L3Harris Technologies Inc (LHX) 2007 Q2 法說會逐字稿

Good afternoon, and welcome to Harris Corporation's second quarter fiscal 2007 earnings release conference call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Good afternoon, everyone, and welcome to Harris Corporation's second quarter fiscal 2007 earnings call. I'm Pamela Padgett, Vice President of Investor Relations and Corporate Communications. And on the call today 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. Before we get started, a few words about forward-looking statements. In the course of this teleconference, Howard, Gary 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 Harris 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 Relation section of our website, which is www.harris.com. A replay of this call will be also be available on the Investor Relations section of our website. With that, Howard, I'll turn the call over to you.

Thank you, Pam, and thanks to all of you for joining us today on our second quarter earnings call. Harris once again posted excellent revenue and earnings growth in the second fiscal quarter of 2007. While growth was led by the RF Communications segment, the Government Communications and Microwave Communications segments also delivered strong revenue growth and solid operating performance. In the Broadcast Communications segment, we delivered organic revenue growth, but income was lower. On the Engineering and Technology front, we're making real progress, driving increased revenue from our new product programs. Revenue from products introduced in the past three years increased from 17% of total revenue for fiscal 2006 to about 30% of total revenue in the first half of fiscal 2007. Now, let's discuss the second quarter results for each of the segments.

Government Communications Systems revenue for the quarter was $484 million, a 9% increase over the prior year and very solid growth. Operating income was $56 million; operating margin continued strong at 11.5% of sales. Our Government Systems business remains quite diversified in terms of both programs and customers, providing a solid business base with opportunities for continued growth. New wins in the quarter increased our total funded plus unfunded backlog to $4.5 billion. Our Civil business area continues to be a major growth driver. We made excellent progress in the quarter on the $2.2 billion 15-year FAA Telecommunications Infrastructure program that was awarded in 2002. FTI is a new state-of-the-art communications network that increases the number of available services, improves network reliability and security, and will save the FAA hundreds of millions of dollars in operations costs. More than 10,000 communications services have now been accepted at more than 2,100 FAA facilities. We expect to complete the FTI deployment within calendar year 2007. And for the remaining years of the program will operate and manage the FTI network, and provide additional communications services that could increase the program value to a potential $3.5 billion.

We reached the first major milestone in the quarter on the $600 million five-year Field Data Collection Automation program for the U.S. Census Bureau that was awarded in 2006. Harris successfully demonstrated the performance of our prototype wireless handheld device that will enable the first paperless door-to-door Census in 2010. We'll deliver several hundred of these units in March in support of a Census rehearsal exercise that's planned for May. The Defense Systems business benefited from a new three-year $66 million contract for preproduction and testing of the Hawklink Common Data Link system for the Navy's LAMPS helicopters. High-speed wireless communications links are a core Harris technology, enabling improved intelligence, surveillance and reconnaissance activities via the transmission of real-time sensor data. Potential value of the Hawklink program could exceed $350 million by 2015. Harris is applying its Falcon radio technology to wireless Weapons Data Links, as well. Earlier this year, Harris was selected by Boeing as one of two competing suppliers for the Small Diameter Bomb program.

The National business area returned to growth in the second quarter, thanks to several new intelligence program starts, and from growth in our Commercial Space Systems business. We expect growth in the National business to continue in the second half of fiscal year 2007.

Harris Government Systems remains very well positioned to drive continued revenue growth going forward, as evidenced by a pursuit pipeline that has grown to $4 billion in value for proposals outstanding plus those expected to be submitted within the next 90 days. These program opportunities cut across a large number of civil, defense and intelligence agencies and departments. The most promising large pursuit continues to be the $1.2 billion seven-year Advanced Extremely High Frequency Multiband Satellite Terminal program for the U.S. Navy. We are in a head-to-head competition in this program against Raytheon, with a down select expected in June. AEHF terminals will provide the Navy more than four times the bandwidth of today's Milstar terminals. The Harris team successfully completed multiple system test demonstrations using simulated high seas conditions ahead of schedule. Full scale demonstrations are now scheduled for March.

Another development program with significant future potential is our High Bandwidth Networking Radio. This program is a derivative of the WIN-T program for the Army. Working closely together with BAE Systems and General Dynamics, we are providing the High Bandwidth Networking Radio for a supplemental program called Joint Network Node. The radio features a Harris-developed waveform that enables the network to continually select the optimal routing for high data rate mobile communications. The Harris High Bandwidth Networking Radio was the featured technology in a very successful demonstration held last week and attended by more than 100 military and DOD officials. This radio is now ready for field deployment, and we believe JNN may now precede the full implementation of WIN-T.

