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Powerwave Technologies, Inc. (NASDAQ:PWAV)

Q4 2010 Earnings Call

February 1, 2011 5:00 p.m. ET

Executives

Tom Spaeth – VP

Kevin Michaels – CFO

Ron Buschur - President & CEO

Analysts

Charles John – Canaccord Genuity

Steven O’Brien – JP Morgan Securities Equities

Scott Searle - Merriman Capital

David Marsh - Odeon Capital

Amir Rozwadowski - Barclays Capital

James Faucette – Pacific Crest Securities

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Powerwave Technologies Earnings Conference Call. My name is Manecia and I will be your coordinator today.

At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions).

I would now like to turn the call over to Mr. Tom Spaeth, Treasurer. Please proceed.

Tom Spaeth

Thank you. Good afternoon and welcome to Powerwave Technologies fourth quarter 2010 financial results conference call. I’m 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 composition, 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 our 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’s ability to enter into and compete in vertical markets for its projects such as Government and Defense markets, common stock prices, dept purchases, the success of new products, expense levels, capital expenditure rates, inventory turns, tax rate, day sales outstanding and the company’s ability to pay off its convertible debt 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 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, the 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 significant customer accounts.

Please refer to our press release, Powerwave’s current Form 10-KA for the fiscal year ended this January 3, 2010, our Form 10-Q for the quarter ended October 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 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 these 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 fourth quarter of 2010 were 175.6 million and we reported GAAP net income of 6.4 million, which equates to fully diluted earnings per share of $0.04. This includes 1 million of restructuring and impairment charges, 800,000 of non-cash debt discount amortization expense related to certain of our outstanding convertible notes. An additional 1.5 million of expense related to the conversion of 16 million of our convertible notes and the repurchase of 10 million of our convertible notes during the quarter.

In addition, we incurred 900,000 on non-cash pre-tax stock-based compensation expense in the quarter. All of these charges and amortization totaled approximately 4.2 million for the fourth quarter.

On a pro forma basis, excluding the restructuring and impairment charges, the debt-related charges and the stock-based compensations expenses for the quarter, we generated pro forma net income of 10.1 million, which equates to pro forma net earnings of $0.06 per share.

On a geographic basis, the North American market continued to be our strongest market, but we did see reduced strength in the Asian-Pacific market as was expected.

Our total Amercia revenues for the fourth quarter was approximately 64.9 million, or 37% of revenue. Our total Asia-Pacific sales were approximately 59.6 million, or 34% of revenue. And total European and other international revenues were 51.1 million, or approximately 29% of revenue.

In the fourth quarter, Antenna Systems product group sales totaled 84.6 million or 48% of total revenue. Base Station Subsystems sales totaled 73.3 million, or 42% of revenue and Coverage Solutions sales totaled 17.7 million, or 10% of revenue.

Our total 3G-related sales were approximately 62.3 million or 36% of our total revenue. Our 2 and 2 1/2G related sales were approximately 90.4 million or 51% of revenue. And our 4G sales, which includes both LTE and WiMAX were approximately 22.9 million or 13% of revenue.

In terms of our customer profile in the fourth quarter, total OEM sales account for approximately 41% of our total revenue and Direct and Operator sales account for approximately 59%.

Nokia-Siemens continue to be our single-largest customer representing approximately 25% of our revenues in the fourth quarter.

Looking forward to 2011, we expect that we will continue to fluctuate around an approximately 60/40 split of Direct versus OEM sales.

Moving on to gross margins, on a GAAP basis our total consolidated gross profit margin was 29.6% in the fourth quarter.

In our press release on Page 4, there is 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 stock compensation expense, which combined totaled 600,000, our pro forma gross profit margin was 30%.

We believe that our strong gross margins are a continued demonstration of the success of our business strategy of the last three years, which include our extensive manufacturing restructuring efforts and cost control activities as well as our focus on targeting higher-margin sales activities within our target markets.

While we certainly have more work to do, we believe that we should continue to operate in our revised-target gross margin range of the high-20s to low-30%.

Next, I’ll review our operating expenses for the fourth quarter. Our Sales and Marketing expenses were 7.3 million. Research and Development expenses were 16.9 million. And G&A expenses were $12.4 million.

