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Powerwave Technologies (NASDAQ:PWAV)

Q4 2009 Earnings Call

February 04, 2010 5:00 pm ET

Executives

Tom Spaeth - Treasurer

Kevin Michaels - Chief Financial Officer

Ron Buschur - President & Chief Executive Officer

Analysts

Charles John - Piper Jaffray

Steven O’Brien - JP Morgan

Rich Valera - Needham & Co.

Bill Choi - Jefferies

[John Evans] - Edmund White

Tony Rao - East Shore Partners

Amir Rozwadowski - Barclays Capital

Scott Searle - Merriman

Operator

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Powerwave Technology’s earnings conference call. My name is [Shenan] and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions)

I would now like to turn the presentation over to your host for today’s call, Mr. Tom Spaeth, Treasurer; please proceed.

Tom Spaeth

Thank you, [Shenan]. Good afternoon and welcome to Powerwave Technology’s fourth quarter 2009 financial results conference call. I am Tom Spaeth Powerwave’s Treasurer, joining us on today’s call will be Ron Buschur; President and Chief Executive Officer and Kevin Michaels, Chief Financial Officer.

Before starting, I would like to point out that various remarks we make about future expectations, plans and prospects for Powerwave, including but not limited to, anticipated revenues and revenue growth rates, operating margins, gross profit margins, earnings per share level, cash flow projections, revenue composition, improvements in cost structure, cost savings related to our facility consolidations, future cost savings related to our cost reduction activities, demand levels for the company’s product lines, projected growth in market share, trends in the wireless infrastructure market, the timing of product deliveries and future orders, the company ability to enter and compete in vertical markets for us products, common stock prices, debt purchases, the success of new product expense levels, capital expenditure rates, inventory returns, tax rates and day sales outstanding are all forward-looking statements.

These statements are subject to numerous risks and uncertainties that could cause Powerwave’s actual results to be materially different from those projected or implied. Some of the risks and uncertainties include our ability to accurately forecast and anticipate customer orders realize anticipated cost savings and synergies.

The negative impact on demand for products due to the macroeconomic environment and world-wide credit tightening, reduced demand due to industry consolidation among our major customers, fluctuations in foreign currencies, the ability to accurately forecast cash flows and credit collections, the impact of competitive products and pricing, economic and political conditions and the loss of one or more of significant customer accounts.

Please refer to our press release. Powerwave’s current Form 10-K for the fiscal year ended, December 28, 2008. Our Form 10-Q for the quarter ended, September 27, 2009 and other filings, which are on file with the Securities and Exchange Commission for additional information on factors, which could cause our actual results to be different from those projected or implied.

In addition on this call, we’ll discuss non-GAAP financial information, a reconciliation of the non-GAAP financial information, to our financial statements as prepared under GAAP is included in our press release dated today, which can be found at our website at www.powerwave.com and on Business Wire. The press release has also detailed information concerning several of the significant items impacting our results and we urge you to review that information.

Now I’m going to turn the call over to Kevin Michaels, Powerwave’s Chief Financial Officer.

Kevin Michaels

Thank you, Tom. With all the risk factors in mind I would like to start by reviewing our financial results, which are also summarized in our press release. Net sales for the fourth quarter of 2009 were $142.6 million and reported a GAAP net loss of $1.3 million which equates to a basic loss per share of $0.01. This loss includes 800,000 of non-cash intangible asset amortization related to our prior acquisitions and 800,000 of restructuring and impairment charges.

These charges and amortization totaled approximately $1.7 million for the fourth quarter. On a pro forma basis excluding the restructuring and impairment charges and intangible asset amortization charges we generate pro forma net income of $1 4 million which equates to pro forma diluted earnings per share of $0.01. I want to note that include in both our GAAP and pro forma results is the impact of approximately $1 million of pretax stock base compensation expense almost all of which is included in operating expenses.

If you exclude this expense from our reported results it adds approximately $0.01 per EPS for both GAAP and pro forma results. This is the same impact in the prior year period. On a geographic basis total America’s revenue for the fourth quarter of 2009 was approximately $37.9 million or 27% of revenue. Total Asian sales were approximately $72.7 million or 51% of revenue and total European and other international revenues were $32 million or approximately 22% of revenue.

In the fourth quarter, our antenna systems product group sales totaled $45.7 million or 32% of total revenue. Base Station Subsystems sales totaled $85.7 million or 60% of revenue and coverage solutions sales totaled $11.2 million or 8% of renew. Our total 3G related sales were approximately $35.9 million or 32% of our total revenue.

Our 2G and 2.5G related sales were approximately $78.1 million or 55% of revenue and our 4G sales, which include LTE and WiMAX were approximately $18.6 million or 13% of revenue. In terms our customer profile in the fourth quarter total OEM sales account for approximately 62% of our total revenue and direct and operator sales account for approximately 38% of revenue.

