Aviat Networks Inc (AVNW) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Harris Stratex Networks conference call. At this time, all participants are in a listen-only mode. Later we will open the call for your questions. Instructions will be -- for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I would like to turn the 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 fourth quarter and full year of fiscal 2009, which ended July 3rd.

On today's call will be Harald Braun, President and Chief Executive Officer; and Tom Cronan, Senior Vice President and Chief Financial Officer.

During this conference call we may make forward-looking statements regarding our business, including statements relating to projections of earnings and revenue, business drivers such as a 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.

For those who may not have had a chance to read our release, let me provide you with a recap of our financial results. Then I will turn the call over to Tom for details on the quarter.

In Q4 we achieved revenues of $135 million. On a non-GAAP basis gross margin was 37%, and net income was $5 million with earnings per share of $0.09. By segment, North American revenue was $59 million, international revenue was $73 million, and network operations revenue was $3.4 million. We ended the quarter with the second consecutive record cash position of $137 million, and we posted positive operating cash flow of $26 million. Our book to bill ended the quarter at 1.

I would like also to mention a few highlights in our fourth quarter. In particular was the successful distribution of Harris Stratex shares by our majority shareholder in May. We are now a fully independent Company, and believe this will enable us to execute on our strategy, broaden our investor base, and realize greater shareholder value over time. Concurrent with the planned distribution, we launched a multi-city roadshow to mark our new communication initiative with investors.

We also had a number of customer wins since our conference call, which I'm proud to announce here. A couple of these are BSNL, the world's [seventh] largest telecommunications company, based in India, and Open Range Communications, a wireless WAP and service provider to rural America. I'll speak to these successes, as well as the challenges, later in my remarks.

Now let me turn the call over to Tom.

Thank you, Harald.

Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended July 3rd, 2009.

Fourth quarter revenue was $135.2 million, and we reported a net loss of $3.4 million or a negative $0.06 per share. GAAP results included $18.9 million of pretax charges, composed of the following -- $10.6 million related to a trade name impairment charge; $4.3 million of stock compensation and restructuring charges; $3.7 million was for the amortization of purchased intangibles; and $300,000 was for a software impairment charge. The $10.6 million trade name impairment charge is in addition to the $22 million charge taken in Q2. This additional impairment was triggered by the notification by Harris that they were terminating our trademark license, since we are no longer a subsidiary of Harris Corporation. The remaining balance of the trade name intangible assets is approximately $400,000, which is expected to be amortized over the next two quarters.

Now I would like to present the detailed quarter -- 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 comparisons of our results across reporting periods. Please refer to our website for the complete GAAP to non-GAAP reconciliation table.

By segment, North America microwave contributed $58.5 million of revenue in the fourth quarter, up 6% from the year-ago period. The flip between mobile and private orders for North America in the quarter was 49% mobile and 51% private.

The international microwave segment contributed $73.3 million, 41% lower than the year-ago period. By geography, Africa contributed $32.4 million of revenue, 32% lower than Q4 of fiscal year '08. EMER, which comprises Europe, the Middle East and Russia, contributed $18.8 million in revenue, 66% less than the year-ago period. Revenue for the rest of the world was $22.1 million, 5% more than the Q4 fiscal year '08 results.

The network operations segment contributed $3.4 million in revenue compared to $7.1 million in Q4 of fiscal year 2008. In the quarter one customer, MTN, located in Africa, contributed more than 10% to our revenue.

Gross margin was 37.1% in the quarter, versus 30.6% in the year-ago period. The higher than expected gross margins resulted from favorable margin impact on some projects -- gains on currency translation, decreased warranty expense, favorable purchase price variance, and product mix. Approximately $8 million on the favorable margin impact was in the form of one-time amounts that are not anticipated to recur in subsequent quarters. While there has been some clear benefit from our lowering manufacturing costs, the extent of the margin increase this quarter was greatly impacted by the one-time upside. Ignoring the one-time amount, we believe that our margin is trending up; but there will still be some variability on a quarterly basis depending on the product mix and the completion of projects.

Total operating expenses were $44.1 million or 32% of revenue. This amount compares to $43.7 million in the prior quarter, but includes the full quarter of operating expenses associated with Telsima in the fourth quarter. The difference in expense between the third and fourth quarter for Telsima was approximately $2.7 million. When compared to the fourth quarter of fiscal year 2008, total operating expenses including Telsima were down by 14% or $7 million. This decrease was driven primarily from our cost reduction program, as well as lower commissions and bonuses. Excluding the impact of Telsima and bad debt, the operating expenses in the period were 19% or $9.1 million lower than the fourth quarter of fiscal year 2008. Operating income was $5.9 million for the quarter, compared with $5.9 million in the year-ago period.

Our pro forma tax rate was 21%, which is lower than last year's tax rate of 26%. The lower pro forma rate is attributable to increased volume of international revenue flowing through our Singapore international headquarters. Our cash tax rate is expected to be about 7%.

Employee headcount was 1,521, including the Telsima headcount, compared with 1,543 employees in Q3.

Now we'll move on to the balance sheet. We are very pleased to report, especially in light of a challenging global business environment, that we achieved a record cash balance, including short-term investments, of $137 million at the quarter end. That balance compares to $116 million at the end of the last quarter. Net cash, which we define as cash less third party debt, was $127 million at the end of Q4, compared to $106 million at the end of the prior quarter, as third party debt was unchanged at $10 million in the third quarter. Operating cash flow for the quarter was a positive $26 million, compared with $28.9 million in Q3.

