Aviat Networks Inc (AVNW) 2012 Q1 法說會逐字稿

Ladies and gentlemen, thank for by standing by. Welcome to the Aviat Network conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(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 first quarter fiscal year 2012 earnings call. This is Cindy Johnson, and I am joined by our Mike Pangia, President and Chief Executive Officer; Ned Hayes, Senior Vice President and Chief Financial Officer; and John Madigan, Vice President, Corporate Controller, and Principal Accounting 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 Securities and Exchange Commission. These can be found on the investor relations site of our website, which is www.AVIATnetworks.com. Now I'd like to turn the call over to Mike Pangia, President and CEO of Aviat Networks. Mike.

Thanks, Cindy, and thank you all for joining us today. I'll provide some comments about our progress during the first quarter, including an update on the business, and review of the market conditions. I will also formally introduce our new CFO, Ned Hayes. Then John Madigan, our Vice President, Corporate Controller, and Principal Accounting Officer, and most recently, our Interim CFO will provide a review of our financial performance.

I would like to start by saying that I am pleased with our first quarter financial performance. From a top-line perspective, we finished above the high end of our guidance, with revenue coming in at just over $111 million, and with an orders book to bill of approximately one. Non-GAAP gross margins were right in line with our expectations at 29.7%. Our restructuring efforts during the last year, and the renewed focus on our core competency of microwave transmission translated into a profitable quarter on a non-GAAP basis. Our business model improvement is clearly evident when comparing our performance on a year over year basis. We will continue to focus on optimizing our expense levels, while improving our internal processes. John will provide additional details in a moment.

Beyond the financial performance in Q1, we also accomplished another key milestone with the divestiture of our WiMAX business. Having previously divested our Netboss business, we are firmly positioned to focus on wireless transmission and backhaul for both public and private networks around the globe. Now I would like to provide an update on our view of the microwave transmission market. We continue to secure orders and expand our footprint with existing customers in the mobile operator segment, using our current technology and service capabilities. We believe that there is steady growth in the segment, and that it will continue over the long term, as mobile operators build network capacity to address increasing demands for bandwidth. We recognize that in order to significantly expand our mobile operator customer base and displace competitors, we need to bring our next generation of products to market, and I will provide an update on that shortly.

We're encouraged by the signs of growth in non-mobile segments, mostly in North America today, but increasingly in other parts of the world. Typical applications are in utility and public safety networks, where the emphasis is on quality, service, reliability and network security. Requests for turnkey services have also grown, with new opportunities in both the mobile operator and private network segments. An area of moderate concern relates to the ongoing flooding disaster in Thailand, which is where one of our contract manufacturers is located. Working closely with our CM partner, we have triggered our disaster recovery process, and our operations team is utilizing safety stock to prioritize shipments of the effective eclipsed products to minimize the short-term impact to our customers. To resume production of the affected products, we relocated part of the production to a new facility outside of the flooded area, and for the balance, we'll be utilizing our broader CM base. We expect the transition to take approximately three weeks. While the full effect of this disaster on our business is still under review, we are taking all possible steps to mitigate the impact on our customer base. I am proud of our Team's expertise and diligence during this period in our efforts to quickly mobilize to address the situation.

Now I would like to comment on some specific activities by sector. In Africa, we saw increased orders from our customers in Nigeria, as they continue network coverage expansion and capacity improvement plans. Orders in Q1 included the first WTM 6000 sale in this sector. This is a significant milestone for our long haul trunking products. We also received significant orders from our customers in South Africa and Kenya. Also, we are seeing continued business from traditional customers in Saudi and Iraq, as the regional strength in key Middle East countries continues to grow. Our strong service and support capability in this region remains a key competitive differentiator for us. In Europe, we saw an acceleration of orders from our tier 1 operator customer in France. This is a typical scenario where they are overlaying an existing mobile network with enhanced mobile data capability, and using the latest feature sets in our hybrid packet microwave technology to make best use of existing network assets.

