Aviat Networks Inc (AVNW) 2010 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks conference call. At this time, all participants are in a listen-only mode. Later, we will open up the call for your questions. Instructions for queueing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference over to Mary McGowan of summit ir group. Ms. McGowan, you may begin.

Thank you for joining us today to provide financial results for the third quarter of fiscal 2010, which ended April 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 revenues, business drivers such as the transition to IP infrastructure, the timing and capabilities of new products, network expansion by mobile and private network operators, and variations of economic recovery in different regions. 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.aviatnetworks.com. Now I'd like to turn the call over to Harald Braun.

Thank you, Mary and good afternoon, everyone. Earlier this afternoon we issued a press release describing our results for the third fiscal quarter of 2010. For those who have not had a chance to read the 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 Q3, we achieved revenues of $120 million. On a non-GAAP basis, gross margin was 31%. Net loss was $6.7 million or $0.11 per share. By segment, North America revenue was $40 million and international revenue was $80 million, and our book-to-bill ended the quarter above one. Highlights from our third quarter include positive operating cash flow of $18 million and a record cash position of $140 million, a sequential rebound in Africa, although we remain guarded on near-term spending levels. [Uninor] a key Q2 customer within India is now starting to generate revenue for us. We are seeing encouraging customer acceptance of the IRU 600 product in North America, and in Q3, we laid the groundwork for an [unscheduled] transition to contract manufacturing in North America. I will provide more color on our strategy and our markets later in my remarks. Now let me turn the call over to Tom.

Thank you, Harald and good afternoon, everyone. Let me start with some general comments about the quarter. First, the revenue for the quarter continues to be disappointing. Revenue declined quarter-over-quarter in North America. The activity level from a bookings standpoint did pick up at the end of the quarter in North America but too late in the quarter to turn into revenue. On a positive note, Africa's revenue did recover substantially in the quarter. The margins were also lower this quarter. About half of the decline was caused by lower revenue and geographic mix issues, less North American revenue and more African revenue. The other half of the decline came from increased overhead and charges such as excess, obsolete and scrap. Finally, you will note that we took a number of reserves and charges this quarter related to ceasing manufacturing in San Antonio. These reserves and charges are as a result of our strategy to converge our products onto a single product platform by the end of this fiscal year. This consolidation will result in increased focus and efficiencies in manufacturing, sales, and support in fiscal year 2011.

Now for more specific information. I will begin with the GAAP financial performance of Aviat Networks for the quarter ended April 2. Third quarter revenue was $120 million and we reported our net loss under GAAP of $25.7 million or minus $0.43 per share. GAAP results included $22.9 million of pre-tax items composed of the following -- $16.9 million related to our Q3 announcement that we are ceasing manufacturing in our San Antonio facility and will be moving production of our products to a Texas facility, one of our US based contract manufacturers. Of these impairments, $7.9 million are pre-tax items primarily related to the provisions for access and obsolete inventory and $5.5 million are amounts for the impairment of our San Antonio building and certain manufacturing related equipment. The remaining $3.5 million of this item is related to inventory purchase commitments; $3.6 million was from the amortization of purchased intangibles; $1 million of stock compensation and restructuring charges; and $1.4 million was for rebranding and expense associated with transitioning from a Harris Corp., subsidiary to an independent Company.

Now I'd like to present the details of the quarter based on non-GAAP results. We believe the supplemental non-GAAP financial results reflect the basic operating results of the Company and will facilitate comparisons of our results across reporting periods. Please refer to our website for the complete GAAP to non-GAAP reconciliation tables. Although we began the analysis and work necessary to adopt the new accounting revenue recognition standards, we made a decision that we were not ready to adopt that standard in Q3. Therefore, we had an increase in the amount of deferred revenue on our balance sheet this quarter. We still intend to early adopt the new revenue recognition standards in our fiscal fourth quarter, subject to completing our analysis and having sufficient controls in place to administer the new standards. By segment, North America, in what is typically a seasonally weak quarter, contributed $39.6 million of revenue in the quarter, down 8% from the year-ago period, but down 20% sequentially from Q2. The split between mobile and private orders for North America in the quarter was approximately 52% mobile and 48% private.

The international segment contributed $80.4 million, 30% lower than the year-ago period, but up 10% sequentially from Q2. By geography, Africa contributed $37.7 million in revenue, 41% lower than Q3 fiscal year 2009, but 103% greater than or more than double the revenue contribution from the last fiscal quarter. EMER, which comprises Europe, the Middle East and Russia, contributed $22.9 million in revenue, 31% less than the year-ago period and 23% lower than Q2 of fiscal year 2010. Revenue for the rest of the world was $19.8 million, 8% greater than Q3 fiscal year 2009 but 20% less than the last fiscal quarter. Beginning with the first quarter of fiscal 2010, we eliminated the network operation segment as a separate reporting unit and consolidated the segment into our remaining two segments based on the location revenue as recognized. In the quarter, MTN Group, operating in Africa, contributed more than 10% to our revenue. Gross margin was 31.1% in the quarter versus 30.4% in the year-ago period and 36.3% last fiscal quarter.

