L3Harris Technologies Inc (LHX) 2003 Q4 法說會逐字稿

Good afternoon and welcome to Harris Corporation's Fourth Quarter Fiscal 2003 Earnings Release Conference Call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations. Please go ahead madam.

Thank you. Hello everyone and thank you for joining us today. We are reporting today on Harris Corporation's fourth quarter fiscal 2003 quarter. I am Pamela Padgett, Vice President Investor Relations and with me on the call today is; Mr. Howard Lance, Chairman and CEO; Mr. Bryan Roub, Senior Vice President and Chief Financial Officer; and also Mr. Bob Henry, Senior Vice President and President of the Government Communication Systems Division. Before we get started today, I would like to say a few words about forward-looking statements. In the course of this teleconference, Howard or other management may make forward-looking statements. Forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks, and uncertainties, please see the press release and filings made by the company with the SEC. In addition in our release and on this teleconference, we will discuss non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in the release and is on our website. Additionally, an audio replay of this call will be available on investor relations section of our website which is www.harris.com, and with those words, Howard, I will turn it over to you.

Thank you Pam and welcome everyone to our Q4 earnings call. Today we are going to discuss fourth quarter financial results for the company, cost reduction actions taken in the fourth quarter, fourth quarter segment results and then we will close with our outlook for fiscal year 2004. Then we'll open up the lines to answer your questions. Turning first to the total company results for our fiscal fourth quarter. Overall, I think we had a good quarter in spite of the continuing weak global economic environment. I was pleased with our results in aggregate and we met our financial expectations. More importantly, during the quarter we completed a number of important cost reduction actions that we previously announced in May. These cost reductions position us to deliver significant improvement in fiscal year 2004 earnings. Revenue for the company increased 17% in the quarter over last year and new orders in the quarter also increased.

Net income on a GAAP basis was $0.7m with EPS of 1 cent per dilute share and that compares to 26.6m and EPS of 40 cents per diluted share last year. However, net income was reduced in the quarter by $38.4m in pretax charges. These charges are associated with our cost reduction actions that we announced in May. You will notice we went a bit further with our actions than the $30-35m range we had anticipated, but we wanted to take as many actions as possible to derive the maximum benefit going forward. These actions will contribute approximately $25m in annualized savings in fiscal 2004. Excluding these charges net income was $26m in the quarter with EPS of 39 cents per diluted share. Income from the sum of our 5 operating segments grew by 22% over last year showing excellent improvement from operations.

Non-operating income in the quarter was only $1.6m compared to $7.7m last year reflecting lower sales of marketable securities related to our previous technology investments. My further comments today regarding the performance of individual segments will reference our performance excluding the cost reduction expense impact. This non-GAAP results for the fourth quarter and the fiscal year are detailed in table 6 of our press release. We continue to have outstanding results during fourth quarter at the government communications systems and RF communications divisions. The principle revenue drivers continued to be first, a favorable government procurement environment for the technology upgrades in both defense and civilian communications networks and for tactical radios and second here is market share gains.

Our excellent performance also continues to reward us with new classified programs. As expected our commercial communications segments had mixed results in the quarter. Broadcast communications division was below the prior year in the fourth quarter, as many of our customers delayed further their planned capital spending projects. The microwave communications division achieved modest revenue growth; while the network support division was profitable, excluding charges for the first time in 10 quarters.

We have a long way to go in further improvements, but I believe these are signs of progress. Our commercial divisions continue to be clearly focused day in and day out with managing their businesses and markets that are clearly going through a bottoming process. Let me now turn our attention to some comments on the segment detail beginning with our telecom business first.

Sales at the Microwave Communications divisions were $78m in the quarter compared to $65m last year. North America sales continue to be stronger than the prior year. Sales to cellular and PCS service providers in the region mainly for [backhall] were solid and the private network business was also good. Harris continued to maintain its leading market share position in the U.S. market.

