Alvarion Q3 2007 Earnings Call Transcript

Alvarion Ltd. (ALVR)

Q3 2007 Earnings Call

October 31, 2007 9:00 am ET

Executives

Siegel Magen - Director of Corporate 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

Blaine Carroll - FTN Midwest Securities

Larry Harris - Oppenheimer

Ehud Eisenstein - Oscar Gruss

Irit Jakoby - Susquehanna

Joanna Makris - Brean Murray, Carret

Daniel Meron - Rbc Capital Markets

Scott Sullivan - Smith Barney

Jonathan Hollis - Ion

Daniel Meron - RBC Capital Markets

Gunther Karger - Discovery Group

Presentation

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Alvarion Incorporated Q3 2007 Earnings Release Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator Instructions).

As a reminder, this conference is being recorded Wednesday, October 31, 2007. And it is now my pleasure to turn the conference over to [Siegel Magen], Director of Corporate Marketing. Please proceed.

Siegel Magen

Thank you, operator. Good morning, everyone. On the line with me today are Tzvika Friedman, CEO and Efrat Makov, CFO.

The earnings release was issued this morning. It is now available on all major news feeds. Matters discussed in this conference call may contain forward-looking statements within the meaning of the Safe Harbor provision in the Private Securities Litigation Reform Act. These statements are based on the current expectations or beliefs of Alvarion's management and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

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

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

Tzvika Friedman

Good morning, everyone. Our team continues to execute according to our plan and we are pleased to report excellent progress in several areas in Q3. We achieved another record quarter and are on-track to achieve our growth target of 25% to 30% for the year. WiMAX shipments remained high at $34 million and revenue reached $35 million, more than double the same quarter last year.

We attained important technical milestones and our system was again featured by Intel at both its Developer Forum and at the keynote address at a major trade show. We held our first telecom service provider user-forum with over 50 operators participating along with many Open WiMAX partners and we won some important strategic deals.

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

Revenue growth continued to be driven by primary broadband applications. Our community WiMAX shipments, to date, 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 margin came just below 50%. This is something we have taken into account in our planning and through careful expense control, we were able to remain solidly profitable and cash flow positive while continuing our major investment in WiMAX.

Order size is getting larger. In Q3, we had 16 customers, with revenues of over $1 million, but customer concentrations remained low with no 10% customer in the quarter. We continued to benefit from repeat business from Q1 customers such as Telkom South Africa and challengers such as Iberbanda.

To give you some regional highlights, revenue from North America grew significantly, reflecting our earlier decision to focus on carriers. WiMAX business with Tier 1, Tier 2 and challenger in license frequency is showing traction.

In addition to WiMAX growth, we expect growth in the unlicensed market. In Q3, we were the first vendor to bring FCC approved 5.4 gigahertz multipoint products to the market with our expanded BreezeACCESS VL line.

There is a tremendous amount of activity 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 the legal challenges were resolved. The next step is testing and evaluating various vendor solutions and the normal RFI/RFP process. There is no particular pressure to move quickly since the government has granted a six-month extension to the deployment deadline. And we do not expect vendor selection for quite some time.

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

Another key market, Taiwan, is also very active. The government official in Taiwan said recently that Taiwan expects to have 8 million WiMAX subscribers by the end of 2010. We are seeing several small initial deployments as part of M-Taiwan, a project aimed at establishing a wireless broadband infrastructure in Taiwan.

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

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

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

Being chosen by ITRI is a strong indication of the advancement and innovation of our technology and the maturity of our solutions. This brings us a great deal of visibility with several segments of the industry. We participated in the fourth mobile WiMAX PlugFest earlier this month. These WiMAX forum sponsored events are important because they provide equipment suppliers with an open environment to test compatibility and interoperability of equipment in preparation for certification.

