Aviat Networks Inc (AVNW) 2010 Q4 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, and 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 hand the conference call over to Cynthia Johnson. Cynthia, you may begin.

Thank you, operator. Good afternoon, everybody, and welcome to our fourth quarter fiscal 2010 earnings call. This is Cynthia Johnson, and I am joined by Chuck Kissner, Chairman and Chief Executive Officer and Tom Cronan, Senior Vice President and Chief Financial Officer.

During this conference call, we may make forward-looking statements regarding our business including statements relating to projections of earnings and 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 the filings made by the Company with the SEC. These can be find on the investor relations section of our company website which is www.aviatnetworks.com. Now I'd like to turn the call over to Chuck Kissner, Chairman and Chief Executive Officer of Aviat Networks. Chuck?

Thanks, Cindy and thank you all for joining us today. During the conference call today, I am going to provide a general overview first, and then Tom will provide a detailed financial review of our fourth quarter 2010 and some specifics on the restructuring that we recently announced. And then he will provide a discussion on the guidance from Q1, then I'll provide a update on our business status, market conditions and our short and long term strategy.

So first the overview. Our revenue at $116.3 million came in within the range of the revised guidance of $115 million to $120 million. While there were some issues around parts shortages and the back end loading of shipments, our demand activity was still relatively flat during most of the quarter. While we have seen some uptick in business in the last few weeks, our short term forward guidance reflects caution about demand in the first quarter. Non-GAAP profitability for the quarter was primarily affected by the legacy OpEx levels. Starting in the current period, we have begun to address our cost structure with the implementation of key actions from our previously announced restructuring plan. Tom is going to discuss the short and long term impacts of our restructuring plan in more detail during his prepared remarks.

Cash collections were again good for the quarter, so as we enter the most significant phases of our restructuring and the focus and acceleration of new product developments, we are beginning with a strong balance sheet. Before I turn the call over to Tom, I'd like to mention our views on the overall state of our industry. We are pleased, actually, to say the industry conditions seem to be stabilizing. In addition to that, end user demand for bandwidth continues to increase, even though capital expenditures are constrained. And finally, we are seeing new vertical market opportunities present themselves. So while our fourth quarter results were disappointing, these reasons give us cause to be cautiously optimistic about fiscal year 2011. With that, I will turn the call over to Tom. Tom?

Thank you, Chuck. Today, in addition to the detailed financial review, I will discuss the option of new revenue recognition standards, the decision to write off $71.1 million as intangibles and other intangible long term assets and the impact of the financial restructuring on our forward-looking model. Let me start with the review of the GAAP financial performance for the quarter ended July 2, 2010. Fourth quarter revenue was $116.3 million, and we reported a net loss of $88.8 million, or minus $1.49 per share. GAAP results included $83.5 million of pretax charges, primarily composed of the following, $71.1 million related to intangibles and other assets and impairment charges, $3.2 million was for the amortization of purchase intangibles, $4.2 million was for software and other impairment charges and $5.1 million of stock compensation and restructuring charges. These charges were offset in part by gains of $2.2 million from the sale of the San Antonio building and from the final settlement of the Telsima acquisition purchase price. These charges were substantially non-cash charges.

The decision to write off the intangibles and other long term assets was necessitated by the low market capitalization of the Company. The accounting rules require a periodic assessment of the goodwill intangibles. Given the low market capitalization over a sustained period of time, an independent assessment of the Company's intangibles and other long term assets did not support the book value and resulted in the decision to make the right offer. On a going forward basis, the reduction in the intangibles and the other long term assets will result in lowering our depreciation and amortization by $12 million annually.

Now I would 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. We will facilitate comparisons of our results across the reporting period. Please refer to our website for the complete GAAP to non-GAAP reconciliation tables at www.aviatnetworks.com. With respect to our balance sheet, we have had a positive operating cash flow of $6.5 million and ended the year with positive operating cash flow of $28.3 million and a cash position of $141.7 million. We delivered revenues of $116.3 million. This is down 14% year-over-year and down 3% sequentially.

Regarding the revenue recognition, as we discussed on the Q3 earnings call, we assumed that we would early adopt a new revenue recognition standard and assume that a significant portion of our deferred revenue would be released as a result. We successfully adopted the new revenue recognition standards ASU 2009-13 and ASU 2009-14 during the quarter. The adoption allowed us to recognize $7.9 million of additional revenue during Q4. WiMAX represented all but $1.2 million of the additional revenue that we recognized as a result of adopting the new standard. This is because the WiMAX business was previously accounted for under the software revenue recognition accounting standards which typically resulted in extended deferral. We expect the new revenue recognition guidance will provide better alignment between the economics of the arrangement and the related revenue recognition. The adoption of the new revenue standard did not affect the first three quarters of fiscal 2010.

By business segment, North America contributed $38.1 million of revenue in the fourth quarter, down 35.9% for the year ago period. The split between mobile and private orders for North America in the quarter was 42% mobile and 58% private. The international segment contributed $78.2 million, 3.2% higher than the year ago period. By geographic segment, Africa contributed $38 million in revenue, 16.2 higher than Q4 FY '09. EMEAR, which comprises Europe, the Middle East and Russia, contributed $17 million in revenue, 15.4% less than the year ago period. Revenue for the rest of the world was $23.2 million or essentially flat. In the quarter, one customer, MTN located in Africa, contributed more than 10% to our revenue. Gross margin was 31.1% in the quarter versus 37.1% in the year ago period and 31.1% in Q3.

