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Harris Corp. (NYSE:HRS)

F4Q07 Earnings Call

August 7, 2007, 4:30 PM ET

Executives

Pamela A. Padgett - VP, IR and Corporate Communications

Howard L. Lance - Chairman, President and CEO

Gary L. McArthur - VP and CFO

Robert K. Henry - EVP and COO

Analysts

Ferat Ongoren - Citigroup

Joseph Nadol - JP Morgan

James Mcilree - C.E. Unterberg Towbin

Lawrence Harris - Oppenheimer & Co

Stephen Ferranti - Stephens Inc.

Ted Wheeler - Buckingham Research

Christopher Donaghey - SunTrust Robinson Humphrey

Presentation

Operator

Good afternoon, and welcome to the Harris Corporation's Fourth Quarter Fiscal 2007 Earnings Release Conference Call. This call is being recorded. Beginning today's meeting is Pamela Padgett, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Pamela A. Padgett - Vice President, Investor Relations and Corporate Communications

Thank you. Good afternoon everyone. Welcome to Harris Corporation's fourth quarter fiscal 2007 conference call. I am Pamela Padgett, Vice President of Investor Relations and Corporate Communications. And on the call with me today is Howard Lance, Chairman, President and CEO; Gary McArthur, Vice President and Chief Financial Officer; and Bob Henry, Executive Vice President and Chief Operating Officer.

A few words about forward-looking statements: In the course of this teleconference Howard, Gary, or other management may make forward-looking statements. Forward-looking statements involve assumptions, risks, and uncertainties that could cause actual results to differ materially from those statements.

For more information on discussion of such assumptions, risks, and uncertainties, please see the press release and filings made by Harris with the SEC. In addition, in our press release and on this teleconference we will discuss certain financial measures and information that are non-GAAP financial measures. A reconciliation to the comparable GAAP measures is included in tables of our press release and on the Investor Relations section of our website which is www.harris.com. A replay of this call will also be available on the Investor Relations section of our website.

And, Howard, with that I'll turn the call over to you.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you, Pam, and welcome to all of you joining us today for our fourth quarter earnings call. Harris posted solid results in the quarter across all of our segments; ending the year with record orders, excellent backlog and a robust opportunity pipeline.

Revenue was $1.2 billion in the fourth quarter, an increase of 22% compared to $1 billion in the prior year quarter. Organic revenue growth was 13% in the quarter driven by our government segments. Non-GAAP net income was $99 million or $0.71 per diluted share, slightly ahead of our expectations. And the $1.4 billion in new orders in our fourth quarter was a record, positioning us for a very successful fiscal 2008.

Fiscal 2007 full-year results were indicative of the strong year in both government segments with our commercial segments finishing the year with positive momentum. Revenue for fiscal 2007 was $4.2 billion, an increase of 22% compared to fiscal 2006. Non-GAAP net income for the year increased 26% to $391 million and non-GAAP earnings were $2.80 per diluted share.

Revenue from new products introduced within the last three year was an important contributor to revenue growth, comprising 31% of total revenue in fiscal 2007 compared to 21% of revenue in fiscal 2006. Our increasing investments in R&D are producing a larger number of new product introductions which are improving our competitive position as well as reducing product costs.

The Government Communication Systems segment had excellent growth in the quarter, revenue was $554 million a 15% year-over-year increase. Contribution from the recently completed Multimax acquisition was $9 million in the quarter, so organic growth was about 13%.

Each of the Government systems business areas posted revenue growth in the quarter compared to the prior year quarter: Defense, Civil, National Intelligence, and Harris Information Technology Services. For the full year organic growth for the segment was 10%.

We were pleased to see continued momentum from our National Intelligence customers as we achieved our third consecutive quarter of year-over-year revenue growth. We also started several new classified programs and technical studies during the quarter. Major revenue growth drivers in the quarter included the Federal Aviation Administration Telecommunication Infrastructure program, the Field Data Collection Automation program for the US Census Bureau, the Patriot IT Services program for National Reconnaissance Office, the CDL Hawklink program for the Navy, the MIDS Terminal program, and the F-22 Aircraft program.

Operating income for Government Communication Systems was $53 million in the fourth quarter and this included absorbing $16 million in cost overruns on the commercial satellite antenna program, which I discussed during our call on May 31. We believe that the expected cost and completion on this program are now pretty well understood. The first antenna is scheduled to be delivered in August with the remaining three scheduled for delivery in January.

We are entering fiscal 2008 with growing Government Communication Systems revenue in a diversified based programs and customers. Our largest programs are under long-term contracts and their opportunity pipeline for new programs and customers continues to expand.

Total funded plus unfunded backlog is now over $4.5 billion including Multimax contracts. Our near-term opportunity pipeline is now $7 billion, represented by proposals outstanding plus those expected to be submitted within the next 90 days.

Included in this opportunity pipeline are several large systems integration programs for international customers: in Europe, the Middle-East and Africa, and Central Asia. Most of these systems opportunities are in defense communications and security and surveillance applications. Objects span a range from small systems to large secured communication networks; all of these pursuit represent well-known application of our technology and utilize the experienced international dealer organization that has helped their RF com business successfully penetrate international markets.