International sales grew nicely in the quarter compared to last year. Areas of relative strength continued to include Eastern Europe, South East Asia, the Middle East, and Africa. The Microwave division reported a $2m operating loss in the fourth quarter. Gross margins were below the prior year quarter and the current year third quarter as a result of sales mix and supply chain transition issues.

I'd like to spend a few minutes talking about each of these issues, as well as, to describe actions that have already been taken to improve the results going forward. First with regard to sales mix, about $4m of Microwave revenue in the fourth quarter resulted from the sale of excess electronic components in our inventory. These component sales were made at the same prices as our acquisition cost. So they did not contribute to operating profits in the quarter. This action generated cash and will improve inventory turnover. No further impact from this item is expected in fiscal year 2004.

And moving on to the supply chain issues, clearly the length and depth of the downturn in the telecom markets has put tremendous pressure on our supply chain and forced many companies to go under. We have made previous comments regarding the bankruptcy of BAE Systems for example, a major supplier to our product operations in France. This and other supply changes eruptions caused us to incur significant extra costs in order to deliver systems on time to international customers in the quarter. When you combine the supply chain issues together with ongoing competitive pricing on big jobs the result is that several large international projects delivered in the quarter were at lower than average gross margin rates. The answer going forward is to solidify the supply chain by moving to more reliable and lower cost vendors, and by redesigning our international products to take out cost. We are doing both. We have now completed the transfer of the majority of our domestic and international sourcing of electronic subassemblies to a new supplier, Celestica. We have now completed redesigns on the MicroStar product line that will lower our product cost going forward. And we have discontinued the higher costs MDL product line in France, and we'll transition customers to the lower cost MicroStar line. We continued to see excellent progress on expense reductions at Microwave during the fourth quarter. This combination of lower expenses and improving gross margins is expected to result in steady improvement and operating income for this division throughout fiscal year 2004.

Turning to network support, sales in the quarter were $13m as a cumulative effect of our division cost reduction programs allowed for a nominal positive operating income result in the quarter. And this compared with our $1.4m operating loss last quarter and $3m operating loss in the fourth quarter of last year. We also received the first major order for our new EXP field technician test system worth $5m. Our solution links to Telecom Central Office with the field technician and is aimed at reducing telecom service provider cost; while improving customer satisfaction through the enabling of more efficient field operations and reducing the number of customers call backs. Turning now to the broadcast communications division results were pretty much as expected in the fourth quarter. Revenue was $77m compared to $100m last year. Sales were up about 2% sequentially. The prior year quarter benefited from broadcasters purchasing digital TV equipment to meet the FCC mandated May 2003 deadline for PBS stations. Digital TV equipment revenue in this quarter including transmitters, encoders, and related products accounted for a majority of our revenue decline.

Analog transmission and studio systems combined revenue was relatively flat year-over-year. Broadcasters continue to delay many capital projects in the quarter. Even as their increased cost of covering the war in Iraq were winding down. And we believe they continued to do this because of ongoing concerns about the economy and future advertising revenues. Operating income fell to $2m in the quarter on much lower volume levels compared with $11.8m in fiscal 2003. We believe there were several promising developments in the quarter that could be very helpful in driving higher revenues for broadcast as fiscal 2004 progresses. First, early indications are that broadcast advertising revenue at the major networks is going to be up for the fall season. Second, the SEC has proposed new deadlines that would require stations in the larger markets to comply with near full-power requirements by July 2005. All other markets would comply one year later. Proposed deadlines are helping to bring more clarity to the timing of increased demand for Harris digital TV equipment. And final observation, request for proposals are increasing, as broadcasters begin to budget for transmission and studio system upgrades to full-power digital capability.

Now I want to remind you that we remain committed to improving operating profit results at broadcast at the current quarterly revenue levels. As we have seen it's been difficult for us to precisely call the timing of the increased revenue from DTV investments. Actions that were taken in the fourth quarter will contribute immediately the results in early fiscal year 2004. Let me turn now to our two government segments. Our RF Communications divisions had another record setting quarter with the business actually accelerating in Q4. Revenue increased by 34% over the prior year to $99m and was up 13% sequentially. Orders were over a $110m.