In the non-mobile area, new projects and project extensions in the defense and security segment continue to generate additional opportunities in that vertical market. Our Asia-Pacific focus continues to be on top-tier mobile operators in specifically targeted countries. Orders in Q1 were in line with our fiscal year 2012 plan, and we see good ongoing activity over the next few quarters. We are also beginning to see broader opportunities in other market verticals, such as public safety and national security. In the quarter, we also received a follow-on order for a large public security project in Malaysia working with one of our global system integrator partners.

In North America, the private networks base continues to be a strong market for us. We have an extensive track record in this segment, and are one of the most trusted names when it comes to providing mission-critical microwave solutions. Q1 marked another strong quarter, led by a significant multi year turnkey solution win with a large Midwest utility. We also announced that we were selected by the state of West Virginia to expand their existing microwave network to provide high-capacity IP transport connectivity that will form a key component of the West Virginia statewide broadband infrastructure project. In addition, we successfully completed product evaluation and qualification with a number of large West Coast utilities, and are beginning to receive purchase orders to support their network upgrades for smart grid. Our mobile carrier business in the region was steady in Q1. As we enter the second half of our fiscal year, we're expecting sales to our mobile carrier customers to increase, as they begin to build out their LTE networks into rural America.

Now, I would like to provide an update on our products and services. Our product development plans are proceeding in line with our expectations. The all new RF design is key to the cost reduction of our current eclipse platform. It forms the part of our future generations of radio products, which began shipping in two of the five highest volume frequency bands to customers in Asia-Pacific and Europe. The next two bands are scheduled to be in production by the end of the current quarter, giving us an excellent opportunity to ramp volume, and to transition from the current version to the new one during calendar 2012, just as we said a year ago. Legacy products for North America have now been fully replaced by the eclipse based IRU600 platform, and its market leading performance and feature set is helping us to regain market share in several vertical market segments. Customer feedback for this product has been positive, and the enhancements we are introducing for strong security, data encryption, and integrated loop switch are important differentiators in mission-critical public safety and utility network applications.

I am excited about the progress we are making on our technology road map and the ways in which we have addressed assuring with our customers of backwards compatibility and maximum reuse of assets. We are seeing this as an increasingly important customer evaluation criterion. I will continue to update you on our progress in the coming quarters.

Now, I would like to provide an update on our fiscal year 2012 objectives and plan. In the last earnings call, I mentioned that we are focusing on four key objectives for fiscal year 2012. They included; acquiring new customers, focusing on improving costs and operational efficiencies, continuing to accelerate innovation in wireless transmission, and investing in our service capabilities to strengthen our competitive position. I'm excited to report that we are moving forward with our plans, and have made progress in each of the key objective areas. In Q1, we added 34 new customers. This is about the same number as what we added in the last fiscal quarter, although we are seeing an increasing number coming from North America.

Within the past week, I made a few organizational alignment changes with our global operations and services structure to streamline processes and reduce complexity. We also reallocated internal resources to better align the talents of our sales force with global sales opportunities, by creating a new business development team focused on positioning our new technology towards acquiring new customers and entering new markets. In engineering, we will continue to focus on accelerating innovation, while reducing product costs to improve the bottom line. As mentioned earlier, our overall product road map remains on track, and we are executing the key milestones against this plan on a quarter to quarter basis. Relative to our service capabilities, we continue to see strong demand for our maintenance and support business, leveraging our large install base, and we continue to work on enhancing and expanding our portfolio of services offered on a global basis.

Most recently, we received top marks for a customer service and support program in an Infonetics microwave survey. According to the survey, peer providers and customers alike agree that Aviat Networks's program is a leader in this industry in this critical area when selecting a microwave provider. Looking ahead, we remain cautiously optimistic about our near-term business opportunities, while remaining focused on executing our fiscal year 2012 plan. Longer term, we continue to be confident that the rollout of our new products and the upcoming platform refresh will restore our competitive advantage and provide the industry's leading value proposition.