Integration of Multimax with existing Harris Services Business is progressing quite well. We have renamed the organization Harris Information Technology Services to better articulate our focus on US Government customer's information technology networks. We will accomplish this by serving the entire value-chain from network design to deployment to network operations and ongoing support. The capabilities and customer base for Multimax combined with our existing customers and capabilities make Harris a powerful force in the growing Government IT outsourcing market.

Our position as a prime or subcontractor on a number of key Government-Wide Acquisition Contracts will enable Harris to receive IT products and services task quarters that span across the Department of Defense, Intelligence, and Civilian Agencies. These contracts include NETCENTS for the Air Force, ITES II for the Army, EAGLE for the Department of Homeland Security, and Networx Enterprise for the General Services Administration. Harris was also among a number of companies awarded a significant new GVAC contract last week. Called Alliant it's a GC/GSA contract vehicle that will be used to procure integrated IT solutions across a variety of Federal Government agencies.

As we enter fiscal 2008, they are quite well positioned in this segment. We continue to expect solid organic revenue growth with excellent operating margins.

We have a lot of positive news to talk about in the RF segment. First of all, we had another strong quarter of performance in all respects: revenue, orders, and operating income. We were also awarded some very significant new contracts and several large additional opportunities are moving forward. Revenue for RF Communications was $326 million in the fourth quarter, an increase of 34% over the prior year. Operating income also increased by 34% to $112 million.

Orders for fiscal 2007 were $1.3 billion that was a 19% increase over the prior year with orders growth seen in both US and international markets. Our year end backlog increased to $800 million. On our May 1st earnings calls and again at our May 8th Analyst Meeting we discussed the near term opportunity pipeline at RF. You will recall we outlined $3 billion in opportunities in the US market and 1.5 billion in international.

During the quarter we've made good progress turning opportunities into long term contracts and orders. In the fourth quarter, the US Department of Defense awarded Harris a five-year IDIQ contract with the potential value of $422 million for Harris, Falcon II HF radios and systems. We received a $104 million in orders against this contract in the quarter. Our Falcon II HF radios are the standard within all branches of the US armed forces. In addition, two very large IDIQ contracts were awarded to Harris for our new Falcon III JTRS radios.

In June we were awarded a contract by the Joint Program Executive Office Joint Tactical Radio System to supply Falcon III handheld and vehicular radios. Contract has a one year contract ceiling of $2.7 billion and a five year ceiling of $7 billion. Orders will be awarded under contract based on the results of a competitive procurement process between Harris and the incumbent supplier.

And then in early July Harris was awarded a contract for Falcon III radios from the Marine Core, for deployment in a variety of applications by including their new mine-resistant ambush protected vehicle line. Harris is the sole source supplier on this contract. It has a potential value of $212 million with two orders totaling $158 million received thus far. We also received an order for $26 million last week to provide additional Falcon II and Falcon III radios for the Navy MRAP vehicles. We believe this Falcon III contract awards clearly validate that our JTRS contract strategy is working.

Harris is in production today with JTRS-approved Falcon III radios. It allow the DoD to address it's full range of immediate mission requirements and also take advantage of backwards compatibility with legacy systems such as SINCGARS.

These Falcon III radios can also be upgraded in the future to accommodate new waveforms that are compatible with the JTRS software communications architecture. In July, we entered into a licensing agreement with the JPEO JTRS that will provide Harris access to the entire library of current and future waveforms enabling quick and cost effective integration into the Falcon III radio family.

More than 17,000 Falcon III radios have already been deployed with US armed forces. And feedback from our troops has been very positive. Having recently completed a recertification of our Falcon III handheld with the JPEO, we believe that Falcon III is the first and only JTRS-approved radio that does not require wavers.

Turning to International, there have been many continuing positive development there as well. US and allies are moving forward with their own communications modernization programs to take advantage of latest technology and also to have full interoperability with US forces. As previously outlined for you, we identified a number near-term international opportunities including Pakistan, the Philippines, Mexico, Algeria, Iraq, the United Arab Emirates, and Australia.

In early June we received some very good news on the Philippines program, the Defense Security Cooperation Agency notified congress of a possible foreign military sale to the Philippines for Harris radio systems. This sale could total $96 million if all options are exercised. While we do expect a long procurement process, this announcement puts us one step closer to receiving orders. About eight months ago there was a similar public announcement notifying congress of a possible sale to Pakistan, and then in July we received a $76 million order from the government of Pakistan for Falcon II HF radios that will provide their defense forces with liable communications in the most of rugged frontier areas of the country.

We also are continuing to make good progress on new products that move us into new adjacent markets. During the quarter, we received initial order for our high-capacity line-of-sight radio. This light weight high-speed broadband Ethernet system can securely transmit IP traffic up to 50 kilometers and support throughput in excess of 70 megabits. It's easily deployable and offers a very viable alternative to traditional military microwave radio solutions. We also received initial orders in Q4 for our new Secure Personal Radio designed for individual soldier deployment in international markets. We expect growing demand for both of these new products.

Fiscal 2008 should be another very strong year for RF with double-digit revenue growth and continued excellent operating margins.

Broadcast Communications showed significant improvement in the fourth quarter in terms of sequential growth in the orders, revenue, and operating income. These improvements enhance our confidence in being able to deliver revenue growth in fiscal 2008 as well as improve the operating margins both from new products and from the cost reduction actions that we've completed recently.