Similar to last quarter, there were higher than usual agent commission payments. The incremental amount was approximately $2.7 million in this period, which resulted in higher OpEx and higher margins. On a normalized basis, the gross margin was approximately 28%. The lower margins this quarter resulted from two distinct factors. First, the geographic revenue mix included a lower level of revenue for North America where the margins are typically higher. And second, the amount of excess and obsolete inventory and scrap reserves was higher in the non-GAAP results than in the comparative periods. Additionally, the reduction in volume of our legacy products, combined with the higher start-up costs associated with the limited production of both the IRU 600 and the WiMAX products, adversely affected our margins this quarter. We believe that our margins are generally trending in the low [30s%], but there will still be some variability on a quarterly basis depending on the structure of the transaction, product and geographic mix, and a completion of projects.

As we stated last quarter, we may also have some margin impact in the near term for the transition from manufacturing certain of our product lines in our own factory to an all-contract manufacturing model. The date for ceasing manufacturing in our own facility remains the end of our current fiscal year. Total operating expenses were $43.4 million or 36% of revenue. This amount is flat when compared to OpEx in Q2 fiscal year 2010. The OpEx in Q3 fiscal year 2010 includes $2.7 million in additional agent commission expense, or $500,000 less in additional agent commission expense than Q2 fiscal year 2010. Therefore, [the] normalized OpEx increased $500,000 quarter-over-quarter. This increase was due to primarily seasonal factors. There was $800,000 in additional employer paid payroll taxes,including Social Security or equivalent payments when compared with Q2. There was approximately $300,000 in incremental marketing spending associated with the two large trade shows that we attended in Q3 fiscal year 2010.

OpEx in Q3 2009 was $43.7 million compared with the normalized OpEx of $40.7 million for Q3 fiscal 2010. We are still targeting reducing our normalized OpEx to the $38 million to $39 million range. Towards that goal, our quarter-ending employee headcount for Q3 was 1,442 compared with 1,519 in Q2 fiscal 2010. Most of the benefits of that reduction will not be seen until Q4. Operating loss was $6.1 million for the third quarter compared with operating income of [$4.4] million in the year-ago period and operating income of $1.1 million last quarter. The net loss was $6.7 million in the third quarter compared with the net income of $2.9 million in Q3 of fiscal 2009 and the net income of $800,000 in the last quarter. Our pro forma tax rate remained at zero as we are near our year-to-date break-even net income. Last year's tax rate for the quarter was 24%. Our cash tax rate is estimated to be about 2% for the full year. Now we'll move on to the balance sheet.

Operating cash flow for the quarter was $17.9 million. Third-party debt was unchanged at $10 million in the quarter. The cash balance on April 2, 2010 was $140.5 million compared with $126.4 million on January 1, 2010. The $17.9 million operating cash flow compares with $500,000 in negative operating cash flow in Q2. We again had extremely good collections in the quarter and the ending net cash balance of $130.5 million, that is net of the $10 million of debt, represents the highest ending net cash balance for the Company since its inception in 2007. Accounts receivable decreased from $133.3 million in Q2 to $115.2 million in Q3. DSOs declined from 91 days in Q2 to 84 days in Q3. We calculate this DSO number based on a 12-month rolling average. Our target for DSOs is 80 days. Depreciation and amortization of properties, plants and equipment and capitalized software was $5 million. CapEx for the quarter including capitalized software was $4.9 million. Inventory and unbilled costs in the quarter ended at $100.1 million, a decrease of $26.3 million compared with Q4 2009, and a decrease of $18.3 million compared with Q2 of fiscal 2010.

Approximately half of this quarterly reduction resulted from reserves taken for excess and obsolete inventory, and half resulted from operational reductions in the net inventory. Inventory turns for the quarter were 5.3 compared with 4.2 turns in Q2. We continue to look at our overall level of spending in the specific areas of those expenses. We will have some challenges this fourth fiscal again with manufacturing costs until we cease production of our manufacturing operations in Texas. We look forward to completing the manufacturing transition in Q4 and to eliminating the associated fixed cost. Our focus on cash management remains strong and will continue in the coming quarters. Now I'd like to turn the call back to Harald to provide you with a market and business update.

Thank you Tom. As Tom noted in his remarks, we were disappointed that our revenue came in at the low end of guidance. Although we anticipated a seasonally slow quarter in North America, there were some additional push outs coupled with ongoing slowness in other regions. Looking ahead, we are encouraged by renewed activity in regions that have been hit hard by the global slowdown. In addition to this new activity, we still need to see broader economic confidence in order to reach improved revenue levels. As we have always done in this environment, we will maintain our laser-sharp focus on the balance sheet. We continue to drive innovation, compete for [tier one] [audio skips here) around the world and focus on meeting our customers' service needs. I would now like to provide a business review of the quarter and the specific color on the regions we serve. Here, I also include some color for our long-term growth strategy that encompasses IP Mobile [Backhaul], our 4G WiMAX activities and our global network services.

In North America, our order rates are trending slightly ahead of 2009. We are finding opportunities within multiple business segments, including state and local government, enterprise, tier one carrier, and OEM. We are confident in our positioning towards the mobile backhaul segment ,but recognize that any expansion of [micro] specific backhaul is likely to develop more slowly as the focus is fiber first and on building up the core network. In our growth stimulus program, we began the initial phase of work on a major project in one of the Mid-Atlantic states. We expect to see orders associated with this project and others over the coming quarters as federal funds are distributed. Since these projects are turnkey and include engineering, site implementation and installation, revenue will lag orders. We do expect to see significant revenues from stimulus funded projects in fiscal year 2011. Thus far, over 100 infrastructure projects has been awarded, totaling $2 billion-plus in funding with more to follow. This covers middle mile and last mile projects. To date, the breakdown of stimulus funding has been 67% for fiber and 33% for projects using wireless, which is in line with what we had expected.

