Aviat Networks Inc (AVNW) 2009 Q3 法說會逐字稿

Welcome to the Harris Stratex Networks conference call. At this time, all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. Now I'd like to turn the conference call over to Mary McGowan of the Summit IR Group. You may begin.

Thank you for joining us today to provide financial results for the third quarter of fiscal 2009, which ended April 3. On today's call will be Harald Braun, President and Chief Executive Officer; Russ Mincey, the company's Global Corporate Controller; and Tom Cronan, our newly appointed CFO.

During this conference call we may make forward-looking statements regarding our business, including statements relating to projections of earnings and revenues, business drivers such as the transition to IP infrastructure, the timing and capabilities of new products, and 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. These can be found on the Investor Relations section of our company website, which is www.HarrisStratex.com.

Now I'd like to turn the call over to Harald Braun.

Thank you, Mary, and good afternoon, everyone. Let me first provide you with some highlights from our third fiscal quarter. Then I will turn the call over to Russ to discuss the financial results in detail.

I am pleased to report that we achieved revenues of $158 million in our third quarter, which is at the high end of the guidance we updated on April 13. On a non-GAAP basis, gross margin was 31%, net income was $3.7 million with earnings per share of $0.06. By segment, North American revenue was $42 million, international revenue was $113 million, and network operations revenue was $2.9 million. We ended the quarter with a record cash position of $116 million, and we posted positive operating cash flow of nearly $30 million. Our book to bill for the quarter was under 1, a further indication of the effect of the global economy on the timing of the orders in our pipeline.

I'd like to report on some key events that occurred since our last conference call. First, I am pleased to announce that we have hired Tom Cronan as our Chief Financial Officer. Some of you may remember Tom as the CFO of Redback Networks. There, he restructured the company and served as CFO from 2003 until the sale of Redback to Ericsson in 2007. Tom most recently was the CFO at AeroScout [Incorporation], a private technology company. Tom will be joining us for the Q&A portion this call. Please join me in welcoming Tom to the company.

Also, we completed the acquisition of Telsima in February, a California-based company that should enable us to diversify our 4G portfolio while expanding into new markets. I'll speak more on that later in the call when I discuss our future strategy.

Now let me turn the call over to Russ to give you the full financial details of the quarter.

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 April 3, 2009. Third-quarter revenue was $158 million and we reported a net loss of $38.3 million or minus $0.65 per share. GAAP results included $39.6 million of pretax charges composed of the following. $32.7 million related to our accelerated transition towards a common IP-based platform. Of these impairments, $29.3 million are noncash charges primarily related to provisions for excess and obsolete inventory and writedowns of property, plant, and equipment. The remaining $3.4 million of this charge is related to inventory purchase commitments. $3.6 million was for the amortization of purchase-related assets. $2.4 million was a one-time charge for in process research and development expenses related to the valuation of the Telsima acquisition, $400,000 of stock compensation expense, and $500,000 of restructuring.

Now I'd like to present the details of the quarter based on non-GAAP results. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate comparison of our result across reporting periods. Please refer to our website for complete GAAP to non-GAAP reconciliation tables.

By segment, North America microwave contributed $42 million of revenue in the third quarter, down 26% from the year-ago period. The split between mobile and private orders for North America in the quarter was 29% mobile and 71% private. The international microwave segment contributed $113 million, 4% lower than the year-ago period.

By geography, Africa contributed $63 million in revenue, 13% higher than Q3 FY 2008. EMER, which comprises Europe, the Middle East, and Russia, contributed $32 million in revenue, 18% less than the year-ago period. Revenue for the rest of the world was $18 million, 20% less than Q3 FY 2008.

The network operation segment contributed $2.9 million in revenue compared to $4.2 million in Q3 FY 2008. In the quarter, one customer, MTN, located in Africa, contributed more than 10% to our revenue.

Gross margin was 31.1% in the quarter versus 29.5% in the year-ago period. The increase met our directional guidance given in our last conference call and was largely caused by lower manufacturing costs and lower than projected project costs. While product and customer mix can have a significant impact on our overall margin, we expect the lower manufacturing cost to continue.

Total operating expenses were $43.7 million or 27.6% of revenue. This amount compares to $41.7 million in the prior quarter, but includes $3.4 million in higher charges for bad debt expense and also additional operating expenses associated with Telsima in the third quarter. During the third quarter, we reviewed our allowance for doubtful accounts according to our usual policies and procedures while giving adequate consideration to the downturn in the global macro economic environment, and we increased the allowance for doubtful accounts by $5.6 million.

On a year-over-year basis, excluding the impact of the increased bad debt expense recorded in Q3 FY 2009 and the additional Telsima expense, the total operating expenses declined 5% as we have achieved savings from facility closures in Canada and South America as well as headcount reductions excluding the additions from the recent acquisition.

