L3Harris Technologies Inc (LHX) 2008 Q2 法說會逐字稿

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

Hello, everyone, and welcome to our second quarter fiscal 2008 conference call. I am Pamela Padgett, Vice President of Investor Relations and Corporate Communications, and on the call today is Howard Lance, Chairman, President and CEO, Bob Henry, Executive Vice President and Chief Operating Officer, and Gary McArthur, Vice President and Chief Financial Officer.

Before we get started, a few words about forward-looking statements. In the course of this teleconference, management may make forward-looking statements. Forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information and a discussion of such assumptions, risks, and uncertainties, please see the press release and filings made by 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. The reconciliations of the comparable GAAP measures is included in the tables of our press release and on the investor relations section of our web site, which is www.harris.com. A replay of this call will also be available on our Investor Relations section of our web site.

Howard, with that, I will turn the call over to you.

Thanks Pam, and welcome to all of you joining us today. I am very excited to share with you our results for the second quarter, and our new outlook. Harris's performance showed continuing strong momentum in the quarter in both revenue and earnings growth. And the outlook for the second half of the year has strengthened. For fiscal year 2008 in total, we expect each of our four operating segments to deliver significantly higher revenue and earnings than in fiscal 2007. Revenue was a record $1.3 billion, 30% higher than the prior year quarter. Organic revenue growth was a strong 13% with growth across all segments. Sequential revenue increased by 7%. Operating performance was also excellent in the quarter. Non-GAAP net income, excluding acquisition related costs, was $120 million. Earnings were $0.87 per share, a 28% increase compared with last year.

In the Defense Communications Electronics segment, which includes, as you recall, the RF Communications and Defense Programs businesses, revenue increased 18% to $472 million. Operating income increased to $142 million and was a very strong 30% of sales. RF Communications revenue led the segment performance, increasing 25% compared to the prior year and 13% sequentially. Strong demand for our broad range of tactical radio systems continued across both U.S. and International markets and customers. We have a very robust sales funnel. We are continuing to add production capacity at our Rochester New York facilities. We are continuing to roll out new products with additional capabilities. We are successfully expanding into new markets. And we are successfully winning new customers and important endorsements.

The bottom line is this, we believe RF Communications will continue to deliver profitable growth going forward. This is not a one-dimensional business, as some might mistakenly believe. We have made the right investments to achieve a broader product portfolio. We are serving expanding markets and we are delivering consistent market share increases in both U.S. and International markets. Unlike many of our competitors, our business model is not focused on selling single purpose legacy radios developed with U.S. Government funding and selling those to a few customers. Quite simply, we believe we are faster to market than our competition, with solutions that solve our customer's rapidly changing, mission critical, communications requirements.

We believe it is all about having a vision for the market. Investing our own R&D dollars to develop new products that utilize new technologies and create new capabilities and then delivering the most advanced communications products in the industry to a highly diverse market and customer base. Harris has led and will continue to lead the ongoing transformation of defense communications across global markets, because we are able to deliver the radios of the future to those markets today.

We believe we have pretty good visibility with the RF business at this point. Funding is not an issue. Demand is strong for all of our products. And our production capacities will not limit our ability to grow. We fully expect orders to once again meet or exceed revenue in fiscal 2008, creating strong momentum and backlog to drive double digit revenue growth in our fiscal 2009.

We believe there are multiple, sustainable drivers to provide for ongoing growth in our core global tactical radio markets. These include long-term multi-year monetization programs across the U.S. Department of Defense and our international allies to provide more sophisticated communications capabilities. The drivers also include force expansion including 30,000 in the U.S. Marine Corps and 60,000 in the U.S. Army. It includes forced restructuring and modularity programs, that create smaller, faster, better equipped units with enhanced mobile communications capabilities. And the drivers include increasing requirements for global communications interoperability across services and countries.

And finally, the deployment of network centric communications to improve situational awareness and force effectiveness by creating a wide-band data rich networking environment. These growth drivers represent tremendous opportunities for Harris. We believe that funding will continue to flow from multiple sources to allow for the continued procurement of tactical radio systems, to accomplish these critical objectives. Of course, you know the funding will include the annual U.S. Department of Defense budget, supplemental budgets in 2008 and 2009 at a minimum, foreign military sales programs, and will include funding for the defense budgets of our international allies, especially rich, oil-producing countries in Africa, the Middle East, and central Asia.

