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Executives

Ronald J. Buschur – President and Chief Executive Officer

Kevin T. Michaels - Chief Financial Officer

Tom Spade – Treasurer

Analysts

George Iwanyc – Oppenheimer & Co.

Kimberly Watkins – JP Morgan

Thomas Lee – Goldman Sachs

Jeff Cabal – Lehman Brothers

T. Michael Walkley – Piper Jaffray

Kenneth Muth – Robert W. Baird & Co., Inc.

Anil Doradla - Caris & Company

Brian Modoff – Deutsche Bank Securities

LaVon Von Redding - Occi Capital

Bill Choi – Jefferies & Co.

Powerwave Technologies, Inc. (PWAV) Q1 2008 Earnings Call May 5, 2008 5:00 PM ET

Operator

Good day ladies and gentlemen and welcome to the First Quarter 2008 Powerwave Technologies Earnings Conference Call. My name is Eric and I will be your coordinator for today. (Operator Instructions) I would now like to turn your presentation over to Mr. Thomas Spate, Treasurer.

Thomas Spate

Good afternoon and welcome to Powerwave Technologies First Quarter 2008 Financial Results Conference Call. I am Tom Spate, Powerwave’s Treasurer. Joining us today on the call will be Ron Buschur, Powerwave’s President and Chief Executive Officer and Kevin Michaels, Powerwave’s Chief Financial Officer.

Before starting I would like to point out that various remarks we make about future expectations, plans, and prospects for Powerwave including, but not limited to, anticipated revenue and revenue growth rates, operating margins, gross profit margins, earnings per share levels, cash flow projections, revenue composition, improvements in cost structure, cost savings related to our facility consolidation, future cost savings related to our cost reduction activities, demand levels for the company’s product lines, projected growth and market share, trends in wireless infrastructure markets, the timing of product deliveries and future orders, the success of new products, expense levels, capital expenditure rates, inventory churns, tax rates, and days sales outstanding are all forward-looking statements. These statements are subject to numerous risks and uncertainties that could cause Powerwave’s actual results to be materially different from those projected or implied. Some of the risk and uncertainties include our ability to accurately forecast and anticipate customer orders, integrate acquisitions, and realize anticipated cost savings and synergies, the potential negative impact on our demand for our products due to industry consolidation among our major customers, fluctuations in foreign currencies, the ability to accurately forecast cash flows and credit collections, the ability to implement new ERP systems, the impact of competitive products and pricing, economic and political conditions, and the loss of one or more significant customer accounts. Please refer to our press release, Powerwave’s current Form 10-K for the year ended December 30, 2007, and other filings which are on file with the Securities and Exchange Commission for additional information on factors which could cause our actual results to be different from those projected or implied.

In addition, on this call we will discuss non-GAAP financial information. A reconciliation of the non-GAAP financial information to our financial statement as prepared under GAAP is included in our press release dated today, which can be found at our website at www.powerwave.com and on Business Wire. The press release also has detailed information concerning several of the significant items impacting our results and we urge you to review that information.

Now I’m going to turn the call over to Kevin Michaels, Powerwave’s Chief Financial Officer.

Kevin T. Michaels

Thank you, Tom. And with all the risk factors in mind, I would like to start by quickly reviewing our financial results, which are also summarized in our press release.

Net sales for the first quarter of 2008 were $226.3 million and we reported a net loss of $14.2 million, which equates to a net loss on a GAAP basis of $0.11 per share. This loss includes approximately $5.5 million of restructuring and impairment charges, which include charges related to the restructuring and consolidation of several of our facilities as well as severance costs. There is also an additional $8.7 million of non-cash intangible asset amortization related to our prior acquisitions. In summary, all of these charges and amortizations totaled approximately $14.2 million for the first quarter of 2008.

For the first quarter, on a pro forma basis, excluding all restructuring and impairment charges, acquisition related charges, and intangible asset amortization, we would have reported pro forma net income of $800,000, or pro forma net earnings per share of $0.01.

I want to note that included in both our GAAP and pro forma results is the impact of approximately $1.3 million of pre-tax stock-based compensation expense due to FAS 123R, almost all of which is included in operating expenses. If you were to exclude this expense from our reported results you would add approximately $0.01 to EPS for both our GAAP and pro forma results for the first quarter. This is approximately the same impact as in the prior year period.

Now I will describe our revenues on a geographic basis. Our total America’s revenues for the first quarter of 2008 were approximately $86.1 million, or 38% of our revenues. Our total Asian sales account for approximately 28% of revenues, or $62.7 million, and our total European and other international revenues were $77.5 million, or approximately 34% of revenues.

Comparing our revenues from the first quarter of 2008 to the first quarter of 2007, we saw significant growth in both the America’s region, as well as the Asia-Pacific region. Our total sales increased by 38% year-over-year, which was driven largely by increased demand across these marketplaces.

If we factor out the impact of foreign exchange rates on our revenues of approximately 6% year-over-year we still had an annual growth rate of 30% when compared to the prior year period.

For the first quarter sales of products within our Antenna Systems product group totaled $51.9 million, or 23% of total revenues. Base Station Subsystem sales totaled $152.5 million, or 67% of revenues, and Coverage Solution sales totaled $21.9 million, or 10% of revenues.

For the first quarter our total 3G-related sales were approximately $90 million, or approximately 40% of our total revenues. Our 2G and 2.5G-related sales were approximately $128.2 million, or 57% of revenues, and our total WiMax sales were approximately $8.1 million, or 3% of revenues.

We are now included all 3G-capable products within the 3G category, to provide what we believe is a more accurate view of the breakdown of the transmission protocols driving our revenues.

In terms of our customer profile for the first quarter, our total OEM sales account for approximately 68% of our total revenues and our total direct and operator sales account for approximately 32% of our revenues.