Revenue in the quarter was a $166 million sequentially up 20% over Q3. All three product area posted a higher sequential revenue: the new infrastructure in digital media, software systems and transmission systems. Non-GAAP operating income in the quarter was $12 million compared to $5 million in the third quarter and driven by the higher revenue.

Cost reduction actions are also contributing to the improved results. These have been primarily directed at downsizing transmission systems and software systems to better align their cost structure with revenue run-rates. We expect annual savings of about $12 billion from these actions.

Year-over-year revenue and operating income comparisons for the quarter were lower as expected due to a decline in transmission systems and software systems revenue. Operating income results in the quarter also reflected an increase in our R&D investments across the video infrastructure product portfolio. New products represent the competitive edge in this business. We will continue to invest to expand our market position.

Lower year-over-year revenue in transmission systems down 25% and software systems down 10%, mast another very strong quarter of organic double-digit growth in video infrastructure and digital media; which were up 16%.

Demand for Harris video service, graphic systems, test and measurement equipment, routers and multi-image processors were all higher than in prior year. Customers continue to invest to upgrade their media operations from analog to digital and from standard to high definition formats.

Orders in the fourth quarter of broadcast were higher than sales at $186 million. Year-over-year orders increased 10% and were higher in video infrastructure and digital media, software systems as well. Transmission systems orders were down slightly year-over-year but were higher than sales.

It is important to note that during the fourth quarter we exited what we called the radio resell business which included sales of a number of non-Harris OEM radio products at low gross margins, sold primarily through a telemarketing group. Now under GAAP we are unable to report this business as discontinued operations, but we will reconcile the BCD quarterly revenue impact for you on a non-GAAP basis going forward.

For fiscal 2008 in total, we expect the negative impact on revenue due to extinguished business to be about $19 million.

We expect solid organic revenue growth in the broadcast segment in fiscal 2008 with improving operating margins. Video infrastructure and digital media revenue is expected to increase at double-digit growth rates as a result of new products and continued customer spending to upgrade media operations to digital and high definition. Product margins should improve as a result of new products and cost reduction actions in the supply chain.

Software systems revenue in fiscal 2008 will benefit from a large number of new wins achieved in fiscal 2007 with our new media workflow software products, along with the expected market growth in digital asset management. As in any software business, most of our costs are fixed, so an increase in revenue should drive improved margins. For transmission systems we are not planning on significant organic revenue growth for 2008 in our guidance but we are expecting significant profit improvement making this business a contributor to operating income once again.

We are expecting a pick-up in digital TV transmission system shipments as broadcasters prepare for the February 2009 FCC mandated transition to digital. We are also expecting some revenue growth from HD radio transmission shipments.

In fiscal 2008, we also expect a benefit from having established Harris as the only true end-to-end solutions provider for the digital and high definition build out. Customers are turning to Harris for immediate solutions across multiple workflow areas, such as newsroom editing, video processing, and channel release. Harris is the only company offering such a broad set of interoperable solutions. It's what we call the "Harris One" solution.

Let me give you some examples, in the newsroom editing workflow broadcasters are investing to retool their newsrooms to support high definition content. To meet this opportunity Harris launched NewsForce, a file-based news solution build on our NEXIO HD server platform. NewsForce includes new Harris editors that have been optimized for HD. Harris also integrated Apple's Final Cut Pro software with NewsForce for a high powered newsroom editing. And we have very soon in NewsForce optimized for live sports broadcasting. And these are some of the first applications to adopt HD production environment.

In the video processing workflow we're seeing strong demands as broadcasters rebuild their network operation centers to manage digital and HD content and distribution. Harris has extended its product line to support demand for enhanced high definition at 1080p that's double the resolution of current HD systems.

We also introduced new products that support the latest MPEG4 video compression standard and we launched a family of fiber-based products. These product lines enable media companies to interconnect their various global locations and move content seamlessly from production to the consumer.

And in the channel release workflow broadcasters are continuing to add specialty channels such as news, weather, and traffic and channels dedicated to IPTV, mobile TV, and streaming media. Harris Channel ONE offers the industry's only integrated channel solution combining a high quality graphics layout sever with master control and branding, all in a single chassis.

In the fourth quarter, we won a number of quarters for integrated systems such as the ones I've been discussing from a broad base of customers such as Comcast, Turner Broadcasting, Fox Sports, Madison Square Garden, Digiturk in Turkey, TVP in Poland, and TV Angelera [ph] in Brazil.

Let me move next to the results of Harris Stratex Networks. Management of Harris Stratex will host the conference call to discuss their fourth quarter results in much more detail immediately following this call at 5:30 PM Eastern Time.

All of my comments today are based on pro forma non-GAAP comparisons, as if our former microwave division and Stratex Networks have been combined at the beginning of fiscal 2006. Just to remind you the merger was finalized January 26th, 2007, and Harris owns 57% of the company with consolidated results with the elimination of the minority interest.

Harris Stratex Networks showed significant sequential improvement in the fourth quarter in revenue, orders, and operating performance. Management team is clearly addressing the issues that arose in the third quarter with the formation of the company and are making steady progress in the integration of these two businesses and the realization of plant cost synergies.