Our growth prospects will certainly depend upon our ability to win against competition. And on that front our track record over the past five years speaks for itself. We estimate that the global market for tactical radios expanded from $2.7 billion in calendar year 2006 to $3.4 billion in calendar 2007. That is about a 26% increase. At the same time we believe that Harris increased its share of the global market from 33% in calendar 2006 to 37% in calendar 2007. Driving a 40% calendar year revenue increase for Harris.

The introduction of our next generation JTRS compliant Falcon III product line, continues to make great progress, as evidenced by a string of new orders and with over 30,000 new radios now shipped to customers. And we recently announced national security agency approval of our new Falcon III, multi-band multi-mission man pack radio. The Falcon III man pack is the first type one encrypted radio to be able to provide wide band capabilities for tactical networking as well as multi-mission narrow band wave forms for compatibility with Legacy radio systems. Its wide band capabilities increase the data throughput tenfold, enabling applications such as video to now be used in mobile battlefield situations.

We are also rolling out other new products and capturing market share in adjacent markets.. Recent wins include an $8 million contract with the Marine Corps for our new high-capacity line of sight data radio, which provides high bandwidth data transmission between command posts and forward operating bases, at data rates in excess of 80 mega bits per second. And we received an $8 million contract from the government of Norway for our new secure personal radio that enables secured tactical communications down to individual soldiers.

We have leading positions on the right programs and the right contracts. We are convinced that modernizing, expanding and advancing communications capabilities will remain a priority in the U.S. and around the world. Our customers will most certainly include the necessary funding in their budgets to accomplish these important tactical objectives. Each new military initiative and each new pocket of political instability only serves to underscore the long term priority, that is to provide sophisticated, flexible, mobile and fully interoperatable communications around the world.

In our defense programs business in the quarter, revenue was only slightly higher due to production timing on the F35 Lightning II, and FAA18 Super Hornet programs. We expect some improvement in our second half. Our position on major mill set com and data link programs and our advanced mobile communications programs, such as JNN and WIN-T, give us a very broad based offering to drive future growth in our defense programs business.

Finally, we continue to see progress in our pursuit of global defense communications and defense systems programs. The collaboration between the RF communications and defense program teams has been excellent. These new business pursuits are primarily in eastern Europe, the Middle East, Africa and central Asia, and our pipeline of bids outstanding exceeds $1 billion in value. Most of the awards are expected to be made during the next 12 months, so stay tuned.

Revenue in the government communications systems segment was 38% higher than last year at $507 million. Organic revenue growth was 12%. Revenue increased across all three business areas, in civil programs, in national intelligence programs and in IT services. Our Multimax acquisition not only added to total revenue but it contributed to the organic growth rate. Operating income excluding acquisition costs increased to $50 million or 10% of sales.

Revenue growth in the quarter was driven by long term stable contracts, including the field data collection automation program for the U.S. Census Bureau. The program will provide mobile hand held devices for door to door census enumerators, along with a complete management system to improve the census operating efficiency. Our solution uses proven technologies and commercial office shelf hardware. It delivers mull million overlapping security features including fingerprint authentication, password authentication and data encryption. Over 2000 hand held computers have already been successfully field tested and multiple dress rehearsals will be completed prior to the program's final implementation in 2010. Revenue in the quarter also benefited from growth on the Navy Marine Corps intranet program and on the net sense program for the U.S. Air Force. Both of these are part of the Multimax acquisition. Multimax continues to perform on plan.

Our national intelligence programs revenue increased 14% in the quarter year over year, with broad-based growth across our proprietary space systems and mission systems business areas. Our continuing successful performance on major systems integration programs has allowed us to significantly broaden our customer base in this segment. We believe that our enhanced capabilities and customer focused senior account management structure will lead to future program wins in such high growth market areas as information assurance, service oriented architecture networks and assured health information systems.

Turning to broadcast, revenue in the broadcast communications segment was $164 million, a year-over-year increase of 6%. Operating income excluding acquisition related cost was $10 million or 6% of sales. We were quite pleased with our continued revenue growth trends. Double digit growth continued in the video infrastructure and digital media business, driven by continued demand for high definition servers, routers, master control and graphics systems and our new CENTRIO multiviewer product line. Software Systems revenue also increased, thanks to the completion of several large automation projects. Transmission revenue was lower in the quarter, but this this was as a result of our exit of our of the radio resale business last year. Demand for digital TV transmission systems is expected to be stronger in the second half as broadcasters begin their final migration to comply with the February 2009 FCC mandate.

