Aviat Networks Inc (AVNW) 2011 Q1 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 questions. And instructions for queuing up will be provided at that time.

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference to Cynthia Johnson. Cynthia, you may begin.

Thank you, Operator. Good afternoon, everybody. And welcome to our First Quarter Fiscal 2011 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 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 IT 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 would like to turn the call over to Chuck Kissner, Chairman and Chief Executive Officer of Aviat Networks. Chuck?

Thanks, Cindy. And thanks to all of you for joining us today. During the call today, I'm going to provide a general overview. And then Tom will provide a detailed financial review of the first quarter of 2011 as well as the status of the restructuring that we announced last quarter. Then I'll come back and provide an update on our business status, the market conditions and some more information about the going-forward strategy.

So first the overview; our revenue at about $109 million came in about the middle of our guidance of $100 million to $120 million. Demand did begin to improve during the quarter, but we were constrained by operational disruption that we previously had indicated should be expected. And I'll speak to those later.

Order input was quite strong during the quarter. It contributed to a positive book to bill, of which actually would have been positive, even if we had recorded revenue at the top of the range.

Cash usage was significantly above our original projections. And that was due to the level of operational disruptions that affected inventory and, to a greater extent, our receivables.

As our shipping performance improves, that increased non-cash working capital should convert back to cash again. But, clearly, that wasn't our plan for the quarter.

The refocusing of our product development has begun to yield results already with the release of some new Eclipse features for the market and momentum on some additional enhancements that are underway.

In addition to that, our efforts to reduce costs in the product line are on track. Our -- while our wireless transition business, which includes the mobile backhaul business, is encouraging, we do continue to face challenges with our WiMAX product line as we work hard to satisfy both existing and new commitments. And, just as an example, WiMAX negatively impacted gross margins by about 250 basis points during this quarter.

In general, we're on track with our restructuring plan, but the number of operational issues that are, really, connected to the speed at which we're moving have been pretty high. That being said, we are making progress. And we're convinced that moving at this fast rate is the right thing to do for the business.

So, with that, I'll turn it over to Tom.

Thank you, Chuck. We have now completed the first full quarter of our fiscal 2011 restructuring plan.

In Q1, we made good progress towards our goal of reducing our year-over-year total spending by $30 million to $35 million. Operating expense was down $4.1 million sequentially. Spending in our manufacturing and operations group was down $400,000 sequentially.

In part, our spending reductions were accomplished by reducing headcount by 130 people, or 9% of the worldwide headcount to the level we had planned for Q1.

Part of this reduction was moving in-house manufacturing to a contract manufacturer in Texas. In the long term, this transition will reduce our cost and improve our margins. However, in the short term, this transition has proved very disruptive.

Although revenue for the quarter was in line with our guidance, we experienced significant manufacturing and delivery delays as a result of accelerating the completion of both the manufacturing transition and the systems conversions. We have finally completed the transition of our legacy enterprise resource planning, or ERP system, in North America to an Oracle-based system.

As happens in these kinds of changes, there are significant order processing issues which impacted order fulfillment in North America. These North American disruptions, as well as continuing worldwide component shortages, significantly affected the timing, geographic distribution and the mix of overall revenue.

Most importantly, our inability to make complete shipments significantly affected our collections in the quarter. We are making incremental improvements in our North American manufacturing process in the ERP systems in Q2. But we expect it will take us through at least Q3 until our manufacturing ability is sufficient to match customer demand.

Our second major restructuring element is the closure of our Research Triangle Park, or RTP, facility and the relocation of our finance function to California. The closure will allow us to consolidate our product development functions into lower cost facilities in Sylvania and New Zealand and to consolidate our US finance organization into one location to increase efficiency and streamline decision making.

We announced this closure in August and put a retention program in place for key personnel in RTP and have begun hiring the finance team in Santa Clara. To date, we are on track in finance, having hired half of the planned finance positions in our Santa Clara headquarters location.

As we previously indicated, we expect that there will be short-term incremental cost in Q2 and in the first half of Q3 as we add staff in both engineering and finance ahead of the RTP closure.

In addition, there is, of course, some risk in the near term of both disruption to the development schedules and to our financial processes as we relocate our finance function and portions of our engineering group.