Accounts receivables increased slightly to $142.9 million, compared with $142.6 million in Q3. And DSOs stayed in the same range, changing from 72 in Q3 to 76 in Q4. The Company continues to focus on cash management across all areas, including accounts receivable and accounts payable. Depreciation and amortization of property, plant and equipment and capitalized software was $6.7 million. CapEx for the quarter, including capitalized software, was $7.3 million. We continued our initiative to decrease overall expense, maintain our DSOs and improve inventory terms. We are committed to continuing our focus on cash management in the coming quarters.

Now let me talk about our comparative year end results. For fiscal year 2009, the Company reported revenue of $679.9 million, compared with revenue of $718.4 million in the prior year. GAAP net loss for fiscal year 2009 was $355 million, or a loss per share of $6.05, compared to a net loss of $11.9 million or a loss per share of $0.20 for fiscal year 2008.

Included in the fiscal year 2009 results is an adjustment for $2.9 million in additional currency translation expense that is included in the cost of product sales and service. In reviewing the year end close, we determined that certain unhedged currency translation exposures associated with sales in Polish Zlotych should have been charged as an expense during this fiscal year. The foreign exchange currency charge is correctly stated in the fourth quarter, and the cumulative results for fiscal year '09. We have provided an explanation of the impact of these expenses on fiscal year '09, including the impact to prior quarters in fiscal year '09 in a footnote to tables 1 and 4.

On a non-GAAP basis, gross margins were $212.7 million or 31.3% of revenue, compared with $215.5 million or 30% of revenue for the prior year period. Net income for fiscal year 2009 was $28.3 million or $0.48 per diluted share, compared to net income of $34.4 million or $0.59 per diluted share in fiscal year 2008. The operating cash flow for fiscal year 2009 was $71.3 million, compared with the operating cash flow of $40 million for fiscal year 2008. Fiscal year 2009 non-GAAP results exclude $373 million of pretax charges, comprised of $311.6 million for goodwill and intangible impairment charges, $29.8 million for product transition charges, $14.8 million amortization of purchased intangibles, $11.2 million restructuring and stock compensation expense, and $5.6 million for writeoffs of acquired new process, R&D and software.

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

Thank you, Tom.

It's obvious that the challenges of the macro-economic climate continue to restrain growth potential in our core markets. In any given region we can be faced with currency issues, poor economic conditions, limited access to capital as credit markets remain tight, reduced capital spending or customer [consolidation]. The last item on that list can introduce pricing pressures, but it also generates more attractive volume opportunities.

Regardless of these challenges we are committed to our strategic vision, as we continue to make significant progress. We are executing on our four growth (inaudible) strategy announced last year -- expanding our customer reach geographically, and with our proven technologies; introducing a broader range of services to support our customers' growing needs; moving quickly to a fully-outsourced contract manufacturing model; and rebalancing our R&D investment to fund additional innovation incubators.

I would now like to provide a business review of the quarter. We are seeing the first positive signs of economic stabilization in some regions, in particular North America. In Q4, North America performed above our internal plan. Year-over-year revenues for the North American sector is up 6%. On a sequential basis, the region's revenue improved 39%. We continue to win contracts with mobile carriers, as well as at State and Local Government levels. We're confident that these project commitments should contribute to future revenue improvements.

The rapidly increased popularity of smart phones, and the applications that they enable, is driving the need for more bandwidth in the backhaul portion of the mobile network. Our IP backhaul solutions are a compelling alternative in more cases than in the past, and we are optimistic about the future of this segment.

The American Recovery and Reinvestment Act creates another area of opportunity, to which we are [playing] significant efforts. Rural broadband is almost a perfect fit for us; what we offer specifically, backhaul over long distances and WiMAX in the last mile. Our ability to provide an end-to-end solution, including long-term managed service support, is closely aligned with the need of many small networks, and will be developed. Our backhaul solutions have now been accepted by the Rural Utility Services, or RUS, telecommunication program. This is required for equipment to be used in RUS-funded projects.

The first application [window] for the stimulus funding applications closed last week. Here the focus is on middle mile projects, where Harris Stratex's backhaul solution is very well suited. We provided consulting and network design support for a number of grant applications, and we will now await completion of the grant review process. Initial funding for projects is anticipated in late calendar 2009 or early 2010.

Africa remains a region of relative strength when measured by customer demand and network infrastructure expansion. We continue to have a leadership position in Africa, but the region is not without its own challenges. Cash and credit excess are becoming increasingly important to customers, and roll-off has been slow. The strength of the US dollar also makes network deployments more expensive.

Despite these challenges, our order outlook is relatively strong for this region, and we added offices in Africa where we see the greatest growth potential. The acceptance of our two new growth areas, WiMAX and energy and security, continue to confirm that our products and services are a perfect match for this continent. Africa is fast becoming a role model for our end-to-end solutions.

In our EMER region, which comprises Europe, the Middle East and Russia, the challenges continue, and may last longer than originally anticipated. Russia has demand, but financing obstacles remain. Across Europe, especially Eastern Europe, operators continue to focus on their cash positions and are constraining their capital spending. The expansion plan of some Middle East operators have stalled, as they (inaudible) weigh strategic options. Fortunately, this does not include our large Middle East contracts.

Select large operators, however, are investing in their future growth. We are working diligently with British Telecom, and are planning ahead for new infrastructure deployment, although no specific timeframe has yet been announced. In Q4 we announced a two-year contract win with EIDS, a systems solutions provider for armed forces and [civil] security worldwide. Harris Stratex will be supplying the Eclipse radio platform and network, which is our network management solution.

We also announced a contract win with the Georgian mobile operator, MagtiCom, to expand their wireless infrastructure in their country using the Eclipse platform. As with many large orders, detail planning is critical and timing can be uncertain. Our large Middle East contract is such an example. Product shipments began in quarter four, as anticipated, and we expect to recognize the revenue in fiscal Q2. However, while customer commitments remain solid, the timing of the network deployment left the desired visibility. As a side note, the deferred revenue situation we announced on August 7 is not related to our Middle East contract.

