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Executives

Tom Spaeth - VP

Kevin Michaels - CFO

Ron Buschur - President & CEO

Analysts

Bill Choi - Jefferies

Scott Searle - Merriman Capital

David Marsh - Odeon Capital

Amir Rozwadowski - Barclays Capital

Powerwave Technologies, Inc. (PWAV) Q3 2010 Earnings Call October 28, 2010 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the third quarter Powerwave Technologies Earnings Conference Call. My name is Jennifer and I will be your operator for today. At this time all participants are in a listen-only mode and 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 Tom Spaeth, Vice President and Treasurer. Please proceed.

Tom Spaeth

Thank you. Good afternoon and welcome to Powerwave Technologies' third 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 the split between operator and OEM sales, operating margins, gross profit margins, earnings per share levels, cash flow projections, revenue compositions, supply chain constraints and shortages, 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 into and compete in vertical markets for its products such as government and defense markets, common stock prices, debt purchases, the success of new products, expense levels, capital expenditure rates, inventory turns, tax rates and days 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, realized anticipated cost savings and synergies, the negative impact on demand for our products due to the macroeconomic environment, reduced demand due to industry consolidation among our major customers, fluctuations in foreign currencies, the ability to accurately forecast cash flows and credit collections, ability to enter into new markets for our products and solutions, 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/A, for the fiscal year ended, January 3rd, 2010, or Form 10-Q for the quarter ended July 4th, 2010, and other filings which are on file with the Securities And Exchange Commission for additional information on factors which could our actual results to be different from those projected or implied.

In addition on this call, we will 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 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 am going to turn the call over to Kevin Michaels, Powerwave's Chief Financial Officer.

Kevin Michaels

Thank you, Tom and good afternoon everyone. 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 third quarter of 2010 were $156.8 million and we reported GAAP net income of $7.9, which equates to full diluted earnings per share of $0.05.

This includes $1.5 million of restructuring and impairment charges and $800,000 of non-cash debt discount amortization expense related to certain of our outstanding convertible notes. These charges in amortization totaled approximately $2.3 million for the third quarter.

On a pro forma basis, excluding the restructuring impairment charges and the debt discount amortization charges, we generated pro forma net income of $9.8 million, which equates to pro forma net earnings of $0.06 per share.

I want to note that including both our GAAP and pro forma results is the impact of approximately $700,000 of pre tax stock based compensation expense, almost all of which is included in operating expenses. Excluding this expense from our reported results added approximately $0.05 to EPS from both GAAP and pro forma results. The prior year period impact was $0.01 to EPS for both GAAP and pro forma.

On a geographic basis, the North American market demonstrated the expected growth in demand during the quarter as our total America's revenues for the third quarter of 2010 was approximately $71.5 million or 46% of revenue. Our total Asia Pacific sales were approximately $33.7 million or 21% of revenue and total European and other international revenues were $51.6 million, or approximately 33% of revenue.

In the third quarter, Antenna Systems product sales group totaled $76 million or 48% of total revenue. Base Station sub system sales totaled $64 million or 41% of revenue and Coverage Solutions sales totaled $16.8 million or 11% of revenue.

Our total 3G related sales were approximately $77.1 million or 49% of our total revenue. Our 2G and 2.5G related sales were approximately $62.3 million or 40% of revenue and our 4G sales, which includes both LTE and WiMAX, were approximately $17.4 million or 11% of revenue.

In terms of our customer profile for the third quarter, total OEM sales accounted for approximately 32% of total revenue and directed operator sales accounted for approximately 68%. This continues our trend of increasing the direct portion of our sales as a percentage of our business. We expect that in the near term we will continue to fluctuate around in approximately a 60:40 split of direct versus OEM sales.

Moving on to gross margins, on a GAAP basis our total consolidated gross margin was 29.4% in the third quarter which is a further improvement over the last quarter as well as an increase of almost 350 basis points from the first quarter of this year.

In our press release on page three there is a table with a reconciliation to the various factors impacting our gross margin for the quarter. On a pro forma basis, excluding restructuring charges, which totaled $1.2 million, our total gross profit margin was 30.1%.

