Harris Stratex Networks, Inc. F2Q09 (Qtr End 1/2/09) Earnings Call Transcript

Feb. 5.09 | About: Harris Stratex (HSTX)

Harris Stratex Networks, Inc. (HSTX) F2Q09 Earnings Call February 4, 2009 5:30 PM ET

Executives

Mary McGowan – IR, Summit IR Group Inc.

Harald Braun – President and Chief Executive Officer

Sally Dudash – Senior Vice President and Chief Financial Officer

Russ Mincey - Global Corporate Controller

Analysts

Blaine Carroll - FTN Midwest Securities Corp.

Stephen Ferranti - Stephens Inc.

Richard Valera - Needham & Company

[Illya Grozovski] - Morgan Joseph

James Faucette - Pacific Crest Securities

Operator

Welcome to the Harris Stratex Networks conference call. (Operator Instructions)

I would now like to turn the conference call over to Mary McGowan of the Summit IR Group. Ms. McGowan, you may begin.

Mary McGowan

Thank you for joining us today to provide second 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 relating to projections of earnings and revenues, business drivers such as the transition to IP infrastructure, the timing and capability of new products, and continued network expansion by mobile and private network operators.

These and other forward-looking statements involved 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 on the Investor Relations section of our company website, which is www.HarrisStratex.com.

Now I'd like to turn the call over to Harald Braun.

Harald Braun

Thank you, Mary, and good afternoon, everyone. Let me first provide you with some highlights from our second fiscal quarter, then I will turn the call over to Sally to discuss the financial results in detail.

I am pleased to report that we achieved revenues of $191 million in our second quarter, in line with the guidance that we confirmed on January 7.

On a non-GAAP basis, gross margin was 30%, net income was $11 million with earnings per share of $0.19.

By segment, North American revenue was $65 million, international revenue was $121 million, and Network Operations revenue was $5 million.

We were able to maintain a strong cash position, ending the quarter at $99 million and we posted positive operating cash flow of $13 million.

Our book to bill for the quarter was under 1. This is a further indication of the effect of the global economy on the timing of orders in our pipeline.

Once again, we demonstrated strong demand for our product platforms and services solution as revenue momentum continued with year-over-year sales up 5%. This was achieved in the face of a very difficult global situation.

Later in the call I will provide comments on our markets, an update on our strategy for growth, and some further information on the action we are taking to protect and strengthen our business.

Before I turn the call over to Sally, I would like to bring your attention to a management change for those of you who may have missed the press release issued earlier today. Our CFO, Sally Dudash, will be leaving the company effective February 13 after serving as CFO since the company's formation in 2007. Sally has contributed to the company's growth over the last two years at both the financial and strategic planning levels. On behalf of the entire company, I would like to express my gratitude to Sally and wish her well.

While we search for a permanent replacement,  Russ Mincey, the company's global corporate controller, will be acting as interim principal financial officer. He has more than 25 years experience in financial management, including supply chain distribution, cash management, credit and collections, SEC compliance and Sarbanes-Oxley oversight. Russ will also be joining us for the Q&A session of this call.

Now let me turn the call over to Sally to give you the full financial details for the quarter. Sally?

Sally Dudash

Thank you, Harald, and good afternoon, everyone.

Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended January 2, 2009. Second quarter revenue was $190.9 million and we reported a net loss of $315.4 million or $5.37 per share. This was a result of charges that totaled $327.1 million composed of the following - $301 million impairment of goodwill and other indefinite lived intangible assets, $20.8 million increase in deferred tax valuation allowance, $3.8 million amortization of purchase-related assets, $1.1 million restructuring charges, and $400,000 stock compensation expense.

In January 2009, we determined that based on the current global economic environment and the decline of our market capitalization, it was likely that an indicator of goodwill and other indefinite lived intangible asset impairment existed as of the end of the second quarter of fiscal 2009. As a result, we performed an interim review for impairment of our goodwill and other indefinite live intangible assets.

