L3Harris Technologies Inc (LHX) 2008 Q1 法說會逐字稿

Good afternoon, and welcome to the Harris corporation's first quarter 2008 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.

Thank you. Good afternoon, everyone, and welcome to Harris' first quarter fiscal 2008 conference call. I'm Pamela Padgett, Vice President of Investor Relations and Corporate Communications and on on the call with me today is Howard Lance, Chairman, President and CEO, Bob Henry, Executive Vice President and Chief Operating Officer and Gary McArthur, Chief Financial Officer. Before we get started I will say a few words about forward-looking statements. In the course of the 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 the 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. And Howard, I will turn the call over to you.

Thank you, Pam. And welcome again to all of your joining us today for our first quarter earnings call. Fiscal 2008 got off to an excellent start, as Harris posted strong revenue and earnings growth in the first quarter. And new orders set the stage for continued growth going forward. Revenue increased 30% compared to the first quarter of last year, to $1.2 billion. Organic revenue growth, excluding the impact of acquisitions, was a strong 13%. And orders in the first quarter increased 24% from the prior year quarter to $1.4 billion. Operating performance was also excellent. Non-GAAP net income, that is, excluding acquisition-related costs, was $104 million, and non-GAAP earnings per diluted share was $0.76. That was an increase of 10% from the prior year. But you have to remember the prior year quarter benefited from a favorable tax settlement of $12 million, or $0.08 per share.

I also want to remind that you our segment reporting in the first quarter reflects a change relating to our government businesses. Defense programs is now combined with the results of the RF Communications division, in a segment renamed Defense Communications and Electronics. We filed a Form 8-K on September 11th that provided historical financial results for the newly-configured segments by quarter for both fiscal years 2006 and 2007. This new segment reporting reflects how we are operating the businesses to take full advantage of synergies across a broad spectrum of global defense communications market opportunities. For example, in fiscal 2007, we launched our international systems growth initiative to leverage our systems integration expertise and the RF Communications division international dealer organization. This new initiative has created a $1 billion international systems opportunity pipeline. And it is also spawned new integrated communications solutions for Harris, such as our recently introduced border security shelter.

Let's now move on to the segment results for the first quarter. In the Defense Communications and Electronics segment, which again includes RF Communications division and the Defense Programs business, first quarter revenue increased by 13% to $429 million. Operating income increased 21% to $132 million, or about 31% of sales. Margins for RF Communications products were a bit higher than the previous year quarter, and slightly above our fiscal 2008 guidance, due to a favorable mix of high margin Falcon 2 shipments that we had in the quarter. RF Communications revenue increased 20%, compared to the prior year quarter. Demand for Harris tactical radios was strong in both our domestic and international markets and across all product lines, including the Falcon 2 and new Falcon 3 radio systems. Backlog for RF Communications increased in the quarter to a record high of about $1 billion.

During the quarter, Harris received $26 million in new orders for the Navy's mine resistant ambush-protected or MRAP vehicles bringing our total orders to date for the Navy and Marine Corps to $145 million. And Harris HF and multi-band radios will be used on many of the MRAP vehicles for the army. In fact, we received our first army MRAP order in the quarter for $20 million, and an $8 million order was received after the quarter ended. The MRAP vehicle programs represent an excellent growth opportunity for us going forward. These vehicles are receiving priority funding from the Pentagon at the direction of Secretary of Defense Gates. Our Falcon tactical radio suite is sole-sourced on both the Navy and Marine Corps vehicles. And our new Falcon 3 vehicular grab-and-go configuration, which provides two hand-held radios allows for continuous communications when they're removed from the vehicle. And that's an important capability in urban environments which fixed mount legacy radios can't offer.

So in total, we've booked $173 million in MRAP orders so far. We believe that the potential opportunity across DOD could amount to an additional $500 million in future tactical radio orders for Harris as some 22,000 MRAP vehicles are ultimately deployed. Demand also remains robust across a broader range of U.S. DOD and international customers. Production continues to ramp up for our next generation Falcon 3 radios. During the quarter, we received new orders from Falcon 3 multi-band hand-helds from the U.S. Army and Navy, as well as from the governments of France, Spain, and Denmark. The $212 million tactical hand-held radio contract award from the Marine Corps and the $158 million order that we received under that contract so far was a key win for us. We have now shipped about 21,000 Falcon 3 radios since the introduction of the new product.