Fourth quarter revenue was $174 million, 19% higher than the third quarter, with growth in both North America and International segments. International regions with the greatest sequential growth included Africa, Europe, the Middle East, and Russia. The pickup in international orders was reflected in several sizable new projects. Harris Stratex received new orders totaling $19 million from one of the largest mobile operators in Nigeria to both increase capacity of existing wireless networks and to expand into new areas in Northern Nigeria.

Harris Stratex was also selected for a $12 million project to extend the access and backbone networks for leading mobile operator in West Africa. On a year-over-year basis fourth quarter revenue was essentially flat with prior year, revenue growth in North America continue to be strong while international revenue was lower compared we might say to a very strong prior year quarter for international. The outlook for Africa, Europe, the Middle East, and Russia continues to be positive moving into fiscal 2008. We also expect improvements in the Asia Pacific region from opportunities in the Philippines, Bangladesh, Sri Lanka, Fiji, and Indonesia.

Non-GAAP operating income in the fourth quarter was $8 million improving sequentially from $4 million in the third quarter. Please remember that Harris non-GAAP operating income for the segment includes FAS 123R expenses as well as amortization of intangibles.

Sequential improvement in operating performance was driven by both higher revenue and improved product gross margins, partially offset by higher operating costs. Cost synergies expected from the combination of these two businesses are beginning to contribute. We believe Harris Stratex will deliver solid organic growth with improved operating margins in fiscal 2008. Now I would like to turn the call over to our Chief Financial Officer, Gary McArthur.

Gary L. McArthur - Vice President and Chief Financial Officer

Thank you, Howard. Good evening. To begin with I would like to make a few comments about the financing of the acquisition of Multimax which was closed on June 15th, our previously announced share repurchase program, and our redemption of the $149 million of outstanding 3.5% convertible debt due 2022.

On June 15th, 2007 we closed on the acquisition of Multimax at a purchase price of $400 million. The purchase price was funded using commercial paper backed by our $500 million credit facility. It is our intent to refinance the $400 million with fixed rate debt prior to the end of this calendar year. On May 1st, we announced a $600 million share repurchase program of which the first $200 million were to be repurchased prior to our fiscal year ended June 29th, 2007, between May 1st and June 29th, primarily through an overnight share repurchase program, we repurchased 3.9 million shares at an average price of $50.81 per share.

It remains our intent to repurchase the remaining $400 million over the next two years and to fund the repurchases from available cash. In July, we provided notice to all convertible debenture holders that we will redeem on August 20th, 2007, $149 million of outstanding 3.5% convertible debt. On or before August 17th, the debenture holders may elect to convert their debentures into Harris common stock at a conversion rate of 44.2404 shares for each $1,000 of principal amount. The potential conversion of the shares will have no impact on Harris' fully diluted shares outstanding as the conversion price for the shares has been deep in the money and has been accounted for accordingly.

For more details surrounding this redemption and/or conversion please see our 8-K filed on July 17th. The company's strong financial foundation and expected continued strong cash flow generation will enable us to continue to invest in internal growth initiatives and strategic acquisitions as well as repurchase stock.

With regards to our financial position, we had another good quarter. EBITDA on a non-GAAP basis increased from $172 million in the fourth quarter of fiscal 2006 to $206 million in the fourth quarter of fiscal 2007 or 20%. Net operating working capital [Technical Difficulty] increased from 10.1% to 10.6% as a result of the acquisition of Multimax, without Multimax, net operating working capital as a percent of revenue would have been 9.6%. Capital expenditures decreased from $54 million to $30 million. Cash, cash equivalents and short term investments were $389 million as of the quarter just ended.

Cash flow generated from operating activities was $115 million in the quarter. Cash flow from operations for the year was $439 million as compared to $334 million for fiscal 2006. Operating cash flow for fiscal 2007 was lower than expected primarily due to lower accounts receivable collections in the fourth quarter at our Broadcast Communications Division and at Harris Stratex.

Our expectations for cash flow from operations for fiscal 2008 remains in the range of $550 million to $600 million. Capital expenditures, including capitalized software, for fiscal 2007 were $129 million as compared to $146 million in fiscal 2006.

Including a full year Harris Stratex Networks and Multimax, our guidance for fiscal year 2008 for capital expenditures and capitalized software remains between $140 million and $150 million. Depreciation and amortization increased from $95 million in fiscal 2006 to $135 million for fiscal 2007, primarily due to amortization intangibles resulting from the acquisitions of Leitch, OSI, Astra and the combination of Harris Microwave and Stratex Networks. Including a full year at Harris Stratex Networks and the increase in amortization of intangibles resulting from the recent acquisition of Multimax, depreciation and amortization for fiscal year 2008 is now expected to be between $165 million and $175 million.

Finally, our outlook for the full year tax rate for fiscal 2008 continues to be at 34%. The tax rate for any given quarter could vary up or down as a result of discreet tax events occurring therein.

Thank you I will now turn the time back to Howard.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thanks Gary. Let me conclude by summarizing our outlook for fiscal 2008 and then make a couple of comments about reporting segments. Revenues now expected increase by about 20% in fiscal year 2008 compared to fiscal year 2007 with excellent organic year-over-year growth in a range from 8% to 10% higher.