Our total operating expenses including 500,000 of restructuring expenses and 800,000 of stock compensation expense were $37.1 million for the quarter. On a pro forma basis, which excludes restructuring charges and stock compensation expense, our total operating expenses is equal to approximately 35.8 million.

Now, I’d like to take a look at our operating income for the quarter. As many of you know, we have a long-term operating model target of 10% for operating income. During this year, we are extremely proud of the progress that we have made in driving significant improvements in this important metric.

For the fourth quarter, we reached an 8.4% operating income margin on a GAAP basis. And on a pro forma basis, our operating income margin reached 9.6%. While we have further improvements to deliver, we have made excellent progress on this metric. And we believe that you can see the operating leverage potential in our business model.

In terms of other income and expense, we recorded a total of approximately 6.2 million of other expense in the fourth quarter of 2010. There was some one-time charges this quarter related to our convertible debt.

As we previously announced, we converted all of our 60 million, 1.875% senior convertible notes into common equity during the quarter, which resulted in a 1.1 million charge.

In addition, we repurchased 10 million of our 1.875% subordinated convertible notes during the quarter, which resulted in a $400,000 charge related to the expensing of the debt discount associated with those retired notes.

In addition, the remaining 1.875% convertible subordinated notes incurred approximately 800,000 of non-cash debt discount amortization expense during the quarter pursuant to FASB accounting standards codification topic 470-20, all of which is included in interest expense.

In addition, during the quarter we recognized a net-form currency translation loss of approximately 1.9 million for the quarter, which was due to the stronger Chinese R&B, as well as a stronger dollar. This loss is also included in other expense.

On a pro forma basis, excluding the debt-related charges and discount amortization for the quarter, our net other expense is 4 million.

Our fourth quarter tax rate on a GAAP basis was approximately 26%. While we continue to evaluate our future tax rate based on our diverse international operations, we currently estimate that our effective worldwide tax rate will be between approximately 20% to 25% for 2011. I want to stress this estimate will fluctuate based upon our actual results.

Next, I’ll review our balance sheet. Total cash of January 2nd, 2011, was approximately 62.5 million, of which 900,000 is restricted cash. As I mentioned, during the quarter we repurchased the total of 10 million of our outstanding convertible notes. As well as converted a total of 60 million of our outstanding convertible notes into common equity, thereby reducing our total outstanding notes of approximately 207.9 million, of which 57.9 million are puttable by the holders in November, 2011. And the balance of 150 million is puttable by the holders in 2014.

Over the last two years, we have significantly reduced our outstanding debt to its current manageable level. And we believe that our future cash flow combined with our existing cash balances in credit facilities provides us with more than adequate resources to meet all of our debt obligations.

For the fourth quarter, our cash flow from operations was approximately 3 million. And our total capital spending was approximately 1.9 million in the quarter.

Our net inventory was 50.4 million, which is down approximately 10% from the third quarter of 2010. For the fourth quarter, our net inventory represents inventory turns of approximately 9.8 times, which is a significant improvement from the 5.7 times recorded in the first quarter of this year.

Out total net accounts receivable was 187 million, while our AR day sales outstanding increased to 97 days.

Now before turning the call over to Ron, I’d 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, we are establishing our new Fiscal 2011 annual revenue range of 650 to $680 million. The midpoint of this range represents annual growth of 12%, which we believe is above the expected growth rates for the industry.

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

Ron Buschur

Thank you, Kevin, and good afternoon everyone.

I am very pleased and happy to share with you our financial results as well as the progress we have made introducing new products and solutions this year. We remain extremely focused and committed to continue to position Powerwave Technologies as a worldwide leader who is the supplier of choice for supporting growth in global wireless demand.

In terms of the fiscal year 2010, we met our annual guidance. And for the fourth quarter, our revenue grew by over 12% on a sequential basis, and 23% year-over-year basis.

For the quarter, our gross margins reached 30%. And our pro forma operating income reached a very respectable 9.6%.

On the income front, we are very proud to be able to show the power of the leverage that we have built into our operating model. I am very pleased to report that the Fiscal Year 2010 is our first fully profitable year on a GAAP basis since 2005. While we and the industry have certainly gone through a lot over the last five years, we are further committed to further improving our operating results and driving improved profitability in the years ahead.

On the financing front, we were able to convert our 60 million senior subordinated notes into common equity during the quarter. In addition, we retired an additional $10 million of our convertible notes during the quarter as well.

