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Executives

Mary McGowan –Summit IR Group Inc.

Harald J. Braun – President, Chief Executive Officer and Director

Thomas L Cronan – Senior Vice President & Chief Financial Officer

Analysts

Stephen Ferranti – Stephens, Inc.

Richard Valera – Needham & Company

Ilya Grozovsky – Morgan Joseph

Blaine Carroll - FTN Equity Capital Markets

Analyst for James Faucette – Pacific Crest Securities

Larry Harris - CL King

Kevin Dede - Jesup & Lamont Securities Corporation

Jeff Osher - Harvest Capital

Brett Hendrickson – Nokomis Capital

Harris Stratex Networks, Inc. (HSTX) F4Q09 Earnings Call August 20, 2009 4:30 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 the call for your questions. Instructions for Q&A will be provided at that time.

As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the conference 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 fourth quarter and full year of fiscal 2009, which ended July 3rd. On today's call will be Harald Braun, President and Chief Executive Officer, and Tom Cronan, Senior Vice President and Chief Financial Officer.

During this conference call we may make forward-looking statements regarding our business including statements relating to projections of earnings and revenue, 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 web site which is www.harrisstratex.com. Now I'd like to turn the call over to Harald Braun.

Harald Braun

Thank you, Mary, and good afternoon, everyone. For those who may not have had a chance to read our release, let me provide you with a recap of our financial results. Then I will turn the call over to Tom for details on the quarter.

In Q4 we achieved revenues of $135 million. On a non-GAAP basis those margins were 37%. Net income was $5 million with earnings per share of $0.09. By segment, while the American revenue was $59 million, international revenue was $73 million and network operations revenue was $3 million to $4 million.

We ended the quarter with a second consecutive record cash position of $137 million and we posted positive operating cash flow of $26 million. Our book to bill ended the quarter at 1.

I would like also to mention a few highlights in our fourth quarter, in particular was the successful distribution of Harris Stratex shares by our majority shareholder in Maine. We are now a fully independent company and believe this will enable us to execute on our strategy, broaden our investor base and realize greater shareholder value over time.

Concurrent with the planned distribution we launched a multi city road show to mark our new communication initiatives with investors. We also had a number of customer wins since our last conference call, which I'm proud to announce here.

A couple of these are BSNL, the world's seventh largest telecommunications company based in India and Open Range Communications, a wireless broadband service provider to rural America. I'll speak for these successes as well as the challenges later in my remarks.

Now let me turn the call over to Tom.

Thomas Cronan

Thank you, Harald. Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended July 3, 2009. Fourth quarter revenue was $135.2 million and we reported a net loss of $3.4 million or a negative $0.06 per share.

GAAP results included $18.9 million of pretax charges composed of the following, $10.6 million related to a trade name impairment charge, $4.3 million of stock compensation and restructuring charges, $3.7 million was for the amortization of purchased intangibles and $300,000 was for software impairment charge.

The $10.6 million trade name impairment charge is in addition to the $22 million charge taken in Q2. This additional impairment was triggered by a notification by Harris that they were terminating our trademark license since we are no longer a subsidiary of Harris Corporation. The remaining balance of the trade name intangible asset is approximately $400,000, which is expected to be amortized over the next two quarters.

Now I'd 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 comparisons of our results across reporting periods. Please refer to our Web site for the complete GAAP to non-GAAP reconciliation table.

By segment, North American microwaves contributed $58.5 million of revenue in the fourth quarter, up 6% from the year ago period. The slip between mobile and private orders for North America in the quarter was 49% mobile and 51% private.

The international microwave segment contributed $73.3 million, 41% lower than the year ago period. Africa contributed $32.4 million in revenue, 32% lower than in Q4 of fiscal year '08. EMER, which comprises Europe, the Middle East and Russia contributed $18.8 million in revenue, 66% less than the year ago period.

Revenue for the rest of the world was $22.1 million, 5% more than the Q4 fiscal year '08 results. The Network Operations segment contributed $3.4 million in revenue compared to $7.1 million in Q4 of fiscal year 2008. In the quarter, one customer, MTN, located in Africa, contributed more than 10% to our revenue.

Gross margin was 37.1% in the quarter versus 30.6% in the year ago period. The higher-than-expected gross margins resulted from favorable margin impact on some projects, gains on currency translations, decreased warranty expense, favorable purchase price variance and product mix.

Approximately $8 million of the favorable margin impact was in the form of one-time amounts that are not anticipated to recur in subsequent quarters. While there has been some clear benefit from our lowering manufacturing costs, the extent of the margin increase this quarter was greatly impacted by the one-time upsides. Ignoring the one-time amounts, we believe that our margin is trending up but there will still be some variability on a quarterly basis depending on the product mix and the completion of projects.

Total operating expenses were $44.1 million or 32% of revenue. This amount compares to $43.7 million in the prior quarter but includes a full quarter of operating expenses associated with Telsima in the fourth quarter. The difference in expense between the third and fourth quarter for Telsima was approximately $2.7 million.

When compared to the fourth quarter of fiscal year 2008, total operating expenses, including Telsima, were down by 14% or $7 million. This decrease was driven primarily from our cost reduction program as well as lower commissions and bonuses. Excluding the impact of Telsima and bad debt, the operating expenses in the period were 19% or $9.1 million lower than the fourth quarter of fiscal year 2008.

Operating income was $5.9 million for the quarter compared with $5.9 million in the year ago period. Our ProForma tax rate was 21%, which is lower than last year's tax rate of 26%. The lower ProForma rate is attributable to increased volume of international revenue flowing through our Singapore international headquarters. Our cash tax rate is expected to be about 7%.

Employee head count was 1,521 including the Telsima head count compared with 1,543 employees in Q3. Now we'll move on to the balance sheet.