In addition, Aviat Networks has worked with a number of states in completing their applications for second-round funding. We will continue with our growth stimulus program which was launched one year ago, and believe we are well positioned in various projects due to these early efforts. The Africa region remains a large and significant growth opportunity for Aviat Networks. Over the last several quarters, pressure on customer CapEx has limited the growth and projected expansions. While this factor remains a challenge, there are still vast requirements for infrastructure build-outs and much needed investment in the region. After numerous years of growth, consolidation within the region is increasing as operators from other regions look to invest. This was recently seen by Vodafone purchasing the controlling interest in Vodocom. [It is allotted] wiring the remaining shares in Atlantic Telecom [Zane and Bharti], which is currently being finalized, and more recently, the proposed acquisition of certain [Orascom] assets by MTN. This transaction still has a number of hurdles to pass, but would make MTN the fourth largest operator in the world.

In March, Zane and Bharti reached agreement which we now expect to free up capital spending since the uncertainty of M&A activity is now resolved. As for the agreement, Zane is expected to concentrate on the Middle East an Bharti will obtain the African assets. So what is the takeaway from all this consolidation? The bottom line is that there is a positive indication that operators are investing in this region. It underlies our strategy that the developing markets are growth areas. During the quarter we saw strength from MTN in Nigeria, the Ivory Coast and Zambia. MTN has continued to follow its strategy of increasing capacity and optimizing its networks. We also saw numerous opportunities in other regions of Africa and with other carriers, including regional expansions and more WiMAX rollouts. Aviat Networks secured a large WiMAX 16e contract in the region as the demand for broadband in Africa continues to grow. As with any region that has strong growth opportunity, Africa has its challenges. We continue to see aggressive pricing from a number of our competitors as well as offers of financing. We remain optimistic for the future given our long-term customer relationships and proven track record throughout the continent for turnkey solutions and services.

Now let's turn to the EMER region, which comprises Europe, the Middle East and Russia. We recently concluded a new frame agreement for our WiMAX solutions with [Yiscotel], one of the top ranking providers of state-of-the-art communications solutions in Eastern Europe as well as a number of former Soviet republics.Yiscotel has previously deployed 12 commercial WiMAX projects based on our 16d technology and together we are now in the process of rolling out 16e systems in Russia with one major WiMAX service provider. This [deal] is important as it positions us for the upcoming rollouts expected after the Russian government releases its nationwide two-to-three gigahertz spectrum for wireless [port] and services. Russia was a region hit hard by the global economic slowdown and we are pleased to see tangible business opportunities now emerging. Poland, previously a strong area for Aviat Networks, is still in the midst of a very slow recovery. We are monitoring the situation and are ready to support our customers when CapEx spending returns.

In the UK, British Telecom has started to place orders for the multi-year contract that was awarded in the spring of 2009, to expand its global 21st century network footprint. Initial orders are for deployments outside the UK, while progress continues for testing, training and operational readiness for deployments within the UK. Our Middle East network deployment continues with uneven timing on the build-outs, which is typical for large projects. While the impact on revenue remains difficult to forecast, we are pleased that this large and complex project is proceeding along successfully. As I mentioned earlier, as a result of the Zane Bharti merger, Zane will now be concentrating on the Middle East regions. We also anticipate that this move will now free up capital spending since the uncertainty of M$A activities is now resolved. The Asia Pacific region continues to present growth opportunities with ongoing CapEx investment in several countries. In Q3, as anticipated, we received key purchase orders from PS& L in India and [Singtel Optos], the second largest telecom company in Australia.

Uninor, the tier 1 contract win in India which we announced last quarter, also began to look orders and generate revenue. On April 9, India's long awaited [auction] of 3G wireless spectrum started. The 3G options are currently on the way and the broadband wireless auction known as BWA auctions for two to three and two to five gigahertz will be held two days after the 3G auctions are completed. We are already seeing early revenue traction in India from our WiMAX business unit and we'll continue to compete aggressively. Australia, another key growth area for us, has a broadband initiative launched by its government. We are actively participating in this process and feel we are very well positioned, given our success with other key build-outs in the region. We have increased our investment in Australia to support this key growth area and to expand our footprint with this initiative. Now I would like to provide some [outlook with regard] to our long-term growth initiatives.

Our overriding product strategy for IP Mobile Backhaul remains focused on converging to a common IP-based microwave platform. This is based on the successful Eclipse family of products. The proportion of IP-enabled products that we now supply continues to increase. At the end of fiscal Q3 on a trailing 12-month basis, 63% of our product sales came from this category. This is up from 28% when we started tracking these metrics in June 2008. We are progressively enhancing the entire product platform with value-added functionality and new features including a higher speed [packet plane] in our [nodal] solution, adaptive quoting and [modulation], and added security features for both pay load and network management protection. We are receiving solid customer approval for the IRU 600 versions of the platform as we focus in filling out the full range of frequency bands to cover the Wi-Fi [area] of custom applications in North American federal, private, and mobility markets. The IRU 600 is designed for all indoor high performance applications ,and it's the key for our strategy of moving to a contract manufacturing model in the USA and lowering our overall cost structure.