As I think you know, we have significantly expanded our broadcast product portfolio over the past three years, creating a total solutions capability that now spans multiple work flow areas from content creation to content management and distribution to broadcast transmission. Broadcasters are continuing to make capital investments to enable their transition to high definition. Our systems allow media networks to interconnect their global locations to move content seamlessly from production to network to station to consumer. Regardless of whether it is over the air, over cable, IP TV, mobile TV or streaming media, Harris offers the industry's broadest end to end H.D. solutions.

While we were pleased with our top-line growth, we are not delivering the double digit return on sales margins that we believe this business can and will generate. Production and supply chain costs at our Toronto Canada plant were much higher than expected, reducing segment growth margins. We are expecting improvement in the second half as our video processing distribution and networking product cost issues get addressed. We are pleased to have a new Vice President of Operations at broadcast coming on board later this month, and to have increased focus and effectiveness in improving our margins.

Having said all that, we continue to believe in the potential for the broadcast business and remain committed to continuous improvement in its financial results forward. Our Harris Stratex Networks segment will host a conference call to discuss their second quarter results and outlook immediately following this call at 5:30 p.m. eastern time. Let me take just a moment and cover the segment highlights. Second quarter revenue for Harris Stratex was $181 million, an increase of 5% compared to the prior year on a pro forma basis. Operating income, excluding integration costs associated with the business combination, increased sequentially to $11 million or 6% of sales.

North America revenue was up slightly compared to last year but revenue increased 13% sequentially. Demand continues to be fueled by mobile network footprint expansion, increased bandwidth demand and microwave frequency relocation. Gross margins are unplanned in North America and the business is delivering its results as expected. International revenue was $111 million in the second quarter, a 7% increase compared to the prior year on a pro forma basis. Combined revenue for Latin America Asia Pacific increased by a significant 54%, driven by success with new customers. Africa was about flat with last year and revenue in Europe, the Middle East, and Russia was significantly lower as a result of operator consolidation and slower than expected implementation of 3G networks.

Unfortunately,International gross margins were impacted by this shift in revenue away from Europe, the Middle East, and Russia towards Latin America and Asia Pacific volume. Additionally, freight costs were higher and services margins for engineering and installation projects were lower than previously expected. Rest assured, actions are being taken to get these costs back under control and to improve financial performance in the second half of the fiscal year. The business is improving sequentially, and the plan cost synergies were achieved in the first half.

Let me now hand off the call to our Harris CFO, Gary McArthur.

Thank you, Howard, good afternoon, everyone. I'm going to take the next few minutes to talk about our financial position. Cash, cash equivalents and short term investments were $382 million as of the quarter just ended. Year to date cash flow generated from operating activities was 189 million compared to $182 million in the first half of fiscal 2007. All four operating segments generated positive operating cash flow both year to date and in the quarter. And our expectation for cash flow from operations for fiscal year 2008 continues to be in the range of 550 to $600 million.

Depreciation and amortization for the first half of 2008 increased to $84 million from 55 million in the first half of fiscal 2007. This was primarily due to the increase in property plant and equipment and identifiable intangible assets resulting from the Harris microwave combination with Stratex Networks and the acquisition to Multimax. Depreciation and amortization for 2008 is expected to remain between 165 million and $175 million. Capital expenditures were 68 million for the first half as compared to 63 million in the first half of fiscal 2007, our guidance for fiscal year 2008 for CapEx also remains at between 140 and $150 million.

During the quarter we placed $400 million, a 5.95% coupon 10 year fixed rate debt and repurchased $25 million of the $150 million 6.35% coupon debt that is putable to us in early February, actually next week. Subsequent to the quarter and we received notification that an additional $99 million of that debt will be put to us. The remaining 26 million will remain outstanding and will not come due until February 2028. Also during the second quarter, we repurchased 785,000 shares of our common stock at an average price of $63.64 per share. This brings our total shares repurchased in the first half of fiscal 2008 to 1.7 million, repurchases to date, under our $600 million program, totaled $300 million, leaving a remaining authorization of $300 million. At current Harris stock prices, we may be more aggressive with stock repurchases in the second half of this fiscal year. Our outlook for the tax rate for fiscal 2008 continues to be at 34%, noting that the tax rate for any given quarter could vary up our down as a result of discreet events.

