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Executives

Mary Mcgowan – Investor Relations, Summit IR Group Inc.

Harald J. Braun – President & Chief Executive Officer

J. Russell Mincey – Global Corporate Controller

Thomas L Cronan – Senior Vice President & Chief Financial Officer

Analysts

Nathan Johnson – Pacific Crest Securities

Stephen Ferranti – Stephens, Inc.

Aalok Shah – DA Davidson

Richard Valera – Needham & Company

Ilya Grozovsky – Morgan Joseph

Harris Stratex Networks, Inc. (HSTX) F3Q09 (Qtr End 4/3/09) Earnings Call May 5, 2009 5:30 PM ET

Operator

Ladies and gentlemen thank you for standing by and welcome to the Harris Stratex Networks conference call. At this time all participants are in a listen-only mode. Later we will open up the call for your questions. Instructions for queuing up will be provided at that time. As a reminder this conference call is being recorded for replay purposes. Now, I'd like to turn the conference call over to Mary McGowan of The Summit IR Group. Ms. McGowan you may begin.

Mary Mcgowan

Thank you for joining us today to provide financial results for the third quarter of fiscal 2009, which ended April 3. On today's call will be Harald Braun, President and Chief Executive Officer; Russ Mincey, the company's Global Corporate Controller, and Tom Cronan, our newly appointed CFO. During this conference call, we may make forward-looking statements regarding our business including statements relating to projections of earnings and revenues, business drivers such as the transition to IP infrastructure, the timing and capabilities of new products, and network expansion by mobile and private network operators.

These and other forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and filings made by the company with the SEC. These can be found on the Investor Relations section of our company website, which is www.harrisstratex.com. Now, I would like to turn the call over to Harald Braun.

Harald J. Braun

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

I am pleased to report that we achieved revenues of $158 million in our third quarter, which is at the high-end of the guidance we updated on April 13. On a non-GAAP basis, gross margin was 31%, net income was $3.7 million with earnings per share of $0.06. By segment, North American revenue was $42 million, International revenue was $113 million, and network operations revenue was $2.9 million. We ended the quarter with a record cash position of $116 million and we posted positive operating cash flow of nearly $30 million. Our book-to-bill for the quarter was under 1. A further indication of the effect of the global economy, the timing of the orders in our pipeline. I’d like to report on some key events that occurred since our last conference call.

First, I’m pleased to announce that we have hired Tom Cronan, as our Chief Financial Officer. Some of you may remember Tom as the CFO of Redback Networks. There he restructured the company and served as CFO from 2003 until the sale of Redback to Ericsson in 2007. Tom most recently was the CFO at AeroScout Incorporation, a private technology company. Tom will be joining us for the Q&A portion of this call. Please join me in welcoming Tom to the company. Also we completed the acquisition of Telsima in February, a Californian-based company that should enable us to diversify our 4G portfolio, while expanding into new markets.

I’ll speak more on that later in the call when I discuss our future strategy. Now, let me turn the call over to Russ to give you the full financial details of the quarter. Russ?

J. Russell Mincey

Thank you, Harald and good afternoon everyone. Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended April 3, 2009. Third quarter revenue was $158 million and we reported a net loss of $38.3 million or minus $0.65 per share. GAAP results included $39.6 million of pre-tax charge composed of the following. $32.7 million related to our accelerated transition towards a common IP based platform. Of these impairments, $29.3 million are non-cash charges primarily related to provisions for excess and obsolete inventory and write-downs of property, plant, and equipment.

The remaining $3.4 million of this charge is related to inventory purchase commitments. $3.6 million was for the amortization of purchase related assets, 2.4 million was a one-time charge for in-process research and development expenses related to the valuation of the Telsima acquisition, $400,000 of stock-compensation expense and $500,000 of restructuring. Now I would like to present the details of the quarter based on non-GAAP results. We believe the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate comparison of our results across reporting periods.

Please refer to our website for complete GAAP to non-GAAP reconciliation tables. By segment, North America, microwave contributed $42 million of revenue in the third quarter, down 26% from the year-ago period. The split between mobile and private orders for North America in the quarter was 29% mobile and 71% private. The international microwave segment contributed $113 million, 4% lower than the year-ago period. By geography, Africa contributed $63 million in revenue, 13% higher than Q3 FY'08. EMER, which comprises Europe, the Middle East and Russia contributed $32 million in revenue, 18% less than the year ago period. Revenue for the rest of the world was $18 million, 20% less than Q3 FY'08.

The network operations segment contributed $2.9 million in revenue, compared to $4.2 million in Q3 FY'08. In the quarter, one customer MTN located in Africa contributed more than 10% to our revenue. Gross margin was 31.1% in the quarter versus 29.5% in the year ago period. The increase met our directional guidance given in our last conference call and was largely caused by lowering manufacturing costs and lower than projected project cost. While product and customer mix didn't have a significant impact on our overall margin, we expect the lower manufacturing cost to continue.

Total operating expenses were $43.7 million or 27.6% of revenue. This amount compares to $41.7 million in the prior quarter, but includes $3.4 million higher charges for bad debt expense, and also additional operating expenses associated with Telsima in the third quarter. During the third quarter, we reviewed our allowance for doubtful accounts according to our usual policies and procedures, while giving adequate consideration to the downturn in the global macroeconomic environment. And we increased the allowance for doubtful accounts by $5.6 million.

