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Alvarion (NASDAQ:ALVR)

Q4 2005 Earnings Conference Call

February 8th 2006, 9:00 AM.

Executives:

Carmen Deville, Investor Relations

Tzvika Friedman, Chief Executive Officer

Dafna Gruber, Chief Financial Officer

Analysts:

Erik Zamkoff, Morgan Joseph

Dan Harverd, Deutsche Bank

George Iwanyc, CIBC

Rich Church, Unterberg

Troy Peery, Oppenheimer

Ehud Eisenstein, Oscar Gruss

Steve Ferranti, Stephens, Inc.

Frank Marsala, First Albany Capital

Steven Koffler, Shannon River Partners

Kevin Dede, Merriman

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Alvarion Fourth Quarter Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, instructions will be given at that time. If you should require assistance during the call, please press '*' then '0'. As a reminder this conference call is being recorded. I'd now like to turn the conference call now over to your host, Investor Relations for Alvarion, Ms. Carmen Deville. Please go ahead.

Carmen Deville, Investor Relations

Thank you very much operator and good morning, everyone. Welcome to Alvarion's Fourth Quarter 2005 Results Conference Call. This is Carmen Deville. And together with me today are our CEO, Tzvika Friedman and Dafna Gruber our CFO. The earnings release was issued this morning and is now available in all major news feeds. Matters discussed in this conference call may contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on the current expectations or beliefs of Alvarion's management. And are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements.

The following factors among others, could cause actual results to differ materially from those described in forward-looking statements. Inability to further identify, develop and achieve market success for new product, services and technologies; including the WiMAX and cellular mobile product offerings. Increased competition and its effects on pricing, spending, third-party relationships revenue. As well as the inability to establish and maintain relationships with commerce, advertising, marketing and technology providers. And other risks detailed from time to time in filings with the Securities and Exchange Commission. In addition, our limited history in completing acquisitions may adversely impact our ability to successfully integrate the business of Alvarion and interWAVE. And we may face liabilities and expenses in excess of those currently anticipated with respect to the acquisition of interWAVE. After all of that, I'd like to turn the call over to Tzvika Friedman, Chief Executive Officer of Alvarion. Tzvika, please go ahead.

Tzvika Friedman, Chief Executive Officer

Thank you. Good morning everyone. On today’s call we would like to discuss our results for the fourth quarter and review our progress in 2005 as a whole. We’d also like to talk about some of the important milestones coming up in 2006 for the industry and for Alvarion. I would like to begin with Q4 results. We are please to report a return to sequential growth in revenue. We continue to believe that Q3 was the low point and we are gradually emerging from the transition period. We are targeting continued quarter-over-quarter improvement.

The most encouraging aspect of our Q4 results is the continuing increase in revenue for WiMAX. Our BreezeMAX revenue reached about $10 million in Q4, up from about $9 million in Q3. We believe that BreezeMAX is the most deployed and field proven WiMAX platform and that our BreezeMAX revenue represent a majority of data 216-based equipment being sold currently. With our continuous focus on overall cost reduction, we meet our gross margin target of 45% again in Q4. The higher level of operating expenses compared with the fourth quarter, a year ago reflect the inclusion of the cellular mobile expenses for the full quarter R&D work to expand our WiMAX solution to include self-installed product and codec in additional frequencies. We are also focused on building capabilities to sell to Tier 1 players and new challenges, and on mobile WiMAX deployment, while focusing on affording our customers a smooth migration to the recently ratified 802.16e standard now called 802.16 2005.

We are moving ahead on a lot of different fronts these days. Before we look ahead to the important milestones coming up this year, I would like to talk about 2005 as a whole. Our fundamental business, mostly wireless DSL performed well during the transition to WiMAX. Given the aggressive deployment schedule of our large Latin American customer in 2004, when they accounted for about $60 million in revenue, there was some perception that this customer went away in 2005. In reality, this was not the case, and they accounted for about $10 million in revenue during the year. In 2006, in addition to the $7 million order from these customers that we expect to contribute to revenues beginning in Q2, we continue to see major potential for additional business in several countries in Latin America. Excluding the contribution of our large Latin American customer in 2004 and 2005, broadband wireless access revenues in 2005 increased by 20% over 2004, a good foundation for continued growth for 2006. We reached a yearly market share of about 30% of the DWA market, keeping our dominance in supplying out door applications. We gained many new customers in 2005 and reached major market share in all trials and commercial WiMAX deployment.

In 2006, we expect to expand our leadership to nomadic and portable solutions. We made good operating progress in cellular mobile, but we are not satisfied with the financial performance as revenue recognition continues to lead shipment. While we still need to improve our execution in some areas, we accomplished a lot during 2005, for example, during Q4 we successfully launched the largest project ever for Alvarion in this business. A deployment also led in Guadeloupe and Martinique. We believe this will be an important reference account that will help us land more large orders for cellular mobile infrastructure.

In addition, we have achieved some wins that have not been converted to revenue. This business continues to be lumpy as it depends on low number of customers. We believe this unit will grow faster that the rest of the business in 2006, and will likely account for higher percentage of revenue than in 2005. Perhaps, our most important accomplishment during 2005 relates to leading the WiMAX revolution. Throughout the entire year, while other vendors were still in development, we sold millions of dollars of BreezeMAX solution to various types of operators around the world.