Operating income was $5.5 million for the quarter compared with $13.1 million in the year-ago period. Our pro forma tax rate was 24%, which is lower than last year's rate of 26%. The lower pro forma rate is attributable to increased volume of international revenue blowing through our Singapore International HQ. Our cash tax rate is expected to be about 7%.

Employee headcount was 1,303, down from 1,395 in Q2. With the addition of Telsima at the end of the quarter, we added 162 employees, bringing the total headcount to 1,465.

Now I'd like to move on to the balance sheet. We are pleased to report especially in light of the challenging global business environment that we achieved a record cash balance including short-term investments of $116 million at quarter end. That balance compares to $99 million at the end of the last quarter. Net cash, which we define as cash less third-party debt, was $106 million at the end of Q3 compared to $89 million at the end of the prior quarter, as third-party debt was unchanged at $10 million in the quarter.

Operating cash flow for the quarter was a positive $28.9 million compared to $12.5 million in Q2. Accounts receivable decreased $38 million following an outstanding collections effort in the quarter, and DSOs improved from 87 in Q2 to 72 in Q3. The continuous downward trend of DSOs from 101 just one year ago reflects management's focus on cash management.

Inventory and unbilled costs decreased by $24 million in the quarter and turns increased from 4.2 to 5.2. As part of the accelerated technology transition that we mentioned in our press release, inventory decreased due largely to a $16 million noncash increase to the excess in obsolete reserve. A $7 million decline in unbilled costs occurred as we were able to bill previously deferred amounts and meet delivery and acceptance terms.

Depreciation and amortization of property, plant, and equipment and capitalized software was $5.9 million. CapEx for the quarter including capitalized software was $4.9 million. We continue our initiatives to decrease DSOs and improve inventory turns and have committed to continue the focus on cash management in the coming quarters.

Now I'd like to turn the call back to Harald to provide you with a market and business update.

Thank you, Russ. In this challenging economic environment, we achieved our revenue targets, improved our gross margin, controlled our expenses, and continued to execute on our objectives for cash management. Last quarter, I spoke to you about two initiatives. First, a restructuring program to align our overall R&D investment with our strategy. Second, aggressive cash management activities focused on accounts receivable, collection, and aging.

Let me address our restructuring program. These activities have already begun and will continue to be phased in over the next three to six months. As a result of this program, on an adjusted basis we have continued to reduce our operating expense. The program continues to be implemented across the company and at various levels. This includes manufacturing efficiencies, tools and process improvements, headcount, and facility reviews. We have also aligned our investment in R&D with a focus on innovation and the transition to IP solutions as well as our other long-term growth strategies. The savings we have achieved thus far contributed to our positive cash flow in Q3 and allowed us to acquire Telsima. Our long-term goal remains one of achieving a sustainable cost management program that will act as a roadmap to greater performance and increase market leadership. At the same time, we continue to work on our process improvement and increase our efficiencies.

Russ has already covered the success of our cash management efforts. We consider the focus we applied to accounts receivables, aging, and collection a highlight of the quarter. We achieved our seventh consecutive quarter of positive operating cash flow, and we'll continue to focus on improving our cash balances.

Before I turn to a business review of the quarter, I would like to announce another key management appointment. Mike Pangia has joined the company as our Chief Global Sales and Services Officer. He comes to us from Nortel, where he headed up Global Sales Operations and Strategy. With his extensive experience in the mobile telecom industry and his knowledge of international markets, Mike has already begun to make significant contributions. Please join me in welcoming him to our company.

Across all regions, visibility remains challenging. However, demand for our products and services are there. The gating factor continues to be the credit access and conservative CapEx spending. Despite that, we continue to capture new business in key regions.

In Europe, we are excited to have been awarded a multi-year contract with BT Group. Under this global supply agreement, we will provide Harris Stratex Eclipse Packet Node radios. Elsewhere in Europe we signed a contract with a major system integration for the Eclipse radio platform and the NetBoss network management solutions. These products will support deployments of secured communication networks in the defense and security industries.

We previously announced a large contract in the Middle East. Last quarter, we noted that shipments were rescheduled for our June quarter. This was due a redesign and upgrades to their network. The design phase is now completed, and we expect site builds, and product shipments will begin around the end this quarter.

Africa remains a region of relative strength. Operators here have continued to expand their network infrastructure and have continued to select Harris Stratex as their partner. One example is Africell Holding, a subsidiary of Lintel, which selected us to expand its GSM networks in Africa. Our Eclipse radios will provide backhaul for next-generation IP enabled mobile base stations to support increased reach and capacity in Gambia and Sierra Leone.

