Alvarion Q3 2007 Earnings Call Transcript

Oct.31.07 | About: Alvarion Ltd. (ALVR)

Alvarion Ltd. (NASDAQ:ALVR)

Q3 2007 Earnings Call

October 31, 2007 9:00 am ET

Executives

Siegel Magen - Director ofCorporate Marketing

Tzvika Friedman - CEO

Efrat Makov - CFO

Analysts

Ittai Kiddron - CIBC

Mike Walkley - Piper Jaffray

Steve Ferranti - Stephens Inc

Rich Church - Collins Stewart

Ari Bensinger - Standard &Poor's

BlaineCarroll - FTN Midwest Securities

Larry Harris - Oppenheimer

Ehud Eisenstein - Oscar Gruss

Irit Jakoby - Susquehanna

Joanna Makris - Brean Murray,Carret

Daniel Meron - Rbc CapitalMarkets

Scott Sullivan - Smith Barney

Jonathan Hollis - Ion

Daniel Meron - RBC CapitalMarkets

Gunther Karger - Discovery Group

Operator

Ladies and gentlemen, thank youfor standing by and welcome to the Alvarion Incorporated Q3 2007 EarningsRelease Conference Call. During the presentation, all participants will be in alisten-only mode. Afterwards, we will conduct a question-and-answer session. (OperatorInstructions).

As a reminder, this conference isbeing recorded Wednesday, October 31, 2007. And it is now my pleasure to turnthe conference over to [Siegel Magen], Director of Corporate Marketing. Pleaseproceed.

Siegel Magen

Thank you, operator. Goodmorning, everyone. On the line with me today are Tzvika Friedman, CEO and EfratMakov, CFO.

The earnings release was issuedthis morning. It is now available on all major news feeds. Matters discussed inthis conference call may contain forward-looking statements within the meaningof the Safe Harbor provision in the PrivateSecurities Litigation Reform Act. These statements are based on the currentexpectations or beliefs of Alvarion's management and are subject to a number offactors and uncertainties that could cause actual results to differ materiallyfrom those described in the forward-looking statements.

The following factors, amongothers, could cause actual results to differ materially from those described inthose forward-looking statements: failure of the market for WiMAX products todevelop as anticipated; Alvarion's inability to capture market share in theexpected growth through WiMAX market as anticipated, due to, among otherthings, competitive reasons or failure to execute on our sales, marketing ormanufacturing objectives; inability to further identify, develop and achievesuccess for new products, services and technologies; increased competition andits effect on pricing, spending, third-party relationships and revenues; aswell as the inability to establish and maintain relationships with commerce,advertising, marketing and technology providers; other risks detailed from timeto time in the company's annual report on Form 20-F, as well as in otherfilings with the Securities and Exchange Commission.

I would now like to turn the callover to our CEO, Tzvika Friedman. Please proceed.

Tzvika Friedman

Good morning, everyone. Our teamcontinues to execute according to our plan and we are pleased to reportexcellent progress in several areas in Q3. We achieved another record quarterand are on-track to achieve our growth target of 25% to 30% for the year. WiMAXshipments remained high at $34 million and revenue reached $35 million, morethan double the same quarter last year.

We attained important technicalmilestones and our system was again featured by Intel at both its DeveloperForum and at the keynote address at a major trade show. We held our firsttelecom service provider user-forum with over 50 operators participating alongwith many Open WiMAX partners and we won some important strategic deals.

Since everyone is asking us if wethink we can win against traditional telecom equipment vendors once they enterthe market, I will address this upfront. It is no longer hypothetical. We arecompeting with these vendors and we are winning. Not everything, of course, butour fair share of deals so far.

Revenue growth continued to bedriven by primary broadband applications. Our community WiMAX shipments, todate, reached more than $220 million, significantly more than any other vendor.The shift in mix we have been expecting occurred in Q3 and our gross margincame just below 50%. This is something we have taken into account in ourplanning and through careful expense control, we were able to remain solidlyprofitable and cash flow positive while continuing our major investment inWiMAX.

Order size is getting larger. InQ3, we had 16 customers, with revenues of over $1 million, but customerconcentrations remained low with no 10% customer in the quarter. We continuedto benefit from repeat business from Q1 customers such as Telkom South Africa and challengers such as Iberbanda.

To give you some regionalhighlights, revenue from North America grewsignificantly, reflecting our earlier decision to focus on carriers. WiMAXbusiness with Tier 1, Tier 2 and challenger in license frequency is showingtraction.

In addition to WiMAX growth, weexpect growth in the unlicensed market. In Q3, we were the first vendor tobring FCC approved 5.4 gigahertz multipoint products to the market with ourexpanded BreezeACCESS VL line.

There is a tremendous amount ofactivity going on in Asia-Pacific that is not reflected in revenue this quarter,due to the long sales cycle on some of the projects in the region. In Australia,OPEL finalized the financial terms of the project with the government and thelegal challenges were resolved. The next step is testing and evaluating variousvendor solutions and the normal RFI/RFP process. There is no particularpressure to move quickly since the government has granted a six-month extensionto the deployment deadline. And we do not expect vendor selection for quitesome time.

We have continued to work onexpanding our ecosystem of partners with a particular focus on key markets. Forexample, in Japan, we havebeen working closely with Hitachi,one of our strong local partners, to optimize a solution for the needs of thelocal market. Three licenses, two for mobile and one for rural broadband, areexpected to be awarded in Japanin the next few months, and four groups of companies have applied. According to local media reports, WiMAXservices are expected to be available in 2009.

Another key market, Taiwan, is alsovery active. The government official in Taiwansaid recently that Taiwanexpects to have 8 million WiMAX subscribers by the end of 2010. We are seeing several small initial deploymentsas part of M-Taiwan, a project aimed at establishing a wireless broadbandinfrastructure in Taiwan.