We're also very pleased with the rollout of other new products aimed at further increasing our addressable market size. The Falcon 3 multi-band man pack radio should receive NSA type-one certification by the end of this calendar year. We believe the Falcon 3 man pack will be the first JTRS compatible radio deployed with wideband networking capability and certified by NSA. During some recent field trials, the Falcon 3 man pack is really illustrating how wideband networking capabilities can address the very demanding mission requirements of today and not have to wait until years in the future when JTRS program radios might begin production. The Falcon 3 man pack underwent extensive testing at Fort Bliss, Texas, and White Sands Missile Range, New Mexico, in September. During these exercises, multiple radios were used in both fixed and mobile ad hoc networking applications to evaluate potential enhancements to the communications network currently used on the Army Patriot Missile System.

Also, our new high capacity line of sight broadband ethernet radio has been well received with new contracts totaling $10 million from the Army and Marine Corps received during the quarter. These radios provide ground troops the ability to send secure high bandwidth data between command posts and forward operating bases at data rates in excess of 80 million bits per second.

Turning to international, our international business activity also remained very robust for RF Comm. International orders during the quarter included the Algerian army, the United Arab Emirates Royal Guards, and the governments of Saudi Arabia and Kazakhstan. During the quarter, Harris was also awarded a $76 million contract to supply the government of Pakistan with Falcon 2 HF radios. And an important milestone was reached during the quarter in our pursuit of a potential $96 million order from the Republic of the Philippines as a letter of offer and acceptance was executed by their Ministry of Defense.

Let's turn now to the Defense Programs business. First quarter revenue in our Defense Programs business declined 3% year-over-year with growth in communications and networking systems offset by declines in aircraft electronics. Revenue increased on several important programs, the CDL Hawklink program for the U.S. Navy, the U.S. Army WIN-T program, the LMST set comm program for the Marine Corps and the MIDS Terminal Program which applies to many Department of Defense aircraft. On the flip side, the avionics revenue decline was primarily timing related and it is due to the transition of the F-35 lightning from the systems design and development phase, moving into low rate initial production phase. New contracts won in the contract, included a $30 million follow-on program to supply fiberoptic network components for the F-22A Raptor, and a $9 million contract from the Navy to supply digital map computers for military jet aircraft and helicopters. At MILCOM 2007, the military communications exhibition held earlier this week in Orlando, Harris featured a number of important new products and capabilities that enable intraoperable communications within all layers of the DOD global information grid.

In addition to our Falcon tactical radios, we highlighted the new Harris high band networking radio. This revolutionary product is the first to provide wireless long-range high bandwidth communications on the move for the U.S. military. The radio uses a Harris developed wave form that enables the network to automatically select the best communications path available. Also at the show, we featured digital asset management solutions from our broadcast division that provide our government customers capabilities for the secure storage and distribution of data, imagery, maps and video direct to the war fighter. Harris was very proud to serve as industry host this year for MILCOM, the largest international military communications event.

Let me turn to Government Communication Systems segment, the first quarter revenue in this segment rose 43%, to $490 million, benefiting from our acquisition of Multimax in June of 2007. But organic growth was also a very strong 16% in the quarter. Operating income was $43 million in the quarter, compared to $32 million in the prior year. Income benefited from the strong organic revenue growth, the contribution of the Multimax acquisition, and successful renegotiation of pricing on one of our long-term IT services contracts. Unfortunately, these very positive results in the segment in the quarter were offset by additional charges related to cost and schedule overruns on fixed price commercial reflector programs. As a result, operating margin was about 9% of sales in the quarter, a bit below the operating margin we expect for this segment.

Now, let me go into a little more detail on the nature and scope of the continuing issues with the commercial reflector programs. We have a total of ten commercial reflectors under contract at various points in the development and production queue, each of which is utilizing new design features that improve the reflectors performance in space. During the quarter, we unfortunately failed critical tests on the first of the reflectors under development. Failure on the vibration and deployment tests required additional engineering design changes, additional materials, additional testing, and led to further production delays. The good news is that the first reflector was finally shipped to the customer in October for the spacecraft integration phase. We are on schedule to make the launch date in January. This shipment was a significant milestone, as it meant that the new designs had finally passed our very rigorous testing. However, the design changes and delays further increased our expected costs at completion on the reflector programs.