Moving on to gross margins on a GAAP basis, our total consolidated gross profit margin was 26.4% in the fourth quarter. In our press release on page three, there’s a table with a reconciliation of the various factors impacting our gross margin for the quarter. On a pro forma basis excluding restructuring charges and non-cash intangible asset amortization totaling 800,000 our total gross profit margin was 27%, which is up slightly from the third quarter.

Next I’ll review our operating expenses for the fourth quarter. Our sales and marketing expenses were $7.6 million. Research and development expenses were $14.6 million and G&A expenses were $11.7 million. On a pro forma basis, which excludes restructuring charges and intangible amortization for the fourth quarter, our total operating expenses equaled approximately $33.9 million, which is essentially flat with last quarter.

As a note, I would like to highlight the fourth quarter had an additional week in it since we used 52, 53 week fiscal calendar. So I do believe this demonstrates we are keeping as tight control on our expenses. In terms of other income and expense, we recorded a total of other expense of approximately $2.6 million in the fourth quarter of 2009.

The main component of this is our interest expense for the quarter. In addition for the fourth quarter, we did incur a net foreign currency loss of approximately $800, largely due to the weakening euro at the end of the quarter. Our fourth quarter tax rate was impacted primarily by income generated in China that was not offset elsewhere. This resulted in a net tax provision for the quarter of approximately $1.7 million.

While we continue to evaluate our future tax rate based upon our diverse international operations, we currently estimate that our effective worldwide tax rate will be approximately 25% to 30% for 2010. I want to stress that this estimate will fluctuate based upon our actual results. As a note, due to our primary deferred tax assets being written off in the U.S., should our net income increase in this region our effective tax rate will decrease.

Next I’ll review our balance sheet. Total cash January 3, 2010 was approximately $63 million of which $2.6 million was restricted cash. This represents an increase from the third quarter of 2009 of almost $16 million. For the fourth quarter, our cash flow from operations was approximately $20 million and for all of fiscal 2009, we generated positive cash flow of over $31 million.

For the fourth quarter, our total capital spending was approximately $5.9 million, which includes the cost of our new Thailand manufacturing facility. For 2010, we would expect our capital spending normal range of $2 million to $2.5 million per quarter. For the fourth quarter of 2009, our net inventory was $60.5 million, which is reduction of $9 million from the third quarter of 2009. Our net inventory represents inventory turns of approximately 6.9 times. Our total net accounts receivable remain relatively flat at $142.9 million while our AR day sales outstanding increased slightly to 91 days.

Before turning the call over to Ron, I would like to remind our investors that we believe that they are better served by focusing on long term trends as opposed to the short term volatility that is inherent in the markets we compete in. In terms of 2010, while there continues to be significant uncertainty surrounding the global, macroeconomic environment, we want to caution investors that there are inherent risks within our markets and with our ability to accurately forecast, but we are providing guidance for 2010.

With that in mind, based upon our current forecast for this year we are establishing our target fiscal 2010 annual revenue range of $590 million to $620 million. This represents an annual growth rate of between 4% to 9% which track the expected growth of wireless infrastructure spending for 2010.

While we were establishing a target forecast for 2010, we want to stress that we remain conservative in our outlook for overall capital spending within the wireless infrastructure industry. We realize that we are all in a tough economic environment and we expect to see various offers continue to control their overall capital spending in this type of environment. In spite of this we do believe that there are opportunities for Powerwave to continue to do well in this environment.

With that I will turn the call over to Ron Buschur, Powerwave’s President and Chief Executive Officer.

Ron Buschur

Thank you, Kevin, and good afternoon, everyone. We like to share with you some of my thoughts regarding our fourth quarter results and our review our current outlook for 2010. First, I would like to thank all of our employees for their strong efforts and particularly our suppliers for the continued support and allowing us to achieve the start up and the ramp up of our new Thailand manufacturing location.

I’m pleased and proud of the efforts and I believe this new location will further position Powerwave to improve our cost structure as well as deliver significant benefits not only for Powerwave, but for our direct operator and OEM customers, with our enhanced ability to support greater volumes and production efficiencies.

In terms of the marketplace we do believe that conditions have stabilized and we do see a slight improvement in our revenues versus the third quarter of this year. As we look at the overall market there is still an ongoing concern to what the impact of capital spending will be due to the global economic conditions as noted by many of our customers.

In spite of these concerns we do believe that the fundamental long term out look for the wireless industry is strong and provides many new opportunities. The subscriber growth rates are continuing to increase globally as well as increase day to usage in wireless networks. Based on these facts we do believe that this will facilitate capital spending and generate increased demand back into the global wireless infrastructure markets.

In addition to bringing on our newest manufacturing facility during the fourth quarter, we also further improved our operational metrics during the fourth quarter. In particular, we improved our gross margins with gross margins coming in 27% compared to 21.3% in the fourth quarter of 2008. This is an improvement of over 550 basis points for the year and is a third consecutive quarter that our gross margins have been over 26%.

Clearly our manufacturing consolidations operating efficiency improvements and cost reduction efforts over the last two years are paying off and we have the company well positioned to leverage our new operating model as we see improvements in the global telecom infrastructure market. At the same time we have achieved our quarterly operating expense target of $35 million.