As you know, during Q2 we won businesswith Chunghwa Telecom as well as the first 16e mobile project in Taiwan with APTG.The initial deployment including those recently announced by severalcompetitors are still small, but larger projects related to recently awardedlicenses are coming in the future, and we target winning one or two of them. Weare also seeing our efforts pay off in the form of achieving several industrymilestones.

For example, a few weeks ago, theInternational Telecommunication Union approved WiMAX as an IMT-2000 standard,putting WiMAX on the same footing with 3G technology. This decision is of globalsignificance to operators who look to the ITU to endorse technologies beforeinvesting in infrastructure and it should accelerate adoption.

Another important milestoneoccurred recently when the industry's first application lab opened in Taiwan. The labis intended to be an open environment where developers can come to develop andtest new WiMAX applications. Clearly, in order to test applications, thereneeds to be a network infrastructure available and we are proud that we werechosen to supply our 802.16e mobile WiMAX solution to the lab. The lab is runby the Industrial Technology Research Institute, a non-profit R&Dorganization engaged in applied research and technical services with 6,000employees around the world.

Being chosen by ITRI is a strongindication of the advancement and innovation of our technology and the maturityof our solutions. This brings us a great deal of visibility with severalsegments of the industry. We participated in the fourth mobile WiMAX PlugFestearlier this month. These WiMAX forum sponsored events are important becausethey provide equipment suppliers with an open environment to test compatibilityand interoperability of equipment in preparation for certification.

As an indication of growingsupport for WiMAX, there were more than 200 engineers from 42 companiesparticipating. In addition to our own engineer, AWB, a venture in which we areinvolved in cooperation with Taiwan-based Accton, was also an activeparticipant in the PlugFest. Individual vendors are prohibited from discussingdetails of their interoperability testing at PlugFest, but we want to highlightthe fact that we are extremely pleased with our experience at PlugFest. Weperformed interoperability testing with numerous devices and successfully testedunique features such as fast handoff and HARQ.

HARQ stands for hybrid automaticrepeat request, which enables fast recovery from transmission errors by storingdefective packets and combining them with subsequent retransmission. Inaddition, HARQ provides diversity in time and, therefore, is an essentialcapability for operational robustness and improved throughput in challengedcondition of wireless mobile communication. Advanced Antenna Technology such asbeamforming has been touted a lot recently.

It is important to remember that asuccessful solution requires the depth of experience to integrate technologiessuch as beamforming into the deep layers of mobile WiMAX error protocol inexactly the right way. The way in which this integration is done is the realdifferentiation; not the beamforming technology itself.

This brings up another aspect ofWiMAX that is not well-understood, its flexibility. The definition of 3Gstandards are so comprehensive that there is very little opportunity todifferentiate between different vendor solutions. This is not the case withWiMAX where there is much more opportunity to design unique feature,performance and functionality on top of the basic WiMAX standard. This enablessubstantially more comparative differentiation than with traditional servertechnology. And the core R&D experience required to develop WiMAX is muchcloser to broadband IP than to traditional wireless technologies, givingAlvarion a distinct advantage.

As a further indication of ourtechnological advancement, at WiMAX World show in Chicago, we were the only vendor to showcasepersonal broadband services as vehicular speed with downlinks in excess of twomegabit per second.

Due to the maturity of oursystem, we were invited by Intel to develop a forum to showcase our basestation with all these advanced features operating with Intel's Montevinanotebook with the Echo Peak WiFi WiMAX capability. At this event, Intelintroduced the first platform to be built from the ground up to ultra-mobilePC, as well as new platforms for mobile Internet devices. These feature smallform factors and major improvements in power efficiency in order to offer thecapabilities of a laptop computer in a device the size of an iPhone.

Our long-standing relations withIntel have never been stronger or more active. We have been working togethercontinuously since our two companies first began collaborating in the earlypart of this decade. Some of you probably remember that four years ago, at anAlvarion investor event, Ron Resnick of Intel, now the President of the WiMAXForum, described a plan to put WiMAX in a variety of devices so that anyapplication that runs an Intel-based PC would run on a mobile Internet device.

The other piece of personalbroadband vision is the completely open architecture, which we have advocatedtogether with Intel, Cisco and others culminating in the approval of [Prophecy]in Q2. Even the WiMAX doubters and skeptics are beginning to acknowledge that theneed to eliminate the world-garden-approach where mobile devices are lockedinto a network of a single carrier that controls the available applications.

Introducing a truly openarchitecture will be a destructive game-changing development. and working withour partners, we are moving closer to this reality every day. We believe thatwhile they might appear to support a best-of-breed approach in public, thetraditional telecom equipment manufacturers are actually resisting this conceptbecause it represents a total strategic change in the way they do business, theway they are organized, and how they approach the market, etc.

However, we have already seensigns that the Open WiMAX approach is appealing to operators, both the incumbentsand challengers. We recently held our first user-forum in Greece, which was attended by over 50 of ourWiMAX customers from Europe and the Americas, both incumbents andchallengers, as well as several of our ecosystem partners. These attendees wereall present because they support and have adopted our Open WiMAX approach.

At the end of Q3, we had over 200commercial WiMAX deployments, up from about 170 last quarter. As more trialsconvert to deployment and operators shift their focus towards e-systems,tracking the running total of all trials is becoming less meaningful. So in thefuture, we intend to focus on tracking our e-trials. After concluding some andadding others, we have more than 40 active trials of our 802.16e TVD solutions.

