Powerwave Technologies Q3 2007 Earnings Call Transcript

Executives

Kevin Michaels - CFO and Secretary

Ron Buschur - President and CEO

Analysts

George Iwanyc - CIBC

Jeff Kvaal - Lehman Brothers

Munjal Shah - Jefferies

Kim Watkins - JP Morgan

Mike Ounjian - Credit Suisse

Tom Lee - Goldman Sachs

Brian Modoff - Deutsche Bank

Blaine Carroll - FTN Midwest Securities

Ken Muth - Robert Baird

Anil Doradla - Caris & Company

Joanna Makris - Brean Murray and Carret

Scott Searle - S Square Technologies

Powerwave Technologies, Inc. (PWAV) Q3 2007 Earnings Call October 29, 2007 5:00 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the ThirdQuarter 2007 Powerwave Technologies Earnings Call. My name is Sean, and I willbe operator for today. At this time, all participants are in a listen-onlymode. We will conduct a question-and-answer session toward the end of thisconference. (Operator Instructions)

I would now like to turn the presentation over to your hostfor today's call, Mr. Kevin Michaels, Chief Financial Officer. Please proceed.

Kevin Michaels

Thank you, Shaun, and good afternoon, everyone, and welcometo the Powerwave Technologies third quarter 2007 financial results conferencecall. Joining me on today's call will be Ron Buschur, Powerwave's President andChief Executive Officer.

Before starting, I'd like to point out that various remarkswe may make about future expectations, plans and prospects for Powerwaveincluding, but not limited to, anticipated revenues and revenue growth rates,operating margins, gross profit margins, earning per share levels, revenuecomposition, improvements in cost structure, the timing for completion of theintegration of the Filtronic Wireless acquisition, the timing of consolidationof our manufacturing facilities, cost savings related to our facilityconsolidations, future cost savings related to our cost reduction activities,demand levels for the Company's product lines, projected growth and marketshare, trends in the wireless infrastructure market, the timing of productdeliveries and future orders, the success of new products, expense levels,capital expenditure rates, inventory turns, tax rates, cash flows and dayssales outstanding are all forward-looking statements.

All of these statements are subject to numerous risks anduncertainties that could cause Powerwave's actual results to be materiallydifferent from those projected or implied. Some of the risks and uncertaintiesinclude our ability to accurately forecast and anticipate customer orders,integrate acquisitions and realize anticipated cost savings and synergies, thepotential negative impact on demand for our products due to industryconsolidation among our major customers, fluctuations in foreign currencies,the ability to implement new ERP systems, the impact of competitive productsand pricing, economic and political conditions, and the loss of one or moresignificant customer accounts.

Please refer to our press release, Powerwave's current Form10-K for the year ended December 31, 2006, our current Form 10-Q for thequarter ending July 1st, 2007, and other filings which are on file with theSecurities and Exchange Commission for additional information on factors whichcould cause our actual results to be different from those projected or implied.

In addition, on this call, we will discuss non-GAAPfinancial information. A reconciliation of the non-GAAP financial informationto our financial statements as prepared under GAAP is included in our pressrelease dated today, which can be found at our website at powerwave.com and onBusiness Wire.

With all this in mind, I'd like to start by quicklyreviewing our financial results, which are also summarized in our pressrelease. Net sales for the third quarter of 2007 were $200.7 million, and wereported a net loss of $28.6 million, which equates to a net loss on a GAAPbasis of $0.22 per share.

This loss includes approximately $8.2 million ofrestructuring and impairment charges, related to the restructuring and plantclosures of several of our manufacturing locations, as well as an accrualrelated to the termination of both outstanding margin and revenue commitments,associated with our former Philippinesmanufacturing facility.

There is also an additional $7.6 million of non-cashintangible asset amortization related to our acquisitions. In summary, all ofthese charges and impairments totaled approximately $15.8 million for the thirdquarter of 2007.

For the third quarter, on a pro forma basis, excluding allrestructuring and impairment charges, acquisition related charges andintangible asset amortization, we would have reported a pro forma net loss of$10.2 million or a pro forma net loss per share of $0.08.

I want to note that included in both our GAAP and pro formaresults is the impact of approximately $1.4 million of pre-tax stock-basedcompensation expense due to FAS 123(R), almost all of which is included inoperating expenses. If you were to exclude this expense from our reportedresults, you would add approximately $0.01 to EPS for both GAAP and pro formaresults for the third quarter. This is approximately the same impact as in theprior year period.

Now, I'll describe our revenues on a geographic basis. Ourtotal Americasrevenues for the third quarter of 2007 were approximately $55.8 million or 28%of revenues. Our total Asian sales account for approximately 26% of revenues or$52.8 million, and our total European and other international revenues were$92.1 million or approximately 46% of revenues.

For the third quarter, sales of products within our antennasystems product group totaled $44.4 million or 22% of total revenues. Basestation subsystem sales totaled $146.4 million or 73% of revenues and coveragesolution sales totaled $10 million or 5% of revenues.

For the third quarter, our total 3G related sales wereapproximately $29 million, or approximately 14% of our total revenues, and ourtotal WiMAX sales were approximately $5.8 million or 3% of our revenues.

In terms of our customer profile for the third quarter, ourtotal OEM sales account for approximately 73% of our total revenues, and ourtotal direct and operator sales account for approximately 27% of our revenues.

