Harris Stratex Networks, Inc. F1Q09 (Qtr End 09/26/08) Earnings Call Transcript

Nov.12.08 | About: Harris Stratex (HSTX)

Harris Stratex Networks, Inc. (HSTX) F1Q09 (Qtr End 09/26/08) Earnings Call Transcript October 29, 2008 5:30 PM ET

Executives

Mary McGowan – IR, Summit IR Group Inc.

Harald Braun – President and CEO

Sally Dudash – SVP and CFO

Analysts

Blaine Carroll – FTN Midwest Securities

Stephen Ferranti – Stephens Incorporated

James Faucette – Pacific Crest Securities

Jim Warren [ph] – Morgan Joseph

Greg Weaver – Invicta Capital

Rich Valera – Needham and Company

Operator

Thank you for standing by. Welcome to the Q1 2009 Harris Stratex Networks earnings conference call (Operator instructions) I would like to turn to conference call over to Mary McGowan of the Summit IR Group. Please go ahead.

Mary McGowan

Thank you for joining us to provide the first quarter fiscal year 2009 financial results for Harris Stratex Networks.

On today’s call will be Harald Braun, President and Chief Executive Officer, and Sally Dudash, Vice President and Chief Financial Officer. During this conference call, we may make forward-looking statements regarding our business including statements related to projections, earnings and revenues, business drivers, transition to hide IB infrastructure, timing and capabilities of new products and continued network expansion by private and network operators.

These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information please see the press release and filings made by the company with the SEC. These can be found in the investor relation section of our company’s website which is www.HarrisStratex.com.

I will turn the call to Harald Braun.

Harald Braun

I would like to provide highlights from our September quarter, then I will turn the call over to Sally Dudash to discuss the quarter in detail. I am pleased to report that we achieved record quarter revenues of $196 million in September, our highest level since the merger. We also posted record net income of $5.6 million on a GAAP basis. On a known debt basis, gross margin was 30.8%. Net income was $11 million and earnings per share were $0.19.

By segment, North American revenue was $61 million, International revenue was $131 million and network operations revenue was $3.4 million. We maintained a strong cash position for the quarter at $97 million and posted positive operating cash flow. Once again, we demonstrated strong demand of our product portfolio and service solutions as revenue momentum continued with year over year sales up 14%.

We saw very strong growth in Africa which is up 25% year over year, strength in this region came from existing major customers who continued to expand their network infrastructures. This region is on track for another year of growth in fiscal year 2009. We also saw solid growth in Asia Pacific. This was driven by a rollout from a key customer in Australia which was coupled with sales through the number one mobile provider in the Philippines.

North American remains steady with a 9% year over year increase. We continue to see steady orders and revenue in both the mobile and private sectors in this region. Following record setting bookings last quarter, we were pleased to see continued momentum in August. Our book-to-bill ratio is more than 90% going into the second quarter. With all that, volume exceeding that of the year ago period. Later in the call I will provide comments on our market and our strategy for growth.

Let me turn the call over to Sally to give you the full financial details of the quarter. Sally

Sally Dudash

Thank you, Harald Braun, good afternoon everyone. Let me start with a review of the GAAP financial performance at Harris Stratex Networks for the quarter ending September 26, 2008. First quarter revenue was $196 million and we reported net income of $5.6 million or $0.09 per diluted share. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate comparison of operating results across reporting periods.

Our non-GAAP income statements exclude amortization of purchase related assets, restructuring, and stock compensation expense. Please refer to our web site for complete GAAP to non-GAAP reconciliation tables. For the first quarter of fiscal 2009, these non-GAAP charges totaled $8.2 million and are composed of the following: $3.8 million amortization of purchase related assets, $3.3 million restructuring charges, and $1.1 million stock compensation expense. The following discussion is based on non-GAAP results. All comparisons with prior periods have been adjusted to reflect the restatement of our financial results.

Restated pro-forma tables for fiscal 2007 and fiscal 2008 have been posted to our web site. By segment, North America microwave contributed $61 million of revenue in the first quarter, 12% higher than Q4 of fiscal 2008, and 9% higher than the year-ago period. The International microwave segment contributed $131 million of revenue, 5% higher than Q4, and 20% higher is and the year-ago period. By geography, Africa contributed $66 million in revenue, 37% higher than Q4 of 2008 and 25% higher than Q1 of 2008. Europe, Middle East and Russia contributed $37 million in its seasonally slowest quarter, 34% less than Q4 of 2008, but 13% higher than the year-ago period and revenue for the rest of the world was $28 million, 35% higher than Q4 and 18% higher than Q1 of last year.