On schedule as our fourth quarter operating expense came in at $33.9 million. From a balance sheet perspective we also demonstrated improved inventory control with net inventories dropping by over $9 million from the third quarter and our inventory turns improving to $6.9 up from $5.8 in the third quarter.

The combination of operating expense reductions and strong gross margins along with prudent operating and financial management enabled us to generate positive operating cash flow of over $20 million for the fourth quarter. In addition to our cost reduction efforts we continued to be focused more than ever on expanding our customer base and utilizing our capabilities in new vertical markets.

While we continue to drive to gain market share in our existing core business, we continue to leave the industry 4G products and solutions. Recent example is our LTE and WiMAX remote radio head product which won the 4G EE product of the year. In addition our antenna products won the 4G EE LTE visionary award clearly demonstrating Powerwave’s technical expertise and breadth of our new product portfolio.

These products and solutions will be instrumental in allowing Powerwave to increase our current network operator business as well as penetrate the new vertical markets and looking at these new vertical markets we were taking a lead with our cabinet solutions in ground, above ground and below ground solutions as well as our new DAS solutions. We are raising the bar in new standards and rapid Mobile Deployment Units with our new RMDU, which is designed to enhance the Mobile operations of public safety groups wireless, datacenter operators, military contractors and government agencies.

Our RMDU is a lightweight compact data and Mobile communications site that is easily transportable in less than 30 minutes and is designed from a single person operation. Demonstrating our focus and commitment to the government business, and with our goal to provide innovative wireless solutions to a wider range of public sector clients, we recently hired industry Veteran Jake MacLeod.

As Vice-President of government solutions for Powerwave, Jake will lead the company’s effort to address vertical markets in the wireless solutions and Broadband stimulus efforts in the government, public safety, military, and departments of homeland security sectors, which we believe president business segments that offer new and exciting avenues for revenue growth for Powerwave.

In addition to focusing on driving these new revenue opportunities, we continue to remain focused on reducing our overall cost structure and manufacturing and improving our productivities, our efficiencies, our yields, our cycle time and better capital utilization while maintaining our leading industry quality and performance.

Our commodity teams are continuing to rationalize a number of suppliers simplifying our supplier process while shortening our lead times cycle times and reducing our inventory levels. We believe that all these efforts combined with our previous action further leverage our operating results and will help improve our ability to generate increased cash from our operations and improve the shareholder value. We remain committed and determined to improve Powerwave’s profitability and performance in 2010 and beyond.

I would like to turn the call over to the operator and address any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Charles John - Piper Jaffray.

Charles John - Piper Jaffray

This is Charles John sitting in for Mike Walkley. Just a few from me, the guidance is obviously a good surprise, thanks for that. What is giving you the confidence to give this revenue guidance for 2010 and just discuss some of the factors that you baked into this guidance?

Ron Buschur

Well, we certainly are seeing some increased action and opportunities here in North America if you look at the information that’s been received within AT&T, Verizon and some of the activities with Clearwire and others. It indicates that we believe there’s going to be an improvement in spending.

We’re seeing some improvements in the European market that gives us some comfort that we’re going to see a little bit of a return in that marketplace. We’re cautious about that. The APAC region we believe, lend itself to some opportunities and some of the previous wins that we’ve had in that area has been very good.

Latin America seems to be a strong area of continued growth and then we are seeing a lot of interest and support and desire to work with Powerwave and our government sector as well as our DAS and in-building coverage. We spent a lot of money in research and development on expanding that product line and we believe it will benefit from that this year.

Charles John - Piper Jaffray

Then maybe digging into two specific regions, the APAC and North America, some of the last couple of weeks CapEx data coming out of India and China, they’ve been pretty weak, but North America has obviously been much better than some of our expectations. So could you just discuss overall CapEx expectations from some of your larger OEMs for 2010 in the emerging markets, specifically India and China and then if you could just remind us your exposure by division to the AT&T and Verizon CapEx that you’re expecting in 2010 and what areas they will be focusing on most of the wireless CapEx?. Thank you.

Kevin Michaels

As far as breaking out some of the information by our customer, we won’t provide that information just due to the confidentiality between the two companies, but when I look some of the OEMs and their projections talking about the APEC marketplace.

Obviously there has been a push out of some of the license in some of the emerging regions where they aren’t going to rollout, but there’s a need based on the coverage issues and the capacity issues in these emerging markets to provide coverage and new solutions and with that it lends itself to our product portfolio and we had very good success in those regions last year. We established ourselves as a good technology leader in that space, but individual and company that can actually do business in that region and be somewhat profitable doing so.

So we got to be careful with that and will continue to watch how we do business in parts of the India and APAC region, but there is a lot of growth as data is really driving demand and capacity issues in the existing networks and North America clearly there is a lots of synergies let’s say when you are looking at our products and solutions to the constraints that are existent in AT&T’s network or even Verizon’s network when you look at how they are trying to now compete head to head for our service and one of the issues that both are confronted with is data and the bandwidth of handling that large block of data and process that in an effective matter.

