Alvarion Ltd. (USA) Q1 2006 Earnings Conference Call Transcript (ALVR)

Alvarion Ltd., (ALVR)
Q1 2006 Earnings Conference Call
May 10, 2006, 9:00 a.m. EST Executives January 1, 0000 ET

Analysts

George Iwanyc, CIBC
Rick Church, Unterberg
Daniel Meron, RBC Capital Markets
Erik Zamkoff, Morgan Joseph
Troy Peery, Oppenheimer
Ehud Eisenstein, Oscar Gruss
Gunther Karger
Steve Ferranti, Stephens, Inc.
Kevin Dede, Merriman
Robert Gobel

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alvarion First Quarter Earnings Release. At this time, all participants are in a listen-only mode. Later, we will open up the lines for questions and answers. If you should require assistance during the call, please press “*” then “0”. As a reminder, today’s conference is being recorded. And at this time, I’d like to turn the conference over to your host, Carmen Deville, to read today’s Safe Harbor. Please go ahead.

Carmen Deville, Investor Relations

Thank you very much operator and good morning everybody. Welcome to Alvarion’s First Quarter 2006 Results Conference Call. I’m Carmen Deville, Investor Relations for Alvarion, and together with me today are our CEO, Tzvika Friedman, and Dafna Gruber, our CFO. The earnings release was issued this morning and is now available on all major news feeds.

Matters discussed in this conference call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations or beliefs of Alvarion’s management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

The following factors among others could cause actual results to differ materially from those described in the forward-looking statements. Inability to further identify, develop, and achieve market success for new product, services and technologies; including the WiMAX and cellular mobile product offerings, increased competition and its effects on pricing, spending, third-party relationships revenues, as well as the inability to establish and maintain relationships with commerce, advertising, marketing, and technology providers, as well as other risks detailed from time to time in filings with the Securities and Exchange Commission.

In addition, our limited history in completing acquisitions may adversely impact our ability to successfully integrate the businesses of Alvarion and interWAVE, and we may face liabilities and expenses in excess of those currently anticipated with respect to the acquisition of interWAVE. After all of that, I’d like to turn the call over to our CEO, Tzvika Friedman. Tzvika, please go ahead.

Tzvika Friedman, Chief Executive Officer

Thank you. Good morning everyone. On today’s call, we would like to discuss our results from the first quarter 2006, share some examples of our continuing leadership in WiMAX, and talk a little about the factors that will affect us in the coming quarters.

Alvarion continues to focus strategically on two main businesses -- fixed BWA including WiMAX and mobile WiMAX. As you know, we see fixed and nomadic WiMAX as an important strategic and we will have BreezeMAX available in additional frequencies in the second half of this year. I will discuss what is happening in this area in detail in a moment. We also see huge potential for mobile WiMAX and we are one of the few vendors positioned to address both markets.

In the first quarter, we increased our BreezeMAX revenue, significantly reduced the non-GAAP loss and the cash burn, reported gross margin above our targets, and continued our sequential revenue growth. This represents good progress because the first quarter tends to be a seasonably weaker quarter. Our non-WiMAX broader wireless business was steady and the only disappointment this quarter was the performance of the cellular mobile unit, which I will address in a moment.

To add a little additional perspective to the rate of adoption of WiMAX, we checked and found out that we have more than $50 million of revenue from BreezeMAX solutions so far. This included first quarter when WiMAX revenue increased again to about 28% of total revenues for the quarter. But even more important is the way the revenue is spread among the wide variety of customers all round the world in 55 commercial deployments and close to 100 active charts. Among the 100 of WiMAX customers, we have some operators that are expanding their network for the second or third time, others have completed trials and are waiting for spectrum to be awarded, and some that are just beginning new trials.

The breath of our WiMAX customer base is a major advantage that is not well understood. We think of it as planting many seeds, which can sprout and grow significantly in the future. Working with so many different operators also provides better and faster understanding of customers’ applications and requirements.

Now, we’d like to talk about some of the major developments by region. Our strongest region continues to be EMEA. The innovative challengers continued to expand the WiMAX network in Western Europe. These are the next-generation carriers that are the first to adopt new technologies. We added new customers in Scandinavia and Italy during the first quarter. We are also seeing initial orders from Central and Eastern Europe where spectrum has recently been allocated such as Poland, Ukraine, and Russia. Tier 1s are among the many applicants who are licensed in France and Germany. They are also conducting trials and we have five of these trials going on with Tier 1 operators in Western Europe.

Based on the face of the license and allocation process, we make the orders before the end of the year with revenues in 2007. In addition to EMEA, Latin America continues to be one of the strongest markets for WiMAX. We have commercial WiMAX deployments in six different countries in Latin America and trials going on in several more.