As we did in the fourth quarter of fiscal 2007, we evaluated and updated the expected cost of completion on each of the reflectors under contract during the quarter, considering all of the known risks. As a result of this assessment, we incurred a $24 million additional charge for cost overruns, which is included in the Government Communications System segment results in the quarter. Those of you who follow our Company know that this is not typical of our program performance and execution. Our 30-year track record is unmatched in designing and building satellite reflectors, both government and commercial contracts. We clearly underestimated the complexities and costs associated with implementing the new design features. Our computer simulations and models did not scale as we moved into production of the much larger reflectors using the new design features.

Let me try to anticipate one of your questions. Will Harris incur any additional charges on the reflectors under contract yet to be delivered? It is a very good question. The answer is the additional $24 million in expected costs that we have booked in the first quarter does anticipate extra costs for resolving known problems and known risks in the continued development and production of the remaining reflectors. So we should be financially covered to the extent that the remaining reflectors share the same issues as the first one. We may not be fully covered if new issues were to emerge that we have not seen before.

Recent performance aside, the space antenna business has historically been a very profitable and a very good business for Harris. We are clearly the market leader. Over the past five years, we have shipped some $240 million of reflectors at an average operating margin of 14%. And these include cost plus and fixed price contracts. We're committed to getting our reflector business performance back on track. We believe that the commercial market is going to be particularly robust over the next five years with a potential $500 million in new opportunities out there, driven primarily by recapitalization of the geo segment of the satellite market. It is important to remember that the vast majority of the Government Communications Systems business is very healthy and growing and produce better than expected results in the quarter.

Organic revenue drivers included continued excellent progress on our long-term integration and services contracts, including the field data collection automation program for the U.S. census bureau, the FAA telecommunications infrastructure program, and the patriot program for the national reconnaissance office. Revenue drivers also included a follow-on contract to provide custom display terminals for the FAA voice switching and control systems program. Our national intelligence business within this segment secured new wins in the quarter totaling $175 million in program value. This business area posted its fourth consecutive quarter of year-over-year revenue growth. The Multimax acquisition was a strong contributor in the quarter with contracts such as the Navy/Marine Corps Intranet Program and NETCENTS program for the U.S. Air Force. The integration of Multimax is right on plan and our expanded list of government-wide acquisition contracts is providing Harris with access to a number of important new opportunities.

IT service wins in the quarter included the Alliant program for the U.S. General Services Administration. This is a very large 10-year IDIQ contract with a $50 billion ceiling. We also won a $25 million IDIQ contract with the U.S. Navy for IT services and an $11 million program with NOAA and a follow-on IT services contract with the Army for $8 million. In summary, the Government Communications Systems segment effectively serves a large and growing set of customers and programs with consistently high levels of program execution. Customer satisfaction and Harris' reputation are solid. The commercial reflector cost overruns are certainly disappointing, but they have been absorbed and segment profitability should improve going forward.

Revenue in the Broadcast Communications segment in the first quarter was $147 million a year-over-year increase of 5%. Excluding the revenue in the prior-year quarter from the radio retail business, which we exited, would give you a revenue growth calculation of about 7%. We see continuing strength in demand for our industry-leading infrastructure systems that enable digital content management and high definition broadcasting. Operating income in the quarter increased to $10 million, 18% higher than the prior year, as we saw the benefits from cost reduction actions completed in the second half of fiscal 2007. Double digit revenue growth continued in the video infrastructure and digital media business area, which includes products like routers, master control, networking, test and measurement equipment, servers and graphics. Software Systems revenue was slightly higher in the quarter, while revenue and Transmission Systems once again was lower than the prior year, this time due to lower international analog transmitter shipments.

Year-over-year sales of digital transmitters actually increased in the first quarter as broadcasters are finally beginning to prepare for the February 2009 FCC-mandated transition to digital transmission. Orders in the segment were higher than revenue and included major new business from customers like Sony Entertainment Television. They're going to use our H-Class suite of business software to manage sales, advertising and programming across all of their worldwide properties. Nexstar Broadcasting Group selected the Harris OSi-Traffic application for their 49 stations. We received an order to upgrade the American Forces Network to deliver expanded entertainment and news content to one million U.S. troops deployed around the world. At the Public Broadcasting System network in Alexandria, Virginia, Harris NEXIO servers will be used to roll out their HD services. Our system will encode programming at PBS and transfer files across satellite and fiber networks to every PBS member station across the country.