In March we concluded an agreement with Eband Communications to market their 70-to-80 gigahertz backhaul solution worldwide. This enables us to offer solutions from four to 86 gigahertz, which represents the broadest range of products in the industry. This also reflects increasing interest on the part of our customers in higher through put products. Development continues on our StarMax radio access network products and related (inaudible) software solutions. Here, we are rolling out a broader range of frequency bands and increased service management functionality. In addition to meeting the needs of our customers in India, Russia and Africa, we have now added a US version of the product. In the US, we see applications into broadband stimulus-funded projects and some utility networks.

Now let me turn to our global network service business. This unit helps customers optimize their networks and has opportunities worldwide. We recently won a managed service contract in the Caribbean. Here we will assist the customer in establishing connectivity across their multiple island MPLS network. At the same time, we will streamline the management of their networks via our network operation center, or NOC, in Raleigh. As another example, we recently closed a multi-year contract with a tier one mobile operator in Nigeria. Here we are providing transmission equipment, spares and inventory management across the Eclipse and [True Point] networks. We will expedite on-site parts replacement and enhanced logistical site event tracking. This type of end-to-end service solutions are growing in demand and are delivering higher value to customers who we are seeking cost effective solution.

Let me conclude my formal remarks with comments on guidance. As we are all aware, the global slowdown has stalled the revenue momentum of companies worldwide, Aviat Networks included. Our strength as a global Company with operations in more than 130 countries is now subject to recovery in a number of those regions, not just one. As already discussed today, customer confidence and committing CapEx varies from region to region. Demand for build-outs on the part of tier one operators worldwide is there, but commitments to spend are being made with considerable caution. Until we see more predictable revenue trends from the majority of regions we serve, we will continue to provide a wide range in our guidance. That said, at this point in the quarter, we believe we have more visibility than we had in Q2. And our current outlook is for revenue of approximately $125 million. Given the lumpiness and timing issues with revenue recognition, there is still a plus or minus $5 million range for this outlook. We will continue to focus on our balance sheet and tight controls over operational spending. At this point, I would like to open the line for questions.

Thank you, sir. (Operator Instructions). Our first question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Thank you. I was wondering if you could talk about the deferred revenue that you had discussed last quarter. I think you said it had gotten up to around the mid-teens level. And it sounds like you're saying that that was actually increased this quarter. What's the disposition of that revenue? When do you expect to start recognizing it and seeing that actually positively contribute to the top line?

Yes, Rich so it did increase by several million dollars this quarter, and so it's still in the mid-teens or slightly larger than that now. And we expect that, given our schedule to adopt the revenue recognition new standards in Q4, that we would begin to be able to start recognizing some of that deferred revenue in Q4. We don't know exactly what that is yet because it will depend upon many of the facts and circumstances around those particular orders and deliveries that need to occur on some of the orders. So it's not quite determinable the exact amount, but the timing would start in Q4 and then it would go out over the next couple of quarters.

Okay. And then gross margin, you had talked about a target of the mid 30% level once you got through this transition. It sounds like based on your commentary of what's going on in Africa, that you would need a significantly different revenue mix to achieve that. Can you comment on what implied mix of revenue there would be, say North America versus rest of world, to achieve that mid 30% number, if that still is an active target?

Well, I think there was two things on the mid-30%, I would say. When we talked about the mid-30% target, we were talking about revenue levels that were more like $150 million per quarter. It's harder to achieve those targets obviously with less absorption of overhead cost at the current revenue level. So we would have to see some increase in the revenue. So that's the first point. The second point is, I think it does require a mix issue and a continued focus on trying to reduce some of the fixed overhead we have in the Company in order to improve the margins across-the-board, whether we're selling into Asia Pacific or Africa. So I don't know the exact number but it would imply certainly returning to more like the mid- to-upper 30s percents for North America rather than being in he low 30s% as we were this quarter.

Great. Just one final one if I could, on WiMAX. Harald, two quarters ago you had said you [felt WiMAX could be] 10% of revenue for the year and I think we are talking about probably a lower revenue number than we would have thought back then. But do you think WiMAX could still reach that level?

Rich, on the orders level we are tracking, I think, with the situation in India and Russia and also Africa on the orders level, I think we are tracking. On the revenue level, we have some challenges, as you can imagine, with the deployment of this new product. So it's the first time after we integrated the Company, which we bought. This is all new products, [these are new products] and this has some challenges to deploy, and then of course getting the customer acceptance. So there we have some challenges. But the good news there is on the order side, we are tracking.

Is there anything -- mean you mentioned challenges in deployment, which is different than just [RevRec]. Can you shed any light on what these challenges in deployment are? Are you having actual product issues in the field?

No, there are no product issues. I think it's tracking exactly what you anticipate here, with revenue recognition in principal, you have to get acceptance, right?

Sure.

And that is the situation. It's not that there are product issues. Right? You're bringing the product to the field and the products need to be tested and you have to get an acceptance for it. And it's not only new for us, it's also new for the customer. So that is for the 16e deployment worldwide. So that was BSNL, that's the first time they do that. So there is from site readiness to deployment to acceptance, there is some timing issue here. And then of course that has to do something with revenue recognition in the end of the day. But I don't see at the moment some product challenges I have to say in deployment of the 16 e together with the Gateway.

Okay, that's helpful, thank you.

Thank you, Rich.

