Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)

Powerwave Technologies, Inc. (NASDAQ:PWAV)

Q3 2008 Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

Tom Spaeth – Treasurer

Kevin Michaels – CFO and Secretary

Ron Buschur – President and CEO

Analysts

Charles John – Piper Jaffray

Jeff Kwall [ph] – Barclays Capital

George Iwanyc – Oppenheimer

David [ph] – J.P. Morgan

James Falcol [ph] – Robert W. Baird

James Faucette – Pacific Crest

Bill Choi – Jefferies & Company

Kevin Dede – Morgan Joseph

Brian Modoff – Deutsche Bank

Tony Wallace [ph] – East Shore Partners [ph]

Operator

Good day, ladies and gentlemen, and welcome to the third quarter 2008 Powerwave Technologies earnings conference call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today’s conference. (Operator instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Mr. Tom Spaeth, Powerwave Treasurer. Please proceed, sir.

Tom Spaeth

Thank you. Good afternoon, and welcome to Powerwave Technologies’ third quarter 2008 financial results conference call. I am Tom Spaeth, Powerwave’s Treasurer. Joining us on today’s call will be Ron Buschur, Powerwave’s President and Chief Executive Officer; and Kevin Michaels, Powerwave’s Chief Financial Officer.

Before starting, I would like to point out that various remarks we make about future expectations, plans, and prospects for Powerwave ,including but not limited to, anticipated revenues and revenue growth rates, operating margins, gross profit margins, earnings per share levels, cash flow projections, revenue composition, improvements in cost structure, costs related to our facility consolidations, future cost savings related to our cost reduction activities, demand levels for the company's product lines, projected growth in market share, trends in the wireless infrastructure market, the timing of product deliveries and future orders, the timing of proposed staff reductions in our Finland manufacturing facility, the success of new products, expense levels, capital expenditure rates, inventory returns, tax rates, and day sales outstanding, are all forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause Powerwave's actual results to be materially different from those projected or implied. Some of the risks and uncertainties include our ability to accurately forecast and anticipate customer orders, integrate acquisitions, and realize anticipated cost savings and synergies, the potential negative impact on demand for our products due to the macroeconomic environment and worldwide credit tightening, potential reduced demand due to industry consolidation among our major customers, fluctuations in foreign currencies, the ability to accurately forecast cash flows and credit collections, the impact of competitive products and pricing, economic and political conditions, and the loss of one or more significant customer accounts.

Please refer to our press release, Powerwave's current Form 10-Q, for the quarterly period ended June 29th, 2008, and our Form 10-K for the fiscal year ended December 30th, 2007, and other filings, which are on file with the Securities and Exchange Commission for additional information on factors, which could cause which could cause our actual results to be different from those projected or implied.

In addition, on this call we will discuss non-GAAP financial information. A reconciliation of the non-GAAP financial information to our financial statements as prepared under GAAP is included in our press release dated today, which can be found at our Web site at powerwave.com and on business wire. The press release also has detailed information concerning several of the significant items impacting our results, and we urge you to review that information.

Now, I’m going to turn the call over to Kevin Michaels, Powerwave's Chief Financial Officer.

Kevin Michaels

Thank you, Tom, and good afternoon everyone. With all the risk factors in mind, I would like to start out by reviewing our financial results, which are also summarized in our press release.

Net sales for the third quarter of 2008 were $238 million, an increase of 18.6% from the same period last year. We reported net loss of $1.8 million for the third quarter, which equates to a GAAP net loss of $0.01 per share. The GAAP loss includes approximately $6.1 million of restructuring and impairment charges, which includes charges related to the restructuring and consolidation of several of our facilities as well as severance costs.

There was also an additional $6.7 million of non-cash intangible asset amortization related to our prior acquisitions. All of these charges and amortization totaled approximately $12.8 million for the third quarter of 2008.

On a pro forma basis, excluding all restructuring and impairment charges and intangible asset amortization, we generated pro forma net income of $10.4 million, or pro forma fully diluted earnings of $0.08 per share.

I want to note that included in both our GAAP and pro forma results are the impact of approximately $1.1 million of pretax stock-based compensation expense due to FAS 123R, almost all of which is included in operating expenses. Excluding this expense from our reported results adds approximately $0.01 to EPS for both GAAP and pro forma results. This is the same impact as in the prior year period.

On a geographic basis, our total Americas revenues for the third quarter of 2008 was approximately $70.5 million or 30% of revenue. Total Asian sales were approximately $100 million or 42% of revenue. And total European and other international revenues were $67.5 million or approximately 28% of revenues. More in the third quarter, our revenue from the Asia Pacific region by more than $27 million when compared with the second quarter of this year. As we have forecasted, we did see a slowdown in the European region during the quarter.

In the third quarter, our antenna systems product group sales totaled $75.4 million or 32% of total revenue, base station subsystem sales totaled $142.9 million or 60% of revenue, and coverage solution sales totaled $19.7 million or 8% of revenue.

Our total 3G related sales were approximately $101.1 million or 42% of our total revenue, and our 2G and 2.5G related sales were approximately $127.9 million or 54% of revenue, and our WiMAX sales were approximately $9 million or 4% of revenue.

In terms of our customer profile in the third quarter, total OEM sales accounted for approximately 59% of total revenue, and direct and operator sales accounted for approximately 41%.

Moving on to gross margins, on a GAAP basis, our total consolidated gross profit margin was 21.4% for the third quarter, which is an increase from the 20% reported in the second quarter of this year. In our press release on page three, there is a table with the reconciliation of the various factors impacting our gross margin for the quarter. On a pro forma basis, excluding restructuring, impairment charges, and non-cash intangible asset amortization totaling $7.5 million, our total gross profit margin was 24.5%.