In summary, our financial foundation is very strong. Cash flow from operations continues to improve, capital expenditures continue to decline as a percent of revenue, with our recent upgrade of Moody's, our credit rating at S&P and Moody's are now BBB+ and BAA1 respectively. Stock repurchases are proceeding as planned, and our capital structure continues to provide us the financial flexibility to finance organic growth, pay dividends and pursue strategic acquisitions. Back to you, Howard.

Thanks, Gary. Let me wrap up my prepared remarks by summarizing our updated financial outlook for fiscal 2008.

Harris' increasing fiscal 2008 revenue guidance to a new range of 5.2 to $5.3 billion. That's about 24% higher than fiscal 2007, at the mid point of the range, and corresponds to organic year-over-year growth of about 12%. Non-GAAP earnings guidance for fiscal year 2008 is also increasing from a previous range of $3.35 to $3.45 per share to a new range of $3.45 to $3.55 per share. The new guidance represents year-over-year EPS growth of about 25%. Our increase in guidance is principally being driven by higher expected revenue, income and operating margins at the RF Communications division. We now expect year-over-year revenue growth at RF of about 25% for the full year with margins of about 34% of sales for the full year. This will drive revenue growth of about 18% for the defense communications and electronics segment and segment margins should now be at least 29% of sales for the year.

There is no change in guidance for the Government Communications Systems segment. Revenue growth of 6 to 8% with margins of 9 to 11% of sales. We now expect somewhat higher reported revenue growth for the year of 8 to 9% at broadcast communications, with margins of 7 to 9% of sales, as we work our way through the cost issues that impacted gross margins. Harris Stratex Networks is now expecting higher year-over-year pro forma revenue growth at about 10% for the year. For the full year, margins are expected to be in the 6 to 8% of sales range, with improvement in the second half compared to the first half. Overall these projections add up to another very strong year for Harris in fiscal 2008 with good momentum and with real potential for further growth in fiscal 2009 and beyond.

With that, we will ask the operator to please open up the line for your questions.

(OPERATOR INSTRUCTIONS) Our first question will come from SunTrust Robinson, Mr. Chris Donaghey.

Hi, good evening, great job on the quarter. I wonder if you can, starting on RF, obviously, on the capacity expansion in Rochester, can you provide a little bit more elaboration on, is it a specific radio type? Is this all Falcon III expansion, is there still Falcon II legacy orders that are coming? Is this for the Falcon III man pack? Can you just walk us through where that capacity is being added?

Chris, it is across the board, but it is primarily to fund the new radios that we are releasing. Obviously, already released the Falcon III hand held, just announced approval NSA on the Falcon III man pack. The HCLOS, the secure personal roll radio is not coming from Rochester. I guess it is initially. We expect at some point to move that to the UK. So we have got a lot of demand across the product line, and so it is nothing specific, and we also are making expansions expecting that revenue growth in fiscal 2009 that I referred to.

Okay. Great. Thanks. And on the Falcon III man pack, have you started to see interest in the user community that may have been buying PRC 117s or 150s over the past years? The interest level in upgrading to the man pack Falcon III?

Yes, there is a lot of interest. And the number one feature that they are looking at is this bandwidth -- networking bandwidth capability that is in this radio. And the ability to develop a true network situation awareness environment on the battlefield is of great interest to our customers.

Okay. Great. Thanks and good job, guys.

Thank you.

Next question will come from Steve Ferranti with Stephens Incorporated.

Thank you. Steve Ferranti with Stephens. Congratulations, guys, on a nice quarter. I wonder if you can give us an update on the consolidated interim single channel hand held radio IDIQ? What kind of activity levels you are seeing there, maybe which branches of the military are most active there?

Well, we announced some orders, at least one order in the press release. We see more proposal activity underway. It is primarily -- the order we received is primarily Air Force. We expect additional procurements by the Army, and perhaps down the road by the Marine Corps, but I think the Army is working on some right now.

Okay. And I guess following up on that, how are you seeing progress, in terms of sort of improving your penetration within the U.S. Army and sort of prying them away from their radio record, which is (inaudible)?

Well, we were pleased to win the last procurement under that acronym seizure contract with the air force. We are very optimistic as we go forward with the Army. I don't want to count those orders, Steve, until we receive them. But that contract was set up with a very high ceiling, lots of long term opportunity to do procurements under it, and initially there are only two suppliers.