Margins in the quarter were negatively impacted by the lower than expected revenue. The lower margins on the WiMAX revenue, which was all revenue from India and scrap in excess and obsolete charges of approximately $4 million. Approximately $8 million of the favorable margin impact in the year ago period was in the form of unusual amounts that did not reoccur subsequent quarters. Total operating expense were $43.2 million, or 37% of revenue. This amount compares to $43.3 million in the prior quarter. However, the OpEx in Q3 included $1.6 million more in agent commissions than Q4. The increase in OpEx resulted primarily from an increase in sales expense related to customer quoting activity, primarily in North America and increased market expense related to trade show attendance in Q4. Operating loss of $7 million for the quarter compared with operating income of $5.9 million for the year ago period. Our pro forma tax rate was zero compared with last year's tax rate of 4%. Net loss for quarter was $7.5 million compared with net income of $5.1 million in the year ago period.

Now, I will move on to the balance sheet. During the quarter, we paid down $5 million from our line of credit, notwithstanding that repayment, we are very pleased to report that we achieved a record gross and net cash balance. Including short term investments, gross cash was $141.7 million, net cash was $136.7 million at the quarter end. That balance compares to $140.5 million gross cash and $130.5 million net cash at the end of last quarter.

Operating cash flow for the quarter was a positive $6.5 million compared with $17.9 million in Q3. Accounts receivable decreased to $104.8 million compared with $115.2 million in Q3. And DSOs improved from 84 days in Q3 to 80 days in Q4. Company continues to focus on cash management across all areas, including accounts receivable and accounts payable. Depreciation and amortization of property plant and equipment in capitalized software was $6.1 million in the quarter. CapEx for the quarter, including capitalized software, was $5 million. Employee headcount was 1,380 in Q4 compared with 1,442 employees in Q3.

Now let me talk about our comparative year-end results. For fiscal year 2010, the Company reported revenue of $478.9 million compared with revenue of $679.9 million in the prior year. GAAP net loss for the fiscal year 2010 was $130.2 million, or a loss per share of $2.19 compared to a net loss of $355 million, or a loss per share of $6.05 for fiscal year 2009. Fiscal year 2010 net loss includes $119.8 million of pretax charges, primarily comprised of $71.1 million for goodwill and intangible impairment charges, $16.9 million in charges for product transition, $2.7 million for Harris transition charges and rebranding costs, $4.8 million for software and other impairments, $13.8 million amortization of purchase intangibles, $10.3 million restructuring, rebranding and stock compensation expense, and offset by $2.2 million in gains from the settlement of the Telsima acquisition purchase price and the sale of the San Antonio facility.

We understand that our current revenue levels from our legacy expense structure is too high. Therefore, we announced on August 12 that we are going to reduce total spending by $30 million to $35 million in fiscal year 2011 compared with fiscal year 2010. These reductions will effect both cost of goods sold spending, as well as OpEx. As we compare our business model with our competitors and peer group, we quickly determined that we had two major deficiencies, our margins and our high G&A expense.

Our restructuring intends to address both problems by focusing our reductions on manufacturing operations spending for near term improvements on margins and flat to increasing R&D expense for mid to long term improvements in the cost and innovation in our products that will lead to greater margins over time. In addition, we are substantially reducing our G&A spending this fiscal year as well as reductions in sales and marketing. In implementing those goals, we completed the outsourcing of our in house manufacturing to a Texas based contract manufacturer in Q4.

We announced today the closure of our RTP facility and the relocation of our finance function to our corporate headquarters in California. The closure will allow us to consolidate our development functions into lower cost facilities in Pennsylvania and New Zealand and to consolidate our US finance organization into one location, to increase efficiency and streamline decision making. Obviously, these types of actions will have short term disruptions and short term incremental costs, but as we model the OpEx, we would expect by the fourth quarter that we will have reduced the quarterly OpEx run rate by $6 million to $8 million. We will achieve this reduction by reducing SG&A by approximately 30% when comparing Q4 fiscal year 2010 to Q4 of fiscal year 2011. The primary focus of this reduction will be G&A. We intend to establish a quarterly run rate that will be profitable at the current revenue level and will allow us substantial leverage as we increase our revenue levels over time. We expect to complete substantially all of our cost cutting actions by the end of Q3.

Let me conclude with our revenue, margin and cash guidance. Our forward-looking visibility is still limited, as reflected by our book to bill last quarter being approximately 1. Until we begin to see more predictable booking trends from the majority of regions we serve, we will continue to provide a wide range in our guidance. Therefore, for Q1 fiscal year 2011, our current outlook is for revenue in the range of $100 million to $120 million. There continues to be lumpiness in the orders and concerns about our ability to ship all of our orders at the end of the quarter given current supply constraints that lead to our wide range of revenue and general conservatism.