On a year-over-year basis excluding the impact of the increased bad debt expense recorded in Q3 FY'09 and the additional Telsima expense, the total operating expenses declined 5% as we have achieved savings from facility closures in Canada and South America as well as headcount reductions excluding the additions from the recent acquisition. Operating income was $5.5 million for the quarter, compared with $13.1 million in the year ago period.

Our pro forma tax rate was 24%, which is lower than last year's rate of 26%. The lower pro forma rate is attributable to increased volume of international revenue flowing through our Singapore International HQ. Our cash tax rate is expected to be about 7%. Employee headcount was 1,303 down from 1,395 in Q2. With the addition of Telsima at the end of the quarter, we added 162 employees bringing the total headcount to 1,465.

Now, I would like to move on to the balance sheet. We are pleased to report especially in light of the challenging global business environment that we achieved a record cash balance including short-term investments of $116 million at quarter end that balance compares to $99 million at the end of the last quarter. Net cash, which we defined as cashless third-party debt was 106 million at the end of Q3 compared to 89 million at the end of the prior quarter, as third-party debt was unchanged at 10 million in the quarter.

Operating cash flow for the quarter was a positive $28.9 million, compared to $12.5 million in Q2. Accounts receivable decreased $38 million following an outstanding collections effort in the quarter and DSOs improved from 87 in Q2 to 72 in Q3. The continuous downward trend of DSOs from 101 just one-year ago reflects management's focus on cash management. Inventory and unbuilt cost decreased by $24 million in the quarter on turns increased from 4.2 to 5.2. As part of the accelerated technology transition that we mentioned in our press release, inventory decreased due largely to a $16 million non-cash increase to the excess and obsolete reserve. A $7 million decline in unveiled cost occurred as we were able to build previously deferred amounts and meet delivery and acceptance terms.

Depreciation and amortization of property, plant, and equipment and capitalized software was $5.9 million. CapEx for the quarter including capitalized software was $4.9 million. We continue our initiatives to decrease DSOs and improve inventory turns and have committed to continue to focus on cash management in the coming quarters. Now, I would like to turn the call back to Harald to provide you with the market and business update.

Harald J. Braun

Thank you, Ross. In this challenging economic environment, we achieved our revenue targets, improved our gross margin, controlled our expenses and continued to execute on our objectives for cash management. Last quarter, I spoke to you about two initiatives. First, the restructuring program to align our overall R&D investment with our strategy. Second, aggressive cash management activities focus on the accounts receivable collection and aging.

Let me address our restructuring program. These activities have already begun and will continue to be faced in over the next three to six months. As a result of this program on an adjusted basis, we have continued to reduce our operating expense. The program continues to be implemented across the company and at various levels. This includes manufacturing efficiencies, tools and process improvements, headcount and facility reviews. We have also aligned our investment in R&D with a focus on innovation and the transition to IP solutions, as well as our other long-term growth strategies. The savings we have achieved thus far contributed to our positive cash flow in Q3 and allowed us to acquire Telsima.

Our long-term goal remains one of achieving a sustainable cost management program that will act as a roadmap to greater performance and increased market leadership. At the same time, we continue to level our process improvement and increase our efficiencies. Russ has already covered the success of our cash management efforts. We consider the focus we applied to account receivables, aging and collection a highlight of the quarter.

We achieved our seventh consecutive quarter of positive operating cash flow and we will continue to focus on improving our cash balances. Before I turn to a business review of the quarter, I would like to announce another key management appointment. Mike Pangia has joined the company as our Chief Global Sales and Services Officer. He comes to us from Nortel, where he headed up Global Sales Operations and Strategy. This is extensive experience in the mobile telecom industry, and his knowledge of international markets. Mike has already become to make significant contributions. Please join me in welcoming him to our company.

Across all regions, visibility remains challenging. However demand for our products and services are there. The gating factor continues to be the credit access and conservative CapEx spending. Despite that, we continue to capture new business in key regions. In Europe, we are excited to have been awarded a multi-year contract with BT Group. Under this global supply agreement, we will provide Harris Stratex Eclipse Packet Node radios.

Elsewhere in Europe, we signed a contract with the major system integration for the Eclipse radio platform and the NetBoss network management solutions. These products will support deployments of secured communication networks in the defense and security industries.

We previously announced a large contract in the Middle East. Last quarter, we noted that shipments were rescheduled for our June quarter. This was due to a redesign and upgrades to the network. The design phase is now completed and we expect site builds and product shipments will begin around the end of this quarter. Africa remains a region of relative strength. Operators here have continued to expand a network infrastructure and have continued to select Harris Stratex as their partner.

One example is Africell Holding, a subsidiary of Lintel, which selected us to expand its GSM networks in Africa. Our Eclipse radios will provide backhaul for next generation IP-enabled mobile base stations to support increased reach and capacity in Gambia and Sierra Leone.

In North America, Q3 was seasonally weaker, but we did see strong bookings at both the state and local government level as well as the mobile carrier level. We except to deliver on these orders over the next several quarters. We were also pleased to see committed projects remain on track and the transition to IP continue. Although, at a slower pace compared to rest of the world.

