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Alvarion Inc. (NASDAQ:ALVR)

Q4 2012 Earnings Call

March 4, 2013 9:00 am ET

Executives

Hezi Lapid – President, Chief Executive Officer

Avi Stern – Chief Financial Officer

Elana Holzman – Vice President, Investor Relations

Analysts

Rich Valera – Needham & Co.

Gunther Karger – Discovery Group

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alvarion Q4 and Full-Year Results for 2012. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require assistance during the call, please press star then zero. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Elana Holzman. Please go ahead.

Elana Holzman

Thank you. Good morning and good afternoon everyone, and thank you for joining us for the Alvarion Fourth Quarter and Full-Year 2012 Earnings conference call. I hope you’ve had an opportunity to review the press release we issued earlier today. You can find a copy on our website at www.alvarion.com. I’m joined today by Hezi Lapid, President and CEO, and Avi Stern, CFO. Hezi and Avi will provide an update on our business and fourth quarter results, after which we will open the call for questions.

Before turning the call over to Hezi for his prepared comments, we would like to remind you that Hezi and Avi will be making forward-looking statements during the call. These statements are based on management’s current expectations and certain planning assumptions which are subject to risks and uncertainties. Actual results may differ materially due to factors mentioned in today’s press release and discussed on this conference call. We encourage you to review the risk factors discussed in our SEC filings and earnings press release issued today. We do not undertake to update in light of new information or future events. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis and have been adjusted to exclude certain charges. We have provided reconciliations for these non-GAAP financial measures to GAAP financial measures in the earnings release, which can be found on our website.

Hezi?

Hezi Lapid

Thank you, Elana. Hello everyone. Before discussing the ongoing business and our turnaround plan, I would like to say a few words about the announcement we made a week and a half ago regarding the agreement of the sale of Alvarion’s carrier licensed division, which we refer to as DWA, to Telrad Networks. When I first joined Alvarion, we explored different strategic alternatives with the objective of achieving profitability. We believe that this transaction is the optimal outcome for Alvarion’s other business line, which is focused on unlicensed solutions. In light of market conditions and Alvarion’s limited resources, we came to the conclusion that the best outcome for shareholders and customers is to divest the DWA business and focus our resources on the unlicensed segment where we see most significant growth opportunities and where we believe our technology positions us well versus competitors.

Over the course of the last several months, we negotiated with a number of different potential buyers, most of them not based in Israel, and we believe that the deal we struck with Telrad is the best possible deal. On completion of the sale of the DWA business, Alvarion will focus on providing (inaudible) broadband solutions in the unlicensed frequencies. In this space, we are targeting two market segments: the first, public and private networks for vertical markets touches small cities and public safety, education, oil and gas and transportation; the second, the carrier Wi-Fi market, including mobile data offloading for mobile operators, odd zones and hotspots. This new focus will enable us to concentrate our resources and attention on those two markets where we see significant growth potential and where we believe we have a competitive product offering.

Clearly as you can see from the results we announced today, the company is still not profitable and there is still significant work to be done. But we have made progress over the past several months and we believe that profitability is achievable. The turnaround plan which we initiated back in mid-2012 was comprised of different elements, cost-cutting measures, bringing cash into the company, improving our (inaudible) program, reviewing our roadmap, et cetera. First and foremost, our objective was to cut our burn rate and stabilize the company financially. We initiated various expense reduction measures along with adjustments to headcount. Our quarterly expenses for the unlicensed portion of the business totaled approximately $7 million compared to 9 million in the first quarter of 2012 prior to our cost-cutting measures. We believe this is a reasonable run rate for expenses but we continuously monitor our expenses without undermining our future growth.

Another critical element in our turnaround plan has been our effort to bring cash into the company and strengthen the balance sheet. This was accomplished through sale of assets such as part of our IP portfolio and claim rights against Nortel for which we’ve received to date a total of approximately 21 million. This allowed us to reduce our debt by 11 million in Q3 and Q4, and over the course of last year we reduced our outstanding debt from 13 million to $11 million.

In the area of sales and marketing, our stated go-to-market strategy is working through our partner network. We are spending considerable effort to reviewing our partner database and restructuring our channel and distribution network to be more efficient and effective. We are also expanding our sales channels with new value-added partners that can help us target large projects and secure future growth. We recently signed new agreements with value-added partners in different parts of Africa, Asia and Australia, and we hope to see the fruits of these efforts materialize into sales over the next several months.

We are holding several product luncheons to educate our partners on our product portfolio with all the new partners in the United States as well as in the rest of the world. We are also working to develop relationships with strategic partners who will integrate our wireless solutions and help us extend our market reach. We continue to invest in our Wi-Fi product which (inaudible).

