Aviat Networks Inc (AVNW) 2008 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you so much for standing by. Welcome to the Harris Stratex Networks conference call. At this time, all participants in are in a listen-only mode. Later we will open the call for your questions. Instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I'll turn the conference over to Mary McGowan of the Summit IR Group. Ms. McGowan. You may begin.

Thank you for joining us today for the Harris Stratex Networks financial results for the second 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 statements regarding our business, including statements relating to projections of earnings and revenues, the volume, timing and mix of our product orders, 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 we will refer to as MCD, with those of the former Stratex Networks, which we will refer to as Stratex. These and other forward-looking statements involve assumptions, risks and uncertainties and 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 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 reflect the basic operating results of the company, and will facilitate comparison of operating of results across reporting periods.

Now I would like to turn the call over to Guy Campbell.

Thank you, Mary, and thanks to all of you for joining us today.

Our second quarter continued to demonstrate strong top line momentum. North America posted record second quarter revenues. The combined Asia-Pacific and Latin America region surged 54% over the prior year, and network operations climbed an impressive 30% year-over-year. To be sure, we still have areas that need work and opportunities that need to be captured, but we are proud that we're able to meet customer demand, be the provider of choice for many operators around the world, and hold or increase our market share in key growth areas.

In the second quarter, we continued to see improvement in most financial metrics of the business. Let me share with you some of the highlights from our second quarter of fiscal 2008. On a non-GAAP sequential basis, revenue for the December quarter increased 5% to $181 million. Gross margin improved 100 basis points to 31%. Net income increased 22% to $12 million, and earnings per share increased $0.04 to $0.21. By segment, North America revenue was solid at roughly $64 million. International revenue was approximately $111 million, and network operations had another strong quarter with $6.5 million. We have realized the expected cost savings of $14 million from our merger in the first half of fiscal 2008, and we are on track to achieve our $35 million goal for the full year. While gross margin improvement did not rebound as much as expected, our strategy is still aimed at achieving margin expansion, which we believe is the formula for delivering shareholder value. 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'd like to turn the call over to Sally for a review of the quarter's financial details. Sally?

Thank you, Guy, and good afternoon, everyone.

Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended December 28th, 2007. Second quarter revenue was $181 million and we reported a net loss of $1 million or $0.02 per share. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company, and will facilitate comparison of operating results across reporting periods. Our non-GAAP income statements exclude the charges that resulted from the merger transaction, integration costs, asset impairment, and stock compensation expense. Please refer to our website for complete GAAP to non-GAAP reconciliation tables. For the second quarter of fiscal 2008, these non-GAAP charges totaled $17.6 million, and are composed of the following - $7.6 million for integration and restructuring charges; $3.8 million, asset impairment; $3.6 million, amortization of purchased intangibles; $1.9 million for 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 for the quarter at $181 million was an increase of 5% compared to Q1 and also a 5% increase from the second quarter of fiscal 2007. New product revenue, which we define as revenue from products less than 3 years old, was 61% of total revenue. By segment, North America microwave contributed a record $64 million of revenue, 13% higher than Q1 and an increased over the year-ago quarter. Q2 is traditionally our strongest quarter in this segment. North America revenue in Q2 saw strength from increased bandwidth demand, footprint expansion, and 2 GHz microwave relocation for advanced wireless services for mobile operators.

The Networks Operation segment contributed $6.5 million in revenue in the quarter, comparable to the first quarter of the year and 30% higher than Q2 of fiscal 2007. Increased demand for this segment, service assurance solutions with next generation network customers, is fueling revenue growth. Gross margins in both of these segments are on plan and delivering to our expected results.

The international microwave segment contributed $111 million of revenue in the second quarter, also comparable to Q1 and 7% higher than the year-ago period. Strong gains were achieved in our combined Latin America and Asia-Pacific region, with a 57% sequential increase in revenue, as the company's focus on capturing new customers, particularly in Asia-Pacific, gained traction. Revenue from EMEA was comparable to the first quarter, and Africa revenues decreased by 22% compared to Q1, as a result of operator consolidations and slower implementation of 3G networks in these regions.

Gross margin was 31.1% compared to 33.9% in the second quarter of fiscal 2007, and up from 30.1% in the first quarter of fiscal 2008. Compared to the first quarter, we were able to recoup 1 percentage point in gross margin versus the 2% that we had anticipated. Product mix returned to more normal levels, which would have produced the 2% improvement. However, overall gross margins were impacted unfavorably by a combination of a mixed shift between the Africa region, and Latin America and Asia-Pacific, and an increase in the cost of services and freight compared to Q1 and our expectations. We are taking immediate steps to reduce the added cost to improve performance in the second half.