We are very pleased to report, especially in light of a challenging global business environment, that we achieved a record cash balance including short-term investments of $137 million at the quarter end. That balance compares to $116 million at the end of the last quarter.

Net cash, which we defined as cash less third party debt, was $127 million at the end of Q4 compared to $106 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 $26 million compared with $28.9 million in Q3.

Accounts receivable increased slightly to $142.9 million compared to $142.6 million in Q3 and DSOs stayed in the same range changing from 72 in Q3 to 76 in Q4. The company continues to focus on cash management across all areas including accounts receivable and accounts payable.

Depreciation and amortization of property, plant and equipment and capitalized software was $6.7 million. CapEx for the quarter, including capitalized software, was $7.3 million. We continue out initiatives to decrease overall expense, maintain our DSOs and improve inventory terms. We are committed to continuing our focus on cash management in the coming quarters.

Now let me talk about our comparative year-end results. For fiscal year 2009 the company reported revenue of $679.9 million compared with revenue of $718.4 million in the prior year.

GAAP net loss for fiscal year 2009 was $355 million or a loss per share of $6.05 compared to a net loss of $11.9 million or a loss per share of $0.20 for fiscal year 2008. Included in the fiscal year 2009 results is an adjustment for $2.9 million in additional currency translation expense that is included in the cost of product sales and service.

In reviewing the year-end close we determined that certain unhedged currency translation exposures associated with sales and Polish złoty should have been charged as an expense during this fiscal year.

The foreign exchange currency charge is correctly stated in the fourth quarter and in cumulative results for fiscal year '09. We have provided an explanation of the impact of these expenses on fiscal year '09 including the impact to prior quarters in fiscal year '09 in a footnote to tables 1 and 4.

On a non-GAAP basis, growth margins were $212.7 million or 31.3% of revenue compared with $215.5 million or 30% of revenue for the prior year period. Net income for fiscal year 2009 was $28.3 million or $0.48 per diluted share compared to net income of $34.4 million or $0.59 per diluted share in fiscal year 2008.

The operating cash flow for fiscal year 2009 was $71.3 million compared with the operating cash flow of $40 million for fiscal year 2008. Fiscal year 2009 non-GAAP results excluded $373 million of pretax charges comprised of $311.6 million for goodwill and intangible impairment charges, $29.8 million for foreign transition charges, $14.8 million amortization of purchased intangibles, $11.2 million restructuring and stock compensation expense and $5.6 million for write-offs of acquired in process R&D and software.

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

Harald Braun

Thank you, Tom. It's obvious that the challenges of the metric and of the climate continue to restrain growth potential in our core markets. In any given region we can be faced with currency issues, poor economic conditions, limited access to capital as credit markets remain tight, reduced capital spending or customer complications.

The last item on that list can introduce price inflations, but it also generates more attractive volume opportunities. Regardless of these challenges we are committed to our strategic vision as we continue to make significant progress.

We are executing on our four growth biller strategy announced last year, expanding our customer reach geographically and with our proven technologies, introducing a broader range of services to support our customers growing needs, moving quickly to a fully outsourced contract manufacturing model and rebalancing our R&D investment to fund additional innovation incubators.

I would now like to provide a business review of the quarter. We are seeing the first positive signs of economic stabilization in some regions, in particular, North America. In Q4 North America performed above our internal plans.

Year-over-year revenues for the North American sector is up 6%. On a sequential basis, the region's revenue improved 39%. We continue to win contracts with mobile carriers as well as at state and local government levels. We are confident that these project commitments should contribute to future revenue improvements.

The rapidly increased popularity of Smart phones and the applications that they enable is driving the need for more bandwidth in the backhaul portion of the mobile network. Our IP backhaul solutions are a compelling alternative in more cases than in the past and we are optimistic about the future of the segment.

The American Recovery and Reinvestment Act creates another area of opportunity to which we are playing significant efforts. Rural broadband is almost a perfect fit for us. What we offer specifically backhaul over long distances and WiMAX in the last miles. Our ability to provide an interim solution, including long-term managed service support is closely aligned with the needs of many small networks and will be developed.

Our backhaul solutions have now been accepted by the rural utility services for IUS Telecommunications program. This is required for equipment to be used in IUS funded projects.

The first application endorsed for the stimulus funded applications closed last week. Here the focus is on little mile projects where Harris Stratex Network solutions is very well suited.

We provide a consulting and network design support for a number of grant applications and we will now await completion of the grant review process. Initial funding for projects is anticipated in late calendar 2009 or early 2010.

Africa remains a region of relative strength when measured by customer demand and network infrastructure expansions. We continue to have a leadership position in Africa but the region is not without its own challenges.

Cash and credit excess are becoming increasingly important to customers and rollout has been slow. The strength of the US dollar also makes network deployments more expensive. Despite its challenges, our other outlook is relatively strong for this region and we add in offices in Africa where we see the greatest growth potential.

The acceptance of our two new growth areas, WiMAX and Energy and Security continue to confirm that our product and services are a perfect match for this continent. Africa is fast becoming a role model for our end-to-end solutions.

In our EMER region which comprises Europe, the Middle East and Russia, the challenges continue and may last longer than originally anticipated. Russia has demand but financing obstacles remain. Across Europe, especially Eastern Europe operators continue to focus on their cash positions and are constraining their capital spending.

The expansion plan of some Middle East operators have stalled as they evaluate strategic options. Fortunately that does not include our large Middle East contracts. The next large operators, however, investing in their future growth. We are working diligently with British Telecom and are planning ahead for new infrastructure deployment, although no specific timeframe has yet been announced.

In Q4 we announced a two-year contract with EADS, a systems solutions provider for armed forces and civil security worldwide. Harris Stratex will be supplying the Eclipse radio platform, and NetBoss, which is our network management solution.