Regarding gross margins, we have decided that as we move from manufacturing our own products in North America to 100% contract manufacturing, we will also transition our accounting treatment of our internal manufacturing operations costs. We have been including some of our internal manufacturing overhead in our product costs. We will now be expensing all of this internal overhead costs in the current period. This should lead to more margin predictability going forward and more focus on overhead costs. In order to make this change, we will take an approximate $6 million charge in Q1 that will impact margins and will reduce our inventory values by the amount of the charge. The addition in Q1, we expect to ship and take revenue on another significant portion of the WiMAX India contract, which will also negatively impact margins. Therefore, we expect short term margins will be at least 500 basis points lower in this quarter.

We expect gross margins to recover in Q2 and to approach our interim target levels by Q4 fiscal year 2011 of 32% to 33%. Our longer term gross margin targets remain in the mid-30s but will be dependent on the introduction of the next generation of products that is are beginning development. Regarding our operating margins, our target is to achieve low single digit operating margins by Q4 of this year as we achieve our OpEx reductions and our margins return to the interim target level. Our long range target remains in the high single digits as we achieve our longer term gross margin target. We will continue to focus on maintaining a strong balance sheet, but we will need to use cash the next couple of quarters to pay severance and for other restructuring related expenses. Now, I would like to turn the call back to Chuck to provide you with the market and business update.

Thanks, Tom. Before I get started here, I wanted to just make one note. Some investors have asked me why I took on the job of CEO of Aviat Networks about eight weeks ago. Maybe they were trying to make their own decision, I'm not sure. But I just want to tell you what my thinking was here. One is, our core business is sound. Secondly, even though there are challenging market conditions, it is clear to me that with appropriate management of our costs, our business can operate profitability and deliver consistent free cash flow. Third, we have highly skilled employees who can develop innovative new products, and that's necessary for the future. We have an attractive customer base that continues to stand behind us and wants us to be successful. And finally, we operate in a market segment itself that provides opportunities for long term growth. For all of those reasons, and I think also reinforced by how people at Aviat have responded to the initiatives that we have kicked off in the last few weeks, I am quite optimistic about the long term prospects for the Company.

So, obviously fiscal 2010 was a challenging year, not only because of the economic turmoil, but obviously because of our own internal issues. As a result of the market though, we did experience delayed purchases, longer sales cycles and limited visibility that affected orders. And frankly, the Company was slow to make the changes that were required by these conditions. As you heard from Tom, we don't really expect fiscal 2011 to be easy, but by the end of this fiscal year, we do expect to have made substantial progress with a series of initiatives that I will be discussing in a little bit more detail here and to have fully implemented the cost reductions necessary to operate profitably, even at lower revenue levels.

So, although we see fiscal 2011 as another challenging year,there were some signs of recovery, actually, in Q4. For fiscal 2010, for those of you who have been following, Africa order volumes, which were down 44% for the year in the Europe, Middle East and Russia sector which was down about the same, were the primary reasons we were down year-over-year. But in Q4, we saw the Europe, Middle East and Russia sector recover somewhat. We had strong sequential orders growth there, bringing it to the highest level for the year and primarily, this is the result of recovery in Russia after a couple of years of very minimal infrastructure expansion. We expect the recovery to continue, and we have actually received significant follow on business already in the current quarter.

We were also awarded significant business from a tier 1 operator in Europe after a long and difficult battle with our major competitors. But we won due to the strength of the complete product offering, including services, along with a track record of operational excellence and customer intimacy. That large -- the large Middle East project that was awarded a couple of years ago continues to roll out, and we made another equipment shipment in Q4. The British Telecom project that was awarded in the spring of 2009 continued to roll out in the fourth quarter, and we believe we will have gradual increases in the shipments over the next few quarters. Africa, though, continues to be weak with capital expenditure restrictions that continue to delay network expansions to meet the demand for higher bandwidth there. Operators have dropped their capital expenditure to revenue spend ratio, and they've asked their vendors for help in finding solutions to continue the infrastructure build out onto that reduced capital expenditure model. We are in discussions with them to review how to address this.

But we do continue to win major business, though, in Nigeria, Kenya, Ghana, Benin. We saw our first significant win in South Africa. The acquisition of Zain Africa by Bharti postponed Zain's planned purchases, but with the transfer of their assets to Bharti now concluded, we have received this quarter our first order from Bharti Proposal activity has been more active the past few weeks in Africa, so we are cautiously optimistic.

In North America, we had a significant sequential quarterly increase in bookings as we continue to grow both our tier 1 business there and our state and local government business. We received a letter of award for a significant stimulus funded project, and just received a week ago the first call off purchase order authorizing us to begin the field and engineering services to design the network. This is a turnkey project including site surveys, engineering, installation and commissioning, and we expect good revenue from this project in fiscal 2011. Also, we did recently execute the agreement with Verizon wireless, which makes our Company one of the approved microwave suppliers in support of their 4G LTE network build out. Asia orders were weaker in Q4, but that's mostly a cyclical issue. We are actually optimistic long term about Asia, having received orders from Australia with a tier 1 mobile operator from the Philippines with both the number one and number two cellular operators and from the leader cellular provider in Afghanistan. We also closed a significant follow-on order from the tier 1 mobile operator in the Maldives . The plan -- the business plan going forward, let me talk a little bit about that.