RF Communications had another fantastic quarter. Revenue was $286 million, a 58% increase over the prior year, and an 8% sequential increase over our first quarter. Operating income increased 56% to $96 million. Operating margin was above 33.5% in the quarter, and is still expected to be about 34% for the entire fiscal year. Demand remains very robust in the U.S., and the international market is gaining strength. New product introductions are being well received, and we are pleased with our initial successes in expanding into several new markets. We expect the market and our revenue and orders rate to remain very robust throughout the rest of fiscal 2007, setting the stage for another strong year of growth at RF in fiscal 2008.

Continuing tactical radio market strength reflects increased requirements to upgrade tactical communications capabilities for U.S. forces, and the increasing need for interoperability across DOD and coalition forces. The Iraq and Afghanistan missions have brought a new sense of urgency to fulfill these broad requirements. And force restructuring is pushing tactical radio communications down the command chain, eventually putting some form of tactical radio into the hands of every soldier and into every vehicle. Strong demand for Harris radios also reflects a growing preference for our feature-rich technology solutions, our unmatched level of service in the field, and our commercial business model that offers off the shelf products with the shortest lead times in the industry.

DOD orders in the second quarter included multiple requirements for the U.S. Marine Corp, Navy and Army. We also received a $16 million order from the Navy to begin providing tactical radios for the new Joint Explosive Ordinance Disposal Rapid Response Vehicle. These new high-profile heavily-armored vehicles are being rolled out by Navy, Marine Corp and Army engineers to provide protection against improvised explosive devices, or IEDs. The communications systems architecture has been specially designed around the Falcon III SCA-compliant radio, and provides a full range of secure communications with unparalleled interoperability.

As I mentioned earlier, our international business remains strong and growing. International markets represented about 37% of RF revenue in the last fiscal year 2006. During the second quarter, international orders doubled compared to the prior year, and are expected to grow 25% to 30% in fiscal 2007. We are at the beginning of what we believe will be a multi-year international upgrade cycle, with large program opportunities in countries with active defense communications modernization programs. These programs include procurement requirements of $400 million to $500 million in Pakistan, $150 million to $200 million in Iraq, and $80 million to $100 million in Mexico, to name just a few.

Last quarter I told you we were working to update our addressable RF market size going forward. We presented some new data at a financial conference on December 5th, 2006, and it's posted on the Harris Investor Relations website. The slide shows a calendar year 2006 addressable market size for RF of $2.7 billion, expanding to a potential $6 billion addressable market in the 2007, 2008 time frame. We have already made significant progress in releasing new products based on our Falcon III platform to expand in many of these new markets. Falcon III is becoming Harris' commercial offering for the JTRS radio of the future market. Dennis Bauman, he's the Joint Program Executive Officer for the JTRS program, has been widely quoted endorsing commercial solutions offered outside the JTRS programs of record, and specifically the Harris multiband handheld model, the AN/PRC-152.

The Harris Falcon III is the first widely fielded tactical radio to receive certification under the JTRS Software Communications Architecture Standard. It's software architecture allows the radio to be easily upgraded with new waveforms as they're developed. An example of this is the incorporation of the new digital waveform for land mobile radios, known as APCO 25. Applying APCO 25 into the Falcon III allows complete interoperability with state and local public safety officials and first-responders. We've now shipped approximately $130 million of Falcon III products to date. And we have installed production capacity for up to 48,000 handheld units per year at $300 million to $400 million in revenue. The Falcon III handheld is in service across the U.S. Army, Navy and Air Force with an impressive performance record so far. We believe we are very well positioned with Falcon III to compete for substantial upcoming procurements across DOD.

Work continues on the new Falcon III Multiband Manpack model that will begin shipping to customers by September 2007, following NSA certification. And similar to our first mover advantage with the Falcon III multiband handheld, we will be capable of volume production several years ahead of any other JTRS compatible Manpack radios. The Falcon III Manpack provides significant new capabilities; increased frequency range up to 2 gigahertz, L-Band SATCOM capability, significant reductions in weight and size, and wideband secure networking capabilities. At the October 2006 AUSA Exhibition, we demonstrated a fully functional six radio network that provided multiple video feeds, situational awareness data, and voice communications to all of the radios on the net, simultaneously. We're continuing the development of additional new products for new markets. These include applications such as On-the-Move SATCOM, secure communications network devices, high capacity secure line-of-sight radios, high capacity data radios, and small form factor soldier radios for both domestic and international markets. We are committed to invest and move the technology forward to offer new capabilities to our customers that meet their needs.

