L3Harris Technologies Inc (LHX) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the Harris Corporation's First Quarter Fiscal 2007 Earnings Release Conference Call. Today's call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Hello and welcome, everyone, to Harris Corporation's First Quarter of Fiscal 2007 Earnings Call. I'm Pamela Padgett, Vice President of Investor Relations and Corporate Communications. With me on the call is Howard Lance, Chairman, President, and CEO, Gary McArthur, Vice President and Chief Financial Officer, and Bob Henry, Executive Vice President and President of Government Communications Systems Division.

In the course of this teleconference, 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 press release and on this teleconference we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in the tables of our press release and on the Investor Relations section of our website, which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website. Howard? I will turn over to you.

Thank, Pam, and thanks to all of you, once again, for joining us today for our First Quarter Earnings Call. Harris started its new fiscal year with an excellent first quarter, posting outstanding revenue and earnings growth. Revenue for the first quarter was $947 million, a 25% increase compared to the prior year quarter. Organic revenue growth continued at a very strong 18%.

Orders in the first quarter increased 53% to $1.1 billion, significantly outpacing revenue and setting the stage for continued growth throughout fiscal year 2007. Orders were higher than the first quarter of fiscal 2006 in each of the Company's four business segments. The sales opportunity funnel continues to be strong and our investments in R&D are creating some very successful new products. Non-GAAP net income in the quarter increased by 48% to $97 million. Non-GAAP earnings were $0.69 per share, a 47% increase over last year.

Now, let's get right into the segment results for the quarter. Government Communications Systems revenue was $459 million, 6% higher compared to the prior year quarter, as revenue increased across the Department of Defense, civil programs, and technical services business areas. Operating income in the quarter was $53 million. Margins continued to be very strong at 11.5% of sales. We believe operating margins in this business of 11 to 12% are healthy, sustainable, and above our peers.

Revenue growth was primarily driven by three of our largest government systems integration programs. The five-year, $600 million field data collection automation program for the U.S. Census Bureau. This will enable the first paperless door-to-door census in 2010. Harris has already delivered 100 fully functional handheld prototypes with integrated GPS and cellular capabilities and our customer is very satisfied.

The 10-year, $1 billion Patriot operations and maintenance support program for the National Reconnaissance Office also continues to grow. As a result of our progress on this contract, we have identified another $40 million in new business opportunities.

The $2.2 billion, 15-year FAA telecommunications infrastructure, or FTI program, also contributed to revenue growth during the quarter. The FTI scope has been expanded to now include the mission support and satellite communications networks. As you will recall, FTI replaces four decade-old legacy networks with a single state-of-the-art nationwide network, and significantly increases the number of services available to FAA personnel. Users will benefit significantly from enhanced network security, extremely high levels of network reliability and availability, and the increased bandwidth.

FTI is significantly forward in technology at a considerable cost savings to the FAA. Let me give you an update on the program. Approximately 85% of the 400 major control facilities are now connected to the FTI network. And these include facilities like control towers, radar sites, and root control centers and flight service stations. New equipment has been installed and accepted at some 2,000 FAA sites nationwide. And over 9,000 communication services are now connected. We continue to transition about 600 to 800 new services each and every month.

The FTI program is expected to save taxpayers hundreds of millions of dollars over its program life. A recent FAA analysis of hub sites that have transitioned to FTI projects an estimated 33% cost savings compared to the legacy network in the first three years. And this savings increases to 50% in subsequent years.

Our national programs revenue was lower than the prior year in the quarter, but there are continuing signs of future improvement. New wins included $44 million in contracts from two large national intelligence customers. Another leading indicator of the future is increased funding for capability studies that we see across the business.

Sales increased in our commercial satellite antennae product lines where we are successfully leveraging our strong government legacy position. National programs revenue is expected to be about flat in fiscal 2007, but this market can be a growth driver for Harris going forward, and it offers excellent margins.

Significant new government contracts awarded to Harris in the quarter included the $16 million future digital system program for the Government Printing Office. This is a new customer. A potential $21 million avionics contract with Boeing for the Apache Longbow helicopter. $68 million in contracts to supply antennas for four commercial satellites. A one-year $42 million follow-on contract to provide global IT support services to the Bureau of Consular Affairs for the U.S. State Department. A two-year $17 million follow-on contract with Boeing for anti-jam GPS electronics for use on joint direct attack munitions. And a two-year $10 million follow-on contract with the U.S. Army for multiple-launch rocket system electronics.

Our pursuit pipeline continues to be a very sizeable $3.5 billion. This includes proposals outstanding, as well as proposals expected to be submitted within the next 90 days. The largest programs expected to be awarded during 2007 fiscal year would include the $200 million innovative space radar antennae technology program for DARPA expected in January.

A $100 million comprehensive large array data stewardship program, which will modernize NOAA's environmental archive, and that's expected to be awarded in March. The $200 million GPS3 satellite program, expected in April. The $1.2 billion AEHF Navy multi-band terminal program - we're expecting that to be awarded in June 2007. And there's also about $100 million of commercial space antennae opportunities that we expect to be awarded during the next nine to 12 months.

Let me move on to RF Communications. RF began 2007 with a very strong quarter. Revenue was $264 million, an increase of 54% over the prior year. Revenue also increased sequentially, up 9%, outpacing a strong fourth quarter. Operating income was $88 million in the quarter, increasing 51% over the prior year with operating margins above 33%. But the real story here is on orders. Orders more than doubled compared to the year-ago quarter, and are now expected to exceed $1 billion in fiscal year 2007.

As a result, we should exit the year with a substantial order backlog of $700 million or more. This substantial level of backlog would support another very strong revenue year in fiscal 2008 for the RF segment. And our pipeline of new products that I'm going to talk about next continues to open new markets at home and abroad.