Our total direct and operator sales increased as apercentage of our revenues from the second quarter of 2007, which was 22% ofour revenues. For the third quarter of 2007, our largest customers includedNokia Siemens Networks, which account for approximately 35% of our revenues,and Alcatel-Lucent, which account for approximately 17% of revenues for thequarter.

Now, I will describe our gross margins for the thirdquarter. On a GAAP basis, our total consolidated gross profit margin was 13.6%for the third quarter. On a pro forma basis, excluding a total of $12.9 millionwhich consist of restructuring and impairment charges and non-cash intangibleassets amortization, our total gross profit margin would have been 20%.

While our gross margin improved from the second quarter of2007, it continues to be negatively impacted by under absorption of ourmanufacturing overheads and the fact that we have not completed all of oursupply chain consolidation activities, as well as the continued largepercentage of our OEM-based revenues, which typically carried lower marginsthan our direct operator revenues. All of these factors combined negativelyimpact our gross margins for the third quarter.

As we have previously stated, we have been in the process ofconsolidating our three Chinamanufacturing operations into one location at Suzhou, China.We completed the manufacturing consolidation by the end of the third quarter,and we are now completing the remaining legal and accounting consolidationactivities, which we hope to complete by the end of this year or soonthereafter.

Next, I will review our operating expenses for the thirdquarter. Our sales and marketing expenses were $13.1 million, our engineeringexpenses were $17.9 million, and our G&A expenses were $18.3 million.Excluding restructuring and impairment charges and intangible assetamortization for the third quarter totaling $2.9 million, our total operatingexpenses equaled approximately $49.3 million. This represents a decrease ofapproximately $5.5 million from the second quarter of 2007, and is a decreaseof over $9 million from the first quarter of 2007.

We saw reductions in every area, and to-date we have drivenover $36 million in annualized operating expense savings. As many of you know,we are slightly ahead of our plan on operating expense reductions, but we stillhave additional reduction targets that we are driving for over the next year.

Now I will continue through the income statement. In termsof other expense, we recorded approximately $2.3 million of other expense inthe third quarter of 2007. The main contributors to this other expense was ourinterest expense of approximately $2.3 million, with interest and other incomeoffset by a net foreign currency translation loss of $1.8 million recognized inthe third quarter.

This FX loss was largely due to the weaker Swedish Kronor inUS dollar versus the Euro, and the fact that a large amount of our Eurorevenues are currently transacted on our Swedish subsidiaries books.

For the third quarter, our tax rate was impacted by someminor tax payments in the valuation allowances on our deferred tax assets.While we will continue to evaluate our future tax rate based upon our diverseinternational operations, we currently estimate that our effective worldwidetax rate will be in the range of approximately 5% to 10% for fiscal 2007.

I want to stress that this estimate will fluctuate basedupon our actual results and due to the fact that both our US and Swedish deferred tax assetshave been written off. With the prior write-off of our main deferred taxassets, those entities operate effective 0% rate, and our reported rate reflectsany income or losses on our other tax jurisdictions. For the third quarter on afull GAAP basis, our rate was approximately 5%.

Next, I will quickly review our balance sheet. Total cash atSeptember 30th, 2007was approximately $197.7 million of which $7.3 million is reflected asrestricted cash. The cash balances reflect the addition of approximately $145.5million in net proceeds from our 3.875% convertible subordinating notes due2027 that were issued on September 24th, 2007. In addition we repaid the approximately $12.7 millionoutstanding under our receivables financing facility during the quarter.

For the third quarter, we had a use of cash from operationsof approximately $2.8 million, which comes from our operating loss and some ofthe restructuring activities executed during the quarter, offset by animprovement in our inventory turns as well as reduction in our DSO.

From a pure balance sheet perspective, factoring in our debtrepayment, we added approximately $5.7 million of cash during the thirdquarter. Our capital spending totaled approximately $2.6 million for thequarter.

For the third quarter, our net inventory was $134.4 million,which represents inventory turns of approximately five times. As we havepreviously stated, our goal is to increase our inventory turns to the targetrange of eight turns by the end of this year. We remain extremely focused onreducing our inventory, and thereby, improving our turns as well as freeing upthe cash trapped in our balance sheet.

While our total net accounts receivable increased to $211million, our accounts receivable days sales outstanding reduced toapproximately 96 days from 101 days in the second quarter and 108 days in thefirst quarter of 2007.

Before turning the call over to Ron, I would like to remindyou that we are no longer providing quarterly guidance. We believe that ourinvestors are better served by focusing on long-term trends as opposed to theshort-term volatility, which is inherent in our markets.

In terms of our guidance for the remaining portion of fiscal2007, please note that our guidance is subject to a number of risks anduncertainties that could impact our future outlook and results, and many ofthese are detailed in our public filings with the SEC.

With all of that in mind, we are updating our previously announcedfiscal 2007 annual revenue range of $725 million to $800 million to a newrevised range of $750 million to $790 million. At the same time, we arecontinuing with our restructuring and consolidation efforts in order to lowerour operating breakeven targets and improve our gross margins.

While we are not providing earnings guidance, we do want toshare with you our current expectations for the remainder of this year. On therevenue front, we continue to believe that the second half of 2007 will seestronger demand across much of the wireless marketplace, which should result insequential market growth during the fourth quarter.

In terms of Powerwave's ongoing restructuring and costreduction activities, we expect to see some sequential improvements in ourgross margins, while for the fourth quarter, we expect our operating expensesto be relatively flat than the third quarter. This is in line with ourpreviously established pro forma quarterly operating expense target of $50million or less by the end of this year. We are continuing to drive to obtainadditional reductions during fiscal 2008.

