L3Harris Technologies Inc (LHX) 2004 Q1 法說會逐字稿

Good afternoon and welcome to Harris Corporation's first quarter fiscal 2004 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Harris Corporation's first quarter fiscal 2004 conference call. I'm Pamela Padgett, Vice President of Investor Relations, and on the call with me today is Mr. Howard Lance, Chairman and CEO, Mr. Bryan Roub, Senior Vice President and Chief Financial Officer, and Mr. Bob Henry, Senior Vice President and President of the Government Communications Systems division. Before we get started, let me 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. And also, to let you know, an audio replay of this call will be available on the investor relations section of our Website, which is www.harris.com. And with that I'd like to turn the call over to Howard.

Thanks, Pam. And welcome to everyone to our first quarter earnings call. Today we'll be discussing our first quarter financial results for the company, our progress in improving the performance in our two telecom businesses, the ongoing market challenges, and our outlook in our broadcast business, strong results in our two government-related businesses and our outlook for the remainder of fiscal year 2004 for Harris. We'll, as always, conclude the call with your questions.

Turning first to total company results for our first quarter, results significantly exceeded expectations in revenue and earnings. Both our Government Communications Systems and RF Communications businesses had outstanding revenue and income growth. These two businesses are continuing to outpace market growth. We have strong leadership and good contract pursuit processes in both of these businesses. As noted in our press release, we achieved meaningful improvement in our two telecom businesses when compared to the first quarter of last year. Revenue and operating income improved at both Microwave Communications and Network Support compared to the prior year quarter. Cost reduction actions implemented last fiscal year in both of these businesses are having a positive impact on operating results. Results in our broadcast business were disappointing. Capital spending by broadcasters on digital equipment and studio systems continues to lag, despite the impending deadline by the FCC and growing consumer interest in digital television. Cost reductions are helping margins in this business remain positive, and we will continue to assess other cost reduction opportunities until revenue trends improve.

Revenue for the company increased 24% in the quarter compared to last year. Net income increased 31% to $26 million. Earnings per share increased from 30 cents in the prior year to 39 cents this quarter. And new orders increased by 39% over last year. And as we also noted in our press release, there was no contribution during the quarter from non-operating income, compared to $16.2 million in the prior year quarter.

Let's get into some details now, beginning with our telecom businesses. Revenue increased 17% in Microwave Communications from $56 million in the prior year to $66 million in the quarter. Operating income improved significantly from the prior year. The operating loss was narrowed from $7.3 million in the prior year to $2.2 million loss in the current year. Our performance in the North American market continued to be strong, with sales increasing 20% year over year. Demand is continuing from wireless service providers as they increase network capacity, expand the reach of their networks, and replace leased lines with microwave. We also experienced very good demand in North America from private networks.

In international markets sales increased 13%, although the first quarter of last year was a relatively easy compare. Areas of strength and future opportunity continue to be Eastern Europe, Southeast Asia, the Middle East, and Africa markets. While opportunities in the sales funnel appear to be increasing and higher orders were encouraging, we have yet to see the steady and broad-based proposal and order flow that would signal a sustainable global recovery. Visibility is still quite limited, and it's just too early to call this as a real turn in the microwave market. While we did not reach our goal of $70 million in revenue and break even for the quarter, we are making substantial progress in Microwave. Revenue improved and cost reductions are having a positive impact at both the gross margin and operating expense lines. Operating expenses were again lower, and product cost reductions flowed through to improve gross margins. As you may remember from last quarter, we completed some significant steps toward reducing our product costs, including redesigns on the Microstar product line, discontinuation of the high-cost MDL product line manufactured in France, and we also completed the transfer of our electronic subassembly sourcing to Celestica.

The most exciting recent news at Microwave occurred last week in Geneva -- the introduction of our new product family called TRuepoint. We think our customers are going to find that this product hits the mark for their microwave needs, now and going forward. We believe TRuepoint offers customers a meaningful value proposition. It's scalable with a capacity-independent RF unit. And it will be offered in capacities from 2 by E-1 to STM-1 for international customers or 4 by DS-1 to OC-3 for U.S. customers. It's also flexible, with a frequency-independent signal processing unit. And this will allow us to offer our products and frequencies from 6 all the way to 38 gigahertz. TRuepoint is compact in size, offers improved ease of installation and service, and it has significantly enhanced software capabilities this allows users to collect both modulation, plug and play functionality on startup, recon figures and upgrades, and built-in self-diagnostics. This is the first Harris radio that delivers universal applications, capacities, frequencies, and network interfacing all in a single platform. Shipments to customers are expected to begin in early calendar 2004. We are obviously very excited about the future contribution that TRuepoint will make to operating results at this division.