We're raising our expectation for fiscal 2007 RF order--excuse me--revenue by about $60 million, thanks to the strong order rates. We continue to see robust demand for our Falcon II radios, and government funding is solid. Demand for our new Falcon III radios is also rising with the growing awareness in the market that the Harris Falcon III is a JTRS-capable radio.

Demand is strong in both the U.S. and international markets. U.S. orders growth in the quarter was driven by multiple new requirements from across the U.S. Department of Defense. New orders included $130 million from the Army, and $39 million from the Marine Corps for Falcon II high frequency radios to be used to support ongoing missions, as well as national emergency communications requirements.

We received $69 million in new orders from the Marine Corps and 46 million from the Army for Falcon II multi-band radios. These are going to be used to upgrade and replace legacy tactical radio systems at both active duty and reserve units. With more than 18,000 units now in the field, the Harris Falcon II multi-band manpack radio has become a DOD standard.

Our international tactical radio business received significant new orders in the quarter from Algeria and Indonesia. We were also awarded a $7 million order for the Falcon II HF and VHF radios to support the Enduring Friendship program. This is a U.S. initiative with Caribbean and Central American countries to improve their maritime security capabilities. Phase I of the program included radios for Panama, the Dominican Republic, the Bahamas, and Jamaica.

Also during the quarter, the Republic of Georgia Ministry of Defense awarded Harris a $10 million order and joined a growing list of allied nations standardizing on the Harris Falcon radio series.

We are continuing to invest for future growth with our Falcon III R&D program. Falcon III technology will build upon the success of our Falcon II, but it also opens up new markets for Harris. The Falcon III multi-band handheld, known as the AN/PRC-152, and its dual radio vehicular version, known as the AN/VRC-110, have been fielded with great success thus far. We have about $80 million in product shipments to date.

These radios are also creating a widespread awareness of Harris' utilization of the JTRS software communications architecture and the ability of the Falcon III to meet today's mission requirements, while also providing compatibility for future JTRS requirements. As new wave forms are developed, they can simply be ported into the Harris software-defined radio.

We reached a major and very important milestone in July when the AN/PRC-152 was certified as SCA-compliant by the JTRS Joint Program Executive Office. The Falcon III is the first widely fielded tactical radio to receive JPEO certification, and this represents we believe a significant endorsement in the marketplace.

At the recent AUSA Annual Meeting and Exposition held in Washington, we formally introduced the multi-band manpack version of the Falcon III that we currently call the RF-300-MP. This new radio incorporates significant new capabilities. These include wideband secure networking, extended frequency range to 2 gigahertz, L-Band SATCOM capability, and a significant reduction in both weight and size. The Falcon III manpack will clearly help enable the U.S. military's transformation to true network-centric operations.

NSA certification is already underway and we've received several small orders. We expect that the Falcon III manpack will be the first radio to market with high speed, wideband networking, and COMSEC, to be certified by the NSA. The radios should be shipping in the first quarter of fiscal 2008.

We also conducted a number of live demonstrations at this exhibition for Army, Marine Corps, and Department of Defense executives. We demonstrated the capability of our Falcon III to deliver unprecedented levels of battlefield networking performance. Simultaneous communications of multiple video feeds, situational awareness data, and voice communications over all of the radios on the network.

This information was communicated over multiple Falcon III manpack and vehicular radios, as well as over prototypes of our new personal role radio, or PRR, currently in development and aimed at individual soldier use. All of these radios were equipped with the Harris ANW2 wideband ad hoc networking wave form.

We also showcased the Falcon III incorporating the APCO25 wave form. Now, APCO25 is important because it's the new digital standard in use by fire and police radio systems at virtually all state and local levels. We all know that communications interoperability between military and public safety officials is a crucial element in successfully responding to local disaster situations.

At another exhibit, the African Aerospace Exhibition, we introduced our new secure personal radio. And this is currently being developed for international markets. This new radio brings secure digitized voice and data communications to the individual soldier in a pocket-sized configuration. The SPR is scheduled also for production in fiscal 2008. So, lots of exciting things going on in the RF division.

Let me now move on to the Microwave Communications segment. Microwave had revenue and orders growth and strong operating performance once again in the quarter. Revenue increased to $94 million, 24% above the prior year. This is the seventh consecutive quarter that orders have been higher than sales, and we continue to build order backlog. Operating performance was solid and operating income was $8 million with margins at 8.4%. And this was compared to only $3 million in income and 4% margins in the year ago quarter. Higher sales and higher gross margins were driven by strong TRuepoint product line performance across the board.

Strong demand for our products continued on a global basis. In North America, mobile operators continue to upgrade and expand their networks to enable new data, audio, and video services. And private networks continue to upgrade for increased reliability, survivability, and interoperability. We expect capital spending growth to continue. And we also expect demand to be stimulated in North America by the upcoming 2-gigahertz spectrum relocation. We think early demand from this relocation could be seen as soon as our third quarter in fiscal 2007.

Increased international demand continues to be driven by network expansions at a diverse and growing customer base throughout West Africa, East Africa, the Middle East, and Eastern Europe. Major orders in the quarter came from regional customers - places like Nigeria, Tanzania, Kenya, Iraq, and Mexico.

Harris also signed a five-year frame agreement during the quarter with Africa's largest mobile telecom provider, MTN Group. Harris will supply digital microwave radios for both backhaul and access application across MTN's expansive networks throughout Africa. This agreement builds on our previous success with MTN where, you might recall, Harris helped design and deploy their backbone network across Africa, called the Y'elloBahn.

During the quarter, Harris also received its first order from a major European telecom system supplier for our high capacity TRuepoint 5000 microwave radios. These are going to be deployed for a large 3G operator in Indonesia, and with follow-on orders expected.