Total operating expenses declined from $40 million or 23% of revenue in the second quarter of fiscal 2007, to $39 million or 22% of revenue in Q2 of fiscal 2008. However, OpEx increased by $900,000 compared to the first quarter of the year. Although expense synergies are being realized according to our plan, we have seen an increase in G&A related primarily to having SOX readiness for the company that was not previously anticipated at the levels we have experienced. R&D spending was $11 million in the second quarter or 6% of sales. We are addressing the spending in G&A to return to planned levels in the second half of the year. Depreciation and amortization of property, plant and equipment and capitalized software was $4 million. CapEx for the quarter was also $4 million. Operating income was $16.8 million, and net income was $12.1 million, or $0.21 per share, an increase of 24% from Q1. Our Proforma tax rate remains at 26% and our cash tax rate remains at 2 to 3%. Employee head count was reduced in the quarter from 1410 to 1400, and is in line with our integration plans for head count reductions.

Moving on to the balance sheet, Harris Stratex's cash balance, including short-term investments, was $83 million at the end of December, compared to $79 million at the end of September. Operating cash flow for the quarter was $10 million, an improvement of $8 million from the first quarter. Inventory and unbilled decreased by $12 million in the quarter, primarily from billing milestones being reached on several of our large North America systems projects. Inventory turns, including unbilled, were 2.8, compared to 2.5 in Q1 of FY '08. We had an increase in DSOs to 112 days in the second quarter, compared to 107 days in Q1, but this was the result of the billing achieved on the North America jobs that moved into accounts receivable, as noted above, and the fact that most of this occurred in December. We expect these receivables will be collected within the current quarter. We continue our initiatives to decrease DSOs and improve inventory turns, and are encouraged with the overall balance sheet progress in the quarter.

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

Thank you, Sally.

Let me talk about our markets, our growth opportunities and some of the successes we are seeing. Global wireless momentum is indeed everywhere. Mobile networks will cover 90% of the world population by 2010. There is steady existing and new network growth. 3G subscriptions grew 90% in 2007, and traffic generated by mobile networks tripled. There is growing demand for greater bandwidth, especially in backhaul networks.

This past quarter we continued to see revenue momentum and strong customer demand across our major business segments. In North America we saw record revenue this quarter. This is in a market typically dominated by leased lines, but where increasingly leased line substitution due to network footprint expansion and the need for more bandwidth is creating more demand for our products and services. In North America we are seeing demand driven by the demand from 2G to 3G, and we continue to see spending for 2 GHz and microwave relocation for advanced wireless services. We believe the utilization of new spectrum for the advanced wireless services spectrum could provide an overall opportunity of up to $150 million in North America over the next 2 to 3 years. In Q2, the split between mobile operators and private networks was 68% versus 32%. As you may recall, the split taken over a 12-month period is typically 50/50. We would not be surprised to see at leased line substitution, and other revenue drivers, continue to move the revenue distribution heavily aligned towards mobile operators.

Despite this possible revenue shift, private and government networks remain an important part of our customer base. In Q2 we announced a contract with the Columbia River Inter-Tribal Fish Commission for our Constellation radios. This deployment will enhance Oregon's statewide communications and public safety backbone network. We also see the availability of Homeland Security funding, enabling increased growth in private networks. I am pleased to announce the Harris Stratex has been selected by Boeing as a digital microwave subsystem provider for the secure border initiatives network. At the local government level, we have been awarded a $7.7 million contract by the San Jose City Council to furnish and install the Ecom microwave interoperable communications system carrying dispatch traffic for police, fire, and emergency medical services. These are clear examples of private networks seeking our expertise in designing and building transmission networks for mission-critical applications. The record levels of revenue in North America were achieved with strong gross margin levels. We believe this strength can be attributed to our customer-centered focus, our end-to-end transmission capabilities, transport access and carrier-grade ethernet systems and software, network management solutions and turnkey professional services.

During Q2 we co-sponsored a survey of mobile operators' backhaul requirements with a leading market research firm. One of the findings applicable to all of our markets was that existing backhaul traffic capacity is increasingly stressed; but also that the operators must find ways of handling this capacity without significant increases in CapEx or OpEx budgets. This provides Harris Stratex for an opportunity for traffic engineering and backhaul capacity management using our service assurance tools, whether with wireless or other transmission technologies.