We think with our MCPA products as well as our Broadband antennas and some of our in building and DAS solutions it lends itself to that type of market condition and constraint in the network so we are going to benefit from that and I think when you look at guidance at the OEMs have given I think that’s pretty consistent to what they are saying as far as the APAC region, North America they seem to be little more optimistic and in Europe we are all seeing a slight improvement which is good but I don’t think anyone is putting their too far out in front of the card right now to determine weather we arel see a big improvement there in the European market.

Ron Buschur

Just add on to that I do believe that our guidance is within the bounds of what’s out there already from various people looking at overall spending levels. I think we have been reasonably conservative and the goal is hopeful as we go through the year we will see the growth that Ron is talking about.

Charles John - Piper Jaffray

Kevin, just looking at the guidance I’m thinking about it Q4, obviously carries of very cautious with the spending, but look like the feeling a lot better right now. Can you maybe not giving specific Q1 guidance, but just maybe some sense of seasonality and how we should expect the revenues to ramp throughout 2010? Thank you.

Kevin Michaels

Sure. As you know we aren’t giving quarterly guidance and I think at this stage, there is still of lot of uncertainty out there I think at this point if we give any kind of cautionary tone it will be more traditional look where normally the first quarter is a little slower than the fourth quarter and then you build kind of through the year and I think that’s the trend we were looking at right now and that is the most information that we have that we can share.

Charles John - Piper Jaffray

Then in the guidance, are you assuming to come back to the customer in the back half or 10% customer in the last two quarters do you see them as a key customer going forward?

Ron Buschur

Absolutely do see them as a key customer. I think if you listen to their results it’s not surprising that they are not necessarily winning all the new tenders out there so they aren’t seeing growth that they anticipated either. That has a direct impact on our business. They are very strategic to Powerwave as well as our other OEM customers, so we are going to continue on that and we think we are well positioned with them.

Operator

Your next question comes from Steve O’Brien - JP Morgan.

Steven O’Brien - JP Morgan

AT&T recently outlined plans to add a third and fourth carrier and certain large markets to improve 3G call quality and also discussed adding RNC capacity and upgrading some legacy RNCs potentially. Would this type of upgrade drive demand for Powerwave’s multi-carrier amplifiers and what other antenna products should see a pull through from this kind of upgrade.

Ron Buschur

You are absolutely right. That’s a very good observation. It certainly would lend itself well for Powerwave’s multi-carrier amplifier products. Our TMA products and new Broadband LTE antennas, there is also a demand within that network to possibly utilize some of the DAS solutions and repeater remote radio head products as well. We believe that this lends a good opportunity for Powerwave looking forward and I don’t think it’s just AT&T that has these types of constraints, as I said earlier. So, I give us optimistic view of maybe to the operator demand in North America.

Steven O’Brien - JP Morgan

So would the amplifiers, antennas, RF precede or typically follow an RMC change or upgrade?

Ron Buschur

It typically follow, the upgrade and it depends. It can be a quarter or so after as you know the build outs do tend to take a period of time. As you outlined obviously several cities that are ruled out now in trial, we are actively involved in that, but we do see the activities picking up.

Steven O’Brien - JP Morgan

Playing a little bit when fabricate on the CapEx budget and how you set your guidance for 2010, it seems like many carriers around the world are looking to offload traffic via Wi-Fi and Femto cell to solve sort of network congestion problems. Could these sort of dampen the longer term business opportunity for Powerwave? Is that factored into the budgets in your guidance for 2010?

Kevin Michaels

Steve, we don’t it’s going to dampen and as I’d stated earlier, we spent significant amount of money on upgrading our product portfolio around our in-building and DAS solutions including Pico cell type of product.

So we believe either way that they go, but we do believe that the outside in theory is a good thesis looking at the business going forward that everyone needs to provide coverage indoor and the Pico will work on that and you can’t off load and get the bandwidth that you need in a network using that type of equipment.

So we feel very confident. They will continue to go down the path of upgrading. You’re not just having data issues. You also have coverage issues with that network today.

Steven O’Brien - JP Morgan

If I could ask one more just looking back on 2000, for my numbers are right 2G revenue declined a bit less than 3G and seems counterintuitive to me. I guess maybe it was the contribution from emerging markets. Can you help me with any factors that may have caused this and when we look at 2010 would we expect or do you expect to move back to more normal sort of 4G outpacing 3G out pacing 2G in the revenues?

Ron Buschur

Well, I think part of what we’re seeing and you actually answered your question. I think at the beginning where you talked about is it regional. Clearly it was, if you think about North America, Europe not actually spending at the levels that we seen in the previous year, 2008 and you go back and look at the emerging markets that are building out and that is India, the APAC region itself and even parts of Africa, that is traditionally looking towards the 2G, 2.5G type of network.

Operator

Your next question comes from Rich Valera - Needham & Co.

Rich Valera - Needham & Co.

