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Powerwave Technologies, Inc. (NASDAQ:PWAV)

Q2 2011 Earnings Call

August 4, 2011 5:00 pm ET

Executives

Tom Spaeth – Vice President, Treasurer

Ronald J. Buschur – President and Chief Executive Officer

Kevin T. Michaels – Chief Financial Officer and Secretary

Analysts

Matthew D. Ramsay – Canaccord Genuity

Steven O'Brien – JPMorgan

Scott Searle – Merriman Capital, Inc.

Lawrence Harris – C.L. King & Associates, Inc.

Ted Moreau – WJB Capital Group, Inc.

Tony Rao – East Shore Partners

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Powerwave Technologies Incorporated Earnings Conference Call. My name is Caris and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I would now like to turn the call over to your host for today Mr. Tom Spaeth, Powerwave’s Treasurer. Please proceed, sir.

Tom Spaeth

Thank you. Good afternoon, and welcome to Powerwave Technologies second quarter 2011 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 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, future cost savings related to our cost reduction activities, demand levels for the company's product lines, projected growth in market share, trends in the wireless infrastructure market, the timing of product deliveries and future orders, the company's ability to enter into and compete in vertical markets for its products such as Government and Defense markets, common stock prices, the company's ability to resolve new product production issues, 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 which are intended to qualify for the Safe Harbor and the liability established by the Private Securities Reform Act of 1995.

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-K for the fiscal year ended January 2, 2011 and our Form 10-Q for the quarterly period ended April 3, 2011 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 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'm going to turn the call over to Kevin Michaels, Powerwave's Chief Financial Officer.

Kevin T. Michaels

Thank you, Tom. And with all these 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 second quarter of 2011 were $170.6 million and we reported a GAAP net income of $7 million, which equates to basic and fully diluted earnings per share of $0.04. This includes 700,000 of non-cash debt discount amortization expense related to certain of our outstanding convertible notes, and $1.9 million of non-cash pre-tax stock based compensation expense in the quarter. All of these charges and amortization totaled approximately $2.7 million for the second quarter.

On a pro forma basis, excluding the restructuring and impairment charges, the debt-related charges and the stock based compensation expenses for the quarter, we generated operating income equal to 8.6% of revenue and pro forma net income of $9.2 million, which equates to a pro forma net earnings of $0.05 per share.

Now looking at our revenues on a geographic basis, the North American market continues to be our strongest market as was expected. Our total Americas revenue for the second quarter was approximately $80.2 million or 47% of revenue. Our total Asia-Pacific sales were approximately $41.8 million or 25% of revenue and total European and other international revenues were $48.6 or approximately 28% of revenue.

In the second quarter, Antenna Systems product group sales totaled $76 million, or 45% of total revenue. Base Station Subsystem sales totaled $77.6 million or 45% of revenue and Coverage Solutions sales, totaled $17 million or 10% of revenue.

The total 3G-related sales were approximately $60.1 million or 35% of our total revenue. Our 2G and 2.5G-related sales were approximately $67.5 million or 40% of revenue and our 4G sales, which includes LTE and WiMAX were approximately $43 million or 25% of revenue. In terms of our customer profile in the second quarter, total OEM sales accounted for approximately 29% of our total revenues and direct and operator sales account for approximately 71%.

Nokia and Siemens was no longer our single largest customer during the quarter representing approximately 16% of our revenues in the second quarter. One of our North American direct resellers reached 28% of revenues for the second quarter and one of our Eastern European direct resellers reached 15% for the quarter.

Moving onto gross margins on a GAAP basis, our total consolidated gross profit margin was 28% in the second quarter. In our press release on page three, there is a table with a reconciliation of the various factors impacting our gross margin for the quarter.

On a pro forma basis excluding stock compensation expense, which totaled $200,000, our pro forma gross profit margin was 28.1%.

As a note, for the second quarter of 2011, we saw a significant improvement in our gross margins from those in the first quarter of 2011, which were impacted by a Coverage Solutions project cost estimate adjustment as well as significantly higher freight cost. While our gross margin is with in our target operating ranges, we did incur higher than expected warranty cost, as well as we continue to experience some slightly higher manufacturing cost during the quarter.