As I've said many times before, a key differentiator for us is the breath 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 our customers worldwide monitor and manage their networks, an area where we're seeing greater success with key network management wins.

That brings us to our network operations segment, whose impressive 30% year-over-year growth is driven by our NetBoss product suite. Our network management capability is not the typical element manager capability that many independents have in our space. Our NetBoss product suite and turnkey services provide our customers with top-level management systems to effectively operate all elements of their voice, data and video networks. We are increasingly seeing network operation opportunities and executing on them worldwide, especially in the Middle East and Africa. As testimonial, we recently noted that du, a service provider in the United Arab Emirates, purchased the services assurance system for its network based on our NetBoss product suite. NetBoss will provide a comprehensive solution for this customer's quad play network, which offers voice, data and video serviced over a converged fixed and mobile network.

Also in Q2 we announced the selection of NetBoss by Bahrain-based Batelco, a leading regional Telecom provider. We'll deploy an advance NetBoss services assurance solution Batelco's transport and next-generation networks. As Sally pointed out, our revenues in International increased 7% over the year-ago period, with strength across most major business segments. The drivers are new greenfield networks, continued subscriber growth, mobile network expansions and backhaul traffic increases, and the transition to IP transport in operator networks.

It's worth noting that the pace of growth can be sporadic depending on the region. Variability due to the timing of large network rollouts, as well as the impacts from civil unrest, can and will occur; but we believe the scope of our operations enables us to maintain the trend of revenue momentum we have demonstrated.

In Asia-Pacific and Latin America we are clearly improving our market position. Revenues saw a jump of 54% year-over-year, which positions us well for the future. In Asia-Pacific we're gaining market share, and we won new accounts in countries that include India, China, the Philippines, Sri Lanka and New Zealand; and we engaged in a number of 3G expansion rollouts with Eclipse Super-PDH radios. We believe these sales with provide us with the opportunity to improve our margins, as customers expand their capacity through software upgrades. Earlier this month we announced a win with iZZinet, Malaysian service operator, to provide Eclipse radios for its nationwide wireless broadband network rollout program. Our engineers from the Asia-Pacific region created a unique network design, with all radio network [planks] transporting carrier-grade ethernet services for this innovative operator.

Africa remains a key growth area, and we're seeing a pickup in activity as new orders and new partnerships emerge. Our position in this region remains strong, even while the market is undergoing disruption from mobile operator consolidation, and to a lesser extent civil unrest in some countries. Earlier this month we announced a multi-million dollar agreement with Starcomms, Nigeria's leading CDMA operator, to supply Eclipse radios as part of their 3G network expansion into new cities throughout Nigeria. Our continued selection to work with with largest operators throughout Africa is testimony to our strong reputation and long-standing relationships in the region.

We were met with challenges in Europe, the Middle East and Russia in Q2. In Russia we experienced a lag of sales due to slower implementation of 3G upgrades, but we remain to our customers here and see a number of opportunities in Russia on the horizon. In the Middle East we saw a number of pushouts to Q3, improving our backlog as we enter the quarter. In Europe we secured some significant wins, and there are a number of opportunities that we're pursuing aggressively. In December we announced one such win with Sonacom, a Portuguese operator. Here we'll connect base station transceivers across northern Portugal, using the Eclipse platform and a range of services including network design, site surveys, installation commissioning and training. In countries such as Portugal, where lease line prices remain relatively high, there is a strong business case for using microwave radio in the access and backhaul network when deploying or upgrading wireless networks to offer new high-speed mobile network services. Because of its carrier-grade ethernet transport capability, Eclipse is quickly becoming the first choice backhaul solution for mobile broadband wireless providers.

Other areas of interest include WiMax, where the adaptation continues to progress as networks are being deployed. The number of WiMax networks we're participating in is increasing, with opportunities extending into markets including Europe, Africa and the Middle East. During the quarter, we added a number of key WiMax customers. Let me tell you about two of them. TDF, a French converged service provider, will deploy our Eclipse wireless transport platform to provide high-speed gigabit ethernet connections for their WiMax network. As radio frequencies become more difficult to obtain in France, the ability to deploy high-capacity links in the minimum bandwidth enables TDF to deploy links in regions where frequencies may not otherwise be available. Our ability to provide scalable bandwidth from 10 to over 600 megabits in a single radio channel was a clear differentiator. Another recent win was with French WiMax operator, Altitude. This network will also be based on our Eclipse microwave radio, which is ideally suited to support WiMax backhaul traffic. Eclipse has proven to be the reliable product of choice for WiMax backhaul, and is the only radio to support carrier ethernet transport with layer 2 quality of service. We continue to be engaged in consulting for IP transport network design, traffic optimization, planning and turnkey implementation for WiMax networks, in addition to providing backhaul solutions.

