Aviat Networks Inc (AVNW) 2008 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by and welcome to Harris Stratex Networks conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the call over to Mary McGowan, of Summit IR Group. Ms. McGowan, you may begin.

Thank you for joining us today to discuss the Harris Stratex Networks financial results for the first quarter of fiscal 2008. On today's call will be Guy Campbell, President and Chief Executive Officer; and Sally Dudash, Vice President and 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, continued network expansion by mobile and private network operators, 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 will we refer to as MCD, with those the former Stratex Networks, which we will 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 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 results, which are used by management to reflect the basic operating results of the Company, and will facilitate comparison of operating results across reporting periods. Now I would like to turn the call over to Guy Campbell.

Thanks to all of you for joining us today. I am pleased to report that we entered our new fiscal year with strong orders and revenue momentum, an increasing validation of our leadership position in technology innovation, product and services breadth and global reach.

Let me share with you some of the highlights from our first quarter of fiscal 2008. On a non-GAAP basis revenue for the September quarter was $172 million. Gross margin was 30.1%. Net income was $10 million or $0.17 per share. By segment, North America revenue was $57 million, international revenue was $109 million, and network operations had a strong quarter with revenue of $6.5 million.

Orders in Q1 increased for the third consecutive quarter, and the book to bill ratio for the quarter was greater than 1. We also captured the synergy cost savings we targeted for Q1. This underscores our confidence in meeting our targeted $35 million total cost savings in FY '08 from supply chain management, headcount reduction, and facility consolidation.

Later in the call I will provide comments on our market and product positioning, as well as an update on our financial guidance for the year. Now I would like to turn the call over to Sally for a review of the quarter's financial details.

Good afternoon everyone. Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended September 28, 2007. The GAAP results are those of our new combined Company, excluding the results for Stratex prior to February 2007. For GAAP purposes all prior year comparisons are against the results of MCD only.

First quarter revenue was $172 million compared to $174 million in the fourth quarter of fiscal 2007, and $94 million in the year ago period. We reported a net loss for the first quarter of $800,000. This compares to a loss of $5.3 million in the prior quarter, and net income of $4.8 million in the year ago period.

We believe the supplemental non-GAAP financial results used by management reflect the basic operating results of the Company and facilitate comparison of operating results across reporting periods. Our non-GAAP income statement 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 first quarter of fiscal 2008 these non-GAAP charges totaled $14.3 million, and are composed of the following, $7.6 million integration and restructuring charges, $3.6 million amortization of purchased intangibles, $2.4 million stock compensation expense, and $700,000 amortization of fixed assets fair value step up.

The following discussion is based on our non-GAAP results. Revenue at $172 million was an increase of 7% compared to the first quarter of fiscal 2007. New product revenue, which we the define as revenue from products less than three years old, was 56% of total revenue.

By segment, North America microwave contributed $57 million of revenue, increasing 8% compared to the first quarter of fiscal 2007. North America customer orders driving Q1 results were composed of 57% from mobile operators, and 43% from private operators. This is weighted more this quarter towards the mobile customers than our average 50-50 split, as this segment continues to see strength from increased bandwidth demand, footprint expansion, and 2 GHz microwave relocation for advanced wireless services from these public operators. Private operator demand comes from network hardening, network interoperability, and homeland security projects.

The international microwave segment contributed $109 million of revenue in the first quarter, an increase of 5% compared to the first quarter of fiscal 2007. Year-over-year gains in international were seen in almost all geographies. The geographic breakdown of revenue was as follows. Europe, Middle East and Russia at $33 million was an increase of 14% compared to the year ago period. Latin America and Asia-Pac $24 million, an increase of 6% compared to the year ago period. And Africa at $52 million was flat year-over-year.

Africa, Europe, the Middle East and Russia remain strong growth areas. Opportunities in these regions continue to be driven by infrastructure buildouts, the growth of IT networks and services, and 3G licenses being awarded in Russia. Operators continue to expand their coverage and capacity across West Africa, East Africa, the Middle East driving increased business activity.

The network operations segment contributed $6.5 million in revenue in the quarter, which is a 48% increase from the year ago period. Increased demand for this segment's Service Assurance Solution with next generation network customers is fueling revenue growth.

