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Executives

David Brant – SVP & CFO

Eric Stonestrom – President & CEO

Analysts

Steve Ferranti – Stephens Inc.

Rich Valera – Needham & Company

Michael Nelson – Stanford Group

Blaine Carroll – FTN Midwest Securities Corp.

Joanna Makris – Brean Murray, Carret & Co.

Gunther Krager – Discovery Group

Scott Steril [ph]

Airspan Networks Inc. (AIRN) Q2 2008 Earnings Call Transcript August 6, 2008 4:30 PM ET

Operator

Good morning. My name is Adrian and I'll be your conference operator today. At this time, I would like to welcome everyone to the second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be question-and-answer session. (Operator instructions) Thank you. Mr. Brant, you may begin your conference.

David Brant

Thank you very much, Adrian. Welcome everyone and thanks for joining our call today. We appreciate your participation and continued interest. With me on the call today is Eric Stonestrom, our CEO.

To start off the call, Eric will provide his perspectives on our business, and I'll then take you briefly through the results for the quarter ending June 29, 2008. We will close with the question-and-answer session. The Company issued a press release today containing detailed results for the second quarter 2008. This release is available on the Company's Web site, as well as various financial websites. In keeping with SEC requirements, I must advise you that this conference call will contain forward-looking statements reflecting the beliefs and assumptions of management, based on current available information. Listeners are cautioned that a variety of factors, including certain risks may affect our business and cause actual results to differ materially from those set forth in the forward-looking statements.

Listeners are therefore cautioned not to place undue reliance on such statements, as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from their forecast. For more detailed discussion of risks and uncertainties relating to Airspan Networks, you are directed to the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2007 and the quarterly 2008 reports on Form 10-Q.

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

Eric Stonestrom

Okay. Thank you, David. Good morning to everyone on the call. I'm sure most of you have had time to review our 2Q release. We are pleased to have hit the revenue target for the quarter in what has clearly been a tough market environment. Despite the challenges, we saw in the second quarter some real clarity about the where the market opportunities are headed, and I'd like to start off this call by reflecting upon where WiMAX sits today as an industry and how Airspan will capitalize on the substantial opportunities within this environment.

Airspan has been in the business of providing broadband connectivity for the last decade. We have provided over $600 million of products to over 1000 customers to meet this basic network need. The opportunities for the products that we make are expanding in three basic ways as WiMAX goes mainstream. I'll talk through those ways and then I'll turn to some specifics of the quarter.

The first way in which the market is expanding is in additional applications. The best example of this is the addition of mobile connectivity to what was historically a fixed network model. A project with Comstar, Armenia which was recently launched is a good example of this. The KTVI, UQC rollout in Japan is another example. These are the cases where a traditional technology that was used for fixed connectivity has been supercharged and enhanced and now provides a platform for mobile computing.

Another example of the market expanding for our products due to initial – additional applications is the arrival of true PCBs connectivity. Previous connectivity provided by our products and those of our competitors all required discrete, separate devices in the customer (inaudible). In the second quarter, we introduced our MiMax device which is a small dongle. It plugs into a PC receiving WiMAX signals in many frequencies and we more importantly received a WiMAX formal certification for this unit, which will combine four frequencies and plugs into any PC with a USB port. This is a significant development for Airspan as the certification process involved over 20 vendors, but success was limited to a small handful of market leaders.

Certification is significant because operators deploying WiMAX can utilize the products with confidence that they will work into a multi-vendor echo system. In addition of the formal certification we completed interoperability testing with the Tier-1 vendor space station at the request of a major customer and we will continue to test with other vendors throughout the year. At the industry level, there is no doubt that the demand for broadband mobile computing is significant.

The successful introduction of the next iPhone has demonstrated to the masses the undeniable market demand for mobile broadband computing. For the mainstream mobile broadband applications, WiMAX is the solution for disruptive carriers. It'll leverage at the early availability to grab market share from the incomings, while they wait for LTE. The WiMAX industry is doing the first completely carry away wireless standard in the last 20 years, and we are doing it far more quickly than it is ever been done before. This mobile broadband application area represents a major increase in addressable market for Airspan.

A second way in which the opportunities for our products is expanding is in the introduction of additional frequency variance for our products. As you know, our customers utilize radio Spectrum that they typically obtain from governments in order to use the products and build the network. We have been steadily adding to the portfolio of products that we have in terms of additional frequencies. This increases the number of customers' we can sell to. In the second quarter, we announced new products in the 1.5 Gigahertz band and we received FCC certification for our products in the 5.4 Gigahertz band allowing us to sell those products in the US to customers like Charles River Partners who are rolling out a broadband connectivity platform across numerous states in the US.

We also saw in the second quarter a significantly increased run rate for 3.65 Gigahertz US products. As you might recall, the 3.65 band was opened by the FCC at the start of the year and we have a dominant and growing position in this frequency band. This is another example we are having the right frequency with the right necessary government approvals increases addressable market. And I'm proud to say we've captured over 20 customers since the introduction of that product.

The third area in which the market is expanding is actually simply a larger addressable market for our core product and our core business. As I said before, we've been in the business of providing broadband connectivity for the last decade. This area of growth relates to the basic economics of broadband connectivity in the developing world. In the midst of the extensive discussions on mobile WiMAX, the market seems to have forgotten the excellent opportunity for merging and underserve DSL alternative markets. We call this broadband connectivity for the next 5 million people.