Now I will describe our gross margins for the first quarter. On a GAAP basis, our total consolidated gross profit margin was 18.6% for the first quarter. In our press release on Page 3 there is a table with the reconciliation of the various factors impacting our gross margin for the quarter. On a pro forma basis, excluding the total of our $11.5 million, which consists of restructuring and impairment charges and non-cash intangible asset amortization, our total gross profit margin would have been 23.7%.

For the first quarter our GAAP reported cost of goods sold includes a credit of approximately $1.1 million related to our sale during the first quarter of inventory which was previously determined to be excess and obsolete to our ongoing requirements. This represents a pick-up of approximately 0.5% of gross margin and when you subtract this from our reported pro forma gross margin, our adjusted pro forma gross margin would have equaled 23.2% for the first quarter.

For 2008 we continue to be focused on executing on our plans to improve our gross margins. We have additional work to be completed during this year to complete our supply chain consolidation activities, as well as further reduce our manufacturing overhead costs and try to drive higher margin revenues within our business.

Next I will describe our operating expenses for the first quarter. Our sales and marketing expenses were $12.5 million, our engineering expenses were $19.7 million, and our G&A expenses were $15.1 million. Excluding restructuring and impairment charges and intangible asset amortization for the first quarter, which totaled $2.7 million, our total operating expenses equaled approximately $47.3 million. This is below our fourth quarter total of $50.4 million and is on track for our quarterly goal of $45 million for the second half of this year.

I want to state that we remain committed to our cost reduction plans and we are continuing to execute on those as we go through this year. As a note, our quarterly target of $45 million for the second half of this year excludes any amortization of intangibles and restructuring and impairment costs. In addition, it also excludes any employee bonus accruals.

Now I will continue through the income statement. In terms of other income and expense, we record a total of approximately $5.3 million of other expense in the first quarter of 2008. The main contributors to this expense were two items, the first being our FEx translation loss for the quarter, which resulted in the loss of approximately $3.2 million for the first quarter. This loss was due to the significant fall in the value of the U.S. dollar versus most all currencies, especially the Euro and the Swedish krona. Some of our sales in Europe, as well as our inter-company transactions are denominated in the U.S. dollar, generating this translation loss on our consolidated results.

While we also recorded a significant balance sheet translation gain due to the change in the value of the dollar, this does not offset the P&L impact on the foreign dollar receivables. We are working to reduce these amounts as we go forward.

As I am sure most of you are aware, the fall in the value of the dollar, coupled with the interest rate cuts by the U.S. Federal Reserve, has significantly weakened the dollar as well as significantly reduced short-term interest rates. While this has overall benefited our revenues, this has significantly reduced our interest income.

Our net interest expense for the first quarter was $2.8 million. This reflects the interest expense of our outstanding convertible notes, the amortization of our prior debt issuance costs, offset by interest income that we did generate during the quarter.

For the first quarter our tax rate was impacted by some minor tax payments and the valuation allowances on our deferred tax assets. While we will continue to evaluate our future tax rate based upon our diverse international operation, we currently estimate that our effective worldwide tax rate will be in the range of approximately 10% for fiscal 2008.

I want to stress that this estimate will fluctuate based upon our actual results and due to the fact that both our U.S. and Swedish deferred tax assets have been fully reserved. With the prior write off of our main deferred tax assets, those entities operate at an effective 0.0% rate and our reported rate reflects any income or losses on our other tax jurisdictions. For the first quarter, on a full GAAP basis, our rate was approximately 7%.

Next, I will review our balance sheet. Total cash at March 30, 2008, was approximately $86.2 million, of which $3.2 million is reflected as restricted cash. Total cash balance is increased by $20.7 million from the fourth quarter of fiscal 2007.

For the first quarter, our net inventory was $94 million, which represents inventory turns of approximately 7.4x. We remain extremely focused on continuing to improve our inventory turns, which should over time free up some of the cash still trapped in our balance sheet.

While our total net accounts receivable increased to $255.5 million, our A/R days sales outstanding increased to approximately 103 days, from 94 days in the fourth quarter of 2007. This increase is largely due to the strong shipments we achieved during March, which impacts as calculation. As a comparison, for the first quarter of 2007, our DSO was at 108 days.

Now before turning the call over to Ron, I would like to remind you that we do not provide quarterly guidance. We believe that our investors are better served by focusing on long-term trends as opposed to the short-term volatility which is inherent in our markets.

In terms of our guidance for fiscal year 2008, please note that our guidance is subject to a number of risks and uncertainties that could impact our future outlook and results and many of these are detailed in our public filings with the SEC.

With all that in mind, based upon our current expectations for this year, we are increasing our previous fiscal year 2008 annual revenue range from $860 million-$900 million to our new range of $880 million-$920 million.

Why we are increasing our forecasted revenue for fiscal 2008, we want to stress that we remain conservative in our outlook for overall capital spending within the wireless infrastructure industry. As I am sure all of you will point out, almost all our major equipment providers are forecasting weakness in their business, including our largest customers. In addition, we remain extremely cautious with regards to the current economic environment which certainly can have a negative impact on our industry and business.

In summary, we are in a very stressful time in our industry. Overall demand for wireless services continues to increase, while major suppliers are battling each other, based largely on price. At the same time, the supply chain for the industry, that section that Powerwave plays in, has suffered several years of losses and is going through large-scale consolidation. This is the current reality that Powerwave competes in. And in this market we continue to believe that we have some of the best products and technology available to further advance wireless solutions for the global wireless infrastructure market.

We stress that we still have a lot of work to do, as we believe we are positioning Powerwave to be the long-term leader in our industry. We have to continue to execute on our restructuring and cost reduction efforts in order to continue to lower our operating break even targets and improve our gross margins and drive profitability.