The network operations segment contributed $3.4 million in revenue in the quarter compared to $7.1 million in Q4, and $6.5 million in Q1 of last year. Gross margin was 30.8% in the quarter, in line with expectations compared to 30.6% in Q4 of fiscal 2008 and 28.9% in the year-ago period. Total operating expenses were $45.4 million or 23% of revenue. This compares to $51.2 million in Q4. In Q1 operating expenses included costs for outside professional services and legal and accounting fees in support of the restatement process. As we look to the second quarter, our expectation is that total operating expenses will be comparable to the first quarter.

Depreciation and amortization of property, plant and equipment and capitalized software was $5.6 million. CAPEX for the quarter including capitalized software was $5.4 million. Operating income was $15 million compared to $5.9 million in the fourth quarter of 2008, and $14.3 million in the year-ago period. Net income was $11.2 million, or $0.19 per diluted share. We expect our pro forma tax rate for fiscal 2009 will be 24%, which is lower than last year’s pro-forma rate of 26%. The lower rate is attributable to our increased volume of international revenue flowing through our Singapore International headquarters. Our cash tax rate is approximately 4%. Employee head count was 1,412 compared to 1,421 at the end of Q4.

Moving on to the balance sheet, Harris Stratex Networks' cash balance including short-term investments was $97 million at the end of September compared to $98 million at the end of June. Operating cash flow for the quarter was $4 million. Net cash, which we defined as cash less third-party debt, was $87 million at the end of Q1, down from $89 million at the end of the prior quarter, but improved compared to $63 million as of Q1, fiscal 2008. Third-party debt increased by $1.2 million to $10 million in Q1 as we retired our existing debt and replaced it under our new credit facility.

Inventory and unbilled increased by $14 million in the quarter and turns declined from 5 to 4.6. The increase was caused by the timing of billings on large system projects which should normalize as the year progresses. An increase in new product inventory in anticipation of future sales, and the timing of revenue recognition on shipped products as a result of delivery and acceptance terms, which we also expect to clear within the next several quarters. Accounts receivable decreased by $5 million. DSO was 96 for Q1, reduced from 101 in Q4 of FY ‘08, and 108 in the year-ago period.

We continue our initiative to decrease DSO and improve turns and in general focus on cash conservation over the next several quarters.

Now, I would like to turn the call back over to Harald Braun to provide a market and business update.

Harald Braun

Thank you, Sally. I would like to lead with an updated view of our wireless market. The primary growth drivers we have previously described are fundamentally still in place. There is ongoing expansion of basic services in developing countries and there are increases in the roll out of 3G network services especially in the rapid adaptation of smart phones with more intensive data application. Our value proposition in mobility networks remains fundamentally strong. Our customers typically measure us in terms of the relative CAPEX for wireless backhaul versus other solutions or in terms of total cost of ownership of our network solutions.

Sometimes we are measured on the basis of lowering long-term OpEx especially compared with leased line solutions. The latter solution has to cope with significant cost expansion to go along with capacity increases. Our solution doesn’t. For these reasons, we believe that the growth in network data and the pressure, will assure us of viable market opportunity in mobility and broadband networks for the long term. As you all know, building mobile wireless network infrastructure is a capital intensive business and our customers often require access to capital. This is clearly a higher risk factor in the present economic climate, but we are not seeing any significant impact to our revenue opportunities at the present time.

With our private networks business, which is comprised of state and local governments, private enterprises and utilities among others, here are some risks given the potential of budget cutbacks or delays under the current economic conditions. We have received assurances from customers that projects in our backlog are fully funded and not at risk. However, we are preparing risk analysis profiles of our key customers and key regions to better anticipate shifts in wireless spending. We believe this analysis will enable us to take timely actions to mitigate our risk when necessary.

In previous calls I indicated I would also provide updates on our growth plans and strategies. As you may recall, these growth pillars are, number one, solutions for IP mobile backhaul. Number two, an expanded portfolio of network services, especially professionally managed service categories. Number three, using WiMax as a part to 4G opportunities, and number four, site management. These include security and surveillance, as well as power management and efficiency solutions to lower overall OpEx.

We intend to execute our growth strategy and build on our early momentum. Our future growth initiatives are all based on developing new solutions to reduce overall network costs and as such, as well aligned with our long-term customer needs.