PC ownership is increasingly global driven by low-cost PC initiatives. Governments are legislating universal broadband service initiatives which subsidies the build out of networks. In the phase of these initiatives, WiMAX offers a much more affordable package than wire line. The upfront costs are lower and the service delivery is quick and efficient. Once WiMAX has a foothold, there's little motivation to switch to wire line technologies even when the penetration is high enough. The DSL alternative market continues to offer significant growth opportunities for companies like Airspan.

The real opportunity for purified WiMAX vendors is in bridging these market segments. It is a fact that many carriers who start out as fixed DSL alternative providers, plan to be disruptive mobile broadband players in their markets. To do so, they are leveraging the fixed WiMAX standards which is stable and scalable today to gain a foothold before incumbent wire line cellular carriers establish a dominant position. Airspan continues to be the vendor of choice for large WiMAX deployments in this segment. We recently announced a network expansion over the carrier in Jordon, Wi-tribe where basic connectivity today is a pass to mobility in the future, and this important segment is driving our growth.

So, in summary, we see the market opportunities for us growing as we introduce new products in the mobile space as we add the frequencies to our portfolio and as we see increasing penetration in our core markets. WiMAX carriers consistently choose Airspan for the following reasons. First, we follow the standards. No fixed WiMAX solution follows the standards more closely than Airspan. On the mobile side, our MiMAX device received Wave 2 certification in the first group of products that were certified by the WiMAX forum and we are proud to be among this group of select companies.

Second, we provide fixed to mobile operatability. It's not just talk, we are demonstrating this capability now. This allows operators to pragmatically build business now driven by the needs for high speed connectivity and then to add mobility as economics and as importantly the availability of devices make it attractive.

Thirdly, we have a broad product range. WiMAX deployments are not one side sits offs [ph]. Carriers' who choose Airspan can select from a range of base stations which are suitable for various applications, geographies and size. Within the industry, we continue this for multiple frequencies and multiple geographies reporting as revenue diversity and mitigating concentration risk.

Fourthly, we lead an advance technology. By continuing to offer performance enhancing technologies first, Airspan is able to provide significant business model improvements to carriers. A great example of this is Fractional Frequency Reuse, a technique where we have the clear industry lead, which allows carriers to get substantially additional capacity in a limited amount of radio spectrum. There is a maximum in the industry that you can never have too much spectrum. This is like winning a highway with a maximum number of lanes.

Airspan's unique techniques extend considerably the effective throughput of a given block of spectrum. Think of it like the ability to expand a highway to handle more traffic without building additional lanes. In short, Airspan is unique. We have the largest number of self-installed WiMAX networks in the industry. We have more mobile upgradable commercial WiMAX deployments in the industry than anyone else. We are the only Tier-3 [ph] WiMAX vendor with a Tier-1 mobile WiMAX account.

Lastly, our technology knowhow is providing a sustainable differentiation as both large vendors and startups couple together with their first systems and products in this area.

Now, let me turn to the quarter. We've had a good quarter where and we executed well on the commercial and operational front, while initiating the restructuring previously outlined. Here are some of the highlights. We recorded a 25% increase in revenue over the first quarter of 2008. Our WiMAX and customer account increased by close to 40% in the second quarter over the same period last year, highlighting the momentum we are seeing in our business. We recorded some great wins during the quarter with contract expansions in Jordon, Saudi Arabia, Sri Lanka and new wins in the United Kingdom, Puerto Rico, Afghanistan, and India to name a few.

This commercial growth is a clear testament to the fact that our products continue to have competitive advantage allowing us to compete and win new business and that our products are stable and value-added, allowing and encouraging our current customers' to expand their networks on the foundations of profitable business model. Airspan also continues to benefit from the strategic alliances we have formed. We continue to work very closely with Fujitsu on the alliance product, which we market as MacroMax E. We delivered the first units into Japan within the second quarter and we are bidding MacroMax E in the multiple mobile RRPs across all continents.

We are bidding with Fujitsu for some of these opportunities and independently for others. Market feedbacks of this products has been tremendous and we are proud of the products various awards and recognitions. We are encouraged most of all by the interests in all of our markets for this unique solution. This product is much smaller than the competitions offerings in the same frequency bands. It uses much less power and it has a much greater range and power output. These unique capabilities have been seen by operators as a clear differentiation. We are also finding that our fixed WiMAX business continues to be strong, both direct and with partners.

The Gilat relationship which was announced recently is firing at all cylinders with new business acquisitions in the quarter in Mexico, and Kazakhstan and in Turkey. This relationship is close and collaborative and we continue to expect significant growth from this important channel. The vertical markets that we serve in addition to the core telecom business are also opening up for WiMAX and we see good potential there. During the quarter, we shipped a considerable amount of product to (inaudible) to be incorporated in their defense solutions portfolio. We also won contracts in the Middle East to use their span 4.9 Gigahertz WiMAX for video surveillance and we have many more bids in this important application.

In addition, we are pleased to see increased sales in the oil and gas sector on top of the defense sector. Many in the oil and gas sector have decided that WiMAX is a very viable alternative to the traditional technologies that they use both for (inaudible) and communication between machines and people. And the budget as you know in that sector are quite significant. Our product set offers a lot more flexibility for these applications when compared to the OEM Mobile WiMAX offerings of the large vendors. We see a long life for our fixed WiMAX as well as our mobile WiMAX solutions in these markets.