As we mentioned on the last call,we have been competing for a role in more than a dozen large strategic WiMAXprojects. Some of the informal indications are good and we hope to be able toannounce at least one important win before year-end, but please remember thatit is unrealistic to expect to be selected for all of them and the timing ofthe announcement is in the customers' hands, not ours.

To summarize, we are making goodprogress in both technical and business terms and we are on track to meet ourgrowth target for the year. With personal growth and deployment still likelyonly towards the end of next year, we continue to believe 20% to 30% growth for2008 is the right target. Our second major financial objective for next year isto make additional progress toward our target operating model. Now I would liketo turn the call over to Efrat.

Efrat Makov

Thank you, Tzvika. We are pleasedwith the continued momentum during Q3 resulting in another quarter of recordresults. WiMAX revenues more than doubled from Q3 of '06, and they grew 25%sequentially. Shipments were up over 90% from the third quarter of last yearand were about the same as in Q2.

Our non-WiMAX business was aboutthe same as a year ago, and declined slightly from a very strong Q2.

Turning to the geographicbreakdown of revenues, EMEA accounting for 54%, down from 57% in Q2. Latin America accounted for 90% compared to 21% lastquarter. North America increased to 20% from11% in Q2. And APAC declined to 7% from 11% in Q2. Direct sales accounted for42%, down from about 49% in Q2. Distribution for about 47% versus 40% in theprevious quarter and OEM represents the remaining 11%, about the same as in Q2.

As we have been expecting forseveral quarters, our mix has begun to shift, and gross margin trended slightlylower, just under 50%. We continue to enjoy a relatively favorable mix ofrevenues and expect our gross margin to trend lower and stabilize around 45%longer term. Our non-GAAP operating expenses in Q3 were $29.6 million comparedto $28.8 million in the previous quarter. The increase in operating expensesrelated mainly to variable selling costs.

Non-GAAP results in Q3 included anet profit from continuing operations of $2.4 million or $0.04 per dilutedshare compared to $2 million or $0.03 per diluted share in Q2. Q3 of '06 wasbreak-even. GAAP net income in Q3, which included deferred stock compensationexpense, the result of discontinuing operations and amortization ofintangibles, was $621,000 or $0.01 per diluted share.

Cash and cash equivalents as ofSeptember 30 were approximately $125 million, reflecting an increase of over $3million from Q2. DSO declined to 52 days and the inventory level was about thesame as in Q2.

Turning to the outlook, we expectrevenues in Q4 to range between $61 million and $65 million. This rangerepresents revenue growth of 27% to 30% for the full year. Based on thisrevenue range, we expect non-GAAP per share earnings from continuingoperations, which excludes amortization, the effect of stock option expensesand one-time charges, to range between $0.02 and $0.05. GAAP EPS will rangebetween $0.02, and a loss-per- share of $0.01.

Our growth target for 2008remains unchanged at 20% to 30%. Another important goal for 2008 is to growexpenses at a slower rate than revenues and improve the operating margin movingtowards a long-term goal of 10%. Now we will be happy to take your questions.

Question-and-Answer Session

Operator

Thank you very much. (OperatorInstructions). And our first question comes from the line of Ittai Kiddron withCIBC. Please proceed

Ittai Kiddron - CIBC

Thank you and good job on thequarter, guys. Tzvika, I had a question for you. You mentioned one largecontract by year-end. When you mean large contract, is that a $10 million andhigher target?

Tzvika Friedman

The last contract we indicatedprojects, which are -- we said last time, over $20 million, not necessarily inone year and some of them could even be above $100 million.

Ittai Kiddron - CIBC

What is your perspective onCisco's entrance into this marketplace and how do you see that change thecompetitive landscape? I know it gives some validation into WiMAX, but from acompetitive standpoint, certainly raises the bar. What is your perspective onthat?

Tzvika Friedman

I think the first point youmentioned I think is very good because you still have skepticism thrown in theair from QUALCOMM and from Ericsson and I think when the largest player in theworld like Cisco decides there is a market, it says something about the factthe validity of the market and the potential for everyone in the market.

In addition, I think Cisco wouldbe a competitor and we will have another strong competitor. That is what I cansay. I don't underestimate their ability to compete. Although in many places,we are partnering and working together. One of their divisions that providescore infrastructure for mobile is and will continue to be one of our Open WiMAXpartners.

Ittai Kiddron - CIBC

Okay. And with respect to thegeographic location of this one-time track, would Asiabe a good guess?

Tzvika Friedman

For the --?

Efrat Makov

What do you mean one time?

Ittai Kiddron - CIBC

For the one large contract youhope to nail down by year-end?

Tzvika Friedman

We cannot. The issue is not onlywhat we can close, it is also what we can announce. And as I say, it is not alwaysin our hands, so I cannot know exactly where it will be,

Ittai Kiddron - CIBC

Okay. Lastly, when you look intothe next quarter, you had a very nice improvement in the US business. It looks like from arevenue standpoint, almost double quarter-over-quarter. Yet the others seem tobe -- well, all of them seems to be down sequentially, all of the otherregions. How should we think about the transition to fourth quarter with regardto the regions and maybe you can comment on why do you see downtrends in thosethree markets?

Tzvika Friedman

I think we can expect Q4 to bemore like Q2 in terms of how it will be divided between the different regions.

Ittai Kiddron - CIBC

Very good. All right. Good luck,guys.

Efrat Makov

Thank you.

Operator

Our next question comes from theline of Mike Walkley with Piper Jaffray. Please proceed.

Mike Walkley - Piper Jaffray

Great. Thank you very much. It'sclearly good to see the growth in the WiMAX piece of business. Can you justhelp us on your 2008 guidance how we should think about the legacy business? Itwas down a little bit sequentially off a strong Q2. Is that kind of a flatoutlook for '08 and then the 20% to 30% growth is mainly driven by your WiMAXside?