With regard to our portfolio strategy, I can advice that we have now embarked on the development of a new common microwave platform for all of our IP backhaul applications. This will built on our position in carrier Ethernet applications which has already been well established with the Eclipse product. We will augment this with a number of new technology elements that will strengthen our position in carrier Ethernet applications as well as address all of our global wireless backhaul requirements. New products from this program will begin to appear within the next 12 months.

The strength of our future product development growth has become an increasingly important part of large customer’s vendor qualification programs. Our customers need to look ahead to IP, migration and capacity expansion requirements. They are making their near-term product selection with a view to the future. The feedback on our technology roadmap from key customers and customer targets has been very positive.

Let me return to a discussion of our business in the first quarter. We posted strong results in Africa. One of the leading growth regions for wireless infrastructure build-outs. Operators in Africa have continuously expanded their network infrastructure and have continued to select Harris Stratex as their partner. We are continuing to see new opportunities in this area in mobile backhaul application as well as in other vertical market opportunities.

Our renewed focus on Asia Pacific implemented five quarters ago is now beginning to deliver encouraging results. Two of our original targeted Tier One customer accounts have quickly moved forward with their implementations, driving stronger sales to the region during the quarter. Our Eclipse mobile solution has been well positioned with our selective customer targets. It has gained acceptance for 3G network rollout, especially with respect to this migration capability for all Ethernet applications.

In prior calls I have discussed handling higher growth in high capacity microwave for IP applications. This is a specific target for us. This technology shift is driven by the success of our Eclipse product. On a trading 12 months basis, 34% of our products came from this category for quarter one, up from 31% in the prior quarter.

We also remain confident that product shipment in this category will exceed 50% by the end of fiscal year 2009. We operate in a highly competitive market segment. We don’t expect that to change. Where we win is often based on the strength of our product line, our track record for innovation, our speed of delivery and our deep customer relationship.

However, we believe that product only companies are vulnerable in this segment, and we have demonstrated that we can better protect our long-term customer position by packaging the right blend of network and support services, supply chain logistics and project management. We recognize that our current mix of services is putting some pressure on our overall gross margin, but our decision to accept this margin pressure is strategic. It helps us to bring new key accounts and helps us protect our position in existing accounts. Overall, this is an area of focus both in terms of our competitive capabilities and getting the blend of services and products where we need it to be.

In a few moments we will open for Q&A, but first I would like to comment on guidance and our near term outlook. Our expectation for the second quarter of fiscal year 2009 revenue is a range of $185 million, and $195 million. This guidance reflects both the strength of our backlog and our current view of worldwide economic conditions. We expect that our operating performance metrics for Q2 should be in line with Q1. The slightly lower earnings in line with the revenue guidance. We believe the gross margin percentage will improve, but modestly. We also expect to incur additional restructuring charges between $2 million and $5 million.

In summary, I am pleased with our first quarter of fiscal year 2009 in which we achieved record revenue and net income for the company. We continue to make progress on improving our internal processes for the company. Our value proposition in mobility networks remain strong and we see the primary growth drive of our business as fundamentally still in place. Our outlook remains positive for 2009.

At this point, I would like to open the line for questions. Operator, please call for questions.

Questions-and-Answer Session

Operator

(Operator instructions) First question comes from the line of Blaine Carroll of FTN Midwest Securities. Please go ahead.

Blaine Carroll – FTN Midwest Securities

Thank you. Hello, everybody.

Harald Braun

Hello, Blaine.

Blaine Carroll – FTN Midwest Securities

Harald if we can look at the revenue for a minute, I mean all your different geographies actually put up very good growth both year-over-year and on a sequential basis. So, I guess the guidance of the 185 to 195, what areas of your market are making you nervous on that projection? Is it realistic that we would be down sequentially in the December quarter which is typically a strong quarter?

Harald Braun

No. Thanks very much Blaine. So, I think some areas where we have some programs in place are definitely in Europe and Latin America. So we put some emphasis on that. There are some RFPs coming up, and actually there were some RFPs for major tier one customers, which we are participating in. So we see that something is going on there but it’s not close. So, there is a very close look into this region and in Latin America also. So those are some regions, I would not say that they are troubled, but I would say that we have to definitely focus on that.

So we are watching that, and there is another region where we have an emphasis or actually where we have actually a focus on, that is in Russia segment, and India and China segment. So we have particular strategies out in this region. So, I wouldn’t be so concerned, and I don’t see this as a major impact for the last calendar quarter. Again, the strongest region, and where we see some good momentum coming up, and of course also our deals which I announced last time did come in the third and fourth quarter. I’m looking forward to a good second half of the year Blaine.

Blaine Carroll – FTN Midwest Securities

Would you be up sequentially in the March quarter? I mean typically that is a historically weak quarter.