As we enter this year, our total debt is down to $207.9 million, of which only $57.9 million is due at the end of the year. And the remaining $150 million is not due until 2014.

I am very proud of the job our team has done over the last couple years in reducing our debt and managing the business through the market debit crisis without any financial aides or bailouts as we focused on managing our business to improve profitability during these trying times. We have positioned the company well for long-term success, which will continue to generate positive shareholder value.

As you know, during the last few years, we completed our manufacturing consolidation activities, which has enabled Powerwave to have a highly-competitive low-cost manufacturing structure that is highly flexible and scalable without compromising our superior quality and our leading-edge technology and product solutions.

Our focus on expense management has positioned this company to be truly a lean and mean operation. We can now leverage our resources on a global basis.

And lastly, our strategic focus on driving our sales towards integrative products and solutions, which provide higher gross margins as well as customer diversification have continued to have a positive effect on our business profitability.

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 models and plans.

We need and we will continue to grow our core wireless business while expanding into additional market segments such as Government sector where we can create true solutions utilizing all of our technology and engineering expertise.

With our excellent product portfolio, our superior patent portfolio, the state-of-the-art facilities in cost effective geographic locations combined with what we believe are the best personnel across all disciplines, we have positioned Powerwave for continued long-term success.

I am very excited about the prospects for our business. The demand in wireless data is exploding as can be seen by the expediential growth in the use of Smartphones utilizing voice, video, and data. This demand is fueling requirements for cost effective infrastructure deployments for both upgrading to existing 2G, 3G, and 4G deployment technologies. We believe that Powerwave has the products and solutions necessary for these types of cost-effective deployments. And we are well positioned to benefit from this demand.

In addition to our continued effort and emphasis on product development, we are putting increased emphasis on our sales efforts globally to ensure that we capture market share in these expanding and growing markets.

We believe that the investments we have made and we will make continue to help further improve our position in the market and enable us to capture new market share as the infrastructure is built out over the next few years.

Powerwave intends to leverage our strengths in global positions we have established in the commercial markets into the Government and Defense markets so we can deliver more predictable, consistent, sustainable, and profitable growth inherent to the volatility that we see in our global commercial wireless industry.

As 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 that our team has done. And I want to personally thank our employees globally for their focus, their confidence, and unwavering commitment.

I would now like to highlight and review some of the details of this aggressive restructuring and transformation. The team has closed eight manufacturing facilities to simplify our manufacturing operations, while opening a new lean state-of-the-art facility in Thailand. We consolidated our engineering sites to better utilize our resources globally, while we opened a new R&D design center with hardware, software, and antenna capabilities in India.

Since 2007, we have reduced our operating expenses by over 35%, implemented our value-solution strategy, which utilizes our redesign common product platform solutions.

During the same period of time, we have improved our product gross margins from around the low teens to 30%. We have reduced our inventory levels. And we have improved our inventory turns to a very respectable 9.8 turns this quarter. We continue to generate positive cash flow from our operations. And we have made excellent progress in reaching our operating income target of 10% by achieving 9.6% on a pro forma basis for the fourth quarter of 2010.

These efforts, as well as reducing our outstanding debt, can be seen in our financial results, our product acceptance, our product yields, our product development lead times, our customer delivery metrics, our customer diversification, as well as our customer satisfaction metrics.

At the same time, we are continuing to invest in key resources, facilities, state-of-the-art equipment, and developing advanced products and solutions, which will enhance our technological leadership position worldwide.

We remain committed and determined to improve Powerwave’s profitability and performance in 2011 and the years beyond. And continue to generate the level of returns necessary to benefit our shareholders.

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

Question-and-Answer Session

Operator

(Operator Instructions). And the first question comes from the line of Mike Walkley with Canaccord Genuity. Please proceed.

Charles John – Canaccord Genuity

Thanks. This is Charles John sitting in for Michael Walkley. Hi Ron, and Kevin.

Kevin Michaels

Hi.

Charles John – Canaccord Genuity

Hi. Just a few questions from me. First, just by reconcilement of the run through that you’ve seen from some of the other OEMs for the December quarter and comparing that with your revenue numbers, just wondering, is it more timing or would we see a push out into Q1 and maybe a better-than-normal season March quarter for you guys?

