Aviat Networks Inc (AVNW) 2011 Q2 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.

(Operator Instructions)

I would now like to turn the conference call over to Cynthia Johnson, Director of Corporate Communications. Cynthia, you may begin.

Thank you, operator. Good afternoon, everybody, and welcome to our second quarter, fiscal 2011 earnings call. This is Cynthia Johnson, and I'm 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 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, we 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 Cronan will provide a detailed financial review of our second quarter of fiscal 2011. And, some status on the restructuring that we began several months ago. Then, I'll provide an update on the business status, market conditions, and, for more information, about how we are progressing on our strategy.

First, the overview. Our revenue at $124.2 million came in above our guidance of $105 million to $120 million. This was a direct result of significant improvements in the supply chain, as we were able to clean up many of the transition and restructuring disruptions from prior quarters.

Demand was strong again this quarter, with a book to bill over one. Cash usage was significantly better than we projected as we cleared many of our prior operational disruptions. The refocusing of product development is now yielding results as well. Besides the product announcements we made during Q2, we expect to shortly announce additional products this quarter, which increase our future coverage, market coverage, and reduce product loss.

And, finally, and importantly, on a non-GAAP basis, we were -- generated a very small operating income in Q2. Yes, we do still have a number of challenges to go, but we are pleased with our progress over the past few months. With that, I will turn it over to Tom.

Thank you, Chuck. We have now completed the second full quarter of our fiscal 2011 restructure plan. In Q2, we were ahead of schedule in getting to our goal of $35 million to $37 million in quarterly non-GAAP op ex. We also made good progress towards our goal of reducing our year-over-year total spending by $30 million to $35 million.

Non-GAAP operating expense was down $3.1 million, sequentially. This is on top of the $4.1 million, sequential, reduction last quarter. Revenue increased in Q2 as we improved both our worldwide part shortages and our North American order management issues. In order to resolve these issues, we were not able to decrease spending in operations as quickly as in the op ex area.

Part shortages improved substantially in Q2, but still required expensive expedite fees to meet customer commitments. In addition, we resolved the order management issues in North America in Q2 through brute force with increased headcount. This, obviously, adversely affected the margin. In Q3, we will be working on process and systems improvements, and order management to reduce costs in both the short and the long-term.

Overall, our spending reduction continues to be driven primarily by headcount reduction. In Q2, we reduced headcount by 44 people, or 4% of the worldwide headcount, to 1,210, which is the level we had planned for Q2. Since we announced a restructuring in July, we have reduced headcount by 174, or roughly 13%, of the worldwide headcount.

As we discussed on the last call, one of our major restructuring elements is the closure of our Research Triangle Park, or RTP facility, and the relocation of our finance functions in California. The closure will allow us to consolidate our product development functions into lower-cost facilities in Slovenia and New Zealand, and to consolidate our US finance operations into one location, increase efficiency, and streamline decision making.

To date, we are on track in finance, having hired all of the plan finance positions in our Santa Clara headquarters location. The remaining RTP finance personnel will assist with the current close and filing of the quarterly report, and then will leave the Company at the beginning of March.

Almost all of the RTP R&D personnel have left as of the end of January. Given the incremental cost of finance and R&D personnel, in both RTP and other locations including California, we would expect that the op ex will be flat to slightly up in Q3, before reaching the target levels in Q4, as we have indicated since August.

In addition, there is, of course, still some risk in the near term, of both disruptions to development schedules and to our financial processes. Those risks are generally reducing now. Now let me review the GAAP financial performance for the quarter ending December 31, 2010.

Second quarter revenue was $124.2 million, and we reported a net loss of $12.5 million, or minus $0.21 per share. GAAP results included $7.2 million of pre-tax charges composed primarily of the following. $4 million of restructuring charges and rebranding costs, $500,000 for the loss on the sale of the NetBoss assets, $1.3 million for share-based compensation expense, and $800,000 for the amortization of purchased intangibles.

Now, I'd like to present the details of the quarter based on non-GAAP results. We believe the supplemental non-GAAP financial results reflect the basic operating results of the Company, and will facilitate comparisons of our results across reporting period. Please refer to our website for a complete GAAP to non-GAAP reconciliation table at www.aviatnetworks.com.

We delivered revenues of $124.2 million. This is up 1%, year-over-year, and up 14%, sequentially. By business segment, North America contributed $40.4 million of revenue in the first quarter, down 18% from the year ago period, but up 13%, sequentially.