The results of this review were a $279 million charge to writedown all of our goodwill and a $22 million charge to writedown a majority of our indefinite lived intangible assets. We also recorded an increase in deferred tax valuation allowance of $20.8 million based on our assessment of the future recoverability of our deferred tax assets. We will not be required to make any current or future cash expenditures as a result of these charges and they do not impact our financial covenant compliance under our credit arrangements or our ongoing financial performance.

Now I'd like to present the details of the quarter on a non-GAAP basis. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate comparison of our results across reporting periods. Please refer to our website for complete GAAP to non-GAAP reconciliation tables.

By segment, North America Microwave contributed $65 million of revenue in the second quarter, 5% higher than Q1 of fiscal 2009 and 2% higher than the year ago period. We continue to see steady revenue in both mobile and private sectors in this region. The split between mobile and private orders for North America in the quarter was 41% mobile and 59% private.

The International Microwave segment contributed $121 million of revenue, 7% lower than Q1 of fiscal 2009, but 9% higher than the year ago period. By geography, Africa contributed $51 million in revenue, 25% higher than Q2 FY '08; EMER, which comprises Europe, Middle East and Russia, contributed $48 million in revenue, 50% higher than the year ago period; and revenue for the rest of the world was $22 million, 42% less than Q2 FY '08.

The Network Operations segment contributed $4.9 million in revenue in the quarter compared to $6.5 million in Q2 of FY '08.

Gross margin was 29.6% in the quarter compared to 30.8% in Q1 of FY '09 and 30.9% in the year ago period. The decline in gross margin was caused by a higher mix of services revenue in the quarter that drove unfavorable absorption of factory overhead. This is not a trend that we expect to continue in future quarters.

Total operating expenses were $41.7 million in the second quarter or 22% of revenue. This compares to $45.4 million in the prior quarter, where we incurred higher outside professional services fees. On a year-over-year basis, total operating expenses declined 3% as we achieved savings from facility closures in Canada and South America as well as headcount reductions.

Operating income was $14.8 million for the quarter compared to $15 million in the first quarter of fiscal 2009 and $13.2 million in the year ago period.

Net income was $10.9 million or $0.19 per share.

Our pro forma tax rate was 24%, which is lower than last year's rate of 26%. The lower pro forma rate is attributable to increased volume of international revenue flowing through our Singapore international headquarters. Our cash tax rate is expected to be 6.5%.

Employee headcount was 1,395 compared to 1,412 at the end of Q1.

Moving on to the balance sheet, we were very pleased to see our cash balance, including short-term investments improve to $99 million at the end of Q2 compared to $97 million at the end of Q1. Net cash, which we define as cash less third-party debt, was $89 million at the end of Q2 compared to $87 million at the end of the prior quarter as third-party remained at $10 million in the quarter.

Operating cash flow for the quarter was $12.5 million.

Inventory and unbilled costs increased by $12 million in the quarter and turns declined from 4.6 to 4.2. Inventory increased as a result of building new product inventory in anticipation of shipments to a key account that is under contract but now delayed for delivery for one to two quarters. There was also some delay in revenue recognition on shipped products as a result of delivery and acceptance terms which we expect to clear next quarter.

Accounts receivable decreased by $15 million and DSO improved from 96 in Q1 to 87 in Q2.

Depreciation and amortization of property, plant and equipment and capitalized software was $6.1 million for the quarter. CapEx for the quarter, including capitalized software, was $4 million.

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

Now I'd like to turn the call back to Harald to provide you with a market and business update.

Harald Braun

Thank you, Sally.

Given the challenging business environment worldwide, I was very pleased that we were able to deliver solid results for revenue, earnings and cash generation. I will provide further color on the second quarter, but first I will elaborate on some balance sheet items.

During quarter two, we applied particular focus on accounts receivable aging and collections. I have set imperatives for my staff and will continue to monitor this area very closely.