Turning now to Network Support, revenue in the first quarter was $15 million, about $2 million higher than the year ago quarter, and also $2 million higher than the fourth quarter of fiscal 2003. And orders were higher than sales. Net income was $1.8 million compared to a loss of $2.7 million in the year-ago quarter. This is now a profitable and contributing division for Harris. Improved results came from three areas. First, initial deliveries were made of our new EXP technician test systems. This made a significant contribution to revenue, orders, and net income, and is expected to be a contributor throughout the fiscal year. The system is being rolled out initially at one major customer and has successfully completed field trials with a second customer. Second, revenue in our core tools and test sets product line showed improvement, and orders are trending up. And finally, the cumulative effect of division cost reduction programs over the past two years has given us strong operating leverage associated with the revenue improvement.

Turning now to broadcast, broadcast revenue declined from $68 million in the prior year quarter to $58 million in the current quarter. Operating income followed, declining from $1.9 million in the prior year to $1.1 million. But the extent of the decline in income was significantly mitigated by cost reduction actions that were previously implemented. We remain adamant about making sure our cost structure matches our current level of revenue in this business. The actions we took last quarter did result in lower operating expenses. We will continue to look for opportunities to further improve operating results. Broadcaster capital spending remained weak in the quarter. Even though spending traditionally tends to be weaker in our first fiscal quarter, we had hoped to see some modest year-over-year improvement. Broadcasters have been slow to release capital spending projects for a number of quarters, over concerns about a sustained improvement in their local advertising revenues. The impact of weak demand was most evident in our studio products and systems business. Although the number of opportunities in the sales funnel has increased, timing continues to slip on projects getting funded.

The quarter was also impacted by an ongoing low level of spending for digital television equipment. As you know, the FCC has given broadcasters temporary waivers on the timing of full power transmission deadlines. But looking forward, broadcaster capital spending will improve. It's just the timing that remains a bit unclear. The FCC has recently proposed a deadline that would require stations in the top 100 markets to comply with full power DTV requirements by July 2005. All other markets must then comply one year later. We said last quarter that requests for proposals are increasing as broadcasters begin to budget for transmission and studio system upgrades to full-power digital capacity. I'm happy to report that this quarter we received our first digital upgrade order. This was worth several million dollars, and it was from a large market broadcaster. There are also encouraging signs on the consumer side that should eventually help to drive this market. The Consumer Electronics Association is now forecasting that over 4 million digital television sets will be sold this calendar year. If this is achieved, that will be 9 million sets sold so far. Perhaps more important, they predict that an additional 9 million households will likely buy DTV sets over the next 18 months, and their study revealed another 30 million consumers say they're likely to purchase sets over the next three years. The number of hours of programming is now too many to count. Most of the prime-time is now broadcast in high definition, and there are five widely recognized cable high-definition services, including HBO, Showtime, Discovery, HDNet, and ESPN. We think those are all very positive factors.

Turning to our two government segments, in our RF Communications division, growth continued in the quarter. Our Falcon II family of radios is recognized as one of the most reliable, secure tactical systems available to the US military as well as our allies in the global war on terrorism. RF Com revenue increased 40% over the prior year to $89 million, and for the second consecutive quarter, orders were over $100 million. Operating income increased 69% over the prior year to $25 million as a result of the strong revenue. Income improved both as a result of higher volume, manufacturing efficiencies, and favorable pricing due to very strong market demand. The strength of both sales and orders is being driven by the global war on terrorism, on both the domestic and international fronts. U.S. military forces are staying in Iraq and Afghanistan, which has increased communications requirements for both current and newly deployed troops. Coalition forces are stepping up their participation in the war on terrorism in the Middle East as well, and also in other areas such as the Philippines. RF Com orders during the quarter included equipment for a number of army units as well as the U.S. Navy Seabees and defense forces in Poland, Slovenia, Estonia, and Turkey. The business also had several classified project wins during the quarter.

From a longer-term perspective, let me update you on our progress on two radio of the future standardization programs, one for the U.S. and one for the United Kingdom. During the quarter Harris joined with ITT and Boeing to begin our pursuit of contracts under Cluster 5 of the U.S. Joint Tactical Radio System program, or JTRS. Cluster 5 encompasses DOD's next generation man pack and handheld radios and has a potential value to Harris in excess of $500 million. As you know, we were awarded a contract for Cluster 1 of JTRS last year. It also has a potential value of approximately $500 million over the next 15 years. We are also very please to be providing our Sierra 2 encryption modules for all Cluster 1 radios. That contract has a potential value of an additional $100 million over the next ten years. And more importantly, positions us nicely as the leading contender for encryption modules on all JTRS radios. And as previously discussed, we are providing up to 10,000 radios for the Bowman tactical radio program in the United Kingdom. This contract has a value to Harris of $220 million over six years. We believe RF Communications is very well positioned in the short term as well as in the longer term.