Gross margin was 30.1% compared to 31.9% in the prior quarter, and 32.2% in the year ago period. Overall gross margins were impacted in the first quarter by the mix between international shipments of Eclipse high capacity products, which command a higher margin, and low capacity products. On average the mix between these products will be 60% high capacity and 40% low capacity.

Demand this quarter was driven by new mobile system wins that had a higher concentration of low capacity products, which resulted in a mix of 50% high capacity and 50% low capacity. This 10 point shift in mix had an unfavorable impact on our margins. We see no reason why the mix will not return to the historical average in future quarters.

Service revenue mix remains comparable with the prior quarter and prior year at 14% of total microwave revenue.

Total operating expenses declined from $42 million, or 24% of revenue, in the fourth quarter to $39 million, or 22% of revenue, in Q1. Expense synergies are being realized according to our plan. R&D spending was $12 million in the first quarter, or 7% of sales.

Depreciation and amortization of property, plant and equipment and capitalized software was $5 million in the quarter. CapEx, including additions for capitalized software and IT systems and tools, was $6 million.

Operating income was $13.3 million, flat compared with the year ago period and down sequentially from $13.8 million in the fourth quarter.

Net income was $9.9 million in the quarter, or $0.17 per share, compared to $10.3 million or $0.18 in the fourth quarter. Our pro forma tax rate remains at 26%, and our cash tax rate is approximately 3%.

Employee headcount was reduced in the quarter from 1,450 to 1,410 and is in line with our integration plans for headcount reduction.

Moving on to the balance sheet, Harris Stratex' cash balance, including short-term investments, was $79 million at the end of September, compared to $90 million at the end of June. As I mentioned previously, we had $6 million in capital expenditures for the quarter, $3.7 million of which was for improvements in our IT systems and tools.

Although our overall cash and investment balance declined, we did improve operating cash flow from a negative $1.6 million in the fourth quarter to a positive $2.1 million in the first quarter.

Product inventory balances were essentially flat compared to the fourth quarter, and we saw decreases in raw materials and finished goods as a result of our inventory management initiatives. Unbilled cost increased by $11 million as a result of continued growth in system projects. These projects have longer cycle times to cash than product shipments, however, they are predominately with North America customers, and they are scheduled to ship during the remainder of the fiscal year. Inventory turns, including unbilled, where 2.5 compared to 2.6 in Q4 of FY '07.

We had a four-day increase in DSOs to 107 in Q1 compared to 103 in Q4, again influenced by the timing of shipments during the quarter. Initiatives are underway to decrease DSOs to less than 100 days within the next three to six months.

Now I will turn the call back over to Guy for a market and outlook discussion.

Now I would like to talk about our market, its evolving demands, and why Harris Stratex is positioned to compete and win. Our strength as a business begins with our focus on the fastest-growing, highest value markets. We are targeting high capacity backhaul, nodal networking applications, IP transport, and network planning and optimization as fast growth areas. This is in addition to the markets we traditionally serve well, such as TDM cellular backhaul, network interconnection, and public safety.

In the mobile segment the rate of base station deployments is increasing in all market areas, and is expected to do so through 2008. The base station additions are a historical market driver for new microwave backhaul.

The move to deployment of 3G advanced services is clearly driving new levels of capacity and the requirement for increased efficiency in backhaul. These market trends play to our strengths in both product innovation, with our scalable capacity products, and Ethernet migration strategies, along with our service delivery capability in all aspects from planning to implementation and support.

We see encouraging signs in the interest for WiMAX network deployments, and continue to increase our customer base in this area. In addition to providing backhaul solutions, we are now engaged in consulting for IP network design, traffic optimization planning, and turnkey implementation for WiMAX networks.

A key differentiator for us is breadth of the product portfolio. We provide solutions for all types of wireless networks, from low capacity voice networks to high capacity IP networks supplying voice, video and data, all on the same network. In addition, we offer services to help customers worldwide monitor and manage their networks, an area where we are seeing greater success with key network management wins.

Our customers span the globe. We recently announced a contract with ONE, an Austrian mobile operator, to upgrade its cellular backhaul network. Our Eclipse microwave radios will increase bandwidth, reduce operating costs, and build an IP-ready infrastructure to support future network deployments.

