $2 million positive operating cash flow generated by Stratex in the month of January on a pro forma combined basis.

The negative cash flow was derived primarily from an increase in inventory in the quarter. The project delays mentioned earlier resulted in an increase in inventory of $9 million on a quarter-to-quarter basis, which reduced turns from 2.8 in the December quarter to 2.6 in the March quarter.

Since the end of March, we have shipped approximately 4 million of this product. Notwithstanding this increase in inventory, order-to-ship times have improved from over 10 weeks to an average of six weeks by quarter-end and have had a positive impact on our ability to meet customer delivery requirements.

DSOs for the quarter were at 91 days compared to 89 days in the December quarter on a $5 million increase in accounts receivable. A significant portion of the quarter's revenue was billed in March, which did impact collections.

These impacts in inventory and accounts receivable were partially offset by positive cash flow derived from an increase in accounts payable and other accruals.

Finally, in the third quarter, we added approximately $150 million to our asset base in the form of identifiable intangibles and $250 million in goodwill as a result of the purchase accounting transactions for the merger. Shareholders equity is approximately $750 million.

And now I will turn the call back over to Guy for a discussion of our technology and product roadmap, a market outlook, and guidance.

Thank you, Sally. Now I'd like to talk about our technology and product roadmap. Our investment in R&D remains as large as any in our industry and will continue to fuel our technology innovation.

We have a significant patent portfolio, and many of our patent activities are related to carrier Ethernet. We are also very active in regulatory activities for carrier Ethernet including the metro Ethernet forum, which is planning the introduction of Ethernet in mobile backhaul. To bring increased value to our customers, as every access radio shipped can be used for future services that employ Ethernet in the backhaul.

This is all achieved by software control and is complemented by industry-leading capacity, throughput, and latency. We offer a technology mix that enables our customers to meet the continuing changing demands associated with network evolution. As an example, nodal solutions have been widely accepted, and the fact that many of our competitors are trying to emulate the nodal properties of Eclipse reinforces the validity of this solution.

Our efforts in innovation have extended to the manufacturing and logistics processes so that our times to manufacture, lead times, and capacity offer a competitive advantage.

To serve our customers worldwide, Harris Stratex Networks offers the most complete range of wireless products, solutions, and services in the industry. Because our technology is flexible, our solutions work in any telcom or IT network demanding high-speed wireless networking.

In addition, we will continue to leverage our engineering excellence by offering field services that cover the entire cycle of network implementation from analysis, planning, design, and systems integration to site build, deployment, and network monitoring.

Let me take a few minutes to provide some insights into our new technology and products. The rise in 3G services, especially high-speed downlink packet access commonly referred to as HSDPA, is creating a growing demand for high-capacity backhaul. Industry analysts estimate that this area will see a 19% CAGR through 2012.

The Eclipse product line with capabilities to 400 megabits per second can be used to backhaul this traffic as Ethernet, STH, Super PDH, or PDH.

To maintain our competitive advantage, in Q4 we are scheduled to introduce a modem card that will enable ultra-high capacity to roughly 800 megabits per second on one radio frequency.

Q3 was our second-highest quarter ever in terms of TRuepoint 5000 shipments. We are working on new features primarily for the North American market targeted for release by June 2007. We also will be shipping our scalable MUX crossconnect, or SMX card, this summer. This is key to reducing equipment costs, saving rack space, reducing installation time, and enabling remote provisioning of microwave traffic.

The transport market remains another important area for us. Our introduction of the TRuepoint 6000 will reinforce our leadership in North America for both medium and high-capacity transport and will allow us to grow our market share in the Middle East, Africa, and other markets.

The initial release is now targeted for later this calendar year versus the original plan of June. The launch of additional frequencies and capabilities will continue over the following 12 months.

We continue to add features to the NetBoss network management suite. Compared to other vendors, we are able to offer a full range of hardware and software products and services. We will continue to build on this strength and to develop new solutions to make our products and services more valuable to our customers.