In India, we are working with all the major operators that have 3.3 Giga licenses. We are in the early stages of commercial deployment with two operators and we are active in trials with the others.

Lately, we are starting to see some return on our investment in China. We are working on several WiMAX trials in several provinces with large Chinese operators. One of the trials has already materialized into commercial orders. The operator is targeting the lower enterprise users and high-end individual users.

In North America, the municipal market is continuing to get a lot of attention and is growing quite rapidly. It is really two different markets: One, where low cost civic access is the driver, and the other which is focussed on productivity gains and public safety. On the civic access site, we provide the high-capacity, municipal network that is being used to feed all these mesh clouds you are reading about. Recent example includes Corpus Christi, Madison Wisconsin, and several others. On the public safety side, not only are we providing a municipal network, but we are also able to provide mobile access to vehicles like police cars and other emergency vehicles using our 900 Megahertz mobile solutions. A good example of this is our present project where we also worked with IBM.

Today, we announced that we have formalized our strategic partnership with IBM. IBM is the major solution provider to enterprise, communities, municipalities, etc. They are one of the major users of wireless WiFi technology in this segment and have identified the need for broadband wireless infrastructure in this segment. We are pleased they have chosen us as their worldwide partner to a address this segment.

In addition to the municipal market in the U.S., we are concentrating on the high-end risk and the Tier 2 operators, leveraging our relative advantage in product to this market. Meanwhile, Tier 1 prospects in the U.S. and around the world are taking up a lot of our time while generating very little revenue. We are working with several large carriers in the U.S. on various projects, which include numerous opportunities. Sales cycles are very long and most of the Tier 1 carriers are looking towards the availability of 802.16e base solution for various types of applications -- fixed, nomadic, portable, and mobile. We believe we have a comparative advantage mainly by offering the solution now that can evolve along with standards and the certification process. We expect to have our first solution for the 802.16e in trials before year end. Meanwhile, we will be building our four-motion echo system with additional strategic relationships, which we hope to finalize in the same timeframe.

We are on track for certification of our existing product as planned this quarter, followed by the release of our self-install stock solution, which is currently in trial with several customers.

Now, a few words about competition. As the industry leader, we have various types of competitors, large and small. This is another indication that WiMAX is gaining momentum. Those vendors that aren’t ready with a working solution are trying to freeze the market by over promising on future capabilities and features. Although it’s frustrating and maybe delaying certain orders, we believe our overall position in the market is unchanged as illustrated by this example. A customer that initially chose another vendor came back to us when that vendor’s product did not perform as promised.

Before I turn the call over to Dafna, I’d like to say a couple of words about the cellular mobile business. As you know, we have not been satisfied with the performance of this unit, although we have made some progress in improving the product and operating performance. During the second quarter, we have found the level of new orders disappointing, mainly from the CDMA side. Long term, CDMA can be a good business, but one that will require significant investments. Therefore, we have decided to concentrate our attention on making the GSM business cash flow positive while continuing to support all kinds of customers. We have already gained a lot of know how in mobile systems, which was one of the benefits of acquiring this business. So, in light of the user opportunity we have in WiMAX, we believe it is important to be focussed and concentrate our resources where the big opportunity is.

To summarize, we see WiMAX continuing to grow and we strongly believe that we are well positioned in WiMAX. We have some important product introduction coming in the second half of the year and we are working on some very large opportunities. We continue to focus on a business for stability and growth.

Before we open the call to questions, I’d like to ask Dafna to give you some additional financial perspectives on the quarter. Dafna…

Dafna Gruber, Chief Financial Officer

Thank you, Tzvika. Hello everyone. First quarter revenue was $48.1 million, within the range of our guidance. This represents a sequential increase of 3%. EMEA accounted for about 60% of revenues, North America to about 20%, Central and Latin America to about 15%, and Asia-Pacific to 5%, similar breakdown as last quarter. Direct sales accounted for about 43% of revenues, distributors increased to about 46%, and OEMs represented the remaining 11%. As you know, this quarter, we adopted FASD 123R. The aggregate impact on net income in the first quarter was $1.5 million and we expect approximately this level and higher of option-related expenses going forward. This expense actually shows up in several different line items in the P&L and we will refer you the reconciliation table attached to the press release for details.

Now, for purposes of comparisons to prior periods, we will refer to non-GAAP numbers that exclude the impact of adopting this rule, amortization of intangibles and one-time items. Our gross margin was 46%, up from 45% in the fourth quarter and better than our long-term target which continued to be 45%. Total operating expenses were similar to the fourth quarter. Excluding the amortization and one-time charges, non-GAAP net loss decreased by about 30% to $2.4 million or $0.04 per share in the first quarter, which was within the range of our guidance. This is an improvement from a non-GAAP loss of $3.8 million or $0.06 per basic share in the fourth quarter.