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

Hi. Good afternoon guys. Thanks for taking my question. I just wanted to pick up on that last point, Harold. Your last quarter we talked about BSNL orders coming online at Q1 and perhaps contributing from a revenue standpoint. Can you talk a little bit about whether BSNL contributed to revenue in Q1 and maybe perhaps what that was relative to your expectations going into the quarter?

Yes. I think there is a combination of course of what we do at the moment with our project on adopting the new revenue recognition rules, and Tom can give you a little bit more color on that. But as I said, the orders are coming in. We are preparing ourself to adopt the new revenue recognition rules. And of course, we are preparing the [sides] for final acceptance. So from the technology side, we need to be ready and from the deployment side we need to be ready, and we need to be ready from the revenue recognition rules. Tom, maybe you could give more color.

So I think last time we talked about that we were targeting Q3 or Q4 depending on both the readiness of the product and our readiness to adopt the new standards. And we decided that we weren't ready to adopt the new revenue recognition standards and we still have some customer acceptance issues. So on both fronts, we weren't ready for the revenue in Q3, and so our expectation now is that that will occur in Q4. So it has moved a quarter and as we stated before, that deferred revenue is still sitting on the books.

Got you. So is it fair for us to think that whereas BSNL may have been a 10% customer Q1, it's now more like a Q2 10% type customer? And should we continue to think that the rural contract perhaps follows one quarter behind the urban contract?

Yes, I think so. So I think they have now all hands-on-deck to deploy their first project, and they are learning a lot, we're learning a lot, all contractors which are involved there are learning a lot. And I think we are [a quarter off]. And so the timeline from the next contract I think, I cannot say with certainty, but it will be trailing I think, three or four months later than this deployment here.

Okay, great. And then the Middle East contract, I know it comes in through a variety of different customers and I think in Q4, they added up to being a 10% customer. Was that up or down in Q1, and I guess how should we expect that to trend here in calendar Q2?

Yes, so it was down slightly. The best indicator of that I think in our remarks was the comparison between the $2.7 million in agent commissions versus the $3.2 million we paid in the previous quarter. So you can see as a percentage there how much it was down. So it was slightly down. It is a lumpy deal, and so we're obviously trying to get another shipment next quarter and we're in process on that. So we have an expectation that we will be able to do that again, but we obviously have to work that and get that done. And I don't want to comment yet on the size of that until we complete our negotiations with the customer.

Yes, and as I said in my remarks on the deployment and the rollout activities and in the interaction with the customers, I have to say I'm very pleased now, since it took us I think more than a year to get there and to do it. The activities are there, it happens, it's on the way and deployments are starting there, so that's actually encouraging to see and also on the working level and deployment level, so it's rock solid.

And just another thought there. So would that customer have been a 10%? I know, again, it comes in through different accounts. But would it have been a 10% customer in the quarter? And has anything changed in terms of the overall price tag? I [was thinking it had been] $60-plus million plus over three to four quarters. Has anything changed on the total value there?

Yes, we said last quarter so think it's fair to ask the question again. They would not have been a 10% customer this quarter. In combination with both of the companies, it was not quite a 10% customer. And I think we reset the total number a couple quarters ago, and we said it was more like $55 million versus $60 million, is our expectation of the size of the deal.

$55 million, got you. And then just one last question if I could. In North America, Harald, obviously in the press release you talked about North America as being one of the key drivers of weakness this quarter and that kind of stands in stark contrast, to fairly optimistic commentary last quarter. Can you talk about incrementally, what changed there in North America?

Yes, there were, I would almost say, some last minute various customer push-outs, right? So that was pretty unexpected and this goes from site readiness to customer acceptance, testing taking longer because of manpower issues and it goes -- it's not one customer, it's four or five of those. And that did add up. But the good news is that it is a push-out so it's not that they are gone. So it's in principal deployment, site issues, timing issues, which we're right on the border of the quarter.

Okay, great., I'll see the floor. Thanks guys.

Thank you.

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

Hi, thanks. Just a follow-up to the prior question, Harald. The sluggishness or the push-outs that you're seeing in North America, was that more on the mobile operator side or on the private network side?

It was a mix. It was actually a mix. I would say the majority was on the private network side. There were some state and local government situations and I think it was more -- the majority was on the private side, Steve. So I think some of them are resolved already, so it was hard on the line.

Yes. And I guess Tom, it sounded like you didn't record any revenue associated with BSNL during the March quarter. Were you able to record any of the prior deferred revenue balance that you had had in the December quarter? Or did these additional deferrals just accrue to the previous balance that you had?

On BSNL there was no revenue taken either directly or out of [defers]. On some of the other deferred revenue, there are some ins and outs, things that come in and things that go out. But the net was a positive increase in the deferred revenue.

Okay. And then I guess when you look at the guidance you provided for the June quarter, how do you factor in the deferred revenue balance versus some of the dynamics you're seeing out in the field. Can you help us get maybe an insight in terms of how you think about your ability to record some of this deferred revenue in the June quarter and how much of that might be in your June quarter guidance?

That's a difficult question because some of this non-standard deferred will happen regardless of whether or not we adopt a new standard. Some of it is dependent on the adoption of the new standards, some of it is dependent on customer acceptance, plus new standards. So it's a sort of multi-tiered question that's not the easiest one to answer. What we tried to do in setting up the expectation for the quarter is have a plan to be able to make it either way, whether the revenue recognition standard gets accepted or not . So we see a path to getting to the guidance we gave regardless of whether we adopt the standard or not. But it certainly is easier if we adopt the

And I joined a bit late onto the call and you may have covered this previously, but can you give us a layman's explanation, a 30-second layman's explanation in terms of what this new standard will entail and how adoption of that will sort of change your ability to -- or improve the ability to recognize revenue?