Next, I will review our operating expenses for the second quarter. Our sales and marketing expenses were $8 million; research and development expenses were $15.7 million, and G&A expenses were $11.3 million. Our total operating expenses, including $1.7 million of stock compensation expense were $35.1 million for the quarter.

On a pro forma basis, which excludes restructuring charges and stock compensation expense, our total operating expense is equal to approximately $33.4 million.

Now, I would like to take a look at our operating income for the quarter, for the second quarter we saw a significant improvement in operating income reaching 7.4% of revenues on a GAAP basis and 8.6% of revenues on a pro forma basis. In terms of other income and expense, we recorded a total of approximately $4.2 million of other expense in the second quarter of 2011, includes another expense of approximately $700,000 in non-cash debt discount amortization expense during the quarter associated with our 1.875% subordinated notes.

In addition during the quarter, we recognized a net foreign currency translation loss of approximately $1.5 million, which was due primarily to the stronger Chinese RMB. This loss is also included in other expense.

On a pro forma basis, excluding only the debt discount amortization for the quarter, our net other expense is $3.4 million. For the second quarter, we incurred a tax provision of approximately $1.5 million or a rate of approximately 17.4%. We continue to evaluate our future tax rate based upon the diverse international operations. We currently estimate our effective worldwide tax rate will be between approximately 20% and 25% for 2011. I want to stress that this estimate will fluctuate based upon our actual results.

Next I'll review our balance sheet. Total cash at July 3, 2011 was approximately $49.7 million of which $1 million is restricted cash. For the second quarter, our cash flow from operations was the use of approximately $10.8 million and our total capital spending was approximately $1.7 million in the quarter.

Our use of cash during the quarter is primarily related to our sales increase and resulting increase in the accounts receivable, as well as our increase in the inventory which is related to our efforts to utilize more ocean shipping as opposed to air freight in order to better control our freight cost.

Our net inventory was $69.7 million, this represents inventory turns of 7.1 times, which is an improvement from the first quarter turns of 6.5 times.

Our total net accounts receivable was $213.5 million, while our AR day sales outstanding decreased slightly to 114 days from 116 days. We currently anticipate that our DSOs should decrease during the third quarter as we anticipate increased collections throughout the third quarter.

After the end of the quarter, we refinanced our outstanding 1.875% Subordinated Convertible Notes with the private placement of $100 million of 2.7% Senior Subordinated Convertible Notes, which have a first put date in 2018. At the same time, we retired $42.6 million of the 1.875% notes leaving approximately $15.3 million of the 1.875% notes outstanding.

In addition, we can currently repurchased a total of 11.2 million shares of our common stock. All these transactions closed on July 26.

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, as we state in our earlier press release, we continue to believe that we will achieve our 2011 annual revenue guidance of $650 to $680 million.

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

Ronald J. Buschur

Thank you, Kevin, and good afternoon everyone. For the second quarter, we were able to grow our revenue by 25% sequentially from the first quarter of this year and by 18% when compared to the same period last year. I believe that this demonstrates the demand for Powerwave's advanced products is strong, and these products are very competitive in the market place.

In addition, we improved our gross margins from the first quarter of this year where we continue to control our operating expenses, which enables us to drive strong profitability on both GAAP and pro forma basis for the second quarter.

From an inventory turns perspective, we continue to focus on our lean strategies to improve our overall performance and we have made great strides this quarter in improving our inventory turns to 7.1 times versus the first quarter turns of 6.5 times.

As Kevin mentioned in July, we refinanced our outstanding 1.875% Subordinated Convertible Note, with a private placements of $100 million or 2.75% Senior Subordinated Convertible Note, which has a first flip date of 2018, which we believe should address any concerns around our balance sheet that may have or existed. In addition we repurchased the 11.2 million shares of our common stock. We continue to believe that we will be able to achieve our annual revenue guidance of $650 million to $680 million for 2011.