We expect to achieve organic growth in every operating segment, 6% to 8% organic growth in government systems, 5% to 10% organic growth in broadcast. $670 million to $700 million of revenue at Harris Stratex Networks, and as a result of the new orders that we've received in the past four months, revenue at RF is now expected to be at least 15% higher than fiscal year 2007.

We've increased our non-GAAP earnings guidance for the year to a new range of $3.30 to $3.40 per diluted share. This excludes integration charges related to Multimax and Harris Stratex Networks. The midpoint of the new guidance range represents a year-over-year increase of about 20%. Please keep in mind that our fiscal 2007 first quarter benefited significantly from a favorable tax settlement that is not expected to repeat in the first quarter of fiscal 2008.

On a pretax basis, we expect our first quarter non-GAAP year-over-year earnings growth to be on par with total year EPS growth guidance. Segment operating margins to fiscal 2008 are expected to be 11% to 12% in Government Communication Systems; 10% to 12% in Broadcast Communications; about 10% in Harris Stratex Networks and about 33% at RF Communications, as we deliver increased Falcon III handheld radio shipments at slightly lower gross margins.

Let me close by also reminding you that beginning with our first quarter results in fiscal 2008, we will be making a slight change in our segment reporting, specifically affecting the two government segments. To reflect the way we now manage the business.

Going forward the Government Communication Systems segment will continue to include the results of our Civil and National Intelligence businesses along with Harris IT services, including Multimax. However, this segment will no longer include the results of our Department of Defense business. The Defense business results will be combined with results of the RF Communications business in a segment named Defense Communications and Electronics. There will be no change in the Broadcast Communications or Harris Stratex Networks segment reporting.

Following the filling of our Annual Report for fiscal year 2007 on Form 10-K, we will file a Form 8-K which will provide you with historical pro forma GAAP and non-GAAP results by quarter for fiscal years 2006 and 2007 for financial comparison purposes. The Form 8-K will also restate our fiscal 2008 segment revenue and operating income guidance to conform to the new segment reporting structure.

At this point I'll ask the operator to open the line and we will take your questions.

Question And Answer

Operator

[Operator Instructions]. Our first question will come from Carl Copeland [ph] with Lehman Brothers.

Unidentified Analyst

Hi, good afternoon, guys. Howard, I wondered if you would tell us a little about your order expectations in RF Com for 2008 and how they may have changed as a result of being pulled underneath the Harris JPO [ph] Umbrella here and how you're really looking at this from an incremental perspective in terms of orders?

Howard L. Lance - Chairman, President and Chief Executive Officer

Well Carl, we're certainly hoping that orders will continue to show year-over-year growth as they did in '07 but at this point in the year, it's awfully difficult to peg a specific number on it. We're obviously very pleased with the magnitude of the contracts ceilings that exist on several of the contracts I talked about. They do give our customers lots of upside to place additional orders with us. We're obviously very pleased with the progress and the acceptance of penetration on the Falcon III, now as JTRS-approved radio, but at this point it's little early to peg a specific number but clearly we are helping for sequential year-over-year progress.

Unidentified Analyst

I guess, if I could ask it another way, I mean. Are you planning on the new contract structure leading to more orders then you were otherwise planning before that contract vehicle was put in to play, internally?

Howard L. Lance - Chairman, President and Chief Executive Officer

Yes, I think the answer would be yes. Initially we provided revenue growth expectation around 10% higher than the 2007 year, we are now talking about at least 15%. Certainly some of that is going to come from new orders, some of which have already been received in the early part of the new fiscal year, others that will be received later.

Unidentified Analyst

Great. Thank you very much.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thanks.

Operator

Moving on, the next question will come from Ferat Ongoren with Citigroup.

Ferat Ongoren - Citigroup

Good afternoon.

Howard L. Lance - Chairman, President and Chief Executive Officer

Hi Ferat.

Ferat Ongoren - Citigroup

Howard, let me ask the same question in a different way. I am looking at orders you received so far and the backlog number for the yearend. The overall bond bearing is getting close to [ph] $1.1 billion and usually there was a backlog of one year. Your guidance suggested about $1.3 billion in radio revenues, and we have the switch IBIP [ph] about, I mean, it doesn't look like you are affecting too much from the IBIP in your guidance?

Howard L. Lance - Chairman, President and Chief Executive Officer

Well, first of all, we talked about again for around 15% on $1.179 million from last year that gets you up to something in the 135 range. So, we still have a number of orders that we have to receive based on backlog plus orders, plus remember that all backlog is not shippable that we have at the beginning of the year, in that year. But as I've said before these contract ceilings do give us considerable upside, but with lots of moving parts in budget funding and the timing of specific orders not being well known, we're just going to have to stay tuned, I would hope, I'd have a lot more to say with more specificity for you at the next call.

Ferat Ongoren - Citigroup

Yes. Right. And then probably the same issue, but if you look at the guidance; at the end of May you provided a guidance range reaching with Multimax. It seems like you are up only $0.02, and I am looking at the increasing the guidance just on the radio side which is about $60 million or about $0.10. But there is some revenue acceleration in Government business into this quarter or are you being conservative on commercial margins?