Now let me talk about our products. Customers depend on us to develop differentiating technology and offer a breadth of solutions. Our investment in R&D remains as large as any our industry, and will continue to fuel our product innovation. This engineer commitment enables us to maintain our technology leadership and offer our customers superior solutions and services. In Q2, we introduced and began shipments of a new Eclipse gigabit ethernet system, which also is TDM-capable. In addition to meeting the needs for operators using pure IP transport, this new product delivers an ideal solution for operators requiring TDM services today with a software migration to gigabit ethernet tomorrow. Eclipse gigabit ethernet, as well as other Eclipse ethernet offerings, have superior throughput and packet handling capabilities, as well as highly competitive network features, and have been gaining momentum in the pure IP segment of the market, as well as in applications using both TDM and IP.

As a reminder, TRuePoint 6400, an all-indoor radio solution, began shipping in Q1 in North America for deployment of an all IP network in Kentucky. It's introduction represents an opportunity for revenue and margin improvement in the high-capacity transport segment of the market. Product shipments increased in Q2 and will continue to ramp in the coming quarters. We will continue to roll out additional TRuePoint 6400 frequencies, capacities and software-defined features in the coming quarters. Market feedback for the TRuePoint 6400 continues to be very positive, and we expect these new feature releases will help drive North America orders for balance of fiscal 2008 and beyond. We are now actively selling the TRuePoint 6500, which offers a full-featured long-haul trucking platform. We expect to start delivering the solution in the second half of the year.

Looking farther ahead to calendar 2009, we are working on our next generation ethernet-based product platform. This platform, which combines the best of the best from our TRuePoint and Eclipse platforms, plus new innovations, has exciting potential. We are prioritizing our development efforts into the largest growth areas. We expect this platform to deliver new levels of product performance and cost-efficiency, while supporting our customers' network evolution to ethernet transport. As has been our practice in the past, we will continue to support our legacy products and to meet our customer needs. Our innovative product line is a clear differentiator, and our professional and support services help us create long-term customer relationships. We lead our industry in our commitment to customer service, engineering excellence and comprehensive field services. Our services cover the complete cycle of network implementation; from analysis, planning, design and system integration, to site build, deployment, network monitoring and training. These service capabilities have enabled us to forge sustainable long term relationships with our customers.

Before going into the Q&A, I'd like to provide an update on our company's guidance for the year. Based on our results for the first half of fiscal 2008, we have revised our outlook. Demand remains strong, and our targeted regions of the world are still growing, despite the difficult environments from time to time. With North America's record revenue growth this past quarter, and the gains in the combined Asia-Pacific and Latin America region, which was targeted as a growth opportunity earlier in this fiscal year, we are confident that we are increasing our overall market share. Network Operations is quickly establishing itself as an important differentiator in our customer decision-making, and underscores our customer-centered approach to this business. We remain bullish on our outlook for top line growth through the second half of fiscal 2008 and beyond, as we expand into emerging markets. All of these factors give us confidence to increase our revenue expectations for fiscal 2008, from our original forecast of between $670 million and $702 million, to between $700 million and $720 million.

As I already mentioned, we are on track to achieve our goal of $35 million in cost synergies by fiscal year end. However, the full effect is not flowing through to our bottom line. Factors such as customer, product and geographic mix continue to hamper our efforts to expand margins. We saw this in the first quarter; and while we did achieve 100 basis point improvement in Q2, it was not the 200 points we anticipated. Our strategy is still aimed at achieving margin expansion, which we believe is the formula for delivering shareholder value. We expect to accomplish this through continued operating efficiencies, additional product cost reductions, and new product introductions.

However, we now believe that the customer product and geographic mix we experienced in the first half of the year will continue into the second half, and this will limit the rate at which we can expand margins this fiscal year. Therefore, we are adjusting our EPS expectations. Non-GAAP earnings per share are now expected to range between $0.85 and $0.95 for fiscal 2008. While this EPS adjustment is a disappointment, the forecasted improvement of between 24 and 50% in the second half of fiscal 2008 versus the first half, does show solid sequential improvement and good momentum for Harris Stratex. We believe that our top line growth will continue, aided by our planned new product introductions. The TRuePoint 6000 family, which has strong gross margins will continue to ramp sales over the coming quarters. And the planned editions to the already extensive capabilities of the Eclipse product line will enable Harris Stratex to increase its position in the carrier ethernet and IP networking space, which will further drive revenue with higher margins.