We also began to realize OPEX improvements on the cost reduction actions previously taken in Canada, Brazil and U.S. facilities. In this economic climate we need to balance expense management with our desire to strategically invest in our long-term future.

To that end, we have created a program to strategically reduce spending and enable us to support our long-term growth initiatives. Aligned with our overall company strategy, the cost reduction program will be executed in a phased approach over the next 6 to 9 months. These cost reduction initiatives will include optimization of our productivity and collaboration across all functions, improvement in the overall efficiency of our business operations, alignment of investment in R&D, with a focus on innovations and solutions towards our long-term growth strategies, reduction in professional consulting services, travel, and other discretionary expenses.

Our long-term goal is to implement a sustainable cost management program that will act as a road map to greater performance and increased market leadership.

Now let me return to a business review of the quarter.

In Africa, we posted our second consecutive quarter of 25% year-over-year revenue gains, which was a solid performance. This region remains one of the leading growth areas for wireless infrastructure buildout. Operators here have continued to expand their network infrastructures and have continued to select Harris Stratex as their partner.

In the region that includes Europe, the Middle East and Russia, Q2 sales increased 50% year-over-year as key customers in the Middle East took deliveries for significant network expansion rollouts. We previously announced a large contract in the Middle East, but shipments have not yet started. Additional customer requirements are resulting in an upgrade in the network design. We now expect to begin shipments in our June quarter.

In North America sales increased slightly year-over-year. Revenue drivers include work on several large system integration projects, three of which were a large system integrator, a leading U.S. carrier, and a major local government. Permitted projects and budget spending seems to be remaining on track; harder to predict is the timing and approval of budgets for new projects and so we remain watchful. The March quarter is seasonally the slowest in North America. Order intake has also declined due to consolidation in the mobile carrier segment. One encouraging trend is the increase in requirements for wireless i2 network solutions. We see this in both the mobile and the private sector in North America. Timing, however, remains uncertain.

Our renewed focus on Asia-Pacific implemented six quarters ago continues to delivery encouraging results. Our Tier 1 customer in Australia and our Tier 1 operator in the Philippines continued the rollout of their 3G mobile networks. In Malaysia we have a significant new customer win.

For some time now I have spoken to our product strategy aimed at a common microwave platform. This strategy will reduce the number of products required to support our worldwide customer base and will build on our position in carrier Ethernet applications. We are adding key features to enhance our solutions and maintain a leadership position in the IP mobile [inaudible] market. New products from this program will begin to appear around the middle of 2009.

The growth in microwave IP application is a specific target for us, driven by the success of our Eclipse product platform. In quarter two, on a trailing 12-month basis, 38.4% of our product sales were IP applications. This is up from 28% in quarter three of fiscal 2008, when we started measuring this category. We remain confident that we will exceed 50% of product sales by the end of fiscal year 2009.

We continue to lay the groundwork for our strategy with network services as customers look to optimize their investments. We are having early success as we continue to build out our operations and we find our networking capabilities, which is a key differentiator. Network services remains a cornerstone for our growth pillar strategy.

We have made significant progress in the development of our end-to-end 4G wireless networking solutions. During the quarter we successfully completed a field trial that the government federal rule [inaudible] initiative in South America. We will be also showcasing a complete 4G wireless networking, including IP wireless backhaul, at the Mobile World Congress in Barcelona February 16th to 19th.

Our energy and security growth pillar is generating a lot of interest with key customers in Africa. We are now entering into proof of concept trials centered on site security and efficient energy solutions.

These overall future growth initiatives are based on developing new solutions to reduce overall network cost and are aligned with our long-term customer needs. We are encouraged by our customer feedback. We will continue to invest in these growth strategies and position ourselves for the market's turnaround.

