Airspan Networks Inc. Q4 2007 Earnings Call Transcript

| About: Airspan Networks, (AIRO)

Airspan Networks Inc. (AIRN) Q4 2007 Earnings Call February 27, 2008 5:00 PM ET

Executives

Eric Stonestrom - President and CEO

David Brant - SVP and CFO

Paul Senior - CTO

Analysts

Rich Valera - Needham & Company

Gunther Krager - Discovery Group

Michael Nelson - Stanford Group Company

Operator

At this time, I would like to welcome everyone to the fourth quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. (Operator Instructions) Thank you. Mr. Brant, you may begin your conference.

David Brant

Thank you very much, Jonathan. Welcome, and thanks everyone for joining us today on our fourth quarter conference call. We appreciate your participation and continued interest. With me on the call is Eric Stonetrom, Airspan's CEO and Paul Senior Airspan’s CTO.

To start off the call, Eric will provide his perspectives on the business. Paul will then present some highlights to our product strategy, I will then take you through the results of the quarter ending December 31, 2007. We will close with the questions, as normal.

The company issued a press release today containing detailed results for the fourth quarter and full year 2007. This release is available on the company's website, as well as various financial websites.

In keeping with SEC requirements, I must advise you that this conference call will contain forward-looking statements reflecting the beliefs and assumptions of management, based on currently available information. Listeners are cautioned that a variety of factors, including certain risks, may affect our business and cause actual results to differ materially from those set forth in forward-looking statements.

Listeners are therefore cautioned not to place undue reliance on such statements, as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ. For a more detailed discussion of risks and uncertainties relating to Airspan Networks, you are directed to the company's annual report on Form 10-K filed with the Securities and Exchange Commission for the year ended 31 December, 2006 and quarterly 2007 reports on Form 10-Q.

With that, I'll turn the call over to Eric, our CEO.

Eric Stonestrom

Okay. Thanks, David and good afternoon to everyone on the call. First of all, I would like to know that Airspan recently celebrated its tenth anniversary and personally, I can comment that the industry has never been more exciting or dynamic and that our team and product line has never been stronger. The market opportunity for the types of products that we design and manufacture has also never been larger.

That’s said, 2007 was clearly a challenging transition year for Airspan. As the revenues from our older product lines fell from $82 million in 2006 to $30 million in 2007, I am proud of the products we have made in WiMAX, despite the headwind from the legacy products.

We significantly grew our WiMAX business, which in the fourth quarter represented more than 80% of our total portfolio. We achieved 40% full year revenue growth of WiMAX with WiMAX sales of $64.3 million. We have been able to successfully shift our focus along with many of our longstanding customers and work with them as they migrate their networks to WiMAX.

We have also been successful in bringing new customers on board both in the emerging markets and in the developed world. As carriers choose WiMAX as their first solution to provide voice embedded services to their fast growing customer base and choose Airspan against the various competitors in the market place, due to our unique product differentiation.

A few highlights of the quarter as well as the full year deserve mention. We registered $95 million of revenue for 2007 including $64.3 million of WiMAX. I said earlier a 40% WiMAX revenue increase year-over-year, fourth quarter total revenues of $23.8 million consistent with our guidance and fourth quarter WiMAX revenues of $19.3 million representing 81% of the total revenues. 2007 was a year in which our competitive positioning was confirmed.

Infonetics, in its December report, ranked us number 2 in equipment shipments across the WiMAX spectrum. According to industry analyst [Maro Vitas], Airspan is now the number one player for combined certified and compliant WiMAX, 802.16- 2004 shipments with a market share of 20% at the end of 2007, and clearly ahead of all competitors.

There is growing conviction which we have always had that the global WiMAX opportunity is very large. For instance, Infonetics is forecasting a 5 year compound annual growth rate of more than 80% between now and 2010, and we intend to capitalize on that growth.

Taking a quick look at last quarter, we saw commercial success in a number of new network wins, including SaudiTel a large mid-eastern incumbent operator, expansions from QatarTel, an existing customer, a new network deployment of over $2 million with WiTribe Jordan, which is majority owned by QatarTel. Wins in Latin America with operators Tricom and PuntoNet, a win in eastern Europe with Comstar Armenia, a leading operator in Armenia and also a major spectrum holder in Russia, a win in the South African cone with Vodacom and Celtel, a victory in Indonesia with IM2, a leading telecom service provider and a significant network to deployment with KEPKO in South Korea, the largest electric utility.

In total, we shipped over 1500 base station sectors in the quarter, split about 50:50 between our WiMAX platform and MicroMAX platform. This is the largest amount of base station infrastructure we ever delivered in a quarter in the history of the company and shows the expanse to which Airspan's products are getting market acceptance and recognition.

We also targeted new markets with our existing WiMAX products. The SEC approved US based operators to work in the 3.65 gigahertz band in the middle of the year and we got an early jump in this marketplace with a SEC certification of our WiMAX equipment in this band, the first MIMO enabled WiMAX solution to receive such certification.