Ron Buschur

I think, as you know, you see a lot of inconsistencies when you look at the rollouts from the OEMs. Typically, we trail the OEM build outs. Whether it’s backlog or some of the base station subsystems that they supply, we tend to lag maybe a quarter or so after those types of large deployments or spends.

So what we’re anticipating is the typical seasonal performance that you see in Q1 within our industry. And then we see a strong growth, you know, as we look at the latter part of Q2 and going out. And you know, you look at Q4 to Q3 in our last quarter results, you know, we had a sequential growth of over 12%.

Charles John – Canaccord Genuity

So Ron, throw in maybe the overall issue of component constraints. It just sounds like the expectations that it might continue through the end of March quarter. How do you see that playing out into maybe some of your expectations for the first half of 2011?

Ron Buschur

I guess we’re pretty pleased with what we see as far as the demand. I mean, we know that there’s typically a slow first quarter in this industry and that’s been historically the patterns that have taken place at least in the last ten years. But I don’t see anything that’s hindering that beyond the typical seasonality of the first quarter.

Charles John – Canaccord Genuity

Okay, great. And then, Kevin, congratulations on a steady gross margin and also hitting the almost the 10% operating margins for this quarter. That’s really impressive in a tough environment. I know you’re not giving specific guidance, but maybe would you care to comment just on how we should think of these two metrics as we go through the year and maybe the puts and takes that are needed to get to your longer-term model?

Kevin Michaels

Well, I think where we’re really targeting, and I think I tried to say this during the presentation is we’re targeting our gross margins to be the high-20s, low-30s area. So I think around, you know, around this 30% area, you know, there’ll be some fluctuation, but minor, but we think that because the level we are for this year.

Clearly, our goal is to get to the 10% level in operating income. You know, we’re close, but we haven’t gotten there yet. So hopefully as we go through the year we’ll get there.

I think, as Ron mentioned, the first part of the year, the first quarter, you know, you have some seasonal slowdown there. It usually runs around 15% from the prior quarter, in those kinds of ranges. That’s normal. But you know, clearly our guidance for the year reflects some good growth overall. As I mentioned the midpoint on the guidance range of 650 to 680 represents over 12% growth annually.

So you know, clearly as we go through the year, we expect some better revenues as we go through the year and that shall allow us to hopefully hit our operating margin targets.

Charles John – Canaccord Genuity

Okay, great. And Ron, the last one for you. Just when you look out longer term and think of the LTE and the various carrier deployments that [inaudible] this year, maybe you could just talk about the strategic position relative to these LTE builds.

Ron Buschur

Well, I think we’re in an excellent position when I look at the selection criteria of our products and solutions across the carrier arena. I think, as you can see from our Antenna deployments as well as our Tower-mounted Amplifiers and some of our Base Station Subsystems, we have had a tremendous growth in the LTE segment of our business, specifically with two large operators here in North America that are building out and one in Europe. So I’m very happy with the selection criteria and certainly our ability to deliver large quantities, not samples but large volume quantities of all these solution sets across the product portfolio.

Charles John – Canaccord Genuity

Okay. Thanks, guys.

Kevin Michaels

Thank you.

Operator

And the next question comes from the line of Steve O’Brien with JP Morgan. Please Proceed

Steven O’Brien – JP Morgan Securities Equities

Hi. Thanks for taking my question. The shift this quarter, I mean, I think on a year-over-year basis the growth was very strong for North America, you know, on a sequential basis as you expected, I guess. Actually, the question might be do you think this was sort of a normal sequential decline for North America in terms of seasonality? And then as we look into early part of 2011, do you expect that trend to sort of hold a more front-end loaded spending out of North America, LTE builds, you know, followed by strength in the back half of the year from Asia?

Ron Buschur

We certainly think that we’ll see some additional build outs in the beginning half of this year regarding some of the LT deployments. Keep in mind, a lot of the deployment schedules are based on completions and milestones of building out these networks. That doesn’t happen overnight. I think that the North American Operators did a pretty good job of building out a substantial quantity of sites and we continue to look forward to the growth that we think that they’ll achieve and see during this period of time.

