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Executives

Ron Buschur - President & Chief Executive Officer

Kevin Michaels - Chief Financial Officer

Tom Spaeth - Vice President & Treasurer

Analysts

Steve O’Brien - JP Morgan

Amir Rozwadowski - Barclays Capital

Michael Walkley - Piper Jaffray

Bill Choi - Jefferies

Brian Modoff - Deutsche Bank

David Marsh - McMahan Securities

Scott Searle - Merriman

Tony Rao - East Shore Partners

Powerwave Technologies (PWAV) Q1 2010 Earnings Call May 3, 2010 5:00 PM ET

Operator

Good day, ladies and gentlemen and welcome to the first quarter 2010, Powerwave Technology’s earnings conference call. My name is Shinada and I will be your operator for today. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions)

I would now like to turn the conference over to your host for today, Mr. Tom Spaeth, Vice President and Treasurer; please proceed.

Tom Spaeth

Thank you. Good afternoon and welcome to Powerwave Technology’s first quarter 2010 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, supply chain constrain, manufacturing levels, 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 and market share, trends in the wireless infrastructure market, the timing of product deliveries and future orders, the company’s ability to enter and compete in vertical markets for it’s 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, our ability to obtain material components within expected lead times, 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 the 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, January 3, 2010, 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 also has 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’d like to start by reviewing our financial results, which are also summarized in our press release.

Net sales for the first quarter of 2010 were $114.5 million, and we reported a GAAP net loss of $10.8 million, which equates to a basic loss per share of $0.08. This loss includes $400,000 of restructuring and impairment charges, and $1.3 million of non-cash debt discount amortization, offset slightly by a $500,000 non-cash gain, recognized on the exchange of a portion of our long term debt during the quarter. These charges are the amortization totaled approximately $1.2 million for the first quarter.

On a pro forma basis, excluding the restructuring and impairment charges, and the debt discount amortization charges, we had a pro forma net loss of $7.1 million, which equates to a pro forma net loss per share of $0.05.

I want to note that included in both of our GAAP and pro forma results is the impact of approximately $1 million of pretax stock based compensation expense, almost all of which is included in operating expenses. Excluding this expense from our reported results adds approximately $0.01 to EPS for both GAAP and pro forma results. This is the same impact as in the prior year period.

There in the first quarter, we experienced significant supply shortages of various electronic components, as well as significantly increased order lead times for such components. These combined supply shortages and increased material order lead times, impacted our ability to timely produce products, which negatively impacted our revenues for the first quarter. As Ron will discuss, we expect to recover from these shortages as we go through the remainder of this year.

On a geographic basis, total America’s revenue for the first quarter of 2010 was approximately $34.2 million or 30% of revenue. Total Asian sales were approximately $45.7 million or 40% of revenue, and total European and other international revenues were $34.6 million or approximately 30% of revenue.

In the first quarter, our antenna systems product group sales total $39.4 million or 34% of total revenue. Base Station Subsystem sales totaled $65.2 million or 57% of revenue, and Coverage Solution sales totaled $9.9 million or 9% of revenue.

Our total 3G related sales were approximately $42.4 million or 37% of total revenue. Our 2G and 2.5G related sales were approximately $60.3 million or 53% of revenue; and our 4G sales, which includes LTE and WiMAX were approximately $11.8 million or 10% of revenue. In terms of our customer profile for the first quarter, total OEM sales account for approximately 55% of total revenue, and directed operator sales account for approximately 45%.

Moving on to gross margins on a GAAP basis, our total consolidated gross profit margin was 26% in the first quarter. In our press release on page three, there is a table with the reconciliation of various factors impacting our gross margin for the quarter. On our pro forma basis, excluding restructuring charges that totaled $21,000, our total gross profit margin was 26.1%, which is within our target range of the mid to high 20s for gross margin.

Next I will review our operating expenses for the first quarter. Our sales and marketing expenses were $9.4 million research and development expenses were $14.3 million, and G&A expenses were $11.3 million. On a pro forma basis which excludes restructuring charges, our total operating expenses equaled to approximately $34.9 million, which is essentially inline with our annual targets.

In terms of other income and expense we recorded a total of approximately $3.6 million of other expense in the first quarter of 2010. The main component of this is our interest expense for the quarter.