Harald Braun

I think in line that’s what we at we expect Blaine.

Blaine Carroll – FTN Midwest Securities

In line meaning flat? What is it, I am sorry Harald, what does in-line mean?

Harald Braun

Yes, I think we said it would be flat.

Blaine Carroll – FTN Midwest Securities

How booked are you for the December quarter? What was your turns business during the September quarter?

Sally Dudash

The turns business, as we look into the December quarter, is fairly comparable with quarters in the past. We talked to between 60% and 70% backlog going into the quarter that is what we currently see for December as well.

Blaine Carroll – FTN Midwest Securities

Okay. You talked about gross margin improving modestly. Can you define improve modestly?

Harald Braun

Yes. I think I told you that I did guidance in the last and for the next quarter, the December quarter, right. So, it is hard for me to stay at the moment, but there will be a slight improvement, and I am not comfortable to give you a percentage point or something at the moment Blaine.

Blaine Carroll – FTN Midwest Securities

Okay. But north of 31% sounds good?

Harald Braun

Around.

Blaine Carroll – FTN Midwest Securities

Okay. I will pass it on. Thanks.

Operator

Next question comes from the line of Stephen Ferranti of Stephens Incorporated.

Stephen Ferranti – Stephens Incorporated

Stephen Ferranti of Stephens Incorporated; thanks for taking the question. Good job on the quarter.

Harald Braun

Thank you very much Steve.

Stephen Ferranti – Stephens Incorporated

Question for you on EMA region that you reported that’s a fairly diverse region. I was wondering if you could give us additional color on what sub regions may be we are up and which we are down within EMA?

Harald Braun

I think it’s somehow evenly distributed, but Steve, the last time we did put out that there is one particular region which we won a big project and I gave you the numbers, the business volume there. This is in Saudi, and we are expecting to turn that to revenue in the third and fourth quarter. So, it was also pretty positive on the second half year. That is a big project and there are some delays. We will take a little bit in the second quarter but then we see the majority turning over in the third and fourth quarter. So, that will come. The region is not in balance anymore because this is really a huge one. So, I couldn’t say that they are evenly distributed. There is not one project that sticks out.

Stephen Ferranti – Stephens Incorporated

Okay. Because it seem like it took a little bit of a dip there sequentially, and I was wondering if that was due to any specific sub region.

Harald Braun

No, no specific subregion, but in the region this quarter is all the time, vacation, Ramadan, and these are the reasons Steve.

Stephen Ferranti – Stephens Incorporated

Okay, very good. On the flip side, North America was pretty strong, as strong as it has been in some time. What do you see in the North American market? There has been some anecdotes, speculation about carriers deferring spending where possible. What are you seeing?

Harald Braun

To address this complex situation, and the turmoil in the credit market, and some economic crisis worldwide, we recognize that and we take actions. The actions are the following.

We decided to do a risk profile analysis for all of our key customers and take a look at that, evaluate them, see where we are, whether they are possible impacts and when we have that transparency, we provide, at least for us, it’s very important, to see if we can define risk mitigation programs. Particularly North America, that could be, by the end of this calendar year, maybe they spend the budget they allocated and we don’t see a big impact, but it could be an impact next year that made the cut back or postpones projects.

That’s what we are anticipating. For this year, I don’t see a big impact but let us finish our risk analysis, our risk profile analysis and we will have some more questions. At the moment it remains fine and strong but the impact is in the beginning of the year and budgets may be postponed or cut back.

Stephen Ferranti – Stephens Incorporated

Can you categorize, Harald within North America, how much of that was private networks versus carrier business in the first quarter?

Harald Braun

Do we have the numbers?

Sally Dudash

We don’t have that statistic, Stephen but we are seeing pretty steady business in North America across both sectors in the past quarter.

Stephen Ferranti – Stephens Incorporated

Okay.

Harald Braun

Nothing sticks out.

Stephen Ferranti – Stephens Incorporated

Can you even put a ball park split on it? Is it 50/50 – 80/20? Any color you can give?

Sally Dudash

I would say closer to 50/50. It was not skewed. It is not typically skewed any more than 10 points off of 50.

Stephen Ferranti – Stephens Incorporated

Okay. Fair enough. I guess one last one from me for Sally. Can you just talk about your targets going forward for DSO, inventory turns and payable turns?