We also announced a multiphase award to upgrade the Anchorage Alaska Public Safety Network used for fire, police, medical and emergency service communications. This project includes our TRuepoint and Constellation radios, and is the latest in several significant turnkey public safety network programs led by Harris Stratex. These contracts are a testament to our reach into different geographic and vertical markets.

We're taking an aggressive strategic approach to expanding into new markets and leveraging our strong relationships with customers who are themselves expanding. For example, we are working with our long-term customer MTN in Nigeria, Guyana, Zambia and the Ivory Coast as they continue to expand across Africa. And we're winning more work in Europe and Russia, having announced projects this quarter was with VimpelCom, the leading mobile operator in Russia, and [Naji.com], the leading mobile operator in the Republic of Georgia.

Our objective is to generate new business with current customers through expanded product and service offerings, and to uncover new opportunities in growing markets. This is particularly true in the case of microwave customers turning to us for network management and services assurance solutions for next generation networks.

We are committed to being close to our customers, living and working where they live and work. This is evident in our recent office expansions. Our new international headquarters in Singapore is enabling us to better serve our customers in Asia-Pacific, where we are realizing orders and revenue expansion. In September we announced the opening of a new office in Mexico City, which will optimize our sales and support efforts as regional headquarters for Latin America.

In early October we also expanded our office in Romania to support our client base in Southeast Europe, where we have a number of key contracts with mobile, broadcast, media and WiMAX operators.

Our strategy is to selectively expand in regions with the strongest growth potential. Customers depend on us to develop differentiating technology and offer a breadth of solutions. Our investment in R&D remains as large as any in our industry, and will continued to fuel our product innovation. This engineering commitment enables us to maintain our technology leadership and offer our customers superior solutions and services.

Now let me talk about our products. TRuepoint 6000 began shipping in Q1 to the Commonwealth of Kentucky for deployment of its all-IP network. The equipment is installed and moving traffic. The TRuepoint 6000 is a high capacity all-indoor radio solution for both IP and TDM transport. This radio is positioned to extend our leadership position in North America in both medium and high capacity transport and to grow our market share. Our development program remains on track for subsequent frequency releases and capabilities throughout fiscal 2008.

We have continued to add features and functionality to NetBoss, our network management suite, making the service increasingly valuable to our customers worldwide. The NetBoss solution for service assurance saves installation and integration time, while reducing customers' operating expense through ease of operation. Our customers recognize the value-added of our network operations offering, which is reflected in the 48% year-over-year revenue increase we reported for Q1.

We had two key wins in the quarter to provide top-level management systems for next generation network operators in the Middle East. In September we were proud to announce that our Eclipse Carrier Ethernet wireless transport platform received certification from the Metro Ethernet Forum, MEF, a global alliance of more than 120 leading telecommunications vendors.

The MEF certification program provides service level benchmarks for manufacturers' equipment, and service provider performance in complex Ethernet-based networks. Eclipse is the first and only wireless product to meet the requirements of both MEF 9 and MEF 14 technical specifications. These certifications are a testament that we lead the market in developing wireless transport systems for large-scale, multiservice Ethernet networks, including next generation mobile network infrastructure and networks deploying WiMAX and other service delivery technologies.

We believe our Eclipse product is fundamentally superior due to its advanced capability. Layer 2 functionality is essential to provide the quality of service to support true Carrier Ethernet transport. Examples include traffic segregation, privatization and monitoring, link aggregation, and our unique patent pending resilient wireless packet ring technology. The value of this intelligence inside the radio is in its ability to remove or reduce the cost of external Ethernet switches.

Our innovative productline is clearly a strength, but any discussion of our products would be incomplete without mentioning our comprehensive services suite. By providing a wide range of professional and support services, including network design and optimization, site build, site maintenance and equipment installation, we can expand the reach, capacity and management capability of existing networks, and support new buildouts in any region of the world. Our services drive stronger customer relationships, resulting in sustainable long-term revenue.

New market applications, such as WiMAX, provide additional opportunities. At this juncture, WiMAX backhaul remains relatively small, but we are currently involved in more than 20 WiMAX deployments around the world. Some where we're doing the site builds in addition to providing the equipment.