Operating income increased 44% over the prior year to $27m as a result of the higher revenue. We are continuing to benefit from our reputation as a most reliable and responsive supplier of secure, tactical radios to both the U.S. military and our allies in the global war against terrorism. Department of defense continues to be a major customer. We also received our first significant order for Homeland defense during the quarter. A $10m order from the U.S. Army, defense early response front. [Deric] provides funding allow agencies such as the National Guard to purchase new radio equipment. In the international markets continued standardization of systems and foreign military sales funding have also being significant drivers all year. New orders in the quarter came from Turkey, Oman, Venezuela, Estonia, United Arab Emirates, and Algeria. I am pleased to say that the Bowman program for the UK Ministry of Defense continues to be right on track.

We shipped our first production HF Radios from our new UK facility during the quarter. You will recall this contract calls for 10,000 radios being delivered and has a contract value of $220m to Harris over 6 years. Harris also received an additional contract on the joint tactical radio system, JTRS program during the quarter. Our Sierra Cryptographic Subsystem was selected as the standard for Cluster 1 of the JTRS program and will be used on 100% of the radios. This contract could represent as much as a $100m in revenue over the next 10 years, but I think more importantly, we are well positioned to become the encryption standard for all of the JTRS clusters. Harris expects to provide more than $500m in system design, development, and production for the JTRS Cluster 1 where we are part of the Boeing team. Harris plans to participate in all of the clusters. Our latest schedule although, as you know, it moves around frequently indicates awards for Cluster 3 and Cluster 5 in the summer of calendar year 2004.

And finally, turning to Government Communications Systems, they also had a very solid quarter; and importantly, continued to grow faster than the market. Revenue increased 27% from the prior to $317m. This represent 13 consecutive quarters with year-over-year organic revenue growth in this division. Operating income increased by 19% to $30m. Strength in the division is seen across all business areas and comes from long-term strategically important programs. Of the $68m increase in revenue in Q4, about 50% came from the four major programs won during the past 18 months. And about 30% came from new classified programs. The major programs included the following. The FTI program, which is the FAA telecom infrastructure program, represents a $3.5b contract potential over 15 years to Harris. We are the prime contractor and systems integrator on this program, which will modernize telecommunications networks at over 6,000 FAA sites.

MCOM, short for Mission Communications Operations and Maintenance, is a $350m plus 7-year program, supports the U.S. Air Force satellite network.

MAF/TIGER is a $200m 8-year program with the brand new customer, the US Census Bureau. We will provide GPS and geo-location capabilities as well as information processing and database management expertise to the Census Bureau on that project.

Finally, the Joint Strike Fighter program. Harris provides next generation avionics infrastructure, image processing, digital map software, and fiber optic components. This contract has an expected value to Harris of more than $2b over 20 years. Those are the 4 big programs right now, but several other important programs are just beginning to ramp up and are going to drive additional growth going forward. FAB-T, short for Family of Beyond Line-Of-Site Terminals, is for the US Air force. Space-Based Radar or SBR is also for the Air Force and finally, GGI, short for Global Geospatial Intelligence for NIMA. Before discussing the individual segment outlook for fiscal 2004, let me now turn over to Bryan Roub to ask him to talk about cash flow and balance sheet items. Bryan.

Thank you Howard. Cash flow from operations for the fourth quarter was $52m, which exceeded our expectations and also represented the best quarterly performance for the fiscal year. The 52m in the quarter brought our annual total to more than $150m. As has been the case all year, the asset management results at all of our businesses has been really pretty good, but the superb performance of our Government Communications Systems and RF Communications divisions have been major positive forces. In the rest of our operations where improvement is needed yet; steady progress is being made. Our inventory returns improved 8.4 from the third quarter level of 6.8, while accounts receivables day sales outstanding moved up slightly from 65-66. We continue to target areas for further improvement and I expect further progress in the coming fiscal year. We did buyback 100,000 shares of our stock in the open market during the quarter on an average price of $30.50. That modest repurchase leaves us with the remaining authorization from our board of 1.5m shares. With our continuing buildup of excess cash we are likely to be more aggressive in the coming months with our repurchase activity. As a result of the good performance, cash and cash equivalence at the end of the quarter totaled $443m. Our total debt was 434m therefore we were net debt positive at the end of the quarter meaning debt was less than our cash balances. One remainder in our balance sheet we have around $30m of short-term borrowing; that short-term debt is offshore and serves as a natural hedge against foreign currency fluctuations.