We are proud to note that we shipped close to 20,000 Intel based PCs in 2005, far more than another vendor. Most of our WiMAX customers in 2005 were in a category we call "the novelty challenges." These are the carriers that are the area adopters of new technology. Such as Iberbanda in Spain, Ikatel in France, and Irish Broadband in Ireland as well as Airtouch in Argentina, Kenya Data Networks and Ikatel in Africa. We are proud to say that our customers have good business models and are able to increase revenues based on our advanced solutions. We are able to maintain our leadership position in dominant market share because our customers are satisfied from their value as their wireless partners.

Sell cycles tend to be longer with incumbent carriers, many of which did not have license spectrum in 2005, but we are well positioned with these operators as well. During 2005, we were involved in trials with dozens of incumbent carriers all around the world. Like the one we announced with T-Com unit of Deutsche Telekom in September. We can’t provide much more information about them, because most of these activity took place subject to non-disclosure agreements.

We are encouraged by the market development and by our access, position with many potential customers, but it’s important to remember that it is still early days. When considering our position for revolving our leadership in BWA to an equally strong position in WiMAX it is important to consider that we have participated in 4 generations of OFDM technology and had about $75 million of revenues from OFDM based products in 2005.

We have a broad base of customers in 140 countries with first hand experience with our wireless OFDM solutions, far more than any another other vendor. We believe that our track record and position as a partner of choice will be a significant advantage in competing with larger equipment vendors that choose to enter the market at a later stage. We have also a track record of advanced solutions from municipalities and a history of innovation in early mobile broadband applications for law enforcement. We recently introduced a new product called 4.9 Gigahertz and a complete cellular network solution in the smallest form factor available. Therefore, we are well positioned to benefit from the growth we see in the government and municipal market that we expect to see growing in 2006, particularly in North America.

We have an excellent relationship with Intel and are working closely with them also on their extensive worldwide new transit initiatives. With our extensive array of products, we are positioned to be partner of choice for systems integrators serving the government in municipal market and we expect to be announcing additional important channel partnerships.

In 2005, about 12% of our revenue came through our primary OEM partners with another 39% from local distribution partners. While it’s true that our relationship with certain partners will become more complex, because some of them intend to offer competing products in certain areas, we should not look at it as an all or nothing situation. We expect to continue to enjoy strong and positive relationships with other OEM partners.

In addition, we are working on a range of future partnerships that includes system integrators, complementary technology partners, and specific regional marketing channels to address new markets and new applications. In addition, we will continue to develop our brand and reputation, as well as our direct sales capability, positioning the company to address larger operators. Many of the Tier 1 carriers are interested in nomadic, portable and mobile applications and are attracted to our value because of our earlier development work on 802.16e standard and the unique migration path that to these standard that we are offering.

We see fixed broadband wireless access markets both WiMAX and non-WiMAX as an important and growing market for the next several years. In 2006, growth will be driven by network expansion for our install base plus additional commercial deployments growing out of the many trials and small deployments we’ve been doing during 2005, as well as new license and initiatives and demand driven by the introduction of nomadic self install wireless solutions.

An important milestone in the first half of 2006, will be the first shipment of our advanced indoor self install version of the Intel based CPE these new subscriber units will save instillation and logistics costs and enable subscriber to move the modem from one place to another creating what is called the nomadic market. By midyear, we expect to see additional spectral allocation and deployment in areas that have recently allocated specs too. By the end of 2006, we expect to see deployments from new license holders in places like France and Germany.

Meanwhile, we are committed to realizing the long term vision of personal broadband that will both enhance end-user lifestyle and improved business productivity. We believe that the concept of personal broadband enables by our volumes mobile WiMAX offering, will enable both established and new network operator to offer the freedom of personal broadband, through broadband for consumer and business customers. Personal broadband offering is going to create a host of new opportunities in the whole telecomm ecosystem, and we believe we are in the best position and therefore the partner of choice for these transitions.

Interest in portable mobile WiMAX is building, particularly certain regions such as Korea, Japan, Twain, and the US. We recently achieved another milestone when the mobile task group of WiMAX Forum approved the profile that defined the main feature of mobile WiMAX air protocol based on 802.16e standard which implies broad industry agreement on the operating feature of mobile WiMAX. We believe we are in a strong position in developing portable mobile market, based on our unique, open, distributed all-IP architecture, our smart base station with advance in tele-technology and our focus on scalable flexible solutions.

Operators recognize that we have the most comprehensive roadmap in terms of applications, frequency supported performance and features. We continue to be flexible and adaptive in order to meet the needs of earlier adaptor of portable mobile WiMAX and to leverage our existing core technology. We are currently working on a number of new partnerships that will strengthen our position and help us deliver a unique value proposition that goes beyond few product superiority.

To summarize, we expect our near term growth to come from traditional fixed broadband wireless application, served by both WiMAX and non-WiMAX solutions, depending on the frequency. The additional growth fueled by new market segment such as municipal broadband and public safety application. At the same time, we expect the market to begin to shift in focus that we have made internally almost a year ago to begin realizing the promise of true personal broadband via portable mobile wireless solutions. This represents a total market that is several times larger than the fixed market and one in which we are well-positioned to participate.

Before we open the calls to questions, I’d like to ask Dafna to give you some additional perspective on our financial performance and the outlook for Q1. Dafna?

