Aviat Networks Inc (AVNW) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Aviat Networks conference call. (Operator instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to hand the conference over to Cynthia Johnson, Director of Corporate Communications. Cynthia, you may begin.

Thank you, Operator. Good afternoon, everybody, and welcome to our third 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 conference call, we may make forward-looking statements regarding our business, including statements relating to projections of earnings and revenues, business drivers, such as the transition to IP infrastructure, the timing and capabilities of new products, network expansion by mobile and private network operators, and variations of economic recovery in different regions. These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and filings made by the company with the SEC. These can be found on the Investor Relations section of our 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, Cynthia, and thanks to all of you for joining us today. During the call today I'm going to provide a general overview. Then Tom is going to provide a detailed financial review of the third quarter of fiscal 2011 and the status of the restructuring that we began earlier this year. I'm going to then provide an update on the business status, our market conditions and some more information about how we're progressing with our strategy.

So first the overview. Our revenue at $115.5 million came in at the lower end of our guidance of $115 million to $125 million. But please note that our guidance included both the microwave and the WiMAX businesses, and the results now only reflect microwave as we're reclassifying WiMAX results starting in Q3, due to a decision to sell this business. Tom is going to comment on this decision in his portion today.

In the prior quarter, Q2, our total revenue of $124.2 million included about $8 million of WiMAX, so the comparable revenue for microwave was $115.9 million, so revenue was essentially flat quarter to quarter. And also remember in our prior quarter, Q2 was a catch-up for shipments that were previously delayed out of Q1 by supply chain issues. So we believe we did well at the achieved revenue level.

WiMax revenue in Q3 was about $1 million, though, down from the $8 million in Q2 because we dramatically reduced our selling efforts on these products. So one way to look at the microwave revenue, our ongoing operation, to make it easier to understand, Q1 was $103 million; Q2 was $116 million, and that included catch-up from Q1; and then Q3 was $116 million.

On the supply chain, we had a great quarter in meeting customer commitments and reducing lead times. We've come a long way in that regard. Orders were relatively slow, though, in Q3 with a book to bill less than 1. But orders through April have been particularly strong, and our outlook for Q4 orders indicates a likely recovery from Q3, and I'll touch on that later.

We did announce several important new products this quarter as our product development builds momentum. Customer reception to the new products and to our road map has been exceptional. Actions associated with the restructuring program that we announced early this fiscal year were completed on schedule for OpEx, and they'll be completed in the current quarter, Q4, for manufacturing related costs. Gross margins were as expected, and all cash usage was for restructuring and discontinued operations. In fact, the core business generated cash from operations, which bodes well for future cash generation.

So lots of progress, but there's always challenges. The business challenges ahead include completing the rollout of a wave of significant new products that are in the pipeline now throughout the next fiscal year, and then the other challenge is continued industry pressures on pricing.

At this point we believe we're on track with the programs that we implemented in fiscal '11 as we work through the final quarter of the year, and we're now planning the next phase of our turnaround, which I'm going to comment on later. So with the restructuring and the WiMax changes, we realized that it may be challenging to understand all these numbers today, so we're trying our best here to address that in our comments. So with that, I'll turn it over to Tom.

Thank you, Chuck. As we exit Q3, we see a clear path to achieve spending goals we announced at the beginning of FY '11, a $35 million to $37 million in quarterly non-GAAP OpEx, including the discontinued operations. As expected, OpEx, including our discontinued operations, was up about $900,000 quarter over quarter due to the overlap in personnel during the relocation of our finance function.

As we successfully completed our finance and R&D transition during Q3, we would expect OpEx to decline next quarter to the targeted range, which without our discontinued operations expense will now be $34 million to $36 million. There may be some variables in the quarterly OpEx going forward, due to the timing of R&D projects and external spending, as well as agent commissions, which are variable.

As we stated in our conference call last quarter, we're about one quarter behind in our cost-reduction plan and operations, due primarily to manufacturing and order management issues in North America in the first quarter of this fiscal year. We did, however, reduce head count by 58 in operations during Q3, and we are planning a further reduction of 36 during Q4.

As we stated in the last conference call, the WiMax business has been a significant drag on all aspects of the company's financial performance -- margin, cash, expense, and inventory, to name a few. As we evaluated options for the WiMax business, we decided to reduce our selling efforts this quarter and to place the business for sale. We have had substantial ongoing development efforts to support one large customer in India. In the third quarter of fiscal '11, we provided that customer a software update that we believe substantially meets our commitments. That was an important milestone in being able to market and sell the WiMax business. We've engaged an investment banking firm and we're actively marketing the WiMax business.

Given that the WiMax business is for sale, we are reflecting the WiMax operations as discontinued operations for financial reporting purposes. This will enable us to make the necessary investments, write-offs, or market decisions for that business without affecting the base business results. Commencing with this quarter, you will see us report the results without WiMax, and we'll separately report the WiMax results as a discontinued operation.

Before we discuss the non-GAAP results, let me review the GAAP financial performance, including our discontinued operations for the quarter ended April 1st, 2011. Third quarter revenue was $115.5 million, not including WiMax revenue. We reported a net loss, including the discontinued operations of $36.9 million or $0.63 per share compared with a net loss of $25.7 million or $0.43 per share in the year-ago quarter.

Net loss from the continuing operations was $25.5 million or $0.44 per share compared with the net loss of $22.5 million or $0.38 per share in the year-ago quarter. The GAAP tax expense for the third quarter is $15.2 million, substantially all of which relates to the establishment of a valuation allowance against deferred tax assets for our Singapore subsidiary.