And finally, our largest division, Government Communications Systems. It had another record-breaking quarter. Revenue increased 33% from the prior year to $334 million. This represents 14 consecutive quarters with year-over-year organic revenue growth in this division. The improvement was seen across virtually all of the major product lines and program areas. Operating income increased by 35% to $31.9 million. Growth in the quarter came from several areas, as I mentioned. Classified programs were clearly the most significant driver of growth in this quarter. Harris's technology innovation, application know-how, and solid reputation in the classified world gives us a competitive edge for winning future business. Growth also came from the continued ramp-up of new programs that we have won over the past two years. These are long-term strategic programs that will be significant drivers of our business for years to come. The programs include the FAA Telecommunications Infrastructure, or FTI program. This is a $3.5 billion contract potential program over the next 15 years. MCOM, which is the U.S. Air Force Mission Communications Operations and Maintenance Program. This is a $355 million, seven-year program supporting the U.S. Air Force satellite network. We also saw growth from the Joint Strike Fighter program. This has an expected value to Harris of more than $2 billion, spread over the next 20 years. MAF/Tiger, which is our $200 million, eight-year program for the U.S. Census Bureau, is ramping up. In this program we're providing GPS and geolocation capabilities as well as information processing and data base management. FAB-T, which is the Family of Beyond Line-of-Site Terminals, a $90 million, six-year program for the Air Force that could reach a much larger value, is also getting ramped up. As is Space-Based Radar, a $90 million, 30-month development and demonstration award. Potential value to the winner of the three-way SBR competition could be more than $1 billion. All of these programs form a solid foundation for growth going forward.

One additional indicator of the health of this business can be seen through our human resources function. At the beginning of fiscal 2003 staff head count at the Government Communications Systems division was about 5400. At the end of the first quarter of this year head count is now at 6400. That's nearly a 20% increase in manpower that we are applying directly to increased work at the division. In addition, we have open requisitions for over 300 additional positions in the division, and we are actively in the process of filling these. Our confidence in the continued strength of the GCSD business grows daily. Before discussing our individual segment outlook for the rest of fiscal 2004, let me turn the microphone over to Bryan Roub for a discussion on the financial position of the company.

Thank you, Howard. Cash flow from operations for the first quarter was $82 million. That figure is three times the $26 million we generated from operations in the first quarter of last year. The result represented the best first quarter performance since we repositioned the company at the end of fiscal year 1999. As was the case all of last year the absolute asset management results were superb in our Government Communications and RF Communications divisions. In our commercial operations, where improvement continues to be a high priority, steady progress is being made. In the first quarter of this year each of our five divisions contributed to the $56 million year-over-year increase in cash flow from operations, and all had positive cash flow for the quarter. The Broadcast division led the way in terms of year over year improvement by a wide margin. Inventory turns declined from 8.4 in the fourth quarter to 7.8 and accounts receivable days sales outstanding moved up to 66 from 69. The lower first quarter revenue level compared to the fourth quarter drove those changes. There continues to be room for further improvement in our microwave business, primarily in accounts receivable, collections, and inventory turnover. We have good people assigned to these problems, and they are making progress.

Capital expenditures in the quarter were $14 million compared to $10 million last year. Capital expenditures for the full year will be higher than fiscal 2003 because of a continued high level of spending through government businesses, basically to provide facilities and equipment, mainly test equipment for the significant contract wins of the past 12 to 14 months. My estimate continues to be in the $80-85 million dollar range for capital expending with $65 million of depreciation for the full fiscal year. We did not buy back shares of our stock during the quarter. We do have an authorization from our board to purchase 1.5 million shares, as most of you know, and we intend to buy shares to keep our average shares outstanding at the current level. As a result of the good performance, cash and cash equivalents at the end of the quarter totaled $507 million. The total debt was smaller than that. It was $431 million. One quick reminder, the short-term debt that we have on our balance sheet relates to offshore hedges against foreign currency fluctuations. Our liquidity is excellent. The earliest maturity of any long-term debt we have is four years away. And in addition, we now have in place a $300 million credit facility, which we closed on this new four-year agreement this month.

Finally, I'd like to update our cash flow guidance for fiscal 2004. We expect cash flow from operations to be between $135 million and $160 million. That's up $10 million from my estimate on our July conference call. Because of our incredible first quarter, my confidence in the $135-160 million for the full year has also increased. Now back to Howard to update you on the P&L outlook for the fiscal year.

