Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Powerwave Technologies Inc. (NASDAQ:PWAV)

Q4 2007 Earnings Call

February 4, 2008 5:00 pm ET

Executives

Ronald Buschur – CEO

Kevin Michaels – CFO

[Tom Spate] - Treasurer

Analysts

Kim Watkins – JP Morgan

[George Iwanik] – Oppenheimer

Blaine Carroll – FTN Midwest Securities

[Jeff Haval] – Lehman Brothers

Mike Walkley – Piper Jaffray

[James Fossett] – Pacific Crest Securities

[Analyst] – Deutsche Bank

Larry Harris – CL King

Kevin Dede – Morgan Joseph

Rich Valera - Needham & Co.

[Analyst – Karras & Company]

[Unspecified Analyst]

Operator

Good day ladies and gentlemen and welcome to the Powerwave Technologies report fourth quarter results conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. [Tom Spate], Treasurer.

[Tom Spate]

Good afternoon and welcome to the Powerwave Technologies fourth quarter 2007 financial results conference call. I am [Tom Spate] Powerwave’s Treasurer. Joining us today will be Ronald Buschur, Powerwave’s President and Chief Executive Officer and Kevin Michaels, Powerwave’s Chief Financial Officer. Before starting I would like to point out that various remarks we make about the future expectations, plans and prospects for Powerwave including but not limited to anticipated revenues and revenue growth rates, operating margins, gross profit margins, earnings per share levels, revenue composition, improvements in cost structure including those resulting from the sale of our manufacturing operations in Hungary, the timing of consolidation of our manufacturing facilities, costs savings related to our facility consolidation, future cost savings related to our cost reduction activities, demand levels for the company’s product lines, projected growth and market share, trends in the wireless infrastructure market, the timing of product deliveries and future orders, the success of new products, expense levels, capital expenditure rates, inventory turns, tax rates, cash flows, and day sales outstanding, are all forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause Powerwave’s actual results to be materially different from those projected or implied. Some of the risks and uncertainties include our ability to accurately forecast and anticipate customer orders, integrate acquisitions and realize anticipated cost savings and synergies, the potential negative impact on demand for our products due to industry consolidation among our major customers, fluctuations in foreign currencies, the ability to implement new ERP systems, the impact of competitive products and pricing, economic and political conditions, and the loss of one or more significant customer accounts. Please refer to our press release, Powerwave’s current Form 10-K for the year ended December 31, 2006, our current Form 10-Q for the quarter ending September 30, 2007 and other filings which are on file with the Securities and Exchange Commission for additional information on factors which could cause our actual results to differ from those projected or implied. In addition, on this call we will discuss non-GAAP financial information, a reconciliation of the non-GAAP financial information to our financial statements as prepared under GAAP is included in our press release dated today which can be found on our website at www.powerwave.com and on Business Wire. The press release also had detailed information concerning several of the significant one-time items impacting our results and we urge you to review that information. Now I’m going to turn the call over to Kevin Michaels, Powerwave’s Chief Financial Officer.

Kevin Michaels

Thank you Tom and good afternoon everyone. With all these risk factors in mind I would like to start by quickly reviewing our financial results which are also summarized in our press release. Net sales for the fourth quarter of 2007 were $230.6 million and we reported a net loss of $188.4 million which equates to a net loss on a GAAP basis of $1.44 per share. This loss includes a number of one-time items, the largest being non-cash goodwill impairment charge of approximately $150.6 million which equates to $1.15 per share or 80% of the GAAP loss for the quarter. Also included in the loss for the quarter is approximately $16 million of restructuring and impairment charges which include charges related to the restructuring consolidation of several of our facilities as well as intangible asset impairments and severance costs. We also incurred approximately $200,000 of in process research and development charge related to a small acquisition that we completed in the fourth quarter. There is also an additional $7.6 million of non-cash intangible asset amortization related to our prior acquisitions. In summary all of these charges and impairments totaled approximately $174.5 million for the fourth quarter of 2007.

For the fourth quarter on a pro forma basis, excluding all restructuring and impairment charges the goodwill impairment charge, acquisition related charges and intangible asset amortization, we would have reported a pro forma net loss of $8.8 million or a pro forma net loss of per share of $0.07. I want to note that included in both our GAAP and pro forma results is the impact of approximately $1.3 million of pre tax stock based compensation expense due to SFAS 123R almost all of which is included in operating expenses. If you were to exclude this expense from our reported results you would add approximately $0.01 to EPS for both GAAP and pro forma results for the fourth quarter. This is approximately the same impact as in the prior year period.

Now I will describe our revenues on a geographic basis. Our total Americas revenues for the fourth quarter of 2007 were approximately $62.6 million or 27% of revenues. Our total Asian sales accounted for approximately 27% of revenues or $62.6 million and our total European and other international revenues were $105.4 million or approximately 46% of revenues. For the fourth quarter sales of products within our Antenna systems product group totaled $45.6 million or 20% of total revenues. Base station subsystem sales totaled $165.7 million or 72% of revenues and coverage solution sales totaled $19.3 million or 8% of revenues. For the fourth quarter total 3G related sales were approximately $22.5 million or approximately 10% of our total revenues and our total WiMAX sales were approximately $15.5 million or 7% of our revenues. In terms of our customer profile for the fourth quarter our total OEM sales accounted for approximately 68% of our total revenues and our total direct and operator sales account for approximately 32% of our revenues.