Tzvika Friedman

We did not do the exact calculationand guidance about the legacy, maybe just to highlight on 2007. On 2007, we sayit would be roughly flat and even Q3 is flat compared to last year. It's maybea little bit lower than the stronger Q1 and Q2. For next year, we expect WiMAXto grow over 50% and to contribute to the majority of the growth.

Mike Walkley - Piper Jaffray

Okay. Great. Thank you. And justone last question. On the sales and marketing R&D, it was in line with yourguidance of kind of up $0.5 million to $1 million sequentially. How should wethink about those two line items growing in the near term?

Tzvika Friedman

We will control the growth of theOpEx so we will stay profitable.

Mike Walkley - Piper Jaffray

Okay. So you just control them,but should still kind of grow as a percent of your sales growth? Is that thebest way to think about it coming off that $0.5 million?

Tzvika Friedman

We expect the OpEx to grow, butin a lower rate than the growth in revenues.

Mike Walkley - Piper Jaffray

Okay, great. Thank you very muchand good luck.

Tzvika Friedman

Thank you.

Operator

Our next question comes from theline of Steve Ferranti with Stephens Inc. Please proceed.

Steve Ferranti - Stephens Inc

Thank you. Good morning. A quickquestion on the larger contracts that you had spoken about earlier, can youtalk about to what extent you think those might be multi-source deals versussingle sourced?

Tzvika Friedman

I would expect most of them to bemulti-source, but we have this one example that is a single source.

Steve Ferranti - Stephens Inc

Okay.

Tzvika Friedman

But my expectation for largeprojects is that it will be more than one vendor.

Steve Ferranti - Stephens Inc

Okay. And would those typicallybe broken up on a regional basis then I guess between suppliers?

Tzvika Friedman

Usually you would put one in onecity and another in another city. We would not mix them between differentcities.

Steve Ferranti - Stephens Inc

Got you. And could you give uskind of a flavor for to what extent these larger contracts are with incumbentsuppliers versus upstarts/competitive carriers?

Tzvika Friedman

It's the mixture of all actuallyif I think of it as Tier 1 incumbent or challengers. There are even solo operators.So it is a combination of all.

Steve Ferranti - Stephens Inc

Okay. And one last one for me.The recent ITU decision that you mentioned earlier to classify WiMAX as anofficial 3G technology, I know we are still early on following that decision,but have you seen any change in terms of carrier perceptions, particularly withthe incumbent wireless carriers, changing in their perceptions regarding WiMAX?And perhaps some of the OEMs that have been on the fence in terms of WiMAX, doyou think this decision changes their perceptions on the technology? Thanks.

Tzvika Friedman

Just to highlight, the WiMAX wasa technology in IMT-2000 event, so it is not into 3G. 3G is also part ofIMT-2000 event. What I can say is that all of these operators are well aware ofit and it's not a decision that was secret and suddenly found out. They knewabout it before. So I don't expect it would be an immediate change for them. Ithink the changes in the effect it would have also on regulators allowing WiMAXin some of these bands. Some of the operators are waiting for such a decision toknow that another [stamp] that it's the right direction to go.

I think we still face regional, Iwould say, battles certainly in Europe to get to use the fact that the IMT-2000to get WiMAX into the 2.5G and it would probably initially on the European basisand then country-by-country, but it is a right step, a good very strong step inthe right direction.

Steve Ferranti - Stephens Inc

Okay. Very helpful. Thanks andcongrats on a solid quarter, guys.

Tzvika Friedman

Thank you.

Operator

Our next question comes from theline of Rich Church with Collins Stewart. Please proceed

Rich Church - Collins Stewart

Thanks. A couple of questions.Can you give us, Tzvika, any sense or reaction that you are getting fromcarriers worldwide around what is happening at Sprint and if anybody -- if theyare delaying to watch how Sprint's trials go or how Sprint's rollout goes, anyimpact on activity?

Tzvika Friedman

I will say this very carefullybecause I might be looking from an optimistic eye, but I didn't see anyreflection on that. By the way, I am not sure the fact that Sprint, a recentevent and a new CEO coming in would necessarily affect the WiMAX business.Actually Barry West and the new CEO said that the WiMAX plans are on track, soI am not sure -- people perhaps wait to see what will happen, but I didn't seethat it delays any decisions.

Rich Church - Collins Stewart

Okay, great. And on your OEMrelationship side, can you talk about any plans in that area? Are you lookingto add more OEMs or what is your strategy there?

Tzvika Friedman

Our strategy for the long term,as we indicated many times, is to be able to sell to customers with a channelthat fits them and these channels include sometimes OEM if we have a solutionthey do not have. But as I indicated about some of our current OEMs in the longterm, there will be a comparator, so it is a good competition, a partnership,but we know it is a long-term channel and we are more focusing on having theright strong local partner, the example of Hitachi, which we had in Q3.

Sometimes what I call strongglobal partners in the light of the IP companies that perhaps we work with themin few places. We mentioned IBM in the past. And potentially OEM with some ofthe current players would not have a full portfolio or a whole solution inspecific cases. So this is the current plan about the overall channel,including OEM.

Rich Church - Collins Stewart

Okay. And on the operating modelcomments, talk about the timing of when you expect gross margins to get to the45% level and when you might see a 10% operating margin? I mean is that severalyears out or maybe any kind of commentary you could make about --

Tzvika Friedman

I will not tell you it is 3010,okay? What I can tell you, it is not 2008. And in 2008, we will be on the waythough. Probably a 10% operating profit is something which is more in '09, '10timeframe.

Rich Church - Collins Stewart

Okay. Thanks a lot.