Now I would like to turn the call over to John Madigan to provide an update on our financial performance. Before I do, I would like to take a few minutes and formally introduce our new CFO, Ned Hayes. Over the course of the last few months, we actively searched for a new CFO. When we outlined the attributes we were looking for, we had a tall order. We wanted an individual who had been a CFO for a public company, and with a strong track record in investor relations, had been involved in mergers, acquisitions, or company integrations, has a strong background interacting with public company boards, has global business and functional experience beyond finance, especially in IT and systems, supply chain and manufacturing. Has a good understanding of telecommunications and high technology. Last but not least, a strong finance professional, with a track record of building and leading great teams. Our goal was to hire a CFO by the start of our second quarter. After a comprehensive search, we found the right candidate for our Company in business that possessed all of the attributes from our wish list. With that, I would like to formally introduce Ned, and welcome him to our Aviat Networks team.

Thanks, Mike, for that warm introduction. I decided to accept the role of CFO at Aviat Networks because of the Company's proven track record of success, their strong Management Team, and solid balance sheet. I firmly believe Aviat Networks has much to offer its customers, and is well positioned for future growth and profitability. I very much look forward to supporting the Company in its plans to creating shareholder value, and want to thank Mike and the Aviat Team for appointing me to this position. Now I would like to turn the call over to John Madigan for an overview of our financial results. John?

Thanks, Ned. Our GAAP financial statements, along with a reconciliation of non-GAAP financial measures, are included in our press release. I would like to take a few minutes to summarize our non-GAAP financial performance at a high level. The key highlights from the past quarter were revenue of $111.4 million, which was at the high end of guidance, and was up 11% year over year, and down 8% sequentially, due to seasonality. Gross margins of 29.7% were within the range of our plans. As mentioned on the previous call, the positive impact of the previous year's restructuring is substantial.

In Q1 of last year, OpEx was $39.3 million, including WiMAX, and $37.2 million, or 37.1% of revenue after excluding WiMAX as a discontinued operation. In Q1 of fiscal '12 after the cost reductions to base business and without WiMAX OpEx was 32.8 million, or 29.4% of revenue. First quarter expenses came in lower than expected, partially due to certain costs, which were delayed into the second quarter. Net income was positive at $100,000. Cash used in the quarter was $10.6 million, which was at the high end of our estimates. Cash usage during the quarter associated with restructuring, discontinued operations, and exiting the North America legacy product line was approximately $8 million. The disbursements associated with exiting the North America product line represent final payments to suppliers which had terms extending into the first half of fiscal '12. The remaining cash usage of $2.6 million was related to the timing of vendor payments.

I would now like to elaborate on our discontinued WiMAX operations. During the quarter, we divested the WiMAX business and recorded a loss of $2 million. The divestiture of the WiMAX business was part of our overall restructuring plan, and will have a meaningful and positive impact on the overall business going forward. Although the divestiture has been completed, we still have remaining accounts receivable, and liabilities on the books that need to be settled. For the balance of the year, we expect the cash flow from settlement of these items to be slightly positive. We have cash outlays for a remaining supplier and employee related liabilities, transition costs, and costs to support a remaining customer. The majority of this cash outlay will be in the second quarter, and will be included in the second quarter cash guidance we provide. We also have remaining accounts receivable from a large WiMAX customer, and we expect to collect a substantial portion of this balance in the second half of the year. Now, I'll turn the call back to Mike.

Thanks, John, and also a big thank you to you for stepping into the CFO role on an interim basis, helping our business remain on track in anticipation of Ned's arrival. Now, let me conclude with our revenue guidance for our second quarter of fiscal year 2012. Based on current trends our revenue outlook range is $100 million to $110 million. However, as mentioned earlier, we are still assessing the impact on our business from the flooding in Thailand, and cannot say accurately if or how it will affect our second quarter. We will update our guidance should we learn of any tangible effect on the business. As mentioned earlier, we have actions underway to mitigate the effects from the flood, and we hope to minimize the impact. We expect Q2 gross margins to be slightly down from Q1 in the 28.5% to 29.5% range. This dip is primarily attributable to product mix and an increase in the cost of goods sold related to our Thailand recovery efforts, which we have made a conscious decision not to pass on to our customers.