During the quarter, we launched a GO-Stimulus Partnership Program. This is designed to capitalize on the American Recovery and Reinvestment Act, which allocate $7.2 billion in grant and loan funding for broadband and wireless initiatives for current and potential customer.

The Harris Stratex partnership program provides operators with a turnkey service to provide stimulus success. These services range from building successful grants and loan applications to network deployment, implementation and support. We are tracking this closely and feel that our product portfolio and service capability position us to capitalize on the rural broadband opportunity.

In Asia-Pacific, we continue to expand our footprint. Optus in Australia and Smart Philippines continue to rollout of their 3G mobile networks. We received a new customer in India, as a result of our recent acquisition, which will begin to rollout in early fiscal 2010.

Our overriding product strategy remains focused on a common microwave platform. This strategy will reduce the number of products required to support our worldwide customer base and will build on our position in carrier Ethernet applications. The growth in microwave IP application is a specific target for us, driven by the success of Eclipse product platform. In Q3, on a trailing 12-month basis, 38.5% of our product sales were IP applications; this is up from 28% in quarter Q3 of fiscal year 2008, when we started measuring this category.

To maintain our leadership position in the IP-mobile backhaul market, our ability to innovate will be key. We continue to drive toward a common IP-based platform at CTIA, we introduced the IRU600, this all-indoor radio unit is specifically designed to address the wireless backhaul needs of North American customers.

These solutions address capacity crunch and help operators, avoid backhaul bottlenecks. We also introduced our new Adaptive Optimization feature for the Eclipse Packet Node wireless platform. This feature set enables mobile operators to maximize the bandwidth efficiency of the entire wireless backhaul.

These functionalities freeze up capacity to support the introduction of high-speed IP services in the network along with the evaluation to 4G LTE. As you may recall, one of our growth pillars was 4G. This growth initiative has now migrated to business unit status. 4G is providing us with exciting opportunities in a market that is estimated to be roughly $1 billion today, growing to as much as $7 billion by 2012.

In February, we acquired Telsima Corporation as a part of our strategy to compete aggressively in the end-to-end 4G market. We selected Telsima for a number of reasons that include an extensive patent portfolio in mobile WiMAX products that meet 802.16d and 16e standards for WiMAX broadband wireless access, engineering resources that allow us to capture other 4G technology opportunities and strong software capabilities that can quickly expand our own skill set.

We believe that a combination of the acquired 4G product technologies, together with our strong sales channels and cost effective manufacturing operations gives us a stronger market position, and the ability to grow our 4G business unit.

Now let me provide you with a brief overview of the wireless market. We believe that the growth drivers are still in place. Network traffic generated by new data services is driving the demand for more bandwidth. Developing countries continue to expand or plan to expand their infrastructure, and RFP activities continuing around the world. At the regional level, the issues that faced us in quarter two have not changed. Overall, we remain watchful of the risk profiles in all of these regions we serve.

Giving our diminished visibility, we will continue to provide quality guidance at the revenue level and directional guidance on gross margin and operating expense. Based on our current expectations, we are now guiding. Quarter four, revenue in fiscal year 2009, to be in the range of $140 million to $160 million. Gross margin is expected to be slightly lower; total-operating expenses in quarter four expected to be comparable to Q3 including the absorption of Telsima expenses.

We will continue to focus aggressively on cash management and our quantity goal is to generate cash at this revenue level. I would like to speak on to the next chapter in Harris Stratex's history that as a fully independent company. The future of broadband wireless communication presents us the significant growth opportunities. We believe that our ability to strengthen our position in this market space and execute on our strategy is now enhanced as an independent company.

We believe we will also be able to broaden our investor base and realize greater shareholder value over time. In anticipation of Harris Corporation's distribution of its majority position effective May 27, we will be meeting with current and potential institutional investors over the next several weeks. We look forward to seeing many of you on those road shows. If you have an interest please contact Mary McGowan for details. At this point, I would like to open the line for questions. Operator, please poll for questions.

Question-and-Answer Session

Thank you, sir. (Operator Instructions). And our first question is from the line of James Faucette with Pacific Crest Securities. Please go ahead.

Nathan Johnson – Pacific Crest Securities

Hi. This is Nathan Johnson calling in for James. I was hoping you could talk a little bit about the competitive landscape especially looking at IP offerings it seems like its – its been really you guys Dragon Wave, Ceragon I was wondering if that was going or if you guys expected that to change in the near future from some of the competitors in the TDM space such as NEC and others?

Harald J. Braun

No, no thanks very much for the question. So, we see actually the same competitors worldwide at the bids, which we received at the RFPs, which we received. So, there is no major change, it is regionally different so in some region in Africa we see different players than in Africa or in Europe. So, but we see in principle the same one, so…

Nathan Johnson – Pacific Crest Securities

Do you anticipate I guess additional competitors over the next 12 months or you guys think that your IP technology or competitive advantage has a longer timeframe than that?

Harald J. Braun

No, I think we see some additional competitors, but not new ones so we saw them also in the last quarters in some region, who are, where he is coming up and strong, we see less from Dragon Wave these days, we see less from NERA these days. So, but, Alcatel-Lucent, NS, NEC Ericsson, Huawei, these are normally the players we compete with.