Our liquidity is excellent. The earliest maturity of any long-term debt as most of you know is more then four years away. In addition we have available more then $200m of unused credit facilities and the company's debt-to-total capital ratio is about 27%. As expected capital expenditures in the quarter were $25m this is slightly higher than our historical levels due to our investment in network operations center as part of the FDI contract and from the expansion of the RF Communications division facilities. In the RF Communication division continuing growth of the RF business in general and [JPRS win] in particular created a need to expand RS facilities in Rochester. During the quarter, we purchased a building adjacent to our existing facility for about $10m and that is included in our capital spending number for fiscal 2003. For the year capital spending was 73m and was slightly below last quarter's estimate. Depreciation for the year of 56m was right in line with our previous estimate.

Finally, I would like to provide some guidance for fiscal year 2004. We expect cash flow from operations to be greater than $100m for the third straight year. My current estimate of that level is between $125m and $150m of cash flow from operations. Capital expenditure should remain at somewhat high levels in fact higher in 2004 than 2003 because of continued growth in our two government businesses, where we need to provide facilities and equipment, mainly test equipment on the significant contract wins over the past 12-14 months. I estimate now that we'll be in 80-85m range for capital spending and have about 65m of depreciation. Back to you, Howard.

Thanks Bryan. Let me close my remarks with a brief discussion of our expectations for fiscal year 2004. EPS is expected to range from $1.50-$1.65 per diluted share based upon the following general assumptions. First of all from a macro view, the global economy does not show much improvement. This continues to restrict our growth in the commercial communications markets. We expect the momentum in government communication systems to continue. Since many of our new wins are just beginning to ramp up, this should drive revenue growth of 10% in 2004. We expect to have comparable operating margins to fiscal 2003. RF communication showed tremendous revenue growth in fiscal 2003 as you know up 26% for the year. Realistically, we do not expect this rate of growth to continue in fiscal 2004. But we do have an expectation of growth in revenue in the 6-8% range with a strong first half. Given that we are starting with a considerable order backlog position. Operating margin should be at or near fiscal 2003 levels. For microwave we expect quarterly sales of $70m plus or minus and operating income at breakeven or better in each quarter. We believe that the cumulative impact of all of our cost reduction activities will drive improvements in gross margin and lower expenses. Network support revenues are expected to be flat to slightly higher, with operating income for the year also at breakeven or better. Although the timing is debatable, we believe the telecom service providers will eventually begin to replace and upgrade equipment for their technician workforce. And finally, for the fifth segment, broadcast, our priority for this year is to drive improvement in profitability. Our goal is to reach 10% operating income margins by the fourth quarter. Revenue is expected on par with 2003, expect for the large international analog radio jobs that will likely not be repeated.

We expect minimal non-operating income in 2004 as a result of lower sales of marketable securities arising from previous technology investments. Although we are quite pleased with the favorable rulings we have received in two intellectual property litigation cases, we can't realistically predict the timing of any of those payments. However, we did pass an important milestone this week regarding the Ericsson case. The trial judge issued a ruling to uphold the jury verdict in favor of Harris with the financial value net of expenses of approximately $45m. The Sanyo case is still waiting a ruling by the Appellant court. The lower court, you will recall, also ruled in favor of Harris with the financial value of this award net of expenses of approximately $5m. So with those remarks, I'd now like to ask Shauna to open the line for your questions.

