Aviat Networks Inc (AVNW) 2010 Q1 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 up for your questions. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference call over to Mary McGowan of the Summit IR Group. Ms. McGowan, you may begin.

Thank you for joining us today to provide financial results for the first quarter of fiscal 2010, which ended October 2. On today's call will be Harald Braun, President and Chief Executive Officer, and Tom Cronan, 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 the transition to IP infrastructure, the timing and capabilities of new product, 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 re 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 would 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, and then I will turn the call over to Tom for details on the quarter. In Q1 we achieved revenues of $120 million. On a non-GAAP basis gross margin was 33%, net loss was $800,000, with loss per share of $0.01.

By segment, North American revenue was $48 million, international revenue was $72 million and we ended the quarter with a strong cash position of $133 million We posted positive operating cash flow of $4.4 million, and our book-to-bill ended the quarter at 1.

I would also like to mention a few highlights since our last conference call. We signed a development partnership with Juniper Networks. The first product from this affiliation is a wireless service gateway platform to support 4G and beyond. We captured new customer wins in Canada, Australia, Afghanistan, India and West Africa, to name a few.

We were also the recipient of several awards , including recognition as the top WiMAX provider in the Indian market, with an estimated 70% market share. We also received an award for innovation that recognized our continued development of features for our Eclipse Packet Node IP backhaul platform.

I'll provide more color on our strategy and our markets later in my remarks. Now let me turn the call over to

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 October 2, 2009. First quarter revenue was $120 million and we reported a net loss of $7.8 million or minus $0.13 per share. GAAP results included $6.1 million of pre-tax charges composed of the following -- $3.8 million was the amortization of purchase intangibles; $2.3 million was stock compensation, restructuring charges, and other.

Now I would like to present 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 results across reporting periods. Please refer to our website for a complete GAAP to non-GAAP reconciliation tables.

By segment, North America contributed $48 million of revenue in the first quarter, down 24% from the year ago period. The split between mobile and private orders for North America in the quarter was approximately 30% mobile and 70% private.

International segment contributed $72 million,46% lower than a year ago period. By geography, Africa contradicted $29.9 million in revenue, 55% lower than Q1 fiscal year 2009. EMER which comprises Europe, the Middle East, and Russia, contributed $18.6 million in revenue, 51% less than the year ago period. Revenue for the rest of the world was $23.5 million, 20% less than Q1 fiscal year 2009.

In fiscal year 2009 network operation segment was only 2% of annual revenue. Beginning with this first quarter of fiscal 2010, we eliminated the network operations segment as a separate reporting unit, and consolidated this segment into a remaining two segments, based on the location, revenue is recognized. In the quarter, two customers, NTN located in Africa and Middle East Telecommunications Company each contributed more than 10% to our revenue.

Gross margin was 33.3% in the quarter, versus 31.3% in the year ago period. The higher gross margin resulted from cost savings in the operations function, as well as lower logistics expense and better supplier pricing on some projects. We believe that our margin is trending up, but there would still be some variability on a quarterly basis, depending on the structure of the transaction, product mix, and completion of projects.

Total operating expenses were $40.3 million, or 33.6% of revenue. This amount compares to $44.2 million in the prior quarter, and represents a reduction of $3.9 million. OpEx in Q1 2009 was $40.5 million.

For prior year comparisons we need to look at the annual expenses with and without the OpEx associated with the Telsima acquisition. When compared to the first quarter of fiscal year 2009, total operating expenses including Telsima were down 11% or $5.1 million. This decrease was driven primarily from our cost reduction programs, as well as lower commissions and bonuses.

Excluding the impact of Telsima, the operating expenses in this period were 21%, or $9.4 million lower than the first quarter of fiscal year 2009. In Q2, depending on the mix of projects and transactions that are recognized as revenue, there may be commission charges that classify as OpEx that will need to be recognized as expenses in the period. Operating loss was $300,000 for the first quarter, compared to operating income of $15.9 million in the year ago period.

Our pro forma tax rate was zero, because of the loss in the quarter. Last year's tax rate was 24%. Our cash tax rate is estimated to be about 2% for the full year 2010.

Employee head count was 1,531, compared with 1,521 employees in Q4.

Now I'll move on to the balance sheet. Operating cash flow for the quarter was a positive $4.4 million. Also during the quarter, we made a non-operating cash payment to the former Telsima investors of $4.2 million. Despite that payment, the cash balance as of October 2, 2009, was $133 million, a decline of $3.8 million from the Q4 ending balance of $136.8 million.

Third party debt was unchanged at $10 million in the quarter. The $133 million gross cash balance compares to $96.9 million at the end of the first quarter of fiscal year 2009.

This is the ninth consecutive quarter of positive cash flow. The $4.4 million operating cash flow is compared to $26 million in Q4 2009 and $3.9 million in Q1 of 2009.

The collection team continues to do a great job in this difficult economy. Accounts receivable decreased to $114.3 million in Q1, from $142.9 million in Q4. And DSOs changed from 76 days in Q4 2009, to 69 days in Q1 2010. This represents the lowest DSO level in the history of Harris Stratex Networks. 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 million. CapEx for the quarter, including capitalized software, was $4.8 million. We continue our initiatives to decrease overall expenses, maintain our DSOs and improve inventory turns. We are committed to continue our focus on cash management in the coming quarters.

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

Thank you, Tom. Overall we are seeing similar business conditions as we saw for the last two quarters. The macro-economic environment remains challenging and continues to constraint our full revenue potential.