You also have to keep in mind, there’s a lot of weather issues that took place in North America that may have slowed down some of their builds as well. But you know, we sense next year should be – the beginning of the year should be very good. We certainly felt comfortable and confident with the share gains that we picked up in North America and we were pleased with what we seen in Asia. And as we had indicated in Q3 and Q4, we kind of expected to see things improve within the APAC region in Q4 and continue and that’s what we believe will take place.

Steven O’Brien – JP Morgan Securities Equities

Got you there. Understood. The last quarter, I think Ron, you commented there was – there’s a lot of good coverage solution RFPs, RFPs out in the fourth quarter. You know, how is the closure rate, or the win rate for Powerwave? You know, maybe the results here from a revenue side was, you know, if I recall back to the first quarter of 2010 maybe looking for a 20 million quarter towards the back half of the year. So how can we think about 2011 in the Cover Solution business?

Ron Buschur

Well, I mean there was a lot of programs. You’re absolutely right, that were bid and that were laid out for approval and I think we did pretty well for achieving a large percentage of the wins that we had hoped to achieve there in this space.

Keep in mind as we talk about these DAS deployments, these are 6 to 10 months of deployment efforts in many cases. These are quite large programs and projects and they’re milestone based upon competition so you’re going to see lumpy types of revenue that we can recognize over the quarters as we achieve certain milestones. But we are very focused and self-committed and believe that DAS and that in-building coverage area is a very good area of business and we think we’re well positioned to grow that business.

Steven O’Brien – JP Morgan Securities Equities

Great. Can I ask, on the operating expenses side, you mentioned, Ron, some increased investments. Can you help quantify what that could potentially mean? You know operating expenses have been very stable for eight straight quarters, or you know in the $35 million plus-or-minus range. You know, with the rising revenues in 2011, opportunities from Government and other areas, is there going to be some absolute dollars spending increases?

Kevin Michaels

This is Kevin. Let me answer that. I think basically what we’re looking at is a few million dollars of additional expense; through the course of the year, 3 or $4 million spread out. The nature of the year, the first quarter gets a little bit more because of the industry trade shows, there’s a little more spending in the first quarter related to the industry trade shows because they both occur in the first quarter. But you know, over the course of the year, you know, it’s a couple million dollars spread across the year. So it’s not a large significant increase, but you know, a little bit but not much.

Ron Buschur

And the other thing, Steve, is we stressed previously, and I’d like to stress again, we have a model now that we think is scalable beyond the revenue that we have just delivered this quarter without any significant increase in our operating expenses. And I think that’s what makes us very excited about looking at the future.

Steven O’Brien – JP Morgan Securities Equities

I’ve got you. I appreciate that. And my last thing is just a point of clarification here. The non-GAAP disclosure excluded stock-comp expense this quarter, correct? So that was, I don’t know, maybe a 60 basis point, pretty small benefit on the margin line. But going forward, when you target 10%, I guess you’ll be excluding those stock-comp expenses in the future?

Kevin Michaels

Yes, we will. We excluded – and in the press release there’s a detailed breakout so you can see where those are and exactly how much they are. But we’ll be breaking those out going forward.

As our stock prices rebounded as you know over the last year, the value of that comp expense will increase as we go forward.

Steven O’Brien – JP Morgan Securities Equities

Thanks for that, Kevin.

Kevin Michaels

Sure.

Operator

(Operator Instructions). And the next question comes from the line of Amir Rozwadowski with Barclays Capital. Please proceed.

Amir Rozwadowski – Barclays Capital

Thank you very much, and good afternoon, Ron and Kevin.

Ron Buschur

Good afternoon.

Kevin Michaels

Good afternoon, Amir.

Amir Rozwadowski – Barclays Capital

I was wondering if we could dig a bit more into your, pardon me, revenue outlook for the year. There has been some discussions about opportunities perhaps at another North American Carrier that’s looking to consolidate some of its networks in deploying multi-bank antennas. I was wondering what you thought of that opportunity and if that – any growth around that opportunity was factored into your guidance for 2011?

Ron Buschur

Well, Amir, we’re very excited about that and obviously, you know that we’ve been aggressively providing them units for their trial cities and we think that we’re well positioned to benefit from that build out if they do that consolidation. But keep in mind, the growth that we have outlined for this quarter is well above what the analyst are predicting for the growth for the year within our segment. So we’ve factored in some upside and obviously, you know, we think that there’s some other potential upside that we may be able to achieve if we’re successful. But we think right now it’s best that we focus on what we believe we can deliver so we can now build upon this last year’s success and meeting our guidance and making sure that we execute again on our financial plan that we have in place. But there’s several opportunities, not just in North American, but in Europe as well.