Right. From a high level standpoint, the two things it affects are the way in which you do revenue recognition when you sell something in a bundle which is if you're selling a package of services in combination with products, you're selling products together with each other, not as separate line items. You have to do revenue recognition generally today following a standard that looks at a residual method, and many times it requires you, if you didn't shift the entire bundle all at one time to defer revenue. Under the new standard, you use a different method of estimated pricing that, generally for most companies, you'll have the ability to recognize more revenue at the time of the initial sale even if you have some pieces of the bundle that aren't shipped, not always but generally. The other factor here is from the standpoint in the way in which 97.2, which is the software revenue recognition standard is applied to hardware. That standard, many times will result in deferring all of your revenue until certain deliverables are delivered. And under this new standard you're allowed to estimate the value of pieces and then to take a proportion of the revenue earlier than you would under the old standard. So those are the basic changes. That's why most people are seeing a little bit of pull-in that varies greatly by the past practices as to the impact and also specific contracts. But it depends a lot on the industry. Apple had a huge impact. We don't expect it to be enormous, but it will make life easier and I think more predictable.

And so when that's applied to the revenues that you've deferred over the last couple quarters, you might recognize a big chunk of that all at once upon adoption of this standard?

Well the last piece of standard that's important as well is that it only applies to new contracts that were entered into or substantially modified within the fiscal year that we adopt it. So part of why it won't have a huge impact necessarily in Q4 is because it wouldn't apply to all of the contracts that are out there, it would only apply to the ones that are new or substantially modified. And BSNL would be new or substantially modified. Some of the other ones may not be.

I see.

Okay?

Okay, that's it for me. Thanks guys.

Thanks, Steve.

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

Thanks, guys. Harald, I'm having a tough time reconciling the tone of business that you're seeing with the tone of business that some of your competitors are seeing globally. Where they have begun growing over the past couple quarters sequentially, you guys are still bouncing around at this [$120 million-ish] level. Can you just help me understand that?

Yes. I think, as I said in the guidance section there, we are acting in 130 countries and we had some good business as you know in Africa and also in some parts of Europe, in particular in the Eastern portion of Europe and in Russia. So the Europe region of the EMER region, had some substantial revenue contribution and Africa had some substantial revenue contributions. We don't see that compared to last year, so we see that they are still in recovery mode. And there are the other elements which some of our competitors don't have. We have really a substantial amount of tier one customers worldwide, and the spending right now on microwave is not there right now. And we anticipate that more towards the second half of the calendar year. So there are the fiber first or the 75% or 80% fiber build-outs versus 20% microwave build-out rules out there, and we see that worldwide. And the spending is just not -- on the tier ones not happening. So there are some explanations where we have some tough times in some regions in which we aer acting. So we need them in full recovery mode to get again from the $120 million to the $130 million to the $150 million ranges. They need, these regions in particular Africa, Europe and then North America, have to recover fully to get into this area again.

And so in the tier two business, how would you sort of describe the health of your tier two customers?

Our tier two customer actually in North America is a main contributor to the mobile operator percentage Tom gave in his remarks. So the tier two customers are really a majority contributor there, and US Cellular, for example, is a very good example for that. In the rest of the world similar, but not that massive. Canada, a similar situation there, cautious but spending. But not in the amount we would see for tier ones. We expect tier ones to spend more towards, as I said, towards the second half of the year. But this is a more solid contribution right now in the tier two and tier three range.

Okay, and then one other question. To get into that [mid 30s%] gross margin range, would that be a function of a resumption in growth in the revenues or could you do that even at these revenue levels?

I'll start and then I'll give it to Tom. First off, it's a function of revenue. Of course, we have to get to this -- and we're resizing the Company right now into the $150 million revenue. We need to get there into the $150 million revenue again,and I think it's exactly what I said before. The recovery and the spending level in the US has to increase with tier one customers in particular, and then in Africa it has to increase and the rebound in the recovery in our EMER region has to come. So as I said in the last remarks, Asia Pacific is doing well and did well in the last quarter. They were, this quarter somewhat flattish, but they had a good quarter last time. So we need North America, we need Europe and we need Africa to recover and the spending level to increase to get there. Tom?

Yes, I think that's right. There is a volume sensitivity on both the pricing for the TM and the absorption of the overhead that does make it volume sensitive. And I think we've said in the past $150 million a quarter is the number we're targeting to get to those margin targets.

Thank you.

Thank you. Our next question comes from the line of Joanna [Makris] with Mizuho Securities. Please go ahead.

Hi there. I just wanted to hone back in on the comments surrounding the North American business. If you look at -- it's roughly a $10 million sequential decline. If you had to put some clarity around that, how much of that do you think is seasonality versus the push-outs? And then if you think about potentially how much of that comes back in the June quarter versus over the next two to three quarters --

Joanna, this is pretty balanced, right? I would say you are right with the number, and I think that it is pretty balanced almost 50/50 in push-out and seasonality.

Okay. And then what's your view in terms of how much of that can come back in the June quarter versus more of a kind of two-to-three-quarter push out?