Dafna Gruber, Chief Financial Officer

Thank you, Tzvika. Hello everyone. Q4 revenue was 46.5 million, within the range of our guidance. This represents a sequential growth increase of 3% and a decline of 17% from Q4 of 2004. BreezeMAX our flagship product accounted for about 10 million or 22% of our revenues in Q4 and OFDM-based products reached 45% of our total revenue.

The cellular mobile revenue didn’t reach our target in Q4, and revenue from this unit was similar to Q3. EMEA accounted for about 60% of revenues, North America for about 20%, CALA for about 15% and APAC for about 5%. Direct sales accounted for about 44% of revenues. Distributor increased to about 46% and OEM for the remaining 10%. The fourth quarter of the year is traditionally strong in EMEA region and mainly in channel sales. Our gross margin was 45%, which is in line with our long-term model. While internally, operating expenses were about the same as in Q3, while internally we continue to move resources to the development of nomadic and mobile solutions.

Q4 GAAP net loss was 4.9 million, a decrease from 5.5 million in Q3, based on 59 million basic shares outstanding, GAAP loss per share was $0.08 compared to $0.09 per share in Q3. This was also within the range of our guidance. Excluding the amortization, non-GAAP net loss decreased to 3.8 million or $0.06 per share in Q4. This is compared to non-GAAP loss of 4.4 million or $0.07 per share in Q3. Looking at the full year, our fundamental business grew nicely during the transition period. As Tzvika mentioned, excluding our large Latin American customer and the CMU, BWA revenues grew 20% in 2005. Over the last four reported quarter, we kept our market shares at above 30%.

Recently we announced that we have a new frame agreement with the large Latin American customer, which could be rolled up to 15 million in 2006, with 7 million already in hand. While we don’t expect this substantial contributions from this order until Q2, there are actually 3 important positive news here. First of all, the customer has not gone and we see additional potential for business for this customer this year. Second, we were able to extend our relationships to include potential deployments of our BreezeMAX products and we also seen movements in various Latin American countries with well, which we were not active in until now.

General mobile revenue was about 10% of the total for the year, which didn’t meet our expectations, primarily because revenue recognition lead achievement. The best example for this phenomenon is the Outremer deal, which is the largest order ever received by this unit. We already shipped in 2005, over 10 million worth of product. This shipment will be translated into revenues only during the coming two years.

Turning again to the balance sheets, cash and cash equivalents were 114 million at the end of 2005. Our inventory was down by about 2 million to 43 million and DSO are at 76 days. We expect Q1 revenues to range, to be in the range of 46 to 51 million. Based on this revenue level, we expect non-GAAP net loss per shares, which excludes amortization and the effects of the new law regarding option expensing to range between $0.03 and $0.06.

As a result of the adoption of the new SFAS 123R in Q1, we believe the recurring expenses of the stock-based compensation will range between 1.5 and 2 million for the quarter. These charges will be reported in the various lines of items of the income statement and will be included in the GAAP financial statements only.

In addition, we expect a positive one-time impact from a required change in the accounting principals regarding the method of calculation of deferred stock compensation and of the new rules. We cannot quantify the amount of the positive impact at this time, and therefore, we prefer not to provide GAAP guidance for Q1.

Thank you for attending the call and we are pleased to take your questions now.

Questions-and-Answer Sesssion

Operator

Thank you ladies and gentlemen. Operator Instructions Our first question goes to the line of Erik Zamkoff with Morgan Joseph. Please go ahead.

Q - Erik Zamkoff

Hi, good morning. A couple of questions, and I will pick the big picture here. Can you give us an update on progress on 700MH spectrum and your outlook for that in the U.S.? Number two, the possibility of satellite vendors, particularly DirecTV or EchoStar embracing WiMAX. And number three, can you talk about availability of self-installed CPE for commercial deployment and any progress on trial?

A - Tzvika Friedman

I will try to answer one by one. First of all, regarding 700MH. In 700MH we expect a more spectrum allocation in the next 2 years and only then to see this as a possible WiMAX frequency. We think it could be an excellent frequency for a mobile WiMAX, but I think the current allocation of frequency to many, many operators and the holders is not there, is not enough to create a big market in that area. We expect things will change when more bandwidth is being released in the next 2 years.

The satellite is a completely different story. We think here we have players which can take the opportunity of WiMAX and mobile WiMAX and be in a similar situation to their competitors and being able to provide the triple play and even the quarter play. What the WiMAX and mobile WiMAX allows the WiMAX holder is to bring a, not only a TV broadcasting but allow them to provide IP, allow them to provide voice, and also use the IP for return challenge so they can provide interactive TV. If you add into it also a mobile that can also provide mobile services in the future. So it has completely changed their competitive position.

You have probably heard the recent announcement about the potential joint venture between DirecTV and EchoStar. I think what you can read about it is roughly what we can discuss. We cannot say that we are in a specific position here, any position with this operator but we think what is important here is that it shows what we are discussing for quite a long. That the WiMAX opened opportunity for new operators, for new type of players, to go into this market and to buildup networks that will be profitable to them and will be very large deployment. And we see results for example and there will be other examples like that. Regarding the self-installed CPE, we expect commercial deployment in revenue probably towards the end of Q2 and Q3 although we are already have been showing it for early crowd.

Q - Erik Zamkoff

One last follow-up on. Can you give us a quick update on your certification progress and your strategy with regards to WaveOne and WaveTwo?

A - Tzvika Friedman

We intend to go to a specification as we planned in the first half of 2006. Currently as we indicated we are targeting WaveTwo, but we need to see what would be available in this time frame.