In addition during the first quarter, we entered into a privately negotiated exchange agreements, under which we exchanged $60 million in aggregate principle value of our outstanding 1.875% convertible subordinated notes to 2024, for a similar $60 million in aggregate principle value of new 1.875% convertible senior subordinated notes to 2024. With these new notes, they extend the first put date available to the holders of these notes from November 2011 to November 2013.

With the completion of these exchanges transactions we have remaining only $70.9 million of the original 1.875% notes that have a put date in November 2011. The new $60 million 1.875% notes put date is November 2013, and there is a $150 million of the 3.875% notes that have a put date in October of 2014. Therefore our total long term debt currently remains at a total of $280.9 million. The exchange transactions resulted in a onetime non-cash gain of approximately $0.5 million.

In addition, the existing 1.875% notes incurred approximately $1.3 million of amortization of non-cash debt discount during the first quarter [with] an interest expense for the quarter. In addition, we did incur a net foreign current transition loss of approximately $700,000 for the quarter, which is also included in other income and expense.

Our first 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 $1.8 million.

While we continue to evaluate our future tax rate based upon our diverse international operations, we currently estimate that our effective world-wide tax rate will be between approximately 15% to 25% for 2010. I want to stress that this estimate will fluctuate based upon our actual results. As a note due to our primary differed tax assets being written off in the US, as our net income increases in this region, our effective tax rate will actually decrease.

Next I will review our balance sheet. Total cash at January 3, 2010 was approximately $65.5 million, of which $2.5 million is restricted cash. This represented an increase in cash from the fourth quarter of 2009 of almost $3 million. For the first quarter, our cash flow from operations was approximately $4 million. For the first quarter our total capital spending was less than $1 million, and for the remainder of 2010, we would expect our capital spending to be in the range of $1 million to $2 million per quarter.

For the first quarter of 2010 our inventory is $59.8 million, which is a reduction of about $1 million from the fourth quarter of 2009. Our net inventory represents inventory returns of approximately 5.7 times. Our total net accounts receivable was $111.9 million, and our AR days sales outstanding decreased to 89 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 supposed to short term volatility that is inherent in the markets we compete in.

With that in mind, based upon our current forecast for the remainder of this year, we are reaffirming our target fiscal 2010 annual revenue range of $590 million to $620 million. While our first quarter revenues were disappointing, we do believe that with improved supply chain performance, coupled with the anticipated growth, we should be able to pay in annual revenues within this range for 2010.

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

Ron Buschur

Thank you Kevin and good afternoon everyone. I would like to share with you some of my thoughts regarding our first quarter results, and then I will review the current outlook for 2010.

First I would like to say we are definitely not satisfied with our results for the first quarter but I am pleased with the demand outlook, as well as the market dynamics. As we stated in the press release, our first quarter revenues were impacted by the supply chain constraints, as well as sales demand mix issues that we experienced during the quarter.

I believe that most of you are aware that the lead times for various types of electronic components from boards to semi-conductors have experienced significant increase over the last quarter as demands have started to improve across the global electronic industry. This is parts of the large reduction in capacity within the component and supply industry that has occurred over the past few years.

During the first quarter, we have seen lead times stretching across the range of components that we purchased, with advanced ordering requirements in some cases extending out to at least 26 weeks, but we have definitely increased and adjusted our procurement activities and strategies within the supply chain, and given the short terms turns nature of our business, we were not able to respond to the changes of demand throughout the first quarter. I believe we will be able to fulfill these orders going forward. We are still being impacted by the supply chain constraints, and currently expect this to continue for the next few quarters.

As we look at the overall market, we do believe the fundamental long term outlook for the wireless industry is strong, and provides many new opportunities. We have seen significant increase in customer order activity across many of our markets, particularly in North America and in the European market, so our Q1 results were down due to supply chain constraints.

We have seen significant improvements in the second quarter demand and forecasts, which is now residing what we projected. These events have created backlog situations for our factories and products which we have not experienced for many years. So given this backlog situation, and the supply constraints in mind, I would like to provide some guidance for the second quarter.

Based on what we see today, our current second quarter revenue range is $145 million to $155 million, but more importantly as Kevin stated earlier, we continue to believe that we will be able to achieve our annual revenue guidance of $590 million to $620 million. This is in spite of the slow start in the first quarter.

As many people in our industry have stated, we continue to see subscriber rates increasing globally, but we see an increase in daily rate usage in wireless networks globally. Based on these facts, we do believe that we will continue to facilitate and see capital spending, and increase generation of demand back into the global wireless infrastructure market.