Sally Dudash

Sure. I have mentioned that a minimum for this fiscal year, we would like to see did DSO get to 90 so take at least 10 days from where we ended last year. Our inventory turns, we would like to see up towards six. They were at five as we ended last year. We had a little decline in this quarter but nothing that we saw as permanent. Payable days are coming down. Everyone is looking and our vendors are looking to insure payments are made on a timely basis so we ended our year last year with payable days. I have the statistics, about 60, I believe. 59. We hope to keep them comparable to that this year although in the first quarter they went down a few days.

Stephen Ferranti – Stephens Incorporated

Thanks. One last house keeping question, were there any 10% customers in the quarter you could identify?

Sally Dudash

We had one in Africa. That is not atypical for us.

Stephen Ferranti – Stephens Incorporated

Thanks and congratulations again.

Sally Dudash

Thanks.

Operator

Our next question comes from the line of James Faucette with Pacific Crest Securities.

James Faucette – Pacific Crest Securities

Thanks very much. I just want to ask a question as it relates to your evaluation, looking at your customers. From what I understood what you were talking about, that none of your customers had been modified their budgets and spending plans based on the current credit crunch, but I am wondering how you see them dealing with the extreme changes in exchange rate and how you are having to deal with that, for example, a customer in Australia and the Australian dollar has depreciated the US dollar by half, in just a period of a few months. Wondering what pricing pressures that may put on and what you are seeing in customer’s reaction to those changes and what we should expect to see?

Sally Dudash

With regards to our foreign exchange trading, we are not seeing any issues on not being able to close contracts or customers not being able to close contracts yet. We are seeing some delay in a lot of processes we need to run through major financial institutions, just because the banks have got a lot of other things, and it’s a very volatile trading market. We deal with strong banks for FX that have not had issues through this timeframe. Banc of America is one of our Prime banks, BNP. We have not seen yet any issues in closing these contracts. Maybe a little slower.

James Faucette – Pacific Crest Securities

What about on a go forward basis? Just to take an example, in Australia, four or five months ago they were looking at spending 100,000 Australian dollars on a project, now, they would be looking at 140, 000 Australian dollars.

Sally Dudash

Harald made a point of this assessment we are doing on the CapEx spending profile by Market and customer. For that, among other reasons, to see what trends we might see with our customers, due to any number of things, which regards to the impact on their spending profile. We have kicked that off, and I will let Harald say a few words.

Harald Braun

That is exactly why we kicked that program off this risk profile analysis and talked to our major customers and key customers, and seeing what did you plan, is the rollout there? Are they expanding more to make the rollout happen, and what we see so far, we talked – I was traveling for the last 2 1/2 weeks, and I was attending a major conference the last two days, worldwide tier one carrier on the sea level, we conducted a lot of interviews there, and it looks like the spending level of what they want to do, the strategic elements of their plan for the year don’t change.

What is interesting for me see that they stick to that strategy, and this huge demand of band width required from smart phones. I don’t mention all the smart phones out there so it’s increased by the weeks now that there exists demand there and they are executing their plans. I don’t see a big risk but let us make a profile analysis. In direct discussions with the customer, these questions take shape and we take an analysis and have the mitigation program in place. There is the reason we’re doing what you are asking.

James Faucette – Pacific Crest Securities

That is very reassuring. Not to belabor the point, but when you say these sea level executives are going to spend the same amount as they had planned, are you saying they will spend the same amount they planned in local currencies or U.S. dollar terms?

Harald Braun

At the local currency and the amount of dollars. I want to reassure, that program, what you planned is still alive? Is the budget still there? That, so far, looks good. We have a little bit in the currency issue, how do we deal with that? That will be the next question. We are not at that level to be able to discuss the exchange rate.

James Faucette – Pacific Crest Securities

That is very helpful, thank you.

Operator

Next question comes from the line of Kevin Dede with Morgan Joseph. Please go ahead.

Jim Warren – Morgan Joseph

Hi guys, this is Jim Warren [ph] for Kevin Dede, congratulations on a nice quarter. A question about pricing. Are you seeing anything happening to pricing for high-capacity, low capacity radios given the economic environment?

Harald Braun

No. I don’t see the impact yet on that. I said that in my script, the pricing pressure at the moment comes from the competition and the offerings and how you package it. That is a very fierce competition. From the economic crisis, I could not pinpoint one deal or something to the economic crisis at the moment.

Jim Warren – Morgan Joseph

In terms of the competition, have you seen any change in the landscape?

Harald Braun

Same as I pointed out last time, same level, same competitors and I don’t expect that to change, and I don’t expect major confrontations, other than the next couple months or quarters. We have to deal with the same competitors but it will be very hard going forward. The deals get bigger and suddenly everybody is there. It is very hard. That is business.