On a GAAP basis, our reported cost of goods sold includes a credit of approximately $2.4 million related to the sale of inventory to several customers that was previously determined to be excess and obsolete to our ongoing requirements. This represents an increase of approximately 1% of gross margin, and when you subtract that from our reported pro forma gross margin, our adjusted pro forma gross margin was 23.5%, which is down slightly from the adjusted pro forma gross margin of 24% on a similar basis in the second quarter of 2008. Our gross margin was impacted by lower sales in the third quarter and by the increase in our OEM in Asia-based sales, which carried lower gross margins.

Next, I’ll review our operating expenses for the third quarter.

Our sales and marketing expenses were $10.3 million, research and development expenses were $18.5 million, and G&A expenses were $18 million. Excluding restructuring and impairment charges and intangible amortization for the third quarter, which totaled $5.3 million, our total operating expenses equaled approximately $46.7 million, which is approximately $3.2 million reduction from the second quarter of 2008. In addition, this amount includes approximately $1.5 million of an employee bonus accrual for the third quarter.

We remain committed to our cost reduction plans, and we will continue to execute on these plans in the quarters to come. As we have previously stated, our quarterly operating expense target of $45 million for the second half of this year excludes any amortization of intangibles and restructuring and impairment costs as well as any employee bonus accruals.

In terms of other income and expense, we recorded a total of approximately $42,000 of other expense in the third quarter of 2008. This compares to $4.7 million of other expense in the second quarter of 2008. The main contributor to this reduction in our other expense was a foreign exchange translation gain of approximately $2.6 million for the third quarter. This gain was primarily due to increases in value of the US dollar during the third quarter.

Our third quarter tax rate was impacted by some minor tax payments and the valuation allowances on our deferred tax assets. While we will continue to evaluate our future tax rate based upon our diverse international operations, we continue to estimate that our effective worldwide tax rate will be approximately 10% for fiscal 2008. I want to stress that this estimate will fluctuate based upon our actual results. For the first nine months of 2008 on a full GAAP basis, our rate was approximately 10.6%.

Next, I’ll review our balance sheet. Total cash as of September 28, 2008 was approximately $61.3 million, of which $3.6 million is restricted cash. Cash flow from operations was approximately breakeven for the third quarter. As we stated on last quarter’s call, during the third quarter, we paid out approximately $20 million of one time payments, which included the repayment of our 1.15% convertible notes, which amounted to approximately $14 million, a deferred payment of approximately $4 million related to our VersaFlex acquisition, and approximately $2 million in relation to the Swedish tax claim that was included in the LGP Allgon acquisition.

Total capital spending was approximately $2.2 million for the quarter. I do want to highlight that we have now paid all the short term debt that was outstanding at the end of the second quarter. And we have no other long term debt coming due until November 2011.

Looking at other items on our balance sheet, our net inventory was $88.8 million, which represents inventory returns of approximately 8.1 times. We remain extremely focused on maintaining and improving our industry leading inventory returns.

Our total net accounts receivables increased slightly to $256.8 million, resulting in our AR days sales outstanding increasing to approximately 98 days from 94 days in the second quarter of 2008, and 103 days in the first quarter of 2008.

Before turning the call over to Ron, I would like to remind you that we do not provide quarterly guidance. We believe that our investors are better served by focusing on long term trends as opposed to the short term volatility that is inherent in the markets that we compete in. Please note that our guidance for 2008 remains subject to a number of risks and uncertainties that could impact our future outlook and results, and many of these are detailed in our public filings with the SEC.

With all that if mind, taking into consideration the current macroeconomic crisis impacting all the economies that we compete in, we have decided it is appropriate to revise our expectations for this year. As you are aware, the global credit crisis escalated during September and October. And in the last two weeks, we have started to see an impact on our business. A few customers have started to cancel or requests delays of orders for equipment. Based upon our current best estimates, we are resetting our target fiscal 2008 annual revenue range to our previous guidance range of $880 million to $920 million.

While we are decreasing our forecasted revenue for fiscal 2008, we want to note that while economic factors are not in our control, we still believe that there are opportunities for Powerwave to continue to do well in this environment.

With that, I'd like to now turn the call over to Ron Buschur, Powerwave's President and Chief Executive Officer.

Ron Buschur

Thank you, Kevin, and good afternoon, everyone.

The first one I’ll address is a topic that I believe is on everyone’s mind, and that is, what is the current outlook for the wireless infrastructure spending. There’s a lot of uncertainty due to all the issues facing the global economy, the freeing up, the credit markets, to the apparent entry into a recession. These impacts are affecting most of the markets that we compete in. Some of our customers are re-evaluating their purchasing intentions. That they, along with us, are trying to determine the near term impact of the credit crunch as well as the long term macroeconomic impact on our market demand.

Our customers from both the OEM and direct operator markets are not able to give us firm forecasts as they do not know how long the credit markets will be constrained, which impacts their long term capital spending plans. However, as we look out beyond the fourth quarter into next year, we do believe that the long term demand for the wireless service, especially data driven demand, will continue to increase and create demand for additional infrastructure spending, which should create demand for all the products and solutions that Powerwave provides.

We continue to believe that the wireless network operators throughout the world are looking for ways to continue to improve their network performance more cost effectively using solutions like those we provide rather than investing in new base station equipment.

Despite the negative economic concerns, I am very pleased and proud of the third quarter results. And I would like to thank all of our employees and partners for their commitment, hard work, and support.

For the third quarter, we saw revenues increased 18.6% versus the prior year. The continued focus on controlling and reducing our cost, we were able to reduce our pro forma operating expenses by $3.2 million from the second quarter of 2008. In the third quarter, we have also achieved our targeted pro forma quarterly operating expense of $45 million.