We believe that our strong gross margins are a continued demonstration of the success of our business strategy over the last three years which include our extensive manufacturing and restructuring efforts in cost control activities as well as our focus in targeting higher margin sales activities within our target markets. While we certainly have more work to do, we are pleased to be operating in the higher end of our target gross margin range for the mid to high 20s.

Next I'll review our operating expenses for the third quarter. Our sales and marketing expenses were $7.3 million. Research and development expenses were $15.7 million and G&A expenses were $11.7 million. Our total operating expenses including $300,000 of restructuring expenses was $35 million for the quarter. On a pro forma basis which excludes restructuring charges, our total operating expenses equaled approximately $34.7 million which is in line with our $35 million quarterly target for this year.

Now I would like to take a look at our operating income for the quarter. As many of you we have a long term operating model targeted as 10% for operating income. During this year we're extremely proud of the progress that we have made in driving significant improvements in this important metric. For the third quarter we reached a 7% operating income margin on a GAAP basis, now pro-forma basis our operating income margin reached 8%.

While we have further improvements to deliver we have made excellent progress on this metric and we believe that you can now start to see the operating leverage of potential in our business model.

In terms of other income and expense we recorded a total of $1 million of other expense in the third quarter of 2010. The largest component of this is our interest expense for the quarter. In addition, the existing 1.875% convertible subordinated notes due 2024 incurred approximately $800,000 of non-cash debt discount and amortization expense during the quarter pursuant to FASB accounting standards codification topic 470-20 which is included in interest expense.

In addition, during the quarter we did recognize that net foreign currency translation gain of approximately $2 million for the quarter which was primarily due to the weaker dollar. This gain is also included in other expense. On a pro-forma basis excluding the non-cash debt discount, amortization for the quarter, our net other expense is $200,000. The second quarter tax rate was approximately 20%; we continue to evaluate our future tax rate based up on diverse international operations.

We currently estimate that our effective worldwide tax rate will be between approximately 20% to 25% for last quarter of 2010. I want to stress that this estimate will fluctuate based upon our actual results.

Next, I will review our balance sheet. Total cash at October 3, 2010 was approximately $71 million of which $900,000 is restricted cash. This represents an increase of almost 9 million in cash from the second quarter of 2010. Our cash flow from operations was approximately 8 million for the third quarter and our total capital spending was approximately 1 million in the quarter.

Our net inventory was 55.5 million which is basically flat from the second quarter of 2010, for the third quarter of 2010 our net inventory represents inventory returns of approximately 7.9 times which is a significant improvement in the 5.7 times recorded in the first quarter of this year.

Our total net accounts receivable is 156.3 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 best served by focusing on long-term trends as opposed to the 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 not changing our fiscal 2010 annual revenue range of $590 million to $620 million, which has been unchanged from the beginning of this year.

We do believe that difficult supply chain issues will continue throughout the remainder of this year which will continue to make the environment somewhat challenging. In terms of the existing analyst consensus view of our fourth quarter revenues which I believe is a 176 million.

We are comfortable with the consensus view. As a final note we will provide our 2011 guidance when we report our fourth quarter results.

With that I would 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 am very pleased and excited to share with you our improving financial results as well as the progress we have made in introducing new products and solutions. We remain extremely focused and committed to continue to position Powerwave Technologies as a worldwide leader in supporting the global wireless demands.

In terms of the third quarter, our revenues grew by over 8% on a sequential basis and 13% on a year-over-year basis. For the quarter, our gross margins reached 30% and our pro forma operating income reached 80%.

On an income front we are proud to be able to show the power and leverage we have built into our operating model. Our GAAP fully diluted earnings per share were $0.05, while our pro forma earnings per share were $0.06. We believe that our strong financial performance further verifies the success of our long term strategies.

In particular, our manufacturing consolidation activities have enabled Powerwave to compete on a competitive basis in a low cost manufacturing structure that has highly flexible and scalable capabilities without compromising our superior quality.

Our focus on expense management has positioned the company to be truly lean and mean where we can leverage our resources on a global basis. And lastly, our strategic focus on driving our sales towards integrated products and solutions which provide higher gross margins have continue to have positive effects this quarter.

On a supply chain front, we have see some improvements but we continue to experience longer than normal lead times for a wide variety of electronic components and this will we believe continue and be the case for the remainder of this year.