Operator

Thank you. We have a question from the line of Dan Harverd with Deutsche Bank. Please go ahead.

Q - Dan Harverd

Hi, Dafna could you repeat the breakdown of revenues that you gave? You mentioned the 3 segments of South American operate the BreezeMAX and I did not hear that.

A - Dafna Gruber

I guess the geographical breakdown of Europe and Africa accounted for 60% of revenue, North America for about 20%, Latin America for 15% and APAC for 5%. I also mentioned that direct sales accounted for about 44% of revenues, distribution for 46 and OEM for 10%.

Q - Dan Harverd

Thank you. Now you also mentioned the cellular mobile unit was roughly the same as Q3, can you define – put that into percentage terms or dollar terms?

A - Dafna Gruber

It is in dollar revenue is about the same as last quarter, of about $5.5 million.

Q - Dan Harverd

Okay, thank you very much. Just going on to the trials, Tzvika can you comment on whether you are seeing any pickup in the amount of trial activity? Perhaps what a trial entails and whether that tends to be an ongoing process with occurring the whole time?

A - Tzvika Friedman

Actually the number of trials is growing, although a trial is something which takes a certain time. Sometimes these trials are long and they could take 12 and 18 months and sometimes it is something, which is a short period. We believe that it is important for us and this why we invest so much into it. To be in these trials because it improves our position and the customer, our understanding of their needs. And their understanding into our technology and what they can do with it. As we indicated we are over 100 trials.

Q - Dan Harverd

Have you seen any instances where trials are halted or where your participation does not proceed?

A - Tzvika Friedman

We had cases where the trial was for a specific period and they did not continue. There are cases that they operator can only get the license for a certain period to do the trial. And I must say that there could be a place that I can imagine some very large solo operator who wants to see to do the trial. In order to say, you know we tried and we think we should continue something else. But in general we are very focused to do a trial. In places that are strategic for us and can evolve later on for additional revenue.

Q - Dan Harverd

Okay and then just one final question. When you talked about the Intel based modem, can you give an indication what kind of size that is in terms of portability, just the practicality of that.

A - Tzvika Friedman

I not sure I understand, could you repeat?

Q - Dan Harverd

Yes, you were talking about the, in terms of the portable or the pneumatic solution, can you just give an indication of the size of the modem?

A - Tzvika Friedman

The size, the actual size, yes. We can, first of all, I think we have a picture in our website. It is a size of a small notebook, not a laptop, an actual paper notebook.

Q - Dan Harverd

Alright. Understand. Okay, thank you very much.

Operator

Thank you. We have a question from the line of George Iwanyc with CIBC. Please go ahead.

Q - George Iwanyc

Hi good morning Tzvika and Dafna. Could you give me an idea of what your long-term targets? Are you still comfortable with the 35% target for OpEx and 45% target for gross margin?

A - Dafna Gruber

Yes.

Q - George Iwanyc

Okay, so timing wise can you give an idea on the OpEx side? How long you think it will take to get there?

A - Dafna Gruber

We do not give specific timelines. We believe that in revenue of 70 million per quarter we should be closer to that target.

Q - George Iwanyc

Okay, thank you. And on the cellular product side, can you give an idea of how much the revenue recognition issue is contributing to the sales being a little bit below your target?

A - Dafna Gruber

I think we have a fairly large backlog already of unrecognized revenues that has to do with relatively large shipments we have done in 2005 and could not recognize it yet.

Q - George Iwanyc

So it is a meaningful part of the differences between what you are expecting and what you are able to record?

A - Dafna Gruber

Yes. We need to remember that it is probably going to be a trend where in a certain quarter we rarely make revenue coming from shipments from one of the previous quarters.

Q - George Iwanyc

Okay and when you look at the guidance you gave for the cellular products, how confident are you that you can see growth there faster than what you are seeing in the rest of business?

A - Dafna Gruber

We believe that this year was a certain transition year where we built our backlog and we gained some large orders that didn’t contribute to bottom line, yet. Therefore we say confidently that believe that this business will grow faster than the rest of the businesses in 2006.

Q - George Iwanyc

Okay. And one final question. Can you give an update on just how the pricing environment looks?

A - Tzvika Friedman

Pricing environment, we see as we indicated some competitive pressure over on the CPE side, but as we indicated we are very focused on our cost reduction to enable us to keep the gross margin.

A - Dafna Gruber

Most of the reduction in prices is now on the CPE side where we move from our own chip based CPE to WiMAX base or Intel based CPE and that is cuts the price to the end user already by about 30%. Seems to designed for much lower cost. You do not have an impact on our gross margins.

Q - George Iwanyc

Okay, thank you very much.

Operator

Thank you. We have a question from the line of Rich Church with Unterberg.

Q - Rich Church

Thank you. Could you talk about, give us an update on mobile WiMAX of your product availability timing?

A - Tzvika Friedman

Okay. Good morning Rich. A few words about mobile WiMAX. We plan to demo a mobile WiMAX during the first half of 2006. Probably commercial trials can start end of 2006, beginning of 2007. We believe commercial deployment and large deployment would only happen in 2008. We are quite advanced with our product development meeting these schedules.

Q - Rich Church

Okay, and you talked a lot about partnerships. Could you give us a sense of how many partnerships are you pursing and what would be the timing of signing some of those?