I believe these new higher margin product introductions, in addition to continued value engineering, and additional cost savings initiatives within operations, will result in improvements in our earnings for the second half of 2008 and beyond. Once again, I would like to thank the employees of Harris Stratex networks around the world for their talent, dedication and efforts.

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

Thank you, sir. Ladies and gentlemen, at this time we will begin our question and answer session.

(OPERATOR INSTRUCTIONS)

Our first question is coming from George Iwanyc with Oppenheimer and Co.

Thank you for taking my questions, Guy and Sally. I would like to dig in a little bit more into growth margin and the OpEx numbers. On the gross margin side, can you explain a little bit more about how the product mix changed during the quarter and expand on what is going on with the geographic mix that's really weighing on the margin right now?

First of all, as we indicated in the prepared remarks, the product mix has normalized as we had expected during the quarter. So that returned to a normalized level. It did produce what could have been a 2% uplift in the gross margins from the 30% we had in Q1 in Q2. Unfortunately, we had the impacts of the geographic mix shift from Africa to Asia-Pacific, and with the differing gross margins between those two regions, that coupled with the costs that we incurred on our service operations created another point of gross margin degradation for the quarter. So I think that, in summary, it was geographic mix and the less-than-anticipated gross margin from our service operations due to higher costs.

So when you look at Asia-Pacific, is the lower growth margin there primarily the result of larger contracts and more aggressive pricing in that region?

Actually, I think that the gross margin impacts coming out of Asia-Pacific were anticipated you know, by us, the levels that were achieved were anticipated. It's just that when you have a movement in your revenue from a higher margin region, in this case being Africa, to Asia-Pacific, which typically has lower margins because of the competitive price nature there, there is nothing really much that you can do about it. And, you know, we have to live with that impact.

Okay. Now if the mix is expected to stay somewhat normal to what it was like this past quarter, what gives you confidence that gross margin will start to improve, looking into the second half of the year?

Well, first of all, we think that everything that we're doing to improve the gross margins on the services side of the business, which is a controllable element, we will deal with that, and that will have an impact in the second half of the year. So as we said, we're actively taking action to improve our margins on the services business. Another area we're actively taking action on is on managing the impacts of increasing freight costs that's we've seen over the first half of the year, to try and handle that and control that cost. As far as the geographic mix, there's really not a lot that we can do about, you know, where customers will buy our products and what mix of products that they'll need to meet their network needs. So we're kind of -- that kind of falls into the noncontrollable area. But we think that by working on costs across the product lines, if we're able to improve our margins by lowering costs, that will have an impact no matter where the products are sold, and we feel that we need to take that approach. So you know we need to work on things we control; and that's lowering the cost of the products, lowering the cost of the services, improving the situation that we have by freight by lowering those costs, and we think by doing these things we can help with margin improvements.

The other thing we talked about was the introduction of new products. We think as we get more and more of the new products in our midst in the second half of the year, we will improve our margins also through that endeavor. We talked about the TRuePoint 6000 products are now ramping up, they've ramped up from Q1 to Q2, and they'll continue to do so throughout the second half of the year, and into the next fiscal year. We also have enhancements, some that I mentioned in my remarks, on the Eclipse product line that are directed towards the ethernet and IP networking space, a space which typically comes - has with it higher margins because of the typical applications that those product solutions address. So we'll get some margin improvement with new product introductions, we'll get some improvement through continuing to work on our costs to lower them in the areas that I mentioned, and I think if we do these things we'll continue to see gross margin expansion that we have in our plans. Of course it wouldn't hurt if we would have more of our revenue coming out of the higher margin areas.

Okay. And just one final area. Sally, can you give us an idea of the SOX costs that's you're seeing that weren't expected, and how long you anticipate that to hit G&A, and if there are any other costs in there that were a bit of a surprise?

No, it it was the SOX compliance costs that were increased over what we had anticipated. I think I would say that SOX compliance, as you might imagine, is an expensive endeavor for any company, and consistent with our merger plans we have streamlined, moved, combined and created new processes at our various locations, all of which prompted the need for new documentation and testing. This is a cost that we will get behind us in the next several quarters and our -- my rough estimate is that it will cost our company approximately $3 million for the fiscal year.