Turning now to Microwave Communications, revenue during the quarter increased 14% to $101 million, and orders exceeded sales for the eighth consecutive quarter. Non-GAAP operating income increased 63% to $10 million, with operating margin a healthy 9.7%. Demand in North America came from both wireless service providers and private networks. Several mobile operators are beginning to now substitute microwave for leased lines, in order to lower backhaul operating costs. And they're upgrading and expanding networks to enable new high bandwidth audio and video services. Private network demand is also being driven by the need for higher bandwidth, and they're taking advantage of continuing available Federal funding for network upgrades. International demand remains strong, with orders reflecting the continued expansion of our customer base. Europe, Middle East and Africa continue to dominate orders, driven by the deployment of 3G services and network expansions.

As you know, last week we completed the merger of our Microwave Communications segment with Stratex Networks to form a new company, Harris Stratex Networks. The combination creates an exciting Company with about $650 million in annual revenue, significant global reach, and the industry's broadest solutions offering. Harris Stratex Networks has strong leadership already in place. I want to congratulate Guy Campbell on being named President and CEO of the new Company. Guy successfully led the turnaround of our Microwave business from losing money three years ago, to now growing at double-digit rates, building backlog, and earning a 10% return on sales in the latest quarter. I'm confident that this business will continue along its growth path, generating increased revenue and profitability, and creating value for Harris and its other shareholders. I invite you to listen to the Harris Stratex Networks conference call at 5:30 this evening to hear more details about its second quarter results and outlook.

And moving on next to the Broadcast Communications segment. Revenue was a strong $155 million in the quarter, an increase of 14% compared to the prior fiscal year. Adjusting for the impact of acquisitions in the prior year, and these include Leitch Technology, Optimal Solutions and Aastra Digital Video, organic year-over- year revenue growth was about 6% in the quarter. Sequentially, revenue increased by 11% compared with our first quarter of fiscal 2007. Operating income at Broadcast was $13 million, an 8.4% operating margin compared to non-GAAP operating income of about $15 million in the prior year. Segment income excluding depreciation and amortization was $22 million in the second quarter, representing a 14.6% operating margin, compared to $21 million in the prior year.

Higher organic revenue was led by double-digit growth in the quarter in the Video Distribution business area. This area includes systems that provide networking, signal processing, master control, digital content storage and retrieval, news editing, branding and graphics, and test and measurement to global broadcast stations and media networks. Significant wins in the second quarter included a large HD infrastructure project for FOX Sports. We're providing 36 shared storage NEXIO servers and 17 internal storage servers for their Multichannel Network Control Center, currently under construction in Houston. We also began shipping our IconStation system to 40 ABC affiliate stations during the quarter, as part of their major network branding program. Harris is the acknowledged global leader in HD video distribution, master control and branding solutions.

Transmission revenue was about flat year-over-year in the quarter, with radio systems higher and TV systems lower. Radio transmission growth was driven by strong market acceptance of the new Harris FlexStar HD radio exciter, and by higher demand for European standard digital radio transmitters in Europe, China and India. TV transmission revenue and orders were both lower than the previous year. We discussed softness in our TV transmission business last quarter. Many customers are continuing to delay purchases of digital transmitters required to meet the FCC's February 2009 mandate for full power digital broadcasting. We estimate that $250 million in digital transmission equipment remains to be purchased for upgrades and redundancy prior to the deadline. We also discussed last quarter the slower than expected development of the mobile TV market in North America. While we clearly expect to maintain our leadership position in these markets and see orders pickup eventually, we decided to take actions now to reduce some of our transmission business operating expenses in the meantime. As a result of these actions, we expect to reduce fiscal 2008 operating costs by $10 million. We'll incur about $5 million of charges for severance and facility exits.

Revenue in the Software Systems business in the quarter continued to be lower than expected due to softness in the automation software market. The slower development of both mobile TV and IPTV markets also negatively impacted new software orders and our revenue. Software Systems income was negatively affected by the lower revenue, as software gross margins are above 70%. We're also experiencing somewhat higher year-over-year expenses associated with the deployment of our next generation software platforms; H-Class for global media networks, Invenio digital asset management, and OSi air time sales and traffic for U.S. station groups. We are having considerable success at winning new OSi and H-Class business in a competitive market place. But these are typically multi-year contracts, where revenue is recognized over the contract life, rather than up-front software license fee revenue. So revenue grows more slowly in this business model. And while we benefit from a predictable income stream over the longer term, income is negatively impacted in the shorter term by the higher costs required during the project's initial design and deployment phases.