These examples represent only a fraction of the products and features and functionality that we are addressing. Our mission is to remain an innovation leader in a competitive global market force.

Now let me comment on the industry dynamics we are seeing. The mobile market segment continues to provide us the greatest opportunity for wireless transport solutions with the fastest-growing markets being the Middle East, Africa, and Russia.

Competition in the mobile market segment remains strong among both suppliers and operators. On the operator front, footprint expansion through access and new license wins coupled with supply chain consolidation is providing larger bid opportunities but also increased price pressure.

Globally, two industry trends increased backhaul capacity and mobile networks in the migration towards Ethernet transport are gaining momentum. This is good news for our product portfolio in a technology focus.

Elsewhere we are seeing more opportunities in new market applications including backhaul and WiMAX deployments. While this is a small portion of our current revenue, we expect to see increase in this area.

We believe that our integration challenges will impact our projected revenue and net income for the second half of fiscal 2007. Our revised expectations for the second half of fiscal '07 ending in June are as follows -- we expect Harris Stratex Networks non-GAAP revenue to be between $300 million and $310 million in the period. Non-GAAP net income will be between $11 million and $14 million, or $0.19 to $0.24 per diluted share.

All of our non-GAAP guidance excludes combination integration restructuring charges, amortization of purchase intangibles, and stock compensation expense.

Looking forward to '08, we do not believe that the integration challenges will have a lasting impact. Additionally, even though there is some indication from large telecom providers that the market may be slowing, we believe we can grow faster than the market with our innovative products and services.

A delay in the introduction of our TRuepoint 6000 product will have $25 million revenue impact in the first half of the next fiscal year due to lost opportunities, but it won't affect the business in the long run.

We have taken a conservative view on fiscal 2008 growth given the factors noted.

Our non-GAAP financial guidance for fiscal '08 is as follows -- revenue growth of 5% to 10%; earnings per diluted share between $1.05 and $1.22. We expect 30% to 40% of the FY08 earnings to be realized in the first half of the year, and 60% to 70% in the second half.

Guidance excludes pretax, an estimated $3 million in combination charges, $12 million of integration and restructuring charges, $14 million of amortization, and $10 million of stock compensation expense.

We expect to capture our full cost reduction target of $35 million in fiscal '08 and achieve significant year-over-year earnings growth. However, most will be realized in the second half of the fiscal year.

Total integration and restructuring charges are projected to be less than the $30 million we estimated in January.

We believe strongly that the greater scale and industry leadership we have created in this game-changing strategy will reshape the industry for wireless transmission network solutions. The breadth of our product and services offering is unmatched, our innovative technology sets us apart from our competition, and our global distribution channels extend our reach. All of these factors combined to underscore the value of our new company and our ability to increase shareholder value.

In conclusion, I'd like to take this opportunity to thank all Harris Stratex Networks employees for their tremendous work and dedication to our new company.

At this point, I'll ask the operator to open the line for your questions.

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) Blaine Carroll, FTN Midwest Securities.

Guy, when you talk about the integration challenges, and I'm looking more on the sales side of the equation, can you go into a little bit more detail on that? Is it confusion within your own sales force on what products to sell to the existing customers or is it a situation where the customers have a little bit of confusion, and have you lost any customers during this transition?

First of all, the quarter was really two months, and we had a relatively short period of time to go through our integration activities. The impact where we've had the disruption was really in areas that had the most significant geographic change of sales territories and a change in sales management. So for us it was Europe, Middle East, and Africa were the areas that had the most impact.

We talked about the fact that we had $9 million in the quarter move into from Q3 to Q4. This is, in some degree, due to the time it's taking for us to work through the integration transition activities that have taken place and only having two months to do that.

We haven't seen any loss of any significant customers or any major impacts other than the delays that we noted. So I think that we believe all of the integration difficulties that we've had in both the direct sales channels and the indirect channels are temporary and will be resolved during this quarter.