Nathan Johnson – Pacific Crest Securities

Great. And then just wanted to ask quickly one pricing pressure, given the currency fluctuations, I was wondering if you guys had seen meaningful pricing pressure particularly in markets where currencies have devalued substantially against the U.S. dollar?

Harald J. Braun

Yes. Of course this is an issue worldwide, so in some of the our regions for example in Australia that there wasn't currency issue and we were lucky to have the contract in U.S. dollars and of course we are discussing with our customers and how are we covering this situation. So, there are some regions where we have some currency issues by that, but it has not been in the last quarter a big issue for our company. Russ do you like to give some color on that?

J. Russell Mincey

No, it was exactly as we have predicted in Q3, it's not a significant issue for us.

Nathan Johnson – Pacific Crest Securities

Okay, great. And last question and then I'll hop back in the queue. Just in looking at the North American market, obviously there were some seasonality, but it seemed a little bit weaker than expected even on top of that. Do you guys anticipate a turnaround in the next quarter or two I mean is there any indication looking at our fee activity that there maybe some improvement over the next few quarters?

Harald J. Braun

Yeah. We see some trends here and maybe its not in macroeconomic environment, but we see, as I've said before in the calls some consolidation ending in some cases, for example Alltel and Verizon. So, we see that ending and through that I think there are some activities coming up again as I said in the state and local government business the budgets are still there, they're executing their projects. So, that's positive, I think the mobile operators if I could point that out, are carefully in watching what, which projects do you continue to do or which project you put a little bit on the hold, not to say that they are stopping it. So, for me it's all a shift to the right on the timeline. So, we see a slight recovery, we see an uptick in North America and the good thing of course and I spoke about it in the script is for us that there is an opportunity in this stimulus package for rural mobile broadband or broadband. Of course, its not all wireless, the part of the $7.2 billion is also cable or wireline, but a huge part of the $7.2 billion I expect to be mobile and that give us the good opportunity and that stimulates of course in particular our business. I would say that we are in the sweet part of those, but again there is some work to be done it's a project that goes over a period of time. And its not all done so, but we as I've said, we will be participating, we will be watchful, we will be influential and we will see how to participate in that program.

Nathan Johnson – Pacific Crest Securities

Very helpful. Thank you.

Harald J. Braun

Thank you very much.

Operator

Thank you. Our next question is from the line of Steve Ferranti with Stephens, Inc. Please go ahead.

Stephen Ferranti – Stephens, Inc.

Hi thanks guys. Nice show on the cash flow in the quarter. I guess just to…

Harald J. Braun

Thanks very much.

Stephen Ferranti – Stephens, Inc.

Just to turn I think Harald you mentioned what sounded like a nice contract award with BT in Europe. Can you …

Harald J. Braun

Yes.

Stephen Ferranti – Stephens, Inc.

Provide any more color there, was that related to your IP, transition of IP or is that coverage extension, what type of applications they're going into?

Harald J. Braun

Yeah. So, see we consider that a big win, I mean to have a contract with BT Group is a big win. On the other side we are just carping with them and doing some design work and at this point in time I cannot give you more color on that where we are doing, or where the applications will be placed in their network. So, we have to wait a little bit on that. So, at this point in time, it's pretty fresh that that contract. So, we are very excited that they selected our IP based platform and we will give you some more color down the road at the moment I cannot talk more about that.

Stephen Ferranti – Stephens, Inc.

Okay. Is there any I guess just following up on that is there can you talk about the extent to which you might see that start contributing to revenue or at what point in the future?

Harald J. Braun

No, no as I have said at the moment we're sitting there, we just signed a contract, a couple of weeks ago and we are just sitting together and designing some the network and working with them together. So, at the moment I have no visibility to exact tell you the quarter when that hits.

Stephen Ferranti – Stephens, Inc.

Okay, okay I understand. I guess turning to the Middle East contract it sounds like you're expecting shipments there to start end of June. Any sort of ballpark in terms of what kind of quarterly run rate that could represent or maybe how long that contract will be deployed over?

Harald J. Braun

Yeah. I think Steve last time I talked about that and by the way I visited them in, during the quarter to have a visibility and be directed there talking to the customer and see what's happening on site. So, we are very impressed with their planning activities. So, that debt was of course very, very important for me to see where the project stands. In previous calls, I have said that we have that that is around about 60 million contract over several quarters. I think I mentioned three to four quarters and as I've said in the last call they're redesigning the networks because they're defining bigger pipes and this had some upside opportunities for us. So, we are starting now in this quarter rollout and shipments, but if you take the $60 million divided by three and come up with 20 that that would be not the right thing to do right now, because it is a start of, they're in the site builds and we are starting that. So, it is as a start less than 10 in this ballpark that's what we at the moment are estimating.

Stephen Ferranti – Stephens, Inc.

Okay. That’s helpful. And….

Harald J. Braun

And then of course we will see how fast we adopt the rate of shipments, how fast we roll it out, it’s a big country, it’s a nationwide project, it's not very easy as I said before to really get it into the quarter.

Stephen Ferranti – Stephens, Inc.