The international segment contributed $83.8 million, 14% higher than the year ago period, and up 14%, sequentially. By geographic segment, Africa contributed $26.2 million in revenue, 41% higher than Q2 fiscal year '10, and up 14%, sequentially. EMER, which comprises Europe, the Middle East, and Russia, contributed $33.7 million in revenue, 13% higher than the year ago period, and up 17%, sequentially.

Revenue for the rest of the world was $23.9 million, 3% less than Q2 fiscal year '10, but up 10%, sequentially. In the quarter, there were no customers who contributed more than 10% to our revenue. Gross margin was 29.7% in the quarter, versus 36.3% in the year ago periods, and 22.5% in Q1. This gross margin is consistent with the gross margin levels we indicated in the last conference call.

As you may recall, the margins in Q2 fiscal year '10 were significantly assisted by one project in the Middle East that had very high margins. As we stated previously, we expect margins to recover to our short-term goal of 32% to 33% in Q4 fiscal year '11. Though operating expenses were $36.2 million, or 29% of revenue, this amount compares to $39.3 million, in the prior quarter, or 36% of revenue.

The decrease in op ex resulted primarily from a reduction in G&A, and sales and marketing expense within the quarter. Operating income was a positive $700,000 for the quarter, compared with an operating profit of $1.1 million, in the year ago period. Our pro forma tax rate was zero, as it was in the year ago at period. Net income for the quarter was break-even compared with net income of $800,000, in the year ago period.

Our gross cash was $102.4 million, and net cash was $96.4 million, at the quarter end. That balance compares to $107.8 million gross cash, and $101.8 million net cash at the end of last quarter. Operating cash flow for the quarter was a negative $3.7 million, compared with a negative $36.8 million in Q1.

Cash usage for restructuring during the quarter was approximately $4 million. Our collections in the quarter improved greatly, and we executed in accordance with a plan we established at the beginning of the quarter. Not withstanding collections in line with our plan, we still increased receivables by $26 million in the quarter, mostly as a result of higher than expected revenue, and WiMAX shipments that have longer payment terms.

We have very tight controls over our disbursements this quarter, and were able to renegotiate longer payment terms with two of our largest contract manufacturers. The results of the higher volume and more favorable terms resulted in accounts payable increasing $20 million to $74 million. Depreciation and amortization of property, plants, equipment, and capitalized software was $2.2 million. Cap Ex for the quarter, including capitalized software, was $1.8 million.

Employee headcount was 1,210 in Q2, compared with 1,254 in Q1. The headcount in Q4 fiscal year '10 was 1,384. Let me conclude with our revenue margin and cash guidance. Our forward-looking visibility remains good since orders were, again, strong. However, there continues to be lumpiness in the orders and remaining restructuring activities and operations.

We feel that it is appropriate to provide a range of revenue and caution in our guidance. Therefore, our current outlook is $115 million to $125 million. As previously indicated, we expect gross margins to reach our interim target levels in Q4 fiscal year '11 of 32% to 33%.

Our longer-term gross margin targets remain in the mid-30%s. But, will be dependent on the introduction of the next generation of products that are now in development. At about $8 million in revenue in Q2 with low margins, the WiMAX portion of the business continues to be a drag on operating margins.

In addition, we incurred about $9.5 million a year in operating expense to fulfill our customer commitments and operate this business. We will continue to look for alternatives to reduce our losses from the WiMAX business going forward, as a way of improving our overall business model. Regarding our operating margins, our target remains to achieve low single-digit operating margins by Q4 of this year, as we achieve our op ex reductions and our margins return to the interim target levels.

Our long-range operating margin targets remain in the high single digits and modestly higher revenue levels. We expect that substantially higher revenue levels will be able to achieve higher leverage and correspondingly higher operating margins. We are anticipating good cash collections again this quarter, given the higher accounts receivable.

There'll be some pressure to pay down some of the accounts payable, so we're expecting cash use this quarter in the range of $0 to $10 million, which includes $5 million for restructuring payments. Our goal remains to be cash flow positive in Q4. Bottom line, we continue to be encouraged by progress in our restructuring.

Including our cost-cutting efforts and improvement in demand for our products. While we have ample reason to be -- to keep a conservative stance this early in the process. Now, I'd like to turn the call over to Chuck to provide you with the market and business update.

Great, thanks, Tom. First, the market. Overall, long term, we are continuing to be optimistic about the demand for wireless backhaul. Growth in the mobile wireless data area is putting backhaul requirements front and center.

It turns out, the more we work with this, the range of bandwidth required for 3G and LTE, are in the sweet spot of our microwave radio capacities. As LTE gains momentum we expect this to be even truer. The reason for this is becoming more evident in the work we are doing with carriers on their LTE backhaul requirements.