Jim Warren – Morgan Joseph

Can you comment a little about the progress on your radio development?

Harald Braun

As I said, I am very pleased. When I started and we did the analysis, I saw many platforms, very good features. In the meantime, we have taken actions, aggressive actions to get to one product line and the second workshop with all the world wide leaders, R and D leaders, he has this in place, and it comes together nicely and as I pointed out, they have a clear understanding of the road map, a clear understanding of what we provided on this common IP enabled platform. I’m very pleased to see that. We have to break it down, when particular features come out, we have that breakdown and that is what we are discussing with the customer, the customer demands. For me, it looks very positive. I am very happy with this progress.

Jim Warren – Morgan Joseph

That is good to hear. Also, how are build outs in India going? Are you involved in a lot there in terms of as far as how that breaks in?

Harald Braun

That is an area I pointed out. The first question I got, the regional situation, we really have concerns, we see something happen, we have good regions, some areas, from the beginning, I discussed the region, we split the world into five regions. In India ,we have a special program going, that is what the company did when I was not there. I mentioned that in my script. They really put a focus on that focused strategy carries the same thing is what we do in India, China and Russia. There is a focused strategy, and we’ll see where especially where gross strategy can be applied. The region heads for APAC are doing a fantastic job. The region head for EMA does a fantastic job here to get us to that focus strategy, and then we are executing the strategy.

So, I think that are some areas we were not too satisfied when I took over but now I see some progress and the strategy has to be presented by the end of the year. I gave them the goal and then be executing that. But this market, as I said, you cannot ignore it. On the other side you have to be careful. I just came from a conference where we had some discussion with some number one Indian incumbents and providers, very good discussions with them. There is something going on. Everybody knows what the output is in this country so we have to be careful.

Jim Warren – Morgan Joseph

So you have been there for a couple quarters now, just wondering if you are seeing a change in culture or if you are seeing the sense of urgency and also if new compensation structures have been adopted yet?

Harald Braun

I’ve been here a little more than half a year. As I said, we had a strategy alignments, strategic direction definition, then accordingly, we could the organization in place that is coming along very well, I am traveling a lot to the customers , I’m coming from my second worldwide trip, talking to major customers in the U.S and Europe and Africa, and I see the strategy coming together very well. The Organization is building up. The least of my worries is the culture because to get the people aligned to one strategy and we have the foundation program, the unity program, the modified program in place, to get us to one process and one toolset base, that is counting along very well.

Reviewing that half year, the area of strategy, organization, and fixing the basis with tools and processes is coming into place and of course with that is the cultures that will change. I just had my letter of this week to tell them we have our principal values and mission statement out, now we have to live it. That portion of the process that is done. Now, we have to embrace it. So that comes together. I see a lot of changes in the first half year. On the other side you have other challenges. We are addressing them. That is very important to analyze, to see where we are and address it and put it on the table and address

Jim Warren – Morgan Joseph

Thanks a lot, good luck going forward.

Harald Braun

Thanks very much.

Operator

Next question comes from the line of Greg Weaver from Invicta Capital. Please go ahead.

Greg Weaver – Invicta Capital

Nice job getting the ship pointed in the right direction. Sounds like from your commentary that things are moving along. Can you give us a little color on how bookings have been so far this quarter?

Harald Braun

Yes. I’m just coming off of a business review meeting with Sally. We have some good reporting established in the next couple months, transparency is good, there are some areas to work on, the COO has taken actions with our CFO office and CTO office. We have a good transparency, Sally, and it is coming along good. I don’t see an impact at the moment from the macro economic situation. At the moment it looks good. We have some tasking to do, we have every day our sales regional call but it is coming along. I am not worried. Sally do you have some other color there?

Sally Dudash

Our revenue guidance is in line with what we are seeing from a booking perspective and our typical turns business, none of that is any different yet than we have seen in the past but we did guide our revenue at a slightly lower range in Q1 which is a tremendous quarter for us revenue wise, we beat anything we had ever done, that was an exceptional quarter for us on the revenue line.

Harald Braun

The backlog, I pointed out is good. It’s coming together but there is always work to do.

Greg Weaver – Invicta Capital

Did shipping of the product in the first quarter strain your operations or supply chain such that you weren’t as efficient as you would have liked to have been?

