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Executives

Mary McGowan - Co-Founder of Summit IR Group, Inc.

Harald J. Braun – President, Chief Executive Officer and Director

Sally Dudash – Vice President and Chief Financial Officer

Analysts

Richard Valera - Needham & Company

Blaine Carroll - FTN Midwest Securities

Matthew Robison - Ferris, Baker Watts, Inc

Neil Wagner - Stephens Inc.

Jim Moyer - Morgan Joseph

Greg Weaver - Invicta Capital Management

Harris Stratex Networks, Inc. (HSTX) F3Q08 Earnings Call April 29, 2008 5:30 PM ET

Operator

Good afternoon ladies and gentlemen and thank you so much for standing by. Welcome to the Harris Stratex Networks conference call. At this time all participants are in a listen-only mode. Later we will open the call up for your questions. Instructions for queuing up will be provided at that time. As a reminder this conference call has being recorded for replay purposes. Now I would like to turn the conference over to Ms. Mary McGowan, of the Summit IR Group. Ms. McGowan, you may begin.

Mary McGowan

Thank you for joining us today to discuss the Harris Stratex Networks financial results for the Third Quarter Fiscal 2008. On today's call will be Harald Braun, President and Chief Executive Officer and Sally Dudash, Vice President and Chief Financial Officer.

During this conference call, we may make forward-looking statements regarding our business, including statements relating to projections of earnings and revenues, the timing and capabilities of new products business drivers such as the transition to IP infrastructure and continued network expansion by mobile and private network operators. These and other forward-looking statements involve assumptions, risks and uncertainties that could cause actual results to differ materially from those statements. For more information, please see the press release and filings made by the company with the SEC.

In addition, in the tables of our press release and on this teleconference we may discuss certain information that is non-GAAP financial measure. Our reconciliation from the comparable GAAP measures is included in the tables of our press release and on the Investor Relations section of our company website, which is www.harrisstratex.com. We believe the supplemental non-GAAP financial results, which are used by management, reflect the basic operating results of the company, and will facilitate comparison of operating results across reporting periods.

Now I would like to turn the call over to Harald Braun.

Harald Braun

Thank you Mary and welcome to all of you joining us today. It’s my pleasure to host my first quarterly earnings call for Harris Stratex Networks. Later on this call I will discuss my view of the company after only three weeks as CEO and also my priorities this call for realizing to company’s full potentials, but first let’s review this quarters financial performance.

Our third quarter continued to demonstrate strong top line momentum with non-GAAP revenues coming at $178.2 million up 21% year-over-year and down slightly from the prior quarter. International sales were up more than 27% year-over-year driven by the strength across all of our key regions. We’re once again gaining attraction in Africa. New operator licenses are being awarded helping to drive demand. One of our new customer Starcoms is one such operator who is expending the region. We believed we are well positioned to capture increased business as these operators expand their networks.

We are also capturing new business in the Middle East and Russia, New Zealand and Maldive Islands and Bangladesh. We have seen growth of our business in Australia and we expecting the large IP based multiyear contract with a Tier I operator. We are opening an office in Sydney to support growth in this country. North American revenues were up 16% year-over-year and that region had its strongest quarter in terms of booking since the merger. A $9 million order contract with the city of San Jose, California is designed to support communications between law enforcement, fire protection and emergency medical service for 31 different agencies. This is just one example of the segment successes.

Now let me provide Q3 financial highlights. On a non-GAAP basis revenue for the March quarter was $178 million up year-over-year to 21% and down sequentially only 2%. Gross margin come in at 31% up slightly to Q3 ’07 and flat sequentially. Net income of $12 million was essentially flat from the prior quarter and earnings per share was $0.20, by segment North American revenue was $57 million, International revenue was $117 million and Network Operations revenue was $4.2 million.

Later in the call I will provide comments on our market, my early vision for the company and the areas of immediate focus. Now I would like to turn the call over to Sally for a detailed review of the quarter’s financials. Sally?