By fourth quarter, notwithstanding the short-term incremental expense in Q2 and Q3, we will have reduced the quarterly OpEx run rate by $6 million to $8 million and expect to substantially complete all of our cost-cutting actions by the end of Q3.

The third element of our restructuring in Q1 was the sale of our NetBoss assets to a newly created, privately financed company. The new company was founded by our former NetBoss development partner and a private equity fund.

The NetBoss product line was struggling for the last 12 months from a revenue and operating margin basis. And we believe that it is in the best long-term interest of our customers and our shareholders to sell these assets to a company that will exclusively focus on developing and delivering these products to our customers.

We retained a license to use the NetBoss product within our network to operation center. We will continue to offer this service to our customers. The sale was immaterial, and we did not disclose the selling price.

Now let me review the GAAP financial performance for the quarter ended October 1, 2010. First, the revenue was $109.1 million, and we reported a net loss of $21.3 million, or minus $0.36 per share.

GAAP results included $11.5 million of pre-tax charges composed of the following; $5.6 million of restructuring charges, $3.9 million for the loss on the sale of the NetBoss assets, $1.1 million for share-based compensation expense and rebranding cost, $900,000 for the amortization of purchased and tangible.

Now I'd like to present the details of the quarter based on our 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 complete GAAP, the non-GAAP reconciliation tables, at www.aviatnetworks.com.

We delivered revenues of $109.1 million. This is down 9% year over year and down 6% sequentially.

By business segment, North America contributed $35.6 million of revenue in the first quarter, down 26% from the year-ago period and down 6% sequentially. The international segment contributed $73.5 million, 2% higher than the year-ago period.

By geographic segment, Africa contributed $23 million in revenue, 23% lower than Q1 fiscal year '10 and 39% lower sequentially. EMR, which comprised is Europe, the Middle East and Russia, contributed $28.7 million in revenue, 54% higher than the year-ago period and up 69% sequentially. Revenue for the rest of the world was $21.8 million, 7% less than Q1 fiscal year '10 and down 6% sequentially.

In the quarter, there was no customer who contributed more than 10% to our revenue. Gross margin was 22.5% in the quarter versus 33.3% in the year-ago period and 31.1% in Q4.

As we discussed on our last earnings call, margins in the quarter were negatively impacted by a non-cash charge of $6 million related to the removal of material overhead from the standard costs of our products.

We made this change because we're no longer manufacturing in-house. Now we are taking all of the costs associated with our internal operations organization, which supports our contract manufacturers each quarter. In the past, we put most of this cost into the product cost in inventory.

Margins in the quarter were also negatively impacted by the low margins in our WiMAX contracts [by] geographic and product mix issues.

As many of these factors that affect margins were specific to the first quarter, we expect our margins to recover substantially in Q2. Total operating expenses were $39.3 million, or 36% of revenue. This amount compares to $43.2 million in the prior quarter. The decrease in OpEx resulted primarily from a reduction in G&A and sales and marketing expense within the quarter.

Operating loss was $14.8 million for the quarter compared with an operating loss of $300,000 in the year-ago period. Our pro forma tax rate was 0%, as it was in the year-ago period. Our cash tax rate is expected to be about 2%.

Net loss for the quarter was $15.3 million compared with net loss of $800,000 in the year-ago period. Our gross cash was $107.8 million, and net cash was $101.8 million at the quarter end.

That balance compares to $141.7 million gross cash, $136.7 million net cash at the end of the last quarter. Operating cash flow for the quarter was a negative $36.8 million compared with a positive $6.5 million in Q4.

Our collections in the quarter were very disappointing. We anticipated that we would have a more difficult collection quarter in Q1 because we had such a strong quarter in Q4 compared to revenue. This, in combination with the fact that we're still generating a loss and spending more cash than we are collecting, let us to guide that we would use $10 million to $15 million in cash.

This guidance did, however, assume that we'd keep both accounts receivable and accounts payable relatively flat as we had in past quarters. We also assumed that we would use inventory in the quarter benefiting cash.

