Aviat Networks Inc (AVNW) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Harris Stratex Networks conference call. At this time, all participants are in a listen-only mode. Later we will open up the call for your questions. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for replay purposes. I'll now like the turn the conference over to Mary McGowan of the Summit IR Group. Ms. McGowan, please go ahead.

Thank you joining us today to discuss the financial results for the fourth quarter of fiscal 2007. On today's call will be Guy Campbell, President and Chief Executive Officer of Harris Stratex Networks, and Sally Dudash, Vice President and Chief Financial Officer. During this call we may 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 Communications division of Harris Corporation, which we will refer to as MCD, with those of the 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 tables of our press release and on this teleconference we may discuss certain information that is a non-GAAP financial measure. 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 believe the supplemental non-GAAP financial information -- 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. Since our last call Harris Stratex Networks has made great strides. We are encouraged by the improvements in our business and their impact on our financial performance. Let me share with you some of the highlights from the fourth quarter. On a non-GAAP basis revenue for the June quarter increased sequentially 19% quarter over quarter to $174.1 million. The North America microwave segment had sequential revenue growth of 20%, reflecting continued market strength with both mobile operators and private networks. Revenue for the international microwave segment also increased 20% sequentially, as orders increased and project activity with key customers in Africa, Europe, the Middle East and Russia increased. We also showed substantial improvements in orders in revenue for the Asia Pacific region. Our gross margins increased to 32%, reflecting cost synergies and a more normalized product service mix. Our net income was $10.3 million, a substantial sequential increase quarter over quarter. Orders in Q4 increased over Q3 and the book-to-bill ratio for the first two quarters of operations for the new Company was greater than one. We captured $3 million of synergy cost savings in the fourth quarter.

Before turning the call over to Sally for a review of the quarters financial details I'd like to provide an integration update. I am pleased to report that the integration of our sales teams is now essentially complete and our fourth quarter orders and revenue gains demonstrate. The three main drivers for synergy cost savings -- supply chain, head count and facility consolidation -- are on track to deliver the $35 million we promised for fiscal year 2008. Later in the call I will provide comments on the market and our position in it, as well as financial guidance.

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

Thank you, Guy, and good afternoon, everyone. First I'd like to review the details of the financial performance of Harris Stratex Networks for the quarter ended June 29, 2007. The GAAP results are those of our new combined Company, except they exclude results for Stratex prior to February. For GAAP purposes our fourth quarter revenue was $174.1 million, and we reported a net loss of $5.3 million; which includes $23.9 million in pretax charges composed of the following: $3.2 million write off of inventory and fixed assets fair value step up; $2.6 million write off of the purchase price allocable to customer backlog; $3.6 million amortization of purchased intangibles; $12 million integration, severance and restructuring charges; and $2.5 million stock-compensation expense.

We believe the supplemental non-GAAP financial results provided in our reconciliation tables, which are used by management, reflect the basic operating results of the Company and will facilitate comparison of operating results cross reporting periods. Our non-GAAP income statements include results as if the two companies had been combined for all comparison periods, and exclude the charges that resulted from the merger transaction, integration costs and stock-compensation expense. Please refer to our website for complete GAAP to non-GAAP reconciliation tables for the four quarters of fiscal 2006 and the four quarters of fiscal 2007.

I will now been discussing our financials based on non-GAAP results. As we said, revenue for the quarter was $174.1 million, an increase of 19% compared to the third quarter, and a decrease of 2% compared to the year-ago period. For the two quarters ended June 29, revenue was $320.9 million compared to our guidance of $300 million to $310 million. The sequential increase and improvement compared to guidance came from improvements in all geographies, led by revenue gains in North America and Europe, Middle East and Russia and Asia Pacific. For the total year revenue increased by 9% compared to fiscal 2006. By segment, North America Microwave contributed $58.8 million of fourth quarter revenue and increased 20% compared to the third quarter and 30% compared to the year-ago quarter. The drivers for mobile operators in this segment continue to be lease-line substitution, increased bandwidth demand, footprint expansion, and two gigahertz microwave relocation for advanced wireless services. Private network revenue continue to be strong in the fourth quarter, with significant business from state and local government for network hardening, network interoperability and Homeland Security projects.