In North America, Q3 was seasonally weaker. But we did see strong bookings at both the state and local government level as well as the mobile carrier level. We expect to deliver on these orders over the next several quarters. We were also pleased to see committed projects remain on track and the transition to IP continue, although at a slower pace compared to the rest of the world.

During the quarter, we launched our GO-Stimulus Partnership Program. This is designed to capitalize on the American Recovery and Reinvestment Act, which allocates $7.2 billion in grant and loan funding for broadband and wireless initiatives for current and potential customers. The Harris Stratex Partnership program provides operators with a turnkey service to provide stimulus success. These services range from building successful grants and loan applications to network deployment, implementation, and support. We are tracking this closely and feel that our product portfolio and service capability position us to capitalize on the rural broadband opportunity.

In Asia-Pacific, we continue to expand our footprint. Optus in Australia and Smart in the Philippines continue the rollout of their 3G mobile networks. We received a new customer within India as a result of our recent acquisition, which will begin to roll out in early fiscal 2010.

Our overriding product strategy remains focused on a common microwave platform. This strategy will reduce the number of products required to support our worldwide customer base, and we will build on our position in carrier ethernet applications. The growth in microwave IP application is a specific target for us, driven by the success of our Eclipse product platform. In Q3 on a trailing 12 month basis, 38.5% of our product sales were IP applications. This is up from 28% in quarter three of fiscal year 2008 when we started measuring this category.

To maintain our leadership position in the IP mobile backhaul market, our ability to innovate will be key. We continue to drive toward a common IP-based platform. At CTIA, we introduced the IRU600. This all-indoor radio unit is specifically designed to address the widest backhaul needs of North American customers. These solutions address capacity crunch and help operators avoid backhaul bottlenecks.

We also introduced our new adaptive optimization feature for the Eclipse Packet Node wireless platform. This feature set enables mobile operators to maximize the bandwidth efficiency of the entire wireless backhaul. This functionality frees up capacity to support the introduction of high-speed IP services in the network along with the evolution to 4G LTE.

As you may recall, one of our growth pillars was 4G. This growth initiative has now migrated to business unit status. 4G is providing us with exciting opportunities in a market that is estimated to be roughly $1 billion today, growing to as much as $7 billion by 2012.

In February, we acquired Telsima Corporation as part of our strategy to compete aggressively in the end-to-end 4G market. We selected Telsima for a number of reasons that include an extensive patent portfolio in [mimec] and mobile WiMAX, products that meet 802.16d and 16e standards for WiMAX broadband wireless access; engineering resources that allow us to capture other 4G technology opportunities, and strong software capabilities that can quickly expand of our own skill set. We believe that a combination of the acquired 4G product technologies together with our strong sales channels and cost effective manufacturing operations gives us a stronger market position and the ability to grow our 4G business unit.

Now let me provide you with a brief overview of the wireless market. We believe that the growth drivers are still in place. Network traffic generated by new data services is driving the demand for more bandwidth. Developing countries continue to expand or plan to expand their infrastructure, and RFP activity is continuing around the world. At the regional level, the issues that faced us in quarter two have not changed. Overall, we remain watchful of the risk profiles in all of the regions we serve.

Given our diminished visibility, we will continue to provide quarterly guidance at the revenue level and directional guidance on gross margin and operating expense. Based on our current expectations, we are now guiding quarter four revenue in fiscal year 2009 to be in the range of $140 million to $160 million. Gross margin is expected to be slightly lower. Total operating expenses in quarter four expected to be comparable to Q3 including the absorption of Telsima expenses. We will continue to focus aggressively on cash management, and our quarterly goal is to generate cash at this revenue level.

I'd like to speak on to the next chapter in Harris Stratex's history -- that as a fully independent company. The future of broadband wireless communication present us with significant growth opportunities. We believe that our ability to strengthen our position in this market space and execute on our strategy is now enhanced as an independent company. We believe we will also be able to broaden our investor base and realize greater shareholder value over time. In anticipation of Harris Corporation's distribution of its majority position effective May 27, we will be meeting with current and potential institutional investors over the next several weeks. We look forward to seeing many of you on those road shows. If you have an interest, please contact Mary McGowan for details.

At this point, I would like to open the line for questions.

Operator, please poll for questions.

Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions). And our first question is from the line of James Faucette with Pacific Crest Securities. Please go ahead.

Hi, this is Nathan Johnsen calling in for James. I was hoping you could talk a little bit about the competitive landscape, especially looking at IP offerings. Seems like it's been really you guys, DragonWave, Ceragon. I was wondering if you expected that to change in the near future from some of the competitors in the TDN space such as NEC and others?