Unfortunately, due to more back-ended loaded shipments in the quarter and partial shipments to customers that proved not to be collectible in the quarter, our collections were more than $30 million lower than last quarter. This is reflected in an increase in receivables of $15 million on a sequential basis.

We also had a reduction in accounts payable of $5 million and essentially flat inventories after taking into account the net write down of $6 million in inventory due to the change in the application of our material overhead that we already discussed. We would expect that the increase in receivables and the reduction of accounts payable should be a benefit to cash in future quarters.

So on a balance sheet basis, we saw some overall erosion. But, generally, we had a large shift in assets from cash to receivables and a reduction in our accounts payable liabilities. This is not what we forecasted. And we expect to rebalance our assets back to cash over the next few quarters.

During the quarter, we entered into a new line of credit for $40 million with Silicon Valley Bank. This line of credit should give us more flexibility under our covenants than the previous line of credit.

As indicated earlier, accounts receivable increased to $120.5 million compared with $104.8 million in Q4. And DSOs increased to 94 days in Q1 from 80 days in Q4.

The Company has taken several steps to focus on cash collection in this quarter and to assure that customers are receiving complete shipments as early as possible to facilitate cash collection within the quarter.

Depreciation amortization of property, plants and equipment and capitalized software was $3.6 million. CapEx for the quarter, including capitalized software, was $2.3 million.

Employee headcount was 1,254 in Q1 compared with 1,384 headcount in Q4. As I stated earlier, the headcount reduction in the past quarter are consistent with our restructuring plan. And we remain on track to reduce the quarterly OpEx run rate to $35 million to $37 million per quarter by Q4 of fiscal 2011.

In doing this, 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 remain confident that we will complete substantially all of our planned cost-cutting actions by the end of Q3.

Let me conclude with our revenue, margin and cash guidance. Our forward-looking visibility is improved compared to last quarter since our book to bill was substantially greater than one. However, as we continue to expect internal disruptions during the restructuring, we will continue to provide a wide range in our guidance.

Therefore, for Q2 FY '11, our current outlook is for revenue in the range of $105 million to $120 million. While we generally expect top-line revenue growth, there continues to be lumpiness in the orders and concerns about our ability to shift all of our orders at the end of the quarter, given current manufacturing and supply issues.

We feel that it is appropriate to provide a wide range of revenue and caution in our guidance. We still expect gross margins to substantially improve in Q2 and that margins will approach our interim target levels by Q4 of fiscal '11 of 32% to 33%.

Our longer-term gross margin target remains in the mid-30s, but will be dependent on the introduction of the next generation of products that are now in development.

Regarding our operating margins, our target remains 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 operating margin targets remain in the high single-digits and modestly higher revenue levels. We expect that at a substantially higher revenue level, we will be able to achieve higher leverage, but correspondingly higher operating margins.

We are anticipating substantially better collections this quarter than in Q1. However, we believe that there will still be manufacturing and supply issues that will interfere with collections in Q2. That said, we expect that we will need to use $10 million to $20 million in cash this quarter.

Bottom line, we're encouraged by the progress in our restructuring, transitions from legacy systems and improvement in demand for our products. But we have ample reason to keep a conservative stance this early in the process.

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

Thanks, Tom. First, let me talk a little bit about the market. Overall, long term, we're now -- we're pretty optimistic. The industry conditions seem to be stabilizing, end-user demand for bandwidth continues to increase, mobile data usage is continuing to grow strongly with 3G spreading. For example, ABI Research says from now until 2015, data use is expected to increase at a CAGR of 42% in Europe and 55% in North America.

Beyond that, we see opportunity as mobile operators transition eventually to new technologies like LCD and that will push bandwidth demands higher and also increase the number of cell sites.

We expect the LCD roll-out to continue to gain momentum and to drive the need for capacity in backhaul. And as end-user demand for bandwidth continues to increase and networks expand, we're optimistic about some new opportunities for new products and services.

Now on our last earnings call, we indicated that demand was starting to firm up again in Africa and our Europe, Middle East and Russia region. And that was true, and as a result, total orders for the company were very strong in Q1 and that was driven by business out of Africa, Russia and the North American stimulus program.