We also announced a contract with the Georgia mobile operators, Nexicom, to expand a wider infrastructure in that country using the Eclipse platform. As with many large orders, detailed planning is critical and timing can be uncertain.

Our large Middle East contract is such an example. Product shipments began in quarter four as anticipated and we expect to recognize the revenue in fiscal Q2. However, while customers' commitments remain solid, the timing of the network deployment lacks the desired visibility.

As a side note, the deferred revenue situation we announced on August 7th is not related to our Middle East contract.

Asia Pacific continues to deliver a number of growth opportunities. During the quarter we captured several WiMAX rollouts and 2G expansions in the Philippines, Thailand and Indonesia while offers in Australia continued its 3G mobile network rollout.

As we reported last week we have signed a contract to supply BSNL, the world's seventh largest telecommunications company with an 802.16e mobile WiMAX network. This network will enable wireless access in urban areas in southern India.

Let me take a moment to provide some insight into the tender process in India. First of all, it is very complex. As part of the tender, potential suppliers need to pardon eligibility and technical evaluation process for qualifying for participation. Typically, there are numerous tenders for different regions being opened and awarded at any given time.

For example, two different tenders, the rural one and the urban one have been awarded and we won the urban tender. The rural two tender, which we're also competing for, is expected to close sometime this month.

As a customer example, BSNL provides 3G mobile and WiMAX services to different regions and conducts a separate tender process for each. Depending on the size of the network to be deployed, BSNL may offer several seats or levels of participation each with a reduced percentage of the tender pricing.

As you can see, it is very complex and we are pleased to have won the award for the southern Indian state of Kerala. Let me also add that this multi year contract is a direct result of our Telsima acquisition.

This early success with BSNL provide a good set rate into a discussion of our product strategy and growth pillars. On our last conference call we said our 4G and WiMAX pillar had migrated to business unit status as we rapidly integrated the Telsima business.

We continue to see revenue opportunities from this $1 billion market in regions that include Africa, Asia, Latin America and the Middle East. The BSNL contract will serve an early testament for the successful execution of this growth strategy.

As most of you know, our overriding product strategy remains focused on converging to a common IP place microwave platform. This will increase R&D efficiency, simplify our supply chain, improve our lead times, reduce component cost and decrease the number of products require support from our worldwide customer base.

To maintain our leadership position in the IP mobile backhaul market, we are continuing to innovate. Towards that end, we continue to focus on enhancements to the Eclipse platform and create solutions that allow us to migrate away from our legacy products.

Last quarter we talking about the introduction of the IIU 600 in all indoor radio units specifically designed for North American customers to address network bottlenecks. We have now accepted our first customer order for this product.

The Eclipse product platform is leading the need and driving the growth in microwave IP applications. At fiscal year-end on a trading 12-month basis, 37% of our products came from this category for quarter four. This is up 28% when we started tracking this matrix at fiscal year-end 2008.

In our global network services [inaudible] we are driving to meet the need of our customers to optimize their investments, reduce the operation expenses and improve productivity, to help manage networks for enterprise, carrier and state and local government customers, we recently commissioned a state of the art network operations center, or NOC, at our Raleigh, North Carolina headquarters.

Our NOC provides 24 by 7 energy security and surveillance controls for subscribers who applied as well as performance monitoring to ensure productivity. This also allows us to [inaudible] operations previously collocated with Harris Corporation in Melbourne, Florida.

Further validating our success in global network services is a five-year agreement to provide a NOC with Open Range Communications. This contract provides full service support for Open Range, high speed WiMAX networks serving rural America. We will be acting as a cost effective manager of managers enabling Open Range to focus on product innovation.

Finally, we have another growth pillar, energy, security and surveillance, or ESS, that has also advanced from incubator to business unit status. The market size and opportunity is significant.

Today there are already 1,500 sites that have green elements and another 2 million to 5 million sites that can use our solution to reduce the operating costs. We are already capturing customers for solutions packages that offer controller, hybrid energy, surveillance and excess.

These packages, which are all software controls, will deliver a high-value, cost-effective solution to our customers. We are excited about the early promise of this growth initiative and we look forward to [drive riding up it] in the coming quarters.

Let me now provide you with a brief overview of the dynamics I see happening in the industry and in our company. We continue to believe that the growth drivers are still in place. Network traffic is driving the demand for more bandwidth. Developing countries still plan to expand their infrastructure and RFP activities continue around the world.

At the regional level, the challenges that faced us in Q3 remain, especially in Eastern Europe. Overall, we remain watchful of the risk profiles in all of the regions we serve. We do see signs that North America has stabilized, but we are cautious with our extended profile outlook.

Africa remains a region of relative strength for us when measured by demand and opportunity as does Asia Pacific. We believe we are establishing a competitive position in India largely as a result of our acquisition and expect to enlarge our footprint in other countries as well.

As we have seen over the last several quarters, orders are taking longer to turn into revenue. Further, as many of our products become more software based there is also the expectation that software recognition rules may dictate that shipments will not translate into revenue in the same timeframe.

We have made and we will continue to make a reasonable level of investment to prepare for the upturn in our market. Our management team continues to rationalize our company's operating expenses and further improve our cash management.

The activities associated with our restructuring program will continue to be phased in. Year-to-date we have reduced costs by roughly $25 million. Our head count, as I've shared this with you, continues to [doubt] our tools and process improvements.

As we have mentioned before, the latter will require most of fiscal year '10 for full implementation. Our expense management program has once again contributed to our positive cash flow for quarter four and enable us to achieve our eighth consecutive quarter of positive cash flow.

Our Q1 outlook remains cautious due to the global economy and the continued constraints on financing of infrastructure projects. While our book to bill has improved to 1 we believe it is still difficult to provide financial guidance and want to caution that our actual results could differ from current expectations.