For the quarter, we maintained an overall pro forma gross margin of 24.5% despite a slowdown in our direct operator business. With the reductions in our operating expenses, we were able to achieve a pro forma operating margin of 4.9%, and a pro forma fully diluted earnings of $0.08 per share for the quarter.

We still have some work ahead of us, but the good news is, we are ahead of the competition in terms of streamlining and reducing our cost structure. And we will continue to execute on this strategy going forward.

Now, I’d like to review some additional highlights and activities in the third quarter.

In terms of the product areas, we saw our antenna systems revenue increase 10% sequentially and 70% year-over-year, far more than the overall industry growth rates that have been reported. In addition, our coverage solution product segment, an area where we’ve been spending significant R&D resources as well as introducing many new solutions this year, we saw a 98% growth over the third quarter a year ago.

Looking at our top customers for the third quarter, total revenue for Nokia-Siemens was approximately $77 million, and accounted for approximately 32% of our total revenue, and increased by approximately 13% from the second quarter. Revenue from Alcatel-Lucent was approximately 33% – or $33 million, excuse me, which represents approximately 14% of our revenues.

At the end of the second quarter, we announced our plan to close our manufacturing operations in Maryland. We can now report that all production activities have been transferred from Maryland location. The majority of our production capacity was transferred to Asia, with some specific technologies and capabilities moving to our Southern California location. We should see some benefits from this consolidation during the fourth quarter and into 2009.

In addition, this week, we announced the restructuring of our manufacturing location and activities regarding our Finland operation, which is being done to reduce our overall manufacturing and operating expenses to further lower our breakeven point. We expect the consolidation to be completed by the first quarter of 2009.

During this period of time, we redefined our product design methods and our locations to better facilitate a shorter and more effective design cycle to improve our product ramp capability at a lower cost. Powerwave has and will continue to evaluate and analyze the utilization and locations of our engineering and design teams globally to help minimize our investments and resource expertise while maintaining our technology leadership position.

But we do believe these activities, coupled with out previous actions, will further leverage and reduce our overall operating cost by consolidating production capabilities and reducing overhead cost and redundancies where possible. We are continuing to focus on our objective of reducing our overall cost structure and manufacturing by improving our productivity, efficiencies, our yields, cycle times, and better capital utilization. As well, we are focusing on our efforts around rationalizing and simplifying our supply chain, shortening our lead times, and reducing our inventory levels while continuing to reduce our operating expenses.

At the same time, we continue to invest in key research and development activities, enhancing our product and technology leadership position with our customers by providing them with cost effective solutions. Clearly, we continue to believe that Powerwave has one of the strongest product portfolios, the best personnel and engineering resources as well as the most advanced leading edge technology solutions for the next generation of products.

Powerwave Technologies has the right strategy to weather this economic storm. We have made great strides in driving profitability across our whole organization. And we have successfully grown our revenues and significantly reduced our operating expenses by returning the company back to profitability during the past year. And we will continue to execute on this plan going forward.

I continue to believe that this team, these solutions, and the wireless industry will create exciting and growing opportunities for Powerwave Technologies’ investors and employees in the years ahead. As I previously stated, we still have a lot of work ahead of us. And we are extremely focused on improving Powerwave’s profitability and performance, which will generate the level of shareholder value you deserve.

I would now like to turn the call over to the operator, and address any questions that you may have.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And please stand by for your first question. And the first question comes from the line of Mike Walkley of Piper Jaffray.

Charles John – Piper Jaffray

Thanks. This is Charles John sitting in for Mike. Hi, Kevin and Ron.

Kevin Michaels

Hello.

Charles John – Piper Jaffray

So obviously, I talked to Michael there and not much visit to you, but could you give us some color on what you’re hearing from carriers? And more importantly, in your discussion with them, does it sound like they have pretty firm plans for reducing CapEx for the next couple of months and 2009? Or is it more of a latency approach, and there is some potential for changing it, potential it is not as bad as what people are forecasting?

Ron Buschur

I think a lot of the operators are really trying to wait and see what really takes place. You do have some carries who are saying that they are going to continue with some of their deployment activities. But I really believe a lot of that is how they recognize the revenue more than just having new deployments taking place. We’re seeing that at one specific large operator here in North America.

The visibility is very poor. So I think many of the operators still believe that there’s going to be a need to improve their networks. But they’re going to wait and see what the macro environment looks like before they commit to moving forward with that. I wouldn’t say they have necessarily frozen it.

Charles John – Piper Jaffray

So just a little on that, do you think – at what stage are the carriers act in terms of having function capacity in the towers? If I put it in another way, can they really afford to pause their CapEx for a few quarters until they get better visibility? Or given the strong data sense, would they still have to spend on gear like power amplifiers or other gears on the towers?

Ron Buschur

Well, I mean we certainly can’t speculate what they believe they can do. But looking at it from our perspective, it’s clear that there’s an increase in demand for data, and that is utilizing some of the capacity that’s out there and is causing some issues with the quality of service in the network. That’s very good news in a little broader picture. But short term, I believe they’re probably setting back there, and trying to utilize, again, the equipment they have until they have a little bit better visibility longer term. So I don’t think we’re going to see them making a quick deployment of new hardware until they better understand the market.

Charles John – Piper Jaffray

Okay. And one last question from me, just to understand your guidance a bit better. It’s down, I think, it’s at the midpoint, about 20% sequentially. And using a pretty set increase in the sales in the APAC region, I was wondering if you could give us the mix in this new guidance? And how we should think of profitability, both gross margin and operating margin for the next quarter?

Kevin Michaels

Well I think, clearly, as we stated that we’re seeing weakness across a lot of markets. So the weakness is occurring internationally as well. I think a lot of the markets internationally, especially some of the developing markets, rely heavily upon credit. And given the credit issues in the world today, a lot of those operators are slowing down significantly their deployments as they deal with the credit issues. So the timing of that and how that will happen is really uncertain right now. So we really don’t have any feedback on that.