The International Microwave segment contributed $110.6 million of revenue in the fourth quarter, an increase of 20% compared to the third quarter and a decline of 13% compared to the prior-year period. In the fourth quarter of fiscal 2006 we shipped an unusually large order to a single customer in Africa, which impacts the year-over-year comparison. Gains in international compared to the third quarter were seen in all geographies. The geographic breakdown of revenue was as follows: Africa, $41.3 million, an increase of 10% compared to the third quarter; Europe, Middle East and Russia, $44.2 million, an increase of 32%; and Latin America and Asia Pacific, $25.1 million, an increase of 17%, driven primarily by gains in Asia Pacific. Africa, Europe, the Middle East and Russia remain strong growth areas. As reported in the third quarter, opportunities in these regions are driven by infrastructure build outs, the growth of IT networks and services, and 3G licenses being awarded in Russia. Operators are expanding their coverage and capacity cross West Africa, East Africa and the Middle East, driving increased business activity.

The Network Operations segment contributed $4.7 million in revenue in the quarter, which is a 10% decrease from the third quarter and a 7% increase over the prior year. Awards on several projects being pursued by this segment were delayed into our fiscal 2008. Gross margin was 32% in the fourth quarter compared to 30% in the third quarter, and 34% in the year-ago period. New product revenue increased from 56% of total revenue in the third quarter to 59% of total revenue in the fourth quarter, and margins for these products also improved. Service revenue as a percent of total microwave revenue was approximately 14% in the fourth quarter, compared to 22% in the third quarter, and reflects a more normal mix for our business. Synergy actions relating to product cost reductions were achieved, but were somewhat offset by cost increases in other areas. These related primarily to inventory reserve increases and project close-out charges.

Total operating expenses were $41.8 million in the fourth quarter, or 24% of revenue, compared to $38.9 million or 26.5% of revenue in the third quarter, and $44.2 million or 25% of revenue in the fourth quarter of fiscal 2006. The increase in expenses from the third quarter was due largely to increased selling and other expenses related to the increase in revenue. R&D spending was $12.2 million in the fourth quarter, or 7% of sales, and SG&A expenses were $29.6 million or 17% of sales. Depreciation and amortization of nonpurchase-related intangibles and capitalized software under the provisions of FAS 86 was $4 million. CapEx for the quarter was also $4 million.

Operating income was $13.8 million compared to $5.6 million in the third quarter and $15.2 million in the prior year quarter. Net income was $10.3 million or $0.18 a share, compared to $3.7 million or $0.06 per share in the third quarter, and $10.3 million in the year-ago period. For the last six months of the fiscal year we achieved earnings per share of $0.24 compared to our guidance of $0.19 to $0.24 per share. Our pro forma tax rate was reduced to 26% for the last six months of the year. This is the result of international revenue flowing through our international headquarters in Singapore and the favorable tax treatment negotiated with the economic development board in that country. For this comparison we used our normalized rate of 30% for the prior year quarter comparison. Our cash tax rate remains between 2% and 3% and is consistent with prior guidance. Employee head count at the end of June was approximately 1,440 compared to 1,450 at the end of March.

Moving on to the balance sheet, Harris Stratex' cash balances, including short term investment, was $89.6 million at the end of June compared to $95.2 million at the end of March. Operating cash flow was negative $1.6 million for the quarter. Overall our cash balance decreased by $5.6 million from March. The remainder of the decrease resulted primarily from a decrease in debt of $1.6 million and $4 million in capital expenditures, offset by proceeds of $1.7 million from the exercise of former Stratex stock options. The negative operating cash flow was derived primarily from an increase in accounts receivable in the quarter. Most of the gains in revenue for the quarter occurred in the last month, which created this increase. DSOs increase to 103 days at year end compared to 91 days at the end of March. However, I am pleased to report that during the month of July we have collected $54 million of our outstanding receivables, which is an increase of $21 million compared to collections in the first month of the fourth quarter.