Understand. Would that be I guess one sort of swing factor in terms of the revenue range that you had guided to. I mean it seems like it’s a fairly wide range of revenue there. Would that be perhaps one swing factor that could swing you one end to the other of that range?

Harald J. Braun

It was somehow a swing factor last time, right. And it continues to be one, I mean, this is a big contract with a roll out. So, and I said it’s hard to predict exactly when it hits, but this macroeconomic environment, Steve has a couple of other ingredients that receive suddenly in the Middle East and also in some other areas in EMEA companies stopping and postponing really on the timeline entire projects. We haven’t seen that before, and we see that now. That of course is also a swing factor. There are several of those, and again remaining Europe and Russia and now swapping over to a some countries in the Middle East, we see that now more coming up, really a big shift to the right on projects. And that are the swing factors right now.

Stephen Ferranti – Stephens, Inc.

Right, right. Are there any territories in particular that are maybe especially volatile in terms of some of the activity that you're describing in terms of order volatility?

Harald J. Braun

As I said as before, Russia, some countries in Europe and now swapping over to some countries which I don't want to mention in the Middle East.

Stephen Ferranti – Stephens, Inc.

Okay. Okay.

Harald J. Braun

On the other side in the Middle East some big projects going on. So, we cannot really put the big brush out there in the Middle East. So, it’s really some countries, which are meaningful, that meaningful business with us. So that at the moment, we consider in the regional setup the weak points. Will they come back, absolutely? Do they have demand absolutely as I said before it’s a shift to the right.

Stephen Ferranti – Stephens, Inc.

Understand. Last question from me just turning to gross margins. Can you walk us through some of the levers there that cost gross margins to fluctuate either one way or the other? Is it product mix, is it absorption of overhead, pricing pressure. What you see is the biggest levers affecting your gross margin today and sort of how do you view gross margin directionally going forward?

J. Russell Mincey

This is Russ. I will answer that. I mean, we are starting to see now especially in this quarter some of the favorable impact of the cost reduction efforts that we’ve been doing in earnest over the last few quarters. The impacts of those efforts usually lag a quarter or two behind when we actually make the efforts to decrease cost. We started to see that in Q3, it rose to 31.1% based on some of those decreases that saw in our overall spending, a lot of it was related to manufacturing type spending and we predicted that those decreases will continue in the future. I think to be cautious, Harald, guided margins more historical levels in the upcoming quarter, though.

Stephen Ferranti – Stephens, Inc.

I see. And is that just really related to the revenue sequential revenue decline more than anything/

J. Russell Mincey

I mean I think when you have to say with the range of revenue we have, it would depend on whether we are at the high end or the low end. So I think we’re just being cautious in the guidance that we’re offering and prudent and the guidance that we’re offering today.

Stephen Ferranti – Stephens, Inc.

Right, right. Okay terrific that’s it from me guys. Thanks for the color.

J. Russell Mincey

Thanks very much.

Operator

Thank you. Our next question comes from the line of Aalok Shah with D.A. Davidson. Please go ahead.

Aalok Shah – D.A. Davidson & Co.

Hi, guys. Couple of quick questions. Russ, you may have mentioned this and I may have missed it, but you took your receivable down quite a bit this quarter. Can you explain what do you guys did differently this quarter take that down and what might be going forward?

J. Russell Mincey

Well. Sure, I mean we had an absolutely fantastic collections effort. I might take the opportunity to answer your question to say something about the bad debt reserve that we’ve called out separately, because it was a little higher than usual, but I want to say that first of all, we have good customers these were aged accounts that we have been reviewing over some period of time. And we have essentially exhausted all reasonable effort to collection, we feel it was a prudent thing to go ahead and put some additional allowance for doubtful accounts on the books related to that. We think we’re very comfortable now with the net accounts receivable balance we have going forward. In regards to accounts receivable, now we have a tremendous focus on cash collections, which is part of an overall focus on cash management in our company. It’s just one of the things we’re doing to emphasize cash in our company today.

Thomas L. Cronan

And building on that, Russ. Absolutely, I would say that the team, and we form a lot of the team there a couple of quarters ago so after I arrived to have a laser focus on that and I think we have no absolutely visibility tracking it and collecting it. So that team is working very well and of course it comes very handy in this macroeconomic environment.

Aalok Shah – D.A. Davidson & Co.

And Harald, do you mentioned that the RFP activity remains pretty solid. Do you guys see a dip at all during this kind of last six-month period, where we seen this macroeconomic storm?

Harald J. Braun

Yeah. This is actually funny. You don't see that. The activities are there, right. The RFP is coming out, you see very seldom that somebody is postponing an RFP, you don't see that. So, the RFPs are coming out, the evaluation processes may be a little longer, it take a little bit more time because you see a lot of operators handling also of course their balance sheet. And the RFPs are coming out, it takes maybe a little longer, but they award also projects, right. So, you see the industry is not slowing down in terms of the way we need to do something. It would be a dramatic situation in case we wouldn't see the activities, the RFP activities but that’s we cannot report that.

Aalok Shah – D.A. Davidson & Co.