Asia-Pacific continues to deliver a number of growth opportunities. During the quarter, we captured several WiMAX rollouts and 2G expansions in the Philippines, Thailand and Indonesia, while [operators] in Australia continued its 3G mobile network rollout. As we reported last week, we have signed a contract to supply BSNL, the world's seventh largest telecommunications company, with an 802.16e mobile WiMAX network. This network will enable wireless access in urban areas in [southern] India.

Let me take a moment to provide some insight into the tender process in India. First of all, it is very complex. As part of the tender, potential suppliers need to pass an eligibility and technical evaluation process for qualifying for participation. Typically, there are numerous tenders for different regions being opened, and the [wallet] at any given time. For example, two different tenders, the rural 1 and the urban 1, have been awarded and we won the urban tender. The rural 2 tender, which we are also competing for, is expected to close sometime this month.

As a customer example, BSNL provides 3G mobile and WiMAX services to different regions, and conduct a separate tender process for each. Depending on the size of the network to be deployed, BSNL may offer several seats, or levels of participation, each with a reduced percentage of the tender pricing. As you can see, it is very complex, and we are pleased to have won the award for the southern Indian state of Kerala. Let me also add that this multi-year contract is a direct result of our Telsima acquisition.

This early success with BSNL provides a good segue into a discussion of our product strategy and growth pillars. On our last conference call, we said our 4G and WiMAX pillar had migrated to business unit status, as we rapidly integrated the Telsima business. We continue to see revenue opportunities from this $1 billion market, in regions that include Africa, Asia, Latin America and the Middle East. The BSNL contract win is an early testament for the successful execution of this growth strategy.

As most of you know, our overriding product strategy remains focused on converging to a common IP-based microwave platform. This will increase R&D efficiency, simplify our supply chain, improve our lead time, reduce component costs, and decrease the number of products required to [part] from our worldwide customer base. To maintain our leadership position in the IP mobile backhaul market, we are continuing to innovate. Towards that end, we continue to focus on enhancements to the Eclipse platform and create solutions that allowed us to migrate away from our legacy products.

Last quarter we talked about the introduction of the IRU600 an all indoor radio unit specifically designed for North American customers to address network bottlenecks. We have now accepted our first customer order for this product.

The Eclipse product platform is meeting the need and driving the growth in microwave IP applications. At fiscal year-end on a trailing 12-month basis, 37% of our [productives] came from this category for Q4. This is up 28% from when we started tracking this metric at fiscal year-end 2008.

In our global network services [segment], we are driving to meet the needs of our customers to optimize their investments, reduce their operational expenses, and improve productivity. To help manage networks for enterprise carrier and State and Local Government customers, we recently commissioned a state-of-the-art network operation center, or NOC, at our Raleigh, North Carolina, headquarters. Our NOC provides 24/7 energy, security and surveillance controls for subscribers worldwide, as well as performance monitoring to ensure productivity. This also allowed us to [complete] operations previously colocated with Harris Corporation in Melbourne, Florida.

Further validating our success in global network services is a five-year agreement to provide a NOC with Open Range Communications. This contract provides full service support for Open Range's high-speed WiMAX network serving rural America. We will be acting as a cost-effective manager of managers, enabling Open Range to focus on product innovation.

Finally, we have another growth pillar, energy, security and surveillance, or ESS, that has also advanced from incubator to business unit status. The market [siphon] opportunity is significant. Today there are already 1,500 sites that have green elements, and another 2.5 million sites that can use our solution to reduce cost, operating -- reduce the operating costs. We are already capturing customers for solution packages that offer controller, hybrid energy, surveillance and [access]. These packages, which are all software controls, will deliver a high-value, cost-effective solution to our customers. We are excited about the early promise of this growth initiative, and we look forward to providing an update in the coming quarter.

Let me now provide you with a brief overview of the dynamics I see happening in the industry and in our Company. We continue to believe that the growth drivers are still in place. Network [traffic] is driving the demand for more bandwidth, developing countries still plan to expand their infrastructure, and our IP activities continue around the world. At the regional level, the challenges that faced us in Q3 remain, especially in Eastern Europe.

Overall, we remain watchful of the risk profiles in all of the regions we serve. We do see signs that North America has stabilized, but we are cautious with our extended growth outlook. Africa remains a region of relative strength for us, when measured by the demand and opportunity, as does Asia-Pacific. We believe we are establishing a competitive position in India, largely as a result of our acquisition, and expect to enlarge our footprint in other countries as well.

As we have seen over the last several quarters, orders are taking longer to turn into revenue. Further, as many of our products become more software-based, there is also the expectation that software recognition rules may dictate that shipments will not translate into revenue in the same timeframe. We have made, and we will continue to make, a reasonable level of investment to prepare for the upturn in our markets. Our management team continues to rationalize our Company's operating expenses, and further improve our cash management.

The activities associated with our restructuring program will continue to be phased in. Year-to-date we have reduced costs by roughly $25 million. Our headcount and facilities review continues to (inaudible) our [tool] and process improvements. As we have seen mentioned before, the latter will require most of fiscal year '10 for full implementation. Our expense management program has once again contributed to our positive cash flow for Q4, and enabled us to achieve our eighth consecutive quarter of positive cash flow.

Our Q1 outlook remains cautious, due to the global economy and the continued constraints on financing of infrastructure projects. While our book-to-bill has improved to 1, we believe it is still difficult to provide financial guidance, and want to caution that our actual results could differ from current expectations. Based on these expectations, we are now guiding for the following -- Q1 revenue in fiscal year 2010 to be in the range of $120 million to $140 million; gross margin is expected to be in the range of 30% to 31%; and total operation expenses in Q1 are expected to be below Q4. We continue to have a laser focus on cash management, and our quarterly goals are to generate cash at this revenue level.