I believe that we are well positioning this company for both short-term and long-term success, which should generate positive shareholder value. Our strategy focused on driving our sales towards integrated products and solutions, which provide higher gross margins will continue to have a positive effect on our business.

I do announce that we have commenced multiple trials for our new Active Antenna array products here in Santa Ana. We're excited about moving forward with these actual trials, which we believe will further demonstrate the significant advantages of this product and improving coverage capacity of the cell side while significantly reducing the CapEx expenditures.

I believe that our focus on customer diversification and more profitable business has us on the right track as shown in our financial results. We need and we will continue to grow our core business while expanding into additional market segments such as the government sector, where we believe we can create true solutions utilizing all of our technology and engineering expertise. These solutions such as our Active Antenna Array products or ICC programable filter, Picocell products along with our RMDU and all of our other current advanced solution portfolio products, in addition to the state-of-the-art facilities in cost effective geographic locations combined with what we believe are the best personnel across all the disciplines has positioned Powerwave for the long term continued success.

I continue to be very excited about the prospects for our business over the next few years, the demand for wireless data is exploding, and we’ve seen exponential growth in the use of smartphones utilizing voice, video, and data. This demand is still in requirements for cost effective infrastructure deployments, for upgrades of both 3G as well as new deployments for 4G. In addition to our continued emphasis on new product development, we are putting increased emphasis on our sales additionally to ensure that we capture market share in these expanding and growing markets. We believe that these investments we have made, as well as the ones that we will continue to make will further improve our market position and enable us to capture new market share as an infrastructure is build out in the years ahead.

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

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

Question-and-Answer Session

Operator

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

Matthew D. Ramsay – Canaccord Genuity

Yes, thank you. This is Matt Ramsay on today for Mike. Good afternoon, Ron and Kevin.

Ronald J. Buschur

How are you doing, Mike?

Matthew D. Ramsay – Canaccord Genuity

First I’d like Ron to ask for your thoughts on the very dynamic macro environment. I guess, let’s say at least, (inaudible) funding issues, and their discussion on both LTE and WiMax network plans, plus Verizon and AT&T giving somewhat different directional back half wireless CapEx guidance. Could you discuss your overall views of the carrier spending in North America and effects on your business for the back half?

Ronald J. Buschur

We’re pretty confident still that we should be able to achieve the guidance that we had given for the full year. Obviously, the clarity of the market that we see with the uncertainty of Clearwire, some of the uncertainty that exists since AT&T T-Mobile have combined has made a little more difficult to predict the exact time of some of the build-out in the expenditures. But we do believe that we’re going to continue to see certain growth in North America and is going to be strong. I guess we’re very pleased as well to see some of the continued growth and expenditure in Europe, but the macroeconomic environment certainly makes a pretty difficult and I think we’re all watching our business and trying to figure out how we can run the business more effectively based on the uncertainty of the U.S. economy as a whole.

Matthew D. Ramsay – Canaccord Genuity

All right. Thank you for that color. And Kevin one question for you on OpEx, it looks like your OpEx was down around $2.5 million sequentially after the trade show expenses in Q1, it seems a reasonable for it to be down, but I noticed that all three categories of OpEx were all down sequentially. Could you give an update on your OpEx expectations for the rest of the year particularly split out by other different sectors?

Kevin T. Michaels

Sure, I think we’re really kind of operating within our targets, we’re doing a little bit better than targets, but our target for the year has been trying to keep it around the $35 million level before stock option expense and we’re down about $33.5 million. So we’re just running a little bit ahead I wouldn’t change our overall outlook for the year, I’d believe our expense targets were where they’ve been at for the year. Obviously, we like every business we’re just watching expenses closely.

Matthew D. Ramsay – Canaccord Genuity

All right. Thank you very much.

Kevin T. Michaels

Thank you.

Operator

And your next question comes from the line of Steven O'Brien with JPMorgan. Please proceed.