On a quarterly basis, we are required to evaluate whether we can utilize the deferred tax assets on our balance sheet. Based on the latest forecasted income for Singapore, it is likely that we would not be able to utilize the deferred tax assets of our Singapore subsidiary; therefore, we set up a valuation allowance against them. As of the end of Q3, we no longer have any material deferred tax assets on our balance seat.

$4.5 million of restructuring charges and rebranding costs; $3.3 million excess in obsolete inventory, associated with exiting the North American legacy product market; $1.3 million for shared-based compensation expense; and $900,000 for the amortization of purchased intangibles. Also included in GAAP is a loss from discontinued operations net of taxes of $11.4 million and the tax expense in the quarter of $15.2 million.

Now I'd like to present the details of the quarter based on non-GAAP results. All the comparisons of non-GAAP results will also exclude the WiMax results from prior periods. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate comparison of our results across supporting periods. Please refer to our website for complete GAAP to non-GAAP reconciliation tables at www.aviatnetworks.com.

We deliver revenue of $115.5 million, not including WiMax revenue. This is down $1.5 million year over year and roughly flat sequentially. Chuck mentioned the WiMax business was down from about $8 million to about $1 million sequentially. By business segment, North America contributed $42.5 million of revenue in the third quarter, up 7.6% from the year-ago period and up 5% sequentially. The international segment by geography contributed $73 million, 5.8% lower than the year-ago period and down 3.1% sequentially.

By geographic segment, Africa contributed $26.5 million in revenue, 28.6% lower than the third quarter of FY '10 but up 9.3% sequentially. EMER, which comprises Europe, the Middle East and Russia, contributed $23.6 million in revenue, 3.5% more than the year ago period but down 29% sequentially. Revenue for the rest of the international segments was $22.9 million, 30% more than Q3 FY '10 and up 28% sequentially.

In the quarter there were no customers who contributed more than 10% to our revenue. Gross margin was 30.5% in the quarter versus 30.9% in the year-ago period and 32.7% in Q2. This represents a less favorable mix than the prior quarter as we indicated in last quarter's conference call.

As we stated previously, we expect margins to recover to our short-term goal of 32% to 33% in Q4 FY '11. Total operating expenses were $35.3 million or 30.6% of revenue. This amount compares to $34.4 million in the prior quarter or 29.7% of revenue. As previously stated, the increase in OpEx resulted primarily from an overlap in personnel as we transitioned the finance function from RTP to California.

Operating loss was $100,000 for the quarter, compared with an operating loss of $3.2 million in the year-ago period, and operating income of $3.5 million in Q2 of FY 2011. Our pro forma tax rate was 0 as it was in the year ago period. Our cash tax rate is expected to be about 1%. Net loss for the quarter was a negative $300,000 compared with a net loss of $3.8 million in the year-ago period, a net income of $2.8 million in Q2 of fiscal 2011.

Our gross cash was $95.7 million and net cash was $89.7 million at the quarter end. That balance compares to $102.4 million gross cash and $96.4 million net cash at the end of last quarter; therefore, the change in the cash balance was $6.7 million. Cash usage for restructuring and discontinued operations during the quarter was approximately $7.9 million. So without the restructuring and the discontinued operations, we would have increased our cash balance quarter over quarter.

Our collections in the quarter were in accordance with the plan we established at the beginning of the quarter. As expected, we take down our accounts payable, which had grown quite a bit in Q2 by about $8.3 million. An additional $7 million in accounts payable is associated with the discontinued operations and now appears as accrued expenses and other current liabilities on the balance sheet. Our accounts receivable were down $4.3 million.

We continue to have very tight controls over our disbursements in Q3 as we managed cash use from operations to about break-even level. Depreciation and amortization of property plant and equipment and capitalized software was $3.2 million. CapEx for the quarter, including capitalized software was $1.8 million. Of the $3.2 million in depreciation amortization, approximately $1 million was associated with the discontinued operation.

Since this is the first quarter we are treating WiMax as discontinued operations, let me tell you what the results would have been for this business unit. Third quarter revenue for the WiMax business was $1 million, and the loss from the discontinued operations was $11.4 million. The discontinued operations results included $9.7 million of pre-tax charges composed primarily of the following -- $1.8 million of asset impairments and charges, including goodwill; $7.9 million reserves for excess and obsolete inventory and supplier liabilities associated with the decision to de-emphasize sales as we look for a buyer. The gross margin for the discontinued operations for the quarter, excluding the pre-tax charges, was a negative $100,000. The OpEx, excluding the pre-tax charge, was $1.6 million.

Employee head count was 1,067 for the base business and 81 for the discontinued operations in Q3 compared with 1,129 for the base business and 81 for the discontinued operations in Q2.

Let me conclude with our revenue margin and cash guidance. Our current revenue outlook, not including any revenue from WiMax, is $105 million to $120 million. One of our product lines is supplied by a contract manufacturer based in Japan. They very recently informed us that shipments from June forward will be delayed due to certain Japanese suppliers who have been severely affected by the recent events.

We are working with this supplier to minimize the impact, but at this time we need to provide a wide range of outcomes for Q4 until we get better visibility. As previously indicated, we still expect gross margins to reach our interim target levels in Q4 FY '11 of 32% to 33%. Our longer-term gross margin targets remain in the mid 30s but will be dependent on the introduction of the next generation of products that are now in development. We have many new products in development, but any impact on revenue margin is not expected until the second half of our next fiscal year.