Before going to Q&A, I would like to comment about fiscal year 2009. By any measure, it has been a year of significant change. We defined a vision and a new strategic direction based upon four growth pillars, and we are in full execution. As a proof point to our vision, our acquisition in February immediately expanded our WiMAX and 4G portfolio, as well as access to new markets such as India.

On May 27th, we became a fully independent company. With that independence, our ability to strengthen our position in the wider telecom market, and to execute on our strategy, was greatly enhanced in the face of the global economic downturn, and we generated $71 million in operating cash flow. Most importantly, we completed our management team, with the hire of our Chief Financial Officer and Chief Sales Officer. For me, this is the organizational structure needed to support our strategic direction.

After all of this change, I now feel we have the right product portfolio to compete and to win. We will endeavor to innovate and improve in the days and years ahead. The strength of our balance sheet will enable us to prosper. I am also confident that we have the right management team in place to execute on our strategy, and to realize greater shareholder value.

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

Thank you, sir. (Operator Instructions). And our first question comes from the line of Steve Ferranti with Stephens Inc. Please go ahead.

Yes, hi. Thank you. First question, I guess related to gross margin in the fourth quarter, it looks like even factoring out some of the one-time adjustments that you had in the quarter that you held gross margins flat to slightly up, in spite of a lower revenue level. Can you give us some sense for perhaps some of the more structural and sustainable changes that you've made thus far into the quarter, and what can we expect in the next quarter or two from here?

Yes. So Steve, the long-lasting changes are restructuring of reducing cost expense in the operations and manufacturing group, so our overall expense structure is lower. So that's one of the primary contributors. The other contributor is shifting between the Eclipse product and the other product lines; as we have more of an Eclipse product mix, we generally have a better margin profile. And so as we talked about in the past, one of the major factors going forward will be the acceptance of the new product line in North America, because I think that will have a very favorable impact on the gross margin.

So as we look forward, we still have some ability -- inability to forecast exactly what the product mix will be on a quarter by quarter basis, and we did guide to 30% to 31% with a -- again, a lower revenue projection, so it shows you a little bit of our belief in the margin structure. And I think as the revenues come back, we'll see a much better margin profile.

And then I guess, Harald, you touched upon, in your prepared remarks, that you had seen some new business opportunities in North America, and obviously it looks like from the segment info you provided that trends there have strengthened a bit. Is the IRU600 platform -- are these new opportunities that you're seeing, are they related to the IRU600?

Yes. Steve, yes. So the IRU600 is available. We have -- we have them in the hands of the first customers. We're going to go to piloting. We see that there are a lot of new opportunities with mobile operators, since they have really demand for the network bottlenecks, as I mentioned, and they are based on the IRU600. That is very positive for us. You know that this is the first platform that's a combination of the TRuepoint product portfolio and the Eclipse product portfolio, right, with an enhanced feature set, so I'm very happy to see that.

The second one is the opportunities we see from the stimulus package. So as I mentioned, we have helped a lot of operators to fill out applications and apply for grants and loans, and so that is very encouraging to see.

The third part, of course, is that State and Local Government business, they are deploying. This is also very encouraging to see, that we see no slowdown there. And we have a little bit of new strategy in North America.

You know that we have a new leadership team, and we have a new structure there. Very, very happy to see how they are acting, and how they are following through. I think that are the four components, Steve, which I would like to mention there.

Okay. Great. Last one for me. You mentioned a number of factors that you felt were weighing on carriers' ability to place orders in some of the weaker geographies that you've seen, exchange rates, availability of credit and the like. Is there any one or two that you could pick out that really you're hearing from your customers is a gating item, in terms of their willingness or ability to spend at this point?

Yes. I think the one thing that pops in my mind across the world is financing. We hear that in every review I do on a monthly basis here with all my regional and my sector heads, and of course also in reviewing RFPs, the request for financing is jumping right on number one. The infrastructure projects, of course, to fund them is pretty expensive for them. Everybody is watching the balance sheet, and the access to capital in some of our growth regions and emerging markets is a problem for them. So we can help there.

On the other side, you can imagine that also the competitive pressure to very big suppliers and vendors is tremendous here, because some of them are offering finance packages, right, so we are competing here. On the other side, it's also a big opportunity for us to help our customer base, to help them finance projects. But this is the number one area which jumps into my mind.

Do you think you've lost some deals because of, I guess, the inability to provide financing alongside -- ?

Yes, I think so. To be honest, I would say so, yes. There are some where we just cannot compete. And as I've said before numerous times, we are not -- we do not do financing. And so that -- yes. I can imagine -- I can see a couple of projects we have to walk away from.

Right.

I would not say that we lost them, because I just don't compete -- I cannot compete.

Right.

And then we withdraw.

Okay, thanks. That's it for me, thanks, and good luck going forward.

And your next question comes from the line of Rich Valera of Needham & Company. Please go ahead.

Thank you. I wonder if you can give any color on where you think margins can go as revenue ramps? I know if we could pick a number, whether it's $150 million or some materially higher number but one that you've done in the recent past, just to get a sense of where with your current structure you think the margins could be at materially higher level? Are we talking sort of low 30s to mid 30s, if we got up to a 150, 160? Just any kind of color to help think about where we could be at higher revenue levels would be helpful.

Okay, Rich. So I think there is two pieces to this discussion. First, there is the near term piece, when we continue to have the current structure and the current set of product lines; and then as we transition to the IRU600 and we move to a much more leveraged contract manufacturer basis, and more sales of the IP-based product in North America, I think there is probably two different gross margins that we would talk about.