Harald Braun

This quarter, I took the liberty to visit our warehouses and organizations and wanted to see in person the progress and what they did. The processes are in place, the tools are there, and I visited also our apartments and of course it was all in check and in line with our COO office. We have some work to do there, as we mentioned in the last call, we put our new logistics center in Amsterdam and I visited that two weeks ago. I checked it out and I am impressed. There is a lot of work to do, we just established that. I would color it with we are on the right track, a lot of things to do, but it comes together. So I’m encouraged, let me put it this way.

Greg Weaver – Invicta Capital

Okay. You mentioned there were some time items in the quarter in terms of audit expenses.

Sally Dudash

The specific item I called out was one that I had discussed in our last call and that is that we did expect and would incur additional costs for professional services to complete the restatement process, which we completed at the end of September. That process combined with professional services and legal costs, was just over $1 million dollars.

Greg Weaver – Invicta Capital

Looks like you trimmed sequentially on the R&D side of things. How do you see your SG&A inflated by the cost you referenced but I am surprised in terms of the current quarter, that we’ll be looking at it to be flat again. Can you help us to understand on the SG&A side, what is going on?

Sally Dudash

I can. There are two factors I will point to, that are contributing to the guidance that we gave for OpEx The first is we have increased our bad debt provisioning to be more conservative in light of the credit market situation, and we do expect in the short term, that will have an impact on our OpEx. The second is that we have accelerated our spending on system improvement projects, due to our desire and need to accelerate the visibility into operational trends in many natures, inefficiencies in the business, so that we can have a better way to put remediation plans in place when we need to. So we have decided to accelerate some of that spending over the next several quarters. Those are two of the factors that have contributed to the guidance that we gave.

Greg Weaver – Invicta Capital

That is helpful. Can you help me understand in terms of the bad debt provisioning? Is it a catch-up future?

Sally Dudash

It is not catch up, just looking to the future, probably being a little more conservative on assessment of aging, given the situation in the markets. We felt that was prudent.

Jim Warren – Morgan Joseph

Harald, you mentioned in the past couple calls about the trailing 12 months IP revenue mix. Maybe I missed it.

Harald Braun

We were 31% in the prior quarter, and now we have 34%, so a 3% increase. I mentioned that in my script.

Jim Warren – Morgan Joseph

Sorry I missed that.

Harald Braun

Yes, no problem. So, it’s up and of course as you imagine it’s very important to me, and again how important IP is, I can only tell you, wherever I go, wherever I talk to customers, again I have to quote this conference where I was from Sunday to yesterday evening with a lot of industry captains in the world. It is just mind-boggling what is going on in the communication industry especially in the wireless area, especially driven by what I said all the time in the last half year, by the smart phones and the amounts of data.

Everybody is talking about data, data, data and the data growth and also in the last earnings calls from Verizon and others, you see that that really comes into play. That is very handy for us. Of course this is actually where we are looking in this area. So, it’s very important and everything is based on IP.

Greg Weaver – Invicta Capital

A related question, I guess you mentioned there is a number of tier-one RFPs that are out there, could you give us may be a sense of some of the magnitude of the opportunity here with this explosion in data?

Harald Braun

Yes. The magnitude in terms of dollars or?

Greg Weaver – Invicta Capital

Correct. How big are these relative to kind of what you have been working on historically?

Harald Braun

It varies between 20 and 100 million.

Jim Warren – Morgan Joseph

Per opportunity?

Harald Braun

Per opportunity, Yes, and that depends of course also on tier one because, there are really some very big ones, big tier ones in here. In Europe, there are two, in North America there is one, and the biggest thing is in Europe and in North America. Very encouraging, as I said last time and we are making tremendous progress, I cannot say anything in detail but there are some letters out already. So that’s interesting to see how we proceed there.

Greg Weaver – Invicta Capital

Any sense of the timing when one of these might come through?

Harald Braun

I think, of course, now, it gets to the short list, and you are going to contract negotiations, it can take a while. So, everything between the next two and four months, something like this, we have some signs and some outcome, some results.

Greg Weaver – Invicta Capital

Okay, great, thank you.

Operator

(Operator instructions) Next question comes from the line of a follow-up question from Steve Ferranti of Stephens Inc. Please go ahead.

Stephen Ferranti – Stephens Incorporated

Thanks, just a quick follow-up on the previous line of questioning. Some of the RFPs you talked about, in the US, can you give us some sense, are these carriers that have existing wire line networks or are these carriers that might lack their own wire line network? And if you are seeing some interest from carriers with their own wire line network, what drives them to begin looking at microwave? That has typically been a technology that has lag a little bit in the U.S.?

Harald Braun

It’s a hybrid, they have both. Wireline and wireless.