Until these products ship in higher volume as a percentage of our revenue, we expect to have lumpiness in our revenue and margins in the early part of FY '12. We'll give more specific guidance of course beyond next quarter at the normal time. Regarding our operating margins, our targets remain as it has since we began the restructuring this year to achieve low single digit operating margins by next quarter of Q4.

We are anticipating reasonable cash collections again this quarter given the accounts receivable balance. Much like the third quarter, we are not expecting to use cash in the fourth quarter for operations in our base business. We will, however, use cash for restructuring and discontinued operations payments. Overall, we expect that cash usage will be in the $0 to $10 million range in fiscal fourth quarter.

Bottom line, we continue to be encouraged by progress in our restructuring, including our cost-cutting efforts 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.

All right, thanks, Tom. I'd like to comment on the market conditions that we're seeing and give you some regional observations and give you some observations about next fiscal year. First on the market, I'm sure you know the global microwave market continues to be robust, due to both mobile subscriber growth and increasing data traffic, but what about Aviat specifically?

Well, our most recent analyses show that the market share declines that Aviat has experienced over the past few years have slowed or stopped, depending on the geography. Of course, we still have a lot of work to do especially in rolling out the new products and mainstreaming them to a higher proportion of our business, but we're encouraged, as Tom said.

For example, we just recently had a planning meeting about next year that involved the heads of our sales organization, and I sensed a renewed energy about our opportunities now. There was quite a bit of excitement. And our internal opportunity tracking systems have shown a marked upturn in the last month or two. That being said, the competitive pressure in the marketplace is intense. On large new bids in particular, pricing reductions have been greater than in prior periods, and this is often led my competition from China.

While our new products can compete in this environment, the timing of the releases and the ramp of those products will likely put pressure on margins. We believe this is an industry phenomenon. It's not just Aviat. But as these new products get mainstreamed, we believe our financial performance will achieve our stated goals. So we're obviously under pressure to roll these products out as quickly as possible over the coming quarters.

I'd like to comment on some specific activities by region just to give you a flavor of what's happening. In a couple of regions, EMER and North America had slow order rates in Q3 but our April orders as I said are the strongest we've seen in a while. In fact, it's the strongest we've seen in the last two years. And as I indicated, the opportunity pipeline is up significantly.

So talking about EMER, a tier one operator in France has entered into a frame agreement now with Aviat for Eclipse packet node radios. It's a three-year agreement. We're delivering our latest packet microwave technology, which includes our new DAC GE3, and that provides advanced carrier class switching, Synchronous Ethernet, adapted modulation and IP over TDM.

And with this customer, we're deploying for the first time a new product called the Network Convergence Module or NCM. This product was developed to enable operators to use legacy TDM links and convert them to carry IP over TDM using something called ML-PPP, which is Multilink Point-to-Point Protocol. This is a unique capability with Eclipse, and it's currently interoperable with certain Nokia Siemens and Huawei base stations, as well as the Cisco and mobile wireless router. It enables operators to save significant base station and router costs when they're upgrading their legacy networks IP.

In Asia we've received some new expansion orders from existing customers in places like Australia and the Philippines, but we've also now closed orders with two new accounts. In fact, if I look at last quarter, we are adding accounts again. One in particular that's interesting is in India because this is important to us because we haven't actually participated much in the Indian microwave market for a while. We have obviously in the WiMax market.

In Africa, we had a good bookings quarter, and trends are for a very strong uptick in business there. We secured a large order for a new non-mobile account in northern Africa, which was a breakthrough for us, and we're seeing strong business trends from our traditional key accounts throughout the rest of Africa. We're really bullish about Africa again, and we've got a number of business initiatives there which we expect will further secure our position there in both products and in services.

North America, as I indicated, North America orders were weak in Q3, but they're growing again. Now, the main issue here was finally moving our North American customers to the new Eclipse products. Also there's been prolonged evaluation processes from certain large customers and increased competitive pressures during the period; however, the reception to the new Eclipse products in general has been terrific, and that's why we're seeing a reversal of the booking decline going forward. It's been really gratifying to get the North American customer feedback about Eclipse, and it's showing up in a number of new customer engagements, customer feedback at the CTIA show in March, not only from existing customers but potential new customers, and it's also gratifying because my observation is we had probably gotten a reputation for having older technology in the North American business specifically, but that's obviously changing now.

In addition, we are getting very high marks for our well-established complete service offering In North America. So we anticipate seeing the beginnings of a North America orders turnaround starting in Q4, and that's based on the number of customer-requested lab and field trials, as well as large volume opportunities that have shown up in both the private network and the service provider spaces.

The Verizon business is running well. They're currently testing additional new Aviat products for compatibility with network equipment from Cisco and Alcatel-Lucent. We're now bidding our newer products into the utilities market and the private network market because these products have now reached a level of maturity that's needed to actually bid into these segments.

You know, in many ways the North American transition has been the most challenging part of the original merger, but this has been a major focus over the past year, and it's now beginning to produce results. Let me make an overall comment about our relationship with our customers. All this restructuring, the product development refocusing, systems conversions and all the other changes that we've made have created some disruptions, which we warned our investors about earlier this fiscal year.