While there are some positive indications in various regions, the fact remains that we need broader global economic stabilization. We believe it is this economic unevenness worldwide that conceals the fundamental strength and demand for our microwave backup products and services. In turn, this latent demand is not yet reflected in our current results.

I would now like to provide a business review of the quarter with specific color on the regions we serve. In North America, we continue to see signs of stabilization in the overall market, and note that with Q1 bookings we were up 28% from the year ago period.

We have been awarded a contract by MTS Allstream. One of Canada's leading national communications solutions companies, MTS will be implementing an HSPA network in the province of Manitoba, using our Eclipse Packet Node Solution, along with our full turnkey and support services. This win demonstrates our ability to be fully responsive to our customer needs, while being innovative and flexible as a solution provider.

We also captured a multimillion dollar expansion project in the San Francisco Bay area, involving homeland security funding. This will deliver communications between law enforcement, fire protection, and emergency medical services.

Our key differentiator in North America continues to be our ability to offer and deliver on end-to-end turnkey services. A tier 1 US carrier has placed an initial order for the IAU600. This is a our all-indoor radio unit specifically designed for North American customers to address network bottlenecks. We expect to see shipments in the March quarter.

Now let me provide a brief update on the American Recovery and Reinvestment Act, or the stimulus program, as it is more commonly called. In August, the first application window for middle mile projects closed for the stimulus funding applications.

We are now awaiting completion of the grants review process, worth an estimated $3 billion to $5 billion, and should note the winners by the end of this calendar year or early next year. In one instance, a particular state has applied for funding in the $100 million plus range, and we expect to participate in that project.

Another phase of the stimulus program is for smart grid funding. Under this program, nearly 30 of our customers applied for ,and were awarded stimulus money in October. These projects are large, turnkey in nature, and present us with a significant opportunity. As these smart grid projects roll out, it is important to understand the process.

As expected, bookings from the stimulus grants will precede revenues. However, since much of the work would be engineering, planning, and design, we anticipate as revenues will be more likely in fiscal 2011 and lag bookings more than usual.

Africa remains a region of relative strength when measured by customer demand and the potential for network infrastructure expansion. Harris Stratex has deep, long-term customer relationships with the key operators in this region. The strong growth is currently inhibited by lacking CapEx spending by operators, and potential M&A activity with our two largest customers, which have slowed their spending.

While facing this data challenges, we remain optimistic of a recovery in the coming quarters, because of the inherently strong end user demand for communication services, and mindful of the trust our customers have in us. We are seeing a number of opportunities for turnkey WiMAX rollouts as the technology gains momentum in this region, as well as for energy, security, and surveillance, or ESS systems.

ESS has great interest in Africa due to the economic value delivered, especially during a period where operators are challenged to become more innovative in their businesses. We are pleased with the reception of those products and services are receiving.

In our EMER region, which comprises Europe, the Middle East, and Russia, the challenges continue. Backlog is high but as a reminder, is skewed by our Middle East contract. As we mentioned last quarter, product shipments for this particular contract began in Q4, as anticipated, and we expect to begin recognizing the revenue in fiscal Q2. Unfortunately, the visibility on this important program is still lacking, and will continue to hamper our guidance.

The good news is that our customers commitment remains solid. In general, the area of this regions where we are seeing increased activities are some Middle East countries and Russia. However we remain cautiously optimistic on Russia, as that has been one of the hardest hit regions with a global downturn. Across Europe opportunities are opening up or WiMax and IP backhaul solutions, but again timing is uncertain.

Asia-Pacific remains a bright spot for wireless datacom in an otherwise troubled global economy. More than a year ago the strategy for renewed focus on the Asia-Pacific region with emphasis on tier 1 operators. We are pleased to note that we are successfully executing on that strategy, and that revenues and orders are coming in above our internal plan.

We captured a new major win in Australia, and also in Australia, continues to aggressively roll out their 3G networks. We are seeing solid businesses for microwave backhaul from the two largest operators in the Philippines, namely Smart and Globe. This is in addition to a new win for IP backhaul with a mobile WiMax operator, plus a new build-out in Afghanistan.

Let me now provide you with an efforts to win another tender with BSNL, the world's 7th largest telecommunications company. During our last conference call, we had already won the urban one tender to enable wireless access for the southern Indian state of Kerala. At that time, we had also entered a bid for BSNL rural two tender.

We are pleased to report that in mid-October, BSNL revealed that Harris Stratex was among the four winning bids that will be awarded a percentage of the project. We are pleased with our success rate at capturing these tenders. More importantly, we are pleased with the successful execution our team is managing for BSNL.

We like also to stress the fact that India is an increasingly important region to us, beyond our success in WiMAX. We are promoting our core IP mobile backhaul platform to key operators and believe that our technology offers a competitive advantage. advantage.

Despite the current economic challenges, our long-term growth strategy continues to be very encouraging. Discussion of our product strategy and growth pillars give us an opportunity to focus our success with our 4G WiMAX.

As we just discussed, there are significant revenue opportunities in the Asian Pacific region, and we are capitalizing on them. In August we received recognition based on Voice & Data magazine research as the top company in India's WiMAX equipment market, with an estimated 70% market share. Beyond India there are also growing opportunities in Africa, Europe, Latin America, and the Middle East, where we are conducting field trials.

A key element of our end-to-end offering in WiMax is our own wireless service gateway, which we are now deploying with BSNL in India. It was developed as part of the Juniper Open IP Development partnership. We introduced this project in a very short time frame, and we will continue to involve it and provide mobile and fixed mobile conversion solution.