Our call is not complete without a discussion of where I see wireless data com market going. Despite the current global situation, we still believe that this is the industry to be in. We are not immune to the economic issues facing our customers, but we do believe our growth drivers remained fundamentally in place and that our value proposition is very timely.

We continue to see and to capture opportunities as developing countries expand their wireless infrastructures. We see the stress to networks that telecom operators are experiencing as more intensive data applications drive the rollout of 3G network services and our customers are increasing their requirements for mixed mode as the transition to IP continues. This is an area that is a key differentiator for Harris Stratex.

To be sure, the gating factor for all these [inaudible] elements is the global economy. We do not believe that the opportunities are diminishing; however, the timing of these opportunities is more difficult to forecast for our customers and for us. In market conditions such as these, our value proposition is more compelling. Customers typically measure us in terms of the relative CapEx for wireless backhaul versus other solutions. Sometimes we are measured on the basis of lowering long-term OPEX, especially when compared with lease line solutions. The latter solution has to cope with significant cost expansion to go along with capacity increases. Our solution doesn't.

As a result of our risk profile analysis, coupled with widely reported news articles, we are proceeding cautiously in Europe and Russia. These two regions are experiencing the greatest difficulty with their economies. We are fortunate to have a strong market position in Africa, which remains a high growth area; however, we are aware of currency issues in various African countries and are watchful of exchanging risk profile.

In a few moments we will open up for Q&A, but first I would like to comment on our near-term outlook, the actions we are taking to strengthen and protect our business and our guidance. We believe that overall demand of our backhaul solutions and services also remain relatively strong; however, the weakening global economy is creating forecasting and timing issues for our customers. This, in turn, inhibits our visibility. Given our diminished visibility, we will be providing quarterly guidance at the revenue level and directional guidance on gross margin, operating expense and EPS.

As we enter our historically softest quarter, our expectation for quarter [inaudible] revenue in fiscal year 2009 is in the range of $150 million to $170 million. To provide investors with a framework for other non-GAAP Q3 operating performance metrics, we are planning for the following - gross margin is expected to improve to the Q1 level or slightly higher; total operating expenses are expected to be comparable to Q2 levels, and EPS is expected to be lower on lower sales.

In a market that is increasingly unpredictable, we do have aspirational goals for the company. While we have demonstrated that we can be profitable and generate cash with a 30% gross margin, the overall long-term outlook is to improve gross margin approaching the 35% level and achieve double-digit operating income.

As I outlined in the beginning of my remarks, our near-term objective is to have a laser focus on cash management and to continue to generate cash at this revenue level. We're looking forward to updating you in the quarter ahead as we enhance our product portfolio to maintain our competitive advantage. We have confidence in the value proposition that we offer our customers. Our outlook for 2009 and beyond remains positive.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) Your first question comes from Blaine Carroll - FTN Midwest Securities Corp.

Blaine Carroll - FTN Midwest Securities Corp.

Sally, I want to start with wishing you luck post-February 13th.

Sally Dudash

Thank you.

Blaine Carroll - FTN Midwest Securities Corp.

Harald, a question on the quarter. How booked are you for the midpoint of that revenue guidance range?

Sally Dudash

I can answer that, Blaine. We are within our normal range of 60% to 70% of our revenue in backlog in the third quarter as we generally are every quarter. I think we might add to that that turns business is getting tougher and tougher with the economy the way it is. Purchase orders are tougher for some of our customers to close on. Financial closes are getting harder, but we felt it important that we stick in the 60% to 70% backlog as we looked forward to the quarter.

Blaine Carroll - FTN Midwest Securities Corp.

It's nice to see the operating expenses coming down, Sally?

Sally Dudash

Excuse me?

Blaine Carroll - FTN Midwest Securities Corp.

It's nice to see the operating expenses.

Sally Dudash

Yes, it is.

Harald Braun

Blaine, on the backlog, I think that 60% to 70%, what Sally mentioned, I think is in line with our expectations, right, so that it is in line. And, of course, you know that we had programs in place and we put that now into more a company wide program to reduce our operating expenses. And we did already something in the last quarter and now we some results.