During the quarter we secured several new wins for WiMAX networks. Eclipse is ideally suited for WiMAX backhaul traffic by enabling operators to support Carrier Ethernet transport. Our WiMAX backhaul solution enables operators to fit more capacity in less bandwidth than other solutions, resulting in significant overall savings. And gives operators the ability to deploy high capacity links in the minimum bandwidth in regions where frequencies may not otherwise be available.

The wireless transmission market continues to grow and expand, and there are a number of market trends in world regions driving healthy growth. We will take advantage of these growth opportunities by delivering innovative solutions through continued R&D investment, extending the breadth of our product and service portfolio, and leveraging our scale and global reach.

In looking at the year ahead, we are aware that the environment we operate in is highly competitive. However our first quarter, which is seasonally one of the weaker quarters, delivered strong revenue and the third consecutive quarter of order increases. For these reasons we are reiterating our fiscal year 2008 guidance.

On a non-GAAP basis we continue to expect revenue to range between $670 million and $702 million, and earnings per diluted share of $1.05 to $1.22. The leadership team is completely focused on delivering the fiscal -- financial performance we have set forth for the Company in fiscal year 2008.

Once again, I would like to thank the employees of Harris Stratex Networks around the world for their talents, dedication and efforts. At this point, I will ask the operator to open the line for your questions.

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

Good results guys. I had a few questions for you. First of all, can you tell us how much of your revenue is IP Ethernet [event]? And can you tell us what is the relative gross margin of that productline versus your corporate average?

I don't have a breakdown on how much of the total revenue was from IP. I can say that it has been steadily increasing and becoming more significant, and that margins are typically higher for that application.

Would you estimate though it is above 10% of your revenue?

I would prefer to get back with you on that. I can't validate that 10% is either high or low.

Now relative to your annual guidance, you mentioned a long list of opportunities and continued momentum and growing trial activity and book to build greater to 1, yet in order to get into at least a midpoint of your guidance -- I want to say conservative -- it implies flat three quarters ahead of us. I am kind of trying to scratch my head a little bit.

Can you walk us through at least from a seasonality standpoint, between now and the end of June '08 your fiscal year, how should we think about seasonality? At least, if not from a percentage standpoint, at least from a directional standpoint quarter over quarter?

I think previously we provided seasonality associated with the guidance we have provided for the revenue outlook guidance. And I think that still holds true. While we are pleased with the orders and revenue performance from Q1, it is one quarter. And we believe that the ranges we provided for the revenue guidance are still valid, and we are not prepared to make any adjustments to those at this early point in the year.

But should we at least assume a sequential take down in March similar to what you had last year, at least from a directional standpoint?

Yes, that would be appropriate.

Now, Sally, turning to the operating expenses, great job on that side. Can you tell us sales, SG&A, how should we think about that number being reduced even further? What is the floor that you expect that number to get to before it starts growing again with revenues?

We still believe the guidance we gave last quarter holds. We have talked about OpEx on average should range between 22% and 23% of revenue for the year. And we are executing to that plan as evidenced by Q1.

As you stated, quarterly this may be impacted due to revenue volumes, with Q3 historically being a weaker quarter. But we still believe for the year the 22 to 23% is a good number.

With regards to the gross margin, it seems like you were caught a little bit by surprise by the mix this quarter. Assuming the trends holds for the December quarter, why do you feel comfortable that the margin issue is not going to be repeated? What gives you confidence there about the increase in gross margin going forward?

Our prior guidance has been that gross margin should improve modestly through the year. As I mentioned in the call, we believe the mix impact in Q1 was atypical. And we see no reason why this should not return to a more normal mix in the future quarters. And on that basis, we feel comfortable we're still on track for the overall earnings guidance that we provided.

Does that imply that the upside in revenue you had this quarter, was that the element that was atypical -- that increase in revenue also came with a much lower gross margin?

As I mentioned, we had a higher percentage of our new system wins with the low capacity products, so that did drive the gross margins. So, yes.

Lastly on tax rate, can you tell us how should we think about tax rate for the year?

26% pro forma tax rate is still holding for us.

Blaine Carroll, FTN Midwest Securities.