We are almost complete with our product transition from the Legacy products to Eclipse. Legacy orders were essentially last time buys, and Legacy revenue was down 35% sequentially, with Eclipse revenue up about 19% sequentially.

Geographically, let me talk a little bit about the order trends. In the EMER region, that Tom mentioned, that was a strong quarter, again. We received major orders in France, the UK, Middle East, Poland, and Russia at the about the same level as about Q1. Our BT project continues to grow, slowly, with solid bookings up slightly from Q1. In Asia we continue to see strength.

We saw close to 26% increase in orders from backhaul products over Q1. Tier one operators from Thailand, Philippines, and Australia were about half of the orders, as they spent for network expansion because of competitive pressures they were facing. In Africa, operator spending was up in the second quarter.

Many of the larger players came to the end of their financial year, and that aided in the increased spending for the region. The major portion of the spending, from our viewpoint, came from increased expansion in [Barty] and various -- operations throughout Africa. We are starting to see increased demand from MTN South Africa, which was the tender that we won about a year ago.

We won an MLA maintenance service agreement for MTN Ghana, which offers expansion opportunities . In managed services, and perhaps services opportunities, in other MTN operations across West Africa. There's positive demand from the major players heading into Q3. We expect business activity to remain positive in Africa.

In North America, bookings declined in Q2 as compared to Q1, but that was largely because we had booked a large stimulus funded project in Q1. We are seeing success in migrating our customers, obviously, from the Legacy to Eclipse platforms as I talked about. We are expecting revenue to improve in the coming quarters in North America, as we complete major turnkey deployments and with the implementation of that stimulus project that we were awarded in Q1.

We are also seeing some increase in the mobile operator business as they deploy 3G more fully in suburban and rural areas. Let me make a quick comment on restructuring. When we announced the restructuring back in July, we committed to, essentially, to complete it by the end of the third quarter.

We are on track to accomplish that, but I want to just provide a reminder to everybody, we still expect possible disruptions in Q3, as we finish up because of the speed that we are moving. We do expect to meet our spending targets for Q4, and we are now focused on achieving more consistent improvements in our operational efficiency. And, more importantly, on the roll out of new and services. As you recall, that was an important part of the directional change.

So, let me talk about new products a little bit. We announced a couple of major new products in Q2, that was the Eclipse DAC GE3, that was mentioned on a previous call. It did begin shipping before the end of the quarter. This product significantly steps up the ethernet capability of Eclipse. It's been extremely popular. We are ramping up to meet customer requirements now.

The Aviat WTM 6000, we announced the new trunking, which is sometimes called a long haul product, in early November. This is the industry's first hybrid, or all packet trunking radio, to store up to 4 gigabits per second of data throughput. The first shipments of WTM 6000 will commence in the initial frequency bands in the early part of this calendar year.So, why are these products important? Well, the DAC GE3 builds on our leadership in the IP backhaul market.

This is a leadership we established several years ago by introducing capacities and ethernet features that are very competitive in the IT market. In fact, we have now shipped over 200,000 ethernet cords with Eclipse, which, I think, puts us pretty high in the rankings. The WTM 6000 accelerates our progress in the long haul, or trunking market, where we have had a good track record for years.

This product dramatically raises the competitive bar, especially in geographies where core, large-scale network infrastructures need it. We have been saying for sometime that there would be more new products coming, so, there will be some announcements between now and Mobile World Congress, which starts February 14th.

These announcements will we be consistent with the plans we've discussed previously, and they will represent the emergence of a new approach to wireless transmission in the growing IP world. And to provide a framework, here's the overall new product architecture from Aviat.

Going forward, there will be three groups of projects. The Eclipse radio platform that you are probably familiar with, an all new IP centric radio platform, and an advanced set of packet node products. First on Eclipse, there are new developments that will create future enhancements and cost reductions beyond what we have announced so far, for both the radio elements and the digital interface units which further optimize the migration to IP and backhaul.

Second, the all-new radio platform will be a completely new radio with a unique combination of click printing capabilities that's specifically designed for future all IP networks, to be used on its own or in conjunction with Aviat nodal networking products, or with major third-party products. Speaking of the nodes, the third area is the advanced packet node solution. Our Eclipse platform actually broke new ground as a nodal wireless transmissions solution.

And, with the many recent enhancements that we made to the platform, the Eclipse node has evolved into a high-capacity packet node for IP wireless transmission. Future generations of the packet node will be more powerful, with increased nodal density, wireless IP networking intelligence, and management. They will work with both the Eclipse or the new radio platform, and even third-party wireless, or fiber transport products.