But now we're seeing new energy in the customer relationships again. Our customers seem to be giving us a thumbs-up about what we're doing. It's early, but we're encouraged. A little bit more about restructuring. As we mentioned earlier, we completed the OpEx restructuring in Q3. We expect to complete the manufacturing spending portion in Q4. And as you probably remember, we had supply chain disruptions in Q1, and we had improvements in Q2, but we did very well in Q3. In fact, our delivery performance and lead times significantly improved in the third quarter. Average lead times from Q2 to Q3, they decreased about 25% internationally and about 35% in North America, and on-time delivery improved dramatically.

Of course, as Tom mentioned, the Japan supply situation is a concern, but we don't see that as a long-term issue at the moment. Our lead times are very competitive now. So the big thing for us in the last year obviously has been getting new products going again. So let me comment about that.

I'd say in summary, product innovation is back on track here at Aviat. Major new products that we announced in Q3 included the WTM 3000. This was showcased at Mobile World Congress in February. It's a fully functional carrier Ethernet transport node and a true zero footprint package that reaches unlike other all outdoor packet radios that require an indoor unit or a separate switch and a router to provide networking features.

Customer interest has been very high on both this and also what it implies for our road map as it's planned to be the first of a family of products. And we plan to ship this product later this calendar year. The Eclipse IDU GE3, we also announced this product at Mobile World Congress. This is an ultracompact indoor unit. It combines the very latest carrier Ethernet networking capability with advanced radio features. This is targeted at the deployment of cost-effective wireless tail-end cell site connections on the edge and stand-alone point-to-point links. Initial shipments of this product did commence in the third quarter, which was a quarter ahead of our committed schedule.

In March, we also announced a solution for global backhaul synchronization over packet microwave networks. We did this collaborating with Symmetricom through their ecosystem program. And this we added something called IEEE 1588v2 Synchronization. And basically what this is, is it allows a smooth introduction of 4G and LTE. This is now shipping in the current quarter in Q4.

Now, with regard to the pipeline for new products, our technology developments are progressing well. They remain on track to both lower the costs of our overall portfolio, as well as to further enhance product performance in several key areas. There are focused efforts also on multiple key technology elements that are going to form the building blocks of several new product variants that are going to be released over the next few years.

Just as we initially introduced the innovations of the Eclipse platform several years ago, we are again using innovative technology identifying ways to lower the total cost of ownership for our customers and increase the value of our solutions to better support our financial goals, especially gross margin. So it isn't just about lowering the product cost, but it's also about providing more value to our customers.

Still, it does take time to roll out all of these products, and margin pressures during the transition means we're going to have look for other areas to improve our overall cost effectiveness while we're improving our market reach. We're looking critically right now at all aspects of our business to see how we can continue to improve our business processes and improve our cost effectiveness.

So let me summarize before we go to questions. With the restructuring almost complete and new products being steadily released now, next year FY '12 is going to be a transition year for Aviat. We've reduced costs in our business and in our products. We're introducing new products. Customer interest is growing again. But we still have work to do in examining further how to reduce our cost of doing business. We do feel good about the progress we've made so far this fiscal year. We're excited. We're confident about our long-term success. And I particularly want to thank the Aviat team here. The team of people here have made huge strides in the past year, and I'm very proud of them. So at the beginning of the call I said we would try to help sort out the complicated nature of the results that we're reporting this year, and I think we tried, but I assume you still have some questions. So, Operator, would you now please open up the call for questions.

Thank you, sir. We will now begin the question and answer session. (Operator instructions). Our first question is from the line of Barry McCarver with Stephens, Inc. Please go ahead.

So I guess my first question in regards to the discontinued operations -- anything specific about kind of the timing and why now decide to sell the WiMax business versus several quarters ago? And can you give us any color on kind of, you know, the timing of this deal? Is it something that's been underway or just getting started?

Yeah. So one of the things we've been talking about is that when we looked at restructuring the business at the beginning of the fiscal year, we actually looked at divesting the WiMax business at that time, but the liabilities we had under the contract in India were so significant that we didn't believe that we could successfully dispose of the business at that time until we made very good progress in eliminating the liabilities there by producing the code base and improving the products to a point where we think we are in a good position now to be able to sell the business and not have someone assume a very large set of liabilities. So that's really been the timing around the R&D developments that were the trigger for putting the business for sale.

The timing is we started at the end of Q3 our active selling process. We've engaged an investment banking firm to help us do that. And we're actively marketing the business. We don't know exactly how long it's going to take to do that, but we're actively marketing.

Okay. And then second question for Mr. Kissner. It's certainly encouraging to hear the status of the Eclipse platform, particularly the success in North America. I guess, can you just give us an idea of kind of where we're at in that development? Do you feel like you're over the hump and about to have even more success outside the US as well, or do we still have quite a bit to go in that development?

Well, Eclipse has been firmly entrenched outside the US for a while now. So that one really is just about increasing our selling efforts, just becoming more and more competitive. That's where the price [breakers] are most significant, is outside the United States. Also, I would say that outside the United States we've been pushing pretty hard on our service business, which has been a strong business in the US, and I see some pretty good potential for service outside the United States.

I think in North America, as I said, we've had to introduce Eclipse over the past couple of years, and I'd say right now we have so much feedback now on Eclipse that's positive that it's now -- the reputation of Eclipse is improving dramatically. As our people like to say now when they come back, and they say, you know, this product really works. It's miles ahead of where we were before in terms of the legacy products that were there before. They're just having an easier time. I think the technology adoption rate in North America just has been a slow process for us in general, and it seems that that's now picking up speed. So I guess to answer your question, I'd say we're much more optimistic now about North America. The rest of the world I think that really hasn't changed much in terms of Eclipse. That's just growing from where we are right now.