We have already deployed the system commercially in several US networks and we recently identified a 109 operators registered to utilize this band, illustrating the size of the opportunity. Our advantage in 3.65 is that we use our standard HiperMAX products which are in wide spread operation in Europe and in the Middle East and this solution brings many unique features to the opportunity space. We are excited now to be able to offer this product in the US for the first time.

We also signed customers that have previously been the stronghold to our competitor Alvarion, like the operator in Enforta, the largest ISP in Russia. Enforta recently announced an infusion of $20 million of capital, in recognition of their leadership in the fast filling Russian market and they recently selected us to provide our WiMAX products in their network build out.

I would like to spend a few minutes on Airspan's competitive positioning. The wireless space has undergone many changes in the past couple of years. Speaking just of WiMAX, incumbent carriers are making the transition from early legacy solutions for fixed WiMAX. Airspan has successfully built out its product portfolio to follow this transition.

We now offer the broadest range of frequency bands in the industry. Our products have been built to address the available frequencies and specific network needs of our customers. We have succeeded in moving our customers to WiMAX and getting the leading market share in the IEEE 802.16- 2004 compliant systems as well as our exciting selection by Fujitsu for the development of mobile products and these are both indicators of our success in the market place.

We will also just strengthen our go to market approach with the addition of industry veteran, [Jacqueline Burn] as CMO, who join the company just on Monday and will be aggressively focusing on our outbound positioning in the market place.

We also recently signed an OEM agreement with the Gilat, the premium VSAT equipment and services company, which provides us access to many market opportunities that our traditional sales channels would not address. Gilat selected Airspan after an exhaustive search of the WiMAX vendors in the industry, and it’s another step in the direction to build our market channel.

With that, I’d like to introduce Paul Senior, our Chief Technical Officer who will be joining us for the first time on one of these earnings call to provide a brief overview of our technology strategy and why we see 2008 as a watershed year for WiMAX. Paul?

Paul Senior

Thanks Eric. I’d like to talk about Airspan’s mobile WiMAX product strategy and basically explain our go-to-market strategy with the different types of base station products that we are planning to put into the market place.

As many on the call know ,our first product was a crossover platform that allowed WiMAX carriers to provide service using both fixed and mobile profiles. This is the HiperMAX base station. We have been shipping HiperMAX for around 18 months and have a large number of deployments around the world with carriers such as Telefonika and Vodophone.

Alongside this base station development, we have also created a range of end-user CPEs fixed applications, who EasyST and the ProST. EasyST was the world’s first indoor WiMAX modem and now we have shipped over 120,000 units.

The ProST is also a big runner in providing connectivity to the biggest locations, where internets and VPN services are required. The HiperMAX approach and solution has been adopted by customers like the UK’s FREEDOM4 operator through it is most popular by Intel Capital and they have invested in an infrastructure based on fixed WiMAX that can be converted to mobile WiMAX when market conditions are right.

In fact, we believe that 2008 is the year when mobile WiMAX will arrive and the first interoperable WiMAX Forum certified mobile product should be announced by the Forum in the next few months. In fact, the Forum put out the press release that said that testing for certification actually started last month. WiMAX Forum certification is a very good sign. We sold the 16D fixed and the market starts to ramp just after fixed WiMAX certification is completed. Certain competitors introduced pre-certified so called [VIVO] variants of mobile WiMAX last year. The market acceptance for those products has been very limited. Airspan chose to instead go straight to the full ways to MIMO product set and it certainly looks like this version of mobile WiMAX will be the dominant one.

Our second generation mobile WiMAX base station is a 16E only product and it’s called MicroMAX. We announced this product earlier in the fourth quarter. MicroMAX is a brand new top of Macro base station that is miniaturized all in one design and has an integrated radio and base band technology. MicroMAXd has been a very smooth footprint. In fact, its volume is less than 20 liters, that’s about three-fourths of a cubic foot. But despite this very small size, the base station is very powerful and it can deliver a full 2 times 10 watts full MIMO capability.

The special thing about this is that the Base Station is so small that it can be installed directly on the tower or the mast or onto a rooftop. The antennas can be connected on the front of the base station and so there is no cable between the baseband part and the radio part and therefore no cable loss.

This approach reduces the cost to carriers as they don’t need an indoor shelter to install the base station. In fact, all you need to do for this base station is to provide power and a direct back-hole connection. The other special thing about MacroMAXd product is that the baseband span signal which we have employed has typically twice the capacity of most of the competing product.

We have the ability to run a full 2 times 10 Megahertz channel at the same time or run a full 20 Megahertz channel. 20 Megahertz is an option in the upcoming version of Mobile WiMAX that will be in the marketplace in 2009 and 2010, the so called release [1.X 16E] profile. 20 Megahertz actually enables a single spectrum of base stations to work at up to 75 Megabits per second. That compares with today's Mobile WiMAX of around 33 Megabits per second when running the MIMO profile.