Howard L. Lance - Chairman, President and Chief Executive Officer

Well, I think the other factor we really talked about explicitly then that you have to consider, as our share price has gone up the impact on the outstanding shares of our share buyback program has been reduced and so we will have now a higher share count for the year in calculating EPS on a diluted share basis then we would have thought three or four months ago. So that serves to have a little bit of an offset to the improved guidance we've provided on RF. So, we are comfortable that right now with the visibility we have the 3.30 to 3.40 on a non-GAAP basis is a reasonable place to be in guidance.

Ferat Ongoren - Citigroup

Okay. Thank you very much.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from Joseph Nadol with JP Morgan.

Joseph Nadol - JP Morgan

Thanks. Good afternoon.

Howard L. Lance - Chairman, President and Chief Executive Officer

Hello.

Joseph Nadol - JP Morgan

Howard, I wonder if on the RF side again and not to leave all the other segments. But if you could, maybe from a high-level standpoint, talk about what you are seeing in terms of share, you've given us some nice numbers in the past there and there is definitely a lot of moving parts big IDIQ contracts out there. So what are you seeing in terms of market share momentum?

Howard L. Lance - Chairman, President and Chief Executive Officer

Well, I'd think it will be getting better than... we do this typically on a calendar year basis, and so for calendar year '05 to '06 we talk about considerable growth, I think up to 33% of the market. Given the progress we have made this year, I would expect it would be higher. I don't know exactly what that number it is until we get to the end of the year. We are doing well and making a lot of progress and we are doing our best to continue to drive growth in this business which is our number one objective and so far so good. I think the international pipeline gives me some confidence that we are also gaining, or likely to gain market share internationally. And while we've had good market share internationally, it's been less than with US government. So, we talked about in the long run driving this business, one of the drivers being international market share gains, and again programs like Pakistan good vibes on the pipeline for the Philippines and others, we hope to talk about in future calls. All give us a lot of confidence that international market share is going up as well.

Joseph Nadol - JP Morgan

Is there any specific share target that's built into your forecast in terms of the two huge IDIQ contracts that were given out to you and to TELUS?

Howard L. Lance - Chairman, President and Chief Executive Officer

No, not specifically. I think our goal when we talk about revenue growth for the RF segment of 15% year-over-year, we want look to that in the US as well as the international markets, so that we have a double-digit growth in both of those. So that would be our internal target. There is plenty of opportunities, that's the good news.

Joseph Nadol - JP Morgan

Okay. Just one more, on the cash flow, could you be a little bit more specific as to what happened in the quarter and additionally why didn't next year's guidance go up, if it was collection that kind of dragged into FY08?

Gary L. McArthur - Vice President and Chief Financial Officer

Hi, this is Gary. Let me answer that one. Basically, in looking at the guidance we provided the 550 to 600, it's a pretty wide range and I think it's fair to say that we are now pretty content that we will be at the higher end of the range but we have decided not to take guidance up at this time. With regard to the question, specifically, I know that Sally will talk about it in more detail on the Harris Stratex call. So, I won't talk about that. And the broadcast division it really wasn't at over 90 days increased. In fact it wasn't that case at all. It was really that just a large amount of the sales took place late in the quarter and we just didn't get a chance to collect the money. I think a lot of that has been collected already in this quarter. So, we are not expecting any long term impact from those collections being down as you suggested. At this point we didn't think it was prudent to take the range up. It is a big jump over where we are ending up this year as to go into next year and I think there is a lot of year left before we make those kind of decisions.

Joseph Nadol - JP Morgan

Okay. Thank you.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thanks.

Operator

Moving on with Unterberg Towbin, we have Jim Mcilree.

James Mcilree - C.E. Unterberg Towbin

Thanks. Good evening.

Howard L. Lance - Chairman, President and Chief Executive Officer

Hi Jim.

James Mcilree - C.E. Unterberg Towbin

Hello. The MRAP procurement for the Army, and I know it's coming through the Marines since they are the program manager. But do you have to sell directly to the army or are you selling it to the marine to then kind of deploy it to the Army? How does that work?

Howard L. Lance - Chairman, President and Chief Executive Officer

I don't know the answer of that. Bob do you?

Robert K. Henry - Executive Vice President and Chief Operating Officer

No, I don't.

James Mcilree - C.E. Unterberg Towbin

All right. Well, then let me try a different one. Can you discuss your manufacturing capacity in RF, either what your plans are for the upcoming fiscal year and/or the capacity utilization and also is it just a Rochester that's manufacture or do you have other locations?

Howard L. Lance - Chairman, President and Chief Executive Officer

Yes. Generally what I would say about capacity is that I don't believe that manufacturing capacity will limit our ability to either achieve the guidance we have provided or should we have more orders go to a higher level. We have moved up material amount of our international radio production over to an expanded operation outside of London in the UK that gas freed up space in the Rochester location and at the same time we are throughout fiscal '06 and '07 significantly increased capacity in Rochester, especially for the Falcon III handheld radios and the vehicular conversions of those. So, I don't see capacity in manufacturing being a limiting factor for us.

James Mcilree - C.E. Unterberg Towbin

Great. Thank you.

Operator

Next question will come from Lawrence Harris with Oppenheimer.

Lawrence Harris - Oppenheimer & Co

Yes. Thank you and good afternoon. I would like to ask a non-RF related question.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you.

Lawrence Harris - Oppenheimer & Co

In the broadcast area, the digital TV transmitters, I think you indicated the book-to-bill was greater than one, in your discussions with some of the stations you are seeing them starting to upgrade from low power to full power, where do we stand there?