Congratulations. Nice quarter. Guy, anything different in the pricing environment that you're seeing out there?

No, the pricing environment is -- remains fairly constant from Q4 to Q1. We haven't seen any major changes that weren't in our plans. The pricing environment is tough and has been tough, but we haven't seen any radical changes from the past.

So this was all mix. If you look at the split between the international and the North American, the split was pretty much the same as it was last quarter. Were there more low margin radios selling into the U.S. market or into the international market?

That was really in the international market. And as we said in our press release, and as Sally said in her comments, it really reflected some large system wins that we had. The particular architecture of the systems that we supported with products there was just a larger percentage of low capacity radios out at the edge than we had high capacity radios in the core for those particular system implementations. However, is not all bad. We think in the future that there will be capacity upgrades and expansions for these networks, and we're still happy with that revenue.

Guy, what type of radios are going into the microwave relocation?

Those in North America would be a combination of both Constellation and TRuepoint radios.

Low cap or the higher cap?

It has been mostly higher cap.

Let me see. Any impact with Alcatel-Lucent during the quarter? How was their revenue runrate just versus last quarter or the quarter before?

The Alcatel-Lucent runrate is tracking pretty much according to plan, not any real radical changes that we saw or expect.

Is that pretty much 100% margin business?

No, it is a combination. There is a part that is licensees fees and there are some that is equipment sales.

Great job. Thanks. I will pass it on.

Steve Ferranti, Stephens, Inc.

A question on the mix of products again during the quarter. Can you give us a sense for perhaps what geographic regions might be more heavily weighted towards edge radio product versus higher capacity core radio products? Can you segment it out that way?

We can -- for the first quarter we can give you an indication that we had probably more in Asia-Pacific than in other regions, but it can move around. We had some new operator wins in Africa that also had a number of lower capacity requirements, or a larger percentage let's say than high capacity.

When we're talking about the edge radios I would assume that is the Stratex product. Is that right?

That was the Eclipse product.

Okay. If we look at -- you mentioned in your script targeting Asia-Pac as a strategic growth region. If you look at the market there, obviously a price competitive market, entrenched suppliers. What is the strategy for dealing with the cost structure going into those markets?

First of all, we think we've got a very good total product offering for meeting operator demands in Asia-Pacific. However, we do recognize that it is probably the most price competitive market also. But we do have a cost structure that allows us to compete and to win business, and to win it at a margin that is reasonable. We intend to continue to expand our business in Asia-Pacific going forward.

Then the last one for me, to what extent do you think the supply chain efficiency that you hope to gain in the second half of the year might help you along those lines in terms of bringing down the cost structure, particularly on the low end product?

We're on track with our supply chain savings. And as we have stated in prior calls, that is a significant part of our synergies for the second half of the year. It will provide us with good benefit in that regard.

Can you give us a sense as to what margins look like on the lower end product versus higher and products?

They are generally 10 to 15% lower than on the higher products -- on the higher capacity products.

Matt Robison, Ferris Baker Watts.

Those low cap products, you mentioned Eclipse, should we take away that the Eclipse margins are that low? There was a time, at least when Stratex was reporting those products, that they were actually gross margin drivers. And I recognize that the low cap stuff you're competing with a lot more -- you have got a lot more competitors. But was -- is part of the story also that you were selling legacy MCD low capacity stuff, or did you mean to say it was all Eclipse?

No, I think we said it was all Eclipse and it was predominately Eclipse. But I think you maybe got the wrong message. We don't want to imply that Eclipse products are low margin products. It is really the difference in margin between high capacity products and low capacity products. And that is really what impacted us. It wasn't that they were Eclipse versus legacy MCD or any other products. It was strictly the mix between high cap and low cap.

Do you think -- I know you're working -- you made some investment in IT and you're working that through the system. Are you -- do you expect to have -- when do you expect have an executive dashboard that allows you to see where your margins are intraquarter?

We still have a lot of work to do on our IT integration initiatives. We talked about the investment that we have made in the design of the new system. I would say the implementation of the next phase of implementation will come in over the next couple of quarters. We will begin to see the benefits of this towards the end of the fiscal year and into next fiscal year.