We were also selected to supply infrastructure for new digital signage systems for the Venetian Resort Hotel in Macao and the Saudi Arabia Ministry of Culture and Information placed a major order with us for their facilities in Riyadh that include our complete high definition product portfolio. The competitive advantage created by the breadth of our systems and software capabilities across the broadcast market we think is quite evident in many of these new wins. Harris really is the one company in the market capable of delivering intraoperable workable solutions that span the entire broadcast delivery chain, supporting the transition to digital and high broadcast services.

We introduced some important new products in the quarter in broadcast, including the NEXIO AMP, or advanced media platform server, which dramatically expands the functionality of video playout servers and provides a foundation for a scalable end-to-end high definition or standard definition solution. We also shipped our first CENTRIO multiviewers. This is a product new product category for Harris. Multiviewers are used to streamline complex multichannel image monitoring applications. Orders were very strong in the first quarter, and CENTRIO revenues are expected to increase in the second quarter.

And let me finally move on to the results of Harris Stratex Networks. Their Management will host a conference call to discuss the first quarter results and outlook in more detail immediately after our call, beginning at 5:30 p.m., eastern time. First quarter revenue for Harris Stratex was $172 million, an increase of 7% compared to the prior-year quarter, on a pro forma basis, that is, if we had had the business combination at the beginning of fiscal 2007. Non-operating income was $7 million in the first quarter, about flat with the prior year. A higher mix of lower margin, low capacity radio shipments in the quarter dampened operating results. Orders were, once again, higher than revenue and reflected strong demand for Harris Stratex wireless products and systems across both the North American and international markets. The adoption of IP-based networks is also beginning to generate new demand as operators around the globe drive convergence of their voice and data networks to provide new communication services at lower cost. Harris Stratex networks has a broad product portfolio and is well positioned to support both traditional and IP-based network traffic.

Improvement of orders and revenue in the quarter indicates that recent changes in the sales organization are beginning to yield results. Integration activities and expense reductions are on plan. Management remains very focused on growing the top line and delivering on the cost synergies in order to improve future operating performance even further. Let me now hand the call over to Harris' Chief Financial Officer, Gary McArthur.

Thank you, Howard. Good afternoon, everyone. The Company's strong financial foundation and expected strong cash flow generation will enable us to continue to invest in internal growth initiatives and strategic acquisitions, pay dividends, and repurchase stock. EBITDA on a non-GAAP basis continued to be very strong, increasing in the first quarter of fiscal 2008 to $214 million, or 31%. Net operating working capital as a percent of revenue increased from 11.7% to 12.6%, primarily as a result of the acquisition of Multimax. Cash, cash equivalents and short-term investments were $359 million as of the quarter just ended. Cash flow generated from operating activities was $64 million in the quarter, as compared to $54 million in the prior year quarter. First quarter operating cash flow is traditionally our lowest quarter, and not indicative of cash flow for the entire year, as a result of payments in the quarter of our annual incentive bonuses and profit-sharing contributions that are tied to the results of the previous fiscal year. Our expectations for cash flow from operations for fiscal 2008 continue to be in the range of $550 million to $600 million.

Depreciation and amortization for the first quarter increased from $27 million in $Q1 of 2007 to $42 million for Q1 of fiscal 2008, primarily due to the increase in property plant equipment and identifiable intangible assets resulting from the Harris microwave combination with Stratex Networks and the acquisition of Multimax. Depreciation and amortization for fiscal year 2008 is expected to be between $165 million and $175 million. Capital expenditures, including capitalized software, in the first quarter as compared to the prior year first quarter, decreased slightly from $35 million to $33 million. Our guidance for fiscal year 2008 for capital expenditures remains at between $140 million and $150 million. Our outlook for the full year tax rate for fiscal 2008 continues to be at 34%, noting that the tax rate for any given quarter could vary up or down as a result of discrete tax events.

Regarding our capital structure, in July, we initiated the steps necessary to redeem the $140 million of outstanding 3.5% convertible debt, resulting in essentially all of the debentures being converted into 6.6 million shares of common stock. On August 20, 2007, we redeemed the remaining $3,000 of principal amount of debentures that were not converted. As you will recall, we funded the $400 million purchase price of Multimax with commercial paper backed by our $500 million credit facility. Our intent remains to refinance the $400 million with longer-term fixed rate debt prior to the end of this calendar year, most likely in mid November. During the first quarter, we repurchased nearly 900,000 shares of our common stock, at an average price, including commissions, of $56.67 per share. Repurchases to date, under our $600 million program, totaled $250 million, leaving us with a remaining authorization to repurchase our common stock of $300 million. Back to you, Howard.