Sally Dudash

Thank you Harald and good afternoon everyone. Let me start with a review of the GAAP financial performance of Harris Stratex Networks for the quarter ended March 28, 2008. As Harald mentioned third quarter revenue was $178 million and we have reported net income of $7 million or $0.09 per diluted share. We believed the supplemental non-GAAP financial results reflect the basic operating results of the company and will facilitate the comparison of operating results across reporting periods. Our non-GAAP income statements exclude the charges that resulted from the merger transaction, integration cost and stock compensation expense. Please refer to our website for complete GAAP to non-GAAP reconciliation tables.

For the third quarter of fiscal 2008, these non-GAAP charges totaled $7.3 million and are composed of the following. $4.4 million amortization of purchase related intangibles, $2 million stock compensation expense and $900,000 integration related charges. The following discussion is based on non-GAAP results. Segments revenue for the quarter breaks-down as follows. North America has $57 million was 16% higher than the year ago period and down 11% from Q2.

Africa at $56 million was 49% higher than the year ago period and 36% higher than Q2. EMER at $39 million was 17% higher than Q3 FY ’07 and 23% higher than Q2 FY ’08. Asia-Pacific plus Latin America at $22 million was 3% higher than Q3 of ’07 and down 42% from Q2 and network operations at $4 million was down 19% from the year ago period and down 35% from Q2 of ’08.

The revenue decline from Q2 to Q3 is normal for North America, as Q3 is seasonally our softest quarter in this segment. North America revenue in Q3 continued to see strength from increased bandwidth demand, footprint expansion and 2 gigahertz microwave relocation for advanced wireless services from mobile operators.

In Africa, we are seeing a rebound in capital investment following a series of operator consolidations and in EMER the transition of networks from TDM to ethernet is fueling revenue growth. The decline in our combined Asia-Pacific and Latin America region is due to timing of awards and the Network Operations segment experience some delays in their project awards. However, increased demand for this segment service assurance solution with next generation network customers continues and we expect to see improvement in the fourth quarter.

Gross margin was 31% in the quarter; although margins increased from the year-ago period this performance was flat compared to the second quarter. Actions were taken in the quarter to address costs particularly in the area of freight and logistic. But they did not impact the overall results in the third quarter. We still expect to see some improvement as we exit the fiscal year.

Total operating expenses decline from $40 million, also 22% of revenue in the second quarter to 39 million also 22% of revenue in Q3 of 2008. I should note that the third quarter OpEx included a reduction in expense of $2.5 million related to the mark-to-market of liabilities associated with our outstanding warrants. As discussed in our second quarter call, we have seen an increase in G&A related to ensuring SOX readiness for the new company that was not previously anticipated at the levels we are experiencing.

R&D spending was $11 million in the third quarter or 6% of sale. We continue to address the spending in G&A to lower the spending rate as we exit this fiscal year. Depreciation and amortization of property plant and equipment and capitalized software was $6 million CapEx for the quarter was $4 million.

Operating income was $16.5 million for the quarter compared to $16.8 million in the second quarter and $5.6 million in the year-ago period. Net income was $11.9 million or $0.20 per diluted share. Our pro forma tax rate remains at 26% and our cash tax rate remains at 2% to 3%. Employee headcount was up in the quarter from 1,400 to 1,430 as we added strategic hires in support of revenue growth. Moving onto the balance sheet, Harris Stratex's cash balance, including short-term investments increased to a record $100 million at the end of March, compared to $83 million at the end of December. Operating cash flow for the quarter was $23 million, an improvement of $13 million from the second quarter.

Inventory and unbilled decreased by $7 million in the quarter and turns improved from 2.8 to 3. Accounts receivable decreased by $9 million and DSO’s will reduced from a 112 days in the second quarter to 103 days in Q3. We continue our imitatives to decrease DSO’s and improved inventory turns and our very encouraged with the overall balance sheet progress in the quarter.

And now I will turn the call back over to Harald for a market and outlook discussion. Harald?