Typically, we don’t give earnings per share guidance and such. Clearly, with the fall off in revenue and the kind of reductions you’re looking at potentially there, that would have a negative impact on our gross margin.

Charles John – Piper Jaffray

Okay. Thanks a lot, guys.

Kevin Michaels

Thank you.

Ron Buschur

Thank you.

Operator

Your next question comes from the line of Jeff Kwall [ph] of Barclays Capital.

Jeff Kwall – Barclays Capital

Yes. Thanks. Kevin and Ron, to what extent – is this something that you folks feel that you may need to deal with further restructuring? Is it we wait it out a quarter or so to see what happens? Or how should we think about that?

Ron Buschur

Well Jeff, we’re continuing to simplify our network, figure out ways to be much more competitive, and continue to focus on lowering our expenses. We had a plan that we put in place. And we’ve been executing that now for the last year. And we’re going to continue to complete that strategy and that plan. And we’re going to take the steps necessary.

We’re not just reacting to the market dynamics. Certainly, that has an effect on us. But the strategy and the plan that we had in place was always to go down this course and this path that we’ve been currently working towards finishing, and that we’re working on looking into 2009.

Kevin Michaels

And Jeff, let me add to that because I think it’s a good question. And where we are, as you know, we’ve really been on our – restructuring our cost bases almost over the last year and a half. And I think we feel we’ve done a lot there. We’re pretty far through that. We have some further minor steps to do, but we’ve really been able to pull those costs down. We’re hitting our operating expense target. We hit the target we want to do for the end of the year and the third quarter.

Clearly, we’ve been faced with a new environment here that is difficult for everyone out there. What we feel good about is we’ve done most of the hard lifting. I mean we did announce a small closure just this last week that we’re doing. And certainly, in this environment, we’re going to look to cut our costs further. The reality is we’ve done a lot of the heavy restructuring. So we don’t anticipate any large scale activities because we’ve already done them. And we think we have a very good solid structure. We’ll continue to fine tune that. We’ll continue to drive our costs down and our operating expenses down. But we think we’re – yes, if you can be in a good position for this kind of environment, we think that’s where we are.

Jeff Kwall – Barclays Capital

Okay. Great. And then, I guess, the next question is, do you feel like we are in the early innings of this? Or that may not be an easy question to answer, but–?

Kevin Michaels

I’ll take the first on that, and see if Ron wants to add. I think the biggest thing is we don’t think – we don’t know. Clearly, things that happened here in the last two months that no one could have predicted in the stock market and everything else, clearly, we’ve seen activities here just in the last couple of weeks that are disturbing and – but it’s what’s happening out there today in the marketplace. And we don’t think that our industry is alone. But that we think the credit issues follow everyone around.

How long will it take to turn around? We don’t know. I mean, we do know and we do believe as the earlier person mentioned, demand for wireless and data is strong. Clearly, it’s not going to just – people, operators are going to put things on hold. They’re going to wait and see how long it takes. But we know, over the longer term, the demand is there and it should drive some demand. But are we talking one quarter or two? We just don’t know.

Jeff Kwall – Barclays Capital

Maybe my last question then would be, are there areas in your – that you’re seeing that are being hit more severely by carriers chopping, firming CapEx? Or is it pretty broad brush as far as you can see?

Ron Buschur

I’d say, Jeff, I think it’s probably a broader approach across the complete product portfolio. I don’t think it’s any one product segment. I think one of the areas, as Kevin had outlined, a lot of the operators are really struggling with is the true capacity that they have available and the increase in demand for data. And that’s taxing the network. So if they get to a point to where they realize that there’s a need to do something that, obviously, allows us to sell products within our product portfolio at a broader pace and a broader approach than what we have today. So I don’t think any one element at the market is really being affected, or product segment, I should say.

Jeff Kwall – Barclays Capital

Okay. Perfect. Thank you both very much.

Kevin Michaels

Thank you.

Operator

Your next question comes from the line of George Iwanyc of Oppenheimer.

George Iwanyc – Oppenheimer

Thank you for taking my questions, guys. Ron, just picking up on the same line, can you give us an idea of how the bookings level looks for this quarter, and how that compares to what it was entering last quarter?

Ron Buschur

Well, I think it’s fair to say, George, based on Kevin’s comments over the last couple of months here, we’re seeing a real crunch taking place in the market itself from the credit perspective, some concerns with the future economy, which has caused, I think, all of our customers to really go back and assess what they need. So looking at the bookings and stuff, I think you could certainly say in the last weeks it’s been a little bit slower than what we would have liked to have seen. And we’re seeing an impact. And that’s what’s led us to go back to our previous guidance, and set that as a range that we want to move forward with.

Kevin Michaels

And just to build up on that, George. This is Kevin. As you know, we’ve never had a big backlog of booking business. Our business has traditionally always been really based on a turns business. Our largest customer segment, the OEMs, is the demand poll type business. So while there’s forecast and stuff, it’s not a pure bookings type business. So it’s not like we sit on a big backlog.

And clearly, what we have started to see here, just in the last couple of weeks, is them coming back to us, adjusting their forecast, and telling us demand’s coming off. That’s a real time type of feedback that we’re providing. And we don’t normally operate with a one-to-one backlog of book business.

George Iwanyc – Oppenheimer

And is there any incremental price (inaudible) that you’re seeing at this point or is it holding firm and you just don’t have an idea of what the demand will be?

Kevin Michaels

No. We don’t see any. There’s no pricing activity associated with this. This is just straight from them.

George Iwanyc – Oppenheimer

And are there any product areas that have historically been more resistant to changes in demand, like the antenna area being up this past quarter? Are there any product segments that–?

