Symmetricom Inc. F2Q09 (Qtr End 12/28/08) Earnings Call Transcript

Symmetricom Inc. (SYMM)

F2Q09 (Qtr End 12/28/08) Earnings Call

February 04, 2009; 04:30 pm ET

Executives

Tom Steipp - President & Chief Executive Officer

Justin Spencer - Chief Financial Officer

Dan Madden - SVP Finance & Investor Relations

Analysts

Joe Spec - RBC Capital Markets

Mike Crawford - B. Riley & Co.

Ted Jackson - Cantor Fitzgerald

Mark Harrell - Morgan Keegan & Co.

Cris Blackman - Empirical Capital

Presentation

Operator

Good afternoon and thank you for standing by. All participants will be in listen-only mode until the question-and-answer session of the conference. (Operator Instructions)

I would like to introduce the host for today’s conference, Mr. Dan Madden. Mr. Madden, you may begin.

Dan Madden

Good afternoon. Welcome and thank you for attending Symmetricom’s fiscal 2009 second quarter conference call. With me today are Tom Steipp, President and Chief Executive Officer and Justin Spencer, Chief Financial Officer. If you have not received today’s news release, you may download it at www.symmetricom.com.

During the course of this conference call, we will make forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, including statements concerning third quarter and fiscal 2009 guidance and our expectations of operating performance in fiscal 2009 and fiscal 2010.

Actual results could differ materially from those projected in the forward-looking statements. The company disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements are contained in the company’s Form 10-K for the year ended June 28, 2008, and subsequent filings with the SEC, as well as in today’s news release.

I will now turn the call over to Tom Steipp, CEO of Symmetricom.

Tom Steipp

Thank you, Dan. Good afternoon everyone. Welcome to our review of Symmetricom’s fiscal 2009, second quarter financial results. During today’s call I will cover the second quarter highlights, provide an update on strategic developments and summarize the performance of each division. I’ll then turn the call over to Justin, who will provide details on our financials, and we will conclude with some remarks before taking questions.

Starting with the financial highlights of the second quarter; I’m pleased to report higher operating income and earnings per share over the last year, despite a challenging economic environment. Although revenue for the quarter was slightly lower than the prior year, we took several actions during the quarter to minimize costs and recently announced a restructuring which will position us well for the remainder of the fiscal year and heading into fiscal year 2010.

Revenue for the quarter was $48 million, below our expectations, due largely to the timing of a significant order and delayed revenue recognition on some shipments. We received an initial order for $6 million from BSNL, India’s largest telecom company, during the last week of the quarter, resulting in shipments that will begin in the third quarter.

We are making great progress in penetrating markets like India and expect BSNL to be a meaningful contributor to revenues in the second half of our fiscal year. We also deferred revenue for a $1 million government order, which we expect to recognize over the next two quarters and had a $0.5 million revenue impact from the Nortel bankruptcy filing.

Non-GAAP gross margins were 48% reflecting a growing mix of new products and the benefits of our focus on reducing manufacturing costs. Non-GAAP earnings were $0.06 per share, up from $0.04 per share a year ago.

During the second quarter we achieved two strategic milestones relative to our new products. First, we received an initial order for the time provider, 5,000 for commercial deployments with a major North American service provider. This is one of our new PackeTime products which we anticipate will contribute to future revenue growth.

Second, a major Latin American carrier selected our V-Factor for their IPTV deployment. This was a highly competitive bid and our selection demonstrates the strength of our technology.

Now let me turn to the results of our two divisions. Starting with the telecom solutions division; second quarter revenue was $27 million, down 11% from the prior year. We saw some softness in our OEM business, as a result of the industry’s decreasing investments in CDMA networks and lower year end spending from telco service providers.

Despite a delay, we’re pleased that BSNL, the largest telecom company in India and the seventh largest service provider in the world, has chosen to deploy our SSU-2000 sim gear for the build out of their network infrastructure. This is a new customer for us and our first significant win in India.

In cable, the continuing deployment of modular CMTS drove shipments of TimeCreator in both domestic and international markets. We expect continued success in the cable industry from the adoption of our DOCSIS 3.0 timing servers. In addition, we see the potential for increased sales of our next generation Sync, PackeTime and V-Factor products into this market.