As most of you know, our overriding product strategy remains focused on converting to a common IP-based microwave platform. This will drive our overall efficiency and contribute our financial improvement, especially on the gross margin line.

Innovation remains a key cornerstone for our leadership position in the IP mobile backhaul market, and recently Harris Stratex was recognized for its overall innovation achievement. In October, we were awarded the 2009 Wireless Backhaul Distinction Award for our Eclipse IP wireless backhaul platform. This award recognized the Eclipse platform's global reputation as the most comprehensive wireless backhaul solution currently available. I'd like to take the opportunity to thank our employees, whose dedication to innovation made this award possible.

The Eclipse product platform is meeting the needs and driving the growth in microwave IP application. At the end of fiscal Q1, on the trailing 12-month basis, 39% of our product sales came from this category. This is up from 28%, when we started tracking this metric at fiscal year end 2008.

In our global network services, our goal is to optimize our customers investment with views to operational expenses and improve productivity. We previously announced the opening of our NOC at our Raleigh, North Carolina headquarters, to manage networks for enterprise carriers and state and local government customers. That announcement was followed by a five-year agreement to provide open range communication with a NOC with its high speed WiMAX network serving rural America. I'm happy to report that we are executing on this contract, integrating with the network, and providing 24 by 7 support.

In September, we partnered with Zain Nigeria to launch launch a NOC in Lagos. This NOC is a part of a full turnkey project to be completed by Harris Stratex, and will include the design, build-out, network process re-engineering, and optimization.

We are currently in discussion with another tier 1 operator in Nigeria to optimize their network. Our engineers will keep the customers, re-engineer the network operations process to optimize cost, performance, and improve the operating environment.

Service assurance is the key part of the value they brings to the customer. It is built on our core skill and experience in developing and deploying network management solutions to customers globally. Beyond Africa, we are looking at several large opportunities in EMER, Latin America, and North America.

Another growth pillar, of energy, security, and surveillance, or ESS, has significant market potential that we are still in the early stage of exploring. Based on customers' feedback from presentations, workshops, and field trials, we are receiving strong interest for our energy management, hybrid power solution, security solutions, and the overall controller platform. As a reminder, these are all software-controlled. We have our first customer deployment in West Africa and are in the final stages of completing a field trial as a tier 1 operator in east Africa.

While the lackluster global economy and budgetary factors may inhibit the revenue run we envision, we believe that this, our business unit has the product offerings and resonates with customers, and that ESS will achieve its full potential. We are excited about the early promise of all of our growth initiatives, and are seeing early momentum, in customers' inquiries, field trials, and RFPs, in Africa, Europe, and Latin America.

All of these initiatives further our ability to cross-sell our product and services, and deepen our customer relationships. It is not unusual for a WiMAX customer to need the IP mobile backhaul or network operations that we supply, and vice versa. All of our products and services can be cross-sold.

Before we go to Q&A, I'd like to reiterate some of the dynamics we are seeing. We have made and 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.

Compared with Q1, fiscal year 2009, we have reduced total cost by roughly $6.3 million. Excluding Telsima, the quarterly saving improved to $10.6 million.

Our headcount and facilities review continues, as does our tool and process improvements. As we have mentioned before the latter require most fiscal year 2010 for full implementation.

Our expense management program has once again contributed to our positive cash flow for Q1, and enabled us to achieve our ninth consecutive quarter of positive cash flow. Our Q2 outlook remains cautious, due to the global economic and the continued constraints on financing of infrastructure projects. While our book-to-bill is 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 -- Q2 revenue in fiscal year 2010 to be in the range of $120 million to $130 million; gross margin is expected to be comparable to Q1; and total operating expenses in Q2, after normalizing for any agent commission, I expect it to be below Q1 levels. While awaiting the global economic recovery, we will continue to invest in innovative products and services that enable our customers to achieve leadership in their regions they serve. We have a strong balance sheet that enables us to invest and prosper, and we believe that all of our efforts will drive shareholder value over time.

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

Thank you, sir. (Operator instructions). We have a question from the line of Steve Ferranti with Stephens Inc. Please go ahead.

Thank you. Good afternoon, guys.

Hi, Steve.

I wanted to ask you, your revenues came in at the low end of your prior guidance and I guess you provided a fairly wide range of guidance since September, and I wanted to see if you might help us think about -- were there any factors that didn't come in in the quarter, or factors that changed in the quarter that would have led revenues to be at the lower end versus at the higher end? I would imagine given the wide range that you provided there was some swing factors there that could have shifted revenues one way or the other. Can you give us some color in terms of what might have been the delta there?

Yes. We have some projects in the world where we have significant revenues and so as we saw it before, they are continuing to be pushed out. That is the case in Africa in particular,r and also in North America, but you see also some of them are in Europe. So what we plan there with some of the operators, is pushed out to later in our fiscal year.

So there were some large projects with significant revenue opportunities which are pushed out. So that is in our troubled regions, in Africa and EMER you saw the numbers as compared to last year. So there are a few, but significant projects which are pushed out.

Okay. That's helpful. And then two of your major customers in Africa had been in potential merger discussions with other carriers, and it looks like those are off the table. Do you think that that potentially is the first step toward a resumption of maybe more normal ordering patterns in that region?

Yes, so you know, Steve, there is not only one factor, there are several factors in that region which are challenging us right now. One of which is the consolidation of mobile operators. So in particular that is Zain, and they are talking to several others and these talks are not over. This is continuing, and with that continuation of discussions, the spending is not coming in as we saw it before and as we planned before.