Thanks, Bryan. Let me close with a brief description of our expectations for the remainder of fiscal 2004. Clearly we're off to a very good start with our first quarter results. Revenue and income were substantially ahead of the prior year. On the outstanding performance of our two government-related businesses and the improvement of our telecom businesses. These results give us increased confidence in achieving our fiscal year 2004 earnings guidance that we provided last July of $1.50 to $1.65 per diluted share.

Here's how we see the segments. We expect the momentum in Government Communications Systems to continue. This should drive revenue growth in the range of 15% to 20%, somewhat higher than the 10% that we had communicated previously. We still expect comparable operating margins to fiscal 2003. RF Communications showed tremendous year-over-year revenue growth in the first quarter. Given our considerable order backlog, we expect a very strong second quarter as well. However, given the high level of revenue in the second half of last year, we doubt the double-digit growth rates are sustainable. The strong start in the first half, however, should be enough to drive full-year revenue growth of at least 10%. Again, a little higher than the 6% to 8% growth expectations we communicated last quarter. We still expect operating margins to be near fiscal 2003 levels for the year at RF. For Microwave, given our first quarter results and the fact that visibility in the international markets is still limited, the second quarter could be very similar to the first quarter. We will, however, continue to drive for improvements in operating margin and our growth programs in new products should allow us to reach our goal of $70 million in quarterly revenue and break even or better operating income in the second half of the year. Network Support quarterly revenue should be sustainable or slightly higher than Q1 going forward. With expected operating income of about $1 million in each quarter. In Broadcast, the timing of an improvement in capital spending remains unclear. Therefore, we are cautious about our expectations for both revenue and operating income. Revenue could likely be lower than our previous estimates. A slow start in Q1 will make it difficult to achieve our goal of 10% operating income by the fourth quarter, but we do expect consistent margin expansion as revenue improves through the year. And we could still achieve the 10% number if revenue grows enough. And finally, our outlook for minimal, non-operating income remains unchanged. We are quite pleased with the favorable rulings we've received in two important intellectual property litigation cases, but we still can't predict the timing of any payments. Just to remind you, the combined value of these two judgments to Harris is approximately $50 million.

That completes our prepared remarks. We'll now ask the operator to open the line for your questions.

Today's question and answer session will be conducted electronically. If you'd like to ask a question, you may signal us by pressing the star key followed by the digit 1 on your touch-tone telephone. For those of you joining us today using a speaker phone, please release the mute function so your signal will reach our equipment. Again, that is star 1 to ask a question, and first we'll go to Steve Murphy with CIBC World Markets.

Hi. Good afternoon.

Hi, Steve.

Hi, Steve.

Hi. First question I guess is probably for Bob. You mentioned your tremendous growth and opportunities in the classified area. Are you seeing bookings of revenue yet from funding from the FY 03 supplemental budget which had a good allocation of classified spending in there?

No, I've been in to talk to the execs in the government, and we've talked about this but we're not seeing the real flow of that money at this point in time. I expect we'll start seeing that in the next 90 to 180 days.

Okay. Great. So that's still to come. Okay. I guess switching to Microwave a little bit, you mentioned in the press release that there had been $35 million of development costs going into TRuepoint, that had gone into TRuepoint. Can you put that into context in terms of how long a period that was, if it all came out of Microwave expenses, and also if now you're getting the product release is going to help margins there?

The $35 million has not all been spent. That will be basically the total program investment over about a three-year period, and we are sitting today maybe halfway through that process, Steve. So that -- we didn't mean to imply that was all in the past.

Okay. Great. And I guess the last one is, you know, you've addressed somewhat, but can you give us a color of how much effect of the cost reduction initiatives in the commercial units we're seeing in the margins at this point, you know, given the timing? Is that kind of -- are the $25 million in annualized savings that you've talked about sort of fully in the numbers in this quarter?

Yeah, I would say yes. In fact, the $25 million was what we talked about in terms of kind of year over year savings. We saw some additional savings, you know, starting in FY 03. But obviously, some of those savings calculations are a little hard to see because we are talking about higher volumes in some cases and lower volumes in other cases. But I'm very confident and we're tracking these savings division by division, line item by line item. I'm very comfortable that we are seeing the savings and if you adjust for volume I think you'll see the $25 million kind of run rate and starting off the year perhaps even better than that. But we're really holding things very tight, as you might expect, because I just don't have the kind of visibility into the rest of the year that I would like. We're continuing to invest. The primary investments will continue in engineering R&D because I think new products are going to help pull us out of the current situation regardless of what the economy does.

Okay. Great. Thank you very much.

Now we'll hear from Arindam Basu with Morgan Stanley.

