Aviat Networks Inc (AVNW) 2008 Q3 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 are in listen-only mode. Later we'll open the call for questions. Instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the conference over to Mary McGowan of the Summit IR Group. Ms. MsGowan, you may begin.

Thank you for joining us today to discuss the Harris Stratex Networks' financial results for the third quarter of fiscal 2008. On today's call will be Harald Braun, President and Chief Executive Officer, and Sally Dudash, VIce President and Chief Financial Officer.

During this call we may make forward-looking statements regarding our business, including statements relating to projections of earnings and revenues, the timing and capabilities of new products, business drivers such as the transition to IP infrastructure, and continued network expansion by mobile and private network operators. 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 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 Harald Braun.

Thank you, Mary. Welcome to all of you joining us today.

It's my pleasure to hold my third quarter call for Harris Stratex Networks. Later on in this call, I will discuss my view of the company after only three weeks as CEO, and also my priorities thus far for realizing the company's full potential. But first, let's review this quarter's financial performance.

Our third quarter continued to demonstrate top line momentum, with non-GAAP revenues coming in at $178 million, up 21% year-over-year and down slightly from the prior quarter. International sales were up more than 27% year-over-year, driven by strength across all of our key regions. We are once again gaining traction in Africa. New operator licenses are being awarded, helping to drive demand. One of our new customers, [Stockonse], is one such operator who is expanding in the region. We believe we are well-positioned to capture increased business, as these operators expand their networks.

We are also capturing new business in the Middle East and Russia, New Zealand and Maldive Islands, and Bangladesh. We are seeing growth of our business in Australia and we're expecting a large IP-based multiyear contract with a Tier 1 operator. We're opening an office intended to support growth in this country.

North American revenues were up 16% year-over-year, and that region had its strongest quarter in terms of bookings since the merger. A $9 million order contract with the city of San Jose, California, is designed to support communications between law enforcement, fire protection and emergency medical services for 31 different agencies. This is just one example of this segment's successes.

Now, let me provide you three financial highlights. On a non-GAAP basis, revenue for the March quarter was $178 million, up year-over-year 21% and down sequentially only 2%. Gross margin came in at 31%, up slightly Q3 '07 and flat sequentially. Net income of $12 million was essentially flat from the prior quarter, and earnings per share was $0.20. By segment, North American revenue was $57 million; International revenue was $117 million; and Network Operations revenue was $4.2 million.

Later in the call I will provide comments on our market, my early vision for the company, and the areas of immediate focus. Now I would like to turn the call over to Sally for a detailed review of the quarter's financials. Sally?

Thank you, Harald, and good afternoon, everyone.

Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended March 28th, 2008. As Harald mentioned, third quarter revenue was $178 million, and we reported net income of $7 million or $0.09 per diluted 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 and stock compensation expense. Please refer to our website for complete GAAP to non-GAAP reconciliation tables.

For the third quarter of fiscal 2008, these non-GAAP charges totaled $7.3 million, and are composed of the following - $4.4 million amortization of purchase-related intangibles; $2 million stock compensation expense; and $900,000 integrated - integration-related charges. The following discussion is based on non-GAAP results. The segment revenue for the quarter breaks down as follows - North America at $57 million was 16% higher than the year ago period and down 11% from Q2; Africa at $56 million was 49% higher than the year-ago period and 36% higher than Q2; EMER at $39 million was 17% higher than Q3 FY07, and 23% higher than Q2 FY08; Asia Pacific plus Latin America at $22 million was 3% higher than Q3 of '07 and down 42% from Q2; and Network Operations at $4 million was down 19% from the year-ago period and down 35% from Q2 of '08.

The revenue decline from Q2 to Q3 is normal for North America, as Q3 is seasonally our softest quarter in this segment. North American revenue in Q3 continued to see strength from increased bandwidth demand, footprint expansion and 2 gigahertz microwave relocation for advanced wireless services for mobile operators. In Africa we're seeing a rebound in capital investments following a series of operator consolidations, and in EMER the transition of networks from TDM to ethernet is fueling revenue growth. The decline in our combined Asia Pacific and Latin America region is due to timing of awards, and the Network Operations segment experienced some delays in their project awards. However, increased demand for this segment's service assurance solution with next generation network customers continues, and we expect to see improvement in the fourth quarter.