In MTM we see actually some light at the end of the tunnel. This MTM - Bharti situation you talk about is over for now. We see some activities coming out there now, but it looks like they are more backend loaded to our fiscal year than anything else. So that is opening up, but Zain not opening up but there are some other contributing factors.

In the biggest region, in our biggest region where we do business, there are banking crisis. You might have seen all the reports in the press that seven banks in that particular region went out of business because of their business activities, but of course with that there's a problem of access to capital, but there's also consolidation happening and what I would call the GSM camp and the CDMA camp.

Too many operators, as we indicated last year, that there are many, many operators, more than 15 operators, they are split into the GSM camp and the CDMA camp, now they are starting to discuss with each other in this particular camp, to consolidate. That is another driver where we see in two areas, in particular, the CDMA camp, zero spending right now for the last couple of quarters. It's not only these two mergers, but our biggest customers. One is opening up, the other one is struggling to invest, and there are more than one factor which give us more than 50% downturn.

Fair enough. Last one for me. I wanted to confirm that the Middle East customer that you mentioned as a 10% customer is not the major $60 million plus opportunity that you had there. Is that correct?

That's correct, that's absolutely correct.

And just to confirm, also you said shipments have started for the larger opportunity there. Do you expect to start recognizing later in this fiscal year? Yes. That is also correct. We have at the moment a lot of activities going on here in the Company to that particular project, and we have now some visibility and we see movement there. So we have numerous people in the country there right now, we see movement, and we see that coming in Q2 turning to revenue. Do you expect that it will follow at least a somewhat linear pattern once you start recognizing revenues on that project?

Some, yes. Of course the team and a couple of leaders from our Company, they are talking to the customer. It could be that the next quarter is a little bit more, almost linear, but not totally linear, right?

Yes, never is. Okay. I appreciate the color, guys, and good luck going forward.

Thanks.

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

Thank you. Understanding visibility is tough, each of the last couple of quarters you've given what appears to be fairly conservative guidance and then either missed it or come at the low end of that guidance. Anything that should give us reassurance that this quarter we are bouncing off a bottom, anything that is different than the past couple of quarters, other than the fact that we are at lower levels, that would give us some confidence we are bottoming here?

Rich, the activities starting to pick up. That is the positive news on the areas I discussed in the prepared remarks. And of course the push out of the projects, some of them are pushed into the second quarter. So that gives us also some reassurance that something will happen. That is a good tick up. We are starting to believe that we are at the bottom, with the activities that we see in the market. Visibility is better than the quarters before.

Okay. And I know there's not a direct comparison, but the other couple of microwave radio merchant providers are seeing a much stronger result, or at least seem to have more visibility than you guys and clearly there's a difference in geographical exposure, which I think explains part of it. But I think it's fair to ask the question if you think there's any competitive issues in terms of, are they winning business that you for some reason are not able to win that is giving them better near-term fundamentals than you?

No. Actually in the RFPs, which are mentioned, also in the new customer wins we didn't see them, we are acting somehow in different regions. So I don't see that there are some competitive issues with them.

So they are acting in different regions, and as you know one of the competitors, they are acting mainly with one customer, right, and the other one, we don't run into that much. So I wouldn't say that that is a reason of losing business against them. They are of the top four, which in some regions are overly aggressive. If there is something that we lose against somebody, that is mainly from the top five telecom vendors.

Rich, I think one of the differences is that, or some of the people you are talking about, they don't have the services business. So their order to revenue cycle is shorter than ours. We have a longer revenue cycle so when you come out of these things you tend to have a little bit longer recovery period because the order started and that takes a little longer to get to revenue. Part of it is you're seeing a different business model, where if they're getting orders and they're turning them in the same quarter, they might see a bounce back a little bit faster than we will, given our revenue cycle and business model.

Right. Another one on the guidance you gave for gross margin and OpEx for the current quarter. You kind of made the comparison for OpEx backing out any additional agent commissions but I thought the way at least one of your deals was structured you would see the benefit on the gross margin line, which would essentially be offset by higher agent commission. So I'm not sure why you would back out the commission from the OpEx but not back out anything from the gross margin in that guidance.

Part of it is we are dealing with looking forward and not looking backwards. We have to look at the quarter, how much of that deal is in, how much of it is out, and so that has a lot to do with our view of how we are guiding here If we have a perfect crystal ball, we could all sit down and do the math, but we don't have a perfect crystal ball.

But it's something we shouldn't consider a real operating expense. It's a real expense. It's something that you should include in your thoughts of OpEx going forward, it's just we don't know how much to conclude.

It's variable dependent on a specific deal, and ame thing with gross margins, yes.

Right. Understood, that's helpful In WiMAX, Harald, there were some very nice accolades you got with respect to your market share in India. Trying to reconcile that with the fact, I'm not sure what you are seeing in terms of WiMAX shipments or revenue right now. Can you just give us any color on what you are currently doing with respect to WiMAX shipments or revenue now, and how you would expect that to trend over the next couple of quarters?

Yes, I can do that. The shipment into India to existing customers like Tata and Reliance are more on the 16D side because the frequency option which you want to participate on is actually postponed to next year. The only two companies where the frequences to build-out of WiMAX products is BSNL and MPM. So these two guys have the frequency to build it out, but for 16E products. So 16D we are shipping right now and it's limited because we are focusing going forward to 16E. and of course the BSNL the winner of 16E contracts.