With that, I'd like to now turn the call over to RonBuschur, Powerwave's President and Chief Executive Officer.

Ron Buschur

Thank you, Kevin, and good afternoon, everyone. I want tostart by stating, as you can see, we have made significant improvements duringthe third quarter, and we remain focused on our objective of reducing ouroverall cost structure on both the manufacturing and operating expense side.

The team is focused on this objective as, I believe, ourresults demonstrated. We remain committed to further improve our overall costmodel in order to ensure the long-term success of this company, and to be in theposition to report positive financial results.

On a different topic, I want to note that during the lastmonths our industry has seen many announcements from various participantsdescribing slowness in certain market segments or other issues that are impactingthese companies. These statements certainly have lowered the expectationsthroughout the investment community.

However, we are not questioning what others have to say, andI want to know how quick their expectations can change in this wireless industry.We have not changed our overall view of this market from our last previousquarter.

We continue to see opportunities through various marketsthat we competed. We see increasing demand coming from our direct operatormarket as well as from certain OEM customers. We see increasing demand for ournext generation technologies such as HSDPA, WiMAX to software defined radio andproducts, as well as continued demand for basic voice service such as GSM.

While I do not want to overstate demand, this demand hasplaced on our supply chain a significant length in delivery times forcomponents and raw materials. While these factors certainly pose a challengefor companies like Powerwave, I believe that it is good news overall for ourindustry.

Looking at our third quarter revenues, I believe theydemonstrate the strength of some of our OEM customers, as well as animprovement in demand from our wireless network operator customers.

During the third quarter, we saw continued strength fromNokia Siemens as well as Alcatel-Lucent. For the third quarter our total NokiaSiemens revenue was approximately $71 million and accounted for 35% of ourrevenue. Alcatel's revenue was $33 million, which represents approximately 17%of revenue.

Our other OEM customers accounted for approximately 21% ofour total revenue, which we believe supports and demonstrates our efforts tofurther diversify our customer base. We will continue to drive our efforts toexpand our customer penetration in what is a very consolidated industry.

As Kevin mentioned, we saw our direct network operatorbusiness grow 30% during the third quarter, and we continue to believe thatthis portion of the market will continue to demonstrate strong growth. Ibelieve Powerwave is very well positioned to capitalize on these opportunities.

From a regional perspective, we saw growth in all regions,with the strongest growth coming from the Middle East, Europe and North America. As we have stated previously, we believethat we are well situated to capitalize on the growth in the industry, whereverit may occur. Powerwave maintains a global footprint, and we continue toleverage that capability as much as possible.

Another interesting point is that this will be the fifthconsecutive quarter in which we have grown our base station subsystem business,and in this quarter we've achieved revenues of over $146 million. As a note,this is not all power amplifier business, quite to the contrary. Poweramplifiers only make up 25% of the total revenue. Powerwave today offers a welldiversified mix of products and wireless infrastructure products for thismarket.

As stated earlier, we have been very focused on executingour operational plans’ cost reduction efforts. I want to stress that we arevery focused and committed to take the actions necessary to return Powerwave toprofitability. We continue to be very active in taking the actions necessary toreduce our costs and expenses, and position this company to return toprofitability.

In terms of our cost structure, as many of you know, we havebeen consolidating our Chinamanufacturing sites from three to one location in Suzhou, China.We did complete the final manufacturing line consolidation by the end of Q3,and I want to assure you that we are continuing to work on our supply chainconsolidation, as well as focusing on further improvements to our operatingcost structure.

As Kevin stated, we expect to see additional improvement inour gross margins over the next few quarters as we work towards our goal of themid 20% range. We have made improvements in our inventory turns from four tofive turns in Q3. In addition, we saw a net reduction of approximately $12million of inventory in the third quarter.

Even though we have an increase in our production capabilityand ramped up multiple new products during the same period of time, we remainvery focused on improving our inventory turns to eight times as we previouslystated. While this is an aggressive target, we will continue to drive ouroperations towards making this target a reality.

In addition, we continue to review both our internal andexternal manufacturing resources with a goal to significantly reduce ouroverhead cost. We are in the process of further executing actions, which alongwith the increased volumes, should improve and increase our gross margins on along-term basis.

As we stated last quarter, we set an initial target ofreducing our pro forma operating expenses to a quarterly rate of $50 million orless by the end of this year with additional decreases going forward. As youcan see from our results, we have achieved this target a quarter earlier thanpreviously stated, and we're reviewing additional plans to further reduce ouroperating expenses in 2008.

From an overall market standpoint, as I think you can see,we remain optimistic that the second half of 2007, I believe, we are very wellpositioned with the network operators and we have the right products andsolutions, and we are well positioned to gain market share from theseopportunities.

These new opportunities are from both the network operatorcustomers as well as the OEM customers across a wide range of products in ourproduct portfolio. I believe we have one of the strongest product portfolios,the best personnel and engineering resources, as well as the most advancedleading-edge technology solutions for the next generations of products in thisindustry.

With all of that, it is clear that Powerwave is the lastindependent network wireless infrastructure designer and manufacturer, who issolely focused on global wireless communications industry needs. As I statedlast quarter, I believe this creates great opportunity for Powerwave and ourcustomers.

What this means for our customer is clear. When you want asupplier that is focused on the wireless industry and on their success, thereis only one company in the industry to think of, and that is PowerwaveTechnologies. We continue to believe that this creates excellent and excitingopportunities for Powerwave's employees, customers and our investors in theyears ahead.