From a geographic perspective, we are seeing a growing momentum in the US. I spoke earlier about the range of frequencies we can now offer in this market. We believe we are the leader of the 3.65 solutions with strong accounts and strong channels for our products. We are – expect our sales – market to continue to improve despite the tough economic conditions in the US. The US market is very dynamic right now and we excited to be a key player. Our strategy going forward may be summarized as the following.

First, we are addressing the market with a broad product range but we are getting it right with products the customer needs – the customers' need. Second, we are introducing products that are differentiated, competitive, quality-oriented and stable. We are not racing to be first but to be best. And finally, we are leveraging alliances where possible to increase our reach.

In closing, I would like to reiterate we are confident as we move into the second half of the year, and now we have better visibility with effect to guidance. Given our momentum and the current market perspectives, we anticipate that our full year revenue will be in the range of $90 million and WiMAX will continue to increase as a percentage of our customer wins and revenues. We expect that revenues will trend up in successive quarters and we look forward to adding substantial mobile WiMAX revenues to our existing base.

With that I'll turn the floor over to David for a look at the financials.

David Brant

Thank you Eric. Okay, I'd like to give you a brief recap of the quarter's financial highlights. Revenues

Total revenues for the second quarter were $21.4 million up 25% from the first quarter 2008. Quarterly revenue was down slightly 3% from the $22.1 million recorded in the same quarter last year. In the quarter, we recorded $12.7 million of WiMAX revenues, which represented approximately 60% of our total quarter's revenues. We saw 10% year over year headline [ph] declined in our WiMAX revenues in the second quarter – primarily to the fact that (inaudible) had significant about 28% revenue content from (inaudible).

On non-WiMAX revenue for the second quarter 2008 were primarily due to increased sales of proximity subscriber terminals to Actel. Our cash position, we ended the quarter with solid cash, restricted cash in short-term investments amounting to $33.1 million. Cash received in the quarter was $900,000. With reserves boosted from those of the full outstanding receivable DBD after reaching settlement during the quarter as previously announced. In addition, in order to maximize our work in capital resources, we are in discussion with Silicon Valley Bank to increase the availability of borrowings under our existing line of credit, which would potentially allow us to drawdown the full $20 million facility available subject to certain conditions and covenants.

We initiated our previously announced restructuring program during the quarter and have recorded $600,000 in charges related to this activity. We continue to anticipate achieving an approximate 15% reduction of our pricing expenses compared to the first quarter 2008. We expect that the full impact of the cost reduction will be seen in the fourth quarter 2008. We continue to monitor the effects on our cost reduction exercise of foreign currency appreciation, in particular the shekel and sterling as material amounts of our operating expenses are incurred in these currencies.

Gross margin came in 32% compared to 8% for the second quarter 2007, which included the quarter in 2007 includes of an inventory write-down of $5.9 million.

Operating expenses increased 15% for the second quarter, compared to the same period last year. Research and development costs increased by 15%, $6.7 million and decreased slightly 3% compared to the first quarter 2008. Sales and marketing expenses of $4.3 million in the quarter rose by 23% over the second quarter 2007 as we increased our corporate marketing and high costs associated with the introduction of our Mobile WiMAX portfolio and agents commissions.

General and administrative expenses on the other hand decreased 14% over the same period last year, primarily due to lower head count. The reduction from the first quarter 2008 is due to lower audit and professional fees.

Net loss was $8.8 million or $0.15 per share for the second quarter 2008 based on $58.7 million weighted average shares, compared to a net loss of $11.7 million or $0.29 per share for the corresponding 2007 period.

As some of you like the numbers for stock compensation, let me give you those. Our FAS 123 cost for the quarter were in research and development $205,000, and sales and marketing $132,000, G&A $280,000 and cost of sales $21,000. That's a total of $638,000.

Moving to the balance sheet. We had a good quarter in terms of cash used. Cash collections in the second quarter were good, as I said including the receipts of DBD.

DSO improved significantly to 67 days from 110 days at the end of 2007. Inventory turns were 4.8 for the second quarter, compared to 3.6 for the end of 2007. We continued to seek further opportunities to improve our working capsule [ph] as we move forward.

Cash decreased $3.6 million from the end of 2007 primarily to the results of $2.8 million used in operating activities. A cash log for $15 million partly offset by improved working capital to $12.2 million and we had $1 million that we used for capital expenditures.

Accounts receivable closed $18.6 million, down from the end of year $33.9 as significant cash collections have been made during the first half. With respect to the NASDAQ decision, we continue to monitor closely our decision bid price with respect to our NASDAQ listing. We have until October 22nd, 2008 to cure the deficiency and resolve this issue. We continue to consider carefully our options.

With that I would like to open the call to questions and answers, Adrian.

Question-and-Answer Session

Operator

(Operator instructions) Your first question or comment comes from the line of Steve Ferranti.

Steve Ferranti – Stephens Inc.

Hi, guys, nice job on the revenues this quarter. Eric in your prepared remarks, you talked about a challenging market environment in the second quarter, can you provide us more color with what you are seeing there that might provide challenges that plays in the second half?