Overall, we remain very well positioned in the broadcast space to be the preferred partner for global broadcast and media companies as they make the necessary investments to transition their operations into the high definition digital content age. Through the combination of our legacy businesses and several strategic acquisitions, we have created the industry-leading end-to-end solutions capability. We have expanded the size of our addressable markets from about $1 billion three years ago to $5 [million] to $6 [million] today. We're also now able to serve many of the faster growing product areas. Make no mistake, we are not satisfied with today's level of segment profitability, and we will take the appropriate steps to further reduce our costs. But we are also going to continue to invest, to ensure the future of this business with leading products and leading new software solutions. We expect our Broadcast Segment to deliver strong revenue growth over the next several years and to continue to expand operating margins and return on capital to more acceptable levels. I'd now like to ask Harris CFO, Gary McArthur to provide his comments on the quarter.

Thank you, Howard. Good afternoon. Before jumping into my comments about our financial position, I would like to take a moments and make a few comments about the recently completed combination of our Microwave division with Stratex Networks. I echo Howard's comments in that we couldn't be happier with the progress made to date in putting the two companies together, and with the combined entities go-forward business outlook. As announced on Friday of last week, the Harris Microwave and Stratex combination is expected to be neutral to fiscal 2007 earnings, excluding the anticipated integration and acquisition costs estimated at $0.16 per diluted share, and the after tax gain to Harris that will be recorded in our third quarter of approximately $0.92 per diluted share. A detailed description of the calculation for determining the gain is available on our website. With regards to our financial position, we had a very good second quarter.

A key driver of our improving financial position is our strong and improving earnings before interest, taxes, depreciation, and amortization, or EBITDA. EBITDA on a non-GAAP basis increased from $140 million in the second quarter of fiscal 2006, to $180 million in the second quarter of fiscal 2007, or 29%. This large increase was led by the growth in RF Communications earnings, and the improved operating income before depreciation and amortization at both Microwave and Broadcast. Non-GAAP EBITDA as a percentage of revenue also increased from 17% in the prior year quarter, to 18% in the current quarter. Cash, cash equivalents and short-term investments increased to $368 million as of the quarter just ended. Cash flow generated from operating activities was $128 million in the quarter. Year-to-date cash flow from operations was $182 million, as compared to $112 million in the first half of fiscal 2006. All four segments generated positive operating cash flow in the first half of fiscal 2007, and all four segments generated higher operating cash flow in the first half of fiscal 2007 as compared to the first half of fiscal 2006.

We continue to be on track with our internal plan. And with the just completed formation of Harris Stratex Networks, which will be consolidated in our financial results, our full year estimate of cash flow from operations for fiscal 2007 is forecasted to be in a range of $400 million to $450 million. Capital expenditures, including capitalized software for the first half of fiscal 2007, were $63 million. Including Harris Stratex Networks, we continue expect to spend near the same levels as last year on capital expenditures and capitalized software, at between $140 million and $150 million. Depreciation and amortization for the quarter increased from $45 million to $55 million for the first half of fiscal 2007 as compared to the first half of fiscal 2006, primarily due to amortization of intangibles resulting from the acquisitions of Leitch, OSI and Aastra. With the inclusion of Harris Stratex Networks, depreciation and amortization for fiscal year 2007 is now expected to be between $130 million and $140 million. During the quarter, we bought back 465,000 shares of common stock at an average price of $41.96.

Under our existing repurchase program, we have authorization to repurchase 2.9 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, our outlook for the full year tax rate continues to be at 33%. Noting that the tax rate for any given quarter could vary up or down as a result of discrete tax events occurring therein. Back to you, Howard.

Let me close now by discussing our updated fiscal year 2007 guidance that reflects strong second quarter results, and also now includes expected results of Harris Stratex Networks starting from January 29th. Our consolidated revenue growth expectation has been increased to a range of 19% to 21% higher than fiscal year 2006 revenue. Organic revenue growth is expected to be 12% to 14% higher. We're also increasing guidance for non-GAAP earnings from a range of $2.70 to $2.80 per diluted share to a range from $2.75 to $2.85 per diluted share. We're raising expected Government Communications Systems revenue growth to a range of 6% to 8% higher than last year, with expected operating margins in a range of 11% to 12%. We're also increasing the RF Communications segment expected revenue growth to 38% to 40% above 2006, with expected operating margins for the year at approximately 34%. For Broadcast Communications, we now expect revenue growth of 13% to 15% above 2006, with operating margin in the range of 9% to 10%. Perhaps a bit higher if we can get costs out through our actions more quickly. The actions we will implement in the back half of this year, along with expected 2008 revenue growth, should drive much higher returns in fiscal 2008.