Looking at the operating metrics for the first quarter, both our targeted sales strategy as well as our cost reduction activities are working. The cost reduction activities of the last two years, including consolidation of our manufacturing activities, improvements and operating efficiencies, and stream lining our expense structure has positioned the company’s manufacturing cost structure to be extremely competitive. This is demonstrated by our ability to maintain a reasonable market of 4.1 in the first quarter, while we have a reduction in revenue.

From a sales view point, as we discussed over the last year, we have stopped pursuing low margin business, particularly low margin commodity products like some OEM products, and we are focusing on improving our sales mix for higher margin products and solutions. In addition we are continuing to target additional market segments such as government, defense, military, where we can create true solutions utilizing all of our technology and expertise.

Clearly our manufacturing consolidations, operating efficiency improvements, and cost reduction efforts over the last several years are paying off, and we have the company well positioned to benefit from the telecom infrastructure market place. At the same time, we are controlling our operating expenses, and we are well positioned to leverage our cost structure as revenues improve over the next few quarters.

From a balance sheet perspective, we are also demonstrating strong performance in spite of our lower revenues for the first quarter. We generated positive cash flow for the first quarter of almost $4 million and we maintained tight inventory controls, and reduced our DSOs to 89 days. We continue to focus more than ever on expanding our customer base, utilizing our RF capabilities and new vertical markets while we continue to drive and gain market share in our existing core business.

We believe that all these efforts combined with our previous actions will further leverage the operating results, as well as self-improve our ability to generate cash from our business. We remain committed and determined to improve the profitability and performance in the remainder of 2010 and beyond.

I would now 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 Steve O’Brien - JP Morgan.

Steve O’Brien – JP Morgan

I would like to just look further into what metrics, specifically in point to in terms of the demand flow or any other specifics you can give us in terms of the second half outlook that gives you confidence in reaffirming your full year guidance today. It looks like the second half of the year will have to be up -- release 20% or more higher than the first half in terms of revenue. Are there any concerns that your customers may turn to other vendors regarding these component charges and problems for selling demand?

Ron Buschur

Well first of all Steve, this is Ron. We don’t believe that its unique to Powerwave to have these constrains within the supply chain and in our component suppliers today. So I believe everyone is experiencing issues with lead times that have extended beyond what we had anticipated.

As far as looking at some metrics, and the confidence that we have in the growth that we project for the second half of this year, obviously we have a significant amount of backlog that we have going into Q2 from some missed opportunities in Q1.

Then looking at some of the build outs that are recognized and known throughout North America and some of the other build outs that we are participating on currently in North America, as well as some opportunities that we are seeing in other parts of the world, give us a lot of confidence that we’ll continue to be able to grow our business. We do at the second half of the year; anticipate seeing some other opportunities in some of these other vertical markets.

Steve O’Brien – JP Morgan

Can I go a little deeper on some of the component issues? I think in previous calls you discussed how Powerway’s commodity teams were rationalizing the number of suppliers in order to shorten lead times. Did this have any impact on -- the prior diversity have any impact on this quarter in particular, and then maybe a different topic, may be its related, has there been any impact from the recent unrest in Thailand versus your newly opened facility?

Ron Buschur

Well first of all, as far as the unrest and uncertainty in Thailand, no we haven’t seen any disruptions from that, even though we are monitoring that, and we are very concerned and we are cautious about how we mitigate our dependency on any one given site, but we haven’t seen an impact there.

When you look at the rationalization that we have done within the supply chain, actually to the contrary I am afraid if we hadn’t done the consolidation that we had just communicated to you, we may have been in the little bit worse situation, because we would had a small amount of volume with all of these different suppliers, and we may have been a lot lower on the priority list of trying to help us recovery some demand, and those component shortages.

I do know that buying power certainly has some leverage on the component buyers, and we want to move ourselves up that value chain, and more consolidation that we can do to a given supplier gives us a little bit more buying power and the benefits which doesn’t hinder us, but it’s a challenging market.

I think everyone’s seeing it across all component suppliers, but one of the things that we are trying to do now is obviously continue to maintain our lien manufacturing techniques, and focus on improving our turns, but with that we recognize and we do have to possibly pick up a little bit of more inventory than what we had done in the past, and may be not run quite as lien. So we are addressing that as we move out through the reminder of this year.

Operator

Your next question comes from Amir Rozwadowski - Barclays Capital.