A - Tzvika Friedman

Okay there are, there are several partnerships and let’s start with the simple one. Even for example, for the CMU we may find partnerships and that would use for example our advanced compact solutions for satellite extension for a large vendor selling cellular network can use our volume and the satellite extension. That is one type of partnership. The natural partnership, which you know, which are the OEM partnerships evolve globally or sometimes local, strong local partner for our VWA solution. Specifically in the mobile WiMAX I think what we are, what we can do, I think the volume is not a supply of the whole mobile solution. It means we do not provide IMAs, we do not provide the back office or core network. We could be an excellent partner for those who have the solution and do not have the actually radio access networks, what is called run based on WiMAX. So actually we can take that and get both compliment technology of the solution but also it helps us in maintaining good go to market strategy with these partners for various customers.

Q - Rich Church

One thing quickly on the timing, I mean, do you expect to have new partnerships signed by this year, or by the end of the year?

A - Tzvika Friedman

We believe that throughout 2006 we could have a few announcements. And actually we need to close this partnership as well as to agree with the partner when the right timing.

Q - Rich Church

Okay. And do you expect, I mean, given your comments about the OEM partnerships at the beginning of the call - do you expect OEM as a percent of revenue should go up or does it stay stable in ‘06?

A - Tzvika Friedman

We believe it will be about the same. It can go up depending if some of the larger Q1 player will move faster.

Q - Rich Church

Okay, and then just one more. If you could, last quarter you did a nice job of, of giving us kind of the frequency availability update by regions. I was wondering if you could update us on that?

A - Tzvika Friedman

The few things I can update. I think 2.3 in North America is open and some of these license holder needs to do something with the licensing still until summer of 2007, so we may expect some movement there. There is also a band in the U.S. that is coming up for auction called the AWS about 90MH I think and about 1700MH. In Poland, as we indicated, 3.6 was opening up. We do expect in Europe, other places are now talking about providing 3.6 giga in addition to the 3.5giga. In Singapore, 2.3 and 2.5 was allocated and we expect Germany and France towards mid of the year to grant licenses. Again, this is the expectation. You know, we don’t control what governments are doing and as we indicated last time, in Japan, they indicated they would like to grant licenses for mobile WiMAX in the beginning of ‘07 for commercial deployment of ‘08.

Q - Rich Church

What, very quickly, are you working on at the moment at the timing of availability to pursue those opportunities?

A - Tzvika Friedman

We, as we indicated in the past, we are working of course on the 3.5 giga. We also announced we work on the 2.3 and the 2.5 giga as well as 3.5 CPE. We also have products, working on the recent product on the 3.3, which for example is required in Argentina, Indonesia, India, possibly China, and the 3.6 giga.

Q - Rich Church

Great. Thanks a lot.

A - Tzvika Friedman

These are by the way for the WiMAX also as I indicated we are releasing product on 4.9 giga for the public safety in the U.S.

Operator

Okay, we have a question from the line of Troy Peery with Oppenheimer. Please go ahead.

Q - Troy Peery

Thanks for much. Yes, I have seen that the business is firming a little bit. You talked about in the past reaching $10 million in sales from cellular. Can you give us an update for the timing of when that business might achieve that level? Is that still part of your thinking?

A - Tzvika Friedman

As we indicated, Dafna and myself have said we are not satisfied with the results we had. We wanted to be in the $10 million already in Q4. But, as we indicated, some of the revenues are lagging shipments, and this business is lumpy. We expect to there is still target to reach this number and we expect it to happen in 2006.

Q - Troy Peery

I see. Okay. And you have had pretty good OpEx control the past few quarters. In terms of the R&D work that you mentioned on the self-installable initiative, could you gauge that for us? Is it 60% or maybe 75% complete or something in terms of where you are in terms of development stage supporting that? And also, can you size the expense related to that going forward please?

A - Tzvika Friedman

Regarding where we are from the development is difficult to estimate. You know, depends on how you ask it. But in general, I do not think that we are, from a timing point of view, we still want to invest a lot in proper testing to make sure we have a very stable and quality product. From the issue of the technology risk, we are fast behind this. It is working, it is being demonstrated, and so I think the majority is already behind us on that product.

Q - Troy Peery

I see. Okay. And you also mentioned the auctions in the U.S. over the summer, the 1.7 and 1.9 gig spectrum. What is your sense of what kind of opportunities you might see there, you know, urban, rural. I mean how would you target product development, if at all, around potential opportunities in the U.S. if this spectrum becomes free and gets gobbled up?

A - Tzvika Friedman

I think that there’s two issues. First, some of the frequency will probably be for a current cellular technologies and their expansions. So, they probably will not be open for WiMAX. The 700 MH might be open for WiMAX. The way we build our system is such that we can be flexible in adopting new frequency without adopting all the, all the equipment. So I believe that if will see such opportunity coming up, we will be able to come up with the right product pretty quickly.

Q - Troy Peery

In 6 months or less, 9 months or less?

A - Tzvika Friedman

Probably a commercial product within 9 months.

Q - Troy Peery

Yes. And you mentioned that you shipped 20,000 Intel-based CPE in ‘05. I wonder, what is the revenue level attached to that? How much is that? Go ahead.

A - Tzvika Friedman

It is about $8 to $10 million.

Q - Troy Peery

8 to 10? Okay, and then…

A - Tzvika Friedman

Maybe they did not connect but probably that range.