Finally, it's worth remembering that MacroMAXb Airspan’s first market offering is in the 2.3 and 2.5 Gigahertz WiMAX band, where we have never been active before. We received widespread praise for the product at the recent Mobile World Congress in Barcelona, where potential customers and some worried competitors looked at the products on display there and both knew that 2.5 gigahertz band will probably represent about 40% of the world's WiMAX frequency; and band holders at 2.5 gigahertz include people like KDBI in Japan, Sprintz in the US, Clearwire in the US and Cable and Wireless in a number of locations and these are the operators with some of the most ambitious plans to deploy mobile WiMAX.

Finally, mobile MacroMAXd sees world's developing partnership with Fujitsu of Japan. We signed a four-year corporation deal with them. The logic was that, by combining our technologies and R&D resources, we can reduce time-to-market and also create a class leading product with a smaller investment in R&D. This made sense that both parties and in fact, Fujitsu donated its radio transceiver technology and we created the base band technology in the MacroMAXe base station. But Fujitsu and Airspan will independently sell the base station and the first deployments of the base station will begin next quarter.

The final part of our mobile WiMAX technology strategy within use of devices, we’ve had a significant CPE business in the fixed WiMAX space and we plan to continue this success by creating differentiated products for mobile WiMAX. As we previously announced, we have created the world's first multiband mobile WiMAX, end-user device, which we called a MIMAX USB. The MIMAX USB is a core band device that connects to a laptop and allows the laptop to connect to any mobile WiMAX carriers network, as the unit will operate on all of the defined mobile WiMAX profile that 2.5 gigahertz, 3.5 gigahertz and 5.0 gigahertz. We are seeing now a lot of interest in this device and already submitted it for WiMAX certification. We intend to extend the WIMAX profile during 2008, and now I’d like to hand it back to David.

David Brant

Thank you very much Paul. And let me take you through the financial highlights. Our WiMAX momentum continued with fourth quarter revenues reaching $19.3 million, representing 81% of our overall sales. Total WiMAX shipments in the fourth amounted to $21.7 million and the deferred revenue on some of the base shipments with the acceptance criteria and mobile WiMAX deliverables that is not being completed.

Total revenues for the fourth quarter amounted to $23.8 million bringing full year 2007 revenues to $95 million. Our 2007 full year WiMAX revenues were $64.3million up 40% from 2006 and represented approximately 70% of our total 2007 revenues. Unknown WiMAX revenues came in at $30.7 million, down from the $83.1 million for 2006, which has been anticipated and discussed during the last several earning calls.

The geographical breakdown of revenue for the quarter was as follows, 36% from Latin America and the Caribbean, 19% from Europe, 24% from Africa and the Middle East, 14% from Asia and 7% from North America. For the full year at the geographical split was 31% for Latin America and the Caribbean, 29% from Europe, 10% Africa and the Middle East, 20% from Asia and 9% from North America.

The gross margin for the quarter came in at 29% and was diversely affected by revenue that fell related to most two particular contracts and provisions related to non- WiMAX inventory. If we exclude these items, underlying gross margins will remain at about the same percent as in previous quarters. Under these two arrangements we deferred approximately $1 million in revenue with a 100% margin, $0.6 million was reserved for winding down commitments with the sub contract [mar vitas] products.

Operating expenses for the fourth quarter of 2007, at $14.9 million were at the same level as the fourth quarter of 2006, and up 10% from the third quarter of 2007. Research and Development costs increased to $7 million in the fourth quarter, primarily coming from our intensified effort focusing on mobile WiMAX. Sales and marketing expenses rose slightly over the third quarter to $3.8 million as we increased our marketing efforts related to our new collaboration with Fujitsu and additional overall general marketing spend.

General administrative expenses increased to $3.8 million over $3 million in the third quarter of 2007, this is mainly due to the absence of non-recurring tax credits in foreign exchange benefits that we recorded in the third quarter. During the quarter, we have recognized a non-cash deemed dividend of $0.5 million. As you remember from the previous call, these charges are the results of the activation feature in the [search doc], which was activated at the time of the secondary offering in the third quarter. This additional $0.5 million in the fourth quarter is a result of the underwriters exercising their over-allotment provision.

Net losses attributed to our common stock holders was $8.4 million, up $0.14 per share for the fourth quarter compared with $9.9 million, $0.24 per share in the third quarter of 2007 and $4.1 million, $0.10 per share for the same period last year. The weighted average shares used in the quarter amounts to $58.3 million, This weighted average excludes the preferred stock on an asset converted basis of $21.6 million and [all our] exercised options.