Okay. Thank you very much.

Thank you. Our next question is coming from Blaine Carroll from FTN Midwest Securities. Please go ahead.

Hi Guy, hi Saily.

Hi, Blaine.

Guy, can you talk about, you know, the demand side of the equation, maybe the book-to-bill or where your backlog sits, and what type of seasonality do you expect to get from the December quarter into the March quarter?

Okay. The book-to-bill for the quarter was less than 1, but the book-to-bill for the first half of the year was almost exactly 1. Our backlog is still good as we look into the third quarter. Backlog is approximately $230 million. And entering the third quarter we had about 70% of the revenue that we anticipate for the quarter in backlog, so it was actually a fairly good situation coming into Q3.

As far as the general market, we think the general market is still very strong. We're very happy with our situation in North America and the growth prospects there that we talked about. We're also happy about what we see in the development of market needs for the ethernet and IP networking products that we have, and in general, just the market growth that we see out there for backhaul requirements in mobile networks. So we think that the market is still strong, and I think that was reflected in the fact that we increased our revenue expectations for the year.

Did you expect the March quarter to be weaker than the December quarter because of, you know, installations and the winter geographies and so forth?

Well, we generally, you know, experience seasonality in the third quarter, where the third quarter has been typically our weakest quarter of the four, and we anticipate that Q3 could be down from Q2, which it has been historically. But nothing outside of the normal historical seasonality trends that we've always seen.

Okay. And then one of the markets that you talked about was India, and I thought commentary in the past was, you know, that India was a tough market to make money and therefore it wasn't a big concentration for the company. I'm wonder if you could give us an update on that?

Those statements from the past are still true in the present. India is a tough place to make money and it hasn't been a strong area of focus for us. However, we believe that in any of the geographic markets where we see opportunity to drive revenues at reasonable margins, that we will pursue those activities. We did find a few of those situations in the second quarter, and were able to capitalize on them. But you are right, from a significance standpoint, India is still not a significant market for us, but it is an area where we will take opportunistic - you know, opportunities as they present themselves.

Okay. And then one of the things that Sally, you touched upon was, you know, the fact that you -- the mix would have given you back the 200 basis points in margin but these other issues weighed on it. Could you give us any idea of how much the cost synergies would have added to gross margin?

Well, the cost synergies are executing according to plan.

Yes.

I can -- if you would like -- do you want to know what would have happened if we had not incurred these added charges?

Yes, that's fair.

So we have done that analysis and think that if the other costs had not been incurred, we would have seen a 3 to 4% improvement in margins compared to Q1 versus the 1% that we did, and that might have translated to approximately $0.04 per share.

Okay. And then on the ES&A line, Sally, do you expect it to stay at, you know, the level where it is at right now, the 39.5, because of the Sarbox, and you sort of talked about that winding down over several months?

Well, what we see now is that - we should see a -- a G&A -- SG&A as a percentage of sales less than 22% for the year, but we are seeing higher revenue. So in prior calls and discussions I've talked about 22%, now I would say 21 to 22% on our higher revenue guidance, and we think we can take actions to get the expenses back in line with our plan in the second half of the year, but not necessarily recoup what we saw happen for the first half.

Okay. Thank you.

Thank you. Our next question comes from the line of Steve Ferranti with Stephens, Inc. Please go ahead.

A couple of questions. Just to follow up on the previous set of questions, can you break out specifically what -- in terms of a dollar amount, what the freight and sort of one-time type of costs were in the quarter that you incurred in your gross margin -- costs to goods sold?

We didn't quantify that in dollars. We did more in percentages of margin impact. And as I had stated, we believe we did achieve the 2% improvement from Q2 base to getting our mix back to the 60% high capacity, 40% low capacity level, but then lost percentages on -- a percent on the combination of the regional mix and services cost. So again, if everything -- if all of the mix items had worked in our favor, we would have seen a 3 to 4% improvement from Q1 in margin.

I see. And you had alluded, I believe, in the script to some freight costs being a contributor there. Can you kind of break out for us - you know, it seems like you've worked through some of the numbers. Can you break out for us how much of it is attributed to region versus how much is attributed to freight costs? And the reason I'm asking is, freight costs to me seem like, you know, I understand you might have some expediting in a given quarter, but that to me seems like not something that would impact an entire second half of the year?

We do not expect the freight costs to impact the second half of the year.

We expect to mitigate the impacts that we've seen going forward.