Operator

Our next question comes from theline of Ari Bensinger with Standard & Poor's. Please proceed.

Ari Bensinger - Standard & Poor's

Yes, thank you. I am trying toget a hold on the operating model. It seems like gross margins long-term aresupposed to dip from the 50% level to the mid-40s, so you will have to get theoperating leverage from lower operating expenses. So, I am just wondering goingforward, where should we see most of that leverage from? Of course, R&D isvery important. So, is most of that going to be in sales and marketing andG&A?

Tzvika Friedman

The way we look at this is thatwe target, of course, growth and we indicated growth of this year and growth ofnext year. So, actually you will see that the OpEx level will go down in totalto around 35% to allow 10% operating profit. We could expect that the sales andmarketing expenses to be in the range of 14% to 16%, the R&D expenses to bein the range of 14% to 16%, the G&A to be in a range of 4% to 5%, you willget to 35% gross margin. But the current OpEx would not grow in the same rateas the revenues grow. Some of the investment in R&D is in place, theinvestment in go-to-market; some of the investment we already did should servealso for the growth of next year. So, we don't expect the growth in the OpEx tobe in the same rate as the growth in revenue in 2008, as well as in 2009.

Ari Bensinger - Standard & Poor's

Understood, very helpful. And canyou give us some metrics in terms of customer, maybe win rates? And also likeyou have said before that usually the customers, they start off with smallorders and as they become more comfortable with the technology andinstallments, they up their orders. Have you continued to see that trend interms of maybe like repeat customers?

Tzvika Friedman

Yes. I don't have the exactdetail, but I can tell you most of the customers we have, we hardly lose acustomer. Once we get a customer, usually they like the product, the quality,the company, the service, so we hardly ever lose a customer we already have.Regarding the hit rate on RFP and RFQs, in this rate I think our hit rate is goodbecause we are focused. We are not going after every deal, and if there aredeals we don't have the right channel and partners or solution, we just decidenot to go.

Ari Bensinger - Standard & Poor's

Very good, and lastly, have youput out any number on opportunity in the WiMAX infrastructure market?

Tzvika Friedman

I'm not sure I understand thequestion.

Ari Bensinger - Standard & Poor's

On your addressable market, indollars what may be the market opportunity you see for WiMAX going forward?

Tzvika Friedman

There is various market researchthat goes from $9 billion for 2010 to $4 billion in 2010. We believe it is someplace in between this range. I would not go to the high end, certainly not whenwe are planning our growth. Maybe we will be surprised for the good, but wecannot plan on exponential numbers that someone puts on a market research. Ourassessment is that the numbers are in the range of this market research.

Ari Bensinger - Standard & Poor's

Thank you.

Operator

Our next question comes from theline of Blaine Carroll with FTN Midwest Securities.

Blaine Carroll - FTN Midwest Securities

Yes, thank you. Tzvika, youtalked about your hit rate on the RFPs and RFQs, but could you talk about theoverall activity that is out there and when do you think that peak activitywill come in?

Tzvika Friedman

I think there is always a verybig activity. We see it in the number of RFI and RFQ. We're answering nowcompared to a year ago, which was also a growth in activity. And this is why wealso --

Blaine Carroll - FTN Midwest Securities

I'm sorry, what are thosenumbers?

Tzvika Friedman

Hundreds of RFP, for example,this range of numbers.

Blaine Carroll - FTN Midwest Securities

Okay.

Tzvika Friedman

And it is one of the reasons, whywe think we will grow 20% to 30% next year, is built on the fact that there ismore activity and more RFP, plus the growth from existing customers.

Blaine Carroll - FTN Midwest Securities

Okay. And then how much of it isfor the fixed WiMAX versus the mobile WiMAX?

Tzvika Friedman

This is a tough question, becausemost of the RFPs are for 80216e standards. So, most of them are for the mobileWiMAX standard. Regarding the application, I think many are asking for fullmobile spec, although the specific applications for the next two years will befixed nomadic.

So it is difficult to judge,because you can have someone wanting to see that your handoff is a fewmilliseconds. Although, for the next two years, we are only going to do fixsolution. But they have the ambition, the dream to go to mobile in the future.Some of them even the license does not allow it yet. So, it is difficult tosay. Otherwise, I will tell you that many are still for fixed nomadic, but itis based on mobile spec.

Blaine Carroll - FTN Midwest Securities

Okay. And then for Efrat, couldyou talk about seasonality between the fourth quarter and the first quarter?

Tzvika Friedman

Traditionally, first quarter isweaker in the wireless industry. People ask me why. I can tell you, it is thewinter. People want to dig in the ground or climb towers. Other people willshow you that actually there are too many festivals during this quarter. Someareas celebrate the New Year and end it at the end of January, others have newyear in China, Carnival in Spain, Carnival in Brazil. Summer is a little bitweaker quarter seasonality.

Efrat Makov

But it's true that Q1 last yearwas stronger than Q4.

Blaine Carroll - FTN Midwest Securities

Right, I mean you may haveseasonality, but it may not be down. Normaltelecom-ish because you've got a business growing, so we may not expect it tobe down sequentially, correct?

Tzvika Friedman

Maybe not, yes, but stillseasonality is weak.

Efrat Makov

It is seasonal.

Tzvika Friedman

It is always weaker than Q2, right?

Blaine Carroll - FTN Midwest Securities

Okay. And then how much CPEequipment did you sell during the quarter? What is that mix that is impactingthe gross margin?

Tzvika Friedman

We don't provide exact mix, butthe dollar value of sales of CPE this quarter is bigger than last quarter. So,the mix of infrastructure to CPE is more tending to the CPE side, this timethan previously.