Eric Stonestrom

Yes. Hi, Steve. I think the main challenge in the market environment really relates to the amount of technology that's available that's new sitting in our potential customer base both from ourselves and our competitors. There is a big push now on Mobile WiMAX on the (inaudible) 16e products. There's also a lot of application where the benefits of those products aren't immediately clear but become clear over time and I think as the customers saw through when the launch it certainly a continued factor in their evaluation to think about what is target application is today, what it's going to be? What user devises are available? How many products are certified in the industry and so that as you know leads to people postponing rather significant decisions and definitely has been a factor in the first half of the year for us. I imagine for our competitors as well. It's clear though as we gone through the second quarter that the killer applications are there, the customers that understand those and we gotten good visibility into how we are going to be expanding their network. So, I look at the first half of the year as half of our people were testing the market, understanding what application to launch from understanding how stable the products were from the various vendors. And I think we are well set to grab potential in the second half both with existing customers and new customers. With that said, technology overhang continues to be an ongoing challenge in this business, probably the biggest challenge as well as the challenge of our competitors. Customers decide what to do and in certain markets such as the developing world, they very rarely have to take because they absolutely want to get product launch and get a market position. In the developed world and Western Europe, in the US more consideration goes on. So, that's the sort of dynamic that's going on here.

Steve Ferranti – Stephens Inc.

And I guess in that regard, how much of a milestone was the 16e certification in terms of clearing up some of that uncertainty and to what extent now that we are through the – we see initial wave there, do you think that uncertainty gets resolved looking ahead?

Eric Stonestrom

Yes. The milestone was very significant in a couple of regards. First, the addressable universe of customers for us went up considerably because now we can go and approach and we have been approaching everybody who's bought a base station from Alcatel-Lucent, from Motorola, from Samsung, from other companies. This gives us an opportunity to engage with those operators who may have already made an initial infrastructure decision and we are getting tremendous traction there. We have a program of marketing going at those people and the certification is a real credibility builder there. The engineers who worked in all those target companies and they don't want to spend time just trialing and testing for the sake of it, but when you bring them a product that's been certified, they have confidence that they can actually put it into their network and use it quickly. So, it's given us a real open door in terms of addressing market that previously was less or not addressable to us. So, I think that that really has been an important milestone. I think that certification of additional products will help. I think the other thing that's relevant is what we certified in the first half was Wave 2 WiMAX, including MIMO and many, many of the initial appointments the people started out with were based on a SISO type model and that improvement from MIMO have been substantial. So, operators who might have been on defense waiting until MIMO was available, now see out there that it's stable, that it's certified and that's another bit of win in the sales here for growth.

Steve Ferranti – Stephens Inc.

And can you give us a quick update in terms of where you guys are on the MacroMAX certification?

Eric Stonestrom

Yes, the MacroMAX, deployments began and we've shipped the products to Spain I believe this week to where the certification lab is. We'll be doing that certification over the next couple of months. So, we were not – in the first round because we didn't submit the product based on where we were in the development cycle and now we are there and we've put the product into the lab. Obviously, there would be a process that runs according to their standard procedures. But we are actually engaged in doing that now. And I will point out in the first wave of certification only three base stations actually got through, and I think seven attempted to get through. So, our strategy worked and final the product was very stable and ready to go.

Steve Ferranti – Stephens Inc.

Okay, great. And then one last one from me. You spoke a little bit in the prepared remarks that you are feeling confident about the visibility going into the second half. Can you talk a little bit about some of the factors that lead to that confidence and how your visibility is in terms of orders and backlog and that kind of thing?

Eric Stonestrom

Yes. What we saw in the second quarter, we had a lot of products that was put into the use in the second quarter and particularly a lot of the products that were launched towards the end of last year, that being Wi-tribe in Jordan, in Saudi Arabia, Saudi Tel, Omnea in Jordan, Qatar Tel, Tricom in Dominican Republic. A number of these operators took substantial initial network build outs in the fourth quarter of last year and now they have much better visibility of how much equipment they are buying and at what rate. So, we certainly have very good confidence in execution on that set of projects here in the second half of the year, where the first half was somewhat colored by their launching activities. We also have some new wins. Then we are also seeing some additional revenue coming in from the channels like (inaudible) that I mentioned. I think we put all that together. We have a second half is probably less dependant on brand new product coming out and getting into the network and getting accepted and more shipments of additional equipment into operators who have a running base. We also have, we believe some substantial opportunities in places where we ship considerable infrastructure at the end of last year and in the first quarter of this year are really in the launch process now.

Steve Ferranti – Stephens Inc.

Okay, very good. Thanks for taking my questions and good luck going forward guys.

Eric Stonestrom

Thank you.

Operator

Your next question comes from the line of Rich Valera.

Rich Valera – Needham & Company

Thank you. Good morning.

Eric Stonestrom

Good morning, Rich.

Rich Valera – Needham & Company

Eric, of the back half revenue, just wondering if you could give a rough sense of how much of that you think might be legacy, obviously legacy was pretty strong in the first half. Wondering if you would expect to continue at recent levels into the second half?

Eric Stonestrom

Rich, let me take that one. Out of the $90 million that we are forecasting, we expect between 75% and 80% of that to be WiMAX revenues.

Rich Valera – Needham & Company

Okay. That's very helpful. And on that topic, any update with Axtel, obviously they have been placed some nice proximity orders. Do you have any updates on where they stand with WiMAX, or your participation potentially in their ultimate WiMAX rollout there?

Eric Stonestrom

Yes, certainly they are continuing to put proximity in which I guess is an indication of what technologies they have available that are stable, what we really can't comment on where they are. The other suppliers we obviously continue to talk to them and we continue to look for ways to get engaged. But I think the continuing deployment of the legacy is an indication of how they are growing their business right now.

Rich Valera – Needham & Company

Sure. And David, excellent job on the cash management in the quarter. Can you one, say how much did DBD actually pay you in the quarter on the receivable side? And two, how should we think about the second half cash usage as you probably won't have quite as favorable working capital flow in the second half?