The tender which we won, we are actually in shipments right now, and we are also coming into deployment more during this year -- during our fiscal year -- and from the new tender I don't think that we see something this year, but from the initial tender, we are starting not only to ship, we are starting later on this year to deploy. So that is a very important one and of course we need to perform there in order to be also recognized for new tenders coming up with BSNL. So overall we think we are above 10%, that's what we have in the plan, for what we have in the plan for this year's WiMAX rollout.

I'm sorry. What is the 10% number?

10% of our total revenue what we do --

For the fiscal 2010 year?

Yes.

Okay, that's helpful. And then one final one if I could. A big picture question of where do you think -- and it's a tough one -- where do you think your new normalized revenue level is as we come out of this.

I think it's probably fair to assume that there's some business out there that may never come back. I don't know that you automatically assume that you would get back into that $170, $180 million range. Do you have any guess of where that new normalized level is as we come out of this?

Yes, of course. We are building that up. I think we have some visibility. We have in our biggest growth regions some visibility to come maybe first, second quarter of the calendar year 2010, but it looks like more to the middle of next year that revenue levels come up over several stages.

I don't think that there will be a spike. It would be more linear growth again to the old levels. I see that coming, but it won't be a spike as it was from the second to the third quarter last year. So we saw the whole market plummeting. That would be more linear, and I would expect that to be in the first half year of the calendar year 2010.

Okay. Thank you.

Thanks Rich.

Thank you. Our next question comes from the line of Blaine Carroll with FTN Midwest Securities.

Yes, thank you. Hi guys.

Hi Blaine.

I'll ask Rich's question a little differently. Is there a shift in the market more towards high capacity radios versus say low capacity PDH, and I wonder if you gave what percent of your revenue would come from high cap?

I don't think that we measure that high versus low. We don't measure that, Blaine. I'm not 100% sure whether that is a pattern that we see here. So I would say it's pretty much distributed. I couldn't tell you in order that is a trend.

Okay. Any update on where you stand with Verizon right now?

Yes. It has movement. I somehow pointed it out in my prepared notes. There's movement, and that's good. So we were with service Verizon and all, we see that we completing the regional contracts and starting to go out and ship.

Okay. And then Tom, if you could, could you talk about cash management throughout the remainder of this fiscal year, and give an update on what is going on with the San Antonio facility and the outsourcing?

Okay. Tackling the last one first, our plans is the same, we intend by the end of the fiscal year to have migrated to a contract manufacturer relationship and no longer be building products in San Antonio, commencing in the next fiscal year. So that is still the plan and has been the plan for self-quarters.

From a cash management standpoint, we continue to be very focused across the board on both our DPOs and our DSOs and our efficient use of cash. From a looking forward standpoint we'll have a couple of challenging quarters that will make us continue to be very focused on very strong cash management as we manage through this revenue cycle, and then as we start to ramp back up. We are preparing for that by talking to all of our contract manufacturers and adjusting the terms so we can try to match up as close as possible the DPOs and the DSOs.

And of course we have that $70 million facility available to the extent that we need it but I think we have plenty of cash and we should be fine as we move through this cycle and we are going to try to manage as close to zero as possible. I don't think we are going to throw off a lot of cash on the next couple of quarters.

And the reason for that does it have to do with closing down San Antonio?

No. It has to do with the current -- the revenue versus operating income and the loss position more than anything else.

Okay. And then lastly, anything new on the competitive front, Harald? Are you seeing, I don't know whether it's Walley coming in, or any other technology or more fiber being deployed, anything along those lines?

Yes. On a competitive front similar as it was in the last quarters, we are seeing in our growth segments, in particular in Asia-Pacific but also in Africa, Chinese vendors, who are very alone. Maybe that is a little bit of change because it's also the other companies, ETE. We are seeing them more and more, and of course from this competitive pressure there, they can do in some areas much much more than we can do in terms of bundling, or of course and the number one, financing. So that is still an issue. But not only an issue for us, but an issue for everybody in the telecommunication industry where these companies show up.

On the other side we see some signs of what I would call signs of maturity from this particular Chinese vendor because we see them walking away from some deals in some areas in this world. For example, in Latin America. But we saw also on the BSNL award, or short list, they were 7th, so last place. So there are some interesting things going on and we see also on the financing side some signs of caution. I would put the headline out, some signs of maturity in the market from this particular vendor. So we have to observe that a little bit more, but nothing new except maybe on the ZTE side, and some of the big four, one of them goes a little bit more weak.

Okay. I'll pass on, but thanks a lot and good luck.

Thank you.

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

Thanks. Can you guys talk a little bit about the integration of the Telsima? So obviously they have the business that they had before you acquired them. Can you talk about how it's been going, sort of leveraging your sales force and being able to perhaps get some new sales for the Telsima product?

Yes, Ilya we can do that. So internally we had of course in the first nine months what we call an integration program, a Telsima integration program, and that is completed. In our last meeting I advised our executive team now for moving from integration to scale, so we think as a management team we have integrated fully Telsima in all areas whether this is in operations, in finance, in marketing, and of course in our operational, our COO organization. So what we call the 4G business unit is a full-fledged business unit, with a shadow P&L, reporting to our COO. so this is done.

Of course we have also now one sales team in the five regions, and they can sell WiMAX products, WiMAX and of course also wireless service gateway products. So we have enabled the sales force with training, with people. We hired new people with this particular skill set and have also trained our people, so that is also in full swing.

But we had also focus strategy, so we have focus region for WiMAX, as I pointed out in the prepared remarks. One of the focus areas is of course India, but there are others. There are also Latin America, there are also some in Africa. So there are some big tenders in Africa which we are working with.