Thanks, Gary. Let me conclude my prepared remarks by summarizing our updated financial outlook for fiscal 2008. As you saw in our press release, we increased non-GAAP earnings guidance for fiscal year '08 from a previous range of $3.40 -- $3.30 to $3.40 per diluted share to a new range of $3.35 to $3.45 per share. As a result of stronger than expected revenue and profitability in the Defense Communications and Electronics segment. Midpoint of the new guidance represents year-over-year EPS growth of about 21%. Revenue for the year is expected to also increase in a range of about 21% above 2008, with strong organic growth in a range of 9 to 11% higher than last year. We expect to achieve our revenue growth in each operating segment. Let me summarize those for you.

We expect 15 to 17% organic growth in Defense Communications and Electronics, driven by RF Communications growth of about 20%. We expect 28 to 30% growth in Government Communication Systems, reflecting 6 to 8% underlying organic growth, plus the contribution of the Multimax acquisition. We expect 5 to 10% organic growth in Broadcast Communications, and we calculate that by excluding about $19 million in revenue from fiscal 2007, attributed to the exited radio resale business. And we expect revenue of $670 million to $700 million for the year at Harris Stratex Networks consistent with our previous outlook.

Turning to our expectations for the segment operating margins, we expect about 28% of sales in Defense Communications and Electronics, with the RF Communications division that is part of that segment at about 33%, again consistent with our previous guidance. We expect operating margins of about 9 to 11% of sales in Government Communications Systems, which includes absorbing the lower operating margin experienced in the first quarter, as a result of the reflector programs cost increases. We continue to expect 10 to 12% sales operating margins in Broadcast Communications and about 10% of sales in Harris Stratex Networks. We believe that all adds up to another very strong year of expected growth and financial performance for the company. At this point, I will ask the operator to open the line and we will take your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we will take our first question from Carter Copeland from Lehman Brothers.

Good evening.

Hello, Carter.

I wanted to ask very briefly about the IDIQ contract with the -- under the JTRS program office, I saw that two recent task orders were issued under there for Talis. Were those competitive build and were you in there hoping to win any of those? Any color there would be great.

The answer would be yes, we were in there, yes we had hoped to win. This is the first competitive procurement under that task order. It is fair to say it was very competitive, especially from a pricing standpoint. We were up against some challenges because of the fact that the army has been utilizing Talis and their incumbency is relatively strong. We didn't expect to win the first one. As you see, from our increased guidance, we really didn't have it baked into our plan for the year. So we know that these competitive procurements, especially where have you very entrenched incumbents are going to take a while for them to see the benefits. But we were pleased to be a part of the procurement. There will be more. And I'm confident we're going to win a portion of that business over time.

So these are -- each task order is different is basically what you're saying? In terms of how it is being more entrenched in the case of this most recent one?

Well, when I say entrenched, what I mean is that at the Army, Talis has been the supplier of hand-helds for a long time. Look over at the Marine Corps, on the other hand, we won sole source, this $212 million ceiling contract in the same kind of competition. So it is clear that the Army continues to take the route of being more interested in the incumbent supplier. We think we offer significantly more functionality in our product that does require a modest premium. At this point, they've gone with the low priced supplier.

Great. Thank you very much.

On all of these contracts, we think there are going to be many more procurements. We're very pleased now to have these vehicles in place where we're guaranteed to be able to compete. Prior to this, they were all sole sourced from Talis, so we're taking some solace in being in the game at this point.

Of course. Thank you very much, Howard.

Our next question comes from Joe Nadol from JPMorgan.

Thanks. Good afternoon.

Hi, Joe.

Hi. Howard, on the Gov Com segment, there was a -- with the $24 million overrun, you came pretty close to what we would have expected on the operating income line despite that. I'm wondering how big was the pricing, I guess, benefit from that IT contract that was mentioned in the text here, and was there anything else going on in the quarter?