Moving to the balance sheet. At December 31, cash restricted in cash and short investments amounted to $36.7 million, a decrease of $12.3 million over the end of the third quarter. Borrowings from the Silicon Valley bank line of credits remained at $7.5 million. Day sales outstanding were high at the end of the fourth quarter at 110 days compared to 89 at the end of the third quarter as a number of large payments including many on Letters of Credits, fell into the beginning of the first quarter 2008, which was subsequently being received. We expected the associated decrease at the end of the first quarter. As such this gave rise to the high cash used related to working capital in the fourth quarter. Inventory turns were 5.1 for the fourth quarter, compared with 4.2 for the quarter also adjusting inventory for deferred cost of sales.

For the year, cash increased $9.5 million at the end of 2007 from the end of 2006. Increases in cash of $32 million related to the equity offering, $7.5 million in draw downs from Silicon Valley Bank and $1.7 million from the exercise of stock options were offset in part by $16.4 million used in operations excluding the inventory write down, $12.2 million for working capital and $3.1 million for capital expenditures.

Deferred revenue remained at approximately the level of the third quarter of $5.1 million. In addition, we've made shipments of approximately $2 million that has not been accepted and not invoiced the cost set in deferred cost of sales. We expect this deferred revenue to become realized revenue during 2008.

With that, I'd like to hand it back to Eric for some closing remarks.

Eric Stonestrom

Okay. Thank you David and thanks Paul. Let me just conclude our part of the call and then we will take some Q&A.

We will talk briefly about the guidance and the outlook for 2008. As you heard from Paul, we have a strategy that's emphasizing our technical leadership and we are confident that we will see a strong demand for our WiMAX products throughout the year. The $110 million plus of WiMAX we have shipped to-date represents an established footprint and a large investment by carriers in our products. Both fixed and mobile WiMAX are forecasted by industry analysts to continue to grow at rapid pace with location centric fixed applications expected to be $4 billion in 2012, while personal broadband applications, primarily mobile are expected to be $5 billion. We believe that Airspan is well positioned to benefit from both and our new mobile offerings allow us to extend this momentum.

Turning to the outlook for 1Q '08, the telecom equipment sector traditionally experienced a seasonality with a lighter first quarter from the previous year's fourth quarter and we are anticipating that same trend for our business, with a forecast to register revenues of between $20 million and $21 million for the first quarter '08. This represents a sequential decline of about 14% due mainly to the decision of one our fixed WiMax customers DVD in Germany who has an excess of 17,000 units deployed, to pause in deployment and wait for certified mobile WiMAX in a better capital markets environment.

In spite of this discontinuation of approximately $4.5 million of fixed WiMAX business, we do anticipate our 1Q WiMAX to grow year-over-year and we also anticipate approximately $3.5 million to $4.0 million of non WiMAX revenue, down from $12 million in the first quarter of 2007.

As we move into this year, we are intensifying our focus on mobile network deployments as I described and Paul has described and the new opportunities presented by these projects and our strong product line up make us optimistic for the year.

The characteristics of these products are such that they will not contribute significant first half revenue and will require continued R&D investments. However, we are cautiously optimistic for the potential of these new products to contribute substantial revenue in the second half of ’08 and we will have more visibility as time moves on.

So with that, we would like to open the call for Q&A and take any of your specific questions.

Question-and-Answer Session

Operator

(Operator Instructions) your first question comes from the line of Steve Ferranti.

Steve Ferranti - Stephens Inc.

Hi thank you. Question regarding your Fujitsu relationship. I wonder if you can give us a little more color there about the four-year arrangement or there any exclusivity clauses in its and sort of what type of I guess expense sharing arrangements there might be in terms of marketing dollars and the like and then I guess as a follow to that, obviously KDDI being one of the big targets there initially and some positive industry trade publications, speculation regarding Fujitsu position with KDDI. I wondered if you would give us a little color on what you are seeing as there well?

Eric Stonestrom

Okay Hi Steve, its Eric, let me take that question, Fujitsu relationship is a non-exclusive relationship basically gives each partners the rights to bring the product to market, we have agreed we will coordinate our approach to the market with some clear leadership coming from Fujitsu and Japan and some of the other tier-1 one accounts with their law position and that clearly was shipped was from us and some of the other accounts. So we have an arrangement that is basically around the interest to sell the product. We have a back and forth trade arrangement for the components that we make and supply it to the other party.

In terms of marketing we are coordinating our marketing efforts very closely, we are each funding our own marketing OpEx, so we are not actually putting money in to a joint venture structure or anything that’s complicated, we are basically each putting in money on the marketing side independently to help to grow this business. As I said before we do have this partnership with Fujitsu, which is very focused on the potential in the Japanese market and we believe that our base stations Forum factor differentiates us especially when compared with other products on the market that they KDDI consortium might be considering that includes both products from independent companies like Alvarion and also larger equipment suppliers like Motorola.

We feel, we have some specific advantages in terms of the design of the products that we put together, we feel we have some specific advantages in terms of the partnership arrangement that we selected, but we do stress that the final award has not yet been made. So the news from Japan is still at the stage of a developmental relationship that we have with Fujitsu. Needless to say, we are putting all of the available efforts in to strengthening our presence in Japan, since we believe the KDDI consortium would be one of the significant events for 2008 for the industry.