Turning to the balance sheet, cash and cash equivalents were $109 million at the end of the first quarter. We continue our operations expectedness and our inventory was down again this quarter, this time by about $5 million, and our DSO was stable at 76 days.

As we Tzvika mentioned, during the second quarter, we’ve noted that the level of new orders from the cellular mobile unit will come even lower than we’ve previously anticipated. This event has triggered goodwill and other intangible impairment analysis. We started this analysis and reported that it usually takes few weeks. As of our most recent annual impairment test, the intangible assets attributable to the CMU were around $30 million, but at this point we cannot advise reasonable estimate of such potential impairments if any.

In the second quarter, we expect revenue in the range of $48 million to $52 million. Based on this revenue level, we expect non-GAAP net loss per shares, which excludes amortization, the effect of the stock option expensing, and possible charge for the CMU business to range between $0.02 and $0.05.

Now, we would be pleased to take your questions.

Question-and-Answer Session

Operator

All right, ladies and gentleman at this time, we will conduct our question and answer session. If you wish to ask a question, please press “*” then “1” on your touchtone phone. You may remove yourself from queue at any time by pressing the “#” key. Once again, if you have a question please press “*” and “1” at this time.

And our first question comes from the line of CIBC World Markets from George Iwanyc. Please go ahead.

George Iwanyc, CIBC

Good morning Tzvika and Dafna. If you look at the…(inaudible) can you characterize the timing of the changes there and give us a sense of what backlogs look for…(inaudible).

Dafna Gruber, Chief Financial Officer

George, we are sorry we couldn’t hear the question.

Tzvika Friedman, Chief Executive Officer

Acoustically, there was a problem.

George Iwanyc, CIBC

I’m sorry, let me try and ask again. When you look at the cellular business, what timing do you expect for the changes there, and can you give a sense of what the backlog looks like by the technology for GSM and CDMA?

Dafna Gruber, Chief Financial Officer

I’m not sure I got the question, but I’ll try to answer what I got out of the question. We saw during April that the pipeline for passing orders was lower than we originally thought and several of our deals that we were hoping to be able to conclude were not there and this is the main reason we’re going with this announcement right now. We’re currently doing an evaluation of the status of the business in order to get a better understanding of what we need to forecast for the near future. We believe the GSM special application business is a good business that we intend to put a lot of focus on. We also intend to continue to support our existing customers, but at this point we should probably expect lower revenues than we previously anticipated.

Operator

Thank you and our next question comes from the line of Rick Church from Unterberg. Please go ahead.

Rick Church, Unterberg

Thanks. Can you tell us what the cellular revenues were at the quarter and how does that split between GSM and CDMA?

Dafna Gruber, Chief Financial Officer

The revenues for the CMU were $4.5 million, the majority of it coming from the GSM business.

Rick Church, Unterberg

Okay. With the second quarter outlook, do you expect the $4.5 million to come down sequentially?

Dafna Gruber, Chief Financial Officer

We are currently evaluating the level of business going forward, but we believe that approximately this level should continue or even improve.

Rick Church, Unterberg

Okay, with regards to the overall guidance of $48 million to $52 million, could you talk about…basically it’s flat to slightly up…can you talk about why given the improvement on the WiMAX side?

Dafna Gruber, Chief Financial Officer

I think, in the second quarter, we expect to see some more improvement in the business which represents the majority of our business, which is the BWA and WiMAX business, and actually all the potential growth we are indicating is coming from this side of the business. We also showed good improvement this quarter in the BreezeMAX revenues and we expect BreezeMAX to continue to be the main generator of growth going forward.

Rick Church, Unterberg

Do you expect the more traditional areas to be flat or to decline sequentially, is that offset by growth in the newer areas?

Dafna Gruber, Chief Financial Officer

In the first quarter, the business which is not WiMAX business was about flat and most of the growth came from the BreezeMAX side.

Rick Church, Unterberg

Okay, on gross margins, nice improvement there, can you talk about what drove the strength in the near term?

Dafna Gruber, Chief Financial Officer

There were two main reasons. First of all, the mix of product and mix of business between the different product lines, and since we sold a large number of products with various applications, this changes from quarter to quarter, 1% or 2% up and down should be expected, and also the revenues will be between very large number of operators with relatively small deals, and sometimes we make better margins on these type of deals.

Rick Church, Unterberg

Do you think we will see 46% again in the second quarter or it will come back more to the normal long-term goal?