Blaine Carroll - FTN Midwest Securities

Okay. Great, thanks and goodluck.

Tzvika Friedman

Thank you.

Operator

Our next question comes from theline of Larry Harris with Oppenheimer. Please proceed.

Larry Harris - Oppenheimer

Yes, thank you andcongratulations on the results for the quarter. I apologize if this was askedpreviously, but any updates in terms of developments in Eastern Europe?

Tzvika Friedman

It was not asked. What I can sayabout East Europe is there are a few projects in various countries; Poland, Romania,Bulgaria, Russia and we are progressing wellwith some of them.

Larry Harris - Oppenheimer

Understood, and the otherquestion is, we saw a number of companies, unlike yourself, miss top lines,miss bottom lines in the quarter. At the margin, did you see any kind of impactbecause of the credit markets, the bond markets, etc. in terms of ability toclose deals in the quarter?

Tzvika Friedman

Currently, we did not see anyimpact on this. It may impact in the future, funding for challenges in ourmarket, but currently we didn't see anything.

Larry Harris - Oppenheimer

Understood, okay, great. Well,thank you.

Tzvika Friedman

Thank you.

Operator

Our next question comes form theline of Ehud Eisenstein with Oscar Gruss. Please proceed.

Ehud Eisenstein - Oscar Gruss

Yes, thank you. Nice numbers.Just to follow-on on the gross margin, the mix shift is between CPEs and basestations or so also between the product lines?

Efrat Makov

Yes.

Tzvika Friedman

The reason for the gross marginreduction is that we sell more CPEs than infrastructure this quarter. It meanswe start filling CPEs to base station or infrastructure with delivered quartersbefore.

Ehud Eisenstein - Oscar Gruss

And that is a trend that weexpect to continue going forward?

Tzvika Friedman

We expect this trend to continuegoing forward, yes.

Efrat Makov

We said that before. That's themain reason why we see the gross margin going down eventually to mid 40s.

Ehud Eisenstein - Oscar Gruss

Absolutely. I know a 10% customerin the quarter, how many 10% customers do you expect in '08?

Tzvika Friedman

We did not look at it. I am notsure there will be --.

Ehud Eisenstein - Oscar Gruss

That's another way to ask aboutthe larger deals that you cannot announce at the moment.

Tzvika Friedman

Just to clarify, when we talkedabout large deals, it doesn't mean there have to be $20 million in one year or$30 million in one year. So, if you look at the next year growth to be 10%, youhave to be over $20 million, right?

Ehud Eisenstein - Oscar Gruss

Sure. And I missed your commenton the 80 active deployment drive.

Tzvika Friedman

No, you missed in quarter. Thisquarter is only 40.

Ehud Eisenstein - Oscar Gruss

Okay. It's 40. Thank you, goodluck.

Operator

(Operator Instructions). Our nextquestion comes from the line of Irit Jakoby with Susquehanna. Please proceed.

Irit Jakoby - Susquehanna

Hi, thank you. So you mentioned40 mobile trials this quarter. I believe it is the same number that youmentioned last quarter as well. Can you talk about how this compares with thetotal number of mobile trials in the industry and where you are seeing the mostactivity in terms of geography and the kinds of operators?

Tzvika Friedman

Okay. Let me start by explainingthat what we discussed is the active trials. It means that some of the trialswe had were stopped. Some of them were converted to a commercial deployment. Sothe active trials stay at 40, which is roughly a number we had previously. Howit is compared to the overall industry, it is difficult for me to say, but Ithink it is a significant part of the industry. You can imagine that in certaincases when we have a trial with us in the trial, there are two or three othervendors, so people also have trials in the same places.

Irit Jakoby - Susquehanna

And so geographically, where doyou see the most activity?

Tzvika Friedman

I think it is almost everywhere,even places that not go for mobile WiMAX very quick are testing. As I indicatedbefore, they are testing the mobile WiMAX technology, including the mobilefeatures even though they don't specifically go to a mobile solution.

Irit Jakoby - Susquehanna

Okay, great. So to switch to anoperating margin question, I know you mentioned that target model of 10%operating margin is expected in the 2009, 2010 timeframe. Is there a revenuelevel that corresponds to that?

Tzvika Friedman

I think we discussed before thatit is in the range of $80 million.

Irit Jakoby - Susquehanna

Okay, great. Thank you.

Operator

Our next question comes from theline of Joanna Makris with Brean Murray, Carret. Please proceed.

Joanna Makris - Brean Murray, Carret

Hi, there. I wanted to follow upa little bit on some of your comments on Japan. When looking at some ofthese upcoming opportunities in Japan,I guess how well-positioned do you think some of the larger incumbents likeMotorola and others will be in this market? It seems like the majority of theirproducts are sort of optimized towards larger deployments on some of theirexperiences with the USoperators and obviously at least one of your competitors is developing asmaller, more compact device for this market. So I guess how do you see thelarge incumbents playing out in Japan?

And then secondly what do you seeas other opportunities within 2.5 gig in the UK or other regions and what couldbe the timing on other 2.5 gig opportunities? Thanks.

Tzvika Friedman

Okay. A little bit about Japan.Japan,as I indicated, two licenses, probably maybe even three at the end, for mobileWiMAX and there will be four companies who compete on it. I think when thinkingof selling in Japan,we are well-positioned. One thing is to have the right product and the rightproduct in Japanis probably, as you indicated, a compact, high power, all-out solution and Isuspect that I think most of the industry knows about. Not all of thecompetitors have such a solution.

The second portion is to have theright channel, relation, history and I think some of our competitors arepositioned quite well. Some of them don’t have such a position I expect that inJapan competition from localvendors like NEC and Fujitsu either have products in time could be even tougherthan some of the names of those who sell in North America.