Amir Rozwadowski - Barclays Capital

One of the questions in terms of understanding some of the progression through the course of the year; I mean certainly based on your second quarter guidance you are expecting this marked step up in sales. Ron, you had mentioned that some of the component issues are still there. I mean, what is the variability in terms of your sales based through the component issues there. Is this target predicated on the fact that the component issues will ease through the quarter or have eased or how should we put that into context?

Ron Buschur

No, we really believe that for Q2 we have a handle on the supply chain and the component issues necessary to deliver a solid quarter to our shareholders. With that, we do know that there is still a lingering impact and it will continue for several more quarters we believe, until some of the capacity either is put back into operation, or there is multiple sources that are brought on in some cases to alleviate the constrains that currently exist.

So that’s how we are kind of forecasting and looking at our demand going forward, and as I’d indicated, we are looking at taking on maybe a little bit more inventory here to make sure that we meet our demand levels, but with that we’ll be very prudent in how we manage that obviously, because the turns and the cash flow generation of our operations are very critical.

Amir Rozwadowski - Barclays Capital

That’s helpful, Ron. Then I was wondering if you could expand a little bit in terms of the demand environment in Asia at the moment. It just seems as though if we look at sort of sales from Asia on a sequential and year-over-year basis, there seems to have been some challenges there. Are you folks currently being impacted by some of the regulatory environments in India or how should we think about the factors there impacting business in Asia?

Ron Buschur

Well, it has been a little bit slower due to some of the regulatory issues, but we’ve also seen that several of the operators in the APac Region have maybe slow down their spend slightly as well, and they are preparing themselves for the 3G build out.

I do believe India possibly opens up some other opportunities with some of the current change in political climate as far as having some Chinese vendors supplying the infrastructure hardware within India, we are hoping the benefit from that; and we do think that there would be some additional demand as we get towards the third quarter within that region. Some of the operators are trying to build out, and they have approval with the licensing of 3G technology and even the next generation.

Amir Rozwadowski - Barclays Capital

That’s very helpful Ron; and then lastly if I may, you folks have made a consternate effort to sort of restrain out backs at the sort of $35 million run rate. As you see sort of these sales recover throughout the course of the year, how challenged are you or how should we think about your ability to maintain that sort of OpEx run rate? Will there be additional investments required in order to help support higher sales levels or is that something that you feel you have a fairly solid grip on?

Kevin Michaels

Yes Amir, I’ll take that. This is Kevin. No we feel pretty good, and I think as we’ve said previously, we feel pretty good on our offering expense structure, that run rate, it’s pretty solid. And I think as we have said, through the year, the first quarter year’s a little higher, because there’s initially taxes and some additional expenses like trade show expenses, and as you go through the year it tapers down little bit. I mean certainly we are very focused on trying to drive sales and expand the sales, but we feel we have a structure that operates within the revenue ranges we’ve given, so we feel its pretty adequate there.

Clearly, the only up-side which we always caution about, obviously when we start exceeding some revenue commitments, there is some commission dollars and bonus dollar opportunities, but those are small, at most $1 million to $2 million of potential additional in a quarter, so its not huge. But we feel pretty good that that structure should last throughout the year.

Operator

Your next question comes from Mike Walkley - Piper Jaffray.

Michael Walkley - Piper Jaffray

Kevin, just a little bit on the operating expense structure; to hit kind of your $140 million or $145 million target for the year, should we expect sales and marketing maybe to come down a little bit after the trade shows and its more R&D that grows, or do you feel like R&D ….

Kevin Michaels

Yes, I think it comes down a little bit, and it is kind of offset by that, but it’s within those ranges, that’s correct.

Michael Walkley – Piper Jaffray

And then, you guys put up a strong gross margin despite the softer sales here, and it looks like the time in the facility is really bearing fruit. If you hit these revenue targets for the year, with a better back half of the year, could we see mid to high 20 gross margins and operating margins in the high single digits? Is that a goal you think you can hit?

Kevin Michaels

Definitely we’d see our margins -- we think we have the ability to improve the gross margins and that would lead to the improved operating margins.

Michael Walkley – Piper Jaffray

And then with the supply constraints, it sounds like you might need to take on a little additional inventory and comment on cash flow, the $30 million plus like you did last year. Is it still achievable or should we expect some working capital this year just to get the inventory in the house?