Yes, as we've thought about -- that's a very good question, because we did have a pretty good quarter in spite of taking the $24 million in charges. In aggregate, I would probably tell you there was probably $16 million to $17 million benefit on the flip side coming from a combination of some end-of-year procurement upsides where we got some orders at the end of the government's fiscal year, using available funds under these various IDIQ contracts we have. We did note the catch-up profit from renegotiation of contract pricing on one of our major IT services contracts. We can't go into the detail because it is a confidential contract but that was a major number. We also had some good award fees on several close-outs in the quarter on programs across the government communications systems space. So depending on how you want to look at it, we were able to absorb this cost. On the flip side, we would have done much better, obviously, if we hadn't had to take these charges. But it does speak a bit to the diversification that we have in the segment. But does that give you a sense of the color around the offsets there that help to make up --

Yes, that is very helpful. The second question is on the MRAP side, it is very helpful that you kind of quantified the opportunity. I am just wondering, sort of more qualitatively, you have the -- I think the 173 million of orders so far, you mentioned, and another 500 opportunity. Is that an expected future booking? Or is -- I mean how much of that 500 do you really feel highly confident and how much is a little bit more of a reach, like maybe -- and I guess I'm thinking specifically about the Army vehicles where it is a little tougher for you guys to break in. How much of that 500 is Army versus say Marines and other services?

I don't have that particular split at my fingertips. What I can tell you is that we are basing the $500 million opportunity on about 22,000 total vehicles procured, about 17,000 -- or 15,000 have been essentially funded at this point, but we think there are going to be requests to fund about another 7,000, so I wanted you to know what our base is for total vehicle production. We're assuming that we are going to maintain our sole source position for the whole suite on the Marine Corps and the Navy. And we're assuming a factored amount of business that would come along from the Army. We'll of course get whatever HF -- whatever HF they put in the vehicles, we will get, we probably won't get much of the VHF and we will probably get a portion of the multi-band. So we factor all of that in, and a round number is we feel pretty comfortable eventually, we should be able to book $500 million in orders. That assumes obviously the funding is maintained and so on and so forth and they really do 22,000 units.

I can't tell you what the timing will be on that. What I will tell you is that we don't really have any of that additional in our guidance for this year, as revenue. So if we do get additional orders, and they have very short turn-around, which this is a very high priority project, subject to our production capacity, and we are putting on additional capacity in the second half of the year, to break up any bottlenecks that we have, but subject to that one caveat, we would have some upside if we get additional material MRAP orders above what we already have for this fiscal year.

It seems like the billion dollar backlog, I'm surprised you didn't raise your RF growth forecast a little more given the backlog and then the other opportunities. You mentioned the MRAP and there is also the other international stuff you were talking about that hasn't been booked yet and was just wondering why you didn't bring it up a little bit more.

Chalk it up to my conservative nature that all of this is still not booked. We did about 20% year-over-year as we said on RF in the first quarter. We feel pretty comfortable that's sustainable throughout the year. But we're ramping up the factory pretty fast. More than our capacity, I worry occasionally about our supply chain capacity. And we don't want to be in a position where an important part of our Company profitability gets estimated beyond what we know we can deliver.

Okay. Thank you.

You're welcome. Thanks.

We will now move on to Steve Ferranti with Stephens Incorporated.

Thank you. Good evening. Congratulations on a great quarter, guys.

Thank you.

I wonder if we could delve a little bit more into the capacity situation at RF Communications. Can you sort of quantify for us in terms of where we are today in capacity, any metrics you could provide there would be great, and where you're heading, and maybe how much of this future demand you see might be done at Rochester?

Overall, we have capacity, and I've talked on numerous quarterly calls about how we've added capacity. So it is not an overall capacity issue. We have some bottlenecks on individual lines. It is impossible to be precise about the forecast and the actual product line by product line, sub assembly by sub assembly. And again, the same is true of our supply chain. Bob Henry and his team have a lot of work going on right now in the supply chain to make sure there aren't any bottlenecks out there. But clearly, without quoting a number, we want to be in a position to add 25, 35% more output than we delivered in the first quarter, as quickly as we can. And those are the kind of numbers you will get to when you look at 20% year-over-year growth that is in our guidance.

So in the not too distant future, we will be producing primarily at the Rochester factory at over twice the revenue that we were producing at six or seven quarters ago. So that is a pretty monumental feat. And our operations team is doing an outstanding job. So don't be concerned that there are huge limits to capacity, but it is really more a case of dealing now with bottlenecks and also dealing with customers' requirements, shifting them all around. When we get MRAP orders, as we have last quarter, those have the highest government priority and we have to move other things out of the way. So we're dealing with a lot of ins and outs. So not a concern. But you I wanted to mention that we are bringing on additional capacity and again it is in that 25 to 35% kind of overall capacity very quickly.

That's helpful. Thanks. And one last one for me. Sort of given the strong backlog you've got in RF Comm today, how do you feel your visibility at this point in this year compared with previous years? It seems like, given the backlog and sort of given the growth estimates, we've got -- it seems to me stronger than normal visibility in this segment and I wonder if you could sort of comment on that?