Now looking at the sales, we have continued to increase in customer order activities for the second quarter across several of our markets, particularly in North American marketplace and parts of Eastern Europe. We believe that our focus on diversification and more profitable businesses has us on a right track as shown in our financial results.

But make no mistakes; we still have some work ahead of us to fully achieve the long term results that we believe are available to us based on our financial model and plans. We need to continue to grow our core wireless business while expanding into additional market segments such as the government sector which we can truly create solutions utilizing all of our technology and engineering expertise.

With our excellent product portfolio, superior patent portfolio state of the art facilities and cost effective geographic locations combined with what we believe were the best personnel across all disciplines is positioning Powerwave for continued success.

I continue to be very exited about the long term prospects regarding our government business area which we believe is well focused on delivering mission critical solutions for the wireless networks which are clearly needed in today's challenging environments.

I am proud to announce that we have signed an agreement with a major government integrator to provide them with multiple advanced integrated solutions be trailed over the next two quarters. From a balance sheet perspective, we continue to improve our performance. For the third quarter we generated $8 million in cash flow from the operations. While our DSOs increased slightly to 91 days, we have also driven further improvements in our inventory turns increasing them from 5.7 in the first quarter this year to 7.9 turns in the third quarter.

As I have stated, we have been executing on our restructuring and transformation plans for the company over the last three years and I am very pleased and proud of the excellent job the team done. I want to personally thank them for their focus, confidence and unwavering commitment. We have executed on consolidating and simplifying our manufacturing operations, engineering sites to better utilize resources, decrease our overhead cost, implement our valued solution strategy and create a lower operating cost structure.

The success of these efforts can be seen in our financial results, our products and our product development lead times as well as their customer mix. The same time we continue to invest in key resources. Facilities, state of the art equipment, development products and solutions which will enhance our technological leadership position world wide.

We believe at these efforts combined with our previous actions will provide the leverage to improve our operating results as well as help further improve our ability to generate increased cash from our operations.

Now, I am looking at our industry, we believe their continues to be long term driver set to create additional demand for our products and solutions. In particular, we believe that the data driven demand driven by the rapid increase in smart phones world wide will continue to increase and create additional infrastructure spending globally.

The desire for IPV solutions, mobile broadband and the interoperability as well as well as in-building coverage needs will continue to create opportunities for Powerwave to differentiate and demonstrate our technological leadership position.

We remain committed and determined to improve Powerwave's profitability and performance for the remainder of 2010 and the years 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 the line of Bill Choi from Jefferies. Please proceed.

Bill Choi - Jefferies

Okay thanks. Hey congratulations on the profitability, margins are moving up nicely. I am curious why you are talking about getting more leverage here. You didn't increase the longer term gross margin target of mid to high 20% and it does seem like there was some mix related benefits to gross margin especially since you had higher mix of coverage solutions. Do you see that mix changing much is 30% type of gross margin sustainable?

Kevin Michaels

Bill this is Kevin, I think to start with we are still comfortable with our model. We are not prepared to change the model yet and we obviously will see how we progress and we are not giving guidance for next year I think with our current model obviously we are operating at the high end of the range. We think there is some opportunity longer term but we are not prepared to change the model yet so that question. In terms of our the mix going forward I think just say around 10 percentage obviously from a long term perspective we see some growth opportunity given the coverage solution market place but that is a longer market.

Ron Buschur

Bill this is Ron, we do expect to see some pick up as we have indicated as we get into Q2 of next year.

Bill Choi - Jefferies

We do expect that coverage solutions to then since this is project based to be flattish to down until be a new project start contributing in Q2?

Kevin Michaels

Well I don't think we are looking to give guidance for next year so we are going to stay away from that question. There is always going to be some variability due to the project nature of that business just in the existing coverage solution market but we think from a longer term perspective we do think that business should grow.

Ron Buschur

Bill the products and solutions that we are offering to the government aren't just focused on in building our data solutions as well. They are a broad range of products.

Bill Choi - Jefferies

I understand you don't want to talk about next year so much but in the press release you guys talk about next year so much but in the press release do you guys talk about North America wireless capital spending patterns remaining strong throughout next year. Do you have any sense for how we should be thinking about the traditional seasonality from Q4 to Q1 at this point?