As we stated on the call last quarter, we will drive sales of our existing product line in Q1 and Q2, phasing in our new cost-reduced products as they become generally available. Accordingly, we do expect gradual gross margin improvement beginning in the second half of fiscal year 2012. Longer term, our gross margin targets remain in the mid 30s, to be obtained by the introduction of the next generation of products that are now in development. As we stated before, we do not expect to achieve these longer-term goals until the latter part of fiscal year 2013. In the last earnings call, I said that we would be able to reduce our operating expenses to the $32 million level in Q2. Because the timing related we just discussed earlier, we now expect that our spend will be in the range of $32 million to $32.5 million for the second. On a go-forward basis, opportunities remain to further optimize and better align our spending to ensure that we are investing in the key areas supporting our overall objectives.

We are anticipating reasonable cash collections again in the second quarter, given the accounts receivable balance. We expect cash from continuing operations to be slightly negative to break even. We expect to use cash for restructuring and discontinued operations payments of approximately $4 million to $6 million. Most of the cash we expect to use in Q2 is associated with these activities, and our expectation is that cash flows related to these activities will significantly diminish. And looking ahead, our objective will be to generate cash in the second half of the year. I would now like to conclude the Management overview with a summary of a few investment considerations.

Our restructuring is largely behind us. We have refocused our business on its most valuable part, the core microwave transmission segment. We have a stable $400 million plus business that is break even to slightly profitable. The top line and market share have now stabilized. We have a solid balance sheet. As the major restructuring and business divestitures are now completed, we are moving from cash break even on to cash generation. We have a well defined technology road map and are successfully executing against this plan every quarter. We have a strong, loyal customer base in both mobile and non-mobile markets and who have demonstrated their confidence in our ability to deliver on our next generation of valuable products and solutions. In conclusion, these are some tangible proof points that we believe will create shareholder value.

Now, I would like to turn the call over for questions. Operator, you may proceed with the Q&A.

Thank you, sir. We will now begin the question and answer session.

(Operator Instructions)

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

Thank you. First on the revenue guidance, I was wondering how much caution you have baked into that, due to the Thailand manufacturing situation. I guess a couple quarters ago, you guys had about $120 million of revenue and I think a book to bill at or above 1, and then this quarter $111 million of revenue with a book to bill at 1. You had been booking comfortably above, let's say, $105 million revenue level, which is the guidance you've given. Just wondering what was going on with the guidance relative to your recent relatively strong bookings.

Yes. I want to be clear on this, Rich. Our revenue guidance for Q2 is $100 million to $110 million. That's our current view, what we expect the revenue outlook to be. We still don't have, with all of the accuracy associated with what the impact of Thailand would be, and to the extent -- to the extent that there's a tangible effect on this guidance, you know, we will provide an update to the extent that does occur. You know, as far as -- we don't give details around the book to bill in terms of whether it's -- how far below and above 1, et cetera. The reason we don't do that is because, at any point in time, the conversion rates associated with bookings differ. But I just want to reiterate, our guidance is $100 million to $110 million for the second quarter.

I'll try to ask it a different way. Is maybe the disconnect between the recent strength in bookings and the current guidance due the fact that these bookings are longer term in nature, and won't necessarily be reflected, you know, in the next quarter or so, or is there a change in the demand outlook that would warrant lower guidance? Just trying to get any better feel for that guidance of bookings.

Yes. So one of the perspectives I gave around what's going on in our segments. I mean, we are seeing growth in North America in the non-mobile segment. We are winning large turnkey multi-year deals in the utilities and private network space. These projects do have a conversion rate to revenue that would be a bit longer than a traditional product sale. So to the extent that business grows significantly, that could have an impact on the conversion to revenue. But, I guess, at this point in time, it would be -- just giving you a little bit more color around that area, but I wouldn't necessarily say that we've seen anything to this point in time as significantly or materially different at this stage.