Tom and I have both spoken a lot about restructuring here today. This is just one element of the plan going forward. Our plan has both operational and strategic goals. From an operational point of view, there are three key goals. One, to align our cost base to the reality of what the size of this business is, second, to stabilize the top line with execution improvements in several key areas, including optimizing the product portfolio and third, to create more predictable results by fixing certain business processes in both our management and ERP systems. From the strategic point of view, our two main goals are to grow the top line, we are using the acceleration of technology innovation and focusing on credible growth areas in which we know we have core competencies. And secondly, to create a sustainable business model with the alignment of costs, new core technologies that we will be bringing in and channel development.

And to do all of this, we have examined our products, our markets, our facilities, our development programs and our operational flows inside the Company to insure that we are focused on the things that we do well. The things that we have -- we feel we have strong opportunity in going forward, and we have begun installing more effective management processes that run effectively with the speed that's required in a business of our size and the market that we are engaged in. We have been aggressive, obviously, about our cost reduction plans, but they are focused. As Tom mentioned, G&A is most dramatically affected in this play out. Our process design going forward has a general goal of reducing complexity in how we do business. We have reexamined all the products and markets and where the Company does business, and we've either already refocused them in the last eight weeks or are adjusting them to those areas that have the most promise, either in product or service area or geographic area.

We are working on our strategic plan right now, we are putting the finishing touches on this. We have been working with the board on this since I became CEO. There are a number of details we still have to work through, but here are some key components. Number one, we will be emphasizing the microwave area, which I believe is our area of core competency, by accelerating innovation and wireless transmission, including wireless backhaul, reducing the cost of our products and increasing the performance. Secondly, we are realigning the WiMAX business.

I want to just either remind people or tell them for the first time, if they haven't heard it, we believe WiMAX is a technology, not a market. And we will be using that technology to focus on the wireless transmission business rather than all of the markets that are touched by WiMAX, and we believe by doing that, that's much more complimentary to our business and our microwave products. And the third area is increased focus on our services business. This is a differentiator for this Company , by focusing on network operations and management network design and installation.

I want to re-emphasize something that Tom alluded to, that over the next two to three quarters, we will be making significant changes to the business, and there will be some disruptions likely. I also want to insure our investors we have experience in change management. Our employees fully understand that change is needed, not only to reduce costs, but to have a stronger and better run Company with a clear strategic focus in order to be successful in the long run. We are very confident here that by moving to a leaner, faster, focused organization, we will be more successful. Clearly, accelerating innovation is going be a strong part of this strategy going forward. And I want to remind you, the Company has a long history of game changing innovations and operational excellence, and it is clear that our employees are motivated to unlock these capabilities. So, we expect to introduce some new backhaul products in the third quarter of fiscal 2011, and we anticipate a number of new wireless transmission innovations being introduced in the first half of fiscal 2012.

I would just like to wrap up before we go to Q&A here. I want to thank our shareholders, our customers and our employees for their support and confidence in our ability to execute in these challenging economic times while we transform this business. I especially want to thank our employees who have embraced the need for us to focus change and execute with speed. We do look forward to reporting to you on our progress during the fiscal year. Although the business environment we expect will remain challenging, I'm confident that we will be delivering on the goals that I've outlined. Cindy, let me turn it over to you now for

Thanks very much, Chuck. That concludes our prepared remarks. Operator, you can go ahead and open up the lines for questions.

Yes, ma'am. (Operator Instructions). Our first question comes from Rich Valera with Needham & Company. Please go ahead.

Thank you. First, I would like to welcome you back, Chuck, and wish you best of luck in your new tenure here.

Thank you.

Thanks. And then first, I just wanted to make sure I understood the gross margin commentary. Tom, could you clarify if there was any of the type of benefit in the gross margin line that you were seeing from the Saudi program in this quarter?

A little bit. As you can see, our commissions were way down comparatively to the previous quarter. So, there was a small amount, but not very much.

Okay. I guess what has me confused is you mentioned, it sounds like there's $4 million of what sounds like one-time scrap charges. Was that in your pro forma gross margin, or was that backed out?

It was. It was in the margin.

No, if you don't have that next quarter, you would have gross margins pushing the mid 30% range. So what m a missing here? Why wouldn't margins move up pretty sharply here in the absence of these charges going forward?

We are intending to take another $6 million charge next quarter that's related to a change in accounting. So, that's the primary reason for saying that we expect our margins to be going down. We also expect to have the same circumstances where we will have a large amount of revenue coming through from our Indian WiMAX contract.

Okay. But then move to say Q3, again, without that $4 million charge and now without an accounting charge and presumably now with the full benefit of the Austin shut down behind you, I'm having a hard understanding why mid 30s isn't where the gross margin is as opposed to -- you talked about a Q4 gross margin of 32%, 33%, which doesn't seem to really jive with what you are talking about in the near term here. are talking about in the near term here. Am I missing something? Is there something else in the mix that maybe isn't obvious?

I think as we look forward, we make predictions about where we think pricing is going versus cost. And we, when we model, we are relatively conservative in our model of what we think is price the going to do versus our ability to do cost at the same rate. So I think that's probably the difference in our two views.

Okay. And if I could, just one more on gross margin. If you back out the $6 million charge next quarter, could you give us a sense of what you would expect gross margin to do on a sequential basis? Is it -- it would be up presumably?

Yes, it would be up, probably a 100 basis points from where we were this quarter.

Without the $6 million charge?

Right.