Kevin Michaels

I think really right now -- we don't have any feedback for what we think the next year is going to be. I think from a general statement and you're correct. In our press release we do feel that the demand drivers are in place and will continue in place throughout next year in terms of how particular quarter seasonality is going to play out we're waiting to see, as you know traditionally -- the first quarter is traditionally down slight from the fourth quarter but it's a little early for us to really try to discuss that.

Ron Buschur

And I think a lot of it Bill depends on obviously the implementation and the success of the roll out that a couple of the major operators have in North America here in Q4 to build out those networks.

Bill Choi - Jefferies

Right. But if you're currently component constrained and the orders keep coming in, don't you have at least some sense that this got more visibility into a Q1 than you would normally have and any sense for how much maybe the component shortages might have helped you leave on the table at least for this third quarter?

Ron Buschur

Well I don't think the component constraints have anything to do with looking at Q1 and the forecast that our customers have given us. It gives us an indication of what we believe the beginning of Q1 may look like from a revenue perspective, a short fall that we may or may not be able to deliver in Q4. But your question was really focused more on the customer demand and that's something that as we had indicated, we wont know until we exit Q4 they are successful in their build out plans.

Bill Choi - Jefferies

Right, but in so far, the component shortages continue. At least whatever the normal seasonality is it should be a little better than that because you keep dragging a part of the business out a little bit, correct?

Ron Buschur

Well that depends. The other operator customers stay within the range of business that they currently have and as you know, not all of the operators in North America have a continued build out plan for next year.

Bill Choi - Jefferies

Okay. Last question. Last quarter you said $10 million to $15 million impact on revenue due to constraints. Do you have a similar number for this quarter?

Ron Buschur

Yeah, it's probably around $5 million to $10 million of constraint.

Bill Choi - Jefferies

Okay. Thanks.

Operator

And your next question comes from the line of Scott Searle from Merriman Capital. Please proceed.

Scott Searle - Merriman Capital

Hey good afternoon guys. Nice job on the gross margins. First from a macro standpoint, Kevin, Ron, in terms of maintaining the guidance for the year, 590 to 620, basically existing expectations of about 175 million plus kind of take into account the lower end of that range. You're talking about component shortages. What are the other swing factors there that would enable you to get to something into the mid point or higher end of that range? What has to happen over the next 60 days to be something north of 590 - 595?

Ron Buschur

Scott, first of all the component shortage, it has alleviated but the problem is the lead times have not. The lead times 26 to 28 weeks in some cases. So unless its been planned going into the end of Q3 or even midway through Q3 and less at something, that's a common component that we either have in inventory or someone else does. It's almost impossible to go chase upside at this point. There's got to be a common product or platform that we may be carrying or suppliers have. So its not a lack of desire to change to chase it's just that the fact that those lead times are out 26 – 28 weeks.

Scott Searle - Merriman Capital

Well Ron, let me just follow up maybe a different way then, so is there any way that you could be at the higher end of that range. It sounds like what you are saying is it would really be a mix driven issue if certain products are in demand and you can get the component and you will be able to service it but otherwise you would be constrained at the lower end of the range. Is that how to think about that, the 590 to 620?

Ron Buschur

That's probably a good way of looking at that Scott. Yes.

Scott Searle - Merriman Capital

Okay and on the coverage solution side it was a nice bump up this quarter. Are there any big one time projects in there and how is the pipeline looking on that front?

Ron Buschur

Well the pipeline looks pretty good on the wireless business; we have a lot of opportunities. A lot of large bids and RFPs that are out, this next quarter we hope to close on a couple of those and there is no real one time effect that too place as we talked about. It's a cyclical business but we think we have been pretty successful here at this last quarter in couple of avenues and we hope as we focus more and more of these new products and solutions that we have developed for this segment and we start seeing some of the success of that investment and obviously there is several of the large operators here in North America that are talking about an inside out strategy for their wireless coverage understanding the need for outdoor coverage but certainly the desire to have the in building and DAS coverage in the venues covered to provide the any customer with the ultimate coverage and service they are looking for and that opens up many opportunities for us.