And then, Sally, as we look out towards the end of, let's say, fiscal '08, can you give any idea on a quarterly run rate of where ES&A would end up being?

I think selling and administration -- engineering, selling and administration expenses for the total year should be in the 22% to 23% range. And as our -- those should be fairly consistent across the year.

But you're not going to realize the cost savings until the second half, correct?

Most of the savings that are in the second half will be the supply chain savings.

So we'll see that in the gross margin?

Yes, it will be more linear.

Steve Ferranti, Stephens Inc.

I'm wondering if you could discuss with us to what extent you've noticed whether or not your competitor has gotten maybe more aggressive in the marketplace during your transition period?

Yes, we have seen that competitors have been more aggressive, but I'm not too sure that it has to do with the integration of MCD and Stratex. I think it's also been a general tone in the market relative to integrations, in general.

We have seen, for example, that a few of our competitors have been quite aggressive with regard to actions that they've taken not just in opportunities that we've been seeking but opportunities that have impacted other major mergers in the area, for example, the Alcatel/Lucent and the Siemens/Nokia merger. But we have seen a tendency of an increase in competition where I think there are competitors there that see opportunities based on the number of mergers in the market.

Okay, and then, I guess if I turn to the gross margin side, it seems like it was impacted by a higher-than-expected service revenue content. Can you give us an idea of regionally where you're seeing the strength of the greater-than-expected lift in the services business?

We have strong services business in North America and in Africa, and we saw the project delays in Europe, Middle East, and Africa, which were predominantly product sales that slipped from Q3 to Q4.

Okay, so, then is it safe to assume that the strong performance in North America is, to some extent, or maybe to a large extent, services-related then?

Services are, yes, a fair amount of the North America growth.

Matt Robinson, Ferris Baker Watts.

Just a follow-on on that one -- so the high percentage of services was because of the relative absence of product sales on the denominator?

Yes.

Okay. Now, can you help out on a little housekeeping here -- what was the comparable backlog for pro forma ending second quarter?

About 129.

Okay, and can you repeat the 2008 amortization and the headcount comparison?

Sure can -- 2008 headcount comparison would be reduction of the 200 people from our starting point of 1,500. And amortization of the purchase intangibles is 14 million.

Okay, now, that 22% to 23% ESN&A for '08 is pro forma without stock comp?

That is correct. And to Blaine's earlier question, we should see a reduction of 1% to 2% of that towards the end of the year. So I would take it to 21% by the second half of the year, and it would exclude amortization and stock comp.

In your services rev, is it almost entirely installation and operational services? Or do you have a meaningful amount of maintenance revenue?

Our services include installation commissioning, we have network design, we have site acquisition services. It's a fairly wide and broad gamut. We also have maintenance services as well. The increase in our services has been on turnkey projects in North America and Africa for full implementation support of the networks.

So it's all labor-intensive as opposed to, like, warranty-type --

Yes, yes.

And what's the margin on it?

On average, our services margins combined are 25% -- direct margin.

Guy, can you comment -- it seems like the biggest story here is the absence of execution. Maybe I'm just a little bit biased in terms of my reaction to the numbers, but if you want to go from there, how are you going to improve your execution?

Well, I think that in some degree it's been time-oriented. Like I said, we had two months to move through the execution. If anything, we should have seen that we didn't, was the level of difficulty was higher than anticipated -- and, in particular, as I pointed out, in both our direct and indirect channels, to position them properly within the new organization, the new structure, and the new processes.

So we've taken action to improve this, to get back on track, and we believe we'll start to see some of the results of that in this quarter and into Q1.

What kind of action?

Well, I think a lot had to do with get the leadership settled, to get the people onto the same page, to get the training done, as we had pointed out, and to work to make sure that we had the commission plans understood and in place. So there are other elements all around sales to make sure that we could get these difficulties behind us and move forward.

When we checked in at various points at mid-quarter, it didn't seem like there was a whole heck of a lot of sales headcount change. I know that on the Stratex side, I guess, some folks went over to [NERA], and what -- maybe you could update us on that. How many people did you lose or churn out of the organization in sales?