I said there is some -- we have some -- in the starting of this quarter, we saw already the push-out, some of the push-outs contributing so that's very encouraging. So there are real push-outs coming into the next quarter. So I think we can recover to a good solid booking number there. That's what we see, they have a good start ,and then can increase our revenue accordingly.

Okay, great.

So it's a good solid start for the North American team for the quarter.

Okay, great. Africa, do you think this quarter represents kind of a baseline run rate? I mean, do you think there could be volatility over the next couple quarters? How do you view that?

Yes, I think what we see here with our two main customers, right? MTN, they are in the closing activities. But MTN was in last quarter a good one. And the Zane activities, also this Bharti transition has impacted it a little bit. So at the moment it's a little bit of a roller coaster in Africa and up and down. It's very, very hard to predict there with two of our main customers having these activities going on. But there are some signs of hope in the biggest market which we're seeing there in Nigeria. So it's a little bit, Joanna, it's a little bit up and down.

Okay, and then lastly on another topic, one of your competitors mentioned some increased security clearances required now to get into the Indian market and that may have impacted negatively some of the Chinese suppliers. What are the dynamics going on there, and how does that change maybe the competitive dynamic for you or does it not?

Yes, that's correct. We're seeing similar signs that there are increased security risks and you have to do a little bit more checking on the customers, and we're seeing that also. At this point in time, it really helped us because in some areas of the country which they didn't allow some Chinese competitor, the vendors got smaller,right. And when you have not all that competition you have a better chance. So I would say it's helpful there but we still need to compete with others. There are very other aggressive vendors out there, but you are correct. We see the same thing happening in some regions. It's not all over India, but in some regions. I think close to the border regions they are having some security risk there and that is helpful at the moment for us.

Okay, thank you.

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

Hi guys. Thank you very much. This is Colin Dunman in for [Aloke]. I just had a quick question. I wanted to follow-up on this revenue recognition issue. I understand you're moving to the new accounting standard, and right now you're using the current old standard. I was just wondering if you could presume you've been using this same standard for -- going back in the history of the Company. And so I'm just kind of wondering, it seems that this revenue recognition issue is a relatively recent happening and I'm just wondering is there something that's changed in your business or the way that you have to get customer acceptance or your products that's causing this to differ from what I would presume you would have expected? Or what's causing this to happen, where maybe in the past it wouldn't have occurred that way?

Yes, that's a good question. There has been a change, and the change is related primarily to the WiMAX products. Because when we purchased that Company over a year ago, when we went in and looked at the products, we made a determination from an accounting standpoint that there was more than an incidental amount of the product that had software in it, and so we had to apply the 97.2 rules which did require us to defer more than we would under the rules that we're applying to our own products which were not under 97.2 because they were much more hardware based than the WiMAX products. And so there was a difference in the application of the standard between the WiMAX products and the traditional backhaul products, so that was a change for us.

Also, when you purchase a start-up company, you find that many times the terms and conditions that they put in place may not have been as rigorously screened as the ones that we would have put in place had we been in control at the time, and the way in which -- the gyrations you have to go through in order to fill all of the customer requirements were probably not as easily done as they would have been had we had the opportunity to actually structure the contract from the beginning ourselves. And so that's the other issue we found with some of the contracts that we inherited from the start-up company. So I would say it was the application of 97.2, the fact that it's a brand new product [would tend] that it would not be entirely complete because it's a brand new product so you do have those issues. And then the rigor which the contracts were negotiated.

That's very helpful, thank you. And then related to that, now that this has happened for a couple of quarters and it sounds like you're probably getting a better idea of this and also a better idea of how to forecast it, outside of the lumpiness that's inherent with the deferred revenue and all that, do you feel like your forecasting ability has improved to the point where you could say there's increased confidence in this quarter's revenue guidance as opposed to the last two quarters?

Yes. I think from what I said, the guidance I changed a little bit the tone there and said $125 million plus or minus $5 million. I think it's a little bit different tone than last time because I think we have a little bit more -- Over 80% of our revenue in the backlog so we booked that already. We have a much better book-to-ship visibility right now as we had in previous quarters. So that makes us believe that there is a good line of sight to the $125 million.

The only thing I would tell you about some of the contracts we've been continuing to go back and forth on, the biggest issue is the probably the fact that we still require a third party to give us an acceptance or a thumbs-up in some of these things. And so when you're relying on a third party to say yes to you, there's always this element of uncertainty. So we try and take that into account in our forecasting, but sometimes, it's difficult to gauge that whether or not it will occur within a quarter or not.

Okay, and then just one last one.I wanted to follow-up a little bit on Africa. It looks like Africa was very strong for you guys this quarter and it's a little bit in contrast to the comments that you made last quarter and this quarter again about customers coming in with pricing and potential financing. I think specifically [Huawei] is one of them. I'm just wondering about the sustainability of that and what you're seeing there.

Yes, of course this quarter, or last quarter, it was much better than the quarter before. We said that and we did indicate that also from orders and how we turn it to revenue. So that was a much better situation, but compared to where we were [a year], it's still not where it needs to be. We are used to a different kind of revenue number there. So in the meantime, of course, when you have in the region difficulties to get to capital or access to capital is not there, or the banking system is not there where it was a year ago or the oil prices are not there where it was a year ago and consolidation is happening, so we have all of these uncertainties. And then a competitor comes in with financing packages with banks of their country and combine that, you get the deal and you also get the financing package, it's very hard to compete not only for us. It's also very hard to compete for some others of our competitors, and that's what we're seeing.