Based on these expectations we are now guiding for the following. Q1 revenue in fiscal year 2010 to be in the range of $120 million to $140 million. Growth margin is expected to be in the range of 30% to 31%. And total operation expenses in Q1, I expect it to be below Q4. We continue to have a laser focus on cash management and our quarterly goals are to generate cash at these revenue levels.

Before going to Q&A I would like to comment about fiscal year 2009. By any measure it has been a year of significant change. We did find a vision and a new strategic direction based upon four growth pillars and we are in full execution.

As a proof point to our vision, our acquisition in February immediately expanded our WiMAX and 4G portfolio as well as access to markets such as India. On May 27th we became a fully independent company. With that independence our ability to strengthen our position in the wireless telecom market and to execute on our strategy was greatly enhanced in the face of the global economic downturn and generated $71 million in operating cash flow.

Most importantly we completed our management team with the hire of our Chief Financial Officer and Chief Sales Officer. For me, this is the organizational structure needed to support our strategic direction.

After all this change, I now feel we have the right product portfolio to compete and to win. We will endeavor to innovate and improve in the days and years ahead. The strength of our balance sheet will enable us to prosper.

I am also confident that we have the right management team in place to execute on our strategy and to realize greater shareholder value. At this point I would like to open the line for questions. Operator, please poll for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Stephen Ferranti – Stephens, Inc.

Stephen Ferranti – Stephens, Inc.

First question I guess related to gross margin in the fourth quarter. Looks like you’ve been factoring out some of the one-time adjustments that you had in the quarter that you held gross margins flattish to slightly up in spite of lower revenue level. Can you give us some sense for perhaps some of the more structural and sustainable changes that you’ve made thus far into the quarter and what can we expect in the next quarter or two from here?

Thomas L Cronan

The long lasting changes are restructuring of reducing cost expense in the operations and manufacturing groups so that our overall expense structure is lower, so that’s one of the primary contributors. The other contributor is shifting between the Eclipse product and the other product lines. As we have more of an Eclipse product mix we generally have a better margin profile until as we’ve talked about in the past one of the major factors going forward will be the acceptance of the new product line in North America because I think that will have a very favorable impact on the gross margin. So as we look forward we still have some inability to forecast exactly what the product mix will be on a quarter by quarter basis and we did guide to 30% to 31% with again lower revenue projections so it shows you a little bit of our belief in the margin structure and I think as revenues come back, we will see much better margin profile.

Stephen Ferranti – Stephens, Inc.

Then I guess Harald, you touched upon in your prepared remarks that you had seen some new business opportunities in North America and obviously it looks like from the segment info you provided that trends there have strengthened a bit. Is the IIU 600 platform, are these new opportunities that you’re seeing, are they related to the IIU 600?

Harald J. Braun

The IIU 600 is available. We have them in the hands of the first customers. We’re going to go to piloting. We see that there are lots of new opportunities with mobile operators since they have really demand for the network bottlenecks as I mentioned and they are based on the IIU 600. That is very positive for us. This is the first platform as a combination of the true point [inaudible] portfolio and the [inaudible] portfolio [right] with enhanced feature sets so very happy to see that.

The second one is the opportunities we see from the stimulus package. So as I’ve mentioned, we have held a lot of operators to fill our applications and apply for grants and loans and so that is very encouraging to see.

The third part of course is that state and local government business, they are deploying. This is also very encouraging to see, that we see no slowdown there. And we have a little bit of new strategy in North America. We have a new leadership team and we have a new structure there, very, very happy to see how they are acting and how they are following through.

I think those are the four components that I would like to mention there.

Stephen Ferranti – Stephens, Inc.

You mentioned a number of factors that you felt were weighing on the carriers’ ability to place orders in some of the weaker geographies that you’ve seen, exchange rate, availability of credit and the like. Is there any one or two that you could pick out that you’re hearing from your customers is a gating item in terms of their willingness or ability to spend at this point?

Harald J. Braun

The one thing that pops in my mind across the world is financing. We hear that in every review I do on a monthly basis here that all my regional, my sector heads, and of course also reviewing RSPs, the request for financing is jumping right on number one. The infrastructure projects of course to fund them is pretty expensive for them. Everybody’s watching the balance sheet, and the access to capital in some of our growth regions and in emerging markets is a problem for them. So we can help them. On the other side you can also imagine that also the competitive pressure to very big supplier and vendors is tremendous here because some of them offering finance packages. So we are competing here. On the other side, it’s also big opportunity for us to help our customer base, to help them finance projects. This is the number one area which jumped into my mind.

Stephen Ferranti – Stephens, Inc.

Do you think you’ve lost some deals because of I guess the inability to provide financing alongside?

Harald J. Braun

I think so. To be honest I would say so, yes. There are some that we just cannot compete and as I’ve said before numerous times, we are not doing financing and so yes. I can see a couple of projects we had to walk away from. I would not say that we lost them because I just cannot compete. Then [inaudible].

Operator

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

Richard Valera – Needham & Company

I was wondering if you could give us any color on where you think margins can go as revenue ramps. I know if we could pick a number whether it’s $150 million or some materially higher number but one that you’d done in the recent past, just get a sense of where with your current structure you think the margins could be at a materially higher level. Are we talking sort of low $30s to mid $30s if we got up to a $150, $160? Just any kind of color to help think about where we could be at higher revenue levels would be helpful.

Thomas L Cronan

I think there’s two pieces to this discussion. First is the near term piece when we continue to have the current structure and the current set of product lines and then as we transition to the [RAU] 600 and we move to a much more leveraged contract manufacturer basis and more sales of that IP based product in North America, I think there’s probably two different gross margins that we would talk about. So in the near term I think as the sensitivity to revenue is also a little bit product mix sensitive but I would say we have the opportunity to improve 100 to 200 basis points from our guidance if we get the revenue uptick that you’re talking about. So that would be probably the sensitivity.