Okay. And last one for me, does the weak dollar help you guys in terms of your competitiveness against, perhaps, the other supplier, being that they are foreign company?

Well, I think in general, the weak dollar helps us in competitiveness abroad. I don't know what percentage of their content is imported. I think most of it is made in the U.S. So, I think most of those radios are U.S. dollar based. It is certainly not helping us in our broadcast business from a cost standpoint in Canada so our costs are going up in U.S. dollar terms, but we are getting some of the benefit at the sales line internationally and being more competitive against people like [Tallis] and [Road Insures]. Net-net, I think it is helping, but I don't think in the radio -- the tactical radio procurement area it is a major factor.

Okay. Great. Thank you for taking my questions.

Thanks, Steve.

From Collins Stewart we will hear from Jim McIlree.

Thanks, good evening. I don't mean to nitpick about this because obviously the results are very good. But it seems like every quarter broadcast and microwave are just a little bit less than expected and the second half will be great. And I would like to understand why -- why the second half will be better this time around?

Well, I think, first of all, our track record is that we are making improvements sequentially. I think the problem, Jim, is we are not achieving the guidance that we provide. That is the risk when you provide guidance. We are disappointed at that. But I don't think one should lose confidence or lose perspective relative to the sequential improvement. We are frustrated that we do not have as much visibility and headlights on, especially the gross margins in those businesses as we seem to have in our others. We are working to try to and correct that. But right now, it kind of is what it is. And rather than expect a lot of improvement in the second half, our guidance, I think you will find, suggests in both of those businesses, pretty modest improvement in the second half.

So we;re going to work very hard on delivering that and trying to restore our credibility with our shareholders in both those businesses. Having said that, $5 million in those is not going move the needle on the Company all that much, and we are very pleased that in aggregate we continue to meet or exceed the targets that we set.

Have you incorporated any sort of economic slow down into your thinking for the rest of fiscal '08?

No, I don't think we see a lot in the rest of our fiscal year. We have pretty good visibility, Jim. I think we'll certainly make sure that we are paying attention to that as we move into fiscal year '09, and certainly to extent that the U.S. stimulus packages do not take hold, we certainly would share concerns about that.

The good news though is that in 2008 calendar year with the elections, with the Olympics, and the Olympics are helping us in China as well as in the U.S., I think there are some mitigating factors that will help us in broadcast not have quite the same kind of general economic slow down even if there is a slow down in the U.S. Right now, CapEx spending in microwave continues to be pretty strong. We are a little concerned and watching, as I said, this slow down in revenue in Europe, Middle East, and Russia. We think that is a few accounts rather than any kind of a general trend. but we will be paying close attention to whatever leading indicators we can find on both the commercial businesses, but the second half seems to be in pretty good order.

Okay. And last one, Gary, can you give us the ending share count, the shares at the end of the December quarter? And then, what would the share count be at the end of the March quarter? Forget about the buy backs, but just what would it be assuming the bonds that put to you are put to you?

Basically, the share count at the end of the quarter was roughly 137.1 million shares outstanding. We really have not talked about where the forecast takes us but it won't go down that dramatically just from the December quarter to the March quarter. Based on, where our current thinking is on the share buy back. I did mention that we may be more aggressive and accentuate May, we haven't decided, we're not happy with where the stock price is at. We have set up plans to buy so many shares back during the year, and we may be more aggressive in the third quarter. But, right now we would not expect that share count to go down dramatically, by a few hundred thousand at most between now and March.

Okay. Great. Thank you very much.

And from JPMorgan, we will hear from Joe Nadol.

Good afternoon.

Hi, Joe.

Hi. I would like to start out on RF. I am just wondering if you could give out more granularity, if possible, on demand I guess on the second quarter specifically? I know you had an absolute blow-out first quarter. You indicated that the first half was good. I am wondering what Q2 looks like?

What do you mean by demand? Are you talking about orders -- or revenue?

Yes.

As we've said before, quarterly orders, don't mean much, in our view, because they come in big chunks. 500 million one quarter and 200 million the next quarter and 400 million the next quarter. Half year over half year, orders were up, over the prior year. We think they will be up even more significantly in the second half versus second half last year and we believe we will reach a level where orders meet or exceed our revenue guidance for the year. That puts us in position to have momentum coming on to the second half with those strong orders as well as excellent backlog to get off to a fast start in fiscal year '09.