Blaine Carroll - FTN Midwest Securities Corp.

And Harald, when you said that the operating expenses in the March quarter will be similar to the December quarter, did you mean on an absolute basis or on a percentage of sales basis?

Harald Braun

I think we are going to do that on an absolute basis. I think that was our calculation.

Blaine Carroll - FTN Midwest Securities Corp.

And then, Sally, on the charges, were all of them non-cash charges?

Sally Dudash

There would be a small amount inside the restructuring that will be cash, but the rest is noncash.

Blaine Carroll - FTN Midwest Securities Corp.

And then, Harald, one of the things that you said - and I know you don't want to give guidance beyond March - but typically March is seasonally the lowest quarter and when we have this pushout in the Middle East from that big customer, do you expect March to be the low point of the year?

Harald Braun

I think so. I think so. First of all, I think the macroeconomic environment, as I've said in the script, is [inaudible] now and it's really unpredictable for us. And I think it would be prudent for us to get more visibility here, that's number one. And number two, what we see when we shift the Middle East contract to the right, I guess it will be the lowest quarter.

Blaine Carroll - FTN Midwest Securities Corp.

You think March will be the lowest quarter?

Harald Braun

Yes, the Q3 quarter.

Operator

Your next question comes from Stephen Ferranti - Stephens Inc.

Stephen Ferranti - Stephens Inc.

The first question I had was really regarding the mix of business between mobile and private network in North America. I was sort of surprised, I guess, by the skew towards private networks there. Is that mostly government application or can you give us some color in terms of where you're seeing the strength there?

Sally Dudash

State and local governments, also system integrators would be another part that would be in that number. We have seen this kind of skew before - 60/40 is about as wide a spread as we've seen. Over time it does tend to even out at the 50/50 level, so that would some additional color on that.

Harald Braun

That's right. But, you see, here also, Steve, you see also some directional statements, right, from mobile operators. They are really watching their spending, and that's one thing. The other thing is alternatively have consolidation in the industry to one major situation, you know, the Verizon/Alltel situation. And so therefore I think it's explainable that we have more private sector revenues than mobile operators.

Stephen Ferranti - Stephens Inc.

And I guess along those lines, what are you seeing from some of the U.S. carriers in terms of their acceptance or their actions toward embracing wireless backhaul perhaps more than they had in the past. We had been hearing about some RFQs and RFPs floating around. Is there any color you can give us there? Are you chasing some of those opportunities?

Harald Braun

Yes. We are not only chasing these opportunities, we are competing and I have to say, Steve, we are doing very well. I'm very encouraged with our platform and the acceptance of our platform. And we, of course, are very encouraged also that the industry is adapting our IP technology. This is a very good trend.

And even on the consolidation side, on the consolidation side and this merger which I just mentioned there is one portion of the merger, they just freezed their spending. But I'm very, very optimistic going forward that this part of the merger will again spend money and all indications for [inaudible] IP. And these are very encouraging signs. And not only the mobile operators; we see them now also on the private side. So we're getting there.

Stephen Ferranti - Stephens Inc.

Harris just hosted their conference call. Obviously they're looking at strategic alternatives to you guys. They said that they would be moving the financial results from Harris Stratex into discontinued ops. They expect by the end of I think the March quarter that something might happen there. Can you give us any sense for what's going on there, number one? And, number two, what's your sense of how this will impact your business going forward in terms of will it enable you to do things that maybe you weren't able to do while Harris was majority owner?

Harald Braun

Yes. I would say first of all we are fully engaged in the process, so that's not one side doing things without us in the know. So we are really in a handshaking kind of discussion here and we know what's going on. Of course, we want to achieve the best for the company. And I'm feeling that, I'm engaged in that, and I think that it's very good.