Harald Braun

Thank you Sally. Before I comment on my strategy for Harris Stratex let me take a few moments to discuss the industry in which we complete. Mobile wireless momentum continues to provide most up the industry growth today. I see that growth continues for at least another 3 to 5 years, especially in the mobile backlog segment, where we compete for most of our part business. There are number of growth factors that we believe does drive our business. One important example is the transmission to IP infrastructure from the current TDM technologies that are used today.

The first IP and able base stations were deployed within the last year and we believe the growth from this trend is in its very early stages. Beyond this the evaluation to our 4G technology seems -- such as mobile WiMAX and LTE, will only further the need for change. In 2007, the worldwide microwave gross market was 8%. Over the next several years we see continued overall growth in the 6% to 8% range. However, I expect the underlying growth in higher, capacity IP capable microwaves, where we have been playing a legal roll to be closer to 20%. In North America the combination of increase data traffic together with the move from TDM to IP is a more competitive driver from lease lines substitution. Perhaps I’ll comment in the next 12 to 18 months. This is the significant opportunity for as a North America and we have products that are now IP already and uniquely position to address the transition.

As an example, major U.S. carriers are investing build as in building out their wireless broadband capacities to meet their demand for data. AT&T for instance has already noted that volumes for data services more than doubled in the past year. While there is a clear indication that we are moving from a voice era to a data era, the data demand for this transition in significant and we fit in the suite spot with our products and services. In international, the transition to IP is already occurring. On the trading 12 months basis we estimate 28% of our product revenue came from IP radios.

The scope of our solutions sets us apart. Harris Stratex's has IP-ready microwave radios and leading network management software all backed by a comprehensive service offering. We are ready for the market transition to IP with technologies that meets today’s needs and tomorrow’s goals.

Now let me turn to my first 20days of CEO of Harris Stratex’s. In this initial period I have met with the number of employees and hosted round table discussion with department managers and spent considerable time with my leadership team to understand their strengths and where I make them stronger. I can tell you that I’m impressed thus far with the high level of technical capability and the energy level in our company.

I have conducted an extensive operating review of the quarters performance and identified tools needed to better manage our processes and results. What I have seen does not surprise me for a company only one year into its major. As you might expect more review is needed, but more importantly accent is needed. My approach is one that I have to do successfully in the past as a result of my initial assessment I have launched initiatives focused on: number one, defining that objective direction; number two, improving our financials and number three, achieving continuous improvements in processes and quality. This holistic approach should enable us to retain the savings that we achieve.

My message to the organization continuous to be one of urgency, accountability and discipline. I believe our customers are the most important asset, and I’m extremely impressed as to size and quality of the worldwide customer base. In conjunction with my sales executives, I have already reached out to customers worldwide and will be meeting with as many as I can in months come.

In June, I will be visiting nine countries to conduct regional operational reviews and customer visits. I will also be visiting our new offices in those areas such as Sydney, Australia as well as our International Headquarters in Singapore.

As for the actions to be taken, I’m very eager to provide you with my strategy, my initiatives and milestones that will enable you to measure the company’s success. It is my objective to leverage my industry knowledge and global experience as we move to our next level of growth. So at this early stage, I will provide you with some broad objectives and expect to provide you with more detail action plans and metrics in the month to come.

My first priority is to work to maintain the annual revenue momentum that the company has demonstrated since the merger. Harris Stratex offers end-to-end wireless transmission capabilities, transport, access and carrier-grade Ethernet systems and software network management solutions and turnkey professional services. Our continued revenue strength tells me, that we are exceeding our expectations to provide customers with product and services that help them compete.

I now want to assure that we are the supplier of choice tomorrow and in the years to come, but there is a difference between being a supplier and being a strategic supplier, the later is my objective.

Gross margin has been an area of disappointment for us. We have not seen improvements hoped for in this merger, it’s one of my top priorities. The company did pick up actions in quarter three and we expect to see the benefits in future quarter. We are applying the sense of urgency, discipline and control that I mentioned earlier to address the situation.