On the other hand, I think we can get to our long term targeted gross margin range of the mid $30s once we transition away from our high fixed cost environment to a much more variable cost environment.

Richard Valera – Needham & Company

That’s sort of a 12 month, you said? Twelve months to get that done?

Harald J. Braun

That’s correct.

Richard Valera – Needham & Company

I’m just trying to understand the sort of revenue outlook and reconcile a lot of positive things you’re saying in terms of new orders, new wins you’ve gotten, the Mideast contract which was supposed to be kind of a dramatic ramp. You have deferred revenue which should be recognized in near term periods. You have a couple of wins you talked about here, open range, WiMAX win, and yet we’re still seeing revenue continuing to go down. So just trying to understand, which part of the business is sort of collapsing or is it just that these things we’re talking about on the positive, we really haven’t seen revenue from them yet and we may not for a couple quarters. It seems like there’s a disconnect between a lot of positive announcements and revenue that continues to go down to levels not seen in quite a while.

Harald J. Braun

That’s correct. First of all I think the announcements are very important and of course customer commitments also that they place orders. So that’s very, very positive. On the other side I mentioned in the script that it takes longer to turn them into revenue. That is in particular true with the Middle East contract. So as we started shifting as I mentioned last time there are continuous obstacles on the customer side on how they roll out the network, how they're redefining parts. And we are helping them, of course. And so the equipment is now in the country. So and still they are slowly starting to deploy that. So very difficult to have for us now a real projection on when they really starting to deploy it so that we can take it to revenue.

So that is one thing. So building of networks of this - I would not say gigantic networks but a nationwide networks takes a while and we see that in the Middle East contract. The good thing is that we are in very close contact with them and see that they're doing things, that they are designing, that they are building the sites and so that is going to happen in this very slow process.

The disconnect I'm seeing here is really that people giving us the order but the turn into revenue could go over several quarters. So what you saw may be in the last year and in the past quarter from a pure IP mobile backhaul company that a lot of that 60%, 70% turns in the same quarter with more software content and the software recognition rules there, accounting rules, you will not see that they turn in the same quarter and in particular when you have big networks to build.

So I think that is a little bit to disconnect. So we have to set the expectations that could maybe order entry and revenue turn that that into a longer turn cycle in the future.

Richard Valera – Needham & Company

So it's the constant demand levels at some point in the next couple of quarters that would imply you're going to see better revenue. I mean, these things have to turn a revenue at some point.

Harald J. Braun

Absolutely, absolutely. And I think, as you know, Rich, we have just started to go more into the access area of this WiMAX. We just started to go more into the core area with wireless gateways. And we're expanding our product portfolio. We just started it.

And at one point in time, of course, you have that you are in that flame that you have continuously to take revenue, also with our services business, same thing, to build out a network operation center and get customers on there. We [started just a bit] and now we see that hopefully in the next quarter continuing.

And not only that, I hope that the visibility as a macroeconomic environment gets also better so that we have this double effect coming in to bring us back to the normal revenue levels. I agree with that statement.

Operator

Your next question comes from the line of Ilya Grozovsky - Morgan Joseph.

Ilya Grozovsky - Morgan Joseph

What was the linearity in the quarter like?

Thomas Cronan

So I would say that it was back-end loaded. And most of our quarters are back-end loaded. It was a little bit more back-end loaded than the previous quarters in the year.

Ilya Grozovsky - Morgan Joseph

What would the revenues had been in the quarter had you been able to recognize that initial contract as a normal revenue as opposed to deferred?

Thomas Cronan

I think we had sized the deferral in the $5 million range.

Ilya Grozovsky - Morgan Joseph

On Africa, Africa obviously took a pretty big step backwards in the quarter. Can you just sort of elaborate on what you're seeing there? I mean, obviously the 10% customer was MTM which comes from Africa. What else is happening besides that?

Harald Braun

I mean, there are a number of things there. So there is this operator consolidation I would say. And I think a year ago when I saw that happening, how many companies actually are building their own networks that there is an unsustainable model, I think in some areas in Africa you see now that operators are talking to each other and that consolidation is kind of happening.

In this calendar year and in the beginning, the first half year of 2010 I see operator consolidation happening in Africa. That will, of course, slow down some processes. Then you have very, very big customer in Africa and this customer is acting out in the Middle East who is looking for consolidation with somebody else. I think you know what I mean.

And this slows down, this is, by the way, a very big customer of ours. And that slows down when you are looking for or when you are about to merge or to consolidate with somebody that directly slows down the procurement process. I think that is a major activity.

So customer operator consolidation is happening, number one. Number two, the access to finance packages is very, very apparent on the second place in Africa because there is a lot of currency issues there. And when you just see what happened in Nigeria, the access to US dollar is very, very difficult and their stock markets are not doing very well. The oil price is not coming back to that where they were last year. They are all contributing factors to access to capital. And with that they are slowing down projects.

We have a handful of projects which they are just stalling. I'm not saying that they are cancelled, but they are stalling. And they are pushing out to the right-hand side of the timeline. Those are the major two contributing factors.

Operator

Your next question comes from Blain Carroll - FTN Equity Capital Markets.

Blain Carroll - FTN Midwest Securities Corp

Harald, do you feel like giving any more detail on the BSNL contract whether it's size or margin impact, when shipments will start? Shipments don't tie into revenue, when you'd start recognizing revenue from that.

Harald J. Braun

I mean, here we of course a first example of WiMAX build out with [August, the year, in particular 97 two rules] and under revenue recognition. We need to think about that of course. At the moment, where we are, I cannot give you - and that is not okayed with the customer - I cannot give you the amount of the contract size.