As a final note, we remain extremely focused and committedto returning this company back to profitability, and we would do everything wecan to continue to build and maintain your confidence.

I would now like to turn over to Sean, our operator, andaddress to any questions you may have.

Question-and-AnswerSession

Operator

Thank you. (Operator Instructions)

Your first question comes from the line of George Iwanyc withCIBC. Please proceed

George Iwanyc - CIBC

Thanks Ron and Kevin. Kevin, when you look at the OpExdirectional guidance that you gave, how do you see that splitting out on bysales and marketing, R&D and G&As? Are those flat as well or is there abit of shifting along those lines?

Kevin Michaels

I think they should be relatively flat. I mean there couldbe some shifting, but we're definitely not that exact in our guidance. I meanflat. In total, I mean, could there be some shifting of $1 million between oneor other accounts, sure. But generally I'd say they should be roughly flat forthe fourth quarter.

George Iwanyc - CIBC

When you look into next year, which areas do you think youhave the most leverage into gaining some more gains from?

Ron Buschur

We're going to see some benefit, I think, from theengineering in the R&D aspect of our consolidation, as well as the G&A.

George Iwanyc - CIBC

Okay. And on the gross margin, it sounds like you are verycomfortable getting back to the mid 20% area. What type of actions can you taketo get there and when do you think you can get to that point?

Ron Buschur

Well, George, I think you could see that we're making theappropriate measures and taking the appropriate steps to improve our marginsquarter-over-quarter. And as you said, we are still focusing on maintaining andgetting back to the mid 20% range. And we have the appropriate steps in place,and now it's a matter of executing that and getting some better absorption intoour factories and additional revenue as we had outline.

George Iwanyc - CIBC

On the supply chain can you give us an idea of how far longyou are there?

Ron Buschur

Well, on the supply chain activity, we'reprobably about maybe 30%, 35% along our path of trying to rationalize oursupply chain activities and consolidate some of the suppliers that we havemaybe brought into the Powerwave's supply chain over the last couple of yearsand during these acquisitions that we've done most recently.

So there is some rationalization thatneeds to take place there yet. That's what we're going to be focusing on in Q4and going forward starting 2008.

George Iwanyc - CIBC

And it sounds like you are seeing somelengthening in getting components. Are there any shortages that are holding youback on any product line?

Ron Buschur

Well, there is certainly a constraint with the timeframesthat some of our customers are looking for this product. That's a double-edgeproblem and sword to live by. One, we certainly want to shorten the supplychain and be able to respond to those needs. But our supply chain has beenthrough very difficult times as we have over the last year with lack ofvisibility or forecast. So its difficult for them now to start ramping up andgetting back to a level that they can shorten that supply chain down to thefour to six-week level that we want to see.

George Iwanyc - CIBC

Okay.

Ron Buschur

We're comfortable that they're working hard to do that, andwe'll continue to do that. And I really don't want to just specify anycomponents. It's just a lot of demand that we're placing right now on thesupply chain.

George Iwanyc - CIBC

All right. One last question. Ron, can you give us an ideaof how you feel about visibility looking into the rest of the fourth quarter?

Ron Buschur

Well, I think for the first time in a week, we feel asthough we have pretty good visibility for the fourth quarter as we'd indicated.And we have said from the very beginning, we thought the second half of thisyear would be strong. And I think it's safe to say that we're seeing that typeof strength and demand that's being placed on Powerwave's products across ourproduct portfolio.

George Iwanyc - CIBC

Thank you.

Ron Buschur

Thank you.

Operator

Your next question comes from theline of Jeff Kvaal with Lehman Brothers. Please proceed.

Jeff Kvaal - Lehman Brothers

Thanks very much to you. I waswondering if you might give us some of the variables that would go into thedialing in our precise 4Q guidance a little bit more, if that's possible? Whatare some of the factors that might swing it to the high or low end of therange?

Ron Buschur

Well, I think, Jeff, we'redefinitely if there is a range of factors, and I don't think it really helps usto go through that. I mean, obviously, we're not trying to pinpoint a number.Obviously, the issues are on one level with the OEMs, how strong are the OEMs?And obviously that is impacted by how strong various operators are across theglobe, and what is driving demand, and how fast they deploy, and all thosefactors, as well as, as you know, in our direct operator business we saw somegood growth in the last quarter.

Hopefully, we'll see that furthergrow this quarter, but how strong that is and timing for it, as well asabilities of us to respond to orders as we get to the latter particular of thequarter if the orders come in, how quickly can we turn those around? All thosefactors are going to impact it. So we don't want to get specific with any onecustomer or anything like that.

Jeff Kvaal - Lehman Brothers

Okay. Well, that pretty answeredmy next question, which is about AT&T.

Ron Buschur

Well, we certainly hope that as wego into Q4, we're seeing an improvement with the network operators and thespend. When they continue to spend, we benefit from that. Obviously, as youknow, Jeff, with our relationship, we're pleased with the spending that we'reseeing across multiple network operator customers, just not AT&T lastquarter. And certainly, we are well positioned this quarter to benefit fromthat growth.

Jeff Kvaal - Lehman Brothers

Okay. Thanks, Ron. And then as far as, in the past you havegiven us a target revenue level for where you folks might be at breakeven. Areyou able to refresh that?