Kevin, I just wondering if you could talk about how you see gross margins going forward, you’ve been up here around the 27% level for awhile and sounds good a higher revenue levels next year. Is there much level from these levels and how mixed dependent is the margin next year?

Kevin Michaels

Sure, Rich. I think one level is certainly have a mixed component and we fluctuate around the last couple of quarters within 1% range and I think the near term that’s probably variances I would say. Clearly there’s a lot of leverage in the model and clearly the big drivers for us as we go through the year hopefully, we see good growth in revenue. There’s a lot of potential leverage for us in the model.

So we think we can see start going up to the higher end of our ranges and start approaching the 28%, 29% ranges, but a lot of it going to be from how well demand goes. I think as Ron mentioned the business we take a lot of costs out and we have a strong structure now, especially with our new facility in Thailand, coupled with our manufacturing in Asia already.

We think we have leverage opportunity to put more volume through the structure. So we are happy with where we have margins at now. We are in the middle of the target range we had for years at mid-to high-20s. So we think we can stay in this range and hopefully improve.

Rich Valera - Needham & Co.

With respect to OpEx, you guys have done a nice job there bringing that down. Do you see it’s sustainable at these levels, or will that scale somewhat with the higher revenue you’re expecting next year?

Kevin Michaels

It will scale a little bit through the year, but I think looking at next year on a total basis, I’m kind of looking at between $140 million, $145 million as a range for total OpEx in that kind of range, it will fluctuate around. Clearly, the beginning of the year, it runs little higher, because you have taxes in those kinds of things here in the first quarter that start a year or so. We think generally we’ll stay in this range.

Rich Valera - Needham & Co.

Finally on the tax rate, what happened there? You guys were consistently seemingly forecasting set of a 10% tax rate for a while now and what caused it to jump up to I think you said 25% to 35%?

Kevin Michaels

We’re really looking at we kind of backed into where we’re at. Basically, we’re paying some taxes primarily in China. We’re having profits over there. Obviously, we’re doing what we can to minimize those profits, but we’re generating some small level of profit there and it results in small amount of tax.

The thing I try to state is that, we’ve said that target range for next year of 25% to 30% and that’s being conservative. If we do better in terms of revenue and leading to more income, that rate drops and that’s the ironic thing situation we’re here is that at lower income levels our rate goes up, at higher income levels our rate drops and it drops pretty dramatically.

I mean, the issue that we have is our tax is kind of almost fixed isn’t the right word, but they’re very fixed at a run rate basis, but as we drive more revenue in income through, the taxes don’t go up, because of our large deferred tax assets. That well countered intuitive, but we’re just trying to be conservative there.

Operator

Your next question comes from Bill Choi - Jefferies.

Bill Choi - Jefferies

Whole bunch of stuff, but first clarification on the operating expenses, if you do your targets here, which is 4% to 9%. You scaled back salary, etc., don’t you give some of that back and are you baking in perhaps bonuses that might be tied to achieving some of these revenue levels, already in that $140 million to $145 million?

Kevin Michaels

Yes, we are.

Bill Choi - Jefferies

Now it’s year end, do you have the six month backlog, which you typically give out at the end of the year?

Kevin Michaels

I actually don’t have that number handy. We haven’t calculated it yet. As you know, we don’t run the business on backlog and the numbers really not meaningful to us.

Bill Choi - Jefferies

What do you estimate to be the revenue impact of that extra week in the current quarter?

Kevin Michaels

It doesn’t really have any I mean it was in the last quarter, is the fourth quarter. So this quarter…

Bill Choi - Jefferies

That’s what I meant, yes in the fourth quarter, what did you think that revenue backlog?

Kevin Michaels

I don’t think it had any real impact at all.

Bill Choi - Jefferies

I want to talk about multi-band antennas a little bit, particularly, in relation to the topic on AT&T. We’ve been hearing that some of the equipment just aren’t ready from the vendors yet. Can you talk about the preparedness of your products and TMA is multi-band antennas to hit the 700 megahertz band. Is there some color on when the orders might start here?

Kevin Michaels

Bill, I can tell you that for the most part Powerwave is prepared from an antenna perspective. Our tower-mounted amplifiers are qualified and ready to be deployed as well as our multi-carrier amplifier products. All of the high volume forecasted products that AT&T and others not just AT&T.

I mean Verizon has an LTE rollout as well. Both of those customers in the product lines associated with that we’re prepared to meet that ramp and move forward. As I’d indicated, I think it lags a little bit. Maybe a quarter or so behind the build out of the core, where they’re looking at back hole and others and that’s kind of what we’re seeing.

Bill Choi - Jefferies

When were the antennas and the amps qualified?

Kevin Michaels

They were towards the end of last quarter.

Bill Choi - Jefferies

So, around December timeframe, right?

Kevin Michaels

Yes, November, end of November, first of December.

Bill Choi - Jefferies

Can you also give an update on 3G license activities in Europe. They are obviously also talking about getting some spectrum from broadcasters in addition to what is that the 2100?