Now in addition, as promised, we are increasing our commitment to our full line of services offerings. In fact, we've already seen some step up of service contracts of many types, engineering, installation, maintenance, system integration, and network operations management. We hope to expand these offerings globally.

Of course, these products are all designed to be highly cost-effective. Besides expanding our market potential, we absolutely need to reduce product costs in order to meet our financial goals. So, just in summary, before we go to questions, we do believe this restructuring and the new products will enable us to be in a much stronger position going into fiscal year '12 and beyond.

And, I also don't want to under estimate the work that still needs to be accomplished to finish the process improvements and deliver these new products. Our employees have clearly demonstrated that we can achieve our aspirations. It's starting to show in the result and it's starting to show in the growing confidence inside Aviat. With that, I will hand it over to the operator for

Thank you, sir.

(Operator Instructions)

And, our first question comes from the line of Blaine Carroll with Hudson Securities. Please go ahead.

Yes. Thank you. Congratulations, Chuck and Tom. Great quarter.

Thanks.

Thanks, Blaine.

A couple questions, if I can. Chuck, first of all, I know one of the things you've been focusing on is linearity, both in the order intake as well as the revenue. I was wondering if you could touch on linearity. Secondly, if you could talk about the production capacity right now.

I know you've done a lot of work with the contract manufacturers and, Tom, I think you talked about the component shortages are still a little bit there, but have improved. I'm wondering if you could talk about, what type of capacity, revenue capacity, you think you have right now with your cm's. Thanks.

Okay. Linearity was quite good on orders in Q2. It was not as good on shipments. It really wasn't a process problem there. It was really about cleaning up these shortages and logistical things, and things like that.

We had actually planned for a quarter that was more backend loaded, and it pretty much came about as we had expected. In general, I would expect we would be relatively linear, certainly more linear than we have in recent history, because we didn't have the shortages. The shortages are clearing. There's been a significant clearing of shortages going forward.

At this point, I don't think we really have a specific -- a generic production capacity issue. It's probably more about the timing of orders, when the projects are rolling out. That obviously somewhat dictates when we ship during the quarter, or even what quarter we ship in.

We still have some logistical issues going on, because we haven't cleaned everything up yet. I wouldn't say that's going to contribute too much in linearity, so, we are basically pretty happy with that right now.

Okay. And, then, one quick one. Tom, where will the headcount be at the end of Q3?

I'm sorry, the end of what?

At the end of the current quarter, at the end of Q3.

At the end of the current quarter, the headcount will be down about another 100.

Wow. Okay. Thanks. Nice job, guys.

Thank you.

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

Thank you. Yes, nice job on the revenue, guys. Chuck, last quarter you expressed some confidence that you could grow the second half revenue, over the first half. With this stronger start to the first half, do you still think that's a reasonable assumption?

Well, actually, I think I said it was possible. Just to characterize in my confidence. I think it's still possible, but one of the reasons that we went -- did revenue as high as we did was we were more successful in catching up with late shipments that had been accumulating over the Q1 timeframe, and even before. In some ways, that sort of says that it makes it more difficult to ramp up in the second half. My feeling about it hasn't changed. I think it's still possible. But I wouldn't say --

You had a positive book to bill again, obviously, which sort of helps towards that end, I would presume.

Certainly, I think that's true. I think it's more a question about the timing of these projects when they roll out.

Sure. And on gross margin, Tom, you didn't specifically say what you thought it would be in the third quarter. Can you give us any help there?

I didn't specifically say it was in the third quarter, because we are still having issues with the expense structure in North America, as we clean up the processes there, so, it will be relatively dependent on the mix, the overall revenue level, and specifically, where we get revenue in the world. So, that's why we didn't give any specific guidance, other than to say that we think by Q4 we will get back to where we need to be.

Now, you do have less of an impact -- of a negative impact from WiMAX in the third quarter, is that right? I thought you had a $2.5 million hit in 2Q, and something less in 3Q? Is that fair?

Specifically, yes. We have less WiMAX. We will still have the impact from the expense structure and operations.

But, just to give it some rough bounding, would modeling it flattish be a reasonable assumption that this point?

Yes, from a general modeling standpoint, I think that would be reasonable.

Okay. Obviously, very nice job on the op ex, significantly better than you had talked about with a $36 million level. Even if it's flat to slightly up in the third quarter, it would seem that hitting $36 million, which was essentially the midpoint of your prior target, may be conservative at this point? Do you think, maybe, there is a biased towards the low end of that prior $35 million to $37 million range at this point?

For Q4, yes. I would say that would be a good assumption.