Kevin Michaels

I wouldn’t say that there’s any single product area that I would point to. I mean, that’s just – there’s different mix every quarter, and different segments, and where we saw some growth. I mean you saw – we obviously saw a lot of strength in the Asian markets this last quarter.

George Iwanyc – Oppenheimer

Okay. And just one final question, you mentioned that you’re looking at lowering the breakeven level. Can you give us a rough idea of where – if we do see a dramatic drop off in demand, where you think the new targets for 2009 could be for the OpEx level?

Kevin Michaels

Well I think, we’re still working – I mean clearly, as we – I think I said this a little earlier. We’re looking to drive our OpEx lower. We’ve hit our target of the $45 million per quarter. And we’re looking at how do we lower that further, and though the actions reduced. So I’m not prepared to set a target yet. And clearly, we’re still trying to get a handle on all of what 2009 would look like. But clearly, our goal is to have a lower operating expense.

George Iwanyc – Oppenheimer

Okay. Thank you.

Kevin Michaels

Thank you.

Operator

Next question comes from the line of Edgar Gelblum of J.P. Morgan.

David – J.P. Morgan

Hi. Thanks. Kevin and Ron, its David [ph] helping Kim Watkins out. A couple of questions, first of all, if we do look at the guidance and trying to get a sense technology wise between 2G to 3G and WiMAX, is the slowness across the board in your orders? Or are you seeing carriers decide to continue to push on 3G, but maybe cut back on the GSM expenses and the 2G expenses maybe a little bit earlier than they originally were planning? Or are you seeing the 3G buildups coming off at the same speed as the 2G.

Ron Buschur

I think they’re very similar, both 2G and 3G platforms are slowing down. I don’t believe there’s any operator or any deployments that are being either slowed down or increasing based on the technology platforms. We see them both being so at this point.

David – J.P. Morgan

Okay, so no strategic rationale behind that. On a geographic basis, given that the path now that you’ve seen in Asia, would that – is that – as we look at that as something that’s more lumpy and will come back, even scaled to what the new revenue growth rate will be going forward? Or does that represent strength in Asia that seems to supersede the slowdown that you’re seeing in eventually the rest of the world.

Ron Buschur

Well, we don’t think it’s going to be a little bit lumpy moving forward, but I do think the APAC region, again, is strong, and there are some opportunities there. What really concerns me is the credit crunch and the financial concerns within the capital markets to continue to fund these new build outs of these networks. So that is going to have a bigger effect, I think, on some of the deployments in the APAC region, specifically, India and China, than what it would in, let’s say, North America or Europe. So that’s why, if you look at that, I think you have to be a little bit more cautious in that region.

David – J.P. Morgan

If you do look at India and China, you have 3G licenses being awarded in India early next year, possibly as soon as January, February. And in China, you have spectrum coming unlocked as well in a very, very part of the year. The slowdown that you’re seeing, taking that into account, that new spectrum would be allocated within the next few months? Or is this assuming that none of it happens?

Ron Buschur

Well right now, what we’re assuming is that things are going to slow down again due to the fact that many of these new deployments were going to be funded by capital that was going to be lent to these operators, not necessarily from the proceeds or the funds that they had internally. So again, we believe unless the capital markets improve, they’re going to be held back a little bit on these deployments. If that’s not the case, then certainly I do think that these new deployments take place of the new licensing and opening up some of the spectrum and expanding it. We expect to see some growth with that.

And that’s a positive outlook when you look at some of the other, let’s say, utilization of spectrum and some of the other licensing issues that have taken place in areas such as China for how many years with the 3G licensing. So I do believe that’s a positive. It is an opportunity for growth. But my concern is and our reservation is the fact that we’re not sure that they’ll have the capital to do these deployments.

David – J.P. Morgan

Right. That makes sense. That’s good to know. Your guidance for the full year, when you back into your fourth quarter, would indicate – with your OpEx levels and gross margin levels, would indicate a negative margin or somewhat close to it, let’s say, depending on the way you end up with for the fourth quarter. We’re not getting too much into 2009, assuming – I mean you see it now. That usually brings you down in the first quarter, assuming that that were at this run rate for some time or in some sort of an economic malaise for a little while, how low do you feel comfortable letting your operating margin get before you start doing anything in addition. I know you’re not through restructuring now. But how low do you feel comfortable? Are we going to retest some of the lows that we got in 2007 with the operating margin? Or it’s just some sort of cutoff point, at which you say, “I can’t let it get below negative x percent.” And therefore, restructure some things.

Kevin Michaels

Well I think, as we mentioned earlier, we’ve done a specific amount of restructuring. We’ve taken a lot of costs out. We have some more work to do, but we’re well that (inaudible). So we think we’re in a good position here to leverage the company. Clearly, as we’ve already stated, we’re looking at our approach and further reductions in our operating expense line, which will help drive our margin there. Clearly, what we’ve had focus this year on improving our gross margins, we’ve seen some good improvements there. Clearly, a sudden falloff in revenue is going to have a negative impact on gross margin. But we still believe we can maintain a reasonable gross margin. And going forward, we can leverage that.

So we’re not prepared to give guidance for ’09 because there’s just too much uncertainty there. But clearly, our long term goals of maintaining profitability, obviously, maybe there’s some difficulty in the short term, but that’s our strategy. And we’ll do whatever it takes to deliver that.

David – J.P. Morgan

Right. I understand. The current quarterly run rate can’t seem to support the $45 million in OpEx until the heavy lifting may have happened. I’m just wondering at what point you have to do some more heavy lifting rather than the tweaks that you have associated with it. You get either two quarters, three quarters.

Ron Buschur

Well again, you’re making the assumption that all the effects of what we’re currently working on and all the initiatives that we have under way have only got us to the $45 million.