In terms of Powerwave’s ongoing restructuring and cost reduction activities, we expect to see some sequential improvements in our gross margins as we go through the second half of this year. In addition, we are continuing to drive to lower our pro forma operating expenses to the quarterly rate of $45 million for the second half of this year.

With that, I would like to turn the call over to Ron Buschur, Powerwave’s President and Chief Executive Officer.

Ronald J. Buschur

Thank you, Kevin, and good afternoon everyone. I am very pleased and excited about the results for Q1 and we have made significant strides in returning our company to profitability.

On a pro forma basis we reached an operating margin of 2.7% and generated $0.01 in earnings for the first quarter. But I can assure you we are not satisfied with these results and we are very committed and determined to create the shareholder value that many of you have seen from Powerwave Technologies previously.

We also remain focused on our objective of reducing our overall cost structure on both the manufacturing and operating expense side. You can see that we drove our operating expense levels lower during the first quarter and we continue to focus on managing our costs and expenses. This team is, and will continue to be, focused on this objective, as I believe our results demonstrate.

For 2008 we remain committed to further improve our overall cost model in order to assure the long-term success of this company in any type of macro economic environment.

For the first quarter of 2008 we experienced strong demand during the month of March, which overcame most of the normal seasonality that we expected. As Kevin mentioned, while we remain cautious on the overall demand for capital spending in wireless, we do believe that we will continue to see increased demand coming forward from direct operator markets, as well as through certain of our OEM customers.

As we have noted many times, we believe that our ability to grow in this environment is much easier than some of those major OEMs in our industry. First of all, it’s takes a far smaller amount of revenue to significantly impact our revenue than it does for major OEMs, which require billions of dollars to have an impact. Second, we believe that the wireless network operators throughout the world are looking for ways to improve their network at lower costs using solutions rather than buying new base stations.

Powerwave Technologies has been offering many solutions and products which significantly improves the wireless performance at a lower cost. This is where we have been investing and we will continue to invest our R&D dollars. Around solutions. This is where we believe there are greater opportunities for us to grow in the future.

The team and I still have a lot of work ahead to improve Powerwave’s profitability and generate the level of shareholder value you deserve. I am sure that most of you are aware this remains an extremely competitive environment. With your continued support, along with the hard work of our management team and employees, we believe that we are making very good progress and we have the correct strategy to return the company back to the position of strength. This has not, and will not, occur overnight, but we believe that we have turned an important corner in this journey.

Now I would like to outline some of the success we had in our first quarter. If you compare our quarterly results from Q1 2008 versus Q1 2007 you can see we have grown our overall business by 38.3% year-over-year. In terms of product areas we saw our Antenna System revenues increase by 13.9% sequentially and 60% annually; far more than the industry growth rates that have been reported. In addition, in our Coverage Solution product segment, and where I believe where many of you know, we have been focusing our attention, we saw a 13.5% sequential growth, and 75% annual growth.

During the first quarter we have seen strong demand from our global customers and we have also expanded our network operator customer base. For the first quarter our total Nokia Siemens revenues were approximately $65 million and accounted for 29% of revenue. Alcatel-Lucents’ revenue was approximately $48 million, which represented 21% of our revenue.

From a regional perspective, on an annual basis we saw growth in the Americas and the A-Pac regions. On a sequential basis we saw growth in North American with anticipated seasonality in other regions.

As I stated earlier, we have been very focused and committed on executing our operational plans, our cost reduction efforts, to return this company back to profitability. I want to assure you that we are continuing this work on consolidating our supply chain as well as focusing on further operational improvements to enhance our operating cost structure.

The results for the first quarter reflect some of the impacts in the actions that we have taken last year to improve our cost structure. As Ken has stated, on a pro forma basis, excluding the sale of the written-off inventory, we were able to achieve gross margins of 23.2%. While we are proud of obtaining this important milestone, we have stated many times that our ultimate goal is to see additional improvement in our gross margins over the next year as we work toward reaching our goal of the mid-twenty percent range.

From an inventory turns perspective we continue to be very focused on driving our inventory turns. We are working to improve upon our industry-leading turns of 7.4x and we hope to get back to 8+ turns by the end of this year.

As we stated last quarter, we set an initial target in reducing our pro forma operating expenses to a quarterly rate of $45 million by the second half of 2008. For the first quarter we were able to lower our pro forma operating expenses to $47.3 million, down almost $3 million from the fourth quarter. I want to state that I am proud of our team’s effort and commitment to reduce our expenses and I want to reassure you that we remain committed and focused on further continuing to reduce our operating expenses during the second half of this year.

From an overall market standpoint, as I think you can see, we remain very optimistic about 2008 and I believe we are very well positioned with the network operators and we have the right solutions and we are very well positioned to gain market share from these opportunities.

A revised guidance for 2008 now reflects annual growth of over 15%, which is double that of most industry analysts’ predictions for the total market growth in 2008. Clearly, we believe we are positioned to grow faster than the overall market as well as positioned with our new products to capture additional market share globally in 2008.

I continue to believe that Powerwave has one of the strongest product portfolios, the best personnel and engineering resources, as well as the most advanced leading-edge technology solutions for the next generations of products in this industry. We continue to believe in this team, these solutions, and the wireless industry. Exciting opportunities are created for Powerwave Technologies in the years ahead.

As a final note, while we have not reached the initial goal of returning Powerwave back to profitability, we remain extremely focused, committed, and confident that we can return this company back to the level of profitability that will drive benefit for you as our shareholders, our employees, customers, and suppliers. The team and I will do everything we can to continue to improve the company’s global market share position and the financial performance while maintaining and building upon the confidence and your support.

I would now like to turn the call over to Eric, the operator, and address any questions you may have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from George Iwanyc with Oppenheimer.