Hello, gentlemen and lady. A question on broadcast for you, Howard. You know, the cost cutting has clearly helped, but this still appears to be a pretty high fixed cost business, and it doesn't appear to even – you know, you think that international analog radio revenues are an appropriate Band-Aid, which you know, we're in agreement with. So you know, what's next in terms of cost cutting? With all these high-cost special events, you know, the broadcasters can't be willing to spend on cap ex. So is there some big item that you've been holding on, cutting on -- excuse me, holding off cutting in terms of a facility or facility consolidation, or do you think it's mostly find it, grind it type items right now within broadcast?

Well, let me see where to start. There certainly is not one big item. I think we are continuing to trim and keep our costs as low as we can in the division. To have the kind of decline that you saw in Q1 in revenue and have a relatively small impact on earnings, I think, you know, bears that out. I don't think there's one silver bullet that we flip a switch and dramatically change the cost structure. We have lowered it. We're looking at a variety of alternatives that would lower it further. With regard to your comment on analog radio, we actually had a pretty good quarter in analog radio and used that to basically offset the weakness in digital television. So our overall transmission business was just about where we would have expected to be. The real weakness was highlighted in the studio products and systems area, which is tied to more broadly capital spending projects. I am very encouraged by the sales funnel. I recently had a detailed review of that. But I'm certainly not willing to put all those numbers in our outlook at this point. Until we get those items a lot further through the funnel. So clearly, we're doing the analysis now on what other steps could we take. Anything that is viewed as discretionary is being reviewed as to whether there is a need to spend the money or not. But at the same time we're working very hard on the sales process to make sure that we capture more than our fair share of whatever business is out there. We're excited to have a new Vice President of Sales coming on board in that division and that coupled with the reorganization we've done in the sales area, where we now have sales account managers and sales managers representing all of the solutions in the broadcast division focused on call letter and enterprise customers, we think that that is going to pay dividends. We've got a number of new products, as you know, that we've introduced over the past six months. So I think we've got a lot of activities that are going to read out as we move forward, but we're cautious to call any of those at this point in terms of having a huge improvement in the business until we start to deliver it.

Okay. On the RF Com business, could you define the backlog again? Is that shippable within six months or shippable within a year?

Generally speaking, I think the new orders that we got in the last quarter are probably shippable throughout the next four quarters.

Okay.

I don't know the specific aging of the backlog. But certainly two strong quarters in excess of $100 million show very strong revenue this quarter. And as we indicated, we expect it will also drive strong revenue again next quarter. But it's certainly not like all of those orders get shipped in the next quarter.

Right. And then on TRuepoint, do you have order backlog for TRuepoint already? Can you characterize the customers demonstrating interest in terms of applications in geography?

No, we're not taking orders yet for the product. We really have just rolled it out. We now will be meeting with individual customers. We started some of that with our international customers at the Geneva show, and we'll be rolling out to them exactly what the frequency by frequency schedule is and exploring with them their opportunities. We do expect this to be a very global product. We have commented before on the fact that we were not as heavily penetrated in international markets as we were in North America. And so clearly, international customer requirements and specifications have played a huge role in designing the functionality of this product line. And we're going to, we believe, be successful in using it to improve our participation in all the markets around the world, but certainly a specific focus on international opportunities. In many of these developing markets, Asia, Eastern Europe, Middle East, and Africa, where investments are being made for additional network capacity and new networks.

Okay. And my last question is about Network Support. I was wondering, you gave some description of the EXP technician test system, but I was wondering how you choked operating expenses in Network Support. It seemed much more, you know, significant impact of op ex control this past quarter. I was just wondering if, you know, Dan had a garage sale or something to cut back on SG&A.

No, we didn't let him do that as he was moving back into our government division, we did not let him do that. A couple of things going on. Number one, the actions we took last quarter exiting the ATM central office test product line took with it some reasonably significant expenses. Second, the EXP product margins, gross margins are good and enhanced the division. We're shipping at relatively low quantities at this point. So prices are at very attractive levels. Going forward, as the volumes increase, we'll go down some of our volume price scales, and so perhaps gross margins won't be quite as high. But we had the combination of those various factors coming together in the first quarter to produce a very nice result. But as we indicated, we do believe that that business is sustainable through the rest of the year at or near the kinds of profitability we set -- about a million dollars a quarter, I think, going forward. And if we deliver on that, I think you certainly would agree that we would have seen a tremendous turnaround from last year to this year and put this division in a position where it can contribute and not be a drag on earnings.

All right. Thank you very much.

You're welcome. Thank you.

Now we'll hear from James Mcilree with Unterberg Tobin.

Thank you. The tax rate was 100 basis points lower than last year. Is that sustainable for the rest of the year?