Steven O'Brien – JPMorgan

Hi, thanks for taking my question. First upon the outlook for 2011, I just want to clarify and I don’t want to split the hairs, but today Ron and Kevin you both expressed confidence in reaching the 650 to 680 range, I think the 8-K on earlier this or back in July, kind of qualify that is expecting to reach the low end of that range, though, are you marginally more positive about being in the range over the last month?

Ronald J. Buschur

I think we’ve always been fairly confidant that we’d be within the range that we had given. What we try to do for the investors when there were some concerns earlier in the quarter, there was rumors that weren’t even going to meet the projected revenue for the quarter, that’s why we came out and announced that we’d be within the guidance. We’re still comfortable that we can achieve that, the macroeconomic environment makes it difficult as you can imagine. I think every business is seeing a challenge right now and what the market has done today. I think in the clear indication of some of the uncertainty there in the market place, but I think we’re well positioned and we’re going to continue to focus on taking advantage of the opportunities in North America and then Europe as well as the APAC region.

Steven O'Brien – JPMorgan

Great. The gross margin in this quarter, Kevin outlined there was some warranty in manufacturing expense that they’ve done much favorable. Can you add a little more color there and perhaps how quickly this is kind of one quarter phenomenon, just looking back at 2010, towards, rather three quarters you were at 30% gross margins on lower revenue. So just wanted to see if this is one quarter saying and how you will resolve the manufacturing part of it?

Kevin T. Michaels

Sure, well the first thing I’d say is, we’re not really going to get into the business of projecting our gross margin, that’s not something we give exact guidance on. So within our range, our range has always been in the mid to high 20s, that 25 to 30 range. So I think we’re well within that range and our goal is to remain in that range. We did for the quarter, we encountered some higher repair cost. Right now, I can’t say if those will continue or not, but we’re obviously working on those. We’ve seen some slightly higher cost in a few products and obviously from a another perspective of our overall margin is effected by mix and our mix for the quarter wasn’t as favorable as they were last year, so obviously we’re working on that in trying to improve the mix, but we’ll see how that goes throughout the rest of the year.

Steven O'Brien – JPMorgan

And can you just elaborate on the last point, like when the mix might be, should we look out for in terms of margin volatility?

Ronald J. Buschur

Alluding to a little bit is the mix between some of the OEMs purchasing, some of the advanced products versus selling them directly to the network operator that does have any effect on the margins. And then as you’d indicated we did have some repairs and warranty and difficulty ramping and continuing to ramp some of these advanced products, so pretty advanced electronic products. They are no longer passive products, so we believe we have a handle on it and I think the product mix and the margin issue should stabilize and we don’t anticipate it being any worse, as Kevin had indicated, we believe we are with in the range that we continue to guide our investors on and we continue to build our financial plans around to be in the upper 27%, 28% range between 25% and 30% was the guidance that we always have given.

Steven O'Brien – JPMorgan

Catching around. Thanks. And just roughly maybe you can drive a little more color on the trail activity and the interest levels around the next generation products, Active Array Antennas, Picocells, what stage of trials we’re in and what maybe the timing for going to market?

Ronald J. Buschur

Well, clearly the Active Array, its the first trial sets that are being done. We have two large North America operators participating in that trial as well as one European operator and then one Latin America operator, trailing this product, which we think having that type of trial activity is pretty good. It certainly is estimate that they believe in those technology and they think it’s going to be a cost effective solution.

And then following on as we get to the beginning of the fourth quarter, is when we told our customers that we we’ll be presenting them with an opportunity to trial a Picocell. We have it demonstrated in our facility in Santa Ana. So we think those products are advanced products that should give the operator, a real competitive cost advantage when they are looking at the CapEx expenditure for their network as well as the operating costs, if these are dream solutions that all represent real advantage when you look at the utility cost and the ongoing maintenance of this product.

We’re excited about that I think it’s probably going to be as you know when you do trials in new products that’s probably two to three quarter period that they run the trials before you ever hear any results and considering how many of the operators are just now beginning to maybe get to a stage where some of their LTE rollouts or maybe just starting to meet some of their expectations, I think it’d be premature to think that they are going to go and change out a complete network immediately yet in the next two to three quarters with these Active Array, that it could be a supplement to some of the base stations, subsystems that are being bought.