As part of our focus on international growth in the Indian subcontinent, we signed up three new resellers to expand business in Bangladesh and Sri Lanka. We also signed up a partner agreement to provide in-country services on microwave implementations in India.

Turning next to new product development, I'm pleased to say that our next generation wireless transport solution is tracking to our planned rollout schedule. The TRuepoint 6000 is directed at the higher capacity long haul segment of the microwave market. We have successfully demonstrated high levels of traffic on our TR6000 prototypes in the lab, and we expect to release the first radios to production on schedule during our fiscal third quarter of this year.

Finally, the pro--excuse me--proposed combination of our Microwave Communications division with Stratex Networks that we announced back on September 5 is continuing to move through the regulatory approval process. We still believe that combining these businesses will create greater scale and deliver complementary global distribution channels, an unmatched product portfolio, and the potential for significant business cost savings.

Let me move on now to broadcast. Revenue in the Broadcast Communications segment was $140 million, and that's up 59% compared to the same quarter a year ago. Revenue benefited from our prior year acquisitions of Leitch Technology, Optimal Solutions, and Aastra Digital Video. Excluding the acquisitions, revenue was about flat with the prior year. Operating income was $9 million in the first quarter, compared to non-GAAP operating income of $6 million in the prior year, and that excluded charges in fiscal '06.

There are lots of moving parts in the Broadcast segment with our four business areas - television systems, radio systems, software, and video distribution products, along with the impact of all of these acquisitions. So, today, I'm going to spend just a little extra time in the segment to discuss both the quarter and our outlook in a little greater detail.

Revenue and income in the quarter were negatively impacted by an industry-wide supply chain shortage of lead-free electronic components required by the European Union Environmental Regulations that became effective on July 1. Lead times on some of these components were extended very quickly to as long as 14 weeks. We also had some difficulty this quarter in turning new orders that were received very late in the quarter into revenue. We estimate the combined impact on revenue of these two items was about $10 million, with lower income of about $6 million. We believe these problems are now largely behind us as we move forward.

The good news is we had very strong orders momentum in the Broadcast segment in the quarter. And I believe this bodes well for improving results going forward. New orders more than doubled compared to the same quarter last year and were higher than revenue. And even excluding acquisitions, organic orders growth was about 35% in the quarter, led by very strong software systems orders.

Harris received a significant software order from British Sky Broadcasting, also known as BSkyB, a leading content provider with more than 8 million subscribers in the U.K. and Ireland. Harris will provide our new H-Class enterprise software solution for controlling, monitoring, and executing pretty complex advertising schemes at BSkyB. This will be one of the largest Air Time Sales system installations in the world.

Significant software orders were also received from two major U.S. television station groups, including Allbritton Communications and its nine ABC affiliate stations. And this was for our optimal solutions, Air Time Sales, traffic, and billing software. The OSi platform can support a single call letter station or scale to support a larger station group, as is the example with Allbritton.

While software systems revenue was about flat in this quarter, we are very well positioned with our software business going forward. Our new H-Class platform offers unparalleled enterprise-wide functionality for our global customers that need and demand that. And the recent acquisition of the OSi product line hits the sweet spot for our U.S. station group clients.

We believe that the rollout of IPTV will eventually offer software systems revenue growth for us. But the slower rate of equipment investment by companies such as AT&T is pushing revenue beyond fiscal 2007. As a result of these IPTV market dynamics, and a bit slower than expected growth in the automation software market, we've reduced our software revenue outlook in this fiscal year by about $15 million.

Now, I should emphasize that we're coming off a very strong fiscal 2006 for the software business, with revenue and profits benefiting from several large non-recurring projects at some of the global networks. By the fourth quarter of 2007, we believe we'll see year-over-year software revenue growth returning.

Turning to the radio systems business, radio transmission orders were higher in the quarter compared to last year, as was revenue. The transition to HD radio in the U.S. is progressing nicely with 1,000 stations now on the air, and that's about double last year's number. During the quarter, Harris became the exclusive HD radio transmission supplier for Radio One, a leading station group. We clearly made good progress with our radio business. We expect to see solid revenue growth throughout fiscal 2007.

Television transmission orders declined year-over-year in the quarter, as did revenue. While U.S. stations are required by the FCC to be fully transitioned to digital broadcasting by February 2009, they appear to be deferring capital spending on their remaining digital transmitter needs as long as possible. Perhaps the FCC has trained our customers to believe these deadlines are not real. But whatever the case may be, investments have not picked up.

We talked about the fact that mobile television offers an opportunity for transmission revenue growth in the longer term. But for now, the focus of QUALCOMM and others is on continuing to make progress on the new technology that's required for successful and reliable over-the-air transmission of broadcast quality video to a variety of different kinds of portable devices. While Harris is deeply involved in field testing activities worldwide on this technology, and we do expect to be a major player in this developing market, we do not expect much revenue to materialize in fiscal 2007.

So, as a result of the digital TV and mobile TV market situations, we've reduced our TV transmission revenue outlook in fiscal 2007 by about $25 million. We're reallocating our resources within Broadcast to other areas of the business that are growing, have lots of opportunity for future growth, including and especially our video distribution business.

Orders in video distribution experienced strong double-digit growth once again in the quarter, as a conversion to digital studio and master control operations continues. As a reminder, this business includes the video processing and distribution, test and measurement, and digital media product lines from the former Leitch Technology business, along with the Harris legacy and recently acquired Aastra Networking products.

While revenue in the first quarter was impacted by the lead-free component shortages I spoke about, we are still expecting double-digit revenue growth in the video distribution business for fiscal 2007 in total. The introduction rate of new video distribution products is a key driver of our revenue growth going forward. Among the new products demonstrated at the recent IBC Exhibition in Amsterdam was the Video Tech Quick Media Analysis Server System. This is a fully automated test and measurement platform designed to verify the quality of ingested digital content. We also showcased the new G Series live production graphics system at this show.