First of all, it's significant. And what I can do there is that we are planning to gather with them right now the build out of this project. Our COO just was there. We have a lot people right now. They are sitting with their planning teams together and plan the rollout.

So and I have to say it's a very fast timeline they have for their tender. By the way, they're doing it in parallel of course also the rule one tender, which I mentioned in the script with somebody else. And I think you know also who that is.

So there is a lot of activities going on there in BSNL and we're sitting with them on the table and are planning the project management of that rollout. So we will see something towards the end of this year.

Blain Carroll - FTN Midwest Securities Corp

Harald, the published reports out there have been that the total BSNL WiMAX rollout could be somewhere - and it's a pretty wide range between $300 million and $700 million. Which end of the range would you expect that?

Harald J. Braun

So, Blain, I cannot talk about the range or the number. But as I said, India is a very big country. There are several tenders which are structured there. So and of course we have, as I've said and what I’m trying to say in that script, they have an L1, L2, L3, L4 position. When you are an L1 then you are the number one on the list and you get a certain percentage of the contract. And when you have an L2 and an L3 they get lower percentage off the contract.

So even if I would give you a number at the moment when they decide to have two or three vendors there then you have according to that a percentage of the contract. But in total, the numbers I think north for all the BSNL, a number which you see there is north of $500 million but not for that one contract, for several contracts.

Blain Carroll - FTN Midwest Securities Corp

And then the Telsima product portfolio included an ASN gateway. Is that something that you can turn and sell into other networks? And does it also work as a home agent in CDMA networks and a GGSN in GSM networks?

Harald J. Braun

Absolutely correct. And I was not ready for this earnings call to come up with some announcements here. But during the quarter I think we can do some announcement there and I can tell you also that a part of that BSNL deal there was already our own ASN gateway a part of this product portfolio. So it was not only WiMAX. It was also ASN gateway, a component of it.

And so within the next couple of weeks we will extend our strategy and we will then disclose what all or what else we do.

Blain Carroll - FTN Midwest Securities Corp

And then, Tom, for you could you talk about what caused the deferred revenue during the quarter and is this sort of a new policy that Harris Stratex is going to have going forward which could also be impacting the revenue guidance for the current quarter and maybe quarters going forward?

Thomas L Cronan

The particular situation that we deferred the revenue was sort of a traditional issue associated with whether or not the contract was complete or not. It wasn't a 97.2, it wasn't a change of policy. It was just us following our typical review practices and getting to the facts, which took a little bit of time to get to. But when we got to the facts we decided that the deal didn't qualify for revenue from a timing standpoint in Q4. And so we would expect that to roll into a subsequent quarter as we said.

So I think it is not a change in policy. It's a traditional sort of review that we do on all of our deals. And we made a decision then. It didn't qualify. Now we do have, as Harald said, for the WiMAX products which are the newer technology and the 15E, we do have to look on those on a case-by-case basis and see if they qualify for revenue. And many of those contracts would be subject to deferral under 97.2 if they obviously include any commitments that aren't yet deliverable or they're bundled and we can't have separate pricing for each of the components of the bundle.

So we're looking very much at those deals. And I think the short-term referral impact you'll see will be related to the WiMAX product line. But the one last quarter was not. It was our traditional product set.

Blain Carroll - FTN Midwest Securities Corp

And then getting back to Rich's question, what is your revenue breakeven level right now with margins in around 31% and the operating expenses where they are right now?

Thomas L Cronan

So I'm not quite sure I understand your question.

Blain Carroll - FTN Midwest Securities Corp

Why are you losing somewhere around a nickel for next quarter on $130 million in revenues? So I'm wondering what type of revenue number do you need? Are you going to be reducing operating expenses going forward or are OpEx going to stay at this level?

Thomas L Cronan

So we are going to be reducing operating expenses on a going-forward basis to put ourselves in a position to be profitable at a lower revenue level. We also anticipate that revenue levels will come back. So it is kind of a moving metric.

And so I don't want to declare what the number is yet, but I just want to let you know that we're very focused on our operating expense. And given the current environment we're going to be retracting our OpEx in a judicious way and trying to position ourselves to have more leverage.

Operator

Your next question comes from the line of James Faucette - Pacific Crest.

Analyst for James Faucette - Pacific Crest

This is Nathan Johnson calling in for James. Just wanted to get an update from you guys on your position or your progress in going after the Verizon business as they migrate to LTE. At least our understand was that the Verizon kind of central was going to be qualifying venders and then the regional areas would be making decisions on what equipment was going to be deployed. I was wondering if you guys are still in the qualification process or kind of where you're at in that process.

Harald J. Braun

I can shed some light on that. So that is also an encouraging sign, actually in North America. And the Verizon [Elink] RFP was awarded and there were a number of seats. Happy that we could qualify and go forward and we are now - it's almost a year now - after a year sitting now with the regions together and design with them contracts and deployment strategies. So and it is based on the Eclipse platform and in the future also on the IIU 600. So we are working under the directive of the headquarters with the regions now and so that is very encouraging to see.

So that opened really up in the last couple of months. And other large areas in North America it's the same thing happening. Of course, you can imagine also it was a big customer of ours and so this is just the integration into Verizon that opened also now up the integration from our perspective is complete. So that opens up, again access there.

A couple of Tier 2 players open up again. They're starting to spend. So that is a very encouraging sign. Everything is based going forward on the Eclipse platform and on the IIU 600. So the sales team is very - our tools and our processes are all guided and geared up now for taking orders for the IIU 600. The product is out there. So we are opening the flood gates now for that and we will see. And we see some good encouraging signs in this early stage. Everything is IP based. As I've said in numerous calls before everything that we do going forward is IP based and the products are coming out of the road map. So that is actually a very encouraging sign here in North America.