David Brant

Sure. We've rendered [ph] some NDAs on what we can say about DBD. At the end of the year, we had a balance of $4.7 million of accounts receivable which we disclosed in our case. So, that was paid during the quarter. So, normal accounts receivable would of course might make a big impact to our DSO. Now, we've made significant improvements. I would expect our cash usage to be about the level of around about our operating loss as we move forward through the year. We have a – in a normal time we need some cash to see the end of the course but we are going to be – is going to move to our operating loss levels.

Rich Valera – Needham & Company

Great. And Eric, can you provide any update on – you referenced your deployment with KBDI [ph]. Can you provide any updates around – you've got the initial order, now that you are shipping that. Any sense of when you might get a follow on there, and would that be part of that back half ramp?

Eric Stonestrom

Okay. We don't have much revenue – certainly the project is progressing well, and we are very, very pleased with the performance to date of the product and also the cooperation with Fujitsu. We have a small contribution, may be 5% to 6% of the total second half revenue coming from new business we would generate from the partnership. I won't necessarily specify from where. And I think in a substantial activity there would be a 2009 activity.

Rich Valera – Needham & Company

Great. And finally, just comments on your relationship with Nortel, obviously they signed an agreement with Alvarion on the mobile side. If you talk about your relationship, are you – little bit confusion what whether or not you are exclusive on the fixed WiMAX side and what exactly your ongoing relationship is there with Nortel?

Eric Stonestrom

Yes. We are certainly very deeply involved in the partnership with them. We have a number of projects that actually have recent wins on their number in the pipeline and we don't see really much effect from this announcement they made with our competitor to the extent that we never really partnered with them on Mobile WiMAX at all, and we have – Fujitsu has chosen our route to market. Around the mobile side, we certainly weren't surprised by the direction they took. They really didn't have much space to do anything with us. That said, I actually think revenue will be up if you look out over the next 12 months in it with a reasonably healthy growth rate based on the momentum they've got on the fixed side. In terms of exclusivity or not I can't really comment. And so, we don't have contractual like crucivity. On the other hand we have a lot of products that they are now known under the Nortel brand, their customers like and they are buying and I don't think – if you look at their partnership with our competitor, a lot of us focus is around them trying to promote their ASN Gateway and some of the back office stuff that's needed in 16e, that's not relevant in fixed. So, it really is a different sub set. Again we always view them as a competitor in Mobile WiMAX and so in terms of our market, our growth rate and trajectory we did not see impact here from this recent move.

Rich Valera – Needham & Company

Great. And just one final one if I could. You mentioned last quarter that you thought Sprint Clearwire JV could help move things along in the international markets particularly for the 2.5 gig frequency. Have you seen much forward progress in that international market at that frequency, may be because of that or because of the certification that just happened?

Eric Stonestrom

Yes. That's a great question. I think what we've seen is with the capital prices that's been in the marketplace, the concept networks Western Europe is I think I stated in the last call really aren't evolving at the moment. There's not a lot of appetite for new builds. In Western Europe I think people want to see how things progress in the US. So, that's why this Sprint Clearwire deployment is so important, and it about whether – but I think capital conditions seem to improve before you see a lot of somewhere a network build in Western Europe. In Asia, by contrast the good thing is 2.5 Spectrum has been licensed quite expensively recently and there is whole lot of tendering activity going on there. So, I think the – in the case of Asia, its mainstream operators, it's folks like the main cell phone operators in the Philippines, in Thailand, all of them have been active to get Spectrum in 2.5, and they are very encouraged with what they see and they are tendering right now to buy equipment. So, they are very busy on the response side there. That's really going – feel like where we are in the capital cycles where were in 2002 and you go through a phase where the networks that are being built by money rated by bonds disappear, and what you are left within is operators that are already in business with business models over folks that are well financed and well rounded like Clearwire launching projects, and we are seeing the same behavior now. So, 2.5 we are seeing, it's mainly in the hands of existing carriers outside of the US. So, it's an extension of their business model as opposed to a creation of a new enterprise.

Rich Valera – Needham & Company

Okay. Thank you.

Operator

Your next question comes from the line of Michael Nelson.

Michael Nelson – Stanford Group

Yes. Thank you. The question is showed many sequential revenue growth in the second quarter, but I was surprised by the revenue mix in the quarter. I guess, can you explain what led to the significant increase in non-WiMAX revenues as well as the drop off in WiMAX revenues? Thanks.

David Brant

Yes, Michael. The increase in the non-WiMAX revenues, is we shipped – we previously announced that we had got an order from Actel, and we had significant shipments to Actel for our proximity products in the quarter. And so that was the reason for the increase, significant increase in our sequential non-WiMAX business. From the Spect of the WiMAX sales mean they were down slightly, I mean they were pretty much flat, and I think we've always said that the first half would be more challenging than the second half. So, as we believe the introduction of our Mobile WiMAX would give us momentum and we are increasingly confident about registering growth in our WiMAX revenues in the second half that we've talked about earlier.

Michael Nelson – Stanford Group

Yes. I guess as a follow up to that, it sounds like you are expecting really a significant increase in WiMAX revenues in the second half of the year relative to the first half. I guess you touched on this a little bit, but I guess, what is the visibility that you have there, really gives you that kind of confidence in such significant growth in the second half of the year?