Steve Ferranti - Stephens Inc.

Okay great. And I wonder also if you could walk us through, you had some commentary on DVD there at the end and I wonder if you kind of walk us through that again and it sounds like there might be a pausing in their deployment based on a couple of factors, credit market conditions and waiting for the mobile product, I wonder if you could sort of give us some color on how you feel positioned with them as they move to the mobile product and then secondly are you seeing current credit market conditions impacting any other customer deployments as well.

David Brant

Hey Steve this is David and on DVD, I mean they DVD, as Eric said they've told us they've had a change in their Management and Board direction and I mean they have network for this operation, they have 17,000 plus customers and the details of what we have, what we're working with them on is in the 8-K that we filed and that’s about as far as far as we can expand on the specific details and they -- they delivered about $9.1 million of revenues in 2007. We're not expecting that DVD to be a big customer in 2008. With respect to other customers we're not seeing a significant impact on any other customers with respect to credit market.

Stephen Ferranti - Stephens Inc.

Okay and you look like you've personally had a pretty optimistic view of the second half of the year at this point. Can you give us a sense for what type of visibility you've got into the second half of the year as we said today and perhaps some additional color on the optimism there?

Eric Stonestrom

Okay yes Steve, basically as I said in the commentary we're not really laying out a full year WiMAX revenue number at this point. The reason is we have a few of the projects especially in the Mobile WiMAX domain and the 2.5 and 2.3 base station that we just introduced with Fujitsu that we think could bring positional upside that is significant but we obviously we don’t have that business in the bag yet.

This is just to talk through a few of those, you have operators like Unwired in Australia who's actively looking for a network expansion that recently got acquired by a very well capitalized the cable TV company in there. Again they haven’t made vendor selection yet but we are actively in the hunt on that and that would be a substantial deployment. We have the [Avias] in Japan, on that I talked about already which would have a substantial impact on our topline as well as profitability.

We have several other significant carrier opportunities, the Opal project in Australia, which we've talked about before continues to be an exciting opportunity. Again no decision has been made there and we can't really comment on where they are and the process has been precisely touched, again I think it is going to be a watershed event in 2008.

So, if we look at the constellation of projects that we have in hand now, we are confident we are going grow the WiMAX business and the open question is what is the second half look like and how much does this new base station product line contribute to the revenue stream that we already have in place.

Steve Ferranti - Stephens Inc.

Okay. Great. And last one from me, David, this is for you on the gross margin front, can you walk us through a little more detail in terms of, I guess the couple of one-time items that impacted gross margin in the quarter. Sounds like you had some high margin business that was differed revenue and then some inventory correction as well.

David Brant

Yeah, that's right, Steven. Two items, one was we have huge commitments relating to mobile WiMAX deliverables and 802.16e. We differed approximately $1 million of revenue related to the Airspan 2 contract with probably a 100% margin. That was actually wound out of the -- with our sub-contract manufacturer. We are closing of the commitments so we thought it prudent to include approximately $600,000 related to that wind down. With that in respective we have about just under $2 million of inventory on the balance sheet with across our post [GISX and WIKL] product lines now.

Steve Ferranti - Stephens Inc.

Its okay and then and so the million of high gross margin business that was deferred with would that be like a software upgrades for going from fixed to mobile?

Paul Senior

It is delivering the profile related to 802.16 e

Steve Ferranti - Stephens Inc.

Got you. Okay thanks that’s all me guys thanks.

Eric Stonestrom

Okay.

Operator

Your next question comes from the line of Blaine Carroll.

Blaine Carroll - FTN Midwest Securities Corp

Yes with the FTN Midwest. Hi guys.

Eric Stonestrom

Hi Blaine.

Blaine Carroll - FTN Midwest Securities Corp

Couple of questions if I could, first of all during the fourth quarter if you could talk about the linearity and tying them more into the DSOs to how backend loaded was the quarter and then that’s naturally begs a question on visibility into the first quarter and how booked are you for the $20 million to $21 million in revenue?

Eric Stonestrom

Okay yeah. Lets start with the linearity the quite a bit of the revenues are shipped in the last month of the quarter I think, In this case we had some initial complexity because we have some revenue that was deferred from previous quarters that we brought into revenue and then we had in addition quite a bit of stuff that we deferred in the quarter, as David as spoken through.

The real timing issue on the DSOs that was about $4 million I guess $3.6 million of letters of credits we have from three different transactions, which really related to shipments we had made with a 90- day term with an LC at the end of the third quarter and those LC's that were presented did not actually clear until early January. So we had a timing issue which shifted about $3.6 million of LC backed collections just over the end of the year date. Obviously we did collect all that money it was just a banking process, so that was an unusual timing issue, I think David can throw more color on that.