So I would say a fully fledged business unit and able sales team, but with a focused strategy. So that would be my take line for that.

Okay, thanks.

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

Yes, thank you, and congratulations on the market share statistics for India. I just wanted to clarify one item and that is with the North American revenue being down year-over-year, to what extent could your de-emphasis to the MegaStar and the Constellation-type radios, the legacy Harris radios, has that had an impact on your year-over-year sales comparison?

No, not at all. Of course when you have a transition from a product line or from several product line to one product line, there's an impact here and there, and I think we debated and discussed it in previous earnings calls. We had to, we absolutely had to shift to an IP mobile backhaul platform, otherwise we wouldn't capture new wins with new customers like what we just said with MTS, or AllStream or with other customers like the tier 1 operators here in North America. There would be no way to capture these deals.

At 15 deals we are transitioning towards that platform and thee are transitioning actions going on in the tier 2 and tier 3 markets. So that is not it. I think it's softness of the -- in the industry, and I see signs now that we can recover there, and that we are going in the right direction. And of course there are new opportunities. I wanted to point out that the stimulus package, that there are new opportunities coming our way. So I would say no, that would not be the major element of why the revenue was down there.

As you prepare for the closure of the San Antonio plant, you are seeing customers ordering the new IP-based products?

I see customers ordering new IP-based products, but they are ordering some of the existing products, some tier 2 and tier 3 know that we are going out -- putting that out -- off our line of products, but there will be of course maintenance contracts that we will support -- we will provide services. We don't let them hang. What we do is we have migration strategies defined for those customers. So that will take a while until that maintenance contract is over. But the production as Tom said during the year and these older products will be discontinued then.

All right, thank you.

Thanks.

Thank you. Our next question comes from the line of Matt Thornton with Avian Securities. Please go ahead.

Good afternoon, everyone.

Hi Matt.

A couple of quick questions. I want to clarify. Tom talking about some of your comments on gross margin, it sounds like based on the results this quarter and the guidance for next quarter that we are starting to trend up, albeit we will be bumpy from quarter to quarter, but we are starting to trend up and that 3% level is a realistic go forward kind of platform number. Is that fair?

That's fair.

Excellent. And secondly, there's a lot going on in 2010 that could be drivers, obviously with US broadband stimulus that you talked about Harald, India 3G spectrum issuance. Can you rank order how you view those drivers in terms of how they will impact your business, and have you gone any further as to quantify perhaps what those opportunities might be either to Harris Stratex or the backhaul segment in total?

Yes, absolutely. As you know when I started here in April last year, I would say we were somehow a one trick pony in the IP mobile backhaul market, and we wanted to be a more relevant and more significant to our customers, therefore we come up with areas, in the adjacent areas. I am very happy to see that we are executing this strategy. All of the growth pillars that we have in the beginning are now business units and are contributing to revenue. I want to see, of course, these revenue shifting to the new areas, so that we are not relying only on that one business unit, IP mobile backhaul. And of course, have a bigger market pipe to address. So that is happening, I see that happening in IP mobile backhaul because the bent with demand mainly driven now by video application is there and it's increasingly there and I think we don't need to debate that. And 50% of our business is coming from emerging markets. That is in this market there's existing infrastructure and with this nonexisting infrastructure we have a very good offering for our customers, not only now, in the microwave point-to-point area, but also in the point-to-market point area, with our WiMAX portfolio. So this is a big driver in particular in Asia-Pacific, and also in Africa. So we see that, and of course it allows us also cross-selling opportunities.

We had one cross-selling opportunity where we led with our WiMAX in India and now going into microwave deployment. So that is this cross-sell opportunity. So that's very significant for us. But we have another opportunity where we led with a network operations center, where we had the chance to capture backhaul business. And all these drivers coming to this infrastructure area, but also with our wireless service gateway product portfolio, which is an application product, we anticipate that we can capture some market share together with our other offerings which we have. For example, the WiMAX together with the gateway is deployed in both BSNL tenders. So the drivers I'm pleased and we can participate now in a bigger scale so that I'm very happy that we are executing in this tough environment our strategy, and of course this is not easy, but it makes us from our belier more relevant to our customers And I think the drivers are undoubtedly in place in all the regions worldwide.

And how would you rank order, I guess if you narrowed it down to the impact spectrum issuance in India, versus broadband stimulus in the US when you look out into 2010 and 2011? How would you rank order and have you gone any further to quantify what those opportunities could mean?

Yes, quantification is very difficult. So I have better visibility in India on the WiMAX deals than I have opt stimulus package, because we are still waiting the awards on which customers are awarded what amount of money, and then of course it's up to them to decide who is building it out. And what technology they want to build it out. So that is a little bit of a crystal ball. What we know is that the statistics who from our customers did apply in the first phase for money, and the good news there is also that is not only the mobile broadband access stimulus money, it is also the smart grid stimulus part available. So that is a good one. So I really cannot compare that because the business visibility on the stimulus is really, really very nebulous, very challenging.

In India, I'll rank that at the moment, visibility is there and movement is there. That's a good thing. So they are moving and BSNL is moving very fast because of the auction coming up next year because they cannot capture market share before the others get spectrum and can also build out WiMAX systems and products. So the movement is faster at the moment on the WiMAX side, so I rank them higher when I needed to compare these two. But very difficult to compare it. And the ranking order, this is clear, our bread and butter business is IP mobile backhaul, and then followed by WiMAX, followed by wireless service gateway, and followed by services. So maybe services we need to put in the second place because we had a significant amount -- last quarter 22%,Tom something like this?