Ron Buschur

We didn't calculate it. Obviously, it was higher than the$200 million we're at. I mean our goal, our long-term goal which we've stated,we're trying to bring that breakeven down to $200 million. I mean, clearly,we're not there at this quarter. And it's going to take us a little while toget there, but that's still a long-term goal. So that's what we are drivingfor.

Jeff Kvaal - Lehman Brothers

And then, finally, Kevin, would you mind helping us with howwe should model the other income line for you guys over the next few quarters.

Kevin Michaels

That's a difficult line because we're being impacted byforeign currency movements, and that's been the wildcard on us. We wereimpacted by $1.8 million of negative translation losses this quarter thatcontributed to that expense line there. Hopefully, that doesn't continue. Butit's hard to predict that.

So I would expect to see that come down this quarter slightly,but the foreign exchange movements and the way they we translate our books, thefact that we have some Swedish Kronor books that are impacted by Euro andDollar accounts, is a little unique and it's causing some strange translations.And we are reviewing that to possibly make some changes in the next year.

Jeff Kvaal - Lehman Brothers

Okay. Excellent. Thanks. Thank you both very much.

Kevin Michaels

Thank you.

Operator

Your next question comes from the line of Bill Choi withJefferies. Please proceed.

Munjal Shah -Jefferies

Yes, hi. This is Munjal on behalf of Bill Choi. Couple ofquestions. One was when should we expect you to pay off the debt, the $130million debt. Should it be July or could it be possible that you might pay ifoff earlier?

Ron Buschur

Sure. With the debts due in July of '08, so that would bepaid then. In terms of prior to that, have we purchased any bonds so far, yeswe have. We're open to purchasing bonds at a discount, but that all depends onwhat's made available to us out there in the marketplace. So we can't guaranteehow much we may or may not buy before the due date.

Munjal Shah -Jefferies

Okay. Could you tell us how much you have purchased so far?

Ron Buschur

Just been a few millions dollars worth

Munjal Shah -Jefferies

Okay. And second question was related to the OEM sales. Theyare at pretty healthy levels here in. Is it fair to say that the replenishmentfrom the OEMs has been done and these are the base levels to kind of modelinggoing forward, or should we expect those to potentially decline in Q3? What'shappening in the market?

Ron Buschur

Well, I think we're a little bit less optimistic about maybethan growing to the levels I think you are trying to allude to. We're cautiousmaybe saying that with the forecast that Alcatel-Lucent has given for theguidance, and I think some of the discussion around Ericsson, we'd like to staya little more conservative on that aspect of our business.

But we're very pleased with the growth that we're seeing outof the OEM customer base outside of those two large or three large players aswell. So we are seeing some other areas picking up. And we're really focused,as we had indicated, to try to have a better balance between our networkoperator direct business and our OEM business. And that's something that theteam is continuing to focus on as we go forward. But the demand is strongacross both operator and OEM business at this time.

Munjal Shah -Jefferies

Okay. And one last one, if I can. On the contract manufacturers,are you in the process of transitioning some business or rationalizing, how youwork with your contract manufacturers, any color there will be helpful?

Ron Buschur

Sure. I assume that you are referring to the fact that wehad cancelled the agreement that we had with one of our EMSproviders on the Philippine operations. What we were trying to do is to getPowerwave in a position to where we can be much more competitive from a marketposition, so we don't have an obligation for volume and gross marginsassociated with that operations within the Philippines.

This should derive positive cost savings for the company andthat's the reason that we elected to cancel that. We're very committed to our EMS partner that we have today, Celestica. And we dobelieve that there are some further expansions that we can do with otherpartnerships with some of our operations to continue to reduce our operatingexpenses going forward.

Munjal Shah -Jefferies

All right. Thanks a lot, guys.

Kevin Michaels

Thank you.

Operator

Your next question comes from the line of Kim Watkins withJP Morgan. Please proceed.

Kim Watkins - JPMorgan

Thank you. I wanted to dig into the geographic trends thatyou've been seeing a little more and touch on third quarter, and obviously howyou see them playing out in fourth quarter and 2008. And specifically, Inoticed that EMEA was up pretty strongly, 14% quarter-over-quarter, if youcould talk, kind of parse that out and talk about what you're seeing in WesternEurope versus Eastern Europe, any impact of network sharing in Western Europe,and also Africa, and then also touch on APAC and North America?

Ron Buschur

Okay. Well, we're seeing demand acrossthe Middle East, Europe and parts of the Africaregion. And I think a lot of the sales improvement that you're seeing there inthe European region would probably fall more towards the Middle East. We're seeing some opportunities there. And as you know,we've opened up facilities in the Middle Eastfinally, and we're able to service those customers more effectively in thatregion.

As well as the APAC region, whichincludes India, we're seeingsome growth in that marketplace, as well as parts of Indonesia and other parts of theAPAC region. It seems to be giving us some growth as well. So we're pleasedwith that trend from our previous quarters.

Kim Watkins - JPMorgan

Okay. And you didn't mention Western Europe, any downtick at all from network sharing?

Ron Buschur

No, I won't say it's a downtick, but I don't think thatwe're seeing the aggressive trends of growth that we were seeing, let's say, atthe beginning of the year in the Eastern European countries.

Kim Watkins - JPMorgan

Okay. And then, Andrew recently announced that they'reeffectively selling back their filter assets to Nokia Siemens. Since Nokia issuch a large customer for Powerwave, is there any risk to that business nowthat Nokia Siemens has its capability in-house or how should we be thinkingabout that?