Ron Buschur

2100 exactly, that to us is an indication even though many of the operators aren’t really talking about it openly that there is quite a constraint in that network and they are eating up a little bit of that capacity for data and with our Broadband in tenant portfolio as well as the multi-carrier amplifier that’s is really what that product is designed to do.

Amplify multi-carrier and different frequent frequency spectrum and boost that output power that will give capacity and reach. So, we’re pleased with that and we think that will allow us to leverage some of the work that we have done in North America into the European market and we do have a multi-carrier amplifier now that meets the standards in Europe and that was an output power requirement that previously we could not meet and now with the work of our engineering team we have an amplifier that meets those requirements.

Bill Choi - Jefferies

When was that ready?

Ron Buschur

We just finished that at the end of the year.

Bill Choi - Jefferies

So then looking at European weak in Q4, was it more on the antennas or amplifiers?

Ron Buschur

We haven’t sold a lot of amplifiers into that market. It was really more around the antenna products.

Bill Choi - Jefferies

What are your expectations for the broadcast spectrum being available for 4G in Europe?

Ron Buschur

Well, if you follow the guidance that was given it’s more towards the second, third quarter is when they projecting that they will start trying to utilize that and if I really get more specific, it’s really targeted at the third quarter is what a we think is realistic.

Operator

Your next question comes from [John Evans] - Edmund White

John Evans – Edmund White

Can you talk first of all you did a great job in generating free cash flow in the fourth quarter. Can you talk since you said seasonally Q1 you should kind go down. Should you generate cash in Q1 or do you think you will burn cash and then can you kind of give us a sense of your thought process of being able to generate cash this year?

Kevin Michaels

Sure. Let me first say we aren’t going to give quarterly guidance. We aren’t going to pay quarterly cash flows and those types of things. I will talk about for the next year clearly and as Ron mentioned and as we’ve mentioned previously cash flow generation is one of our top priorities. So, either we are running the business to generate cash and will continue to do that.

We aren’t going to give quarterly targets there, but we do believe for next year we do believe that we should be able to exceed the cash flows that we generate for 2009 and that certainly our target and obviously want to exceed it by as much as we can. That’s our goals.

John Evans – Edmund White

How much did you generate in 2009?

Kevin Michaels

Total cash flow was little over $30 million.

John Evans – Edmund White

So you think if you hit your plan you will exceed that in 2010?

Kevin Michaels

Yes, we will.

John Evans – Edmund White

Then can you help us understand so you have I think $130 million left on the one and 7-8 that are portable to you and 11-11 will go current this year. Can you give us insight or thought process into potentially how you guys look to pay for that?

Kevin Michaels

Well, I think the issue is they really don’t go current until the end of the year. They are almost two years away and the things that we said were consistent there. We are looking to generate cash flow over the next two years to position to pay off the bond. We will continue to look at financing alternatives as they present themselves. We have done that all along and at the same time we will take advantage when prices are attractive to repurchase bonds in the open market. We have done that as well, too. That is our stated strategy. We haven’t varied from that and will continue on that path.

John Evans - Edmund White

So I mean if you think about over the next two year if you could generate 35 year that will get you enough with what you have in cash to be able to pay for them. Can you just tell me how much do you feel like you need cash on the balance sheet to run the business?

Ron Buschur

Well, it varies on how the size of the business going in like that I would say we think that it’s probably in the 30s something like that, you want to see at a minimum, obviously our goal is to generate strong cash flow over the next two years as well as we will look at financing alternatives as they present themselves and will continue to drive it that way.

John Evans - Edmund White

Then the last question is if I may just ask relative to that, you had assets sales in the past etc. Have you done everything that you had from an asset sale standpoint or assets?

Kevin Michaels

No, we haven’t. We have a fair amount of real estate. We did close on one real estate transaction during the fourth quarter and that raised just a little bit under $4 million in total and let me receive that cash in the fourth quarter, but that’s not part of cash flow from operations, we do have other real estate.

I think as everyone knows, the real estate market is not great. So we still have markets some real estate listed. We aren’t optimistic that in the short term we will see activity there, but we continue to pursue those and hopefully over the next year or two we may have activity in those as well.

John Evans - Edmund White

So the $4 million that you had, was that in the balance sheet at the end of the year or not?

Kevin Michaels

Yes, it was.

John Evans - Edmund White

It wasn’t in the cash flow?

Kevin Michaels

Not in the cash flow, but it was in the balance sheet, yes.

Operator

Your final questions comes Tony Rao - East Shore Partners.

Tony Rao - East Shore Partners

There’s been some interesting developments from various semiconductor companies, what I guess would be termed only disruptive technologies that can be used for driver amplifiers in high power amplifiers. Have you been exploring anything with these new technologies so far as to drive the efficiency of your amplifiers up?

Ron Buschur

Tony, yes, that’s a great observation. As you know, we spend a lot of time looking at devices characterizing devices and I think here looking at the efficiencies that are note in the industry, people are probably talking around the 30% efficiency, some maybe 35%. It depending where you look at it, whether it’s a back end or the front end of the chain and I think you will find as we get into some of these shows, which we typically show some of our newer products.