Kevin Michaels

No, I think for the year we definitely feel that we can exceed last year’s cash flow and we still feel strongly about that. I think there will be some quarterly fluctuations, but as Ron mentioned, we are willing to bring long term inventory if we can get our hands on it, but at the same time we intend to grow our inventory returns, and as the business expands the turns will grow. So we will take rational steps, but we feel in the net of that we’ll still be cash flow positive.

Michael Walkley – Piper Jaffray

And Ron, just a question for you, maybe you can give us a little color on some of the new initiatives we’ve been working on in the government defense areas, and maybe how that pipeline is coming together for you?

Ron Buschur

Well, we are seeing multiple opportunities to where I envision that this next quarter we’ll possibly will be able to announce possibly a win; where we are supplying some of our repeated products and our rapid mobile deployment units in that segment, and we have a pretty healthy pipeline for a very short period of time at which we’ve assemble a group of people to focus on these new vertical markets.

We are getting good acceptance of the technology, and with that we feel pretty comfortable with the pricing that’s associated with those different vertical market segments, and I think it will complement our existing margin structure and enhance the performance of our operations in parallel.

So, I’m optimistic about that, but as you know, military, government and homeland security, those types of markets, the sales are a little bit longer. They are not quite as quick as what we’d like, but we are making good progress right now, Mike. I feel very good about what I’ve seen.

Michael Walkley – Piper Jaffray

This is a last question from me, and I’ll pass it on. Just to get my arms around kind of your growth in the back half of the year, is it easing up components, and then India and some Asia markets bouncing back in the second half of the year, and then continue to build up in the U.S. market as the year progresses. Is that kind of the steps to think about? How we get there given the slow start to the year?

Ron Buschur

That’s correct Mike.

Operator

Your next question comes from Bill Choi - Jefferies.

Bill Choi - Jefferies

I am still trying to understand perhaps how much the booking really strengthened; if you could provide some kind of color about either book-to-bill or backlog. I guess you ended Q4 with the backlog of $76.7 million. May be some additional color about where the near term disability is?

Kevin Michaels

Yes Bill, we are not going to get into providing those kind of details on a quarterly basis, but we would say, I think the message that we have definitely have given to you today, is that we certainly have seen an increase of orders through the quarter that we were not able to provide products to, because would have taken the products during the quarter, and we feel that those order trends are continuing and they’ll continue to pull through the year.

I think as Ron mentioned, we did have a stronger backlog of orders leaving the quarter than we normally do, because of the supply constraints that we had, but at the same time we do believe demand is out there, especially in North America, and the trend that we believe we are seeing from other people in our industry, we are seeing as well.

Bill Choi – Jefferies

Now the North America order strengthening, I think a lot of us, including us I have done that study, but the comment about European order strengthening, I’m curious if you could provide a little more color on as to which regions and what type of projects are you seeing there?

Ron Buschur

Well, the region is Europe and Eastern Europe. We are seeing some DAS in building frame solution that seem to be strengthening, and we have some operator sales within the Eastern European block countries that are picking-up for the 3G solutions that we have.

Bill Choi – Jefferies

So not much momentum at this point on the Western European countries, and some of the new amplifier products you have out?

Ron Buschur

No, maybe I wasn’t clear Bill. At the beginning I had indicated that we are seeing some improvements in Europe with our DAS solutions, and some of our in-train coverage solutions which includes the amplifier product as well, and that’s in Europe.

We are really focused on continuing to try to leverage that amplifier platform technology as we had demonstrated and shown during the two shows. The first quarter is our base platform across all the different product lines, and we are getting good success with that and we want to continue to leverage that.

Bill Choi – Jefferies

The other question is more on the balance sheet. You guys talked about obviously building a little bit more inventory. Given orders are continuing to ramp up here, how are you looking at accounts receivables and DSOs for the rest of this year as things continue to strengthen?

Kevin Michaels

Sure, this is Kevin, Bill. I think it will be as we’ve seen traditionally; the DSOs would range probably between 90 days to 100 days, and its going to depend on the mix of North America versus the rest of the world.

I think as you are aware, North America tends to pay a little faster, so you see more ramp-up in North America that will keep the DSO on the lower side of that. More international revenues, they tend to pay a little longer and it pushes the bump a little bit, but we feel pretty good that we’ve got a very clean accounts receivable and we are very comfortable as they will generate good cash flow for us.

Operator

Your next question comes from Brian Modoff - Deutsche Bank.