And I think what's coming out for us is, of course, what we are perceiving here, is a positive outcome, and I think that's what I'm seeing so far. And I think we are a couple of weeks away from knowing in which direction it goes. We are influencing it, we are working with the parties, and I think we are doing the right thing. So that's what I can say today for the company, both sides doing the right thing for Harris Stratex.

Operator

Your next question comes from Richard Valera - Needham & Company.

Richard Valera - Needham & Company

I'm not sure if you gave this because I missed the first part of your prepared remarks, but did you give a book to bill for the quarter?

Harald Braun

Yes, we did. We said less than 1.

Richard Valera - Needham & Company

And then can you put any numbers around the slippage of the Middle East project? Any sense of how large that was or how big of an impact that might have had on the March quarter?

Harald Braun

Yes, Rich, I think we did - in one earnings call, I think, I disclosed the amount. I think the total business amount was $60 - it's a $60 million deal. And I would not like to split that into quarters, but it is a significant deal for us. And the situation on the customer's side, they're doing all the right things all for the right reasons, and we see also if everything goes in the right direction there that there's a positive outcome for us with additional opportunities. And we see slippage here to the right, but it has nothing to do with the economic crisis. It has nothing to do with the banks or with financing or something else. It's all good, it's all positive, I would say it's green light, but it is a significant contract with a significant margin.

Richard Valera - Needham & Company

If you had to make a guess at this point, when do you think that might close? Do you think it's one quarter slippage or could this be a multi-quarter slippage?

Harald Braun

I think we have seen signs already from the other quarters, but we could make it up with other projects. What we see now is a solid slippage to the right. I would say visibility at the moment in [one]. But, you know, you never know. It's a Middle East contract. That's all I want to say. And it is a redesign of the network. The visibility which we have today is a quarter.

Richard Valera - Needham & Company

And how about the general bookings outlook excluding that one large contract? Would you say it's  it sounds like you're saying the demand is pretty good, but there's a lot of uncertainty in some areas around sort of financing perhaps. How would you characterize the overall bookings outlook beyond the March quarter?

Harald Braun

I think, again, as I said, the visibility is pretty limited, right? But what we're seeing, let's say, in the Middle East contract we just discussed, over that we see actually - we would see a positive outlook, but I'm not 100% sure whether we get back to the level which we anticipated. And I would not say that after a quarter or two this macroeconomic crisis is bouncing back. I think we have to weather the storm a little longer.

Therefore, it's very clear to me to have particular actions taken in cost reductions and also particular actions taken on the balance sheet. We are closely, closely watching the balance sheet items, and I think that is to prepare for a couple of more quarters. But I think, as we said before, our anticipation is that the third quarter would be [inaudible] [lowest]. And I remain positive on what I see from the customers and upgrading and what I said earlier, renovating the network, so the demand is there.

Richard Valera - Needham & Company

And on gross margin, it's fairly impressive that you're suggesting a pretty meaningful uptick in gross margin in March on $30 million nominally less of revenue, so it sounds like there's not a lot of sensitivity to volume interestingly. What is driving that? Is it purely a mix issue in the March quarter that has you expecting a higher gross margin?

Harald Braun

I think - Sally, you can also answer that - I think I said it earlier. The deal, what we are shifting to the right, has significant revenue impact and also significant margin impact.

Sally Dudash

So that's after Q3. For Q3, Rich, I think one is we do believe the mix will normalize again, that that was not this - this has happened to us a couple of times, where we've seen the services mix go up, but it will normalize. And two, the specific actions we're taking on cost reduction, we do have ways we can lower our operational costs for some savings and they're under way under our reduction program. So that is how we can see the ability, not huge, but the modest improvement even on the lower revenues.

Richard Valera - Needham & Company

So I guess it seems like what you're saying is you feel gross margins are - I don't want to put words in your mouth - but sort of minimally sustainable around that 31% level, I guess, barring some significant mix shift towards service that can happen here and there.