George Iwanyc – Oppenheimer & Co.

When you’re looking at the first quarter results, can you give us an idea or some more color on what drove the North American 3G?

Ronald J. Buschur

We’ve seen some growth in North America on our amplifier products and some of our antenna products, as well as some of the new coverage solution products that we introduced.

George Iwanyc – Oppenheimer & Co.

Is this something that you think is sustainable or is it really just a one-quarter correction, catch up?

Ronald J. Buschur

No, we certainly think based on what we see in the market that we should be able to maintain this level of business. The demand for these new products and the products that we have are good at this point and we hope to be able to maintain this.

Kevin T. Michaels

And just let me add a point to that, George. In terms of 3G I would say that we haven’t seen a dramatic change in our 3G business; we just, historically, as you know, we’ve shown some lower numbers for the 3G share of our business and we’ve been noting that we were excluding a lot of products that had 3G, but if they had some 2G capabilities we were labeling as 2G, and what we’ve done for this year is gone back through and identified all the pipes, because what we’re finding is a lot of stuff that may have some capabilities is being installed into networks that are either currently 3G or are going to be turned on shortly to 3G.

So I think the percentage of 3G really hasn’t changed for us, we haven’t seen any significant huge increase there, but we’re just more accurately giving you guys a better percentage now.

George Iwanyc – Oppenheimer & Co.

Okay, fine. Apples to apples [inaudible]

Ronald J. Buschur

Correct.

George Iwanyc – Oppenheimer & Co.

And then when you look at the full year guidance, what gives you confidence, are you anticipating a steady sequential increase or a heavier second half to the year?

Ronald J. Buschur

Well, George, as we had indicated, I don’t think that based on our past track record, giving you quarterly guidance is prudent, but as we had indicated we do see strong demand and we do think that we will be able to achieve the types of revenue that we have outlined in the guidance going forward. And certainly we’re off to a positive start here in Q1.

George Iwanyc – Oppenheimer & Co.

And one last question, Kevin, on the supply chain improvement that you show in such good shape. How far along are you at this point?

Kevin T. Michaels

Well, we still have a fair amount of work to do. And as we said, we expect it will continue throughout this year. So I would say we are probably at the half-way point, roughly. But we expect to have it done by the end of the year, but certainly there is a lot more work through out this year. And as we stated numerous times, it’s consolidating our suppliers as well as redesigning selected products. And we’re getting that focused on the common platform. So it certainly doesn’t happen overnight, but we’ve certainly been working on it and we expect to continue to do that throughout this year.

Operator

Your next question comes from Kim Watkins with JP Morgan.

Kimberly Watkins – JP Morgan

I wanted to ask you about those strengths you mentioned in March, just again to clarify. I wanted to know if you continued to see that in the month of April. Because when I look at your guidance for the year, it looks like at midpoint, it seems like flat guidance throughout the year, or maybe there’s a quarter where you see some seasonality in there. If you could talk about it that would be great.

Kevin T. Michaels

As Ron had mentioned, you know we’re really trying to stay away from quarterly guidance, but I think, as you know, in the industry historically you have some weakness in the first quarter and obviously we did much better there because we did see strength coming into March. Historically the summer quarter is sometimes a little slower because the Europeans typically go on vacations. So sometimes you have a little weakness in the summer quarter, from July-September. So those are the kinds of historical patterns out there.

We’re optimistic, at the same time, as I think you’ve noted and other people have noted, there is certainly a lot of concern out in some of the OEM levels and we’re just wanting to stay cognizant of that.

Kimberly Watkins – JP Morgan

And what did you see so far in April?

Kevin T. Michaels

Once again, we’re not going to get down to what we’re seeing on a monthly basis. I think as you see, we’ve raised our overall guidance so obviously we are optimistic about the outlook for this year.

Kimberly Watkins – JP Morgan

And moving on to gross margin, pretty sizeable sequential improvement there. What was the larger, in the face of the sequential decline in revenue, albeit a small one, what was the larger impact there? Was that mix driven or is that largely a function of the restructuring?

Ronald J. Buschur

We’ve seen a combination of a mix and some of the restructuring coming through, as well as some of the design improvements for some of the products that we’ve introduced and that we currently have in production, Kimberly. So if you really look going forward, we have to focus a lot of our efforts now on some of the manufacturing efficiencies and the operations to drive the remaining improvements, getting our margins.

Kevin T. Michaels

And just to build upon that, obviously, as you know, last year we did a lot of different restructuring efforts and we have some more continuing this year, but we are seeing, I think if you had to weight between the two, it’s a number of those benefits, as Ron mentioned, coming forward. As you can see in our results, there was not a huge mix shift going on during the quarter.

Kimberly Watkins – JP Morgan

And I just wanted to ask you about Nokia. They were down sequentially for you, although up year-over-year. Last year was a little bit difficult comparison period. They mentioned on their conference call that they had some inventory build in the Nokia Siemens business but they didn’t give a lot of detail. Are you at all concerned about inventories there and kind of what do you foresee throughout the remainder of the year at Nokia Siemens?

Ronald J. Buschur

Well, we certainly are aware that they stated they have some inventory. We don’t believe that the inventory that they’re holding is something that we want to comment on and we don’t think that it really has an impact on the Powerwave products. But certainly they’re not going to deploy until they deplete the rest of the inventory that they have within their channel at this point. Going forward, we’ve kind of modeled in what we believe to be a go-forward run rate for Nokia and, you know, if they move through this inventory a little bit quicker, I think that would be positive for the company.

Operator

Your next question comes from Thomas Lee with Goldman Sachs.