Steven O'Brien – JPMorgan

Great. Thank you very much.

Operator

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

Scott Searle – Merriman Capital, Inc.

Hey, good afternoon, just to follow-up on the gross margin question, Kevin, you mentioned mixes as part of the issue, but OEM mix was down in the quarter. It sounds like there is some warranty costs, it’s unclear if they’re continuing. But you mentioned as well advanced products and those are the newer products, you take in terms of the advanced antenna arrays, et cetera. Is that impacting and being expensed now through the P&L, even though we really haven’t ramped those up yet, or is there something else going on there that I should be aware of?

Kevin T. Michaels

Scott, in terms of mix it’s more than just OEM verus operator, it’s down to our actual products across many categories. So we don’t normally get that granular but obviously within all of our product categories we have ranges of products and ranges of margin and we the bigger things in the quarter were definitely some warranty costs. We are seeing some slightly higher cost on the manufacturing side and within some mix there we saw slightly less favorable mix. But it’s not a mix of OEM versus operator, it mixes within our product categories. And to be honest we just don’t get that granular on a public scale, but those are things obviously we think that we can deal with.

Scott Searle – Merriman Capital, Inc.

Kevin, just a follow-up on the manufacturing issues. So is that for pre-existing products that there was some issue or is it for some…?

Kevin T. Michaels

The development products are not, those costs are not in cost of goods sold. The margins only effect products that are actually in production. The development products are not though the expenses are not in that.

Scott Searle – Merriman Capital, Inc.

Got you.

Ronald J. Buschur

Keep in mind that we’re still at 28%. I mean we are at close to the upper end of that range. We are obviously focused towards the 30% and that’s what we would like to achieve but we’re certainly at the upper end of what we had anticipated from the range that we had given as guidance.

Scott Searle – Merriman Capital, Inc.

And Ron may be a follow-up on that. You had been bumping your head on that 30% range. Now, clearly I think the newer project, the Active Antenna Array, the Picocells et cetera should have higher gross margins and therefore nice contribution. But can you get back to that 30% range without contribution from some of the newer product portfolio?

Ronald J. Buschur

We absolutely believe that we can. And as Kevin had indicated, we think that we get back towards the upper end as we have talked about. But right now we have some issues that we have to deal within the newer products that we’re ramping in high volume. I think one of the areas of expertise at least I think all the investors and yourself and the analysts always has given faraway credit for is our capabilities to manufacture the products with the highest level of quality and get the yields up that very quickly, and we will do that. And the team is working on it and certainly that’s not something that causes me to lose any sleep at night.

Scott Searle – Merriman Capital, Inc.

Hey, Ron, just a follow up on the Picocell, you sound like you are going to trial in the fourth quarter. Did that slip a little bit? Is there something going on there or is it just a staging issue from an operator standpoint?

Ronald J. Buschur

It’s really just the acceptance of staging of the operator. I think the deployments as you know as a whole across North America or maybe a little behind what everyone is anticipated.

Scott Searle – Merriman Capital, Inc.

And maybe just in terms of the guidance for this year, you are still maintaining the higher end of the range as well. Could you give us an idea about, how do you think about the spread, between that 650 to 680 in for 2011, what would have to happen to get you to the higher end of the range, is it Sprint network vision kicking into gear or is it some other item that we’re not thinking about it current time?

Ronald J. Buschur

I mean obviously, we think that there is the T-Mobile, AT&T acquisition has some impact on that, Sprint has some impact on that and we still have expectations and unfortunately with our governments being somewhat at a stalemate here over the last month or so of our government business adding to some sales and that could contribute as well.

Scott Searle – Merriman Capital, Inc.

Lastly if I could, just looking at some of the new products, you just don’t get them ramped up. If you can give could give us an idea maybe by the fourth quarter, what sort of contribution if I drill in government solutions as well, what that could look like by the December quarter, and kind of the range of expectation we should be thinking about in 2012 for active antenna rates, Picocells in government solutions, thanks.