No. No, thanks very much for the question. So we see actually the same competitors worldwide at the bids which we receive -- at the RFPs which we receive. So there's no major change. It is regionally different, so when some region in Africa -- obviously different players then in Africa or in Europe. So -- but we see in principle the same.

Do you anticipate I guess additional competitors over the next 12 months, or do you guys think that your IP technology or competitive advantage has a longer time frame than that?

No, I think we see -- we see some additional competitors but not new ones. We saw them also in the last quarters in some regions. Huawei is coming up and strong. We see less from DragonWave these days. We see less from NERA these days. But Alcatel-Lucent, NSN, NEC, Ericsson, Huawei, these are normally the players we compete with.

Just wanted to ask quickly on pricing pressure. Given the currency fluctuations, was wondering if you guys had seen meaningful pricing pressure, particularly in markets where currencies have devalued substantially against the US dollar?

Yes. Of course this is an issue worldwide. So in some of our regions, for example in Australia, there was some currency issue. And we were lucky to have the contract in US dollars. And of course we discussed it with our customers, and how are we covering this situation. So there are some regions where we have some currency issues. But it has not been in the last quarter a big issue for our company. Russ, do you want -- would you like to give some color on that?

It was exactly as we had predicted in Q3. Not a significant issue for us.

Okay. Great. And last question and then I'll hop back in the queue. Just in looking at the North American market, obviously there's some seasonality. But it seemed a little bit weaker than expected even on top of that. Do you guys anticipate a turnaround in the next quarter or two? Is there any indication looking at RFP activity that there may be some improvement over the next few quarters?

Yes. We see some turns here. And maybe it's not in the macro economic environment, but we see as I said before on the calls some consolidation ending in some cases. For example, Alltel and Verizon. So we see that ending. Through that I think there are some activities coming up again. As I said in the state and local government business, the budgets are still there. They are executing their projects. So that's positive.

I think the mobile operators if I could point that out, are careful in watching what -- which projects they continue to do, or which projects they put a little bit on hold. Not to say that they are stopping it. So for me, it's all a shift to the right on the timeline. So we see a slight recovery. We see an uptick in North America.

And the good thing, of course, and I spoke about it in the script, is for us that there is an opportunity in this stimulus package for rural mobile broadband. Or broadband, of course. It's not all wireless. Part of the $7.2 billion is also cable or wireline. But a huge part of the $7.2 billion I expect to be mobile, and that gives us a good opportunity. And that stimulates of course -- in particular our business. I would say that we are in the sweet spot of those areas.

But again, there is some work to be done. It's a project that goes over a period of time. And it's not all done. So -- but we, as I said, we will be participating. We will be watchful. We will be influential. And we will see how to participate in that program.

Very helpful. Thank you.

Thank you very much.

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

Hi, nice job with the cash flow in the quarter.

Thank you very much.

I guess just to turn -- I think Harald, you mentioned what sounded like a nice contract award with BT in Europe. Can you provide any more color there? Was that related to their transition to IP, or is that coverage extension? What type of application is that going into?

So Steve, we consider that a big win. To have a contract with the BT Group is a big win. On the other side we are discussing with them and doing some design work, and at this point in time, I cannot give you more color on that work. We're doing already applications will be placed in their network. So we have to wait a little bit on that. So at this point in time, it's pretty fresh, that contract. So we are very excited that they selected our IP-based platform and we will give you some more color down the road. At the moment, I cannot talk more about that.

Okay. Is there any -- I guess, following up on that, is there -- can you talk about the extent to which you might see that start contributing to revenue or at what point in the future?

No. No, as I said, at the moment we're sitting there -- we just signed a contract a couple of weeks ago, and we're just sitting together and designing the network and working with them together. So at the moment, I have no visibility to exact tell you the quarter when that hits.

Okay, I understand. I guess turning to the Mideast contract, sounds like you're expecting shipments there to start end of June. Any sort of ballpark in terms of what quarterly run rate that could represent or maybe how long that contract will be deployed over?

I think, Steve, last time I talked about that, and by the way I visited them during the quarter, to have visibility and be directly there talking to the customer and see what's happening on site. So we're very impressed with their planning activity. So that was very, very important for me to see where the project stands. In previous calls I've said that we have -- that this is around about a $60 million contract over several quarters. I think I mentioned three to four quarters. And as I've said in the last call, they are redesigning the networks because they are defining bigger pipes. And this had some upside opportunities for us.

So we starting now in this quarter rollout in shipments, but if you take $60 million divided by three and come up with $20 million, that would be not the right thing to do right now because it is a start of this. There are the site builds and we are starting that. So it is as a start less than $10 million, in this ballpark. That's what we at the moment are estimating.

Okay. That's helpful.