Eclipse orders were up over 40% sequentially. And this is a positive sign for gross margin over the next quarters. In North America, our microwave bookings were sequentially flat, but we continued to migrate the tier one customers from the legacy TRuepoint clients into Eclipse. And as we previewed last quarter, we were awarded a significant stimulus funded project in the first quarter and we started the engineering work, finalizing the customer's network design. We expect the installation of that to commence in the third quarter.

In Africa, the CapEx restrictions that we talked about before, that has delayed many of the tier one operators' network expansions, eased last quarter, as we indicated we thought they would, and we actually nearly doubled bookings sequentially, specifically out of Nigeria, Kenya, Ghana, Benin, Burkina Faso, South Africa and Tanzania.

In the Europe, Middle East and Russia region, there was significant growth in the prior quarter out of the strength of orders from Russia, Poland and the Middle East and that was a 30% sequential growth in orders.

Some specifics on the EMEA region include the BT project that was awarded in 2009 and is now showing improved visibility, with approval for more significant quantities of the Eclipse product for delivery starting in the current quarter, Q2, and beyond.

This came about after many months spent on integrating our product and our network management system platform on the BT's network tools. We finally booked the first major order, which was a little over $2 million.

We also saw a return of orders in Russia and Uzbekistan, with our main customer in Russia, who is aggressively deploying 3G now. And overall, we're pleased with the strong start on orders in the EMEA region, but we need to get our delivery issues sorted out, obviously, in order to continue this momentum. And I'll touch on the delivery aspects a little bit later.

In Asia, we continue to see a steady demand for the microwave products and maintain the same solid level of business that we had in the prior quarter. On top of that, we received significant follow-on orders from one of our WiMAX partners in Indonesia. So in Asia, that resulted in a close to 50% increase in orders compared to the prior quarter.

Backhaul and other wireless transmission products in Asia, for Q2, looked solid as tier one operators are spending the balance of their 2010 budgets.

So let me touch on the operations issues that Tom and I both mentioned already. Operationally, we've obviously had major challenges since starting the quarter. We did make a decision, as I think we told you before, to finalize the acceleration of the system integration that had started way back in 2007, when we merged the companies.

And the ongoing delays in completing this process have greatly contributed to many of the issues that we've seen, especially over the past year.

And due to these ongoing issues, as well as the reductions in force that are -- that have happened and are coming, we're committed to achieving, we decided we had to complete this integration quickly, despite any risks. That's why we said last quarter that there was a likelihood for disruption to occur.

The challenge was that we believed there were order processing issues with the old legacy system that couldn't be adequately resolved unless we actually made the conversion. Now on top of this, there have been some industry-wide discreet component shortages, and a result, during the first quarter we suffered extended an incomplete shipment to customers that prevented the inventory reduction that Tom mentioned and increases in receivables.

We have been rapidly working through these systems issues and we're starting to see improvements now, but I expect we're going to continue to have residual issues through most of the current quarter as well. But we are confident we're going to get these long anticipated systems issues finally behind us.

The restructuring process is on track. As Tom indicated, we began reducing headcount from our plan and we started a major move of the finance function to California.

In addition, the merging and relocation of other functions is on track, so we do expect that we'll meet our Q4 spending targets that we provided last quarter.

Bottom line, we do expect, by Q4, Aviat Networks will be what we said it would be on the last call a leaner, more focused and innovative company.

In Q2, we do hope to see top-line growth return for the first time in four quarters. We also expect to return to cash generation later in the year, as we work through the current operational issues. We've completed putting together our internal strategic plan and we've rolled that out throughout the company now. And let me talk about three aspects of it.

The first is products. The second is our solutions and the third is financial performance. In terms of products, we are accelerating innovation in our wireless transmission and refocusing our investments on microwave backhaul.

I'm sure, as many of you know, we were one of the first companies to supply the capability to migrate to an all IP backhaul network and we've reinvigorated our developments in this area.

We began explaining our new long-term road map to our key customers last quarter, and this has been met with a very positive response. Our focus on being the best in all forms of wireless transmission, and especially in IP backhaul, seems to be resonating very well.