Now I will describe our gross margins for the fourth quarter. On a GAAP basis our total consolidated gross profit margin was 10.4% for the fourth quarter. In our press release on page five, there is a table with a reconciliation of the various factors impacting our gross margin for the quarter. On a pro forma basis, excluding a total of $15.4 million which consists of restructuring and impairment charges and non-cash intangible asset amortization our total gross profit margin would have been 17.1%. For the fourth quarter our GAAP reported cost of goods sold includes a charge of approximately $10.8 million related to inventory determined to be excess and obsolete to our ongoing requirements. This represents 4.7% of gross margin and when you add that back on a non-GAAP basis our adjusted gross margin would have equaled 21.8%. For 2008 we are focused on continuing to work to improve our gross margins. We will be working during 2008 to complete our supply chain consolidation activities as well as further reduce our manufacturing overhead costs and try to drive higher margin revenues within our businesses.

I now want to review the significant one-time items that impacted our results for the fourth quarter. In our press release on page four, there is a table summarizing the EPS impact of these various items. Hopefully this makes it somewhat easier to follow. For the fourth quarter of 2007 we incurred total restructuring and impairment charges of $16 million. This amount included an intangible asset impairment charge of approximately $2.7 million related to decision to end of life certain products acquired as part of previous acquisitions as well as the reduction in the estimated intangible value of a customer list from a previous acquisition. Within this amount is approximately $9.1 million of inventory related charges associated with the restructuring of the company’s Hungary and Chinese manufacturing locations, approximately $600,000 related to additional facility impairments, approximately $500,000 for transition costs associated with the sale of the Hungary manufacturing operation, approximately $2.1 million in severance costs, approximately $1 million for fees associated with planned closures and consolidations. In total these restructuring and impairment charges represent approximately $0.12 per share for the fourth quarter. We also incurred $7.6 million of intangible asset amortization which equates to approximately $0.06 for the quarter. Stock option expenses equaled approximately $1.3 million or $0.01 for the quarter.

The final major item included in our results for the fourth quarter of 2007 is the preliminary result of a SFAS 142 “step two” impairment test that resulted in a non-cash goodwill impairment charge of $150.6 million for the quarter. Due to the significant decline in the market value of our common stock price during the fourth quarter the company determined that an indicator of goodwill impairment existed during the fourth quarter of 2007. We want to note that this goodwill impairment charge is preliminary and therefore is subject to change based upon the final results of the “step two” impairment testing. The final results of such tests will be included in our Form 10-K for the fiscal year ended December 30, 2007 which is to be filed with the SEC. As a note, we had approximately $502 million of goodwill in our books as of September 30, 2007 and with the preliminary charge we will have approximately $350 million of goodwill at the end of December. The goodwill impairment charge is equivalent to approximately $1.15 per share. As shown in the table in our press release the total of these items equals approximately $1.34 per share for the fourth quarter of 2007 which compares to our GAAP reported loss of $1.44 per share.

Next I will review our operating expenses for the fourth quarter. Our sales and marketing expenses were $12.6 million, our engineering expenses were $19 million and our G&A expenses were $19 million. Excluding restructuring and impairment charges and intangible amortization for the fourth quarter totaling $159.1 million our total operating expenses equaled approximately $50.6 million. This is slightly above our third quarter total of $49.3 million and is slightly above our goal of $50 million for the fourth quarter. We did encounter some higher than forecasted expenses during the fourth quarter which include higher professional fees associated with our year end audit, accounting and tax areas as well as some increased expenses associated with a small engineering acquisition that we completed during the fourth quarter. I want to state that we remain committed to our cost reduction plans and we are continuing to execute those as we go through this new year.

Now I’ll continue to the income statement. In terms of other income, we recorded approximately $1.4 million of other income in the fourth quarter of 2007. The main contributors to this other income were two items, the first being the gain we generated from repurchasing the majority of our convertible bonds which come due this July. We generated net gain on the purchases of approximately $2.2 million. The second item is our FX translation for the fourth quarter which resulted in the gain of approximately $1 million. These gains were somewhat offset by our interest expense during the quarter. For the fourth quarter our tax rate was impacted by some minor tax payments and the valuation allowances on our deferred tax assets. While we will continue to evaluate our future tax rate based upon our diverse international operations, we currently estimate that our affective world wide tax rate will be in the range of approximately 10% for fiscal 2008. I want to stress that this estimate will fluctuate based upon our actual results and due to the fact that both our US and Swedish deferred tax assets have been fully reserved. With the prior write-off of our main deferred tax assets those entities operate an affective zero percent rate and our reported rate reflects any income or losses on our other tax jurisdictions. For the fourth quarter on a full GAAP basis our rate was approximately 2%.

Next I’ll quickly review our balance sheet. Total cash at December 30, 2007 was approximately $65.5 million of which $7.4 million is reflected as restricted cash. The cash balances reflect the purchase by us of approximately $116.4 million par value of our outstanding 1.25% convertible subordinated notes due July, 2008 during the fourth quarter. For the fourth quarter our net inventory was $94.3 million which represents inventory turns of approximately eight times. We remain extremely focused on continuing improving our inventory turns which should free up some of the cash trapped on our balance sheet. While our total net accounts receivable increased to $237.7 million our AR day’s sales outstanding reduced to approximately 94 days from 96 days in the third quarter and 108 in the first quarter of 2007.

Before turning the call over to Ron I would like to remind you that we do not provide quarterly guidance. We believe that our investors are better served by focusing on long terms trends as opposed to the short term volatility which is inherent in our markets. In terms of our guidance for fiscal year 2008 please note that our guidance is subject to a number of risks and uncertainties that could impact our future outlook and results and many of these are detailed in our public filings with the SEC. With all that in mind, we are establishing our fiscal 2008 annual revenue range at $860 million to $900 million. At the same time we are continuing with our restructuring and cost reduction efforts in order to lower operating break even targets and improve our gross margins. While we are not providing earnings or quarterly guidance we do want to share with you our current expectations for 2008.