Our strategy for the Broadcast business will continue to be focused on extending the breadth and penetration of our total solutions offering. We expect to drive higher growth in attractive markets by positioning Harris as the industry supplier of choice with an integrated array of hardware and software solutions, and with unmatched customer support. The acquisitions we've made have done exactly this and have positioned us to better capitalize on the transition to digital in the marketplace. The companies we've acquired offer some of the best solutions in the industry.

We're completing the integration of the Harris and Leitch Technology sales forces with regional leaders now in place in the Americas, Europe, and Asia Pacific. The new sales structure will drive incremental revenue growth by leveraging the division's broad portfolio of hardware and software solutions presenting one integrated Harris Broadcast Communications offering to customers and prospects worldwide.

Several orders in the quarter suggest that we are on exactly the right path. For example, Harris is providing the largest digital satellite television provider in Turkey with Playout Automation software. But not just that. We're also providing servers, routers, a branding solution, and a broadcast test and measurement equipment solution. For VT communications in the U.K., Harris is providing a complete solution that includes our Net Express audio-over-IP platform, Playout Automation software, Workflow software, and our Net Boss network management and monitoring software for their new multi-platform global content distribution system.

Another target for growth is the government market. And more specifically, military base communications infrastructure. We booked our first significant order this quarter where Harris is deploying servers, networking equipment, and digital asset management solutions on two U.S. Army bases. Now, similar to our Broadcast customers, these users have large appetites for ingesting, storing, adding reference data, and analyzing, archiving, retrieving, and transporting large quantities of digital video content. This particular application is related to military training exercises where video will be captured from more than 60 different sources, including night vision cameras.

In summary of the Broadcast segment, video distribution equipment revenue growth should continue to be at double-digit levels, and we expect to deliver on the fiscal 2007 earnings accretion from the Leitch Technology acquisition. Radio transmission revenue growth should continue, thanks to our strong position in HD radio. Software revenue will likely be about $15 million lower than our prior expectation, due to market dynamics in IPTV and flatness in automation. And television transmission revenue will likely be about $25 million lower than our prior expectation, due to lower fiscal 2007 order rates in DTV and mobile TV.

I want to emphasis though that the fundamentals in the Broadcast market remain very positive. And Harris is well positioned to create significant shareholder value in this segment. Our revised Broadcast segment outlook for 2007 is about 15% revenue growth, and 10 to 11% operating margins.

I also want to remind you that our Broadcast business is in very good hands. Tim Thorsteinson is a 15-year broadcast industry veteran, he's got a solid track record, and he has a very experienced management team surrounding him. They know how to manage costs and focus R&D investment to drive profitable growth.

I'd now like to ask Harris Chief Financial Officer, Gary McArthur, to give you his comments.

Thank you, Howard. Good evening. Before discussing Harris' financial position, I would like to make a few additional remarks regarding the proposed combination of our Microwave business with Stratex Networks. All required antitrust filings have been made, and the Form S-4 has been filed with the SEC for their review and comment. We anticipate proxy materials will be sent in late November to Stratex Networks shareholders seeking their approval of the merger. The closing is expected to occur early in calendar year 2007.

As set forth in the S-4 materials, the newly formed public company, Harris Stratex Networks, Inc., will be traded on the NASDAQ global markets and will have the same June fiscal year-end as Harris Corporation. Both the Harris Microwave and the Stratex Networks management teams are fully engaged in anticipation of the closing. Integration teams have been formed and cost saving targets assigned to each team. Forecasted savings from synergies for fiscal 2008 remain at 35 to 40 million with estimated acquisition and integration costs that will impact the new company's income statement estimated at 40 to 45 million.

The majority of the acquisition and integration related costs are expected to be incurred in fiscal 2007, and after netting out the effects of minority interests are expected to negatively impact Harris Corporation's fiscal 2007 EPS by approximately $0.12. Harris Corporation will also realize a substantial gain at the time of the merger closing. The gain can only be calculated as of the closing because it is dependent upon Stratex Networks' closing date share price. Using the Stratex Networks share price as of yesterday's close, Harris would have recorded a gain of $0.82 per diluted share. A detailed description of the calculation for determining the gain is available on our website.

Excluding the above-described acquisition and integration costs and the significant expected one-time gain, the transaction is expected to be neutral to Harris Corporation's earnings in fiscal 2007 and accretive by $0.07 per diluted share in fiscal 2008.

I will now move to a discussion of Harris Corporation's financial position. Our financial position continues to be very strong. Cash and cash equivalents were 296 million at the end of the first quarter. Cash flow generated from operating activities was 54 million in the first quarter compared to 86 million in the first quarter of 2006. All four segments generated positive cash flow in the quarter. RF Communications, Broadcast and Microwave, posted higher cash flow, while cash flow from operating activities at Government Communications Systems were lower due to unusually strong collections in the first quarter of 2006.

The 54 million of operating cash flow in the first quarter is consistent with our internal plan, and our full-year estimate of cash flow from operations for fiscal 2007 is now between $400 and $450 million. As amortization of intangibles as a result of acquisitions is significantly impacting our financial results, we believe EBITDA to be an additional measure for consideration in determining the operational health of the Company.

EBITDA on a GAAP basis increased from 104 million in the first quarter of fiscal 2006 to 164 million in the first quarter of fiscal 2007, or 58%. This large increase was led by the growth in RF Communications earnings and the improved earnings at both Microwave and Broadcast. EBITDA, as a percentage of revenue, also increased from 13.6% in the prior year quarter to 17.3% in the current quarter.

Asset management results were mixed. Days sales outstanding were at 56 days. Inventory turns were at 5x and net operating working capital at the end of the quarter was 395 million, or 10.8% of annualized sales. The higher working capital is primarily due to investments in the FTI program at our Government Communications Systems division. The FTI investment is expected to peak in the second half of this fiscal year.