Scott Searle - Merriman Capital

Hey Ron and also a follow up on your comments on the vertical side, the government opportunity. Timing, in terms of getting past some of the trial activity, can you provide a little more color in terms of the potential magnitude of the opportunity post conclusion of that trial. What is going to constitute success and maybe I don't know if you can put dollars around it but help us understand kind of the financial profile of that business? Higher gross margins, etcetera.

Ron Buschur

Well I can certainly tell you that the trial in that area take anywhere from three to four months depending on how successful and how in-depth you go on those trials. You are correct; the solution sets are not products now so we end up with a little better margin mix. It's still a competitive market place and obviously with the spending cuts that are taking place in some of the budget cuts within the military and the government it's not like you are going to command 60% gross margins with these products but we certainly do believe these solutions and products will have a better margin in our current base business and as far as the size it really depends on the success of multiple trials associated with that but I think it would certainly be a meaningful win for us as we exit let say Q1, Q2 if we are successful on this to where it would make nice contribution to our top-line and certainly help our bottom line results and I really don't want to speculate on the amount at this point but you know the magnitude of some of these large government contracts.

Scott Searle - Merriman Capital

Okay and just Kevin 10% customers in the quarter, you mentioned Nokia, but did operator customers fit into that category?

Kevin Michaels

We had a couple of operator reseller customers that one in Eastern Europe and one here in North America, so we were seeing that.

Scott Searle - Merriman Capital

Okay and lastly if you could just provide a little color in terms of the radio head opportunity. What -- the design activity in interest level looks like both from an OEM standpoint and operator standpoint. When you might have some better visibility into that maybe beyond WiMAX? Thanks.

Ron Buschur

Yeah. Well Scott, we're certainly seeing some success on LTE today. A lot of our remote radio head activities are focused and are being developed around LTE technologies. We're currently deploying some products that are LTE capable and a network abroad as well as a network here in North America. We still see a real desire from the operators to have a remote radio head concept in their network. We do see an OEM customer who has been a strong customer of ours continue to deploy the WiMAX version as well as the LTE version that will be going into a network here in North America. So we're really focused and pleased with the results around our LTE remote radio head as well as our WiMAX remote radio heads and then as we exit this year and we start in Q1, I think you will hear some exiting new product releases and some opportunities for some of our newer technology to be showcased there in Barcelona and we'll certainly share with you the results in Q1 of those trails and activities that are underway

Scott Searle - Merriman Capital

Hey Ron. As you're getting more actual deployments now, what does the dollar content end up looking like in a remote radio head configuration versus traditionally what you would get in a typical operator deployment?

Ron Buschur

Well I guess that's a bit difficult to really answer and the reason being if the network operator is not replacing lets say some of its antennas and they have an LTE type of network already built out and we're just filling in some of the holes or we're provided the coverage with the remote radio head in that scenario, it obviously wont be as large of a deployment from a revenue perspective and a dollar perspective for Powerwave as it wouldn't be for offering the multi carrier amplifiers, the tower mounted amplifiers as well as the antennas and some RF conditioning components. But when you look at it from an overall business perspective, we're very pleased with the overall profitability of that solution set as a remote radio head as a standalone in comparison to the margins associated with the individual products.

Scott Searle - Merriman Capital

Great, thank you.

Operator

(Operator Instructions). Your next question comes from the line of David Marsh from Odeon Capital. Please proceed.

David Marsh - Odeon Capital

Thank you. Could you guys talk about depreciation and amortization for the quarter? Expense for the quarter?

Kevin Michaels

Yeah, it's roughly same to the last quarter, roughly about the same. No real change there. So I think it's about $5.5 million.

David Marsh - Odeon Capital

Okay and did you guys have any inventory obsolescence charge in the current quarter?

Kevin Michaels

I know nothing. We always have some but nothing to the tune that we break out.

David Marsh - Odeon Capital

Okay, great. And I guess North America is obviously picking up. Everybody is pretty well aware of what's going on here. I guess the one question I would want to focus on is the rest of the world. Could you talk about what's going on in the more developing economies, specifically India, the Far East? Asia was obviously a little bit weaker. Could you just talk about what you're seeing in terms of activity from the carriers over there and the prospects as we will forward into the next calendar year.