Kevin T. Michaels

Ron, do you want to take a shot at that.

Ronald J. Buschur

Yeah, if you look at the range of products we believe that the active array and the Pico will start to ramp as we enter into the first part of next year as we talked about, we anticipate as we always said to have a modest contribution with the government sales this year. We still believe we’re on track to achieve that and based on some previous discussions that we have in some of the budgetary constraints that are in place, we still believe that our products are going to get accepted and we’re going to be able to announce a significant opportunity for Powerwave to exit this year and demonstrate our capabilities in the government sector and set those up very well for 2011, Scott. And in 2011, we’d like to see that percent of our sales to start climbing towards the 7% to 10% in the government sector.

Scott Searle

Great, thank you.

Operator

And your next question comes from the line of Larry Harris from C.L. King. Please proceed.

Lawrence Harris – C.L. King & Associates, Inc.

Yes, thank you. I was interesting in some of the trends on a geographic basis. At least according to what I was estimating, Asia-Pacific region came in a little softer than I had thought and be interested on your current thought as to what’s happening or what you see happening in Europe?

Ronald J. Buschur

My guess Larry, we were – Asia came in about where we had anticipated, we’ve seen a little bit of a slowdown there as some of the operators were trying to fight for the 3G license that they had not been awarded in India especially.

In Europe, I think the network operators there and the capacity of the networks that are in place are starting to be attached to the level that they no longer can support, the capacity that they have placed on them and we’re starting to see the operators look at ways to improve the coverage and capacity of that network and that benefits as well.

And Eastern Europe has been pretty strong for us and Western Europe has been very good. So we’re starting to see a pick up there, which has been lagging for many quarters.

Lawrence Harris – C.L. King & Associates, Inc.

Very good. And I noticed you had a several distributors or resellers that show up is greater than 10% customers this quarter. Do you think this could be a trend here over the next few quarters and is there any impact on margins if you have more sales for the distributors?

Kevin T. Michaels

Larry, it’s Kevin, they’re not distributors, they’re direct resellers. And actually they’ve showing up for a while, you’re just seeing more business there in certain markets, I mean, I think as Ron mentioned, I mean, if we look in Europe, it’s Eastern Europe where we’re really seeing strength in Eastern Europe, Western Europe is being kind of flat. We deal with a reseller over there, a couple of them, but one them - they’re seeing the strength for us there. And in the North American market some of the large operators want to bring stuff more through some of these resellers that qualify for certain business condition.

So we have seen an increase of that and that’s really is driven by the operator’s decision. So it’s not really affecting the margin, they’re not distributors in that type of sense, so it’s not having a big impact there. So to answer your question overall, yes, we expect to continue to see that in some certain markets.

Ronald J. Buschur

Understood?

Lawrence Harris – C.L. King & Associates, Inc.

Okay. Thank you for the clarification.

Kevin T. Michaels

Sure.

Operator

(Operator Instructions) And your next question comes from the line of Ted Moreau with WJB Capital. Please proceed.

Ted Moreau – WJB Capital Group, Inc.

Great, thanks for taking my questions. I was just curious about are you still targeting about $50 million in cash flow from operations for 2011?

Kevin T. Michaels

Sure, Ted, I mean our number, we haven’t updated that, I mean, obviously, this last quarter, we were a little disappointed in our cash flow. We did have some strong collections after the end of the quarter, we collected since the end of the quarter, close to $30 million, so timing was out there and I think a lot of that’s been driven by a lot of international customers who are paying slow. We’re getting paid but they were slow. I think a lot of the economic issues out there have slowed down some payment, so we’ve experienced some of that. I think on a 12 month basis, we’ll definitely be at that kind of cash flow level. In terms of what will be the remainder of this year, it’s going to depend a lot on the working capital changes, obviously we hope to see significant reduction in our DSO between now and in the end of the year. And that should generate a fair amount of cash, but whether we get to that full number for the year, we just have to see how the working capital works. But we do expect definitely a strongly cash flow positive business the other half of the year.

Ted Moreau – WJB Capital Group, Inc.