Gross margin was 31% in the quarter. Although margins increased from the year-ago period, this performance was flat compared to the second quarter. Actions were taken in the quarter to address costs, particularly in the area of freight and logistics, but they did not impact the overall results in the third quarter. We still expect to see some improvement as we exit the fiscal year. Total operating expenses declined from $40 million or 22% of revenue in the second quarter to $39 million, also 22% of revenue, in Q3 of 2008. I should note that the third quarter OpEx included a reduction in expense of $2.5 million related to the mark-to-market of liabilities associated with our outstanding warrants. As discussed in our second quarter call, we have seen an increase in G&A related to ensuring SOX readiness for the company that was not anticipated at the levels we are experiencing.

R&D spending was $11 million in the third quarter or 6% of sales. We continue to address the spending in G&A to lower the spending rate as we exit this fiscal year. Depreciation and amortization of property, plant and equipment and capitalized software was $6 million. CapEx for the quarter was $4 million. Operating income was $16.5 million for the quarter, compared to $16.8 million in the second quarter and $5.6 million in the year-ago period. Net income was $11.9 million or $0.20 per diluted share. Our pro forma tax rate remains at 26% and our cash tax rate remains at 2 to 3%. Employee head count was up in the quarter from 1,400 to 1,430 as we added strategic hires in support of revenue growth.

Moving on to the balance sheet. Harris Stratex's cash balance, including short-term investments, increased to a record $100 million at the end of March, compared to $83 million at the end of December. Operating cash flow for the quarter was $23 million, an improvement of $13 million from the second quarter. Inventory and [unveiled] decreased by $7 million and turns improved from 2.8 to 3. Accounts receivable decreased by $9 million, and DSOs were reduced from 112 days in the second quarter to 103 days in Q3. We continue our initiatives to decrease DSOs and improve inventory turns, and are very encouraged with the overall balance sheet progress in the quarter.

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

Thank you, Sally.

Before I comment on my strategy for Harris Stratex, let me take a few moments to discuss the industry in which we compete. Mobile wireless momentum continues to provide most of the industry growth to date. I see that gross continues for at least another 3 to 5 years, especially in the mobile backhaul segment, where we compete for most of our [part] business. There are a new of growth factors that we believe will drive our business. One important example is the transition to IP infrastructure from the current TDM technologies that are used today. The first IP-enabled base stations were employed within the last year, and we believe the growth from this trend is in its very early stages. Beyond this, the evolution towards 4G technologies, such as mobile [WAN] and LTE, will only further the need for change.

In 2007, the worldwide microwave growth market was 8%. Over the next several years, we see continued overall growth in the 6 to 8% range. However, I expect the underlying growth in higher-capacity IP-capable microwaves, where we have been playing a leading role, to be closer to 20%. In North America, the combination of increased data traffic together with the move from TDM to IP is a more competitive driver for leased-line substitution that's occuring in the next 12 to 18 months. This is a significant opportunity for us in North America, and we have products that are now IP ready and uniquely positioned to address the transition.

As an example, major U.S. carriers are investing billions in building out their wireless broadband capacities to meet their demand for data. AT&T, for instance, has already noted that volumes for data services more than doubled in the past year. There's a clear indication that we are moving from a voice era to a data era. The backhaul demand for this transition is significant, and we fit in the sweet spot with our products and services.

In international, the transition to IP is already occurring. On a trading 12-month basis, we estimate 28% of our product revenue came from IP radios. The scope of our solution sets us apart. Harris Stratex has IP-ready microwave radios and leading network management software, all backed by a comprehensive service offering. We are ready for the market transition to IP with technologies that meet today's needs and tomorrow's goals.

Now let me turn to my first 20 days as CEO of Harris Stratex. In this initial period, I have met with a number of employees and held round table discussions with department managers, and spent considerable time with my leadership team to understand their strengths and where I can make them stronger. I can tell you that I'm impressed thus far with the high level of technical capability and the energy level in our company. I have conducted an extensive operating review of the quarter's performance and have identified tools needed to better manage our processes and results. What I have seen does not surprise me for a company only one year into its merger. As you might expect, more revenue is needed. But more importantly, action is needed.