Yes, it is. If you remember, Jim, on the last call -- you may not remember. I thought there was going to be pressure downward, and because of favorable state and local activity, income tax activity. So the 33 represents the – our current estimate of what it's going to be for the year.

Okay. Great. And Bryan, if I can just push you a little bit on your cash flow estimate, you seem to be either very conservative or my math just isn't working right. If I just take the next three quarters of net, and your estimate for depreciation, in order to get to that 135, 160 operating cash flow, it would imply very large outflows of cash for working capital but your commentary seems to suggest that's not the case. What am I missing?

Well, I don't know if you're missing much. What I am worried about is that in our government businesses, particularly RF Communication, they have been turning orders so quickly and making so much money. They're throwing off a ton of cash. And their ratio is well above what you'd expect as a norm. And I hope they aren't listening because I would encourage them to do better. There's a little concern there that, you know, they won't turn. And we do have improvement to actually make happen in our -- particularly in our Microwave business but even also in Broadcast. And until I see that actually occurring, I think this is a pretty good estimate. You know, last year we did $150-some million. To repeat that, which is right in the middle of this range, I think is a pretty good performance, really.

You know, to echo that, we certainly have an expectation of doing better than we did last year, and the bottom end of Bryan’s range wouldn’t accomplish that. We're going to do our best to do better than last year. But we started out the year obviously very strong, and that's not a sustainable cash flow rate for our business. We had incredible success in the unbilled -- the unbilled cost category, and we know going forward as we have growth year over year continuing in both GCSD and RF that those businesses are going to require additional working capital dollars. So those all put together is what provides that range, but we certainly hope that we can beat last year's numbers.

Great. And lastly, on the TRuepoint rollout, you're not taking orders now. When would you expect to take orders, and then when would you expect to start seeing revenues from that product line?

Well, we're expecting some revenues in the first calendar quarter, which would be our third fiscal quarter. I don't know the precise date that we're starting to book orders, Jim. You know, we may be approaching that or, you know, we may have booked an order. I'm not aware of it. It's certainly not in any volume. And I don't want to leave the impression that TRuepoint in fiscal year '04 will have a huge contribution. But I would hope by the time we're exiting the fiscal year that we're shipping meaningful quantities, that we are at our cost targets and that we are using this new product platform to gain market share and introduce Harris to new customers around the world.

Okay. And do you need to invest in sales and support for that product or have you been making those investments today?

No, we certainly will make some incremental investments to launch that product. I think the marketing side of the equation is an important piece. And I'll be working with Guy Campbell, our new President at the Microwave division, to determine what's required to successfully get this product demonstrated to potential customers who may not know us.

Okay. Terrific. Thank you.

Thank you.

As a reminder, it is star 1 if you have a question. And if you find your question has been answered, you may remove yourself from the queue by pressing pound. Now we'll hear from Chris Quilty with Raymond James & Associates.

Good evening, gentlemen.

Hi.

A couple of questions. First of all, on the broadcast business, have you seen any kind of a pickup in the digital radio side given I think the satellite radio companies are adding new subscribers around a quarter of a million a quarter, I would imagine that would get the broadcasters a little bit more motivated?

There is what I would characterize, Chris, an increased level of discussion. You know there were some technical issues that kind of slowed down this process, I think related to the Codec. I believe those have now been successfully resolved, and I think that technical resolution coupled with the success of satellite radio, I read where Delphi is ahead of their plan in delivering receivers capable of that, and I think that certainly is putting some pressure at the discussion point in terms of when on-air customers start accelerating the IBOC process. We're being fairly conservative. We don't have a lot in our plan for this year. As we indicated on the last call for IBOC. But we do expect to start seeing some shipments. I think at this point there are only something like 40 to 50 stations on the air out of over 10,000. So I personally believe this could be very much a consumer-led transformation that could occur, and it's really just a question of, again, calling the timing. It's not an '04 event for us and may not be '05, but as we start seeing receivers capable of handling digital IBOC over the air go into automobiles in the after-market, then we start seeing them go in in new production, we see competition from satellite radio perhaps driving some of the over air broadcasters and giving them concern about losing listeners, this thing could accelerate quite rapidly, and given our position, which I think is strong or stronger than it is in digital television, I think we're very well positioned. Now, it's not quite as large a market. I think it's been gauged in total at maybe a billion dollars on the high side over a number of years. But -- and we certainly wouldn't get all of it. But I have high hopes for what it can do. We continue to invest on the transmission side to make sure we have the products that our customers will need when they're ready to go.

Okay. And I guess this one applies both to Broadcast and Microwave. Is there anything in the $20 billion worth of reconstruction funds for Iraq that might become meaningful for you in terms of their buildout of infrastructure?