And I know you spoke about this before in your last conference call, but has there been any chance to your thoughts as to weather or not to use the balance sheet to extent some credit to your customers and maybe and get some deals done to accelerate deals at least with…

Harald J. Braun

No, no we didn’t change our mind there, as we said, so we don’t finance, we help customers, help finance and find financing opportunities for them, find capital. We do that a lot, and actually that worked pretty well for us at least in the visibility for that last year, I mean the company, but we will not finance and we don’t think we should do that. Some other competitors are out there, they do that, they do full vendor financing, but we cannot do that and we will not do that.

Aalok Shah – D.A. Davidson & Co.

And then last question from me, Harald. You mentioned when you came on Board that you want to focus more of your attention on kind of doing a, kind of a complete solution for your customer.

Harald J. Braun

Yeah.

Aalok Shah – D.A. Davidson & Co.

Can you give us a sense of your progress on that? Should we be looking at the Network operations revenue line? How should we be thinking about that as we go forward?

Harald J. Braun

Thanks very much for the question. And I think you and I talked about our four growth pillar strategy. So that four growth pillars are absolutely in play today, in the call I provided color on two of those. I think we are making tremendous progress. When you see the end-to-end solution, I define that from the subscriber, let’s say from the wireless subscriber whether he use a mobile phone, a laptop, a play station, a GSM system or whatever in the car that for me all mobile subscribers. And we are coming from the IP mobile backhaul portion of this end-to-end solution. But we’re extending that now with recent acquisition more towards excess so and have the ability to that to grow into new next generation mobile services and that is making progress, you see that on the announcement that we have acquired a company.

On the other side, if constant that was the excess portion. So, and from the mobile backhaul business to the core portion, we made also some progress in terms of converged edge, this CS and gateway, [AS] gateway and that is a product portfolio where we also made tremendous progress. So and then of course wrapping around to the whole thing to service suite is our telecom network management solution, it has tremendous progress and we are making some big steps and of course and always the new leadership, we put the sales and the services organization together under one roof led by Michael Pangia. We have now also the right leader there with a lot of experience to make that a successful business unit going forward.

Aalok Shah – D.A. Davidson & Co.

Okay, great.

Harald J. Braun

So, I think we made a tremendous progress, we need to give it some time on the services side so this is we do services, but I define services for you in an area, where I said I want also to manage and to optimize networks, I want to plan and design the networks, of course we still commission, install and build networks, but I want to do the whole service suite and we're making tremendous progress there, a lot of new leaders there, it’s a total new company Aalok.

Aalok Shah – D.A. Davidson & Co.

Okay, Harald one last question from me I appreciate your answer on that. On the Telsima acquisition how should we be thinking about the revenue contribution from Telsima?

Harald J. Braun

Yeah. Of course, we have a plan and it’s some of the revenues are already built in this quarter, but I have to caution the thought process here, I get a lot of questions to that and of course we will disclose in the future and I think also Russ correct me, if I'm wrong, May 18th, I think we have to do an 8-K is that correct.

J. Russell Mincey

May 18 is the deadline.

Harald J. Braun

18. So, we will get some more color on that, but I have to point out one thing we didn’t buy the company because of the revenue. So, and you may have seen and heard in the industry the amount of revenue this company could make. So, the other areas which I mentioned before in my earnings script right, having the technology assets, have the engineering skills, which we need to go more into a software business that was our main drivers and of course have access to technology and have access, we'll have some new customers in India, which helps our India entry strategy, it was not the revenue and I have to, I have to say also, we bought a company in a situation, where we need to rebuild the customer again and we build the delivering channels and the service channels to customers again, right. So, and I think we can do that with – with our company. So, it's not about the revenue, its about a lot of other factors therefore we bought Telsima.

Aalok Shah – D.A. Davidson & Co.

Okay, great. Thank you very much.

Harald J. Braun

Thanks a lot.

Operator

Thank you. Our next question comes from the line of Rich Valera with Needham & Company. Please go ahead.

Richard Valera – Needham & Company

Thank you. Good evening gentlemen. Harald, I'm not sure if you mentioned the book to-bill for the quarter?

Harald J. Braun

Under one I said.

Richard Valera – Needham & Company

Okay. And what's your thought on sort of the bookings outlook going forward. I mean you gave a little bit of color on the revenue side, but any sense of the bookings prospects either in the June quarter or beyond to materially pickup or is that sort of no better visibilities than the revenue at this point?

Harald J. Braun

Yeah. This is as challenged as the visibility on the revenue. And, so we have some prediction, we are at the moment in process of defining our new operating plant for next year. Our AOP, our annual operating plan so, I'm sitting together with the team right now and projecting the next year and the visibility on the bookings and who was doing, what, when, which is its very, very difficult. And when I came to the company, that was not the issue at all, but at the moment we really, really having focus efforts on that with the sales organization, which is the operating and the service organization to see what is coming and what is not coming, it's I think as Steve talked about swings, right, the swings are still big and therefore it's very difficult to predict, I would not predict. So, it would be crystal ball.

Richard Valera – Needham & Company

No. Fair enough. And lots of talk about your Middle East project, and it sounds like it will sort of finally start in the June quarter and then you'll have a full quarter of it in September. So, it sounds like all things equal that would be a sequentially up component of the revenue in September, do you think and I know, I don't want you to have to predict too far ahead, but it is possible that's enough to sort of drive sequential growth in the September quarter or do we don't want to go that far off?