As an indication of growing support for WiMAX, there were more than 200 engineers from 42 companies participating. In addition to our own engineer, AWB, a venture in which we are involved in cooperation with Taiwan-based Accton, was also an active participant in the PlugFest. Individual vendors are prohibited from discussing details of their interoperability testing at PlugFest, but we want to highlight the fact that we are extremely pleased with our experience at PlugFest. We performed interoperability testing with numerous devices and successfully tested unique features such as fast handoff and HARQ.

HARQ stands for hybrid automatic repeat request, which enables fast recovery from transmission errors by storing defective packets and combining them with subsequent retransmission. In addition, HARQ provides diversity in time and, therefore, is an essential capability for operational robustness and improved throughput in challenged condition of wireless mobile communication. Advanced Antenna Technology such as beamforming has been touted a lot recently.

It is important to remember that a successful solution requires the depth of experience to integrate technologies such as beamforming into the deep layers of mobile WiMAX error protocol in exactly the right way. The way in which this integration is done is the real differentiation; not the beamforming technology itself.

This brings up another aspect of WiMAX that is not well-understood, its flexibility. The definition of 3G standards are so comprehensive that there is very little opportunity to differentiate between different vendor solutions. This is not the case with WiMAX where there is much more opportunity to design unique feature, performance and functionality on top of the basic WiMAX standard. This enables substantially more comparative differentiation than with traditional server technology. And the core R&D experience required to develop WiMAX is much closer to broadband IP than to traditional wireless technologies, giving Alvarion a distinct advantage.

As a further indication of our technological advancement, at WiMAX World show in Chicago, we were the only vendor to showcase personal broadband services as vehicular speed with downlinks in excess of two megabit per second.

Due to the maturity of our system, we were invited by Intel to develop a forum to showcase our base station with all these advanced features operating with Intel's Montevina notebook with the Echo Peak WiFi WiMAX capability. At this event, Intel introduced the first platform to be built from the ground up to ultra-mobile PC, as well as new platforms for mobile Internet devices. These feature small form factors and major improvements in power efficiency in order to offer the capabilities of a laptop computer in a device the size of an iPhone.

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

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

Introducing a truly open architecture will be a destructive game-changing development. and working with our partners, we are moving closer to this reality every day. We believe that while they might appear to support a best-of-breed approach in public, the traditional telecom equipment manufacturers are actually resisting this concept because it represents a total strategic change in the way they do business, the way they are organized, and how they approach the market, etc.

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

At the end of Q3, we had over 200 commercial WiMAX deployments, up from about 170 last quarter. As more trials convert to deployment and operators shift their focus towards e-systems, tracking the running total of all trials is becoming less meaningful. So in the future, we intend to focus on tracking our e-trials. After concluding some and adding 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 WiMAX projects. Some of the informal indications are good and we hope to be able to announce at least one important win before year-end, but please remember that it is unrealistic to expect to be selected for all of them and the timing of the announcement is in the customers' hands, not ours.

To summarize, we are making good progress in both technical and business terms and we are on track to meet our growth target for the year. With personal growth and deployment still likely only towards the end of next year, we continue to believe 20% to 30% growth for 2008 is the right target. Our second major financial objective for next year is to make additional progress toward our target operating model. Now I would like to turn the call over to Efrat.

Efrat Makov

Thank you, Tzvika. We are pleased with the continued momentum during Q3 resulting in another quarter of record results. 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 year and were about the same as in Q2.

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

Turning to the geographic breakdown of revenues, EMEA accounting for 54%, down from 57% in Q2. Latin America accounted for 90% compared to 21% last quarter. North America increased to 20% from 11% in Q2. And APAC declined to 7% from 11% in Q2. Direct sales accounted for 42%, down from about 49% in Q2. Distribution for about 47% versus 40% in the previous quarter and OEM represents the remaining 11%, about the same as in Q2.

As we have been expecting for several quarters, our mix has begun to shift, and gross margin trended slightly lower, just under 50%. We continue to enjoy a relatively favorable mix of revenues 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 compared to $28.8 million in the previous quarter. The increase in operating expenses related mainly to variable selling costs.