That is kind of what I am getting at looking forward into FY '09. You gave some pretty specific guidance in the press release which is double digit growth. And you said you had a backlog of about 1 billion -- over 1 billion at the end of last quarter, I am assuming revenues the same, roughly the same level now. You're sales in this business are approaching 1.5 billion, so you have, maybe 8 months, 9 months of backlog, which is a fairly short cycle, I wondering what really gives you that visibility that double digit growth projection in FY '09. How confident are you in that?

We are confident enough to say that is our expectation. It is not like all of those orders are in house to deliver all of fiscal year '09, Joe. But, we believe very strongly and very confidently that the drivers that I indicated, which are driving significant quotations and proposals in our pipeline, not only from the U.S. and also internationally, that that is going to allow to achieve 10% year-over-year growth in fiscal year '09 or more. Obviously, the proof will be in us delivering that. But we place a lot of value on our track record and our consistent performance. I think you have to step back when you think about this business and recognize that our business model gives us a significant competitive advantage. We do not have to wait two years for the government to decide what the specks are in the next radio and then two more years to provide the funding and then three more years to do the [SV&D] phase. We are able, we think, very successfully, to identify where the market is going and to get there ahead of competition with a radio that works, has significant reliability to perform its mission critical function, and to therefore create a significant reason why customers ought to buy our radios. And we have seen it over and over again during the last several years.

So I believe in our ability to continue that. And even though we are a bigger business than we were two or three years ago, we significantly expanded the markets that we are serving, in terms of the VHF, multiband hand held market and now new radios like personal roll radios, high capacity line of sight radios and the whole defense systems opportunity. We will be updating the chart that we have been using where we talk about the market expanding through a $6 billion potential, and I assure you the next time you see the chart it's going to be larger because we think that the market is growing at an even faster rate than we had expected.

We are also very confident in the funding. There is a lot of speculation out there around funding, obviously. We do not submit or approve government budgets. Obviously I have to start with that. But we are listening to our customers. They are telling us that funding is going continue. We are going have a supplemental that's going to be approved any time now. There is going be, we believe, and our customers believe, at the D.O.D., a supplemental in fiscal year '09, that's going to be required to either fund ongoing troops or to fund reset if troops are dropped down at significant levels. In either case, we think there is going be significant money available.

I don't think a lot of people realize that there is significant leeway in the spending of these supplement budgets. They do not have to be spent within the government fiscal year that the supplemental budget is approved. The spring 2007 supplemental fund, it funds purchases through Harris well through fiscal 2008. And imminent 2008 supplemental, therefore, is going to fund purchases well into 2009 fiscal year. So our view is that, regardless of who is in the White House, who is in congress, or the magnitude of troop reductions in Iraq, which there is a lot of speculation of what will that number be, we just don't think that any of those actions are going to eliminate the need for a 2009 supplemental. I'm not going to speculate beyond 2009, but we believe strongly that the capabilities our radios are providing is going cause D.O.D. as well as international customers to put these into their normal budget cycles.

Tactical radios is a pretty small number when you consider the size of the overall fundamentals -- or supplementals, that, in FY '07, for example, the supplemental totaled $170 billion. Less than 5% of that came for tactical radios. And most of that, was for our competitors legacy [SINGARS] radio, which we are not getting significant amounts of revenue on and we're not counting on huge amounts in our guidance. At some point we think when the supplemental budgets are folded into the regular budgets that the customers will use that opportunity to repurpose that funding to more advanced modern future-proof radios. Again, I think we have got a good position to benefit from that.

So, we cannot be precise and we're not going to be precise on exactly what our revenue's going to be for every customer, and every quarter, and every program. But we have momentum, that momentum is not slowing. Our guidance on orders that I just discussed suggest that it's going to be even accelerating in the second half of the year. Obviously we feel pretty good about our future. We think we're doing more things right than wrong. It does depend on us winning against competition. We don't think in the near term it really depends upon funding.

Fair enough. I wasn't trying to pick at quarterly numbers, I was just trying to get a sense of where you see the trends going so that is very helpful. Thanks. The only one minor thing that I would ask for, if you can give it on '09, is your gut feel for the double digit growth. Do you feel like domestic will grow faster or more slowly than international or is it too early to tell?

We are just beginning that process, in fact, this week, of looking at 2009 and beyond. So I think we will have a lot more color on that in our next call. But we have said in the past that we expect, over the next several years, to see strong growth in both domestic and international markets, but we have said that we expect international markets to grow somewhat faster. We will get a chance to talk with management folks about their current view on that this week and we will certainly be talking with you all in the next call about them.