Harald J. Braun

Potential, potential. So, first of all I have to say Russ there visited, had high-level meetings up to the operation side saw everything what's happening, what's done. So, that that will access me a lot I have to say then to see the activities, the design activities, the network activities, the build on site in a very challenging environment by the way I was taken away by the challenging environment, which we are working in there, right again across that that big country. And was very encouraged to see the progress they made and the planning activities. So, and of course I am very happy to see that, starting that we now get out of the gate. So, as I have said it's not done yet and so it's a Middle East project, right. It's not very, very easy to predict, but I saw it and I think they have potential upticks on that project. I don't want to go too far out there, because I don't want to disappoint you guys there.

Richard Valera – Needham & Company

Fair enough. And it sounds like you, you also expect may be one of your new Telsima project to start kicking in, it sounded like in the beginning of fiscal 2010 is that accurate and you think that could also hit in the first quarter or is that maybe, second quarter event?

Harald J. Braun

That’s a current and I think that’s what we planned. We have a lot of activities going on there, some of our C level one of us, some of my team is there and every week we have activities there, also very good to see when you go to India and see what level of activities are going on there on the WiMAX level it's very, very encouraging to see that and actually they roll all the network there. And at the moment on the 16d level, but we're talking here in this particular project, we are talking 16e. Right, mobile WiMAX, very encouraging to see that we are what we call another bond kind of vendor and so we are in the first place there and again, it's a huge network rollout and it looks like in the quarters, in the first quarters in 2010. That’s my visibility right now.

Richard Valera – Needham & Company

Now you mentioned it’s the 16e project and I know a little bit about the history of Telsima, I mean they frankly had big challenges delivering 16d product and I think 16e given order of magnitude more complicated with the mobility aspect, what gives you the confidence that you are going to be able to rollout in mass quantities the 16e equipment that's required by this project?

Harald J. Braun

First confident is that we have now a bigger R&D set up and that the Telsima – former Telsima colleagues will be fully integrated into the Harris Stratex’s R&D world that is a huge advantage and we have people there, we have the leadership established. We have the processes under control, we have the organizational under control, they are acting now in a much, much more structured environment. That gives me one and we have a very good leader on side in this particular case in Slovenia and then of course also the leadership in India, in Bangalore is in place that's one factor. The second factor which gives me lot of confidence is the operational level, right the fold in a company, which had some operational challenges in the supply chain in the service organization and then in the end gives me confidence to roll them in and fully integrate them in our COO function, with high in search, [there don't be], gives me very good confidence what I am seeing over the last four weeks and by the way we have a weekly review on the integration progress of this company, it is a fully integrated company in our company and that gives me confident that we have now leveraged that we have leveraged with our OEM partners with our CMs right and a couple of others, which the company didn’t have before. I think their challenge number one was then on operations and on services and then R&D, you hit it on the nail, and I think that is exactly the area, where we can help a lot and we establish the customer relationship and of course also the rollouts.

Richard Valera – Needham & Company

That's helpful. And then if I can just pursue the 4G discussion you started earlier a little bit, you clearly, right now you seem to have the capability in mobile WiMAX and you have alluded to potentially having participating in the LTE market, just wondering in what form you would plan to participate in that market. You know, historically any small company that's tried to go into the sort of cellular base station market, whether it would be some form of niche or even some sort of repeater technology, most of those companies have never made it to put it mildly. And so I’m wondering in what form would you look to compete in the LTE market if you are to avoid sort of going head-to-head with giants of the telecom industry?

Harald J. Braun

That’s a very, very good question. And we of course thought a lot about that, but what I’ve told first my team is to participate in the next-generation mobile industry and opportunities. First of all you need to be a player, you be to be on the playing fields, you be to be on the ground and not on the grandstands. There you don’t learn a lot. Right, so and how do we get into that playing ground. How do we get on the field and play? So that is something we learnt a lot already there. The second thing was do we have the skill set, in which direction do we have to grow as a company. So, from the radio kind of engineers, hardware engineers, radio engineers to the software engineers, (Inaudible) cannot and exercise recently on what do we predict and how many more software engineers we need to participate on that. So, we are shifting in principle to which the company toward more software oriented company. And that gives us some capabilities in the new mobile arena, this product in particular we’ll participate in, I couldn't say that right now because there is and I don't want of course not if everything away of our strategy thinking here, but there are a lot of strategy thoughts and how do we want to participate in that near world, but as I have said again we need to be on the playing field to be there and participate down. I would not like to give too much away here and I have to say also LTE is some years, away. I think we have some good approaches from our platform to grow into that market.

Richard Valera – Needham & Company

Thank you. And just one final one if I could. On gross margin, it sounds like you are making some nice structure on improvements to the cost structure sort of manufacturing operation that should help that. So, wondering how we should think about gross margin on somewhat higher maybe more normalized revenue levels couple of quarter out…

Harald J. Braun

Yeah.

Richard Valera – Needham & Company

If we got back into that, let’s just say maybe $170 million or $180 million level. How would you guys be thinking about gross margin at that point?