Okay, okay, great. And then was the quarter fairly back in note and that’s why did that have any influence on the raise (inaudible) or is it really just all kind of lengthening?

Kevin T. Michaels

It had some backend loading, but its kind of similar to what we’ve had in the other quarters, so I think more of it has to do with just some lengthening in terms – I mean internationally, we are seeing people really stretch our terms and we’re seeing, in (inaudible) regions, places like the Middle East have really stretch terms out and its kind of understandable with the unrest over there, but we’re seeing a sniffing and stretch out of terms there. And in Europe, we’ve seen some stretch out in terms as well as in the Far East. And in the U.S. it has slowdown a little bit from a traditional being much faster. So we’re just, I think we don’t think it as – we think we’re kind of over hump and we are – you should start seeing that come down, but we have ramped up a fair amount there and grow our inventory as well.

Ted Moreau – WJB Capital Group, Inc.

All right.

Ronald J. Buschur

We did that on purpose, but that the working capital change is just kind of didn’t workout for us this quarter.

Ted Moreau – WJB Capital Group, Inc.

Okay, okay. And then getting back to the geographic questions a little bit here. Given the macro uncertainty in Western Europe, is there any indication at all that might -- that carriers could be pushing out LTE timeframes?

Ronald J. Buschur

Well, actually the discussions that I’ve had with major the operators in Europe and I was just one of the major operators’ supplier conference. They’re talking about continuing to rollout the LTE network here in Q4 and that was on target for what they’d always anticipated. So I think A, at least seem to be on track for what they have anticipated. Maybe some of the smaller operators maybe pushing it out certainly with the financial concerns that are in that region, it makes some sense that they would pull back. Then looking at Deutsche Telekom, T-Mobile, obviously they’re going to be a little more prudent in what they spent and how they spent based on the merger and the timing of that.

Ted Moreau – WJB Capital Group, Inc.

Okay. Great, thanks for taking my questions, guys.

Ronald J. Buschur

Thank you.

Operator

And the next question comes from the line of Tony Rao with East Shore Partners. Please proceed.

Tony Rao – East Shore Partners

Good afternoon.

Ronald J. Buschur

Hi, Tony.

Tony Rao – East Shore Partners

Hi, can you just talk a little bit about inventories. They have grown about $20 million over the last couple quarters, and just give a little insight what the rest of the year will hold?

Ronald J. Buschur

Yeah. Tony, we hope to see the inventory start to come down as Kevin and I’d talked about over the last couple of quarters. You’ve seen that our freight cost had been pretty high. And one way for us to combat that freight costs was to put more inventory on the water and carry more of the raw inventory and put it on water as well to lower the costs. And then with that we expected to see a better growth in the inventory and that’s what you’re seeing, but I do believe now we should have a steady state to where we should build the build out and meet our guidance for the year and hopefully started seeing the inventory levels come down as we exit the year.

Tony Rao – East Shore Partners

Do you have a target in mind? Where you think it might be at the end of the year?

Ronald J. Buschur

Yeah, we’d like to see it back down to where we started possibly at the beginning of this year.

Tony Rao – East Shore Partners

Okay. And then just a couple of questions about product areas, the coverage solutions area had a really strong ramp in this quarter, that was about close to 50% on a sequential basis, and you did have some issues with one project that you are working on. So can you just give me a little feedback on if that has been resolved completely in this quarter, and where the new business was, was it mostly in U.S.? Was it split internationally, a little bit of color there?

Kevin T. Michaels

Tony, I’ll make a start and then have Ron follow up. I think on that – the project that obviously, last quarter we took adjustment on that deflated from the last quarter’s business because that impacted the revenue as well as we took the charge last quarter. So that – the comparison quarter-to-quarter isn’t quite there, but we had some good strength there. I mean that project is a long-term project, so its still going on, so we believe we have an understanding with the parties but there is still further negotiations going on. We think we’re more than adequately covered for that, but it’s a long-term project, it has another couple of years to go. So it will go on. And that said I’ll let Ron speak of just the outlook in that segment.