Certainly. The question-and-answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the "" key followed by the digit "1" on your touch-tone telephone. Also if you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We'll proceed in the order that you signal us and take as many questions as time permits. Once again, that is "" "1" if you would like to ask a question. Our first question comes from Steve Murphy with CIBC World Markets.

Hi, good afternoon. A couple of questions, you mentioned that you have 25m in annualized savings from the cost reductions. How much of that should we think about on the headquarter expense line versus in the segments, you know, in terms of the model for '04?

Well, generally speaking, Steve, you will see the vast majority of it in the individual business units. Where we cut the cost at corporate predominantly was those services that are providing support for the operating units. And so, they are the direct beneficiaries of those cost reduction in terms of the direct allocations that show up in their P&Ls. You should expect to see some modest reduction in the headquarters expense line, but very large maturity of it will show up in the division results.

Okay. Great, with [--] why is the non-operating income dropping off so much? And I guess can you just refresh us on the components of it you had in FY '03?

Yeah. There are several components, the principal one, as Howard mentioned, is the sale of investment securities and those securities are from investments we made in -- technology investment overtime, but although the pipeline [--] and that is a dominant number. And although overtime we have a couple more in the pipeline, we expect will come out, go public etc., and be monetized, we don't have in the near-term. So that is pretty much gone for in the near-term now, a huge number that has been in there for long-time is royalty. Intellectual property income over a long period of time has been in that non-operating line, we narrowed against the expenses to go after it and Howard mentioned the Ericsson and Sanyo, those would be non-operating income, we just can't count on them at this point.

Got it. Okay. Couple detail things, in terms of broadcast, you mentioned that the expected revenue to be flat except for large international analog deals which may not repeat, about how much of total revenue was this and therefore, I guess should we be thinking about revenue there down a little bit?

In the range of $15m change year-over-year from those large international jobs. You recall Steve that my comments about the kind of the macro view, what we are basically saying is we are going commit to this range of improvement in EPS on the basis of continued strength in our two government businesses, but without much revenue help because of the global our view at least of the global economy in the commercial markets. So, the improvements they are going to make in profitability are coming from kind of basic hand-to-hand combat, blocking and tackling, taking out costs, things that we did in Q4, previous things that we had done to Q4 and certainly additional things that we'll continue to do this year. But this would not be what I would call our revenue led profit recovery in our commercial businesses. If we should see stronger revenue that's part of the reason we give you a range as we would feel like that would generate some of the potential on the upside to this range. On the other hand who knows you know, I think, the recovery has been predicted for some time and we think that there are certainly some risks on the down side again that's the reason we provide the range.

Okay great and one last detail in Microwave business. Could you give us the breakdown on U.S. versus international and also well the discontinuance of the products they have impact [--] any impact on revenue.

The second question first, I don't believe that the discontinuation of the product lines are going to have material impact, we expect sales to be relatively flat for the year again in this kind of environment and the sales mix is slightly more than 50% in North America and slightly less than 50% international. It's been at that rate for the last several quarters.

Okay. Thank you very much.

Thank you Steve.

We'll now go to Arindam Basu with Morgan Stanley.

Hi folks, how are you.

Hi Arindam.

Hey Brian, I have couple of questions for you on the cash flow, actually, so you really [covered] our estimates from cash flow for operations this quarter and was [or try to] get a sense for cash that's being held offshore. We know you had, I think about 125m previously offshore and if there is any different repatriation mix or tax issues or any FX concerns that you guys are dealing with right now?

That's good question. We continue to have about the same amount offshore [--] the 130, and I think they are the amount that we needed to hedge in actually was in Canada, came up in this quarter that's why we have the higher level of borrowing, but that's a natural hedge because we are borrowed. There are no particular tax issues, although down the road, with respect to the foreign sales corporation, legislation is an international issue with [GAAP]etc, which maybe is what you are referring to. We don't know how that is going come out, like everybody else we are waiting. But there are no significant issues over which we have, you know control.