Analyst for James Faucette - Pacific Crest

And then I guess given what you know about the timing of the Verizon deployment, at what point do you expect to start shipping - or how far ahead, I guess, of a market's launch would you expect to start shipping?

Harald J. Braun

Very difficult to say when that is. So the visibility remains a little bit fuzzy there. The question for me is - I think we are worldwide in a situation that the operations part of the operators want to deploy. I think they cannot wait because the bottlenecks existing right now. And that's not only for North America the case. It is also for a couple of countries in the rest of the world the case.

It looks almost that the operational side of the house is holding - the finance side of the house, not the operations, are holding the operational guys a little bit back at the moment and watching the macroeconomic situation turn better so that they open the gates for investment.

And the operation guys it looks like because of the RFP activities and all of the discussion which we all have and the awards that they want to move. But on the finance side of the house are holding them back.

The question for me is how long can they hold them back? And I think that that is maybe a couple of quarters away. So that's my take. So when you listen to a worldwide consensus there, when the market comes back, it looks like that is in the calendar year, first, second quarter of 2010. So and I think that will maybe be the timeframe, maybe another two quarters that people are not starting to deploy.

Analyst for James Faucette - Pacific Crest

Just hoping to get an update on the competitive landscape. I mean, certainly in the past it's really been a pretty small group of potential competitors particularly looking at IP microwave backhaul, especially being able to support both TDM and IP. Do you see that changing over the next six months or are you expecting that to be competing against any new entrants particularly as it relates to IP backhaul?

Harald J. Braun

First of all, it's changing. Actually, as we as a company are changing with our product portfolio, we are not only in IP mobile backhaul anymore. This market is pretty stable in terms of our competitors like the Ericsson and [inaudible] and MSN [inaudible] PDL there and of course [Marie] is making a bigger impact here also worldwide.

But this is pretty much the group which we are competing with and so they are out there. But we are entering also different segments now in our product strategy where we see now different competitors. And actually in the 4G, what I call the 4G space, the access space with WiMAX, there are less competition. There's less competition now. So you see [inaudible] exiting. You see [inaudible] exiting. You see Ericsson never entered it. You see this space is now occupied by different players, smaller players which we think we have a much, much better position to win against with our complete product portfolio from access to core.

As Blain pointed out before that we have also now not only access. We have IP mobile backhaul but we can also connect to the router, IP Cloud with our wireless gateways. So we have different competitors now. But when you see the end-to-end solution combined with our network services then the competition is changing a little bit. So we see less competition there in this end-to-end solution. But when we drill down in specific segments it is also getting better because the market has less competitors except in the IP mobile backhaul space. They are still the same people there.

Operator

Your next question comes from line of Larry Harris - CL King

Larry Harris - CL King

Just a follow-up to the last question, you said that, I believe, in terms of IP, Ericsson hasn't entered the market. Do you have any expectation that they will or are they developing a product? What have you heard?

Harald J. Braun

So and they didn't enter the market in WiMAX to be complete. So they have a different strategy. What I am seeing here is very clearly that the big telecommunication vendors are going to LTE, that they are focusing their R&D efforts on LTE. So that is a clear sign and of course Ericsson has also their microwave portfolio. And we're competing with them.

So my point of view, it's very difficult for them to innovate in the pace we can innovate. So that should be from our point of view speed to market and innovative products as a heads up. As I've said numerous times when the big companies are starting to bundle, then of course we have a - it is difficult to compete with them or are offering finance packages.

But then it's very difficult to compete. But I think we have our space and we can compete with them and Ericsson will definitely not enter the WiMAX market. They have a different strategy.

But what I was planning to say and of course what I emphasize is that the big companies are exiting the WiMAX marketing and focusing on LTE so that opens spaces for us and in particular in the area of Asia Pacific and in particular India. They are focusing more on 4G and deploying WiMAX with Tata, Reliance, BSNL, Bharti. They are the main players there. And all of them are offering WiMAX.

So this is a huge market. You see that also happening in Africa. You see it happening in Latin America and that's our space where we focus with our 4G business unit.

Operator

Your next question comes from line of Kevin Dede - Jesup & Lamont.

Kevin Dede - Jesup & Lamont Securities Corporation

I was wondering, Harald, Tom, if you could be a little more specific about answering Rich's question regarding your transition to a full contract manufacturing and have your full product line on Eclipse. I mean, how much is Eclipse in the product mix now? And do you mean 12 months from the end of June or 12 months from the end of September?

Thomas L Cronan

I think from a transitional standpoint Eclipse today represents a majority of our product mix. We're selling primarily Eclipse outside the United States. In the United States the majority of the products sold are not Eclipse-based products.

So the big transition that we need to work through is in North America. So that's really what we're talking about from a transitional standpoint. We see that as an opportunity because generally, historically the IP prices have been much higher in North American than on a worldwide basis.

The Eclipse product was built to be very competitive in very competitive markets. And so we think the margin attribute to that product in North America will be very favorable. So that was the first piece of the answer.

The second piece is there is some movement a year away. But our target date is 12 months from June to move to 100% contract manufacturer. And that's the target that we're executing against.

Kevin Dede - Jesup & Lamont Securities Corporation

So at that point you think that a margin level in the mid 30 range would be fair.

Thomas L Cronan

Yes, starting with the following quarter.

Kevin Dede - Jesup & Lamont Securities Corporation

So you mentioned that the ESS segment now is full business unit. I was wondering if you could give us an idea how much of your mix it might have been in June or what it would be in terms of orders with a 1:1 book to bill.