Eric Stonestrom

Yes, let me take that again, Michael. I think the important thing you realize is the fact a lot of the projects that we started in the second half of '07 are now in the second phase of deployment. So you got a run rate that you can predict. You've got your customer take rate that are actually going better than expected. And we didn't have it in the first half as many of those networks were just getting launched. So, if you deliver a fair amount of infrastructure to an operator, it's going to take a few months for the operator to get the operations going, and that's what we went through in the first half. Now that the operations are running, you get a much better visibility on growth rates from existing customers. The other thing is if you take the second quarter of '07, we actually had 28% of our WiMAX revenue came from the Ozame [ph] it was the tail end of that contract. So, I think it's not quite what it was, factual if the (inaudible) sales were down 5%, but what I think is missed the work with this, we had quite a concentration with Ozame in the second quarter of '07. So, now we are facing a more distributed customer base.

Michael Nelson – Stanford Group

Fair enough. I guess I'm looking at – it looks like you also had a sequential decline in WiMAX revenue, and I guess is are you seeing some of those orders start to come in now in early 3Q that may be did not come in Q2?

Eric Stonestrom

Yes. We had a very strong July for order intake. We also had a lot of stock come in the second half of June. We are balancing our cash but weren't driving inventory. So, we had quite a bit that came in the second half of June that we hadn't dealt to despite virtue of waiting to see the rate at which the networks are actually going to grow out.

Michael Nelson – Stanford Group

Okay. That's very helpful. And then another separate topic. I guess, can you talk about may be some of the initiatives you are undertaking as part of your goal to reduce the operating expenses and how far along would you say you are in that process right now?

David Brant

Sure, Michael. The operating expenses we announced 15% targeted reduction. It involves both head count reductions and general non-core expense reductions across the board. We have given notice to every employee and contractor that will – that has and will be leaving the Company. So, we are in the process where significantly along that process we expect – that was done towards the mid to the end of the second quarter. So, we have people leaving in the second quarter, in the third quarter, hence we expect to see the full results during the fourth quarter.

Michael Nelson – Stanford Group

Great. That's helpful. Good luck, guys. Thanks.

David Brant

Thank you, Michael.

Operator

Your next question comes from the line of Blaine Carroll.

Blaine Carroll – FTN Midwest Securities Corp.

Yes. Thank you. Eric, just a follow on question to some you mentioned earlier. These contracts that you received in the second half of '07 and you are now seeing the following through as you go into the third and fourth quarter. What are some of the risks that are associated with the potential of that follow through not occurring, whether it's macro economic or subscriber growth or site acquisitions, that type of stuff?

Eric Stonestrom

Okay. It's always not a lot of deals has never done – but a lot of these are projects that we have long-term contracts in place. We ship purchase orders. We have a track record of them, executing and getting the networks in. And so I don't really see the risk as significant. On the demand side I think the driving the spice [ph] for the second half is straight forward since a lot of its products and stuff that we've already produced. That said, the fact that you have people launching new enterprises is always a risk factor. I guess I revert back to what I was saying earlier the best customers decide what to do – people that already have an ongoing business and know what they are doing and now we have a track record and visibility within executing orders for equipment and the most risky type of build out is with new operators with new capital with newly formed companies. We don't have much of that in the second half in our portfolio. Again the capital crunch is with effect where there is less money chasing brand new network build, but the first side of that is the risk factors are actually lower because we are selling to people who know how to use the equipment. So, there's concrete demand, and so therefore, they are just pulling products on the basis of that demand.

Blaine Carroll – FTN Midwest Securities Corp.

Okay. There's better visibility into that?

Eric Stonestrom

Yes.

Blaine Carroll – FTN Midwest Securities Corp.

Is there any more proximity revenue coming through associated with Axtel in the second half of the year?

David Brant

Yes, yes, they will be. We have the balance of the existing orders that we have which is in the $3 million to $5 million range.

Blaine Carroll – FTN Midwest Securities Corp.

$3 million to $5 million over the next two quarters, David?

David Brant

Yes, sir.

Blaine Carroll – FTN Midwest Securities Corp.

Okay. David, on the interest line not that it's a big deal. But what made it switch from interest expense, interest income?

David Brant

Well, that's a good question. Foreign currency in there as well. I don't have the breakout of that to my finger tips. So, –

Blaine Carroll – FTN Midwest Securities Corp.

May be I'll ask another quick one. Eric, one thing you talked about on the challenges was on the technology side. And it sounds that most of your commentary was on a decision between 16d and 16e, nomadic versus full mobility. But are there also evaluations going on with some customers who are out in the marketplace as far as other technologies whether it's YVN [ph] CDMA or LTE on the wireless, may be staying with a DSL or some other fixed line type of solution?

Eric Stonestrom

Yes. We are seeing – I mean the good news is on fixed DSL is an opportunity we are going after right now in the US. It's fairly substantial. Network estimates WiMAX with its current economics and price point is about 40% of the capital they would need to invest on the wire side. So, it's the existing operator with existing network and the economics for WiMAX are very favorable. The thing that people often is with WiMAX at price points of the basic equipment have come down by half from where say the industry was three years ago. And it's a very cross elastic [ph] business with wire line and lower the prices are and better are the performance. So, it's wire line the more business we get. So, that's what phased to our favor. I guess the big and headline news is the LTE push, a long-term evolution, that's for those who aren't familiar with it. That's an evolution of existing cellular operators and vendors. We are trying to keep new networks from being built, preclude the availability of or the acceptability of WiMAX. And the reality is WiMAX is tier now and we've got basically operators launching it now like Clearwire, and it provides the highway that's probably ten times as fast as you are getting from the 3G platforms. LTE is probably 4 to 5 years away. So, it is an overhang, but it's an overhang with carriers that probably want to buy anything from us in the next 12 months anyway. The big operators on the mobile side that are going to evaluate for quite a while before they make a decision, we'll obviously be looking at both technology.