Okay, great. Thank a lot, guys.

Thanks, Barry.

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

Good afternoon, guys. Thanks for taking my question. Chuck, you talked about competitive pressure, particularly on some larger bids given by some of the Chinese OEMs. Can you give us a sense of what regions you're tending to see this pressure?

Well, the ones that -- the big ones that I know about have been in Europe, in Asia, and a little bit in Africa. I'd say those are the three I've seen the most of right now. But basically, I'm not sure -- you know, I think it is fairly widespread now. It doesn't really much matter. It really matters where are the big bids coming out, where are the big new bids coming out. We do expect to see the full complement of competitors when the bids are large enough, and we expect to see Chinese suppliers in many of those bids.

But the Chinese OEMs are the instigators there from what you're seeing so far. Okay. And then, Tom, just on the model, I'm trying to triangulate some of the comments here. So gross margin in 4Q 32% to 33%, but I guess when we get to the first half of '12, you know, taking into account some of the competitive pressure that Chuck's talked about, before we get to the new products having more impact, should we think about 32% to 33% but with some volatility or should we expect a step down in the first half of the year before the new products and I guess how can we think about that?

Yeah, so I think it will be very mix dependent. We have a good mix for Q4. So we feel relatively confident about the margin numbers for Q4. So depending on the mix, we could see it decline before it starts to come back up again. So that's what I was trying to signal, is we could see volatility and we certainly could be a decline before it starts to head back up again.

Okay. And then on the OpEx line, the $34 million to $36 million on the continued operations, is that a line you guys can hold here, at least until we start to see a material pick-up in revenue?

Yeah. And I think Chuck indicated we're actually looking at ways that we might try and reduce that further, but we're not ready to commit to that yet. But we're at least at that level, and we're going to try and be below that.

Terrific. And then just one final one, and then I'll jump back in the queue. The Japanese disruption that you talk about, I'm assuming we're probably talking about some of the long-haul radios here. Correct me if I'm wrong. And maybe if you could just quantify kind of what that has contributed on a quarterly basis, just so we can kind of size that exposure a little bit.

Yeah, so you're right about the product line. And it's been fairly lumpy because it comes in big orders. So it goes from anywhere from 0% to about 10% of the revenue in the quarter and anywhere in between. So we're not seeing a total collapse of the supply chain. We're just seeing pressure on getting everything we need. So I think we'll see how we do in June, but our expectation is that, you know, it's probably in the sort of 5% or 6% impact on potential revenue, but we'll so how it goes.

Okay. Terrific. Thanks a lot. I'll jump back in the queue.

Our next question is from the line of Aalok Shah with D.A. Davidson & Co. Please go ahead.

Hi, there. Tom, you may have already done this, but what was the book to bill on the quarter?

I'm sorry, can you repeat? A little light on the -- if you're on a speakerphone, can you pick it up?

Can you hear me?

Yeah, now we can.

Okay. Sorry, you may have said this already, but what was the book to bill on the quarter?

It was less than 1.

And then in terms of Japanese suppliers just to follow up on that last question, in terms of how you can kind of shift away from that supplier, is that something that you're planning to do and how quickly can you do it if you are planning to do that?

Well, it's an entire product line. So we cannot easily shift away from it. The supplier themselves is okay, but they have some component suppliers that have issues and they are, you know, rapidly looking at alternative suppliers for the subcomponents. So they're putting together an action plan to be able to source the subcomponents from other people than they currently have been sourcing them from, and we're working with them on that.

Okay. And then in terms of the Middle East, were there any kind of shipment delays because of the recent uprisings there?

In Q3, no, there were not.

Okay. And then for Chuck, just really quickly, in terms of the competition at this point, are you seeing any changes in the competitive field, especially now with Seregon and [Mayora]? Is there any changes that you're seeing out there?

We didn't really notice much in Q3 in terms of change, no.

Okay, great. Thank you very much.

Thanks.

Our next question is from the line of Blaine Carroll with Hudson Securities. Please go ahead.

Yeah, thank you. Tom, just to sort of conclude one of the previous questions, are you expecting any disruption in Q4 from the Middle East?

We have some orders that are being delayed in one or two countries that may or may not make it into Q4 because of some of the disruptions, so from an order standpoint I would say there's some orders that are not very material but there are some orders that will be potentially affected. We took that into account as we looked at our revenue forecasts, so I think we excluded anything that we thought would be risky from the range that we gave you.

Okay. And then are we going to get restated financials? Or are we going to go on a quarter-by-quarter basis as you release?

So from the standpoint of the Q, we would include the comparative periods will have the WiMax comparisons in there. From the standpoint of the previous quarter, the first and second quarter, I think we gave you numbers today that are comparative to Q2. The only quarter you're missing is Q1. And I think that will be in the 10K. You'll see those comparisons.

Okay. And then, Chuck, on the WiMax business, how many potential suitors are there out there for this business? And if you're not able to sell it, you know, how long of a process would this be and would you think of just closing it down?

I think if -- first of all, there are more than I thought, I guess is the best way I would answer it. During the process of starting to market this, our bankers identified quite a few people who had dialogue. There are more serious buyers out there than I thought. So my answer to your second question is more positive than it would have been before. I'm actually much more encouraged about selling it. I think it would be valuable to some other people. It's just not as valuable to us. Obviously we can't keep doing this business forever, you know, with this kind of financials. So we would have to figure out some other way of disposing of it, long-term.

Okay, thanks.

Thanks, Blaine.