I have identified areas, where cost reductions can be realized and have the science resources to capture them. By early observations, I have identified a number of areas of opportunities. There are two areas that I like to discuss with you now. They’re our services offerings and R&D. Services is an area that is a key differentiator for Harris Stratex, but at the least, we have a normal untapped potential. We have the capability to deliver a wide range of professional services, which include consulting, network design, site service and build, system integration, installation, commissioning and training.

One of my major objectives will be to enhance the range and depth of services we offer. They are our services that are a natural fit for our global customer base, but are not yet capitalized on. Be assured, we have already begun to expand our service offerings to all our customers, but not at the level or pace we are capable of or that our customers can benefit from. Another goal is to optimize our R&D spending. I just mentioned before, I believe innovation is critical to stay competitive in the marketplace. It is also critical to growth, gross margin expansion and to stay ahead of price erosion.

Our investment in R&D, remains as large as in our industry. One of our current key focuses will be to assess our product offerings and innovation targets to ensure that our R&D spent is met wisely to stay ahead of our competition, meet our customer’s needs and meet the financial expectations of management and our shareholders.

Sustaining profitability is another critical goal. As we maintain our revenue momentum, work to improve the gross margins and drive innovation is our intension to ensure continued profitability. With any business, there are challengers. However, Harris Stratex’s greatest assets are its global customer base, its history of innovation, as well as its turnkey solution. I believe, I have the experience to step into the company’s strengths that can bring us the discipline needed to unlock real potential.

In summary, as I mentioned on my call with you on April 8 our opportunity is in fast growing markets, where we can address the worldwide trends with effective and efficient solutions for our customers. My objective is to accelerate the pace of progress in the company, with tremendous opportunity for sustainable, profitable global growth.

Before going to Q&A, I would like to provide an update on our company’s guidance for the year. Based on the strengths of our revenue momentum exiting Q3, we now believe revenue for fiscal year 2008 are expected to be at a high end of our prior guidance. Due to continued pressure on gross margin, however non-GAAP earnings are expected to be at the low end of prior guidance.

This excludes the affect of transition costs related to the company’s management changes in the fourth quarter. These we estimate at $0.03 per share which we will include next quarter when we report non-GAAP results. Taking this target is a challenge; as a new CEO I’m aware that I could have lowered guidance to a level that I believed was easier to achieve. However, I have chosen to maintain our earnings guidance excluding the non-recurring management transition costs at the low end of the guidance range.

We have programs and initiatives in place to reach this goal. My preference is to challenge my people and to ask them to perform and my message remains one of urgency, accountability and discipline. While our near-term cost issues are challenging, the opportunity in our market is sizable and we plan to complete aggressively and at the same time improve our financial performance.

At this point I would like to ask the operator to open the line for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is coming from the line of Rich Valera with Needham & Company. Please go ahead.

Richard Valera – Needham & Company

Thanks, good afternoon. Just wanting to focus in on the gross margin, if I could -- if the main -- actually it hit the low end of your guidance it would appear that you need probably something approaching 100 basis points of gross margin improvement always depending on the revenue and it sounds like the one thing you have identified where you taking from immediate steps is sort of on the shipping costs. Is there anything else going on, that’s gone unless -- few weeks or that’s going to go on during the quarter to help that gross margin?

Harald Braun

Yes, absolutely. As I mentioned before we have some problems in place and we have not only deliver freight cost and I think that was discussed earlier with the previous management, but we kicked off -- Sally and I kicked off some initiatives and this efficient is going into operations, where we need absolutely more efficiencies. We have in this bucket also a location strategy concept and of course we are looking also at the near-term costs savings -- in R&D, what we do in our labs, what we do with our contractors and so on and so forth. So -- and there is another area in IT where I see untapped potential to use more tool basis to be much, much more efficient. So, we have picked out from a nice project and to team we have one person responsible for that and Sally and I have weekly reviews to see how we can come to an improvement in this quarter and as you know there are only two months and a couple of days left, so that’s the challenge, but what the team brought back to me a last week, actually in the end of last week, looks very encouraging. So -- and I will be on that and as I said I will be -- urge them for discipline and get this savings, which identified a captured in this quarter.