Ron Buschur

If we look at India as an example we are finally seeing some activities there that are positive with the release of some of the awards of the 3G licensing. So, we are happy with that, Eastern seems to be pretty strong. We are seeing even parts of Europe picking up slightly and when I look at the overall APAC region I guess I don't really, we haven't seen a big impact overall to the sales we had there.

In fact I would look at that I would say we are down a little bit but most of that was associated with the deals within India and the 3G licensing and then obviously there was some slowdown that we have seen in China on a couple of their deployments as well. China Unicom. But otherwise the regions outside of North America in some cases are starting to pick up which is a positive sign.

David Marsh - Odeon Capital

Right, absolutely. Specifically in China and then are you seeing any up tick in activity at this point. Are you, can you access the kind of your, from your standpoint your share competitive position versus the other competitors in that region in particular.

Ron Buschur

Well since our competitions haven't announced their results and I guess they are not going to its pretty tough for us really to determine the share. Right now in the spaces but I think it is safe to say that China just last quarter for everyone has been slow and looking at share I think we are pretty happy with the push pull model that we have through the OEMs as well as with some of the operators direct.

And I don't think that we would be misleading anyone by saying that we certainly happen to tell you that they have their owner or maybe even picked up a little bit in parts of Asia and that's not just China it's other parts of Asia that are deploying as well right now.

David Marsh - Odeon Capital

So, what you alluded to their with regard to the competitors I guess, could you talk about because your perspective on how some of the competitors are going into other organizations effects your outlook in terms of your ability to compete for business, do you think it enhances or in anyway hinders your competitiveness in your world market place.

Ron Buschur

One thing that we would certainly all agree I can't certainly blame the people the management team at CommScope for thinking that you are undervalued. I can certainly tell we are very much undervalued and we have a quality product and our capability compete globally is very good and I can understand their concern around stock pricing and value associated with our company.

We feel the same holds true for us, now looking at the competitive landscape that makes them more attractive or sexy as you would indicate it, I don't believe that to be the case at all. I think what people are looking at right now is the ability to deliver the right products and solutions into the right place and deliver those products on the timely manner.

It's unfortunate if the economic downturn had such an impact on our supply chain and the capabilities within that supply chain because at this point I think the whole industry would have certainly benefited from the fact that we have some pretty phenomenal growth that's taking place here in this wireless sector and I think we would have all been in a better position had we been a little bit mature as an industry and forecasting the demand in the previous year maybe been a little more rationale.

So we think that we are well positioned competitively, I think that we have demonstrated to many of our customers that we can certainly go through very difficult times as a company. As an organization we have demonstrated that to our customers over the last few years.

Our competitors there for a while were trying to tell our customers we may not be around and I think we've alleviated those concerns by our current position from an operating perspective in our financial model and we're not sitting back on a horse. We are being very aggressive. We still know that there is leverage left in this model and we know that we can deliver some more upside in our current strategy.

David Marsh - Odeon Capital

Well it sounds good. Very good results in the quarter and best of luck going forward.

Ron Buschur

Thank you Jay

Operator

And your next question comes from the line of Amir Rozwadowski from Barclays Capital. Please proceed.

Amir Rozwadowski - Barclays Capital

Thank you very much and good afternoon Ron and Kevin. Ron you talked a bit about the supply constraint issue and it seems as though you folks are still being hindered from a supply constraint standpoint. Any visibility in terms of when you think this could ease a bit. It seems like its held back some of the growth in the marketplace.

Ron Buschur

Well it has Amir. The issue isn't really so much -- I guess it is a constraint but it's more the lead times associated with it. There is capability to supply in the marketplace. The problem is we don't have the upside capability that we all had built into our plans lets say a few years ago because capacity has been taken out of the marketplace. So there is not a lot of excess capacity there for component suppliers to ramp up to meet upside for demand and it may drop in within the quarter or that drops in even within about a quarter and a half because with a 26 to 28 week's lead time, you have a challenging time to forecast next quarters business, when you really had to do that a quarter and a half ago.