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

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

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

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

Question-and-Answer Session

Operator

Thank you very much. (Operator Instructions). And our first question comes from the line of Ittai Kiddron with CIBC. Please proceed

Ittai Kiddron - CIBC

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

Tzvika Friedman

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

Ittai Kiddron - CIBC

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

Tzvika Friedman

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

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

Ittai Kiddron - CIBC

Okay. And with respect to the geographic location of this one-time track, would Asia be a good guess?

Tzvika Friedman

For the --?

Efrat Makov

What do you mean one time?

Ittai Kiddron - CIBC

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

Tzvika Friedman

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

Ittai Kiddron - CIBC

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

Tzvika Friedman

I think we can expect Q4 to be more 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 the line of Mike Walkley with Piper Jaffray. Please proceed.

Mike Walkley - Piper Jaffray

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

Tzvika Friedman

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

Mike Walkley - Piper Jaffray

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

Tzvika Friedman

We will control the growth of the OpEx 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 the best way to think about it coming off that $0.5 million?

Tzvika Friedman

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

Mike Walkley - Piper Jaffray

Okay, great. Thank you very much and good luck.

Tzvika Friedman

Thank you.

Operator

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

Steve Ferranti - Stephens Inc

Thank you. Good morning. A quick question on the larger contracts that you had spoken about earlier, can you talk about to what extent you think those might be multi-source deals versus single sourced?

Tzvika Friedman

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

Steve Ferranti - Stephens Inc

Okay.

Tzvika Friedman

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

Steve Ferranti - Stephens Inc

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

Tzvika Friedman

Usually you would put one in one city and another in another city. We would not mix them between different cities.

Steve Ferranti - Stephens Inc

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

Tzvika Friedman

It's the mixture of all actually if 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 an official 3G technology, I know we are still early on following that decision, but have you seen any change in terms of carrier perceptions, particularly with the 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, do you think this decision changes their perceptions on the technology? Thanks.

Tzvika Friedman

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

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

Steve Ferranti - Stephens Inc

Okay. Very helpful. Thanks and congrats on a solid quarter, guys.

Tzvika Friedman

Thank you.

Operator

Our next question comes from the line 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 from carriers worldwide around what is happening at Sprint and if anybody -- if they are delaying to watch how Sprint's trials go or how Sprint's rollout goes, any impact on activity?

Tzvika Friedman

I will say this very carefully because I might be looking from an optimistic eye, but I didn't see any reflection on that. By the way, I am not sure the fact that Sprint, a recent event 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, so I am not sure -- people perhaps wait to see what will happen, but I didn't see that it delays any decisions.

Rich Church - Collins Stewart

Okay, great. And on your OEM relationship side, can you talk about any plans in that area? Are you looking to 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 channel that fits them and these channels include sometimes OEM if we have a solution they do not have. But as I indicated about some of our current OEMs in the long term, 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 the right strong local partner, the example of Hitachi, which we had in Q3.

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

Rich Church - Collins Stewart

Okay. And on the operating model comments, talk about the timing of when you expect gross margins to get to the 45% level and when you might see a 10% operating margin? I mean is that several years 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 way though. Probably a 10% operating profit is something which is more in '09, '10 timeframe.

Rich Church - Collins Stewart

Okay. Thanks a lot.

Operator

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

Ari Bensinger - Standard & Poor's

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

Tzvika Friedman

The way we look at this is that we target, of course, growth and we indicated growth of this year and growth of next year. So, actually you will see that the OpEx level will go down in total to around 35% to allow 10% operating profit. We could expect that the sales and marketing expenses to be in the range of 14% to 16%, the R&D expenses to be in the range of 14% to 16%, the G&A to be in a range of 4% to 5%, you will get to 35% gross margin. But the current OpEx would not grow in the same rate as the revenues grow. Some of the investment in R&D is in place, the investment in go-to-market; some of the investment we already did should serve also for the growth of next year. So, we don't expect the growth in the OpEx to be 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 can you give us some metrics in terms of customer, maybe win rates? And also like you have said before that usually the customers, they start off with small orders and as they become more comfortable with the technology and installments, they up their orders. Have you continued to see that trend in terms of maybe like repeat customers?