And if I kind of walk through the model to get to, you know, sort of the guidance level that you are talking about, really it seems like relatively minimal margin and gross margin, in particular expansion in the second half of the year, is that fairly accurate?

That is accurate. Last time we talked, we had talked -- our guidance implied, suggested that we would average 33% or mid-30% margins for the year. What we think now is that we can exit the year at that level, the second half of the year improving modestly over the first half, but not -- not as we had previously thought due to the -- this number of mix issues that we have seen over the first two quarters.

Okay. And you know, of course we've been talking about a longer-term, you know, target of 40% margins for this business, do you believe it's still capable of that? And I guess what -- you know, type of you know geographical mix would that assume?

Well, first of all, it's going to assume that we're going to be taking to the market new product introductions that will come with higher price points and more favorable costs associated with those products. So what we're planning on as we move forward is to expand the overall product margins by lowering the cost on an overall basis, and selling into the high-capacity segment of the market, in the IP transport segment of the market as a greater percent of the overall business, and I think we've seen the potential that that will happen, in some ways helped by the market itself, as it has a higher appetite for those types of products, and our ability to deliver to the market the products that the market needs for networks as they evolve.

So I think that I lot of our plans relative to gross margin expansion has to do with the new products coming on line and coming to market, and then second, our continued effort to reduce costs and improve efficiencies across the organization, and we have plans to continue to do that. So I think, you know, in summary, it's you know, new products, with higher margins, because of their needs in the market in the cost points at which we'll deliver those products, and then continual improvement in operations going forward, which we have plans for, to continue to take our own costs down.

If I can add a point of clarification on my comments. This margin issue was in our international business, not across our whole company. So, when I am discussing the 3 to 4% margin, it's on our international revenue.

Okay. I guess one last follow-up on the gross margin question. You know, you still got obviously in the second half some cost synergies that would, you know, obviously help your costs of goods sold but you're still seeing sort of only 100 to 200 basis points of improvement in the second half of the year, which would imply really no change in product margins themselves, outside of the synergy improvement for the back half. Is that fair? And then I guess looking ahead into '09, are these new product introductions what we're waiting for, to see the lift outside of the synergies improvement?

Well, I think that we're going to be working on additional improvements going forward, beyond what we do in fiscal '08. And we've started putting those -- or solidifying those plans at this point, so even though we've -- we will run through our synergies, our $35 million that we targeted for this year, by the end of this year we're already working on plans for further cost efficiencies that we expect to achieve next year, and we'll talk about those more specifically at the next earnings call, when we intend to deal -- to give you an indication of guidance for the next fiscal year. So we're working on our plans and we do not intend to stop with the $35 million that we targeted for this year. We're working aggressively on next year to see, you know, how we can continue to drive operating efficiencies.

I think one of the things we haven't talked about, and the question came up in Asia-Pacific and what we think about that and our growth there, and the margins there, well in the margins in Asia-Pacific, today we're selling network solutions at a certain capacity that are effectively hardware sales going into these network operators. All of the hardware solutions that we're putting in will be capacity-upgradable with software in the future, and we believe that our software sales over time will also ramp, which will help our gross margins as we look out in the future. So I think there are a number of elements. We've got a lot of actions, and even though we, as you pointed out, are looking at a rather modest improvement for the remainder of fiscal 2008 of 100 to 200 basis points, I would hope that we can do better and we will do better as we go forward. And we'll continue to show margin expansion. The difference between what we anticipated and where we are now is the rate of that expansion, but we will continue to expand gross margins.

Okay. Thanks. That's all I had. I'll turn it over from here. Thanks.

All right. Thank you. Matt Robison with Ferris, Baker Watts, please go ahead with your question.

Thanks for taking my question. When did you folks - when in the quarter did you know that your gross margins were going to be light?

Well, I think that, you know, until we get to the end of the quarter, it's still -- we're still not sure. And the reason for that is that the quarters, as you know, Matt, are extremely back-end loaded, and until we see the actual revenue that we will record in the quarter, and where that -- what products and what geographies, we do not actually have a clear indication of what the final gross margins will be. That coupled with the fact that we had a push-out of revenues from Q2 to Q3, and as Murphy's law would normally have it, it's generally the higher margin opportunities that move when this occurs. So I mean it's really, when we close the quarter is when we know that we're going to have a margin miss. And as Sally said, this cost us a point, which was a couple cents per share.