Richard Valera – Needham & Company

Great and sort of along the same chain -- train of thought, one of the attractive aspects of the merger were the substantial costs saving to synergies to be realize between by merging the two companies and I believe it was $35 million, roughly half of which was expected to come out of cogs and half of which was expected to come out of OpEx. Just I want to understand, where we stand with respect to those initiatives to track those synergies, particularly on the COGS line, it seems that basically all the synergies are being absorbed by margin compression perhaps due to mix shifts in other thing and just kind of wanted to understand what are the dynamics that play with the costs savings versus, the sort of flat margins.

Sally Dudash

Sure Rich, I will take that question. The one area where synergy has absolutely been captured is in our supply chain cost reduction effort. We talked about $19 million that we would say from that initiative and that target we will reach. Unfortunately as you say other cost issues, mix issues have dampened the gross margin performance and over shadowed the cost savings, but we think that the -- we mentioned many mix issues that impact us; customer mix, product mix, service mix, geographic mix and fundamental as Harald has mentioned our challenge now is to continue to reduce cost out of the equation because these mix issues will remain, they are a part of our business.

Harald Braun

Yes and if I may add to that and build on it; what I see after a couple of weeks that -- which -- that’s progress made on the integration, but there is also some improvement areas and as I mentioned before, the tooling and the processes or the tools which support the processes I think there is a lot of untapped potential there and for example in one area I see that -- I would say only one-third of the tools which supports some process, which I daily use more or less that’s two third on untapped potential and I think we can in the next couple of weeks really energize people to get these tools working and that is a huge efficiency level on what I see so for. So, tools is something; in operations we had some great discussion and how to improved the work flow in the factory and then the other area so, they have some real potentials to that.

Richard Valera - Needham & Company

Great and now I know its pretty well, but as you look longer term at this business and what ever plans you might have an initiative. I mean how do you think about it from a margin perspective I mean what would -- do you even have targets yet or is it too early for that. I think at this people are -- investors are probably a little frustrated that it looks like it’s sort of a very low 30% gross margin business, kind of the 31 or 2. Do you see prospects for this being a higher gross margin business down the road as you implement your initiative?

Harald Braun

Yes, I seen that, but I would say its too early because what we are doing right now is I kept three initiatives already off in the last couple of days, but one of the initiatives is to get together with the executive team. We have a series of executive workshops planned and in this workshop Rich, we are defining the strategic direction of the company and then of course structure follows direction. So when we have the direction set, we have to see how we restructure and how the structure follows this direction and with all of that I have to change a couple of things. Of course I do that to improve the margin and of course our profitability. So, it's too early for me to tell in which percentage points are we increase, but there needs to be an improvement done and I think we have a fair chance at it.

Operator

All right thank you. Our next question is from the line of Blaine Carroll with FTN Midwest Securities. Please go ahead.

Blaine Carroll - FTN Midwest Securities

Yes, thank you. Harald just staying with the cogs question for a minute; can you give us some idea of what the split is within that line item between -- whether its materials costs, manufacturing costs, shipping cost, just sort of on a percentage basis and then which of those areas has grown over the year and where is the biggest potential to take cost out of the equation?

Harald Braun

So again I'm just analyzing that. I would say at the moment all of above, in every area I think there is something. I didn't dive too deep into some areas, but what I did already I did dive deep into the R&D area and on the product side and I see them a lot of potential and this is about the strategy, the product strategy, what can we do in existing products and so on and so forth. So, from my lets say limited knowledge so far I see that as one of the big areas. The second one on sitting together is my officer in the operations and see there where we can improve further things in manufacturing. I visited already to factory and I had an extensive review there and I see good things and I see something’s also where we can improve a lot. So, I have to dive a little bit deeper in there to see what it really looks like, but the two areas I would say R&D and operations so our manufacturing if you will end product that are some main areas.

Blaine Carroll - FTN Midwest Securities

Okay. And then what about on the pricing environment; any changes there?

Harald Braun

In terms of pricing pressure or…

Blaine Carroll - FTN Midwest Securities

Yeah area anyone getting more competitive, prices coming down more than normal?