Dafna Gruber, Chief Financial Officer

We are planning on the long-term goals and as I said there might be fluctuations in our gross supplies, but we are basing our business model on 45% gross margins.

Rick Church, Unterberg

Okay, thanks a lot.

Operator

Our next question comes from Daniel Meron from RBC Capital Markets. Please go ahead.

Daniel Meron, RBC Capital Markets

Thanks. Can you provide some light on the competitive landscape that you talked about earlier, who do you see more out there? Some of the operators had some announcements both on trials and on new product launches, if you can refer to that. And also on the CMU side, you referred to the weakness or lagging trend there, is it mostly demand issue, execution or more competition that you see in the market place?

Tzvika Friedman, Chief Executive Officer

Okay, I’ll start with the first one. As I indicated, we have a variety of competition. It could be a small vendor going into the market with a WiMAX solution for a specific niche. And as you indicated, it could be large players promising to come with a solution towards the end of the year based on the “e” solution, and actually we have both competitions, it depends on the specific market. As we indicated, we are targeting our market and our strategy on the long term and we are ready with a solution to address the market, which is based on the “e” standard, even if it’s a fixed market…

Daniel Meron, RBC Capital Markets

Yeah, also regarding the CMU business is it mostly execution or demand, is it competition, what is reason for the lagging revenue there?

Tzvika Friedman, Chief Executive Officer

It’s a combination of issues that the market and the demand in some area and competition in some of the businesses, mainly in the CDMA. As a company, we are more and more focussed around the WiMAX.

Daniel Meron, RBC Capital Markets

Any changes to the OpEx that you expect within the next couple of quarters, either from the cost of goods sold or from the operating expenses themselves, because of this shift in focus?

Dafna Gruber, Chief Financial Officer

Regarding the gross margin we continue to target 45% as our targeted gross margin and any change from that would be really dependent on the structure of the coming business, mix of product lines, and size of deals. Regarding the operating expenses, we have a certain moderate growth in expenses planned for the future in a rate which is somehow much smaller than the rate which we hope the revenue would grow, and we are currently evaluating our position in the cellular mobile unit, but it looks to us that even if we make certain changes in areas of investment it would probably not change the overall picture.

Daniel Meron, RBC Capital Markets

Okay, thanks Dafna, and last one from me. Tzvika, maybe you can you relate to the partnership you announced with IBM, what market specifically you’re looking to, it sounds like it’s more municipal and public safety, but could it expand? And also other partnerships in the pipeline, where do you stand there? Thank you.

Tzvika Friedman, Chief Executive Officer

First of all, let’s start with IBM. IBM, we specifically have a partnership around the municipality market, in the public market, and this is initially focused in North America and Latin America, and we’ll expand from there to other areas. Naturally, when you have a relationship with partner and it is around wireless other things come up and it may develop to an even bigger partnership around the WiMAX in specific areas. Regarding other partnerships, we are working on different corporations, both technology corporations and go-to-market corporations, and as we discussed, we believe we’ll make progress and will be announcing some at the end of the year.

Daniel Meron, RBC Capital Markets

Great, thank you, Tzvika and Dafna, and good luck going forward.

Dafna Gruber, Chief Financial Officer

Thank you.

Operator

Okay, and you have a question from the line of Erik Zamkoff from Morgan Joseph. Please go ahead.

Erik Zamkoff, Morgan Joseph

Hi, good morning. I was wondering if you could give us an update on the spectrum allocation process, also your certification process. And in addition, could you talk to your strategy with regard to offering fixed applications on the mobile standards and whether that gives you a competitive edge over some of the other players out there?

Tzvika Friedman, Chief Executive Officer

Okay, first regarding band allocation, I think that in many new areas things are discussed. There is some progress in the Mexico. To give you an example of France and Germany where there are many applicants and there’s a lot of noise about it in the local press about applicants, both Tier 1s and operators as well as sometimes local municipality asking for licenses. I think it’s in the last stages in France and later on in Germany. Other places are progressing, but I don’t recall a specific one that was allocated this quarter. The process is there, the process in many places is 2.5 Giga. In the U.S., as you know, there is a coming allocation also in the 700 MHz which could go to WiMAX soon. Regarding certification, as we indicated, we are going through the certification process this quarter, targeting to have the certified product this quarter. It is part of our original plan and to meet the planned schedule is our commitment to our customers. So currently, we are on our plan. Regarding the last question, naturally, as we indicated, even if you remember six months ago in the conference call, we indicated that we see that in the long term this industry will be based for fixed, nomadic, portable, and mobile on the “e” standard, because this is standard that most of the future investments into new chips and new developments will come through. This is why we are targeting our TBD solutions around the e-based standard. It doesn’t mean they are mobile, but we support both fixed and mobile basically. We believe we are in a unique position where we can provide a solution now, but it’s our greater goal to the e-based standard in the future.