The second question was about 2.5gig, I think there is an expectation to have licenses in the UK, first of all, maybe in Japan, then in the UK,then I think in Scandinavia. Licenses werealready awarded in Taiwanand I hope that with IMT-2000, there will be maybe some flexibility in somecountries in Europe. You have also in the 2.X,you have 2.3 in Russia, some2.5 gig in Russia.You have 2.5 in Latin America, a few placesalso.

Joanna Makris - Brean Murray, Carret

Thank you.

Operator

Our next question comes from theline of Daniel Meron with RBC Capital Markets. Please proceed

Daniel Meron - RBC Capital Markets

Thanks. Hi, Tzvika and congratson continued execution here. A couple of questions, I may have missed thembefore. Can you give us a sense on what was the level of WiMAX shipments in thequarter?

Tzvika Friedman

The shipments of WiMAX in thequarter were $34 million.

Daniel Meron - RBC Capital Markets

Shipments were $34 million. Okayso that was flat sequentially?

Tzvika Friedman

Yes.

Daniel Meron - RBC Capital Markets

Okay. So --.

Tzvika Friedman

From a very high in Q2.

Daniel Meron - RBC Capital Markets

Right. You had a very high Q2, sonow kind of you recognized some of those shipments in this quarter. Okay. Sobook-to-bill was what, just around one here?

Tzvika Friedman

Sorry?

Daniel Meron - RBC Capital Markets

What was book-to-bill for thisquarter?

Tzvika Friedman

For the WiMAX, --.

Efrat Makov

35 to 34. The math works.

Tzvika Friedman

It's nit picky. It's shipped. Wedidn't discuss booking of WiMAX.

Daniel Meron - RBC Capital Markets

Okay. That's fair. Okay. And then as far as -- Iknow that you mentioned the gross margins shifted this quarter because of moreCPE shipping, which is obviously positive because it means that there is a [lotof] subscribers joining the service. Any change in the pricing environmentwhatsoever?

Tzvika Friedman

There is constantly pressure onpricing and the way to address it is to constantly work on cost reduction. Notnecessarily you have to reduce prices quarter-over-quarter, but certainly thereis a price trend, especially in the CPEs, to go to lower, lower numbers andthat is constantly investing in new cost reduction plans, especially in thee-products in the future for cost reduction. But I cannot say that the grossmargin reduction is due to price pressure this quarter.

Daniel Meron - RBC Capital Markets

Okay. And then a couple ofcarriers that I talked to mentioned some issue about indoor coverage. You guysprobably have one of the higher numbers of deployments in actual commercialdeployments out there. What was your experience as far as the actual range ofindoor coverage, as well as the radius that you guys manage to cover oncommercial deployment?

Tzvika Friedman

We actually are extremelysatisfied and surprised from the performance. Some of the performances we aregetting are much above what we committed. Actually, we warned customers to becareful not to plan for what they are currently getting because when the cellwill be full or maybe there will be trees, they will not get these distances,but we have a customer with a favorable condition, had to self-install theirCPE working indoor in a range of seven kilometers. So it is a very, very goodperformance. It is not something we expect. I think that in urban areas, youshould expect, also due to capacity limitations by the way, you probably wouldnot do more than one or two kilometers.

Daniel Meron - RBC Capital Markets

Okay. And then last one for me.Efrat, maybe you can touch on the cash flow. This quarter's cash flow waspretty healthy. I think it was like 6% or 7% of revenue. How should we thinkabout it going forward? Should we expect the same level of cash flow, maybe alittle bit better? Thank you.

Efrat Makov

I can't forecast cash flow andyou can see that some of it was based on exercising of options. Generallyspeaking, it depends on how we deal with the inventory level versus cashcollection. I think we will have to see. I don't know if it is going to go upor down, but with the current share price, it could be similar I guess.

Daniel Meron - RBC Capital Markets

Okay. Any linearity based on theaccounts receivable? Would that contribute to the cash flow this quarter?

Efrat Makov

Sorry. I didn't understand thequestion.

Daniel Meron - RBC Capital Markets

The linearity in the quarter, wasthe linearity in the quarter better than previous quarters as would beindicated from the accounts receivable on DSO?

Efrat Makov

Within the quarter you mean?

Daniel Meron - Rbc Capital Markets

The linearity in the quarter, wasthe linearity in the quarter better than previous quarters as would beindicated from the accounts receivable on DSO?

Efrat Makov

Within the quarter you mean?

Daniel Meron - Rbc Capital Markets

The linearity; how much youbooked in July versus August and September versus previous quarters. Was it lessback-end loaded than previous quarters?

Tzvika Friedman

It was not very good fromlinearity. Unfortunately in July, August, many people are --

Efrat Makov

But it's very typical to Q3 ingeneral.

Tzvika Friedman

Resting in different islands, notexactly in the office or doing business.

Efrat Makov

Yes, for this specific quarter, Ican say it was more back-loaded, but that is not very typical.

Daniel Meron - Rbc Capital Markets

Okay. Very good. Thank you somuch and good luck going forward.

Operator

Our next question is a follow-upquestion coming from the line of Rich Church with Collins Stewart. Pleaseproceed.

Rich Church - Collins Stewart

Thanks. I just had a quickquestion on the tax rate. Do you expect to pay taxes next year on the interestincome or otherwise or what should we be looking for?

Efrat Makov

Well, currently, I am notexpecting to pay any taxes. We have really huge NOLs at the moment, socurrently I do not expect that.

Rich Church - Collins Stewart

Okay. I thought there was someIsraeli --.

Efrat Makov

You are right about the interest.You are right about the interest in general, but we will have to see.Currently, I can't tell you differently.