Amir Rozwadowski – Barclays Capital

Great. So is it fair to characterize that as, you know, do you expect some is there, but perhaps, you know, steady execution of your plan would be upside to this outlook?

Ron Buschur

Yeah, in some cases that would be true, yes.

Amir Rozwadowski – Barclays Capital

Okay. That’s great, Ron. And then you have been talking a bit more about some of the vertical opportunities, particularly in the Government where you’ve been focusing some of your attention. I was also wondering if you could provide us an update in terms of some of those opportunities. Have we started to see some of that filter through to your topline or is that also another initiative that we expect, you know, perhaps a little bit more visibility as we progress through the year?

Ron Buschur

No, I think you’re going to see that as we progressed through the second half of the year as I had indicated last quarter. We have signed some agreements with several large integrators to provide them solutions and products. And we’re just in the beginning stages of developing some of those products and we hope to see the benefit of that maybe at the late half of – the first half of this year or the early half of the second. So I think it’s going to be an opportunity that will benefit Powerwave’s topline, obviously, but more importantly it will allow us to leverage our research and development dollars across these other vertical markets and leverage our expertise globally.

Amir Rozwadowski – Barclays Capital

Great. And then lastly, if I may Ron, on the Antenna Systems side of the business, I mean, we’ve been talking a bit now for a couple of quarters about some of the upgrade cycle taking place in North America. And obviously we’ve seen commentary by the few largest carriers in terms of their aggressive rollout. Can you give us an update in terms of characterization of build outs within other regions? I mean, do you start to see or expect to see some of those build outs occur in other regions at a similar pace, at a more aggressive pace? I’m just trying to characterize if it’s still largely a North America trend over the next couple of quarters or are you starting to see similar trends occur, discussions occur within other regions?

Ron Buschur

Well, we do think that we’re going to see some build outs in parts of Europe. You know, we built out LT Advanced Network in Sweden, one of the operators there. And they continue to see the benefits of that. Our discussions with several of the large network operators in Europe has led us to believe that they’re looking at enhancing their networks for this next year to build out the next generation of technology there.

And then you still have a pretty compelling story for the existing 2G-3G and some of the WiMAX products in some of the emerging markets such as Africa and Latin America as well. You know, it’s not just the next generation of LTE deployment that we’re exciting about and we’re seeing the benefit it’s really across the board. But I think to answer your question you’re going to see North America continue to lead on the LTE deployments and I think we’ll see other operators in Europe start picking up the pace and building out their networks. And we do know that several of the operators in Latin America have the desire to build out their networks as well. And we think Asia may be a little bit slower to follow and the emerging markets are going to be building out, we think a much simpler network short term.

Amir Rozwadowski – Barclays Capital

Great. Thank you very much for the color, Ron.

Ron Buschur

You’re welcome.

Operator

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

Scott Searle - Merriman Capital

Hey, good afternoon. Hey Kevin, just a quick clarification of an earlier question on OpEx, talking about increasing 3 to 4 million for the year. Is that off of the base in December of 35.8 million or is that an annual number?

Kevin Michaels

That’s an annual number, you know, for the whole year.

Scott Searle - Merriman Capital

Okay. And just, you know, a couple of interesting points in terms of the mix this quarter, you know, it seems like Nokia bounced back after being a little bit soft. Is that sustainable at all to a North America that was down a little bit sequentially? Is there anything going on there to comment on?

Ron Buschur

Well, we certainly think that Nokia, you know, it’s cyclical based on their end, as you know Scott, but we believe that we’re in a good position there to maintain the business and we’re doing everything we can to try to grow that business. As far as North America, you know, we were very pleased with what we’ve been able to pick up and gain this last quarter and what we see in demand this quarter. So I wouldn’t read anything into that. If anything, I think, you know, we were taxed to build just about anything that we could for one of the North America operators towards the end of the year and a lot of it had depended on some pretty poor weather conditions and lack of ability maybe in some regions to build out those networks.

Scott Searle - Merriman Capital

But Ron, there were no component constraints that landed you guys this quarter, or was there a little bit of that?