Return on invested capital was very strong at 18.8% in the quarter just ended. Capital expenditures, including capitalized software, were 35 million in the quarter. We continue to expect to spend near the same levels as last year on capital expenditures and capitalized software, at between $140 and $150 million.

Depreciation and amortization for the quarter increased from 20.2 million to $27.3 million, primarily due to amortization of intangibles resulting from the acquisitions of Leitch, OSi, and Aastra. Depreciation and amortization is expected to be between $120 million and $130 million for fiscal year 2007. In the quarter, we bought back 160,000 shares of common stock at an average price of $43.03. Under our existing repurchase program, we have authorization to repurchase 3.4 million additional shares. We will continue to repurchase shares of common stock to offset the dilutive effect of shares issued under our stock incentive plans as we go forward.

Finally, as a result of the previously announced favorable tax settlement of 12 million in the first quarter, our outlook for the full year tax rate is 33%, noting that the tax rate for any given quarter could vary up or down as a result of discreet tax events occurring therein.

Let me now turn the time back to Howard.

Thanks, Gary. Let me close by summarizing our consolidated financial outlook for the year. Since our last earnings call in July, we've increased earnings guidance for fiscal year 2007 by an additional $0.10 per share. So non-GAAP earnings guidance for 2007 is now $2.70 to $2.80 per share. This represents a year-over-year increase of about 24% compared to prior year non-GAAP earnings of $2.22 per share. Revenue is now expected to be in the range of 13 to 15% higher than fiscal 2006, with strong organic revenue growth of 11 to 12%.

In our Government Communications Systems segment, we are increasing our expected fiscal '07 revenue growth to 5 to 7% higher than fiscal 2006. Operating margins are expected to continue to be in the 11 to 12% range.

In the RF Communications segment, we are increasing expected fiscal 2007 revenue growth to 30 to 35% higher than fiscal 2006, and operating margins should be approximately 34% for the year.

For our Microwave segment, we are also increasing our expected fiscal 2007 revenue growth to 10 to 15% higher than fiscal 2006. We expect operating margins for the year in total to be in the 9 to 10% range.

And finally, as I already discussed, in the Broadcast segment, we are lowering our expected fiscal '07 revenue growth to approximately 15% higher than fiscal 2006, with operating margins in the 10 to 11% range.

At this point, I'll ask the operator to open the line, and we'll take some of your questions.

Thank you. (Operator Instructions.) And we'll hear first from Chris Donaghey of Suntrust.

Hi. Good evening, guys.

Good evening.

Howard, first of all, on the tactical radio market, is there any way that you can help quantify us--quantify for us what the growth outlook is for the market over the, say, a two or three-year timeframe, and how you should grow relative to that? Because, again, I continue to believe that there's been an intense amount of scrutiny on your tactical radio business. So, if you could help kind of put some quantification around the growth parameters for that business over the next couple of years it might help.

I think there's been undue concern about the future of that business, Chris. Do I expect growth at RF in fiscal 2008? Absolutely. I think our strategies for growth at that division are clearly working, based on the results. We have higher expectations for new orders in fiscal 2007. I've discussed those. We'll exit the year with substantial order backlog.

We've got, I think, a significant new product pipeline pumping out new things for us to sell with lots of new features. We've talked about previously the Falcon III handheld and vehicular version. Now we have all set for 2008 the manpack version of the Falcon III. We've got additional offerings in the secure comms arena coming online. I talked in the comments about the development of our personal role radio for U.S. customers. And also, the secure personal radio for international customers.

All of these products are going to help drive incremental growth in fiscal 2008 and beyond. And we've talked previously about the significant international radio opportunities in countries like Pakistan, Mexico, UAE, Iraq, Algeria. And these are all starting to come into focus. I think it's premature for me to provide a specific number on that trend line. But I'm feeling very positive and confident in our ability to continue to grow that business and continue to gain market share.

Okay, great. Thanks. That helps a lot. On the Broadcast segment, as you look at what happened in the quarter and how you've adjusted the outlook going forward, what surprises you most about the negative changes that you made, first of all? And second of all, on the transmission side, do you have a percentage in terms of how many stations still need to go through additional infrastructure build-out to get to either full power or the redundancies that they currently possess on the analog side?

Well, on the first part of your question, I would have to absolutely say that the weakness in the TV transmission business is--was not expected when we put together our plan for the year. And the order of magnitude of that decline at $25 million or thereabouts is off about a $100 million business base. So, it's a significant number.

We should have, perhaps, in hindsight, expected the take-up of mobile TV to go more slowly. That's not a question of if, in my opinion. It's a question of when. We are very well positioned. And I would tell you that the slower adoption in the market has caused us to gain a lot of ground on competition over that timeframe.

I am surprised about digital TV. We still estimate there's $250 to $300 million of transmitters that should be purchased in order to fill out the complete capability for Broadcast, including redundancy. Now, whether they'll put all of that redundancy in by the February '09 date or not is hard to say. But we continue to be disappointed at the rate at which they're ordering. We are out communicating with customers, Chris, that there's only so much capacity in our factory. We are not going to increase capacity to handle a big spike. And I'm optimistic at some point that's going to start loading up the factory.

But we thought it was prudent at this point to revise our outlook in that part of the business. And because those are very high margin products at the gross margin line, it had a major impact on our profitability expectations for the year.

The reason I wanted to go through the detail in the four different product areas within broadcast is that some are clearly on track, one or two aren't. And I think it's important to understand some of those moving parts, which we understand are complicated for you all to understand because we just report at the segment level normally.

Okay, great. Thanks. And nice quarter, guys.

Next we'll hear from Joe Campbell of Lehman Brothers.