In sales, I think we probably lost in the area of about a half a dozen people, in total.

Half a dozen -- out of how many is that?

I would say out of about 100 to 120.

Okay, that doesn't seem like a big number. So they were just kind of wondering whom they were going to call on and how they were going to get paid. Is that why they didn't get it done?

And whose territory is which, and those types of things -- and whose customer belongs to whom? You know, you've got to keep in mind that we did have a sales force in some areas where we had two salespeople calling on a same major account and geographic territory. Those issues had to be worked out.

Have you seen any, in terms of the intrinsic demand in the market, have you seen any decline or upheaval there?

No, I don't think so, nothing significant.

So your revised guidance is just -- you're just trying to get your legs under you and trying to find a place where you get more confidence in what you can achieve with this new organization?

That's true.

Rich Valera, Needham & Company.

Just getting back to your comment, Guy, on the reason for the $25 million haircut on the first half of fiscal '08. Did you say it was a pushout of the TRuepoint 6000 introduction?

Yes, that's what it was. We had originally planned for a release of TRuepoint 6000 at the end of this fiscal year, and now we've moved that out six months. So we've modeled the opportunity lost at approximately $25 million due to that event.

However, I did indicate that that's temporary event, you know, it's a one-time hit that we're taking. The product will come out, and it will achieve our objectives once we have it released and rolled out.

Not to beat on this, but how did you come to that realization? It seems like a big -- a six-month delay seems like a big delay to realize within the span of a couple of months. Was it just -- did something go wrong or was it just that the budgeting -- the schedule for that rollout had been badly mismanaged? I'm just trying to understand how you incur a six-month delay in the span of a couple of months' timeframe when we last talked.

I think it's a good question. I think that what probably isn't known that a good portion of the TRuepoint 6000 development was being done up in Montreal, Canada, at our design center there. The Montreal facility is one of the facilities that is being impacted by the restructure and is being downsized considerably.

So we found ourselves in a situation, we were trying to roll out a complex development at the same time we're trying to restructure a major facility and downsize it. So we had, I'd say, more difficulty than what we thought we would have due to those events.

Did you have some people leave that you didn't want to leave? Did some developers decide to proactively leave on their own accord?

We did have some of that. We had some people leave sooner than we had planned. We had some people leave that we had not planned at all on the engineering side. So I think that that, combined with what we didn't take into effect is some slowdown coming even before the merger was announced, rumors were in place about what plant's management might have.

Right, okay. And then, Sally, you'd said you expected 30% to 40% of the earnings in fiscal '08 to be in the first half. Can you give us a similar percentage on revenue? Is it a similar type of percentage?

Yes, it would be comparable.

So 30% or 40% range for revenue as well?

Yes.

Great, and the tax rate embedded within your pro forma guidance, just to be sure, is it 30%, sort of nominal tax rate that you embed in that guidance? How should we think of that?

In '07 yes, in '08 we have reduced it 3% to 4%, as we do think we'll see our pro forma tax rate improve next year. It is dependent upon the mix of products that we sell, but we do think we'll see an improving tax rate next year.

Just one final question, if I could. You mentioned a cash tax rate in the 2% to 3% range. What's your best estimate as to how long that cash tax rate is sustainable at that level?

We have NOLs that we've carried forward from Stratex, pretax of approximately $100 million, and that's $35 million, $36 million of cash savings. We can utilize between $15 million and $18 million of that in an year, of course, depending upon our pretax U.S. income. So we'll see that sustain us for some period of time. After that period of time, with our products running through the Singapore trading company, we'll continue to enjoy the low tax rates that that will afford us.

So eventually your cash would gravitate towards your pro forma tax rate and be in that high 20% range?

Yes.

James McIlree, Unterberg-Towbin.

Could you indicate how long lead times are for shipments -- what they are now and what they were about three months ago?

We've improved our shipments from greater than 10 weeks to, on average, across all products, six weeks.