Ron Buschur

Well, I think if you look at that it sends two messages tome and it gives me a lot of comfort in a couple of aspects. One, it's clearthat Powerwave is the only company that's focused on the wireless space. Andsecondly, I think Nokia has stated publicly that they want to just make surethat they secure the supply chain that they have in place, specifically aroundsome of the Nokia Siemens products that they were supplying.

And I would also say that Powerwave has a very strong andwill have a very strong and healthy relationship going forward. And obviously,we knew Powerwave could not be a sole provider of components too long becauseevery OEM is always wanting multiple sources. Siemens and Nokia have made itvery clear we're strategic partner of theirs and they will continue forward,and Powerwave will benefit from that continued growth. And it tells me Andrewis not committed and focused on that element of the business.

Kim Watkins - JPMorgan

So how do you and Andrew divide the business there?

Ron Buschur

I think I won't go and specify how Nokia does and Siemenswill do that. That's certainly how they want to divide up their business. I cantell you we're well positioned on their next generation of products and theircurrent Flexi Base Station product portfolio today. As you know, about a yearago we did not necessarily aggressively pursue the Siemens filter business thatAndrew did. And I think, in hindsight, that was a very good business decisionon Powerwave's part.

Kim Watkins - JPMorgan

Okay. Last question, headcount at the end of the quarter?

Ron Buschur

We're about 3,100, slightly down over the previous quarterby maybe 100 or so.

Kim Watkins - JPMorgan

Okay, great. Thank you very much.

Ron Buschur

Thank you.

Operator

Your next question comes from line of Mike Ounjian with CreditSuisse. Please proceed.

Mike Ounjian - CreditSuisse

Great. Thanks for taking the question. Kevin, in terms ofthe gross margins for the quarter, were there any charges in there in terms ofinventory write-downs that you didn't pro forma out this time?

Kevin Michaels

Yeah. There were some in there that we didn't pro forma out.It's about $2.5 million of inventory charges that were not pro formaed out.

Mike Ounjian - CreditSuisse

Okay. So for backing that out, we should compare it to the$3 million that you broke out last quarter.

Kevin Michaels

Yeah.

Mike Ounjian - CreditSuisse

Okay. That's helpful. How should we expect that to trendgoing forward? Are there more charges that you'd expect or more inventorywrite-downs that you expect in Q4 and going forward?

Kevin Michaels

Well, one level we don't expect in order to expect it we'dbe taking it. So we're not expecting it. But as we consolidate site singlesthrough sites, and as we look at some of the product lines and stuff, we haveidentified some stuff that becomes excess. So that can happen.

Hopefully, we won't have anymore. But in this nature of thisbusiness, with things changing all the time, things do pop up. But I do thinkit will be pretty minimal and shouldn't be a significant number.

Mike Ounjian - CreditSuisse

Right. Okay. And then, as we look at the revenue guidance,obviously, it's a range of sort of flattish to kind of more traditionalseasonal growth, it sounds like operators would be kind of the driver ofsequential growth if you get to the sort of the higher half of the guidance. Imean should we also think of that having some impact on the product mix awayfrom subsystems or would subsystems still be the driver from power ampsdirectly to the operators, are you thinking about that?

Ron Buschur

Yeah. Mike, first of all, we're sorry that they butchered upyour name Ounjian. But we do believe that going forward if you look at thebalance we should see some improvement with the direct operator. But lookingbetween the product sets, I would say they'll probably be flat. I don't expecta shift between the two, because if you look at what makes up our base stationsubsystem, it's a lot of the products that the operators would buy as welldirect.

Mike Ounjian - CreditSuisse

Okay, great. Thank you very much.

Ron Buschur

Thank you.

Operator

The next question comes from line of Brant Thompson withGoldman Sachs. Please proceed

Tom Lee - GoldmanSachs

Hi. This is Tom Lee for Brant. I just had a couple ofquestions on your 3G revenues. And I noticed it's been kind of trending overthe past few quarters in kind of the mid to high teens. My first question is,is there anything out of the ordinary that kind of drilled a sequential declinein 3G revenues, and secondly, is kind of the mid to high teens, is that theright way to think about it as we look to into Q4 and to 2008?

Ron Buschur

Well, I don't think there is anything in particular that'scausing any shift there. I mean, we did see some sequential decline from June.But if we look year-over-year, we're about flat. We have seen, if you alwaysnotice in there, we've seen a growth in WiMAX. So I don't know if you want toconsider WiMAX 3G. If we have WiMAX back in there, then we have pretty close toa flat area there.

So we're seeing growth in WiMAX. On the 3G side, I thinkyou're aware of the 3G activities in North America.I think those have just started to ramp up again with T-Mobile.

And I believe in Europe, Western Europehas been a little slow. So you could see a little slowness there. Especially inthe summer, they did take their vacations. So you would expect to see someslowdown of that business in the summer quarter like we saw. So you'll expectto start to see some pickup of that here at the end of the year.

Tom Lee - GoldmanSachs

So by and large, it's really going to be determined by, tothe extent of your direct revenues, you can get additional traction on thedirect operator side in terms of getting that number higher?

Ron Buschur

Right. And I think as Kevin had indicated, for the year, Ithink you're going to find that it will be pretty flattish around there ormaybe slight growth if you add WiMAX in.

Kevin Michaels

Yeah. And then, as you ramp up a new deployment on the 3G,if there is OEM supplying that, I mean since we do supply many of the largeOEMs you could see a ramp up in that side of business as well. You could see itdriven both through OEM as well as through direct sales.