On the revenue front, we currently believe that the analysts’ consensus numbers for both the fiscal year at approximately $880 million and the quarterly consensus numbers are reasonable and we are comfortable with these estimates. In terms of Powerwave’s ongoing restructuring and cost reduction activities we expect to see some sequentially improvements in our gross margins as we go through the year. In addition we are continuing to drive to lower our pro forma operating expenses throughout fiscal year 2008. With that I’d like to turn the call over now to Ron Buschur, Powerwave’s President and Chief Executive Officer.

Ronald Buschur

Thank you Kevin and good afternoon everyone. I would like to start off by stating that as you can see we have made significant progress in returning the company back to profitability. We have also shown sequential revenue growth for the last four quarters. We continue to remain focused on our objective of reducing our overall cost structure on both the manufacturing and operating expense side. The team is and will be focused on this objective as I believe our results demonstrate. For 2008 we remain committed to further improving on our overall cost model in order to ensure the long term success of this company in any type of economic environment. We continue to experience growth during the fourth quarter in various markets that we compete in. We see increasing demand coming from our direct operator market as well as through our OEM customers.

In terms of the product areas, we saw our base station subsystem revenues increase by 13.2% sequentially, far more than the overall industry growth rates that have been reported. In addition in our coverage solution product segment, an area we have been focused on, we saw over 90% sequential growth. In the direct operator market we saw our revenues increase by 37% sequentially for the third quarter. We believe that the direct operator portion of our business will continue to demonstrate strong growth in 2008 and I believe Powerwave is well positioned to capitalize on these opportunities with the right solutions and products.

Now let’s focus on our fourth quarter revenues. I believe they demonstrate the strength of some of our OEM customers as well as an improvement in demand from our wireless network operator customers. During our fourth quarter we continued to see strong demand from Nokia Siemens as well as Alcatel-Lucent. For the fourth quarter our total Nokia Siemens revenue was approximately $76 million and accounted for approximately 33% of our revenue. Alcatel-Lucent revenue was approximately $37 million which represented approximately 16% of our revenue. From a regional perspective we saw growth in all regions with the strongest growth coming from the A-Pac region, Europe and North America regions. Powerwave maintained a global footprint and we are well situated to capitalize on the growth in our industry and we will continue to leverage and maximize the capability as much as possible.

As I stated earlier we are very focused and committed on executing on our operational plans and cost reduction efforts to return the company back to profitability. In terms of our cost structure, as many of you know we have been consolidating our China manufacturing sites from three to one location in Suzhou, China. At the end of Q4 we sold our operations, our manufacturing operations in Hungary to [Sanmina SCI]. The goal of this sale is to further reduce and streamline our manufacturing operations while achieving lower costs through leveraging tier 1 EMS providers. We anticipate that we should start seeing cost improvements from [Sanmine SCI] during the second half of this year. I also want to reassure you that we are continuing to work on our supply chain consolidation as well as focusing on further improvements to our operating cost structure.

As Kevin stated, we expect to see some additional improvements in our gross margins over the next few quarters as we work towards reaching our goal of the mid 20% range. When we look at the fourth quarter and we adjust the additional inventory charges our non-GAAP gross margins were approximately 21.8%. Continuing down the pro forma financials, when you adjust out the $10.8 million inventory charge for the fourth quarter our pro forma results would have resulted in a $0.01 profit for the fourth quarter. We believe that this demonstrates a focus and hard work that our employees are executing on, we know that we must continue to focus on improving this performance during 2008. You should be assured that this management team is extremely focused on executing and delivering on this for 2008. When you look at our balance sheet for the fourth quarter we have made some significant improvements. The largest one is our inventory turns which reached eight turns for the fourth quarter. In addition we saw a net reduction of approximately $40 million in our inventory during the quarter even though we had to increase our production capabilities and ramp up multiple new products during the same time period. We continue to be very focused on driving inventory turns. We are working on maintaining and improving our leading industry turns of eight times and we hope to set new records in 2008.

As we stated last quarter we set an initial target of reducing our pro forma operating expenses to a quarterly rate of $50 million or less by the end of the year with additional decreases going forward in 2008. I want to assure you as Kevin stated, we remain committed and focused on further reducing our operating expenses and we are currently reviewing additional plans to further reduce our operating expenses during 2008. From an overall market standpoint as I think you can see, we remain very optimistic about 2008 and I believe we are well positioned with the network operators and have the right solutions and we are very well positioned to gain market share from these opportunities. Our guidance for 2008 reflects an annual growth rate between 10% to 15% which is almost double what most industry analysts are predicting for the total market growth in 2008. Clearly we believe we are well positioned to grow faster than the overall market as well as positioned to capture additional market share in 2008.

I believe that Powerwave has one of the strongest product portfolios, the best personnel and engineering resources as well as the most advanced leading edge technology solutions for the next generations of products in this industry. What this means to our customer is clear, when you want a supplier that’s focused on the wireless industry and on their success, there is only one company in the industry to think of and that is Powerwave Technologies. We continue to believe that this creates exciting and growing opportunities for Powerwave’s employees, customers and our investors in the years ahead. As a final note, we remain very focused, committed and competent that we will return this company back to profitability and we will do everything we can to maintain and build upon your confidence. I would now like to turn the call over the operator and address any questions you may have.

Question-and-Answer Session

Operator

Your first question comes from Kim Watkins – JP Morgan

Kim Watkins – JP Morgan

A question OpEx Kevin and Ron you both touched on this a little bit, I know in the past you talked about getting down to a $45 million level of OpEx by the second half of the year is that still the goal and can you reach it by some of the plans that you’ve already put in place at this point or does that require additional plans?