Steve, sorry. And then of course we will see how fast they adopt the rate of shipments, how fast do we roll it out. It's a big country, it's a nationwide project. It's not very easy as I said before to really get it into the quarter.

Understand. Would that be I guess one swing factor in terms of the revenue range that you had guided to? I mean, it seems like it's a fairly wide range of revenue there. Would that be perhaps one swing factor that could swing you one end to the other in that range?

I mean, it was somehow a swing factor last time, right. And it continues to be one. I mean, this is a big contract with a big rollout. So -- and I said it's hard to predict exactly when it hits.

But this macro economic environment, Steve, has a couple of other ingredients that we see suddenly in the Middle East and also in some other areas in [e marks], companies stopping and postponing really on the timeline entire projects. We haven't seen that before. And we see that now. That of course is also a swing factor. There are several of those. And again remaining Europe and Russia and now swapping over to some countries in the Middle East, we see that now more coming up. Really a big shift to the right on projects, and that are the swing factors right now.

Right. Right. Are there any territories in particular that are maybe especially volatile in terms of some of the activity that you were describing in terms of order volatility?

As I said, as before, Russia, some countries in Europe. And now swapping over to some countries which I don't want to mention in the Middle East.

Okay.

And on the other side of the Middle East, there are some big projects going on, as you're aware. So it's not all -- so you cannot really put the big brush out there in the Middle East. So it's really some countries which are meaningful and have meaningful business with us. So that at the moment we consider in the regional setup to be points. Will they come back? Absolutely. Do they have demand? Absolutely. As I said before, it's a shift to the right.

Understand. Last question for from me. Just turning to gross margins, can you walk us through some of the levers there that would cause gross margins to fluctuate either one way or the other? Is it product mix, is it absorption of overhead, pricing pressure? What do you see as the biggest levers affecting your gross margin today, and how do you view gross margin directionally going forward?

Yes, this is Russ. I'll answer that. I mean, we're starting to see now especially in this quarter some of the favorable impact of the cost reduction efforts that we've been doing in earnest over the last few quarters. The impacts of those efforts usually lag a quarter or two behind when we actually make the effort to decrease costs. We started to see that in Q3. It rose to 31.1% based on some of those decreases that we saw in our overall spending. A lot of it was related to manufacturing-type spending. And we predict that those decreases will continue in the future. I think to be cautious, Harald guided margins to more historical levels in the upcoming quarter, though.

I see. And is that just really related to the revenue, sequential revenue decline more than anything?

I mean, I think when you have to say with the range of revenue we have, it would depend on whether we were at the high end or the low end. So I think we're being cautious in the guidance that we're offering, and prudent in the guidance we're offering today.

Right.

Okay. Terrific. That's it from me, guys. Thanks for the color.

Thanks very much.

Thank you. Our next question comes from the line of Aalok Shah with D.A. Davidson. Please go ahead.

Hi guys. Couple quick questions. Russ, you may have mentioned this and I may have missed it. You took your receivables down quite a bit this quarter. Can you explain what you did differently this quarter to take this down and what it might be going forward?

Sure, we had an absolutely fantastic collections effort. I might take the opportunity to answer your question to say something about the bad debt reserve that we've called out separately, because it was a little higher than usual. But I want to say that first of all, we have good customers. These were aged accounts that we had been reviewing over some period of time and we have essentially exhausted all reasonable effort to collect. We felt it was a prudent thing to go ahead and put some additional allowance for doubtful accounts on the books related to that. We think we're very comfortable now with the net accounts receivable balance we have going forward.

And in regards to the accounts receivable, no, we have a tremendous focus on cash collections which is part of an overall focus on cash management in our company. It's just one of the things we're doing to emphasize cash in our company today.

And building on that, Russ, absolutely I would say that the team -- and we formed a lot of the team there a couple of quarters ago, so after I arrived -- to have a laser, laser focus on that. And I think we have no absolute visibility tracking it and collecting it. So that team is working very well. And of course, it comes very handy in this macro economic environment.

And Harald, you mentioned that order -- or the RFP activity remains pretty solid. Do you guys see a dip at all during this last six-month period where we've seen this macro economic storm?

This is actually funny. You don't see that. The activities are there, right. The RFPs coming out, you see it's very seldom that somebody is postponing an RFP. You don't see that. So the RFPs are coming out, the evaluation processes may be a little longer. They take a little bit more time because you see there's -- a lot of operators handling also their balance sheets, right? And the RFPs are coming out. It takes maybe a little longer, but they award also projects, right? So you see the industry is not slowing down in terms of the way we need to do something. It would be a dramatic situation in case we wouldn't see the activities, the RFP activities. But that's -- we cannot report that.

And I know you spoke about this before in your last conference call, but has there been any change to your thoughts as to whether or not to use your balance sheet to extend some credit to your customers and maybe get some deals done to accelerate deals at least with -- ?