Great. That's helpful. And, sum Verizon. I know you were kind of selected as one of the vendors for their 4G backhaul, and that's going to be a long process. Anything you'd to report there in terms of any activity, stuff you guys are trying to do, maybe, selling to any other regions?

We are actually selling to the regions. I think in North America, that's one of the major influences we have on 3G and LTE rollout, in terms of network capacities, and so on. So, there were shipments to Verizon already.

For the 4G, for the LTE backhaul?

I would say, yes. I would say right now it's more for the 3G putting in more coverage.

Right.

But we are doing planning on what's required for LTE. We have done a white paper. I think we'll be doing some presentations at Mobile World Congress about what these capacity requirements are. We think we have a pretty good idea now. We are moving -- the industry is moving a little bit out of the fog.

I think at some point there was panic about how much backhaul capacity would be required. We are obviously interested in really what is required over the long haul, because we want to make sure that our products match that requirement. What we have found out in working with a number of operators, is that when you get past the hype, we are probably right in the sweet spot, as I have mentioned, in terms of microwave backhaul. So, we always have a biased reason for being interested in this, but it's turning out pretty well.

Sure. Chuck, you mentioned potential product announcements in three areas around the Mobile World Congress. It sounded like some of those were some of the kind of next-gen products that I thought were going to be, really being delivered like first part of calendar next year.

Is that correct? I mean, are these, sort of, pre-announcements of products way out there, or are these interim products that are coming before some of these next-gen products that are expected early next calendar year?

What I was trying to do is give you a structure, so, when the products are announced, there will be some soon and there will be some after that. The structure will fall into those three different categories. However, some of these products, potentially, are revolutionary. If you remember, when Eclipse was introduced, we had to introduce it, the concept, fairly early because it required the network operators to think about things somewhat differently, so we built that into our thinking.

So, some of this stuff ships fairly soon, like the DAC GE3. It was shipping within a couple of weeks by the time we announced it. Some of it is out further. I don't think anything is as far out as what you just said, early calendar of 2012. I would imagine anything we are announcing right now would be before that.

Okay. That's helpful. Just one final one for me on cash flow. Tom, you mentioned you expect a little more cash flow usage in the third quarter. That's something that will be the final chunk of the severance expense. Can we expect you to be cash flow positive, then, in the fourth quarter?

Yes, that's our goal, Rich.

Okay. That's helpful. All right, thanks gentlemen.

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

Hi, Chuck, hi, Tom. Congrats on the quarter.

Thank you.

We'll pass that along to the employees.

Excellent. A couple quick questions for you. Just digging back into the gross margin, and this was touched on earlier. I know WiMAX was about a 250 basis points headwind last quarter, can you put into perspective as to what it was in 2Q? And, also, give us a sense of what the revenue contribution from WiMAX was, 1Q versus 2Q? I'm just trying to get a sense of the size of the business.

Yes. So, the combination of WiMAX and the operational issues in North America were about 200 to 300 basis points impact on the margins in Q2. The combination of both of those things were 200 to 300 basis points. On the revenue, we talked about the revenue of WiMAX in Q2 being $8 million.

That was the combination of our deal in India, which has very negative margins, and some other deals that actually had some positive margins, so, a combination. In Q1, it was less revenue, but it was all the India deal, so, the margin impact was actually as much or more against a smaller revenue base because it was all the India negative deal. So, it was like $5 million or $6 million, but it was more negative from a margin standpoint .

Okay. That's helpful. Tom, you talked about 3Q, given the North American cost structure being a little bit murky in 3Q, and it sounds like gross margin may be more flattish, yet, you sounded confident that 32% to 33% is still the number in Q4. Is that fair?

Yes, that's fair. That's a fair characterization. We have some concerns about Q3, but we are confident, as we clean up the cost structure and operations, we can hit our numbers in Q4.

And, just longer-term, sticking with the gross margin theme, when you talk about 35%, is it just product mix? Again, getting to the new platform. Can you hit that number at current revenue run rates, just based on mix, or do you need revenue to pick up to a certain level to get to that number as well?

I think what we said is, it's really the introduction and traction revenue of the new products that have the lower cost structure in the Eclipse product line that will drive us to the 35%. Before we have -- before we get to those lower cost products, I think we are in the 32% to 33% range. It was independent of big revenue growth.

Got you. Based on the commentary around the product timeline that Chuck discussed, it sounds like 35% is something we should probably be thinking about, maybe 2012 and beyond, but certainly not 2011in any quarter. Is that fair on my part?

From a fiscal standpoint, yes.