Ronald Buschur

Yes Kimberley, we certainly are still continuing to drive for the second half of 2008 to be able to achieve the $45 million in operating expenses. We have the plans in place to be able to achieve that and as I had indicated we’re looking at some additional plans that we’re putting ion place to address the operating expenses on an ongoing basis as well.

Kim Watkins – JP Morgan

Okay so to make sure I understand if you put additional plans in place it would take it underneath the $45 million.

Ronald Buschur

We’re driving to the $45 million and the additional plans we would like to see some other savings if we elect to execute those plans, yes.

Kim Watkins – JP Morgan

Okay and then a question on the 3G revenue, I just wanted to dig into that a little bit. It’s been declining for a few quarters now, I wanted to see if you’re seeing any increase in demand for 3G products out of North America and I know you talked previously about expecting an increase there in 2008, if you could just give us an update on what you’re seeing throughout the world.

Kevin Michaels

Sure, let me start with this and then I think Ron will probably have some more. One of the things I think that is probably tainting our own information is that the way we sort out our revenues is we’re identifying what’s revenue is only tied to 3G and what’s happening to us is remember our products that we have in certain segments are capable of doing 2G and 3G type transmission protocols and we’re not capturing those as 3G revenue because they have the capability to do 2G so we’re capturing those in the 2G bucket. So I think we’re probably penalizing ourselves a little bit more than what the actual outcome is but I wanted to give you that data point.

Ronald Buschur

And then if you look at the revenues by geographic regions as you can see a lot of the activity and some of the growth is in the A-Pac region so that is primarily more of the 2G types of products and applications and solutions as well.

Kim Watkins – JP Morgan

Okay and then what about 3G in North America, have you seen any pick up in demand there?

Ronald Buschur

Well we do see some pick up in demand there and we do know that one of the major network operators is planning on a pretty significant roll out of some new equipment so we certainly want to benefit from that here in 2008.

Kim Watkins – JP Morgan

Okay thank you.

Operator

Your next question comes from [George Iwanik] – Oppenheimer

[George Iwanik] – Oppenheimer

Following up on the OpEx front, can you give us an idea of where you would expect the larger amount of savings to come from, is it from sales and marketing, G&A or R&D?

Kevin Michaels

Well I think we don’t want to get real specific down there but I think that clearly our G&A area is an area that probably has the largest potential savings I mean clearly we’re looking to control costs across all of our areas, but that’s probably our largest area.

[George Iwanik] – Oppenheimer

Okay and then looking at the full year guidance can you give us a sense of your visibility beyond the next quarter into that guidance and what type of events could push you to higher end of it and which ones would make you feel more comfortable with the lower end?

Kevin Michaels

Well I think in terms of the range I think, in terms of our business right now we have a fairly good visibility but in our business it’s only going out one to two quarters. So clearly we don’t have, you know people do not place orders for the last half of the year at this point so obviously its forecasts and its plans that we’ve gotten from our customer bases around the globe so right now we feel pretty positive. Clearly how, we can’t ignore the economic issues going on in North America and how those translate across the world so we’re certainly trying to be somewhat conservative as to how those things play out and I think this year more than most, it’s going to have big impacts on whether we go to the high or low ends of the range. I think we’re too early in the economic cycle to really tell if that’s going to have an impact. We haven’t seen customers pulling back because of any economic issues but obviously that’s a concern that’s probably on most participants’ minds.

Ronald Buschur

And the other piece that we’re really focusing on if I look at the indicators, is some of the I think already announced spends that are going to take place in upgrading some of the networks here in North America and then some of the activities in parts of the A-Pac region and the growth that we’re seeing in building coverage solutions we’re anticipating continued success there. So those are some of the areas and the indicators that we’ll continue to monitor and as Kevin stated you know we’re just trying to make sure that we can meet the objectives that we’ve laid out and fall within in the range that has been give and with what we see today we feel like we can comfortably achieve that.

[George Iwanik] – Oppenheimer

Okay and one final question I know you’re not giving quarterly guidance but if you just look at seasonality in general terms, do you see this year shaping up like historical years or anything that might be different this year?

Kevin Michaels

Well I think from our comments we’ve looked at the consensus out there and I think the consensus reflects some seasonality that would be what you expect in the year and I think we’re comfortable with that so that potentially there can be some seasonality here, especially in the first quarter.

[George Iwanik] – Oppenheimer

Thank you guys.

Operator

Your next question comes from Blaine Carroll – FTN Midwest Securities

Blaine Carroll – FTN Midwest Securities

Ron can you talk about the competitive environment particularly post the Andrew acquisition?

Ronald Buschur

Looking at the competitive landscape obviously now you have the combination of Com Scope and Andrew portions of the Andrew filter business obviously has been sold off. So we do believe that that will create some stability in some of the competitive pricing that we’re seeing from Andrew on the filter end of the business. That certainly doesn’t reflect in the antenna business or in some of the other segments of the market that they currently compete against. I think they still need to look at that and make some decisions how they’re going to manage that going forward but then you still do have some other individuals in the A-Pac region who do have in-building products as well as filter products and antenna products that we compete with. And then you have [Catron] from a base station antenna perspective. We do believe that some of the consolidation that’s taken place with our customers and some of the rationalization that’s taken place in consolidation in our segment will hopefully help stabilize a little bit of the pricing here in 2008.

Blaine Carroll – FTN Midwest Securities

Okay and then Kevin can you talk about the reasoning behind leaving the $10.8 million in the cost of goods sold, why don’t you just X that out and you know we’d be sitting here talking about a penny worth of earnings instead of a loss of seven cents?