We did recently announce, you may have seen the release of a next-generation Ethernet switch card for the Eclipse nodal wireless transmission platform. This new product is a plug-in Eclipse card, it provides enhanced performance in the areas of port capacity, quality of service controls, traffic management and Ethernet services and contained switching.

The new card also introduces packet network synchronization features and it enables fully protected gigabit line interfaces. We've now successfully demonstrated this new product at the industry's largest annual carrier Ethernet interoperability test event that's conducted by the European Advanced Networking Test Center.

This was a big test and it included participation of a multi-vendor, synchronous Ethernet test, combined microwave wireline network. It also was working with several other vendors of non-microwave networking equipment. The product is beginning to ship this month.

We are planning to announce early, by next calendar year, a further major addition to the Eclipse platform and there will be other new product announcements behind that and those will be significant.

Secondly, in terms of solutions, we are expanding our solutions orientation, with networks - network operations management, network designs and installation. This is to further enhance our value proposition with our customers.

As Tom noted, during the quarter, we sold our NetBoss network management solution. We determined that we needed to direct our investments in network management to our core platform, which is called ProVision, as well as to other areas of the business.

Third, the financial performance. Obviously of critical importance. Our goal here is improving our performance by rapidly finishing the integration process, fixing the systems and other products and generating new, higher margin offerings.

We are committed to drive the costs of the business down, improving operational cycle time as we work through this transition. And obviously there are challenges in moving as quickly as we're moving, but we are going to get to a more effective business a lot sooner.

I just want to wrap up, before we go to the Q&A, and just say that the return to innovation and the operational excellence in the company are cornerstones of the strategy going forward. There is a lot of excitement in the company right now and a new sense of energy now that we're focusing on these traditional strengths and we're applying them to market areas that show good growth and opportunity for us to clearly provide value to the customers.

And just in summary, we are more optimistic about our future now and we'll continue to focus our efforts on executing our strategy against what we believe is a pretty good market opportunity in front of us.

So with that, I'll hand it over to the Operator for questions. Operator, can you now open it up?

Thank you, sir. (Operator Instructions). And our first question comes from the line of Blaine Carroll with Hudson Securities. Please go ahead.

Yes. Hi, Chuck. Hi, Tom.

Hi.

Hi, Glenn. A couple of questions, if I can. First of all, Chuck, could you talk about the order linearity during the quarter? Tom mentioned that shipments were back-end loaded, but what was the order linearity like?

Secondly, is there any risk of losing some of the orders that you received or some frustration on behalf of your customers that product isn't being delivered on time? And then, Tom, if you could talk -- or maybe just define, what you mean by gross margins will increase substantially in the second quarter? Thank you.

Okay. In terms of linearity, if you look at the raw numbers for orders, I think it's probably been, if not the most linear, one of the most linear quarters the company has ever had so far.

That being said -- so that was a big plus. I think you probably know we're pushing linearity in a number of fronts here right now, so that had a very positive impact.

That being said, when you look under the covers, some of the linearity was due to large orders at the front end of the quarter that aren't deliverable, that weren't deliverable in Q1. So if you look at what was deliverable in Q1, right, it was about -- it wasn't quite as strong as you might think.

As -- but, of course, that creates a nice backlog going into Q2 and that's integrating and that's one of the reasons why we're relatively bullish about growth going forward.

As far as customer satisfaction and how that reflects, I think we're doing a pretty good job managing the networks, customer networks. Obviously there's some dissatisfaction, but we've been juggling things, I think, relatively well.

I think the issue here is, if we -- if this goes on for too long, then it's really hard to get new orders. Because we haven't delivered what's already due. That customer is unlike to put those new orders up.

So I don't think this can drag on for too much longer. I think the plan that we have in place and what we've actually been able to accomplish so far this quarter I think we're feeling good, relatively comfortable at this point.

Yes, so the other question was what did that mean, when I said substantial improvement in gross margin.

I think we obviously talked about the one-time issue that substantially affected margins. So that won't be there. So we won't see that improvement. And then we -- our current outlook, the geographic and product mix is better in the quarter. So we would expect that the margins would be 30% or greater as we look at next quarter.

Okay. And then one last one, before I pass it on. Chuck, as you're looking at the market, can you size what you think your addressable market is right now and maybe the way you segment the market. Whether it's in Ethernet or voice, backhaul versus core, something along that line?