My approach is one that I have used successfully in the past. As a result of my initial assessment I have launched initiatives focused on, number one, defining the strategic direction; number two, improving our financials; and number three, achieving continuous improvement in processes, tools supporting those processes and quality. This holistic approach should enable us to retain the savings that we achieve.

My message to the organization continues to be one of urgency, accountability and discipline. I believe our customers are the most important asset, and I'm extremely impressed with the size and quality of the worldwide customer base. In conjunction with my sales executives, I have already reached out to customers worldwide and will be meeting with as many as I can in months to come. In June, I will be visiting nine countries to conduct regional operational reviews and customer visits. I will also be visiting our new offices in those areas such as Sydney, Australia, as well as our International Headquarters in Singapore.

As for the actions to be taken, I'm very eager to provide you with my strategy, my initiatives and milestones that will enable you to measure the company's success. It's my objective to leverage industry knowledge and global experience as we move to our next level of growth.

So at this early stage, I will provide you with some broad objectives, and expect to provide you with more detailed action plans and metrics in the month to come. My first priority is to work to maintain the annual revenue momentum that the company has demonstrated since the merger. Harris Stratex offers end-to-end wireless transmission capabilities, transport, access and carrier-grade ethernet systems and software, network management solutions, and turnkey professional services. Our continued revenue strengths tells me that we are exceeding our expectations to provide customers with products and services that help them compete. I now want to assure that we are the supplier of choice tomorrow and in the years to come. But there's a difference between being a supplier and being a strategic supplier. The latter is my objective.

Gross margin has been an area of disappointment for us. We have not seen improvements hoped for in this merger. It's one of my top priorities. The company did [pick off] actions in quarter 3, and we expect to see the benefits in future quarters. We are applying the sense of urgency, discipline and control that I mentioned earlier to address the situation. I have identified areas where cost reductions can be realized, and have assigned resources to capture them.

My earlier observations have identified a number of areas of opportunities. There are two areas that I'd like to discuss with you now. They are our services offerings and R&D. Services is an area that is a key differentiator for Harris Stratex. But I believe we have enormous untapped potential. We have the capability to deliver a wide range of professional services which include consulting, network design, site service and build, system integration, installation commissioning and training.

One of my major objectives will be to enhance the range and depth of services we offer. There are services that are a natural fit for our global customer base that are not yet capitalized on. Be assured we have already begun to expand our service offerings to all of our customers, but not at the level or pace we are capable of, or that our customers can benefit from.

Another goal is to optimize our R&D spending. As I mentioned before, I believe innovation is critical to stay competitive in the marketplace. It is also critical to gross margin expansion and to stay ahead of price erosion. Our investment in R&D remains as large as any in our industry. One of our key focuses will be to assess our product offerings and innovation targets to ensure that our R&D spend is made wisely to stay ahead of competition, meet our customers' needs and meet the financial expectations of management and our shareholders.

Sustaining profitability is another critical goal. As we maintain our revenue momentum, work to improve gross margins and drive innovation, is our intention to ensure continued profitability.

With any business there are challenges. However, Harris Stratex's greatest assets are its global customer base. Its history of innovation as well as its turnkey solution. I believe I have the experience to tap into the company's strengths, that can bring us the discipline needed to unlock real potential.

In summary, as I mentioned on my call with you on April 8th, our opportunity is in fast-growing markets, where we can address worldwide trends with effective and efficient solutions for our customers. My objective is to accelerate the pace of progress in the company, with tremendous opportunity for sustainable, profitable global growth.

Before going to Q&A, I'd like to provide an update on our company's guidance for the year. Based on the strength of our revenue momentum exiting Q3, we now believe revenue for fiscal year 2008, I expect it to be at the high end of our prior guidance. Due to continued pressure on gross margin, however, non-GAAP earnings are expected to be at the low end of prior guidance. This excludes the effect of transition costs related to the company's management changes in the fourth quarter. These we estimate at $0.03 per share, which we will include next quarter when we report non-GAAP results.