No. No, no. We didn't change our mind there. As I said so we don't finance, we help customers, help finance, and find financing opportunities for them, find capital. We do that a lot. And actually that works pretty well for us, at least in the visibility for that last year I'm in the company. But we will not finance, and we don't think we should do that. Some other competitors are out there, they do that. They do full vendor financing. But we cannot do that and we will not do that.

And then last question from me, Harald. You mentioned when you came onboard that you wanted to focus more of your attention on doing a complete solution for your customer. Can you give us a sense of your progress on that? I know network -- should we be looking at the network operations revenue line? How should we be thinking about that as we go forward?

So thanks very much for the question. And I think you and I talked about our four growth pillar strategy. So the four growth pillars are absolutely in play today. In the call, I provided color on two of those. I think we're making tremendous progress.

When you see the end-to-end solution -- I define that from the subscriber, let's say from the wireless subscriber, whether he use a mobile phone, a laptop, a PlayStation, a GSM system, or whatever in the car, that for me are all mobile subscribers. And we're coming from the IP mobile backhaul portion of these end-to-end solution. But we extending that now with our recent acquisition more towards access. So we have the ability to that to grow into new next-generation mobile services. And that is making progress. You see that on the announcement that we acquired the company.

On the other side it comes then -- that was the access portion. So from the mobile backhaul business to the [core] portion, we've made also some progress in terms of a converged edge, the CSN gateway, ASN gateway, and that is a part of portfolio where we also made tremendous progress.

And then of course wrapping around to the whole thing, the service suite with our telecommunication network management solution, it has tremendous progress. And we're making some big steps. And of course now with the new leadership, we put the sales and the services organization together under one roof led by Michael Pangia -- we have now also the right leader there with a lot of experience to make that a successful business unit going forward.

Okay. Great.

I think last year we made a tremendous progress. We need to give it some time on the services side. So this is -- we do services, but I define services for you in an area where I said I want also to manage and to optimize networks. I want to plan and design the networks. Of course, we still commission, install, and build networks, but I want to do the whole service suite. And we're making tremendous progress there. A lot of new leaders there. It's a totally new company.

Okay. Harald, one last question from me. I appreciate your answer on that. On the Telsima acquisition, how should we be thinking about the revenue contribution from Telsima?

Of course, we have a plan, and it's -- some of the revenues are already built in in this quarter. But I have to caution the thought process here. I get a lot of questions to that. And of course we will disclose in the future I think also, Russ, correct me if I'm wrong -- May 18 I think we have to do an 8-K, is that correct?

The 18th is the deadline.

18th is the dead -- so we'll get some more color on that.

But I have to point out one thing. We didn't buy the company because of the revenue. So -- and you may have seen and heard in the industry the amount of revenue this company could make. So the other areas which I mentioned before in my earnings script -- having the technology and have the engineering skills which we need to go more into a software business. That was our main drivers. And of course have access to technology and have access -- or have some new customers in India, which helps our India entry strategy. It was not the revenue.

And I have to say also we bought the company in a situation where we need to rebuild the customer again and rebuild the delivering channels and the service channels to customers again. Right? And I think we can do that with our company. So it's not about the revenue, it's about a lot of other factors. Therefore, we bought Telsima.

Okay. Great. Thank you very much.

Thanks a lot.

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Thank you. Good evening, gentlemen. [Howard], I'm not sure if you mentioned the book to bill for the quarter.

Under 1, I said.

Okay. And what's your thought on the bookings outlook going forward? I mean, you gave a little bit of color on the revenue side. But any sense of the bookings prospects, either in the June quarter or beyond to materially pick up, or is that no better visibility than the revenue at this point?

Oh, I -- this is as challenge as the visibility on the revenue. And so we have some prediction. We are at the moment in the process of defining our new operating plan for next year. Our AOP, our annual operating plan. So I'm sitting together with the team right now and projecting the next year, and the visibility on the bookings, and who is doing what when. Which is -- it's very, very difficult.

And when I came to the company, that was not the issue at all. But at the moment, we're really, really having focused efforts on that, with the sales organization that you're operating -- and the service organization to see what is coming and what is not coming. It's -- I think Steve talked about swings, right? The swings are still big, and, therefore, it's very difficult to predict. I would not predict. So it would be crystal ball.

No. Fair enough. And lots of talk about your Middle East project, and it sounds like it'll finally start in the June quarter and then you'll have a full quarter of it in September. So it sounds like all things equal, that would be a sequentially up component of the revenue in September. Do you think -- and I know I don't want you to have predict too far ahead, but is it possible that's enough to drive sequential growth in the September quarter? Or do we not want to go that far out?