David Brant

And Blaine on, we had significant contract with them ICE in Costa Rica in that sense but those funds came in early the first quarter it was a significant transaction for us in Q3. We shipped that out in very early Q3 and the payments came through in early of this year. So it is about $8 million of slip from Q4 in to Q1.

Blaine Carroll - FTN Midwest Securities Corp

Okay and are any of the receivables at high risk David?

David Brant

On any of the receivables at high risk. On that we provide in accordance with normal GAAP and we believe they are gradual.

Blaine Carroll - FTN Midwest Securities Corp

Okay and then the visibility Eric in to the first quarter?

Eric Stonestrom

Yeah so its looking very much like 4Q, we have and quite of the bookings in hand, we obviously got a month to go so it’s the typical trend that we are seeing I think we do have a better sense now of some of the deferrals we need to make and that’s obviously around the mobile WiMAX as David spoke to earlier, so that certainly we have good visibility into what w need to defer as well. Although we are confident in the guidance that we have given.

Blaine Carroll - FTN Midwest Securities Corp

Okay and then just two questions on the model, David I guess on the gross margins you expect them to bounce back to historical levels and then secondly on the R&D and Eric I think you mentioned that said you are going to continue to invest, is R&D going to stay up at this level going forward?

David Brant

Okay, two things. On the gross margins we still believe that the WiMAX margins are better, but we don’t believe the margins up or better and as we increase our volume and plus the cost reductions we expect those margins to increase to 35% plus during 2008. We've talked about where we think the operational cost will be and we had approximately $14.5 million is where we believe we will be running into Q1 and through 2008.

Blaine Carroll - FTN Midwest Securities Corp

I'm sorry David can you say that again.

David Brant

Of course it's approximating our pricing cost of running at approximately 14.5 million, slightly down on where we were at in Q4 of 2007, slightly down.

Blaine Carroll - FTN Midwest Securities Corp

Okay and what slightly down okay, I thought you said 40. All right, very good quarter.

Eric Stonestrom

And I feel happy about it.

Blaine Carroll - FTN Midwest Securities Corp

Thanks.

David Brant

Okay thank you Blaine.

Operator

And your next question comes from the line of Rich Valera

Rich Valera - Needham & Company

Thanks good afternoon gentlemen

Eric Stonestrom

Hi Rich.

Rich Valera - Needham & Company

Hi David, can you tell us how much of the 8 million of receivables that slipped have been collected so far.

David Brant

All of them.

Rich Valera - Needham & Company

Great.

David Brant

We've collected about $20 million in the first 2 months of this year.

Rich Valera - Needham & Company

Great so in terms of cash, your cash usage in the first quarter, you would expect it -- I am assuming it to be down significantly from maybe roughly 12 million in the fourth quarter.

David Brant

Yes we're expecting in the region of $3 million to $4 million, somewhere around there.

Rich Valera - Needham & Company

Okay, that is helpful and as far as gross margin you said you expect to be a back at 35% at some point, I mean is that potentially achievable in the first quarter or do you think it's really later in the year when you get back to that 35% level?

David Brant

I think it will be a little bit later in the year by virtue of deferrals related to e; the e profile. So we are going to have them -- we have contracts -- these e contracts have to defreeze that we will be taking back in the first quarter as we get acceptances. But there will still be an element that we will defer for delivery of that e profile.

Rich Valera - Needham & Company

So that issue is going to be with you as well in the second quarter, you think? When do you think that you are able to deliver on those e profiles.

David Brant

Yeah, we anticipated it. It goes away in the second quarter.

Rich Valera - Needham & Company

Okay, so you think you will be able to give both in the second quarter?

David Brant

Yeah, that's right. Again, all we are doing here is that you take a price of the unit; you fair value the underlying element of that, which happens to be a 100% margin and that's what's happening at this point of time on those two contracts.

Rich Valera - Needham & Company

So sequentially you should have -- I am assuming you expect to see gross margins up from this sort of sub 30% level.

David Brant

Yes.

Rich Valera - Needham & Company

But maybe not fully reaching the 35% is that fair?

David Brant

That's fair.

Rich Valera - Needham & Company

And then moving on to your new joint venture with Fujitsu and the opportunity particularly in Japan. It terms of -- you mentioned you actually can as to some deployments of that base station in the second quarter, is that with KDDI in Japan or can you talk it all about the potential for winning business at KDDI? When that could happen?

David Brant

Yeah, we are kind of bound under NDA on what we can talk about. I certainly think we would deploy the base station before we recognize revenue on it. Because it would be in a trial application initially, but it's not only KDI that we are targeting for this product, so we have two or three others that are fairly far along, but we think it will start to move the revenue clock but its --at this point of time, it is premature talk about KDDI consortium business I think especially.

Rich Valera - Needham & Company

Okay and you mentioned a few other large opportunities in the 23 to 25 range, when you are going -- just kind of, I think one point that you mentioned Cable and Wireless but then when you are mentioning your large second half opportunities, I don’t think you mentioned them, can you talk about that potential opportunity and sort of why you didn’t include that in your second half opportunities?