Terrific. And, op ex, I think, previously we had talked about being able to hold that level, minus 1% kind of shift in commissions, but other than that, op ex should be able to hold at these levels, $35 million, $36 million up to about $150 million in revenue quarterly run rate. Is that still a fair assumption?

Yes, I mean, that's our target. To leverage the cost structure, the targeted cost structure, of those revenue rates.

Perfect. And, then, just one last one, if I could. Chuck, obviously, one of your competitors just did a big deal. That gets them a little more into the services game, a little more into the long haul trunking game. I just wanted to get assessed to what your initial impression was.

On an emotional basis, I couldn't figure out whether it was a threat or an opportunity in the short-term. I guess, after analysis and reading everything about it, certainly, we know Nera extremely well on a number of different fronts.

I would say, in the short-term, we probably have more of an opportunity than a threat. It is really kind of up to us to really execute upon that. I think the timing is good for us, because we are now coming to market with more competitive products , so we got our act together in terms of organization and so on. I think we are in a good position to exploit that.

In the long term, I just can't tell you. I don't know the answer. It depends on how well they can do the integration. We certainly know that's challenging. But we also know that they've got the capability of execution, we've seen that. So, we're not underestimating

Fair enough. That's helpful. Thanks, guys, and congrats again.

Thank you.

Thank you. And our next question comes from the line of Barry McCarver with Stephens. Please go ahead.

Hi, Barry.

Good evening, guys. Great quarter.

Thanks.

Thanks.You gave a really good rundown of all the positives in your different marketplaces, so, just in an effort to extract a little bit more color, was there any market around the world that you were a little bit disappointed in, in the quarter?

No, because they pretty much met our expectations. We'd like to see a little bit more traction in Asia than we have right now, but it's picking up. We'd like to see it go faster than it is right now. We try to keep our head on North America, because North America is, certainly, down from traditional levels in the past.

A lot of that is because of the way the spending patterns are between state and local governments, and mobile operators, because we're into both, and we don't have much control over that. Some of it is just us causing this change over in products that we probably should have done a lot earlier in the integration process.

We are going through that pretty much now. I think that inhibits some of the sales because operators want to get used to using these new products. I wouldn't say we are disappointed, because it's kind of a level that we expected. If it doesn't get better, within the next year, then I'd say we would be disappointed.

Okay. And, I think you've answered my questions about competition, but focusing a little bit more on North America. Obviously, you've talked about that market and we've had some questions already.

Clearly, we are hearing the bigger wireless carriers, at least talking about, accelerating their 4G rollout. I'm curious as to if what we are hearing in the media from those guys, match kind of movement and planning at the equipment level from your perspective.

Yes, I think that's true. We are seeing that. That being said, I will say that traditionally, and still, they prefer fiber in North America as the medium for backhaul.

So, we are seeing it, but what I think we are seeing is the percentage of the share between fiber and backhaul shifting a little bit more toward microwave, perhaps. That's why we are bullish on what's going to happen over the long-term. That being said, I still don't see it. I still see fiber being the dominant backhaul methodology in North America.

Okay. Thanks a lot, guys.

Thanks, Barry.

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

Hi, this is Brad for James. Just curious to get a little bit more color on margin structure by geographies. Obviously, historically, US has been higher margin with emerging markets being lower. You mentioned the margin drag coming from WiMAX, in the emerging markets. Any additional color you can provide how we should think about the geographic margin structure going forward?

So, I think, as we look going forward, we continue to see Asia being the lower set of margins in the world. There seems to be, at least, some short-term pressure on margins in Europe with some big deals that have recently been awarded, so, usually at the beginning of big deals, our margins are worse and then they get better over time.

Sometimes the timing of the deployment will impact the margins. I would say, in the EMER region we are probably going to see a little bit of decline before it starts to improve again. Africa has been relatively steady. We have seen year-to-year decreases, because of pricing pressures offset by cost savings in the product.

As we increase the new product flow, and get our products to be more cost competitive, I think that will help the Africa margin picture. And, North America has been relatively steady. I think as we introduce the new products with the -- with our IRU600, we have some opportunity to even increase the margin as long as the service implementation are done at a profitable level.

So, I think, generally, we continue to keep our eye on Asia. I think the only one that seems to be declining a little bit for us right now is EMER, we'll see what the overall impact of that is. Africa is pretty steady and North America is pretty steady.

Great. That's really helpful. Thank you. And, then, one other quick one.

In terms of revenue levels, not to be overly negative, but do you guys feel like you've reached an absolute bottom in terms of your quarterly revenue level? Or any circumstances under which you could see taking another step down from where we are at?