Okay, that's quite helpful. And then I wanted to clarify, on your discussion of OpEx and how that should trend over the next several quarters, should we be using the baseline in Q4 of $43 million and subtracting essentially $6 million to $8 million from that for the reduction in SG&A? Is that the right way to think about it?

Yes. That's correct.

Okay, that's quite helpful. And then Chuck, on the booking side, you commentary was fairly encouraging with respect to the improvements you are seeing in EMEAR, I guess with the R on the end for Russia and in North America. And I guess there was some weakness in Asia, but your bookings were near a recent low here of a book to bill of 1 with $116 million of revenue. So trying to reconcile those two items. Was Asia that weak that it offset some nice acceleration in EMEAR and North America?

Well, I think Africa was particularly weak. I think that tended to drag the whole thing down quite a bit. I think we're still struggling to see that one come back. I'd say that would be the biggest thing, and Asia Pac was weak as well. I guess what I was trying to portray there is there's -- the things that were key drivers of revenue being down in FY 2010, a couple of those things seem to be turning around right now. I don't think everything has turned around, but I don't think things have gotten worse. Some things have gotten better. I guess I am also somewhat influenced by when we refocused our efforts, we also brought the entire sales team in, and the input from the sales team and what I have seen since then in terms of forecast and results and so on are also pretty encouraging.

So, I know you don't want to talk about revenue beyond this current quarter we are in, but I will ask you anyway. Do you have any sense of where we could be looking at revenue as we exit this fiscal year? Presumably, you are looking for something materially higher than what you are forecasting for the first quarter, and just wondering if you are willing to take a stab at where revenue might trend over the course of the year?

Well, obviously we have a plan internally, and we have a goal for the board, but we don't make those projections.

Okay, fair enough.

But you knew I was going to say that.

Yes, no, I figured I had to ask, though. And then on WiMAX, want to try to understand what the realignment of this business means. You clearly have had some significant backlog from the BSNL win, and you are now delivering that. Reading between the lines, it sounds like you are going to, in some form, reduce investment on this product, and just wondering how we should think about future WiMAX revenue? At one point, I think it was seen as -- mainly the BSNL deal could be something approaching $50 million a year, and then you were adding other stuff on to that. And just wondering how we should think about that business going forward, given the new strategy for it?

Yes, I think it's -- we will certainly meet all of our customer obligations in that regard where we have those kinds of obligations for WiMAX, and we are aggressively finishing up the development that are required to meet that. But the economics of it for us and the focusing that it causes on other parts of the business it would be lucrative, we would say that we're probably not going to be adding to that part of the business at all. Also, want to re-emphasize that we do think it is the technology, so it will be increasingly more difficult to report this or to talk about this as a separate item because it's going to be used in a more complete wireless transmission solution that goes beyond just backhaul. So, I think it will be important to us, but it won't be, certainly a stand alone business, identifiable business out a couple of years from now. I would be surprised if we would be able to identify it that way.

Okay. That's helpful. And then Tom, if you could give us anymore color on what's going on with the big Mideast contract. Can you say if you recog -- it sounds like you recognized some revenue in the quarter, but less than you did in the third quarter. Can you give us a sense of how much is left on that contract?

So, we still have some backlog for product shipments in that contract which we would expect to ship during the first quarter and second quarter. And by the end of the second quarter, we would have shipped the product portion of that contract. That's our expectations, assuming we make is shipments in the second quarter that we are currently expecting. Then the remainder of the revenue under that contract would be services. So, we are definitely getting into the latter portion of that agreement.

Can you say if you expect similar levels to what you saw in fourth quarter in Q1 and Q2 or just give us any sense of the changing magnitude of that, as the PC or business over those couple of quarters?

If we are able to ship what we have in backlog, I should be back to Q3 levels in Q1 and Q2.

Okay. That's helpful. And then final question for me, you mention you expected to burn some cash as you go through this restructuring. Would you be willing to put any kind of bounds around how much cash you might expect to burn over the next couple of quarters as you do the restructuring?

Yes, I think our current view is that it is in the range of $10 million to $12 million over the first couple of quarters, and then we start to rebound from there, and we will be generating cash by the fourth quarter.

Okay, that's helpful. That's it for me. Thanks again for taking my questions, and good luck, Chuck.

Thanks.

Thanks.

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

Hey Matt.

Good afternoon, guys, how are you?

Good.

Good. We just kind of drilled down on gross margins, so maybe we can start off there. If you look at some of your closest peers, they're targeting and reporting gross margins, let's call it 35% and 40%. Can you just kind of walk us through what the differential is or what the delta there? Is it the WiMAX assets that create the delta? Is it the services business here? Is it from the legacy low cap business that drives us here? Can you walk us through the puts and takes there?

Yes, so I think specifically, when you're talking about some of the separately reporting companies, they have a much larger percentage of exposure to the revenue in North America, especially than we did this quarter. And so I think you can look at some of the regional difference, especially North America, and see that they're driving a lot of their margin -- if you were to ask them margin by region, they're driving a lot of their margin from North America. And so we have more of a balanced business where two-thirds of it generally is coming from non-North America sources and a heavy portion from Asia and Africa. So, I think it's -- geography would be the general driver. We have looked at our services business, and our services business is actually contributing at a reasonable level, it wouldn't be a drag on trying to get to the mid-30s. So, I think that as far as we can tell from our analysis, which we have been looking in great detail in the last couple of months, it's currently, the biggest differences between us and our competitor is really geography.