Kevin Michaels

And in terms of also the impact on our gross margin. So I think we still have activities and still impacts coming that will have positive benefits to our gross margins. So even in a negative revenue environment, we can still have some opportunity there. But as I said, we’re not prepared to give guidance for ’09.

David – J.P. Morgan

Okay. That’s very, very helpful. I appreciate it.

Ron Buschur

Sure, David.

Operator

Next question comes from the line of Ken Muth of Robert W. Baird.

James Falcol – Robert W. Baird

Hi. This is James Falcol [ph] filling in for Ken. I guess, your guidance is in part spurred by the slowdown in orders that you’ve seen and the customer feedback. I just wanted to touch again on that – the comment about the credit crunch’s impact on the developing markets carriers. Have you gotten direct feedback yet that that’s actually having an impact? Or what’s the direct feedback then from the developing markets carriers? And how has that played into the comments that you’re giving.

Ron Buschur

No. That was direct feedback that we were given from carriers.

James Falcol – Robert W. Baird

Okay. And then, I guess a question on foreign exchange exposure. I guess it would be helpful if you could give any sort of rough breakdown what the revenue mix is exposed to in terms of these foreign currencies.

Kevin Michaels

Well we haven’t provided that kind of detail. I think, predominantly, our largest foreign exposure is of the Euro, and then there’s some other (inaudible) in different regions, things like the RMB and Indian Rupee, so. But we’ve never broken that down in detail. I don’t think – we’re not going to do that today.

James Falcol – Robert W. Baird

Okay. And then just touching back on the product categories, I guess the decline this quarter sequentially in the covered solution, are you seeing softness in the more enterprise related area of the business or is there something else that contributed to that? And how would you contrast that enterprise focused area with the more traditional carrier market?

Ron Buschur

Well, the enterprise portion of the business, as we have said, we’re trying to roll out and complete some of the new development efforts around the products and solutions for that market set. So we really don’t have enough products that fill that complete product portfolio to address that market effectively. We’re gaining on that as you can see from the growth in that market segment. But until we exit this year, we won’t have that complete product portfolio available. And we are seeing the softness when you look at it from the operator perspective. And I think that’s primarily driven across all the operators, not any specific operator, or any one region or country.

James Falcol – Robert W. Baird

Okay. Thanks.

Operator

Your next question comes from the line of James Faucette of Pacific Crest.

James Faucette – Pacific Crest

Thanks very much. I’m wondering, just a number of follow-up questions to those that have already been asked. Firstly, the strength that you saw in the September quarter in Asia Pacific, can you be more specific as to which countries that was in, firstly? And then, secondly, as it relates to the slowdown you’ve seen over the last couple of weeks, if you look at your emerging market customers that you do business with generally in dollar terms, have they changed their behavior and are they also attributing it to the credit crunch? Or are they also concerned in some case about their own depreciation of currency? Thank you.

Ron Buschur

Well, I’ll take the first part of that question. And then I’ll let Kevin comment on the second part. The first part, looking at, obviously, the area that we have seen some growth, India’s been strong. We’re seeing a lot of growth in the Korea marketplace as well as China. So those three regions have been quite healthy. And then you have some of the other regions such as Thailand and Indonesia that seems to still have some potential growth and opportunities.

And as far as the currency issue, Kevin do you want to add to that?

Kevin Michaels

Sure. I mean, I think the – your question’s a good one, but it’s probably too sophisticated where we sit in the market today. I think the initial actions are going on about credit. And they’re dealing with credit tightness and credit availability. Those are the feedbacks we’re getting. Is it tied to their currency losing value against the dollar? It could be, but we’re not – we haven’t got to that level. Now this is more real time information. So it’s difficult for us to really give you that kind of – we just don’t know the answer.

James Faucette – Pacific Crest

I understand. I just was asking in case anybody had mentioned it along the way. Thank you very much.

Kevin Michaels

Sure.

Operator

Your next question comes from the line of Bill Choi of Jefferies & Company.

Bill Choi – Jefferies & Company

Okay, several questions here. First, I think on your SEC filings, you guys had shown that in Q3 there was some 7% to 8% benefit on the top line due to forex. Since dollar strengthened, can you just talk about the impact that had on the Q3 revenue?

Kevin Michaels

Sure. It was down in the third quarter. It was around 4%. And if we do a comparison to the second quarter of this year, actually, it was a negative, just about 2% decline from the sequential quarter.

Bill Choi – Jefferies & Company

So a 4% benefit in Q3.

Kevin Michaels

Yes, versus last year.

Bill Choi – Jefferies & Company

Last year, okay. Concerning how your OEM sales were so strong, and these issues you’re talking about, operators having availability to credit, whether they want to go ahead with the deployment or not. I start looking at the amount of product you shipped to the OEMS and kind of worry where those things are, whether they’re stuck in this operator indecision. Therefore, the inventory sitting in front of you in various channels could be quite substantial. Do you have any visibility on inventory, either on operator locations or at OEM locations? And can you quantify how that might be?

Ron Buschur

Bill, this is Ron. I certainly understand a little bit of your concern around looking at the OEM mix and product that we had shipped. Looking at the visibility though that they have of our equipment, it’s pretty weld. That’s one of the last items when you’re looking at the fulfillment of the product before it’s shipped, the complete base station. Our products and solutions, if you think about it, are the last ones to be incorporated and deployed. And they’re typically then, at that point, put into the network.

What we see as far as visibility today and to the OEMs inventory levels, we don’t believe that there’s a concern around the inventory levels so much as just the fact that the future uncertainty and demand maybe causing a little bit of a pause, not necessarily a buildup of inventory that has to be burned off.

Bill Choi – Jefferies & Company

So your OEMs, when they’re also hearing the operators had talked about whether to go ahead with the deployment or not, that has not led to some stock of their own bases and their new component somewhere in OEM locations.