Blaine Carroll – FTN Midwest Securities Corp.

Right. It's Sprint that's unique one because they have those frequencies from when they are looking at that cable TV?

Eric Stonestrom

Yes. One other thing, the number of carriers in the developing world that don't want to wait 4 years for LTE and also there are a number of – if you really find an early LTE and WiMAX are quite similar. We use TDD implementation. It's actually a lot more TDD Spectrum around the world than FTD which is the LTE route. And I think the good new is there is a lot of commonality. So, we are certainly not threatened.

Blaine Carroll – FTN Midwest Securities Corp.

Okay. Thank you.

Eric Stonestrom

Thanks Blaine.

Operator

Your next question comes from the line of Joanna Makris.

Joanna Makris – Brean Murray, Carret & Co.

Hi, there.

Eric Stonestrom

Hi, Joanna.

Joanna Makris – Brean Murray, Carret & Co.

Hi, there. Are you still targeting $35 million quarterly breakeven, is that still fair?

David Brant

Yes. That's on a cash basis and $35 million is what we are targeting.

Joanna Makris – Brean Murray, Carret & Co.

Okay. And could you may be comment on what portion of your OpEx goes towards the legacy business at this point in time?

David Brant

Very little goes towards legacy, Joanna. It'll be less than 5 to 10 I would say.

Joanna Makris – Brean Murray, Carret & Co.

Okay.

Eric Stonestrom

In our OpEx reduction we took out a substantial investment we had in Sinline [ph] which was fairly related to legacy. So, I think you'll see the target numbers move down as we – I would take that 3Q OpEx and then take David's percentages on that as opposed to what we were historically.

Joanna Makris – Brean Murray, Carret & Co.

Okay. Great. Could you quantify may be what portion of your WiMAX revenue is mobile or pre-mobile at this point. Is there anyway you can split that for us?

Eric Stonestrom

Yes, we can. The simplest way is to look at the small base stations we sell as our proxy for fixed, and that's about a third of the WiMAX revenue. About a third is coming from the upgradeable E base station and about a third is coming from the (inaudible) terminal which obviously work in both modes.

Joanna Makris – Brean Murray, Carret & Co.

Great. And then lastly, there is a sort of pervasive concern over service provider CapEx. Cisco last night noted they even noted a somewhat sluggish growth in emerging markets. Is there anything you can tell us may be in terms of trends regarding order sizes or just purchasing cycles from last quarter anything that may have changed even with respect to provisions that are more stringent on installs on some of your customers. I mean anything you can give us anecdotally that would suggest any change would be helpful?

Eric Stonestrom

Yes. I think it hasn't been change in the last three months. Certainly as we forecast earlier in the year, the Western Europe – build a network, that segment is gone, but hasn't changed. That's kind of we worked three months. I think the positive surprise we've seen in the vertical markets descents and oil and gas seem to have depockets at this point and there is a lot more activity there than we would have expected. So, I think a lot of what's happening is those companies are saying we rather run around networks that contract with Verizon or a mainstream network operator. We can actually build some of this stuff out ourself and they are saying WiMAX is a great technology for that space. We have a networking technology that gives us distance and works over the air and has the right security. So, that's in fact there's some additional CapEx coming into the frame from those vertical markets. We have not since the DBD contract had a big operator who's building based on 100% risk finance CapEx, so we are not expecting trends to get any worse here provided we keep targeting customers that really need this stuff and they buy the quantities that they need for the demand that they see right in front of them. And again it feels a lot to me like what we saw in 2002, we've been through this cycle once before with the tail end of 2000 and 2001, and what emerges is that the customer base that really has the applications, the needs and the cash to fund that and they are pretty easily identifiable once you are in the middle of the cycle. They are frustrating in sensing out. You don't place $10 million orders at once. It's going to be more pragmatic for the cash, but at the same time the good news is the visibility is quite good when they are actually using the product as you know has got winning application.

Joanna Makris – Brean Murray, Carret & Co.

Thank you.

Eric Stonestrom

Joanna.

Operator

Your next question comes from the line of Gunther Krager.

Gunther Krager – Discovery Group

Hi, yes. Good quarter, congratulations. Eric, two questions, number one is in the press release you referred to business opportunities. I'm just curious what you had in mind? And secondly, regarding the industry of surveillance, military and security type of markets, is there any movement in that area?

Eric Stonestrom

David you want to take the first one?

David Brant

Our business opportunities are clearly – Our business opportunities are clearly where we have reached – the opportunities that we are pursuing with our 3.65 Gigahertz products into the US. Our opportunities with Gilat, Fujitsu all of which are targets for the second half and give us confidence in our numbers for the second half Gunther. Eric on the –

Eric Stonestrom

Yes. On the surveillance question, we did have a good track record there, here of late we picked up a project in the Middle East as I said 4 Gigahertz to 9 Gigahertz, we've gotten a number of people now using small systems, the thick system for video surveillance and then most of it when we shipped over $0.5 million to Tolaram in the second quarter for their defense systems business. So, we've got a product there that we've actually built around the certification so they have – it's the bigger defense system they bring into market for a number of battle fields, intensive applications and we are part of that and we see that business continuing and growing and they are actually active selling those products around the world. So, it's bigger than just the initial contract.