Although we had the increase in sales late in the quarter we still experienced a modest increase in inventories and unbilled costs, and turns remained flat compared to the third quarter at 2.6. In the fourth quarter we launched the Eclipse global consolidation and logistics operation at our international headquarters in Singapore and provisioned some inventory to meet short lead time requirements. Additionally, in July we accomplished the move of our thin film operation from Redwood Shores to San Jose, reducing our overhead expense as committed in our synergy plan. We built some advanced inventory at the end of June to ensure and support TRuepoint delivery commitments during this transition. This inventory has been consumed in shipments since the end of June. We have initiated inventory management process improvements to achieve an inventory reduction in the first quarter of 2008.

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

Thank you, Sally. Now I'd like to talk to you about the market. The market is demanding high capacity backhaul, backbone and IP solutions. The need for basic connectivity in greenfield networks and new, high bandwidth 3G services is growing. We are clear innovation leaders, with flexible and cost-effective products that enable our customers to meet their growing network demands. But it's not just technology that the world's largest mobile operators need. As operators devote more and more resources to compete for subscribers and overall market share, their need for infrastructure suppliers to provide complete network solutions has increased. This includes everything from network planning and design to site surveys and builds, to insulation and maintenance, to network management and operations. Our network operations capabilities, which include our NetBoss operational support systems and monitoring services, are a proven differentiator and value-add to our complete offering, especially for large network opportunities.

We continue to be the vendor of choice for complete turn key solutions for some of the largest microwave networks in the world. Our innovation and breath of our products and services differentiates Harris Stratex from its competitors. In North America we continue to demonstrate clear leadership in backhaul and turn key projects in the public safety segment. In June we announced that we were under contract to upgrade the Kentucky emergency warning system with $28 million of funding awarded to date. Harris Stratex designed and is constructing the IP-based network upgrade, which is based on our TRuepoint digital microwave radio system and will be managed by our NetBoss service assurance solution. We are serving as the systems integrator for the project, including site planning and installation of all network facilities, equipment and technologies.

Private networks are continuing to be a significant driver of revenue in North America and are increasingly becoming an important set of our customer base in the international area. These applications include broadcast, pipelines, utilities and railroads, in addition to government communications systems. Our work with major operators in Africa is a further testament to how our complete offerings sets us apart. In July, we announced the $19 million contract with one of the largest mobile operators in Nigeria to extend the operators access network reach into northern Nigeria and increase the core network capacity to support new subscriber growth. TRuepoint and MegaStar digital microwave radios will be deployed for access in core segments of the network, and our NetBoss services assurance solution will streamline network management functions. We will also provide a wide range of support in construction services, including site builds, site maintenance and equipment installation.

Also in July, Harris Stratex announced a project with the leading African mobile operator to extend its access and backbone networks in West Africa. The orders, worth nearly $12 million, will deploy TRuepoint and Eclipse products to enhance the reaching capacity of the operators' existing networks and support build outs across a number of African countries. Our ability to service our customers with turn key, wireless transmission solutions is evidence in the size and scope of these contracts. Clearly our breath of capabilities is validated by the trust customers place in us as a full-service provider and by the contracts we are awarded. We have the scale, products and services, technology innovation and end-to-end solutions to work with the largest network operators in the world, many as repeat customers. In Europe, one of the top ten multinational operators reselected Harris Stratex for a multi-year contract extension. We also extended our contract with a major operator in Russia.

Now let me talk a little bit about our products. TRuepoint 6000 is a much anticipated product introduction. It is positioned to extend our leadership position in North America market in medium and high-capacity transport and to grow our market share in the Middle East, Africa and other international markets. The first TRuepoint 6000 release is in initial production at our San Antonio plant and the first deliveries will start in October. Market interest in TRuepoint 6000 continues to be strong and our TRuepoint 6000 development program remains on track for subsequent releases throughout fiscal year 2008. Our innovative product and service portfolio positions to us take advantage of opportunities in new market applications. While WiMAX backhaul opportunities remain relatively small, our participation is growing. We bring our carrier grade ethernet products, solutions and experience to this IP-centric market. We are currently involved in over 20 WiMAX deployments around the worm. Our carrier-grade ethernet solutions are well-matched to the WiMAX environment where quality of service is critical. With a broad product and service offering, our ability to integrate WiMAX technology with the microwave network fabric is gaining much interest.

To further bolster our international business we officially opened our international headquarters in Singapore in June. This location will enable us to better serve our international customers, improve our logistics and supply chain functions, and extend our research and development capability. We believe the strategic initiative will improve our overall financial performance, as well as customer service in the growing Asia Pacific market. Our increased commitment in Asia Pacific is reflected in fourth quarter orders and revenue gains in the region. As we look to the future, the mobile segment continues to provide the greatest opportunity for us. Strong growth is still coming from emerging markets with the need to provide basic service. This is clearly a sweet spot for us, given the breadth of our offerings and our vast experience in greenfield networks. Operators are also looking for new levels of efficiency in backhaul, as the up take of 3G services stress these existing network capacity. This is also an important strength for us.

Our Eclipse and TRuepoint platforms provide a comprehensive portfolio of optimized radios for building point-to-point and nodal wireless backhaul network solutions. As mobile and private network operators evolve their networks towards all IP technologies, Eclipse and TRuepoint deliver software scale [volt] capacity migrations, broad frequency coverage and native support for all types of TDM and ethernet IP data traffic. NetBoss delivers the enterprise-wide capabilities operators need to manage these evolving networks. Our ability to serve customers with leading-edge products and complete end-to-end network services allows us to stand out as the Company providing the best combination of innovation and breath. We are finding more and more that this is what our customers are looking for as they build out their networks.

While we operate in a highly competitive market we believe the strong order demand in all of our key regions plus -- provides us with the confidence to reiterate our fiscal year 2008 guidance. On a non-GAAP basis we continue to expect revenue to range between $670 million and $702 million, and we expect to report $1.05 to $1.22 per diluted share. We look forward to fiscal year 2008 and believe that we are already gaining traction. We expect to capture our full cost reduction target of $35 million in fiscal 2008 and achieve significant year-over-year earnings growth. Harris Stratex Networks has come together as a dynamic and innovative new company, due to the hard work and collaboration of our employees. I would like to thank them for their dedication and efforts.

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

Thank you. (OPERATOR INSTRUCTIONS) Our first question is from Blaine Carroll with FTN Midwest Securities. Please go ahead.

Hello everybody. Congratulations on a great quarter.

Thank you, Blaine.

Guy, one of the things that Sally had mentioned that ties back into the receivables and the DSOs is that business was strong towards the ends of the quarter and I'm assuming that most of that was coming out of turns business and not too much out of backlog. I'm wondering if you could touch on what sort of turned on that spicket towards the end of the quarter?

Actually unfortunately for us this is not an anomaly. We definitely have -- or generally have back-end loaded quarters and the fourth quarter was no exception for us. So I mean from a trends standpoint it's what we have been experiencing. Now would we like to change that and try to more level load quarters, we certainly would, but Q4 looked pretty much like what we had experienced in Q3 from the strong push in the last month of the quarter.

You ended the quarter somewhere around 75% booked versus like a normal run rate of somewhere around 60%. Is that correct?

That's right.

Okay. Sally, what type of sequential revenue trend should we expect from the fourth quarter into the first quarter? Would you consider this $174 million a normal type of quarter, or because the backlog was so high -- I think it was $15 million in unrecognized revenue that flowed over into this quarter -- just trying to get a trend on what the sequential revenue number should look like?

So Q4 is our strongest quarter, and Q1 is -- as we have talked about it probably our third strongest quarter. So we continue to believe the guidance that we gave in our last earnings call for 45% of revenue in the first half and 55% in the second half to hold.

Okay. Then Sally what was the DSO number?

DSO number was 103.

During the quarter.

Yes.

Okay. And then last question and I will pass it on, Guy, when you talk about the Kentucky $28 million order and the Africa $12 million, over what period of time do we expect orders of that magnitude? Is it six-month, 12-month, multiple year type of contract?

Well, none of them are multiple year and some of them could stretch out to as much as 12 months. But generally, in (inaudible) cases it will be less than 12 months and probably less than six months for most of the business.

Okay, great. I will pass it on. Thanks.

Thank you. Our next question is from George Iwanyc with CIBC World Markets. Please go ahead.

Congratulations on the improvement. Sally, can you give us an idea of how you expect gross margin to trend through the year and the OpEx level as well?

I can. We talked last time on operating expenses that we expected they would average between 22% and 23% for fiscal 2008. We've also talked that we will increase our gross margins modestly. In the past we have set our goal for a 40% gross margin achievement, but we indicated in our last earnings call that would take longer than FY '08 to achieve, based on some of the pricing pressures that we have seen. We've also stated that unlike revenue we expect earnings to be 30% to 40% in the first half of next year, and 60% to 70% in the second half of the year; due primarily to the timing of our synergies. So the decrease in OpEx would follow ratably along with that model across the year.

Okay, so following up on that, the $35 million in cost savings expected this year, do you expect most of that to be in place by the end of the calendar year in December?

Yes.

Looking at -- in the strength that you saw late in the quarter, Guy, was more of that coming from the international markets, an improvement there, or was it across all the regions?

Most of it was coming from the international regions. While our North America business isn't completely linear throughout the quarter it doesn't have the strong back-end loading effect that what we have in international, so it was mostly international.

Okay. And then looking at Africa, you have the couple of large contracts that you announced, growth was up, do you expect that to be one of the bigger drivers going forward?

Well, in general, Africa is the fastest growing wireless market, and we expect to continue to participate in that market and have significant growth coming out of the opportunities that are generated there. So we anticipate that going forward we're going to continue to have growth and good growth coming out of Africa.

And last question, you talked about working on, I think 20, WiMAX deployments, is that typically with -- directly with the carriers or are you teaming up with equipment suppliers and combining your backhaul solutions with their access solutions?

In most cases it's actually working with the operators on the opportunities we have in place today.

Do you have any interest in the access side at this point?

We always have interest in it. We are still evaluating as to whether we will jump into that portion of the market or not.

Great. Thank you.

Thank you. Our next question is from Rich Valera with Needham & Company. Please go ahead.

Thanks, good evening. Sally, on the OpEx, could you say anything about what you're expecting sequentially? OpEx were actually up sequentially in the fourth quarter and I think you mentioned that there may have been some non-recurring elements in that that you didn't back out in pro forma. Just trying to get a sense of how we should look at them sequentially into the first quarter, if there are some things that we can just take out right off the top?

The OpEx was increased in the fourth quarter due to expenses related as to the increase in sales. And as a complete -- as an absolute dollar amount we would expect OpEx to be lower in the four -- in the first quarter than you would see it in the fourth quarter. In terms of realizing our synergies throughout the year, the percent of sales will be more noticeable in the second half of the year than in the first half of the year.

And just to be clear, you said 22% to 23% for the whole year, right, OpEx as a percent of revenue?

I did, yes.

Be so presumably you'd start the year at a percentage maybe above that range and then finish somewhere towards the lower end of that or something like that?

Yes.

Okay. And, Guy, you set a goal of hiring a VP of international sales. Can you say were that process is. and how do you feel in general about your sales coverage in international markets, particularly in Africa and the EMEA regions where the [Benkey] region it sounds like had you some disruption following the merger?

As I said in the comments, we're pleased by the improvements that we've had in our sales organization. We've gained stability in the fourth quarter. While we are not completely there, we've improved tremendously over where we were in the third quarter, and I think that we're moving completely out of the realm of needing to talk about that integration difficulty going forward. With regard to the VP of international sales, what we've done is, to facilitate and the integration and to build confidence within the sales organization we moved Paul Kennard into that position to stabilize the sales force. Paul really knows our leading international customers, he knows most of the individuals, particularly in Europe, the Middle East and Africa area, and is able to work with them very well to continue to facilitate the integration process and to drive our business in those regions. So Paul is really focused on it. He's jumped in, he's doing a great job, and I think we'll be able to leave this particular issue behind.

Is that a permanent role for him or an interim one? Is that clear at this point?

It's not clear. It's permanent for right now, for sure.

Okay. And last quarter you did mention and I think you mentioned again this quarter that you've been seeing some -- I guess last quarter was really when you first mentioned seeing some pricing pressure, maybe stepped-up pricing pressure in some regions. How is the competitive landscape? Has that stabilized? Is there any change there?

Well, there's not really too much change. We had forecasted price pressure, declining prices in the 10% to 12% area over the year. That's pretty much looking like that model's holding. We put in place cost reduction exercises to offset that so that we can hold or improve our gross margins. The only place where I think that, as I said last time, there are occasions with larger opportunities where we do see very strong price pressures from some of the competition and I think that's going to be ongoing. There'll be specific opportunities in the market where pricing will be under severe pressure. but in general I would say that the model that we had is holding.

And competitively how do you feel about your share in the market? You've probably seen some smaller companies that are growing very rapidly. And maybe it's not fair because they don't -- they address some niches that might be faster growing, but how do you feel about your share overall in the market? Do you feel like you're holding share, gaining share, what the what's the case there?

Well, right now you know we had an issue in Q3, as we first launched the merger and integrated our operations. I think that we stabilized in Q4 and I think over the stub period we were able to maintain our share, and I think right now we are poised to now expand our share in the marketplace as we enter fiscal year '08. I expect that we'll be more successful and continue to advance our share of the market.

Okay. Thanks for taking my questions.

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

Thanks for taking my question. First, Guy, on that big North American number can you give us a flavor from [conversing] from carriers versus private networks and whether it was particularly seasonal, was it federal input or anything like that?

Well, it was different than in the third quarter. In the third quarter we talked about approximately 55% of the business coming from private networks and 45% coming from mobile operators. In the fourth quarter, those numbers actually changed around, where we had 55% coming from mobile operators and 45% from private networks. I think if you were to look at those numbers over a twelve-month or a four-quarter period you'd see that it basically comes out to about 50/50 split, and that's what we've done historically and it looks like it's working about that way with the new company.

I know you do a lot of business up in Canada with mobile operators, was that what's dominated or did you also have a lot of activity down here in the U.S.?

I think it was a combination between Canada and the U.S. We actually have had an improvement in our business with operators in the U.S.

You mentioned new products versus old products and gave some percentage. What are you -- how are you defining new products?

It's a product that's less than three years old.

Okay, and if you -- how was your -- what was your mix of ethernet-type products and how has that been going? And maybe comment a little bit about how Eclipse has performed over the last couple of quarters?

Eclipse has performed very well over the last few quarters; in fact, expanding in its percentage of total revenue. With regards to ethernet-based products I can't give you an exact percentage of the total. I can tell you that we looked at the number of ethernet-oriented application that is we served in fiscal year 2007 and it was in excess of $50 million.

Okay, and I didn't hear you talk much about backlog. What happened with backlog in the quarter?

Well, typically as we talked about earlier, on backlog we kind of look at it more as to driving backlog to our model as we exit a quarter and enter a new quarter. And as I think Blaine said in his discussion of questions, in Q3 we had -- about 75% of our planned revenue was in backhaul as we enter Q4 and exited Q3. We've got a model that says that we want to maintain, to the extent possible, no more than 40% that we have to turn in any quarter, so as we enter Q1 we want to have a minimum from Q4, at least 60% in the backlog as we enter the new quarter.

I guess there's a lot of variables there. I guess, you mean to say that book-to-bill was probably less than one but your expectations are generally for a sequential decline in revenue for the first quarter, so you feel pretty good about the amount of turns business you have --?

Well, we feel good about the backlog we have entering Q1 and it meets our model and we did have a have -- and we talked about the book-to-bill for the stub period was slightly greater than one as we exited fiscal year 2007 and moved into 2008. And the orders number moves around a lot, but generally if we're going to grow it's got to grow faster than the revenue and we think we're in that category.

Sally, a question for you. On the gross margin, you mentioned some other costs, cited some inventories reserves. What would -- was that -- what we have seen in margins if you were to normalize that out on an adjusted basis?

We've estimated that margins would have been 2% higher had that been -- had those not occurred. We think some of that will be -- is non-recurring and some may be recurring for a few quarters relating to the inventory rebalancing and product line rationalization as we work ourselves through our product transition.

Okay. And, Guy, on the sale force integration sales force integration, it seemed like the biggest issues you had a few months ago were Middle East and also Africa. Do you feel like you've got everything working now or do we still have a little bit more work to do there?

Well, we made tremendous progress. I can fairly state that. I won't declare a complete victory in that area, but I would say that we're 95% of the way there. And I think with Paul Kennard's efforts and focus in that area, like I said, I don't think we'll need to be talking about it in Q1.

Well, congratulations to Paul. And Sally how is the executive dashboard? You had issues with integrating two IT systems, are you feeling okay about that? I know you have -- I think you are going to do a -- implement a new IT system for both legacies or common over both legacies over the next year. Where are we in that process?

We are on plan. This past month we went live on our first phase of our integration of our IT systems and getting our Singapore company's set up on its separate Oracle ledger, and we are proceeding with the plan to put both companies -- former companies systems on to a single platform,. We predict that to happen by the end of the calendar year, so things are moving as-planned and we are looking forward to having our tools in place.

Okay, I'll -- thank you, I'll get out of the queue.

Thank you. (OPERATOR INSTRUCTIONS) Our next question is from Steve Ferranti with Stephens, Inc. Please go ahead.

Hi, good evening. Thanks for taking my questions. You mentioned three drivers where you're seeing strength in North America on the carrier side; it's lease-line substitution, capacity adds and the 2.1 gig relocation. Can you kind of prioritize those in terms of which -- which you're seeing the most traction in at this point?

I don't know if I would stick my neck out and say there was any particular one area that was driving the improved business with carriers. I think it's a combination of lease-line substitution, the footprint expansion, and the beginning of the two gig relo that I think will occur over the first two and a half years. So I think in all those areas we've seen a pick up of activity and that's what leads us to feel pretty good about North America going forward and the impact on our overall business.

And is most of that activity SDH-type of deployments, I'm assuming, or are we seeing any ethernet opportunities in there?

Most of it is SDH, however there are a few ethernet opportunities but mostly SDH.

And then I guess more broadly, can you give us an idea in terms of your revenue breakdown? I realize you are not going to give me exact percentages but can you give me an idea of PDH versus SDH versus IP?

Really, Steve, I don't have those numbers in front of me and if you'd like you can check back with me and I'll try to pull something together. But we haven't been reporting them and they move around quite a bit. I can tell you that for us it's the high capacity world that generates most of our business, so it's SDH business today followed by PDH and then with the IP, which is still in the developmental stages, although picking up. So for us it's really high-capacity application is driving most of the business.

Okay, that's helpful. And then last one for me, you mentioned the inventory reserves earlier. Is that really just associated with product line rationalization or are you seeing perhaps some slowing -- slowing orders for some of the older products there?

No, it's really the product line rationalization. And we expect that even though we've taken some reserves we expect to be able to balance out our inventory and sell it through so that we hope that this is, like Sally said, a one or two quarter phenomenon.

Okay, great. That's all I have. Thanks for taking my questions.

Thank you. Our next is from Kevin Dede with Morgan Joseph. Please go ahead.

Hi, good afternoon. Nice job on the quarter, Guy and Sally.

Thank you.