The results of Harris Stratex Networks will be consolidated into our results beginning in our third fiscal quarter, with a deduction for minority interest reflecting the approximately 44% of the Company that we do not own. Our outlook for fiscal 2007 for the Harris Stratex Networks segment includes seven months of the Microwave Division results on a stand alone basis, and five months of the combined Harris Stratex Networks results. Revenue is now expected in a range from $525 million to $535 million, with operating margin expected to be in a range from 9% to 10%. Our guidance was developed using the pro forma information for Harris Stratex Networks that they provided in an 8-K filed in conjunction with their press release this afternoon. Pam, I'll turn it back over to you.

Operator, we're ready to open the line for questions. In the interest of time, I'd appreciate it if everyone would limit themselves to two questions. If you have more than two questions, though, you're more than welcome to get back in the queue. Okay, operator?

[OPERATOR INSTRUCTIONS] John Bucher, BMO Capital Markets.

John Bucher, thank you very much. Howard, did orders exceed revenues in RF Com? And then, did you say in your comments about the international composition. I think you commented on the orders there. Can you say what international sales were as a percentage of RF Com segment sales?

John, your first question, orders for the second quarter alone were slightly lower than revenue for the first half, or significantly higher than revenues. So backlog was significantly higher at the end of the second quarter than at the beginning of the fiscal year. And I'm sorry, could you please comment again your second question?

Yes, I was going to try to make that just one question in the interest of counting. But the second question was, I know you commented on the order composition in RF Com. I was just wondering whether you could say what international sales were as a percentage of total sales for the quarter in RF Com. And then my second question was to be on this new revised addressable potential market that you've posted, much appreciated. The -- I think you referred to the new $6 billion total addressable market opportunity as a 2007 to 2008. Should we view that as a two-year opportunity funnel? Thank you.

Let me deal with the second question first. Now we're talking about a $6 billion annual market opportunity, John. By saying 2007 and 2008, what I'm talking about is the fact that as we release new products, we reach the full potential of that $6 billion annual market opportunity. So that's why the timing is spread, because we're introducing, as you can see when you look at the chart, a number of new products out of the Falcon III family and many others that I've commented on today. In terms of the specific mix in the quarter for RF, we don't usually talk about that in a given quarter. But clearly, we were at 37% international in '06. That percentage will be lower in '07 as we have lower revenue as a percent for international. Absolute dollars for revenue for international would be higher. But we expect very, very strong order rates, as I indicated. We're up 25% to 30% is our expectation for the year for RF international orders, and we think that bodes very well for continued growth from international. As I said earlier, we see this as the beginning of a multi-year growth cycle.

That does appear outstanding. Thank you very much.

Joe Nadol, JPMorgan.

Howard, first of all, on the budget, the upcoming supplemental. It looks like a lot of the radio funding is going to be -- it looks very robust first of all. But a lot of it is coming under the SINCGARs category as opposed to HF. And obviously, you've started to penetrate that area over the past year or so. I'm wondering if you could offer any color on your strategy there, how much share you think you can take off that chunk of money?

Well, I don't think I can speculate. Clearly though, we view the $1.4 billion in the 2007 supplemental budget request for SINCGARs as business that we now can compete for as a result of the capabilities of our Falcon III. Now, in addition you've got the line item IHFR, which is just short of $500 million, which will be for a variety of high frequency and multiband handheld radios. You have got an $850 million line item, I think, for Marine Corp tactical radios. So there is a sizable amount of opportunity in the supplemental budget that we think will be procured then over the coming quarters.

Okay. Secondly, on the addressable market expansion slide again, there seem to be three relatively larger categories; international systems and programs, portable SATCOM and COMSEC terminals. And I was wondering if you could just maybe give a little bit of color, particularly in the international one, because it's such a large piece. And also, youhave 33% market share of the $2.7 billion addressable calendar year '06. Is there any sense as to what sort of market share we can expect in, say, '08 on that incremental piece of addressable market?

Well, first of all as it relates to some of those, if you take for example the SATCOM on-the-move, this is a SATCOM upgrade program that we are on the team with ViaSat. And so that's an example of getting into a new capability where we'll develop new products to go after that market. The COMSEC terminals, we have several new programs underway and new products that are expanding our capabilities beyond the chip level into the secure terminal product line area. So those are examples of how we're trying to use the foundation of Falcon III technology, which really is core in not only our Falcon III Tactical Radio product line, but these new products for expanding the served market, trying to use that platform and the investments we've made in that to drive growth.