Earlier last month, we released the new version of WBSn, our 11n carrier-grade Wi-Fi solution. This new version brings a significant capacity and coverage boost, improving user experience in challenging conditions of interference and of many users, which is common in high traffic areas; however, we accomplish this with a fewer number of access points for a lower total cost of ownership. This version also includes important networking capabilities for service, flexibility and co-integration. Our solution for 3G and LTE filler operators includes leading Wi-Fi technology and co-integration which is based on an open standard for flexible integration with different core topologies and partners.

Last week in conjunction with Mobile World Congress, we announced an important collaboration with Aptilo Networks to offer mobile carriers an end-to-end easy to implement Wi-Fi mobile offload solution. This solution provides carrier-grade Wi-Fi service management and offloading capabilities, including SIM-based authentication configuration with a 3G and LTE mobile core for quality and charging. The solution is currently in trials in Latin America. It will be promoted globally by ourselves and Aptilo. For example, we recently announced a deployment in Japan where our Wi-Fi solution was deployed to enable 3G data offload by one of Japan’s largest mobile operators. Our base stations cover major train stations and congested areas in downtown Tokyo business districts to provide data connectivity, enabling the offload (inaudible) from the operator’s 3G network.

Our Wi-Fi solution also fits a wide range of public and private networks in different settings. For example, we recently announced that our solution is being deployed to provide connectivity in roving exploration and production teams serving the oil industry in the United States. Over the next several weeks, we expect to share with you additional customer stories.

Before turning the call to Avi Stern, who became Alvarion’s CFO in January, for a review of our results of operations, I would like to make one last comment about our NASDAQ listing. We currently have until April 22 to regain compliance in order to remain listed on NASDAQ. As we previously stated, we are committed to staying listed and about a month ago, based on shareholders’ approval, our Board approved a reverse split in the ratio of up to 1 to 10, which will be executed around April 1, 2013. The execution of the reverse split and final ratio will be determined by the Board as we get closer to the relevant date based on the stock price at the time.

Avi?

Avi Stern

Thank you, Hezi. In light of the announcement we made regarding the execution of the definitive agreement to sell our carrier licensed business to Telrad, the financial results published in our earnings press release, which I will review today, reflect the activity of our vertical and unlicensed carrier solutions business, unless otherwise noted. Results of our carrier licensed business appear as a single line on the P&L, cash flow and balance sheet as discontinued operations. As part of this transaction, Telrad will assume the ongoing obligations and liabilities of the carrier licensed business, including toward suppliers and subcontractors, employees and customers.

All the non-GAAP measures I will discuss today exclude loss from the discontinued carrier license business in addition to other items. In Q4, our revenues were $8.2 million, down from $10.9 million in Q4. We did not have any customers that accounted for more than 10% of our revenues in Q4. On a non-GAAP basis, gross margin (audio interference) 2012 was 38.2% compared to 46.5% in Q3. The decline in gross margin resulted primarily from lower revenues. Going forward, we expect gross margin for the unlicensed business to be around Q3 levels.

GAAP operating expenses in Q4 were $7.9 million. Excluding amortization of intangible assets, acquisitions-related expenses, and stock-based compensation, non-GAAP operating expenses were $7.1 million compared to $7.6 million in Q3. Operating expenses in Q1 2013 are expected to remain similar to Q4 levels and are expected to decline slightly in subsequent quarters.

On a GAAP basis, we reported in Q4 net loss of $0.08 per share for continuing operations. On a non-GAAP basis, we reported a net loss of $0.07 per share. In addition, we reported a net loss of $0.19 per share from discontinued operations in the fourth quarter.

Turning to the balance sheet, cash, cash equivalents and investments, including restricted cash as of December 31 totaled $40.4 million. The net change in cash from continuing and discontinuing operations reflects cash generated from operations of $454,000 compared to cash used of $6.4 million in Q3. In Q4, we made an additional $1 million of repayment of principal on our loan to Silicon Valley Bank. Cash used from operations for the continuing operation was $5.3 million in Q4. The outstanding debt is down to $11 million as of December 31 compared to $13 million from the beginning of the year. Inventory totaled $9.3 million compared to $8.6 million in the previous quarter. Our DSOs increased to 115 days from 111 days in the previous quarter.

Now we will be happy to take your questions. Operator?

Question and Answer Session

Operator

Thank you. [Operator instructions]

Your first question comes from the line of Rich Valera from Needham & Company. Please go ahead.

Rich Valera – Needham & Co.

Thank you, good morning. Was wondering if you’d be willing to comment on the results of your carrier Wi-Fi business in 2012. I think at one point, you’d been targeting roughly $25 million for that business for the year. Just wondering if you could comment on how close you came to that target.