Yes. Good evening. It's actually Carter Copeland. Good quarter.

Thanks, Carter. How are you?

Doing just fine. Howard, I wondered--the RF Communications segment continues to just be as impressive as it can be. And I wondered if you could characterize--as we look forward into '07 and into '08, there seems to be no slowdown in both the Army and the Marine Corps demand for more equipment. And I wondered if you could characterize the capacity in RF Comm, and if there is any way that we run into some sort of capacity constraints out there because these levels are quite high and very impressive.

Yes. Hi. It's Bob Henry. Let me take the question. From a capacity standpoint, I think already we have told you that we've made investments up in the RF area from a facilities standpoint and from a line standpoint. We continue to look at that and surely can more investments if we need to going forward. At this point in time, we see no constraints on our ability to produce at the quantities that we're anticipating at the DOD. So, all the services we'll need going forward. So, we don't see any constraints at this point in time.

You might recall, we put on a fair amount of capacity in advance of launching the Falcon III handheld. And we feel like this is a real competitive advantage that we have by running this as a commercial business, and are willing to make those kinds of investments. And I think you see from the continuing results that it's paying off and it's generating very good returns for the capital that we're investing in the business.

Yes. I mean, it's certainly impressive. I wondered if you might have any comments on--with respect to cash deployment. I mean, it seems that the financial position continues to improve. And are there things that catch your eye or focuses in terms of cash deployment that we should keep an eye open for?

We certainly have plenty of cash available to fund our internal needs for capital investment and then some. We'll use that cash either for strategic acquisitions, if we find those that are in fact strategic and can be accretive and create value. In the absence of that in the long run, we'll find a way to pay down debt or distribute it to shareholders.

Great. Thank you very much. And good quarter.

Thank you.

Now, from BMO Capital Markets, we'll hear from John Bucher.

Thank you. Howard, I want to see if I can maybe take a stab at trying to demystify the perpetual growth you seem to have in RF there. And it would appear that from the standpoint of the overall network effect and the multi-mode complete solution that you guys have outlined before that the Falcon III can provide, that once the manpack does get fielded, you'll have complete communications capability from command and control down to standard vehicles, as well as individual soldiers and Marines. And I'm wondering is some of this the network effect that comes from your being able to field a solution now that truly does cross what had previously been silos. And maybe is that one of the reasons why you're seeing this incredible up tick in demand? And then, why it may actually still continue--or is that yet to be felt?

And then, secondly, with the international exposure there, is there any chance that you might be able to disclose what the breakdown was between international and U.S. and--or whether you'll do that going forward, if international becomes large enough? Thank you.

Well, I certainly think you're right on target in terms of some of the excitement that is generated by the demonstrations that we do. We have very quickly transformed ourselves from simply being viewed as a limited, focused, high frequency radio supplier into a supplier of a broad range of products and systems across the net. And we continue not just to talk about that, but when we can do a demonstration that has vehicular radios, it has manpack radios, it has handheld radios, it has prototype individual personal role radios, all being able to pass this huge amount of content across the network simultaneously, utilizing our own internal developed wideband ad hoc waveform, that's impressing our customers.

These products are largely available today, or let's say within the next year, where the services would have to wait 2010, 2011 perhaps, if these products are developed under the JTRS program. So, this certification and stamp of approval, if you will, from the JPEO for JTRS was extremely important, and has been viewed as a very significant move by our customers.

On the international side, we will be--in 2007, I think orders will probably be around 60/40, maybe a little higher than 60/40, with the higher number being U.S. government customers. But in absolute terms, the international order rate will grow over last year, and revenue will grow over last year. And, as you've heard me say before, I think this is--there's a wave out there for international that will follow-on with the U.S. And while I can't be specific on which country will buy when, there's a lot of demand. And we have seen it too many times to believe it will be anything other than that - that there will be follow-on business and adoption of these technologies in allied countries that the U.S. is adopting.

So, all of these things are causing us to feel, as I think you can tell, pretty optimistic about '08 and beyond for RF, as well as for the rest of the Company. It's not the only part of the business that's growing. We really have a lot of things--a lot more working well rather than not. And in any good-sized business you're going to have a couple of hiccups in a quarter. But overall, we feel very positive about our ability to continue to grow the top line of the corporation, and continue to expand earnings.

One last question. The Falcon III availability date - the manpack date that you gave. Is that for both the standard manpack radio and the high capacity data radio? Will both of those radios be available on that date?

I don't know [inaudible].

We're not certain. I know it is for the manpack. And the large [gating] item for that is NSA certification. We think it's important they certify it. We could be in production sooner, but we're going to wait until they certify it to go into production. And clearly, that will be a good growth driver for 2008 for us.

Thank you.

Now we'll hear from Joe Nadol of JPMorgan.

Thanks. Good afternoon.

Hi, Joe.

Hi. Howard, I guess just to start out on the Broadcast side, Encoda--is the legacy Encoda business where you're seeing the $15 million hit? Is that accurate?

Well, the answer is yes and no. We had an automation business, as well as Encoda had an automation business. So, within software there's kind of two pieces. There's the software that runs the master control in an automated way. We had expected growth this year. The business isn't declining, but we're just not seeing growth in that product line. The other part of the product line is the Air Time Sales scheduling and billing software, which came from Encoda. We have now refreshed that in what we call the H-Class product line.

And then, we added in the OSi acquisition, which is focused on U.S. station group customers. Again, that business isn't declining, but it's relatively flattish for this year. And again, you have to also remember the business model we run there. We--instead of selling licenses, we essentially rent the software to a customer. So, we may get a five-year order worth let's say $25 million, but we'll bill that in revenue $5 million a year. So, it doesn't drive revenue growth in the year as much as it builds your contract backlog and creates this wonderful good margin annuity going forward.