I'm going to ask Bob to talk at a high level about the international systems business. But clearly, what we're talking about there is a market that we have just not pursued up until this point. And we think it offers significant opportunity for us. We're not going to be specific at this point, Joe, with regard to what kind of revenue we think we can get in the next one to two years. But I think as we move toward our analyst meeting in May, we'll be able to provide a little more color around that. But Bob, perhaps you can talk about at a high level, the general direction that we're headed.

Sure. Let me start off by talking about where some of the more significant opportunities appear to be, and those would be in the Middle East and in eastern Europe. We've already had briefings with all of our dealers and our customers in all the key countries. And we've stepped up the amount of people we have in our business development and our advanced programs operation, to not only capture radio business, but to capture some of the new products that Howard already alluded to. We've already submitted requests for information on a job in the Netherlands. And Howard already talked about Pakistan and Iraq and Mexico. We have a number of opportunities in the UAE and Algeria, Nigeria, the Philippines, Georgia, Ukraine. I could go on and on with opportunities for radios and some of the new products that we're in the process of putting out.

Congress has approved the Pakistan purchase, of course, of the 3,900 RF, 5800H radios. That's been done. And we've also been notified that Congress has approved up to $2.1 billion of arms sales to Saudi Arabia. That was done in early October. And what we're going to be doing there, is we're going to be aiming at the Saudi Arabian National Guard portion of this program. We are the standard HF radio supplier for the Saudi Arabian National Guard going forward. And then the last one that we're looking at is in the Philippines, where the government has approved over $100 million for military equipment. And we're looking for the handheld -- VHF handheld radios there. We've already supplied about 2,000 of those radios previously there. I think the total amount they're looking for is 16,000. So, we're going to work towards capturing those other 14,000.

Joe, I think one way to think about the international Systems Business and the reason we think we're going to be successful, is first of all, we're going to stick to our knitting and focus on those kinds of systems integration jobs that deal with coms or information technology, leveraging capabilities that we already have. So, we're not going to venture off into areas that we don't have knowledge of. And to bring the local knowledge of the customer and the local support, we're utilizing the RF Global Dealer Network, which already is established in all of these countries. So we're very pleased. I think we have in excess of $500 million in opportunity pipeline value already identified. And how quickly that opportunity turns into awards and how much of that we get, I don't know at this point. But it's sizable, and we have got feet on the street pursuing it. So that's -- hopefully gives you a little color in that part of that growth market.

Yes, it sure does. Thanks very much.

Rich Valera, Needham & Company.

Howard, you mentioned that your program with the FAA is going to essentially conclude the implementation phase at the end of this calendar year. Just wondering how significant that is on a run rate basis? And should we be concerned about that drop in run rate with respect to just the year-over-year growth for government coms as a whole moving beyond 2007?

No, not at all. Good question, though. The way that this program works, is revenue builds as you do deployment, so you turn on services and that's how we get then, income. So it's actually going to continue to build until full deployment. And then it would -- if there was nothing else, it would flatten out. But we know what's going to happen after that, is they're going to have additional services they want to put on the network. And that's why we talked about still our expectation that this program that's currently awarded in, let's say, the initial deployment phase of $2.2 billion over 15 years, we think it still reaches the potential of $3.5 billion that we've established. This is a network that has the level of reliability and security that's going to allow them to transition other networks -- legacy networks on to this backbone once we're fully done. So you should not expect a drop off, you should expect, we believe, continued growth in future years.

Thank you for that. And just quickly on the high bandwidth networking radio that you're doing for the JNN, one, can you size that opportunity? And two, can you maybe just give a little color around that? As I understood it, JNN was primarily a satellite-based system. And this sounds like there is a terrestrial component to that. If you could elaborate on that.

Yes, I don't really have at this point any specific market opportunities, Rich, that I can comment on. But I think that the interest, you're right, JNN is primarily satellite-based. But this aspect of it has -- primarily the interest has been driven because of the capabilities that we have in this ad-hoc mobile networking competency. And working with BAE Systems, we have both invested some of our own internal R&D to productize this capability, and presented that some months ago to General Dynamics and they're very interested in rolling this out, utilizing our capabilities. So we're just trying to highlight that it's another clear program opportunity.

I think it also highlights that Harris Government Systems is moving away from a mode of where we sit and simply catch RFPs that are pitched from the government. And in our business, we are trying to become much more proactive in identifying growth opportunities. We've integrated a lot of capabilities with the RF Division, working closely with GCSD, and we're learning from that how to more quickly productize opportunities. The high bandwidth networking radio is an example of that. Our activities in taking advantage of base infrastructure quotations where we can put together systems of wireless secure communications on military bases is another example of that.

Thanks.