So in the near term I think as we -- the sensitivity to revenue, is also a little bit product mix sensitive, but I would say we have the opportunity to improve 100 to 200 basis points from our guidance if we get the revenue uptick that you're talking about. So that would be probably the sensitivity. On the other hand, I think we can get to our long-term targeted gross margin range in the mid 30s, once we transition away from our high fixed-cost environment to a much more variable cost environment.

And that's sort of the 12-month you said --

Yes.

12 months to get that done?

Correct.

That's correct. Right.

Great. And then I'm just trying to understand the sort of revenue outlook, and reconcile a lot of positive things you're saying in terms of new orders, new wins you've gotten, the Mideast contract, which was supposed to be kind of a dramatic ramp. You have deferred revenue, which should be recognized in near-term periods. You have a couple of wins you talked about here, Open Range, a WiMAX win. And yet we're still seeing revenue continuing to go down.

So just trying to understand, which part of the business is sort of collapsing, or is it just that these things we're talking about on the positive we really haven't seen revenue from them yet and we may not for a couple of quarters? It seems like there is a disconnect between a lot of positive announcements and revenue that continues to go down to levels not seen, you know, in quite a while?

Yes. That's correct. I mean, first of all, I think the announcements are, for us, very important, and to see that -- of course customer commitments also, that they place orders, right? So that's very, very positive. On the other side, I mentioned in the script that it takes longer to turn them into revenue. So that is in particular true with the Middle East contracts.

So as we started shipping, as I mentioned last time, there are continuous obstacles on the customer side in how they roll out the network, how they are [redesigning] parts, and we're helping them of course. So the equipment is now the country, and still they are slowly starting to deploy that. So very difficult to have for us now a real projection on when they really are starting to deploy it, so that we can take it to revenue. So that is one thing.

So building of networks of this -- I would not say gigantic networks, but nationwide networks, takes awhile, and we see that in the Middle East contract. The good thing is that we are in very close contact with them, and see that they are doing things, that they are designing, that they are building the sites, and so that is going to -- happening and it is a very slow process.

The disconnect I'm seeing here is really that people giving us the order, but the turn into revenue could go over several quarters. So what you saw maybe in the last years and in the past quarter from a pure IP mobile backhaul company, that a lot of that 60%, 70% turns in the same quarter, with more software content and the software recognition rules there, the accounting rules, you will not see that they turn in the same quarter. And then particularly when you have big networks to build. So I think that is the little bit of the disconnect, so we have to set the expectations that that could maybe [order] entry, and revenue turn that is a longer turn cycle in the future.

Right. So it's a constant demand level; at some point in the next couple of quarters, that would imply you're going to see better revenue. I mean these thing have to turn into revenue at some point?

Absolutely. Absolutely. And I think we're -- as you know, which -- we have just started to go more into the access area of this WiMAX, we just started to go more into the core area with wireless gateways, and we're extending or product portfolio; we just started it. And at one point in time, of course, you have that -- you are in that frame that you have continuously to take revenue. Also with our service business, same thing, right? To build out a network operations center and get customers on there, we started just with it, and now we see that hopefully in the next quarter continuing. And not only that, I hope that the visibility and the macro-economic environment gets also better, so that we -- that we have this double effect coming in to bring us back to the normal revenue levels. I agree with that statement.

Okay. That's it for me. Thanks.

Thanks, Rich.

Thank you. Next question comes from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Hi, thanks. I have a couple of quick questions. What was the linearity in the quarter like?

So I would say that it was back-end loaded, and most of our quarters are back-end loaded. It was a little bit more back-end loaded than the previous quarters in the year.

Okay. What would the revenues have been in the quarter, had you been able to recognize that initial contract as normal revenue as opposed to deferred?

I think we had sized the deferral in the $5 million range.

Okay. And then just last question. On Africa, Africa obviously took a pretty big step backwards in the quarter. Can you just sort of elaborate on what you're seeing there, and obviously the 10% customer was MTM, which comes from Africa, but what else is happening besides that?

Well there are a number of things there. So there is -- there is this operator consolidation, I would say, right? And I think we -- a year ago when I saw that happening, how many companies actually are building their own networks, that that is an unsustainable model. I think in some areas in Africa you see now that operators talking to each other and consultation is going [to be] happening. In this calendar year and in the beginning of the first half of the year of 2010, I see operator consolidating and happening in Africa. That will of course slow down some processes.

Then you have a very, very big customer in Africa, and this customer is acting also in the Middle East, who is looking for consolidation with somebody else. I think you know what I mean. And this slows down -- that this is by the way, a very big customer of ours, and that slows down when you are looking for, or when you are about to merge or to consolidate with somebody, that directly slows down your procurement process. I think that is a major activity. So customer operator consolidation is happening, number one.

Number two, the access to finance packages is very, very apparent on the second place in Africa because they're all -- there is a lot of currency issues there, and you just see what happened in Nigeria. The access to US dollars is very, very difficult, and their stock markets are not doing very well. The oil price is not coming back to that where they were last year. They are all contributing factors to access to capital, and with that they are slowing down projects.

We have a handful of projects which they are just stalling. I'm not saying they are canceled, but they are stalling. And they will be -- they are pushing -- putting out -- pushing out to the right-hand side of the timeline. Those are the major two contributing factors.

Thank you.

Next question comes from the line of Blaine Carroll with FTN Equity Capital Markets.

Yes. Thank you. Harald, do you feel like giving any more detail on the BSNL contract, whether it's size or margin impact, when shipments will start? And are -- shipments do not tie into revenue, when you would start recognizing revenue from that?