Thomas Lee – Goldman Sachs

I just had a follow up question on the gross margins. Can you help quantify in terms of the cost reductions. I mean, how much, thus far, has it been driven by some of the supply chain improvements? And how much of it is just manufacturing shutdowns? And when you think about your cost reductions over the course of this year, are we likely to see more improvement on the supply chain side or the manufacturing side?

Ronald J. Buschur

We’re going to be focusing a lot of our efforts, as we had indicated, on our supply chain side, as well as our manufacturing. We have some work to do yet to improve the efficiencies, the productivity, and the cycle times within our operations. We have seen some nice yield improvements in the quarter, but we still have some significant work to get to the levels that we believe are going to be world-class and necessary to allow us to meet our targets of the mid-twenty percent range.

Thomas Lee – Goldman Sachs

And then, just touching on the U.S. market, can you talk a little bit about the change in your revenue, in your visibility, I guess as you look kind of 6-9 months versus exiting last year? Has that significantly improved now versus 3 months ago?

Kevin T. Michaels

I don’t think it’s significantly changed but I think if you listened to us 3 months ago, we were relatively positive for this year. A number of the analysts questioned our positive outlook for 2008 and I think we’ve stayed pretty consistent with it. Over the last few months we really haven’t wavered and so I would say our views haven’t changed here, our outlook hasn’t changed. We think that we’ve taken a pretty good look at it, we’ve tried to remain conservative, we understand the pitfalls, at least we’re trying to understand them out there. We think we have a better handle than we’ve had in the last couple of years. But I would say over the last quarter or two, has our view changed? I would say generally the answer is no.

Thomas Lee – Goldman Sachs

Was most of the U.S. sales, was that more OEM based or direct based? Can you comment on that?

Kevin T. Michaels

It’s a combination of both. We don’t’ break down by the regions; it’s a combination of both. As we said previously, a number of the North American operators certainly are spending again. People like T-Mobile, people like A&T, and Sprint and Verizon. And clearly a number of those major operators drive business through some of the OEMs as well. So we see business driving through there as well.

So we’re confident that if you just look at North American market that this year should be a healthy market. There is good spending there. It may not drive all the major OEMs to the kind of increases they would like to see, but we think it’s a good strong opportunity. Subscriber growth continues along pretty strong and we feel happy about that.

Thomas Lee – Goldman Sachs

But North American, as that strength continues, is it saying too soon that that direct/indirect split, I think 68/32, that we’re likely to see higher mix shift towards direct sales as we progress through the year?

Ronald J. Buschur

I would say that is certainly a safe assumption and that’s across all the geographic regions, not just the North American continent. So we’re going to continue to focus our efforts on direct operator sales and the direct sale.

Thomas Lee – Goldman Sachs

And then last question. Can you remind us, in terms of the competitive landscape, outside of the former Andrew, can you remind us who your key competitors are in both antennas and base stations?

Ronald J. Buschur

Well, I think as you’ve indicated, Andrews and Commscope are probably the major players, and now with Commscope owning that, that represents a significant competition for Powerwave. And then you have some other players in different categories of our business around the coverage solution groups such as ADC, they offer some products in that category, and then in the antennas you have some private companies over in Europe, such as Catron, that sell antenna products. And then as you know, some of the OEMs themselves have products that compete.

Operator

Your next question comes from Jeff Cabal with Lehman Brothers.

Jeff Cabal – Lehman Brothers

I was wondering if you could talk a little bit about the Andrew position or just generally about the landscape and has pricing eased in any way over the course of the past quarter or two?

Ronald J. Buschur

Well, I guess as far as the pricing environment, I think as we had indicated, it’s still a pretty competitive market. I would say that the pricing has not eased. I think we have to be prudent in how we manage the business and how we price our products and solutions in this marketplace. So I wouldn’t say that the pricing pressures and the need for us to be competitive in this market by any means, with that acquisition, have softened.

Jeff Cabal – Lehman Brothers

And then, Ron, you had said that you would like to return back to 25% gross margin in 12 months? Is that how you phrased it?

Ronald J. Buschur

I said we would like to be able to achieve that by the end of this next year, as we exit the year.

Jeff Cabal – Lehman Brothers

Exiting 2008?

Ronald J. Buschur

That is correct.

Jeff Cabal – Lehman Brothers

And Kevin, do you have a target model for us? Like $269 in revenue, and blah-blah-blah?

Kevin T. Michaels

Nothing new that we haven’t given before. I think as Ron mentioned, our goal has always been to get our gross margins back to the mid-to-high range, so our first goal is to try to get them back to 25% and we’re driving to get our operating expenses down on a monthly basis to that $45 million, so that’s your model. So we’re trying to leverage that and we haven’t changed. We’ve been consistently on that model and hopefully now we’re starting to show the way we think we can get there.

Operator

Your next question comes from Mike Walkley with Piper Jaffray.

T. Michael Walkley – Piper Jaffray

Kevin, just a question for you on the operating expenses line. You really did a good job taking it down, especially the G&A line. And as we look to get into that $45 million, which one of your OpEx lines should we think about as the area for future cost reductions?

Kevin T. Michaels

Well, I don’t really want to say it’s all coming out of one. I mean, we’re looking across the company and it’s not me, it’s the company as a whole. All of our management and all of our employees are working hard to control costs. Certainly all the areas are all targeted to try to control their costs. So, between G&A and R&D, those are obviously some of the two biggest areas. Sales and marketing, the first half of the year, you have a number of the large trade shows. So in the second half of the year you have some reduction there. Hopefully it will be offset by strong commission sales, but we’ll see what happens.

T. Michael Walkley – Piper Jaffray

And just on gross margin, if you and Ron can help us out a little bit there. There’s a lot of moving parts as you look into hitting that 25%. Could you help us see the rank or think about different things like mix [inaudible] versus mix to new products, like coverage systems? And also if you just look at things like to the Samina, moving the manufacturing side, which areas give us the most leverage on better gross margin?