Moving to our new 1588 sync products; we shipped initial units of TimeProvider 5000, the Grandmaster Clock, and our suite of PackeTime solutions for its first commercial deployment at a North American service provider. Our Grand Master Clock will be part of a Nokia Siemens integration for this carrier as a wireless backhaul network.

We also received orders for units to be deployed in over a dozen other commercial networks. We are seeing an increase in RFI and RFQ activity for all of our PackeTime products. In total, there are 16 trials underway with major service providers and equipment manufacturers around the world.

Our 1588 solution enable operators to accelerate their migration from TDM to Ethernet backhaul, resulting in significant cost savings, while providing new revenue generating opportunities. We expect more next generation sync products to be released for general availability over the next three quarters.

For our V-Factor products, we are very pleased to have been selected by a major Latin American carrier for commercial deployments in their IPTV rollout. Our video monitoring solution will be integrated with HP’s Quality Management System for use in Chile, Ecuador, Peru and Colombia. We have already received initial orders and delivered our first shipments in the quarter. The remaining equipment will be deployed over the next 12 months. We are encouraged by our growing relationship with HP and this win demonstrates the leading nature of our platform’s advanced capabilities.

Trials of our V-Factor monitoring solution continue with nine major U.S. cable service providers, up from six trials that were underway last quarter, as well as several telecom equipment providers and carriers. We expect the trials to conclude on a rolling basis over the next few quarters and are optimistic about the outcome.

We have received initial orders for our high end Q-1000 Headend video analyzer, from two of the cable trials which were completed in the quarter. We continue to see digital video as a key driver in the evolution of next generation networks, and as the market adoption for monitoring video quality increases, we believe that our V-Factor platform will be an attractive solution.

Turning now to timing, test and measurement; revenues were $21 million for the second quarter, up approximately 14% from the prior year. TT&M revenues in the quarter came from a broad mix of products, including our high performance time and frequency solutions, Cesium clocks and network time servers.

In domestic business, we began receiving orders for our recently developed common timing modules for use in a wide range of government communication systems. The first applications will be in the Air Force and the Army. We believe this represents a long-term evolution in timing infrastructure for mobile platforms and an emerging opportunity for our instrumentation business.

We are also very pleased to announce a multi-year program win for voltage controlled crystal oscillators under the Air Force’s GPS Block 3 program. The contract is valued at approximately $4 million over the next three to five years. GPS Block 3 is a next generation global positioning system, designed to enhance space based navigation and performance and set a new world standard for positioning and timing services.

Before I turn the call over to Justin, I’d like to make a few comments about the cost savings restructuring we announced a couple of weeks ago and that will result in the elimination of approximately 100 positions within the company. We felt that restructuring was necessary to ensure that we achieve our profitability goals in fiscal 2009 and to position the business for continued profit growth in 2010.

Restructuring is comprised of two primary components; reducing manufacturing costs and streamlining operating expenses. About a year and a half ago we started the process of outsourcing the production of our printed circuit board assemblies to Sanmina. We began by moving our highest volume products to a Sanmina facility in China. Based on the success of the outsourcing program to-date, we are now taking the next logical step in transitioning the remainder of our Puerto Rico PCB operations to Sanmina.

More than half of the positions eliminated are in our manufacturing operation and are tied to this and other operational efficiency measures. We are also restructuring our operating expenses by streamlining our sales and G&A costs, as appropriate. Once completed, we expect these actions to result in roughly $7 million of annual savings, which should improve profit margins.

Looking to the remainder of our fiscal year we expect stronger revenues in the second half, consistent with our recent historical patterns. For the past few years, the first half has represented about 45% of total revenues, with second half revenues rising to about 55%. From what we see with respect to our strategic accounts and activity around our new products, we expect a similar pattern in fiscal 2009.

Our outlook reflects our expectations of higher second half revenues, but we are adjusting our annual revenue guidance due to the economic environment and its expected impact on our CDMA OEM business and our North American service provider spending. We now expect fiscal 2009 revenue to be in a range from $220 million to $230 million.

AT&T and Verizon continue to be important customers for Symmetricom and we expect them to be meaningful contributors to our second half. Our guidance takes into account our recent discussions with both of them. Given the savings expected from our recent restructuring actions, we are maintaining our annual non-GAAP EPS guidance.

I’d now like to turn the call over to Justin for details on the financials and full year and third quarter guidance.

Justin Spencer

Thank you, Tom. Let me now provide more details on our second quarter financials. Please note that all comparisons I will provide in my comments are made to the second quarter of the prior fiscal year.

Revenue was $48.2 million, 1% lower than prior year revenue of $48.8 million. Telecom Solutions revenue in the quarter was $27.3 million, down $3.3 million or 11%, driven largely by the delays and lower shipments to wireless OEM customers. We also deferred revenue on $600,000 worth of shipments to customers that recently declared bankruptcy, including Nortel and we’ll recognize this revenue when we are paid.

For the remainder of the fiscal year, the revenue we expect to realize directly from Nortel is relatively small and we do not currently have any further exposure to the Nortel entities that are part of the bankruptcy filing.

TT&M revenue for the quarter was $20 million, up $2.7 million or 14%, following strong prior quarter bookings. TT&M continues to perform well with a healthy backlog in place and several lengthy contracts. As was the case in the prior quarter, no single customer accounted for more than 10% of total revenue, reflecting our increasingly diversified position in the markets we serve.

Gross margin in the quarter was 47.4%, compared with 44.6% last year. On a non-GAAP basis, gross margin was 48.4% compared with 47.1%. Gross margins in the second quarter were higher due to a favorable product mix led by TimeCreator, our new cable timing product and are beginning to reflect the benefit of many of the cost reduction measures implemented over the past year and a half. Of the roughly $7 million in annual savings to be realized once the restructuring is completed, roughly 40% or about $3 million will flow through gross margin.

Operating expenses were $19.6 million or 41% of revenue, down $2.7 million from the prior year. Non-GAAP operating expenses were $19 million or 40% of revenue down $2.3 million from the prior year. Our second quarter operating expenses include roughly $2 million in benefits related to our holiday shutdown, reductions in bad debt reserves and other compensation related programs which are not expected to recur.

After factoring in our normal seasonal operating expense increase in the second half and the benefits of the restructuring, we now expect non-GAAP operating expenses in our second half to be approximately $22 million per quarter. GAAP net income from continuing operations was $1.5 million or $0.03 per share, compared to $200,000 last year. Non-GAAP net earnings for the quarter were $2.7 million or $0.06 per share, compared to $1.8 million or $0.04 per share last year.

Ending backlog was $50.1 million, down slightly from $50.9 million at the end of the prior quarter. We estimate that $40.7 million of our backlog is shippable within six months, $6.1 million is shippable within six and 12 months, and that $3.3 million will be shippable beyond one year.

Cash and short term investment balances were $101.9 million at the end of the quarter, down $4.5 million from the end of September. During the quarter we used $1.9 million to repurchase 485,000 shares of our common stock under our buyback program at an average price of $3.95 per share. As of the end of the second quarter, we had outstanding authority to repurchase an additional 2.1 million shares of our common stock.

During the second quarter of fiscal 2009, cash used for operating activities was $700,000 and capital expenditures totaled $900,000, resulting in free cash outflows of $1.6 million. Cash used for operating activities reflects a $3.4 million increase in net inventory built in anticipation of higher revenue in the second half. We expect to generate significant free cash flow for the entire year.

As Tom noted, we are updating our full fiscal year revenue guidance to an expected range of $220 million to $230 million and maintaining our non-GAAP earnings guidance of $0.35 to $0.41 per share. GAAP earnings are now expected to be in the range of $0.17 to $0.22 per share due to an estimated $5 million in restructuring charges.

For the third quarter we are anticipating revenues in the range of $54 to $61 million, GAAP earnings in the range of $0.01 to $0.05 per share, and non-GAAP earnings per share in the range of $0.07 to $0.12.

I’d like to now hand the call back to Tom for his closing remarks.

Tom Steipp

Thanks, Justin. Symmetricom’s diversified position within wireline, wireless, cable, enterprise and government networks around the world has helped us achieve solid financial results during this challenging economic time.

Looking to the second half of our fiscal year, we expect to build on our first half results with year-over-year revenue growth and significant year-over-year earnings improvement. Between the strength of our existing businesses, our position as a trusted technology leader and the potential of our new products, I believe that we have a strong platform for continuing profitable growth.

We are successfully executing on our strategy with respect to maximizing our opportunities in emerging geographic markets, penetrating new markets with new products, as well our modernization efforts to support increased network capacity and next generation applications. In addition, we will benefit from our restructuring efforts for the remainder of this fiscal year while optimizing the baseline for fiscal year 2010.

I want to thank everyone for joining us today. This concludes the prepared portion of our presentation. Justin and I will now take questions. Kelly, you can poll the audience for any questions.

Questions-and-Answers Session

Operator

(Operator Instructions) The first question is from Mark Sue of RBC Capital Markets.

Joe Spec - RBC Capital Markets

Hi, guys. This is actually Joe Spec [Ph] calling in for Mark.

Tom Steipp

Hi, Joe.

Joe Spec - RBC Capital Markets

Hi, how are you? Just a couple of questions; one, the sequential decline in gross margin, I know the revenue mix, it sounded like there was some delays in push-outs, but on the gross margin side, was any of that volume base or was it more mix?

Justin Spencer

Hi Joe, it’s Justin. The change, you’re referring to the last quarter right?

Joe Spec - RBC Capital Markets

Correct.

Justin Spencer

The primary driver was cable. Last quarter we had a very high mix of cable volume, a record quarter for us and really built on a healthy, a very strong backlog that we had ending the fiscal year and that drove our margins up significantly. So, we returned back to more normal levels this quarter as a result.

Joe Spec - RBC Capital Markets

Okay and then on that, can you give us a little bit more color on the cable product outlook? We’ve seen some of the MSOs come out and say they are cutting CapEx in 2009 and I was just wondering if you have any color given we’re sort of at the month end already.

Tom Steipp

Well, given the current economic environment and the uncertainty associated with that as a disclaimer, I think there certainly is pressure on CapEx spending around all of the competitive markets, between cable and telecom.

Having said that, to a large extent our DTI products are tied to DOCSIS 3.0 and the modular CMTS that tends to be one of the stronger competitive advantages for a lot of the cable operators; so not to say that we don’t have concerns about it, but just to say that at least in our conversations with them there continues to be a strong interest in them advancing the capabilities of their networks and where it’s modular 3.0, we will be a part of that solution.

Joe Spec - RBC Capital Markets

Okay, thanks. Just I missed the backlog number. Do you remind repeating that for the quarter?

Justin Spencer

Yes, $50 million.

Tom Steipp

$50.1 million.

Joe Spec - RBC Capital Markets

Okay, thank you.

Operator

Your next question is from Mike Crawford of B. Riley & Co.

Mike Crawford - B. Riley & Co.

Thanks. Your inventory is up a little bit and I’m wondering how much of that is a function of needing to keep inventory at your contract manufacturing or what your thoughts are going forward regarding inventory levels?

Tom Steipp

Yes, the inventory had very little to do with what we have at contract manufacturers. It more reflected two things; one is, we had a number of projects that we felt had a probability of falling into Q2 and we built according to that, and when those slid out into Q3 we were left with the inventory.

The other thing is this quarter is traditionally one where we’ve gotten more inventory than the rest of the year. Our second half is always much stronger from a revenue standpoint or I should say, has historically been stronger from a revenue standpoint and given the lead times of a lot of our components, there is an evitable build-up. So those are really the two pieces of it and I can’t tell you how much was in each one, but those were the basic components.

Mike Crawford - B. Riley & Co.

Okay, thank you. Then I missed the second part of what you said about Nortel. You said there was a $500,000 impact, but of products that had been shipped to Nortel at the time they filed, what have you been paid for and what’s still out there?

Justin Spencer

Yes, the $500,000 reduction of revenue or deferral, relates to product that was shipped in the second quarter and we elected we think appropriately to not recognize that as revenue. We have not been paid for that product and is governed under the bankruptcy process that is unfolding and so we don’t expect that to be resolved any time soon. Then going forward, we do not have a significant amount of revenue baked into our projections associated with Nortel.

Tom Steipp

Just to comment, a substantial amount of our Nortel revenue tends to go to China for their wireless and that was not part of the bankruptcy proceedings, just for a clarification.

Mike Crawford - B. Riley & Co.

Okay thank you, and can you talk a little bit more about this BSNL win? Are you out there bidding for other similar projects in other emerging markets?

Tom Steipp

Yes, I think the nature of our business is that the incumbent rules. I’m really not aware of any accounts where there are multiple sync vendors installed. So, anytime a country or company comes up with an opportunity we and the other two or three other guys that are in our space go compete for it. That was the case with BSNL in India.

There were two awards just to be clear. One of our competitors got a portion of it; we got a piece of it. We got the larger of the two pieces and believe that because of the emphasis on infrastructure build-out in India, both wireless and wireline, that that’s going to be a solid market for us and one that we’ve kind of been investing in for the last couple of years.

Mike Crawford - B. Riley & Co.

And who got the other piece?

Tom Steipp

The other piece actually went to (Inaudible).

Mike Crawford - B. Riley & Co.

Okay, great. Thank you.

Operator

Your next question is from Ted Jackson of Cantor Fitzgerald.

Ted Jackson - Cantor Fitzgerald

Thanks. So, although the top line was a little light, it sounds like things are going pretty well for you guys. I guess one question I have here is just the point item; can tell me what the depreciation was for the quarter?

Justin Spencer

I don’t have that number off hand Ted.

Ted Jackson - Cantor Fitzgerald

Okay.

Tom Steipp

We are hunting for that. Do you have a next question while we look?

Ted Jackson - Cantor Fitzgerald

I do, another model question. On the $5 million of restructuring expense that you expected to have in the back half of the year, will we see all of that in the third quarter or how would that layer out over the next couple of quarters?

Tom Steipp

A good portion of that will occur in the third quarter, I’d say probably 60% of that in the third quarter and the remaining 40% in the fourth quarter.

Ted Jackson - Cantor Fitzgerald

And then when you think about that, did you say above that? And then how much of that restructuring expense will show up in cogs versus OpEx?

Justin Spencer

About the same ratio; about 40% up in COGS and 60% down in OpEx.

Ted Jackson - Cantor Fitzgerald

Okay and then on the BSNL win, can you give us a sense in terms of; I mean it’s a very large carrier. Where you think a win like that could go. I mean do these guys have the potential of being a piece of business for you of the same magnitude of an AT&T or a Verizon?

Tom Steipp

I don’t know that they would rise to that level, given the nature of our networks here in the U.S. that are predominately wireline centric; whereas in countries like India and China, there’s a much greater percentage of wireless, but having said that, they’re the seventh largest carrier in the world and we took that business very seriously in terms of both the aggressiveness of our bid and our commitment to deliver to them in a way that would position ourselves for follow-on business.

Ted Jackson - Cantor Fitzgerald

And then lastly on the 1588, I think that it seems that with revenue being recognized that maybe that markets developing even a little bit faster than it might have seemed to you for instance when you had your Analysts Day. Number one, is that indeed the case, and then, as you look at that market, do you have any kind of sense in terms of what portion of percent of revenue it might be as we exit in either fiscal or calendar ‘09?

Tom Steipp

I think it’s a little too early to make any projections on the level of revenue that it would constitute exiting either fiscal or calendar. Relative to the first, I think we’re about on plan. We have 15 or 16 trials at this point in time and we’ve got a long list of people who are waiting for units to trial.

So I think perhaps just by virtue of the fact that we don’t have enough product to meet all the demand it maybe a little bit higher. It’s going a little bit faster than we had expected, but having said that, it’s going to be a couple of quarters until the revenue is anything significant.

Ted Jackson - Cantor Fitzgerald

And then a similar question on the cable side, which is something you started to see; some nice traction within the back half of last calendar year. When you look at that business and you look at it for this year, do you expect it to show some meaningful growth and is there a chance that it could at least get to 10% of revenue?

Tom Steipp

Yes, it will definitely show growth year-over-year, and I think this is still going to hold true, although not the same degree of specificity as our other guidance, but we would expect it to be somewhere in the neighborhood of between 10% and 15% of revenue for the company during the course of the fiscal year and when I say that, that would be our new product portfolio, so I’d lump 1588 and QoE in with that.

Since they’re new markets, it’s a little hard to forecast each one individually, but as a composite I think we are pleased with the progress of our new products and certainly very pleased with the competitiveness that they represent in the markets that we’ve got them positioned in.

Ted Jackson - Cantor Fitzgerald

And then my last question is, I know you don’t break out your revenues to the level of detail that you did a few quarters ago, but can you give us a sense in terms of the size of where your wireless OEM business was in the quarter and the declines that you’ve seen in it?

Tom Steipp

Yes, we’re not breaking that out Ted, but it’s CDMA-based; we are seeing a tailing off of that. We were about $25 million the year before last, we were about $20 million last year; we’re running about 10% of revenue this year, 10% down.

Ted Jackson - Cantor Fitzgerald

Okay, that’s it for me. Thanks very much.

Justin Spencer

Okay Ted, I’ve got a number in my head, but I want to confirm it, so I’ll get back to you on the depreciation number.

Ted Jackson - Cantor Fitzgerald

All right. Thanks, Justin.

Operator

Your next question is from Simon Leopold of Morgan Keegan.

Mark Harrell - Morgan Keegan & Co.

Hi guys, this is Mark Harrell filling in for Simon today.

Tom Steipp

Hi, Mark.

Mark Harrell - Morgan Keegan & Co.

How are you doing? A couple of questions; one, can you just repeat the information on the repurchased shares in the quarter.

Justin Spencer

Yes sure. So we repurchased 485,000 shares at our average price of $3.95, which equated to $1.9 million cash outflow.

Mark Harrell - Morgan Keegan & Co.

That was $1.9 you said?

Justin Spencer

Yes.

Mark Harrell - Morgan Keegan & Co.

Okay, thanks. My next question is, you talked about modular CMTS sales being down versus Q1, Q1 being your all time high. Do you think that’s going to continue to trend downward for the rest of the year or do you see a spike?

Tom Steipp

I think the better way to look at it is, the demand has been pretty steadily up and the growth is slowing, but we see a steady demand quarter-over-quarter. What we saw in the first quarter Mark was working off a backlog or to be specific, reducing our lead times from 16 weeks down to two. So, the first quarter represented a spike; we said that last time that we didn’t expect it to continue, but we do see a steady demand quarter-over-quarter and that would give us certainly year-over-year growth.

Mark Harrell - Morgan Keegan & Co.

Okay and is that a kind of phenomenon that you’ll see in future Q1s or do you think that’s a one time thing?

Tom Steipp

I think that’s a one-time. We underestimated the speed with which people would pick up the modular CMTS and we just didn’t have enough inventory to meet the demand.

Mark Harrell - Morgan Keegan & Co.

Next, you said you didn’t have any 10% customers in the quarter, but maybe among your top five, we have an idea AT&T and Verizon that are large. I mean was there an MSO in your top five?

Tom Steipp

Last quarter we had one and I forget which one it was; I think it was Comcast. I’m going from memory, I don’t remember. We didn’t have one this quarter and we didn’t have one that was close enough that we said no, we’re not going to talk about that one.

Mark Harrell - Morgan Keegan & Co.

Also, getting back to the emerging markets discussion, with the 3G licenses in China, do you expect to see any opportunity there and if so, when do you think sales could begin coming in from that?

Tom Steipp

Well, I think the biggest opportunity we have with 3G in China is wrapped up around our 1588 deployments. There are three networks being overlaid in China; TBS/CDMA, CMA 2000 and I forget which; I’m just spacing on the third one right now, but one of the nice things about the business we’re in synchronization is; everything mobile requires synchronization.

So they will either put it in the base station which we don’t think is the likely preferred method, especially in China, they have a bit of an aversion to GPS. So we think more of it will be 1588 deployments and we believe we’re working aggressively to part of as many solutions as we can.

Mark Harrell - Morgan Keegan & Co.

Okay, and just kind of a one more broad question. I know we heard from AT&T and Verizon, the guided CapEx was down in ‘09, but anything else that’s changed in your business that you can talk about, that’s caused the guidance to go down for the fiscal year?

Tom Steipp

No, I think the bigger the customer the more time we spend with them. So we have a lot of very direct conversations with our top-tier customers and absent things that they don’t know about, we’ve got a pretty good estimate of what they expect. The broader economy in general though, since we are so diversified, it’s a little hard to say and we’re being a little cautious probably just given the economic environment.

Mark Harrell - Morgan Keegan & Co.

Okay, that’s all I have. Thank a lot guys.

Operator

Your next question is from Cris Blackman of Empirical Capital.

Cris Blackman - Empirical Capital

Thank you. Hey, congratulations on taking action in the areas you can control and that’s the OpEx on the announcement you had a week or two ago. I know you hate doing that, but it’s certainly something we needed to see. Are you there?

Tom Steipp

Yes.

Cris Blackman - Empirical Capital

Okay. Maybe to follow-on that last question, congratulations on the sizeable order in India. I know China and Japan you were working on orders there behind India, can you maybe give anymore guidance on the success or how China and Japan are going?

Tom Steipp

We really don’t see anything significant in this fiscal year for either China or Japan. Having said that, obviously Japan has the third largest network in the world and in NTT. The suppliers of sync for that are NEC and Fujitsu and they’re both out of the business at this point in time, so we continue to see that as an opportunity.

Then with respect to China, as was just mentioned, I think it was January 7 they released the spectrum for three national new build-outs of infrastructure on the 3G side. My comment holds they’re going to need Sync in every one of the base stations; 1588 is a contender for how they will provide that. We certainly believe that we are well positioned in that market when it takes off.

Cris Blackman - Empirical Capital

Timing of that, has it a guess at all?

Tom Steipp

You know, it’s like infrastructure projects in the U.S. You announce it; it takes a while to build it out. So again, we’re not expecting anything in this fiscal year from that, but just the magnitude of that build-out is pretty intimidating or opportunistic.

Cris Blackman - Empirical Capital

Okay, good. On the wireless, under the last quarter you reported your first OEM board design win for WiMax, any update there?

Tom Steipp

Only to say that in general as we reflected the revenue for the quarter we had some projects that moved out, that’s business which we’re going to pick up in the next quarter. I think that what we said was that OEM business in general seemed to be down and that wasn’t projected related, that was more related to a roll off in CDMA demand as people looked to build out more 3G networks.

We would expect to see over the course of the next 18 months or so, less of what we used to term OEM business and more of what we now term 1588 business. Same customer, same problem, just solved a different way, but it will take a while for one to fall off totally and then take a while for the other one to build up.

Cris Blackman - Empirical Capital

But you do expect in Q3 for there to be revenues starting to hit on that?

Tom Steipp

Yes, we started to get some revenue in Q2. It was a very modest amount, but it was our first commercial deployment and as I mentioned in the call, we have a backlog of customers who want to trial the unit, so we think that’s a good sign.

Cris Blackman - Empirical Capital

Okay. Tom, you mentioned that traditionally your telecom solutions division I guess has been split 45/55 first half of the year to the second half and then you further stated that you expect that to hold true, given the success of your new products.

Tom Steipp

A point of clarification Chris, just for other people listening, that was total revenue, so there is a bit of a mix there, but we went back the last two years, basically since people like AT&T and Verizon quit buying a lot of year end stuff. Very consistently total revenues for the company have been about 45% and about 55%. Obviously we didn’t have the same economic environment that we’ve got today, but that’s part of what goes into our forecasting for the year.

Cris Blackman - Empirical Capital

Okay, that’s total revenue, but I was kind of understanding earlier in this conference call discussion that you were more alluding to Telecom Solutions, is that right?

Tom Steipp

No, I was not. That was total revenue for the company. So again, it’s a bit of a forward-looking statement I guess. It just says historically we’ve run about 45% of our revenue in the first half and you can pull that right off our financial statements.

Cris Blackman - Empirical Capital

AT&T and Verizon, obviously as you mentioned, in this environment we’re not seeing the kind of volume we’ve seen in the past and I know you’ve been expecting an upgrade, but what would be a level that’s just pure maintenance on their part? How much downside is there to the current business? And I know you don’t break it out for us the way you used to, but based on the level of business that you saw with those customers this last quarter, how close are we to just a pure maintenance level of spending?

Tom Steipp

Well, I think historically at a maintenance level they’ve been down, each of them, a couple of million dollars a quarter, plus or minus something like that. When you get to the upper ends, depending on the year and depending on the account, it’s been up in the $5 million, $6 million, $7 million, $8 million a quarter range.

So a big spread there, Cris. What I will say is that we have spent a lot of time with both AT&T and Verizon. We know that AT&T cutting back on their universe spending, but we feel that all the information that we have relative to what they would expect to buy from us and Verizon, is baked into the guidance that we just gave for the quarter.

Cris Blackman - Empirical Capital

And so, I guess just try to help me understand; are we at that maintenance level then? I mean was this last quarter more or less at that maintenance level? When you say $2 million downside and maybe $5 million or $7 million or $5 million upside I mean?

Tom Steipp

Our fiscal first and second quarter are always the weakest because it’s the last half of the year for them and the first two quarters of the year through June, are always the strongest and that reflects, as with the cable operators the fact that they’re on a calendar year end; they put budgets together for us; they try to spend as much of it as possible and we try to get them to spend as much of it as possible, so that there are opportunities to pick up more on the backend of the calendar year.

Cris Blackman - Empirical Capital

Okay and I’ve heard you say a couple of times in this call that, given the economic environment we’re trying to be somewhat conservative. Would that suggest that the guidance that you’ve given us assumes that AT&T and Verizon, we will get somewhat of bump out of them or is that guidance at that maintenance level?

Tom Steipp

This one is easy to answer. The guidance we gave even at the low end would assume a much stronger second half than the first half and certainly that is driven in no small part to our business with AT&T and Verizon.

Cris Blackman - Empirical Capital

Okay. At the Analysts Conference that you had up in New York, I know you stated that you were looking at an operating income of 15% or more by 2010. Is it asking too much to ask you to look out that far again and see if that’s still a realistic expectation?

Tom Steipp

We still think that’s a realistic expectation and would represent a goal, not a forecast but a goal for the company and we’ve been making progress on both gross margins and OpEx.

Certainly, unexpected fluctuations in revenue can have impacts on that, but I think what you saw in our restructuring was just the next step in reducing our operating expense envelope to get us closer to that. I mean keep in mind over the last two years we’ve shut down a couple of facilities; we’ve moved engineering to China; we’ve reduced our dependence on internal manufacturing and used lower cost outsourced manufacturing. We think all of these things will help make us a more profitable company and that’s our goal.

Cris Blackman - Empirical Capital

Congratulations on your efforts in those areas. The gross margin non-GAAP expectation for your divisions, I know you’ve stated in the past that your new products, you expected a non-GAAP gross margin of somewhere between 50% and 65%. Is that still a number that you expect?

Tom Steipp

Yes, I think that still reflects the competitiveness of the products in the markets.

Cris Blackman - Empirical Capital

Do you lean to either side of that 50% to 65% pretty broad range?

Tom Steipp

As with all of our products, it really depends on how they mix inside, but in general, our new products do carry a higher gross margin and obviously have a higher year-over-year growth profile than our more mature products.

Cris Blackman - Empirical Capital

Right. Earlier it was stated that you expect your cable volume mix to return to a more normal level. Obviously this last quarter we were down because of the strength of the prior quarter. It’s kind of hard to understand what adjusting to a more normal is, given that we haven’t had that product so long. Would a more normal level be growth from what you posted in Q4 or from Q4’s level, since Q1 was a spike and then Q2 came back down or is Q2 a more normal level?

Tom Steipp

Yes, I would caution against trying to take any given quarter and extrapolate Cris, but we’re pretty confident that cable, plus the other new products will represent 10% to 15% in the year and that cable is the biggest chunk of that. So, that’s what I would say.

Cris Blackman - Empirical Capital

All right. Hey, thanks guys.

Tom Steipp

Okay

Operator

(Operator Instructions) There are no further questions at this time.

Tom Steipp

Okay, if there are no further questions, we will sign off for the second quarter and look forward to reporting third quarter results with everyone at that time. Thank you very much.

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