The biggest disappointment in all of that really, again, is not a decline, but we had hoped that IPTV market, as it materialized, would allow us to wrap software and some hardware around those implementations and AT&T, one of the domestic leaders, has talked a lot externally about, again, not if they're doing it, but when - the rollout schedule. And it's just moving a little slower. So, we're still going to have growth in the overall division this year, but not at the rate that we had hoped. I still think the business is solid--is going to see accelerated growth again in '08 and beyond.

Do you feel like there's a competitive issue? Has someone come up with a competing solution to H-Class? Is--or is it simply and purely a market phenomenon?

I believe it's a market phenomenon. That doesn't mean we don't occasionally lose deals. But I talked about Allbritton and a couple of others that I couldn't disclose the customer and those were absolutely head-to-head shootouts with competitors that had been winning, and instead, we're now winning. So, I actually think we've turned the tide in the market on those product lines. Things never improve quite at the rate that you hope. We never like to take guidance down on any aspect of our business, certainly. But we'd rather try and be candid about the path that we're on for this year. We took three of the segments up. We took one--we took one down.

When you think about the Broadcast sector big picture, it's where you've been focusing all of your--or the vast majority of your capital--.

--Yes--.

--On strategic acquisitions.

Yes.

And you have a couple of areas--I mean, you have the--sort of the--what seems like a one-time execution issue because of supply or the availability of components. But you have a couple of areas where you have demand falling a little short. Do you--I mean, this is a lower visibility business. This is clearly in the defense side.

Yes.

Do you feel like--I mean, how do you sort of balance the lower visibility and the fact that you're putting in--this is where, again, you're targeting your acquisitions. And on top of that, where are you today? You didn't make any acquisitions this past quarter. What are your thoughts today as to the future of capital going into this area?

Well, clearly, both of our commercial businesses, Joe, are not going to have the kind of backlog entering a quarter, the kind of visibility as the defense side. On the other hand, they offer significantly higher, I believe, long-term inherent growth rates because of the global markets they serve. And they offer significantly more margin expansion opportunity. I mean, we're at 2.70 to 2.80 a share non-GAAP this year, with Broadcast barely in double-digit return on sales and Microwave still slightly below double-digit. That says there's significant upside as those margins do continue to improve.

I still believe strategically Broadcast is a very good place to invest. And as there are additional strategic acquisitions available at reasonable prices that would fill out our portfolio, I think you would see continued investment there. Having said that, they've got to be strategic and they have to be reasonably priced. And I can't say as to whether those opportunities will occur and exactly when they'll occur.

But the Leitch acquisition is--has been a good one. It has--it really--we really now have this broad and wide solutions offering. And I just gave a few examples in the call of how those are--that capability is turning into real order--real orders. And I really feel like we're just getting started in terms of really making that a realization of all of this capability we have.

So, you deal with the issues as they emerge. But I don't want anyone to get the impression that the business is broken or going in the wrong direction. We are making improvement. And there's more right than wrong, but have a little patience. I think the returns in this business are going to be good. And we're going to look back a few years from now and be very pleased about the investments that we made. Time will tell, but I still believe that way.

Do you think that some of the weakness in some of the end markets is presenting any kind of opportunities with regard to pricing and some of the acquisitions you might be looking at?

Potentially.

Okay. And then, just one more. On the budget, looking at the FY07 budget in the bridge--and it's always very difficult to find all of the radio funding. It looked like in the base budget the numbers were maybe a little disappointing. In the bridge, it looked like the Marine Corps got pretty well funded and the Army didn't. Any I guess thoughts on how we can kind of interpret all of this data?

There's lots of moving parts, I think is the answer. There's been a lot of so-called reprogramming of dollars. All the services seem to have a fair amount of flexibility in working with Congress on reprioritization of needs. And while you're correct, some of those line items weren't as big as they had been, or weren't as big as maybe even requested. But, in fact, the orders have exceeded some of those.

So, I really think, while that's interesting information, it's really all about the prioritization of the spending. We still believe that communications will continue for some time to be a--one of the top one or two or three priorities. Information transmission to the soldier in the field is just critical, in terms of them getting intelligence and data, to maximize their impact, minimize their casualties. And I just don't see that changing in the foreseeable future.

Certainly, we continue to work hard, as does our customer, in making sure that funding is there. We can't guarantee funding and I don't have a crystal ball into government fiscal year '08 or beyond. But I am absolutely certain that the demand is going to be there. And based on everything we've seen, the funding is still tracking.

Okay. Thanks, Howard.

Thank you.

And Ms. Padgett, we are at the one-hour mark. We still have questions in the queue.

Let's continue, please.

All right. We'll hear now from Steve Mather of Sanders Morris.

Thank you. Good afternoon.

Hi, Steve.

First off, congratulations on your execution. Sometimes this proves elusive for some other companies, but you seem to have that fairly under control.

Well, thank you. We set pretty high expectations though. We don't even like to stumble a little bit.

Right. There's one area that's interesting to me and that's the positioning. And in each segment you have a very interesting story. Could you take us back a year or two [audio glitch] has been then? And then, basically, why we expect that to continue on? Because you really have done a unique job. I mean, some firms can execute, but you've also positioned yourself in a pretty unique way across a couple of different segments pretty successfully.

Well, it's an ongoing process. We have put in place a pretty rigorous strategic planning process in the Company, I would say. I think it's improved every year. I think the engagement from the operating divisions is higher than it's ever been in our Company on driving future growth. And I think that our operating executives realize that to do that it's not just doing things right, but it's doing the right things.

And so, we spend a lot more time talking about markets and customers and position in markets and scale and competitive advantage and differentiation. And I'd like to think that the sum of all of those, with the efforts of the top 40 or 50 executives in the Company, is what you're seeing in the results, be it in strategic acquisitions, be it in our new product development priorities, or be it in our geographical focus, not just in the U.S., but around the world.