Kevin Michaels

Well the issue is from an accounting standpoint, I can’t put it into a restructuring line because it wasn’t part of a separate restructuring. The restructurings are related to some of the facility closures or sales that we had so from a strict accounting standpoint it can’t go into a restructuring item. Trust me we would love to put it there but we did try to highlight it for people and lay it out there. It just, our accountants wouldn’t allow us to put it in that line but it is certainly, you know we don’t view it as an ongoing type of charge and that it should only be a one time event so that’s why we highlighted it in the call as well as in the press release.

Blaine Carroll – FTN Midwest Securities

Okay I think the comparable to the $10.8 million last quarter was somewhere around $2 million, is that correct?

Kevin Michaels

I think it was like $2.5 million or $2.8 million but yes the same, that kind of range, yes.

Blaine Carroll – FTN Midwest Securities

Okay so on a go forward basis I mean, Ron you spoke about margin improvement, I’m assuming that’s coming off of the $21.8 million but should we consider somewhere around $2 million to $3 million of these one time charges always being baked into our gross margin assumptions?

Ronald Buschur

No you should not and it is off the $21.8 million that we’re going to be moving up to try to reach our range of the mid 20% range. What we’re trying to do is focus the business from this point forward on improving our turns as we had indicated so we don’t expect to see those one time occurrences in the future.

Blaine Carroll – FTN Midwest Securities

Okay and then Kevin I couldn’t find it, what was the cash flow during the quarter?

Kevin Michaels

Cash flow was approximately about $12 million use of cash.

Blaine Carroll – FTN Midwest Securities

Twelve million use, okay thank you.

Operator

Your next question comes from [Jeff Haval] – Lehman Brothers

[Jeff Haval] – Lehman Brothers

Ron for you, could you talk a little bit about the driver of the direct to operator sales and what gives you confidence in the outlook into 2008?

Ronald Buschur

Yes Jeff we had spent a lot of time as you know with some of the products that we had redesigned to better suit and be focused towards the solutions that the operators are looking to deploy. We know we’re well positioned with those operators here in North America and certainly in the European market and we’re starting to see some success in the A-Pac region as well so we have a certain level of confidence that now we have the right solutions that are focused on the customer, the direct operator customer needs not necessarily just the OEM needs for that market.

[Jeff Haval] – Lehman Brothers

Okay are there specific end customers that…allows your visibility to improve?

Ronald Buschur

Well there’s certainly, I think the main North America operators as you know is our focus for the team here in North America and you know and you’re very aware of the roll outs that they’re deploying so we want to certainly gain and take a meaningful market share in those deployments and then in the A-Pac region we want to introduce and we have introduced our antenna products as well as some of our amplifier products in that region directly to the operators.

[Jeff Haval] – Lehman Brothers

Okay great and then Kevin turning the balance sheet for a second, obviously the inventory turns went very much in the right direction; can you talk a little bit about why that was this quarter? Is it a seasonality thing, should it decline again and then also on the DSO side when, should we be thinking about an improvement ultimately there from mid 90s?

Kevin Michaels

Well I’ll start with the DSO side and both these metrics I think as you know Jeff and everyone who’s been listening to us, it’s you know we’ve been very focused on trying to improve our balance sheet metrics and that will continue throughout 2008. You know the DSO side, we’re very focused on making improvements there and we think we will make further improvements during the next year. We’d like to get down to 90 days, we’re around 94 now so we’d like to get down, I’d like to get it lower than that. It really depends on the mix of our business and I think as you know most business outside North America is at a 90 day or higher type of payment range so given our overall international vent of our business it’s hard for us to get a lot lower than that, but we’re certainly driving that. The inventory turns I know, we stated a goal last year to get to eight turns and it’s a steep goal and we’ve gotten there for the end of the year. Clearly our goal is to maintain that this year and continue to drive that going forward. As I think anyone and you know listening to us, we’ve always been very focused that this business needs to be run on a high turns basis in order to improve us and in order to help prevent us from ending up with excess inventory and these kind of other charges that we’ve had and we think we’re implementing our processes, we’re continuing to consolidate some of the past acquisition supply chains. We’ve got a lot more work to do on the supply chain and consolidating that which will occur over 2008 but we certainly as I think Ron mentioned we’re certainly looking over the year to try to drive it higher. I believe today we’re setting the standard in our industry at eight turns, I don’t think that there’s anyone near us and our goal is to try to drive that higher and set some higher standards as we go later in the year.

Ronald Buschur

And the other piece that we’re really focusing on is putting our lean processes in and drive the efficiencies and productivity through the operation which will shorten our cycle times which then drive the inventories and that’s been an operational strategy that we’ve deployed and we continue to utilize in our company.

[Jeff Haval] – Lehman Brothers

Thank you very much.

Operator

Your next question comes from Mike Walkley – Piper Jaffray

Mike Walkley – Piper Jaffray

Just a question in terms of your visibility again in ’08, if I’m hearing things right is it mainly due to some rebound in some key North American customers is that the reason you expect the strongest growth and maybe you can touch on the regional outlook and in terms of your gross margin, it sounds like some potential positive mix shifts could help margins, one being the strong improvement in your coverage system, should we expect those type of levels to continue and also it sounds like potentially a better direct operator sales in North America. Am I understanding that correctly?

Ronald Buschur

You’re understanding most of the aspect correctly expect for it’s just not focused on North America operator that we’re focusing our future growth opportunities. We see some opportunities for growth in the Middle East as well as the A-Pac region with the operators and we’re certainly continuing to demonstrate and try to strengthen our market share in the European market.

Mike Walkley – Piper Jaffray

Great and then on the coverage systems that’s a higher gross margin business than your other solutions and would you expect this kind of strong Q4 run rate to continue into 2008?