Getting this started is a challenge. As a new CEO, I'm aware that I could have lowered guidance to a level that I believe was easier to achieve. However, I've chosen to maintain our earnings guidance, excluding the the nonrecurring management transition costs, at the low end of the guidance range. We have programs and initiatives in place to reach this goal. My preference is to challenge my people and to ask them to perform, and my message remains one of urgency, accountability and discipline. While our near-term cost issues are challenging, the opportunity in our market is sizable, and we plan to compete aggressively, and at the same time improve our financial performance.

At this point, I'd like to ask the operator to open the lines for your questions.

Certainly, sir.

(OPERATOR INSTRUCTIONS)

Our first question is coming from the line of Rich Valera with Needham & Company. Please go ahead.

Thanks, good afternoon. Wanting to focus in on the gross margin, if I could. To actually hit the low end of your guidance, it would appear you need probably something approaching 100 basis points of gross margin improvement, obviously depending on the revenue level. It sounds like the one thing you've identified where you're taking some immediate steps is sort of on the shipping costs. Is there anything else going on, you know, that's gone on the last few weeks or that is going to go on during the quarter to help that gross margin?

Yes. Absolutely. As I mentioned before, we have some programs in place and we have not only the lower freight cost, I think that was discussed earlier with previous management, but we kicked off - Sally and I kicked off some initiatives, and these initiatives go into operations, where we need absolutely more efficiencies. We have in this bucket also a location strategy concept. And, of course, we're looking also at the near-term cost savings, you know, in R&D, what we do in our labs, what we do with our contractors and so on and so forth.

There is another area in IT where I see untapped potential to use more tool bases to be much, much more efficient. So we have kicked off nice project and the team - and we have one person responsible for that. And Sally and I have weekly reviews to see how we can come to improvement in this quarter. As you know, there are only two months and a couple of days left, so that's the challenge. But what the team brought back to me after last week, actually the end of last week, looks very encouraging. So I will be on that. As I said, I will be - urge them for discipline and get this savings which I identified captured in this quarter.

Great. And sort of along the same train of thought, one of the attractive aspects of the merger were the substantial cost saving synergies to be realized between - by merging the two companies. I believe it was $35 million, roughly half which was expected to come out of COGS, half of which was expected to come out of OpEx. Just wanted to understand where we stand with respect to those initiatives to extract those synergies, particularly on the COGS line, it seems that basically all the synergies are being absorbed by margin compression perhaps due to mix shift and other things, and I just kind of wanted to understand what are the dynamics at play with the cost savings versus the sort of flat margins?

Sure, Rich. I'll take that question. The one area where synergy has absolutely been captured is in our supply chain cost reduction effort. We talked about $19 million that we would save from that initiative, and that target we will reach. Unfortunately, as you say, other cost issues, mix issues have dampened the gross margin performance and overshadowed those cost savings. But we think that the -- you know, we've mentioned many mix issues that impact us. Customer mix, product mix, service mix, geographic mix; and fundamentally, as Harald has mentioned, our challenge now is to continue to reduce costs out of the equation because these mix issues will remain. They are a part of our business.

Yes. And if I may add to that and build on it, what I see after a couple of weeks that - which there is progress made on the integration, but there is also some improvement areas. And as I mentioned before, the tooling and the processes, or the tools which support the processes, I think there's a lot of untapped potential there. And for example, in one area I see that - I would say only 1/3 of the tools which supports some processes which are in daily use more or less, there's 2/3 in untapped potential. And I think we can in the next couple of weeks really, you know, energize people to get these tools working, and that is a huge efficiency level on what I see so far. So tools is something. In operations we have great discussions on how to improve the work flow in the factory and other areas. So there is some real potential still left.

Great. And Harald, I know it's pretty early, but if you look longer term at this business and whatever plans you might have in initiatives, how do you think about it from a margin perspective? What would -- do you even have targets yet or is it too early for that? You know, I think at this point people are -- investors are probably a little frustrated that it looks like it's sort of a very low 30% gross margin business, kind of 31 or 2. Do you see gross prospects for this being a higher gross margin business down the road, as you implement your initiatives?