Harald Braun

Yes.

Sally Dudash

Yes, that would be -

Harald Braun

That's our take today. And, of course, the aspirational goal is higher, and that is all depending on our product strategy also to go to a full IP solution. And I think that will take a couple of quarters, but I think we're going to be in the right direction there.

Richard Valera - Needham & Company

And this is probably looking out much further than you want to at this point, Harald, but I'll give it a shot anyway. At this point do you, you know, you had a quite strong start to fiscal '09 and obviously it probably won't be quite as strong a finish, at least through the March quarter. Do you think that, as you look at 2010, that that could be a flat year which would, you know, in some ways be a victory given probably the lower trajectory you would start the year at or is that just too far out to even sort of hazard a guess?

Harald Braun

I think, Richard, it's too far out for us to predict since we see almost weekly changes in the worldwide economy and also in our business.

But therefore we do the risk profile analysis. We had that done. We had a full assessment. We are dating it up now on a monthly basis. I almost have to do it on a bi-weekly basis, to [inaudible] our risk profile. But we have mitigation strategies in place. We know what's going on. We're having customer calls to our major customers so that we know exactly which direction they go. I would say fiscal year 2010 is a little bit far out to make some predictions.

But at the point in time the economy is bouncing back and the wireless industry or mobile broadband industry will be the first off for investments as the demands are there. So that's the good news.

The other portion, what I wanted to stress also in the script, was that despite the fact that we have limited visibility and despite the fact that maybe we have some changes in the industry, we will execute our strategy. We believe our strategy going from I think mobile [inaudible] to 4G and 5G is absolutely necessary to do and we would make really a fault and a mistake if we would not invest in the future and prepare for the market's turnaround.

Richard Valera - Needham & Company

Sally, from the tax rate perspective, do you it see it sort of remaining in the - I think it's been around the sort of 24% - 25%. Is there anything that would change that going forward?

Sally Dudash

A possibility to lower it, but right now we think 24% is a good figure to use.

Operator

Your next question comes from [Illya Grozovski] - Morgan Joseph.

Illya Grozovski - Morgan Joseph

I'm having a tough time reconciling the overall sort of macro environment on your carrier customer and your ability [inaudible] accounts receivable.

Harald Braun

We have difficulties to understand you.

Illya Grozovski - Morgan Joseph

Oh, can you hear me? Can you hear me?

Harald Braun

Oh, that's better.

Illya Grozovski - Morgan Joseph

Okay, sorry. I'm having a difficult time reconciling your ability to reduce DSOs in the quarter with better collections amongst your customers and the overall macro environment and your customers sort of lack of their own visibility and the ability to raise capital and the other issues that they're having. How are you able to have better collections this quarter?

Sally Dudash

Well, I think it comes back to the basic order intake. We are seeing issues with our customers clearly in finding the CapEx to invest, so that manifests itself more in us not getting an order than it does getting an order that isn't going to get paid.

And the second is the focus we've placed on it. We have a very heavy focus on our balance sheet right now given the environment. We have many people on our team working on our collection efforts, and that has helped us a lot. This was a great result for this quarter. So it's something we hope to be able to maintain.

Illya Grozovski - Morgan Joseph

Do you believe that the DSOs will trend down from here or flat?

Sally Dudash

Well, we hit our target this quarter. We had said 90 days was the target this year and we hit it. So I think we have set more aggressive goals internally, but I think at the end of the day, if we could keep it at this level and be able to generate the cash we have, we'd be very satisfied.

Harald Braun

But Illya, to build on that, I think they're very, very clear - focus effort on the balance sheet, focus effort with the team. The team did a terrific job in [inaudible] and also in the front office and the back office to collect and also to see that we get DSOs down. And we have an absolute focus on that. We have the right people working on that. We hit our goals. Of course, when you hit a goal, then, of course, you want to make it even more aggressive and that's what we do in going forward. I think we can be better or maintain, at least, the level.