I would certainly welcome you to come by and I think you will see that we’re taking advantage of that technology and we should be able to demonstrate very, very high efficiencies that are leading this industry right now, which will again benefit the industry as a whole from an operating expense perspective as well as efficiency and be a much more greener and effective efficient solution.

Tony Rao - East Shore Partners

When you look at these new technologies, would you give us a frame of where you think you can drive the efficiencies to?

Ron Buschur

Well, I wouldn’t be surprised to see if efficiencies going up 40% to 50% range.

Tony Rao - East Shore Partners

If you were to offer an amplifier of 50% efficiency and let’s say that existing amplifier in the field are running 30% to 35%, and you present that, I think back to ten years ago when multi-carriers were introduced and it generated a lot of interest in the aftermarket direct to service provider sales. Do you think there is an ROI and interest from the carriers directly to do retrofits just based on the efficiency of the amplifier?

Ron Buschur

We do think that is a compelling solution and I would agree with your assessment there. As well as allowing us to correct the pitfalls that is in the existing 3G network.

Tony Rao - East Shore Partners

So you’re saying that in short term you will have product available, is that the product available for test or will that be product available for production?

Ron Buschur

It would be a combination Tony. We would first introduce, as you known the beta units. So the customers get their feedback, do trials and then we would position it for volume production.

Tony Rao - East Shore Partners

Then any antenna world, what would you say is the primary technological interest from your customers right now, when they are doing deployments? As I understand it Verizon has been proactive and actually leading with some antenna deployments to have their sites LTE and 700 megahertz ready because of the fact that there are so many zoning issues and so on.

It makes more sense for them to do the antenna change outs before the actual equipment is installed because a lot of times the zoning would be negating item at the back end. So what do you see from your customer base, specifically in the U.S., as to what they are looking for from an antennas from a technology standpoint?

Ron Buschur

They are looking for Broadband antennas, obviously utilizing AWS spectrum. Payment noise is a big issue that they have as well as food print, Tony, because you’re right, they’re trying to replace the existing antennas with a single antenna today and be able to meet the needs of the network as well as they rollout the LTE deployment.

I can tell you that Powerwave has a very good performing antenna as far as PIM within these two operators, who are deploying that the next generation of antenna technology as well as technology as well as our Aperture Coupled Patch technology I think lends itself very well to very quiet system that’s manufacturable in scale and allows us to ramp quickly and we have integrated the rap into that that’s utilized in one operator.

The other operator is not interested in having electrical tilt into their network, but what we’ve there is, we’ve been able to provide a very brand band antenna, without RET motors included in there.

Tony Rao - East Shore Partners

Would you just describe the antenna market now as becoming more competitive, because I’ve seen companies like Katherine, who say five years ago had very little exposure in the market and now getting better exposure and then Amphenol seems to be getting some traction and then traditional competitors that you’ve faced. Would you saying at environments getting tougher as we move forward?

Kevin Michaels

No, I wouldn’t say it’s tougher. First of all, the only thing that I would maybe slightly correct on is your observation Catron wasn’t in the market. They’ve been the leader in antennas now probably for 10 years. They own the European market at a very strong level. I think, we’ve done a good job of coming in and taking a little bit of share there and some of these European markets and emerging marketplace as well.

The advantage I see as more and more of the operators are going towards active solutions. Active solutions incorporate filter RF conditioning technology with the antenna’s technology as well as amplification technology for MIMO two way-three way antennas, I think that really does narrow down the competition dramatically, because there’s really only two of us that have that capability and technology in-house.

Tony Rao - East Shore Partners

I was referring to the U.S. market specifically, but one last question if I may. It appears that there’s been some interest from carriers who’re doing trials in the LTE world for very short skirted filter performance and it’s even driving them to do some evaluations of the cryogenic-type filters.

Do you see that your traditional filter technology could be competitive there? Or have you seen the desire from your customers to have possibly in some instances your super conducting type technologies for filters?

Kevin Michaels

No, I think first of all that’s cost prohibitive and we’ve all explored that for many, many years. We do believe that we can achieve the same types of characteristics and performance whether it’s band pass, ban stop or trying to create basically a saw filter technology.

We can do that very effectively with the existing ceramics that we have in our portfolio and our intellectual property that we have in the U.K. today that we acquired through the Filtronic’s acquisition. We’ve developed along with that some very sophisticated auto tunable and IP based technology to where we can actually do that remotely.

So we feel very comfortable that we can provide that solution and it’s much more cost compelling than anything around cryogenics or any of the more futuristic type of products. When I say futuristic, it’s really more around some of the military applications, or the requirements that are used in satellite technology. Not necessarily the wireless based today.

Operator

Your next question comes from Amir Rozwadowski - Barclays Capital.

Amir Rozwadowski - Barclays Capital

Ron, you talked about this earlier and specifically the antenna division in the last question, but I was wondering if you could talk to us a bit more about sort of broader market share positioning and sort of how you see your market share. Is there increased amount of competition going on and pressuring some portions of your business? Or do you feel as though, right now your market share positioning has been quite has held up okay?