Tom Lee - GoldmanSachs

Is it too early to, I guess, give any color in terms of what'08 looks like. Is it going to be roughly flattish, maybe modest growth?

Ron Buschur

Well if you're talking about 3G for '08, I think we wouldexpect to see some good growth in 3G and WiMAX, all the next generationtechnologies we do think that will have some good growth for '08.

Tom Lee - GoldmanSachs

And then, just lastly on the WiMAX front, is that primarilydriven by North America or are there otherregions where you're seeing pockets of growth?

Ron Buschur

Well, it's driven by North America.But we are seeing some other pockets where we're supplying WiMAX products aswell. I mean that's in Europe and other partsof the APAC region.

Tom Lee - GoldmanSachs

Got it. And then, just last, is there any impact in terms ofthe Sprint, Clearwire roaming agreement to that, maybe 10% of your growthexpectations from, let's say, like three, six months ago?

Ron Buschur

Well, we had may be not quite as aggressive growth that youwould outline there in Q1 or Q2 timeframe. We were actually always beingmodest, if you recall, on our expectations in growth and ramp up there onWiMAX, and we said it would be in the Q4 to Q1 timeframe and it would be asmall ramp up, initially less than 10%.

Tom Lee - GoldmanSachs

Got it. Okay. Well, thank you very much

Operator

Your next question comes from the line of Brian Modoff with DeutscheBank. Please proceed

Brian Modoff -Deutsche Bank

Hi, guys. Couple of questions. The covered solutions, you'resaying your covered system have higher margins in the overall business, andthat's has been declining meaningfully from what it was a year ago. What's thereason for that and do you see that turning around, do you see that up againthis quarter?

Ron Buschur

No. Brian, as you know, we were in the process of revampingour complete coverage solution product portfolio and putting new enhancementsinto that product offering. And you had seen, I think, a few of those productsand you know that we're going to be introducing them here in the Q1 timeframe.And we do anticipate the covered solution and in-building coverage businessgrow. And that is a meaningfully segment and a very important market segmentfor Powerwave.

At this point, we're introducing the products that we havecompleted through our research and development efforts. And they do tend tohave a little bit better or adverse margins on an ongoing basis. And that'scertainly part of our growth and our margins assumptions that we have for the2008 period of time.

Brian Modoff -Deutsche Bank

So we'd expect that maybe that we'll see some growth nextyear, from this year in that area?

Ron Buschur

That's for sure.

Brian Modoff -Deutsche Bank

Okay. Can you give us an update on the filter business? Howis that coming along and what's the status of Filtronics in terms of getting itintegrated and moving in the right direction?

Ron Buschur

Well, I think you can see from some of our reductions in ouroperating expenses and some of the consolidation activities, we're making goodprogress along that integration plan that we have put in to place. We stillhave some work to do to rationalize the supply chain, get a little bit moreleverage out of the operation itself.

Marvin and his team are really doing good job of focusing onthat and trying to figure out how we benefit from the combined synergies andstart driving those synergies through the supply chain in our design of our newproducts. And I would say, now, we're maybe 30%, 35% through that process ofreally starting to benefit from trying to look at these synergies.

So we've got some work to do there, and that's what we'll bedoing here at the remainder of Q4 and certainly through the beginning of 2008.

Brian Modoff -Deutsche Bank

So we can see that your biggest drop sequentially was inR&D, would that be reflective of Filtronics restructuring?

Ron Buschur

No. I wouldn't say that's necessarily just focused onFiltronics restructuring. We have done some shifting of some of our resourcesinto Indiaas well. And looking at how we create design centers with core competency andwe reduce some of our sites that we announced last quarter such as our locationin Northern California and some of the sites in Europe, as well that we'redoing design efforts.

Brian Modoff -Deutsche Bank

So in terms of going from last question, going from sevensites down to, I think, you're targeting three or four. You shut two down in China,so now we're are down to, what, say, five left. So we have a couple more tocome, one or two more.

Ron Buschur

We have some more work that we need to be doing, Brian,around the consolidation. And Marvin, the team are looking at what is the mosteffective way of doing that, and how we combine the entities that we currentlyhave and looking at our outsourcing partners as well.

Brian Modoff - DeutscheBank

Okay. Thank you.

Kevin Michaels

Thank you.

Operator

(Operator Instructions)

Your next question comes from line of Blaine Carroll withFTN Midwest Securities. Please proceed.

Blaine Carroll - FTN MidwestSecurities

Yes. Thank you. Hi, Ron and Kevin. Ron, I think one of thethings you mentioned was getting the supply chain down to somewhere around fourto six weeks. I wondered on the other side of the equation what you're quotingyour customers as far as lead times. And then if there is a disconnect, whatimpact that would have on your inventory, and then the inventory turns?

Ron Buschur

Well, right now looking at our current inventory, we'retrying to obviously reduce our inventory levels, as you can see, Blaine, fromthe previous quarter, and we reduced them about $12 million. And we need tocontinue focusing on that to free up the cash that we have trapped on thebalance sheet from previous forecast.

Looking at the current demand that we have in place, thereis an offset between what we're wanting to be able to quote to some of ourcustomers as far as lead times and the lead times within the supply chain.That's what we're trying to bridge that delta. We don't believe that that'sgoing to have a negative impact on the growth of inventory. But it certainlydoes have a bit of an impact on the timing of which we can reduce the inventoryand we can collect on that inventory.