Eric Stonestrom

Yes it is definitely second half opportunity we are one of the selective vendors and we have a fixed opportunity, which we should have filed as required that we are looking at. So, no other reason than the, that the very big active opportunities that we see, but short-term we haven’t yet been selected, we are the ones that you are referring to there.

But again I think Cable and Wireless would be a smaller scale, at the beginning it be in a different Caribbean islands as suppose to an Unwired which should be Australia wide deployments, we are obviously KDDI consortium which would be if is analyzed. So for no other reasons than the virtual side but actually there is probably more different opportunities in the Cable and Wireless network consortium, because they have a number of different properties as you know.

Rich Valera - Needham & Company

Right, now just kind of trying to understand how well you are sort of existing lets say fixed WiMAX business could hold up, if there are delays with getting the mobile product out or some of these mobile or RFPs coming through. Looking at what you did last year, sort of mid $60 million type of revenue I mean what does it take to get back to that number, can you do it with mostly fixed WiMAX or does it take a significant amount of mobile WiMAX to get back to that in ’08?

David Brant

We can do that and if you look at fixed, a lot of our customers are expanding and we are selling, CD devises to strengthen the proper base stations, if you look at the fourth quarter, we shipped 1500 sectors, that was a record up from that 800 in the third quarter and that’s all fixed. And we’ve got with regard to expansions pending with significant customers that are happy with the business model and are happy with the way its working, primarily incumbent carriers, and carriers in the developing markets that really independent of the models here. So we don't see mobile as a necessity to get those kinds of numbers.

Rich Valera - Needham & Company

The growth is it's really that the growth above that level is sort of more with the mobile that come in to play, sounds like

Eric Stonestrom

Yeah I mean the growth about some reason more than above that level would be where the mobile comes in

Rich Valera - Needham & Company

Okay, so it sounds like there is no other customer like DVD that have sort of run into for it to have a reason than a significant pauses based on whatever the market conditions, is that fair?

Eric Stonestrom

Yeah that is fair and its specifically relevant at the Freedom 4 in UK, just announced an injection of capital from Intel capital and they are rolling out our equipment actively so I think that is the case where just happened to be two different business models both in Western Europe and one of them is working well and the other one the Board wants to rethink. So we don't see other processes at this point, in fact that we minimally we had at the end of the year, specially markets like Russia was very substantially higher than what we have earlier in the year.

If you look at the bookings we announced like Enforta, I have already talked, a significant operator who just raised 20 million, actually in and announced that the beginning of January and we converted them from Alvarion to our technology and we are going to be a significant part of their expansion they go from a smaller number of cities to broader footprint in Russia? If you look at Comstar, where we just won at Armenia, with them and they've got ambitions also in Russia, well funded and you look at some of the other opportunities that we are actually realizing in Eastern Europe and Russia there -- the money is there and infrastructure needs to be built-up.

Rich Valera - Needham & Company

Great, one just final one from me on Axtel, I saw you got another proximity order from them and like everyone knows they've chosen Mode as their primary e-supplier. Do you think there is a still chance of you getting some WiMAX business from Axtel and when might that happen?

Eric Stonestrom

Yes, Motorola announced the Phase I award for WiMAX with Axtel, which really comes as a result of their efforts to negate risk through a complex contractual arrangement. They did pick-up a phase there. However we are working away with them as always. We received this expansion order for $9 million which was substantially more than we expected and I think that shows that Axtel is continuing to rely on proximity as they began to introduce WiMAX. We are continuing to try our WiMAX.

We had a certainly lot of interest in the MiMAX device and certainly the new products we brought into the market to keep them interested and we are continuing to try all the products that we have there. But I'd be unwise I think to forecast the time at this point and specially given the uptake in the proximity orders, I think they don’t' know that expansions going to be a legacy expansion for the first half of '08 across the board, not only with us.

Richard Valera - Needham & Company

Okay, that's great. Thank you.

Eric Stonestrom

Thanks Rich.

Operator

And your next question comes from line of Gunther Krager.

Gunther Krager - Discovery Group

Yeah, good afternoon. I think you covered the Japan very well. The question I've is there are two of them actually, on the 700 Megahertz, opportunity and the -- is there anything going on there and North America, a you know all this place particularly. Are there any opportunities happening in that market?

Eric Stonestrom

Okay, hi Gunther, the 700 as you all probably know. The auctions are winding down now and it looks like it is going to generate almost $20 billion for our treasury, which is a good thing. Hopefully, we will see it reflecting in our tax bill. But in terms of WiMAX, there is still some debate about how widespread the use of WiMAX would be in the 700 megahertz band. Certainly the two leading areas now . In the auction process they are both leaning towards LTE. However that said the WiMAX forum has put a 700 megahertz FTD profile forward and we've built prototype versions of that.