Q - Troy Peery

Okay, very good. Last question if I might, it has been, now it has been about a year or more since the cellular acquisition closed. Have you rationalized any of those locations, any of the offices that you acquired with that business?

A - Tzvika Friedman

Yes, we did a lot actually with this business. We rationalized product line meaning to reduce the number of versions of the product we have like Bay Station, the number of switches, we concentrate everything around one core switching platform, which is serving of the GSM switch as well as the core soft switch for the CDMA which by the way took great technology in mobile soft switch, which not many companies today have. We also are in process of rationalizing the - what I call location. We have two locations in U.S. and not consolidating into one location we concentrate the activities. So all switching is all done in China and so we are doing many things that rationalize not only the location but the interface between location, allowing each location to be self contained and work more efficiently.

Q - Troy Peery

I see, okay, I missed it. Did you say that you, you kind of combined the organizations in turning the offices into the U.S. Is that Mountain View or is it..?

A - Tzvika Friedman

In the U.S. we had offices, large offices in San Diego for the BWA for in Mountain View and in the Walnut Creek for the mobile unit. We combined all of them into one location in Mountain View, California.

Q - Troy Peery

Got you, okay, hey thank you very much.

Operator

Thank you. We have a question from Ehud Eisenstein, with Oscar Gruss. Please go ahead.

Q - Ehud Eisenstein

Yes hi, thank you guys. Just a couple of clarifications. In the fourth quarter you did not recognize any revenue from the Latin American operators nor you expect any India, is that correct?

A - Tzvika Friedman

Correct yes.

Q - Ehud Eisenstein

Regarding the mobile unit in numbers were marginally down in the December quarter.

A - Dafna Gruber

Numbers were about the same as in the last quarter.

Q - Ehud Eisenstein

Okay, and can you just give us just some more color on the migration pad from the Docinstein of 2004 to the 2005? Is it going to be software upgrades how do you see it?

A - Tzvika Friedman

We planned our system to allow software upgrade, currently in the Bay Station in the future also and in the chips, which is was explained shortly we would come out to support both D and E standard. But naturally it depends on the customer and also the amount of bandwidth it has and how this upgrade will happen. But it is one of our unique advantages, ability to deploy today to get market share for our customers. To get the market share to customers to other systems and migrate later to the 802.16 205 standard.

Q - Ehud Eisenstein

Okay, great. And can you try to give us some more color in where you see the BreezeMAX revenues going forward towards the second half of this year?

A - Dafna Gruber

BreezeMAX revenue we expect them to grow and be probably the size of growing segment of our business and we expect it to grow quarter-over-quarter to become in our long-term target is growth to reach at least 50% of our revenues, and it may happen sometime during 2006 or after.

Q - Ehud Eisenstein

So you expect revenues to more than double in ’06?

A - Dafna Gruber

I feel that….

Q - Ehud Eisenstein

Not putting words in your mouth but that’s what my numbers show.

A - Dafna Gruber

What we expect is that significant growth in this part of our business, yes.

Q - Ehud Eisenstein

And it’s probably going to be more of backend loaded with more opportunities down the road, is that correct?

A - Dafna Gruber

I think it’s too early to tell at this point.

Q - Ehud Eisenstein

Right. And first quarter this year, that you actually saw growth in the non-BreezeMAX core legacy business, where do you see it heading into ’06?

A - Dafna Gruber

I’m not sure I’ve got your question.

Q - Ehud Eisenstein

Where do you see the non-BreezeMAX fixed broadband products going into 2006?

A - Dafna Gruber

It’s about the same level as last year.

Q - Ehud Eisenstein

Very good. Thank you very much guys.

Operator

We have a question from the line of Steve Ferranti with Stephens, Inc., please go ahead.

Q - Steve Ferranti

With the major carriers that you’ve been talking to has the interest in them been more in the fixed side or on the mobile side?

A - Tzvika Friedman

Are you referring to incumbent operators?

Q - Steve Ferranti

Correct, yes.

A - Tzvika Friedman

It depends on the territory. I can say that it, we have all varieties we have those who have the pressure or even political pressures sometimes to what we call fill the hole for broadband. We have those who actually want to operate in the territories of state, they’re not asking at all to be competing in all rural areas. And there are even those who want to see it as an add-on feature as a wireless or portable DSL to their DSL offering in places where they have DSL.

Q - Steve Ferranti

Okay, I guess that fit mainly with wire line carriers. Has there been any conversation with any of the wireless carriers, incumbent wireless carrier?

A - Tzvika Friedman

It’s mainly wire line carriers. We have few wireless carriers who are looking at WiMAX. They are looking to it, there is, I could say two versions. There are versions of wireless operators who want to use WiMAX in order to get into the businesses. To get direct line into the businesses, so they will not loose the traffic of business customer switching to the WiFi and the wire line, to WiFi to the wire line customers and operators and you also have an interest for more available operators who are not publicly involved in 3G or 3G deployment and when they come to think about mobile data strategy WiMAX is certainly a very attractive opportunity for them.

Q - Steve Ferranti

And are you seeing any competitive threat from the larger OEM’s with their early mobile WiMAX solutions yet?