Okay so you have a tax rated modeled in based on current legislation and you are just [--] that's kind of the thing you are trying to gain right now?

Right now we are modeling at the 34% random, which is what we [--] the rate we had from last couple of years. We are on hold with respect to what might have with foreign sales corporation. So, you know, that could be up, down, or sideways [--] we are uncertain, yes. But it is important to our company. There is one pressure that would push rates down that we are likely to see in the year, but we are not ready to go with it and that is our state and local income tax rate because of some good planning. As far we're going to put down we'd pressure on the 34%, but right now we are using 34 and would suggest you do as well.

Okay. Howard [--] since you've had some really good success recently, I want to ask you about microwave which [--] microwave has been such a big business for a while, it is kind of disappointing right now, and I was wondering if you considered discontinuing purse of the international opportunities because of the domestic opportunities in microwave appeared to have really high growth in operating margins and also [tandem need to be] the sales from the commercial side to pursue microwave sales within our government communications, because the government has given on RFQ for these projects, so they definitely are interested in broadband and how they secure communications both of which you guys have delivered in other product lines?

Well, a good question. With regard to your second point, I'd certainly hasn't been lost on us -- the government is going to be issuing RFQs for microwave and we are aggressively going after that through cooperative effort between our microwave and government communications systems divisions and I think we are in a good position there. But the most strategic question you asked about the international. I think if you concluded that you could not be more competitive in the future than we have been in the past then you might in fact conclude that's we showed refocus more on the domestic opportunities. But I believe with the work that I have seen done on MicroStar and taking cost out and new products that are in the pipeline that are not prepared to talk about today, but I am very excited about and then add to that a new focus, a new leadership in international sale work going on new channels. I want to play this out for a while. And I am very optimistic that we will make progress and will be able to have our international portion of the microwave business, you know, more of a contributor to the improved not only revenue, but profitability. Obviously, if down the road we are not accomplishing that then I think it's appropriate you'd step back and reconsider it.

Okay and then in pursuit of the opportunities in government for Microwave is that [--] will that be a GCS sales persons and then microwave engineering team that would kind of create a customized solution when do RFQ how are you structuring the team that your approaching opportunities.

If it's, you know, if it specifically coming out of one of the government agencies that we are working with and GCSD would be representing Harris direct to the customer, but you know we have had for some time programs that were engaged with through the government contracts that utilize network support software, that utilize Microwave products, that utilize broadcast products, and so there is a strong technical interface in between the divisions and certainly at the customer if that is required.

So there shouldn't be a problem, it's structurally one hand talking to the other basically?

No I don't see any problems with that.

Okay. Back, one more question for Bryan and then and another strategic question for Howard and that's it. Bryan on the, are there still any shares of Intersil held and or did you sell an in July since the sale by Intersil of the [--] of their semiconductor business to Globespan?

At the end of the year we had 200,000 shares left of Intersil and we didn't sell very many after the announcement.

Okay and then last question Howard on the professional services build versus buy strategy [--] is that a service that you could potentially mark it to other OEMs [not just carriers]because for example Ericsson will have significant year-over-year increase in professional services revenue. So is that a [--] is that a target opportunity as well, you guys addressed that internally.

I think the whole area of professional and technical services is one that we talked about going all the way back to our analyst meeting in March and it continues to get lot of attention from management in terms of how we can increase our growth rates for those capabilities even faster than we already have. We've already taken that business from several years ago and they don't quote me the specific number, but lets say $30-40m to this year over $150m. Virtually all organic and I believe we can continue to grow in the government sector, but also learn from that success to drive growth strategies in our commercial businesses in microwave with telecom customers and in broadcast with our broadcast customers.

Okay, thanks folks, I really appreciate the time.

Thank you.

Thank you Arindam.

We will now move to Larry Harris, from TalkSoft.

Thank you. I was wondering if there is any commentary you could provide in terms of how the quarterly earnings perhaps might unfold in fiscal 2004, if RF communications continues at a higher [--] high operating margin and is likely to have maybe a somewhat stronger first half with certainly a strong first half? You know, could that change that the quarterly progression of earnings, you know, any thoughts that you might have on that?