Ron Buschur

Well, I guess it’s hard to really determine when a company likes Trans not public, so there’s no public information that you can achieve from their results and with Andrew and CommScope combining, they have combined a lot of the cable and the antenna technology and their TMAs into one broad category.

So it doesn’t clearly define that, but I can tell you looking at what we have seen in the marketplace and the acceptance of the products, I believe and I feel pretty comfortable that we have gained some momentum and some of these more established markets and certainly we have gained momentum in the emerging markets.

Now with that said, I can tell you in China, for example, it’s a very cut throat and competitive market and you really comparing apples and oranges. The quality level of the products, the feature sets and specifications associated with that and that’s not just including Powerwave. That’s everyone I think if you talk to CommScope, Kathrein, you will find that everyone has a similar view.

You really comparing apples and oranges and that is very competitive in those marketplaces, but I feel pretty good about the technology and position we have. So I would say that we did very well in the antenna portion this year and we’ve introduced obviously many new products in that antenna segment, which allow us now to compete in a broader base.

We know for a fact that, we have one of the best performing antennas from a PIM perspective here in North America and we’re very, very pleased to have a Broadband antenna that can cover 700 all the way up to 2.5. So we think we have a very, very state-of-the-art technology that’s affordable to the operator that gives them a solution to leverage one antenna within their network.

Operator

Your final question comes from Scott Searle - Merriman.

Scott Searle - Merriman

I got on the call a little late, but did you give a breakdown in terms of split of WiMAX revenue and breakdown between operators North America and non-North America?

Ron Buschur

Scott, we didn’t breakdown operators by region, we didn’t do that, but in terms of the total breakdown by grouping, 2G, 2.5G was about 55% of revenue. 3G was 32%, which in 4G we include WiMAX and LTE was about 13%.

Scott Searle - Merriman

In terms of OpEx looking out over the next couple of quarters should we be modeling that to be flat or do we see a little bit of a step up going into the first quarter given the heavy conference schedule?

Ron Buschur

You had that right. First quarter you definitely have a heavy conference schedule, which impacts it as well as you have taxes, New Year of taxes withholdings as well. We did give a range for the whole year of 140 to 145, but I think as you mentioned the first quarter does step up a little bit.

Scott Searle – Merriman

It doesn’t sound like you are providing quarterly guidance. It sounds like directionally, we should assume seasonality in the March quarter, but given the visibility that you got right now, any color to put around versus typically seasonality a little bit better, a little less and how you are feel being that?

Ron Buschur

I think you hit it on the head on typical seasonality is what we would say. I think we go with that and you’re right, we aren’t giving quarterly guidance, but we did give an annual guidance on the revenue range is 590 and 620.

Scott Searle - Merriman

Just one or two other items, on the gross margin front, great job, despite the fact that there’s really limited contribution from the higher margin coverage solutions product line, is there any reason to believe that antennas and Base Station components wouldn’t maintain this level of profitability going forward?

Are there any sort of onetime items or Evans or mix issues that provided we see a ramp up in coverage solutions at some point during the course of 2010 that we wouldn’t continue to see the gross margins creeping up the next couple of quarters?

Kevin Michaels

With revenue growth, I think you will see them creep up some. You have about a 1% fluctuation that occurs where we are kind of running right now with mix. At the same run rate it can fluctuate around a little bit, but generally the answer to your question is yes.

Scott Searle - Merriman

I apologize if you covered this. If you did I can take it offline, but remote radio, Ron did you address that in terms of opportunity for LTE right now and what you are seeing from a customer standpoint and interest level?

Ron Buschur

We did Scott. We talked a little bit about the interest of the antennas around LTE as well as multi-carrier amplifiers, which we think are going to be needed in that network and our remote radio head products and DAS solutions were optimistic that is going to a perfect venue for those products and we are obviously continuing to leverage that radio head technology not just in WiMAX as you know in NLite as well and the testing and the feedback we have been given is very good. We think it’s a cost effective way to build out a network without adding all the additional bay stations are typically associated with a build out.

Scott Searle - Merriman

Ron, do you think that’s via the OEM or going direct to the operator and looking at the 590 to 610 this year. How much are you mentally circling for remote radio head outside of WiMAX?

Ron Buschur

We basically are focused on selling the products through both the OEMs as well as the operator. The OEMs are great reach for us outselling our solutions and we want to continue that, but we have seen an interest with the operators as well. As utilizing our remote radio heads and our antennas directly into their network. Obviously there are slight limitation with base band capability that drives the need to work closely with the OEM to provide that.

Operator

That concludes the Q-and-A session. I will now like to turn the call back over to management.

Ron Buschur

I want to thank everyone for joining us today and your continued interest in Powerwave technologies. We were very excited about the opportunities in 2010 and we look forward to sharing our results in the first quarter. Thank you.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Powerwave Technologies Q4 2009 Earnings Call Transcript

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