Potential. Potential. So first of all, I have to say, was there, visited, had high-level meetings up to the operations side, saw everything, what's happening, what's done. So that relaxes me a lot I have to say. Going to see the activities, the design activities, the network activities, the build on site. In a very challenging environment, by the way. I was taken away by the challenging environment which we are working in there. Right? Again, across that big country. And was very encouraged to see the progress they made and the planning activities. So -- and of course I'm very happy to see that they're now starting and that we now get out of the gate. And so as I said, it's not done yet. And so it's a Middle East project, right. It's not very easy to predict. But I saw it, and I think there are potential upticks on that project. I don't want to go too far out there, because I don't want to disappoint you guys there.

No. Fair enough. It sounds like you also expect maybe one of your new Telsima projects to start kicking in -- it sounded like in the beginning of fiscal 2010. Is that accurate? And do you think that could also hit in the first quarter, or is that maybe a second quarter event?

Accurate. That's accurate. I think that's what we planned. We have a lot of activities going on there. Some of our C-level -- one of the -- some of my team is there. And every week we have activities there, also very good to see when you go to India and see what level of activities are going on there on the WiMAX level, it's very, very encouraging to see that. And actually they roll out also networks there. At the moment on the 16d level. But we're talking here in this particular project, we're talking 16e, so mobile WiMAX. Very encouraging to see that we are what you call an L1 kind of vendor. And so we are in the first place there, and again, it's a huge network rollout. And it looks like in the quarters, in the first quarters in 2010. That's my visibility right now.

Now, you mentioned it's a 16e project. And I know a little about the history of Telsima. They've frankly had big challenges delivering 16d product. And I think 16e is sort of an order of magnitude more complicated with the mobility aspect. What gives you the confidence that you're going to be able to roll out in mass quantities the 16e equipment that's required by this project?

First confidence is that we have now a bigger R&D setup. And that the Telsima colleagues will be fully integrated into the Harris Stratex's R&D world. That is a huge advantage. And we have people there. We have the leadership established. We have the processes under control. We have the organization now under control. They are acting now in a much, much more structured environment. That gives me one -- and we have a very good leader on site in this particular case in Slovenia, and then of course also the leadership in India, in Bangalore is in place. That's one factor.

The second factor which gives me a lot of confidence is the operational level, right? The fold-in company which had some operational challenges in the supply chain in the service organization, and -- it gives me confidence to roll them in and to fully integrate them in our COO function, with Heinz Stumpe, gives me a very good confidence what I'm seeing over the last four weeks. And by the way, we have a weekly review on the integration progress of this company. It is a fully integrated company in our company. And that gives me confidence that we have now leverage, that we have leverage with our OEM partners, with our CMs, right, and a couple of others, which the company didn't have before.

I think their challenge number one was then on operations, and on services, and then R&D. You hit on the nail. And I think that is exactly the area where we can help a lot. And we established the customer relationship. And of course also the rollouts.

That's helpful. And if I could just pursue the 4G discussion you started earlier a little bit. Clearly, right now you seem to have the capability in mobile WiMAX and you've alluded to potentially participating in the LTE market. Just wondering in what form you would plan to participate in that market? Historically any small company that's tried to go into the cellular base station market, whether it be some form of niche or even some repeater technology, most of those companies have never made it, to put it mildly. And so I'm wondering in what form would you look to compete in the LTE market if you are, to avoid going head to head with the giants of the telecom industry?

That is a very, very good question. And we of course thought a lot about that. What I told first my team is to participate in the next-generation mobile industry and opportunities, first of all you need to be a player. You need to be on the playing field. You need to be on the ground and not in the grandstands. There you don't learn a lot, right. So -- and how do we get into that playing ground? How do we get on the field and play? So that is something where -- and we learned a lot already there.

The second thing was do we have the skill set? Which direction do we have to grow as a company? So from the radio engineers, hardware engineers -- radio engineers to the software engineers, we did with Paul Kennard an exercise recently on what do we predict and how many more software engineers we need to participate on that.

So we are shifting in principle the company towards more a software-oriented company. And that gives us some capabilities in the new mobile arena.

Which in particular, which product in particular we will participate in, I couldn't say that right now because there is -- and I don't want to, of course, not give everything away here of our strategic thinking here, but there are a lot of strategic thoughts on how do we want to participate in that new world.

But as I said again, we need on the playing field to be there and participate there. I would not like to give too much away here. And I have to say also LTE is some years away, and I think we have some good approaches from our platform to grow into that market.

Thank you. And just one final one if I could. On gross margin, it sound like you're making some nice structural improvements to the cost structure of the manufacturing operations that should help that. I was wondering how we should think about gross margin on somewhat higher, maybe more normalized revenue levels a couple quarters out. If we got back into that -- let's just say maybe $170 million or $180 million level, how would you guys be thinking about gross margin at that point?