Yes, right, Blaine. Here we have of course the first example of a WiMAX build out with the particular 97-2 rules on the revenue recognition. We need to think about that, of course. At the moment where we are, I cannot give you -- and that is not okay with the customer, I cannot give you the amount of the contract size. What I can do is that I -- so it's significant. First of all, it's significant. And what I can do there is that we are planning together with them right now the build out of this project. Our COO just was there, and we have a lot of people right now there, sitting with their planning teams together and planning the rollout. So I have to say, the -- it's a very fast timeline they have for that tender.

By the way, they're doing it parallel of course also the rural 1 tender, which I mentioned in the script with somebody else, and I think you know also who that is. So there is a lot of activities going on there in BSNL, and we're sitting with them on the table and planning the project management of that rollout. So we will see something towards the end of this year.

Okay. Harald, the published reports out there then that the total BSNL WiMAX rollout could be somewhere -- and it's a pretty wide range, between $300 million and $700 million, which end of the range would you expect that to be?

Yes, so, Blaine, I cannot talk about the range or the number. But as I said, India is a very big country. There are several tenders which are structured there. So of course they have, as I said or was trying to say in that script, they have an L1, L2, L3, L4 position. When you are in L1, then you are number one on the list, and you got a certain percentage of the contract; and when you have an L2 and an L3, then they get a lower percentage of the contract. So even if I would give you a number at the moment, when they decide to have two or three vendors there, then you have according to that a percentage of the contract, right? But in total, the numbers I think north -- for all of the BSNL numbers which I see there is north of $500, but not for that one contract, for several contracts.

Yes, yes, yes. Okay. And then the Telsima product portfolio included an ASN gateway.

Correct.

Is that something that you can turn and sell into other networks? And does it also work as a home agent in CDMA networks, and a GGSN in GSM networks?

Absolutely correct. And I was not ready for this earnings call to come up with some announcements here. But during the quarter, I think we can do some announcement there. And I can tell you also that a part of that BSNL deal, there was already our own ASN gateway a part of this -- of this product portfolio. So it was not only WiMAX, it was also an ASN gateway component of it. And so within the next couple of weeks, we will extend our strategy and we will then disclose what all -- or what else we do.

Okay. And then Tom, for you, could you talk about what caused the deferred revenue during the quarter, and is this sort of a new policy that Harris Stratex is going to have going forward, which could also be impacting the revenue guidance for the current quarter and maybe quarters going forward?

The particular situation that we deferred the revenue was sort of a traditional issue associated with whether or not the contract was complete or not. It wasn't a 97-2, and it wasn't a change of policy, it was just us following our typical review practices and getting to the facts, which took a little bit of time to get to, but when we got to the facts we decided that the deal didn't qualify for revenue from a timing standpoint in Q4. And so we would expect that to roll into -- into a subsequent quarter, as we said. So I think it is not a change in policy, it's a traditional sort of review that we do on all of our deals, and we made a decision that it didn't qualify.

Now we do have, as Harald said, for the WiMAX products, which are the newer technology in the [15E], we do have to look on those on a case-by-case basis and see if they qualify for revenue, and many of those contracts would be subject to deferral under 97-2 if they obviously include any commitments that are not yet deliverable, or they are bundled and we cannot have separate pricing for each component of the bundle. So we're looking very much at those deals, and I think the short-term deferral impact you'll see will be related to the WiMAX product line; but the one last quarter was not, it was our traditional product set.

And then I think getting back to Rich's question, what is your revenue breakeven level right now, with margins at around 31% and the operating expenses where they are right now?

So I -- I'm not quite sure I understand your question.

Well, I have you losing somewhere around a nickel for next quarter on $130 million in revenue. So I'm wondering what type of revenue number do you need? Are you going to be reducing operating expenses going forward, or will OpEx stay at this level?

Right. So we are going to be reducing operating expenses on a go-forward basis to put ourselves in a position to be profitable at a lower revenue level. We also anticipate the revenue levels will come back. So it is kind of a moving metric. And so I do not want to declare what the number is yet, but I just want to let you know that we're very focused on our operating expense, and given the current environment, we're going to be retracting our OpEx in a judicious way, and trying to position ourselves to have more leverage.

Okay. Great. Thanks.

Thanks.

Thanks, Blaine.

Next question comes from the line of James Faucette with Pacific Crest. Please go ahead.

This is Nathan Johnsen calling in for James. I just wanted to get an update from you guys on your position or your progress in going after the Verizon business as they migrate to LTE. At least our understanding was that the Verizon -- kind of central was going to be qualifying vendors, and then the regional areas would be making decisions on what equipment was going to be deployed. I was wondering if you guys are still in the qualification process, or where you're at in that process?

Yes. No, I can shed some light on that. So that is also an encouraging sign actually in North America. And the Verizon [Ealing] RFP was awarded, and there were numerous [seats], happy that we could qualify and go forward, and we are now -- it's almost a year now, after a year, sitting now with the regions together and designed with them contracts and deployment strategies. So it's based on the Eclipse platform, and in the future also on the IRU600. So we are working under the directive of the headquarters of the regions now, and so that's very encouraging to see. So that opened really up in the last couple of months.

And on other large carriers in North America, it's the same thing happening. Of course you can imagine Alltel was a big customer of ours, and (inaudible) with the integration into Verizon, that opened also now up the integration. From our perspective it's complete, so that opens up again access there. A couple of Tier 2 players opened up again. They're starting to spend, so that is very encouraging sign.

Everything is based going forward on the Eclipse platform and on the IRU600. So the sales team is very -- our tools and our processes are all guided and geared up now for taking orders on the IRU600, the product is out there, so we are opening the floodgates now for that and we'll see -- we see some good encouraging signs in this early stage. Everything is IP-based; as I said in numerous calls before, everything that we do going forward is IP-based, and the products are coming out of the road map. So that is actually a very encouraging sign here in North America.