Ron Buschur

Well, I certainly can’t tell you whether they have their components building up as far as inventory levels of finished goods. But I can tell you we don’t believe that there’s a lot of Powerwave products setting in the inventory waiting to be deployed at the customer base.

Bill Choi – Jefferies & Company

Okay. Now, just in terms of what you’ve seen in the last two weeks, the cancellations and delays of orders, certainly understand delays, potentially, outright cancellations. Is there any way to kind of characterize the level of, I guess, finality in these delays and cancellations that might be going on knowing that most of your products are shippable within days to weeks?

Ron Buschur

Yes. I think the cancellations are more driven around some operators who may have planned a build out. And that build out then was stopped due to the fact that they don’t have capital to deploy it. Some of the push-outs that we see are traditional customers. They’re seeing a bit of a slowdown in their business, but they’re end customers. So they’re pushing it out and saying, “At this point, we maybe need to delay it or we may need less of this product this product than what we had anticipated.” But I think looking at the cancellation fees, it’s really driven by some specific deployments that were scheduled where the funding is just not available.

Bill Choi – Jefferies & Company

Okay. And then, Kevin, just on these bonus accruals, you’ve obviously taken accruals for the past two quarters. How does this work? Is this based on annual target? And is there potential for reversal on these bonus accruals in Q4?

Kevin Michaels

Our bonus is quarterly. So it’s accrued and paid quarterly. So there is – it’s solely just tied to the third quarter. So I think you can, rest assured, that there will be no accrual in the fourth quarter.

Bill Choi – Jefferies & Company

Okay, one last one. Of the $11 million in obsolete inventory charge, it took several quarters back. You’ve been able to sell about $5 million of those. What are the possibilities of selling the remaining $5 million plus here?

Kevin Michaels

It’s been – we haven’t sold $5 million. It’s actually less than that. And actually, over the last two years, we’ve taken far more than that inventory charges. But we don’t expect to be – I mean we have taken charges on what we thought was obsolete. We’re surprised to be able to sell some of those stuff. We don’t expect to sell written off inventory. We don’t expect to – as we stated, we don’t expect to continue to do that. We’re always happy when we do, but we don’t anticipate it.

Bill Choi – Jefferies & Company

Okay. Thanks.

Operator

Your next question comes from the line of Kevin Dede of Morgan Joseph.

Kevin Dede – Morgan Joseph

(inaudible). Congrats on a nice job. I’m just kind of curious about the outlook, and whether or not it’s got you to rethink about your R&D spending priorities.

Ron Buschur

Well, it certainly always has us looking at our R&D spending priorities. We have to make sure that if we are spending money from an R&D perspective to develop technology that is utilized longer term, is that the right solution for the market conditions and will we be able to get a return on those R&D dollars that are spent? Or should we take a more, let’s say, very conservative and close-minded approach, short term, and say we’re not going to spend any R&D dollars, and we’ll utilize the technology in the product platforms that we have going forward until the market returns.

As we said at the beginning of this year, we have initiatives underway from an R&D perspective that will allow us to diversify, and allow us to enter into the other market segments of wireless, and not necessarily just wireless communications that we believe are in our best interest as well as the investor’s best interest long term. So we’re going to continue to pursue those investments. And then we are going to scrutinize and re-evaluate our strategy around some of our current initiatives and products around the wireless telecom space.

Kevin Dede – Morgan Joseph

But where would the LPE and WiMAX fit on that list of priorities, Ron?

Ron Buschur

Well, as far as the WiMAX, there’s not a lot of development efforts that need to take place for us to continue deploying WiMAX with the large carrier or the combination of carrier and the operator who’s being put together at the end of the year, and is deploying the WiMAX network. So we feel good about that.

And the other piece that gives us a lot of comfort is, we can leverage that WiMAX technology as well as our 3G into our LPE product platform with a very small investment from an R&D perspective. So those two would continue down the course that we currently have because if you looked at the overall spend, I think you would find, Kevin, that it’s a very small investment relative to our R&D expenditure.

Kevin Dede – Morgan Joseph

When do you think you might be more vocal about some of the diversification strategies that you’re working on?

Ron Buschur

I would say, we’ll probably be addressing those more towards the second quarter of next year.

Kevin Dede – Morgan Joseph

Fair enough. Thanks for taking the questions.

Ron Buschur

Thank you.

Kevin Michaels

Thank you.

Operator

The next question comes from the line of Erin Urquhart of Deutsche Bank.

Brian Modoff – Deutsche Bank

Hi, it’s Brian Modoff from Deutsche Bank.

Ron Buschur

I thought maybe there was someone new, Brian. Sorry about that.

Brian Modoff – Deutsche Bank

It’s quite all right, though. There’s a little bit of butcher job there.

Ron Buschur

Yes. I guess to say. We apologize.

Brian Modoff – Deutsche Bank

Anyway, Kevin, on the balance sheet, just looking at the accounts receivable and inventories. Sequentially, you obviously paid some debt down, but those didn’t improve much. I’m just wondering, anything in there that’s sticky? Or is just you expect to see continued improvement in those two areas?

Kevin Michaels

Well actually, our inventory was down slightly a couple of million.

Brian Modoff – Deutsche Bank

Yes.

Kevin Michaels

Our inventory turns, I think, we’re happy with that. We maintained the turns. That I’d say we’re very happy with that. On our AR, the absolute balance increased a couple of million, our days went up four days. We’re not happy with that. We’re very focused on that. We do believe, going forward, we can drive that down. Clearly, the summer, you always get some slowdowns with the European vacations and stuff, so it’s not totally unexpected. The other thing is I do think some of the credit issues out there are probably causing customers to slow their payments a little bit. It’s not unexpected in this environment. But we don’t – we feel that we’re more than adequately reserved there. So we don’t feel we have any bad debt risk out there.