Kevin T. Michaels

It’s a number of things and we really can’t get down to that kind of specifics. But all those things you mentioned all contribute there. Clearly over time if we can shift the mix of the customer base, and certainly we’re not ignoring our OEM customers, they’re our largest customers, we remain committed to them. That does not waver. At the same time, we’re trying to grow the business and if we can grow the direct business more, that benefits us from a margin standpoint.

Certain of our product areas, you highlighted one: our coverage solution areas. That is a higher margin business. If we’re able to grow that, that shifts the mix for us as well. The areas we’ve been very focused on over the last year is improving our manufacturing and efficiencies and taking out overhead costs. We’ve had some success with that. It’s clearly benefiting us.

At the same time, and as Ron mentioned, we’re getting more efficient. We have more work to do there that will further improve us. Things like Samina, that you mentioned, our transfer of that production. As we mentioned that at the end of last year, that actually really benefited us beginning the second half of this year as they start to get that moved into their plant and we get some consolidated savings coming out of that.

And as we’ve mentioned, the consolidation of our supply chains and getting our products redesigned on the common platforms, which is an ongoing effort here that we’re very focused on for this year. That will contribute to gains as we go, especially in the latter half of this year.

So, it’s hard for us to say this one is going to be more, clearly I would love for next quarter that we do $100 million in covered solutions, although I think that’s a little unrealistic. At least in one quarter. So, it’s hard for us to predict which is going to be more, but we’re confident that combined, all these things will contribute over time.

T. Michael Walkley – Piper Jaffray

Just a follow up question. I know, not to see you take up the guidance, but as you look at the regions, a lot of your OEM customers seem to point to the near regions as one of the areas of slowing growth and you guys are basically flat year-over-year. If you look at that particular business segment, is that the area for your cautionist outlook or is that business that you think can also be up year-over-year?

Ronald J. Buschur

That’s where we’re being a little cautious. You’re correct. And we do think that we’ve done a pretty good job, as you had highlighted, even showing this quarter that we were able to maintain pretty good revenue there, in a down market. And I believe the team is doing an excellent job of trying to grow the sales in that region. But we do want to be realistic in the expectations that we’re setting and that’s a region that we’re cautious about.

Operator

Your next question comes from Ken Muth with Robert W. Baird.

Kenneth Muth – Robert W. Baird & Co., Inc.

Again, just hitting on the geographies here. Your Q1 results were great for the Americas and was up very strong sequentially here. I guess, kind of looking at the new guidance, though, and kind of thinking about this, that $86 million dollars this quarter, do you think that that would be the high point of your revenue from that geography for the year or do you expect that to move higher from here?

Kevin T. Michaels

You’re focused on the Americas’ revenues and do we think it can get higher later in the year? Yes, we do. I mean we’re definitely not trying to get ourselves into predicting by quarter, but do we think there’s opportunities to have that be higher later in the year? Yes, we do.

Kenneth Muth – Robert W. Baird & Co., Inc.

And then, Kevin, is there any other restructuring charges that you kind of see for the remainder of 2008?

Kevin T. Michaels

There is a little bit more but it should be kind of the scale that we’ve just seen. Not anything real huge.

Kenneth Muth – Robert W. Baird & Co., Inc.

And can you maybe comment on some of the progress, I think Marvin MaGee just came on somewhat recently here, I mean there’s some of these things that are still looking positive for the rest of the year, kind of in his area, the Selestica and the kind of outsourcing the supply chain. Is that where some of these things are finally being seen from?

Ronald J. Buschur

Yes, Ken, as you had acknowledged, Marvin joined us recently and we certainly expect to see some additional improvements out of the operations and the supply chain and figuring out we become as efficient and productive as what we once were as an entity. The operational excellence is what we really have to drive for. If you look at the inventory turns, as Kevin has alluded to, we have money that is trapped there on the balance sheet that we want to free up with the inventory.

And the other area that we really need to focus on is the operational efficiencies. And that’s an area that we are putting a lot of emphasis on, our operating plans are built around that, and the team is going to move forward. So Marvin and his team and the rest of the organization is certainly focused on helping us achieve that goal.

Kenneth Muth – Robert W. Baird & Co., Inc.

And you guys said better performance here on the gross margin. The outlook is certainly positive. There has to be some sort of pricing talk in here, too, that you’re willing to be a little bit more steadfast in your pricing. Can you comment how you’re willing to address that piece of the market segment? Because prior things were very heavily competitive and a lot of pricing out there. I’m sure that hasn’t changed a bit, but what is your attitude, as a company, now? How has that been impacted looking forward, because you guys seem are clearly executing better?

Ronald J. Buschur

Well, Ken, obviously the performance of the company, we’re not in a position from a financial perspective, to always be lowering our price. We need to figure out how we can become a more efficient operation and how we can be competitive on a global basis, but yet we have to show you and our shareholders a very good return on your investment and demonstrate that we’re a viable source for your future growth that you’re projecting to your clients.

And you’re right, we have to stay firm on that. The pricing environment, as I tried to indicate, is still aggressive, but I think we’re being a little bit more prudent in how we position ourselves on tenders, bids. And we also are very careful and we’re spending our R&D dollars, and I think you can see the results of that, in areas to where we believe will benefit our shareholders long term.

Kenneth Muth – Robert W. Baird & Co., Inc.

And anything going on, I mean, the coverage solutions ticked up certainly here. There’s a lot of moving pieces going on with the telecommunications service market right now. How do you look at that opportunity over the next one to two years? Is this kind of the first year you’ve got a little more confidence where you can kind of keep this momentum going?