Howard L. Lance - Chairman, President and Chief Executive Officer

The answer is absolutely, we've had over the last couple of quarters pretty good order rates, Larry. The issue really has been when the customers will take the shipments, and we are still working on trying to accelerate some of those from fiscal 2009 into fiscal 2008, and from late in fiscal 2008 to early in fiscal 2008. So, that's an ongoing conversation with customers. But we are getting the orders and we are very confident that we will see the revenue impact of those orders at some point. It's just difficult to call the timing.

Lawrence Harris - Oppenheimer & Co

And the addressable market here, the available market for yourselves and other players in terms of completing the digital conversion, is it still around 250 million?

Howard L. Lance - Chairman, President and Chief Executive Officer

Yes. I haven't heard of any number different than that. The difficulty in estimating, it always has to do with the notion of redundancy. With analog transmitters being out there so many years, typical stations would have backup transmitters in place should the primary go down for some period. Customers may or may not put quite as much redundancy in place as they put their digital systems online, they want. So, that's the one of the areas we've had difficulty in estimating kind of with any precision the size of that margin.

Lawrence Harris - Oppenheimer & Co

I understand. And then switching over to the Government communications area, it looks like the last two quarters you've been more positive to the extent that you can disclose in terms of the national programs. Would it be fair to say that that area could be contribution to growth in 2008?

Howard L. Lance - Chairman, President and Chief Executive Officer

We are expecting year-over-year growth in national as well as civil, the defense programs and the IT services on an organic basis. So, our internal plans which show kind of consistent growth across those four business areas in adding up to our 6% to 8% organic growth guidance.

Lawrence Harris - Oppenheimer & Co

Understood. All right, well, thank you.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you.

Operator

The next question will come from Steve Ferranti with Stephens Incorporated.

Stephen Ferranti - Stephens Inc.

Hi, good evening. Thanks for taking the question. Another question on RF. So, the $2.7 billion JPO, Falcon III contract or IDIQ, did you get the sense there that pricing might become more competitive given that it's a, sort of, consolidated radio parsing vehicle for the Government?

Howard L. Lance - Chairman, President and Chief Executive Officer

I think what we've indicated is the combination of pricing and cost on the new Falcon III handheld will cost us... they have gross margins just a slight bit under the rest of our business and that's leading to our guidance of about 33% return on sales. We still think that's an awfully good number, and we have a number of cost reduction programs that as the Falcon III handheld production ramps up, we will start to feed in fiscal '08 and '09 as we talked about at Analyst Day.

Stephen Ferranti - Stephens Inc.

Okay. And can you give us an idea of the types of activity levels you are seeing on that IDIQ vehicle at this point?

Howard L. Lance - Chairman, President and Chief Executive Officer

I am not aware of any specific activity levels, clearly with the ceiling being established as high as it was, there are a lots of people within DoD that believe that if they want to execute the lot of orders in the short term under the contract. But at this point I can honestly say we have absolutely no idea as to how much of that ceiling would be satisfied in the one year contract timeframe or not. A lot of it, clearly, has to do with funding, whether that funding is going to come solely from the DoD-based budget or whether it's going to come from additional supplementals, that may or may not come down the road. So, our hesitancy in being definitive here is we honestly don't know and our customers don't know because funding is yet to be determined on much of this in terms of all the tradeoffs customers are making among various immediate program needs they have for Iraq and elsewhere.

Stephen Ferranti - Stephens Inc.

Okay, terrific. That's all I had. Thanks and congratulations on the quarter.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you.

Gary L. McArthur - Vice President and Chief Financial Officer

Thank you.

Operator

Next we have Ted Wheeler with Buckingham Research.

Ted Wheeler - Buckingham Research

Hi. Good evening all.

Howard L. Lance - Chairman, President and Chief Executive Officer

Hi.

Ted Wheeler - Buckingham Research

I wanted to ask on the GCSD margin comment. I guess, if we adjust the contract overrun, we are north of 14% here and the guidance is 11% to 12%. I guess the acquisition brings margins down but how should I look at the 14% or so in the fourth and then the guidance in '08 and what contributes to that change?

Howard L. Lance - Chairman, President and Chief Executive Officer

Very good question. In the fourth quarter, a couple of things helped on the positive side that offsets some of that $16 million pill that we have to swallow to get to the right cost of completion on the antenna program. One was even though we had only a couple of weeks of revenue from Multimax, we did have kind of more than their fair share of profit in just that two week period. So that helped a little bit in the quarter and we also another had contract year with the Federal Government contracting agency closeout and we were in a favorable position when all of those negotiations were done, and that helped a little bit. So, we had a little bit of offset. With regard to your question going forward, Multimax should be positive and above the average point for program margins within Government systems, even after we have to absorb a significant amount of the amortization for the intangibles associated with the acquisition. So, again, that 11% to 12% we think is kind of a top tier, kind of return on sales for the systems integration business. It's a mixture of lots of different kinds of programs and hence a bit of a wide range. The last couple of years we've performed more toward the higher end of the range. Again, there is no guarantee we will do that in '08, but certainly our Group presidents, Jeremy Wensinger and Dan Pearson, certainly have goals to try and do that and hopefully that adds just a little bit of color on the fourth quarter.