And is that about as low as it goes, or are you hoping to get even further improvement?

We should see further improvement. Our target for our low-capacity access products would be 30 to 45 days, and the system jaws are the ones that tend to put upward pressure on that. We should see continued improvement, again, as our product mix changes, over time.

I think that, Jim, we'll probably bottom out within an area of, like, three to four weeks of delivery as where it will probably stabilize at as we move forward.

And is that improvement coming from the old Stratex side or the old Harris side or a little of both?

Mostly from the old Stratex side, but a little bit of both as the legacy or the previous MCD products move to the same type of outsource model on the access product side. Obviously, on the trunking side, we're still going to have lead times in excess of that.

Kevin Dede, Merriman.

Guy, my question, really, is just on '08 and your view -- 5% to 10%, it just seems down a little bit from where we had, overall, thought the industry would fall, and I'm just kind of wondering what got you there and whether or not you think the same sort of trends you're seeing now with strength in Russia, Africa, and Middle East stay strong versus the more developed countries?

I think that, as I said, I think we were somewhat conservative in the guidance that we provided for fiscal '08. We were taking into consideration some of the slowdown that is being forecasted by the major system integrators as far as their view of the overall wireless market. I think that most of them are either at a 5% growth or less.

While we believe that the microwave space in the areas that we target will grow faster than that, we put a certain level of conservatism into our guidance for the next year. We've always said that we'll grow faster than the market, in general. We think we can do that by targeting the fastest-growing technology areas and the faster-growing geographic areas, and by doing that, we can -- we're definitely targeted at the 10% end of that range. We've always said we want to have a double-digit growth type of company, and, if possible, we'll certainly do that in '08.

Our final question comes from Andy Schopick, Nutmeg Securities.

Sally, first, I was unable to find on your website anywhere the tables relative to the pro forma presentation. I'm just wondering whether they're really there, or whether you can direct me to where I can find that kind of supplementary data.

I'm sorry, Andy, they should have been posted concurrent with the tables for our press release. And if they have not, they will be shortly.

If I have a problem tomorrow, I can check with you then. I want to ask you about the aging of receivables, whether there are any concerns or issue with respect to aging, and also with inventory being where it is, to what extent you feel comfortable with the allowances for obsolescence.

I think we are comfortable with those aspects of both inventory and receivables. Some of our strategies for improving both our inventory turns and our DSO -- for example, we will take advantage of the structure we're setting up in Singapore to get more localization of collections into the regions there in Asia and in other parts of the world as we put more infrastructure in place, which should help us stay on top of collection issues.

On the inventory side, starting with the supplier day we held in March, we are talking to our suppliers about more vendor-managed inventory, going forward. And, again, as we move our business model to more contract manufacturing than in-house manufacturing, that should help us as well with lowering our inventory balances and improving our turns.

So we have several initiatives on both fronts for FY08.

And, finally on the FAS 86 capitalized software you mentioned. I heard you mention two numbers -- $5 million, 3.2, and I was not sure that I understood precisely what you had said with respect to those numbers.

The $5 million figure that I mentioned was the depreciation and amortization, and it was amortization of other than our purchased accounting amortization. So we do have FAS 86 software and some patents that we amortized. So the $5 million is a combination of the normal depreciation and amortization; $3.2 million was our capex to include additions of capitalized software.

How much capitalized software is actually on the balance sheet right now that's unamortized?

Less than -- about $9 million.

About $9 million? Okay, thank you for clarifying that.

Thank you. Ms. McGowan, at this time I'll turn it back to your for closing comments. Please go ahead.

Thank you all for joining us today on this call. Harris Stratex Networks' management will be presenting at the Oppenheimer conference titled "Mobility, Moving Beyond Voice" on May 15th in New York. We look forward to meeting many of our investors there. Thank you and good day.

Thank you. Ladies and gentlemen, that will conclude today's teleconference. We do thank you again for participating, and at this time you may disconnect.