Do you typically see the book-to-bill less than 1 going into your March quarter because of the seasonality and the usual decline in - sequential decline in revenue for the March quarter?

It can happen. It has happened in the past.

Did it happened last year? Oh, I guess -- that was a tough comparison last year because of the transition.

Right.

Do you have numbers for -- the year year-over-year comparisons for Latin America, APAC, EMEA and Africa? If you want to follow up with me later on that one, Sally, [multiple speakers].

I think they're in the earnings release.

No, they're not.

They're not?

Not for the individual regions, unless I just missed it.

If you want to follow-up, Matt, we can certainly do that.

On this cost savings that you talk about that we really do not see, is that -- is that where we're going to see the -- the moderate improvement you're talking about in the back half to get to the low end of of your guidance? Is that going to come out of the OpEx, because you mentioned -- I think you heard you say you're going to look -- you're looking for a couple of hundred basis points a quarter, so that's not going to move the needle too much on the gross margin line, right?

Well, it will help. And there will be also improvements in OpEx in the second half of the year that will help the earnings situation, but I would say that the improvement on gross margin is certainly a good part of it, and then some improvements in OpEx.

We saw the R&D go down sequentially. Is that where we're going to see it, since you're having the challenges with Sarbox.

Our R&D should continue to show improvement based on the synergy plan and we do have challenges on the Sarbox that will show up on the SG&A line. So, yes.

Do you define improvement as decline in percentage expenses or absolute dollar amounts in expenses?

Absolute dollar amounts, and percentages. Because it's --

One begats the other, right?

Yes.

Okay. I'll yield the floor.

Thank you.

(OPERATOR INSTRUCTIONS)

Kevin Dede with Morgan jJoseph, please go ahead.

Good afternoon, guys. Question just on the overall global environment, Guy, as you see it, with regard to the credit crunch and how you think that might impact some of your fledgling customers in emerging markets?

Well Kevin, I can't speak for the future, I mean up to this point in time we haven't seen any impact from any of our markets. I mean that doesn't mean something cannot happen during the quarter or next quarter, or in the next fiscal year. But up to this point we haven't seen any impacts and ,you know, the only thing we can say is time will tell.

All right. What do you think would be a first indication for you?

Well, it depends on upon which market it is. If it's North America, I would say I would be looking to what has happened to the Federal, State and local budgets, which could come under pressure due to lower revenues in those areas, coming from slower spending, and taxes and so on. So I think that, you know, that would be one indication, and that could have an impact on our governmental business in North America.

Internationally, I think what will happen is then we see more requests for financing than what we've seen in the past, and more difficult terms on contracts that we're negotiating. So I mean, again those would be the indicators, and I guess the third thing, you know, would be is if in any of the regions we start to see push-outs of major projects, and they could be budget-related, where Capex is not available for whatever region, because of sensitivity to credit.

Okay. Would you mind giving us an update on the manufacturing situation? Is the TRuePoint 6000 completely overseas, and parallel and similar manufacturing process as the Eclipse products, or are you still expecting to make those moves and extract cost efficiencies there?

Well that -- those -- the TRuePoint 6000 products, in fact all of the indoor radio products, have not moved yet, and they are definitely on the radar for future cost-efficiencies as we look into the next fiscal year and beyond. Additionally, although we've started to move the TRuePoint 5000 product offshore, that transition is not completed yet, and there are more opportunities to put that into the Eclipse product model. So I think we've got a number of efficiencies left in our operations that we can still execute on and lower our costs in the manufacturing environment.

All right. Last question for me. You can just sort of give us an update on what your personal plans are, and how the pipeline looks to sort of replace your position?

Okay. Yes, my personal plans, I think we announced those back in December. I intend to retire by the 27th of June. Plans are underway, there is a subcommittee of the Board that's executing on a search for my replacement. I'm fully engaged and intend to stay engaged right up until there is a successor here that can come in and take my place and do a reasonable transition, and I know that the Board is actively working that. Today, there is not a candidate that is standing in the wings waiting to come on the stage and take over, but I anticipate that we will have a proper candidate available to fit into my personal time schedule. So I think that things are moving along and, you know, there is nothing more to report than that.

Great. Okay. Thanks, Guy.

Thank you. And that concludes our question and answer session. Management, please continue with any closing comments.

This concludes our conference call. Thank you all for joining us on this call and on the webcast today.

All right, ladies and gentlemen, this does conclude the Harris Stratex Networks conference call. At this time you may disconnect. We thank you for using ACT conferencing. Have a very pleasant rest of your day.