Erik Zamkoff, Morgan Joseph

Okay and one last question, could you give us an update on the self-install CPE and where we are trials versus production?

Tzvika Friedman, Chief Executive Officer

Okay, the self-instal CPE during the first quarter was already in trial with several of our customers. It’s coming out this quarter with a few customer, and probably towards the end of the quarter or beginning of third quarter we’ll have what we call general ability for commercial deployment.

Erik Zamkoff, Morgan Joseph

Great thanks.

Operator

Thank you for your questions. We have a question from the line of Troy Peery from Oppenheimer. Please go ahead.

Troy Peery, Oppenheimer

Hi. How many CDMA customers do you currently have, active customers?

Dafna Gruber, Chief Financial Officer

We have several CDMA customers.

Troy Peery, Oppenheimer

Several?

Dafna Gruber, Chief Financial Officer

Yes.

Troy Peery, Oppenheimer

And Dafna, you touched on it, but maybe a little more specific, how do you think that concentrating more on the GSM part of that business might impact your operating expenses and your margins this year? I’m just trying to get a sense of how much you might think about saving from shifting away from CDMA versus how much it will cost to continue supporting that?

Dafna Gruber, Chief Financial Officer

Actually, we are now in the process of looking very closely into this issue in order to see exactly how to build the model going forward. As you know, the main focus is going to be on the GSM special applications segment of the market.

Troy Peery, Oppenheimer

It seems like the expense side of CMU as a whole might be not as evenly split as the revenues between CDMA and GSM, so would it might be reasonable for us to expect some savings from this longer term, maybe towards the start of next year?

Dafna Gruber, Chief Financial Officer

That’s a possibility, but I think we are still in the evaluation of what we want to do. I think it’s important to know that what we want to do is continue to invest as much as possible in the WiMAX, especially mobile WiMAX applications, and I believe that if there’s going to be some savings we will probably use them for those purposes.

Troy Peery, Oppenheimer

Okay, great. Now with the impairment that you’re thinking about taking, I know you might not, but does that relate to the CDMA specifically or…

Dafna Gruber, Chief Financial Officer

No, we have actually divided the business into two segments of activities, and the goodwill we have on the balance sheet is allocated between the BWA part and the CMU part, and the level of CMU kind of represents goodwill that is related to both GSM and CDMA, and based on the last analysis we’ve done about six months ago, this part involves about $30 million on our balance sheet.

Troy Peery, Oppenheimer

That’s the CMU total?

Dafna Gruber, Chief Financial Officer

CMU total, yes.

Troy Peery, Oppenheimer

But the impairment that you take might not necessarily speak to all assets equally?

Dafna Gruber, Chief Financial Officer

That’s right, but we are still in the beginning of that process.

Troy Peery, Oppenheimer

Okay, fair enough. Before I drop this issue, one last question; should we think of this as more or a less a permanent shift strategically from that part of the market rather than just a temporary de-emphasis from CDMA?

Dafna Gruber, Chief Financial Officer

I’m not sure I got the question.

Troy Peery, Oppenheimer

So, the shift in focus away from the CDMA part of the business and that set of products, is that really a more or less permanent shift away or is it a temporary means of focusing on near-term accretion and getting that CMU cash flow positive?

Dafna Gruber, Chief Financial Officer

I think we look at this business with both GSM and CDMA. We look at both from the short term and the long term. What we see in the short term is the level of business that we’re expecting in the long term is not as high as we want it to be, and we also see that in order to make some more substantial business in the CDMA we will require to do large investments. And therefore when we evaluate everything together, it seems to us at this point that we probably need to continue to focus on our main business, which is the WiMAX business and make some changes in our focus going forward.

Troy Peery, Oppenheimer

Okay, very good, I have a few more and I’ll circle if they don’t get at it. Thanks a lot.

Operator

Thank you for your question, and we have a question from the line of Ehud Eisenstein from Oscar Gruss. Please go ahead.

Ehud Eisenstein, Oscar Gruss

Hi guys, nice to open the BreezeMAX revenue in the quarter. I’m just wondering how much revenues from WiMax are you incorporating to second quarter guidance?

Dafna Gruber, Chief Financial Officer

We have an order of about $7 million that is going to be spread over the next few quarters, so probably $1 million or $2 million in the second quarter and the rest throughout the U.S.