Yes. I'd say the backhaul part of that market is in the $4.8 billion to $5 billion range. And then we -- what we do, usually, internally, is we cut that in half. And we say that, just roughly in half, and we say about half of that is truly an addressable market for us.

Because there's significant parts of the market that are locked up in integrated systems sales. And, of course, we could try to battle it out, but it's not really a good use of our resources. So that's the backhaul part.

There's probably another billion on top of that, but I would call it non-backhaul wireless transmission market. So that would be things like private networks and the enterprise business and things like that. I'd say generally that is accessible to us.

In terms of segmenting, what that would say is that about 80% of the market, we would say, is mobile backhaul right now. And the other 20% is everything else.

Does that answer your question?

Yes, it does. Thanks and good luck.

Okay.

Thank you.

Thank you. Our next question come from the line of Barry McCarver with Stephens. Please go ahead.

Hey, good evening, gentlemen. Thanks for taking my question.

Sure.

Thanks, Barry.

It looks like Africa was -- just regionally, it looks like Africa was pretty lumpy in 1Q versus the previous quarter. In terms of the pick-up in revenue you see for 2Q and potentially the rest of the year, can you give us an idea of geographically where you think that's coming from based on your bookings?

Yes. I'd say right now the -- Africa is strong. EMER, a lot of that driven out of Russia is strong going forward. Those would be the two big ones I'd say.

Okay. And then other question is, when you talked about net margins improving a little bit later in the year, I think you said up to low single digits, any of that coming out of research and development? Or, would you expect given what you're doing with the products there that that could continue to be at a higher level?

Right, so I think when we talk about the operating margin, there's two elements. One is some margin -- some small improvement in the gross margin, and that's driven by cost reductions on the operating side as well as increasing revenues in our forecasts.

And then, the biggest pick up in the operating margins is from the OpEx reductions. So, it's all independent of new product introductions. And then when we talk about our long-term model, getting to high single digits in higher gross margins, that would be dependent on the engineering efforts and coming out with new products.

Okay, great. Thank you.

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

Thank you. I was wondering if you'd be willing to put any color around substantially when you talk about a substantially positive book to bill. Are we talking kind of 1.2, 1.5? Just any kind of range around that would be very helpful.

Yes. I think we tried to do that by saying that we've come in at the top end of the guidance, which was 120. It still would have been positive book to bill.

Okay. That -- that's --

It wouldn't have been marginal, but it would have -- and it would have been still substantially greater than (inaudible)

Great, that's --

We don't -- because we don't actually give out orders numbers, anything more than that would be the same as giving out orders numbers.

All right. That's helpful.

Okay.

And, Chuck, last quarter in response to a question you said you thought you could grow the top line this fiscal year versus last year. And given what you're forecasting for the first half, it looks like you'd need to grow the second half by about 15% relative to the first half, and I guess that's in the face of what I think it will be a pretty significant roll-off of revenue contribution from your big Mid-East project.

So, I guess first question is do you still think you can grow overall revenue this year? And if so, sort of what are the drivers in that second half that help offset the Mid-East project rolling off?

Okay. So, just to be -- now, I want to be -- speak clear on this. It's -- I believe -- we can look back through the transcript, but I think the question was is it possible that we would have growth year over year. And I said, "Yes, it's possible."

But -- so, it -- I wouldn't want to -- given where our sales went to over the past year, I think that would be a -- it would be a tall order to grow for the whole year. But it's possible, because we're seeing a lot of strength in demand.

I think right now we're just focused on getting cost out and getting the top line growing throughout the year so that we end -- so we have a pretty good growth pattern. So, I don't know what that rate is going to be right now. It's dependent on a lot of things. So, that's how I would characterize it.

How much is the conviction that you can grow second half over first half? You'll be -- obviously, you'll have these operational issues hopefully behind you by then, maybe a better bookings trajectory. But again, you will have the Mid-East project rolling off. So, I was just wondering if you'd be willing to say if you think you can grow the second half revenue versus -- over the first half?