Brian Modoff – Deutsche Bank

Can you talk about sequentially the revenue guidance you have, how you see it breaking out by product line? Where you see the growth drivers, essentially for each of your product lines regionally, and then you are saying that a lot of the shortfall is due to the inability to get parts; what’s your comfort level that you will be able to secure enough parts this quarter to be able to meet the guidance that you gave? Thanks.

Ron Buschur

Well first Brian, the areas of growth that we are seeing and we are projecting to grow over this remainder of 2010 is around the antenna products that will be growing significantly as these operators are building out their networks, as well as some of our amplifier base station subsystem components would be the second category.

Then followed on we expect based on some of the tenders and some of the awards that we are hoping to win here in the second half of this year around our coverage solution and our entrain initiatives, and that should allow us to grow and need our forecast and our expectations for the remainder of the year.

Then looking at the supply constraints, that certainly a very valid question. As I’d indicated, we feel pretty confident we secured what we need to be able to continue to meet the guidance that I’d given here for Q2, and our team and the supply organization and our suppliers are working diligently on laying out forecast obviously in the last couple weeks and inventory necessary to build out the remainder of this year, and make sure that we have that already in the pipeline and we have commitments and we are prioritized appropriately to meet that demand.

We feel so we’ll be able to achieve that, but the concern is everyone is obviously out chasing similar components, and there is so much capacity that is available out there in the marketplace. So we have to really stay on top of that on an ongoing basis now.

Brian Modoff – Deutsche Bank

A question, the inventories didn’t increase sequentially in Q1, so this inventory you are building since the end of the quarter; and then so you are also saying that its going to be that your core base station amplifier in the incentive businesses is what’s going to be the bulk of your upside from Q1 to Q2?

Ron Buschur

Q2 and going out to Q3 is where we are going to see the growth in the antenna subsystem and in our Base station subsystem.

Brian Modoff – Deutsche Bank

The product that’s causing out any of the new designs you are showing over the last trade show, that’s a better part of that?

Ron Buschur

I’m sorry Brian, I interrupted you at the beginning, could you repeat that question please?

Brian Modoff – Deutsche Bank

Was there a specific product that you have been showing at trade shows as a part of this or is this your basic stuff that you’ve had for awhile?

Ron Buschur

It was one of our core amplifier products, the semi-conductor technology that we were short on, and we did have some components on our intended technology that we weren’t able to fulfill. So it was the combination of some of the legacy products on the antenna and some of the newer technology as well.

Brian Modoff – Deutsche Bank

Okay. And then Kevin, have you built inventories to order?

Kevin Michaels

We’ve built some. Still obviously were bringing stuff in and I think as Ron said, we are willing to gross inventories but, but I think the real message here is we feel pretty comfortable in our guidance. We still think there will be some constraints during the quarter, but we think we factored that in, that the current market conditions we factored that in to our guidance for the quarter.

Operator

Your next question comes from David Marsh - McMahan Securities.

David Marsh - McMahan Securities

Thank you for taking my questions. Will you guys be filing your 10Q for the quarter today?

Kevin Michaels

I will get filed in a couple days, we are comparing it. We filed the 8K with the press release. The Q should be filed before the end of the week.

David Marsh - McMahan Securities

Can I just ask a few housekeeping questions. What was depreciation and amortization in the quarter?

Kevin Michaels

I don’t have the details in front of me, exactly what they are, so I’d say the Q will be file in a couple of days, we’ll have it there. Its roughly similar to what it was in the last quarter, but I just don’t have the exact detail sitting in front of me.

David Marsh - McMahan Securities

Okay, and CapEx, you mentioned for the quarter was less than $1 million and you mentioned $1 million to $2 million per quarter for the rest of the year. So should we assume that there is sort of a hard cap around $7 million for the year in capital spending?

Kevin Michaels

Well its not a fixed cap, but that’s the same run rate that we had projected out for the year. We have been projecting $1 million to $2 million a quarter, that’s what we projected last quarter for 2010, so we are on that pace. This first quarter just came out a little bit light, but that’s the pace we should be running at. We don’t see anything that would move us out of that scope.

David Marsh - McMahan Securities

Can you tell me what your availability was on your revolving credit facility at the end of the quarter.

Kevin Michaels

I don’t have what the exact number was on it at the end of the quarter. I mean it fluctuates based on our receivables.