And given what you know about the timing of the Verizon deployment, at what point do you expect to start shipping or how far ahead, I guess, of a market launch would you expect to start shipping?

Very difficult to say. And that is for -- the visibility remains a little bit fuzzy there. The question for me is -- I think we are worldwide in a situation that the operations part of the operators want to deploy. I think they cannot wait, because the bottleneck's existing right now. And that's not only for North America the case, it's also for a couple of countries and the rest of the world, the case.

It looks almost that the operational side of the house is holding -- the finance side of the house of the operators are holding the operational guys a little bit back at the moment, and watching the macro-economic situation turn better so that they open the gates for investment. And the operation guys, it looks like because of the RFP activities and all our discussions which we all have and the awards, that they want to move, but the finance side of the house are holding them back. The question for me is, how long can they hold them back? And I think that is maybe a couple of quarters away. So that's my take.

And so when you listen to a worldwide consensus there, when the market comes back, it looks like that it is in the calendar year, first and second quarter, of 2010. And I think that will be maybe a timeframe, maybe another two quarters, that people are not starting to deploy.

Great. That's really helpful. And then just the last thing for me, just hoping to get an update on the competitive landscape. I mean certainly in the past it's really been a pretty small group of potential competitors, particularly looking at IP, microwave backhaul, especially being able to support both TDM and IP. Do you see that changing over the next six months, or are you expecting to be competing against any new entrants, particularly as it relates to IP backhaul?

Yes, first of all it's changing. Actually, as we as a Company are changing with our product portfolio, we are not only in IP mobile backhaul any more alone, this market is pretty stable in terms of our competitors, like the Ericsson and NEC and [Alcatel Lucent] and [NSN], (inaudible) they are all there. And of course (inaudible) it's making a bigger impact here, also worldwide. But this is pretty much the group with which we are competing with, and so they are out there.

But we are entering also different segments now in our product strategy, where we see now different competitors. And actually in the 4G, what I call the 4G space, the access space with WiMAX, there is less competition now. So you see Nokia Siemens exiting, you see Alcatel exiting, you see Ericsson never entered it. You know, you see the space is now occupied by different players, smaller players, which we think we have a much, much better position to win against with our complete product portfolio from access to core. As Blaine pointed out before, that we have also now not only access, we have IP mobile backhaul, but we can also connect to the router and IP cloud with our wireless gateways.

So we have different competitors now. But when you see the end-to-end solution combined with our network services, then the competition is changing a little bit. So we see less competition there in this end-to-end solution. But when we drill down in specific segments, it is also getting better because the market has less competitors, except in the IP mobile backhaul space. They are still the same people there.

Thank you very much.

Thank you. Next question comes from the line of Larry Harris with CL King. Please go ahead.

Yes, thank you. A very comprehensive presentation. Just as a follow-up to the last question, you said that I believe in terms of IP, Ericsson hasn't entered the market; do you have any expectation that they will, or are they developing a product? What have you heard?

So they didn't enter the market in WiMAX to be complete, right. So they have a different strategy. What I'm seeing here is very clearly that the big data communication vendors are going to LTE, that they're focusing their R&D efforts on LTE. So that is a clear sign, and of course Ericsson has also their microwave portfolio, and we're competing with them.

From my point of view, it's very difficult for them to innovate in the pace we can innovate; so that should be from our point of view speed-to-market innovative products as a heads up. As I said numerous times, when the big Companies are starting to bundle, then of course we have a different -- it's difficult to compete with them, or are offering finance packages, but -- then it is very difficult to compete. But I think we have our space and we can compete with them, and Ericsson will definitely not enter the WiMAX market. They have a different strategy.

But what I was planning to say, and of course what I emphasize, is that the big Companies are exiting the WiMAX market and focusing on LTE, so that opens spaces for us, and in particular in the area of Asia-Pacific and in particular India, they are focusing more on 4G and deploying WiMAX with Tata, Reliance, BSNL, Bharti, they are the main players there, and all of them are offering WiMAX. So this is a huge market. You see that also happening in Africa, you see it happening in Latin America, and that's our space where we focus with our 4G business unit.

Okay. Thank you.

You're welcome.

Thank you. Next question comes from the line of Kevin Dede with Jesup & Lamont. Please go ahead.

Thanks. I was wondering, Harald, Tom, if you could be a little more specific about answering Rich's question regarding your transition to full contract manufacturing and have your full product line on Eclipse? How much is Eclipse in the product mix now, and do you mean 12 months from the end of June or 12 months from the end of September?

So those are good questions. I think from a transitional standpoint, Eclipse today represents a majority of our product mix. We're selling primarily Eclipse outside of the United States. In the United States, a majority of the products sold are not Eclipse-based products. So the big transition that we need to work through is in North America. So that's really what we're talking about from a transitional standpoint. We see that as an opportunity, because generally historically the VSP prices have been much higher in North America than in a worldwide basis, and the Eclipse product was built to be very competitive in very competitive markets, and so we think the margin attributes of that project in North America would be very favorable. So that was the first piece of the answer.

The second piece is there is some -- there is some movement, a year away, but our target date is 12 months from June to move to 100% contract manufacturer, and that's the target that we're executing against.

Okay. So at that point you would think that a margin level in the mid-30 range would be fair?

Yes. Starting with the following quarter, right.

Got you. Okay. So Harald, you mentioned that the ESS segment now is a full business unit. I was wondering if you could give us an idea of how much of your mix it might be been in June, or what it would be in terms of orders with a one-to-one book-to-bill?