A - Tzvika Friedman

Well, we certainly are working in a staying in a sophisticated world where we need to learn to cooperative with some as well as compete with them. Certainly, a large players like Motorola, Alcatel and Samsung will be a very strong competitor in this field. However, we are welcoming this competition because we believe that the without these large players in this market it will be difficult to create this huge and big market. And, we have the unique advantage because we can provide early-on deployment of nomadic solution that is a upgradeable with a very easy infact, upgradeable into the mobile WiMAX and it creates for us some market share in a place to penetrate. And in addition as I answered to a previous question, we are a perfect partner for some of other large players who do not have a WiMAX phone and have a core mobile solution and they could address on an equally basis of you know presence and position in the market versus these large operators. So together we can compete with these large other players.

Q - Steve Ferranti

And, I think Dafna before, that you had actually shipped $10 million of equipment already, and you’re just waiting for that essentially engineering and installation effort to complete before you can recognize that revenue?

A - Dafna Gruber

Yes, I gave it was an example of delayed revenue on the project. Well we give them an extended payment terms and can recognize revenues only when payment becomes due.

Operator

Thank you. We have a question from the line of Frank Marsala with First Albany Capital, please go ahead.

Q - Frank Marsala

Let me just ask a couple of questions. First question on seasonality, specifically on EMEA and Latin America, Dafna we saw some good sequential moving both of those areas. What kind of seasonality is built into your guidance for the first quarter for those areas?

A - Dafna Gruber

The first quarter is usually weaker a quarter compared the other quarter and – but our guidance reflects our current view in Q1.

Q - Frank Marsala

Okay.

A - Tzvika Friedman

You see temperature in Europe we understand that no one wants to go out and climb the tower in January.

Q - Frank Marsala

Okay, thank you. I appreciate that. Second question then is on we talked about 700 MHz a little bit and I’ve been talking to a few of those guys lately. Because they’ve got some certainty as far as when that spectrum was going to become available and I’m hearing the best use of that spectrum in their thinking is going to be mobile TV or video streaming kind of thing. In your view Tzvika do think they have the – that WiMAX will have the throughout and that there is a spectrum to do this kind of a thing because that’s what they are talking about doing.

A - Tzvika Friedman

I think mobile TV for broadcasting is possible over WiMAX. I think there is the initiative of 700 MHz that Qualcomm is doing with video flow and they hold some of the 700 MHz, which is why many of the people look at the 700 MHz, the current 700 MHz for this application.

Q - Frank Marsala

Okay and then lastly just sticking with that line of thinking for a minute you talked about Direct TV and Echostar. I need to get current on them. What frequency would they be using if they were to supply another WiMAX to some other fixed wireless solution?

A - Tzvika Friedman

What you can read in the press, there was a company called I think NVS who holds a frequency in 1.5 giga, which is for mobile satellite services. And, I think the current idea is to build some kind company with Direct TV or Echostar and this company to be able to these provide services so they are probably targeting the 1.5 giga. As far as I remember also Imostat holds some of this vendor well.

Q - Frank Marsala

Okay. I am sorry, just a last question. Your confidence – or you seem to have some confidence that have things at the bottom or the second half could be better than the first half, is that really based on more RFP type activity, product availability, products becoming available spectrum? Which of those would you say would be the most – gives you the most confidence?

A - Tzvika Friedman

It's a combination of more frequency opening it up as well as the introduction of the self-install which opens for us a new application which we were not active in before.

Q - Frank Marsala

Okay. Thanks very much then.

Operator

Thank you. We have a question from the line of Steven Koffler with Shannon River Partners. Please go ahead.

Q - Steven Koffler

Good morning. I would like to explore a little bit more this transition that is going on, and let me just clarify the comment by just going through the 3 product segments again. So if basically the "core business" was about flat sequentially I think, correct?

A - Dafna Gruber

About flat, yes.

Q - Steven Koffler

Okay. And the cellular mobile was about flat sequentially, in response to a question Dafna, just if you could please clarify, I think you said your outlook for 2006 in the core business is flat. Did you say something like that?

A - Dafna Gruber

Yes but I think if –we need to define what core business is and I think that we sell to the business which is not wireless DSL and currently proud of the solution we sell for the wireless DSL segment are not WiMAX based yet. So I think this is what you are looking to what you are looking to and we need to understand that it is –it is a complicated mix.

Q - Steven Koffler

That is where I am sort of going with my question. I mean as I remember, and here it really makes sense to focus on the large Latin America customer, all of the sales on the big order was in fixed in 2004 and early 2005. All of that was for fixed applications and did not include any BreezeMAX, correct?

A - Dafna Gruber

Yes.

Q - Steven Koffler

Okay. So now I think you said—I think you said that the activity from that customer started in the second quarter will include BreezeMAX, correct?

A - Dafna Gruber

I think we said generally that we got the initial order of 7 million to be deployed starting in Q2 and throughout the rest of 2006.

Q - Steven Koffler

But it includes BreezeMAX, correct?

A - Dafna Gruber

Both BreezeMAX and the EMGW order.

Q - Steven Koffler

Okay. So that means there is a transition going on. I mean it is basically the same application but they are starting to take the new product to support that application and also be ready for WiMAX, is that a good way to understand it?

A - Dafna Gruber

Yes.

Q - Steven Koffler

Okay. So there is sort of a transition – your core business will not have—it probably won't grow if your BreezeMAX is doing better. Should we be thinking that way?