Okay. I'll try a different track of questioning on it. On the WiMAX related out flows -- I guess first were you paid any sort of compensation for that sale? Secondly, I think you mentioned $4 million to $6 million of expected cash out flows. I was wondering how much of those are WiMAX-related, and then the flip-side, how much do you expect to eventually collect from the WiMAX receivables in your second half?

Okay. So on the compensation on the divestiture of the sale of WiMAX, we did -- there is a $390,000 of consideration that is payable later in the year, and then there is an earn-out, which can go up to $2.8 million, and that's tied to revenues and margins over a period of time. But we haven't received any of that cash at this point, and that was not anticipated, that we would be receiving that yet. Then, on the $4 million to $6 million, that's -- of the anticipated cash out flow in Q2, that's a combination of WiMAX, it's also a restructuring -- from the restructuring programs we had done on the base business, and there is still some payouts associated with that, and there is also some inventory-related payouts, and that's both related to the WiMAX product line, as well as the North America legacy product lines, you know, related to inventory purchases for inventory that had been fully reserved for. That's all included in the $4 million to $6 million estimate of Q2.

Right. And then as far as the potential cash collection is concerned, I mean, there is a substantial receivable balance that remains in place with a specific customer that we intend to collect a substantial portion of in the second half of the year. It's sizable. Any more detail on that wouldn't be appropriate, because there's a certain degree of effort still required on the amount. But that would help us from a cash perspective in the second half of the year.

Okay. That's helpful. I'll yield the floor and get back in the queue. Thanks.

Thank you. Our next question comes from the line of Matt Thornton with Avion Securities. Go ahead, please.

Good afternoon, guys. Mike, not to beat a dead horse, but coming at this from a little bit of a different angle, I want to make sure I understand this. So the guidance for the $100 million to $110 million, does that bake in any cushion for Thailand, or do you just not know enough to have baked in any cushions?

I just don't know enough. This is what we see as our outlook. As I said, and I'm going to say it again, to the extent that, as we get more information and we have a higher level of accuracy, to the extent there's any tangible effect on that guidance, we will provide that.

All right. Fair enough. And then on the gross margin impact, you talked about some of the Thailand efforts and the recovery costs there being baked into that $28.5 million to $29.5 million guide. Any quantification around that? You know, if you backed that out, would margins have been flattish, or up directionally, or any color you can provide there?

Well, it -- I mean, we baked that in -- I don't know how specific I could get on that. It's -- I guess it would be -- you know, it's part of the range. The reason it's baked in, by the way, is because we already know of those costs as a result of expediting material, getting manufacturing equipment to different sites. So, you know, that's kind of the extent to which to quantify it at this point. Once again, the reason I don't want to get more specific than that, is this is what we know at this point in time. There's still some work to be done, so I'll leave it at that. So what we've built in is the known effects to this point in time.

Okay. Fair enough. Moving down the P&L on the OpEx, you guys had previously talked about a $32 million run rate, and I think that was leveragable up to about $130 million in quarterly revenue run rate. Is that still a reasonable way to think about this going forward, or is there additional room to take that lower?

You know, so I think it's reasonable to assume that $32 million level is an appropriate baseline. At the same time, you know, we will continue to look at opportunities to optimize our expense, based on our key objectives, and I use the word optimization to the extent that investing in the right areas, whether it's for growth or for improving your processes and efficiency, that's where our investments are going to go, where we can get the biggest return for the dollars we spend, but it's definitely still appropriate to consider a $32 million level as being sufficient to grow this business beyond its current level.

Okay. And then one more on cash, if I could. I just want to make sure I understand this. So you guys had previously talked about cash usage of $10 million this year for non-operating activities. I think we did $8 million this quarter. You're guiding $4 million to $6 million the next year, so above that $10 million. The incremental delta there, is that all explainable by the WiMAX sale?