Right. I cannot give you the number, but we are very happy that this energy, surveillance and security segment is really coming off the ground. We put it into a business status because we're taking on some customer business. So that is very interesting. We see it in Africa happening, and we see it also in some other areas of the world happening, and there is a huge focus at the moment in that area. And for me in particular, it's very interesting to see -- to come up with some innovation in the [sector] and put a software controller in there, and what you can do with the operating costs for your customers. So that is -- this is a more and more a compelling event for the customers to solve their operation expenses issues.

So exactly on that line, we got a couple of customers in the last quarter, and so we can announce a couple of them. And so it is in the lower range of -- let's not say double digits at the moment in orders, what we see happening over the next, what is it, one to maximum two quarters, so it's -- in the lower range. So they'll be ramping up that business. We just got them last quarter from an incubator into a business unit. So we're ramping it up. So I expect over the last -- next half year a lower digit order intake.

Would you mind giving me your view of the worldwide transceiver market '08 versus '09? Do you see it flattish or maybe down?

Not having the data here, my gut feeling tells me down.

Okay.

And so we just last week we -- we updated from some sources the microwave market in RF, and we saw year-over-year and maybe going forward an almost flattish kind of thing. But not 100% sure that is correct. So flat to down I would say, Kevin.

What is your assessment of the Clearwire relationship? Do you think that's a closed book at this point, or do you think there's an opportunity for you there?

No, I think when you see the history with Clearwire as a customer, this was pretty much open for a long time, and I think they still remain open. I think they just made a position for (inaudible), right, on the WiMAX side and since -- and exited the WiMAX space. So I think it's pretty much -- Clearwire, I it's all the time open.

And I mean I know that your competitor there doesn't have the same flexibility in terms of product mix. So I'm just wondering when you think you might get some leverage?

I cannot disclose this, my strategy, on this call, Kevin.

Okay. Fair enough, Harold.

But you have a good point. Let me put it this way.

Okay.

No, thanks very much. You know what I mean, right?

Absolutely.

Of course there is a strategic component from our Company and we have also strategic -- we address that account strategically.

No doubt you bring much more to the table, so congratulations on all of the hard work and thanks for taking my questions.

Thank you very much, Kevin.

Thank you. Next question comes from the line of Jeff Osher with Harvest Capital. Please go ahead.

Hi, guys. Tom, just two quick housekeeping questions. What was the allowance for doubtful accounts?

This quarter?

Yes.

I don't have it in front of me, but I believe it was in the $2 million to $3 million range.

$2 million to $3 million gross?

Right.

Okay. And then what was actually in deferred revenues?

So the total number is a pretty large number. It's between $30 million and $40 million. The types of deferred we were specifically talking about where we have product shipments that for one reason or another went into the deferred bucket, and not services and not big projects that are in process, that was about $11 million for the quarter.

Okay. And presumably that was up, you said $5 million to $6 million sequentially?

It was actually more than that. That was just one deal that was deferred. So this is -- I would say the new deferred for the quarter was the $11 million on the product shipments.

So sequentially, $11 million was the change in deferred of the product segment?

Right.

Great. Okay. Thanks a lot, guys.

Okay. Thank you.

Thank you.

And we have time for one more question, and our last question comes from the line of Brett Hendrickson with [Nicolas] Capital. Please go ahead.

Thanks for taking the question. Tom, CapEx, are you still thinking $4.5 million per quarter for this fiscal 2010?

We are, yes, that is still the budget. The uptick this quarter was related specifically to one large software contract that we signed in the quarter, so it counts against the quarterly CapEx, but it obviously will get amortized. But it was a renewal that had to be done in the quarter. So that's why it was so large this quarter, but we're still thinking $4.5 million.

And then did you guys say book-to-bill in the quarter was 1? Is that what Harald mentioned?

Yes.

Okay. And then last question, and it kind of gets to the question the last guy was asking, you've got the billed and deferred revenue, but that's good in the sense that you're generating cash, right, even at these revenue levels, or accounting revenue levels? And I know it's not cool any more to buy back stock, and I know you guys talked about it on your little roadshow there. There is a lot of VC firms that are giving up on their companies, and so there is technology available there to acquire, and we get that, and we think you're in a good spot. And we get that to be a Tier 1 supplier, you need to have some cash on the balance sheet.

That being said, even with revenue here and with book-to-bill maybe bottoming, hitting one, so maybe revenue bottoming out, you know, and you're still generating cash even at this low revenue level, I'm wondering if cash is going to keep building, does it make sense to at least to have the authorization -- we're not telling you guys what to do at all, but does it make sense to have authorization to maybe be able to act? I know you wanted to get through the -- what do you call it, the spinout, but we got through that; the world seems to be getting somewhat better, but your enterprise value seems really low relative to the opportunity. And so just your thoughts on that?

Well, I think it's always good to continue to have that debate at the Board level, and to decide what is the best use of cash, what is the best thing for us to do from an overall investor standpoint for the -- for both the near-term and long-term, and so we'll continue to have that debate with the Board. And I think it's a reasonable question for us to continue to ask, what is the right timing for those types of moves, and what flexibility do we need on a going-forward basis for operations or for the acquisition of additional assets. So we continue to have that discussion internally, and we'll continue to do so.

Okay. Good. And thanks for all of the detail today, you guys.

Thanks very much.

Thank you. And Miss McGowan, at this time I'll turn the conference back over to you.

Thank you all for joining us on this call and webcast.

Harris Stratex is planning to attend the Deutsche Bank Technology Conference in San Francisco on Monday, September 14th; the CL King 7th Annual Best Ideas Conference in New York on Wednesday, September 16th; and the TechAmerica AeA Classic in San Diego on Monday, November 2nd. We hope to see many of you at those events.

Thank you, and good day.

Thank you. Ladies and gentlemen, at this time you may disconnect. Have a nice day.