Tzvika Friedman

Yes. I don't have the exact detail, but I can tell you most of the customers we have, we hardly lose a customer. 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 good because we are focused. We are not going after every deal, and if there are deals we don't have the right channel and partners or solution, we just decide not to go.

Ari Bensinger - Standard & Poor's

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

Tzvika Friedman

I'm not sure I understand the question.

Ari Bensinger - Standard & Poor's

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

Tzvika Friedman

There is various market research that goes from $9 billion for 2010 to $4 billion in 2010. We believe it is some place in between this range. I would not go to the high end, certainly not when we are planning our growth. Maybe we will be surprised for the good, but we cannot plan on exponential numbers that someone puts on a market research. Our assessment 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 the line of Blaine Carroll with FTN Midwest Securities.

Blaine Carroll - FTN Midwest Securities

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

Tzvika Friedman

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

Blaine Carroll - FTN Midwest Securities

I'm sorry, what are those numbers?

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, why we think we will grow 20% to 30% next year, is built on the fact that there is more activity and more RFP, plus the growth from existing customers.

Blaine Carroll - FTN Midwest Securities

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

Tzvika Friedman

This is a tough question, because most of the RFPs are for 80216e standards. So, most of them are for the mobile WiMAX standard. Regarding the application, I think many are asking for full mobile spec, although the specific applications for the next two years will be fixed nomadic.

So it is difficult to judge, because you can have someone wanting to see that your handoff is a few milliseconds. Although, for the next two years, we are only going to do fix solution. 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 to say. Otherwise, I will tell you that many are still for fixed nomadic, but it is based on mobile spec.

Blaine Carroll - FTN Midwest Securities

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

Tzvika Friedman

Traditionally, first quarter is weaker in the wireless industry. People ask me why. I can tell you, it is the winter. People want to dig in the ground or climb towers. Other people will show you that actually there are too many festivals during this quarter. Some areas celebrate the New Year and end it at the end of January, others have new year in China, Carnival in Spain, Carnival in Brazil. Summer is a little bit weaker quarter seasonality.

Efrat Makov

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

Blaine Carroll - FTN Midwest Securities

Right, I mean you may have seasonality, but it may not be down. Normal telecom-ish because you've got a business growing, so we may not expect it to be down sequentially, correct?

Tzvika Friedman

Maybe not, yes, but still seasonality 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 CPE equipment did you sell during the quarter? What is that mix that is impacting the gross margin?

Tzvika Friedman

We don't provide exact mix, but the 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 time than previously.

Blaine Carroll - FTN Midwest Securities

Okay. Great, thanks and good luck.

Tzvika Friedman

Thank you.

Operator

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

Larry Harris - Oppenheimer

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

Tzvika Friedman

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

Larry Harris - Oppenheimer

Understood, and the other question 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 impact because of the credit markets, the bond markets, etc. in terms of ability to close deals in the quarter?

Tzvika Friedman

Currently, we did not see any impact on this. It may impact in the future, funding for challenges in our market, 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 the line 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 base stations or so also between the product lines?

Efrat Makov

Yes.

Tzvika Friedman

The reason for the gross margin reduction is that we sell more CPEs than infrastructure this quarter. It means we start filling CPEs to base station or infrastructure with delivered quarters before.

Ehud Eisenstein - Oscar Gruss

And that is a trend that we expect to continue going forward?

Tzvika Friedman

We expect this trend to continue going forward, yes.

Efrat Makov

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

Ehud Eisenstein - Oscar Gruss

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

Tzvika Friedman

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

Ehud Eisenstein - Oscar Gruss

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

Tzvika Friedman

Just to clarify, when we talked about 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%, you have to be over $20 million, right?

Ehud Eisenstein - Oscar Gruss

Sure. And I missed your comment on the 80 active deployment drive.