Thank you. Our next question is from the line of Rich Valera from Needham & Co. Please go ahead.

Thank you. It looks like I guess with the WiMax business, you're cutting your quarterly OpEx by $1 million per quarter, which would suggest $4 million annual OpEx associated with that. I would have thought it was about double that. But why only the $1 million reduction in OpEx with that divestiture?

Actually, the OpEx for the unit for the quarter was $1.6 million. Just from a rounding standpoint, I brought the range down $1 million. As I said, we're going to try and reduce that further. But the OpEx is $1.6 million, so you are closer to -- we're somewhat in between the two numbers, the $1 million and the $2 million here, so $1.6 million for the quarter.

Yeah, I mean, certainly I would hope to see something at the lower end I guess of your new end given that divestiture. Then in terms of bookings, Chuck, you know, talked about them picking up nicely here I guess in April. I know you have a long way to go in the quarter here, but what do we think about a positive book to bill for the fourth quarter? Is that looking more likely than not at this point?

It's too early to say. All I can say is that our pipeline, our Siebel front-end system here that we use has been pretty reliable in terms of predicting the orders, and it's up very, very significantly right now. So it implies that it's going to be a fairly good number. But as you've said, there's still a lot of time left in the quarter. But that being said, we're definitely off to a good run here right now.

Right. And then for the revenue reported on the quarter, the $115 million, even with the WiMax you would have been $116 million, which would have been the lower end of your range. Yet you entered the quarter with what I thought was good backlog and you sound like your delivery was quite strong in the quarter, so what put you at the low end of what I'm presuming was a conservative range during the quarter? What was it that kind of tripped you up?

I don't know if it tripped us up. That's why we gave a wide range. But we also -- remember, we said -- we really pulled back on WiMax quite a bit. In our original plan, we probably would have done $6 million, $5 million to $6 million of WiMax. That's probably the best way of answering it.

Okay. So where did that business go?

It probably went to somebody else or it didn't go anywhere.

So you weren't contractually obligated to deliver that. You were figuring you would have -- I would have presumed you would have a customer that was expecting that business, but I guess not.

Well, there were certain things that got right close to the wire where we would have had to make some commitments for future development that we weren't prepared to do.

No, that's fair. Thanks. Finally, on the cash side, Tom, a couple quarters ago, I think when you had a $36 million cash burn from ops, you mentioned $20 million of that you thought was really temporary stuff you'd get back, yet we've used cash every quarter since then, and it looks like we're going to use cash again next year to the tune of $0 to $10 million. So just trying to understand sort of, you know, where's the cash going and when do we think we get the sort of true cash flow break even here?

Yeah, so I would say a portion of the cash that we've been using has been going into building up a bit of inventory for our customer service business supporting the legacy business on a going-forward basis. So we've been doing more last-time builds than we had originally forecasted to make sure we have sufficient inventory to support our customers in North America. So as I say that's probably about half of the difference. And then the other half is just that we haven't been able to reduce our accounts receivable as quickly as we thought we were going to, as we originally had planned. We're obviously going to take another shot at that again this quarter and try and eat into our accounts receivable. We did reduce it some last quarter, but not as much as we wanted to. So I think those are the two factors, Rich. It's been a little disappointing. I'd like to have better cash performance. But I think at least we're about break even on the base business.

Are we done with the restructuring charges at this point? I mean, the significant ones?

We still will have some cash expense in Q4 for restructuring charges, some of which were actions we took in Q3 where the cash became payable in Q4, and there's some as I mentioned in operations, some additional severance liability that we'll pay in Q4. So there's still some more, but it won't be at the level. It was the highest level all year-long from a cash standpoint in Q3. And it will be substantially less than that in Q4.

Great. Sorry, one more, a quick one if I could. Chuck, you made the comment fiscal '12 is a transition year. And I think, you know, a couple of quarters ago, I think we were all thinking fiscal '11 was the transition year and fiscal '12 was sort of, you know, the more normal operations year, and now we're talking about fiscal '12 as the transition year. So first, I guess what do you mean by transition year? And is that sort of what you had envisioned, you know, a few quarters ago or are the product developments maybe taking a little longer than you had hoped?

No, I don't think it's any different than what we said. We said we would start introducing new products in the second half of FY '11, which is what we've done. We said it would take time to ramp up those products. A lot of those produced cost reduction. It will take time to introduce those products. Until they became a significant portion of the revenue stream, they wouldn't begin to affect the financial results substantially. We also said during FY '12 we were going to start shipping another whole wave of new products in the latter part of FY '12. So actually all of that is right on schedule, and when I say transition, we're talking about product turnover, going from one generation of product to the next. And it's exactly what we expected, actually.

Fair enough. Okay, thank you.

Thanks, Rich.

Our next question is from the line of Kevin Dede with Brigantine Advisors. Please go ahead.

Yeah, Chuck, just to piggyback off of Rich's question, can you give us an update on the ODU upgrade and where you are there? I'm asking specifically because you mentioned pretty much everything but that one.

The small ODU?

Yeah.

Yeah, we're shipping that now. I thought I did have that in a comment.

Oh, okay. If so, I missed it.

It's called the IDU GE3. Maybe you thought it was the DAC GE3 or something.

No, no, no. My understanding was that you were reworking the ODU.

Oh, the ODU. I'm sorry. Yeah, we've never announced that product. So that's just --

No, understood. I'm just wondering where you are on that given that that inclusion of that in the mix will help you drive to your better margin.