Harald J. Braun

Yeah. As I said, I will not drop my aspirational goal, which I discuss with you guys on the 33% to 35% level. So I will not drop that. On the other side, I need to see what at the moment is possible. We need to change structure with the company and a whole that you see that we are changing structural of the company. So, this structural change have cannot happen for one or two quarters. We will get in a level on the 30%, 31%, 32% range. I think that is somehow feasible. So, that is I see possible, again you see that we are doing one common platform with IP and that is not done, that’s not 100% done yet. So, you will see we have a lot of things to clarify and to do with the legacy platforms. And so, that puts pressure on us, but we are taking the right steps and that is we are not done yet towards our goal, our aspirational goal. Russ, you want to give a little bit more color on that.

J. Russell Mincey

Well. I mean you mentioned our move to common IP-based platform, our intention in the quarter was based on the current facts and circumstances to evaluate the inventory write-off, the inventory that we needed to write-off the specific assets related to that those products and try to get that behind us, but of course we have evaluate that in the future, and we have to follow the accounting rules in the future but our intention was to try to get that behind us now and move forward.

Harald J. Braun

Yeah. So we see gradual improvements there, Rich, I hope that you will see that, but I hope that you see also that we have an absolutely laser sharp focus on cash management and that is we’re driving at the moment to company.

Richard Valera – Needham & Company

Sorry, just one followup to that gross margin question. To the degree have you written-off any inventory that might actually be sold and if you do sell that would you sort of call that out as a sort of one, one off in the gross margin?

J. Russell Mincey

I mean we’ve written it down to a level that would be, it’s net realizable value. So I suppose it's hard for me to answer that question today, if we were do that or not do that. Our anticipation is we’ve written it down to the proper value today and our balance sheet is properly stated today.

Richard Valera – Needham & Company

Fair enough. Thank you.

Operator

(Operator Instructions). And our next question is from the line of Ilya Grozovsky with Morgan Joseph. Please go ahead.

Ilya Grozovsky – Morgan Joseph

Thanks. You had said in the past that you wanted to sort of sell add-on on services and products to your core and the examples you had given was security for cell sites, power management.

Harald J. Braun

Yeah.

Ilya Grozovsky – Morgan Joseph

The solar, can you just give an update on there have been customer update of these solutions and sort of how has it impacted you? That would be great. Thanks.

Harald J. Braun

Yeah, thanks very much Ilya for that question. Because that shows today, I focused only on two-growth pillars right, our bread and butter business, IP mobile backhaul and on the 4G growth pillar. We had the other one I think we touched briefly on that that was the services, the global network services growth, build up with our network management solution. But the fourth one, I didn't talk today about. That was the energy, the mobile security and surveillance and energy management growth pillar. This is still in place, we are making big progress we are answering actually huge RFPs right now. From some major operators worldwide, we're making really fantastic progress there and we have also built-in San Jose a lab, where we demonstrate what we can do on the sales side. That I came from the sales sides, once we are on the sales side, we can do a lot to improve the energy consumption on the sales side and secure the sales side and do much, much more So, do we have a contract right now, a small one, some people are, some customers are paying us for some consultative services and some evaluation. So, I would put that in the category of consulting and plan. So, customers some in Europe are paying us actually for that. So, that is and I wouldn't consider that a contract yet. So, but we are working towards that. So, I anticipate that we will see something very soon from a customer side and you remember this grows, but as an incubator mode, right. When we don't see over a certain period of time and we have a management team have a timeframe on that. When we don't see activities there and don't see customer pickup, we will not continue doing that. So, that is very clear, but at the moment, we look – it looks pretty good. So, the progress is there, the activities on the customer side is there, our peer activities are there, we know where we stand and again for one-year ago we were nowhere absolutely nowhere, it was almost an startup company in a company. So, they have some projections for this year, for the new AUP. They have some revenue and margin projections so and we are moving in the right direction. So, I have to give it a little bit more time. I hope that that gives you enough flavor on that one but it is still absolutely active, we are absolutely continuing to execute our four growth pillar strategy in this tough environment.

Ilya Grozovsky – Morgan Joseph

So, are you looking at this as more of a revenue additional driver or more to solidify your relationship with the customer?

Harald J. Braun

I think as a differentiator, as a differentiator because as I've said before, I shouldn't sound arrogant, because I've said, we are the kings of the sales side. So, we are on a lot and lot of sales sides and we saw what can be done at the sales side, in particular in developing countries and we have solutions for that. For me it is an additional revenue stream, but it is also a big differentiator in our service capabilities.

Ilya Grozovsky – Morgan Joseph

Okay. Thank you.

Operator

Thank you. And at this time we have no additional questions. I would like to turn it back to Ms. McGowan for any closing remarks.

Mary McGowan

I'd like to thank you all for joining us on this call and webcast. And as Harald noted, we will be hosting road shows in various cities in May. Please contact me for information as to dates and locations. My number is 408-404-5401. We hope to see many of you well on the road. Thank you and good day.

Operator

Thank you, Ma'am. Ladies and gentlemen that does conclude our conference for today. Thank you very much for your participation and for using ACT Conferencing. You may now disconnect.

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Source: Harris Stratex Networks, Inc. F3Q09 (Qtr End 4/3/09) Earnings Call Transcript
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