Harald Braun

Yes, yes. Price erosion -- I think price erosion is a fact of life that's there, but the best answer is of course to have an innovative product. Having innovative products value and can answer about the premiums. We have plans for our new products and of course we have to take our costs out of existing products and our manufacturing line for these products and R&D costs. Price pressure is a fact of life and we see that happening and of course there are also new entrances coming to play here world-wide with some companies entering from China and we need to be aware of that and we need to be better and that's competition and price pressure is a part of it.

Blaine Carroll - FTN Midwest Securities

Okay and then Sally, how booked are you for the current quarter and how much turns business do you need?

Sally Dudash

Sure. We have 60% of our revenue in backlog going into Q4.

Blaine Carroll - FTN Midwest Securities

Okay and then any hint on looking out towards 2009?

Sally Dudash

Not yet. I think we would like to get our strategic sessions completed, give Harald a chance to completed his review of the business and provide our outlook on ’09 once that’s completed.

Harald Braun

Yeah correct.

Blaine Carroll - FTN Midwest Securities

And then -- how long before -- you mentioned these things that you are doing and the efficiencies and so forth. How long before you can start implementing them – are we going to have meetings all during the fiscal fourth quarter or can some of these start to flow through the P&L?

Harald Braun

Yeah. I think I mentioned the three projects, right. One of the projects is the overarching, in all strategic direction project, where as I say we get together as a management team and then we think about the strategic direction, what we are going to do and how are we going to do I and I have some thoughts there, but this is a series of three workshops just happening in May and in the beginning of June. But in parallel, we are working out what I call the business improvement project right, where we have a lot of work items in there, which we are at the moment thinking through, and we're implementing them directly. There will be no way for it -- there are some areas as I said in processes, in tools, in location concept, in quality, so there are models in this, what I call business improvement project and I can later on provide what it all is and how we measure it, so that you guys can track it and in this area, we can start immediately. So we are I would say, with this project 85% somehow done to kick it off and that is a project which is a very, very essential for us. Hit directly already quarter four and I have also an immediate project kicked off with Sally together on getting back to our low end of the guidance and that is already in full swing. So, I think directly a couple of days after I arrived here, had this extensive review and we direct kicked it off; clear responsibility person after it had a brainstorming session and got the people to work and as discipline we are going to go every week and check where we are and where we're going and to removed the roadblocks. So that project is in full swing already, but I would say the bip -- this business improvement project is made into longer-term project where we see constant improvement in the business.

Operator

All right, thank you and next question is coming from Matt Robison with Ferris, Baker Watts. Please go ahead.

Matthew Robison - Ferris, Baker Watts, Inc

Hi, thanks for taking my question. First off Sally, for the benefit of those that you might think of running through airports, can you give us perspective on the book, the bill and how that 60% compares to where you were three months ago?

Sally Dudash

No we had a book -- positive books to bill for Q3 and we are about the same place as we worked three months ago.

Matthew Robison - Ferris, Baker Watts, Inc

Okay, and on the margins in the past couple of quarters, that is the December and September quarters, there was discussion about the business in Asia and some shipment at thinner margins for product that could be upgraded at a later date. This quarter -- Asia wasn't there like it was in the past couple of quarters, does that mean that you are -- I know you have talked about some of those strength and some of better aspects of your costs that you have got the initiatives that haven’t really kicked in yet, but with the -- you still have that issue with some of the products that are software upgradeable that haven’t been sold at relatively end margins for future upgrades? Is that a factor in the quarter?

Sally Dudash

So, I'll just start by saying as no, we seem to have mix issues happening to us every quarter this year, whether they be as you say product mix, geographic mix, customer mix and where it is true we saw strong revenue in Africa this quarter and the revenue in Asia-Pacific was down. I will say we made a strategic decision to get back into the African margin on one account with a large amount of OEM in it and as an entry point to what we expect to be significant product sales going forward and that margin impact was about 1% for us in the quarter and also I would -- it should be noted, as expected North America revenue was lower, Q3 versus Q2 and that’s going to have an impact on the overall gross margin but that would have been as we expected. So, again it all comes back though to getting crossed out of the equation because these mixed items are with us.