Well, we are certainly investigating that. And I'm going to ask Bob Henry to comment on it because Bob is providing oversight to our Iraq initiatives team that we've put together under the direction of our managing director.

We've had a number of conversations with some companies, both foreign and domestic, who are looking at some infrastructure contracts in Iraq. We're also in discussions right now with the U.S. government on a good size microwave and broadcast infrastructure, a job that they're trying to do to replace, and I believe the number's right, 15 transmission sites that were taken down during the Operation Iraqi Freedom. So we are having those conversations, we have people over in Iraq right now, going for all that. Some of this is the U.S. government, and the U.S. government sometimes is slow to react and move forward. But we are in conversations. We have some penciled agreements that hopefully will be signed in the next two to three months, because it takes about that long to get things signed, and we will be supplying both broadcast and microwave equipment as part of the infrastructure. I just don’t know what the volumes of that will be.

And so, a portion of that would go directly to the Provisional Authority and perhaps another part might move through the Bechtel, Halliburton, or somebody else who you would be a subcontractor to?

Yes, exactly. And we are in discussions with some of those companies at this point in time, to include installation, well, at least assisting in installation and training, and training is going to be a big piece of this going forward, so that they can not only train in how to repair any equipment, although we don’t necessarily have that problem with our stuff, but also, to help in the program content, so I see if the automation – our automation group assisting with that.

We have a real nice motion going on now, Chris, in general in cross-divisional selling. And we’ll see over time what the payoff is for this, but there’s a great level of cooperation among the divisions, and certainly in our commercial businesses, because their markets have not recovered at rapid rates, any opportunities to access government customers either directly, with introductions from GCSD or RF, or through those divisions, is being pursued very aggressively today.

Okay. Maybe you should get Baghdad Bob as a spokesman.

We'll consider that. Thank you.

Okay. And then the final question, on the TRuepoint product line, can you give us an idea of what sort of -- I mean, obviously you're saying one of the big benefits is it's scalable. But what sort of price point it might run at relative to competitors, and who's the real target for that? Is it the -- you know, the guy who needs a low-cost starter solution but you know, wants the ability to move up, or is it the large carrier class customers who want to buy a pretty rugged device to begin with but want the ability to build upon it from that point forward?

Well, clearly, in the long run this platform, because it's scalable, allows a relatively small network need or a large network need to be supplied by simply changing out cards and matching the capacity needs that the customer wants. What we said before, Chris, is that we have been very strong in the North American specification area, in higher capacities. What we hope this product line will do is fill out our product offer and make us much more competitive in terms of features and benefits and also competitive pricing in international markets where some of those bells and whistles aren't required and where lower capacities or lower frequencies are required. And being able to take this one platform, though, we get the benefit of larger quantities of production but yet being able to customize the product in many ways for what the individual customer wants. And then as they need to expand later, anticipating that need for expansion in capacity up front. Similar to what we've done recently with our Constellation 155 radio in North America, where we've been able to take that to 4 by DS-3 capability, we were able to do that, but that isn't the way -- we didn't really design it to be done that way initially. We designed this platform with a lot more of that expansion and scalability and flexibility in consideration.

Okay. And you've said this is your first true frequency agile radio. Are there other competitors on the market who have something that does that from the, I think you said the 6 to 25 or 6 to 30 gig?

You know, I'm out of my element commenting on what our competitors have, Chris. I believe that in aggregate this radio will be very competitive for anything that's on the market or that we are currently aware of being on the market.

Okay. Great. Thank you very much, gentlemen.

In terms of features and specifics, we'd have to get back to you on that.

Moving on, we'll hear from Larry Harris with Oppenheimer.

Yes. Thank you. And congratulations on the results for the quarter.

Thanks, Larry.

Thanks.

Following up on the TRuepoint discussion, do you see it perhaps representing a platform where you could, say, replace the Constellation and some of the other models using the TRuepoint architecture?

I think in the longer run we see TRuepoint as being able to certainly replace our Microstar product line and further out potentially be a replacement for much if not all of the Constellation product line. But the Constellation has a wonderful track record out there and, you know, we'll continue to supply that to our North American customers, who are the predominant users, you know, as long as they want to buy it.

I see. Great. And with respect to the growth at Goverment Communications, which has been very strong as of late, as indicated, we're at 6400 employees, I believe, at the end of the quarter, open requisitions for over 300, and of course you underwent a reorganization of the division recently, you know, with the appointment of product line managers. Are there any items that might hold the division back in terms of growth over the next 12 months, in terms of obtaining qualified people or in terms of quickly getting new facilities and production online? Anything that might hold growth back?