Blaine Carroll - FTN MidwestSecurities

Okay. And it's nice to have goals and targets and that typeof stuff, but is it realistic to be targeting eight times inventory turns bythe end of the year?

Ron Buschur

Well, we're trying to aggressively get to that point. And alot depends on what we have as far as the existing inventory of finished goodsand some of the raw that's in queue that we think that we will be able topossibly sell to some of the operators. But it is very aggressive, you arecorrect.

Blaine Carroll - FTN MidwestSecurities

Okay. And then, Kevin, as far as the operating expenses --and congratulations on bringing it to less than $50 million -- what do youthink the low watermark is on an absolute basis for operating expenses during2008? Where can you bring that down to?

Kevin Michaels

We set a target that we want to try to get to the $45million quarterly rate in 2008, targeting the middle or later half of 2008 toget there. So we certainly want to get down to that level, and that's thetarget we've got right now.

Blaine Carroll - FTN MidwestSecurities

Okay. And then, Ron, you mentioned a couple of times arounddisruption in the market, you're the only one purely focused on base stationequipment and so forth, any change in the pricing environment with some of thedisruption over in Andrew?

Ron Buschur

Well, I think in some aspects its somewhat, I won't sayreduce the pressure, but let's just say reduce the focus short-term. We stillexpect to see unfortunately, Blaine,about the 5% to 8% decline year-to-year until we see a little bit morerationalization in the market. But we're certainly not opposed to trying tomaintain the current pricing models that we have.

It's just there is a lot of other outside disruptions wherethey're starting to combine the technologies of filtering, transmission receiveinto a common module to which ultimately does benefit Powerwave from an overallmargin perspective, but certainly does have a bit of an impact on the top linerevenue when you start doing that as well.

But I think as we see a little bit more rational type ofpricing in the market as the consolidation takes place and CommScope completesthe Andrew merger, I think hopefully it will be a little less aggressive thanwhat it has been?

Blaine Carroll - FTN MidwestSecurities

Are there any assets there that you're looking at, Ron?

Ron Buschur

Right now, we need to somewhat focus on the technology andthe products and the solutions that we have currently acquired. There are someIP that we think will benefit us from a technology perspective that we would bewilling to pick up, but nothing as significant dollar or expense perspectivethat would impact our guidance that we have given.

Blaine Carroll - FTN MidwestSecurities

Okay. Thanks a lot.

Kevin Michaels

Thank you.

Operator

Your next question comes from the line of Ken Muth withRobert Baird. Please proceed.

Ken Muth - RobertBaird

Hi. As you guys exit this year with kind of the Q4 outlookyou gave, would you expect a normal seasonality in kind of early '08 or becausethe revenues are looking a little bit more broader among more customers andmore geographies, might that be a little bit less bumpy?

Ron Buschur

Well, Ken, we're certainly hoping that it's a less bumpythan what we had seen just due to the broad demand that we're seeing right nowin the industry. But as Kevin had stated, and I caution, and you know as well,this industry is pretty volatile. What looks good one day can change veryquickly.

But right now, we would anticipate it maybe being a littleless volatile than what we typically see in Q1. But I wouldn't get yourself toofar ahead there. I am saying that things are going to just stay flat from Q4,Ken.

Ken Muth - RobertBaird

Okay. And you guys came out with a lot of new products in2006, kind of late in the year, and then 2007, just give us an update kind ofwhere you're seeing some of your new products being accepted or where are youin that product cycle?

Ron Buschur

Yeah. Most of our new products, Ken, they came out really inthe Q1 timeframe of '07. And we're seen some nice acceptance of some of theseproducts now as the spend is starting to increase and improve. The area that wewon't see the benefit from until Q4, Q1 timeframe starting up is our coveredsolution, just due to the fact that we're leveraging the technology on ouramplifier platform into our DAS and remote radio head products for the coveragesolution area.

So you're going to see that come into two different, maybe,waves so to speak of acceptance. But looking at the existing product linearound the antennas, we're seeing very good reception, and people really embracingour new i-RET antenna, as well as our two way antennas, our Clean Siteproducts, as well as our VersaFlex base station enclosure and some of the workaround the DAS solution business, where you're looking at taking the existingremote radio heads and incorporating them into a product set that provides aDAS solution into the market.

So it's picking up. But I would like to certainly have thatproduct suite that we've been focused-on on the covered solution end of ourbusiness completed, so we can benefit from that growth. But we're well poisedin 2008 for that.

Ken Muth - RobertBaird

Okay. And then a follow-up just with Kevin. Kevin, I thinkyou mentioned that there is $2.5 million inventory again going to the cost likea solo line. Is that going to be over with as we go into Q4 so we really don'tsee that, because if you'd back that number out, I think you would come outwith about a 21.3% gross margin? Just trying to understand if that's kind ofthe baseline going forward?

Kevin Michaels

Well, yeah. I would leave the baseline at -- let's startwith the 21% that we're at. I mean, hopefully, like I said, I think thisquestion got asked before. Hopefully, we will not continue to see some of that,but it is difficult to predict. I mean we clearly don't expect. We went throughand it didn't. That's all we had. But as we are going through this process,things do pop up that become obsolete. So I can't guarantee there won't beanymore.

Ken Muth - RobertBaird

Okay. Thank you.

Kevin Michaels

Thank you.

Operator

Your next question comes from the line of Anil Doradla withCaris & Company. Please proceed.