Matthew Robison - Ferris, Baker Watts, Inc

When you say OEM, you are talking about network building or you are reselling somebody else here?

Sally Dudash

Exactly. We are selling someone else’s equipment and therefore that does not command as higher margin as when we have a value add to put around.

Matthew Robison - Ferris, Baker Watts, Inc

And so you also -- Harald was talking about closed set professional service is an area of growth and if you cut the professional services, then that one employee is going to have an emphasis on an area that could be real challenged to offset at the gross profit line, at your gross margin calculation. Is that what you are talking about or is there a way to do professional services without having it being dilutive in gross margins?

Harald Braun

Yes, I think when I am talking about professional services I mean we have to define services right and when I’m talking about this services I mean consulting the customer. I mean system integration customizations of product or even a system integrate the end-to-end solution. So really put some brain power into the end-to-end solution and get it to work or even managed networks for operators or go in there and analyze that how they could run their business better with our product in the networks lines and I have to dive a little bit more deeper there, but that's what I mean was professional services or managed services net. So in this areas I can get a huge untapped potentials and I think that is an area which we have to take a look at and given also our good access and the significant customer base worldwide, I think that is a fantastic opportunity to get in there.

Matthew Robison - Ferris, Baker Watts, Inc

Sally, would you had growth in Africa, if you had not that’s on the resale business?

Sally Dudash

It got it back into a customer base. We felt, what the strategic decision to get back into …

Matthew Robison - Ferris, Baker Watts, Inc

Yeah, yeah I understand that; you’re looking for account control and sometimes you can get that by doing more per customer, but I was just as curious if that OEM compound was the biggest factor of your growth in Africa. If that -- if we can look at 49% year-over-year comparison is a new largely driven by you selling other type of securities.

Sally Dudash

I wouldn’t say it was the only - the only component that we are starting to see traction again once we’re past these operator consolidation starting to pick up again in the country and we are well positioned with the number of customers there, but it's a fast growing market and we want to be -- have our strong shareholders.

Operator

Your next question is from the line of Neil Wagner with Stephens Inc. Please go ahead.

Neil Wagner - Stephens Inc.

Hi, guys this is Neil for Steve. Could you guys provide any more specific details regarding the Australian opportunity, specifically when we might start to see that ramp-up in size as well?

Harald Braun

In Australia, right?

Neil Wagner - Stephens Inc.

Yes.

Harald Braun

As I said we are expecting their large IP-based order and we are working to final details right now and I’m going over there in a couple of weeks. I can not provide at this point in time any more details. So, but it is a significant one…

Operator

(Operator Instructions) Kevin Dede with Morgan Joseph. Please go ahead.

Jim Moyer – Morgan Joseph

Hi guys, it’s actually Jim Moyer in for Kevin Dede. Just a question about the North American sales; I know it was seasonal but we had heard CERAGON report some softness there and I know it's a robust market right now, but just wondering if you guys are seeing any softness related to decrease in spending or is it just seasonal?

Harald Braun

No. So what I've seen far Jim, I couldn't say that. So far -- as it was a soft quarter but what I see -- when I did that review with the sales leaders right, I didn't see anything there and I don't see also an impact from the market and from the recession, so to say, but I don’t see that right now. So, I think it continues to be strong.

Jim Moyer – Morgan Joseph

Okay.

Harald Braun

From a pipeline point of view, so that’s what I see so far.

Jim Moyer – Morgan Joseph

And then I guess that goes the same for the rest of the world?

Harald Braun

Yes. So, I am really -- let’s say and it did 228 days, but what I’m seeing is Africa and Middle East right, so that is interesting how are the gross area is out there and I see the second portion is then also going from the Middle East over to APEC and that is also interesting, so -- and then North America. So that's -- I didn't expect that, so I was pleasantly surprised I have to say.