Yeah, it's on schedule. I think it's a good question. That's an important part of bringing the cost down of the products. It doesn't have the splash associated with it with some of the other things that we're announcing. But that is on schedule. And we said that would be shipping fairly early in FY '12.

Okay.

That's one of the ones that has to ramp up over time. As you know, it's introduced a different frequency bands. It takes several months to introduce all that stuff. That's going well right now.

Okay. On the source side of things, granted there's one issue with one product line. I'm wondering what you're seeing for your own manufacturing. Any component issues, pricing changes? Based on our checks, we're hearing that there's certain capacitors are short and may cause changes in pricing. I'm just wondering what you've seen, given your studies.

Well, we've heard some warnings and stuff out in the future, but we have seen no real significant impact on anything else right now. So our belief right now is because we're also making sure we have alternative suppliers, we work with our contract manufacturers to identify additional component suppliers. Right now our belief is we're not going to see an effect of that.

Okay. Broadcom just picked up [profit share]. I'm wondering if you have any comment on whether or not there's an impact there.

No. I think that was inevitable.

Okay. And last question -- just what's going on with the broadband initiative spending in the US? I think last time around you mentioned that there was potential for it, and I'm just curious to see if that might come through.

Well, we're shipping stuff now on the broadband stimulus program. I don't see it as a huge thing going forward actually. We're not factoring much into our numbers.

Okay. Fair enough. Thanks, Chuck.

Our next question is from the line of Dunder Carter with Discovery Group. Please go ahead.

Yes. Hi. Two questions. Approximately what's the world wide headcount presently of the company? And number two question -- is the company basically out of all the legacy from Harris in the domestic side?

First, the answer on the head count is in the base business, the head count is 1,067. And in the discontinued operation we have 81.

Your other question was about where these employees were before the merger? Is that primarily what the question was about in North America?

Yeah, the second question was basically in the pre-merger trains of business that the old Stratex had and the Harris fallout basically is gone. Is that a correct assumption?

So from a legacy product standpoint in the fourth quarter we'll do our last-time build of the two point consolation products and ship those to our customers. And we've replaced those product lines with Eclipse and we're selling Eclipse in North America. We still have the system integration capabilities and the service deployment capabilities from the Harris merger and obviously the sales team selling. But from a product standpoint, you know, which was always the plan, we've now completed the substitution of Eclipse for the legacy products or we will by the time we finish our build in Q4, the current quarter.

Okay, that answers, yes, that we basically did this to acquire the customer base, and then we'll place the old stuff with the Eclipse. Is that also correct?

One way to look at it. But that was the original plan.

Okay. Well, thank you. You're doing good work. Bye.

Thanks.

Our next question is from the line of Joanna Makris with Mizuho Securities. Please go ahead.

I wanted to ask a little bit about the trend of the housing crisis on the suppliers and your new product rollout over the next year or two.

Joanna, you're cutting out really badly.

I'm sorry. Just as you think about the pricing of suppliers and as you launch the new products, are most of the changes driving the economics and the price point for you and profitability or are there some features coming out and functionality that might change or at least shift the dynamic away from pricing?

I think in the short term, it's pricing. In the long term, as I alluded to, it's cost effectiveness but also feature adds which we're really focused on right now. So a lot of the stuff in the new generation of products is about bringing the TCO down or selling things that show up on other products. So, for example, there are a couple of features that we introduced with the new indoor unit -- excuse me, with the Network Convergence Module that we talked about before, which plugs into our indoor node unit. Those are things that would require purchases from the base station manufacturer and from the switch or router manufacturer to put that capability in. That's ML-PPP as an example. The reason this customer was so interested in buying our solution was they don't have to buy this from anybody else. It can all be incorporated into the microwave radio platform. So we believe that gives us an edge. It's more value. And if we convert that into money, obviously that's what our goal is. So we have a number of other things in that category that are in the development pipeline right now mostly around Ethernet network intelligence.

Okay, great. And I wanted to ask about (technical difficulty) if that was an area that was at least somewhat of a focus under the player and wondering if there's any activity or do you view that as a potential, you know, meaningful contributor to represent over the longer term?

I think we lost the subject that you're asking about. It just cut out.

I'm sorry. The smart-end market. Your general thoughts there.

Yeah, I think that's a good potential. I think it's a long-term potential, though. I don't see anything short term, but we've definitely got that market in our focus, at least the backhaul portion of it. We're not going to do -- some of our WiMax stuff was focused on the that before, but, you know, obviously we're not going to participate in that. By the way, are you talking over somebody else's microwave radio? That's the only thing I can conclude.

Thank you very much.

Thank you.

Our next question is from the line of David Zaruk with Blue Mountain Capital. Please go ahead.

Good afternoon, guys.

Hey, David.

A few sort of random questions. Some of this you've already touched on. If I'm doing my math right just in terms of what you've talked about for next quarter, the core business will be I guess profitable at least on an operating basis and generating cash. As we look forward into the front half of the following year, given what you talked about with the need to get the new product out there, can you at least break even in the core business and from a cash basis relative to sort of the margin pressure that could be there versus the incremental cost-cutting opportunities?

Yeah, that's our goal, David. That's why we're looking at some incremental cost cutting.

Is there any way you can frame sort of the magnitude of the margin pressure that we might see in the front half of the year relative to that sort of 32%, 33% order of magnitude you've put out in the next quarter?

You know, I think it's a little too early for that. We'll probably have a much better view at the end of this quarter to be able to give you advice on that. We're trying to get our arms around that. But we'll definitely be better equipped at the next conference call to talk about that.