A - Tzvika Friedman

This is—you could also look at it this way, but there are 2 things. First of all, the BreezeMAX and WiMAX is growing because this market is growing. In addition, the introduction of self-install can generate a completely new application in open areas which open up opportunity for growth. In addition there is what you have asked and this is why Dafna and I are, it is difficult to answer the question, some of the current product are in transition to move to WiMAX so for example our eMGW product we are introducing a WiMAX based or business based application that will in many cases replace it, so it is better for us and for our customer because our customer will prepare a WiMAX based product and for us it is much easier to combine and concentrate and focus resources on 1 platform and not many platforms.

Q - Steven Koffler

Okay. So is it possible that, for example, this is an example, the large Latin American customer, they would take out the old eMGW and replace it with WiMAX capable eMGW at some stage? Do you think they are looking at that?

A - Tzvika Friedman

I don't think in the area of replacing, I was more looking at the area of local is to have new places to deploy where they don't have Bay Stations they can deploy the new WiMAX based solution.

Q - Steven Koffler

Okay. Now two other quick questions. On the competitive front, there was some announcements the last couple of days. Alcatel announced a WiMAX network in St.Petersburg, Russia and Motorola announced their canopy – a canopy win in Northern India. To your knowledge if you weren't involved directly, were any channel partners involved in those and what do think the –for Alvarion I mean, and what do you think the deciding criteria were?

A - Tzvika Friedman

We cannot discuss the dealings in St. Petersburg and regarding the deal in India and I don't think they have any channel partners in it and we are also competing in India and we think this is what –where we think we can make profit.

Q - Steven Koffler

Okay. Last quick question. This Outemere in Guadeloupe, if the –if you’ve had shipments and you have not recognized revenue, where is the inventory sitting? Is those inventories on your balance sheet?

A - Dafna Gruber

Yes.

A - Tzvika Friedman

Yes.

Q - Steven Koffler

I see and so should that be –are you carrying that at cost at about $5 million or something like that?

A - Dafna Gruber

We carried it in cost.

Q - Steven Koffler

So about $5 million in inventory is really in customer location in Guadeloupe?

A - Dafna Gruber

The relevant amount is in cost inventory.

Operator

Thank you and our final question comes from the line of Kevin Dede with Merriman. Please go ahead.

Q - Kevin Dede

Congrats guys on post and sequential growth again.

A - Tzvika Friedman

Thank you.

Q - Kevin Dede

Could you just give us a ballpark figure on a growth level that you are comfortable with for revenue in 2006, understand that you are not expecting to see your non-WiMAX business grow, but you are seeing a nice transition with BreezeMAX and you will see some of the cellular business ramp up. What sort of growth rate are you comfortable with in 2006?

A - Tzvika Friedman

We –if you read the research you see the expectation for the market to grow in between 15 to 30% and we hope to grow with the range of the market.

Q - Kevin Dede

Okay. That is pretty broad. Do you think you might be on the higher side or the lower side?

A - Dafna Gruber

I believe it too early to tell at this point.

Q - Kevin Dede

Okay. On your business with your strong Latin American customer, you're not expecting to ship anything in the first quarter but you think that business could ramp up to potentially 50 million or so in 2006, how do you see that increase rolling out for you? Given that understood it is still early in the first quarter.

A - Dafna Gruber

Yes it is mainly dependent on how quickly they would deploy that and it is probably too early to tell at this point.

Q - Kevin Dede

Do you expect to ship a lot of that first order that you've seen at the end of December in the second quarter?

A - Dafna Gruber

Actually we are shipping the 7 million rolls of order right now. During the first quarter, it would be translated into revenues during the rest of 2006. It would start to be translated once they start deploying the Bay Stations.

Q - Kevin Dede

Tzvika, could you give us just a quick description of some of the processes that your customers on the CMU side need to go through in order for you guys to recognize revenue and about how long takes.

A - Tzvika Friedman

It really depends on the type of product. Special applications projects we may be selling to an integrator that, and then we can recognize the sales immediately and they are doing the solution. Where we build networks, there’s many cases we issue of acceptance what they call ATP. A new contract we sign we’ll try to make sure that we will not be dependent only on their customer deployment base but in general you have to shift the equipment, install it, commission the networks, and then you get acceptance. Then you can recognize the revenues.

Q - Kevin Dede

Okay, do you think that’s, that process itself takes longer than a quarter or 2 quarters……..

A - Tzvika Friedman

Depends on the size of the network. Smaller networks you can do it over a, let’s say, a 3 to 6 months. Large networks could be 8 to 9 months.

Q - Kevin Dede

Last question from me, on fully certified year, and obviously a more intensely competitive environment, how do you suppose you’ll be able to support your 45 gross, 45% gross margin?

A - Tzvika Friedman

The gross margin is a mix of Bay Station services and CPU’s and we believe that because we are the largest player and have the largest volume of CPE’s we also enjoy economy of scale and economy of scope so we with the Bay Station 60 and 70’s we believe we can maintain the target of the 45% gross margin. We need to remember that the market itself is growing and there will be much more Bay Stations.

Operator

And at this time, there are no questions in queue.

Tzvika Friedman, Chief Executive Officer

Okay, thank you everyone for joining our conference call and we hope to see you soon. Thank you very much.

Operator

Thank you ladies and gentlemen. This conference will be available for replay after twelve thirty today running through February 14th until midnight. You may access the AT&T replay system at any time by dialing 1-320-365-3844 and when prompted enter the access code of 813525. Those numbers again, 1-320-365-3844, access code 813525. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference.

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Source: Alvarion Q4 2005 Earnings Conference Call Transcript (ALVR)

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