From (inaudible) we will hear from Larry Harris.

Yes, thank you, and good evening. Just to dig a bit deeper in terms of the broadcast revenue outlook, is HD, TV and the digital transition, I assume that that is driving the decision to go with higher revenue guidance. Any commentary you can provide in terms of what is happening in the radio market right now?

Mostly where we have taken our guidance up compared to our prior view, Larry, has been in the video infrastructure and digital media part of that business. That is primarily the former [Leech] Technology product line, servers, routers, power distribution amplifiers, graphics, multiviewers, master control systems, as well as the video servers. So that is where we continue to see even stronger -- very strong growth. Overall, where we will get the pump the second half in revenue growth, though, is the turn around from shrinking in the transmission business in the first half to starting to see some sequential growth again in the second half.

So all in all, the top line profile looks pretty good. Lots of order opportunity in the pipeline both domestically and internationally, several pretty big deals out there that we hope will fall, and more importantly, fall to us as we go forward in the year. We've got to get equally robust, though, on the gross margin line. If we can do that, then we're going to really like the margins in this business. We are pretty confident margins should be better in the second half than first half, and we need to get on track to that double digit margin return on sales that we've committed to for a while.

So you are seeing the stations upgrading from low power to full power?

Yes, and the orders have looked really quite good, Larry. And there is no one that I have spoken to who questions the deadline of February '09 being real, there is just no discussion about that. Obviously, you heard or read some very good potential coming out of transmission also at the C.E.S. show as we talked about mobile television. We are not putting any numbers on that at this point but we're certainly going to be talking more about that later. I was personally out at that show and personally met with a number of executives at our customer base, and there really is a lot of nice potential in that business for us to capture, in terms of helping customers upgrade so they can do that, that mobile television broadcasting using the Harris exciter. So I am cautiously optimistic on that. And we hope to talk to you more with a more definitive outlook on that in the coming quarters.

Any comments on the radio market?

Digital radio.

Digital radio, I'm sorry, I am the only one not understanding your question. It continues to roll out with the stations, but, the roll out continues to be now over a long enough period of time that we are not seeing huge year-over-year growth. Our market share seems to be solid. We put ourselves back in the number one position, and it is a good business and good margins. But, it is not going drive, we don't think, this business now that we are at a well over $600 million for the segment. It is a driver but it's not a big driver.

All right, well thank you.

Operator, if we have another question, we will take it.

Final question will come from Jim McIlree, Collins Stewart.

You had a $4.2 million in other income this quarter which is a little bit higher than usual. What happened this quarter? Does that go on for the next quarters, too?

Let me answer that, Jim, this is Gary. The increase was primarily due to a $5.6 million gain related to a mark-to-market adjustment on [warrants] of shares to, I should say, to acquire authentic shares. And our total share position now our [funds tech] is about 3.6 million. I think total market value at today's prices is roughly 47 million and our carrying costs, or our basis, is roughly 17 million. So there is about $30 million at current prices where there is a gain in those shares. We have not made a determination today exactly how we will liquidate that position, but it is fair to say we won't be long term holders of the stock and we're going to look at how we best deal with that.

We don't, at this point the warrants, I think, of the mark-to-market kind of took care of that. That accounting, Jim, so we are not expecting significant nonoperating income in the second half of the year at this point.

Right. But you do have a 30 million -- if the price stayed the same you would have a 30 million gain to book at some point?

That is accurate. Yes.

Okay. And so, just to make sure, so the second half other income is somewhere around this 2 million per quarter, 4 million per quarter?

No, the second half nonoperating income included in today's guidance is essentially 0 for the second half coming from nonoperating income sources.

Okay.

The gain in the second quarter really was a result of this mark to market. We did exercise the warrants in the second quarter, so the only income we would have would be if we sold the shares.

Right. Right. Okay. And I am sure Pam has told you about how the market has responded in prior times to using that to make the numbers, so. I am glad it's a 0 in your guidance.

Understood.

Awesome. Thanks a lot.

Thanks, Joe. Thanks for asking and allowing us to clarify that our guidance does not include any nonoperating income to achieve the increased earnings per share.

Thank you everyone for joining us and let me know what else I could do for you.

Ladies and gentlemen, that does conclude today's presentation. We thank you for your participation. Have a wonderful day.