I think for the rest of this fiscal year we have good visibility. I think that again we're pretty comfortable that we're going to be at least 20% higher in revenue than last year. And as the next quarter proceeds, we would love nothing more than to continue to increase that guidance. But we still need to book some more orders for this year. The whole year isn't locked up yet. And we will continue to drive, not just for this year, but for all of our sales people who are listening to the call, we want to drive future growth for next year as well. And so we're focused on not only getting this backlog up, by keeping the backlog up where it is. I'm very pleased to say that the pipeline is there, to allow that. Not only with DOD programs like MRAP are obviously happening, you heard me talk about many of the international pursuits, they're still looking very good, and again, I continue to be very optimistic about the long-term potential of the international systems business which will bring along radios and integration solutions from our Defense Programs area.

Great. That's all I have. Thank you. And congratulations again.

Thank you.

Our next question comes from Ted Wheeler with Buckingham Research.

Yes, hi, good afternoon.

Hey, Ted.

Just on the guidance, on another point, the Defense Communications' 28% margin, I guess I noticed that that is down a little bit from last year, yet the first quarter was up. I guess RF Comm may have a little unusually good back end of last year, but is there anything else in the segment that, maybe in Defense Programs that is depressing margins, and if there is, could you kind of walk us through the timing of when that may change?

Ted, the margins for the segment are really overwhelmingly impacted by what you assume the margins are in the RF piece because it is the vast majority of the revenue and profitability in Defense Communications. We ran last year in the second half of fiscal '07 almost 35% ROF. We provided guidance this year of 33%, largely as a result, and again, I'm talking RF Communications guidance, largely as a result of increased shipments of the Falcon 3 products, which as they start their life are lower margin than HF radios, both as a result of them being small hand-held radios and because we're fairly young in our production cycle. We did a little better than that 33% in the first quarter, but we're still right now calling for about 33% for the year in total. So the reason that the segment total at around 28% would be slightly behind last year, I have it on my chart at about 29%, so the segment, apples-to-apples, both year, about a percent lower would be because of, primarily of the lower RF margins. Defense Programs margins continue to be about the same as they were last year, round about the mid teens.

And probably staying that way for a while.

Yes, I don't see a lot of things that are going to change that. We have new programs coming on that are lower than that, but we have other programs going into production, Bob, if you want to jump in, production programs where we tend to do a little better than that.

Yes, especially on the avionics side of the house and we expect that to come back over the next couple of quarters.

This is a pretty low quarter for avionics, as I indicated in my remarks, Ted.

And that might be a bit of a margin lift if it comes about?

Yes, I think that will. That gives us confidence in the second half that we will certainly meet the guidance on operating margin in the segment that we're talking about.

There was one other question I had, and I might not have gotten everything correct, as you went through it a little bit quickly, but I think you mentioned in the IT services area, an IDIQ opportunity with a $50 billion ceiling?

Yes, that program is called Alliant.

Okay.

And Alliant was awarded to a relatively large number of contractors. Harris was one of those. This has been on our pursuit list as an important win for some time. [Ted Hankston] and his team were successful in getting us one of those contract awards. And it is through the GSA but it literally has tentacles out to almost every agency in the federal government, can buy IT products and services on Alliant, so not only will this be a vehicle for things that we can do directly, but it will be a vehicle for other partner companies that want to use us as a conduit to the customer. Bob, anything you want to add to that?

The use of other companies using that vehicle is something that Multimax had and they have a site up that -- a website up that people can go to to do that and that has been quite successful so that is one of the reasons that we looked at Multimax and closed on that acquisition.

The future in this IT services business is very much these large IDIQ contract vehicles, and if you're not on a vehicle yourself, directly as a prime, you have to go through other people, and the margins frankly are less attractive. So here is a case where we picked up a number of these prime positions with the Multimax acquisition, but we actually, concurrent with doing that acquisition, we won our own on the Alliant program, and I think it will be a strong vehicle for us going forward.

Just kind of gradually build over an extended period?

Absolutely. Absolutely. And I couldn't tell you, for example, in the quarter, what our revenue under Alliant was. I don't honestly know. I doubt that it was too material in the first quarter. But I think over time, I mean -- literally, at MILCOM, I had the benefit of sitting with CIOs from the Intel community, from the DOD community, and this is clearly where you want to be in terms of growing your day-to-day services business, with task orders, and one thing Multimax brought to the party is this web portal that Bob spoke of, as well as a wonderful proposal center where they can very quickly provide quotes on a variety of services, almost like off of a price list, and frankly, we're learning how they do that, and we're incorporating that into the rest of our IT services business. They're quite good at that.