Chris Donaghey, SunTrust Robinson Humphrey.

Congratulations.

Thank you.

Howard or Bob, whoever, I noticed today that the Air Force released the RFP for the SDD phase for Cluster AMF. Can you just provide us an update on what the current state of expectations are for JTRS, and how it impacts your business today, and maybe over the next couple years?

Sure. Let me address that for you. As you know, we have positions on the GMR Cluster 1 and on the AMF pre-SDD. The -- as you said, the RFP finally came out on the -- at the end of January, when they said it would, for the AMF portion of that. These are multi-year development programs, both of them are, with LRIPs in the year 2011 and 2010. So there is still a lot of time before they're going to get product out to the field. We fully support the JTRS program. And we're working towards a successful completion of our development work over time on that. And in the meantime, we will continue to sell in our SCA-compliant Falcon III radios and -- since we're in production on those right now. And as I said, the production on the other radios won't be until the year 2010, I believe for the AMF, and for the GMR, 2011. So we're in very good shape at this point in time.

Okay. Great, thanks.

Jim McIlree, Unterberg, Towbin.

With the expansion in the RF addressable market, will that come at the expense of margins? It seems like moving into the handheld personal soldier radios particularly, it could be a lower margin. Thank you.

Yes, a little too early at this point, Jim, I think to determine that. We have had great success in maintaining our margins in this business. As we have grown, we have ticked up our investment for these new products. Going forward, it's really not going to be a question of maintaining -- I mean, the gross margins are more than large enough to maintain the operating margins we have. It's really going to be a trade off between how much level of investment you want to make for future growth. But to the extent that there is any downward pressure, I see it as relatively minor.

If you recall back four or five years ago, this business was in the mid teens, I think, in terms of return on sales. We don't envision anything like that in the future. And we believe we now have enough scale and enough progress in our supply chain program, that even more competitive lower price point projects, such as individual soldier radios, can be delivered to customers with very attractive operating margins because of our commercial business model. So we'll try and give you more color around that as we proceed on into fiscal year '08. But at this point, I don't see any immediate near term concerns.

Larry Harris, Oppenheimer.

Thank you, and congratulations on the results for the quarter. Just a few clarifications regarding the Broadcast area and it looks like you're taking the appropriate actions there. Any opportunities in terms of mobile TV now that Verizon is getting close to launching service in some cities? Also, in terms of digital radio, looking at the number of stations that could launch in 2007, do you think we'll see an increase over 2006, that would be a similar number? And also, in terms of the Broadcast infrastructure area, that's done well. Could we see that continue to grow over the next few quarters? Thank you.

Let me deal with the last part of that first. The acquisition of Leitch Technologies and Aastra Digital Video, which serve this very large and diverse video distribution area, continues to perform very well. And we believe that we'll continue to see double-digit growth rates in those products and that part of our Broadcast segment, certainly for several more years. We don't see that slowing down. As it relates to your question about transmission, we're going to resize our transmission business from a profit standpoint, assuming pretty modest growth going forward.

If that then, if it results in faster mobile TV ramp up, as you say, because of Verizon or others, or if we get a faster ramp up in HD radio, or if we get a return to higher orders in digital transmission leading up to the FCC mandate in February of '09, all of those kinds of things would just give us even better margins. So do we expect some growth? We're just going to plan on very modest growth in the combined transmission business, and to the extent we do better than that, then we'll get even better leverage on the bottom line. But we're not going to count on high growth. We did that this year. We've learned our lesson from that. And we're going to reset the cost structure of the business kind of at current FY '07 levels.

Understood. Sounds like a good plan. Thank you.

Chris Quilty, Raymond James.

Howard, can you comment within the Government Communications business whether intelligence programs were up or down this year? And understanding that those are generally classified programs, what's your sense of the ability to get back to the sort of double-digit growth rates that you experienced two or three years ago?

Just a clarification Chris. When you talk about intelligence programs, are you talking about at Harris, or government budgets?

At Harris.

Okay. So we returned to year-over-year growth in the second quarter, and we expect to see growth in the second half, as well. But we started out pretty weak in the national business in the first quarter. So for the total year, we'll be flat to maybe slightly higher than fiscal year '06. But the good news is the momentum that I think we're building. It's coming from kind of our traditional intelligence customer base, as they're starting to release new funding for new programs. We're very encouraged by that. It's also coming from our Commercial Space Systems initiatives, and you've seen a couple of press releases as we talked about how that business has grown in significance. And not only is it growing in the traditional antenna area, but we're now starting to get opportunities to expand into doing more space electronics and potentially systems integration on future commercial satellites. So I'm very optimistic we'll continue to grow going forward. That's a big part of our Government Systems revenue, and we need that business area to grow going forward in order to deliver the overall Government Systems growth that we want.