Well, we are paid to be paranoid. The answer to the question is obvious if you come from that point of you. That being said, I'd say we believe that we will continue to see growth in the backhaul area. We don't believe we're going to see growth in the WiMAX area.

The bottom line is, we are focused on backhaul. We are not focused on WiMAX right now, but we are really supporting it. We are making our money on the backhaul business, and that's the one that we do see growing.

We certainly grew -- we certainly have been growing in that area. If I look at the order flow going forward, over the -- we're seeing for Q3, certainly our early visibility in Q4, you could conclude that on microwave alone, or backhaul alone, we could hit the bottom. Things can always change.

Sure.

That help?

Very helpful. Thanks.

Thank you. And our next question comes from the line of Kevin Dede with Brigantine Advisors. Please go ahead.

Thanks. Let me add my congrats, Chuck and Tom. Great job.

Thanks, Kevin.

Just a little curious, if you don't mind going back and discussing this with us, Chuck, on the visibility question. Obviously, you are surprised here on the upside, and that's great.

It certainly calls into question your forecasting, maybe the implementation of the ERP system, and how all that's helping you, or maybe it relates to some of the things that you said you fixed. I was just kind of hoping you could tear into that one a little bit, so I have a better understanding.

Yes. I thought we covered it, but I might not have been clear.

I'm probably slower than most, Chuck. I mean, you've known me for years.

I didn't say that. Simply, we fixed some of the supply-chain problems faster than we projected. That's kind of the bottom line. That's really why it went over.

I don't think the demand profile changed at all. It was really us just trying to be very cautious about what we projected, because we have a lot of things to fix, as you know. We just managed to pull up more across the finish line than we had anticipated.

Okay. So your ERP implementation is -- I guess at the point where you are comfortable with it ?

I think from my discussion with Tom, you said there were a couple areas where you are not going to be able to get that done, near-term. I guess what I am trying to get at is, how comfortable are you with the way that you are seeing your business come together? Because that seems to be the thing that's changing. I mean, I'm not trying to rain on the parade. I'm just trying to get a better handle on how well you see things, I

So, I think in general, we are happy with the systems. There are some isolated issues going on that you would normally expect when you are going through a cleanup process like that. For example, some of the unique processes that we had mostly in North America around full turnkey implementation, have a whole other set of system issues that are associated with that.

Those are the kinds of things that we are still working on. When you step back and look at it from an ERP point of view, it's like 80% of it now is in pretty good shape instead of 20%. So, we've got this other 20% we have to clean up now.

Okay. Can you give me, sort of, a timeline on when you think you'll have that all bolted down?

Well, our target is to finish it in Q3, along with the other restructuring.

Great. Okay. So, the new radio platform that you talked about in past calls, I think you talked to, perhaps, having the ability to introduce that before the end of the year. I know today, you said that you were hoping to introduce it early to give operator customers a chance to become familiar with its revolutionary features. I was wondering if you could just sort of hone in on the timeline there.

I think what we've been saying is, that we would introduce this product, or start shipping it in fiscal year '12. In order to hit the timeframe in fiscal year '12 that we're looking for, given the fact that it's a somewhat unique product in the marketplace, we feel we have to announce it around Mobile World Congress timeframe, so that people have a chance to look at it and start to think about how they would implement this in their networks. This is really for future IP networks.

We have a wonderful product line today for IP networks, but using some newer technologies and a newer approach, we think it could be more effective for the part of the market that's emerging now, and will become really significant in two or three years. It's just we've never said when in fiscal year '21 we thought we would start shipping it. We'll be discussing that as part of the announcement, or, at least, at the Mobile World Congress.

And, in conjunction with that, you'll talk about cost reductions in the Eclipse. When do you think you will be able to ship the new products associated with that?

That is fairly newer term, but we haven't really decided how, or if we are going to announce that, in a really huge, public way. Because it's really a cost reduction. It has increased performance, and it has lowered costs, but we really haven't decided the proper way to introduce that one right now.

But that introduction is key in driving that gross margin from the 32%, 30% range to the mid-30%s, correct? That's the one --

Absolutely. There are several cost reductions that are key. The Eclipse radio is one of them. There is also some of the indoor stuff, the digital stuff, the interface equipment, and so on. That's all going through development right now. The ones that, primarily, from a customer point of view, would be adding new features or dramatically changing the capacity or something like that.

Those would, certainly, have a more public announcement, and we will probably do some type of announcement for stuff that's mostly focused on cost reduction. We will probably do it in a different way. So, the things that you will see coming out before, or around, Mobile World Congress, are more about significant new features or new capabilities that the Company will be offering its' customers.