Ronald Buschur

Yes we certainly do enjoy when we are able to bundle together more of our products and create a solution as we do with our in building coverage, which are our DAS solution products to actually command a little bit better margin on those products and we do want to continue that here in 2008, that’s correct.

Mike Walkley – Piper Jaffray

Great thanks and then just one last question, in terms of your ’08 visibility, would you expect any carriers to be at 10% customers in 2008?

Ronald Buschur

I think, I’m not sure that we would want to sit there and try to speculate on that at this point, certainly that would be a goal, but I don’t want to speculate on that.

Mike Walkley – Piper Jaffray

Great thanks and good luck with the restructuring.

Operator

Your next question comes from [James Fossett] – Pacific Crest Securities

[James Fossett] – Pacific Crest Securities

Most of my questions have been answered but I did have a couple of follow-up questions, on the inventory that has been written down, obviously you feel like that that, the value of that had been impaired hence the write down but I’m wondering are these products that are still for sale and you would expect to sell at a reduced price or is this inventory products that you really don’t foresee being able to sell at all in the future?

Kevin Michaels

Well we’ve written it down as value that we think we can get for it so we’re, while a lot of stuff is obsolete or becoming obsolete, we don’t think we’ll be able to achieve much for it. We’re certainly trying to achieve something for it and if we do then we’d recognize that back and show that in an income statement. But we’ll look through this stuff very closely here at year end, you know it’s our year end, our fiscal year end, our auditors and our sales have gone through this stuff very, very closely and we think we’ve adequately covered everything that’s out there.

[James Fossett] – Pacific Crest Securities

And so if you’re still intending to sell that product, I mean is it written down in such a level that if it were sold that it would be kind of inline with your corporate gross margins or would it be at or above, I guess ….

Kevin Michaels

I think we’ve written it down that it would be, we don’t expect to sell a whole lot of it, let’s put it that way and if we did something actually, say we got some, got in a position where we got to sell some of it, obviously it might be at a much higher margin but we’d have to note that in any financial statement.

[James Fossett] – Pacific Crest Securities

Okay that’s very helpful and then my other question just had to relate with more the general market for Powerwave, how are your carrier customers, particularly in the emerging markets and dealing with the more constrained capital situation or debt markets, is it not much of an issue because they don’t need to raise additional debt, I guess I’m just trying to get a little bit of a commentary from you as to how particularly emerging market carriers may be dealing with constrained capital environment?

Ronald Buschur

Yes, well one of the things that they’re looking at when they’re looking to deploy new capital or even add subscribers is they’re actually looking for solutions such as our remote radio head applications, some of our clean site applications that allow them to use fewer sites in a more rural type of an environment at a little more cost effective manner than what you can achieve with base stations. And we have some products that are really good for rural applications around base station types of solutions in these types of environments. The other area that we’re seeing is a lot of the operators in the A-Pac region and general are trying to enhance the existing network, the GSM products and solutions and that bodes very well for Powerwave’s products and solutions that have been a legacy anchor for Powerwave for many years here in the North America and in the European market segments. So it really bodes well for us to go into these markets and we can demonstrate immediately with white paper examples of how the products and solutions work today. So it gives us I think just a great position to go in and leverage our capabilities in these emerging markets.

[James Fossett] – Pacific Crest Securities

How worried are you that, it sounds like what you’re saying is that particularly in these emerging markets is that the carriers are trying to be obviously more affective and efficient in their capital usage, get more bang for the buck if you will, and you’ve got good product to fulfill that but how concerned are you and how concerned have they told you that they are that that process may come, even it may come to a halt, if the capital markets and the debt markets don’t free up a bit.

Ronald Buschur

Well I guess they’re probably not giving us that type of insight to their concerns around their business regarding the debt market, but if you look at what they’re trying to do from an overall let’s say optimization of the existing network using some of our products and solutions, there’s a pretty cost affective method for them versus going down the path of maybe adding more base stations and sites to a network. I don’t believe at this point I would be in a position to really second guess what they’re believing the debt market impact will have at this point. But we’re certainly watching carefully ourselves and that’s why we try to make sure that we structure this company to be the most profitable and cost affective solution in the market and really position ourselves for an economic market that may not be as robust as what we’d all like to see and that’s why we’re focusing on lowering our operating expenses here in 2008.

[James Fossett] – Pacific Crest Securities

Great that’s very helpful, thank you.

Operator

Your next question comes from [Analyst] – Deutsche Bank

[Analyst] – Deutsche Bank

I just have a quick question in terms of can you please outline what’s the six steps that the operational level and the strategy level have you outlined to improve gross margin for the first quarter and also through 2008. I would appreciate you being as specific as you can.

Ronald Buschur

Well I don’t think that we’re going to obviously go into our operational strategies. I think that’s part of what we have been able to demonstrate over the previous years that we do very upon and that’s executing from an operational level and cutting the cost and I think our financial results have demonstrated that. I think you can see by what we have demonstrated last year for the last four quarters and what we’ve demonstrated in the part around operational excellence, turns, controlling our cost that we’re going to continue to do that and we will drive the margins to the level that we had indicated, which is the mid 20% range. We are going to lower our operating expenses as Kevin and I had reassured you in the call, back to the $45 million range and that’s in the second half here of 2008 and we’re looking for other ways to make sure that we lower our expenses and our costs going forward so we’re competitive in any type of economic climate that we may have to compete in.

[Analyst] – Deutsche Bank

Okay so any specific steps on how you’d reduce bill of materials for instance? Any clarity on gross margin improvements?