Stephen Ferranti – Stephens Incorporated

Would these opportunities be upgrading capacity of existing microwave links, or would these be perhaps replacing T1 lines with higher capacity microwave lengths?

Harald Braun

Yes, mix of that also, so there is a clear and that is actually encouraging part of the whole thing. That there is a mix with its TDM before, right, now we are going to go in – we need to expand because of the data growth, right, and we need to make it more cost efficient, so these line substitutions are back home, and then we need to go to IP. So, transition also to a different technology. So, a mix of all of the above. Well, asset means migrate and go to IP and of course when you have a solution which allows both in the same product, then of course this is very, very useful. I think that is what we do.

Stephen Ferranti – Stephens Incorporated

Right. Would it be safe to say, based on the activity you are seeing, we might see microwave increase its presence in to US market, so to speak?

Harald Braun

We had a discussion on that. That is what we would love to see, what we need to see compared to the rest of the world. I see signs now since the RFP is out, I see signs in that direction. These carries of course, internally, because they are hybrid, in their own house, they are cannibalizing their business. This is a little touchy for them but I see it happening. It needs to happen and I see it happening. It is an encouraging thought. In the rest of the world it is already happening and we are all waiting and happy to see that in the US also.

Stephen Ferranti – Stephens Incorporated

Great, that is encouraging, thanks.

Operator

Next question is from the line of Rich Valera with Needham and Company.

Rich Valera – Needham and Company

Thank you. Sally, cash flow from operations, did you give that number?

Sally Dudash

$4 million.

Rich Valera – Needham and Company

Thank you. The tax rate, you mentioned you are expecting 24% for the year. Is that how we should think about your longer-term tax rate as we look at fiscal 2010?

Sally Dudash

I would for now. We have some opportunity to lower it but for now, 24% is a good metric.

Rich Valera – Needham and Company

Looking at OpEx, thanks for the color on the near-term, but how should we think of it longer-term as a percentage of revenue or an absolute dollar amount? There was sort of a presumption that we are dealing with elevated levels and at some point you would see this drop off or maybe not? I want to get your sense of how we think about that, longer-term?

Sally Dudash

Right now we would like to hold that discussion for another quarter. We saw about 23% of revenue for the year last year in the OpEx line, we saw about the same in Q1. Based on the revenue guidance, it may be a little higher but it is not far out of that range in Q2, but we have also discussed some investments that we are making. What I would like to do is let us get one more quarter and see where we are with some of these initiatives and when we come back at the end of Q2, have a better feel for that.

Rich Valera – Needham and Company

Okay, that is helpful. Harald, this has been discussed in various different ways, but you mentioned in some of your comments that you felt quite good about the second half of your fiscal year, and I wanted to get more color on that. I know part of its is based on the backlog which was based on the big bookings quarter a quarter ago. Part of this is part of the roll-off of the backlog, but what else at else is there? Is there a pipeline of deals that could close over the next quarter or so that will drive that as well? Just wanted to understand your optimism for the back half.

Harald Braun

Yes. That is correct. We talked about the big deal, going into the third and fourth quarter in the Middle East, so that is also a big driver there, but there are also some projects which are very encouraging, which are very encouraged about to close and then we would see already revenue takes from this project coming into play. There are a number of those but there is also one big one. So, we will take a look at that. That could help in the second quarter. A couple of smaller in the second half. A number of smaller ones. So, the deals coming together with existing customers, expansion and with new customers. That is an interesting picture. That is the basis of my optimism here.

Rich Valera – Needham and Company

Okay.

Harald Braun

And it helps to talk directly to them. I took another couple of weeks to travel around the world and talk to the major tier one customers there and, what I am seeing there and what I am hearing there and how are we negotiating and what we are doing is it’s all about what I said before, the deep customer relationships, speed of delivery and innovation. So, it comes together and then of course talking about the four pillar growth areas, you know, that resonates and that’s what I am happy about that.

Rich Valera – Needham and Company

Okay, that is helpful, thank you.

Operator

At this time there are no more questions. I would like to turn the call back over to Mary McGowan for closing remarks.

Mary McGowan

Thank you all for joining us on this call on the webcast. We’re planning to attend several investor events over the next several months. These include the AEA Classic Financial Conference on November 3 and 4, the UBS Global Technologies and Services Conference on November 18, the Stephens Fall Investment Conference on November 19 and then Needham Growth Stock Conference on January 6 through 8. We hope to see many of you at those events. Thank you and good day.

Operator

That does conclude the Harris Stratex Networks Q1 fiscal 2009 conference call. You may now disconnect.

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