So its more the lead time associated with it than the true supply and I do think -- we look at it and we talked to some of our suppliers and you listen to some of the larger manufacturers and whether its semi conductor manufacturers whether its semiconductor manufactures or some of the other components and everyone seems to believe it will see some relief here in Q1 and I think part of that is from the stand point, they're bringing some supply or some idle capacity back in which will create some supply. And the other piece is, they think that we have seen a bit of a slowdown than they have in the automotive industry and the growth associated with that industry. So what we'll see as we get into Q1 but we're sitting here looking at it and we're hoping that based on what we see today, we see positive trends and we hope by Q1 we can alleviate the concern around the supply constraints and focus on fulfilling this demand because it's a healthy marketplace right now and lets take advantage of this opportunity as we have it.

Amir Rozwadowski - Barclays Capital

That's very helpful Ron. And then if I – I am just a curious here a bit in terms of your margin structure. It seems as though we've seen steady improvement from a gross margin prospective and you folks have been able to hold your OpEx pretty steady though the year. If we think about the sustainability there, both from a growth margin perspective as sort of -- as you mentioned healthy growth returns to the top line, how do you think your abilities are in terms of maintaining that margin structure and perhaps driving additional leverage to the bottom line.

Ron Buschur

Well I'll take the first part around the operating expenses and then Kevin will follow on. I know you have some comments on the margins. If you look at the operating expenses, I think we told you as we had started this quarter that we felt as though we could reduce our operating expenses down to a level and we can sustain around $200 million of sales without adding any increase in our operating expenses and that excluded commissions associated with sales.

So if you look at that I think you can see from your model we can clearly maintain our expense levels and we believe that as we bring in some other businesses in fact we maybe able to benefit from synergies associated with those businesses to where we can maybe expand a little, further beyond 200 million.

Kevin Michaels

Sure and couple on that just add-in to that I think the big thing answer is we feel we have a lot of leverage on the operating expenses model and for longer term perspective obviously as a revenue base grows there is some additional dollars there and I think as Ron mentioned also as we expand and some of the other sectors like the vertical markets, like the government markets et cetera. And once they expand and get some revenue traction it will be probably be some more investment there. So, but still you are looking at an operating expense number that is only going to fluctuate a couple of million dollars. So, I think we have a structure that have low leverage in it.

From a gross margin perspective we feel pretty confident that we can stay around the same range as we are plus or minus the point but we are pretty comfortable here. Long term we still got work to do to really setup targets from the long term perspective but we are pretty comfortable at the top end of our traditional range then we can maintain that level in the near term easily.

Amir Rozwadowski - Barclays Capital

I mean in terms of your operating margins, right now obviously we have seen some pretty strong improvement almost couple of 100 basis points away from hitting sort of a 10% operating margin target. Are you comfortable yet in terms of what a longer term operating model could look like?

Kevin Michaels

Well I think from our perspective as we want to get to 10% and get that stable and we think that's doable here in the near term and we think with as we look at the model and part of the thing as you know we have been focusing it's really higher margin opportunities. So you've seen of our OEM business go down but you have seen our operator business go up and you have seen our margin improve. So, we really look at how can we further drive as Ron talked about the solutions sale that we believe will add to more, get those more value for the solution and the capabilities that we have. So we do think that longer term yes, this opportunity is to target a higher operating margin but right now we just want to take a one step at a time but we want to get to 10% and maintain 10% and we are not there yet so that's our near term focus and that's we want to stay focused on that.

Ron Buschur

We have a plan and we certainly know the strategy that we have deployed will allows us to get to around the 10% operating model. If we look at what we have done we have been able to demonstrate now, if you go back you will see at least four quarters of growth around our gross margins. You can see we have reduced our operating expenses and we are down to hold them flat. We continue to invest in research and development, we are the technology leader, we are going to continue to that leadership position. We haven't wavered from our ability to deliver quality solutions that have very higher reliability associated with that and we are going to continue that strategy.

I think with that we will have some pretty favorable results that will build to continue to demonstrate to Wall Street and our shareholders and get the returns that we are all looking forward to and that we have so hard over the last few years of this consolidation strategy of the acquisitions that we have done that positioned us to be that leader.

Amir Rozwadowski - Barclays Capital

Great. Thank you very much for the additional color.

Ron Buschur

Thank you.

Operator

There are no further questions at this time. I will now turn the call over to Mr. Buschur for closing remarks,

Ron Buschur

I want 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 fourth 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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