Ehud Eisenstein, Oscar Gruss

Okay, and underlying your presentation, the press release that you released earlier today saying that you’re developing the promotion in conjunction with leading provider of core network and IP technology, do you mind giving us some more color on the leading provider of core networks?

Tzvika Friedman, Chief Executive Officer

Full Motion is the mobile solution where actually you can divide the full mobile WiMAX solution into having core routers as well as core mobile networks, which as Home Agent, AAA Server, IMS, and so on. We are first of all working with the WiMAX with few companies and among them are Intel and Cisco, in defining the standards for an open interface between these elements. You can mix the best features of these elements together. In addition to that work and working with some of these partners on how a full network would look like, we are working with other potential partners to provide components to this mobile solution.

Ehud Eisenstein, Oscar Gruss

I see, and you said Intel and Cisco, right?

Tzvika Friedman, Chief Executive Officer

This is an example of who we work with strongly on the standard bodies. The other technology partners provide solutions which I did not discuss.

Ehud Eisenstein, Oscar Gruss

And you mentioned Tier 1 U.S. operators earlier, can you just give us some more color here, are they thinking to start deploying the “d” or do you think that they’re waiting for the “e”, obviously is in the spectrum issues?

Tzvika Friedman, Chief Executive Officer

First of all, what all of us are seeing is that each quarter we have less operators because they are consolidating. I think that the plan today of diverging depends on the type of the operator. There are operators who are looking for what we call a Tier 1 access replacement because they don’t have the access to the businesses which they have serviced. There are those who want to fill the hole and there are those who would like to start offering nomadic portable wireless GSM solution. In general, regarding the question about the standard, we are releasing products in the 2.5 and 2.3 Giga in the second half of this year, and these products are moving to be based on a standard which is 802.16e. So it doesn’t mean they are looking for mobile solutions, but they want to see it based on the standard that they and we believe, especially in these bands and the TDB is the standard that will be the required standard.

Ehud Eisenstein, Oscar Gruss

Okay, thank you so much.

Operator

Thank you for your questions, and we have a question from Gunther Karger.

Gunther Karger

Yes, thank you and good morning, two questions. The first is the focus on the current quarter, near term to a more longer view, regarding this current year, I think last year the revenues for WiMAX were around $50 million, the worldwide numbers. This year I understand is around $500 million and when it goes into the billions in two to three years ahead, Alvarion being the leader in this business with a certain market share and given the competition, over the next two to three years what would you expect — and I’m not asking for revenue numbers — but what would you anticipate the growth rates to be above the current base revenue, let’s say the projected current year revenue going forward for the next two to three years? That’s my first question.

Tzvika Friedman, Chief Executive Officer

I think the market is expected to grow between 15% and 30% this year. It also depends on what you put into the WiMAX. I would put a different view on the mobile WiMAX and a different view on the fixed nomadic WiMAX. Mobile WiMAX I expect only commercial trials in 2007 and actually growth in the market probably in 2008 if I exclude Korea. Regarding the growth rate, as I indicated, is between 15% and 30% of the fixed nomadic WiMAX, and I think in order for the inflection point to happen a few things need to happen in the industry like frequency allocation and operators finishing their trials, and the solution available in WiMAX both self-instal and in more frequencies.

Gunther Karger

Thank you and the second question has to do with the cellular system that you discussed already with regard to the interWAVE acquisitions specifically. Given what you know now and what you anticipate seeing, what do you expect is going to happen to your California operation, do you expect that to be retained by the company or immigrated somewhere else or used as part of your North American expansion regardless of the product line?

Tzvika Friedman, Chief Executive Officer

Our North America organization is already consolidated. There’s one organization achieving all the synergies and we continue to support this business in the CMU to make the GSM, as we indicated, a cash contributor, and our strong U.S. position will continue to be there supporting our customers and growth in the U.S.

Operator

All right, thank you, and we have a question from the line from Steve Ferranti from Stephens. Please go ahead.

Steve Ferranti, Stephens, Inc.

Hi guys, good morning. I think that in your script you had mentioned an operator in China that moved from trialing equipment to actual deployment, can you give us an idea of the scale of that deployment at this point?

Tzvika Friedman, Chief Executive Officer

First, I want to explain that there are trials and we had trials in China for quite a while with few of the large operators as I indicated. From our history and I would call it common history, we never know how fast they would move. This one is a good indicator that they moved from a trial to a commercial deployment with real application. We expect it to contribute few millions of dollars.

Steve Ferranti, Stephens, Inc.

Okay, and I’m assuming that’s fixed equipment?

Tzvika Friedman, Chief Executive Officer

This is fixed equipment, our BreezeMAX product.

Steve Ferranti, Stephens, Inc.