Harald J. Braun

I cannot give you the number, but so we are very happy that this Energy, Surveillance and Security segment is really coming off the ground. We put it into a business risk. That is because we're taking on some customer business. So that is very interesting. We see that in Africa happening. We see it also in some other areas in the world happening. And there's a huge focus at the moment in that area. And for me, in particular, it's very interesting to see, to come up with some innovation in the shelter and put a software controller in there and what you can do with the operating costs for your customers. So there is more and more compelling advantage for the customers to source their operation expenses issues. So and exactly on that line, we’ve got a couple of customers in the last quarter and so [inaudible] a couple of them and so it is in the lower range of, let’s not say double digits at the moment in order, what we see, happening over the next 1 or 2 next quarters. So it’s in the lower range. We will be ramping up that business. We just got them last quarter from an incubator into a business unit. So we’re ramping it up and I expect over the next half year, a lower digit order intake.

Kevin Dede - Jesup & Lamont Securities Corporation

Would you mind giving me your view of the world wide transceiver market in ’08 versus ’09? Do you see it flattish or maybe down?

Harald J. Braun

Not having the data here, my gut feeling tells me down and so we just last week we updated from some sources the microwave market in the RF and we saw year-over-year and maybe also going forward almost flattish kind of thing .So but I’m not 100% sure whether this is correct so flat to down I would say.

Kevin Dede - Jesup & Lamont Securities Corporation

What’s your assessment of the clear wire relationship? Do you think that’s a closed book at this point or do you think there’s an opportunity for you there?

Harald J. Braun

I think when you see the history with Clearwire as a customer, this was pretty much open for a long time, and I think they still remain open. I think it just made a position for whoever on the WiMAX side and exited the WiMAX space. I think it’s pretty much… Clearwire I think is all the time open.

Kevin Dede - Jesup & Lamont Securities Corporation

I know that your competitor there doesn’t have the same flexibility in terms of product mix. I’m just wondering when you think you might get some leverage.

Harald J. Braun

I cannot disclose my strategy on this call. But you have a good point. Let me put it this way. You know what I mean. There’s a strategic component from our country and we have also strategic [inaudible] strategically.

Operator

Your next question comes from Jeff Osher - Harvest Capital.

Jeff Osher - Harvest Capital

Hey Tom, just two quick housekeeping questions. What was the allowance for [doubt flow] accounts?

Thomas L Cronan

This quarter? I don’t have it in front of me but I believe it was in the $2 million to $3 million range.

Jeff Osher - Harvest Capital

$2 million to $3 million gross. Then what was exing deferred revenues?

Thomas L Cronan

The total number is a pretty large number. It’s between $30 million and $40 million. The type that’s deferred that we’re specifically talking about where we have product shipments that for one reason or another went into the deferred bucket and not services and not big projects that are in process. That was about $11 million for the quarter.

Jeff Osher - Harvest Capital

Presumably that was up, you said $5 million to $6 million sequentially?

Thomas L Cronan

It was actually more than that. That was just one deal that was deferred. I would say the new deferred for the quarter was the $11 million on the product shipments.

Jeff Osher - Harvest Capital

So sequentially $11 million was the change in deferred of the product segment.

Operator

Our last question comes from Brett Hendrickson – Nokomis Capital.

Brett Hendrickson – Nokomis Capital

Thanks for taking the question. Hey Tom, CapEx, are you still thinking $4.5 million per quarter for this fiscal 2010?

Thomas L Cronan

We are, yes. That’s still the budget. The uptick this quarter was related specifically to one large software contract that we signed in the quarter so it counts against the quarterly Cap Ex but it obviously will get amortized but it was a renewal that had to be done in the quarter. So that’s why it was so large in this quarter. But we’re still thinking $4.5 million.

Brett Hendrickson – Nokomis Capital

Did you guys say book to bill in the quarter was 1, is that what Harald mentioned?

Harald J. Braun

Yes.

Brett Hendrickson – Nokomis Capital

Last question, it kind of gets at the question the last guy was asking you. You’ve got the built in deferred revenue but that’s good in the sense that you’re generating cash, right, and even at these accounting revenue levels, and I know it’s not cool anymore to buy back stock and I know you guys talked about it a little bit on your little road show there, but there’s a lot of VC firms that are giving up on their companies and so there’s technology available there to acquire and we get that, we think they’re in a good spot, but as we get that to be a Tier 1 supplier we need to have some cash in the balance sheet.

With that being said, even with revenue here and with book to bill maybe hitting 1 so maybe revenue bottoming out, and you’re still generating cash even at this low revenue level. I’m wondering if cash is going to keep building. Does it make sense to at least have the authorization? We’re not telling you guys what to do at all but does it make sense to have the authorization to maybe be able to act… I know you wanted to get through the spin out, but we got through that, the world seems to be getting somewhat better, but your enterprise value seems really low relative to the opportunity, so just your thoughts on that.

Thomas L Cronan

I think it’s always good to continue to have that debate at the board level to decide what’s the best use of cash, what’s the best thing for us to do from a overall investor standpoint for both the near term and the long term and so we’ll continue to have that debate with the board and I think it’s a reasonable question for us to continue that, what’s the right timing for those types of moves and what flexibility do we need on a going forward basis for operations or for the acquisition of additional assets, so we continue to have the discussion internally and we’ll continue to do so.

Operator

Ms. McGowan, at this time I’ll turn the conference back over to you.

Mary McGowan

Thank you all for joining us all on this call and webcast. : Harris Stratex is planning to attend the Deutsche Bank technology conference in San Francisco on Monday, September 14, the CL King 7th Annual Best Ideas Conference in New York on Wednesday, September 16, and the TechAmerica AEA Class in San Diego on Monday, November 2. We hope to see many of you at those events. Thank you and good day.

Operator

Ladies and gentlemen, at this time you may disconnect. Have a nice day.

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Source: Harris Stratex Networks, Inc. F4Q09 (Qtr End 7/3/09) Earnings Call Transcript
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