Okay. But you do think it's realistic to expect you can at least break even vis a vis the other cost cuts that are available to you?

Yeah, that's our goal.

Okay. And then on the accounts receivable and sort of the collection issues there, is that more a function of the business mix you've been seeing? So you have some customers in emerging markets that are on letters of credit, and so you collect that upfront pretty fast but you have other more established customers that you give, you know, longer terms to? Is that the issue? Or is it more of a functional collections issue?

Yeah, so that is the issue, the mix and the quarter. The more we have deals in Africa with LCs, the better off we are from a collection standpoint. And each quarter is different on the mix. The other thing is we did not split out the accounts receivable from a discontinued ops. We're still collecting the funds in the WiMax business. As we talked in the past, there's fairly large receivable from this one India customer that we still have pending. And as we start to collect that, our overall metrics for collections will look much better. That's sort of an outlier because of the terms of that deal and because some of the acceptance criteria for payment or a portion of the payment that caused the overall DSO to look so bad.

Okay. So just again from a mix perspective, if we assume that part of just the cash usage and the businesses that are mix related and presumably it's more of your North American or European tier one type customers that you're seeing dominate the mix who get the longer terms, how should we think about just the magnitude of the cash that you can pull out of AR over the next few quarters versus just, you know, as, you know, the permanent kind of working capital that you have to carry, you know, with those types of customers?

Yeah, so the AR should be much closer to the quarterly revenue levels. And, you know, we see our AR at $140 million with revenue levels at $115 million. So I think that's the difference that I'm going after. As the revenue levels go back up, we would expect the AR to go up as well.

Right, right, but absent that you think you can claw back $20 million, $25 million of cash just from normalizing working cap.

Yeah. And a piece of that, though, is dependent on getting some of these collections to flow. They have started to flow out of India.

Right. Okay, so against that just that backdrop, assuming you can through the transitional year in 2012 and in the front half of that, assuming you can at least break even in the core, sort of following up on a prior question that someone asked, as we get past sort of cash restructurings next quarter and if we assume that you either successfully sell WiMax or just shut it down, you know what would you expect the ongoing sort of cash usage of the business? Should it be sort of break even to cash generative at that point?

Yeah. So we're trying to model the business with the cost reductions, assuming we get the margins right so that we would be -- cash flow would break even slightly positive and the base business in the first half before we start to see the business improve. That's our goal.

Okay. And then just looking at the Japan issue next quarter, it sounds like maybe that was sort of recent news that you got from your supplier. Does your guidance, does it bracket sort of, you know, the worst case scenario in your mind? It sounds like it's specific to one product line, but you didn't really elaborate on how important that product line is within your business. I guess what is sort of the range of sensitivities and the guidance relative to that specific Japan issue?

Yeah, we specifically made a larger range this quarter than previous quarters because of this issue. So it is the risk of that supply chain issue is within the guidance.

I think just to reiterate, I think what Tom said earlier is that the supplier, we have shipments through the quarter. Shipments in the first two months are fine. It's the shipments in June and beyond that is a potential issue.

Right. I guess that's sort of what I'd like to understand a little bit better. If, you know, the guidance range for next quarter encapsulates sort of potential risk in the third month of the quarter, do you expect this to just be sort of a one-month issue until you can source alternative components and therefore, you know, the September quarter and beyond should be okay? Or what would be the implied flow through to the September quarter if it's not, I guess?

So we don't know the answer to that question yet. We are concerned about the impact it may have in July and August. We don't know how long the recovery is because they have to get some subsuppliers requalified for some of the materials that they need as they work through the existing components they have on hand. So, you know, I think the issue of the June, July, August issue at least as we see it now, but we don't know exactly when it's going to recover so that's why it's hard for us to forecast the impact on Q1.

Is that a worst case scenario, Tom? Meaning regardless by the end of September you should be able to have qualified new product if Japan -- if the source of supply in Japan doesn't come back online?

Yeah, I think it's a little too early to tell. We don't have the answer yet. We have a bunch of people going to Japan in the next couple of weeks to go sit down with the supplier and really walk through all the difference and really understand what the alternatives are and also to see if we might be able to help them on some of these issues.

Okay. Can you guys touch on sort of linearity in the quarter in terms of both order flow but also, you know, manufacturing and shipment of product?

Linearity in Q3?

It was good.

I believe that's been a big focus of the restructuring effort to sort of not have orders come in at the end of the quarter and therefore have back-end manufacturing and supply bottlenecks. So just trying to get a sense if you're making progress there.

Yeah, I think we are making progress.

Linearity actually was good for the quarter on three things that we drive through the company, which are cash, orders and revenue. We wish actually more orders would have come in at the end of the quarter, but it wasn't there.

David, I think we're just about out of time allocated for questions here.

Okay, thank you.

Thanks.

At this time I would like to turn the conference back to Cynthia Johnson for any closing remarks.

Thank you, Operator. And thank you for your participation. Just a quick update on our upcoming investor conferences and meetings. We'll be attending the Jefferies 2011 Global Technology Conference in New York City on May 10th, Morgan Joseph road show, Denver May 19th, and San Francisco May 20th; Mizuho road show in Boston on June 1st; and Cowen conference in New York City on June 2nd. Operator?

Ladies and gentlemen, if you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter in the access code 4436571 followed by the pound sign. Replay will be available until May 12th, 2011. This concludes the Aviat Networks conference call. ACT would like to thank you for your participation. You may now disconnect.