Okay. Well, I look forward to seeing those. Tom did a great job reviewing gross margin on a geographic basis, but, I was wondering if you wouldn't mind, Chuck, just giving us a little better view of what's going on in Europe, and why some of these newer contracts are priced a little bit tougher. Is that Wallway competition, or what's going on there, and will it stop or stabilize?

Well, typically, when there's large new contracts out, they tend to take a step down in price. This is not just about microwave. This is true across the board. And that's what's going on right now.

There's a lot of 4G -- excuse me, 3G and large new network builds that are being bid right now, and they tend to attract a lot of people who are trying to use price as a way to get in on this next level, so we are seeing that. Clearly Wallway is one of the companies that's definitely pushing the price levels down, and there are others following that as well, so, that becomes the new price level.

Okay. Fair enough. How is that relationship between Zane and Barty, and your potential involvement in India evolving? I guess I'm wondering whether or not you think you will be able to crack that market from a point to point perspective.

We really don't have much to comment about India right now. We are just -- we are not really equipped to compete strongly in India on backhaul with the cost net that we have right now. Clearly, that's a large market for backhaul, so it's not something we intend to ignore forever.

Okay. And, there's lots of chatter about Light Squared here in North America. I was wondering if you would tell us what you are seeing there.

I don't really have much to comment. We are not seeing that much there.

Okay. And, how about stimulus? I know there's one project you alluded to today. Do you think there's anything else coming down the road?

I don't see anything huge right now coming down the road. I think that's going to start tailing off.

Interesting. Okay. Well, thanks for indulging me, Chuck. I appreciate it. Congrats, again, on a nice job.

Thank you.

Thank you. And our next question comes from a line of Scott Searle with Merriam Capitol Management. Please go ahead.

Good afternoon. Nice quarter, guys. Tom, just wanted to make sure I understood on the cash flow side what you were guiding for in the March quarter.

As part of that, I thought you indicated that the new terms with your contract manufacturers that the payables -- extendable payables that we saw in the December quarter, that's going to be the norm going forward? That's what we should expect?

Yes. First, on the guidance. We guided from zero to $10 million in usage which included $5 million in usage for the restructuring cash expenses, and then, from the standpoint of the extended terms, yes, we would expect that we would have these extended terms on a going forward basis with contract manufacturers.

And, we are also trying to negotiate standard terms with more of our suppliers as well as we try and get into a better cash position, since we've been asked by some of our customers to have longer terms, so, we have to try and balance those two things out.

Got you. In terms of a little more granularity on December, you reference some Legacy one time buys and the catch up, basically, for some of the pent up supply-chain issues. I think you mentioned the Legacy buy number, but could you repeat that again, and maybe what the one-time catch-up was as well in the quarter?

I'm sorry. I'm not sure I'm understanding your question.

Just in terms of, you know, the $124 million this quarter. There was a little bit of some pent up demand, given some of the supply-chain issues you guys have been wrestling with. Is there a magnitude, or a number, you can put on that? Is that a $5 million impact to the upside, or how should we think about that?

I think the best way to think about it, is to look at the incremental increase in business in North America. I think we got the pickup in North America. That's where we were concerned about our ability to ship. Given the increase in North America, that's about the magnitude of the incremental amount.

Okay. Also, on the WiMAX front, what is the expectation, again, going into March?

Well, the expectation for revenue in March is that it will be down from the December quarter.

Okay, but you didn't give a number.

We did not give a number.

Okay. And, Chuck, in terms of the book to bill, greater than 1.0, how is that looking by region?

Gee, that's a good question. I knew you could come up with one. I am just looking at it right now.

And, maybe, while you are coming for that, on the Africa front , it sounds like -- so Zane Barty is coming back now and starting to place orders. Is that decision being driven locally within Africa, or is that coming from

It's local. I'd say everybody was -- most people were around one. North America was above one.

Okay. Great. Nice job. Thanks, guys.

Thanks.

Thank you.

I think we have time for one more question, operator.

(Operator Instructions)

And, at this time, I am showing no further questions in my queue. I would like to turn the conference back to Miss Johnson for closing comments.

Okay, thank you.

Thanks, everyone, for your participation. Just a quick update on our upcoming investor conferences and meetings. On February 9th, we will have Stifel Nicolaus conference in San Francisco. The week of February 14th, we will be at Mobile World Congress in Barcelona.

On March 1st, we have the Hudson Securities road show in the mid-Atlantic region, and on March 20 -- March 2nd through 3rd, we have the Brigantine Advisors road show in New York and Boston. Thank you, and that concludes our call.

Thank you.

(Operator Instructions)

We thank you for your participation, and at this time you may now disconnect.