It's a never ending process though because competition doesn't sit still. They react, which forces us to react. So, it's not anything that you're ever done with, but thanks for your comments. I think we're doing better. And it's that whole process that convince especially Gary and Bob and I that even though we've had this tremendous success and growth over the last four years, there is still so much more opportunity out there, and so much more that Harris can take advantage of regardless of the climate of markets or the climate of competition.

We have big markets we serve. We have wonderful technology to go after that. And we really have strong customer relationships. So, I'd like to think there are even more opportunities going forward for us to have new strategies, and then, hopefully, to execute against those.

Good to hear. Thanks.

Now we'll hear from Byron Callan of Prudential Equity.

Yes, thanks. Howard, just a clarification. In your opening remarks, did you say that the 2007 orders for RF would be about $1 billion and the backlog about 700 or--?

--Yes--.

--Could you parse that out again?

Yes, that's correct, Byron. I said that based on the strong start in the first quarter with RF orders, and our expectations and visibility, we think we will once again in '07, as we were in '06, be above $1 billion in new orders in RF. And that given the backlog we started the year at, that order outlook and the outlook that we've provided for revenue growth of up 30 to 35%, that we'll end up the year with 700 million or more in ending year backlog, which then sets us up for growth in '08.

You've got it. Okay, good. And then, Howard, I mean, it just--it really got--back to Chris' question. And it's clearly been something that's been on my mind for a while with Harris. But when you look at the total market, you guys did the March Investor Conference and I think you laid out a range of opportunities that were either sized in terms of dollar amount or, in some cases, radios. But--.

--Right--.

--It looked like it was $2.5 to maybe $3 billion in opportunities that you'd sized. And I recognized there's some international opportunities that are out there. But when you run at this billion dollar run rate, I mean, is there just that much more that you're seeing that you haven't really been able to identify? But you're clearly very confident about this business, and I'm kind of trying to square that with what came out in the March Investor Meeting and the markets that were identified at that time.

Well, it's a very--it's a very good question, Byron. And you're right, we did size the RF market at around $3 billion. I think what sets us apart in our government businesses - not just RF, but also, GCSD - from many other players has been two or three things. Number one, our ability to gain market share.

Right.

So, it's not just the size of the market and how it's growing, but we have shown a consistent ability to gain market share. Second, we have shown the ability to change the size of the market by introducing products that move us into new segments, whether it is the [indiscernible] replacement market, which we were not player in, whether it's the handheld multi-band market, which we were not a player in, whether it's secure communications products, which we're becoming a bigger play in, whether it's going forward - personal role radios, whether it's international, where frankly we were a player in HF, but not much else, and now, we're selling and believe we can sell lots of additional radios.

So, it's this combination effect of the market having good growth, but gaining market share as a result of these strategies aimed at customers and segments, and expanding the size of the market.

The other thing I think that differentiates us over in our government systems integration business is we're not totally dependent just on DOD and Intelligence. We have a large and growing information technology business and developing solutions for customers like the FAA, the Census Bureau, and providing ongoing support services for people like the NRO. And so, even though we're not the biggest, we are very diversified in that business. And that, plus operating really as a commercial business in the RF division, really do set us apart a little bit from other companies.

And I think that sometimes--because we're a multiple division company, sometimes it takes a little more work to understand us as opposed to a pure play company. But sometimes we also get lumped in with, oh, things are going to slow down to low single-digits in defense. And we just don't see that for our Company. And quarter after quarter, year after year, so far at least, we're demonstrating that with our results. And we hope to be able to continue to do that going forward.

Okay, yes. No, I was really specifically looking at--I understand the total size of the market and stuff, but it was the opportunity set that you guys have broken out. There were a number of slides that showed the Army at high frequency standardization, for example, around 400 million. That's kind of what I was driving at. I understand the total size of the market, but I was looking at the opportunity set that you guys had identified back in March. And it sounds like that's expanded. And I'm just trying to figure out where it's expanded and relative to these baselines that were set last March.

Well--.

--Maybe it's something I can follow-up with, if you want, offline. But--.

--Well, I certainly think your point there at the end is the right one, that a lot's changed in the last six months--.

--Yes--.

--And clearly, some of these market opportunities have gotten significantly larger and funding is available that has enabled that. I anticipate as we go forward and give our next investor briefing or some various presentations we're going to be doing at Investor Conferences, that we'll spend some time talking about our view of that market today versus a year ago, so we could help to make that a little more clear. So, thanks for the question.

That would be terrific. Thanks a lot, Howard.

Operator, we'll take one more question.

Yes, ma'am. Our last question will come from Jim McIlree with Unterberg Towbin.

Thank you. Howard, the IPTV slowdown you're seeing, is that just domestic or is that international also? And then, secondly, is there any intention to get into the APCO market as a--with a standalone radio?

Our visibility into IPTV is pretty global. I think we're seeing--but we're probably more concentrated in the U.S. And where we had expected to see growth from that new market was more in the U.S., Jim. So, hence, my comment on AT&T. So, we were pretty focused on the U.S. I've read some reports from other companies that serve that more broadly around the world. And I think that everyone believes it's going to become reality. But it is also very capital intensive, kind of like 3G investments. And I think some people are trying to prove out the business case before they get too far ahead of themselves. So, I know there is some international slowdown as well, but the impact on us was largely domestic.

On the--on your latter question, all I can say is it's a market we continue to watch. We think this link between the military radio and government--federal government capability to communicate with state and local is hugely important. Right now, we think we can participate in that at the federal level. We continue to look at the state and local level, but at this point that's not a market that we're going to enter.

Great. Thank you, everyone, for joining us today. And I'm sorry we didn't get to all of your questions.