Yes, the services continue to grow and we are seeing good trends on the services side.

Was that services 22% of --

That was in Q4. We don't have numbers for Q1 yet.

Got you.

That will be the ranking order. Is it helpful?

Very helpful. One last question digging into India. Can you remind us of what the timing of recognition on the urban BSNL tender, and can you compare the size of the tenders, the urban versus the rural, understanding that you are sharing the rural tender with three other vendors, but what is the size of the opportunities?

On the revenue recognition question, there are some milestones and things we have to get through, but the current expectations it would be that it would be in our fiscal Q3 time period that we would be able to get pasT those expectations and start to recognize revenue.

Got you. And sizing the two opportunities?

On the size, it is somehow I think, on this new one, I have some statistics here. This is in principal for all the participants, 7,000 WiMAX base stations and there's a potential in the lower range of the first three or four selected in excess of 10 million. When you have the lowest or the L3- L4 position, that would be in excess of 10 million. That is my estimate. But it is of course not negotiated yet.

Got you. That's very helpful. Great. Thanks guys.

Thanks.

Thank you.

Thank you. Our next question comes from the line of Kevin Dede with Jesup & Lamont.

Thanks. Harald, Tom, can you talk to gross margins a little bit as they relate to the progress you are making in migrating to one platform? Seems to me that they came stronger than expected this quarter. Do you still sort of see a mid-30s ultimate target when you are completely off legacy products and completely outsourced?

The answer so that is yes. The current improvements are related more to cost controls across the board, whether it relates to logistics or overhead expenses and also negotiations with contract manufacturers and supply chain. So I think that we are not really seeing the total benefit of a moving to a single platform yet. So we would expect to see further benefit as we consolidate into a single platform and a hundred percent strategy.

And Kevin on the technology side, we see a tremendous progress in the movement of the roadmap as we said last year. They are moving from the five platforms to one platform and we are seeing tremendous progress there and delivering now against that plan what we defined last year. So that is actually very, very good. And you see it also on the features which we got some innovation awards and some customers are buying because we have some differentiation in features. So that is actually very encouraging how we rolled that out.

Can you characterize where you are on that roadmap versus the last time we had a chance to talk at the end of last quarter, and whether or not you think your targets might be a little bit higher than they were before?

Higher in regards to what?

Gross margin.

I would think, I would stick to the target.

The target, the difficult thing in our forward-looking forecast, of course, to know where the average selling price is going to be in this time frame but we are preparing ourselves to be in a good position even with pretty high levels of price degradation across the board. So depends on where one sees a curve on the average selling price, but we are confident in the 35% in the mid-30s range, even with some steep curve down curves on the ASPs.

Okay, Harald, you talked about your WiMAX share in India. Is there any way you can give us a feel for where your core business might be in -- in India, and how you might be able to leverage your position in with some of the carrier deployments there, given that area is growing so rapidly?

Yes. Absolutely. As I've said, when I came we had a strategy. We had renewed our strategy on the whole Asia-Pacific region, and the entry of course in India came with the acquisition we did in the beginning of the year, but of course we don't stop there, Kevin. That is an entry point with one customer. We have a cross-selling opportunity. We are having contracts for microwave and we are working on the, on one major, major tender, which would be awarded, I think, during the next quarter, which is more in the microwave side. So for me it would be a strategy is as WiMAX, maybe lead with microwave and services. That is somehow what we we are seeing right now there in these three areas, a cross-selling opportunities between these three. We are strong at the moment in WiMAX, but cross-selling into microwave. But another tender is purely microwave. So both areas we are pursuing there and of course also the service area which is a little bit more challenging there.

Okay. Would you mind giving us a little more color on the Juniper relationship? I know that Juniper has launched a new platform. I'm wondering if the software you developed can ride on top of that, and I also wondering if you shelved the ASN gateway that came with the Telsima deal.

Yes. I can do that. So first in this acquisition we did, we had, we got ASN gateway and I would say we completed that ASN gateway. We had plans to go in this direction because we believed there is for us a play with our products together to connect mobile microwave to the routing cloud in the network.

So when we were completing that ASN gateway, we didn't shelf that, we completed it let me put it this way, and in during the completion we had discussions with Juniper and Juniper had an interest in that and of course we had an interest in that.

What the Juniper interest was to have, in principle, the mobile backhaul space, access, or the mobility access for us and we had an interest to use the routing engine or the routing platform from Juniper.

So the relationship was formed on the new platform that is correct and we had that development program and we are part of the development program and now we are focusing on how do we bring WiMax together with our ASN gateway into BSNL because we deals together with the ASN gateway together with WiMAX in the books, right, and that is important. So that is our immediate focus to deliver the program.

For Juniper I think it is important because we can -- this ASN gateway functionality can be put in there and routers so they can package that together with this router platform, and I think they are very interested in that, given also the competitive impact on the situation. So that is of course their interest. Now we will see where we take that whole partnership. So we are in close discussions with them.

Can you give us any early indications on the impact you are having with that partnership in the marketplace, or is it too early to tell?

Of course we have immediate focus as I've said on the build-outs right now, and to get that started, they can use our software and of course we can sell our product. So that is in early stages and of course you saw the announcement from Juniper last week. So I think it's very early to see where we take that whole partnership. But it is an inspiring and it is also an exciting partnership.

Lastly, can you just give us some insight on the broader market US -- well, obviously you spoke to Verizon already, but can you give us an update on AT&T, and maybe your insight on competitive leverage at Clearwire given they've may have opened up a little bit?