Yes. The incremental delta there would be -- I think when that estimate was put together, we were assuming some collections, as well. And so, you know, if you look at the back half of the year, we had mentioned that we expect to have some positive cash flow associated with collection of the receivables. That was the thought process at the time, coming up with that estimate.

Okay. Terrific. And then just on the second half, any way you can give us the likelihood of collecting on that in the back half of the year? Is there a high likelihood? Is there any additional color there?

Well, we believe that it's reasonably likely. You know, this is a customer in India. So there's a lot of work that we have to do, just kind of working through this, but I think, yes, we believe there's reasonable likelihood.

Yes. We understand the actions and the activities that need to be in place, that need to be executed to collect that cash. So, there's still work to be done. Hence the reason why, I guess, we've got a fairly high level of confidence, but it's still subject to some execution there, and the timing is always tricky in India, as well.

Fair enough. I'll jump back in to queue. Thanks, guys.

Thank you. Our next question comes from the line of Barry McCarver with Stephens Incorporated.

Hi, guys. This is Matt Kaplan in for Barry. I just had a question on what pricing looks like overall, and then how pricing is holding up, I guess, for your new products that you've been releasing.

So pricing continues to be intense. It continues to be, you know, a substantial -- something that we're dealing with substantially on an ongoing basis, so I haven't necessarily seen that intensity change in any way. We do see -- we have been seeing a heightened level of intensity as some of the Chinese suppliers are very focused on some -- they're focused on emerging markets and large operators, of which within our existing to customer base, we have some of those, and therefore, you know, we have to continually work hard to protect our existing customers, and we're doing a fantastic job from a customer retention perspective. But the competition continues to be intense.

Got you. Last quarter you posted a big quarter for revenue out of Africa, and this quarter it held up pretty significantly. Looking out through the rest of the year, do you guys see that staying up? How is business in Africa looking overall?

Yes. So our business in Africa continues to be strong. Africa is heavily weighted towards the mobile side of things, as we all know. Mobile customers have budget and CapEx profiles, which are difficult to predict at any point in time. So what we've seen in the past in Africa is beyond a quarter. It's very difficult to predict what may happen there.

Okay. Great. Thanks, guys.

Thank you very much. Our next question comes from the line of Kevin Dede, Brigantine Advisors.

Good afternoon, Mike. Congrats on the nice top line.

Thank you.

I just wanted to understand the implications of Thailand in gross margin. You said $28.5 million to $29.5 million. I'm wondering what you thought they would be if you didn't have to make the adjustments that you need to make, whether or not the new IDUs you're shipping, I'm sorry, ODUs that you are shipping would have shown up otherwise in the December quarter?

You can help me, John, on this one. I mean, I think I already answered the question on Thailand. It's very difficult to get anything beyond what we said, which is some of the impact in our margins in the second quarter are associated with what we currently know is going to happen there. Anything more precise than that, we have got some product mix changes going on down there as well. So it's probably -- I can't go more than that. John, you want to add anything?

I would concur with that. The range that we see is $28.5 million to $29.5 million, factoring in what we know at this point. Those are the estimates that we feel comfortable with.

Now I know you gave us a little insight on new products in general. You said the 6000 was out for revenue. Are you shipping pretty much all frequencies in that product that you hope to, or is there still more work to do there?

Sorry. Can you give that to me again? Are you talking about the frequencies in our --

Yes. In the 6000, and I was also going to ask you the same question as it relates to the 3000.

Okay. So -- yes. On the 6000 side, we've introduced the product based on our expectations there. The 3000, we've always said is a second half product; and that still remains on track to be introduced in the second half. And anything beyond that, I would have to get back to you, anything more specific to that.

Okay. Then you also mentioned you were shipping frequencies that were popular for use in Europe and Asia on the new ODU. Did I understand that correctly?

That is correct, yes. That began to ship, and we're now into the next couple of bands of that. There's five most popular bands. So that will progress as we move forward.

So do you expect to be shipping those five most popular bands by the end of this calendar year?

By the end of this calendar year? We've done two, and let me be specific here, again.