I don't -- I don't see anything that'll hold growth back. The only possibility would be something if the government came in and started pulling money from a variety of different contracts to pay for the war on terrorism. I think they've got that covered now. So I'm not quite as worried about that as I was. So I see our growth continuing as we go forward based on some excellent contract wins that we've had over the last two years for sure. Some of the support to the war on terrorism, which is still building. And a pretty good what we call orders list. There's this orders list going -- opportunities list going forward. That is very strong also. I feel good about the growth going forward.

You know, we're not certainly immune to this business slowing down or at least flattening in revenue, but we have pretty good visibility we think through the end of the fiscal year, and as we go beyond there we've got to continue in Bob's business to win new deals, to win major strategic new deals, because in any given year we have probably 25%, 30% of programs go away and you've got to constantly be refilling that pipeline no different than in a commercial business. But we are not so dependent on any one program that one program could hurt us. We have probably at the current time close to 200 or more active programs. Certainly some are bigger than others. But I think that diversification plays well to us. And we're continuing to work hard every day to win new programs. And that's really the reason we implemented this new organization. We did not want to be limited or restricted in any way for growing. And to have Al Dukes and Dan Pierson back into Bob's organization, running significant pieces of his business along with Russ Haney and others who were already there is a tremendous strength. And if there were any limitations, I think this will help eliminate those in terms of having enough senior management guidance to drive growth going forward.

Great. All right. Well, thank you very much.

Thank you.

Thanks, Larry.

And everyone, we have reached the one-hour mark. Would you like to conclude, or shall we take more questions?

I think we'll take one more question. Then we'll conclude.

We'll hear from Rich Valera of Needham & Company.

Thanks for squeezing me in there, Pam.

You’re welcome.

I'm not sure if you talked about this as I was a little late getting on the call but could you talk about the sequential trends in each of the major business units looking into the next quarter?

We -- Rich, we -- I think in our outlook section of my prepared remarks, I think that's about as far as we're willing to go. I can hit on some of those points for you again. We said we expect to have continued momentum in the government systems business and end up the year in the 15% to 20% growth range, somewhat higher than we said last quarter. In RF we had such good order backlog and strong orders in Q1 that we expect another strong quarter in Q2, but at some point the comparables get very difficult in RF, so we certainly are just, you know, questioning whether we would be able to see double-digit growth rates in the second half of the year in that business or any growth in the business because we have such a strong second half. For the year we said up at least 10% compared to last year. And again, that's a little higher than our previous outlook. You know, Microwave and Broadcast both continue to suffer from, you know, lumpy markets, not a lot of lead time, not a lot of visibility on demand. In Microwave, we had a good quarter but, you know, one quarter doesn't make a year. We're concerned -- conservatively, I think, concerned that the second quarter might look a lot like the first quarter. But we do expect to see some growth as the second half of the year emerges in both of those businesses. And then finally, in Network Support we feel that the revenue level of the first quarter is probably sustainable, and we should be able to deliver, we think, about a million dollars each quarter in income. So if you put all of that together, I think that'll give you a fair amount of detail. We're not going to be providing quarterly EPS guidance. We reaffirmed our guidance for the year, and we certainly have a -- I have a higher degree of confidence in the range achieving it than we did a quarter ago. And you know, let's see how the second quarter plays out, and we'll go from there. We're obviously very pleased with the start for the year.

All right. That's very helpful. And just one more question. With respect to Broadcast Communications, assuming the mix stays roughly where it is, where do you see the margins in that going, understanding you've made cuts there, but can you boost those margins with a similar mix and maybe slightly higher revenue levels than you have now?

Well, I think for the year, since we said on the last call we expected revenue for the year to be below last year because of the very large analog radio order for Romania, we're now saying that it might even be lower than we thought. But because of the costs we've taken out, the margin rates on operating income divided by sales should be better this year than last year. The question maybe you're really asking is when does this get back to a 10% operating income business for the full year?

Just for a quarter we'd take.

Well, yeah, we would. And so would Bruce Allan and his team. And they're working very hard to get back to that level. And we need a little bit of help from the market to do that. We're not at a cost structure to do that at $58 million in a quarter. But we clearly have a much lower breakeven than we did last year and if we can just get a little bit of help in revenue from the market, help from our new products, it really won't take all that much for you to see nice leverage on the way up in the revenue of that business. So I don't want to be any more specific than that because we are working very hard not to make commitments and then not meet them. And the revenue, I just can't totally control that at this point.

That's fair. Thanks very much.

Thank you.

And thank you, everyone, for joining us today. One last comment, though. I just want to let you know that we will be filing our 10-Q tomorrow morning. So you'll have that. And if there's anything else I can help you with, please let me know. Thanks again.

And that does conclude today's conference call. We thank you for your participation. Have a good afternoon.