Okay, and then Tom, I think you mentioned in breakout, the $30 million to $35 million that you guys are looking to reduce this year, some of that would come out of cogs. What was the split there again -- I'm sorry, OpEx versus cogs?

What we said was on a quarterly comparison basis that you would see the OpEx comparison between Q4 of fiscal year 2010 and Q4 of fiscal year 2011 that there would be a reduction of $6 million to $8 million in OpEx.

And turning now to the guidance for the September quarter here, looks like we've got a couple of things here. I would assume that there's probably some recoup from some of the orders that didn't ship in the June quarter that you would probably recoup in the September quarter. On the other hand, we've got some component constraints that continue to be a bit of a headwind here. But maybe you can just talk to a couple of the other key programs that you'd then talk about. So, Uninor, BSNL, just talk about how the revenue's trending there. And then just talk about the level of, I don't want to say conservatism, but if we look backwards, our last three or four quarters, obviously we have come up short. So, I am trying to gauge how you look at this guidance relative to where we've been the last couple of quarters here.

Well, this is Chuck. There's a level of detail implied there that I'm not sure we can really get into, there's always puts and takes. There's always things that went from one quarter to the next, and you probably won't hear us talk as much about that going forward, about things that slip, because something like that happens every quarter. I guess my only general answer to the question is we understand that we've disappointed quite a few times right now, and we are building that into our guidance, we're building it into our thinking. There's no guarantees in life, but I guess you can just draw a conclusion from that. This is something we believe we can reasonably achieve.

And one final question for me, looking at the EMEAR region. Maybe this is a question for Chuck, how much of this is macro and how much of this is share loss to Huawei and perhaps some of your local specialists in the area. And what do we have to do and what's the timeline to being able to compete and sustain share and ultimately grow share in this region, which is obviously very challenged?

I think that region, I don't know that I -- of course, we don't win all the business we go after obviously, but from what I've been able to see so far, I haven't seen anything in terms of abnormal losses to competitors, including Huawei, at least not at this point. The big swinger here I think is Russia, and that's going to make or break it. We did have, eastern Europe business kind of dropped off a couple of years ago, and so I think we're past that right now. That was driven a lot by network build out and economic conditions. I'm now -- I don't see that coming back in any big way anytime soon right now. But I think Russia will be the swinger on this thing. So if you're talking about that region, I don't think it's because of share loss.

Okay, and just one more if I could. Started to jump around a bit, but over in North America, I think you alluded to the Verizon Wireless, you also alluded to the nice broadband (inaudible) win that you have in the US. How do we expect those ramp in the coming quarters here? Should we expect material revenues in the September quarter, or is this further out?

I think there will be revenues in every quarter, and my general expectation is like all large contracts. It tends to ramp up in a very slow manner, and I think that's what you have been seeing on these deals that we've had over the last couple of years. I don't see anything different here. Something that will build momentum over time, I would imagine it will really start to show up more significantly in the second half of the year and early in FY 2012. So, I think game plan here is just -- we have to just keep stacking these things up. I don't think we are going after the big swinger that's going to swing us one way or the other in order.

Alright, thanks for the clarity. I'll jump back in the queue. Thanks, guys.

Thank you. And our next question comes from the line of Colin Denman with D.A. Davidson. Please go ahead.

Hi, guys. Thanks a lot for taking my question. So, I just wanted to drill down here on the top line a little bit, having a little bit of a hard time understanding the dynamics in this quarter, or the reported quarter. Specifically in North America, I think that was one of the big reasons for the short fall last quarter, the $10 million there. And I think you guys mentioned about 50% of that was due to some push outs and about 50% of that was seasonally. So, I was kind of expecting if some of that deferred revenue came in this quarter that we might see a sequential uptick there. It looks like it was down a little bit, so I was just wondering, how did that differ from your expectations? And either did you see some of that deferred revenue either go away or were there some losses in other parts of your North American business that maybe contributed to that?

I think it was just timing issues, as we did get the revenue on the ones that were pushed into this quarter, but there's other things that push out to the next quarter as well. So, I think it -- a lot of it has to do with just the expectation of the ramp on a few of these deals, and what actually happened. And we're not perfect on projecting when orders will come in and when we would actually see shipments on them. So, part of it is just a normal sort of timing and the expectations versus what actually happened. I would say the other thing in North America is because of the disruption associated with moving out our factory and getting our supply chain going with our contract manufacturers that we are behind in the backlog much more than we would like to be. And we've been working really hard to catch up, and we expect by the end of this quarter we will have caught up to several of these orders that have been in process that we haven't been actually been able to fill, and that's really related to this transition that we've been going through in the last two quarters that we hope to really have completed and caught up to the demand by the end of this quarter.

Do you -- given that, do you think that the deferred revenue from North America region actually increased this quarter instead of drawing some of that down into your revenue this quarter?

It would have been backlog, not deferred revenue. But I don't have those numbers in front of me, so I would be guessing.