A year ago, one-and-a-half years ago, we did all of the deals in Africa without financing. And since six to nine months, we have to require almost for all projects, financing. Because somebody else comes with the finance package along. So that's one big threat and again, that's not only for us, that's also for other of our competitors. Again, there are also ways to compete with that, and I think I did point a couple of them out in my remarks. We are very well established in Africa, have the relationship and also have the ability to put the products into action and deploy them. But it's very hard, it gets harder to harder to compete when somebody brings finance packages with them.

Thank you guys. I'll get back in the queue.

Thank you.

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

Thank you. With respect to the large Mid East contract, can you say when you expect that to largely be completed if you continue at your current pace?

Yes. I think as you saw, we started and we anticipated in the beginning a little bit of different revenue take by quarter and we said, I think at the beginning, three or four quarters that should be done. So we have now done that for two quarters. I think we will have another couple of quarters to go with that project. I think that will be done maybe in the beginning of 2011, mid-2011 latest. I think that would be my guestimate right now, Rich.

You say mid 2011, you mean fiscal 2011?

I mean the calendar year. So we have another two or three quarters, next four quarters to go. I think this is a timing issue. So I would say between two, three, max, four quarters.

Okay that's helpful. And just to circle back on the revenue for the quarter, I'm presuming you were budgeting for, say $130 million when you put that guidance out there and you came in at $120 million. Can you talk about where that delta was relative to where you budgeted for the quarter? Was it all in North America?

A major contributing factor, as you hear from the call here, is North America.

Okay. That's helpful. Thank you.

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

Thanks. Just one follow-up. Harald, when you look back, backlogs obviously have been over one now for three quarters, we've had push-outs in North America which means business is accruing there. BSNL is still in front of us, obviously you tried to pursue the accounting change in the current quarter. But yet the guidance is flat $120 million to $130 million sequentially. So can you talk about what maybe key swing factors are as to where you'd end up at the low end versus the high end? Is it BSNL? Is it the successful changeover to the new accounting policy? What are the key drivers there?

I think the key drivers, as we said before, are to get to the levels to North America which we are used to and then of course getting Africa back to a solid contributor, and then of course in the EMER region, which we have still some countries which are not fully recovered, but which were solid double-digit revenue contributors in the past. And I think these countries need to recover and I think that's one of the major contributing factors. So North America, EMER and Africa, I think this would be my take there.

But for the current quarter, the $120 million to $130 million guidance, again is there one or two key swing factors?

I think swing factors in this quarter is that the North American customers getting back, that the push-outs are getting in, and that we have also the backlog activities which we have accumulated that that will be pushed to revenue. I think we have a plan in place there. It's in principle in Europe, North America, that could be the big swing factors.

Great, thanks.

Thank you. Our next question comes from the line of Jay Albany with Scully Capital. Please go ahead.

Hi, guys. Could you just talk a little bit more about the growth rates you're seeing in your IP enabled products? Thanks.

You mean with regard to the 63%?

Yes, that was more of a composition of revenue. Could you talk about any year-over-year trends you're seeing in that portion of your business?

Yes. Let me answer that from what I'm seeing in the marketplace. Wherever we are, wherever we have RFP activities which are certainly there in the world, we see in principle only a request for IP products. But again, there's legacy [out there]. All the tier ones, they have legacy equipment out there and they want to migrate to a fully IP solution. There is not one RFP which has not that request. So I would say on the RFP side there's 100% request to get to IP, but then of course the request also how to migrate, how to get from their legacy TDM installed base to IP. So that is a clear trend. And when you see what they really deploy is that it gradually goes then from TDM to IP. So it's not that we have a lot of Greenfield deployments on fully IP, we don't see that right now. And when you have deals with big tier one customers, there is actually nobody from them that has that requirement, And when you see the British Telecom situation and see a couple of other situations which we have here in North America, it's very moderate, low IP adaptation right now. But the requirements for IP going forward over the next couple of years are all there.

Okay. I guess I just missed what you said. As you're tracking it as a percentage of revenue is it higher than it was say six months ago?

Oh, yes. I think I started when I came in, I think one or two quarters when I came in in April of 2008 I started these metrics and it was in the 28% range. And we caught up to the 63%. So that means that was really a shift -- and the product is capable of both TDM and also IP. But we track the IP adaptation of the products and there are pay [cards] we put into that system. So yes, that improved actually very much from where we started.

Okay. Just to be clear. I'm sorry, I don't mean to belabor this and I know there are other people on the call. But I guess I can go back and calculate it from your commentary [on the call] but the absolute number of dollars coming from IP enabled products as you're tracking it, it's higher now than it was six months ago or a year ago?

Yes, I would assume so, but I cannot tell you the number, what the dollar number is of that. But I would assume so.

Okay, thanks.

Thank you. I show no further questions in the queue at this time. I'd like to turn the call back to Ms. McGowan for closing comments.

Thank you all for joining us on this call and webcast. In the upcoming quarter Aviat Networks will be attending the following conferences, all of which are in New York. The Cowen Technology Media and Telecom Conference, June 2; the Mizuho Securities Next Generation Technologies Conference June 7; and the Morgan Joseph Best Ideas Conference on June 9. We hope to see many of you at those events. Thank you and good day.

Ladies and gentlemen, this does conclude the Aviat Networks conference call. Thank you for your participation. You may now disconnect.