It's a good question Larry. At this point, we are not going to provide specific quarterly guidance on an EPS number, but I think we tried to provide some color around any changes. I think that's one that is relevant that could change because we expect revenue year-over-year to remain very strong in the first half, and then perhaps to moderate a bit in the second half in RF, as I indicated in my comments. I'll say we expect to come out the gate running in the first quarter due to established credibility for the full year estimates that we have provided today.

All right. Just couple of more questions. You mentioned that you were seeing the broadcasters budgeting for studio system upgrade, is this occurring principally at the network levels or we are starting to see some of the affiliates preparing to consider upgrading their studios?

I wouldn't limit it to network, we are really seeing it broadly across, what we would call, the large call letter stations and the large owners of those and operators of those stations. You know, I'm trying not to get my hopes up because I think our progress in revenue has been broadcast has been very lumpy because of all these factors. I want to reiterate that I do not believe we are loosing market share, I believe that we are in as stronger position as ever with regard to our technology. We've had a very good preliminary reaction to some of our new networking technologies. You've seen some press releases and while they [--] they don't talk about mega dollars, I think we are trying to communicate that the uptake coming out of the National Associate [--] National Association of Broadcaster show has been very positive as it relates to the role Harris can play in helping our broadcast customers really get networked throughout multiple locations at data casting and other things that they would like to do and I think we are well positioned there. But we are cautiously optimistic that at least we are doing some quotations, that's where the recovery has to start, but as you've heard from our overall view for the year on broadcast, I' am certainly not prepared to suggest we are going to have a large revenue growth in that division this year.

I understand, any sense you can provide in terms of what ASPs for digital TV transmitters were in the quarter?

In Q4 they were down a bit from Q3, but they were well above kind of the all time low numbers, I think, Pam, you'll have to remind me I wasn't here, but I think it was Q1 of last year.

And there was some discussion, as I recall, at the analyst meeting perhaps in the August-type timeframe, there might be some meetings with the Board with respect of to the strategy, is that type of thing still under consideration?

Yeah. We have Board meetings about every two months, we talk about some elemental strategy at each of those meetings, but like most companies we take one meeting at year-end and try and particularly focus on it and for us, it's our August meeting, yes.

All right. Thank you.

Thanks, Larry

Thanks, Larry

And we will move to Rena Smith with Needham & Company.

Hi good afternoon.

Hi

Hoping you would give us an idea of the sequential trend into the first quarter for revenue by segments. I know you said that RF is going to come in strong, but what about some of the other segments?

Again I don't think we are going to talk about specifics by each segment by quarter Rena, I think that we have good momentum coming out of Q4 and in government and RF will continue to show a very good comparables I think in the first quarter, right out of the gate and then as we go throughout the year those comparables get little tougher for those two divisions. So, we would expect growth in dollars, but the percentages are going to start to slowdown. In the case of the two telecom businesses, you know, we don't see sequential revenue changing a whole lot, as we have already said. And then finally on broadcast we had a very strong Q2 last year as, you know, and a strong Q2 the year before that and at this point we wouldn't anticipate that kind of performance in Q2 barring some good news for a change relative to regulation or something like that. So, that's about all the detail I could go into I think.

Are you willing to talk about margin turned it all to the first quarter?

Well, just again in aggregate that we expect to come out in the first quarter that we are in. We think we have enough visibility to say that we will have a good quarter. I believe we will meet or exceed the external estimates that are out there and get some credibility to our $1.50 to $1.65 EPS range for the year.

Okay, great. I just wanted to know how much of the benefit of your structuring you might have seen in this past quarter the fourth quarter?

Very little, the $25m that we quoted in our release and that I repeat it today just kind of a net year-over-year benefit.

Okay, and what kind of margins or improvement we see in the broadcast division in the early part of the year.