Kevin Michaels

I think you know as Ron mentioned we’re not going to go down to those kinds of specifics but the thing we’ve talked about is obviously we have further work to do to consolidate our supply chain, consolidate our product portfolio, utilize common platforms, those are all actions that we’ve talked about over the last year that we’re doing, we’re continuing to do and will continue to execute on those strategies.

[Analyst] – Deutsche Bank

Okay thank you.

Operator

Your next question comes from Larry Harris – CL King

Larry Harris – CL King

With respect to the sale of the facility in Hungary to [Sanmina] and the cost savings that you anticipate related to that I believe in the second half of the year, will that hit or have a beneficial impact more to gross margins or operating expenses and am I correct in reading into your comments that you’re looking at similar outsourcing or plant sales during the balance of the year?

Kevin Michaels

Larry I think for the first part of that is the impact will be felt in gross margins. Clearly our ability to get the cost out of there and drive and leverage our partnership with [Sanmina] should impact the gross margins so it should improve our gross margins by lowering our overhead costs and manufacturing costs there. In terms of additional activities we may do during the year I think as Ron stated I think we’re looking to further reduce costs wherever we can both on a manufacturing side and operating expense side and we’ll just leave it at that.

Larry Harris – CL King

Understood, okay thank you.

Operator

Your next question comes from Kevin Dede – Morgan Joseph

Kevin Dede – Morgan Joseph

Nice job on driving the top line. Geez Kevin can you give me a little insight on the tax impact on that $10.8 million inventory write down?

Kevin Michaels

Well it doesn’t have any immediate tax impact really that the issue is that, that impacts mainly, the issue for us from a tax standpoint is we have our main tax assets are fully reserved so reality is right now, it may generate some additional losses but it just goes into the deferred so it doesn’t have any immediate impact but clearly we’re taking those from a tax standpoint and going forward as we return to profitability it’s why our rate stays pretty low for awhile and that’s why we said we expect for 2008 a rate of 10% because we do expect that we won’t be, it’ll take at least a year or more to burn through the deferreds that we have.

Kevin Dede – Morgan Joseph

Okay how about some insight to order trends through the quarter and given that we’re a month into the March quarter, what you’ve seen? Or is it still too early to tell because too many operator customers are still fumbling through their budgets?

Ronald Buschur

Well as we had indicated Q1 is seasonally in the past one of the slower quarters so I guess if we look at the trends that we’re seeing they would probably be in line with that for Q1 but on the other side of the coin, you look at some of the visibility and some of the planned roll outs that are scheduled to take place you know with that we have a little bit better visibility than what we probably had last year at this time. So we would really like to just continue to see the type of visibility we have today that would give us a lot more confidence as we go into the second half of this year certainly so, I guess to answer your question, looking at Q1 it’s not, we’re not surprised at what we’re seeing from a seasonal perspective there. Historically that’s been typically a slower quarter, looking at the first half we have some visibility that gives us some strong indications of where we should end up and we’re hoping that the remainder of the year we have the same type of visibility.

Kevin Dede – Morgan Joseph

Alright last question for me; can you give us some insight on component source and whether or not you’re seeing any challenges finding the components that you need?

Ronald Buschur

We’re not really having I would say a shortage in components, I would say that some of the consolidation and lack of spending that we all experienced in 2006 and 2007 certainly has had an impact on our industry. Many of our suppliers have been put into a financial situation that has made it very difficult for them to respond in the lead times that our customers would like to see. And what we’re trying to do now is re establish that lead time and that supply chain back and make sure that we’re all healthy again during this period of time and don’t fall back into some of the same traps sort to speak that we fell into maybe in 2006 and 2007 with some of these grandiose forecasts that never really matured.

Kevin Dede – Morgan Joseph

Very good, thank you.

Operator

Your next question comes from Rich Valera - Needham & Co.

Rich Valera - Needham & Co.

I have a follow-up question on the gross margin line, I think you said that you expected gross margin improvement sort of sequentially throughout ’08 but how about in the first quarter if you have seasonally down revenue as you’ve indicated you would, do you still think you would see flat or up gross margin from the 21.8% pro forma in 4Q?

Ronald Buschur

Yes Rich I think we would hope to be able to see it flat and be able to demonstrate maybe some improvement but flat is what we’d like to see with the lower revenue certainly.

Rich Valera - Needham & Co.

And just another gross margin question if I could, you know in the fourth quarter you had a very nice sequential increase in revenue, about 15% and you had also a pretty nice increase in the percentage of revenue from direct operator about 5% increase there and sort of on an apples to apples with the third quarter you were up about 50 basis points which I think is probably less than I would have expected given the pretty substantial revenue increase and mix improvement, is there something, anything specific holding that back and what is it that lets you sequentially say keep it flat on a perhaps meaningfully lower revenue level in the first quarter.

Kevin Michaels

Well I mean you’re right there Rich, but I think it really comes down to from our standpoint is we’re working to further improve our manufacturing efficiencies in our locations and cut out our overhead costs and clearly we haven’t gotten everywhere we want to get to yet and that’s what you’re seeing there but I think the movement with us with the Hungary plant, you know we did that right at the very last day of the quarter so obviously there’s no savings in that quarter or even in the first quarter, it’ll be the second half of ’08 we start seeing that but we’re taking actions to further drive the leverage there. We did see some growth in our OEM business too and that does impact us some as well but we do believe, the point you made, we believe we’ll be able to demonstrate those kind of improvements later on through 2008 as the business continues hopefully to strengthen and we’re able to further streamline the performance of our plants.

Ronald Buschur

And a lot of the focus is on the efficiencies and productivity out of the factories.

Rich Valera - Needham & Co.

Right, okay. And then with respect to your other income line Kevin could you just review what were the components of that again?