Tzvika Friedman

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

Ehud Eisenstein - Oscar Gruss

Okay. It's 40. Thank you, good luck.

Operator

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

Irit Jakoby - Susquehanna

Hi, thank you. So you mentioned 40 mobile trials this quarter. I believe it is the same number that you mentioned last quarter as well. Can you talk about how this compares with the total number of mobile trials in the industry and where you are seeing the most activity in terms of geography and the kinds of operators?

Tzvika Friedman

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

Irit Jakoby - Susquehanna

And so geographically, where do you 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 indicated before, they are testing the mobile WiMAX technology, including the mobile features even though they don't specifically go to a mobile solution.

Irit Jakoby - Susquehanna

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

Tzvika Friedman

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

Irit Jakoby - Susquehanna

Okay, great. Thank you.

Operator

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

Joanna Makris - Brean Murray, Carret

Hi, there. I wanted to follow up a little bit on some of your comments on Japan. When looking at some of these upcoming opportunities in Japan, I guess how well-positioned do you think some of the larger incumbents like Motorola and others will be in this market? It seems like the majority of their products are sort of optimized towards larger deployments on some of their experiences with the US operators and obviously at least one of your competitors is developing a smaller, more compact device for this market. So I guess how do you see the large incumbents playing out in Japan?

And then secondly what do you see as other opportunities within 2.5 gig in the UK or other regions and what could be 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 mobile WiMAX and there will be four companies who compete on it. I think when thinking of selling in Japan, we are well-positioned. One thing is to have the right product and the right product in Japan is probably, as you indicated, a compact, high power, all-out solution and I suspect that I think most of the industry knows about. Not all of the competitors have such a solution.

The second portion is to have the right channel, relation, history and I think some of our competitors are positioned quite well. Some of them don’t have such a position I expect that in Japan competition from local vendors like NEC and Fujitsu either have products in time could be even tougher than some of the names of those who sell in North America.

The second question was about 2.5 gig, 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 were already awarded in Taiwan and I hope that with IMT-2000, there will be maybe some flexibility in some countries in Europe. You have also in the 2.X, you have 2.3 in Russia, some 2.5 gig in Russia. You have 2.5 in Latin America, a few places also.

Joanna Makris - Brean Murray, Carret

Thank you.

Operator

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

Daniel Meron - RBC Capital Markets

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

Tzvika Friedman

The shipments of WiMAX in the quarter were $34 million.

Daniel Meron - RBC Capital Markets

Shipments were $34 million. Okay so 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, so now kind of you recognized some of those shipments in this quarter. Okay. So book-to-bill was what, just around one here?

Tzvika Friedman

Sorry?

Daniel Meron - RBC Capital Markets

What was book-to-bill for this quarter?

Tzvika Friedman

For the WiMAX, --.

Efrat Makov

35 to 34. The math works.

Tzvika Friedman

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

Daniel Meron - RBC Capital Markets

Okay. That's fair. Okay. And then as far as -- I know that you mentioned the gross margins shifted this quarter because of more CPE shipping, which is obviously positive because it means that there is a [lot of] subscribers joining the service. Any change in the pricing environment whatsoever?

Tzvika Friedman

There is constantly pressure on pricing and the way to address it is to constantly work on cost reduction. Not necessarily you have to reduce prices quarter-over-quarter, but certainly there is a price trend, especially in the CPEs, to go to lower, lower numbers and that is constantly investing in new cost reduction plans, especially in the e-products in the future for cost reduction. But I cannot say that the gross margin reduction is due to price pressure this quarter.

Daniel Meron - RBC Capital Markets

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

Tzvika Friedman

We actually are extremely satisfied and surprised from the performance. Some of the performances we are getting are much above what we committed. Actually, we warned customers to be careful not to plan for what they are currently getting because when the cell will 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 their CPE working indoor in a range of seven kilometers. So it is a very, very good performance. It is not something we expect. I think that in urban areas, you should expect, also due to capacity limitations by the way, you probably would not 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 was pretty healthy. I think it was like 6% or 7% of revenue. How should we think about it going forward? Should we expect the same level of cash flow, maybe a little bit better? Thank you.