Got you, and it sounds like beyond that particular opportunity you had some other trials going on in that region as well, is that right?

Tzvika Friedman, Chief Executive Officer

We have other trials going on in China and Asia-Pacific in general, yes.

Steve Ferranti, Stephens, Inc.

Okay, great. And then in the past you talked about sort of year-over-year growth in the 15% to 30% range, given the somewhat slower start to the year and that implies some fairly strong second half growth, does the opportunity pipeline that you’re seeing today kind of still support that view?

Tzvika Friedman, Chief Executive Officer

First of all I want to be very clear. We did not give the guidance of such growth for 2006. We gave indications that the outlook going forward may grow and show growth and inflection point when widespread availability of certain stored solutions will be there and more the consumers has been awarded and the operator actually moving ahead, and having a solution in more frequencies. Regarding what we see, we see more trials, more RSPs, and more and more intentions to move forward. We also see, however, some confusion in the market with the customer waiting for the 802.16e solution, which will only be available towards the end of the year.

Steve Ferranti, Stephens, Inc.

Okay, and then just one final question, does the impact of the Lucent-Alcatel merger, how do you see that affecting your partnerships with those OEMs? Thanks.

Tzvika Friedman, Chief Executive Officer

Both Lucent and Alcatel are our partners and our partners for the fixed solution. For our fixed solution, we don’t see it affecting us. We do expect that for projects which are going from fixed and have opportunities to be a mobile solution potentially affects us as Alcatel are developing a mobile WiMAX solution. Therefore, with our arrangement with them on such deals, we are taking special care to guarantee Alvarion’s future interests.

Steve Ferranti, Stephens, Inc.

Thank you.

Operator

Thank you for your questions, and we have a question from the line of Kevin Dede from Merriman. Please go ahead.

Kevin Dede, Merriman

Congrats Tzvika and Dafna on the sequential growth. I think that’s positive in the core usually. I know you said that you planned on having certified products in the second quarter. Do you think you’ll be shifting for revenues with certified products at the end of this quarter?

Dafna Gruber, Chief Financial Officer

Yes, we plan to start shipping products based on certification later this quarter or during the third quarter.

Kevin Dede, Merriman

Okay. Dafna, you mentioned a potential mark down on assets on the CMU side, would that have any implication with regard to the revenue you need to break even and what do you see that break even revenue target?

Dafna Gruber, Chief Financial Officer

The charge for employment is usually a non-cash charge that is not correlated to the operational expenses. We’re apparently looking on that business to see how exactly it will look like in the future, and we’re doing this analysis right now.

Kevin Dede, Merriman

I noticed a 16% year-over-year decline in revenues and the press release talked about a big customer in the March quarter. I just presume last year that was TellMax, I guess what I don’t understand is how your sales mix is changing and why we’re not seeing more year-to-year growth?

Dafna Gruber, Chief Financial Officer

I think that if we compare the first quarter of 2006 to the first quarter of 2005, we need to remember we had a very large portion – if I remember correctly it was over 20% coming from one specific customer – and in order to look at the year over year, we need to take it into consideration. What we also see is that starting the third quarter of this year, we’re showing some sequential improvement from quarter to quarter and hopefully given the guidance we’ll see some more revenue coming in the second quarter. I think that in order for additional growth, we have different parameters. And this is what we’re been saying for a few months now, we believe we have the ability of certain core solutions would push significantly this market and issues that are now pending, we see some improvement there, and also WiMAX solution which are available in addition to the frequencies, once all of them happen it should push revenue to show better growth.

Kevin Dede, Merriman

With the onset of certified products, are your customers more excited about your offering, is there any indication that there is any change in reception from your customers, and how do you plan on defending your gross margin with certified products?

Tzvika Friedman, Chief Executive Officer

First of all, as we indicated in the past, there was never an issue with certification with our current customers, because all our customers knew that they could move to a certified product by software. Regarding the market and new opportunities, sometimes we have a challenge in explaining it, but with the plans of coming in with certified products, this has not been an issue with anyone.

Kevin Dede, Merriman

Okay, thank you for taking my questions.

Operator

Thank you for your question. And we have a question from the line of Robert Gobel. Please go ahead.

Robert Gobel

Good morning, thanks for taking my call. Just a couple of quick questions in regards to the IP portfolio around BreezeMAX, is there an IP there that we can discuss in terms of protecting that solution as the competition continues to increase?

Tzvika Friedman, Chief Executive Officer

We have a very extensive IP around our BreezeMAX for VMA, wireless, broadband, fixed, and networking patterns, which makes us to believe we have a strong proposition overall in this segment.