Yes. I see that. But I would say it's too early because what we're doing right now is, I ticked three initiatives already off in the last couple days. One of the initiatives is to get together with the executive team. We have a series of executive workshops planned. And in this workshop, Rich, we're defining the strategic direction of the company. And then, of course, structure follows direction. So when we have the direction set, we have to see how we restructure and how the structure follows this direction. With all of that, I have to change a couple of things. Of course, I do that to improve the margin and of course our profitability. So it's too early for me to tell in which percentage points we increase but there needs to be an improvement done. I think we have a fair chance at it.

Great. Thanks for taking my questions and good luck, Harald.

Thanks very much, Rich.

Our next question is the line of Blaine Carroll with FTN Midwest Securities. Please go ahead.

Thank you. Harald, just staying with the COGS question for a minute. Can you give us some idea of what the split is between that line item between, whether it's materials, costs, manufacturing costs, shipping costs, sort of on a percentage basis. And then which of those areas has grown over the year, and where is the biggest potential to take cost out of the equation?

So, again, I'm just analyzing that. I would say at the moment all of the above. In every area I think there is something. I didn't dive too deep into some areas. But what I did already, I did dive deep into the R&D area on the product side. I see there a lot of potential. This had is about the strategy - the product strategy, what can we do in existing products, and so on and so forth. From my limited knowledge so far, I see that as one of the big areas.

The second one, sitting together is my officer in the operations, and see there where we can improve in manufacturing. I visited already the factory, and I had an extensive review there. I see good things and I see some things also where we can improve a lot. So I have to dive a little bit deeper in there to see what it really looks like. Two areas I would say R&D and operations, so our manufacturing, if you will, and products that are some main areas.

Okay. And then what about on the pricing environment? Any changes there?

In terms of pricing pressure?

Yes. Anyone getting more competitive, prices coming down more than normal?

Yes, yes. Price erosion - I think price erosion is a fact of life. That's there. The best answer to it is, of course, to have an innovative product. Have an innovative product where you can [ask] about a premium. We have plans for new products, and of course we have to take our cost out of existing products, and our manufacturing line for these products and R&D costs. Price pressure is a fact of life, and we see that happening. And of course, there are also new entrances coming to play here worldwide, with some companies entering from China, and we need to be aware of that and we need to be better. That's competition, and price pressure is a part of it.

Okay. And then, Sally, how booked are you for the current quarter? How much turns business do you need?

We have 60% of our revenue in backlog going into Q4.

Okay. And then any hint on looking out towards 2009?

Not yet. We'd like to get our strategic sessions completed, give Harald a chance to complete his review of the business, and provide our outlook on '09 once that's completed.

Harold, how long - you know, you mentioned these things that you're doing and the efficiencies and so forth. How long before you can start implementing them? Are we going to have meetings all during the fiscal fourth quarter or can some of these start to flow through the P&L?

I think - and I mentioned the three projects, right? One of the projects is the overarching, you know, strategic direction project, where say we get together as a management team and then we think about the strategic direction, what are we going to do and how are we going to do it? And I have some thoughts there. But this is a series of three workshops just happening in May and in the beginning of June.

But in parallel we're working on what I call a business improvement project, right, where we have a lot of work items in there which we are at the moment thinking through, and we're implementing them directly. There will be no way for - there are some areas, as I said, in processes, in tools, in location concept, in quality. So there are models in this, what I call business improvement projects. And I can later on provide what it all is, and how we measure it, so that you guys can track it. In this area we can start immediately. So we are, I would say, with this project 85% somehow done, to kick it off. And that is a project which is very, very essential for us. Hit directly already quarter 4, and I have an immediate project kicked off with Sally together on getting back to our low end of the guidance. And that is already in full swing.

So I think directly a couple of days after I arrived here, had this extensive review and we directly kicked it off. Clear responsibility, a person, after it, had a brainstorming session and got the people to work. Go every week and check where we are, and where we're going and remove the roadblocks. So that project is in full swing already, but I would say this business improvement project is made into a longer-term project where we see constant improvement in the business.

Okay. Good luck. Thanks.