I think that the best I could say right now is looking at the deals in process and our assessment of the probability of closing, I'd say right now our confidence is reasonably high that we'll have growth second half over first half.

Great.

And part of that is driven by some of the products, because we are introducing some new products, some of which we're obviously talking about to customers right now. So, because they're seeing a roadmap again about where we're going in the backhaul area, that tends to increase our effectiveness [of the decision of quality] management.

Okay. That's helpful. And, Tom, I think we've been looking for an actual cash burn associated with this restructuring in the very low double-digit range, I think $10 million to $12 million or $15 million all in. And it looks like through the first two quarters of it will be about $50 million of cash burned.

Now, I gather from your comments you expect to recover much of that through working capital recovery. But, do we -- I guess the question is, do you still have that same estimate of actual cash burn? And if so, what's the timeframe for recovering the working capital that's going to get sucked up these next couple of quarters?

Right. So, I think when I was talking about my estimate of restructuring cash burn, but specifically the cash we would use for payments of employees for severance and other cash payments that were associated with closing buildings, liquidating assets, not the -- while we were still on Q1, which was really a lowering of collections because of the disruptions of the restructuring.

So, as it relates to the severance and other cash restructuring costs the answer is, yes, it's still in the low double digits. And this cash loss is more related to both the operating loss in the quarter and the fact that when we usually generate a fairly positive working capital we weren't able to do that this quarter because of all the disruptions, and we saw some negative working capital on the quarter. So, that's why I think it's recoverable and we'll see better performance as we go quarter -- as we go forward.

Okay. And one final one from me, just on the broadband stimulus, I know you mentioned you had one particular order you're working on there. But, would you be willing to give any estimate of how significant a factor that could be in terms of either bookings or revenue in this fiscal year?

So, I think the bookings we had talked about in the past were in the $15 million to $20 million range is what we said. On revenue, that would be very dependent on when we start the project and what the rate of acceptance is and deployment in third and fourth quarter.

I guess I would say right now that was what we've said in the past, and that's probably right. It takes time to roll these out. We're probably on the high side and beyond in terms of what we've booked and what we have in some terms of visibility right now so that I think it's going to be higher than those numbers.

Okay. And I'm sorry, one final one if I could just with the WiMAX, you mentioned a 250-basis-point hit to gross margin in this quarter. What was that? Is that -- is this temporary? Should -- what should we think about the WiMAX impact going forward?

Because of the way the contract we have in India is structured, we have to be conservative as we take our revenue and our margin. And a portion of the hit what we had is because we have to reserve more margin against the deal than revenue, and so that produced a negative margin this quarter.

And, on an ongoing basis going forward, it will be probably zero until we release all the contingencies under the contract. So, it will -- as we ship under that contract, there will be some impact to the overall margins in the quarter because it won't contribute any margin until we get to point where we can release the contingencies, which now looks like it's still several quarters off.

Okay. Thanks, for that.

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

Hi. Good afternoon. It seems like coming out of last quarter you were a bit more optimistic about trends in North America. You saw some sequential increase in bookings, and I'm wondering why kind of the flattish revenue. Was a lot of that attributable to the manufacturing issues? If you could comment a little bit on the demand outlook in North America?

Yes. I think that's very perceptive. Some -- a lot of the issues that -- we had two kinds of issues. One was around the global component supply, and that affected radio shipments so that was a -- that affected North America and the rest of the world.

The other side of it is a lot of the systems convergence around legacy deliveries and legacy systems. Obviously, because most of the legacy stuff is North America-oriented it affected North America more than others.

So, a lot of this is non-radio parts. It -- the -- what we call OEM parts, parts that are necessary to complete a complete installation where we're more likely to do that in North America. So, that constrained revenue in North America more than in other places around the world.

Okay, thank you.

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

Hi. It's Ilya Grozovsky. I had a question about the cash. So, what with the cash at about what $108 million, a little bit over $100 million at the end of the quarter and your guidance of using about $10 million to $20 million in this quarter so it'll dip, obviously, below $100 million, what level of cash do you feel comfortable with? Or, more importantly, what level of cash do your customers feel comfortable with, your level of cash, do they feel comfortable with? Thanks.