I think double-digit growth is a little optimistic. That doesn't mean that Russ Haney and his team in that business won't set those kind of objectives, and we won't encourage those. But that's probably a little optimistic given the base. That business is two and a half times as large as it was four or five years ago. So just the kind of the power of large numbers makes double-digit growth in that particular segment more difficult.

You've continued to do it in the RF Coms.

Well, we certainly are going to establish those kinds of objectives for all of our businesses. I think Bob is on the record multiple times, if we're not growing any of those government segments at double-digits, he's not a happy camper. And so we work very hard to try and have real plans to achieve that. Sometimes we do, sometimes we don't. But the overall planning process we put in place, which is on -- and at the root of that is, expand your served market and get a faster throughput on new products. Those are the two core things that we're trying to do. And you find that fingerprint all over every single one of the segments at Harris that we talk about. So we'll see. But at this point, I'm just saying, Chris, I wouldn't commit to that double-digit growth for the National segment going forward based on what I know today. But it's growing again, and that is a positive.

Thank you.

Steve Mather, Sanders Morris Harris.

So much to talk about, I'll leave it to one, because we all probably want to hop on the next call with Stratex. Let's see, you mentioned venturing into new areas, but leveraging your knowledge base in history. And you've certainly done an unusually good job in the last three years of doing that. And of course, you'll have a pretty good harvest through the next couple of quarters. Without giving away too much, can you discuss the expanse of what you still see incremental opportunities for acquisitions, the way you have over the last three years?

Well, I think my view hasn't changed too much. We continue to look at strategic acquisitions that would accomplish several objectives, either give us scale in a particular business segment, bring new customers that we think we have synergies with and can leverage other products or systems integration work through them, or fill in geographies that we think offer higher growth. And finally, would bring us technologies or competency that would be complementary to our core coms and information systems technology, but something we can get faster than doing ourselves. We try and then map those kinds of a target universe of companies with affordability, with the ability to deliver good returns, well above our cost of capital within just a few years, to deliver synergies such that deals can be accretive to earnings within kind of the first 12 months, is usually what we're targeting.

And so I -- it's a rich environment. There's lots of targets out there. But I'd say very similar to the last three or four years, the ones that offer the fastest growth and the most interest and synergies, also are the ones that are the higher priced. And so all I can say is that our pipeline of acquisition candidates continues to be pretty robust, and we continue to work on lots of projects. Which ones will actually lead to closure, we can't say at any given time. But we, at the same time, are not counting on acquisitions to do the basic blocking and tackling of organic growth and margin expansion. So I think we have a pretty good balance. And I think our results the last several years would show that we're doing organic improvement. We're also trying to do smart acquisitions.

Operator, we'll take one quick question.

Joe Campbell, Lehman Brothers.

It's, I think, a real feat to not just book all this stuff, but to build all those radios. So, congratulations on a good quarter. I think what we're trying to understand from the charts that you've provided with regard to the $6 billion, should we be thinking that Harris is kind of a third share? You had a $2.7 billion market and sales of roughly a third of that? Whether or not it will -- are you suggesting that at least there's a possibility out there that you could have a third of $6 billion for $2 billion in the kind of '08 time frame? Or should we think of these add-ons as more sort of entry into the market, so that your shares should be naturally lower to start with, and perhaps a target of 30? So just to kind of question about how we should interpret this chart you've given us? Thank you.

Joe, I think certainly our aspirations in the long-term would be to have the kind of market share in new adjacent markets that we have earned in our core market. But I think it's fair to say that you don't accomplish that day one when you enter a market that you really don't have a presence in, and you're doing that organically, you don't go in very often, I don't think there are many examples in business where you would achieve that same market share immediately. But certainly, that's our aspiration over the longer term. 2008 is not longer term, so I wouldn't expect to have that kind of market share in 2008. But I am very pleased with the momentum that we have. And you know us well enough by now that we wouldn't be talking about those market opportunities and those programs unless we had real traction in each of them. So I feel very good about the progress we're making, not only in RF, but at GCSD, in Broadcast and, of course, the progress that Harris Stratex in making in expanding their served markets and driving organic growth. So, again, in May we'll talk a lot more about those growth opportunities to our investors as part of our Investor Day.

Well, we, and I'm sure all the shareholders, hope you make it.

Thank you. We will make it.

Thank you, everyone, for joining us, and let me know how I can help you.

That does conclude our conference today. We want to thank you for your participation.