Brian Modoff – Deutsche Bank

Okay. And then on back on the operating expenses, would you expect to continue to see a sequential improvement, maybe not the same magnitude, but a sequential improvement in that business into Q4.

Kevin Michaels

Yes.

Brian Modoff – Deutsche Bank

Good. All right, guys. Thank you.

Kevin Michaels

Thank you.

Ron Buschur

Thank you.

Operator

And your next question comes from the line of Tony Wallace [ph] of East Shore Partners [ph].

Tony Wallace – East Shore Partners

Hi. I just have a couple of questions left for you. Can you speak a little bit about what’s going on with the AT&T. They’ve been the 10% customer now for several quarters, and it appears that they dropped out this quarter.

Ron Buschur

Yes, Tony. AT&T, I think, is still a very strong customer. I think what has taken place this quarter is you see a revenue recognition timing issue to where AT&T has deployed a lot of far away products. And they’re seeing an improved outlook in their spend and in their revenue for the quarter. And Powerwave, where maybe slightly, as you know, added that from product shipping into the network perspective. Business relationship, product quality, everything seems to be very strong. They’re still well above a 5% customer, and very close to a 10% customer this quarter.

Tony Wallace – East Shore Partners

Okay. So then, would you say that in forward quarters that we expect to see them pop back into the 10% category?

Ron Buschur

If they start spending and move forward, I would certainly hope to see them move up to that area, yes.

Tony Wallace – East Shore Partners

Okay. You talked about the capital issues around the globe. And obviously, that’s a bigger issue in the Asian markets. What about in the US markets? Were the carriers, besides AT&T, in the US market, they don’t – most of the larger ones don’t have the issues of raising capital to do their normal wireless expansions and investments. What’s going on with those carriers?

Ron Buschur

Well they’re just concerned about the uncertainty in the marketplace, same as the rest of us are, Tony. I think if you listen to what Verizon said, they’re going to be – they’re pulling back slightly on what they want to spend. AT&T said that they’re going to spend less this quarter than they did last. But they were – their plans to continue to build out the network were forward-looking. T-Mobile I think is probably the one that’s continued down the path, but certainly has slowed down now. Sprint, I think you know enough about that. I’m not sure that’s a relative gauge, at least today, to what’s going on in the overall operator market from a spend perspective. I think they’re re-issuing and re-looking at their strategy and their deployment efforts. And they’re really focusing their efforts and spending off part of that with clear wire moving forward for WiMAX initiatives.

Tony Wallace – East Shore Partners

Sure, sure. And when we look at Lucent, the business with Lucent, that’s down this quarter, is that also tied to the same types of trends that we’re talking about on macro trends? Or are we at a peak in the delivery cycle there? What can we expect with Lucent?

Ron Buschur

Well I think, as we said, there was a peak at some of the products because we had a transition from one product segment to another, and within our product family to where we knew we were seeing a peak in that. And we kind of cautioned you and the rest of the analysts a couple of quarters ago regarding that peak. And the other piece, I do think that they have some concerns as well within their customer base and some of the challenges of growth that they’re trying to focus on and address. And that has had an effect on us.

But I think they’ve got some areas that they’re focusing on. I think they announced a few wins recently, so. We certainly believe that they’ll return and to the levels that we would like to see. I don’t know if they’ll necessarily return to the levels that we peaked at, Tony, that you were referring to.

Tony Wallace – East Shore Partners

So would you say you’re visibility there – could you describe your visibility there looking at the coming – the quarter that we’re in now, possibly the quarter after that? Would this be a trough in the cycle?

Ron Buschur

Well I wish – I’ll be honest, I don’t have visibility past this quarter, Tony, to give you that assessment. No one’s really looking out and trying to give that type of view. I would say that Q3 is a run rate that was a little bit disappointing for us, but yet we do believe that there is some potential offside based on some of the wins that they have announced.

Tony Wallace – East Shore Partners

Okay. And then, just one more, if I might, it’s – we all look at data as a major driver for wireless expansion around the world. And if you look in times of turmoil, which we’re experiencing now, which is affecting consumer spending patterns, and we see that in all the data in all the data that comes across. Are you getting into discussions with your customers or getting a sense from your customers that they feel that the data spend by their customers could be something that becomes scrutinized, and that that’s a possibility of a place with they look to cut back, and maybe their wireless broadband service, they forego it? Being that said, a strong growth driver, I would imagine that’s also something that they have to be concerned about, the continued response from their customers?

Ron Buschur

Well that’s certainly a good question. I guess I would look at it a little bit differently maybe, Tony. I think what we’re hearing from some of the operators, that segment, they’re not as concerned about because they think in this time of crisis and the time of trying to understand what’s going on in the macro environment, people are trying to collect and get more information versus less to make good decisions. And many of us are out in the ballot during this period of time, touching base with our customers, trying to understand what’s going from a global perspective. So we are more mobile in what we possibly were prior to this type of turn down.

So I don’t think that the operators are looking at it that way. You might say that that’s maybe a discretionary area we’re funding within companies would be scrutinized. But I don’t think they’re viewing it that way.

Tony Wallace – East Shore Partners

Okay. Well, that’s all for me. Thank you, gents.

Ron Buschur

Thank you.

Operator

This concludes the Q&A section of today’s conference. I would now turn the call back over to Mr. Buschur for closing remarks.

Ron Buschur

I want to thank everyone for joining us today, and your continued interest in Powerwave Technologies. We look forward to sharing with you our results for the fourth quarter of 2008.

Operator

Thank you for your participation in today’s conference. This concludes the presentation, and you may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Powerwave Technologies, Inc. Q3 2008 Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts