Airvana Inc. Q4 2008 Earnings Call Transcript

Feb.12.09 | About: Airvana Inc. (AIRV)

Airvana Inc. (AIRV) Q4 2008 Earnings Call Transcript February 12, 2009 8:30 AM ET

Executives

Jeff Glidden - Chief Financial Officer

Randy Battat - President and Chief Executive Officer

Analysts

Blair King - Avondale Partners

Brain Modoff - Deutsche Bank

Catharine Trebnick - Avian Securities

Richard Valera - Needham & Company.

Scott Coleman - Morgan Stanley

Amir Rozwadowski - Barclays Capital

Operator

Good day everyone, and welcome to Airvana’s fourth quarter 2008 financial results conference call. As a reminder, today’s call is being recorded. There will be an opportunity for questions after the prepared remarks.

At this time for opening remarks and introductions, I would like to turn the call over to Airvana’s Chief Financial Officer, Mr. Jeff Glidden. Please go ahead, sir.

Jeff Glidden

Good morning and thank you for joining us. With me today is our President and CEO, Randy Battat. The earnings release we issued this morning is now posted in the Investor Relations section of our website at www.airvana.com. We have also posted a slide presentation that we will be referring to for today’s call. Randy will open the call with an update on the business and then I’ll review the financials and outlook, and at that point we’ll open it up for your questions.

Before we begin, I’d like to remind you that certain information contained in this call constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those forward-looking statements as a result of various important factors, including those discussed in today’s press release and those included in our Form 10-K, which was filed by the company with the SEC on March 7, 2008 and our other SEC filings.

Any forward-looking statements represent only the company’s views as of today, February 12, 2009 and are based on current expectations in light of the current economic environment. While the company may choose to update forward-looking statements in the future, we specifically disclaim any obligation to do so, even if our estimates change.

You should not rely on these forward-looking statements as representing our views after today. In addition, during the call we’ll be discussing certain non-GAAP financial measures as defined under SEC rules, including billings, gross margin on billings and operating profit on Billings.

Please see Exhibits 1, 2 and 3 included in today’s press release for a reconciliation of these non-GAAP measures to the most directly comparable GAAP measure. Again, the release maybe found on our website. A copy of the press release and the slides have also been submitted as an Exhibit to an 8-K filed with the SEC.

With that, I’ll turn the call over to our President and CEO, Randy Battat.

Randy Battat

Thank you, Jeff. Good morning everyone and thanks for joining us. Let’s move to slide four; Q4 was another solid quarter for Arivana, invoiced shipments to operators and OEM customers grew 19% and exceed our outlook ramping up a really strong second half for the company. I’ll review Q4 and the full year 2008 by product line, as well as our outlook for Q1 in 2009, but first a word on Nortel.

Nortel file for bankruptcy on January 14. The financial implications to Airvana affect outstanding invoice and unbilled receivables prior to that date. Going forward we expect Nortel to continue the purchase EV-DO products and services as usual and to pay us according to the terms of our contract.

It is our intention to collect on all outstanding amounts owed by asking Nortel the formerly assumer our contract in bankruptcy court, because this outcome is not certain we are reducing our billings in Q4 by 21.8 million, the value of outstanding invoices at the time of Nortel’s filling.

In addition Nortel shipments of Airvana products between December and their January 14 filling would ordinarily have been billed in Q1. We are therefore reducing our billings by an expected $12 million to $15 million to account for this. We know investors are interested in the most complete picture of business of activity, so we are breaking out our financial data to show the specific elements associated with the Nortel bankruptcy.

Including the $21.8 million of pre bank bankruptcy filing outstanding invoices from Nortel, invoice shipments were $39.8 million for the quarter versus $33.3 million last year and our outlook of $36 million to $38 million, also including the $21.8 million our operating margin of 27% exceeded our annual target of 20% to 25%.

The core EV-DO business was up over the prior year for both the quarter and the second half. New products represented several million dollars of billings in the quarter or between 5% and 10% of total billings. We invested $9.8 million in buying back 2 million shares and we ended the year with $228 million in cash and securities.

Jeff will discuss our financial in more detail later, but I would like to make several points about 2008’s performance on slide five. Consistent with our outlook at the beginning of the year, shipments in the second half and full year were higher than the prior year. Total operating expenses were flat versus the prior year with research and development down, offsetting increases in sales and marketing, G&A and stock compensation.

Operating margin on billings for the full year and including the $21.8 million in outstanding invoices from Nortel was 23% consistent with our target of 20% to 25% and we generated $12.6 million in cash flow from operations during the year.

Our EV-DO product shipments continue to grow in Q4 driven by the long term trend of growth in mobile broadband traffic. As you can see on slide six, data revenues at AT&T and Verizon continue this trend in Q4. Wireless data traffic growth is one of those long term secular themes that are at the foundation of many operator growth plans, just as internet usage was a key planning assumption for wireline operators in mid 90’s.

Even while many analyst forecast the market for overall wireless infrastructure spending to be down in 2009 almost all agree that broadband data remains a rare growth segment. Both AT&T and Verizon are now realizing about $3 billion in revenue per quarter just for data.

Verizon added that non-messaging data revenues is going rapidly, at 52% a year and now represents over 50% of data revenues. They added that 65% of the devices on their network, that’s over 45 million units are now broadband capable. Translated, there is a huge installed base of devices using capacity on their EV-DO network.

On slide seven, we note that our EV-DO business in Q4 was driven by three factors. The first is new coverage deployments. Initial shipments to China Telecomm started in Q4. China business was an expectation in last quarters call and today it’s a reality.

The second driver was capacity expansion. We saw healthy orders for expansion of existing networks, especially for additional cards and Radio Network Controllers and finally we delivered a major software release in Q4, Version 7.0 adds features to expand the clustering capacity of RNCs and gives operators more tools to track and manage the performance of their networks. Software upgrades and maintenance just like last quarter represented over 25% of our EV-DO invoiced shipments for the quarter.

On slide eight, I’d like to make some additional comments on the Nortel situation going forward. We believe Nortel CDMA business is a valuable asset, it enjoys the number two market share position as part of the Carrier Networks divisor, which is consistently been very profitable. Nortel informed us post filing that Airvana is a long-term partner and key supplier, that we play a vital role in its ability to continue serving the needs of CDMA customers and that we are a significant part of both their ongoing operation and future success.

We believe that the CDMA business unit will emerge from this bankruptcy process as a valuable entity, continuing to provide critical products and services to its customers. We intend to be a key provider of EV-DO solutions to Nortel’s customers throughout this process and for many years into the future. I would also note that, Jeff Glidden is now one of four member of Nortel’s Creditors Committee placing Airvana in a significant role overseeing Nortel’s reorganization.

Slide nine, discusses the outlook for our EV-DO products. Business continues to be driven by new deployments, capacity expansion and software upgrades. We’re working on two major releases this year. One would be delivered right around mid-year and the other in Q4.

Including the value of outstanding Nortel invoices we expect our EV-DO shipments to be up in the first half versus last year, with the second quarter higher than the first due to operator deployments schedules. For the full-year we expect our EV-DO business to be higher in 2009 and 2008.

Let’s now turn to our Femtocell product line. As shown in slide 10, femtocell’s transform the indoor experience of using the mobile device by connecting your phone or smart phone to the operators network over the internet. They provide users with great coverage and faster performance and they offer operators a radically lower cost way to deliver high-quality services and traditional macrocell base stations.

The femtocell concept continues to gain mindshare across the industry. Earlier this year, Verizon Wireless lost a femtocell service, which is based on Samsung’s product that delivers voice, but with no broadband data. In 2009, as the year progresses, we expect to see announcements from more operators around the world detailing their plants for femto deployments, there will be a lot of competitive activity in this space.

Throughout 2008, Airvana won a number of deals with both operators and partners, some of these have been announced and some will be in the coming months. It’s still very early days in what we expect to be a large rapidly growing market.

Slide 11, underscores the importance of partnerships in the femto industry. Especially in the early days, operators will want to see their incumbent suppliers taking charge of end-to-end system integration with their core networks and that’s why we signed deals with Alcatel-Lucent, Hitachi, and Motorola and Nokia Siemens networks.

Many operators also wants femto’s integrated with wireline home networking equipment. Last quarter, we announce the signing of a deal with Pirelli Broadband Solutions. Pirelli is a major supplier of broadband home networking equipment with a significant presence at several operators like Telecom Italia.

Pirelli will be integrating our UMTS femtocell modules with their home gateway, so operators can deliver combined wireline/wireless services such as video, telephony, internet access, Wi-Fi and mobile phone service all through a single box.

Finally, we continue to expand our leadership team. In January Glenn Laxdal joined Airvana as Vice President of Femto Product Line Management. Glenn was formally Vice President of Product Management for Nortel CDMA business. Someone we’ve worked with and respected for many years and we are delighted to have Glenn on our team.

We believe that Airvana is in a unique position in the emerging femto market, as really the only vendor with both CDMA and UMTS products with ownership of all critical technology layers in the femto access point and the broadest eco-system of partnerships in the industry.

Looking forward on slide 12, our CDMA and UMTS products remained on scheduled for general availability this year. We have a solid backlog of orders for [3Ga] prototypes and engineering services for delivery in the first half of 2009 and we expect femto billings to represent 5% to 10% of total billings for this period. For the full-year, we expect femto related products to account for 10% to 20% of our total business.

To summarize our outlook, we expect continued growth in the first half and full-year for our core EV-DO business, driven by continued growth in mobile broadband traffic. Nortel’s bankruptcy is an important issue in the short-term, but we don’t believe it affects long-term mobile broadband trends.

Total invoice shipments including outstanding Nortel invoices will be lower in Q1 than last year, but we expect Q2 to be sequentially and annually higher, with the total first half higher, year-on-year. We also expect growth in our EV-DO products and new products for the full year, with new products going from 5% to 10% in the first half, to 10% to 20% for the full year.

I’ll now turn the call over to Jeff, for a review of our financial results.

Jeff Glidden

Thank you Randy. On slide 14, we present our key performance metrics including billings, operating profit on billings, cash flow from operations and total cash for the fiscal years 2007 and 2008. Billings reflects the sales activity in a period and represents the product and services that have been invoiced to our customers.

For 2008, we have also presented Pro Forma billings to include the $21.8 million of pre bankruptcy filing outstanding invoices to Nortel. These billed and unbilled pre-petition amounts will be accounted for in a cash basis as they are collected.

Pro Forma billings for 2008 increased to $146.9 million compared with $142.2 million for the prior year. On a Pro Forma basis our profit on billings for fiscal 2008, was $34.5 million or 23% and compares with operating profit on billings of $34.9 million for 2007.

2008 cash flow from operations was $12.6 million and includes approximately $16 million in tax payments in Q1 of 2008, related to our 2007 profits, as well as an estimated tax payment of $9 million in Q3 of 2008. Our year-ended cash and investment position increased to $228 million and we repurchased $2.7 million shares of our stock for $13.3 million in the second half of 2008.

On slide fifteen, we present Q4, 2008 non-GAAP financial results on both billings and on a Pro Forma basis. Again the Pro Forma results include the $21.8 million of pre-bankruptcy filing outstanding invoices to Nortel and are presented to show the volume of customer activity for the period. As cited earlier, invoice shipments increased to $39.8 million for the fourth quarter of 2008.

Q4, 2008 operating expenses totaled $24.6 million and were $2.8 million or 10% lower than Q4 of 2007. As discussed previously, we are spending less that R&D and more in sales and marketing as we bring our new FMC products to market. On a pro forma basis our operating profit increased to $10.8 million or 27% and compares to $3.4 million for the prior year, again this reflects the significant leverage in our underlying operating model.

Slide 16, presents our longer-term financial model. Given our projected mix of hardware and software products, we expect gross margin to be between 65% and 75%. As these new products come to market and begin to generate additional growth in billings, we expect to see significant leverage in our research and development spending, such that we expect R&D spending to be between 30% to 40% billings.

At the same time, we planned to increase our sales and marketing spend as we bring new products to market. Overall we believe we can continue to grow our business and generate 20% to 25% operating margins and significant cash flow.

Turning to the balance sheet on slide 17, we ended the year with approximately $228 million in cash and investments or some $3.32 per share. In July of 2008, our Board of Directors authorized a $20 million stock repurchase program and we repurchased $2.7 million shares of Airvana stock for $13.3 million in 2008. As announced today, our Board of Directors has approved a second stock repurchase program authorizing the company to purchase up to an additional $20 million of our common stock.

I will conclude our prepare remarks with a financial outlook for the first half in the first quarter of 2009, as presented on slide 18. For the first half of 2009, we expect our EV-DO and FMC products to be greater than the first half of 2008. For the first quarter of 2009, we expect invoiced shipments to be in the range of $32 million to $34 million. We are estimating that $12 million to $15 million of our Q1 invoice and we’ll be considered pre-petition amounts and collection will be subject to the Nortel bankruptcy process.

As a result we will also account for these on a cash basis and recognize billings and deferred revenue as collected. Therefore we expect our first quarter reported billings to be in the range of $17 million to $22 million. As cited earlier, all pre-petition invoiced into Nortel or some $34 million to $37 million will be subject to the bankruptcy process.

Therefore we expect our first quarter operating cash flow to be negative by some $25 million to $30 million. As all post-petition invoicing will be paid under normal terms, we also expect cash flow to positive for Q2 and for the balance of the year. We expect GAAP revenues to be in the range of $7 million to $8 million for the first quarter of 2009.

In summary on slide 19, we believe the fundamental drivers of our business are sound, the growth of wireless data services continues and major operators are and will continue to add capacity to their networks. We are very pleased with our progress and partnerships in both CDMA and UMTS and except commercial deployments to beginning later this year and finally we have a strong financial position with more than $228 million in cash and investments and no debt.

Randy Battat

I know you all will get chocked up, when talking about our cash position, Jeff.

Jeff Glidden

That concludes our prepared remarks and we’ll be happy to take your questions. Operator, you may now proceed with the Q-&-A.

Question and-Answer Session

Operator

(Operator Instructions) Your first question comes from Blair King - Avondale Partners.

Blair King - Avondale Partners

I have just two quick questions here. You slipped in the China Telecom in the fourth quarter and I’m hoping perhaps you could give us some more clarity in terms of what the mix looks like in China Telecom going forward versus the rest of the world and particularly, as you sort of generally guide doing up first half and a growth year in 2009. I’m wondering, if there is anyway you could give, perhaps it’s too early to tell but anyway you could give us some clarity around what you think that impact really has on your business in 2009?

Randy Battat

We are not going to breakout the specific piece of China, but it’s some solid business and it’s started in Q4 and should be continuing as we go forward here. There is a big chunk of rollout deployments to occur especially the first half as China Telecom rushes to launch their service. So, things are happening pretty quickly, but there should be a good chunk of business, both this year and beyond.

Blair King - Avondale Partners

Just lastly, I guess on the femtocell front. I think last time we spoke, we thought the femtocell or I guess you had mentioned, if my notes are correct. The femtocell would be commercially available in 2009 sort of mid 2009, is that still the right way to think about the commercially availability?

Randy Battat

Yes.

Blair King - Avondale Partners

Okay, and could you give any update on the activity there in terms of trial activity or what stage it’s at?

Randy Battat

Well, there is certainly quite a few trials and lots of RFP activity and we’re in sort of the final stages of testing to get to our first live feel deployments and so forth. So, things are remaining on track a lot of activity, we are trying to balance our own internal resources to support all the activity that’s out there. There’s actually more than we have resources to support, so we are juggling a lot of things and prioritizing right now.

Operator

Your next question comes from Brian Modoff - Deutsche Bank.

Brian Modoff - Deutsche Bank

A couple of questions, one on the femtocells, can you kind of talk about what you see competitively on both sides. In CDMA it seems like that’s a natural market for you and perhaps less competitive, but can you talk about the competitive nature of both areas, who you see out there and such? How do you separate yourselves from them?

Randy Battat

Good morning Brian, first of all. In, CDMA the primary competition with Samsung and they’re shipping a product today and we’re not. So, that –

Brian Modoff - Deutsche Bank

Thanks the 1X product.

Randy Battat

That’s absolutely true, and we do not know of their EV-DO plans, but we believe as you mentioned that we are very well positioned in CDMA with combination 1X, EV-DO and also the right partnerships here. Hitachi has a huge position, KDDI for example Alcatel-Lucent and Motorola have very strong positions at places like Sprint, Verizon and most of the other CDMA operators.

I think there will potentially be CDMA femto opportunities at China Telecom as well eventually. So, I think we are in a pretty strong competitive position yet. I’d love to be shipping now, but we are still in the oven.

In UMTS, certainly more competition, I would say the primary one or most targeted at is [Wireway]; certainly Wireway is going to be a significant player in anything that they do. We also run into Alcatel-Lucent, who is a partner on the CDMA front and a competitor on UMTS.

For most competitors, we like to think of them is in late in customers though, customers they don’t know yet, but we are not yet been able to convince Alcatel-Lucent to partner with us as oppose to compete with us and then we do bump into ubiquitous from time to time. Usually, in conjunction with partnership with Motorola or NEC and much less frequently IP access.

Again from a competitive positioning standpoint, we have a very solid partnership with NSN, who is certainly the number two provider of UMTS networks. In these early days the operators are really looking to their incumbent big infrastructure supplier to do a lot of the system integration work.

So, NSN is the strong opportunity, of course we own our own chips and software and all of that, which gives us cost advantage and then the ability to upgrade the product in time and we are also learning that these OEM deals are very significant too. Especially in the European RFP’s a lot of the operators want as much as 50% or more of the deployment to be integrated boxes, in other words femto’s that also have DSL modems and home gateways built-in and when we walk in with the Thomson or Pirelli, we’re very often walking in with the incumbent wireline box provider, which is an important advantage.

Brian Modoff - Deutsche Bank

If you look at and how you want to partner with some of these players, would this be working perhaps with and Alcatel-Lucent for a femto and joint Verizon as an example. What products would you sell in these kinds of relationships with larger OEM? Would it be jus the boxes? Will you try to do the aggregate or gateway as well? How would you look at that?

Jeff Glidden

In CDMA it’s a little bit different than UMTS, but I’ll talk of those new answers, but in all the cases the large incumbent vendor is providing generally some form of system integration services and usually a box that connects the femto to the core network primarily serving as the way to integrate the voice traffic.

The data traffic is pretty straight forward, but the voice part is trickier because your sort of taking circuit switch voice of the handset into the femto wrapping IP packets around it, wrapping security around it, sending it up through the internet and then you have to unwrap the security and the IP and then hook that up to generally a switch and the box that the switch is talking to kind of looks like a classical base station controller from it’s interface standpoint.

So in CDMA, Alcatel-Lucent is creating something that people often refer to as a convergent server. They use our security gateway and our femto service manager, and similar situation with Hitachi.

In UMTS, Nokia Siemens is providing both the box that does that conversion as well as their own service manager and security gateway and then also the module partnerships are more sensitive for us right now in UMTS that they are CDMA, but again in those cases we sell a femto module to Thomson or Pirelli and then they would sell the whole consumer device to the operator.

Brian Modoff - Deutsche Bank

What would you see as kind of looking at CDMA versus UMTS? Where would you see as your margins when you compared the two, your gross margins? Maybe that’s a question for Jeff and I understand him getting chocked-up about his cash flow?

Jeff Glidden

First I’ll apologies. I’ve been fighting a cold, occasionally I loose my voice, so that a tough one.

Brian Modoff - Deutsche Bank

Bit the cash is a thing of beauty anyway.

Jeff Glidden

Cash is beautiful. On the femto’s we see margins, I think we’ve indicated in the 30% to 40% range and on the gateways and concentrative kinds of boxes those would be in the 60% to 70% heavy software mix. So, I think in the overall business, we feel pretty good about the long-term margins.

There will be some pressure in the first few quarters as we’re not quite at volume and so forth, but I think we see pretty good long-term margins on that and on an operating Brian, we would expect 10% to 15% operating margins on the femtos and probably better than that on the gateways and again that should all equate to a 20% to 25% overall margin for the company.

Randy Battat

On other thing just to add is, as Jeff said the femto access points and sales we would expect in the long-term 30 to 40 points. To the extent it’s a module, let’s say in the business like with Thomson and Pirelli, we would expect the gross margin to be between 40 and 50, although probably less revenue dollars.

Operator

Your next question comes from Catharine Trebnick - Avian Securities.

Catharine Trebnick - Avian Securities

So, Tuesday I believe it was, the CTO Verizon announced at a show in older Colorado that they are immediately moving to LTE. How does this in fact, with those aggressive plans to LTE really affect EV-DO upgrades at Verizon. Could you add some more background into what you are seeing between the transition from the EV-DO to the LTE in that type? Because I think it would help me understand better how to model my EV-DO revenue next year?

Randy Battat

Yes, Catharine that’s an excellent question and I thank you for asking it. It’s a slightly complex answer, but the couple of things to focus on when you think about LTE are spectrum and devices and in spectrum Verizon has I believe it’s around 11 megahertz of spectrum that they purchased, which is appropriate for LTE, which compares with depending on the market 30 to 50 megahertz they have for CDMA. So, that’s kind of one carrier of LTE.

So, LTE will be augmenting their existing network, not replacing it. You can’t replace, 30 megahertz to 50 megahertz of spectrum with 10 and I know Verizon’s on a pretty rapid clip to go demonstrate the technology, but you also need to look at device availability and without disclosing too much about unannounced plans of device and chipset suppliers.

If you generally talk to them especially those that are looking at combined CDMA and LTE devices, which you really have to look at that kind of combination in the LTE deployment scenario because, LTE is not going to be rolled out nationwide instantaneously. Therefore, if you have a PC card for your laptop or handset or something like that, it really needs to be dual mode because if you are in the spot where there LTE deployed you don’t want the thing to stop working.

So, if you look at the vendors who have the capability to provide the combination of that, when you look at there internal schedules you kind of conclude that you won’t see, let’s say PC cards before the late 2010 early 2011 timeframe and probably smartphones or something like that till six to 12 months after that.

We would expect to see continued growth and if there is an operator like Verizon, who is deploying LTE. We would expect to see continued traffic growth on the EV-DO part of the network and to see some of that growth moving to LTE. Let’s say in the 11 to 12 kind of timeframe in which case we still would see some good EV-DO business, but a chunk of that growth would be moving over to LTE. Does that help Catharine?

Catharine Trebnick - Avian Securities

Yes it does, and then can you -- I’ve missed it, you’re forecast for the EV-DO piece of the business in ’09. I somehow missed that earlier when you were --

Randy Battat

Yes, it’s up in the year, and up in the first half.

Catharine Trebnick - Avian Securities

Okay, thank you.

Jeff Glidden

Catharine, our delivery of upgrades continues to be even one at mid year and one towards the end of this year and the demand for additional features and functionality is very robust and so that program of upgrades continues as we anticipated.

Operator

Your next comes from Richard Valera - Needham & Company.

Richard Valera – Needham & Company

Thank you good morning. Jeff or maybe Randy in your prepared remarks, you talked about your goal being for Nortel to formerly assume your contract which I assume had some great specific legal implications in terms they’re paying what they owe you from the sort of pre-filing.

I guess, what are the other options that could happen? Are there some potential on the table where they wouldn’t have to pay essentially the back billings or is that sort of not something that you would consider?

Jeff Glidden

Yes, we are in the early stage of this process Rich, so I can only make broad comments, but we have been a long-term partner, key supplier they’ve reiterated that as we look forward. Key to their business, key to customer deliveries, at some juncture through this process they either assume or reject contracts.

Ours is a very key contract and the benefit and beauty if you will, if there is beauty of this process is the things that don’t matter gets shutdown and they save money and things they do matter get reinforced and we go forward. So, we would as Randy articulated work very close with Nortel to make sure we continue deliver against our contract and would drive to have the contract assumed as a key contract in a critical long-term supply, in the event that the contract is assumed than pre-petition amounts or defaults would be cured. That’s really the path that we’re on, it’s early and we don’t have any perspective on the timing of that.

Richard Valera - Needham & Company

Okay, that’s helpful colour. I don’t know if you mentioned it, but FMC as a percentage of billings in the fourth quarter, can you gave that number?

Jeff Glidden

It was 5% to 10%. That was a little bit lower than we had out looked before. A part of that is because the DO business was stronger and then there were some portion of the FMC product shipments that we had originally anticipated to go late in December. They actually shipped early in January.

Richard Valera - Needham & Company

Okay, that’s helpful. With respect the overall billings outlook. I was wondering how you are thinking about the second half, it sounds like the first half up year-over-year and up for the full-year, but it sounds like maybe China Telecom peaks in the first half and I was just wondering what the implications were for the second half. Could we maybe have a down year-over-year EV-DO billings in the second-half?

Randy Battat

No, what we’ve been trying to do is sort of structurally in the commentary here is focused on Q1 to half in the year and we haven’t really been focusing on what’s happening each half, just as closer we get to visibility, but I would say that this is not some hidden way to go say second half will be down. Right now, I would think the second half would be up in the EV-DO business.

Richard Valera - Needham & Company

Okay, that’s very helpful. I know someone else could crack at this, but I’ll take another one. China Telecom, I know you don’t want to sort of predict revenues specifically by customer, but is there potential, do you think for them to reach say a 10% customer level this year or do you not want to go there?

Randy Battat

To be honest, on top of my head, I don’t even know the number. So, I couldn’t go there if I could.

Jeff Glidden

Rich, I would just add that with early stages it is clearly a net new account for us and for Nortel and we’ll give you more visibility as we get it as well. The good news is we have started shipping and those shipments continue. So, we’ll give you more update as we get better visibility, but it’s clearly a plus one for us for the year.

Operator

Your next question comes from Scott Coleman - Morgan Stanley.

Scott Coleman - Morgan Stanley

A couple of quick ones for me. First what’s the bare case on Nortel, either from a payment perspective or a business perspective and obviously you are not comparing for the bare case, but just so we understand where the real risk level is it would be helpful?

Randy Battat

Two things; one you know sort of bankruptcy legalities and the second is sort of operationally and broader business. As Jeff mentioned, contracts with the vendors need to be assumed or rejected by the end of the bankruptcy process. If our contract were rejected then Nortel would not have the ability to sell anymore EV-DO products, and that means that they couldn’t serve Verizon, Sprint etc.

That’s why we think it’s more likely, than not the contract gets accepted. If it does get accepted, they would owe us all outstanding balances that we required to be paid in full. Maybe there is a scenario that somebody may think that it could get renegotiated. I don’t want to speculate that on this call, it’s not our desire to renegotiate anything.

From a broader business perspective, I think in terms of the bare case one would be concerned about Greenfield opportunities, new networks that we are installing. If there is a brand new customer then that customer might have trepidation about buying from Nortel while it’s in bankruptcy.

Fortunately in our business and our business plans there are very few of those. As you know the business case for growth in EV-DO for us does not really count on anything meaningful in terms of new network deployments. It’s really capacity expansion where we are already installed and I think the other thing that we want to pay close attention to is just internal execution capabilities at Nortel, they go through this. It’s not the happiest the times for Nortel employees.

So from our standpoint we need to kind of redouble our own focus on our own internal execution maybe get a little extra close to the operators than maybe we had been in the past to make sure that we’re on top all the execution issues and we’re closer to them in terms of their need, but again I think the broader, the reason we have a pretty good confidence in our own kind of views of the businesses, because that secular trend of broadband traffic growth in the installed base means there is a significant growth in business opportunity.

Market share tends to be reasonably sticky in wireless infrastructure because moving vendors around is incredibly expensive and very disruptive. So, we think if we continue to execute well, we can continue to tap that opportunity.

Scott Coleman – Morgan Stanley

Make sense and maybe I know, you don’t like to make comments about specific carriers, but Sprint is gearing up to launch some new EV-DO handsets like the Palm Tree, their capital spending numbers were extremely low in 2008. I’m curious what you think your opportunity there is in 2009? Is there a significant dealer growth opportunity for you there?

Jeff Glidden

I think there is, but in terms of our own planning assumptions, we are assuming that 2009 is more or like 2008 at Sprint.

Scott Coleman – Morgan Stanley

So, your view of EV-DO up year-over-year for the full-year, assumes no real change there, okay that’s helpful. Then maybe one last one a follow-up on Brian’s question earlier, when you’re walking through the competitive landscape in femtocell’s, maybe I miss this, but I don’t think you mentioned Qualcomm which seems to making more noise in this particular product area, I’m sure you view them simply as a potential late in customer like you do other folks to the space, but they would seem to have the potential to be very disruptive to existing vendors like yourself.

So, I’m wondering if you could just give us an update on how you think they’re going to play in the femto market.

Jeff Glidden

Qualcomm’s talk about their own plans versus us, I’ll just say a couple of things. One Qualcomm is just a close outlay of Airvana. It has been since the earliest days, they’re significant shareholder. I believe they still hold a large churn of stock.

We have very close relationships with them pretty intimate in terms of plans; we have a lot of discussions with them and a lot of complementary activities and of course, the formal President of Qualcomm is on our board Tony Thornley, but the other thing I would just add is that the femto world is way more complex than chip technology, which is where I would expect Qualcomm to play.

The way they certainly play in infrastructure chips is they do sort of some of the core modulation functions in the chips, but the greater complexity. I mean we use Qualcomm chips of course in DO.

The greater complexity occurs when turning the stuff in the systems and comparability’s and work with core networks and so forth. So, I think in terms of core disruptive, I’m not sure I see that, but I think there is always an opportunity for Qualcomm in Airvana.

Scott Coleman - Morgan Stanley

Maybe one last one if I could. Jeff, I think in your remarks, you talked about a software update in late the Q2 or early Q3. In the past, I believe it usually calm in the June timeframe. How should we be thinking about modeling revenue for the second quarter or the third quarter given the trigger on rev wreck could happen on either side here?

Jeff Glidden

Yes, I’ll just be brutally honest with you Scott, our schedules right now for this to go GA, the last week of the quarter in June.

Randy Battat

That’s a little close for comfort for us. So, right now our plans are, that would happened in the last week of the quarter in June and that would trigger revenue wreck event, but if that moves by a few days and sometimes they can move by a few days just because the operator didn’t get around to executing all the test in time. That could easily turn form a Q2 to Q3. So, that’s why being brutally honest, it’s a little on the bubble there and we were little less than totally definitive.

Jeff Glidden

Scott, I will add that there is a revenue wreck event, but the most important piece of that software upgrade is going to starts a new billing cycle. So, whether that occurs at the very last week of June or the first week of July, the important thing is that billing cycle of upgrade which is tens of millions of dollars that we get, it’s real economic value as opposed to accounting and that is a very, very important piece, but we’re driving hard and fast for mid year.

Scott Coleman - Morgan Stanley

The upgrades wouldn’t be until Q3.

Randy Battat

The upgrades, in all instances be recorded in Q3. So, wouldn’t affect it, whether it was plus or minus a day or a week.

Operator

Your next question comes from Amir Rozwadowski - Barclays Capital.

Amir Rozwadowski - Barclays Capital

Just a couple of quick clarifications if I may, on the China Telecom side recognizing that your folks are really providing any trajectory for what’s going on there, but just to clarify. Has the Nortel bankruptcy filing shifted any deployments at that specific carrier, knowing that it’s probably at an earlier stage which relationship with new folks versus someone like Verizon and Sprint?

Randy Battat

Not to our knowledge.

Amir Rozwadowski - Barclays Capital

Okay, that’s helpful and then I know that neither recognizing that you can’t give any specific commentary on carrier plans for femtocells, do you think you can perhaps give us some color on which geographies we should be particularly focused on for potential launches or opportunities that near-term versus sort of longer term over the course of 2009?

Randy Battat

Yes, I mean as said before. I think Japan looks like the hardest activity as soon as closely followed by the U.S. and then Europe.

Operator

Thank you at this we have reached the end of the Q-&-A session. I will now turn the conference back over to management for any closing or additional remarks.

Randy Battat

We would like to just thank you for moderating the call and thank everyone for participating and we will look forward to speaking with you again next quarter. At this time we will conclude the call. Thank you.

Operator

That concludes our conference call. Thank you for joining us today.

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