Okay. And just a little bit more generally on the top line, it just -- I am having a little bit of hard time connecting on the commentary with the result you reported, only because in previous quarters, some of the issues had been the accounting -- shift in the accounting mechanism and some other push outs. And it sounds like you shipped on the Mideast contract and some to BT, and you got about $8 million from the shift in the accounting standard. And so those all seemed like overhangs to me before that I thought would have helped you meet the range this quarter. And so are you -- is there any particular geography where you are seeing share loss, or is there any -- it sounds like the commentaries (inaudible) that I am wondering, given these things that went correctly, what was the put and take there that you think was the real difference between your initial expectation and the results?

So, I would say first in EMEAR, there was a substantially lower shipment to the Middle East contract this quarter than we might have anticipated, and it's moved out into Q1. So from Q4 to Q1, and we talked about that on the earlier question. And so that was part of the reason why Europe was down about the most -- the EMEA region was down the most of each of the segments. And then if you -- if we look at North America, I think, as you said, our expectations would have been higher, and we look across the board and everything was a little bit lower than we wanted it to be. So, I think you are talking $1 million -- here $1 million there for each of the regions, and when you add it up, the difference between what our going in expectation would have been and our ending expectation here.

Okay, thanks. And then, just transitioning to Africa a little bit. I know that one of the concerns with the Bharti and Zain combination there was that Zain had traditionally used you guys and there was some concern whether Bharti would follow suit, and it sounds like you got the first order there. Is that something that -- are you feeling pretty confident that you're not likely to lose that revenue stream there? Have you gotten any indication around that?

We're feeling pretty good right now, but there's no guarantees in life. We've had no indication now that we're going to lose that. I think issues there mostly revolve around MTN, the speed at which they're ordering right now. But the Bharti thing seems to be okay right now, or the Zain.

Okay. And then just last question from me. I don't know if you guys will provide this, but what kind of -- given your guidance and your backlog, what kind of turns business do you think you're going to need to hit the midpoint of the guidance this quarter?

Yes, so we don't generally talk about the turns, especially it has been complicated because of our transition. So, I think we will defer on that question.

Okay, well, thanks a lot guys, and good luck.

Thank you.

Thank you. And our next question comes from the line of Joanna Makris with Mizuho Securities. Please go ahead.

Hi. Good afternoon. I understand that you don't want to give too much specificity on 2011, but broadly speaking, do you think the company can grow revenue on a year (inaudible)?

We're getting a lot of interference on your line, Joanna.

I'm sorry. I understood that you don't want to give too much specificity on fiscal 2011, but just broadly speaking, do you think the company can achieve year-over-year revenue growth in fiscal 2011?

Yes, we think we can achieve, but we're not (inaudible) that number (inaudible).

Okay, fair enough. And just on North America, (inaudible) comment just generally on opportunities such as the smart grid or stimulus and potential contributions to North America revenues (inaudible).

So I think we talked about, in the forward-looking guidance about both Verizon and our stimulus win. So, those were the two that I would probably focus on in the next couple of quarters as being ones that would make a difference on the quarter. The rest of it is sort of our business as usual. And then the biggest impact last quarter, as we talked about, is really the factory transition and our ability to stay ahead of our order demand in North America.

And then just lastly, from a competitive standpoint, have you seen any change from suppliers such as a Nokia Siemens? Obviously, they've talked about (inaudible) initial volume shipments for the June quarter (inaudible) seeing anything from some of the larger incumbent OEMs from a competitive standpoint?

I'm sorry, Joanna. We're -- really, the static is so (inaudible) having trouble understanding what you are saying.

I'm sorry. Any change out of, in particular, Nokia Siemens? They did talk quite a bit about their flexi-packet and their positioning there.

Well, there's a -- everybody is introducing new products all the time, including us. And I guess that one we have known about for a long time, and I haven't seen much of an impact in the marketplace right now. Certainly, where they're selling an integrated solution, we really haven't been a participant in that, anyway. So, I think that's mostly what that is aimed at

Okay. Thank you.

Thanks.

Thanks, Joanna.

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

Yes, hi. This is Nathan Johnson calling for James. Just a few questions. Firstly, a more high level question. I want to get a sense for what you guys think has to happen for you guys to start seeing revenue growth again?

Well, first of all, we have to have a stable economic situation. That's absolutely critical, and especially in the areas of the world where we had some shortfall in FY 2010. So, if Russia continues to come back as it seems to be coming back, and if Africa business starts to improve, I think that will go a long way toward stabilizing and giving us a platform to grow. I think just longer term, we have a responsibility to generate products that have a great deal of value and are competitive. And frankly, we do have some work to do. I think we are in reasonable shape right now, but we have to really be ahead of people to really do well. So, we have accelerated some product developments in the Company, and we think that's going to be critical toward growing the top line. So those would be the two things.

Great, that's really helpful. And then wanted to clarify on the SG&A reductions, you guys did a very good job of explaining the run rates of Q4 to Q4. But how fast do you expect the SG&A reductions to take place throughout fiscal 2011?

So I think we said we would complete the actions by the end of Q3, so you'd see the full results in Q4. I think it will take -- it has taken us a little bit to get going, so you will see some modest improvement in Q1. You will see greater improvement in Q2 and then some incremental improvement in Q3. So, it will come through each of the quarters over the next three quarters. The biggest step function will probably occur in the end of Q2, so you will see it in Q3.