Ron Buschur

No, we think most of the component constraints are behind us. We had at the beginning of the quarter, a little bit of issue with the products and lead times that we had maybe placed, let’s say two quarters before that, on just delivering of the product, but that didn’t hinder our ability at all.

Scott Searle - Merriman Capital

Okay, and APAC bouncing back, is anything going on in India now? You’re starting to get some better visibility there?

Ron Buschur

Yeah, I mean, as we talked about last quarter, we had anticipated I think maybe yourself or someone asked a question, do we think that the APAC region was going to grow and did we think that we would see an improvement there and we were very optimistic that the APAC region would be an area of growth for us and we’ve certainly seen that growth. We think that will continue and part of that is, again, on the license being granted on the 3G and several of the operators aggressively holding that out, and our relationship with an OEM who’s been awarded that.

Scott Searle - Merriman Capital

Okay. And on the outlook for 2011, in terms of that range, 650 to 680, thanks for providing the annual guidance. But can you give us, you know, what is actually being built into some of your expectations? And the big swing factors there, I think to one of the earlier questions, it sounds like there’s an assumption that some vertical revenues start to kick in in the second half of this year. But you know, what else are you assuming? It doesn’t sound like you’re assuming any necessarily big wins. It’s more blocking or tackling. Can you take us through some of the verticals and the big assumptions that kind of comprise that range?

Ron Buschur

Well, I guess, Scott, I’m kind of shocked that you don’t think that we’re expecting any big wins. That percentage of growth compared to what the market growth is, is pretty dramatic. So yeah, we expect to see some wins there and just in the Wireless sector. In the second half we expect to see a reasonable contribution, but it’s not going to be hundreds of millions of dollars in the Government. It’s going to be smaller incremental revenue that should benefit our top line. But we’re expecting to see some wins and it’s not tackling and continuing to block. As I said earlier, we’re going out aggressively, try to gain market share and to continue our focus on our sales and put extreme focus around sales in the right geographic locations to capture the market that we think is afforded to us based on our products.

Scott Searle - Merriman Capital

I apologize, I didn’t characterize that correct. Let me – it’s not – there’s nothing in the numbers in that range that you haven’t identified?

Ron Buschur

That’s correct.

Kevin Michaels

I mean, I think to further what Ron’s saying, you know, we obviously think that we’re going to grow faster than the market or segment. But I think the point you’re asking, which I would agree with is that no, we’re not looking for huge upsides. We think the market – we think we’re positioned well and it isn’t counting on our verticals like a Government business to be major contributors in the year. As Ron mentioned, you know, we’re still at the early stages there. The actual revenue contribution is quite low. So I think overall we would say that we think we’re being reasonably conservative in our guidance and that there is good upside potential.

Scott Searle - Merriman Capital

Just lastly, Kevin, two modeling questions. You know, what should we be assuming in terms of net interest income going forward given the big currency hit this quarter? Is that something that we should be anticipating going forward? And the fully diluted share count now as we, you know, given the convert?

Kevin Michaels

Well the – interesting comment. I don’t have that. We don’t have that yet. We wished we did. That was up there. In terms of the foreign exchange, I mean, if you really, if you look at it over the last, you know, you can go back the last two years, we fluctuated around and you know, we don’t – I think I can tell you where we sit right now. We’re sitting at a small-gain position because the dollar has weakened again. And in the quarter, I think as I mentioned, we got hit this last quarter, half of the hit coming out of the Chinese currency strengthening a little bit. So that said, you know it’s hard for us to forecast that. If you’ve got a good forecast for it, we’d love to see it. But you know, the effects have been minimized over the years. We’ve done a lot to move our hedging and we’ll continue to do more of that. We’ve minimized our exposures. That’s just a translation exposure, so it’s a non-cash hit. It’s really an accounting function so we think we’re doing a good job but we’ll continue to look at further trying to hedge that.

So I think hopefully the effects will not be very significant. That you know, we – you know, even out and then out net interest expenses, you know, it’s running a little bit around $2 million a quarter, roughly.

Scott Searle - Merriman Capital

Great. Thanks, guys.

Kevin Michaels

Thank you.

Operator

And the next question comes from the line of James Faucette with Pacific Crest. Please proceed.