Ronald J. Buschur

Well, I think, Ken, it’s more than confidence. As you know, we haven’t had the product portfolio. We had been spending the R&D dollars for the last year and a half in that market segment to be able to offer coverage solutions. And those coverage solutions are not necessarily to the direct operators, they’re to enterprise, they’re to business, they’re machine-to-machine. There’s a lot of aspects. Transportation and rail, to where we sell this coverage solution product. And that is an area that we’re going to continue to focus on, we’re going to try to grow, and we’re going to maintain and continue to aggressively pursue opportunities there.

And continue to build out our product portfolio. As I shared with you at Las Vegas, we’re not completely done with that technology transfer and development effort yet.

Operator

Your next question comes from Anil Doradla with Caris & Company.

Anil Doradla - Caris & Company

Were there, Ron, any greater than 10% customers from the service operators point of view? I know Nokia Siemens and Alcatel-Lucents were, but from a service operators point of view?

Ronald J. Buschur

No, we had quite a spread of operators that weren’t quite at the 10% range, but we’re happy with the distribution of our customer base and that operator segment. And the growth that we’re seeing there.

Anil Doradla - Caris & Company

So the growth in U.S. during the quarter, was that, would you say, driven primarily be a single operator or a couple of operators?

Ronald J. Buschur

No, I think we’re seeing multiple operators that we had seen some growth there and we’re pleased with what we had been able to achieve there and we’re also seeing some OEM growth as well.

Anil Doradla - Caris & Company

Now, coming to your Europe, Africa, Middle East regions, can you give a little bit more color as to whether Europe was down, Africa, Middle East was up or everything was down? Can you give some how did the quarter shape up for these?

Ronald J. Buschur

I don’t think we’ll get to that granularity but I think it’s fair to say, as you can see, the A-Pac region, we were pleased with what we had been able to deliver in the A-Pac region. Europe, as we said, did okay. We had expected some seasonality there and we saw the seasonality there. So that was good. And the slow down. And going forward we do think that there’s other regions that are picking up, as we had talked about in looking at India, looking at Africa, looking at the Middle East. And we want to continue to focus our efforts in those regions.

Anil Doradla - Caris & Company

During the quarter were there any new products that you guys introduced?

Ronald J. Buschur

I think as you know from the show, we introduced quite a few new products during the quarter around our coverage solutions. Our MCPA products, our 700 MHz product line, and some other additional WiMax products and remote radio had technology.

Anil Doradla - Caris & Company

And finally, on the financial side, can you share some thoughts what you’re planning to do with the debt? How you guys are planning to pay down and whether there are any changes in that plan?

Kevin T. Michaels

I think as you look at us, we’ve obviously repurchased almost all of the bonds that are coming due this summer. There’s about $13 million left and if we don’t repurchase it prior to maturity, we’ll pay it off at maturity. Obviously we have the cash funds available for that. The other bonds don’t come due for another 3 or 4 years, so we don’t have any immediate plans on those. Obviously we’ll see what happens over the next couple of years.

Anil Doradla - Caris & Company

And what was the CapEx during the quarter?

Kevin T. Michaels

About $4 million.

Operator

Your next question comes from Brian Modoff with Deutsche Bank.

Brian Modoff – Deutsche Bank Securities

Couple of questions. First, could you just give us a little more color on, you talked about growing revenues 15% during the year. How is it that you’re going to be able to do that when the rest of the market is looking for a much flatter growth? I understand some of it will be product mix and you’re a smaller company, you have a lot more leverage in certain areas, but I was hoping you could talk a little bit about overall trends in the industry and where you see some of that out-sized growth coming from.

Ronald J. Buschur

Sure. A couple of areas, and I tried to outline, again, that a small amount of revenue does have a significant impact on a company such as Powerwave. $10 million-$12 million of revenue shift is dramatic. That’s a huge win for a company like us and an unforeseen or unforecasted win that we get, compared to the billions of dollars of sales, and in some cases million, that it takes to move some of our other OEM customers.

We look at the coverage solutions area, we see strong demand for that, looking at the 3G networks that are deployed. There’s certainly a need for in-building coverage and the lack of penetration of coverage inside buildings. And enterprise. You’re looking at some of the new and announced roll outs in North America with several of the operators, that they have highlighted. And then you look at some of the growth that’s taking place in the Middle East and we look at some of the growth that’s taking place in India and that’s how we project that we’ll be able to grow our business in multiple segments across OEMs as well as operator and enterprise customers.

Brian Modoff – Deutsche Bank Securities

And so for something like in-building 3G coverage, are you seeing those orders already coming in or do you think that’s something that people are just talking about?

Ronald J. Buschur

I think if you look at our results for the coverage you can see that they’re already coming in.

Brian Modoff – Deutsche Bank Securities

And on the profitability, I just wanted to get a better sense of how is the improvement in the filter business affect margins?

Kevin T. Michaels

Well, we didn’t break out by product line and we’re not going to start breaking out now. So, I think we mentioned previously a number of items have gone through that helps improve us from our past restructuring, the further efficiencies that we’ve been gaining. And these efforts we’ve been working on over the last year, year and half. So, we’ve been working hard on them and I think we’re delivering results now.

Operator

Your next question comes from Lavon Von Redding with Occi Capital.

LaVon Von Redding - Occi Capital

I wanted you to hopefully elaborate a little further on your comments earlier as you talked about further consolidation amongst the suppliers and I guess from a competitive pricing perspective amongst some of the equipment suppliers. Can you give me your best thoughts as to how you see consolidation playing out? I know Commscope and Andrews have combined but there wasn’t that much product overlap. Maybe you have some further color as to how you see this playing out.

Ronald J. Buschur

Well, I think a lot of the consolidation that we initially had, we were talking about as well, could take place at some of our customer base as well. And some of the network operators. You know, there is some speculation out there that there’s going to be several mergers in that space taking place.