Kevin Michaels

Well the biggest piece of that is we have a gain, a $2.2 million gain from buying back the convertible bonds this last quarter so obviously that’s not going to continue and we also had an FX gain in the last quarter about $1 million which you know it’s hard for us to predict where foreign exchange is going. Hopefully it will continue to be favorable but we can’t predict that I would expect for the next quarter to have an expense line there obviously due to our interest expense.

Rich Valera - Needham & Co.

Right okay that makes sense. And at this point I think you’ve talked about a $200 million type of breakeven level as a target, would that still be the active target and would we have any sense of what type of timeframe that might be achievable in?

Kevin Michaels

Well it’s certainly still our target. We would hope you know sometime during 2008 to get there. I think if you look at this year end here, it was obviously around the $230 million level if you back out the one time items and everything. We’re making progress there but you know I think we’re still a few quarters away from getting there but we would hope to get there some time this year.

Rich Valera - Needham & Co.

And I came on the call a little late so I apologize if you did this already but is it, am I understanding correct that you’re guidance is really sort of endorsing the current consensus on both the revenue and earnings numbers out there for ’08?

Kevin Michaels

That’s correct.

Rich Valera - Needham & Co.

Okay, thanks very much.

Operator

Your next question comes from [Analyst – Karras & Company]

[Analyst – Karras & Company]

Just a quick couple of follow-ups, you talked about perhaps penalizing yourselves when you classified revenues a 2G and 3G and that therefore it tended to be a little lighter on the 3D front, but if you were to be taking a very liberal viewpoint looking at all the products that were used in the 3G world, how would the break up look like?

Kevin Michaels

It’s hard because I think we clearly have a larger piece there but it’s just hard because of the range of products and stuff. I can say that I think, I’ll use a simple example, in North America we sell some products to operators that are capable of both 2G and 3G and since its capable of both we lump it into the 2G, 2.5G bucket. So is it 50% higher than the number we support? Probably it’s reasonably to expect that, I mean it’s certainly higher up so we’re showing about roughly a 10% of 3G and is it really probably closer to 20%, yes that’s probably the rough range.

[Analyst – Karras & Company]

Okay thank you. And also could you talk a little bit perhaps some of the dynamics going on in the Ericssson world, I know its not a 10% customer, but over the last three four months we’ve seen huge impacts of your stock prices whenever some news came out from Ericsson, can you explain some of the dynamics between you guys and Ericsson and if there are any?

Ronald Buschur

Well we’d like to understand those dynamics as well. Obviously they’re not a 10% customer and as they are a very important customer to us and we want to continue to service them with the right products and solutions we’re somewhat puzzled how we’re tied to them as well from a performance perspective so I guess we don’t have anything that we would like to add to that except for that I think that’s a barometer for the industry maybe how people perceive the wireless sector as they are the leader in that marketplace and in that space.

[Analyst – Karras & Company]

So if you look at Ericsson’s comments, they really break up their revenue profiles into three buckets right, kind of high you know the software applications and some of the high margin and then some of the low margin business, how do you see yourselves fitting in across some of those buckets that Ericsson talks about? They continued talking about long term, aggressive build outs, coverage build outs but they talk about you know slower than expected software upgrades for you know for their key customers.

Ronald Buschur

Well I think there’s a couple of points that they made that we though was somewhat interesting, one that they’re focusing now all their business on the upgrade market versus what they were anticipating to be their main stream revenue which was software and service in the past. The other piece that we looked at that I thought was interesting is they’re talking about now maybe not necessarily bidding all the tenders and the opportunities in the India market, or the A-Pac region let’s just say in general, because they’re very cost sensitive. I think the point being a lot of the operators now are really looking for the solutions and they’re becoming a little bit more mature in understanding the components that make up some of these elements of products that are being offered from the OEMs and they realize that Powerwave does offer some of these products and they can buy them direct.

[Analyst – Karras & Company]

Okay thanks and finally can you just quickly tell how much was the depreciation and amortization during the quarter?

Kevin Michaels

I think the number is roughly equivalent to last quarter, I think it’s around $13 million, $14 million right around there.

[Analyst – Karras & Company]

Thanks a lot guys.

Operator

Your next question comes from [Unspecified Analyst]

[Unspecified Analyst]

Two quick questions, first you had previously talked about the fact that your China manufacturing consolidation would benefit gross margins by about 100 or 200 basis points, can you talk a little bit about what the impact has been and what you can see moving on to next quarter and secondly if you can comment on where you’re seeing the strength in your WiMAX business.

Kevin Michaels

Sure, I’ll start with the first part of that, in terms of we started the China consolidation, our margins were down around the 18% level so I think we’ve seem some of those impacts. I think they’ll be some further improvements over the next couple of quarters that hopefully will be showing up in our overall margins but I think we have achieved a fair amount of savings and the remaining ones will come through in the next, first half of the year. I’ll let Ron talk about the WiMAX.

Ronald Buschur

On the WiMAX we did see some growth in the WiMAX sales through North America operator whose deploying certain cities with WiMAX as well as a European operator who is deploying some WiMAX and we do believe that some of the European and the A-Pac region operators will continue to look at this as a [niche] solution in those markets so we’re going to continue to sell those products in those regions as well.

[Unspecified Analyst]

Thanks.

Operator

There are no further questions in the queue. I’d like to turn the call back over to Mr. [Tom Spate] for closing remarks.

[Tom Spate]

With that I’d like to thank everyone for joining us today and you’re continued interest in Powerwave Technologies. We look forward to sharing with you our results for the first quarter of 2008.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Powerwave Technologies, Inc. Q4 2007 Earnings Call Transcript
This Transcript
All Transcripts