Thank you very much.

Our next question is coming from Matt Robison from Ferris, Baker Watts. Go ahead.

Thanks for taking my question. First, Sally, for the benefit of those that might be running through airports, can you give us perspective on the book to bill and how that 60% compares to where you were three months ago?

We have positive book to bill for Q3, and we are up about the same place as we were three months ago.

Okay. On the margins, in the past couple quarters, that is the December and September quarters, there was discussion about the business in Asia and some shipment at thinner margins for product that could be upgraded at a later date. This quarter Asia wasn't there like it was in the past couple quarters. Does that mean that you're -- I know you talked some of the strength and some of these other aspects of your costs that the initiatives hadn't kicked in yet. But do you still have that issue from some of the products that are software upgradable that have been sold at relatively thin margins for future upgrades? Is that a factor in the quarter?

So I'll just start by saying as no, we seem to have mix issues happening to us every quarter this year, whether they be, as you say, product mix, geographic mix, customer mix. And where it is true we saw strong revenue in Africa this quarter and the revenue in Asia Pacific was down, I will say we made a strategic decision to get back into the African margin on one account, with a large amount of OEM in it, as an entry point what we expect to be significant sales going forward. That margin impact was about 1% for us in the quarter. Also, it should be noted, as expected North America revenue was lower Q3 versus Q2, and that's going to have an impact on the overall gross margin. But that would have been as we expected. So, again, it all comes back though to getting tossed out of the equation because these mix items are with us.

When you say OEM, you're talking about network building where you're reselling somebody else's --

Exactly. We're selling someone else's equipment and, therefore, that does not command as high a margin as when we have a value add to put around --

Harald was talking about pro - professional services as an area of growth. If that's what professional services is, then that would imply you're going to have an emphasis on an area that could be a real challenge to offset at the gross line or gross market calculation. Is that what you're talking about, or is there a way to do professional services without having it being diluted within gross margins?

I think when I'm talking about professional services, we have to define services, right? And when I'm talking about these services, I mean consulting the customer. I mean system integration. Customization of products, or even system integrate the end-to-end solution. So really put some brain power into the end-to-end solution and get it to work. Or even manage networks for operators. Or go in there and analyze that how it could run their business better with our product in the network line, and I have to dive a little bit more deeper there. That's what I mean with professional services or managed services met.

So in this area I think we have a huge untapped potential, and I think that's an area which we have to take a look at. Given also our good access and the significant customer base worldwide, I think that is a fantastic opportunity to get in there.

Sally, would you have had growth in Africa if you had not done the resale business?

It got us back into - on a customer base that we felt was a strategic decision, to get -

I understand you're looking for accounts control and sometimes you can get that by doing more per customer. I just was curious if that OEM component was the biggest factor of your growth in Africa, if we can look at that 49% year-over-year comparison as largely driven by you selling other people's -

I wouldn't say it was the only component, that we are starting to see traction again once we're past these operator consolidations, starting to pick up again in the country, and we're well-positioned with a number of customers there. But it's a fast-growing market and we want to be -- have our strong share of it.

Okay. Thank you very much.

Thank you, Matt.

Congratulations on your cash increase. Had to get that in.

Thank you very much.

Our next question's from the line of Neil Wagner with Stephens, Inc. Please go ahead.

This is Neil for Steve. Could you guys provide any more specific details regarding the Australian opportunity, specifically where we might see that ramp-up and size as well?

In Australia, right?

Yes.

Yes, as I said, we are expecting their large IP-based order, and we're working the final details right now, and I'm going over there in a couple of weeks. I cannot provide at this point in time any more details. But it is a significant one.

Okay. Thanks.

(OPERATOR INSTRUCTIONS)

Kevin Dede with Morgan Joseph. Please go ahead.

Hi, guys. This is actually Jim [Moyer] in for Kevin Dede. Just a question about the North America, sales. I know it was seasonal, but we had heard Ceragon report some softness there. I know it's a robust market right now. Just wondering if you guys see any softness related to decrease in spending or was it just seasonal?