Ted Wheeler - Buckingham Research

Well, it sounds, I am interpreting then I think you are being fairly conservative on the '08 outlook as it sits today. Is there a fair way to characterize it?

Howard L. Lance - Chairman, President and Chief Executive Officer

Well, I think it's fair to say that we like to talk about things that can help profitability. But having being burned recently with the cost overruns on the antenna program, and we have more antennas yet to deliver. We are still very much in a startup mode on the FDCA program with the Census Bureau. So, we are trying and balance all of that when we consider what's the right... range our guidance. Could we be towards the higher end of the range? Yes, I think so. Are we likely to ball way over the top? Probably, not very likely.

Ted Wheeler - Buckingham Research

Iappreciate the color very much. Thanks. I guess one other thing that I want to review, on the IDIQ process... I am not too familiar with it... but it sounds like there is a window for placing orders and there is a sizable limit which is sounds a good thing, now would the deliveries against those orders also be within unlimited or could these orders extend into the future?

Howard L. Lance - Chairman, President and Chief Executive Officer

Yes. I think it's unlikely that we would get all of the orders with delivery orders... delivery dates within our fiscal year '08. So, I think much of the additional IDIQ orders that we would get would probably have delivery dates in the latter part of our fiscal '08 or more into the second half of calendar '08 which would be our fiscal '09. So, that's fine that continues to drive steady and growing production and growing revenue then into fiscal '09 which is certainly our hope.

Ted Wheeler - Buckingham Research

But these contracts would not cover three year out type requirements, I mean --

Howard L. Lance - Chairman, President and Chief Executive Officer

Well they could. At this point we haven't gotten that level of extension, shall we say. But the fact that there is IDIQ contract had a very large single year but also a very large multiyear, certainly suggest that they may plan to stretch out the shipments somewhat. It's just very hard for me to be specific at this point. We just don't have the information from the customer.

Ted Wheeler - Buckingham Research

All right. Again, thanks for the color. I appreciate it. That was a great quarter.

Howard L. Lance - Chairman, President and Chief Executive Officer

Thank you.

Operator

Chris Donaghey with SunTrust Robinson has the next question.

Christopher Donaghey - SunTrust Robinson Humphrey

Hi. Good evening.

Howard L. Lance - Chairman, President and Chief Executive Officer

Hello.

Christopher Donaghey - SunTrust Robinson Humphrey

Howard, I wonder if you could quickly go back over the business line growth expectations in the broadcast segment, transmission system, software and video infrastructure.

Howard L. Lance - Chairman, President and Chief Executive Officer

Revenue growth for fiscal 2008, Chris?

Christopher Donaghey - SunTrust Robinson Humphrey

Right.

Howard L. Lance - Chairman, President and Chief Executive Officer

Okay. So, we said 5% to 10% for the business in total organic growth. So, we are starting from an '07, excluding what we think is $19 million for the actual business. We expect video distribution and digital media to grow double digit. We expect modest growth in software systems and we expect virtually no growth in our current guidance for transmission systems.

Christopher Donaghey - SunTrust Robinson Humphrey

Okay, thanks. And on the software businesses is the full H-Class platform now generally available as all the development work been completed that needs to be done there to take that product to market?

Howard L. Lance - Chairman, President and Chief Executive Officer

Yes. H-Class has really transformed over the last several years from a product to more of a software architecture upon which we build all our other applications. And so while it's not totally done, it's essentially in place these base players for security and for sharing elements of content across different platforms. Yes.

Christopher Donaghey - SunTrust Robinson Humphrey

Okay, great. And just a couple of data points, Gary, do you have guidance or have an expectation for the share count for 2008 for the full year?

Gary L. McArthur - Vice President and Chief Financial Officer

I don't think we've provided that Chris. We definitely, internally have looked at that with the share buyback, with what's going on there and obviously where we have our incentive plans for management as well going in. I don't know I am looking for guidance from Howard if we really want to provide an exact share number.

Howard L. Lance - Chairman, President and Chief Executive Officer

Well, let me see in a second here, Chris, whether we can quickly get at that... it looks likes it's... for planning we are using something in the range of around a $138 million shares round numbers. Obviously, it does move a little bit depending on what happens with the share prices reduced in the share buyback.

Christopher Donaghey - SunTrust Robinson Humphrey

Okay, great. And one more date point... I apologize I missed it, but the total cost for the satellite overrun?

Howard L. Lance - Chairman, President and Chief Executive Officer

$16 million in the quarter.

Christopher Donaghey - SunTrust Robinson Humphrey

Okay, great. Thanks guys.

Howard L. Lance - Chairman, President and Chief Executive Officer

And again this is a percentage of. And so what you do is you re-estimate your cost to completion and then make up the difference. So, we haven't actually spent all that money at this point but we expect you in the program, and under GAAP we have to therefore adjust our cost to completion estimate.

Christopher Donaghey - SunTrust Robinson Humphrey

Okay. Thank you

Pamela A. Padgett - Vice President, Investor Relations and Corporate Communications

Operator, we are going to end the call with that question. We don't encroach on the next Harris Stratex Networks call. Thank you everyone for joining us and let me know what else you need.

Operator

It will conclude today's Harris Corporation conference call. We thank you for joining us. Please enjoy the rest of your day.

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