As I said, I will not drop my aspirational goal which I discussed with you guys on the 33% to 35% level. So I will not drop that. On the other side, I need to see what at the moment is possible. We need to change structural the company. And I hope that you see that we are changing structural the company. So -- and this structural change cannot happen over one or two quarters. We will get in a level in the 31% to 32% range. I think that is somehow feasible.

So that is our -- that is I see possible. Again, you see what we're doing, one common platform with IP. And that is not 100% done yet. So you see we have a lot of things to clarify and to do with the legacy platforms. So that puts pressure on us. But we're taking the right steps. And that is -- we are not done yet towards our goal, our aspirational goal. Russ, you want to give more color on that?

You mentioned our move to a common IP-based platform. Our intention in the quarter was based on the current facts and circumstances to evaluate the inventory, write off the inventory that we needed to, write off the specific assets related to that -- those products, and try to get that behind us. But of course we have to evaluate that in the future, and we have to follow the accounting rules in the future. But our intention was to try to get that behind us now and move forward.

So we see gradual improvements there, Rich, I hope you see that. But I hope you see also that we have an absolutely laser-sharp focus on cash management. And that is where I'm driving at the moment the company.

I'm sorry, just one follow-up to that gross margin question. To the degree -- have you written off any inventory that might actually be sold? And if you do sell that, would you call that out as a one-off in the gross margin line?

I mean, we've written it down to a level that would be its net realizable value. So I suppose we could. It's hard for me to answer that question today if we would do that or not do that. Our anticipation is we've written it down to the proper value today. Our balance sheet's properly stated today.

Fair enough. Thank you.

Thank you. (Operator Instructions). And our next question is from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Thanks. Harald, you had said in the past that you wanted to sell add-on services and products to your core. And the examples you had given was security for cell sites, power management via solar. Can you just give an update on has there been customer uptake of these solutions and how has it impacted you? That would be great. Thanks.

Thanks very much for that question. Because that shows -- today I focus only on two growth pillars, right. Our bread and butter business -- IP mobile backhaul -- and on the 4G growth pillar. We had the other one and I think we touched briefly on that. It was the services, the global network services growth pillar with our network management solution.

But the fourth one I didn't talk to today about. That was the energy -- the mobile security and surveillance and energy management growth pillar. This is still in place. We making big progress. We answering actually huge RFPs right now from some major operators worldwide. We're making really fantastic progress there. And we have also built in San Jose a lab where we demonstrate what we can do on the cell site. You know that I came from the cell site. Once we're on the cell site, we can do a lot to improve and -- improve our -- the energy consumption on the cell site and secure the cell site and do much, much more.

So do we have a contract right now? A small one. Some customers are paying us for some consultative services and some evaluation. So I would put that in the category, consulting and plan. So customer, some in Europe paying us actually for that. So that is -- I wouldn't consider that a contract yet. So -- but we working towards that. So I anticipate that we will see something very soon from a customer side.

And you remember, this growth pillar is in incubator mode, right. When we don't see over a certain period of time -- and we as a management team have a time frame on that -- when we don't see activities there and don't see customer pickups, we will not continue doing that. So that is very clear. But at the moment, we look -- it looks pretty good.

So the progress is there, the activities on the customer side is there, RFP activities are there. We know where we stand. One year ago we were nowhere, absolutely nowhere. It was almost a startup company in the company. So they have some projections for this year for the new AOP. They have revenue and margin projections. And we are moving in the right direct. So I have to give it a little bit more time.

I hope that that gives enough flavor on that one. But it is still absolutely active. We are absolutely continuing to execute our four growth pillar strategy. (multiple speakers)

Are you looking at this as more of a revenue -- additional revenue driver, or more to solidify your relationship with the customer?

I think as a differentiator. As a differentiator. Because as I said before, and I shouldn't sound arrogant because I said we are the king of the cell site. So we are on a lot of cell sites. And we saw could be done at the cell site -- in particular in developing countries, and we have solutions for that. For me, it is an additional revenue stream, but it is also a big differentiator in our service capabilities.

Okay. Thank you.

Thank you. And at this time we have no additional questions. I'd like to turn it back to Miss McGowan for any closing remarks.

We'd like to thank you all for joining us on this call and webcast. As Harald noted, we'll be hosting road shows in various cities in May. Please contact me for information as to dates and locations. My number is 408-404-5401. We hope to see many of you while on the road. Thank you and good day.

Thank you, ma'am. Ladies and gentlemen, that does conclude our conference for today. Thank you very much for your participation and for using ACT Conferencing. You may now disconnect.