Efrat Makov

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

Daniel Meron - RBC Capital Markets

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

Efrat Makov

Sorry. I didn't understand the question.

Daniel Meron - RBC Capital Markets

The linearity in the quarter, was the linearity in the quarter better than previous quarters as would be indicated from the accounts receivable on DSO?

Efrat Makov

Within the quarter you mean?

Daniel Meron - Rbc Capital Markets

The linearity in the quarter, was the linearity in the quarter better than previous quarters as would be indicated from the accounts receivable on DSO?

Efrat Makov

Within the quarter you mean?

Daniel Meron - Rbc Capital Markets

The linearity; how much you booked in July versus August and September versus previous quarters. Was it less back-end loaded than previous quarters?

Tzvika Friedman

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

Efrat Makov

But it's very typical to Q3 in general.

Tzvika Friedman

Resting in different islands, not exactly in the office or doing business.

Efrat Makov

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

Daniel Meron - Rbc Capital Markets

Okay. Very good. Thank you so much and good luck going forward.

Operator

Our next question is a follow-up question coming from the line of Rich Church with Collins Stewart. Please proceed.

Rich Church - Collins Stewart

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

Efrat Makov

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

Rich Church - Collins Stewart

Okay. I thought there was some Israeli --.

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 the line of Scott Sullivan with Smith Barney. Please proceed.

Scott Sullivan - Smith Barney

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

Tzvika Friedman

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

Scott Sullivan - Smith Barney

Okay, thank you very much.

Operator

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

Jonathan Hollis - Ion

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

Tzvika Friedman

It really, really varies. There are customers that we engaged two years ago and only now we do a trial. It is an industry that in summer as you really involve in education and there are customers that want a license, we had discussion with them maybe two or three months before and afterwards, they want to do a trial very quickly. So, it could range from two years to a few months.

Jonathan Hollis - Ion

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

Tzvika Friedman

The 12 large projects are not necessarily trials. I am not saying we don't do trials with them, but it is not necessarily trials. I expect that probably one to three may make a decision by the 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 would expect maybe one to three. By the end of next year, I assume most of them will take a decision.

Jonathan Hollis - Ion

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

Tzvika Friedman

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

Jonathan Hollis - Ion

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

Tzvika Friedman

We talk about large deals in the range 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 three years, 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-up question, coming from the line of Daniel Meron with RBC Capital Markets. Please proceed.

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 drove the upside into the North American market this quarter. Was that related to the IBM partnership that you had or into any particular segment within the US market? Thanks.

Tzvika Friedman

No, our partnership with IBM continues. We learned that some of the projects in the public arena are even longer sales cycle than, I don't want to say sales cycle because even after you win, 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 was the driver for the growth.

Tzvika Friedman

The Carrier Business grew.

Daniel Meron - RBC Capital Markets

Was it any major carriers or just --

Tzvika Friedman

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

Daniel Meron - RBC Capital Markets

Okay. Thank you. Good luck going forward.

Tzvika Friedman

Thank you.

Operator

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

Gunther Karger - Discovery Group

Yes, thank you for taking the call. The question is at the current quarterly revenue level of approximately $60 million, you are looking at an annual run rate of around $240 million to $250 million. Question, in 2010, that is in two years, the year after next, in two years actually, what would 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 what will be a quarterly -- its well over $100 million.

Gunther Karger - Discovery Group

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

Tzvika Friedman

We did not provide -- as we said in the past, that we expect that -- I think we said in the end of '07, we expect that from '08 onwards, we would expect growth of WiMAX and it really depends on how the -- the market development will be in the range of growth of 30% year-over-year, but it is just an indication. Please don't take it as any guidance. It is just an indication 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. I will turn the conference back to you.

Tzvika Friedman

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

Operator

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

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