I guess what I'm wondering, Mike, is you mentioned incremental progression and gross margin expense, and I'm just kind of wondering whether or not the products are sort of coming out in a rate that substantiates that.

Yes. So let me try to give you a bit more flavor on these outdoor unit, these frequency bands, right? We've got two bands coming out which are out now, followed by the other three, to complete all five bands over the course of the next couple of quarters. The challenge -- not the challenge we have, but the way this works is, there's a combination of things going on in terms of getting these outdoor units into our customer base. In many cases we're converting the existing outdoor unit to the new one. We're working through that process now.

In some cases, the customers require all bands to be complete rather than piecemealing one at a time. Some customers have a new product introduction cycle where you have to take things through the lab. We've got that going on. So there's a combination of events that are going on there. We do expect to start ramping volume in this new outdoor unit over the course of the second half of our fiscal year, and that will be, obviously, a positive effect on our business going forward.

Okay. Can you give us an idea on your bidding activity, and what you've seen in Western Europe and Latin America, and your competitive position? I mean, granted you talked to pricing, and it remains tough, but I'm more curious about those two reasons, and whether or not the new ODU ramp is improving your competitive position, number one, and number two, how aggressive you're being. And is any of this gross margin pressure that you're talking to in the December quarter related to more aggressive bid position?

Yes. So here is kind of the way this is playing out, and it is in phases. In Western Europe, I mean, what we're seeing is, we are seeing opportunities emerge in the non-mobile segment, and I think that's something, a characteristic that we're seeing all over the world. At the same time, we have the opportunity to expand our footprint within our existing customers. We also have the opportunity to convert the existing product with the new ODU within existing customers as well.

As far as penetrating brand-new customers that have had no footprint -- we have had no footprint with them brand-new, that's probably the latter stage of or opportunity for growth, and that's where it will be a combination of both our new outdoor unit, as well as our new platform from the internal intelligent networking side, a combination of the two, where we will require both market-leading performance and a substantial improvement in cost, a combination of those two which will position us best for penetrating those new large mobile operators that have not done business with us in the past. That's specifically the area that our Business Development Team is focused on, Kevin.

Okay. I'm sorry to interrupt you here, Mike, because you're going right in the direction I was hoping you would talk to. Is it that 3000 platform that you need to get to this position?

No. The 3000 is an all outdoor, all IP radio, which will be introduced in the second half. It's too early to tell how large or significant this market is versus the hybrid product that we're currently shipping and, we're looking to replace. But we do expect this to evolve over time. But that is not the trigger for significant new customer acquisition in the large tier 1 mobile operator segment of the business. We currently do not do it today. We do not see it, at this point in time, as being the trigger for that.

Okay. So what you are saying, though, is that the trigger is the combination of this new ODU, and then new features and functionality that you're going to introduce for the IDU?

Our new product platform, from a packet node perspective, which is the internal networking capabilities. It's a combination of those two, it's a refresh of our portfolio that will be the key trigger to that large tier 1 mobile operator segment.

Okay. Fair enough, so that blanket statement is applicable to pretty much every geography.

Well, not necessarily. I would say that, as far as the stages of our growth plan, I would say that in North America, where we already have a market-leading all indoor unit leveraging the eclipse platform, we see continuing evolution of that, and the opportunity to continue to strengthen that portfolio. So I do believe that our opportunity to expand our base beyond non-mobile and mobile could happen in North America, ahead of some of the international markets.

Okay. Thanks for the extra detail, Mike. I really appreciate it.

Thank you, Kevin.

Thank you. Our next question comes from the line of Gunther Karger with Discovery Group. Please go ahead.

Hi. Thank you for taking the call. I think you guys are doing a great job. Having said that --

Excuse me, sir. Can you please speak up?

Hello? Could you hear me or not?

Now we can hear you, sir.

Yes. The question is -- the comment was that you guys are doing an excellent job turning the company around. Thank you. The reverse -- flip side of that comment is, while that's going on, the equity keeps on sliding. Question, is there anything that's going to be done differently over the next 6 months, say, to address this continuing problem?