Jim Moyer – Morgan Joseph

Okay. I know when (inaudible) he had mentioned you just didn’t localized distribution facilities and I was just curious as to if you agree to that strategy or what other opportunities you see for improving those?

Harald Braun

Yes so -- we have that. That was a part of our operations review, right and we have some interesting ideas there. We have to do something that is clear. How that looks like at the moment I cannot tell you, but I'm happy to give you an update there. But there is a need to do something and when I see what they really ship and how much they ship right, this is also a new situation for me and I have a little team which I talk to be educated there that it was very clear and that is a part of the project also what I’ve explained before to come up and it is a part from my point of view in the location concept. So that’s the hint I can give.

Operator

Alright, thank you; our final question is from the line of Greg Weaver from with Invicta Capital Management. Please go ahead.

Greg Weaver – Invicta Capital Management

Hi, thanks for taking my question. Could you give us a sense of the ASP erosion, on an apples-to-apples basis year-over-year, if you took the given product what's happened to the price?

Sally Dudash

So in general we have talked about 10% to 12% on average year-over-year price erosion in our market and that’s pretty consistent with what we see. It’s not equal across all the products in all geography but that is the average that we anticipate, as we think about our product cost reduction and other initiatives required.

Greg Weaver – Invicta Capital Management

Okay and what -- Harald you mentioned about the high Cap market being a higher growth segment. What percent of your total revenue would you put in that bucket?

Harald Braun

On the higher gross sector percent -- what’s it from a product point of view…

Sally Dudash

So, I can -- from a product point of view we've talked about SDH radios as 60% of our product sales

Greg Weaver – Invicta Capital Management

Also PDH?

Sally Dudash

PDH is 40% and then the new -- statistically we are able to get for this call, was that over the last trailing 12 months we’ve had 28% of our products that are actually IP radios are being sold and of course those would be in multiple capacities.

Harald Braun

And I asked the team to give me that number, the 28%. I think that was -- I reported against that in my statement; that of course is very important to see how this transition takes place in the rest of the world and also in the US or North America. I expect that really to grow and that we transition from TDM to IP and of course the product mix -- thanks very much Sally, that’s the 60:40 mix low end and high end. I don’t know what the abbreviation meant, but I told you I measure myself against the 28%, that’s what I am now working on to transition towards IP and I think I did that again, I had a track record for doing that and that is one of the strategies.

Greg Weaver – Invicta Capital Management

And to clarify that 28% is of your total revenue, you've talked about it under the guides of international, but it's a total business, 20% of IP?

Sally Dudash

From a product revenue.

Greg Weaver – Invicta Capital Management

Okay and where do you see that on a go-forward basis; how do you see that trending out?

Harald Braun

I think -- so what is in my mind of course to get something from the 28 again on the product size without service and etc and all that, no doubt we have nothing that was also the case -- I would like to transition that the other way around over the next 2 to 2.5 year. So, I think we are going to go from the 28 to the 50’s so that we have a 50:50 mix and then going to the 60:70 percent ranges within two years. That's my guess, that's my gut feel.

Greg Weaver – Invicta Capital Management

Okay and one last question as follow on to that. What difference is there in gross margin as we transition to the year IP radio?

Harald Braun

What I see so far I think it’s 15 points.

Greg Weaver – Invicta Capital Management

Well. Okay. That's pretty significant. I think that…

Harald Braun

Yes, yes therefore you will understand my number or why I had asked the team to give me the number where we are now and then of course we have to define the strategy with my officers when we sit in the workshops and how we get there, right and how we improve that trend -- the transition trend from TDM to IP.

Operator

Alright, thank you and Mr. Braun, there are no further questions at this time. Please continue with any with any closing comments.

Harald Braun

Yes, then I would say thanks very much for joining the call and for my first earnings call here and this concludes our conference call and thanks again for joining us and being on the webcast today. Thanks very much. I’m looking forward to meet you all in the month ahead. Bye, bye

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Source: Harris Stratex Networks Incorporation F3Q08 (Qtr End 3/31/08) Earnings Call Transcript
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