David Marsh - McMahan Securities

Just with regard to the outlook for the balance of the year, based on the better projected demand for the remainder of the year, covered with the gross margin you were able to realize in the first quarter. Do you guys anticipate that you guys can push gross margins perhaps a bit higher than what you had realized even in the fourth quarter of last year?

Kevin Michaels

I think depending on the trends; I mean that’s definitely our goal. That’s what we are driving to do. We think there is a good opportunity for that.

David Marsh - McMahan Securities

And then lastly, the inventory balance at the end of the year, without specific numbers, do you have a kind of a broad basic idea of mix between 2G, 3G, and 4G products in that inventory number.

Kevin Michaels

No, I don’t. I would say, as you can see by our reported revenue, our largest revenues are still in the 2G to 2.5 G stuff. So that’s a rough approximation. I’d probably follow those revenue trends as how the inventory looks.

Operator

(Operator Instructions) Your next question comes from Scott Searle - Merriman.

Scott Searle – Merriman

Ron on the coverage solutions front, it sounds like you are expecting a pickup in the second half of this year, but could you give us a little bit of an idea, the magnitude of what the bidding pipeline is looking like at the current time, and if there is a chance that we could see revenues from that group getting back up to the $20 plus million range by the end of the year.

Ron Buschur

Well, that’s certainly our goal Scott to get to that range, and with what we have in the pipeline currently, I would say that as we get to the end of Q3 or we get into Q4, we certainly should see that based on the wind projections that we have; what we have currently in the funnel.

Scott Searle – Merriman

Ron, are there any numbers you can put around the size of that funnel at the current time.

Ron Buschur

Its probably, if I look at the funnel and the opportunities associated with that, we have one very, very large project that’s several $100 million, but its safe to say a couple $100 million plus opportunity.

Scott Searle – Merriman

Ron, you mentioned earlier some of the new vertical market applications products. It sounds like you might have something to announce in the not too distant future, but would we see revenues in 2010 or does that really come in 2011 before you see top-line contribution?

Ron Buschur

Possibly to the end of 2010, but certainly in 2011.

Scott Searle – Merriman

Just in terms of 10% customers, you had some big operator customers in the past, more recently its been focused around Nokia and Samsung on the WiMAX front. Given some of the order patters that you are seeing, can we expect to see operators starting to tick-up into that range in the second half of this year.

Ron Buschur

Yes that’s correct Scott. Based on the products and the backlog that we have, that’s where you would see those operator customers moving up into that range.

Scott Searle – Merriman

Just to go back quickly Ron. In terms of some of the lost opportunities in the first quarter, why are you so comfortable that those haven’t slipped away and gone to competitors at this point in time?

Ron Buschur

Well, many of these orders are purchase orders that are placed upon us. We have delivery dates. We confirm the date that which we can achieve the deliveries and then a reconfirm. So we have the confidence around what’s in the pipeline and what's committed. The OEM business as you know, that is forecast, so that does have some variability, but we've taken that into account already in our forecasting and in our analysis of Q2.

Scott Searle – Merriman

And last thing on the gross margin front Kevin, you guys have done a great job with the difficult top line of maintaining gross margins in the mid 20. If I look at the mix going forward, being more skewed towards antenna, and then starting to weigh around coverage solutions. Why wouldn't we be getting up on a sustained basis then into the high 20 as we exit the year?

Kevin Michaels

I think if we are able to achieve our revenue targets as such with that kind of mix, certainly that is a possibility.

Operator

Your next question comes from Tony Rao - East Shore Partners.

Tony Rao - East Shore Partners

I look at the OEM business, and just on a sequential basis it was down $25 million plus, and is that as much a factory of you basically walking away form business that doesn't need your margin targets, or is it a functional sort of the shortages, or is it a function of the fact that some of your largest OEM customers themselves have reported rather week sales in Q1.

Ron Buschur

I think Tony, I think our OEM customers certainly in some cases have lost possibly some market share there in Q1, but we have walked away from some business that just no loner made sense for Powerwave to continue to chase and invest the R&D dollar necessary, as well as support dollars for that business. So it’s a combination of the two.

Tony Rao - East Shore Partners

When I look at that, with all the consolidation that’s going on over the last several years in your space, in the supplier’s space, what is the field of competitors there for some of those products, and do the OEMs feel comfortable going to third tier suppliers?