So one of the things that -- I think we have a huge opportunity, Gunther -- thank you for your observation, with our new CFO on board, I think we have got some fresh eyes and some capabilities to help us drive for shareholder value. So, I don't know, Ned, if you want to provide further perspectives.

Gunther, I'm absolutely on board with the crew points and the investment considerations that Mike ended his comments with earlier in the call. I think we have done a great job stabilizing the base. We have a tremendous embedded base of customers. We are executing against our technology road map that is going to deliver lower cost products and feature rich products that our customers are very excited about receiving. We've gotten very positive feedback from them. It is all about executing against that road map, and making sure, as the financial engineer of the company, that we are optimizing our profitable revenue growth, we're optimizing our cogs so that we can maximize our gross margins, as we deliver these new low-cost products to market, and that we continue to optimize our expenses to make sure that we are as leveragable as possible, so that as we grow the Company, that benefit drops to the bottom line, while we continue to maximize efficiencies in R&D, our marketing and sales groups, and our G&A groups. So I think, again, I joined the company because I absolutely firmly believe there are extraordinary opportunities here to create shareholder value vis-a-vis where we are today.

Thank you, sir. Our next question comes as a follow-up from the line of Matt Thornton with Avion Securities.

To piggy back on a prior question regarding the product road map, I think I understand the time line and the implications of the newly redesigned ODU. The second half of the story is obviously the new IP platform. My first question is, can you remind me of the time line of the platform? Is that in the second half of the year where we start to see that, or is that a fiscal '13 product?

So there's -- as far as going to the new platform, we're talking about a fiscal year '13 introduction. In the second half of that, we would start to see some volume ramp in that area.

Got you.

And we'll be providing more updates as -- a lot of this is in development right now. So as we move forward, we will be providing more updates on this, as we move forward.

And I guess my more overarching question here is, you guys haven't been able to compete in a lot of the cost-sensitive areas, where arguably that's where some of the highest growth has been. So when we fast-forward to fiscal '13 and with the new ODU, the new all IP platform, some of the other periphery products, do you feel you'll be in a cost position to reengage those cost sensitive markets while others, Huawei, Ceragon, several others tend to lead right now?

Yes. So as I said, I was trying to give a bit of some perspectives around how I see our growth playing out. Clearly opportunities -- North America will probably be one of the leading markets relative to growth. We have an opportunity to extend our product leadership there, and that will be in both the non-mobile, followed by the mobile segments. And then I do anticipate -- it's not just about cost-reduced elements of our portfolio coming out. These are also increased -- are better in terms of performance. The combination of the two will allow us to also grow our non-mobile segment, albeit it's a smaller adjustable market on an international basis, and we're already seeing signs of that.

Also, it positions us better within our existing customers to expand our footprint with those customers, but also to improve our value proposition with them. We do have the ability for, all products we introduce are backward compatible, which is good from the standpoint of leveraging our install base, but also provides a long-term evolution and upgrade plan for our customers. Total cost of ownership is very important. But when it comes to price-sensitive, brand-new markets and-or price-sensitive large, tier 1 mobile operators, that would be the last leg of the stool, and because that is, to your point, that's probably one of the largest markets that we have not addressed to this point. That would provide us with the greatest leverage in terms of growth on the top line.

Thank you, and that's all the time we have for questions. I would now like to turn the conference back over to Cynthia Johnson for any closing remarks. Please go ahead.

Thanks, everyone, for your participation. Just a quick update on our upcoming investor conferences and meetings. On November 15, we will participate in the Stephens Conference in New York City. On November 29, the Rodman and Renshaw Road Show in Detroit and Cleveland, and on November 30 and December 1, the Morgan Joseph Road Show, New York City and Boston. That's it. Thank you very much, and that concludes our call.

Ladies and gentlemen, this concludes the Aviat Networks conference call. You may now disconnect. Thank you for using AT&T Conference.