Yes. So, I think we've said traditionally we like to keep our cash balance around $100 million when we've been asked in the past what -- whether we would use our cash to buy back shares or other types of -- uses of our cash.

So, I think consistently, we do feel like $100 million is about the right number, so getting below $100 million makes us want to take actions to try and increase that cash balance, which is what we're doing. So, you'll see us aggressively try and recover back to $100 million, because that's where we feel we need to be in that range.

We don't need that to operate. That is sort of a comfort level for both suppliers and customers, and we can operate at -- very substantially below that number. But, it is more of a comfort level.

Okay, thanks.

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

Hey. Good afternoon, guys. A couple of questions, Tom, just to clarify, so it looks like gross margin you're looking to snap back to 30-percent-plus in 2Q and we should still get back to that 32% to 33% intermediate target by 4Q. Is that correct?

That is correct.

Okay. And then OpEx, how should we expect that to stair-step? I know you're still targeting that, call it $36 million in 4Q. Should that come down evenly over the next couple of quarters? Or, any sense as to how to think about the step-down?

Yes. So because of the increase in personnel, before we can do the further reductions we're expecting, offset by some other reductions in other functional areas that it's going to be relatively flat perhaps even to slightly up next quarter.

And then Q3 should come down a little bit, and then the big reduction will be between Q3 and Q4 as we release the employees in RTP and finish the other cost-cutting reductions in Q3. Then, you'll see the benefit in Q4.

Okay, got you. And when you look to -- you talk about a long-term target of 35%, and I think you mentioned you can get there at modestly higher revenues. What's the bridge from 33% to 35%? Is it just the new products ramping? How much more revenue do you need? I guess, where do we get from 33% at 35% if, again, we're exiting the year with some of the new products up and running, any thoughts there?

We've gotten a little behind on the cost curve here on these products, so basically it's the new products that we've got under development right now. We're pretty comfortable about getting much higher margins as a result of that. (inaudible)

(inaudible - microphone inaccessible)

It's fairly straightforward development. It just takes time.

Got you, and there's two more if I could. I guess coming back to the prior question on North America, it sounds like your large tier one customer has pulled forward some of the demand there and, I think, sounds like they're moving forward pretty nicely there.

Have some of the interruptions here prevented you from capturing some of that upside? And is there any risk to lost opportunity there? I guess, can you talk us through that a little bit?

I think so far we've been fine. As I said, if this goes on for too much longer, it clearly will be some lost opportunity. I think right now the issue is we do have longer lead times than we'd like, and we -- some of the business we get is opportunistic.

I think some of that opportunistic business, that would not be generally tier one. That's been tough to go after. But I think, based on the schedule of recovery we have right now in terms of the tier one stuff, I think we're okay.

Got you, and just one last one if I could, Chuck. When you look at top line growth, obviously we've got new products coming next year and that should be a driver. Is that enough? Is there anything else that needs to be done in terms of channel strategy, in terms of sales force? I guess, is there anything else on your mind to help return to deposit trajectory in the top line?

I think we're much more dependent on liquidity in the global markets and the -- what the market demand is more than anything else right now. So, I think our execution plan is pretty clear right now. I think we're in good shape. We have rationalized our channels in the sales force.

I think long-term we have another strategic issue because we're developing some new products that we hope will find applications beyond what we're doing right now. When we get to that, I think then we have to think about some different channels. But, that's not an immediate issue.

Okay, great. Good luck. Thanks, guys.

Thanks.

Thank you. At this time, I would like to turn the conference back to management for closing remarks.

Thanks, everybody, for your participation. Just a quick update, our 2010 Annual Meeting of Shareholders will be held on Tuesday, November 9, 2010, at 2:30 PM local time at our headquarters location located at 5200 Great America Parkway, Santa Clara, California.

In addition, we will be attending the upcoming Stephens Fall Investment Conference on November 16th in New York City, and we will be on the road in Seattle and Portland on November 18th and in Dallas and Houston on November 30th. Thank you.

Ladies and gentlemen, this does conclude the Aviat Networks Q1 Fiscal 2011 Financial Results Conference Call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter the access code of 4381161 followed by the pound sign. Thank you, for your participation. You may now disconnect.