Hezi Lapid

Okay. I think that I mentioned in the past and in my prepared comments, we believe that the Wi-Fi business shows significant potential. The delay in the new version of our WBSn did not hurt our results in the second half of 2012, but we came out—but we’re not breaking down the revenues for our different product lines.

Rich Valera – Needham & Co.

Okay. And with respect to operating expenses, I heard in your prepared remarks that you expected them, it sounds like, flat in Q1 and down, I think, slightly you said in subsequent quarters. So just wondered if you’d give any other color on your plans to reduce expenses and where you think your break-even will be a couple quarters from now.

Hezi Lapid

I think that the break-even point currently is around 11.5, maybe, on the revenue and between 6 and 7 million in expenses.

Rich Valera – Needham & Co.

That’s the way you plan to have the company structured once you get your expenses fully aligned?

Hezi Lapid

Yes, that is.

Rich Valera – Needham & Co.

Okay. That’s helpful. Thank you.

Operator

Your next question comes from the line of Gunther Karger from Discovery Group. Please go ahead.

Gunther Karger – Discovery Group

Yes, good morning. Best wishes to you all. The question is on the $8 million of revenues for the quarter with the new business going forward, do you anticipate this number to be sort of the bottom from which growth will be seen, or is this number still subject to a further erosion of the new business that you’ve got?

Hezi Lapid

Can you repeat, Gunther? We didn’t hear you very well.

Gunther Karger – Discovery Group

Yes, of course. The $8 million of revenue that you reported just now for the continuing business, which is your new business, do you anticipate this $8 million to be the basis of growth going forward? Putting it another way, does this number appear to be the bottom of the barrel that we have reached?

Hezi Lapid

Well, I don’t want to be in a position where I’m giving guidance – we have decided not to; but let’s say that if this is not the case, I might be disappointed.

Gunther Karger – Discovery Group

Thank you.

Operator

Your next question comes from the line of Robert Murphy, a private investor. Please go ahead.

Robert Murphy

Yes, a very quick question. A, why can you not put out the Wavion revenue, as this is probably what’s driving the company forward; and (b), going back to the margins and the margin differential, you had a low margin quarter – that’s fine, and there was a comment about margin going back to 3Q levels in the mid-40s. If I do the quick math on that, that means about another 4 million of margin which pretty much offsets your loss. So if I were optimistic, I could read that currently, structurally you are break-even. Please comment.

Hezi Lapid

We didn’t do this specific calculation, but I think that at this point, at least on the quarter we are talking about, we are definitely not break-even.

Robert Murphy

Why are you so confident that margins will go back into the mid-40s? What happened in the quarter—aside from the normal problems one would have with restructuring, et cetera, what happened to drive you into the mid-30s, and why are you actually going back to mid-40s?

Hezi Lapid

I think that the gross margin depends not only on direct business but also on the volume, and we believe that getting better volume is going to give better results in the gross margin automatically. So this is part of what we are doing.

Robert Murphy

Okay, and one last question – and don’t take offense – but it appeared that you are actually potentially quite close, because those numbers can move 2 million to 3 million quite easily with the margin projections you’ve given. Something might have come into the quarter or actually probably slipped out of the quarter in terms of revenue, and given the proximity to the upcoming reverse split announcement or requirement, would it not be better to actually give more clarity as to when you will actually break even so as to perhaps get the share price above one and avoid a reverse split?

Hezi Lapid

I don’t believe that giving more details will change dramatically the value of the share of the company in the market, so I don’t really believe that this is going to solve the issue with our listing.

Robert Murphy

With all due respect, I think more information would solve a lot of problems.

Hezi Lapid

Well, we are giving as much information as we can right now, and if we believed that more information might do the trick, then we might reconsider it. But I truly—I’m not taking any offense here, but I truly believe that this is not the case, not at this time. Maybe if we had more time, then maybe your idea was applicable. But in the short time that we have between now and April, I doubt if it would have worked.

Robert Murphy

Okay, thank you.

Operator

Your next question comes from the line of Rich Valera from Needham & Company. Please go ahead.

Rich Valera – Needham & Co.

Thanks. I just wanted to clarify what you said in your prepared remarks with respect to gross margin going forward. Did you say you thought it would be in line with the third quarter of last year, or the fourth quarter?

Avi Stern

The third quarter.

Rich Valera – Needham & Co.

Third quarter – okay. Thank you.

Operator

Once again ladies and gentlemen, if you do have a question, please press star then one.

And at this time, there are no further questions.

Elana Holzman

Thank you for joining us today. I hope you will join us again in the future, and have a good day.

Operator

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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