Guy, how come you don't have the IT mix as part -- it seems like that would be a pretty standard straightforward statistic. Is it just that you don't -- you sell IP and TDM products to customers, you don't necessarily know which features they use, or is there a reporting difficulty that might not be obvious there?

There is really no reporting difficulty. We just haven't singled that out as something that we want to track going forward from the standpoint of looking at specific numbers. We can certainly do that in Q2 going forward in future quarters.

The thing that we're happy about is the fact that we know that without counting the absolute numbers, that that area is expanding for us based on the number of wins and the activity that we have in that particular area. You're right, we probably should start to segment it out, take a look at it in more detail.

Do you think that -- you had all this revenue from the access products. Normally you have stronger seasonality in the December quarter. Was this a circumstance where we might see -- we might be likely to see a flatter revenue -- sequential revenue comparison but maybe make it up on the gross profit dollar line with better mix in the December quarter?

We don't see any change in the seasonality guidance that we provided you before. We typically -- Q2 is typically a stronger quarter then Q1. And I think that will probably be the case in Q2 of this fiscal year. I wouldn't lead you to believe that it is going to be flat or down.

I guess the backdrop for that is always also you have given some percentage of revenue as far as the years go in the past. Now with such a strong first quarter, it would imply that you have -- either your revenue number you expect to be very close to the high end of your arranger, or maybe higher, in order to demonstrate the kind of typical patterns that you have, or maybe it would be flat in the December quarter. I guess that is where I'm coming from. Can you shed the light at all that there might be incremental versus your prior discussion of revenue patterns?

I would prefer not to get into that because it has been our policy about not giving quarterly guidance on things. And I really don't want to do that. I think that --.

How about half to half, because you have done that? What percentage of revenue do you think will be in the second half this year?

We had said before that we expected to get 45% of the revenue in the first half and 55% in the second half. We may do better than that in the first half by some small amount. It is hard to determine. I guess the first quarter results would lead us to believe that we should be confident that that that would happen.

But as you saw the first quarter, while revenue was higher, we had gross margin lower. Next quarter it could turn out that revenues would be low and gross margins will be higher. If you look at the business over the entire fiscal year we expect to be in the brackets that we provided for the guidance. We believe the year is unfolding the way we had envisioned it. And we expect to be within the range we provided for guidance for both revenue and for earnings.

Rich Valera, Needham & Company.

The question on the gross margin, it seems to me to make the low end of your EPS guidance that you would need to be comfortably over the 33% gross margin level for the year, which would imply -- I would characterize it more than a gradual gross margin improvement going through the year. I just want to check if that is your math too, that you need 33% or better gross margin just in -- any commentary in terms of the trajectory to get to that type of gross margin overall for the year?

I think your look at it is essential in line with ours. I think what Sally said is we expect gross margins to return to a more normal point in Q2. And from Q2 forward we expect to see moderate growth, probably up for the year to average out at an around 33% or somewhere in that area, maybe a little higher.

Sally, I don't know if you can help me on this one. Could you say where the gross margin would have been in the quarter if you had had that 50-50 mix that you typically have?

Yes, it was 60/40 mix that we typically have. And we have estimated that that was about a 2% percentage impact on margin, the 10 point shift downwards.

That is helpful. Guy, a technology question. Pseudo-Wire seems to be coming up as a hot topic in backhaul engagements. And some radio providers are actually talking about embedding Pseudo-Wire capability into their radios. Are you seeing any demand for that? And if so, do you have any plans to build Pseudo-Wire capability into your radios?

We have heard of it coming up in some discussions that we've had with operators. It hasn't been a strong trend in the market at this point. We are looking at it and have been evaluating whether it is worthwhile for us to include that in our offering. We haven't determined whether or not we will go forward with that or not, but it has been valuated.

A final one for me. Just how do you feel about the current sales situation, just in general, your salesforce structure, salesforce management? I believe Paul Kennard has been moved into sort of VP of International Sales role. If you could just comment how you feel about that sales structure. Are there any holes that need to be filled or do you feel like you've pretty much got a full bench there now?

I feel pretty good about the sales situation in general. I think that is reflected to some degree in the orders and revenue that we reported for Q1. While we don't have any holes, we will continue to make adjustments and improvements throughout the fiscal year to try and drive even higher performance out of our total sales organization. While we are pleased, we think we can do better and we will continue to make adjustments.