James Faucette – Pacific Crest Securities

Thank you very much. I wanted to follow up on questions related to the different geographies, etcetera. A lot of times we see differences in specifications across geographies and that results in being – having a little bit different equipment requirement. As you look forward to the build out that you’re anticipating in the different geographies around the world, are you seeing different specifications at the merge at this stage that could require a bit more of product portfolio diversity or are things pretty uniform such that you think you’ll get good scale advantages on the product portfolio and development you’re currently doing?

Ron Buschur

Well, I think part of this, James, what’s a real advantage is when you get to an LTE product and network, the specifications are pretty consistent across the geographic locations. It depends on how people want to deploy the networks and that equipment that may vary, but we find that the requirements and specifications are pretty similar across the board.

Now, certainly in parts of Asia, you know, we see people that claim that they adhere and they meet some of the requirements and the specifications, and when we test it we somewhat question ourselves how they can achieve those results or lack thereof results with the products that they’re offering. So one could say maybe the standards aren’t always equal across the board, but we’re pretty pleased with the leverage and we should be able to utilize with our common product platform and our designs that we have designed that are forward compatible, not just to the LT network deployment and technology, but to the next generation of IP-based solutions as well. And we’re going to continue to leverage those platforms moving forward. So I think it’s a good opportunity for scale, our production capacity and utilization of that capacity, as well as our buying power that we should be able to achieve with the economy, the scale driving a common product through the factory.

James Faucette – Pacific Crest Securities

And then, when – just I guess along those same lines, so then when you look at the – at product development going forward, do you think there’s room for you to further extend your performance advantage versus some of your competitors? Or is this going to be a situation where the requirements and the expectations out of your portfolio are going to be relatively stable for the next few years?

Ron Buschur

Well, we think that we have a technology advantage today in our product offering when you look at the companies that have chosen us and the awards and the percentage of the awards that we’ve been awarded when you look at percent of business. So with that, I think we’ve seen some advantage. But when we’re looking at the next generation of technology and how we can leverage some of our R&D dollars, we’re looking at things that are going to increase the content that we provide to the end customers to build out these networks and not necessarily just the component performance and component price associated with, let’s say in the Antenna or an Amplifier or a Repeater. If you understand the direction I’m heading with that.

James Faucette – Pacific Crest Securities

Yeah, absolutely. That’s great. Thank you very much.

Ron Buschur

You’re welcome.

Operator

And the next questions comes from the line of David Marsh with Odeon Capital. Please proceed.

David Marsh – Odeon Capital

Thanks for taking my question. A couple housekeeping items real quickly. What was depreciation-amortization in the fourth quarter, please?

Ron Buschur

The number – it will – the exact number will end up being filed in our K. I think roughly depreciation-amortization is about 5.7 million roughly.

David Marsh – Odeon Capital

Okay. And could you give a rough estimate of what the inventory obsolesce charge would have been in the fourth quarter, please?

Ron Buschur

We don’t break that out. It wasn’t significant.

David Marsh – Odeon Capital

Okay. And do you have an initial execution for capital expenditures for Fiscal 2011?

Ron Buschur

You know, we’re right there around the same range, so we’re running around, you know, I would say around an $8 million to the year. So $2 million, or a little bit less per quarter.

David Marsh – Odeon Capital

Okay, great. And I guess one question I had with regards to – you know, from a strategic standpoint, when you look at some of the other larger players in the United States and then you talk about the opportunity with them and your expectations in terms of their ability to actually roll out. Obviously we’ve seen some difficulties for some of the, but you know, there are others kind of waiting in the wings and [inaudible]. How do you characterize you opportunity there?

Ron Buschur

Well, I think we’re in a very good position with – I assume you’re talking about one of the new operators with the support of Nokia and their network capabilities and our long-standing relationship with them. We feel like we’re in a very good position.

David Marsh – Odeon Capital

Great. Congratulations on the turnaround, guys. It’s a really great year, and best of luck for next year.

Ron Buschur

Thank you, David.

Kevin Michaels

Thank you.

Operator

Ladies and gentlemen, this concludes the question-and-answer session for today’s call. I would know like to hand the call over to Mr. Ron Buschur for closing remarks.

Ron Buschur

I want to thank everyone for your support and for joining us today, as well as your continued interest in Powerwave Technologies. We look forward to sharing with you our results for the first quarter of 2011.

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