Ron Buschur

Well I think initially some of the OEMs, and I can’t speak for them, but I would have to believe that they are in a situation to where there are somewhat desperate to figure our how to lower some of their expenses and to get products and solutions at a lower price, so they can improve there profitability, and in some cases they are wiling to do that, in others they are not.

One of the areas that we are trying to figure out, is how we can reengage with some of the OEMs who are interested in the value of the technology that we have, but again, its got to be at a price point to where we are comfortable that the business makes sense.

It is from a research and development perspective as you know, a pretty expensive proposition to develop these new solutions, and then to have them turned to a commodity very quickly. Its difficult to get a return for our shareholders, and we decided we just won’t run and chase that, but I do think that they are becoming a little bit more aware of that and concerned about that, and we are seeing some indications of some OEMs rethinking that strategy.

Tony Rao - East Shore Partners

You spoke a little bit on the India front about some of the regulatory issues there with sales from China into India, and that would create some opportunities for you potentially in the second half. What product areas do you specifically see as creating new potential?

Ron Buschur

Well the remote radio heads, the DAS solutions as well as the multi -carrier amplifiers are primary areas and we do think our OEM customers and partners who are in a very good position from India perspective will benefit from this new initiative and EBIT that’s been passed down to the operators there in India. So we think we'll benefit from our OEM sales as well with our partners there.

Tony Rao - East Shore Partners

When you look at India and you report the Asian sales, are those sales predominantly or the increase that you spoke about potential. Are those predominantly though in OEM partner are they direct to carrier?

Ron Buschur

You would have a combination, but you would see it probably in that market segment. Specifically India you’ll see that probably driven more though the OEM than you would directly with the operator.

Tony Rao - East Shore Partners

So, say your European OEM was to puck up more business there, the pick up in India may show up in the Europe numbers and for sales that ultimately were destined for India?

Kevin Michaels

We report it as where we invoice it to. So I think some of the OEMs for India are taking products in India, so it shows up in our Asian sales. We love that whole end of the Asian region.

Tony Rao - East Shore Partners

One last one from me; over the years you have had good success selling directly to the service providers and that business, because there is typically more value-added, you see better margins in that business, and its been running at a fairly low rate from historically basis; 38% ticking up to 45% this quarter, but on a low revenue number.

When you look into the latter part of the year, would you see the potential for the direct to service provider sales equips at 50%, and if so, what would be the product there that you’ll see as the biggest driver with the US carriers, is it the antenna systems group or the base station sub-systems.

Ron Buschur

No, we certainly want to see that flip to more of a 50% plus to the provider directly. That category you would see will be the base station sub-system in the antenna products, and I think we’ll see a contribution from the coverage solution as well.

Operator

Your final question comes from Scott Searle - Merriman.

Scott Searle - Merriman

Just two quick follow-ups. Ron, in regard to remote radio heads, there’s been some interest on the LTE front. Do you expect to have design wins by the end of this year; and Kevin, what’s the fully diluted share count now with the new convert? Thanks.

Kevin Michaels

Well, the fully diluted share account, actually it’s only $132 million, it’s in the press release, because with the loss, those shares aren’t diluted, so they don’t add in there. I think the total maximum if everything diluted, its like a $175 million.

Ron Buschur

Looking at the remote radio head and some of the technology associated with that, whether it be a Pico type of product or some of our advanced radio head technology, we do hope to see a contribution towards the end of the year, but we have most of that product in trial stages and looking for a ramp up in 2011.

Scott Searle - Merriman

Okay, and competitively Ron, how would you kind of size up the landscape on the remote radio front head right now, in terms of whose got working product out in the field right now, as opposed to a lot of [posh rugs]

Ron Buschur

Well, I think when you look at the legacy 2G, 3G, I think everyone has products out until marketplace. I can tell you that Powerwave has over 65,000 remote radio heads deployed worldwide, which I think is a phenomenal number and I think would be hard.

Many of our competitors, it would be hard for us to say they have that level of remote radio heads deployed, but looking at the LTE and the next generation of IP-based solutions, one of our major North American operators had told us that we are hands down and leading the competition by probably six to eight months.

Operator

At this time, there are no further questions. I would now like to turn the call back over to Ron Buschur for any closing remarks.

Ron Buschur

I would like to thank everyone for joining us today, and your continued interest in Powerwave Technologies. We look forward to sharing with you our results for the second quarter of 2010.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Powerwave Technologies Q1 2010 Earnings Call Transcript
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