And then the consolidation that really is ingrained in our market segment, if you look at that, is really some of the smaller component manufacturers. You know, unfortunately, this down turn in this market has had quite a negative impact on the tier of suppliers below us and many of the second level suppliers, and they were forced to consolidate.

And in many cases we’ve seen that, and that’s been driven by the OEMs consolidation that’s taken place over the last few years. It’s tough to weather the types of down turn and revenue that we had to go through in 2007 and 2006, the end of 2006. Looking at that consolidation patter, there were many quarters your revenue goes down to half, to 70% of what you had.

So we are seeing smaller suppliers come together and consolidate, which will, in time, I think, be good for the overall supply chain. But that’s the types of consolidations that we’re seeing.

And there is discussion where certain people are saying they’re raising prices and they’re trying to increase and command a higher price for their products. That sounds good, I guess I haven’t seen that yet, to the level that I’d like to see, if that’s really being the case. But, you know, that’s the types of actions and the environment that we’re in today.

Kevin T. Michaels

And just to add to that, as Ron mentioned, we’ve seen a lot of consolidation. I think you would look in the supplier industry, Powerwave has been one of the consolidators over the last four years, and there’s been a lot of consolidations. While there will probably still be some more at a smaller level, a lot of this focus is over the last year you saw some big consolidations starting to occur in the OEM base. And it appears that there will be more consolidation in the OEM base as we go through the next couple of years. There’s a number of players that are designed to only focus on parts of businesses and stuff. And that will continue to have an impact on the industry. We’ve seen some of the major OEMs still have a ways to go as that consolidation which certainly impacts us at the sub-supplier level.

LaVon Von Redding - Occi Capital

And are the OEMs looking to consolidate their suppliers or are they still more focused on trying to maintain a decent competitive environment to get better price from you guys?

Ronald J. Buschur

That’s certainly the case. I would not say that they’re willing to see the industry so they only have a sole source position. So, yes, I think that’s always in the back of their mind, not to consolidate or allow the industry to maybe consolidate too much. You know, that’s a global environment win. I think if we’re in an environment where we have healthy competitors, I think it allows us to be much more prudent and aggressive in our business practices and really forces us to become world-class. And that’s going to benefit us in the long run, and you, as a shareholder, ultimately.

Operator

Your last question comes from Bill Choi with Jefferies.

Bill Choi – Jefferies & Co.

Just in terms of guidance, Kevin, did you provide anything on cash flow and DSOs and inventory turns?

Kevin T. Michaels

No, we didn’t provide any specifics there in terms of guidance for the year. Obviously we hope to continue to generate positive cash flow this year. We had positive cash flow in the first quarter. In DSOs, clearly our goal for this year is to drive them lower than they were to begin the year and the same with inventory. Obviously with inventory turns, we intend to drive them higher. We’re at 7.4x and looking to drive to 8+. But we haven’t set specific targets for each individual one.

Bill Choi – Jefferies & Co.

For DSOs, you actually had a very favorable regional mix. You moved away from Europe where you have some 100+ days and you actually had big North American business. I guess I’m thinking that DSOs should have been a lot better, even if it was very back-end loaded. Any thoughts about how much of an improvement we should be expecting in DSOs?

Kevin T. Michaels

We’re hoping to improve. We were down in the low 90 levels so we want to try to get back to that and drive lower than that. But internationally, the bulk of our business is still internationally and payment terms are out there. And there is an impact, March is a very strong quarter. So, nobody pays in 30 days, so there’s no way you’re going to collect what you sell in March before the end of the quarter. So that does have an impact in the calculation. But it’s an area where we’re certainly striving to get that better and you’re right in the point that if we continue to see a shift in business that will have some impact on what the DSOs will look like.

Bill Choi – Jefferies & Co.

And then on the expense, a little clarification there. You mentioned that you want to get to the $45 million quarterly level and then you said but not including bonus accruals. Can you talk if there were any in March and maybe while you’re at it also give the total employee count with and without the contract employees.

Kevin T. Michaels

We’ll report the employee counts in the Q. I don’t have that off the top of my head there.

Ronald J. Buschur

It’s about 2,500 permanent employees.

Kevin T. Michaels

Yes, roughly. In terms of we haven’t had a bonus accrual in a couple of years, so no, there are no bonus accruals in any of our numbers. And we’re just, obviously if we can meet certain profitability levels we may start accruing some, but we haven’t reached those levels.

Bill Choi – Jefferies & Co.

And the bonus accrual part is not on revenue and more on profitability?

Kevin T. Michaels

A combination of both. But that’s internal to the company, but it’s a combination of both. And obviously we know we have to achieve some much better results before that happens.

Bill Choi – Jefferies & Co.

One last one. I guess whether there were any 10% direct customers in North America. Can you just clarify whether that’s true even when you add the indirect business to these operators through an OEM? Whether you still didn’t have much of a consolidation of the revenues?

Kevin T. Michaels

We really can’t identify through an OEM where all the business goes, so that’s almost impossible for us to do. But we will report any 10% customers and we always report any 10% and obviously we reported Nokia Siemens and Alcatel-Lucents and those are our only two 10% customers this quarter. And if we had more we would report them. But we’re happy with the spread. We have a large operator direct base and while there’s no single guy there at 10%, there’s a number of players that are well known names across the globe.

Operator

This concludes our Q&A. I would like to turn the call over to management for closing remarks.

Ronald J. Buschur

I want to thank everyone for joining us today. And your continued interest in Powerwave Technologies. We look forward to sharing with you our results for the second quarter of 2008.

Operator

Thank you for participating in today’s conference call. You may now disconnect.

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Source: Powerwave Technologies, Inc. Q1 2008 Earnings Call Transcript
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