Ronald J. Buschur

It’s not necessarily trends building out as foretold. We’ve had a couple of other operators that are starting to accept the coverage solution products and we’re making some good headway there. And we have quite a bit of work that’s being done in other parts of the world as well in the coverage solutions. So we’re hoping that as I’ve indicated all along that this segment starts growing and we start getting the acceptance of the product. Now that we have lot of our product portfolio built out around that and it appears to have some strong acceptance. So keep in mind it is cyclical as you know, because these are large venues you build them out and it takes superior time until the completions where we can recognize revenue. So it’s a little more lumpy than what you typically would see in our traditional commercial business.

Tony Rao – East Shore Partners

Yeah, I understand that. Well, being at that all old project that you said will tail down for a couple more quarters in coverage solutions. Is that where the warranty charges? You said you have higher warranty charges in the quarter, is that where the warranty charges are coming from?

Ronald J. Buschur

We had some there, that’s correct, and that’s some of the cost that we had to absorb and try to take care of and then some of the newer products that we’re ramping as well.

Tony Rao – East Shore Partners

Okay. I had seen your tunable filter demonstrations at CPIA, it looks like a very interesting product and that’s into the new active product areas. You didn’t speak about that when you talked about new products ramping and going at the trials and so forth. What is the latest on the tunable software?

Ronald J. Buschur

It is not in a trial with necessarily some of the network operators. It’s being utilized in the government, Tony, government sector. When we do the trials with the Active Antenna Array with one North America operator who has a gamut of different frequencies let’s say that may be close to overlapping and they don’t to want to have quite the guard bands that they have today. They are going to trial that tunable software in that trial, but that’s not a significant portion that we were really anticipating the use for the I command it’s really more in part of the government sector and then may be some of the emerging markets with filtering capability needs.

Tony Rao – East Shore Partners

Okay, great. I just would like a clarification, I think Ron, you had said that if I heard this correctly, Western Europe was very good and that Eastern Europe was better and then I thought later in the call you said that Western Europe was flat?

Ronald J. Buschur

No, what I was think is that it’s best to view that we are seeing right now, the question is what’s the view that we are seeing in the global market. We’re seeing a better anticipated view in Western Europe than what we had anticipated in. Eastern Europe has always been pretty strong and continues to be strong for us, but listening to and being at a supplier conference with one of the major operators there in Western Europe their anticipation is, the fourth quarter and going forward is going to be fairly strong, if that takes place, that should benefit us.

Kevin T. Michaels

Yeah, and Tony, the comment in terms of the actual second quarter, we saw a very strong strength in Eastern Europe, our Western Europe business for the second quarter was relatively flat. So that’s the distinguishing points there. And just to note too obviously, in Ron’s comments, the two members for third quarter typically Europe is on vacation throughout this month. So you see some slowdowns there in the third quarter.

Tony Rao – East Shore Partners

All right. One last question and then I’ll the next person on. Looking at all the LTE business that you are doing to-date and it continues to ramp nicely. Is that the majority of that business, is that coming from domestic or can you give me some flavor for how much of it is coming from Europe?

Ronald J. Buschur

The bulk of it today is coming from North America domestically. We are starting to see some pick up in other parts of the world, but it’s a smaller percentage, Tony.

Tony Rao – East Shore Partners

And when you look at Europe and you said, you expect to see that starting to ramp, would you expect to see the same types of products that you’re selling into 4G in the US, would you expect to see a similar type of a mix selling into the European carriers or because of competitive situations, you might see a little bit of a different mix in Europe?

Ronald J. Buschur

I think the mix may be different from a competitive standpoint, but as you know, there is a tendency in parts of Europe to use more tower-mounted amplifiers as well, Tony and bias these. So we may see our product mix to that extent to balance the uplink and downlink performance of the network.

Tony Rao – East Shore Partners

Well, thanks for answering my questions. I appreciate it.

Ronald J. Buschur

Thank you.

Operator

At this time, there are no further questions in queue. I’d now like to turn the call back over to Mr. Ron Buschur for closing remarks.

Ronald J. Buschur

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

Operator

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

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