Operator

(Operator Instructions) Your next question comes from James Faucette - Pacific Crest Securities.

James Faucette - Pacific Crest Securities

I actually wanted to follow up on the last question. Obviously, you guys have done a very good job with collections to this point and I guess my question is, looking forward, have you received indications of customers looking for some type of vendor financing, whether in the form of extended payment terms or other? And in anticipation of that potentially coming, how shall we think about what your reaction is likely to be, particularly given that it seems like [inaudible] the other overall equipment suppliers are likely to at least provide some sort of vendor financing. That's my first question.

My second question is: If you could look at geographically where you think that credit issues may be the biggest concern for your customers.

And then finally, looking at the Middle East, I know you indicated you had the one pushout there, but looking at other customers in the Middle East, have you seen other indications that that region may be slowing? And I guess I'm particularly concerned about the correlation with the fall in oil prices to spending in that region.

Harald Braun

Sally, you take the first one; I'll take the second one.

Sally Dudash

Three-part question there, Jim. Okay, let's see if we can remember them. The first part, on the financing, this has been our approach to our customers for a long, long time. We do not provide extended vendor financing. What we can do with our customers is work - we have many, many banking relationships, we have pretty deep expertise in finding structured financing for customers, export credit agency financing for customers. We have the ability to source products. Because we are so dispersed globally, we can source products from many different countries and take advantage of export credit agency backing.

And we are actively working those channels and more actively than we used to, so you're absolutely correct. There is desire out there for extended payment terms, for vendor financing, and our approach to that has been the same as always - we'll help you find a structured deal, we'll get you a very good rate, but we stay within our credit limitations that we've had for a long time. So that's number one.

Let me just speak briefly to the second question about spending and then I'll let Harald take it. Clearly, the devaluation of currencies against the U.S. dollar in some of our major markets is impacting our customers' ability to come up with money for their projects, and that's been reflected in the forecast and guidance that we're giving in that we see that trend.

There are currencies out there that are struggling and they're in some of the markets where we do a lot of business. So it's a watch item for us and we are trying, to the best of our ability, to work with customers to help them structure ways to execute their projects where we can.

Harald Braun

Right. I think to the regions I think it's fair to say that we aren't experiencing that at the moment in our region with EMER. You know that we have, James, we have Europe, Russia and the Middle East in one regional setup. We actually don't experience that in the Middle East.

But I would say it's fair to say that we experienced a situation in Africa and also this currency rate issues, they're troublesome. We have to watch that. That's where a customer is looking, then, for financing, customers looking for deferred payment terms, customers looking for, let's say, a creative dealmaking. And there are some responses; we can help here and there.

We have to think about - we have some strategic customers in this region and, of course, we want to help them and the area, which we are allowed to work in, and I think that's why we will be sitting down and trying to help them. Up to now I would not say that we have in Africa any financing going on, but we are working on that and we have some, from the customers, some requests now. And we can clearly see that it comes because of the economic environment.

But I would say Africa would be the number one country there. On the other side we see strong buildouts on infrastructure. And, of course, some of our strategic customers are in this region. We absolutely need to sit down with them and need to be creative on how can we help in our borders. That's one.

And I would say the other areas are pretty much - and, of course, Russia. Russia's in the same situation in terms of huge network buildouts more or less that stopped. And we will see how we can help and, of course, how the operators there will either consolidate or find new financing sources and new capital structures to themselves because that is, in the area where we are, very limited to help.

So that would be the two areas which we are watching, but not in the Middle East.

Operator

Thank you. Ms. McGowan, I show there are no further questions at this time. Please continue.

Mary McGowan

Thank you all for joining us on this call and the webcast. We're planning to attend the Thomas Weisel Partners Technology and Telecom Conference in San Francisco on Monday, February 9th. We hope to see many of you at that event. Thank you and good day.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using ACT Teleconferencing. You may disconnect.

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