Well, that's difficult to say in order to get to 10% target in Q4. I think you should expect kind of gradual improvement throughout the year. That's what we would plan on life isn't always quite that predictable because revenue levels are going to have an impact on it, but certainly we would like to see gradual improvement throughout the year as the cost reduction actions start to take hold that we have already put in place and then hopefully at some point revenues will start to pick up and we'll get a further benefit from that.

Okay, so you are expecting cost actually decline over the course of the year, rather than revenue improving and cost staying the same?

Yes

Exactly.

That would be accurate.

Okay, great. Thank you very much.

Thank you.

Thank you.

We will move to James Mcilree with Unterberg, Towbin.

Hello Jim.

Thank you. Hi and thanks. The range of 150-165, could you indicate [--] you know what would be the [--] what would be happening either in your business related economy to reach you to higher, the low end? That's one question. And secondly, given the cost reduction efforts that you've made in network support and microwave, I am kind of surprised that you are looking for breakeven, it would seem like you have the same type of margin improvement, [over the year] you are looking for in broadcast, why is it just breakeven? Thanks.

Okay Jim, your first question the high and low end of the range. First of all, I believe that today I would say it's a balanced range. I feel like we have opportunities to go the high end we have real potential to go the low end. To get to the high end requires revenue growth in the commercial division's year-over-year, which we described as not currently being expected. So that's primarily what will drive it to the high end, what will drive it down to the lower end of this range would be any kind of external shock that would effect our businesses. We have not planned on that but it's possible. More realistically though we have been going so strongly in both of our government businesses, especially in our RF division and have been providing huge leverage in profit improvement on the up sales that as they start to moderate in terms of their sequential revenue growth, we have the risk if they really start to slowdown in the second half that will cause us to be somewhat under our plan and that's the reason we have a range.

And in terms of that, you know, why only breakeven at MCD, MCD lost $10m in 2003 on non-GAAP basis and NSD lost $7m; that's a $17m improvement with no revenue improvement. We feel like that would be pretty good performance, if we're able to deliver that. You know, remember in our $1.36 non-GAAP earrings for this year, 24 cents or $24m came from non-operating income, which we are suggesting will be minimal next year. That would suggest improvement before non-operating income going from $1.12 to a range of $1.50-1.65. We believe that's excellent performance without getting a lot of help in the commercial businesses on the revenue line. So, that's [--] hopefully that gives you a little bit of sense of the balance that we view and I will go back to my first conference call after joining the Company. My goal is to meet whatever expectations we set and so to do that we need to consider risks on the downside as well as opportunities on the up side. We try to take all that in consideration. I hope I am sitting here a year from now saying that we had good foresight as we set the range.

And my question on the Microwave and the Network Support, really revolves around the comparison versus the Q4 results not versus last year, so you've taken [--] you said that you receive very little benefit after restructuring efforts so far, and you know, with essentially Network Support and Microwave for breakeven for the quarter, so I'm just, you know, if you've taken cost out and revenues were flat and why wouldn't we see a marginal improvement from here [--] I mean, forget about last year just from this quarter?

Okay.

That was my question.

Okay. Thank you for clarifying that and so the Network Support if we would have to maintain revenue at that quarterly level then we would probably expect to do a little bit better. In the case of Microwave, our fiscal fourth quarter is usually a pretty good quarter, if you take out the $4m of components sales I referenced, we were at $74m, we are suggesting conservatively will be plus or minus 70. So, if we did 74 every quarter, I would expect to have better performance than the quarter we just ended. As we go through the year, some of those cost reductions related to people and facilities you get right away; the ones related to product, you know, you work through the inventory and you get those throughout the year. But, I think, essentially at those levels [--] Q4 levels of revenue, if those [--] you take those numbers times four there are going to be strong than the kind of year numbers that we've outlined.

Okay. Great. Thank you and good luck.

Thanks.

Thank you.

And that concludes our question and answer session, Miss Padgett, I'll turn the conference back over to you for any additional or closing remarks.

Thank you so much everyone for joining us and please let know if you have any other questions. Thank you.