Rich Church - Collins Stewart

Okay. Thank you very much.

Operator

Our next question comes from theline of Scott Sullivan with Smith Barney. Please proceed.

Scott Sullivan - Smith Barney

Hi, thanks for taking my call. Iwas wondering if you could make any brief comments on IPR issues for mobileWiMAX and any advantages you might have in this regard. Thanks.

Tzvika Friedman

Our policy for IPR is, we haveIPR, we have many patents relevant to mobile WiMAX and OFDM. However, ourpolicy is that IPR is more of a protection than a way to make revenue. We willjoin the WiMAX forum initiative of collective IPR membership similar to whatwas done in the GSM.

Scott Sullivan - Smith Barney

Okay, thank you very much.

Operator

Our next question comes from theline of [Jonathan Hollis with Ion].

Jonathan Hollis - Ion

Thanks. Congratulations on theexecution. Just wanted to elaborate a little bit more on the announcement thatyou hope to make before the year-end. How long was the trial and how longbetween the time that you first engaged with the customer and their finaldecision?

Tzvika Friedman

It really, really varies. Thereare customers that we engaged two years ago and only now we do a trial. It isan industry that in summer as you really involve in education and there arecustomers that want a license, we had discussion with them maybe two or threemonths before and afterwards, they want to do a trial very quickly. So, itcould range from two years to a few months.

Jonathan Hollis - Ion

Okay. And of the 12 significanttrials that you have right now or the significant customers that you areworking with right now; how many do you expect will make a decision in 2008?

Tzvika Friedman

The 12 large projects are notnecessarily trials. I am not saying we don't do trials with them, but it is notnecessarily trials. I expect that probably one to three may make a decision bythe end of this year, but most of them would not.

Jonathan Hollis - Ion

End of next year?

Tzvika Friedman

Sorry. End of this year, I wouldexpect maybe one to three. By the end of next year, I assume most of them willtake a decision.

Jonathan Hollis - Ion

Okay. And the one that you expectto announce by the end of this year, I mean just the way you worded it; itsounded to me like you were awarded the contract, just you are not allowed todisclose anything about it yet. Can you give us sort of the magnitude in termsof size? Is it a tier 1? What sort of size this is?

Tzvika Friedman

I did not say that we won and Icannot talk about it. I said I know about our position and I think that by theend of this year, we could announce one or two wins.

Jonathan Hollis - Ion

One or two wins. And can you giveus a sense of the size of these wins?

Tzvika Friedman

We talk about large deals in therange of $20 million over a few years, so that is the range.

Jonathan Hollis - Ion

$20 million is a range?

Efrat Makov

Over a few years.

Tzvika Friedman

$20 million over two or threeyears, so it could be a $10 million per year or more.

Jonathan Hollis - Ion

Got it. Thanks and good luck.

Tzvika Friedman

Thank you.

Operator

Our next question is a follow-upquestion, coming from the line of Daniel Meron with RBC Capital Markets. Pleaseproceed.

Daniel Meron - Rbc Capital Markets

Yes, thanks. Just a quick one;you had cooperation going on with IBM at the time. I was wondering what drovethe upside into the North American market this quarter. Was that related to theIBM partnership that you had or into any particular segment within the USmarket? Thanks.

Tzvika Friedman

No, our partnership with IBMcontinues. We learned that some of the projects in the public arena are evenlonger sales cycle than, I don't want to say sales cycle because even after youwin, it takes a long time until the project happens. So, we are a partnership,but the results are still not fully there. The growth in North America this quarter was not related to IBM.

Daniel Meron - RBC Capital Markets

So, can you elaborate on what wasthe driver for the growth.

Tzvika Friedman

The Carrier Business grew.

Daniel Meron - RBCCapital Markets

Was it any major carriers or just --

Tzvika Friedman

We discussed carriers like DigitalBridge, like AT&T, PDSand some of these carriers are moving faster and we enjoyed growing revenues.

Daniel Meron - RBCCapital Markets

Okay. Thank you. Good luck going forward.

Tzvika Friedman

Thank you.

Operator

Our next question comes from the Gunther Karger withDiscovery Group. Please proceed.

Gunther Karger -Discovery Group

Yes, thank you for taking the call. The question is at thecurrent quarterly revenue level of approximately $60 million, you are lookingat an annual run rate of around $240 million to $250 million. Question, in2010, that is in two years, the year after next, in two years actually, whatwould you expect the variance of revenue to be in that year?

Tzvika Friedman

I mean we didn't give guidance for 2010. You asked me whatwill be a quarterly -- its well over $100 million.

Gunther Karger -Discovery Group

Yes, let me rephrase the question. You expect to have anannual growth in the coming year of around 35% I believe you mentioned. Overthe next two to three years, let's say five years, what kind of annualcompounded growth rate would you expect to see?

Tzvika Friedman

We did not provide -- as we said in the past, that we expectthat -- I think we said in the end of '07, we expect that from '08 onwards, wewould expect growth of WiMAX and it really depends on how the -- the marketdevelopment will be in the range of growth of 30% year-over-year, but it isjust an indication. Please don't take it as any guidance. It is just anindication of where we see the growth rate for the company.

Gunther Karger -Discovery Group

Yes, thanks. I understand that. Thank you.

Operator

Mr. Friedman, we have no other questions at this time. Iwill turn the conference back to you.

Tzvika Friedman

Okay, thank you, everyone, for waking up early andparticipating on our conference call. We appreciate it, the effort. We would bevery thankful for your congratulations and we hope to continue discussion withyou in the different conferences we meet. Thank you.

Operator

Ladies and gentlemen, that does conclude our conference callfor today. We thank you for your participation and ask that you pleasedisconnect your lines. Have a great day.

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