No. So what I've seen so far, James, I couldn't say that. So far - as it was a soft quarter. What I see right now, when I did that review with the leaders, right, I didn't see anything there. I don't see also an impact from the market and from the recession, so to say. But I don't see that right now. So I think it continues to be strong.

Okay.

From a pipeline point of view. So that's what I see so far.

And I guess that goes the same for the rest of the world?

Yes. So I'm really, let's see, let's 2 - in 20 days, what I'm seeing is Africa and middle east, right? So that is interesting how the growth areas are there. And I see the second portion is then also growing from the Middle East over to APEC, and that is also interesting. So then North America. So that's - I didn't expect that, so I was pleasantly surprised, I have to say.

Okay. And when Guy Campbell was around, he mentioned he was interested in localized distribution facilities, and I'm curious as to if you agree with that strategy or what other opportunities you see for improving those?

That was part of our operations with you, right? We have some interesting ideas there. We have to do something; that is clear. How that looks like at the moment, I cannot tell you. I'm happy to give you an update there. But there is a need to do something. When I see what they really ship and how much they ship, right, this is also a new situation for me, and I have a little team which I talk to be educated there. But it was very clear and that is a part of the project also what I explained before, to come up, and it is a part from my point of view and the location concept. So that's the hint I can give.

Okay. Great. Thanks very much.

All right. Thank you. Our next question is from the line of Greg Weaver with Invicta Capital Management. Please go ahead.

Thanks for taking my question. Could you give us a sense of the ESP erosion, on an apples-to-apples base [issue] year-over-year, if you took a given product, what's happened to the price?

So in general we have talked about 10% to 12% on average year-over-year price erosion in our market. That's pretty consistent with what we see. It's not equal across all products and all geographies. But that is the average that we anticipate, as we think about our product cost reduction and other initiatives required.

Okay. And what -- Harald, you mentioned about the high cap market being a higher gross segment. What percent of your total revenue would you put in that bucket?

On the higher gross growth sector - from a product point of view --

I can - from a product point of view, we talked about SCH radios as 60% of our product sales.

Oh, the mix, yes.

PDH at 40%. And then the new - statistically we were able to get for this call, was that over the last trailing 12 months we've had 28% of our products that are actually IP radios being sold. And, of course, those would be in multiple capacities.

And I asked the team to give me that number, you know, the 28% I think that was. I reported against that in my statement. That, of course, is very important, to see how this transition takes place in the rest of the world and also in the U.S. or North America. I expect that really to grow and that we transition from TDM to IP. And of course the product mix, thanks very much, Sally, that is a 60/40 mix lowe end and on high end. I didn't know what the abbreviation meant, but I tell you, I measure myself against the 28%. That's what I'm now working on to transition towards IP. I think I did tell, again, I have a track record for doing that, and that is one of the strategies.

And to clarify, that 28% is of your total revenue, you talked about it under the guise of International, but it's total business, 28% of [IP]?

Total product revenue.

Okay. And where do you see that on a go-forward basis? How do you see that trending out?

I think -- so what is in my mind, of course, to get from the 28, again, on the product side, without services et cetera, without OEM, I think that was also the case. I would like to transition that the other way around over the next two to two and-a half-years. So I think we're going to go from the 28 to the 50, so that we have a 50/50 mix, and then go into the 60/70% range within two years. That's my guess. That's my gut feel.

Okay. One last question to follow onto that. What difference is there in gross margin as we transition to the IP radio?

What I see so far is 15 points. One five points.

Wow. Okay. That's pretty significant.

Yes. Therefore, you understand why my number - why I asked the team give me the number you are now, and then of course we have to define the strategy with my officers when we sit in the workshops on how to get there, right? And how we improve that trend, the transition trend from TDM to IP.

Great. Thank you very much.

All right. Thank you. Mr. Braun, there are no further questions at this time. Please continue with any closing comments.

Yes. I would say thanks very much for joining the call, and for my first earnings call here. This concludes our conference call. And thanks again for joining us and being on the webcast today. Thanks very much. I'm looking forward to meeting you all in the months ahead.

Thank you, ladies and gentlemen. This does include the Harris Stratex Networks conference call. At this time you may disconnect. Have a very pleasant rest of your day.