Robert Gobel

Have there been any challenges to date in terms of your relationships with the existing OEMs?

Tzvika Friedman, Chief Executive Officer

No.

Robert Gobel

Okay, and just so I understand in terms of the revenue drivers, there have been a couple of questions in regards to the various moving products on the growth rates, I think in your press release to disclose that BreezeMAX was now almost 30% of revenues, so I get about $13.5 million to $14 million in revenue for the quarter, is that correct?

Tzvika Friedman, Chief Executive Officer

Yes, that’s correct.

Robert Gobel

And when you talk about the traditional product lines, is that everything ex-BreezeMAX or are there other what you classify to be WiMAX products in that product portfolio?

Tzvika Friedman, Chief Executive Officer

Those are not BreezeMAX.

Robert Gobel

So, everything ex-BreezeMAX is considered a traditional product line?

Dafna Gruber, Chief Financial Officer

Yes, although it includes a significant part of our VL product which is on OFDM-based product and…

Tzvika Friedman, Chief Executive Officer

…WiMAX, OFDM is very close to WiMAX in address specifics, wireless DSL WiMAX application.

Robert Gobel

And that would be similar to the initial product deployments at TellMax?

Tzvika Friedman, Chief Executive Officer

The initial product deployment in TellMax was a product called EMGW which was targeting voice and voice-based applications. It was mainly a telephonic plus based application for sub-urban areas, and the VL product is more a wireless DSL, internet access for businesses, and it’s in the unlicensed band covering both 5.3, 5.4, and 5.8, and also what is semi-licensed in the U.S. on the 4.9 Giga product for public safety. The VL for example is a product that you use in many cases in the municipal market I just explained. For example being the single point feeding as a point-to-multipoint for mixed WiFi solutions.

Operator

Thank you, and we’ll move to Mickey J. Gregor from September Group Partners, please go ahead.

Mickey J. Gregor, September Group Partners

Hi guys. I have a question with respect to your migration to mobility. I understand that you’re currently positioning the new offering with the upgrades of that to mobility going forward. I was wondering would that require the hardware change or are you talking about software upgradability profile in your products? Thank you.

Tzvika Friedman, Chief Executive Officer

It’s a combination of things. It depends on where you start or where you want to go to in the upgrade. They are in the mobility solution requirements, what we call to manage handles, and in a standard there is something which is called ASM gateway which handles between mobile base stations. And naturally if someone starts with the fixed solution, we don’t expect him to buy this as well, but optimize the solution to that. So there is some hardware you have to add. Also it depends where you want to upgrade the solution. You can start with the solution with no diversity of smart antennae and then in the future if you want to add diversity then you probably need to add the radio head. So it’s a combination. But on the main product, things are software upgradable as well we indicated, towards the end of the year, we’re going to introduce CPE based on a new chipset which we’re working on with Intel, and that will allow a migration by software over the CPE from a “d” standard to an “e” standard.

Operator

Thank you and we have a question from the line of Rich Church with Unterberg. Please go ahead.

Rick Church, Unterberg

Thanks. Regarding your comments earlier about certain carriers waiting for the “e” standard even if they’re doing fixed, is that specific to North America or worldwide, and also is it specific to Tier 1s or is it more broad based?

Tzvika Friedman, Chief Executive Officer

It’s usually larger carriers. It depends on the application they are targeting. For fixed application, outdoor, it’s not relevant for application where the customer wants 3.5 FDB solution. It’s naturally not the case because 3.5 FDB is not an “e” in the “e” standard yet. So in many cases it’s not affecting, it’s usually the timing which the carriers see finishing their first cycle and going to commercial deployment. Towards the end of the year and beginning of next year they all want to see it based on “e” standards.

Operator

Thank you and our final question of today will come from the line of Troy Peery from Oppenheimer. Please go ahead.

Troy Peery, Oppenheimer

Quick followup; I’m wondering on IBM, was there anyone else they might have looked at that you can speak to which other potential equipment providers they may have evaluated, and then is there anything exclusive about that agreement on public safety in a municipal type deployment?

Tzvika Friedman, Chief Executive Officer

First of all I cannot disclose who else they were evaluating, it’s up to them to do so. What I can say is that they chose us after we had some successful activity. There’s no exclusivity in the contract but both companies invested in having a common solution and working together both technically and in the market, and I think this is sometimes much stronger than a retail contractual exclusivity.

Operator

And that concludes the Q&A session for today, and I’ll turn the call back over to your Mr. Friedman for any closing remarks.

Tzvika Friedman, Chief Executive Officer

I would like to thank everyone for participating in our call. We thank you very much. Some of you got up very early, and we’ll meet you in the future. Thank you.

Operator

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