Hey, Guy, you mentioned advancing your share in the market. Can you give us a couple of characteristics of your products that you think are commanding most attention from your customers?

Well, today, as I think I mentioned in the answer to one of the previous questions, we're showing fairly good advancement on the Eclipse product side, as the complete sales force moves the solutions of Eclipse into the market applications that are in front of us. So those applications with Eclipse are both TDM and IP based, so there's a lot of flexibility in that product portfolio including the nodal capabilities that the product line has, so we are seeing some advancement there with more and more Eclipse sales. I think that going forward we talked about our high-capacity trunking solutions. We feel good about the fact that when we get our TRuepoint 6000 product out there that it'll enable us to grow share in that segment of the market and give us some revenue lift. But I think in general we've a very strong product portfolio that includes trunking and access products supported by our network management capabilities and functions. So I think in total we've got a really solid portfolio and when we look at that and couple it with all the service offerings that we have we feel real good about how we're positioned in the market to serve our customers.

You said the TRuepoint 6000 was out by the end of this calendar year correct?

Right, I actually said we'll start first shipments in October.

October, okay. Then you also mentioned product transition issues and dealing with inventory. Can you give us a little more detail on that?

Well, what we're doing is we move the product transition and rationalization. We have various product categories that will sell slower than what they had in the past, so that's going to require us to take some reserves, do some repositioning and sell those product categories through. Because we're looking at the total product portfolio and rationalizing it for the best solutions in the various segments of the market that we serve. So in some categories we've got two products that serve the same application. We're going to have to go through efforts to rationalize that and then handle the inventory applications and move out the inventory that needs to be moved and take care of it for the long-term. Like I said I think this is like a couple quarter phenomenon. We'll get balanced. We'll sell through the inventory and it'll be gone.

Does this include integrating features from TRuepoint with Eclipse and combining a product or is that a separate development issue?

That's a separate development issue that's underway. We talked about it in the last call that we have an internal program named Unity, that it will take our access capabilities from both product lines and integrate them into a new product line that the code name Unity, which we're targeting for an '09 type of availability in the market.

'09 calendar or '09 Harris Stratex fiscal?

End of fiscal '09 type of time frame.

Okay. Then would you mind giving us just an update on the facilities head count and supply chain synergies? I guess just a little more color of where you are in that integration process?

If you bear with us here we'll give you the breakdown. After the last call we put together some more color on how these broke down between the first half and the second half of the year. For example, if wer were to look at supply chain savings, we said that we would secure for the year around $19 million, with about $7 million in the first half and $12 million in the second half. For the R&D consolidation it was about $2 million in the first half versus $4 million in the second half for a total of $6 million for the year. For international facilities and redundancies it was about $2 million in the first half and $2 million in the second half for $4 million for the year. For North America facilities and redundancies it was about $2.5 million in the first half and $2.5 million in the second half or $5 million for the year. And then for IT consolidation it was about $0.5 million in the first half of the year and $0.5 million in the second for $1 million. And hopefully that all adds up to $35 million if the math is right.

Okay. You say first half '08 versus second half '08?

That's right.

Okay. And the facilities that you're consolidating can you be more specific on their geographic location?

Well, we mentioned one of them in the call. We talked about moving our thin film operation of manufacturing from Redwood Shores into San Jose and that was one of the consolidations that we've just concluded. We also talked about the downsizing of our Montreal facility in the past, we talked about consolidating the two facilities that we had in Mexico City into one, so there's a number of them that are spread out in different international areas that we are working through.

Okay. Then on your WiMAX deployment support, which products from your line do you find fit your WiMAX carrier customers' best?

Well, it's in two categories and for the WiMAX that's really been backhaul and it's been the Eclipse and the TRuepoint 5000 products.

Okay. Well, congrats again on a nice job in the quarter and a nice come back.

Thank you.

Thank you. Ms. McGowan there are no further questions at this time. Please continue with any closing remarks you may have.

This concludes our conference call with Harris Stratex and thank you for joining us today on this call.

Thank you. Ladies and gentlemen, you may now disconnect.