Yes. On AT&T, I have to say there will be an RFP coming out this month, and that of course is very encouraging, right, Verizon I did already talk. So we see movement there and AT&T will come up with an RFP this month, and they are all hands on deck here. And so we see movement there in this direction. So Clearwire for me, we are in contact on all levels. Of course, there's all the time an opening, and we are very encouraged and very happy to see that they are starting their build-out and aggressively their build out, because that will help the WiMAX market. We are happy to see that build-out happening and of course we see Clearwire has all the time potential to supply and to take partners and all the time in opening.

Okay. Last question for me is on BT. I know that you are working hard with them. I'm just wondering if you can give us some insight on to how that is developing?

Yes. I was there by myself three weeks ago, and we have quarterly projects reviews with them. I'm happy to report that they are very happy and qualifying our products and as it is with a lot of tier 1 operators, there's a long process from award and contract assigning to get into their procurement system and then roll out into the field. So we are in, I would say in the 75% stage of getting from whatever award last year, to deployment and getting to their internal process. So I think we are 75% through, which is a normal situation, I learned that by myself, and I know it from the past, of course. All are encouraging signs.

Very good. Thanks, Harald for entertaining the questions.

Thanks much Kevin.

Thank you. Our next question comes from the line of James Faucette with Pacific Crest Securities. Please go ahead.

Thank you very much. Most of my questions have been answered, but I was hoping that you could prioritize for us the geographies that we should expect to contribute to the linear improvement that you are expecting. Should we expect faster contribution from India, then with the US and other developed markets coming in later, or can you just help us think about which markets are likely to contribute, and in which order to your expected growth as we go through calendar 2010 and beyond?

Yes, James. Very strong showing in the first quarter of Asia Pacific, and I wouldn't say only India. I would say also Philippines. I would say also Indonesia. I would say in that area Australia. So very strong showing there. Very good momentum.

I would even say there was a little slowdown in the Philippines where we had some build-outs with all the natural disasters there over the last quarter, that hampered a little bit the situation there. It was tough and a lot of service activities for us, not necessarily that our product is not functioning but just helping the customer and helping our customer to provide services, which is, which was very positive. So that is at the moment the star area, followed by North America.

We've seen North America now going in different areas, mobile operators are starting to move, state and local government business, utilities companies and enterprise is starting to move. There are two areas where we have a good momentum going and of course I mentioned already the areas which are at the moment a little bit in trouble, and EMER and in Africa, we are at the moment, we have both sector leaders here where we have intensive meetings in how we can help and how we can recover there with the customers together. So those are the two areas, the star others at the moment and the two troubled areas.

As we expect North America in particular to be coming a more important contributor, perhaps next calendar year, how important will the North American market be to your continued gross margin, just from a pricing and margin standpoint that is coming? First of all, and then my second question is specifically on Clearwire. What do you need to do either in terms of product or in terms of being the service, secure -- (lost audio).

I'll take the second. Tom you get the first part of it. Kevin has about Clearwire, and I see that as a followup question to that.

First of all what do you need to do, holding content, see how fast Clearwire is rolling out, and of course, show that we can do as we did all the time very well end-to-end solutions in North America and also end-to-end solutions in Asia-Pacific with some very big rollouts, very bigger at the moment than Clearwire has in India. So way bigger.

So that means a showing our capacity, our supply chain, our logistics, and our service capability and of course our product capabilities at work, and make sure that people know that. I think we are prepared. We have the right feature sets. We have the right product. We the right service people on site. We have the right logistics and we have the right supply chain to make sure that we can service a huge rollout from Clearwire. Make sure that we are constantly here, contact with them and see how the whole thing develops. So that I would say would be for me a very important one to consider there to stay engaged.

Yes. Answer to the first part of your question, North America is very important to the overall margin strategy. We continue to get, as everyone in telecom industry, we see North America as being a place where we can get good contracts, good payment terms, and good margins, an important part of the business ,and as we move to more IP devices in North America we expect to both increase customer cost effectiveness as well as our margins.

That's good. Thank you very much.

Thank you. We have time for one more question. Our last question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Quickly on the WiMAX, I want to clarify did you say WiMAX could be 10% of your fiscal 2010 revenue?

Yes. We anticipate what we have in the plan that from our 10%, from our fiscal year 10 revenue, 10% of that we are anticipating in WiMAX.

What percent of your first half revenue do you expect it to be.

First half of fiscal year?

Yes.

Maybe from that portion, 30, Tom, 30%?

First half of the year. So we see a ramp in the back half of the year so a lot of the 10% that is coming is going to be in the back half and the reason for that is that the rollout, a couple of the major WiMAX rollouts are in Q3 and Q4. So we see the revenue primarily in Q3 and Q4. So that is why in those quarters it will be more than 10%. In the year we expect it to be 10%.

Is that 10% predicated just on the urban one you have in hand or also predicated on getting the rural tenders?

No. We have not only BSNL right now, so we are shipping right now. It is Tata, it is Reliance, it is NaoTel in South Africa, it's TUT in Thailand, and there are some other customers. So it's not only BSNL.

Okay. That's helpful. Thank you.

Thank you. At this time, I'd like to turn the conference back over to management for closing comment.

Thank you all for joining us on this call and the webcast. Harris Stratex is planning to attend the Stephens fall investment conversation on November 17th in New York and the Needham conference in January, also in New York. We hope to see many of you at those events. Thank you and good day.

Ladies and gentlemen, that does conclude our conference for today. We thank you for your participation and you may now disconnect.