Gunther Krager – Discovery Group

Thank you.

Eric Stonestrom

Thank you, Gunther.

Operator

Your next question comes from the line of Scott Steril [ph].

Scott Steril

Hi, good morning. Couple of questions, first of on the proximity side of the equation. If I recall correctly that that was a margin challenge portion of your business. In terms of Axtel coming back and reordering with you guys. Has that prior gross margin assumption? Is it been revised upwards? Is it more in line with corporate average now or the WiMAX margin is doing well at this point in time that they are pulling the corporate average up?

David Brant

Just to start with, the margins are better than they were with this product as we went back to them last year on the order. And they do pull the average down. I would estimate that it's favored near the average, the margins would have improved on the quarter by about 3%. So, they do quite an impact on the corporate margin.

Scott Steril

So, overall the WiMAX margins are doing very well at this point in time and should continue to improve?

David Brant

That's what we anticipate, yes.

Scott Steril

Okay. And David, did you give the number in terms of the OEM mix in the quarter and what that contribution you think will look like in the second half because it sounds like there are a number of customers like the lot Fujitsu that will be contributing to that number?

David Brant

Sure. In the first half, it's been approximately 10% of our WiMAX revenues where we are in. I don't have a specific number for the back half, meaning what comes through but I would expect that number to be higher.

Scott Steril

Okay. And in terms of your assumption for KDDI, Fujitsu in the second half of this year, is that still $3 million to $5 million range type number that we should be thinking about?

David Brant

I see that's reasonable.

Scott Steril

Okay. Eric just quickly India I think you mentioned a couple of times in your comments, but what's the update there in terms of the opportunities, the frequency availability that's been I think a number of different plans that were out there whether it was 3.3 Gigahertz or 3.5 Gigahertz or some other bands, how is that shaping out?

Eric Stonestrom

Yes, we are very focused on India. First of, it's a key focus for us. I'm going to be there next week. It's a market you still believe, feeling encouraged by the opportunities. It's a very fast growing infrastructure. There's lot of CapEx in place and there are lot's of potential projects in place. The challenge in India has been a regulatory one as the regulators are shifted around frequency from pillar to post [ph]. You might recall that 3.3 Gigahertz FTD, they then considered changing to TDD. They then moved some of those operators to 2.5 Gigahertz. We are actually selling right now a combination of unlicensed products. So, 5.4 and 5.8 into the enterprise and government sites. That's the business that's been picking up nicely. We are shortlisted with one of the major operators there in 2.5 Gigahertz project, that would use the product we are building together with Fujitsu. We are very bullish on that the two big guys, I guess Bharti and BSNL are somewhat hamstrung still by indecision on frequency. So, they are buying small quantities from our competitor, but this really is a corporate connectivity at this point in time. There haven't been a push by them yet for residential or mass market deployment. I think there will be when frequency stabilizes – we are putting staffs in place to make sure we have a very efficient distribution channel into India because we are big leaders in the market and we see our timing actually very, very good with the product we are building for KDDI. In terms of mainstream operators are getting 2.5 Gigahertz Spectrum. We are also seeing 2.7 Gigahertz which was the frequency we had historical sales. That's come back to life because there's been a number of operators now being asked to move into the 2.7 band from other bands and we have product today that serves that need. So, all in all India is dynamic. It's not – it's contributing less than 5% of our revenue today. It's a very price sensitive market, but it's a market worth investing time in and we certainly are – I think we have a winning set of products. We are putting in a very – but we think it's compelling distribution strategy. And I think nobody has been with a loss yet. It's all, it's still very much in the formulation stages.

Scott Steril

It is given the regulatory challenges, is this 2009 or do you think the regulatory challenges did figure at that point?

Eric Stonestrom

I would – up second half in 2008. I think a lot of it's going to be on the unlicensed Spectrum. Now, so this is business where you are grabbing projects together with our partners and they all be in new airports being built, new road monitoring systems. 2009 for the mainstream telecom revenue.

Scott Steril

Got you. And Eric on Fujitsu, KDDI, just want to check in terms of the milestones, at this point in time you guys pretty much tracking and then translating that into the timing of the ramp given that there's a small portion in late '08. Do you expect that to really start to ramp in the first half of '09 perhaps offsetting any traditional seasonality that you would expect in Telco when you guys could actually be up from December to March or is it way too early to talk about that?

Eric Stonestrom

I think we have an NDA, so I reckon don't want to go into too much detail. You articulated the trend directly.

Scott Steril

Last item. David on the Shackle front, I just – if you could remind us what the policy is at this point in time in terms of how much you are hedging and how much of your costs are Shackle denominated? Thanks guys.

David Brant

Sure. At this time we are not hedging against the Shackle, we don't have any hedges down there. And I would say approximately $3 million in the quarter is Shackle based.

Scott Steril

Thank you.

David Brant

Thank you.

Operator

Your final question comes from the line of Rich Valera.

Rich Valera – Needham & Company

Thanks. David, just a quick follow up on the gross margin. You addressed this but as your mix moves back towards WiMAX in the back half should we expect the gross margin to move back up into that mid 30%, 34%, 35% type of level?

David Brant

Yes. That's exactly what we are expecting.

Rich Valera – Needham & Company

Okay. That was it. Thank you.

David Brant

Okay. Thank you, Rich. Okay. Thank you everyone for your participation today and we'll speak to you again in a few weeks.

Eric Stonestrom

Bye, bye.

Operator

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

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