Okay, great. That's really helpful. And then last thing, coming back a little bit on the discussion related to product capability, just want to know what kind of lead do you guys think you have over competitors right now and what you think that your product lineup is going to look like versus competitors as you go through the cost cutting efforts? Obviously, we are concerned that you guys are able to stay competitive as you go through the cost cutting and the associated disruption of that.

Yes, again, to emphasize something that Tom said, we are being, I think strategic in terms of where we are cutting costs. And our relative spending to -- in R&D and new product introduction as a percentage of our spending is actually going to go up as a result of this. Innovation is an area where you probably haven't paid enough attention over the past couple of years or even longer. So, I think that we are feeling pretty good, actually, about our ability to generate innovation and new products. In terms of where we stand right now, I would say we're probably -- it depends geographically and by application, I think in some areas we are ahead. And I'm not trying to avoid the question, but the truth is in some areas we are ahead, some areas we're on par and some areas we're not as -- we are more behind than I would like to be right now given, maybe not today's business, but maybe six months from now.

So, we have taken certain developments and accelerated the priority of those this year. And when those are complete, I think we will feel pretty good about our competitiveness toward the tail part of this year, and it will be able to maintain a lead. Probably more importantly, we have got other technology that we have identified that we plan to implement that hit another wave of production introductions sometime in FY 2012. I think if we are successful in that, when you're dealing with this level of technology, there's no guarantees. But if we are successful at that, I think we will, again, pull pretty far ahead, as we have in the past.

Great. Thanks so much for taking my question.

Sure.

Thank you. Our next question comes from the line of Neal Waggoner with Stephens Incorporated. Please go ahead.

Hey guys, this is Neal. Thanks for taking my questions. Tom, just going back to the cost restructuring efforts, of the $30 million to $35 million projected cost savings, how should we be thinking about the allocation of cost savings between the (inaudible) closure consolidation, employee headcount reduction, transition to the outsource manufacturing and then reduced focus on WiMAX spending?

That's a big range of things to talk about. So, we will have, a very large percentage of the $30 million is going to come out of headcount reductions. Because as we look across the overall cost basis, about 65% to 70% of our cost is people. And we want to we want to be able to reduce the costs that we have to impact people, so there's going to be a large reduction in heads in order to get this cost reduction.

As between OpEx and operating expense, there was already a large reduction as we went from manufacturing our own products to a contract manufacturing model . That will continue, we will have some more savings on the operating -- manufacturing operating expense side. So on cogs, above the line of reductions. I don't have the numbers in front of me to give you a percentage splits between each of these groups, but the -- I think we really tried to outline where the margins would be and then where the OpEx would end up. And I think from a modeling standpoint, that's probably the most important

Okay, that's fair. And just following up on that, can you talk a little bit about how much you had been spending in the past on the WiMAX business, just in general?

Well, I think we had been saying that we were spending $4.5 million a quarter on the WiMAX business as a business. And you should expect to see a substantial reduction in that as we focus on that business, as Chuck has been telling everyone on the call on the technology side of it and fulfilling the customer requirements in the current contracts that we have.

Okay. That's helpful. Thanks, Tom. And then Chuck, just longer term, could you talk about your outlook for the services business? What percentage of revenue could the services business grow to, and what's the potential corresponding margin impact as that business continues to grow going forward?

I can't give you the percentage of the business right now, where it is going to be, because that's part of the strategic plan that we're finishing right now. But I expect the financial performance to meet what our corporate standard is. I don't expect it to be a drag on margins. That's one of our requirements. And the way it's running right now, as Tom indicated, I think we have a pretty good shot at that.

Okay, thanks, guys.

I think we have time for probably one more quick question, and then we will have to cut the call off.

And our next question comes from the line of Larry Harris with CL King. Please go ahead.

Hi, Larry.

Hi. Welcome back.

Hi, Larry.

Just a question, in the past you've emphasized linearity, and it is a little challenging in the current environment, but do you think that maybe going a few quarters out, there could be some reductions in inventory or receivables as a result of the efforts that you are taking?

Well first, thank you for bringing up linearity, because that was the mantra that was delivered the second day. And people are working really hard now to make that happen, so we have obviously a better running business, and we're actually pretty encouraged how that's being embraced right now. Its effect on the financials, what we are trying to push for right now is having the cost to deliver a unit of value to be much lower, and that's the main emphasis of this linearity. So we don't have excess capacity that's required to do things in the last month. That's primary focus number one. I think we will see some improvement in turns, partly because of that, but partly we are narrowing the product line down as we go forward.

I think this has been discussed on prior calls, but we are accelerating that as we go forward. I think that's going to have the biggest input -- impact on the turns. Receivables, I think were actually in pretty good shape on our -- receivables collection has been running really low, which is one of the reasons why the cash is as good as it is right now. That being said, even as good on the mantra of continuous improvement, you probably can assume that we asked for receivables a turn -- DSO improvement in the Company, but that's an internal objective.

Understood. Okay, thank you.

You're welcome. Thanks.

Thank you. And ladies and gentlemen, that concludes our question-and-answer session. I will hand the conference back over to management for any further remarks.

No further remarks. Thanks very much, operator, and that concludes the call.

Thank you.

Thank you.

And again, ladies and gentlemen, that does conclude the Aviat Networks conference call. Thank you for your participation. You may now disconnect.