So we are tracking it more active. Again we need to see how the auction option shakes up, here in the tail end over the next few weeks to understand exactly what the application would be. But in terms of North America in general, we have seen a lot of momentum on our 3.65 the product that we had deployed in volume and Freedom 4 in the UK and also throughout a number of other customers.

We started shipping that into the US now. We got our CC certification at the end of last year. We've had already five networks that we secured, as I said there are 109 people who filed Spectrum Intention. So that's 109 potential customers. We really stand head and shoulders above the competition. Red Line has a product that's significantly less attractive in terms of performance price and what it can do and some of the other competitors aren’t there at all at this point in time. So we think this is the place we can grab a lot of business in the short term.

Gunther Krager - Discovery Group

Right. Thank you, Eric.

Operator

And your next question comes from the line of Michael Nelson.

Michael Nelson - Stanford Group Company

Yes thanks. Hi guys.

Eric Stonestrom

Hi Michael

Michael Nelson - Stanford Group Company

Yeah, question. You have a number of potential customers that are trialing your products. I am wondering if you could share with us what you’re hearing from them, what kind of feedback. And aside from frequency capability, what are some of the other main characteristics that they are looking for and then in terms of timing, can you provide us some insight into how long your potential customers generally trial your products before making a decision? Thanks.

Eric Stonestrom

Okay, Paul are you still on the line?

Paul Senior

Yes, yeah.

Eric Stonestrom

Yeah, do you want to talk to that question?

Paul Senior

Sure yes. So how long the customer's trial the product, I think it depends on what they are testing. I think today with the fixed WiMAX product trials are very rapid because the technologies is now very mature. We've had those products in the market now many years and people can be very quickly convinced about that job. I think on the mobile WiMAX side people are taking far, far longer to test the technology.

Mobile WiMAX had a little bit of a full storm with the initial profiles that were put out, into the [WiFi] products and a lot of people tried those products and worked out that actually they weren’t good enough and we are waiting around for the MIMO products, and so there is a lot of people are coming, kind of, restarted trials with MIMO technology.

And our strategy was always in the market with MIMO technology which was what we've now done, and I think, our trails here is for Mobile WiMAX will not be the same as, our competitors trail period for mobile WiMAX because we avoided the point of sale.. That’s the key think I can offer here.

Michael Nelson - Stanford Group Company

And I guess whether I guess what do you think is your competitive advantage of, why aside from the frequency capability, why with someone to use Airspan product versus some of your competitor?

Eric Stonestrom

I’ll talked about the new MacroMAXIe -base station particularly. Means that’s say brand new (inaudible) products, it's our second generation WiMAX product, Hiper

The other types interest in the product a very, very high amplitude power. Its what we call the ten volt product, which is almost the higher amplitude you are actually allowed to and directly connects to the antenna. So losses through the cable either. So again that gives you a very good operational range.

And then the final thing we did is we improved the base band technology and made it and gave it the ability to we believe I do emphasize this when most of the competitive [LEG1]. So when you add all those things together, we will sitting here, very proud of that products and that produce - on Fujitsu and its been very competitive products in the market.

Eric Stonestrom

I just want to add it. The Forum factor cant be under-emphasized

O this product, in the size of small back pack and the competitor's 3-4 times our size on power consumption so that's the case where there is a huge differentiation just by virtue of what we have been able to achieve from a material science point of view on a packaging point of view and at Barcelona this was -- as people who really got the product would withdraw.

If I look at our other business a case like India we have been trialing with VSNL who is the major operator there for practically a year and there they tested to make sure the product really works they it has met all their criteria, they have eliminated 8 other suppliers because many of their requirements were data networking requirements that we happen to differentiate our products with.

And so while in case like that no awards been made yet. We’ve stood the time and the entrance of different competitive forces and got into a position where we feel opportunities are pretty good and that’s the case were they just want to make sure that what ever they buy is the best of breed and the best that’s in the market place and that what we have got with our MicroMAX and that’s the product we shipped over 800 sectors of last quarter so its field proven its got a number of the data features that the data size of these customers businesses need in terms of EPNs and DHCP and the way that data networking is dealt with.

So there are substantial ways to differentiate, we’ve rarely lost when we got into a trial situation. We trialed in many cases were the customer didn’t go ahead and buy a lot because they wanted to wait for our WiMAX they wanted to wait for some evolution on their frequency but we try to in whole lot of cases who are weak competitors and likely be Alvarion, we recently announced a couple of deals in Australia, where we displayed and that is following trials, we displayed in Poland in one of the major accounts there following trials. So a lot of times the customers wants to see is, is this the best performance they can buy for the money or that they have to pay and there’s where we tend to differentiate.

Michael Nelson - Stanford Group Company

Great that’s very helpful. Thanks a lot good luck guys.

Eric Stonestrom

Thank you.

Operator

And we’ve reached our allotted time for today’s question and answer session. You have any closing remarks?

Eric Stonestrom

No thanks for the interest and we look forward to talking to you in three months.

Operator

This concludes today’s conference call. You may now disconnect.

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