(OPERATOR INSTRUCTIONS). Santosh Rao, Broadpoint Capital.

Just a few questions. Just on the competitive landscape, can you just talk a little bit about that? Who are you bumping into the most and who are you beating out in the bids?

From a competitive position we run into predominantly the same list of characters. It is Ericsson, it is NEC, it is Nokia Siemens and Alcatel-Lucent are the primary competitors that we see around the globe. And some we see more heavily in one geographic area than the other, but that is the list of competitors we see most frequently.

How about the smaller ones, do they impact you on the margins like the Ceragons and the DragonWaves?

Not really. We run into them from time to time, but haven't had I would say a lot of head-on confrontations.

Now just moving on, on the WiMAX question, are you trialing any of your equipment with Sprint? And do you expect to be part of their ecosystem down the road?

Actually we have a contract with Sprint as a preferred supplier of microwave radios. We secured that contract about two years ago, and it is a four-year contract.

I didn't know. One last question. Just on your acquisition strategy, I know right now you're into integrating your Stratex and Harris portion. But are you open to looking at filling some holes, making opportunistic acquisitions here and there?

I would say that we're open to that. If we find an opportunistic acquisition that fits our overall strategy, we would certainly take a hard look at it.

Kevin Dede, Morgan Joseph.

Let me offer my congrats on a nice quarter. I was hoping you could give me a little more insight on the gross margin trend. I guess I'm a little confused because given the progress you hope to make on integrating the supply chain, you would think there would be some improvement there. And I'm just kind of wondering where you think you are on that process and how much of the gross margin improvement that you see going forward will be mix related versus integration of supply chain management?

I would say first of all, as we said, we expect the mix situation to normalize in Q2, which as Sally pointed out, would take our gross margin up by about 2 percentage points. And we were at about 30%, that would move us to about 32. Then we expect the supply chain and other initiatives that we have underway with regard to our synergy -- cost synergy program to continue to increase gross margins throughout the year such that we would exit the year moderately up from that, let's say by 1.5 to maybe 2 points.

That is very helpful. How about manufacturing facilities, can you give me an update on where you are in the integration process there?

As far as manufacturing facilities, we are fairly well integrated right now, at least for the initial phase. We have moved our microwave components organization from California to -- where it was in Redwood Shores over to San Jose. We have co-located with the remainder of our California organization, so we have made that move.

We have moved more of the product into contract manufacturing than what we had before the merger. So I would say that we have made a number of actions and moves up to this point and we will continue throughout this year to -- with our complete synergy program with manufacturing, which would take more product offshore.

We have one major manufacturing facility, which is in San Antonio, Texas, and that will continue to operate. It has been quite valuable to us in doing system integrations and working on our transport products.

That is the center for the Constellation too, if I'm not mistaken?

That's right.

On a product roadmap and introduction view would -- I think you alluded to having an upgrade to the Constellation coming now that TRuepoint 6000 is out. Can you refresh my memory on that?

That's correct. TRuepoint -- the first release on TRuepoint 6000 is an enhancement to the Constellation productline. And as I stated, we started to ship the first radios in the first quarter. We will continue with our rollout plan throughout the fiscal year where we will continue to add frequencies and capabilities to that product to enhance its value to our customers.

What is on the blackboard after the 6000?

We have an integration of the two radio platforms which came out of Stratex and the Harris Microwave Communications Division, where we will take and integrate those platforms and add some new technology capabilities to it to get to a single platform for the next generation of products. And that work has already started, but we're a little early to get into what that will mean in the way of features and functions and costs for that product, because it is quite a ways out on a timeframe.

Fair enough. I guess we will just keep badgering you as time goes on.

I understand.

Thanks for taking the questions.

As there are no further questions, I will turn it back to you, Ms. McGowan for closing comments.

This concludes our conference call. Please note that we are scheduled to present at the AeA Classic investor conference in Monterey, California on November 5 and 6. And we look forward to seeing many of you there. Thank you all for joining us on this call and the webcast today.

Thank you. Ladies and gentlemen, we thank you again for your participation. And at this time you may disconnect.