Sounds like a nice win. Thanks.

Thank you.

We will now move on to Larry Harris from Oppenheimer.

Yes, thank you. And congratulations on the international Falcon 3 win.

Thank you.

With respect to Broadcast, if you could just give us a little more update in terms of the station upgrade from low to full power, and right now, what is the approximate business mix within Broadcast relative to say transmitters versus video infrastructure versus software?

I will have to ask Gary to make look that up while we're talking. I don't have that in front of me in terms of the mix in the quarter. We can give you some approximate numbers here in a second. The thing I want to you take away I think on the Broadcast segment, Larry, is we're continuing to see double digit growth in the video infrastructure and digital media businesses, all of those different kinds of products that are enabling our customers to make the transition to managed digital content and broadcast it in HD. It is the majority of the revenue, and it's grown at double digit rates now, I think, for something on the order of eight quarters in a row. It doesn't appear to be slowing. Jim Thorsteinson just came back from trips to Europe. He was in Asia in the quarter. And the international wave, we continue to think, it is following a year or two behind the U.S. adoption, so we feel like we've got good growth potential for the bulk of this segment for some time to come.

Software had been negative for a couple of quarters. This quarter, it was barely positive. But it wasn't a drain. That was good to see. Continuing to get some new wins, but we continue to struggle in Software with our rental model where, we get this contract with Sony or with B sky B or with Nexstar Communications and maybe it is a five-year contract and we recognize the revenue over five years rather than all at once. So we're not expecting a lot of growth there.

For several quarters, it was digital TV that was down year-over-year. This quarter, digital TV actually was positive slightly. We think that is encouraging. We have had some success in pulling in some customers who wanted to take their transmitters in fiscal year '09, and have said, you know, we've got the capacity, it is really use it or lose it, so the team has done a good job in pulling some of that into fiscal year '08, but we didn't have the same level of international analog revenue, so that was what created that down growth year-over-year with regard to transmission. So that's kind of color around it. Gary, you want to give some general range of the -- of how the 100% of the revenue in the broadcast is split between the three pieces?

Sure. In '08, transmission revenue for the first quarter is approximately 25%. Our software business is an additional 25%. And the infrastructure and digital media business is the remaining 50%.

So it is the majority of the business, and at the rate it is growing, those percentages for the digital infrastructure and media business is going to get larger as we go forward.

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

Thank you, Larry.

Operator, we will take one really quick question. I know we have others in the queue but I can't run up against Harris Stratex's call.

Thank you, ma'am. Our final question of the day will come from Chris Donaghey with SunTrust Robinson Humphrey.

Hi, good evening, guys. And again, good quarter. Howard, I wonder if you could help me understand the seasonality of this, this new segment. By my calculations this was the first sequential decline in RF Communications from the fourth quarter to the first quarter, with the segment itself doing about 13% total growth. So can you just help me understand the sequential -- or the seasonality of this business as it is structured now going through the rest of '08? And also, if you could help on the margin side as well, the seasonality in the margins through the year.

Well, the second question first. There really shouldn't be any appreciable seasonality. Normally, what is going to give us a little seasonality in the back end of this year on margin is the mix of Falcon 3. As it ramps up, slightly lower margin. And that's why we are holding it at 33% operating margin guidance for RF for the year, even though we started out in the first quarter a little higher. In terms of your sequential point, I think it is accurate that we had just very slight sequential decline in RF from the fourth quarter to first quarter. We used to always have that. It has only been in recent years that we haven't. I wouldn't draw a whole lot of conclusion from that.

We are going to have a very strong year in RF and clearly we are going to have a very strong second half, as we did last year. So I think that will is not going to be a lot of appreciable seasonality differences, but there is a little more in the second half. We're ramping up in the capacity as I said. So as a general statement, the increased guidance that we've given on EPS, I see most of that I guess at the midpoint additional nickel, really coming, most of it, in the second half of the year, as a result of much higher production and shipments in Defense Communications, as well as continued growth in Broadcast and Harris Stratex in the second half.

Okay. Great. Thanks, Howard.

Okay. Thank you.

Thank you, everyone. We appreciate you dialing in.

And that concludes today's presentation. Thank you for attending. And have a great day.